Regal Rexnord Corp (RRX) 2008 Q4 法說會逐字稿

Good morning, I will be your conference operator today. At this time I would like to welcome everyone to the Regal-Beloit fourth-quarter and full-year 2008 earnings conference call. All lines have been placed to mute to prevent any background noise. (Operator Instructions)

And now I would like to turn call over to Mr. Dave Barta,. Regal-Beloit's Chief Financial Officer. Sir, go ahead.

Thank you, Ken. Good morning, everyone and welcome to the Regal-Beloit fourth-quarter earnings conference call. Joining me today are Mark Gliebe, our President and COO; and Henry Knueppel, Chairman and CEO. Before turning the call over to Henry I would 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 inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and ur filings with the SEC. Now I will turn the call over to Henry.

Thank you, Dave. Welcome everyone, and thank you for joining the call and for your interest in Regal-Beloit. We will follow our normal agenda. I will make a few opening comments, Dave will talk about the financial aspects of the quarter, Mark will give you some color on products, markets and operations and then we will finish the formal presentation with first-quarter outlook and Q&A.

This report is certainly a tale of two cities. On the one hand 2008 was a record year for Regal-Beloit. We achieved record sales of $2.2 billion and record earnings of $3.87 per share. The accomplishments were in spite of a deteriorating economy and materials inflation that could only be partially offset by pricing initiatives. To help offset these significant headwinds our team worked diligently and achieved impressive results, setting new standards with record productivity improvements, successful integration of our 2007 acquisitions, and successfully launching a record number of new products. It is impossible to overstate the engagement and talent of the people who make up Regal-Beloit.

On a more granular level, our record year was achieved in large part due to our balance of end markets. And the success of our industrial and International businesses throughout the first three quarters. Our residential businesses were pressured by obvious macro economic factors all year and in the fourth quarter, nearly all of our businesses were reacting to adverse market conditions. When we talked to you in October, we had not yet seen a downturn in our industrial and International markets. We remarked during our call that we could not expect our markets to remain immune to the headline news. As a result, we included a weak December in our forecast. The true turning point, however, arrived in November and the negative impact we felt for the quarter was greater than we had projected. Despite this, our people reacted with their full energy and results speak for themselves.

The nature of business is to acknowledge past achievements and embrace and prepare for the future. As we transition into the first quarter, the challenge becomes greater. Globally we are faced a growing financial crisis coupled with a significant jolt to confidence level. The combination is creating dislocation and substantial changes in everything from commodity costs to exchange rates to capital spending rates and capacity utilization. In the face of these risk levels that are new to our generation, we are required to understand the fundamentals and subtleties of what drove our business in the past few years and what will drive our businesses as we move forward. It is clear that we have been operating in an overheated environment and that we are now in the midst of a full-course correction. The brutal reality is it is difficult, if not impossible, to size or time this correction. In order to create value for our stakeholders in this environment, we will need to be quick to react to the changing conditions at the same time that we drive long-term value creation strategies.

While the capital markets have already significantly discounted valuations for 2009 and 2010 and we believe that the market has corrected or even overcorrected for what businesses now face, the reality is that businesses now must deal with what the market has been projecting. We have a strong balance sheet, the necessary liquidity and the people and processes to face these challenges head on. The actions we have taken and are taking to deal with rapidly changing environments are difficult both personally and professionally but necessary. While we are resizing our operational footprint and cutting overhead costs in preparation for the future, we are not cutting our investment in Lean Six Sigma, productivity or new product development since these are the means to creating longer term value.

We will continue to roll out innovative and cutting edge products that set the standard for our industry and we will continue to evolve our business and improve our operations through the use of sophisticated Lean Six Sigma tools. Further, we will continue to maintain our focus on a strong balance sheet and use it opportunistically for our future. The best offense in this environment will be talented, informed and realistic people. Individuals who understand the task at hand and proactively take steps necessary to deal with it. In this regard, we are poised to excel. With that I will turn it over to Dave Barta.

Thanks, Henry. Touching on the highlights of the fourth quarter, as we discussed on our third-quarter call, we had a solid start to the quarter with sales in October up high single digits. Unfortunately as Henry mentioned the global economic issues manifested themselves and customers' orders started in November, we saw significant order adjustments first in the HVAC business and then saw softness in the commercial industrial markets as we moved through November and into December. Sales for the quarter ended at $483 million which is a 1.7% increase from the $474.7 million recorded for the fourth quarter of 2007.

Included in our results for the fourth quarter of '08 were $38.2 million in sales from the Dutchi acquisition completed in October, the Hwada acquisition completed in April of 2008 and the incremental sales contribution from the Alstom acquisition completed in November of 2007.

I also would like to point out from a segment perspective, we have realigned some product sales to better mirror our organizational structure so we'll see the electrical mechanical segments presented in accordance with this structure that we will be publishing the required level of detail and recast in the history shortly. On this basis, sales for the electrical segment increased 1.9% compared to the prior year inclusive of the acquisitions. Further breakdown of electrical segment, commercial industrial, motor sales in North America decreased 5.6%. Generator sales continued to be a bright spot and increased 13.2%. Sales for the HVACR business decreased 7.8%. And sales of the mechanical segment decreased 0.5%. These sales results were obviously below the guidance we had provided on our third-quarter call and the most significance variance was the HVAC business where we saw that downturn start in November followed by the commercial industrial motor businesses.

As mentioned in our release, our sales outside of the US were 28.9% of total sales versus 25.2% for the fourth quarter of 2007. And high efficiency product sales increased 11.7% of total sales and that was a 12.8% increase over the prior year. We, again, saw very strong sales of high efficiency industrial and commercial refrigeration projects, however these results were negatively impacted by high efficiency HVAC products that, although they were positive did not increase at the rate experienced in prior quarters. The gross margin for the quarter was once again pressured by material cost inflation, material inflation exceeded the impact of pricing by approximately $7 million, which is at the lower range of the guidance we provided. This gap reflected steel cost that continued to rise in the fourth quarter and a lower spot rate for copper that was however, predominantly offset by our copper hedge position, the real story when it comes to gross margins was the outstanding job that our operations team did on driving productivity on a global basis. They did an outstanding job of anticipating some of the challenges we were about to face and we exceeded our guidance in this area as they quickly accelerated products and reacted to this weakening demand.

Operating expenses increased as compared to the prior year as a result of the acquisitions of about a $5.2 million increase. Also increased depreciation, IT costs, and engineering expense. Additionally we did record expense of approximately $5 million as a result of a couple discreet items. AR reserves for several discreet customer issues and impairment of certain fixed assets were the primary drivers of that increase. The tax rate for the quarter was 34%, which was below our guidance. The favorable rate resulted from the distribution of income on a global basis, and the recording of a deferred tax asset related to one of our foreign subsidiaries. Net income for the quarter was $21.4 million compared to $24 million fourth quarter 2007 and on an earnings per share basis, we finished the quarter at $0.67 as compared to the prior year of $0.71.

Turning your attention to the balance sheet, debt and cash flow, we ended the quarter with $576.5 million of debt which is an increase of approximately $12 million from the end of 2007, and obviously reflects the impacts of the cash acquisition of Dutchi and Hwada, note the positive cash flow for the year. This resulted in our ending debt to EBITDA ratio being approximately $2 -- 2 to 1 or 2.1 to 1 at the year end which is well within our covenant of 3.75. Depreciation amortization for the quarter was $16.4 million and $61.5 million for the full year and our CapEx for the quarter of $8.3 million and the full year was $52.2 million. We did bring down accounts receivable in the fourth quarter driven predominantly by the decrease in sales; however, we did overshoot our inventory goals by approximately $27 million as we were not able to adjust production rates as quickly as the sales fall off in November and December.

Now turning our attention to the future. Looking at the first quarter forecast. Our EPS guidance as presented in this morning's release of $0.38 to $0.46 per share. This is obviously a significant change from the year-ago period. I want to provide a little bit more color on this. This estimate is predicated on the sales decrease including the impact of acquisitions of between 14% and 19%. This will obviously will have a significant impact on gross margins. We also see about $4.5 million increase in the cost of sales related to a couple of items, one being the amortization of the writedown of inventory to 2009 standards and then the other being the cost associated with the Neillville and Alvin plant closures.

The price inflation issue will be slightly negative, so we will see an improvement. The cost of steel remains year-over-year an inflation item and our copper hedge position will counter the impact of lower spot prices. While we are moving through SG&A costs, there will also be unfavorable leveraging of SG&A cost. Costs to call out as we did in the release the fact that there is a new accounting pronouncement that will impact interest expense. We did discuss that as I mentioned in our earnings release. This impact will be a noncash interest charge of approximately $1.4 million related to our convertible notes. This amortization ends in March, so this will not be an item that runs beyond the first quarter. The comparable number for the noncash interest charge for the prior year a approximately 1.6% and obviously we will handle a proper recast and restatement of that moving forward.

We are using the tax rate for the first quarter of 34.5% and I would suggest using that rate for the full year at this time; however, subject to change based on our distribution of income on a global basis which we believe will continue to move in a positive direction. We are forecasting capital spending of approximately $10 million in the first quarter and full-year 40 million to $50 million. We are anticipating that full year depreciation and amortization will be in the range of 65 million to $70 million.

As we look beyond the first quarter and we are not going to deviate from our prior practice of one quarter rolling guidance however to provide additional color, we continue to expect a challenging year on the top line with sequential improvement however, but again a tough year-over-year comparison especially in the second and third quarters. That being said as we move throughout the year, we will see material deflation, provide a positive impact in the back half of the year and as well, we will see a continued cost of the plant moves we have under way in the second and third quarters and the benefits will also start rolling in during the third quarter and again those annual savings will be significant. We do as we mentioned in the release see sequential improvements in our earnings per share. With that I will turn it over to Mark.

Thanks, Dave and good morning, everyone. Our sales performance during the fourth quarter was mixed as we saw continued growth in a number of our businesses, while others were negatively impacted by the economic crisis. We continue to experience modest sales growth in our global generator business and our commercial refrigeration business. We saw sizable decreases in our HVAC, air moving and Asian-based businesses. Currency fluctuations also impacted our top line for the quarter.

As Dave mentioned, while we had forecasted a slowdown in orders for the fourth quarter, the orders pattern during the three months of the quarter was somewhat different than what we had expected. October orders were stronger than expected in our HVAC, air moving and industrial businesses; however, November orders were much weaker than we had expected. The weakness in November and December -- and December was driven by an across-the-board slowdown in most businesses in all regions of the world.

Material inflation continued to be a real headwind in the quarter despite the downturn in commodity prices beginning in October. Steel costs did not change material in the quarter and any price relief on steel we did experience was still inflationary on a year-over-year basis. Copper and aluminum spot prices declined significantly; however, our hedge position which was helpful throughout the last three years avoided any benefit. We continued to raise prices throughout the fourth quarter to offset the impact of inflation. But even with the combination of higher prices and improved internal productivity, we were only able to offset a portion of the material inflation. As we look at the first quarter, while steel prices have declined significantly compared to the fourth quarter when compared to the first quarter of 2008, the price of steel will still be inflationary. In terms of copper and aluminum, our hedge position will continue to be a problem until we get to the end of the second quarter.

As you know, we have been working diligently to maintain and expand our leadership position in energy-related products. During the third quarter call, we talked about the success of our new 1040 frame generators. We are now accepting orders and shipping 1040 frame generators.

During the fourth quarter, we launched yet another new energy-efficient motor. We expanded our HVAC X13 product line to include 460-volt applications. As you know, the X13 product line was launched back in 2006 providing our customers with a solution to meet Federally legislated 13C requirements. The X13 product line has been a real success for our HVAC business and has provided solid benefits to our customers. 460-volt applications represents about 10% of the light Commercial HVAC segment and prior to the launch of our 460-volt product, our customers needed to use an extra transformer to step down the voltage in order to use our X13 product. Transformers are expensive, add weight and size and further reduce system efficiencies. These barriers reduce the penetration of ECM solutions into the 460-volt segment. With our new X13 460-volt, customers can get all the energy-saving benefits of the standard X13 motor without the added transformer costs. Initial feedback from our customers on this new product has been very positive.

Also in the fourth quarter, we launched our new global 180 frame motor platform. The 180 frame is a common industry term used to describe the integral horsepower motors from 2 horsepower to 7.5 horsepower that covers 25% of the total IHP market in the U.S. For over a year now, our engineers have been using design for Six Sigma tools to analyze the performance trade-offs of the multiple 180 frame designs that Regal-Beloit acquired through recent acquisitions. Our engineers have now developed a single platform using the best features of each of our designs, as well as using voice of the customer input, the result is our new 180 frame global platform which will have fewer parts, less cost, and better performance than any of our older designs. Additionally the new platform positions Regal-Beloit to meet or exceed the NEMA premium energy efficiency regulations which go into effect in December 2010.

Finally, the new 180 platform is now being produced in our brand-new Monterey 2 facility which recently started production. We are excited about our design platform and our position in this segment of the market. Our focus on new product development continues to be around energy efficient and energy related technologies. We have a strong pipeline of innovation -- of innovative new products that will allow our customers to reduce their systems' costs through the use of more energy-efficient technologies. These products have been designed around impending legislation and feedback from our customers on their needs.

Speaking of energy-related technologies, on January 1, Regal-Beloit acquired Custom Power Technology, which we have renamed to Marathon Power Technology or MPT. Marathon Power Technology is a $3 million custom power electronic manufacturer located in Wisconsin that has been producing custom drives and power conversion devices for about eight years. We have been working with MPT for over two years on the development of custom power electronics that we supply to our generator customers. These products deliver unique application-specific features that manage power distribution and improve efficiencies. We believe that in the future, MPT's experience, expertise and technology can further our efforts to develop and introduce more efficient and higher performance generators and motors.

From an operations perspective, our -- our focus will be to continue to deliver significant operating improvements to offset the impact of the economic storm. We are accelerating our efforts to consolidate design platforms, transition product manufacturing to lower cost locations, and continue to implement Lean in every facility. During the fourth quarter we've continued the transition of our 180 frame motor out of 100-person Neillsville, Wisconsin facility to our Monterey 2 facility. We will complete that Neillsville transition by the end of the first quarter. We will then transition a portion of our Lebanon, Missouri production to the same Monterey 2 facility. Also in November, we made a major announcement to close our Eldon, Missouri facility. Eldon is a 400-person manufacturing facility that came with the August 2007 FASCO organization. Eldon produces motor ports and finished motors that we also produce in other lower cost locations such as Reynosa, Mexico, Piedras Negras, Mexico and Springfield, Missouri. With the downturn in the economy we decided to move quickly. We will begin the transition in February and complete it by the end of the second quarter.

In addition to these production transfers, we are continually right-sizing our businesses to meet market conditions and with the actions we was already taken we have reduced our global workforce by approximately 10%. We will continue to monitor market conditions and adjust accordingly.

In summary, we are pleased with our performance during the quarter despite a number of unforeseen headwinds. The market volatility clearly impacted our business in the fourth quarter; however, our ability to maintain flexible and quickly adapt to the changing environment to combat these challenges placed our results within our guidance range. For the year, 2008 was a record in revenues and earnings and for that we are very proud of our employees. As we move into the first quarter of 2009, we know it is a different game. While we will continue to operate our businesses efficiently and continue to look for ways to reduce costs, align capacity with demand and generate cash, we remain focused on driving sales opportunities to offset the markets downturn. Our quick responses, dedication of our employees, strong fundamentals, and diversified product portfolio heading into 2009 leads us to believe that we will survive the downturn and turn this challenge into a future opportunity for the long-term health and growth of Regal-Beloit. Now back to Henry.

Thanks, Mark. A few more words before we take questions. As we look at the first quarter of 2009, we are obviously very cautious. The combination of a sharp pullback in our end markets combined with normal seasonal slowness will severely restrict our operations. Additionally we recognize the need to reduce inventories that climbed in the fourth quarter as a result of rapid market deterioration and as our customers adjust their inventories. The decline in commodity prices will have little impact on our results in the quarter due to our hedge positions and steel prices though declining are still above last year's levels. Finally, as Dave discussed, we have some one-time hits that come into play for this quarter.

While we have strong productivity and cost reduction plans, the macro economic environment for the quarter will dominate our results. With these realities in mind, our guidance is $0.38 to $0.46 per share. Given this guidance, it is hard to look past the quarter, but we do expect to see relief from most of these issues as the year progresses. While we expect to see continued headwinds in our industrial and International markets, we believe that the residential markets which originally led in the downturn will also help lead in the upturn. We believe that demand is building in the replacement market which is now 80% of the total market. With mortgage rates at historic lows and consumers beginning to save, we believe there is the opportunity for this market to turn positive in the second half of the year. It is too soon to predict the turn in our industrial and International markets but we believe that the infrastructure markets being executed in many countries will help mute the current drop in project work and will stimulate demand.

Finally, as the world witnessed soaring energy costs in 2007 and 2008, nearly every government globally recognized the need to conserve energy and utilize more efficient technologies. Therefore, governments around the globe have incorporated in their programs new measures to stimulate demand for energy efficiency and they continue to focus on creating and passing legislation that addresses global environmental concerns. As an innovator and a front runner in the energy efficient arena, Regal-Beloit is poised to benefit from our existing platform of energy-efficient products and continue to invest in solutions that meet the demands of reducing energy consumption. Clearly we are doing all of the things you expect every company to do in this economic environment. We are reducing headcount, cutting expenditures, accelerating productivity projects that have fast paybacks and taking capacity offline. There is no simple switch that we can flip. We are fully engaged in right-sizing to remaining a strong enterprise. Fortunately, we have a balance sheet that allows us to continue to invest in new products and fast payback projects and to remain alert to unique opportunities that may present themselves along the journey. With that we will open up for questions.

(Operator Instructions) Our first question comes from Michael Schneider Robert W. Baird.

Good morning, guys.

Good morning, Mike.

Maybe we can just talk about the Q1, I guess, unusual one-time impacts whether they are plant closures, et cetera? I guess inventory. I presume it is too high relative to your expectations. You will be shutting production down or taking production days off in Q1. Can you quantify how much inventory you believe is in excess right now and by trimming production days, what you believe the under absorption impact will be in Q1?

Well, obviously some of this is -- what we intend to take out somehow depends on how the market reacts also and what happens in our customers' channels, but we would expect to take roughly $30 million of inventory out during the course of the quarter.

And the hit to just absorption if you can quantify that?

Probably, again, depending on the product, probably lead to maybe $0.10 to $0.12.

Okay. And you believe you can burn all $30 million in Q1, Henry? Or does some spill into Q2?

My guess obviously a clear challenge. But, we are -- we are pretty determined, so -- that is our plan.

Okay. And then the plant moves that are under way, I believe, Dave, you mentioned $4.5 million from amortization and plant closures just in Q1 that will hit cost of sales. Does that incorporate at least the softer side of the disruptions associated with the plant moves? Or -- and if -- if it doesn't, I guess can you put some rough range or qualitative range around that?

Yes, Mike, I would say that that number is -- includes -- includes everything. We think we are well down the path on the Neillsville move, and we don't expect any significant disruptions there. And the -- because we have capacity in place already on the Eldon move and the facilities up and running. It is not like it is a greenfield site. We are not expecting any further disruption or deterioration from that move either.

Okay. And the forecast for sales being down 14 to 19 in Q1. That is obviously a very steep decline. What is it you have seen in January specifically that gives you or leads you to that forecast. Is it that HVAC has fallen off more dramatically, industrial has fallen off more dramatically? What is it?

HVAC is more dramatic than commercial and industrial, but, I mean, these markets are obviously in turmoil. We are seeing weakness pretty universally. And also in other locations around the globe.

Okay. And specific to HVAC. Mark, maybe you can just comment, being down 7.8 seems like a victory actually. ARI was down at least in October, November at least 25% and probably more in December. Where -- where are you gaining share? What is the discrepancy or is it just a case where it doesn't hit you yet because of your specific customer mix?

I think, Mike, it is the story of energy-saving products. The products that our customers are selling are tending to use more -- a higher mix of energy-saving projects. So that is a benefit to us, and that has been true in the last couple quarters. But you are right on the numbers, and you are right in terms of how we feel about the quarter. Now some of that, Mike, I think will, some of that big decline you saw in October and November in terms of down 26 and 27 from ARI, some of that will show up in the first quarter for us.

For you. Okay. And Dave, I apologize, I missed the number. Raw materials in the quarter were an inflation hit of what amount?

The net inflation price was $7 million.

Okay, I will get back in line, thanks, guys.

Thanks, Mike

Our next question comes from Richard Paget from Morgan Joseph. Your line is open, sir.

Good morning, everyone.

Good morning.

I wonder if you guys have started getting any pricing pushback? I know steel is still up with drop in copper and some other commodities. Are customers starting to stay, all right, let's get a little back now?

Oh, absolutely. I mean I think every Company in this environment feels the pinch and is trying to find cost reductions in every way possible. That is the market place that exists. Clearly, there is -- there is some timing lag that we talked about in terms of the way our costs will come down, and so it's -- it's an interesting set of discussions.

And then on your cost side, are you guys locking in any of these chief commodities now for down the road?

We -- yes, we are pretty disciplined hedgers. We -- we would like to think we are smart enough to do timing things, but we have proven in times that we aren't, so we stay very disciplined in what we do, and as a result of that, we are continuing the process that we have had in place for some time and frankly, has done a lot of good things for us over the last three years. Right now it is a tougher road. With that said, I don't know that -- that we can definitively say that this is the low end of where commodities are headed yet, we will see, but certainly we are maintaining our hedging processes.

And then with the stimulus package as we have seen more the line items starting to come out, I mean, obviously general construction spending is going to benefit you guys, but is there anything specifically that you guys are paying attention to that is going to help in the second half?

Anything that is in the direction of energy savings. We are hopeful that that will have a benefit to us. Anything that encourages either our customers or the consumers to shift to more energy-saving products is -- is directionally correct for us. So we are hopeful there will be something there.

I think as you look at the programs that are being enacted and looked at for further enacting, the administration has certainly got an emphasis on energy efficiency and some of those programs will benefit us. We can also say in the Chinese infrastructure projects they earmark roughly 20% of the total spend toward improving energy efficiency, across the board, everything from buildings to sciences, et cetera.

Okay. And then finally on the mechanical group margins in the quarter. They seemed to bump up. Does have have to do with reorg or was there any one-time items in there?

Well, the reorg, the businesses -- the products that went in there are very similar type margin so there was nothing significantly out of the normal. Some year-end inventory accounting that actually -- capitalization of negative variances that helped a little bit, but probably on the high side of the run rate to expect going forward, but again, we will provide the restatement of the segments for you shortly so you'll be able to see the historic run rates and help you out there.

Okay. Thanks. I will get back in queue.

Thank you.

Our next question comes from Holden Lewis from BB&T. Your line is open.

Good afternoon, thank you.

Good morning, Holden.

A couple of things here. First, a little more explanation I think about the gross margin in the quarter would be nice, because I think as you look through the prior three quarters, your gross margin was under pressure year-over-year each time. In fact, the rate of decline in the gross margin each quarter actually got worse as the year progressed and all of a sudden in Q4 you are looking at about 150 basis point sort of improvement. It looks like someone flipped on a light switch, all of a sudden rather than the incremental improvements you would expect from productivity, Six Sigma. It doesn't seem to explain the sudden reversal. Can you give a little more color as to why the gross margin may have left and reversed course that way in the quarter?

Sure, I think there is a couple of things and I touched on them. But the price inflation gap narrowed and was actually at the low end of the range. We were actually expecting a little bit worse than that. So we were favorable both a touch on the commodities side and also on the price side, but the real -- the real driver was the productivity results. They greatly exceeded even what we had baked in the guidance and again as I mentioned, it was the operations team in the third quarter somewhat sensing that the direction of the wind had changed, and very aggressive actions across all of our facilities. And, touched on some of the headcount changes we made and they were some pretty substantial headcount changes, spending levels in factories, just really went at it and that was actually net-net where we increased margins.

Okay. You alluded to, I think, in mechanical, I think, some true-ups or the absence of some costs. How big was that? Was that part of the -- were there any of those true-ups and such in there?

On the mechanical side no real true-ups. With the end-of-year FIFO, LIFO inventory adjustments there was approximately $1.5 million favorable adjustment but again it's not normal end of year FIFO, LIFO inventory adjustments.

Right was that $1 million, $1.5 million, what was it last year?

Because of the amount inflation we saw throughout this year, I don't recall specifically, but it probably would have been -- again, this is directionally maybe half that level.

Fair enough. And now you did put a number somewhat unusually to the -- to the impact from raw materials in Q1. You said slightly negative and what kind of order of magnitude should we be looking for there?

Again with the slight benefit we get from spot price on the -- on copper and then the pricing that carries over, it's, again, minimal. And, certainly we have a range and as far as how we look at that, but probably best case zero to slightly negative. We will cut that gap considerably in the first quarter.

You do feel that pricing now is largely neutralizing the raw materials?

Well, at this point, based on where our averages for copper and the price for paying for steel are versus the pricing?

Okay.

And that's really a quarter-over-quarter measure, Holden. If you looked at a three-year rate, you would say -- you would come to a different conclusion, but for the quarter, that is what it appears to be.

Okay. So -- fair enough. Now when I think about what you are suggesting, I think first half, second half. I mean first half, you are looking at that -- that $4.5 million charge I think for writing down inventory and shutting facility, et cetera. It looks like raw materials are slightly negative in the first half, probably become neutral to positive in the second half. Obviously you are cutting inventory and you would expect to move production back up. I guess the one piece that I am missing is, you are taking the $4.5 million charge or incurring cost, what is the annual expectation of savings from your headcount, your reductions and your facility shutters and all of that stuff?

The -- we talked earlier on the benefit of the FASB. We talked about that at that time of the acquisition being in the--?

$10 million.

$10 million to $11 million range. And then on the Neillsville transition, that is in the 4 million to $6 million range in terms of benefit on an annualized basis.

Okay. And what about moving the lease -- lease in production? What about all the head count reductions? What can we expect in terms of annual savings from all of that?

The -- the headcount actions we have taken so far have roughly a $15 million benefit on an annualized basis.

Some time in the second half you would sort of expect to be at a -- at about a $30 million-plus type of annual savings run rate? Is that right? And you will begin realizing that in the second half of the year?

I think that's fair.

All right, I will jump back in. Thanks.

Our next question comes from Jeff Hammond from Keybanc Capital Markets. Your line is open.

Hi, good morning.

Hi, Jeff.

Just had a question -- there has been a lot of discussion around the Energy Act of 2007 and the potential impact on NEMA premium, the mix of NEMA premium motors and then the walk-in cooler issue on ECM motors. Have you been able to frame the size of that opportunity moving into 2010? And do you expect any kind of prebuy or are there any ways around, -- around using NEMA premium motors in '010 either from an import standpoint, et cetera?

The Act takes -- when we can no longer produce the lower efficiency motors is actually I believe in December of '010. It is a little early to be taking that into account, Jeff. There will be some prebuy. There has been at every other juncture that will come into play during the year 2010, probably more toward the end but will not impact us this year. There are -- there are some opportunities for some prebuy action in the HVAC world as we get into the end of this year because of the coolant changes, but, again, we would expect that to be somewhat muted compared to what we saw during the tier 13 changes.

Relative to the walk-in cooler, that is realtime, and that is happening now, and we are seeing the benefit of that with the products that we have.

Okay. Thanks.

Your next question comes from Nigel Coe from Deutsche Bank. Your line is open.

Hi, Nigel.

I know you don't give guidance, but just want to get your perspective how you think the phasing of EPS could shape up? And specifically you typically see, $0.25 step-up from 1Q to 2Q. 2Q is typically your picky PS quarter. This is not a normal year clearly, but do you still think that kind of broad pattern will remain? Or do you think that 3Q could be higher than 2Q?

I think our overview is that we would probably expect sequential improvement from Q2 to Q3 this year. That is more of an all-around feel than it is anything that we can specifically point to, but there are a lot of adjustments that are taking place and will continue to take place early this year R&D and it is -- our feeling is that there is the opportunity for things to actually ramp up more as we get into the summer replacement season, and as some of the stimulus packages begin to take hold.

I think from an internal standpoint, Nigel, a couple of items we talked about. The Neillsville plant closure will be completed in the first quarter, we will probably have some residual costs from the closure in the second quarter but that will then start yielding the benefits in the third quarter, fourth quarter. The Eldon move as we mentioned we'll see costs in the first quarter, we will see probably more costs for that move in the second quarter. Again with some residual cost in the third quarter, but we will see again, more of those benefits rolling in. I think the other point that is something out of the ordinary for us is as we mentioned because of our copper hedge position, the stock price impact is substantially muted or even point of almost eliminated in the first part of the year, but where we were with hedges and our normal process would mean that we will capture more of the benefits of that in the back half of the year. So we actually will see more of a headwind turned into a tailwind for us in the back -- back half of the year. So those all would start impacting Q3 onward.

That makes sense. And then obviously you were impacted by plant shutdowns in December and January. Are your customers now getting back to production levels that are consistent with more normal levels? Or are you still -- are you still being impacted by that?

No, we are not seeing them -- there is no snap back we are seeing at this point. I think the reality is everyone is trying to deal with -- with what's coming at them in this environment. People are pulling back on CapEx plans and projects, and so there is a lot of adjustment taking place.

Okay. And just a final one on -- what you see in terms of your competitors. This is a tough environment. Are you seeing anything out there that is troubling to you? Any significant discounting? Are you seeing more important activity from some of the low-cost countries?

Yes. I mean, that was a relative question. I don't think that the nature of what's going on in the marketplace is substantially different than what it has been. It is a very challenging marketplace, good quality competitors, and, customers who are very quick to try and discern real value. I don't think it has changed materially. It just is -- unfortunately hit a slightly lower level at the moment.

Right. Okay, thanks.

Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.

Thanks. Question for Henry. What's the normal distribution seasonality of the resi HVAC? In other words, what percent do you typically do in the first half in terms of OEs building, and what is the implication for pushouts and maybe shifting in the seasonality there?

Yes. I'll start and let Mark pick up the pieces. The -- the way the year typically progresses in the first quarter OEMs and the channel in general is building inventory for what they consider to be new home starts in -- that are strong typically in the second quarter and then the replacement season hits hard at the end of the second quarter and runs through the third quarter. Obviously this year with the expectations in the marketplace, that may be slightly different than what we have seen in past years, but that would be -- so we would see it ramp up very quickly from fourth quarter to first quarter because that is when the build typically take place. And then even further into the second to third quarter.

I will just add that it appears to us our HVAC customers are being much more cautious on the build that they are doing this year for the season.

Okay. So -- I guess maybe the switch to buying very short lead time potentially would be the hope. I guess in the third quarter?

Well, it will -- all it takes is a real warm June or something -- anything real warm before July 4, and it will turn out quickly. So we just got to wait and see what the weather does and what their demand is.

Great, thanks a lot.

Your next question comes from Dan Whang from B. Riley. Your line is open.

Yes, good afternoon. The first question was, you provided first-quarter sort of sales expectations, but going beyond that, I mean, what should we expect in terms of year-over-year comps? Should we see some sort of progressive improvement as we go forward on those quarters?

Yes, I wish -- I wish anybody on this phone could tell us -- we are approach it cautiously, Dan. The reality here is if we make a mistake and it is better than we think, that is probably -- that's great news and we will all cheer. But at the moment, we are approaching -- approaching this as -- pretty cautiously, much thinking of what we are seeing right now much more like 1982, '83 than we are 1991 with a quick snapback. I think the headset has to be that we are preparing to be a profitable Company that creates shareholder value in an environment that will be down from where it was last year and we are going to see the comps continue to lag for the first part of the year. Perhaps by the end of the year, we can start to see some positive comps, but that's at this point not something that we are going to count on.

Okay. And -- I think you had mentioned about some of the inventory that you are planning on working through. The first part of the year about $30 million inventory. What categories do those products fall in, mostly HVAC or pretty spread out?

At this point I would say it's somewhat spread, the reality is the markets turn down very quickly in November and we did not react as fast as -- as the markets reacted.

Got it. And finally, what are your expectations in upcoming quarters in terms of new products introduced, -- I know many of them are focused on the energy efficiency front and related to that, what are your expectations for R&D spend in '09, and how does that compare against for '08?

In terms of new products, we have been announcing every quarter, one or two or three new products. We have probably been introducing double that amount. There is no let-up in sight. We are working diligently in every area of our business to provide energy-efficient solutions, so I -- we are -- we are determined to continue to do that. In terms of R&D spend--.

Taking R&D spend the last couple of years we have doubled from where we were but probably to a level of about 2% of sales. As Henry said on an absolute basis, it's not one area we are cutting back on a percentage basis that may slip up with the sales coming down somewhat, but, again, at this point, we are looking at spending on the absolute dollar basis to the similar level of the last couple of years, and that's -- we believe that is the important part of delivering value to customers and ultimately to shareholders as well.

Okay. Great, thank you.

Thank you.

Your next question comes from [Cherak Dotel] from Jefferies & Company. Your line is open.

Thanks, good morning. You guys have given us an impact for foreign currency on the sales line of about 2.2%. How did that kind of fall through to the bottom line? Was that a similar impact to the bottom or--?

Actually net of everything and all the currencies we now deal with, I think the impact off profit if I recall was less than $1 million. So it was not as significant on the off profit line.

Okay. Then moving over to the acquisitions, 38.2 were -- is what would you described as -- as three acquisitions. Can you break that out further? Give us a little bit of color on each of the three?

Actually did not bring that detail by business in, predominantly that was -- we had the Alstom business we bought in November of '07 so there was basically the month of October that would have included that number and it was in the neighborhood if I recall 3 million to $5 million. The Hwada and Dutchi businesses were actually fairly similar so it split pretty evenly.

Okay. And then just finally just on the end markets, could you give us a feel for what the -- the breakout was this go-around? For 2008 versus -- versus 2007. How did you get the industrial or commercial, what was the actual percentage breakout?

Actually I probably will update our IR presentation very shortly. I have that data but not in front of me and we will update that presentation and have it out on our website hopefully for the next week or so.

Thank you, guys, I appreciate it.

Thank you.

The next question is Matt Dhane from Tieton Capital Management.

This is Bill Dezellem with Matt Dhane. A couple of questions. The first one, would you please highlight geographic demand regionally and specifically how Asia may or may not be different than other regions of the country -- pardon me of the globe? And secondarily given the -- the significant change in the sales environment starting in November that you highlighted, how has that impacted or altered your acquisition strategy?

Okay. Well -- well, first of all, as it relates to what's happening regionally in sales. We have seen the turn down certainly in southeast Asia particularly in China, and I think that they are feeling it full force the same as we are seeing elsewhere, and I would say we are seeing a little less in India than we have in China.

A lot more. Very deep in Thailand.

Yes, very deep in Thailand. North America and Europe are probably very similar situations. Our situation in Europe, however, because we are relatively new, frankly, we have a positive situation there as we are bringing new products to market. So overall, that is holding up better for us than other regions. Trying to remember your second question?

Acquisition.

Acquisition. Yes, as we are looking at acquisitions right now very frankly, we are looking -- we are keeping our heads up and our eyes open at what things might come along. We have a balance sheet that will allow us to do a certain amount, and so we have earned the right so to speak to keep our heads up. With that said, frankly, this is an environment where we think that it is important to keep the very strong liquidity and a strong balance sheet. So it would take a very unusual opportunity to jar us loose from that. As we move further into this cycle and we -- and we feel more comfortable, then we might loosen up a little bit more and we are certainly continuing to make contacts and look at the opportunities that might exist over the course of the next year. In terms of priorities, we will continue to work on technology priorities where we believe that the technology can be additive to what we do and we can provide better solutions for our customers and end users. Geographically, there are still some things that we would like to accomplish in certain products.

And one point of clarification, relative to China, are you seeing their sale -- the sales in China actually declining? Or is it a slower rate of growth.

As you know the conventional wisdom was a decline in China would be down to 6% growth. I would say at this point that was optimistic discussion on the point of view of most people who said that and we have seen some actuals decline, not nearly as significant in terms of year-over-year as we might see some other locations, but, it's in actual year-over-year decline.

And then switching to India, does that imply that India actually did -- was up slightly given that it was better? Or was it just a -- a very small decline.

Yes, relatively flat, slightly up.

Great, thank you.

We are back to Michael Schneider with his follow-up question.

Hi, good morning, guys, again. The -- a couple of the nets in the quarter. The reclassification of revenue from electrical to mechanical, did you know just roughly what that was in dollars in quarter? And what product lines were actually reclassified?

Yes, offhand, again, I didn't bring that in with me. I guess I'd suggest that we're going to try to get that recasting of that out within the next 24 hours for every quarter, but it was in the area probably of -- the quarter -- yes, probably 6 million to $8 million. There was a couple of items. There were some products that our electrical group has been selling that are now going to be sold by the mechanical group and then some grove pure lease and recasting that had been going on throughout the year so we eventually formalized both of those.

Okay. But for--?

That's kind of a needle mover, Mike.

It is for the mechanical margin which is my next question the 18% operating margin. Is that the run rate going forward or was there something unusual there?

I think an earlier questions talked about that. The one thing that was probably out of the ordinary as compared to the prior three quarters is the year end inventory accounting FIFO, LIFO adjustments and a period of increasing material costs, the -- that inventory adjustment was favorable to the fourth quarter to a tune of about $1 million to $1.5 million.

Okay.

Not something you would have seen in the first three quarters. The businesses we moved from the mechanical segment -- or from the electrical segment into the mechanical segment we're at very similar margin levels to slightly higher. You are not going to see anything terribly disconnected from the past there.

Okay. And the -- net raw material savings or net inflation savings, I guess, in the second half of the year you expect as the hedges roll off. Can you ballpark those for us to give us some confidence again that earnings are going to accelerate?

Mike, the big connection point there obviously is what happens in pricing in the market. I mean, we -- we have not dollarized the savings that we had from hedging in the past or exactly what that is. We have tried to ballpark where we thought the difference between price and inflation was going to come in. I think we are a little too far away from -- from the second half to start making those calls right now.

Okay. And specific on pricing, what portion of your HVAC contracts are actually indexed to copper or indexed to steel such that it is a mechanical deflation that will occur rather than negotiated?

We have about, I would say half of our business is handled that way.

Okay. Then, Dave, final question just to acquisitions. $38 million in the quarter, what is the run rate now with the several deals and just the lower pace of business you expect in Q1 for 2009?

Let's see if I have that in here with me. I think it is going to be in the neighborhood of probably 25 million to $30 million just off the top, because, again, it would be the Hwada and Dutchi acquisitions.

Okay. But presumably you have reduced your revenue assumptions there as well?

Yes, I think the good news is the Dutchi acquisition in Europe, they have actually been holding up pretty well, counter to maybe the overall markets there. It is a fantastic little business as we knew, and their sales coverage is pretty impressive. So they actually have been holding up pretty well. They haven't seen the type of reduction maybe we have seen elsewhere and Hwada, they have supplied Dutchi's internal sales, but they have seen obviously as Henry mentioned a lot of their business stayed in China. They have seen some decrease there. A portion of it came back to the US and they have seen their reductions there but all told, the two acquisitions actually are holding up pretty well considering the overall environment they are in.

Okay. I apologize, one more, Mark. In the HVAC, Broad Ocean has generally been fairly aggressive on pricing. With the decline in copper and steel, have you seen them or other lower cost or at least lower competitive Asian competitors coming in and quoting at spot rates on copper and steel or has that not yet hit?

Mike, it is a little bit unclear what is going on there. Obviously we don't have a good look into what actually they are doing, but our sense is that they have hedged as well, but to be honest with you we don't know exactly where they are at.

Okay, thank you, again.

And our next question comes from Holden Lewis. Your line is open.

Thank you. Just to clarify. I think you actually made some comment about actually getting new pricing in Q4. Did you actually institute additional price increases in Q4? Or are you just referring to continuing to get those that you put in last in the July period?

The answer is the latter.

Okay. But you didn't see any erosion in those -- in those July increases?

No, we did not. Not in the fourth quarter.

Okay. Okay. And I guess the next question relates to sort of the cash flows. This is obviously a poor quarter where operating cash and free cash is concerned, and granted, you didn't -- didn't get a lot of inventory off the balance sheet, but, looks like net working capital was still a slight positive for the quarter. Throw in the earnings and D&A. I am just surprised that operating cash flow was so weak. Do you want to add some color to that?

The biggest challenge that I mentioned that we had, really we have two areas, one was minor, one was the volume coming down obviously, payables, flexes down with that. So while the team has done a good job of continuing on their strategy to improve BPO on an absolute basis payables is under pressure as they are pulling back on raw material inventories and purchases, our standpoint, again, more flex with volume than it was BPO related or DSO related. And, again, the biggest issue we had in the fourth quarter were inventories. We overshot those as I mentioned in the neighborhood of 25 million to $30 million due to the falloff in volume. That no matter how aggressive we were it was a greater falloff, more suddenly than what we expected. We had hoped to see operating cash flow of $30 million or so better than what we did. We are aggressively going after that for this year.

Okay. And could you just comment -- any issues with regards to9 pension and give us a little bit information about when your next financing needs may be? Just add some color to that.

Sure from a pension standpoint, we have obviously have seen what a lot of people have seen which is your pension assets have decreased quite a bit over this past year. I think we are fortunate, we don't have extensive DB plans. We have frozen many of those plans, the new entrants some time ago and then we've also frozen for most of those plans the accruing of any further service. So we have done the prudent things to do to kind of cap what we have and again on an absolute basis our pension plans are not incredibly large. We will see additional funding. A little bit of question yet what that is going to be based on the government's view of the pension law changes they had and whether they will hold to those or back off as it appears it might.

To give you an order of magnitude, last year our DB pension funding was about $3.5 million to $4 million and my guess is that will probably be 10 million to $15 million this year in the third quarter so not something that -- an incredible burden. We will deal with that.

From a financing standpoint, I think we are fortunate to be in a position we are. The soonest refinancing that will come off will be 2012. Our revolving credit facility. That is the soonest item we would have coming at us is still a couple years off. We do have the convertible notes outstanding that we issued in 2004, and March brings the first puts and call date for those. So that, again, could be something that we deal with that -- at this point we would use the revolver if need be to redeem any notes that would come in.

Okay. And just -- give me also a little bit more color. You made reference in the -- in your release to the convertible and $1.4 million sort of noncash interest charge. Then you referred to the comparable amount would have been 1.6 million. So did you take a $1.4 million charge on the interest expense in Q4 this year that wasn't there last year? Just run through the accounting of that for me please?

Sure. The change in the accounting for convertible notes goes into effect for us for '09; however, there will be -- there is the requirement of a restatement of the prior year. So you will see a restatement of 2008 reflecting that noncash interest and basically the principle or theory behind the change in accounting is -- with convertible notes there is obviously a debt component, there's an equity component and those you have to bifurcate and in fact record a market type interest rate. So that's where the noncash interest charge comes from; however, that is amortization that basically for our notes is a five-year amortization. So it runs to the first put and call date which is in March. So that's why we will see the last of that amortization actually recorded in the first quarter and then that's not something that you will see beyond the first quarter. So that amortization period basically expires in March.

Okay. But the 1.4 and the 1.6, that is not actually in the P&L. Just when you restate it will be?

Correct. For '09 it will be in the P&L for first quarter, for prior year it's not in the P&L via restatement.

Okay. So the interest -- the interest expense is at $6.3 million in Q4, that goes up in Q1?

Correct -- yes, you would have whatever goes on on the debt side of that, but you would have an incremental $1.4 noncash interest charge as well?

That is only going to be in the March quarter. Thereafter it goes away?

Correct.

Got it, okay. Thank you.

Okay.

There are no further questions in queue. At this time, I would like to turn the call back on over to Chairman and CEO Henry Knueppel for any closing remarks.

Okay. Thank you. And thank you everyone for joining the call. Clearly we are facing some challenging times. I think the take away we hope that you take from this call is that we did have a record 2008 and a very solid fourth quarter despite the changing conditions. The first quarter is going to be challenging. We are continuing to take the steps necessary to remain flexible and adapt to that environment. We expect sequential improvement thereafter due to improving demand in residential markets, implementation of significant productivity of projects and lower commodity costs.

Finally, and maybe most importantly we believe that the future belongs to strong fundamentals, right sizing, strong balance sheets, operational excellence and leading edge technology that helps customers differentiate their products and users realize solid benefits. Most of all we believe that the future belongs to companies that are armed with talented people and realtime information and best-in-class processes. Regal-Beloit embodies all of those characteristics in our opinion and we expect our business to distinguish itself in that environment. Thank you for joining the call.

This now concludes your fourth-quarter and full year 2008 earnings conference call. You may now disconnect.