Regal Rexnord Corp (RRX) 2009 Q2 法說會逐字稿

Good afternoon, my name is Daryl and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter 2009 earnings conference call. (Operator Instructions) Thank you Mr. Barta you may begin your conference.

All right, thank you, Daryl Good morning everyone, and welcome to the Regal-Beloit second quarter earnings conference call. Joining me are Mark Gliebe our president and COO, Henry Knueppel, chairman and CEO and John Perino, our vice president of investor relations.

Before turning the call over to Henry, I'd like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. forward-looking statements are not guaranteed since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release in our filings with the SEC. Now I'll turn the call over to Henry.

Thanks, Dave. Welcome, everyone and thank you for joining the call and for your interest in Regal-Beloit. We will follow our typical agenda. We will make a few opening commence, Dave Barta will hit the financial aspects of the quarter, Mark Gliebe will cover color on the products market segments and operations I'll talk a little bit about the third quarter and then we will have questions.

First of all let me just say we are very pleased to be able to report our second quarter performance that exceeded first quarter performance and exceeded our expectations at the start of the quarter. The strength over our expectations came from high efficiency motors aimed at the residential HVAC replacement market segment, stronger than expected demand in our India businesses and faster implementation of cost reduction initiatives. The HVAC strength developed almost overnight due to the stimulus package that was enacted in late March. That package provides incentives for homeowners up to $1500 in the form of tax credits for choosing higher efficiency HVAC systems to upgrade the energy efficiency of their home.

Essentially the effect of this incentive is to allow homeowners to upgrade to a higher efficiency HVAC system nearly free with all of the energy savings benefit present and future-- for present and future years accruing to the homeowner. While the stimulus is not creating new demand in that the homeowner would most likely not replace a perfectly good system to take advantage of the credit, we expect that it will move the residential HVAC replacement market from a SEER 13 market to a SEER 16 market. Since the 16th SEER market segment requires more energy efficiency, this is a positive development for us and we benefited from the positive mixed change as our customers adjusted their inventories to meet this changed market requirement during the quarter. On other fronts the news was not as positive. We continued to see deterioration in our late cycle businesses such as power generation and large project business and we saw virtually no seasonal pickup in most of our businesses.

We believe that demand levels are relatively flat but we expect and are in fact seeing a business increase as inventory liquidation in our channels is subsiding. Globally, India remains positive with positive year-over-year revenues in rupee denomination. In China we saw some positive signs albeit small in domestic demand, stabilization and export demand for the US but continued deterioration in demand for Europe. Finally, in Europe we saw declines during the quarter similar to what we saw in North America in the first quarter. The most positive development for us is the continued strong push globally to improve energy efficiency and reduce carbon fingerprints. The developments in this regard are significant and broad base and they portend better things for those companies like Regal-Beloit that bring meaningful technology to the market.

Internally we continue to make progress in cost reduction efforts across the Company. We are on schedule with our head count reductions, plant rationalizations and expenditure reduction plans. These are difficult actions on many levels but our team is executing on or ahead of schedule. Highlights for the quarter were our successful secondary offering and our cash management programs. As you know, we completed a secondary offering in May that raised $150 million. The interest of investors' participating in the offering was strong, resulting in the offering being oversubscribed in that investors indicated desire to purchase more shares than we ultimately decided to offer.

We are particularly pleased that both existing shareholders and new shareholders were rewarded during the post offering -- during and post offering as confidence in industrial companies and in particular in Regal-Beloit strengthened during the quarter. In our case the combination of the offering, our cash management processes and our well laddered debt puts us in a terrific position to weigh opportunities to enhance our company in an environment that will require strategic combinations in consolidation. In summary, there is nothing easy about the quarter. We continued to pound away at fundamentally reducing costs across the Company while taking aggressive steps to prepare for the future. We increased spending on energy efficiency technologies, brought new products to market and strengthened our balance sheet. With that, I'll turn the call over to Dave Barta.

All right. Thanks, Henry and as Henry mentioned we are very pleased in this environment that we did slightly exceed the upper end of our expectations from an EPS standpoint on a higher share count and Henry touched on some of the positives that certainly the favorable mix, the impressive execution of our restructuring projects by our operations team and a significant reduction in inventories were a few of those positive highlights. We also believe we are seeing the slowing of customer inventory destocking and demand is becoming more in line with end market demand and in fact saw sales per week showed a nice improvement as we moved through the quarter. With that as a back drop, sales for the quarter ended up $454.6 million which was a 25% decrease from the $606.3 million reported for the second quarter of 2008, Included in our results this year were $16.3 million in sales for the Dutchy and what all acquisitions completed in 2008 and the CPT acquisition completed in January of this year. FX was a negative (technical difficulty). FX was a reduction in sales of 1.7%.

Electric segment sales decreased 24.7% as compared to the prior year inclusive of the acquisitions. Excluding the the impact to acquisitions, sales decreased 27.7%. Further breakdown commercial industrial motor sales in North America decreased 33.1%, global generator sales decreased 49.1% and sales for the HVAC/R business decreased 4.4%and sales of the mechanical segment decreased 27.5%. One of the bright spots; however, was the sales of high efficiency products which reached 19.7% of total sales as compared to 13% a year ago and 12.9% of total sales last quarter. The gross margin for the quarter was again pressured by the volume reductions and finished at 20.8% as compared to the 21.6% for the second quarter of 2008. Included in cost of goods sold for the quarter was approximately $1.8 million of expense related to the plant moves which are underway.

Operating expenses were up slightly from 2008 at $65.2 million. This reflects $3.8 million in incremental SG&A expenses related to Hwada, Dutchi and CPT acquisition. Additionally, we recorded $0.5 million related to write down to market value for a property we were vacating as part of the plant consolidations Additionally we recorded increases in bad debt, legal reserves for discrete events that added approximately another $3.5 million to SG&A expenses which we hope is something not to have to talk about again in coming quarters. The tax rate for the quarter was 28% versus 35.3% for the second quarter of 2008. This favorability results from a distribution of income on a global basis. Net income attributable to the Company for the quarter was $16.5 million as compared to the adjusted $37.3 million for the second quarter of 2008 on a per share basis, we finished the quarter at $0.47 per share as compared to the prior year adjusted EPS of $1.11.

Turning your attention to the balance sheet debt and cash flow, we ended the quarter with $553.1 million of debt, which is a decrease of $34.2 million from the first quarter. Cash and cash equivalents increased $208.5 million to a total of $290.5 million, reflecting the net proceeds from our secondary offering in the cash generated in the quarter. Just a few more specifics on the offering that Henry mentioned in the middle of May we did complete a secondary offering of our common stock, a total of 4,312,500 shares were issued and this had the impact of increasing the number of shares for the quarter by approximately 1.75 million for the fully diluted share count. The net proceeds of the offering were $150.5 million which is being held as short-term investments. Also on the financing front as mentioned in this morning's release, subsequent to the end of the quarter, we had a couple of holders of our convertible notes notify us of their intent to convert.

While these notes are not puttable again until March of 2014, they are currently and may be in the future convertible if certain requirements are met. The par value in the notes is payable in cash and we have the option to settle the premium portion in cash or shares. The face value of the notes we are -- subject to the notice is $27.6 million. We have elected to pay the premium in shares which because of the treasury method of accounting that we have been using have historically been included in our fully diluted share count. With regard to other cash flow information, depreciation and amortization was $18.5 million for the quarter and CapEx was $10.5 million.

The highlight of our working capital performance for the quarter, which Henry and I have mentioned was the inventory reduction. We decreased inventories $58 million in the quarter and have decreased inventories $90.7 million from the end of 2008 as we strive to improve our inventory turn performance even in this tough environment. This obviously provided a nice benefit to our cash from operations but has certainly a fairly significant impact on fixed overhead absorption. Turning to the forecast for the third quarter, our EPS guidance is presented in yesterday's release is $0.60 to $0.68 per share and as an estimate we are again assuming a sales decline of 20 to 25% including the impact of acquisitions versus the third quarter of 2008 which I should mention was a relatively strong quarter. Last year our sales were up 10% in the third quarter on an organic basis including price. We will; however, see the benefit of plant and other restructuring projects which are predominantly completed at this point and we will have much less restructuring costs. We do expect to incur about another $1 million of costs related to the current plant closures for the final tailout of those costs.

We expect to see SG&A costs drop slightly from the second quarter on an absolute basis as more of our cost reductions read through and hopefully we see the end to other above normal run rate expenses such as bad debt. The amortization of noncash -- the convert, that ended in the first quarter so again interest expense for the third quarter will be a factor of our actual debt levels times the effective rate and interest income will reflect the level of our current invested cash. We are using the tax rate of 30% for the third quarter and I would suggest again using that rate for the fourth quarter but is subject to change based on the distribution of income. We are also using 38 million shares as the share count for the third quarter EPS calculation. We are forecasting capital spending to be $8 million to $12 million, again in the third quarter, and we will at this point keep our full-year capital spending guidance of $40 million to $50 million although currently we are underspending that rate by a slight amount. We also anticipate full-year depreciation amortization to be $60 million to $70 million range as well. Now I'll turn the call over to Mark.

Thanks, Henry. Thanks Dave as Henry mentioned the sales environment during the second quarter continued to be very difficult as we experienced double-digit declines in most of our businesses. India and our HVAC/R businesses were the exceptions. In India, our domestic sales grew by 4% on a rupee basis with strength in the India HVAC segment offset by weakness in the India industrial segment. In our US based HVAC/R business we benefited from the federal stimulus program and a shift to more energy efficient equipment. Generally speaking, the order decline that we saw in our North America motors business beginning in the late fourth quarter and throughout the first two quarters of 2009 has subsided. Our motor businesses are now seeing modest improvements in orders. We believe that our customers have completed the adjustment down of their inventories and are now filling real demand.

Our later cycle businesses such as generators and mechanical gearing continue to see very weak demand and our businesses in Europe which saw the order fall off begin in Q2 are still declining. Our business in China is still very weak driven mostly by a decline in exports. In our HVAC/R business we saw a pronounced shift to our more energy efficient products as our OEM customers shifted their production to higher efficiency heating and cooling equipment. This shift was driven by the federal government's stimulus program which provides up to $1500 in tax credits to consumers who install these qualifying HVAC systems. We believe that the stimulus is not affecting overall HVAC equipment demand but is shifting the mix. The mix shift drove wholesalers and contractors to put some inventory in place to prepare for consumers' changing demands.

HVAC our demand; however, has been very weak, driven by lower housing starts and a cool summer in the Midwest and Northeast. We expect continued weak demand and positive mix into the third quarter and that will affect both our [Gentech] HVAC/R business and our Vasco air moving businesses. Material inflation continued to be a challenge in the second quarter. While copper spot prices are down on a year-over-year basis our hedge position, which was helpful throughout the last three year, voided any benefits. As we move forward, while our hedge positions have improved, the copper spot price is up 95% year to date. Additionally, while steel costs have declined, steel makers have shuttered plants and we are now projecting high steel prices by year end.

Overall we will see some benefits in materials as our historical hedge positions run out. However, those benefits will be tempered by rising copper and steel prices and continued price pressure. As you know, we have been working diligently to maintain and expand our leadership position in new and energy-related products. During the first quarter call we communicated a product launch from our marathon India business of a new line of high voltage integral motors from 750-kilowatt to four-megawatt. We also discussed the launch of our new deep sea valve actuator from our master gear business.

Today we would like to tell you about two additional new products. First we are in the process of expanding our ARKTIC 59ECM platform to include higher horsepower and double shafted motor models. These new versions will allow us to further penetrate the commercial refrigeration segments where our customers are aggressively taking advantage of our energy efficient solutions. We have had much success with the ARKTIC 59 platform since its introduction last year and we believe there is still a significant opportunity in the commercial refrigeration retrofit space. In the second quarter we launched our new electric gear aluminum frame gear box designed for caustic environments such as food service and outdoor applications.

With this new product, we consolidated two product platforms into one, thereby reducing manufactured parts by 20%, total part numbers by 1000 SKUs. We also improved the efficiency of the design to improve torque capability by over 30%. Finally on new products an update on our 460-volt ECMX13 product that we discussed with you on the February 2009 earnings call. Our Gentech HVAC business was recognized for excellent and product design by the Air-conditioning, Heating and Refrigeration news magazine, an independent panel of 41 HVAC contractors acted as judges in the contest that had 124 entries from 84 different brands. The Company's ECM460-volt motor was the top gold winner in the component and accessories category. The product received accolades around its energy efficiency, ease of installation and overall lower operating costs.

From an operations perspective, our focus has been to serve our customers while reducing our inventories and lowering our costs. During the first quarter we reduced our inventory by $32 million and significantly reduced our employment levels at virtually every facility. In the second quarter we reduced our inventory by an incremental $58 million and further reduced our staffing. As we reduced our inventories and downsized our factories, we experienced lost productivity and a drag on our costs. As we head into the third quarter with continued pressure on revenues, we expect only modest reductions in our inventories and a stabilization of our workforce. With the implementation of lean and the reductions in our demands, we have been able to free up space to consolidate our manufacturing facility.

During the first quarter, we successfully completed the transition of our Neillsville Wisconsin facility to Monterey, Mexico. During the second quarter we successfully completed the transfer of production from our Brownsville, Texas facility to our facilities in Monterey and Wausau Wisconsin. Also in the second quarter we nearly completed the transition of our Eldon, Missouri facility to Reynosa, Mexico, Piedras Negras, Mexico and Springfield, Missouri. We executed these moves faster and at a lower cost than originally expected. As we look forward, we will continue to rationalize our facilities and our product platforms to assure that we can compete on a global basis and take advantage of our most efficient locations of product designs. Our next move will be to transition motors made at our [REHI] joint venture facility in Shenzhen, China to our existing wholly own facilities in Zhejiang and Changzhou China. This project has already begun and completed by the end of the first quarter 2010.

In summary the second quarter was very tough but our team executed to take the necessary actions to right size our workforce, reduce our inventory, and still invest in our future. While the decline in our first half sales has been very difficult, the actions we have been taking are balanced with a mix of both offensive and defensive moves. In a single phrase, we are investing in our future while protecting our core. Our leadership team is determined to win this this environment, our employees overall are displaying resilience and a sense of urgency and a willingness to sacrifice in these difficult times. I am confident that we will come out of this recession a clear winner. Thank you and now back to Henry.

Thanks, Mark. As we look forward to the third quarter, we are pleased that we can project significant earnings per share improvement over the second quarter, particularly in light of the additional shares outstanding. The improvement is coming from tedious hard work that our people have been doing to reduce costs in every aspect of our business, rather than from a projected market recovery. In fact, while we do expect the residential HVAC shift to high efficiency to continue, we believe that some of the product we shipped in the second quarter was used to fill the pipeline and will not repeat in the third quarter.

Furthermore, we have had unusually cool summer in the Northeast and Midwest which is muting in demand. While we along with most economists generally globally believe we are near the bottom and some green shoots are appearing we continue to believe there are no clear quick fixes. Despite that macro view, we remain extremely optimistic about our future. We have positioned Regal-Beloit in a leadership role in the secular mega trend of energy and environmental mandates. We have positioned the Company to take better advantage faster growth markets from a flexible low cost global manufacturing platform and we have a strong balance sheet that provides flexibility and fire power. With that we will open it up to questions.

(Operator Instructions) Your first question comes from the line of Mike Schneider from Robert W. Baird. Your line is now open.

Good morning, guys.

Hi, Mike.

Just one, I guess, nonoperating item. You reported the $1.8 million in facility consolidation costs and the $4 million of bad debt legal and restructuring. Could you give us a sense of what was -- what was built into your expectations? I last last you talked about $3 million this quarter. Was there an incremental amount or am I mixing apples and oranges here?

No. The restructuring -- plant restructuring we had anticipated $3 million in costs and we ended up as you said with $1.8 hidden cost of sales and about a half a million that hit SG&A so $2.3 million so we were $700,000 favorable primarily just on , lower cost of getting some of those things done and then there's a million that we will see from those plant restructurings rolling into the third quarter and then the other SG&A , we hope to be one timers but , bad debt and legal and some of those things , are for fairly discrete event but that was not something that we had

And the bad debt, was it the premiere distributor or was it just a series of smaller distributors that added up?

Well, there was actually some specific customers and obviously I won't talk about who they were but some smaller customers that, we felt prudent to reserve given their specific situation.

Okay. And then you mentioned that sales improved weekly. Is that exclusive of the HVAC business or is that -- well, I guess in effect is it true of the industrial motors business?

That was total, so it would have been impacted by both.

And if you carve out HVAC as a result of stimulus, that the industrial motors would be up sequentially as well on a weekly basis?

That's correct.

Okay. And I guess when you look at the impact of reducing inventory, do you have a sense of what you think that hit the quarter in gross margin?

Not really. I guess the other difficulty is always separating out the impact of an inventory reduction versus kind of your normal, we are running obviously lower with lower volume so we hasn't tried to break that out or quantify the pieces.

Okay. And then final question, just on the mix shift, can you give us a sense of what gross margins benefited from the mix shift that occurred during the quarter?

I'd prefer not to.

Okay. Thanks, guys and -- Congratulations.

Mike what we would say to you on that is we obviously don't want to try to get into defining it, but all three of the items that I mentioned were significant to the improvement during the quarter. HVAC was certainly a piece of that and it was a mix shift but shouldn't be looked at as the key ingredient. It was right there along with our cost reductions coming in faster than we had originally planned and the market ended up being better than we had forecasted.

Okay. Thank you again and nice quarter.

Thank you.

Your next question comes from the line of [Dan Whang from B. Riley and company.] Your line is now open.

Yes, good afternoon. First off question was I think you had talked about some of the continued weakness in your late cycle business and power gen in particular, but at this stage do you know what percentage of your revenue is being driven by kind of the late cycle products and how that's trended for the quarter?

Yes. It's not -- it's probably -- I would say in the 20 to 25%. I mean, it varies from time to time and some of this is a little bit fuzzy because you're guessing at specifically whether or not the customers are late cycle or mid cycle but it's probably in that vicinity.

Okay. And just , based on , what you have on the backlog and so forth, I mean, obviously , you kind of going through this adjustment with late cycle kind of catching up to the others, but when do you think the effects of the late cycle weakness kind of fades? Do you think it will happen as we go into FY10, kind of continue through

Yes. I mean, our experience would tell us that we are kind of in the normal, normal arena if you will from past downturns in terms of the lag and that lag is probably in the vicinity of six to nine months where it's starting to play out but I would think certainly by the end of the year it would have played out.

Okay. And obviously your energy efficient products saw very strong growth. I'm not sure if I heard the percentage growth that the energy efficient products experienced.

Yes. The only thing we have been talking about is the percent of total, which was 19.7% for the total and we have been running more in the, 11 to the last quarter almost 13%. So we haven't talked about the specific amount and, actually, if you'd look at that, even though sales were down at the level they were, the energy efficiency products actually , to get to that level, grew a little bit year over year, so seeing really nice across the board, demand for energy

Okay. Got it. And final question, obviously, you have very ample cash on hand subsequent to the offering and your cash flow generated. Obviously , probably acted in looking at potential , acquisitions, but could you just maybe just update us on how that perhaps sort of discussion pipeline is moving along and potential other uses of the cash that

Sure. The pipeline actually is very good. You know, we are very pleased with it. That said, we are not in a hurry. I mean, I don't think anyone should misinterpret that we are in a hurry to accomplish acquisitions just for the sake of getting them done because we have cash. We still think time is on our side, if you will. The valuations in the market are adjusting.

There's more adjustment to come and so, from our standpoint, we will take action anytime we think that it will create value for our shareholders and we are prepared to move forward as we perfect, if you will, the candidates that we are looking at. In terms of other uses for the cash, if we are still sitting here a year from now having not used it, then we would look at the other alternatives that would make sense such as paying down debt or buying back shares but that would be a -- I would say at this point a last resort.

Great thank you very much. Congrats on the quarter.

Thank you.

Your next question comes from the line of [Steve Sanders from Stephens incorporated.] Your line is now open.

Good morning. Nice quarter. Just a follow-up question on the HVAC side. It sounds like some of the strength you would characterize as somewhat temporary. Any additional color you could provide on that would be helpful or maybe just tell us what you're seeing in July.

Yes. This is Mark. Well, there was two pieces to the puzzle. There was a little bit of -- there was a spurt there in mid-May where we think some of the heat that came about at that point in time, while it was short lived, caused a spurt in demand. I think that's driven by the fact that our senses that the inventory in the HVAC channel is rather thin so it moved through rather quickly.

When it comes to energy efficiency, there was what appeared to be somewhat of a pause at the end of June and our sense is that the contractors and wholesalers got product in place to meet the higher efficiency equipment. So the mix shift is still occurring, but there probably was an inventory fill that happened in the first quarter. It was very difficult to quantify but we are just giving you our sense of what we think is going on.

Right. Okay. Thanks. And then on your Asia business, can you give us a sense of , what export piece of that versus the local demand piece is doing? I would think that demand locally is picking up fairly significantly. Just wondering if you're seeing it and whether that's enough to mask some of the weakness you're seeing on the export

It depends on which location in the country we are in. So first of all let's talk about India. As I had mentioned, our India sales on a rupee basis were up for the quarter 4% and we had seen strength in our HVAC business in India offset weakness in our business, and I'm talking now just on a -- I'm talking just domestic.

Right.

I'm not talking about the export piece. The export piece was off significantly for us in India, but on a domestic basis, HVAC was strong. We had a very -- they had a very, very hot summer in India, so that helped, and number two, we did introduce some new products over there that are kind of line extension products for -- in space we did not have a product that helped us. On the industrial side, we saw a pause in India that, like we have seen all over the world on the industrial side, we are optimistic that that will come back faster than perhaps it has here, simply because of the infrastructure growth going on in India. In China, we are more export focused in terms of where our product ends up, even if we saw the product in China, we believe in many cases our customers are exporting, we have not seen -- while we have -- there is better domestic demand, it's not enough to offset the declines we are seeing on an export basis and so in China we are still very weak there.

Okay. Okay. Thanks very much. And then, Dave, I think last call you talked about maybe 16 or $17 million of annualized benefits from the facility closures. Can you just tell us what you would expect to recognize in the back half of this year?

Yes. We still for the most part are on pace on those savings. I think the one caveat is, obviously, at the volume levels we are at now, we are down , call it 20% or thereabouts so -- versus the 15, $16 million, could shave that by 20% and take a half year because we at this point the big one, which was the Eldon move, was , 90% complete at the end of June and some of the others are in that stage are better, so we are -- by next month we should be completely free from the closure efforts and seeing the savings and again as I mentioned, $1 million of restructuring costs yet to hit in the third quarter and then that should

Okay. And actually, one more. I think you talked about 20 to 25% year-over-year sales decline in 3Q. What would that be excluding acquisitions or just ballpark give us what the acquisitions will add.

Yes. At this point we have anniversaried the Wada acquisition, so the CPT is immaterial, it's the Duchy acquisition so you're looking at 10 to a million or so a quarter and that will be for this quarter and then we will anniversary that in the fourth. Okay. Thanks very much. Thank you, Steve.

Your next question comes from the line of Jeff Hammond from KeyBanc. Your line is now open.

Hi. Good afternoon, guys.

Hi, Jeff.

You laid out the restructuring expense , pretty well. Can you just walk through what benefits you got out of the restructuring first half, how that kind of plays out second half and what's incremental into

The first quarter is to go quarter by quarter of the obviously, we still had all of those plants up and running so it was costs only in the first quarter, no savings. And this quarter we have had the full quarter impact of the Nealsville closure which we said was a three to $4 million annualized savings so we had a full quarter benefit of that the second quarter and for all practical purposes the Eldon facility was up and running for most of the quarter so little to no benefit there as well. So net for the first half of the year was net costs due to the restructuring costs and again we will be in a net savings position as we roll into the second half.

Okay. And then if I look back historically, your 2Q and 3Q sales are fairly comparable I guess seasonally and you're looking from anywhere from a three to 10% sequential increase and it sounds like if anything, HVAC is maybe going to back off a little bit. Can you just talk about, what you're seeing sequentially that gives you the confidence you see, some sequential uplift?

I think the main thing, Jeff, in that regard is that we are seeing a lot of our customers coming to the end of their inventory reduction cycle so we have seen an improvement in orders in most of our businesses and I would say that that's true in China as well as what we are seeing over here in the US in our commercial and industrial businesses.

Okay. And then finally, can you just talk a little bit more about the decline in generators. Is that -- were there some cancellations in there. And how are you looking at that business on a go forward basis?

Yes. I mean, obviously it looks substantial and if you went to the last cycle, it was substantial also and it is later cycle. In this case we are kind of facing an extreme. If you recall a year ago, we were -- we talked about the fact that we had unusually high demand in the first half of the year that came from China, one based on the freak snowstorm that they had early in the year and then two was the earthquake and literally situations where we were full out providing generators to those situations for months. So, I mean, we are coming off of what would have been, an unusual high and in this part of the cycle, a lot of commercial buildings aren't being built and rental fleets are not buying and so on. So it is a business that can be a little bit more cyclical, which is still a very good business for us and , one that will, when it comes back, come back very strong as

Okay. Thanks, guys.

Thank you.

Your next question comes from the line of Richard Paget from Morgan Joseph. Your line is now open.

Good morning, everyone.

Good morning.

You talked about the stimulus package helping out some of the residential replacement cycle. How front end loaded do you think that is where right when the stimulus package came out, a lot of customers were taking advantage of that right away and do you think that might trail off going forward or do you think there's still some room for orders coming in from that?

Yes. I believe that it will have legs. I don't believe it's creating new demand. What's happening is , when a customer -- when a consumer needs a new piece of HVAC equipment, the stimulus just financially is makes sense to shift to a more energy efficient product. So when that occurs, there's a mixed shift for both the -- our OEM customer as well as for us, and while there may have been some inventory load in the second quarter, so that the wholesalers could get the product out there, I do believe that it will -- the mixed shift will continue the stimulus money lasts for two years so we expect it to last for two

Okay. So this isn't like cash for clunkers where there's a cap on the funding and it might run out more quickly than anticipated?

I have not heard that from any of our customers.

Okay. And then just switching onto other parts of the stimulus package, I know there's some other larger programs like the GSA spending, $5 billion plus on retrofitting a lot of existing government buildings to be greener, lead certified. Have you started seeing any orders for that or are these projects still in the beginning stages and this is more of a 2010 event?

There's a number of areas where we are touched by the stimulus plan. The particular program you are mentioning, I can't give you any clarity as to whether it's affecting our order rate or not, but we do know that whether it be stimulus or energy regulation or department of energy, energy star programs that are more voluntary those are all active programs that will have an impact on our business either now in terms of the stimulus or in the future as we mentioned in our offering in terms of the industrial side of our business, they will have an impact.

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

Thank you.

Your next question comes from the line of [Nicole Diblas from Deutsche Bank.] Your line is now open.

Good morning, guys, how are you?

Hi, Nicole.

So can you give us a sense of what book to bill was in the second quarter?

Orders to.

Orders to balance.

I don't have an order number handy, I guess just directionally as Mark mentioned we did see orders strengthen and some of our peers have commented on the same now albeit from incredible lows of March. We did see improvement throughout the quarter.

Okay.

I would say overall, Yes, it's pretty close to one, which is an improvement from where we have been in previously quarters.

Great. That's helpful. And then, I mean, I know you guys talked about how restructuring will become a net benefit in the second half of the year. Is there any way you can quantify that in dollar terms? And then can you also give me the 2010 incremental savings?

Yes. The -- again, just to go through the projects, we had said if you add up the plant restructuring projects , based on last year's Volume so again I would say we at this point have to haircut it by 20% or so, we are looking at total plant restructuring savings of on an annual basis of 15 to $16 million, and , our view is and still is those plants will be down, those that aren't down now, will be completed , this month, so we will see almost a half year benefit of that, again, albeit right now on a lower volume level and aren't so half year savings , get down to lower volume level and about a million dollars of restructuring cost yet we have to go this quarter and we should be complete with that. So that is at this point all of the announced projects that are underway and what we should see

Okay. Thanks. And then if you guys can talk about how the revenue guidance that you've provided for the third quarter, how does that build up between the sub segments such as HVAC generators, industrial, et cetera?

Yes, we generally haven't provided that in advance and I actually don't have it in here with me so I'm not able to at this point.

Okay. That's all that I have. Thank you.

Thank you.

(Operator Instructions) Your next question comes from the line of [Bill Dezellem from Titan Capital.] Your line is now open.

Thank you. A couple of questions. First of all, would you please discuss the significant inventory drop that you had this quarter and really what led to it being more than what you had originally anticipated? And somewhat tied in with that, your accounts payable actually increased in spite of that significant inventory drop and I don't know if it's a separate question or somehow related to the first one but if you could tie into that, please.

First on the inventory side , we had to focus obviously on the quarter. We know that we went -- we came out of 2008 with significantly too much inventory. We were building when we didn't have orders so that led to an inventory build and we knew we needed to take it out in Q1 and Q2 and we did. In terms of why it was a little -- why it was better than what we had projected, some of that's related to our HVAC business where we did have strength in product categories that we hadn't expected going into the

Yes. I think also, we and the team played out some pretty strong targets. We -- even in this environment had a goal for our teams to try to get back to their , DIO levels of a year ago which I think in many cases were records for some of our businesses, so there was a lot of effort. We had an internal -- or external commitment to hit the $35 million or so reduction and, the teams did better and some strength in a few of our businesses helped as well.

On the payable side, I think what we are really seeing there is obviously the -- one of the first things you do when you're seeing a downturn like we have seen, you shut off, allow your incoming materials so in the first quarter we significantly reduced the incoming material and really tried to shut off the inventory flow from raw materials and then as we came into the second quarter, were back as many of our customers back into ordering to the demand level so we have actually seen a little bit of a pickup as our incoming raw materials have normalized the demand level. So what that resulted was in AP really dropping during the first quarter and picking up slightly in the second quarter as we would return to kind of a normal flow of inventory and

That is helpful. And then on a completely different front, would you please describe , what you were thinking from a strategy of acquisitions in terms of which countries appear most interest, either that you are in or not in and why? Try to frame a big picture for us if you would,

Sure. I think when you talk about acquisition priorities clearly we are always looking in the areas where we can add the most value and get leverage as opposed to just addition. We continue to be interested in geography, we are continuing to look at opportunities in Southeast Asia and in Europe in particular although we have also looked at some in other areas as well. We are also looking at technology on several fronts where we believe the technology could add to the total solutions that we can offer for energy efficiency or embedded intelligence in our products. So those are the primary kinds of things that we are looking at,. I can't get a lot more specific than that other than to say we have a pretty solid pipeline of opportunities there, you're always dealing when you're dealing in acquisitions, you're dealing with low probability so when you have a good pipeline, that's a good sign .

Thank you.

Your next question comes from the line of [Chris Edwards from Jefferies.] Your line is now open.

Good morning, guys.

Good morning.

Just a couple of quick questions. Going back to inventory, you guys did a great job of taking that down, obviously, in the first half. How much more run room do you think you have in the second half or do you think that kind of levels off here?

Well, it will level off fairly substantially. I mean, there's still opportunities for us, but as you know, when you get into later part of that kind of an exercise, you're dealing in products that are slower moving by their very nature, so slow moving in a slower moving environment takes a while. So it will -- it will not nearly -- will not be nearly as big a factor in the second half.

Okay. That's what I thought but I wanted to see what you guys were thinking. Then switching back over to some of the high efficiency products. I know that -- I think you implied at least that sales of high efficiency might back off with the HVAC in the US a little bit, but would you expect a similar percentage of sales coming from the high efficiency products going forward? You are right around 13% for a long time and now we are up closer to 20 and I'm trying to figure out how long , if that stays where we are in the second half or if it backs off a little

It probably backs off a little bit. I mean, as we said, we have kind of a -- we had this little bit of an unusual situation in the second quarter. However , the trend here is pretty straightforward. We are seeing growth year over year, have now for five consecutive years in energy efficient products. There's legislation that will be coming online, potential additional incentives that will come online that could speed that up again but it is a steady climb that we don't see

Okay. Thank you very much.

Take one more question.

Your last question comes from the line of Holden Lewis from BB&T. Your line is now open.

Great. Thanks.

Hi, Holden.

Good afternoon. I assume you mean one more questioner, because I have two. First, can you -- you mentioned a lot about the HVAC side. Anything coming out of the efficiency standards on the industrial side at this point or is that still too far into the future so much matter?

Well , there is still activity, as you know, in the spending bills that could move the incentive -- create an incentive that would come ahead of the mandated legislation for December 2010. As you know there's a lot of things that are kind of slowed up in Washington so it's difficult to say how that's going to come out. What we know is that the incentive for moving that up was in both the House and the Senate bill versions but , is hard to call what's going to

Okay. But in terms of your percentage increasing, that has pretty much everything to do with the HVAC, it didn't have anything to do with the industrial side sort of contributing as well?

Well, no. I mean, there was contribution to several fronts and not just in the US. I mean, this is not -- certainly HVAC in the second quarter was bigger as a percentage but we are continuing to see growth in all areas of energy efficiency.

Okay. And then can you just also comment, given how much you took the inventories down, what did your production levels look like in Q2 versus Q1 and would you expect them to step up in Q3 and Q4 from the Q2 levels and , in light of the fact you think that the inventory wind-down is largely

Yes, I think you got two things. Number one is we are seeing a step-up to see what's actually coming through from the market in in order levels and then secondly, we are not going to be taking inventory down as fast ourselves so we would expect to step up and that's embedded of course in our guidance.

Are you able to give a sense of how far you stepped things down in Q2 versus Q1 to achieve that inventory reduction?

Not specific enough that I think it would be helpful at the moment, Holden.

Okay. But it was unusually depressed to achieve that in --

No question. No question. I mean, it was a very, very difficult quarter for across the Company.

Okay. And in Q3 you kind of expect to come back up to Q1 type production levels, order of magnitude or --

That's probably a reasonable approximation.

Okay. All right. Great. Thank you.

Okay. Great. We appreciate your questions. Just a few final takeaways. First of all the -- we want to emphasize that the improvement in the second quarter came predominately from cost reduction efforts that are on target and the improvement in the third quarter we think the great news is that they are coming from the same general spot and that is improvements in our cost structure as opposed to general improvements in the market.

So as the markets actually start to improve, we think that holds good news for Regal-Beloit. New energy efficiency products continue to roll. We continue to bring out new products and invest in that technology and have increased our spending in that regard to develop new products and we have a very strong balance sheet. We appreciate your interest in Regal-Beloit. Have a great day.

This concludes today's conference call. You may now disconnect.