Regal Rexnord Corp (RRX) 2009 Q4 法說會逐字稿

Good morning, and welcome to the fourth quarter 2009 earnings conference call. My name is Crissy, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. (Operator Instructions).

At this time, I would like to turn the event over to John Perino, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you Crissy. Good morning and welcome to the Regal Beloit fourth quarter earnings conference call. Joining me today are Henry Knueppel, Chairman and CEO, Mark Gliebe, President and COO, and Dave Barta, our Chief Financial Officer.

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 our filings with the SEC. Now I would like to turn the call over to Henry.

Thank you John. Welcome everyone and thank you for joining the call, and for your interest in Regal Beloit. We will follow our normal agenda today. I will make some opening comments, Dave Barta will give some financial aspects of the quarter, Mark will give you color on products, markets, and operations, and then I will preview the first quarter and beyond, and we will open up for questions and answers.

Let me just say that first of all we are extremely pleased to be able to report sequentially flat sales in light of the fact that the fourth quarter is normally sequentially weaker. While sales were down 4.1% from last year's fourth quarter, they marked the third consecutive quarter of relative improvement. When we reported on the third quarter we stated that business was better due to growth in energy efficient products and to then ending of inventory liquidation phase of the cycle.

As we view the fourth quarter we continue to see improvement in demand for energy efficient products. And in addition we saw two encouraging developments. First we saw improvement that we believe came from our customers exporting more of their equipment due to the weak dollar. While their exports were muted due to a weak global economy, they were positive sequentially. Second, we saw improvements in demand in most of our residential-oriented products. We believe that the residential markets are improving, albeit slowly.

Other pluses on the sales line were growth in emerging markets and new product sales. Still down were our project-based businesses, some commercial construction-oriented products, Europe in general, and our late cycle businesses including power generation and our mechanical business. From an earnings standpoint we must again carefully delineate the transient nature of some of the tailwinds for the quarter. These include commodities help, due to year-over-year hedge comparisons, and related LIFO impact. More importantly, however, were the improvements that came from production volume and productivity.

For the quarter we were surprised by the strength in what is normally a down quarter. The strength was actually reasonably broad-based as compared to our expectations, and we experienced very few customer shutdowns during the quarter. A second positive point on sales was the continued growth of more energy-efficient products. As a front runner on energy efficient products, this deep-rooted trend continues to bode well for our future. Certainly we were pleased with our earnings leverage that came from cost-out actions we took early in the year. As we have chronicled for you in previous calls, our operating teams have done an incredible job of reducing costs and improving processes across the Company. We are pleased with the progress the teams made in what was a very difficult environment, and we want to thank every employee for their accomplishments. Finally, we continued to strengthen our balance sheet throughout the quarter, capping a terrific year in cash management.

With that, I will turn the call over to Dave Barta.

Thanks, Henry. We are very pleased to report fourth quarter and full year results that reflected the continued successful execution of our strategic plan, and the efforts of our associates globally. While we certainly could not alter the impact of the global economic difficulties, we were successful in optimizing our performance, and we believe demonstrating the transformation that Regal Beloit has and is continuing to go through to be a great company in good times and bad, and I think Henry touched on some of the highlights, but certainly the key highlights from the quarter and the year were the strong cash performance, the resiliency of margins, and the continued success of new products, and the cost reduction and productivity results that our operations teams delivered.

Down 4.1% for the quarter, sales were $463.3 million, as compared to the $483 million a year ago. All of the acquisitions have been anniversaried, so this is a purely organic comparison. The FX impact was a positive 1.4%. From a segment standpoint, electrical segment sales decreased 2.4% as compared to the prior year. A further breakdown of that segment, commercial and industrial motor sales in North America decreased 14.9%, global generator sales decreased 34%, and sales for the residential HVAC business increased 13.2%. We would like to point out that generator business is more of a late cycle business, and it held up much longer than most of our other businesses, and came off a very successful prior two-year run. Sales in the mechanical segment decreased 17.1%.

As we mentioned in the release sales of high efficiency products were 17.2% of total sales, as compared to 12.8% a year ago, and 19.3% of sales last quarter. This sequential decrease is a result of the seasonality of our HVAC business. In almost every other business sales of high efficiency products showed a sequential increase. Gross margin for the quarter finished at 27%, as compared to 23.7% for the fourth quarter of 2008. We had strong productivity results, mixed benefit from new products. We benefited by lower material cost, much more so as a result of our hedging activity, as we saw the spot prices increase throughout the quarter, which in addition to our reduction in inventory, resulted in a positive LIFO benefit. As a matter of record, the LIFO was a function of the product input costs and level of inventory. In 2009 we saw benefits from both factors, as we reduced a substantial amount of inventory.

Specifically in the fourth quarter the benefit exceeded what was included in our guidance. When you look at the full year, however, and view FIFO, the Q1 inventory reval in conjunction with the LIFO, the net impact for the year was not material. However in the fourth quarter we did report a LIFO benefit of around $15 million, which exceeded our guidance by approximately $8 million.

Operating expenses were $71.6 million versus $75 million a year ago. As we mentioned in the release included in the fourth quarter operating expenses was an incremental $5.2 million from the reduction of carrying-value of certain assets. The most significant was the write-down to market for certain excess properties and facilities. The tax rate for the quarter was 27.7% versus 33.9% for the fourth quarter of 2008. We had originally expected a rate of 30%, and that difference the 30% results from a distribution of income on a global basis. Net income attributable to the Company for the quarter was $34.6 million, compared to the adjusted $20.6 million for the fourth quarter of 2008. Fully diluted EPS was $0.90 versus $0.63 a year ago, on almost 18% greater share count.

Turning your attention to the balance sheet, we ended the quarter with $476.5 million of debt, which is a decrease of $54.1 million from the third quarter and a reduction of almost 100 million from the end of 2008. Additional $48.2 million face value of convertible notes were converted by holders during the quarter, resulting in that reduction of debt. We again elected to pay the premium in shares, which because of the Treasury method of accounting has been historically included in our fully diluted share count.

We ended the quarter with cash and investments totaling $380 million, versus $365 million at the end of the third quarter, and versus $65 million at the end of 2008. We couldn't be more pleased with our team's cash execution in the fourth quarter, which often is a neutral or negative cash quarter for the Company, and operating cash ended at $79.4 million for the fourth quarter, including a reduction of about $23 million worth of working capital. Let's get right on to other cash flow information. Depreciation and amortization was $18.6 million for the quarter, and CapEx was $7.7 million.

I will turn and make some comments on the first quarter, and Henry and Mark will cover greater details. Our EPS guidance as presented in yesterday's release, was $0.76 to $0.84 per share. We are basing this forecast on a sales increase of high single to low double digits. And once again we are going to continue to see the benefit of the previously-announced plant consolidation and other productivity products. We are however expecting inflation pressures to increase, which will offset a large part of that volume benefit. We do expect to see SG&A costs drop slightly from the fourth quarter on an absolute basis, as we are not forecasting any extraordinary type expenses.

We are using a tax rate of 30% for the first quarter, which I would also suggest using for the full year. This could vary again based on our distribution of income on a global basis. We are expecting capital spending of $8 million to $12 million for the quarter, depreciation and amortization in the range of $16 million to $19 million, and for the full year we are expecting CapEx of $60 million to $70 million. Now note that this is a little bit higher than our historic running rate, as we are planning on the purchase of two Asian-based facilities for existing operations. That totals about $22 million. And depreciation and amortization is forecast to be $65 million to $75 million for the full year. Now I will turn the call over to Mark.

Thanks, Dave, and good morning everyone. As both Henry and Dave indicated, the fourth quarter of 2009 was somewhat stronger in volume than we had anticipated. Segment growth in HVAC and improved order rates in our global industrial markets both contributed positively to our performance. Additionally we continue to experience a market shift to our more energy-efficient products. In HVAC thin inventory levels throughout the channels caused end market demand to convert to orders quickly.

We believe that the end market demand improved as a result of stimulus funding of tax rebates for energy-efficient HVAC systems, and as a result of a modest late-year pull in of R-22 systems, which will no longer be manufactured as a result of Federal legislation around HVAC refrigerants. Sales in our Asia-Pacific businesses improved in the quarter on a sequential basis, and when compared to prior year external sales in our Asia Pacific businesses were up slightly. Our generator business in China was the exception, as it continues to struggle with double-digit sales decline.

As you know we have been focusing our new product development efforts on energy-efficient products. This secular trend on energy efficiency continues to build up steam, and we are working as fast as we can to answer our customers' calls for energy-efficient solutions. During the third quarter we communicated our new line of energy efficient IEC integral horsepower motors, manufactured in our India facility. We also discussed the launch of our new Durst transfer case for hybrid powered refuse trucks. Today we would like to tell you about two additional new products. First under our Marathon brand, we have recently announced our new [M Power Plus] variable speed pool motor. This product is built on the M power platform that we launched in Australia back in late 2008, and is targeted for the US pool market, where power requirements are higher.

The new M Power Plus uses a new and exciting permanent magnet motor construction, in pursuit of increased energy efficiency, and higher power density over traditional motors. The M Power Plus is a drop-in replacement for standard pool motors, and it allows homeowners to replace their current induction motor with the M Power Plus, to save approximately $125 per year in northern states, where the pool season is typically four months long, and approximately $420 per year in warmer climates. Additionally the patent pending motor mounted user interface provides the homeowner the ability to change speeds either remotely, or by pressing the top side speed selection buttons.

Next under our Genteq brand, we are in the process of launching our 1-horsepower 142R ECM motor. This is the latest edition of a high efficiency variable speed outdoor motors of the Genteq 142R product line. Whereas the majority of our ECM products are intended for indoor residential applications, this high-powered permanent magnet motor is ideally suited for outdoor, light commercial applications, such as rooftop HVAC systems and chillers. Side by side with an induction motor the new 142R ECM motor uses 20% less power, and boasts efficiencies up to 75%. This product has a high ambient temperature rating providing years of reliable, energy-saving operation. The 1-horsepower ECM 142R also features speed ramping for decreased fan noise, and black box diagnostics for reporting field data back to the manufacturers.

Overall we were quite pleased with our fourth quarter results, especially given the troubled economy. As we look forward to the first quarter of 2010, we see a modest recovery as compared to a very weak 2009. We see this recovery most clearly in our earlier cycle businesses, such as HVAC/R, and a few of our industrial segments, and we see it somewhat less clearly in our late cycle businesses, such as mechanical and generators. Additionally we see continued improvement in our Asia-based businesses. We are somewhat concerned about the sharp increases in commodities that we have experienced over the last seven months, as well as the recent commodity volatility.

We have recently announced price increases in many of our businesses. Price increases alone will not cover all the inflation, however, and we will therefore continue our drive to improve our operations through the implementation of Lean Six Sigma, and through the execution of our productivity desk. Our Lean Six Sigma journey continues to help us improve our service to our customers, and the quality of our products. We are excited about our progress, committed to the journey, and humbled by the opportunities that lie ahead.

Finally there continues to be a tremendous amount of legislative activity around improving the energy efficiency of electric motors, and around improving the efficiency of equipment that utilizes electric motors. There is the Stimulus funding for energy efficiency tax rebates. There is the ISO law that will legislate higher efficiency levels for integral horsepower motors, there is the Energy Star ratings on water heaters that require higher efficiency levels, there is the proposed HVAC regional SEER ratings, there is the proposed Crush for Credit legislation, and there are a number of other energy-efficiency legislative proposals in the US, Asia, and Europe. Not all of them will make a lasting impact, but it makes for an exciting time for Regal Beloit and our customers. As Henry stated earlier, it bodes well for our future.

With that, I will turn it back over to Henry.

Thanks, Mark. As we look at the first quarter we are pleased to be able to project another sequential improvement in sales. We expect the improvement to follow the same story lines as the fourth quarter improvement, coming from improvements in residential markets, industrial products, due predominantly to exports of customers' equipment, emerging markets, and energy efficient products across all markets and geographies. Growth will be paced by global recovery, but incremental to where we have been. Income will improve on a year-over-year basis, but will be somewhat muted by commodity, inflation, and related negative LIFO effects, both of which were significant but temporary tailwinds in the fourth quarter.

Looking beyond the first quarter we remain very optimistic about our future. We believe that we will see some choppiness in our markets, and perhaps an abnormal seasonal pattern for the coming year. But overall we expect that they will gradually strengthen. We expect faster growth in our emerging markets, with a growing base and faster growth prospects, we expect to benefit from the increasing impact on our overall growth profile. In addition, we will continue to roll out new intelligent, energy efficient products. These products provide real benefit to our customers and to the end users, and energy legislation will continue to accelerate the transition. 2010 will be another record year for us in new product introductions in all geographies.

We believe that our continued investment in these programs in 2009 will reward our shareholders in 2010 and beyond. We are also continuing to increase the depth and breadth of our Lean Six Sigma programs. We have said all along that it is a journey with great annuities, and it is, and we are being rewarded for earnestly taking on the journey. The cost actions that we implemented this past year were very difficult, but necessary. Fortunately we did not have to resort to cost-out actions that had to be reversed, such as 401(k) cuts or salary reductions. Any costs we add-back now will be done deliberately. Thus we should be able to leverage growth as the recovery gains strength. We are also poised to continue our strategy to be a consistent strategic acquirer.

With our strong balance sheet and cash flow we are in position to take advantage of any opportunities. We have a solid pipeline but we will continue to be patient. We want the right opportunities so that we can leverage value creation for our shareholders. While 2009 was in many respects a very difficult year, and certainly the most challenging to many of our careers, we believe we'll be looked in hindsight as having provided long-term benefit to Regal Beloit.

We have over the last several years transformed Regal Beloit into a different company. We said as we entered the downturn we would fair better than in past downturns, and we have. In fact we have fared better than a significant majority of companies. The reasons include better geographic balance, better market balance, better new product development, Lean Six Sigma and productivity programs, improved working capital disciplines, and most importantly, the talent of our people and the disciplines and quality of our processes. It is the talent and strength and character of our people that gives me the most optimism. Talented people with great tools are prepared and perform in any environment.

Our team stepped up to the challenges of what many are calling The Great Recession, and they are prepared to deal with the challenges in 2010 and beyond. With that, we will open it up to questions.

Your first question comes from Mike Schneider with Robert W. Baird. Your line is now open.

Morning, guys. Fantastic quarter.

Thank you, Mike.

Maybe first we could just talk about at least some of the tailwinds so we can understand just what turns into a headwind next year. Dave you mentioned LIFO was about a $15 million tailwind, about twice what you expected. Was there an extra week in the quarter as well, 14 versus 13?

We did. And that week would have -- and certainly in North America where the bulk of our business is, would have resulted in three extra business days between Christmas and New Year's.

Okay. And while those are slow days, would that equate to literally an extra 7.5% to sales? And then the drop through associated with that?

I didn't try to look at that. But that sounds a little heavy. I would have said it probably was less than that. But certainly a little bit of tailwind due to the calendar.

Was the extra week in your guidance, or was that just something that fell out after the accounting period?

No. That was in our guidance and had been I think communicated previously, that it would be a 53-week year.

Okay. And then materials in the quarter, if I missed it I apologize. Sequentially was the benefit greater, and then as your hedges now begin to reset to market, can you give us a sense of just where the biggest step down in that benefit is? Is it Q1 or Q2?

It starts pretty effectively, probably Q2 would be worse than Q1 from our standpoint. It effectively steps up as we go through the first quarter.

Okay. And within mechanical, margins seem to be bouncing around quite a bit. Is that where the asset impairment was booked? Or is there something else impacting those margins?

I think there was just -- well, there were a couple of facilities that were in the mechanical, half and half or thereabouts. But certainly that business as you know is more North American centric, in terms of manufacturing. So they were really pressured in terms of gross margins by the volume, the absorption lost through the lower volumes.

Okay. And where was the asset reduction or carrying value booked?

SG&A.

Was it for electrical?

There was both electrical and mechanical within that.

Okay. And then the price increases that you have announced, we have heard at least some of your competitors have gone out with high 2%, 2.9%. Can you give us a sense of what the range is, if you weighed an average across your businesses, and then what the effective dates of those are?

The range, Mike, is between 3.5% and 7%, and the effective dates would be early March.

Early March. Okay. Thank you. I will get back in line.

Thanks.

Your next question comes from Steve Volkmann with Jefferies & Company. Your line is now open.

Good morning, guys. This is Chris Edwards on for Steve.

Hi, Chris.

Just one question in particular. One of your competitors is out with some new products and mentioned on their recent call that they are starting to take some wins in the HVAC market with their higher efficiency product. How are you guys thinking about that? What kind of market share do you think that they might be able to take? And what is your outlook for that?

Yes. I don't think we can get into what kind of market share they will be able to take. All of those things are dependent upon the whole value stream as customers perceive it. Our view has always been, and we have said this for a number of years, there will be many competitors. The space is growing, and a lot of people are aiming at it. We have good IP, and we will protect our IP, I can assure you of that. But there are always other ways of accomplishing any given task. So we are not sitting still. We continue to work on new products. Mark has been rolling those out every quarter, and you have heard him talk about them. We continue to update our current technology and not relax. So the only thing that we can do is go work on what we believe we can do to add value for our customers.

I understand that, but with an extra competitor in the arena, particularly one that is relatively well-known, do you expect there to be deep pricing or margin pressure? Or how are you thinking about that?

Well, I think in any business any point in time, there are any number of competitors who are attempting to work various strategies. And so we are continuing to work our strategy of providing additional value and take costs out, so that we can be cost effective and benefit heavy to our customers, so that they gain the real value. If our customers win, we win. And there will be some wins and losses. There are in any business any time. But at this point, we feel pretty comfortable with the kinds of things that we are bringing to market.

Have you seen anybody indicate that they might switch yet? Or is it really too early?

Well, I mean, yes, we are not going to go into the specifics of that. I mean, we know of gives and takes in every market we are in, and so there is not something that we feel compelled to talk about because it is of significance that we should talk about.

All right. Thank you very much. I will get back in line.

The next question comes from Christopher Glenn from Oppenheimer. Your line is now open. Christopher Glynn: Thanks. Yes, Henry, I think you had a comment of maybe you would see normal seasonality. I am wondering if that suggests that, now and in the first quarter you are not seeing a prebuy ahead of price, or anticipating that, or really a restocking activity that then the second quarter would have to compare to?

Yes. I think I said we may see abnormal. We just saw an abnormal fourth quarter. Normally we would have seen the fourth quarter slow down from the third quarter. And it was essentially flat. And I think given the way we would think inventories are in good shape in all of the channels, but our view of the economy this year is it could be a pretty choppy economy with quick starts and stops. And so maybe less predictable if you will from a normal seasonal pattern.

Okay. And what are your kind of thoughts on the resi HVAC OEM intentions given we have had shipments and orders and raised guidance from some of those players?

Well, I mean, as we have said we expect it to continue to strengthen. We are working off of some all-time lows, including everything from cold weather in the summers to virtually no home starts. So I think most of our customers are projecting up high-single digits kind of arena. Mark would you agree with that?

Yes. Mid to high.

Mid to high single digits. So we are expecting it to improve as we go through the year.

Okay. Then just lastly, you mentioned that maybe a bigger impact sequentially on the raws inflation into the second quarter, but with the late March start of price, would the net price cost up economics kind of neutralize from the 1Q to the 2Q?

That certainly is our objective. As you know we have been chasing that gap now for four years. So we still haven't caught up. And you have got two sides that we obviously know what we are going into the market with in terms of price, but the wild card is what happens on the cost side, and as Mark said, copper has been anywhere from $3.00 to $3.40 in the last couple of weeks. And there is certainly pressure on other commodities, and with other products we buy. So that is always our objective. But at this point I guess I would say it is too early to make that call.

Okay. Thanks, guys.

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

Good afternoon, guys.

Hi, Jeff.

It sounds like on the high efficiency side the mix is pretty sustainable. I mean, if you look at kind of 17% for full year '09, how would you think about that number for a run rate in '10?

I wouldn't say that we are ready to project a run rate, but we would expect it to continue to strengthen. We are seeing the activities and demand and legislation virtually everywhere we do business. So we had very nice growth this last year. There was certainly a piece of that that will continue through 2010 having to do with the Stimulus that pushed it up. But then again at the end of the year in 2010 we have the ISO legislation that will come into play for 2011 and beyond for integral horsepower. And there is still discussion about extending the credits, tax credits for residential applications as well, and perhaps even improving them. So there is an awful lot going on there, Jeff. And our view is this is just one of those trends that has a lot of deep roots. It is going to keep coming.

Okay. Great. And then you mentioned your later cycle business is still kind of bouncing along the bottom. But any signals there that we are ready to kind of start moving off the bottom? Or early signs of sequential improvement or end of destocking?

Well, we have seen the improvement that we talked about in the fourth quarter in bookings and in our commercial and industrial businesses that we do believe is coming from some strength in exports. The global economy hasn't recovered totally, so those are somewhat muted, but we do believe that there is improvement that is coming there. And we would expect that to continue and strengthen.

Okay. Thanks, guys.

Your next question comes from Allison Poliniak with Wells Fargo. Your line is now open.

You talked about two new facilities in Asia. Is that replacing what you have over there, or is this brand new for you?

Yes. We have two businesses in Asia, actually one in China and one in India. The China one was the Hwada business that we purchased a couple of years ago. We bought that business we knew at that time we had to move from the current location. So that is an existing business, something we knew about. And this is the year that we are going to make that move. Then we have a facility in India where we are looking at purchasing our facilities. So it could be a new facility, but it is a current business. So this is not a Greenfield start-up.

Okay. And then Henry, during the last peak you talked about a mid-teen operating margin goal, and this cycle obviously you have done a lot of consolidations and productivity efforts. Should we theoretically be looking at a higher goal as we enter the next peak?

Well, there are always a lot of moving parts, Allison. Competition typically is doing similar things. So it can take what you would think in a static environment and change it significantly. Our goal right now is to get to the mid-teens. We have a lot of work to do there, but we think there is a clear path to get there through energy efficient products and new products and growth, and through making our own operations more efficient. So we are still I would say aiming at that level.

Okay. Great. Thank you.

Thank you.

Your next question comes from Walt Liptak from Barrington Research. Your line is now open.

Good morning, guys. Great quarter.

Hi Walt. Thank you.

My first question is on the price increase and the price/cost relationship. Have you provided a data point for gross margin for the first quarter?

We did not. Just the EPS and somewhat of a view of the top line.

Can you give us an idea of the trajectory sequentially?

Yes. Certainly off of the fourth quarter, if you go into the first quarter we are not going to have the LIFO favorability. A large part of that LIFO benefit was driven by the fact we reduced inventories and kept them down. And our goal going forward is certainly to not add-back in inventory as growth happens. Any other piece would be the commodity or input costs. And as we mentioned we are staring at inflationary pressures to a degree. So certainly the LIFO benefit is going to disappear. Beyond that, as Henry mentioned, volume sequentially will be a little bit of a help. We are certainly working on the cost reduction projects. We are continuing to see the benefit from the plant rationalizations we went through this year, but you have got a pretty big headwind coming off the fourth quarter, given we don't have that LIFO benefit.

Okay. Got it. On an annual basis, though, you would expect with volumes and the price increase, higher gross, significantly higher gross margins?

Well, that is certainly -- the strategy of the company is to work on both gross margin and SG&A costs, as Henry just mentioned, to get to that mid-teens op profit level. I think the wild cards we have got, we should have a benefit this year from volumes. The wild card and right now the big headwind is going to be on materials.

Okay. With the price increase not effective until the first quarter, or I mean I am sorry I think you said early March, are you expecting any kind of a prebuy ahead of that price increase? And how does that factor into your guidance of midpoint $0.80?

I think it is a little too early to predict that. Our price increase just went out recently, and it is effective in 30 days. So if it were to all happen, it would happen in a 30-day timeframe. So we are not expecting it, and can't really predict it at this point.

So it is not happening yet?

That is correct.

Okay. And then let me just ask this one just to ask it, the midpoint of first quarter, $0.80 of EPS. You made comments about seasonality changing. But typically first quarter is weak to strong/strong for the second/third, and then weaker for the fourth. If we just take the $0.80 and multiply by four, we are getting a pretty big EPS number that is way above the Street. Is there something wrong with that math?

Well, the math is pretty hard for us to criticize four times eight, right? I think the difficult call this year really is just how is this market going to react. Right now we are feeling some strength. But at the same time we are feeling that strength you see some weakness coming from Europe that is new and hasn't been factored in. A little less bullishness perhaps even here in the US in terms of the sentiment. We have seen the market kind of where we were in a rally phase, pull back over the first part of January. Typically when that is happening it is happening because people are becoming more cautious for various reasons. We certainly have a lot of activity in the government that can cause you to be cautious. And so it is just a very difficult one for us to call. There is nothing wrong with your math, but I wouldn't overjuice anybody's thoughts based on normal seasonality.

Okay. Got it. Okay. Thanks, guys

Your next question comes from Mark Douglass from Longbow Research. Your line is now open.

Hi, gentlemen.

Good morning, Mark.

What were the order rates like in the quarter? Do you provide that?

We generally don't as a routine matter. But I would say as Henry mentioned, our orders have been pretty strong. And at least matched the sales rate. So we haven't seen anything way outside of that either direction.

So you are at least a book to bill of one, maybe a little ahead?

In that area. It depends greatly as you imagine by business.

Sure. Just in general. Okay. That is helpful. And then there is the so-called pent-up demand in resident HVAC, with expectations there. Is a lot of this going to be replacement demand for the foreseeable future? And what are your thoughts on new housing starts? Do you think it is closer to 700 or 800? I mean, where do you fall on that side of the fence?

On housing starts, our view is 750 is a pretty good number. Could vary off of that a little bit either way. But we think that is a pretty good number. Mark.

I think Henry made the comment before about what we are hearing from customers. It is mid to high single-digit increases depending on the customer that you talk to, and that takes into consideration both any replacement market, as well as new housing starts. So that is how they are thinking about.

Okay. So that would be kind of a combination of both?

Right.

Okay. And then you say for high efficiency residential was down sequentially?

Well, when it comes to the high-efficient products, part of the decrease from over 19% of our total sales to 17% was driven by the HVAC. And just again, seasonally that is not the strong season for their high-efficient products to go into that space. So that was the reason why we dropped from a little over 19% to 17% and change.

Right. But then the other markets were showing increasing strength.

Right. Outside of HVAC, almost every business that has high-efficient products were up, including some of our industrial and commercial refrigeration, and so forth.

Including mechanical as well?

Yes.

Okay. Thank you.

Your next question comes from Nicole DeBlase from Deutsche Bank.

Good morning, guys. So just a few for you. Thinking about free cash flow, how are you guys viewing the current M&A pipeline, and maybe describe other uses of cash flow if the M&A pipeline is not very strong right now?

Activity level is certainly picking up pretty strongly. We like our pipeline. There has been a gap as you know between sellers' expectations and buyers' reality. So we are still dealing with that. We like the pipeline. If over a longer period of time we, and again I would just emphasize we don't think that this economy is back on firm footing. We still think there is plenty of opportunities still to come. So we are going to stay patient with that. But over a longer period of time if we didn't feel the pipeline would support or the opportunities would support the use of cash then we would do the other things that companies typically do, pay down debt or buy back shares.

Okay, thanks. Residential OEM inventory movements, can you talk about how that trended during the fourth quarter?

The feedback we get from our customers is that the inventory channels are very thin. And we believe that to be true just because we can feel the pickup in our own demand. And we believe it was selling right through the OEM, right through the wholesaler channel. So we continue to believe that inventory is thin. And that is as a result of customers cashing up during the decline, as well as all of them improving their own operations and cycle times.

Okay. Would you expect to see any material restock during 2010 at this point?

I don't think so. I don't think there is going to be a significant stocking up. I think they are all going to try to continue to run thin just so that they can be very tuned in to what could be a choppy market.

Okay. Could you possibly give us -- quantify the R22 pull-through impact that you saw in the fourth quarter?

We heard from a couple customers that if it did happen the term modest is the way they would describe it. And I asked the same question of them. They didn't know. We don't have a view of that ourselves, so we have to get that data from our customers. But the feedback we got was if it happened, it was modest. We heard one customer say it didn't, we heard a couple others say that it did, but it was modest. And if it does have an impact, it will obviously impact Q1 and Q2, and would come out in that timeframe.

Okay, great. Thanks, guys.

Thanks.

Your next question comes from Bill Dezellem from Tieton Capital Management. Your line is now open.

Thank you. A couple of questions. First of all, relative to the mechanical segment, what opportunities if any are you folks seeing to improve the margins there without a big increase in sales?

Well, that has traditionally been a pretty high margin piece of our business. And clearly it is volume sensitive. So we are fighting the battles currently. We are working on a number of cost-out measures, and a number of new product opportunities that we would hope would restore that business to its traditional margins. But there isn't a single big consolidation or restructuring that we have planned.

And the new products, are you feeling as though those may have a strong enough potential to actually drive the sales growth that you have historically needed for margins? Or are those just simply new products that are higher margin in and of themselves?

Well, certainly we think that we can drive our growth rates higher with those products. I think the bigger issue at the moment this is just this is a later cycle business. So they are in the throes, if you will. We think that the business levels in terms of bookings and so on have flattened, and may be seeing the beginning points of some improvement. So just coming off of being down as far as they will, will bring us a long way back by itself.

And then next question is, on the working capital front, do you have more reductions planned, or are you generally feeling like your working capital is now in the position you would like to see it?

Well, Bill, we are always as you know, looking at how to take working capital out of the business. And I think it is hard to repeat the type of success we had this year. But we do have further working capital improvements in our plan for 2010. And our businesses are committed to that. And I think at this point we are reacting to the volume down, and we took out a lot of the, if you will, the slop that businesses sometimes have when maybe they are not as focused as they should. And I think from here forward a lot of these changes, certainly on inventory and receivables, is going to be improving the way we do business. And those things we are confident there are opportunities, but those oftentimes take a little more effort to get to. But we are still committed to, we have got some businesses on one hand that are running levels of inventory and performance that they have never been at in their history. But there are still opportunities, but they will be certainly more modest than what you saw this year.

Thank you both.

Your next question comes from Mike Schneider with Robert W. Baird. Your line is now open.

Dave, along those same lines of working capital, when you say you are striving to reduce working capital levels, does that mean in absolute dollars, that you would still suffer from under-absorption as you go into 2010? Or do your production rates today generally match what you are selling through out the door?

I think it is the latter. I think our production rates are now matching demand very closely. We certainly feel as Mark said, when you see the demand coming it seems like, more quickly through your customers. And we have got to react very quickly, and we did in the fourth quarter, so I think we are matching it. So on an absolute basis it is going to track to volume. We measure it based on the cash cycle days impact, and that is where we are looking to make those improvements. So I don't see any kind of big disconnect between production volume and demand.

Sure. So during Q4 did you actually enjoy better absorption, or are you still suffering from under-absorption at the plant level?

Well, I guess suffering it would all depend on what base period you're looking at. Certainly from volume levels of '08 yes, we are still down. But we were matching demand, so we weren't under-absorbing to the demand level.

Okay. And then just Q1 I am curious with the price increases issued, and presumably some greater confidence in the distribution channel, would you expect there to be at least some level of prebuying ahead of the March effective dates?

Yes. I think you are looking at a small ripple, Mike, not a huge one.

Okay. So it is not something you've baked into your forecast?

No. And we don't expect it to be meaningful. I mean our past experience with that, there are a few people who take a small bite, but it isn't a big number.

Okay. And just final question, on the international growth rate, what was the growth this quarter? And I am sorry if I missed it.

External sales of our Asia Pacific businesses were like up 1% for Q4.

Okay. Thank you.

A little bit of clarity there, Mike, I think we saw nice growth in a number of our businesses, but it was held back substantially by our generator business in China, which a year ago was flying pretty high. Okay? Time for one last question.

Your last question comes from Steve [Vanman] from Jefferies & Company. Your line is now open.

Steve? Okay. Evidently Steve either fell off or is on mute. So with that I guess we will close off the question and answer period. I would like to leave you with a few takeaways. First of all, the fourth quarter was benefited by a couple of temporary tailwinds, but also meaningfully by improvement in our markets, new energy efficient products, and productivity. First quarter we will experience more market strength in the headwinds in commodities. New products will continue to roll, and our balance sheet puts us in a position to take advantage of any opportunities. We certainly appreciate your interest in Regal Beloit. Have a great day.

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