Regal Rexnord Corp (RRX) 2010 Q2 法說會逐字稿

Good morning and welcome to the Regal Beloit second-quarter 2010 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note, this call is being recorded. I would now like to turn the conference over to John Perino. Please go ahead.

Thank you, Amy. Good morning and welcome to the Regal Beloit second-quarter 2010 earnings conference call. Joining me today are Henry Knueppel, Chairman and CEO; Mark Gliebe, President and COO; and Pete Rowley, Vice President and Chief Accounting Officer.

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 guarantees since there are inherent difficulties 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'll turn the call over to Henry.

Thank you, John. Welcome, everyone. Thank you for joining the call and for your interest in Regal Beloit. We will follow our normal agenda -- I will make some opening comments; Pete Rowley will give you some financial updates; Mark Gliebe will give you some color on the products, markets and operations; and then I will give you a preview of the third quarter.

And a big sense of the second quarter, we're very pleased to be able to report another sequential improvement in both sales and income and another solid quarter in cash flow. This marked the fifth consecutive quarterly improvement in our sales and income results. While sales levels were considerably higher than the first quarter and prior year, they include $28.7 million related to the CMG acquisition which occurred at the beginning of the second quarter.

As projected at the time of the acquisition, CMG did not contribute to net income this quarter primarily due to purchase accounting inventory step ups. While the headlines for the quarter, as stated, read very well, they could have been even better. Unexpected strong demand in both the first and second quarters in our HVAC segment caused supply-chain issues. We ran into parts shortages in both electronic components and steel laminations, punctuated at the end of the quarter by downtime in our Mexico facilities and with Mexican suppliers due to hurricane Alex.

The severity of these shortages resulted in late shipments to our customers, caused us to incur airfreight and premium freight costs and led to inefficiencies in our plants as much of June we scheduled and rescheduled our lines based on supply availabilities.

I want to thank our people who worked tirelessly through weekends and holidays and applied their considerable talents to improving what could have been a much worse situation. The efforts of our people demonstrated our ongoing commitment to do all that we can to get the job done for our customers.

Fortunately the bulk of our businesses did not experience these supply-chain issues. As you can see from the press release, we saw market segment demand improvements in the quarter in virtually all businesses and geographies with the exception of Europe.

We also want to call your attention to our cash flow; it was another excellent quarter which cash cycle improvements offsetting working capital requirements normally associated with organic growth. While there is an element of working capital, specifically inventory, in our HVAC business that ended the quarter lower than we would like, virtually all of our other businesses improved over prior year measures. With that I'll turn it over to Pete Rowley.

Thanks, Henry. The second-quarter exceeded our guidance despite strong supply challenges and related cost pressures. Overall we saw strong demand increases across our business with most of our US markets up close to 20% and Asia up over 40% versus last year's second quarter. The year-over-year second-quarter HVAC volume growth is significant as we anniversaried the HVAC federal tax credit that began in April of 2009.

Sales for the quarter were $584.2 million, up 28.5% from the same period last year. Sales for the acquired business added $28.7 million to the quarter and, exclusive of the CMG business and the 0.6% effect of foreign exchange rates, organic growth was 21.6% for the quarter.

The integration of our CMG acquisition into our other Southeast Asia businesses got a strong start during the quarter. However, as we forecasted and Henry mentioned, net income was breakeven due to purchase accounting expenses. Also from a reporting perspective we want to draw your attention to the fact that the CMG has operations in both our Electrical and our Mechanical segments.

Turning to segment financials, the Electrical segment second-quarter sales increased 28.4% over the prior year or 23.2% excluding the impact of the CMG acquisition. Within the Electrical segment the residential HVAC motor business increased 21.1%; Commercial and Industrial sales, motor sales, in North America increased 19.7% and global generator sales increased 22.2% over the prior year.

Mechanical segment sales increased 13.3% over the prior year excluding the impact of CMG. We saw some improved orders in our later cycle Mechanical businesses during the second quarter.

Overall sales of high-efficiency products for the second quarter were up significantly in absolute dollars and represented 18.3% of Q2 sales. Also in the second quarter, driven by our acquisition of CMG and a 42.5% increase in our Asia-based sales, we exceeded 30% of total sales outside the US for the first time.

Our gross profit percentage for the second quarter was 24.6% versus 20.8% in the second quarter of last year. As we forecasted, commodity inflation significantly exceeded our pricing actions in the quarter. In addition, the HVAC mix benefits related to the federal tax credits that we saw in the first quarter of 2010 were anniversaried in Q2.

Sequentially second-quarter gross profit was down 120 basis points from the first quarter of 2010. This decrease reflects net material inflation as well as costs of the supply disruptions that Henry mentioned in his comments. Partially offsetting these items was the strong variable cost productivity generated from our VCP Project debt and sales volume leverage.

Operating expenses were up $11.5 million as compared to the prior year. This increase includes $6.4 million of CMG operating expenses and continued higher levels of spending on acquisition-related cost and volume-related veritable costs. As a percent of sales operating expenses were 13.1% for the quarter, down from 14.3% for the same period last year and also down sequentially from 13.4% in the first quarter of 2010.

Income from operations was 11.4% for the quarter versus 6.4% one year ago. Excluding the CMG acquisition income from operations would have been 12% for the quarter. The effective tax rate for the quarter was 31.9% versus our guidance of 31%. Fully diluted earnings per share again were $1.07 versus the $0.47 a year ago with almost 11% more shares outstanding.

As Henry mentioned, our focus on cash flow resulted in operating cash flow for the quarter of $55.4 million. From a balance sheet perspective we repaid $38.7 million of our convertible debt and funded almost $76 million of acquisitions and still closed the quarter with $327 million of cash and investments. Excluding the CMG assets our inventories increased only 1.9% from year end while receivables have increased 29.6% due to our sales volume growth.

In summary, the second quarter was a strong quarter that exceeded our forecast despite the difficult supply-chain issues we encountered. We saw continued strength in energy-efficient products and strong variable cost productivity from our plants. Finally, our continued focus on working capital management produced strong cash flow.

As we look to the third quarter, our earnings guidance released yesterday was $1.12 to $1.18 per share. We expect to have a similar level of supply-chain cost description impacts and continued material cost pressure. Our pricing actions will be a benefit but we still forecast net material inflation of approximately $13 million in the third quarter.

Also in the third quarter we will benefit from plant consolidations that were completed in the second quarter of last year in our CMG acquisition is projected to contribute similar sales volume as Q2 with earnings gains as the purchase accounting inventory step-ups are completed. We're using a tax rate of 32% consistent with our year-to-date results, but again this could vary based on actual distribution of income on a global basis.

We expect CapEx to be in the range of $10 million to $15 million for the third quarter and depreciation and amortization to be between $17 million and $19 million for the quarter. Now I'll turn the call over to Mark.

Thanks, Pete, and good morning, everyone. I'll add a little color on product and operations. As both Henry and Pete said, during the second quarter we experienced year-over-year double-digit sales growth in every business and in every region of the world except for Europe. Sales in our Asia Pacific business improved in the quarter on a sequential basis and were up strong when compared to prior year.

Revenue in our India-based HVAC business was very strong driven by an especially hot season and revenue in our China-based industrial motors and generator businesses were also strong driven by continued infrastructure investments in the region.

The strength that we saw in the first quarter in our North America Commercial and Industrial businesses continued throughout the second quarter. In general, all vertical markets showed year-over-year improvement and we experienced very strong growth in the compressor segment and in the leisure pump space.

In the HVAC segment we finished the quarter with sales up 21% as compared to the same period last year. Unfortunately we carried a sizable backlog into the third quarter as a result of our inability to meet stronger than expected demand. Had we shipped our customers' requirements in the quarter sales would have been up another $11 million. This was after a strong first quarter when our sales were up 33%.

As a result of the stronger-than-expected demand we experienced supply-chain issues from our suppliers of electronic components and steel laminations. In addition, Hurricane Alex swept through Northern Mexico in early July and caused temporary disruptions in a number of our facilities. Hurricane Alex could have been much more worse and we could have had many more service issues had we not had our multi-pull manufacturing capability where we were able to temporarily ship supply over to other facilities.

We are beginning to shift out our backlog and we will rebuild our inventories over the next several months. In addition, we are taking several supply-chain actions to ensure we are better prepared in the future. Our customers believe that this unusually strong demand was driven by a rebuild of channel inventory, the launch of some of their new products to better meet the federal stimulus incentives and the very hot temperatures that we been experiencing over much of the US.

For the second quarter we estimate that the expedite costs from overtime and premium freight costs were $4.2 million and we expect similar expenses in the third quarter. As predicted, material inflation was a significant headwind for the quarter, the price increase that we announced in the first quarter did help offset material inflation but was not enough to cover all the material inflation we've experienced. The gap between material and price was $10 million for the quarter.

The volatility of steel and copper costs will continue to challenge our industry and our customers as we collectively attempt to minimize the impact to our businesses.

As you know, we continue to focus our new product development efforts on energy-efficient products. During the last call we discussed the launch of the high-efficiency right angle gear drive for our Mechanical business as well as the high-efficiency distribution blower for our air moving business. Today we would like to talk about more progress on the energy-efficient front.

First is our new [Arctic SSC] for reach-in refrigerators in the Commercial and Refrigeration segment. This new energy-efficient product is a substantial upgrade to an existing product line that features both two speed and reversing options as well as a patent pending application that starts and operates the motor at a higher speed when the cooler door closes to remove fog from the glass. This unique approach to fog reduction saves cost by eliminating the need for anti-fog glass.

Additionally, the new Arctic SSC will have improved reliability versus its predecessor. The energy efficiency of the Arctic SSC is anywhere from 45% to 300% better than the standard motor that it typically replaces. We are already shipping the new products to our customers.

Next I would like to give you an update on the Energy Independence and Security Act of 2007 or EISA. For the last three years our new product development team within our Commercial and Industrial business has been preparing for the implementation of EISA. As you know, this law goes into effect in December of this year and raises the minimum efficiency levels for many industrial motors.

Historically, our brands serving this industrial motor space have focused on highly engineered short cycle customer requirements. We typically did not pursue the higher volume lower cost opportunities and we did not offer medium voltage industrial motors in the higher power ratings. Our Regal Beloit owned factories were US-based and we outsourced a portion of production to low-cost regions. Further, our IT systems and our quotation processes needed to be updated.

Over the last three years, as a result of our investments and our acquisitions, we have reengineered the business from front to back to position us for the future. Our manufacturing footprint now embodies our multi-pull manufacturing strategies where we will have the ability to produce in three different regions for three distinctly different objectives.

We are using the US facilities for the highly engineered short cycle customer requirements, and Mexico is positioned for the higher volume short cycle business while our Asian facilities are optimized for high volume at the lowest manufacturing cost. We'll have the ability to make our NEMA Premium Motors in all of these factories.

Our products are now featured in a line-up of good, better and best alternatives in order to cover our customers' full range of product application and service needs. Additionally, we now offer very large motors, greater than 3,000 kilowatts, and we have updated our e-commerce and IT systems for ease of use and flexibility.

We are not done, there is more to come. However, we are ready for the EISA implementation. EISA is all about energy efficiency and it is just one part of a long-term global secular trend aimed at reducing electricity demand to reduce greenhouse gases.

The integration of Australia-based CMG into Regal Beloit progressed very well throughout the second quarter. We recently announced to our employees the consolidation of our management teams and our facilities. We have closed two warehouses and reorganized our small fractional motor business around a single sales team. We are very pleased with the management team, the business is performing as we had hoped and we are continuing to mine the synergies.

Overall, we were quite pleased with our second-quarter results. Our only disappointments were the difficulties in keeping up with our customers' requirements. As we look forward into the third quarter of 2010 we see continued order strength in most of our Commercial/Industrial businesses. In the HVAC segment we'll ship the second-quarter backlog, but we will see a decline in orders as part of normal seasonality and an eventual refilling of channel inventories.

We will continue our drive to improve our operations through the further implementation of Lean/Six Sigma and through the execution of our productivity efforts. Our Lean/Six Sigma journey continues to help us improve our service to our customers and the quality of our products. With that I will turn it back over to Henry.

Thanks, Mark. Finally, a look forward. As we look to the third quarter we are pleased to be able to project another sequential improvement in both sales and income. We anticipate the strength will come from later cycle businesses continuing to strengthen; continued mix changes to higher efficiency products; a shift down of our HVAC backlog and continued strength in our air moving and Asian-based businesses.

The quarter will be challenged by cost issues similar to those we saw in the second quarter, primarily as a result of year-over-year materials inflation, not offset by price, expediting costs and plant inefficiencies due to supply issues and some specific costs created by Hurricane Alex.

Looking beyond the third quarter, we are concerned with the macroeconomic issues and the pace of economic recovery. While we are not seeing slowing in our markets at this point, clearly a lasting recovery has to have more balance than is being exhibited. We are, however, optimistic about our business model as we anticipate continuing on our rapid pace of new product introductions, strong productivity programs, our geographic diversification and our acquisition strategies.

Fortunately we have a great team of people, great products and a great balance sheet and we are positioned to take advantage of the opportunities that lie ahead. With that, we will open it up for questions.

(Operator Instructions). Steve Volkmann, Jefferies & Co.

Good morning, gentlemen. I'm wondering if we can dig a little bit into what you're seeing on the price side. A, are things kind of going along as you would have hoped? And B, is there an opportunity perhaps to capture a little bit more of this raw material inflation as we go forward?

Yes, what you would -- if you say is it going along as you had hoped, you would always hope that price could offset the material cost and we have not been able to do that completely from a year ago, as you can tell from the guidance that we've given.

In terms of where we go from here, I think we said last quarter that the increases that we put in place were meant to take care of copper jumps up from last year, steel is now up from where it was in the second quarter. However, copper came down during the quarter and is now coming back up as we speak. So, I would say that we have to see where things go from here. But, if we continue to see the cost push, then obviously we're going to need to take additional pricing actions.

And do you have to wait for a certain period to do that or can you do that whenever you feel like the time is right.

Well, I don't think you can say that you can even just do it when you feel like it. But I think certainly we need to have a little bit better clarity of where these things are going before we would make that decision.

Okay. And then with respect to your expedited costs, you said those would be similar in the third quarter to the second. Will you be able to get around that by the fourth-quarter maybe? Or what's your outlook for how that plays out further out?

Yes, we'll be out of it in the fourth quarter. The normal seasonality will reduce our demand in the HVAC space and we won't have the issue going into Q4.

Okay. And then just a final quick one from me. I'm trying to square a number of comments where we've had this ISA appears to have been getting some of your distributors to restock or stock some new motors I think if I'm understanding this correctly. And I'm just trying to figure out, do these types of activities slow as we go into the end of the year or is there a final end of year pre-buy ahead of 2011?

So far we have not seen a pre-buy, pre-buy activity. And what would happen in that case is our customers would build inventory of the product that's going to be regulated away where we can no longer produce it. We have not seen that kind of behavior so far.

And do you think that's because the payback on these more efficient products is actually fairly compelling?

Well, I think it could be because, number one, that would require them to build inventory and that would require them to make a cash outlay. So that probably has people -- puts people in a little bit more difficult situation, that's point one.

Point two, there have been other legislative proposals on the table that have been considered in Congress that would make that a more risky move. We don't -- there's no update to provide you on whether or not those legislative proposals are going to go through, but that could be influencing the way our customers are thinking about it.

Great, understood. Thank you very much.

Steve Sanders, Stephens.

Hey, good morning, guys. Great quarter.

Thank you.

Just a follow-up on the commodities. So was it steel and copper that were both the issue in the second quarter, was it more steel than copper? And then how does that look for the third quarter?

It was both, but in the second quarter the bigger issue was copper from a year ago. In the third quarter the bit bigger issue will be steel.

Okay, okay. And then, Mark, can you expand a little bit on the comment you just made about some legislation that's being batted around that might make the buying of the old motors a little riskier?

We've mentioned this in the past, it's the concept of crush for credit. Are you familiar with what I'm talking about?

Yes, so, I just wanted to make sure there wasn't anything new there.

No, that's what I'm talking about. And my guess is that that's probably not going to happen, but that would be -- we really don't know yet.

Okay. And then in a similar vein, on the potential to extend the HVAC tax credit or other things that are brewing out there that might be good for the energy efficiency business, anything incremental there?

There's the Home Star program that's sitting there. And if the Home Star program were to get passed that would replace the stimulus incentives that have benefited the business. There are also discussions of extending the stimulus benefits around energy-efficient products. So both of those things would be a positive to us. But neither has been -- a final decision has not been made on either.

Okay, okay. And then, Henry, regarding your somewhat cautious macro commentary, it doesn't sound like you're seeing it significantly in your order book yet. And so just to clarify, I'm assuming it's just more the headline-related issues that we're all seeing, is that fair?

That's correct. I mean, I think all of us realize that the consumer has to come back, you have to have a balance. And so we certainly are not seeing that yet.

Okay. And so how does that somewhat of a change in tone impact your M&A strategy? Is it as simple as, regardless of size, if the strategic fit was right and the price was right and you had the liquidity to do the deal you'd do the deal? Or does it make you a little bit more cautious on large deals versus small deals?

It doesn't really change what our thoughts are. We were not -- we have never really just done bet the farm kind of things. So it doesn't change our thought process. We would continue to keep a strong balance sheet in any situation.

Okay, all right, thank you very much.

Thank you.

Mike Halloran, R.W. Baird.

Morning. Just to make sure I understand the full impact of the supply-chain disruptions. It was an $11 million revenue hit in the second quarter and, Mike, my understanding is that will more or less then translate into revenue, comparable revenue into the third quarter?

That's our estimate. Now there's always a chance that there's a piece of that that our customers find another alternative for. But our estimate is that that will carry into the third quarter.

And when you commented earlier about the seasonality being a little bit lower in HVAC 2Q to 3Q, I understand that's pretty normal. But with the disruptions pushing some revenue back into the third quarter is that still going to be in place?

Well, on an order trend basis our orders will experience the normal seasonality. From a revenue perspective we are expecting -- we are $11 million stronger than -- in the third quarter than we would have been had we been able to ship it all in the second quarter.

And could you refresh my memory then on an overall company basis what the typical sequential trend is from an earnings perspective second quarter to third quarter?

Typically it goes -- the strongest quarter is typically the second quarter followed by the third quarter followed by the first quarter followed by the fourth quarter.

And so when you think about the peak typically being the second quarter, obviously this year some of the disruptions kind of mitigate that. Could you talk a little bit about some of the strengthening things that you're seeing in the environment. Is it just the HVAC switching over and you're expecting more normalized seasonal trends 2Q to 3Q and that translates into a little bit better earnings or is there something else going on?

Well, we also have -- Mike, the later cycle businesses are still strengthening. They do follow course and so we're still seeing strengthening in those businesses coming into play that would be somewhat counter to the normal cyclical slowdown that we would see in our Commercial and Industrial business this time of year. So, that's a little extra boost as well.

Not sure. And our Fasco air moving business has more of a furnace build, so that is a third quarter -- typically a higher third quarter than second for that business as well.

And when you are thinking again, broad-based again, you guys have been talking about pretty strong trends through most of your business units. Are you seeing any areas where you aren't seeing at least a normal seasonal trend through the year so far?

Well, again, we are seeing some resurgence, if you will, in the later cycle. So typically, if you looked at our Commercial and Industrial business and you looked at the power generation business and the Mechanical power transmission business, that part that is related to North America, we start to see those businesses slow down a little bit in the third quarter.

We are not seeing that this year. They are still on the rise. So it is a little different than what we consider to be normal cycle, but it is coming out of what was a non-normal situation.

Appreciate the time.

Christopher Glynn, Oppenheimer.

Thanks. Just wondering if you could quantify the purchase accounting impact.

It is negligible for the quarter. I mean the inventory step-up didn't have a significant impact for the quarter, so $0.01 to $0.02.

Okay. And just looking at the high end of the guidance if we take some of the acquisition-related costs and some conditional purchase accounting and integration, it seems like we could get to the high end just on some of that stuff going away. So just wondering if the guidance really accounts for the revenue push into the third quarter.

It does account for it. You need to remember that we are going to see a much more significant materials impact in the quarter. And we are expecting to see continuation of the supply-side issues that we talked about in the second quarter.

Okay, but we could think of that $4 million headwind kind of a sequential benefit in the fourth quarter, I guess?

Yes, offset by what would be normal seasonality of sales.

Okay, and then just on the pricing, are you seeing -- it's always a challenge as you have noted. Is it looking more competitive or more customer negotiations versus historical? Anything interesting in that context?

I wouldn't say there is anything unique or special. Like Henry mentioned, it is always a battle with every customer, but there is nothing unique.

Okay, great. Thanks very much.

Nicole DeBlase, Deutsche Bank.

Good morning, guys. I hate to talk about pricing again. You've had a lot of questions on that this morning. But is there any possible way you could quantify how much pricing you took in the second quarter, and then what you expect to take in the second -- or in the third quarter?

Price did turn positive in the second quarter versus what we saw in the first quarter. So directionally, the net material came down from Q1 to Q2 by about $2 million. So that impact is right around the same area that we are forecasting for Q3.

Okay, got it. And then could you just review what you've baked in for copper for the third quarter and steel as well?

We don't -- Nicole, we just don't give very specific information along those lines.

Okay.

Yes, I mean copper is going to be reasonably consistent from second quarter to third quarter. Steel goes up.

Got it. Thanks, that's helpful. And could you just update us on how the CFO search is going?

Well, we're midstream. We feel pretty good about the slate of candidates. So we would still hope that during the third quarter we will be able to announce a replacement.

Okay, great. And I have one more if I may. Could you just give us an update on what you're expecting for the tax rate in the third quarter?

We had 32%, Nicole.

Okay, thank you.

Mark Douglass, Longbow Research.

Hi, guys, this is [Derek Josie] on for Mark. I kind of had a question about the supply chain issue. Is there any way you can break that down and quantify the expedited freight and the different components of what that cost you during the quarter?

I don't have the specific details. The areas that you typically incur added costs on our, number one, as you mentioned, freight. Number two, you run your plant over time and then, three, you just have general inefficiencies of the facilities. Unfortunately I don't have the specifics.

Okay, I'll follow up on that. And I guess as you look out you kind of have mentioned raw materials for next quarter and fourth quarter. As you look into 2011 in terms of your hedging, is there anything out there that you see where you may be either more aggressive or less aggressive on your hedging strategy?

I don't -- we've never tried to do just straight timing kinds of hedging. Obviously you do pay attention to what you think is happening or what you see happening with inventories and what you see coming at you from a supply standpoint and make your best shot at what's going to happen on the demand side.

We've moved back out a little bit from where we've been over the last two years based on the fact that things were improving and inventories were reducing a little bit. But it's a little bit premature to say where we are for 2011.

Okay. And lastly, I was kind of wondering about your CapEx, what your outlook is for CapEx?

We're a little bit behind where we would've expected to be at this point. But I think overall for the year we may be off of the number that we said a little bit, but it's going to be pretty close.

Okay. Thanks a lot, guys, I appreciate it.

Thank you.

Walt Liptak, Barrington Research.

Hi, thanks, guys. And thanks for the clarity about the one-time items during the quarter. And if we back those out we get to a nice gross margin. I wonder if you could help us with your gross margin expectation for the third quarter.

I think we'll continue to see the pressure and we came down from Q1 to Q2. So I would expect that it would be more in the range of Q2 going forward based on the higher commodities and the net inflation that we're going to see there, Walt, I think that's the best guess at this point.

Yes, the only color I would add to that probably is that CMG will start to contribute; it won't be great at first, it will be a steady ramp over the next two years. But at least we'll be out of the scenario where it's holding us back half a point.

For op earnings, yes.

Okay, thank you.

Bill Dezellem, Tieton Capital.

Thank you. Two questions. Would you please provide more detail around what you see going on in Europe, please? I think you mentioned that was your only market, it was not up double digit. And then the second question is your acquisition pipeline, would you please update us there also, please?

In terms of Europe it's not -- we don't see it getting worse, it just is not -- we're not seeing improvement at this juncture. We've seen more activity from a quoting standpoint over the last two to three months, we've seen some improvement in that. But in terms of actual orders and shipments and so on we're not seeing it.

In terms of acquisition activity, as Pete mentioned, we had additional reasonably heavy costs in the quarter from some of the work that we're doing on acquisitions. So that tells you that we're certainly active. The pipeline we think aligns well strategically. There's just a lot of work involved in acquisitions to make sure that the ones that we do are going to be additive, if you will, to shareholder value.

So, there's nothing new to report at this point other than the pipeline continues to be, we think, reasonably good -- I'll change that and say solid. And we're working on a number of opportunities.

And circling back to Europe, the issues that took place over the last few months in Greece and Spain, you did not see those actually have an impact on your -- a negative impact on your business?

No.

Thank you.

Jeffrey Hammond, KeyBanc Capital Markets.

Hi, good morning, guys.

Hi, Jeff.

Hey, just to double back on the acquisitions. I mean, if we look at the timeline you guys kind of went out, raised equity in mid-2009, you spent less than half of that, around half of it, and you've talked about an active pipeline. Just give us a better sense, is it bid ask is still far away or due diligence just takes time, be patient, or is stuff falling out of the pipeline? Just a better sense of why perhaps we haven't gotten more done to this point.

Yes, I think that's a pretty good synopsis -- all of the above.

Okay.

I mean, acquisitions, as you know, Jeff, are just never straightforward and easy. I mean, as you know, we prefer to do negotiated deals, those take different timelines to mature. So, it's just something that we work all the time and I'm still not disappointed that we raised equity when we did.

I think it was a positive event for our shareholders in terms of the way the market looked at it. And I think it provided us with some opportunities, had the situation stayed -- the kind of credit situation that we were facing at that time stayed the way it was we could have had some incredible opportunities and right now we're faced with the problem of having a very strong balance sheet and improving opportunities on a global basis, which I don't consider to be a big problem.

Right. Now as you see that kind of globally things get healthier, are you seeing more competition for deals or that's being balanced with more things coming to the table?

Yes, well private equity is certainly back in the game. They were out of it for a while -- I shouldn't say out of it totally, but they lost ground there for a period of time for about two years and they're certainly back. Money is certainly available. So there is more competition I think on the deals that are going through the auction process.

Negotiated deals are negotiated deals. So by their very nature you're digging those out where other people aren't treading because you have something to offer that they like or the fit makes more sense than they think they could get through an auction process. So, it varies by deal.

Okay. And then, one of your competitors as been -- has discussed the EISA standard and what they think the impact is on their business into 2011. Have you gone through that analysis? And if so, what kind of bump do you see into 2011 either on a revenue or earnings basis or both?

We have talked about that and would be happy to add some color to that. The EISA law impact, it's -- I've got to get the statistics right here. The industrial part of our business is 40% of it and the EISA law impacts --

Roughly 20% of that.

-- roughly 20% of that. And so that's the part of the business that's going to be impacted in terms of efficiency levels changing on those particular motors. And those motors, we have been saying that we -- because you're adding material to the motor to get the efficiency level the cost of the motor would go up, the price of the motor would go up. And we've said roughly 15% to 20% on the price. And in terms of margins, we view that to be fleet average margin or slightly better than that.

Okay. And then a couple moving pieces on high efficiency because you've been running high teens here. If we assume that the stimulus tax credit gets extended or we get Home Star through and we get the EISA standard, what should that number look like? And then conversely, if the tax credit or Home Star doesn't get extended and we get the EISA standard, what does that mix look like?

I don't think we've done the exact analysis. I do think that in this particular quarter, because of CMG the number was pulled -- the percentage was pulled down a little bit, probably a point or two.

Right.

But I think we'll do the analysis and we can get you on a follow-up question in terms of if everything converts the way we think it will what do we think it will be by Q1 or Q2. That's not a difficult exercise to do, we can do that.

Okay, thanks, guys.

(Operator Instructions).

Okay, well, if there are no further questions, again we'd like to thank you for joining the call. The takeaways from the call in our opinion are that the second quarter showed solid progress in nearly all market segments; we have work to do to take care of customers and reduce inefficiencies from supply shortages; new products continue to roll; our balance sheet is strong; the acquisition pipeline is solid and strategically aligned and we appreciate your interest in Regal Beloit. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.