Regal Rexnord Corp (RRX) 2010 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter 2010 earnings conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. John Perino. Mr. Perino, please go ahead.

Good morning, Amy, and thank you for participating in the Regal Beloit fourth quarter 2010 earnings conference call. Joining me today are Henry Knueppel, Chairman and CEO; Mark Gliebe, President and COO; and Chuck Hinrichs, Vice President and CFO.

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 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 John. Welcome everyone, and thank you for joining the call and for your interest in Regal Beloit. We are going to follow our typical agenda. I'll make a few opening comments. Chuck Hinrichs is going to give a financial update. Mark Gliebe will provide you a color on products markets and operations. I will then give you a forward look, our best view of the first quarter and we'll open up for Q&A.

Overall, the fourth quarter as we had projected turned out to be a difficult quarter. The big headwinds came from commodity prices and seasonally slow fourth quarter HVAC market. These two headwinds were somewhat offset by continued strength in nearly all other markets. Regarding commodities, there is little more that can be said. We began the quarter expecting the then $3.80 copper price to continue through the quarter. We were clearly wrong as it promptly moved up and finished in the $4.30 range. We took pricing actions early in the quarter in an attempt to offset what had been a major move from $2.95 to $3.80 copper it could not be enacted fast enough. With copper now at $4.30 and today a little higher and steel moving up aggressively, we have implemented yet another price increase that will be effective later in the first quarter. This is a frustrating situation for everyone in our industry and one we can only hope will settle down soon.

Regarding HVAC business, the fourth quarter seasonally low was somewhat magnified by some customers taking out additional inventory in their inventory reduction plans. The good news is that we believe it is behind us, and we view inventories to be below industry-desired levels as we enter 2011.

On other fronts, we continue to see strengthening in our later cycle businesses somewhat offset by normal seasonal trends but clearly moving in the right direction. The highlights for the quarter with the acquisition of Elco and Unico and the motors business of A.O. Smith. All of these are exciting, well managed and in sync with our strategies of adding technology, geographic reach, and synergetic business growth. Elco closed early in the quarter and is on track. Unico closed on schedule prior to year end, and we are completing the regulatory filings and requirements in the motors business of A.O. Smith.

As we review the full year of 2010, it was truly a great year for Regal Beloit. We completed the year despite the fourth quarter issues with 22.5% growth in sales, record earnings, record new product introductions, record acquisitions of great companies, strategically aligned, and we still have strong pipelines on both the new product and acquisition fronts and a strong balance sheet to support both. We are really pleased with our record number of new product introductions in 2010. We fully expect 2011 to finish with another new record.

Our teams are energized by the challenges of energy efficiency and embedded intelligence, and they are changing the face of technology in the markets we serve. All things considered, 2010 was a great year for Regal Beloit.

With that, I'll turn it over to Chuck Hinrichs.

Thank you, Henry, and good morning, everyone. We are very pleased with our results for the fourth quarter 2010 as we posted strong sales growth and solid cash flow from operations.

Sales for the fourth quarter of 2010 were $555.7 million, an increase of $92.4 million or 20% over the fourth quarter of 2009. Sales growth in the fourth quarter was primarily due to the addition of $56.8 million of sales from the acquired companies and some early gains from the fourth quarter price increase. For the full year 2010, total sales of $2.238 billion were up $411.7 million or 22.5% as compared to sales in 2009. Sales growth was driven by volume gains and the addition of sales from the companies we acquired in 2010, primarily CMG, Rotor, and Elco. The acquired companies added $119.5 million in sales for the full year of 2010.

Our gross profit percentage for the third quarter of 2010 was 23.4%, down from the fourth quarter of 2009, but in line with the third quarter of 2010. I want to focus on two issues impacting our gross margin, LIFO and the continued run up in copper prices. First, let me comment on the LIFO differences in the fourth quarter of 2010, we had a LIFO expense of $13.4 million. You will recall that in the fourth quarter of 2009, we had a LIFO benefit of $15 million, that is a difference of $28 million from the prior year and negatively impacted the fourth quarter of 2010. Excluding the LIFO impact from both periods, the gross margin percentage for the fourth quarter of 2010 was higher than for the fourth quarter of 2009.

The other discussion item relating to our gross margin is the continued rise in copper prices. Let me give you some data, average spot copper prices for the fourth quarter of 2010 were $3.93 per pound. an increase of $0.92 or 30.6% compared to the fourth quarter of last year, and an increase of $0.63 or 19.1%, compared to the third quarter of 2010. For the month of January 2011, copper prices have again, increased an average $4.34 per pound.

As we have communicated in the past, we have an active and successful commodity hedging program that mitigates some of these price spikes. But even with our commodity-hedging program, this past increase in copper prices pressures our operating margins. We are also seeing an increase in prices for the steel we use in our manufacturing processes.

Mark will update you further on our current price increase initiative. This next slide approximates the seasonal pattern of our quarterly sales. We have excluded the more recent acquisitions for comparison purposes. You can see the typical seasonal drop from third quarter to fourth quarter with some recovery in the first quarter. Next slide, number eight provides additional financial highlights.

Our capital expenditure in the fourth quarter were $15 million and $45 million for the full year of 2010. Over the last 20 years, our capital spending has averaged 2.4% of sales. For 2011, as we previously communicated, our capital spending will approach $90 million as we complete two relocations of our factories in China and close on the purchases of a previously leased factory in India.

Our depreciation and amortization was $18.6 million in the fourth quarter of 2010 and should be approximately $19 million in the first quarter of 2011. Our tax provision was 22.7% in the fourth quarter of 2010, lower than my earlier guidance of 28% as we benefited from the extension of the R&D tax credit in December. This positive variance in the tax provision contributed $0.05 per share to the quarter. For the full year 2010, our effective tax rate was 29.9%. I would expect our tax rate for 2011 to be in the 31% to 32% range.

Turning to the balance sheet, our year-end cash position was good at $231 million, even after funding the Unico acquisition in December. Our balance sheet remains strong with excellent liquidity and financial flexibility. Our total debt to EBITDA ratio was 1.4 times at year end. For the first quarter of 2011, we expect earnings to be in the range of $0.92 to $0.98 per share. In the first quarter, we will see improving sales volume and increased realizations from the fourth quarter 2010 price increase, but we will also experience increased costs for our commodity inputs.

Now, I'll turn the call over to Mark Gliebe.

Thanks, Chuck, and good morning, everyone. During the fourth quarter of 2010, we experienced high-single digit to double-digit sales growth in almost every business and region, our mechanical businesses, which compete in later cycle business segments continue their strong rebound in the quarter with sales up 18.5%. While sales in our Asia-based businesses were up 16%, driven by robust economies in China and India.

The strength that we saw in the first three quarters in our North American commercial and industrial businesses continued throughout the fourth quarter, with OEM sales up 13% and distribution sales up 14%, compared with prior year.

During the quarter, the Energy Independence and Security Act of 2007 or EISA legislation went into effect on December 19. The law prohibits manufacturers from producing motors below minimal efficiency targets.Our operations impacted by the EISA law are now supplying motors that meet the new laws. We did see a small inventory buildup of the older, less efficient, and lower cost motors. And we expect a small impact to be felt in the first quarter of 2011. Additionally, the Canadian government unexpectedly delayed the implementation of their similar legislation to a later date in 2011.

In the HVAC segment, despite a greater than expected slow down at the end of year, we finished the quarter with sales up 1%. Our customer's slow production in December to adjust inventories near year end. As we began the first quarter of 2011, demand is strong as customers build back their inventories and customers appear optimistic about their first quarter outlook.

In spite of sales growth in most of our businesses, we ended the quarter with operating income lower than last year. This resulted from three primary drivers. First, as Chuck mentioned we have the issue of inflationary commodities. Next and closely related, we have a year-over-year LIFO swing in the quarter of approximately $28 million. And last, we had $2.6 million of acquisition cost related to the A.O. Smith and Unico transactions.

The commodity inflation that we are currently experiencing requires us to again address pricing. At the end of the third quarter, copper was nearing $3.80 a pound, up 29% from $2.95 a pound at the end of the second quarter. Around that time, Regal Beloit announced price increases ranging from 5% to 8%. Today, copper is at $4.30 a pound up another 15%. This past week, we announced additional price increases to address the continuing inflation. As Henry mentioned, this is a frustrating experience for us and our customers. We continue to work very hard at finding lower cost approaches to producing our products throughout our Company as well as mining the synergy savings of our new acquisitions. However, productivity alone is not enough to offset the inflation we are experiencing. And so we are forced to increase selling price to help offset rising input costs.

On the acquisition front, we closed two transactions in the quarter, Elco on November 1, and Unico on December 23. The integration of both businesses into Regal Beloit are progressing very well. We are very excited about the energy and the creativity from the new management teams and are quite optimistic about the technology they bring to the Regal Beloit family. The businesses are performing as we had hoped. We are sharing best practices across our related businesses, and we are beginning to mine the synergies.

As you know, we continue to focus our new product development efforts and energy efficient products. During the last call, we previewed our new Eon motor and we also introduced our new draft inducer blower for 80 plus furnaces. While we have a number of new exciting energy-efficient products to share with you today, I would like to take the time this morning to talk about a different type of new product, one that comes from our latest acquisition, Unico. Unico recently introduced a novel new system for the production of oil and gas. The new crank rod pump or CRP system combines products from three Regal Beloit divisions along with some novel mechanics into an integrated application engineer system. Oil and gas is typically produced by beam pumping units sometimes referred to us horsehead pumps or nodding donkeys.There are approximately 500,000 beam pumps operating in the US CRP was developed to offer an attractive alternative to beam pumps for wells with depth up to 3,000 feet. CRP systems have significant advantages in terms of performance, costs, esthetics, and safety. This combination of Marathon motors, Subsidy gear boxes, and Unico variable speed drives uses advanced motion-control technology to optimize oil or gas production and reduce down hole equipment failures. The CRP system mounts directly to the wellhead and can be transported to the site in a small truck. Conventional pumping units generally require a large cement mounting pad and come to the site on a semi-truck. The small footprint, simple installation and less intrusive transportation logistics have big appeal to operators in environmentally sensitive areas. The inherent safety of the unit, along with its quiet operation, are attractive in the areas where residential and oil and gas production operations are starting to overlap. The exceptional energy efficiency of the CRP system also makes it an ideal technology for solar-powered pumping in areas without electric power.

As you can tell, we are very excited about the new products from Unico. We are also very excited about our recently announced agreements to acquire A.O. Smith's electric products company. As you know, the closing is still subject to normal regulatory approval so we are unable to begin integration; however, we do have the ability to begin planning our integration around specific activities. So far, the cultural (inaudible) appears to be everything we had hoped for, and we feel great about the management team that will be joining the company.

Overall, given the commodity headwinds and unfavorable year-over-year LIFO comparisons, we were pleased with the fourth quarter results. As we look forward into the first quarter of 2011, we see continued order strength in all of our business segments. The key headwinds for the quarter will again be material inflation. Unfortunately, we had to announce our second price increase in three months, and we continue to drive productivity in all of our operations. The excitement of our recent acquisitions is being felt in every geographical region of our Company. Elco, and Rotor in Europe, CMG in the Asia Pacific, and Unico, and the pending acquisition of A.O. Smith in North America and China. It is an exciting time to be a part of our Company.

With that, I'll turn now back over to Henry.

Thanks, Mark. As we look at the first quarter, we will continue to be challenged by commodities. And we have again taken pricing actions that we expect to offset most of the current inflation but these actions won't go into effect until later in the quarter.

As we have repeatedly seen in the past year, we simply cannot predict with any certainty if or to what extent commodity costs will continue to run. While commodity inflation is frustrating, we will continue work on what we can control. We will continue to introduce new products at a record pace, and they will be aligned with customer and market needs for higher efficiency and more intelligent products. We will continue to implement lean six-sigma across the Company and accelerate the positive impacts on all aspects of our business.

We will continue to rapidly integrate the acquisitions that were completed in 2010. And we will continue to generate cash and work to integrate the A.O. Smith motor business when that transaction is closed. Together these acquisitions are expected to add revenue in excess of $1 billion. We will also to continue to pursue an active pipeline of additional acquisition opportunities, and we will actively deploy the strategy recently completed by Mark and his leadership team, and we will continue to aggressively develop our people across the Company. We are blessed with an incredible team of people. Their talent and energy are difficult to adequately describe and impossible to overstate. At the end of the day, they are the difference and the reason to confidently say that our best days lay ahead of us.

With that, we will open up for questions and answers -- questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

At this time, we will pause momentary to assemble our roster. I do apologize in advance for any mispronunciations. Wendy Caplan, Suntrust.

Can you all give us a sense of -- I know different facilities have different levels but can you give us an update in terms of capacity utilization in the fourth quarter and kind of some trends in that area, please.

Sure . As you said, Wendy, it's all over the map. Certainly, we have pretty good capacity utilization in our Asian businesses. HVAC was not taxed in the fourth quarter. Commercial Industrial is probably now up into the low 70s reasonably across the board, and I would say Europe is still weak. So, probably in the mid-60s to high 60s.

Okay, thanks, Henry. And certainly international expansion has been an important metric for you all, and can you talk about any new markets that you are focused on for 2011 and how do you anticipate if we were standing here a year from now, sadly, you wouldn't be here with us, Henry, I'm guessing, but what would the international-pie piece look like?

Well, as you can see, we finished this year up, another nice notch up, as we take a look at the acquisition mix of what we completed this year, the mix is pretty good. I would say that A.O. Smith motor's business is a little less international percentage-wise, so that might pull percentages back a little bit but the dollars will be up significantly. Hopefully, we will continue to seek out some additional opportunities internationally. I think when you look at the footprint now that we have, and the product lineup that we have, I think we are set to continue to grow pretty rapidly, taking advantage of the economies we are in. Unico certainly brings some unique new footprint to the Company in a number of areas. And we think there are some synergetic plays there. Our goal, I think as Mark laid out at the December analyst meeting is to be 50% outside the US in the next five years. We believe that's achievable and that's what we are aimed toward.

Finally, can you give us the number in terms of R&D spend this year and what your expectations are for 2011?

Wendy, we'll have that information later when our K comes out ,we are tying out those numbers to make sure we are accurate.

Thanks, Chuck, appreciate it very much.

Thank you, Wendy.

Nigel Coe, Deutsche Bank.

This is actually Nicole on for Nigel. First, I have one question on energy efficiency. I notice this quarter, you did not provide the total energy or high efficiency number for percentage sales. I was just wondering what that was?

I think it was down a little bit based on the HVAC business, which is a higher percent being down and probably a little bit of pre-buy having to do with the CNI business based on the ISO but, Chuck, do you have it?

Yes, for the fourth quarter, Nicole, it was 14.9% and for the full year, it was 17.9% consistent with 2009 numbers.

Okay, great, that's very helpful. I mean you guys often provide us with your expectation for Q on Q movement for the price inflation gap, I know you guys have said it was like a $7 million delta during the third quarter call. Do you have any kind of guidance like that for 4Q to Q1?

It's just very difficult to predict. It's just too volatile, Nicole, but we would expect certainly from a LIFO prospective a similar if not higher amount going into the first quarter, but even that it is going to be driven by prices at the end of the quarter as well as the volume of inventories at the end of the first quarter.

Okay. And then on the pricing actions you guys are taking, what level of magnitude have you put into pricing this week?

We just announced the pricing actions and we are still in the process of communicating with finishing off with all of the customers. At this point, I think it's inappropriate for us to comment on that.

That's fine, thank you.

Thank you.

Christopher Glynn, Oppenheimer

On the LIFO, what does guidance contemplate in terms of further expense here in the first quarter? I think last year's fourth quarter gain you still had a lingering effect in the first quarter?

I think as we came into the quarter, things were steadying out around $4.30 for copper and so the guidance has got that baked in right now. We are seeing a spike again so that could be a moving target.

For the full year, I mean you have had some -- just on the margins year-over-year, you've had some nice integrations in your favor, some further inflation but we expect generally some improvement in the reported margin, excluding any LIFO?

As you know, most of the acquisition we have done -- we typically are taking a look at a two- to three-year period of time where we try to get the margins up to similar to the rest of the Company and that has been proven to be a relatively accurate way of looking at it. We have quite a bit of lag obviously going into this year with the number of acquisitions that we have completed, so if you think of it as a kind of a three-year move toward the herd average that's probably the right thought process.

Okay, and then just a cleanup on the tax rate. Would we expect that pretty even through the year or still R&D in the fourth quarter? I think first quarter you have had some higher tax rate than some years.

I think it is probably pretty even, Chris. The fourth quarter the R&D tax credit was not built in to our forecast and guidance because it was still dependent on Congress's approval, which occurred late in December, so I think the 31% to 32% for 2011 would be pretty consistent.

Okay, thanks, everybody and Henry, congratulations on retirement.

Thank you.

Steve Sanders, Stephens Incorporated.

Good morning, everyone.

Hi, Steve.

First on the EPC acquisition can you be any more precise about the timing and then a follow-up is your weighted average cost to debt is around 4%, 4.5%, should we expect that to move significantly?

I'll take the first one and let Chuck handle the second one. In terms of the timing, no, we really can't. We filed the HSR, the start of that and it takes time to work through it. There really isn't any update, and frankly, it's too soon to try to project anything.

Steve, when we factor in the hedges, our weighted average cost was 4.1% at the end of the quarter. As we talked about on the call with the EPC, we would expect our financing to be put in place at an interest rate of below 5%, so that -- it's not going to change that much, but it could drift up a little bit closer to the 5% number.

Okay and then a follow-up, Chuck, on the operating expenses, when we strip out the M&A expenses this quarter and obviously prior to the EPC closing, are we at a pretty good run rate on fixed side now?

Yes, I think we've seen some inflation across the board and the impact of the acquired businesses would be the single largest variance. Otherwise, as you know, we are constantly focused on controlling or SG&A period-to-period.

The last question, obviously, a nice pickup in the bottom line 4Q to 1Q, it sounds like commodities are a little tougher, tax rates a little tougher so is it primarily volume followed by acquisitions that we should look at as sequential drivers?

Yes, I think you got a combinations of things. One is, we are expecting a volume pick up. Two is, we start to anniversary some of the purchases accounting things that were done for previous acquisitions, so the ongoing quarters look a little bit better and we continue to believe that we will see mix improvements with higher efficiency products.

Okay, thanks very much.

Thank you.

Josh Pokrzywinski, MKM Partners.

I'll take that as the earlier apology on name pronunciation was directed at me.

Thank you. I'm sorry.

Just in terms of -- I understand this is a silly question, given what HVAC did in the quarter and the deceleration, but are there any signs of a pull forward around the tax credit and how have customer ordering patterns changed or not changed around high efficiency product into 1Q?

Tough for us to know, the feedback we have gotten back so far on that topic from our customers is that they don't see a significant shift in ordering patterns at this point. It might be a little too soon to tell, as you probably know, the stimulus tax credit, as it was, 1,500 benefit to the consumer was not renewed. There is now a $500 incentive, which is not insignificant, but so far, feedback from our customers is that they are not seeing a significant shift. But I would say it's still too early to tell.

Got you. Just trying to calibrate some of these moves pieces on commodities, but not trying to beat it to death. Should we see sequential incremental from here forward trend more along the lines as how they should in a normal environment as in, I understand there is some year-over-year noise with LIFO and commodity comparisons, but as we move 4Q to 1Q to 2Q with the pricing actions that you have taken or are contemplating, should we see volume kind of flow through at the normal 25% or are you building in some contingency, there?

Yes, I wish some of those things were just noise, unfortunately, they feel a little bit bigger than that. Josh, I think the problem is just calling when is this run going to stop? If it continues on, it is going to be more than just noise as we move through the year. Steel is now moving up -- last year, that was pretty flat, and so we are trying to get a good sense on where that is going. Copper continues to move up, as you have seen just this last week. So, I don't think that we can say that we have a good feel for where it's going to end up and whether or not the cycle is going to start slowing down.

In terms of first quarter guidance, the expectation is that -- isn't that we get a commodity correction or commodities necessarily flat lined, here. I guess there is some cushion built in for additional inflation?

No. Not really, so, if copper and steel would go up and stay up from the present levels, then, there would be some additional pressure on our margins in the first quarter. We typically try to use a current price to anchor some of our estimates because it seems too difficult to try to forecast what prices would be at the end of the coming quarter.

Got you, but at the very least, hedging should smooth that out an on interim basis?

Yes.

And then just one final one on the EPC acquisition to the extent that it closes in the first quarter here, would you guys update guidance on that?

We hadn't frankly anticipated that, but that's something we will discuss and decide. I think we gave guidance on what we expected the first year at the time that we announced the transaction, nothing has changed to our knowledge at this point as to what we would expect. So we'll just look at all of those factors and determine whether or not we believe updating guidance makes sense.

Fair enough. Thank you very much guys.

Jeffrey Hammond, Keybanc Capital Markets.

I'm just trying to understand a little better in particular given how you show the seasonality of the businesses. If you tax adjust the fourth quarter, you are looking at kind of a $0.35, $0.40 swing 4Q to 1Q on really just a modest seasonal bump. Other than the volume bump, what are some of the other moving pieces, 4Q to 1Q on the earnings? Does the LIFO expense go away -- you start capturing price?

No, we still have some LIFO in there based upon our current spot prices but the bigger driver, Jeff, would be the realization of the price increase from the fourth quarter and then any impact from the current price increase initiative.

Okay . Are you counting on getting some of this next price increase in your first quarter guide?

Very little. It's really more the realization of the fourth quarter price increase and then we'll also benefit from the acquired companies in the first quarter as they move through some of the purchase accounting adjustments, we'll have a full quarter of Unico and Elco.

Just on this -- back to this -- the HVAC OEMs scene, some prebuy ahead of price increases, last call for stimulus, some weather, did you really see the benefit from that in the fourth quarter or are you starting to see it into the first quarter and that therefore gives you greater confidence in the first quarter?

Jeff, what happened in the fourth quarter was a lot of the OEM's took their inventory down near the end of the year and started out of the gate strong. That's what we are experiencing, right now.

Okay, what they kind of saw in November and December, you are seeing in January and into February?

That's probably fair.

Okay, great. Final question, back to the A.O. Smith accretion assumptions, I think, Henry, you said nothing has really changed. Just recognizing that they are a motor company and they have copper and steel in their products. How does the near-term commodity dynamic impact, how you are thinking about those accretion assumptions?

To some degree, they have the same impact, as you know, they are in pretty different kinds of businesses in a lot of regards. There is a piece of it similar to the way it reacts but there is a good piece of their business that has more pricing formulation in it. So, probably, it has a little steadier view than what our business does.

Okay, thanks, guys.

Thank you.

Mark Douglass, Longbow Research.

On the acquisitions, it seems to me that the revenues seem to perform a little bit better than suggested by the original guidance when you announced the acquisitions, first is that true and if so, which ones? Was it kind of a seasonal effect or are they exceeding your expectations?

Mark, this is Chuck. I think they have been pretty far, so far pretty well along on our expectations, but with the most recent ones of Unico and Elco, it's too early to tell. We really didn't have any realization of revenue on Unico in the fourth quarter. So far, the revenue and earnings have been in line with our expectations.

Okay. Going to electrical steel pricing, you are saying it's going up right now, are you mostly buying electrical steel, raw electrical, if you will and then making your own laminations or is it a mix of buying laminations and making your own. How do you--?

It's a mix for us. We do both. We have some of our own facilities and we buy some of our laminations from the outside.

Okay, so you don't necessarily, you are not necessarily tied to just pure logical steel pricing but what motor lamination guys are putting through as far as costs as well?

That is correct.

Okay. I think that's all I have, thank you.

Thanks, Mark.

Walt Liptak, Barrington Research.

I wanted to ask about -- I realize its early in this 2011 price increase, but maybe you would provide some color on what the industry is doing, everybody is in the same situation, are you leading it or are you following or is the whole industry putting through the price increase at the same time and is it the same magnitude of price increase that you put through in 2010?

In terms of the magnitude, as we said we are not really comment on that. Frankly, we never try to comment on what competitors -- we have enough difficulties speaking for ourselves, much less somebody else when we don't know their business. We initiated what we are doing and we have given you and we are giving our customers the reasons why, everyone is going to have to decide on their own. There is a lot of competition, so it's a very difficult market.

Okay, but the competitors are presumably raising prices, too. Are you the first ones with 2011 price increase?

As far as we know.

And given that in 2010, the industry, in general, as well as Regal-Beloit passed along these price increases and it's necessary with steel and copper prices going up, why didn't you just get ahead of it or at least catch up to it? We have a worldwide recovery happening, the dollar is still weak -- why wouldn't you just push through a price increase that would take care of the first half of the year?

Well, I think the only -- I mean I wish it were that simple, I really do, but we have so much competition, as you can appreciate, that comes at us from all over the world. It's coming at us from Brazil, it is coming at us from China, comes at us from Japan, it comes at us from Europe. I mean, it is -- there is just a lot of competition. It isn't that easy and we are concerned every time we do it. We try to take the best measured view we can. We have not over last cycle been able to price enough to offset total commodity inflation. We are making up for commodity inflation with productivity, and I guess the good news is that we have been able to do that in the big sense quarter to quarter, sometimes that's difficult. But it just is not -- I wish we could go get ahead of it. We don't see a clear path to do that. We continue to run behind and frankly not completely catch up.

Okay, given that, can you tell us what your gross margin assumption is for the first quarter EPS guidance?

Well, Walt, we generally don't provide that, but, we certainly have tried to give you a range of our earnings per share for the first quarter.

Okay, thanks.

Bill Dezellem, Tieton Capital Management.

First of all, I would like to circle back to your new product that you discussed here on the call. The existing donkey hedge, they will pump wells to how deep and the reason that I ask is I'm trying to compare that to a 3,000 feet that you referenced as your new product will pump towards.

Yes, there are different products for different applications. The product that we are referring to here, the CRP is only good down to 3,000 feet. There are other products that Unico offers that will go deeper. For this particular product, it's a focus on wells that are up to 3,000 feet.

The traditional donkey hedge that we see out there, that need to come in the semi, they will go deeper than that presumably?

Again, you'll have donkey hedges that will go 3,000 feet and ones that will go deeper. It depends on the size of the equipment that they put in which is dependent on the size -- the deepness of the well.

Unico has products that will go considerably deeper than that. It's a different kind of a product, it's called a linear rod pump versus a (inaudible) rod pump, because that's the kind of equipment it replaces. This in particular is a new product that we think has a lot of run way.

Thank you. I also want to beat the commodity horse here, if we could for a moment. If commodity prices were flat from this point forward, what's your best guess as to when your pricing actions would actually simply recapture the commodity cost increases that you have -- that you have experienced so far?

It just isn't clear. It's not clear to us that we will ever get back to 100% certainly. We think we can get and should get, in fairness to us,back to something that is similar to parity based on just commodities, but I can tell you over the last five years that we lost, I don't have the current number, but I'm going to guess it was, at one point was up to 200 basis points of margins and is probably deeper than that today. I think our customers expect us to offset some of these things with productivity. Certainly, we offset wage increase and we have a very active productivity program. We've offset a fair amount of commodities and our customers expect that, we do it. We have to survive and thrive as well. We have to try to offset as much of this as we can.

Given the extreme nature of the commodity cost increases, does that imply that your customers would be more tolerant and understanding of price increases? They may not like it but at least they understand it, or is there so much competition out there that they are really pushing back?

Well, if you can find somebody that is tolerant of it, call me and I will run, not walk to go get them. No, I mean customers don't -- customers are never going to be tolerant, and I answered the question before. We don't have the ability to go -- I wish we could just keep up with commodity pricing, but the competition is such that we have not been able to do that, and so, I think it's going to continue to be very difficult.

And in the final question, in this same arena, your inventory growth that we saw in the fourth quarter, was that a function of commodity cost increases or is there something else going on behind the scenes?

Bill, I would say there would be some volume increases at year end as the HVAC business slowed seasonally and then, we also had, to a lesser extent, the impact of the acquired companies that came onto the balance sheet at year end without much of a contribution of sales in that stub period.

Thank you, all.

Thank you. You are welcome.

Jamie Sullivan, RBC Capital Markets.

Just a question on the guidance and commodities, the range that you have, you kind of mentioned copper in the $4.30 range, you've also talked about current levels, does the range contemplate something that can absorb the $4.50 level or is that going to be an additional headwind if we stayed here?

It would be an additional headwind.

Okay. And then you mentioned that customer inventories are relatively low. Can you talk about whether it's a specific metric you have or a relative sense of where they are versus historical averages?

It's a relative sense but specifically we are talking about in the HVAC market where we saw customers closing down a little bit early in September and taking inventory out and then coming back. Now, starting to order in a stronger pattern and those conversations our sense is that they did a good job of keeping their inventories down but now need to build for the season.

Okay, and then just on the ease of changeover, have you noticed anything in the competitive landscape where some competitors maybe didn't have a full lineup or you've been able to gain some sales from that?

There are two elements of that topic I'll address. The first one is do you see a buildup from your own customers of the older, less efficient product and as I mentioned earlier, the answer to that was yes, we did see a mild buildup from some of our customers. The second part of the equation is do you see your competitors either having built up inventory of the older costs, at the lower cost product that they can continue to sell out of inventory or do they not have the newer product. And right now, it's a little bit too soon to tell exactly what is happening. There is a lot of different data points. We all have a data point where somebody has the old product , but not the new product. It's too early to sort it all out, but there are data points all over the place.

That's all I have, thanks.

Thank you.

Gregory Macosko, Lord Abbett

Yes, thank you. Nice quarter. I would like to just get a little more on the Unico. That sounds interesting, with regards to the pricing, at least with regard to that 3,000-foot pump. How does that stand, relative to a new donkey head and give us some color on the sales force and just how you will get that out of there -- get that product out there. It would seem like it would be with regard to just the established market there, maybe a tougher sell.

The key -- it certainly it will be a tough sell. It is an established space out there with people making the older product. Our Unico team has direct relations with a number of the oil-producing companies as well as the first tier of sub-suppliers to them. That is where their contact is for the sales organizations focus and it is a global focus, relative to the (inaudible) that's the end user, I think you ought to think about it in terms of the performance of the equipment in terms of extracting the oil as well as the operating costs of the unit in terms of inflation and operating costs, installing the product as well as it's annual operating cost are lower with the Unico product. It is an exciting product.

Okay, and then, finally, with regard to the pricing, there has been a lot of discussion here and obviously, steel is now -- will be more of a factor. When you look at a price increase, is it really, strictly speaking copper and steel at this point or as you are looking, say over the last year or so in looking forward, are these the two factors you are looking at? Give us a sense of what else you would be considering in that price increase.

We are seeing some creep in some other things, aluminum, for example has moved up and we have seen everything from bearings to shaft steel as well as electrical steel and so on so. Obviously, we are trying to take, Greg, into account what we are seeing and what we think will stay and what we think is temporary in nature.

Thank you.

But we are seeing a broader base of move up. Okay, I think we have time for one more question.

Jeff Flynn, Jefferies.

This is Jeff Flynn for Scott Graham, thanks for taking my question. On the fourth quarter price increase, which I think you mentioned was about 5% to 8%, did you provide any sort of break out by segment on that?

No, the price increase was pretty much across all of our products, Jeff.

Okay, thanks. And just on the price increase you just announced for 1Q, it doesn't sound like you expect to see much of that until the second quarter, is that correct?

It would be effective toward the end of this quarter typically there is 60-day or so lag.

Okay, great, thanks, the rest of my questions have been asked.

Thanks, Jeff.

That concludes our question-and-answer session. I will now like to turn the conference back over to John Perino for any closing remarks.

Actually, this is Henry Knueppel and I'll close with these takeaway. First of all, for Regal-Beloit 2010 was actually a great year despite the fourth quarter. First quarter was going to be challenging but bottom line we think will be a winner. New products, geographic reach, and acquisitions position us for strong growth for the coming year, our balance sheet remains strong. Thank you for joining the call.

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