Regal Rexnord Corp (RRX) 2011 Q4 法說會逐字稿

Good morning and welcome to the Regal Beloit fourth-quarter 2011 earnings conference call. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Perino. Mr. John Perino, please go ahead.

Thank you and good morning, and welcome to the Regal Beloit fourth-quarter 2011 earnings conference call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, Vice President and CFO.

Before turning the call over to Mark, 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 these 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.

On slide two we mentioned we are presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit, adjusted gross profit as a percentage of net sales and free cash flow. We believe that these are useful financial measures for providing you with additional insight into our operating performance. Please read this slide for information regarding these non-GAAP financial measures, and please see the appendix where you can find reconciliations of these measures to the most comparable measures in accordance with GAAP.

Now I will turn the call over to Mark.

Welcome and good morning, everyone, and thank you for joining the call and for your interest in Regal Beloit. I will follow our normal agenda. I will make some opening comments; Chuck will give you the financial update; Jon Schlemmer will provide you color on products, markets and operations. I will summarize our prepared comments, we will move to Q&A, and then I will give a few closing comments.

Overall we felt good about our operating performance for the fourth quarter as our results exceeded our guidance. Chuck will go over the details of why our performance exceeded our expectations, but the bottom line from an operating perspective is that EPC, along with a number of our other businesses, performed well in the quarter, offsetting weakness in HVAC and China.

With regard to the EPC acquisition, we are now deep into the integration process, working on mining synergies while rationalizing products and platforms, and we continue on the track to meet or exceed our expectations.

As you know, this is the largest acquisition in the Company's history, and the integration continues to go well.

In terms of our operating performance during the quarter, we achieved record fourth-quarter revenues and record fourth-quarter free cash flow. Our C&I, Mechanical, Unico and EPC businesses performed well in the quarter, offsetting headwinds in our HVAC and China businesses. In HVAC our volume was down related to an unusually warm winter, the reduction of high-efficiency consumer incentives, and the R-22 dry mix shift.

Outside of our operating performance, highlights in the quarter included, first, the launch of 20 new products, nine of which were energy-efficient products. Second, we were awarded Supplier of the Year and Most Innovative Supplier of the Year by two of our top 20 customers. Third, we were able to reduce the warranty accrual that we took in the second quarter by $15.4 million. Fourth, we restructured portions of our European and Australian operation to yield benefits in 2012. And finally, we continued the smooth integration of EPC, and we are on track to achieve our first year synergy run-rate target of $10 million.

With that, I will turn it over to Chuck Hinrichs.

Thank you, Mark, and good morning, everyone. I will start with slide number six comparing our actual fourth-quarter 2011 results to our earlier guidance.

You recall our earlier fourth-quarter EPS guidance was $0.70 per share, excluding the EPC inventory purchase accounting adjustment estimated at $0.25 per share. Our actual adjusted EPS of $0.93 per share compares very well to our earlier EPC guidance -- EPS guidance of $0.70. Both EPS numbers then exclude the EPC inventory purchase accounting adjustments as shown. The schedule then adjusts the actual fourth-quarter EPS by adding the $0.23 decrease in the incremental warranty reserve expense and deducting the $0.10 per share restructuring charges, neither of which were in our original guidance. The last row reconciles to our GAAP EPS the actual fourth quarter EPS of $0.80 and the GAAP guidance of $0.45 per share.

The next slide provides some color on our fourth-quarter results compared to our guidance. First, EPC performed very well in the quarter. We started to realize synergies, and EPC had lower SG&A expenses during the fourth quarter. As I mentioned during the third-quarter call, it is difficult to dissect our results between EPC and the legacy Regal Beloit results as we are integrating the businesses and working as one company.

The fourth quarter also benefited from better product pricing relative to our expectations on cost inflation, and we continue to execute on our productivity and cost reduction initiatives. We put these initiatives in place in the fourth quarter to address the challenging industry conditions.

And finally, we recorded a $5 million LIFO benefit in the fourth quarter as spot copper prices were lower than forecasted.

On slide number eight, we chart our fourth-quarter results. Sales increased 31% over the prior year as sales from EPC and the other acquired businesses offset the slower sales demand in our US, HVAC and China businesses.

As Mark mentioned, the diversification in our businesses enabled our topline sales to grow, despite some of the economic challenges faced in our other markets.

Looking at adjusted income from operations, we posted growth of 52% above the prior year, and our adjusted income from operations improved to 8% of net sales in the fourth quarter. The adjustments to income from operations are shown in the appendix of this presentation.

Slide number nine provides the same charts for our full-year 2011 results. Net sales increased 25% from the prior year with 3.4% from organic growth and the rest from the acquired businesses. Adjusted income from operations increased 30% from the prior year and represented 11% of net sales. Again, the adjustments to income from operations are included in the appendix.

On slide 10 we provide some additional financial highlights. In the upper left quadrant, we summarized our capital expenditures for the fourth quarter and the full-year 2011. We expect our capital spending in 2012 to approximate $110 million, which includes $25 million for the relocation of two of our factories in China. We expected the spending on these projects in 2011, but they were delayed into 2012.

In the upper right quadrant, we summarized our effective income tax rates in 2011 and expect the ETR to be in the 30% to 31% range in 2012.

In the lower left quadrant, we highlight our strong free cash flow results with full-year free cash flow of $208 million or 136% of net income in 2011. We are focused on generating free cash flow for debt reduction, improving shareholder returns and funding our future growth. In the lower right quadrant, we show our year-end 2011 cash position and total debt of $919 million.

On slide 11 we summarize our first-quarter 2012 EPS guidance of $1.07 to $1.13 per share. Of course, our guidance includes the operating results of EPC, but without any inventory purchase accounting adjustments as we completed all of these adjustments in 2011.

We expect to see continued strength in our Commercial & Industrial, Mechanical, Unico and India operations which will partially offset the weakness in our HVAC and China businesses. We expect to continue to benefit from our productivity initiatives, which when combined with pricing will offset cost inflation forecasted in the quarter.

And finally, our guidance excludes the impact of the acquisition of Milwaukee Gear. Although we expect the acquisition to be accretive in 2012, the first quarter will be a minor EPS loss due to the inventory purchase accounting adjustments. These adjustments are still being finalized.

Now I will turn the presentation over to Jon Schlemmer.

Thanks, Chuck. Good morning, everyone. Our operating teams performed well in the quarter, executing on cost reduction efforts, synergy projects and on all of our initiatives. In spite of a tough residential market environment, our team still performed better than expected in the quarter. Needless to say, we are very pleased with everyone's efforts.

During the quarter our Mechanical businesses continue to perform well with 8.5% sales growth. Our Mechanical businesses saw strong demand in both agriculture and power-related end markets. North America Commercial & Industrial sales from continuing operations were up 5.1%. That represented seven straight quarters of year-over-year growth. Commercial & Industrial saw strong demand in a variety of end markets, including power generation and industrial equipment and machinery.

Meanwhile, our North America residential HVAC sales decreased by 16% in the quarter. Our HVAC business continues to experience tough year-over-year comparisons. This is being driven by the reduction of the consumer incentives for high efficiency HVAC systems, the use of our 22 condensers to repair systems and an unusually warm winter. We continue to focus on developing more energy efficient yet cost reduced products to help our customers in this difficult environment.

For the quarter sales outside the US grew by 25% and represented 35% of our total sales. For the full year, sales outside the US exceeded $1 billion for the first time and represented 36% of our total sales. Today we are more diverse than ever, and we expect our global business to continue to grow.

During the quarter, sales of energy-efficient products increased nearly 18% from the prior period, representing 13.4% of our total sales. We continue to see energy efficiency as a significant opportunity. We are developing new products to help our customers meet energy efficient regulation, differentiate their products and reduce energy costs.

In 2011 our engineers developed and launched 50 new products across the Company, more than any previous year. 20 of the 50 were launched in the fourth quarter. Today I would like to talk about two of the new products that are being launched in the fourth quarter.

First, our hermetic business launched their very first variable speed, high efficiency permanent magnet motor for hermetic compressors used in air-conditioning systems. This slide shows a typical example of an application for one of these motors. Compressors consume a large percentage of electricity used by air-conditioning systems, so there is a very good opportunity to increase system efficiency through the compressor motor itself. The new designs have been developed for residential air-conditioning and heat pump applications graded up to 5 tons. The higher motor efficiency, plus the ability to operate at variable speeds, can increase SEER ratings by up to 80%. SEER stands for seasonal energy efficiency ratio, and it is the common efficiency measure for air-conditioning equipment. We are excited about the opportunity for this technology, and our customers are showing interest as a result of the energy savings they can achieve and offer to their customers.

Second, our air moving team introduced a new energy-efficient air circulating fan. These types of fans are used in a wide variety of Commercial & Industrial applications where air circulation is needed for comfort. The design combines high efficiency fan blades with our high efficiency variable speed ECM motors. Compared to a standard fan, one of these new fans can reduce annual energy costs by $50 to $100 per year, resulting in a payback of approximately two years. The energy savings really adds up when you consider that a large number of these fans are typically installed in a single installation. This is a great example of the opportunity to bring energy-efficient technology to yet another application.

Last year we had the opportunity to highlight two new products, and I want to give you a brief update today on those products. During our investors conference in December, we talked about a new energy-efficient ECM motor design for commercial HVAC retrofit applications. In December we had received an order to retrofit the HVAC motors in the Chrysler building located in New York City. Phase one of this retrofit project has now been completed, and we remain upbeat about the available retrofit opportunities for this brand-new product line.

Last year we also talked about Unico's linear rod pump platform for oil and gas applications. In the fourth quarter, our Unico business experienced a 55% increase in year-over-year sales, a $10 million increase. The increase was driven primarily by increased demand for Unico's oil and gas products. Customers continue to show strong interest in Unico's technology. In the fourth quarter, linear rod pumps have been an installed for the first time in the Congo, China and in the UK, and all these systems are performing well. The pictures show the actual installation of the very first linear rod pump in China. The machine that you see in blue is the standard pump jack at the well in China that is being replaced. You can see the Unico linear rod pump being installed. This is the smaller machine in light brown color.

Although not visible in the picture, a Unico variable speed drive is also being installed at the site. The electronic drive provides precise control for the linear rod pump. We could not be more pleased with the new technology developments from this team, the customer interest and the order strength in this area.

Let me spend a few minutes to give you an operations update in a few other areas. As you recall in August of 2011, we announced a $28 million warranty reserve related to a manufacturing quality problem at our Reynosa, Mexico facility. For the past five months, we have been working closely with our customers to minimize the impact on our customers and thereby reduce our costs. As a result of these efforts, we have been able to reduce the warranty reserve by $15.4 million. This is obviously very good news. However, this was a significant issue for us, and we are working hard to implement long-term corrective actions in our overall quality systems. These changes will make us a better company.

You may recall that in 2010 we made simplification one of the five key initiatives of the Company. We want to simplify the Company in order to make us more customer friendly and to reduce our costs. In the fourth quarter, we launched restructuring efforts in both our Australian and European operations. We transferred motor production from our Melbourne, Australia plant to our facility in Thailand, lowering our costs, while at the same time freeing up space to enable further consolidation efforts in Australia. These moves were planned at the time of our CMG acquisition.

In Europe we have consolidated our operations in the UK, allowing us to exit three small facilities. We also closed a small warehouse in Spain, and we merged the front end of our two Commercial & Industrial motor companies in the Netherlands. All these changes help to simplify the business, making it easier for our customers to do business with us and at the same time reducing our costs.

We have also begun to simplify and refresh our brands. During the quarter we announced that the recently acquired HVAC and hermetic products from EPC will be rebranded Gentech, one of our strong global brands. This will make our go-to-market strategy very clear for both our customers and our employees. We will continue to use the well-recognized Century brand on the pump, general industries and aftermarket products sold by the EPC team.

Speaking of the EPC acquisition, as Mark mentioned, we continue to feel great about the team, our progress on the integration and the performance of the business. The business performed better than expected in the quarter, and we continue to be on track to meet or exceed our goals on the integration activities and on the synergy projects. In fact, we recently announced the consolidation of two of our Juarez, Mexico manufacturing facilities. This move will streamline our operations in Juarez and improve our performance for our customers.

Also, our newly acquired employees are now attending lean Six Sigma training programs side-by-side with other employees. Through these exchanges, we are transferring best practices that will improve the overall Company.

Finally, we really appreciate the talent that came with the acquisition and the added knowledge, energy and excitement that this team brings to Regal.

Now I would like to comment on the Milwaukee Gear announcement that we made this past Friday. Milwaukee Gear is a Milwaukee, Wisconsin based manufacturer of highly engineered precision gear products that are sold into the oil and gas, commercial HVAC and other industrial markets. In fact, 60% of Milwaukee Gear's $60 million in revenue is sold into the oil and gas space for wellhead applications. We believe that Milwaukee Gear is an excellent fit. Not only does the business provide us more presence in the growing oil and gas market, but it is also an excellent fit with our more profitable Mechanical segment. Milwaukee Gear has experienced significant growth in the past two, years and the management team led by Rick Fullington has done an outstanding job of gearing up their factory for future growth. The business has made sizable investments in high precision equipment that gives the business the capabilities to meet their customers' exacting requirements. This is the first acquisition in our Mechanical segment in quite some time, and we are elated to have Milwaukee Gear join the Regal family.

To wrap up overall, we had another very solid quarter. Our long-term strategy to diversify our business in both the end markets and our global footprint, combined with strong execution from all of our teams, really paid off. Even with the difficult North America HVAC market, we achieved a record year. We remain focused on making Regal the preferred choice for our customers, our employees and our shareholders. I could not be more proud of our team.

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

Thanks, Jon. So, to summarize, we felt good that we were able to finish above our guidance in the quarter. As Jon mentioned, a few of the businesses were able to perform above expectations in spite of a tough economic environment. As you heard, we executed very well in the quarter on both our initiatives and our acquisition integration efforts. Our simplification initiative will result in a business that is more customer friendly and more efficient.

You heard Jon talk about our restructuring efforts that are coming as a result of our planned acquisition synergies. These projects are heavy lifting but require thoughtful planning, but in the end we will experience real benefits.

Jon also mentioned our brand rationalization efforts where we have chosen the jet-pack brand to be our global HVAC brand. There is more to come on this front, so stay tuned.

We will make it easier for both of our customers and our employees to understand and interact with one Regal voice. We are deep into the integration of EPC, and we feel great about our progress, and we are excited to have the key leaders positioned in leadership roles throughout the Company. We are pleased that we are able to reduce our incremental warranty expense. There was a lot of hard work and learning that went into that end result.

Our stream of new products continues to roll out with exciting energy efficient technology for virtually all of our businesses, and it is great to talk about new energy-efficient products from our newly acquired businesses.

On Milwaukee Gear, we like the oil and gas presence, we like the high precision automation capabilities, we like the margins, and we like the fact that it is an investment in our Mechanical segment. The management team is strong, and we look forward to welcoming them into the Regal family.

Our first-quarter guidance reflects continued weakness in HVAC and China. Again, recall that we had a very strong Q1 2011 in HVAC. However, strength in many of our other businesses, as well as recent acquisitions, will offset these headwinds. We expect the recent acquisitions to meaningfully contribute on both the top and bottom line, and we expect to begin to see real synergy benefits.

Finally, we expect the business to continue to generate strong free cash flows, which we plan to use to de-lever the balance sheet and to continue to seek out strategic acquisition opportunities.

And, with that, we will take your questions.

(Operator Instructions). Mark Douglass, Longbow Research.

Nice quarter. You were mentioning China. What base is China now with EPC, and what is the mix between HVAC and C&I? Relatedly what are you seeing in China now? Do you see some improvement in the various markets that you serve?

China would represent just under 10% of our sales. The three markets would be -- C&I would be the largest part of our China market then generator sales, and then residential HVAC would be the smallest segment.

And then what are you seeing right now and expecting in those three markets?

I would say overall the biggest change has been in what I will call infrastructure spending. We have seen a slowdown in that space, which would fall into our C&I type businesses.

Okay. Thank you. And then with the guidance that you gave the last quarter clearly under appreciated the savings and performance of EPC, it sounds like that was the main driver of it. What are the chances that you are doing it again, or how much of a sequential improvement have you baked into first-quarter 2012 with continued rationalization and restructuring?

I think you are right. EPC would have been the largest contributor to the above guidance performance in the fourth quarter. But I would call your attention to the other items that are on the slide that I spoke to.

It is difficult to forecast in our business the visibility on the markets, and demand continues to be difficult for us. But I think we have done a good job in forecasting what our first-quarter results will be.

As we integrate EPC into our results, it becomes increasingly difficult to look at those results on a standalone basis. So we are moving customers, products. As we integrate and generate synergies, those could be on the EPC column, and they could be on the legacy Regal Beloit column. So we are operating as one business, and therefore, we will be reporting as one business going forward.

You are working on multiple fronts there. And then finally, do you have anything baked in for LIFO benefit or expense?

No, we have not planned on anything because we will reset our expectations in the first quarter. So we don't have any pickup or LIFO expense expected. Of course, the spot market as we saw in the fourth quarter can be very volatile and is already up $0.40 to $0.50 per pound on copper since year-end 2011.

Mike Halloran, Robert W. Baird.

So, first, just on the bridge, when I think about the upside that was put out on the fourth quarter on the acquisition side and then on the price cost side as well, anything assuming commodities do not run too far one way or another, anything there that you do not think is sustainable from a seasonality standpoint on a go forward basis?

Not really, Mark. I think we are trying to -- Mike, I'm sorry.

She got the name wrong. That is totally okay.

I was just following up with the operator calling you Mark. I think we have got those forecasted correctly. But, as I said, we found a great deal of volatility, particularly in copper. Steel is up in the first quarter on a year-over-year basis, and we continue to see inflation and a lot of the other components that we use in our motors and other products.

And I know seasonality has become kind of a tough word, particularly on the HVAC side of things. But when you think about the fourth-quarter guidance range and fourth-quarter numbers, your first-quarter guidance, is that a pretty normal seasonal trend you are assuming on the revenue line there?

I would say it is normal, except for the fact that as we came into the first quarter and came out of the year, the uncertainty in HVAC and related to, as I just said, the unusually warm winter is putting a little damper on normal seasonality.

Yes, that makes sense. And when you think about full-year expectations, could you just talk a little bit about what your customers are saying and how you are thinking about demand as it trends for the year, more from a qualitative standpoint than anything, and specifically address the HVAC side, as well as the C&I side?

Sure. On HVAC our customers are a little concerned about the first quarter, so I think they are a little bit more conservative than they were probably in the fourth quarter. So I think our customers today would say slack to low single-digit kind of growth rates in the year and again with the first quarter being concerning to them.

On the C&I side, right now we are continuing to see order strength in our Commercial & Industrial businesses in North America.

That makes sense, and then just a housekeeping question. Could you guys break out the restructuring expenses by where they landed in the fourth-quarter mechanical versus electrical?

Sure. The majority of it is in electrical products group, electrical products segment.

Yes, it is about $4 million in electrical, $1.8 million in mechanical.

Okay. Great. As always, I appreciate the time.

Josh Pokrzywinski, MKM Partners.

I'm just trying to understand, first, more of a housekeeping item, was there any LIFO benefit baked into fourth-quarter guidance?

We had very little expected, so the $5.5 million pickup really occurred late in the fourth quarter as copper prices declined to around $3.40 at the end of the year.

Got you. Okay. That is helpful. And then thinking about the transition into the first quarter, I mean can you give the sequential puts and takes on price costs getting better? You spoke to EPC additional accretion there. Maybe anymore destocking or re--stocking at the OEM level. Just any kind of sequential color on some of the more esoteric items that could help us with that bridge.

Well, as we were coming through the fourth quarter, our biggest concern throughout the quarter was clearly HVAC. We continue to see our customers taking time out as we progress through the quarter. So it weighed heavily on our minds as we progressed through the quarter. And I would say, as we finished the quarter in terms of inventory levels, it feels to us from the feedback we get that inventory levels appear higher than normal in the HVAC space.

Got you. Just one follow-up. On your last call, you mentioned that there might have been some share slippage in the HVAC world as customers tier down, and maybe there was a bit more competition at those levels. Is that largely behind you do you think, or do you think that lingers on through parts of 2012?

As you go from -- the R-22 mix shift goes -- takes the mix away from the more energy-efficient products to the more standard products. There is more competition for us in the more standard products. And so as long as the R-22 mix shift is implied, which we believe will be well into the second quarter, we will continue to experience that issue.

Jeff Hammond, KeyBanc Capital Markets.

Can you give me a sense of if you take the acquisitions collectively in the quarter, would those have been dilutive or accretive to gross margins?

They would be accretive to margins in the fourth quarter.

Okay. So my back-end envelope, taking out the acquired revenues and OpEx expenses and just using actually flat comparable gross margins, I get something in the order of magnitude of $0.25, $0.30 accretive from these deals. I appreciate Unico being particularly strong, but it just seems like versus your initial guidance of a net neutral EPC that it is just wildly outpacing expectations.

So I note, Chuck, that you talked about looking at this -- it is hard to see it individually. But I just want to get a better sense of, if you originally thought this was a $0.35, $0.40 accretion type of deal in 2012, directionally in rough numbers how should we think about EPC today?

Okay. Well, Jeff, going back to your comments about the fourth quarter, our guidance for the third and fourth quarter for EPC was call it flat on an EPS basis because of the impact of purchase accounting. Purchase accounting adjustments came in $1 million higher than we had forecasted, and as we said, EPC performed better in the four and a half months of 2011 than we had anticipated.

So we think we have captured that upside certainly in our first-quarter results, but at this point I'm not sure we could give you any better information on the full-year guidance of $0.35 to $0.45 per share accretion from EPC. It is just too difficult to go out that far, and as I said before, we are really managing the company as one company.

Can you maybe just to dive into what -- maybe a little bit more what is surprising you to the upside? I mean how much is the demand curve? Where are you finding upside on the synergies?

Well, I think on the sales side I think it was about what we had anticipated for the fourth quarter, and we had generated some synergies and lower SG&A expenses on the EPC side in the fourth quarter. The synergies though going forward could be on the EPC results, and they could be on the legacy Regal Beloit results.

So I would say it is not yet topline growth ahead of our expectations. It would be expense control and generation of synergies from the integration.

And those the synergy upside, I mean does that feel sustainable, or is that just that you got it a little bit earlier, or is it coming in higher?

Well, we had commented earlier that it is coming in a little bit earlier and that we had revised our synergy target to exit 2011 at a run rate of $10 million. So we feel good about it. Most of those synergies came initially from sourcing and logistics, and as Mark mentioned, we are now about to start the heavy lifting of the plant rationalization and integration.

And then just shifting gears, can you give us what you think the mix impact was from this whole R-22 driveshaft dynamic in 4Q?

Well, I can characterize it for you. I mean I don't have the actual numbers in front of me, but I mean what happens is, as you know, in 2010 we were because of the consumer sentiments, because of R-22, the shift into R410A, it was demanding higher efficiency kind of 16 SEER and greater kind of systems. And the demand for those systems went down and the shift went away from energy-efficient systems and over to more standard systems of lower SEER rating. And, as that occurred, it moved away from our ECM type motors over to our standard 48 brand type motors where the prices are lower and the margins are lower.

And does your 1Q guide indicate a similar mix as 4Q?

We have, yes, a similar impact in the first quarter. It is lower demand and not as positive a mix. And, as I had mentioned in my prepared comments, first-quarter 2011 our performance in that business was up 18% on a year-over-year basis. We had a very strong first quarter in 2010. We had not yet started to see the R-22 mix shift hit our business.

Steve Sanders, Stephens Inc.

Sticking with HVAC, Mark, I think at the analyst day, you talked about working on some broad cost reductions and some new products that might offset some of the R-22 headwinds. You did not give a lot of color at that time. I just wanted to see if you could give any more color now as it seems like you are targeting some opportunities here that might help the market share and also the sales and margins.

Good morning, Steve. This is Jon. You are right. We talked about that at the Investors and Analyst Day Conference in New York in December. Those projects are underway. They are very important for our customers right now as we have been talking about our customers continue to see the mix shift more back to standard products. And so they are looking for ways that we can help them and from their entire supply base help them with the cost issues with the standard products.

So there are still opportunities with energy efficient products, but we are also working on cost reduction initiatives for not just our standard products, but as well some of our high efficiency products.

So what I would say is those programs are underway. They are redesign efforts in some cases that take some time for us both to complete the designs, qualify the products, for our customers to qualify the product, but those programs are absolutely critical to us this year, and they are well underway.

Okay. So that is something that might have an impact in what, the back-half?

Well, there is -- some of the programs would be in the fourth quarter when we start to see the customers actually using those products. There are other cost reduction efforts that are actually going into place later this quarter on some of the standard products.

Okay. And then on the restructuring, did you give a payback on the $6 million that you spent in Australia and Europe? And then the second part of that is, as we look into 2012, how should we be thinking about additional restructuring charges as you do some of the facility consolidation and other things around EPC and other acquisitions?

On the front half of your question on the payback, our best view is that is probably less than two years on the European and Australian restructuring that we did. And I'm sorry, can you repeat the second part of your question?

Yes, just the outlook for additional restructuring charges in 2012, any color on that?

We do expect -- as we go into the second and third quarter, we do expect that there will be further restructuring charges related to the execution of our synergy plan, but we don't have them nailed down or not in a position yet where we can communicate. But we would expect them in the second and third quarter.

Okay. And on the priced cost side, I know commodities will not hold here, but if they did would you need more pricing over the next quarter or two, or do you feel like you are in pretty good shape right now?

Well, as you know, we do have hedge. Our normal hedging is out five quarters, and we don't really try to time. But we hedge up 75% in the first quarter, 50% in the next quarter, and then on down to a minor position in the fifth quarter on.

So we are a little bit of a situation of I will just term it as a hedge hangover. We are paying back a little bit. That is not unusual when you have volatile commodities. So we are slightly inflationary on copper in the quarter. So that is the position we're in right now.

Okay. And then last question, I think you mentioned some of the areas on the domestic C&I side that were strong -- ag, power generation, etc. Any areas of weakness that kind of got your attention?

I would say that overall we have seen pretty good strength across most of the markets on the C&I side of the business. The ones that I mentioned in my comments were the ones that stood out as the strongest. There are some that we are seeing growth but in the single-digit area.

The aftermarket I would say in general related to, we think, the mild winter condition is impacting commercial HVAC and some cases as well as residential.

Walt Liptak, Barrington Research.

Great quarter. I wanted to ask about the comments that you made of -- I know I'm beating a dead horse on this cost out for EPC, but I wonder if we could drill down. You mentioned two Juarez plants that were consolidated. Is that complete, and is the heavy lifting that you are talking about doing consolidating some of those many Mexico plants?

Jon made the comment that we were -- just recently announced the consolidation of two of our Juarez facilities, so it is not complete yet. That is still to come.

In terms of the heavy lifting, we have been communicating that there is $35 million in synergy benefits over a four-year period, and the heavy lifting comes in executing to get to that target, and plant rationalization is part of that equation.

Okay. Just to push a little further, to get to the targets for cost savings from EPC this year, is it these two Juarez plants that gets consolidated, or is there more behind that?

That would not be the only part of our 2012 plan. There would be additional activities.

Okay. Great. Then if I could just switch to Milwaukee Gear, you mentioned that the margins on this business are good. Could you give us a ballpark of where gross or operating or EBITDA margins are?

It would be a fleet average for the Mechanical business.

Okay. And multiple of the EBITDA that you paid, could you give me a range or a number?

We did not provide that.

Okay. In 2011 what kind of sales growth you have got in Milwaukee Gear?

It was up strong double digits. I don't have the precise number on my hand, but we can get that for you after the fact.

Okay. Are you expecting it is going to keep growing at double digits in 2012?

Yes, we are --

-- the accretion numbers that you talked about?

Yes, we do expect 2012 will have a strong double-digit growth.

Holden Lewis, BB&T.

I have a question just about the approach toward some of these reports going forward. It seems like when you guys close the EPC deal that you encourage us to sort of think about neutral to slightly dilutive because of the purchase accounting. But, in the last couple of quarters, you have encouraged us to look at earnings we are stripping out that purchasing accounting.

And then as it relates to the restructuring, I mean as I understand it the simplification, that should be an ongoing kind of thing, a continuous improvement. As you said, it is not a one quarter deal meaning.

So I guess it is not clear to me why you should be stripping out those types of costs when I think about the performance of your quarter because it seems like they are going to keep on going in the future. So I'm kind of curious, historically the Regal board has been very conservative in how it has presented those numbers. Are we going to be more aggressive in terms of taking out or highlighting some of these matters than we have been in the past?

Well, I will try to answer that. I mean the guidance we gave for the third and fourth quarter of 2011 included some $26 million of purchase accounting adjustments. Those we thought were material enough that we wanted to estimate those and then call them out when we reported on those results.

So those are behind us now in 2011, and we provided the additional amortization and higher depreciation for EPC going forward. So we are trying to give you that information for future guidance for the results.

At the same time, though, after giving you that detailed information, I admit we are also telling you that we are running EPC as part of Regal Beloit as one business. And, as synergies are attained, it could be at the Regal Beloit level and it could be at the EPC level, and we really don't want to encourage separate reporting of those -- of businesses going forward. They are being merged and integrated today, and therefore, we will be reporting in the future on that basis.

And the restructuring activities could easily be on the Regal Beloit side that would benefit EPC. So I hope you understand the issue we are trying to deal with running it as a combined company and yet still trying to provide you the information you need for your earnings models.

Okay. And then I wanted to get back, I guess, to the walk from Q4 to Q1. What I kind of heard is that EPC accretion should be more positive, but I mean can you talk specifically about what are the pieces that should be better in Q1 versus Q4 that gets you that from your $0.93 to your $1.10, I guess that $0.17 walk?

We don't really provide that guidance. We would see a pickup in revenues from a seasonal basis fourth quarter to first quarter. Mark, Jon and I had talked about the continued strength in the C&I business, Mechanical, Unico and India, and that would be partially offset by the weakness in HVAC and China.

So we will see some positive impact on pricing versus cost assisted by productivity for the quarter. So that would contribute some earnings growth. And then, as we mentioned, we don't really see Milwaukee Gear contributing in the first quarter because of those purchase accounting adjustments.

So EPC is certainly a piece of it, but it is all of the businesses will be contributing to that improvement.

Okay. And then just lastly historically you have indicated what your productivity gains per year have been in the ballpark. Can you give a sense of how much productivity did you bank in 2011, and do you expect the same levels going forward or more?

Productivity for 2011 was below our historical performance. Now candidly part of that was because of two activities. One was because of the incremental warranty accrual that we took, and then the other piece was that a lot of our attention was being paid to the EPC acquisition. But, on a go forward basis, we would expect the return performance to pass levels.

Now the other comment I will make is we did have lower volume in a number of our key businesses that would also push back our productivity.

Jamie Sullivan, RBC Capital Markets.

Mark, your commentary about the inventory in HVAC being elevated, does that mean you are factoring in some destocking in the first quarter?

We are expecting not as quite a robust first quarter in terms of normal seasonality than we would have seen in the past, and part of that impact is that our customers are not planning on building as much because they don't need to.

And then the impact of the mix in the HVAC segment, I'm just trying to understand that a little bit more. Should we think about it that we are still seeing volume down less than revenues and then the mix is an additional headwind in the segment?

Volume down? I'm not sure I understood. Can you say it again, please? I'm not sure I understood your question.

So the HVAC down 16%. Just thinking about mix and volume with mix being an additional headwind, so was volume down less than that and the mix shift caused some additional headwind there? I know you had the price increases as well, so I'm just trying to gauge how much of an impact mix is having on that growth number.

Comparing it to the first quarter last year, we would certainly have headwinds of both volume and mix. On a sequential basis, the volume picks up a little bit in the first quarter. Mix would probably be about the same, and then pricing would not be different on a sequential basis. But, on a year-over-year basis, there would be some improvement.

Okay. That is helpful. And then when you talk about some of the value engineering and targeting some new products, do you expect those to be ready for the seasonally strong periods of 2Q, 3Q?

Yes, some of those products, as I mentioned, especially some of the design efforts on our standard products, will be ready for the stronger HVAC season, the cooling season. Some of the larger redesign projects, especially on our energy-efficient platforms, would be later in the season.

Okay. Thanks and just one last quick one. On the high efficiency products, you mentioned 18% growth. Is that an organic number, and do you have one if it is not?

Yes, that would be an organic number.

[Buthinder Bohai], Jefferies & Company.

Sitting in for Scott Graham here. Just a question on could you give us what were the new products as percentage of sales for this quarter?

New products as a percentage of sales -- (multiple speakers)

We generally don't release that. They start pretty slow of course and then build momentum. And then, of course, there would be the factor of the cannibalization. But I think we have talked in the past about what we call our vitality index in that the products, new products introduced over the last three years, five years represent approximately 30% of our current sales.

Okay. And the second question, the productivity and cost reductions in 4Q, are they being applied more to the acquisitions or to the core business? Essentially basically are you pulling forward earnings synergies from acquisitions?

Once we have an acquisition in place, we apply the same model on productivity to all of our businesses. So I would say that any productivity we get is coming from all -- contributing from all the businesses whether they are acquisitions or legacy.

Bill Dezellem, Tieton Capital Management.

First of all, I would like to start with the high efficiency business. Would you please explain what appears to be a very strong seasonal trend where the dollars and the percentage of revenues in the high efficiency business drops into Q4 versus Q3?

Some of it is seasonal. Some of it is the impacts of the fourth-quarter seasonality compared to the demand in the rest of the year. However, a larger factor that you need to weigh in is the impact of the acquisitions and the acquired companies and the percent of high efficiency sales in the acquired companies and how that has impacted our business.

So while revenue of high efficiency was up significantly in the quarter, it was down as a percentage of sales because we have mentioned before we acquired -- some of the companies we have acquired have less percentage of high efficient products, and that is what we are ramping up our innovation efforts in those businesses to increase the percentage of high efficiency sales in the acquired companies.

I don't think I asked my question very clearly. I was specifically looking at the Q4 versus the Q3 and not this year only going back the last several years, the dollars and high efficiency sales and actually as a percentage of revenue have consistently dropped in Q4 versus Q3. And I, in my mind, cannot grasp why that would be good.

That would be related to the fact that a greater percentage of our energy efficient products historically have been in our HVAC business, and historically HVAC has greater seasonality than any of our other businesses.

Now I say that, but I would also call your attention to some of my other comments that I made today about how excited we were that now all of our businesses are coming forth with energy-efficient products. And we are excited about that, and hopefully they will start contributing at the same level as our HVAC business has.

Great. That is very helpful. Thank you. And then second, China, would you please discuss the weakness that you experienced in China in the fourth quarter and your thoughts going forward?

As I had mentioned earlier, the weakness that we see in China I would characterize as primarily related to infrastructure type building, and that is mostly related to our Commercial & Industrial sales in that market. Our belief is that this will be temporary, that it is a slowing in the economy, and that at some point, it will come back. As of yet, we have not seen it.

And is it your sense that at least half of this phenomenon is inventory reduction in the Chinese channel as a result of a little bit of slowing in construction, or is it your sense that most of the sales softness you are experiencing clearly is in consumption reduction?

I would -- I cannot be sure, but my guess is that there is an adjustment of inventory occurring.

Thank you. And then finally, you had mentioned that you are taking GenTech brand to be your global HVAC brand and that there was more to come. Are we to read into that that you are going to be consolidating additional brands so that you have less cases where you are essentially competing with yourself in various markets with multiple brands?

Our goal is to have a more simplified approach for both our customers and our employees and make the Company easier to understand. And so, as we go forward, our intention is to pick global brands that we think will have a long-term position within the Company and focus on those global brands. And so that is the more to come part that we will be talking about in the future.

This concludes our question and answer session. I would like to turn the conference back to Mr. Gliebe for any closing remarks.

Thank you, and thanks for everybody's interest. Our fourth-quarter performance was a strong close to what was a pivotal year in the continuing transformation of Regal Beloit. In 2011 we accomplished record sales and record adjusted earnings per share. We closed the largest acquisition in the Company's history, and we are well down the path of integration. We launched more new products in a single year than ever before.

Companywide we improved our on-time deliveries to our customers, and we improved our scores on our global customer survey. And we did all of that in spite of uncertain markets, a weak residential HVAC environment, a lengthy regulatory delay in the EPC acquisition and a volatile commodities market.

None of this would be possible without the dedication and commitment of our employees. We are proud of our accomplishments in 2011, and we are genuinely excited about our future.

Thank you for joining the call and for your interest in Regal Beloit.

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