Regal Rexnord Corp (RRX) 2012 Q1 法說會逐字稿

Good morning and welcome to the Regal Beloit conference call. (Operator Instructions). I would now like to turn the conference over to John Perino. Please go ahead.

Thank you, Andrew. Good morning and welcome to the Regal Beloit first quarter 2012 earnings conference call. Joining me are Mark Gliebe, President and CEO, Jon Schlemmer, COO and Chuck Hinrichs, our Vice President and CFO.

Before turning the call over to Mark, I would like to remind you that the statements made in this 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 from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our filings with the SEC.

On slide two we mention that we are presenting certain non-GAAP financial measures related to the 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 measures 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 reconciliation of these measures to the most comparable measures in accordance with GAAP. Now I will turn the call over to Mark.

Thank you, John, and welcome everyone. Thank you for joining the call and for your interest in Regal Beloit. I will follow the normal agenda here. I will make a few opening comments. Chuck Hinrichs will give a financial update, Jon Schlemmer will add color on products, markets and operations. At the end I will summarize. And then I will also add a few comments on the recent change to our corporate brand, and then we will move on to Q&A.

Overall we felt good about our performance in the first quarter. The bottom line is that our business has performed pretty much as we had expected, plus we had the added benefit of a gain on a property sale as well as a one-time benefit from a tax provision.

In terms of our operating performance during the quarter, we achieved record first quarter revenues and record first quarter net income. Our North American C&I mechanical and our global Unico businesses grew in the quarter offsetting headwinds in our HVAC and China businesses.

Outside of our operating performance, recent highlights included, first, this past Monday the Company declared a 5.6% dividend increase representing our seventh increase in the last eight years. Second was the acquisition of Milwaukee Gear.

Third, we began to move into our new hermetic motor facility in China. Fourth, also in China we began construction of our new generator facility. Jon will cover both of those areas here in a few minutes.

Fifth, we continued the smooth integration of EPC and we are on track to achieve our performance targets. And finally, consistent with our customer care and simplification initiatives, we a launched a new corporate visual identity that we will discuss at the end of the call. With that I will turn it over to Chuck Hinrichs.

Thank you, Mark, and good morning everyone. My first slide summarizes some of the highlights of our first quarter 2012 results.

Net sales increased 21.9% over the prior year reflecting the inclusion of sales from the acquired businesses including seven weeks of sales from our most recent acquisition, Milwaukee Gear. Sales in the quarter reflected continued growth in our North American, commercial and industrial motor and mechanical businesses and Unico. This growth helped offset weak sales in our HVAC, China and European businesses.

As we said on our previous calls, the EPC business is being integrated with our other businesses. We are not providing stand alone results, but the EPC results continue to be excellent reflecting good seasonal sales growth and operating profit in the first quarter.

Our first quarter results benefited from two non operating items. First we sold a parcel of land at a facility closed several years ago. The sale resulted in a gain of $1.3 million or $0.02 a share which reduced our SG&A expenses in the quarter. Secondly, our income tax expense in the quarter benefited from a $1.4 million tax decrease at a non-US entity. This represented a $0.04 per share benefit in the quarter.

In summary, our first quarter 2012 earnings per share of $1.16 included the benefit of these two non operating items which totaled $0.06 a share. Excluding these non operating items, our earnings per share would have been $1.10 in line with our earlier guidance for the quarter.

The next slide charts the growth of first quarter 2012 net sales, operating profit and diluted earnings per share compared to the prior year. The take away here is that we generated strong growth in all key operating metrics as we grew our mid and late cycle businesses and added the acquired businesses which offset the weak market demand in our HVAC and China operations.

Let me note that in this chart we use the GAAP results to be consistent with the 2012 results. We subsequently adjusted the first quarter 2011 operating profit and earnings per share to add back the EPC diligence costs of $6.3 million and $0.12 per share respectively to the 2011 results.

On the next slide we provide additional financial highlights. In the upper left quadrant, we summarize our capital expenditures for the first quarter 2012 and our guidance for the full year 2012 which includes $25 million for the relocation of two of our factories in China. Jon will comment on these projects later.

In the upper right quadrant we summarize our effective income tax rate in the first quarter of 2012. We expect the ETR to be in the 29% to 30% range for the rest of 2012 driven by the estimated distribution of our global earnings.

In the lower left quadrant we highlight our strong free cash flow results in the first quarter of $48.7 million equal to 100% of net income for the quarter. We are focused on generating free cash flow for debt reduction, improving shareholder returns and funding our future growth.

The lower right quadrant we provide our quarter end total deposition of $986 million which increased $67 million during the first quarter with the acquisition of Milwaukee Gear in February. We also provide our credit metrics as of the end of the quarter.

On the next slide we summarize our second quarter 2012 earnings per share guidance of $1.42 to $1.48. Our second quarter guidance includes higher sales over the prior year and the prior quarter benefiting from the acquired businesses as our seasonal businesses experience their typical growth. We expect continued strength and sales in our mid and late cycle businesses, our C&I, mechanical and Unico operations.

Milwaukee Gear will contribute to our earnings in the second quarter. The business should offset its remaining inventory purchase accounting adjustments and make a contribution to our profits in the quarter. In the second half of the year Milwaukee Gear should be accretive to earnings as we previously communicated.

Our integration activities at EPC are on going and will accelerate in the second half of this year. We do not expect to incur any material amount of restructuring charges in this second quarter. Now I will turn the presentation over to Jon Schlemmer.

Thanks, Chuck. Good morning, everyone.

As we progress through the quarter we were very pleased with the order strength and performance of our commercial and industrial businesses, including the EPC commercial and industrial products, our mechanical businesses in North America and Unico. Their stronger performances helped offset the weakness in residential HVAC as well as the continued weakness in our China businesses. The combined effort enabled us to meet our guidance for the quarter.

Commercial and industrial sales were up 7% driven by strong demand in a variety of end markets including distribution, agriculture, industrial equipment. Our Unico business performed very well with 46% sales growth. The strength was from a variety of applications including oil and gas, and we continue to be excited about the stream of new products coming from this business. Orders continue to out pace sales in our Unico business and we've initiated efforts to increase capacity to meet the increasing customer demand.

During the quarter our mechanical businesses continued to perform well with sales in North America up 8.7% offsetting sales declines in our European mechanical operations. In mechanical we saw strong demand in industrial, agriculture and power related applications.

As Mark mentioned, we also closed on the acquisition of the Milwaukee Gear business this quarter. Milwaukee Gear is a great addition to our mechanical business, expanding our product range and opening up some new segments for our products. The integration is well underway and we feel great about the leadership team, the products, the process technology and the segments where Milwaukee Gear participates.

Our residential HVAC business experienced a decline in sales compared to the prior year driven by several factors. First, sales in the first quarter last year were up 18%, so we had a tough comparison. Second, we believe the overall equipment market was down double-digit in the quarter, and third we continue to experience a negative mix shift to less energy efficient products as a result of the R-22 conversion.

Despite slowing in China for the quarter, sales outside the US grew by 13% compared to the previous year and represented 34% of our total sales. Our acquisitions and their global sales are driving the increase.

Our China businesses continue to experience weaker sales demand similar to what we experienced in the fourth quarter of 2011. However, our orders started to improve after the Chinese New Year, and we are cautiously optimistic as we enter the second quarter.

We remain committed to investing in and growing our global businesses to further diversify the Company. We like the diversity in our business and the footprint in the emerging markets. Long-term, this is where we will see stronger organic growth for our products.

While we are on the subject of China, I would like to give you an update on the construction of our new manufacturing facilities. We are in the process of building two new world class manufacturing facilities. One for hermetic motors and one for generators. While we have the opportunity to build these new facilities, we are making the investments to plan for long-term capacity requirements, quality and productivity improvements and optimize lean layouts.

Construction of the new hermetic motor plant is now complete, and we are beginning to move equipment from the existing site into this new facility. We will work with our customers to qualify the new site and will be starting production soon.

During the past quarter we also completed the vast majority of the construction on our new generator plant. We will complete the construction this quarter and we will have the facility fully operational by the fourth quarter of this year. These investments in China will improve the operating performance of these businesses and position us for long-term growth.

During the quarter, sales of energy efficient products, including our acquisitions, represented approximately 18% of total sales. We are pleased to see the demand for energy efficient products with our latest acquisitions including EPC, Unico and even high efficiency gearing from Milwaukee Gear. The growth also continues to be driven by legislation.

Just last month, for example, Canada enacted a change requiring industrial motors to meet the more stringent NEMA Premium efficiency levels. You may recall this is the same change that took place back in the US in December of 2010. We have a great range of NEMA Premium products, and we are in an excellent position to support this change in Canada. This is exactly what we expect to continue happening all around the world.

To meet these ever changing requirements and to help our customers differentiate their products, we continue to develop new products with a focus on both energy and energy efficiency. Today I would like to talk about two more new products that our teams launched in the first quarter, both from our commercial and industrial business.

First our Marathon team launched a new line of energy efficient vertical pump motors. These new motors are designed to perform in a wide range of pumping applications such as irrigation, water treatment plants, marine and cooling towers. The special design is capable of meeting the high thrust loads inherent in these applications.

NEMA Premium motors operate with up to 20% fewer efficiency losses and can often offer a pay back in less than two years. These new pump motors further expand our already wide range of high efficiency NEMA Premium industrial motors.

Second, our Marathon generator team introduced a new hydraulic powered generator for use in oil and gas applications. The increased production from oil and gas wells more and more sophisticated electronic monitoring equipment is being used to record and understand well performance. Electricity is needed to power this equipment at remote sites, and that's where our generator comes into play.

Our generators are designed to meet the need for increased safety and certification levels in the harsh oil field environment. We are excited about adding this generator offering to our other oil and gas products from Unico, Mastergear, Marathon and Milwaukee Gear.

I always wish I had more time to talk with you about the new technology and products being developed all across Regal. It really is exciting to see what our teams are doing to help our customers.

I would like to spend a few minutes now to talk about the progress we are making with our simplification initiative. Last quarter I talked about our restructuring programs in Europe and Australia, and we also mentioned the consolidation of two of our Juarez manufacturing facilities. These programs are progressing well, and we are developing the plans for the next phase of our manufacturing simplification efforts.

During the quarter we also held our first ever global supplier meeting. The goal of the meeting was to align our supply base with the initiatives underway in our Company. During the session we communicated our expectations that our suppliers will support our manufacturing and design platform optimization efforts, and our aggressive delivery and quality improvement plans.

Our restructuring efforts will require changes and consolidation in our supply base, and we will definitely align ourselves with the strongest suppliers. Not only are we simplifying our operations in supply chain, but we have also been on a consistent path to consolidate our IT systems and get the entire business on standard ERP platforms. To get there we have been executing two to three ERP conversions every year for the past several years.

In the past two quarters our teams executed on two more ERP conversions, both in our Asia businesses. We executed these conversions without disruption, and we expect efficiency gains for years to come.

We still have more to do, however, by the end of this year we will have approximately 70% of our sales on our standard ERP platforms. These efforts drive efficiencies and they act as an enabler for additional simplification efforts around the Company. I feel really good about the path we are on with our simplification initiative and look forward to sharing more details with you in the future.

None of this of course happens without a talented and a dedicated team. This week we kicked off our fourth executive leadership program which is an intense three-week development program targeted for the top leaders in our Company. We have 29 leaders from seven different countries, and nearly every business, including many of our most recent acquisitions represented in the class. I am really proud how our team delivers and I feel great about investing in them. With that I will turn it back over to Mark.

Thanks, Jon. So to summarize, we felt good that our team was able to perform to our expectations in the quarter. I would like to reemphasize the progress we are making in both our initiatives and acquisition integration efforts. Our simplification efforts will result in a business that is more customer friendly and more efficient.

You heard Jon talk about our building and restructuring efforts. Our progress on shifting to common IT systems and the efforts we are making to consolidate and improve our supplier base. I'm confident that these investments will deliver real value over time.

We are deep into the integration of EPC, and we are seeing great progress. We have firmly integrated the leadership team and the employees into their new roles throughout the Company, and we are certainly operating as one team.

On Milwaukee Gear, we like the oil and gas presence, the high precision automation, the operating margins and the fact that it is an investment in our mechanical segment. The management team is strong and integration is well underway.

With our second quarter guidance, we expect the recent acquisitions to meaningfully contribute on both the top and bottom line, and we expect to begin the heavy lifting on the next phase of our synergy benefits. Finally, we expect the business to continue to generate strong free cash flows from which we plan to use to delever the balance sheet and to continue to seek out strategic acquisition opportunities. As I mentioned earlier, this week we announced the dividend increase which represents the seventh increase in the last eight years.

Before we go into Q&A, I would like to take a few minutes and walk you through the change we announced with the release of our annual report. As you can tell from the logo in the upper left hand corner of the slide we made a change to our visual identity. This change was an outcome of the strategy refresh process that our management team completed at the end of 2010.

We set a vision of how we wanted the Company to be viewed by the end of 2015. More customer driven, one face to our largest customers and one unified Regal team. We wanted cultural clarity in all of our communications driving our five initiatives and our core values. We want people to see us as a business that is lean, simple and efficient.

We also recognize that many of our stakeholders already referred to us as Regal, primarily because the word Beloit was somewhat difficult to spell and pronounce, especially in other languages. So our plan going forward is to refer to the Company simply as Regal. Our official corporate name will not change, however, you will hear us use Regal much more often.

There is obviously a visual change. We believe our new logo is bold, contemporary and yet simple. The change to our visual identity is part of a larger brand simplification effort where we are elevating a few global product brands and rationalizing a number of less relevant brands.

The change in our visual identity has been a significant effort, but we know that with this investment we are sending strong messages to our stakeholders that are consistent with the long-term direction of the Company. We feel great about how it all turned out so far. With that we will take your questions.

(Operator Instructions). The first question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Good morning, guys.

Good morning, Jeff.

So really focusing on the HVAC side for a minute, we heard some real favorable commentary from the OEM's into March and into April. You are saying normal seasonal up lifts. What are your customers telling you and why are we not seeing better than the normal season up lift? What are the customers saying about inventory? And maybe just hit on how this R-22 mix is coming in relative to how you thought it would.

Jeff, good morning. This is Jon. I will try and touch on those questions.

In general, as we mentioned, we are seeing the seasonal pick up in HVAC as we enter into the second quarter, of course. What we are hearing from our customers I would say in regards to overall outlook on inventories are a bit mixed right now.

Some of our customers are saying that inventory in the channel is somewhat normal for this time of year. Others are saying it is a little bit light for the cooling products as they enter into the cooling season. And there is some signs that we could have some customers who have built up a little bit of a head expecting, being prepared and being ready for the cooling season. I would say overall the feeling we would say in general is normal inventory levels for this time of year.

Which should be a good sign because that would say that with consumer demand we expect to see a pretty good correlation to production volume impacting us. We have the early heat in March which was probably good. We saw some indications of that, but then some of the cooling off in April being an offset to that as we got into the second quarter.

On R-22, of course, we saw a big change as we entered through the second quarter last year. We had more of the normal mix in the first quarter last year making for the tough comp in the first quarter. And then we saw that entering the second quarter, and then a change as they exited the second quarter last year as more and more of the manufacturers began to start producing and selling the R-22 dry-ship units. Overall our feeling is that there won't be a big change in the industry on a year-over-year basis, but we will see that impact through the second quarter.

There will be some puts and takes in the second half based on specific customers and their participation level last year versus this year. But that should be less of a year-over-year impact for us in the second half.

Great. And then just overall for electrical, are you thinking in 2Q that business is up? You mentioned I guess on a quarter basis, you mentioned commercial and industrial favorable, HVAC maybe unfavorable.

Good morning, Jeff, this is Chuck. We would expect the seasonal pick up from the sequential quarter at year-over-year will benefit from the inclusion of EPC, but it remains too early to try to predict what the overall sales will be coming out of the HVAC or the electrical business. A lot of it will be determined by weather.

Okay. But within the guidance range are you, on a core basis, thinking around flat?

We typically don't provide guidance on the top line, Jeff, but maybe we can talk with you after the call.

Okay. I will get back in queue. Thanks.

Thank you, Jeff.

The next question comes from Christopher Glynn of Oppenheimer. Please go ahead.

Thanks, good morning.

Good morning, Chris.

Just wondering with the two new facilities coming on line in China, are you currently recording some redundant costs in the P&L?

Yes, Chris, we are, but we haven't tried to accumulate or call those out.

Okay. And then on R-22, the chatter about production cuts coming on the way, I think Honeywell has mentioned to me they've cut back pretty significantly. Any thoughts on if that is a when not if benefit and any color on that?

Chris, this is Jon. Could you elaborate a little bit more on production cuts related to R-22?

Yes, my understanding, Jon, is that R-22 production cuts have been implemented by regulation, or are at least coming. To further that, Honeywell has told me they have in fact cut their R-22 production which would suggest that maybe the install base takes all of the R-22 available in the new units. That mix headwind goes away from you.

I understand, Chris. Thanks for explaining that. What we saw in the first quarter is there certainly were price increases with R-22 coming into the year. And that could have some impact.

There was a delay in the allocation levels that were given in terms of R-22 production that had a little bit of disruption at the beginning of the year. Since then though that has been determined.

While there is a schedule of production cuts going out in the out years, we don't believe that there is any significant impact this year to our R-22 supply versus the demand that is required to support what is going on with the dry-ship right now. We don't see that having a material impact to R-22 production units this year.

Okay. And just to get a little more color on the HVAC bridge that Jeff approached. Wondering if you could try to say what the piece was from R-22 and maybe how much you out performed equipment shipments in the first quarter last year. Because I think we are bridging from a low double-digit equipment down in the first quarter versus yours down 30%. Just to quantify some of the pieces a little bit.

Let me see if I can add a little bit to that. Last year as we mentioned we certainly did have the strong quarter first quarter last year, if you recall. We were up 18% the first quarter of 2011 compared to first quarter of 2010. That was driven by overall demand in strong units as well as a very strong mix. We had the stronger high efficiency mix a year ago and what we experienced the first quarter of this year.

So certainly we are seeing that it is a combination of both units as well as the change and mix moving more toward the standard efficiency products and away from the high efficiency in the first quarter. We haven't really quantified the impact of both of those, but both they had a significant impact in why we were down 30% in the quarter.

Great, thank you.

Thank you, Chris.

The next question comes from Zach Larkin from Stephens. Please go ahead.

Hi, gentlemen. Congrats. Thanks for taking my question. First off, I wonder as you talk more about being a little bit more optimistic in China, are there certain segments within China that are perking their heads up? Or any additional color there would be helpful.

Our view right now is that given the improvement in order rates started somewhere right after the Chinese New Year. Our businesses in China that we are seeing an uplift on are mostly infrastructure related or more industrial related. The improvement and owner rate we are seeing on a sequential basis overall is still softer than we would hope. But we are seeing an improvement that gives us some reason for optimism.

Thanks very much. And then also wondering if you can give us some of the puts and takes on gross margin this quarter? Obviously versus a year ago you had a very strong gross margins in 1Q 2011. But are you expecting margins to be stable around these levels as we move through the year? Should we think about maybe a little improvement given the integration efforts? What is the best way to think about that?

Sure, Zach, I will try to give you a little more color. You may recall we had our second price increase in April of last year. So on a year-over-year basis 2012 first quarter benefited from that price increase relative to last year. That would tend to normalize in this second quarter 2012. There might be a little pick up, but probably not material.

So I would think that margins would be stable in this second quarter over last year. We are seeing some increased inflation in some of our commodity inputs and the general costs, but that would be somewhat offset by the carry over impact of last year's price increase.

Thanks very much.

Hope that helps. Thanks, Zach.

Yes.

The next question comes from Mark Douglas from Longbow Research. Please go ahead.

Hi, good morning, gentlemen.

Good morning, Mark.

Can we talk about the high efficiency sales? They seem to step up on an absolute basis, and then in percentage of sales from 4Q pretty nicely. Can you provide some details as to where that is coming from? Does Milwaukee Gear have an impact on that?

I will make a few comments and perhaps Jon wants to jump in, Mark. First of all as we go from Q4 to Q1, Q4 tends to be our weakest quarter, and then we go into Q1 our HVAC business tends to grow, and then second quarter is the strongest quarter for HVAC. As HVAC picks up, you tend to get a better mix of products overall in spite of the R-22 shift that is going on. So that is certainly impacting.

The other thing that is impacting is we did acquire Milwaukee Gear. And by the nature of the product that they manufacture, a lot of the product that they have is high efficiency. So that helped increase our number during the quarter. Jon, is their any other comments you would like to make?

Just a couple more I would add, Mark. We mentioned the strong growth in Unico, the 46% sales increase. A big part of Unico is variable speed products and it is all about energy efficiency. So that certainly helps us as that business continues to grow.

And then we also have been continuing to focus our efforts on expanding our NEMA Premium lines, as I mentioned with the vertical pump motors. That is just one example. We continue to put a strong focus on how we can expand our business. And as you know, the C&I business, as we mentioned on the continuing operations were up 7%, and a good part of that is NEMA Premium industrial motors.

Thank you for that. And then the second question. With China is it partly relocation and you are also expanding capacity? There has been some delays here. Has this hampered your ability to respond say to R-22 challenges or negative mix shift towards lower efficiency systems ?

No, these businesses supply primarily China. I would say the majority of our generator business is China volume, and same is true with our hermetic business. A big chunk of it is sold right inside China. Unrelated to R-22, as an example, in anyway. It certainly has had no impact on our ability to supply product.

Are these fostering more capacity expansion, but you are talking about relocating as well. Can you just clarify that?

Sure. There are a couple things going on. In the case of our generator businesses, we did need capacity in that facility. But in both situations we had some encouragement from the Chinese government in terms of a land they would like to have for other uses. So that was part of the driver to us relocating our facilities.

Okay. Thank you.

Thanks, Mark.

The next question comes from Josh Porkzywinski of MKM Partners. Please go ahead.

Hi. Good morning, guys.

Good morning, Josh.

To go back to HVAC for a moment, a couple questions on the 2Q guide. I recall a couple quarters ago we talked about with the mix down in the industry, maybe some lower costs or foreign players were becoming a little more prominent, you were seeing them more in the competitive landscape. Does that explain, I guess, maybe a bit of a disconnect between what is going on at the OEM level and maybe a bit more weakness with what you guys are seeing?

Well, certainly as we have mentioned in the past, as you go from energy efficient products in the HVAC space to more standard products, there certainly is more competition in that space. It's not clear to me, Josh, exactly how the quarter ended up.

I think January, the market data would have said that shipments from OEM's were down 29% in the month and from publicly available data and February was down nearly 20%. March seemed to improve slightly, but the data is not out. So it is not exactly clear to me that there is much of a difference in terms of what we have reported and what our customers experienced.

I guess from maybe on a customer by customer basis, not to get into specific ones obviously, but are you seeing internally any differences among customers that would suggest that maybe something is not in uniform acceleration into the selling season?

Josh, there is always puts and takes with customers. So certainly there are customers where we could lose a piece of business, and there is certainly our customers where we will gain a piece of business. And that just happens regularly.

That's fair. And then shifting over to China and some of the capacity expansion there moving into new factories. To the extent that we stay sluggish here, are there going to be a couple quarters of absorption issues moving into the new factory, maybe volume coming in, or I guess lingering here for awhile? Is there a specific demand level that you need those to come in? I guess how is that trending based on what you are seeing into 2Q?

Josh, good morning, this is Jon. I will comment on that. As we planned these facilities, we certainly did try to size the facilities to allow us to have the long-term growth that we expect in our business in China. In particular, in these two businesses. We were very careful with what we did from an equipment standpoint in terms of any overhead that will end up in the facilities given the current outlook in the business.

I also would point out that in some cases as we planned, we can actually improve capacity without even increasing square footage. Because we can optimize the lean layout and lean principals in the operations. That's actually a pretty big opportunity for us in the plants in Asia. So I feel pretty good about what we have done in terms of the impact from the standpoint of overhead rates and the current conditions we are seeing right now in China and how we sized these facilities for the long-term growth.

That's helpful. And if I can sneak one more here just going back to HVAC for a moment. We haven't talked about it in a couple quarters, but are you seeing anything competitively where folks might be getting closer on having a viable ECM product beyond just a bench test?

We have had competition with ECM for some time now. There have been competitors with competing products, and that's been in place for at least a year or two now. We still have a very strong position in that space, but we will have competition.

I guess maybe to ask it a different way, has there been any recent change that says folks are advancing up the maturity curve there, or is it still status quo as it has been over the past couple quarters ?

Well, I think competitors are always going to try to go after that space. It is still a very important space even though R-22 has made it somewhat less important as of today. I expect competition to continue to try and go after that space.

Thanks a lot, guys.

Thanks, Josh.

The next question comes from Jamie Sullivan of RBC Capital Markets. Please go ahead.

Good morning.

Good morning, Jamie.

A question on HVAC, R-22 and the low end mix. I think you mentioned in the past maybe some potential new offerings or off altered offerings to participate there. Just wondering whether you feel you are fully participating in that market now, and as the mix goes there you can benefit from it.

Good morning, Jamie, this is Jon. I will take that question. We did talk about, especially in our December Analyst Day meeting in New York. We talked about balancing our product offering with both value-based products as well as high performing or energy efficient products for the HVAC space. We are continuing to put the focus there.

I feel we have made very good progress with bringing our customers other alternatives both on premium products as well as more value-driven products. So I feel like we have a great product offering today, a great range of products. We continue to try to find ways to make our products even more cost efficient to help our customers, and we will continue to do that as we go forward. In terms of what we had laid out late last year, we are making good progress on those fronts.

Thanks. And then on the restructurings that you mentioned, wondering which ones are maybe incremental from what we knew about last quarter and if there is any relative size or timing on when you expect to see some benefits from those?

Jamie, we will have more information in the future. As we mentioned, we are accelerating the pace of the synergy and restructuring activities. That will increase in the second half of the year, so we will provide more on that information in the future. But we continue to drive toward our stated synergy goal of $35 million from EPC.

Thank you.

The next question comes from Mike Halloran from Robert W. Baird.

Good morning, guys.

Good morning, Mike.

Are you seeing any differentiation in the HVAC trends between your legacy business and then the Smith business you guys brought in, the EPC business? A different mix between the two companies. Just wondering if you are seeing much differentiation.

Mike, good morning. The one difference that is there in the -- I will call it the EPC HVAC products versus the legacy Regal HVAC products is that there is certainly a lower mix of energy efficiency in those products in terms of the ECM related products, so they are more driven by the standard product. So this change for example, the R-22 has less of an impact on that business for the residential products.

That is true on the motor side as well as the hermetic motors. Hermetic motors, of course, can go in an R-22 unit or an R-410A unit, so less of an impact there in terms of mix of product.

Another difference is also the mix of commercial versus residential. There is a stronger mix of commercial products both in motors as well as fan motors hermetic motors for the EPC HVAC business.

Makes sense. And then the margin performance in the quarter, pretty healthy relative to the declines in revenue, particularly on the HVAC side. Why relative to amortization increases on the EPC side and the volume loss or the volume decline? How were you guys able to hold margins and increase a little bit? Was is simply price cost curve, or are you starting to see some acceleration on the synergy side with the A. O. Smith deal and the other factors involved there?

Well, Mike, as we've talked about, we exited 2011 with approximately $10 million of synergy savings from EPC. So those start to build in the first quarter.

As you know we had the price increase of April of last year. And so we were able to benefit from that in this first quarter. And while we continue to experience some increased inflationary costs of our inputs, the price versus cost and productivity that we are getting from our operations continues to hold our profit margins at acceptable levels.

Thanks, guys, appreciate it.

Thanks, Mike.

The next question comes from Walt Liptak of Barrington Research. Please go ahead.

Hi. Thanks. Good morning, guys. Just a follow-up on the question that was just asked. What hedges do you have in place for this quarter, and what do they look like for next quarter, especially around copper?

Walt, our hedging strategy has not changed substantially over time. We stay pretty disciplined. We tend to hedge out five quarters, and the nearest quarter in we are hedged more than we are the farthest quarter out. That is pretty much the way we are sitting today. Chuck, do you have any other comments?

Walt, I would add that as you have seen a lot of volatility in say the copper market, our price in the second quarter is not far off of the spot price that we currently see in the market, $3.82 or so a pound.

Okay. I can't remember from the Analyst Day, but if you had talked about supply chain alignment and optimization, if there was any cost outnumber or cost-savings for deliver equality. Any consolidation that you can help us with and when you might start seeing a benefit?

On the supply chain side, what we did talk about was the synergies with the EPC acquisition and also our simplification initiative. I would say in particular the initial synergies, the $10 million run rate that Chuck talked about, a good part of that is driven by supply chain. We went after that right away.

Teams hit the ground running in August when we closed on the EPC acquisition. It is already helping our synergies.

But what I was referring to just a little bit ago was our focus on further consolidation efforts and supply chain and aligning our suppliers with all the changes that we are making from a simplification standpoint both on their design platforms as well as our manufacturing footprint. So there is more there, and we need our suppliers, of course, lined up with us and help us with those changes.

So you haven't provided any numbers yet on how much you think you will save from this new order supply chain alignment?

No, we have not, Walt.

Thank you.

Thank you, Walt.

The next question comes from Scott Graham of Jefferies. Please go ahead.

Good morning, guys.

Good morning, Scott.

How big is the Unico platform right now?

Sales are on a run rate approaching $100 million, Scott. And that is with the growth that we have talked about from when we acquired it in December of 2010.

Okay. Additionally, the hermetic, you are doing some things there on the manufacturing side. What are your plans with hermetic? It just seems like there is a lot of untapped opportunity, a lot of revenue left on the table from the old regime.

I would say the hermetic business has two pieces to it. One is residential and the other is commercial. We think the business is positioned well to address both markets. The facility that we are investing in China in [Shijiazhuang] is primarily commercially related. It is a sizable and significant investment into the commercial hermetic market which we think has opportunity for us going forward.

Got it. Thank you. I think the last question was simply you highlighted some of the markets that were strengths and C&I and mechanical. I was just wondering if you can highlight within those same businesses markets that maybe went the other way? Obviously, I am not talking Europe. I am not talking HVAC. Just some of the general end markets that you serve. You listed some good ones. Maybe you can list a couple of bad ones?

Absolutely, Scott. Let me just touch on that. A couple areas I would point out. The good news is not many.

As we look across our commercial and industrial business we are seeing good strength in many of the end markets. A couple though where we are seeing some weakness I would say non leisure pump. So water pumping.

When you think about the dry weather that we've had across most of the country, the pump side of the business for non leisure, so non pool and spa, is definitely seeing some weakness. We need a lot more rain to help support that. The good news is in that business though inventory levels are typically low, and when it does rain we will see the demand right a way in our product demand from our customers.

Another one is we have seen some slowing in natural gas. So while oil and gas in total has been strong for us, and especially with the mix of products we have at Unico, any products that are specifically for natural gas with the low natural gas prices we definitely have seen some pull back and slowing in the natural gas part of oil and gas. Those are the two I would highlight.

In addition to the revenue in HVAC.

Revenue which we have talked about, right, in the North America market.

That's all I had. Thanks.

Thanks, Scott.

The next question comes from Samuel Eisner of William Blair. Please go ahead.

Good morning, everyone.

Good morning.

Going back on the pricing of raw materials, how much was your net pricing benefit in the quarter either on the top line or even on the margin?

Sam, we generally don't provide that, but we saw some increase in the first quarter in steel costs on a year-over-year basis and then we would see a little bit of increase on a sequential basis in the second quarter. Copper was down from last year, but it was up from the fourth quarter. And then we are just seeing creep in inflationary costs. Fuel costs we will be generally working through prices of some of our inputs. I think those are some of the highlights that I would bring out.

And then switching gears to the China business, how much was China as a percentage of revenue in the quarter? And I guess what was the growth rate or declines that you saw in that business?

Well, for the full year 2011 it is below 10% of our total sales.

And how much was it down year on year?

We don't generally break those out specifically.

Okay. And then just on Milwaukee Gear. Obviously, you guys expect to at least have some margin benefit or at least profits in the second quarter. How should we think about that going forward? Obviously the Milwaukee Gear business is in my mind a high margin business. So should we see some margin lift in the second half of the year?

Yes, Sam. The second half of the year we will burn through the remaining purchase accounting adjustments, and we would expect that to contribute to earnings. Our initial guidance when we acquired it was that it would be $0.03 to $0.06 per share for 2012. That would be principally in the second half of the year.

Thank you very much.

Thanks, Sam.

The last question for today comes from Bill Dezellem of Tieton Capital Management. Please go ahead.

Thank you. That is Tieton Capital. A couple questions. The first one is relative to China. You mentioned the modest improvement in orders that you are seeing there. Is it your sense that there was extra inventory in the channel that is now being consumed? And as that happens you are getting those orders, or is that more of a function of what you think is an improvement in actual end consumption?

Good morning, Bill. Our view was that there was a slow down in demand overall, and then that started to back up inventory in the channels. We saw that pause throughout the late fourth and early first quarter. Our view is that it is starting to improve. But it is still a little bit early to call that one, so that's why we made the comment that we are cautiously optimistic.

So you do feel as though you have been working through inventory and then the question, Mark, really in your mind is whether the end market demand is actually improving or whether it is a constant level of consumption with just the inventory burn taking place?

That's right.

Thank you. And the other question I have is on the high efficiency revenue front. You had good growth there which often times I have assumed that high efficiency ties with residential HVAC, and that in fact was down. So would you help us understand where the growth in the high efficiency came from?

Sure. So first of all are you talking about a sequential basis, Bill? Quarter to quarter?

Sequential and versus the prior year I believe as a percentage of revenues that there was a decent improvement.

Bill, let me touch on a few of those that definitely would show up both sequential as well as year-over-year. We mentioned Milwaukee Gear, the new company we acquired in the first quarter. Milwaukee Gear has a nice mix of high efficiency gearing. All of that would be upside both sequential as well as year-over-year.

The growth in Unico with their variable speed products that are all about driving efficiency in the end systems. So those variable speed products coming out of Unico with the growth in Unico both sequentially and year-over-year, especially year-over-year with a 46% sales growth there.

The ongoing growth that we have seen in C&I. C&I's first quarter is stronger than the fourth quarter as well as the year-over-year growth that we talked about. There is a nice mix of high efficiency industrial motors in our C&I business as well as some other end applications.

Certainly we have seen good demand with high efficiency pump pool motors from our EPC pump business. That's all year-over-year growth, of course, since we acquired EPC in August of the prior year.

And then our mechanical growth, the North American mechanical growth that we've talked about. While not a large part, there is some high efficiency product in that business that would be growing as well.

So the good point that you mentioned is that it is not all Regal HVAC. Regal HVAC is an important part, of course, of our high efficiency mix, but we are beginning to build a much stronger diversity, if you will, in the high efficiency products.

And I will just add the fact that we have been launching new products every quarter of every year. Most of them energy efficient products. That is also adding to our arsenal.

And so as we look out, when the residential HVAC does return to a more normal level, you most likely will be looking at a record level of high efficiency product revenues as a percentage of sales as that bounces back. Would that be a fair thought process?

Assuming that the mix holds up in HVAC which we believe it won't be as good as it has been in the past, but it will still be better than a typical business. So I think the answer to your question is, yes.

Thank you both.

Thanks, Bill.

Thank you.

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

Thank you all of you for you interest in our business. Our first quarter performance was a good start to the year. We achieved record first quarter sales and record first quarter net income. Both of our recent acquisitions are progressing well. As you can tell, we are busy simplifying every aspect of our Company while building our future in China, improving our performance for our customers in quality and deliveries. We are proud of our achievements and excited about our future. We recognize that none of this would be possible without the dedication and commitment of all our Regal employees. Again, thank you for joining the call and for your interest in Regal. Have a good day.

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