Regal Rexnord Corp (RRX) 2012 Q2 法說會逐字稿

Good morning, everyone. Welcome to the Regal-Beloit second quarter 2012 earnings conference call. (Operator Instructions)At this time I would like to turn your conference call over to Mr. John Perino Vice President of Investor Relations. Sir, please go ahead.

Thank you, James. Good morning. Welcome to the Regal-Beloit second quarter 2012 earnings conference call. Joining me 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 those factors that could cause actual results to differ from projected result results, please refer to today's SEC. On slide two we mentioned that we are presenting non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit, adjusted gross profit as percentage of net sales and free cash flow.

We believe 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 reconciliation of these measures to the most recent comparable measures in accordance with GAAP. Now I will turn the call over to, Mark.

Good morning everyone and thank you for joining the call. Today I will make a few opening comments, Chuck will provide a financial update. Jon Schlemmer will give color on products, markets and operations, and then I will summarize and we'll move to Q&A. Regal posted another quarter of record sales and record earnings in the second quarter. Most of our businesses performed at the high end of our expectations, and our HVAC business slightly out-performed our expectations driven mostly by the warm weather. The combination of these results allowed us to exceed our guidance for the quarter.

A key highlight for the quarter was our free cash flow at 177% of net income which represents the fifth consecutive quarter where free cash flow exceeded net income. Other noteworthy topics for the quarter include first the announcement of our Juarez plant consolidation. Second, we now believe we will exceed our $35 million EPC synergy target and deliver it one year earlier. Third, completing 85% of our transition into our new hermetic motor facility in Taicang China. Fourth, also in China, we began our move into our new generator facility.

And finally, we closed on a small Mexican-based acquisition, buying out our existing Unico JV partner with the idea of growing our Unico presence in the oil-rich Mexican gulf area. As we look forward we see uncertainty in the macroeconomic environment which could result in softer demand in our commercial, industrial, and mechanical businesses.

Additionally we expect to see a negative impact on our sales and operating profit from foreign currency translation in the third quarter. Our HVAC business has substantially anniversaried the R-22 conversion and should benefit from better year-over-year comparisons as well -- and as well from the warmer weather. With that I will turn it over to Chuck Hinrichs.

Thank you, Mark. Good morning, everyone. As Mark stated, our second quarter results exceeded expectations. Net sales increased 26.7% over the prior year, reflecting the inclusion of sales from the acquired businesses.

Sales in the quarter reflected continued growth in our North American, commercial and industrial motor, and mechanical businesses and Unico. This growth helped offset weaker sales in our HVAC, Asia and European businesses. Also sales were negatively impacted by foreign exchange rates which reduced sales by 2.1% in the second quarter. Our second quarter results included $500,000 or $0.01 per share and restructuring charges related to plant closures to generate the EPC synergy savings. We will talk more about these activities later.

In comparing our second quarter results against the prior year results, please recall that in the second quarter of 2011 we took a $28 million charge for a warranty expense item. In summary, our second quarter 2012 earnings per share of $1.49 or adjusted earnings per share of $1.50 per share were above our guidance for the quarter driven by a stronger than anticipated performance from our HVAC and C&I businesses. This chart shows the growth of second quarter 2012 net sales, adjusted operating profit and adjusted diluted earnings per share as compared to the prior year. The take away here is that we generated growth in all key operating metrics as we benefited from the acquired businesses and grew our mid- and late-cycle businesses offsetting the weak market demand in our HVAC, Asian and European operations.

Let me provide additional color on our financial performance. In the upper left quadrant we summarize our capital expenditures for the second quarter of 2012 and our guidance for the full year 2012 which includes $25 million for the relocation of three 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 second quarter of 2012. We expect the ETR to be approximately 30% for the second half 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 second quarter, up $111 million equal to 177% of net income for the quarter. This is the fifth consecutive quarter that we generated free cash flow equal to or greater than net income. We are focused on generating free cash flow for debt reduction to improve shareholder value, pay dividends and fund our future growth. In the lower right quadrant we provide our quarter end total debt position of $911 million which decreased $75 million during the second quarter.

We are proud of our strong free cash flow in the second quarter enabling us to repay the revolving credit borrowings used to acquire Milwaukee Gear in the first quarter. We also provide our credit metrics as of the end of the quarter. Our strong free cash flow continues to drive improvements in these metrics. As we look at the third quarter, we expect earnings per share on a GAAP basis to be $1.22 to $1.30.

Our guidance includes $6 million or $0.10 per share of third quarter restructuring charges for costs to generate the EPC synergies. Our adjusted earnings per share guidance of $1.32 to $1.40 adds back the $0.10 of restructuring charges to the GAAP basis. We expect a similar or higher level of restructuring charges to be recognized in the fourth quarter as we continue to optimize our manufacturing and warehouse footprint.

Jon Schlemmer will provide more details on our restructuring programs. Our third quarter guidance reflects the uncertain economic environment which may lead to demand softness in some of our markets. We also expect to experience a negative impact from foreign currency translation on our third quarter results. Partially offsetting those head winds, we expect to see year-over-year growth in our HVAC business and continued growth in our Unico business. Now I will turn the presentation over to Jon Schlemmer.

Thanks, Chuck, and good morning, everyone. As we progress through the quarter we continue to experience sales and order strength in our commercial and industrial businesses including EPC, our mechanical businesses in North America, and Unico. Their stronger performances helped to offset the weakness in residential HVAC and our Asia and European businesses.

For the quarter sales in our commercial and industrial businesses were up 1.3% with the growth resulting from a variety of markets including distribution and industrial equipment. The Unico business continued to perform very well with 54% sales growth. We have been taking steps to increase production to help meet the growing demand for Unico's products including oil and gas application. During the second half of this year we will take additional actions to further expand the capacity at Unico.

In May we also closed on a small acquisition in Mexico. [Technohar] System Integrators [Technohar] brings a talented technical team to help us grow Unico's oil and gas platform in Mexico and through Central America. During the quarter our mechanical businesses continue to perform well with sales in North America up 9.1% helping to offset declines in our European mechanical operations.

Our residential HVAC business experienced an 11.9% decline in sales compared to the prior year. This decline was far less than we experienced in the first quarter and better than we had expected. We believe the warm weather is helping overall demand, and as expected we did substantially anniversary the R-22 conversion as we exited the second quarter.

Despite the continued slowness in Asia and Europe and the impact of foreign currency translation, sales outside the U.S. grew by 9.5% compared to the previous year and represented approximately 32% of our total sales. Our acquisitions continue to drive this increase. In Asia, we continue to see sequential improvement in order rates, but overall the markets still remain soft. During the quarter we also experienced weaker demand from our customers in Europe. We have initiated actions in both of these businesses to help reduce costs and to control inventory levels given the uncertainty in these markets.

Last quarter we highlighted the construction of two new manufacturing facilities in China. Our new hermetic motor facility Taicang and our generator facility in Shanghai. The construction of both plants is now complete. And initial production has begun in both facilities. In fact, the start up of the hermetic facility is now 85% complete, and we are running several months ahead of schedule. Both facilities will be fully operational before year-end.

During the quarter sales of energy efficient products including our acquisitions represented approximately 20% of total sales, an increase of nearly 29% compared to the previous year. We continue to see demand for energy efficient products across a wide range of applications and geographies. As just one example we experienced an increase in demand this past quarter for high efficiency industrial motors sold in the United States, Canada, Europe and also India. Every quarter I have been highlighting two or three new products.

We continue to place a strong focus on innovation. It is exciting to talk about the new products being developed by our teams. Today I would like to briefly highlight two more products our teams launched in the second quarter.

First, our marathon generator team launched the new Mariner 740 Frame Generator. This new generator was specifically developed for the emerging marine DEP market. DEP stands for diesel-electric propulsion. Think of DEP like a hybrid vehicle. On these ships, electric motors are utilized to power the ship. The motors get their electricity from generators which are driven by diesel engines.

This hybrid configuration is a more efficient way to power the ship. And it is all about sustainability. The configuration allows the ship designer to maximize usable space on the ship as well. That's a great feature for oil and gas work boats, for example. Our marathon team worked closely with the end users and developed a very robust generator specifically designed for this application. The generator's designed for serviceability, a feature highly desired by the end user. We've already shipped our first units and customers are showing strong interest having placed additional orders totalling over $3 million.

Next our gen tech team has introduced a line of standard induction HVAC motors utilizing 100% aluminum windings. These new designs eliminate expensive copper windings altogether. This new product release is part of our efforts in HVAC to place a better balance between premium products and value products for our customers. The launch of this all-aluminum product will allow new and existing HVAC motors to be cost reduced without affecting motor performance. We can offer significant savings and meet the cost reduction demands of our customers in this market.

In the past, aluminum motors were thought to be a compromise on both reliability and efficiency. Our teams have overcome both of these barriers and can offer the cost advantage of aluminum to our customers without compromising reliability or motor efficiency. We have already started production, and several of our customers are showing strong interest in the product. This helps position us to continue competing with low cost motor manufacturers.

As always I wish we had more time to talk about new products. Finally , I would like to give you an update on the EPC synergies and the manufacturing and warehouse consolidation efforts. Earlier in the year we mentionedthe consolidation of two of our Juarez, Mexico manufacturing facilities.

We have now announced our plans to close four of our manufacturing facilities in Juarez, Mexico. This restructuring allows us to re-align our products, simplify the operations and better utilize our overall manufacturing assets in Mexico. The moves will ultimately make us more efficient and allow us to better serve our customers. We are already underway with these moves, and to date we are approximately 20% complete. We will complete all of the moves by mid-2013.

The vast majority of the restructuring expenses will be incurred in 2012 with a small portion carrying over to the first half of 2013. During the quarter, we also initiated plans to exit three warehouses in the United States consolidating into larger existing warehouses. These moves will simplify and cost reduce our logistics operations in North America. We will complete all of these moves by the fourth quarter of this year. We have remained focused on getting the cost synergies related to the EPC acquisition, and these larger restructuring efforts are the final and most complex steps to achieve these benefits.

As we come up on the one-year anniversary of the acquisition, I am pleased to report that we will exceed the $35 million synergy target, and we will realize the benefit sooner than expected. This chart shows the synergy savings and the capital and expense cost to achieve these savings over a four-year period. The last site of the chart is what we presented after the close on August 23rd, 2011 and also during our investor day meeting in December. On the right side, we are showing our current view for synergy savings as well as the capital and expense costs. You can see from the chart that we are expecting to realize more savings than originally estimated and we will realize those savings sooner.

If I could focus your attention on the lower right, you heard Chuck explain the roughly $6 million of restructuring expenses we anticipate for the third quarter. You need to see that year one on this chart is the first year after close. This would be viewed as the 12 months between August 23rd, 2011 and August 22nd, 2012. So the $5.6 million shown here for EPC is a large part of the restructuring expenses we anticipate for the third quarter.

Chuck also mentioned we expect the fourth quarter restructuring costs to be comparable or greater than the third quarter, so that's what we are showing here in year two reflecting the expenses we would anticipate starting on August 23rd, 2012 through August of 2013.

There are additional restructuring costs compared to our original estimates, however the pay back is excellent on these investments. Our integration teams remain focused on achieving these benefits, and I feel very good about what they have been able to accomplish. Even more good news is that there are more benefits above and beyond the EPC synergies we expect to achieve from our simplification initiative. Given the economic uncertainty, we are looking at all of our simplification plans to see if we can pull in some of these projects and realize the savings sooner. We will have more to save on simplification on future calls. With that, I will turn it back over to Mark.

Thanks, Jon. So to summarize, it was another record quarter of sales and earnings. We finished the quarter above our expectations, and we are consistently generating solid free cash flow results. The timing of our Juarez and distribution footprint consolidation could not be any better.

We will begin to see the benefits of this heavy lifting late this year. These programs are a key element of the $35 million EPC synergy target, and as Jon showed our current plan is to exceed the target and deliver earlier than we had planned. With our third quarter guidance we expect modest growth in our HVAC business and softer conditions in our North American commercial, industrial and mechanical businesses. We expect Asia revenues to sequentially improve, but to remain weak overall.

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 opportunities. Our acquisition pipeline is strong and we continue to actively seek candidates that meet both our strategic objectives and our financial criteria. We will now take your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)Our first question comes from Mike Halloran from Robert W. Baird. Please go ahead with your question.

Good morning, guys.

Good morning, Mike.

First on the guidance side, thinking about shortened trends sequentially, the HVAC I think I understand and I will leave that for others to talk about. On the C&I side and the mechanical side you talk about softer conditions in North America. Are you seeing the softer conditions and is this anticipation of softer conditions and how much of a magnitude of slowing if you have in fact seen some slowing did you see in the second quarter on that side?

Well, I will start out reminding you that at this time last year we -- our third quarter for the commercial and industrial businesses, and our mechanical businesses were up 15% year-over-year. To some extent the comparisons are getting a little tougher. This is our 10th consecutive quarter of growth in these businesses. So that's the starting point. I would say the order rates have moderated somewhat late in the second quarter as we go into the third quarter. And it is a bit up and down week to week. That's how I would characterize it.

Are you still anticipating year-over-year growth in the business in the third quarter though?

It is a mixed bag depending on the channel. Overall I would say it is going to be softer than it had been.

And, Mike, I would add that the third quarter will -- the second quarter that we completed fully anniversaried the last price increase that would have benefited the C&I business. So we are now looking at a comparable period on a price side. But really the uncertainty in the economy that we see and the impact on final demand makes it a tough call on whether the sales will be up or flat in that business.

And then on the R-22 side, you anniversaried that on a year-over-year basis, some of the OEs have talked about seeing a beginning of a change on a repair versus replacement side. Is that something you guys have noticed in your throughput at this point, or is that yet to come?

I will let Jon comment on that here in a second. But generally speaking it has been a mixed feedback from our OEMs on a number of fronts. On this particular question, Jon should jump in.

Thanks, Mark. Like Mark said, Mike, the feedback has been a bit mixed on overall repair versus replace dynamic. Some customers are saying they see more of a demand on repairs driving up parts business. Others are continuing to see some strength on the equipment side of the business. But hard to tell how much of that is impacted by weather versus product mix.

Makes sense. And then lastly on the aluminum motor, you are putting out on the HVAC side, can you give a sense for the comparative profitability, qualitatively not quantitatively with the current -- with what would be a comparative motive in your current offering? And a sense from the customers on frankly how receptive they would be to this product that certainly seems like a great cost advantage , but aluminum products in the past have had some hesitancy with folks. So just curious on what the customer discussion has been like.

I will address the profitability, and then Jon can address the customer feedback on this particular product. Anytime we are going to launch a new product, we always make sure there is a substantial benefit in the product for the customer, and then obviously a benefit to Regal. So that's our headset going into any product. I am not going to get into specific margins on any particular launch, but that's our headset as we get into any new product launch. Jon an you comment on the customer feedback?

I would say in general, Mike, the feedback has been very positive. We have been going at this aggressively in terms of trying to offer the most value we can to our customers, and we have done a lot of work on qualifying the changes to overcome some of the hesitancy from an approval stand standpoint. On reliability of the product, we feel terrific about this product being no compromise on efficiency, no compromise on reliability, and being aggressive in terms of bringing value to the customer. We are seeing strong interest right now from many of our customers.

Good stuff. I appreciate the time, all.

Thanks, Mike.

Thank you.

Our next question comes from Christopher Glynn from Oppenheimer. Please go ahead with your question.

Thanks. Good morning.

Good morning, Chris.

I have a question, we are also hearing some of the OEMs talk about R-22 starting to shift over to 410A. Not wondering so much if you are seeing it right now, but how we think about that impact on your mix and just market participation. Is that favorable?

It would be favorable. Any mix toward 410A, away from R-22 because as we talked about in the past with the equipment change going to 410A there is more likelihood that there is work done on the inside of the home which could then ultimately lead to more of a system replacement and a system upgrade which would have more Regal content than just the standard outdoor product where we mentioned before we have more competition on the standard product. So that would be -- that trend, that change would be favorable.

Even at a comparable SEER, low seer, right?

Even at a comparable SEER.

And then take another try at Europe. Sounded like it weakened a little sequentially. No surprise, but do you feel things kind of stabilizing at run rates, or is it still pretty dynamic?

Chris, I'll remind you that only 5% of our total revenues are in Europe, and you know we all view ourselves as a good proxy for Europe because we just don't have that strong of a position there. But I would say our position over there is actually improved somewhat from quarter to quarter, but I don't think we are a good proxy for what is happening overall in Europe.

Thanks, Mark.

Thank you.

Thanks, Chris.

Our next question comes from Mark Douglass from Longbow Research.

Good morning, gentlemen. Thanks for taking my questions.

Good morning, Mark.

Chuck, what was the, if you can quantify it at all, the price-cost benefit in the second quarter ? And then are you expecting to realize -- I know you said the pricing is going to anniversary at least for C&I motors in 3Q, but your cost inputs are going down I would assume. Should you realize more benefits in the near future?

Yes, Mark, we were favorable in the second quarter and on a year-to-date basis on price versus cost. So we would expect to continue to benefit modestly from that in the third quarter. The commodity inputs are slightly deflationary and we will realize that benefit in the second half of 2012. So it continues to be somewhat supportive of us, and then you will recall that many of our contracts with customers will adjust price based on those changes in commodity inputs.

Right. And then record sales of the high efficiency products, not only in dollars, but percentage of sales it looks like. Is that coming more in the C&I or HVAC? And then how does your definition of high efficiency changed over time, or has it? With increasingly stringent standards and mandates, how do you define that relative to where you have been?

Mark, this is Jon. I will try to answer that. Overall the improvement came across multiple segments of the business, not just in C&I or in any one particular area. I mentioned the industrial motors as an example. We saw a step up in high efficiency sales and in multiple regions, the US and Europe, Canada with the new legislation coming in. Our definition really hasn't changed on high efficiency.

We try to keep the definition constant quarter-to-quarter so we can see real changes and demand for those products. As we go forward some of those high efficiency products become the mandated level if you will in a particular region as legislation or regulation catches up with what was a premium product at one time. That does change, of course. The other aspect is acquisitions. Unico is all about variable speeds. It is all about enabling energy efficiency in the application.

That is, of course, part of our acquisition strategy, but that in itself will bring up the percentage of high efficiency sales and we will acquire a company like Unico or even Milwaukee Gear which makes predominantly high efficiency gearing for a variety of applications.

I will just add that in the last call we had we spent some time on this topic outlining the puts and takes we had over the last year, the acquisition of EPC actually dragged the number down a little bit. The acquisition of Milwaukee Gear actually pulled the number up a little bit. The R-22 conversion pulled the number down a little bit. There were a lot of puts and takes and we outlined that on our last call just to try to help make sure everybody understood how we were looking at it.

Thank you.

Thanks, Mark.

Our next question comes from Josh Pokrzywinski with MKM Partners

Good morning.

Good morning, Josh

Thinking about third quarter guidance for a moment, I want to understand some of the sequential moving pieces there, if I could. Just maybe the down tick from the second quarter, how much of that is mix versus any incremental softening in the macro landscape versus pure seasonality? It seems like commodities become a little more favorable versus 2Q, synergies I imagine only go up , and maybe mix in the HVAC business with R-410A being a little bit more prominent as DOEMs reorder and maybe going your way as well. Trying to understand where the leaks are.

Yes, Josh, you have done a good job in summarizing some of those factors. I will try to provide a little more color. From the seasonality perspective, the second quarter has historically , now with the inclusion of EPC, been slightly stronger than the third. We will see a slight decrease in sales on a seasonal basis. You did not mention foreign currency. We would expect that to be a negative in second quarter to third quarter and certainly on a year-over-year basis.

And then we talked about how the C&I and mechanical business will have a much tougher comparison in the third quarter. So I think that would influence the comparisons against prior year. And then as you mentioned price has normalized and the deflationary costs will benefit us slightly in the third quarter as well. So I think those would be somewhat of tail winds for the third quarter. I think those are all the comparisons and the factors and the variables that we took into account in looking at our guidance.

And I mean maybe I am looking at the comparisons wrong, but it seems like the comparison actually gets easier overall in HVAC and C&I moving from 2Q to 3Q, I guess that means margins must be down which seasonally that makes sense anyway, but it looks like the decremental margins were very well managed in the first half . Roughly 8% or 15% in 1Q and 2Q, and it looks like that slides a little bit more. And I am just trying to understand with commodities going your way a little more, should we take that to mean something about the relative mix between C&I and HVAC or is there something going on there with the loss of productivity with some of the restructuring plans even on a temporary basis? I am trying to understand why decrementals would get worse in the third quarter.

You are right on commenting on the strong performance we have had in the first half of this year. But the operating leverage that we enjoy particularly in the second quarter from that higher volume will be a little bit less in the third quarter. That does have an impact on margins in this third quarter. Then the other factors as I've talked about would have somewhat of a dampening effect. So the FX conversion, the translation, but as Mark and Jon mentioned, we would expect to see the year-over-year improvement in the HVAC business, and the others would be the puts and takes in the businesses as they operate in this third quarter.

Okay, That's helpful. And if I can sneak one more in here, just on the $12 million on restructuring spend targeting the second half, how much of that is showing up, or I guess what is the specific amount associated with that in the new growth synergy run rate? I would imagine there is some other year-to-date or EPC to-date out-performance that is baked in there as well. What is the timing and the pay back on that $12 million?

To try to separate those, EPC continues to perform very well against our pro forma estimates. The first half was quite good. And in the first half, we had roughly a penny of restructuring charges related to EPC. You are estimating roughly $12 million or higher in the second half or that we had talked about. The realization on the synergy savings we have done on a run rate basis. And Jon laid that out so that we would finish the second year of EPC with a run rate synergies that we have.

Josh, this is Jon, to add to what Chuck said when you look at the restructuring expenses and the heavy lifting I mentioned for the manufacturing restructuring and the four plants in Juarez, Mexico as well as the warehouse restructuring, the warehousing we are expecting to get completed by the end of this year. We will see the full benefits in 2013, less so in the second half. The Juarez restructuring, I mentioned 20% is now complete. We will see some benefits in the second half, but all of that won't be completed until the middle of 2013. We will see some pick up as we enter into 2013. We see more of the full benefits in the second half of 2013 and of course completely realized in 2014.

When you look at the synergies build over the four years as we showed get together full synergies by year three with a starting point being August of last year on that timeframe, clearly there is a good chunk of the savings we got out of the gate with the sourcing synergies, the logistics work we did, some SG&A savings, other ways we were getting at savings besides manufacturing and warehouse restructuring.

That's helpful. Thank you very much.

Thanks, Josh.

Our next question comes from Jeff Hammond from KeyBanc. Please go ahead with your question.

Hi, guys. Just a few clarifications, and then HVAC follow-up. Can you give us this North America plus nine, is that a core number or total? And then the international number , I think that sounds like an all in. Can you give us that on a core basis?

I'm not sure I understand the North America plus nine. Are you familiar?

Does that include Milwaukee Gear or exclude?

It excludes it. It excludes acquisitions, Jeff.

And international sales up 9.5%. I think you mentioned that as being acquisition driven. Can you give a core and maybe articulate Europe versus Asia at least directionally?

9.5% does include acquisition.

I don't have the without acquisitions number on me. Chuck, I don't know if you have it or not. Generally speaking as I mentioned before we have small exposure in Europe and we are actually doing better in Europe overall than perhaps the rest of the market. China would be more of a struggle for us.

Can you give us a sense how much your Asian business was down?

As we talked about in the past, our total Asia business would be 15% to 20% of sales, and then China would be the largest share of that. But it is less than 10% of our total sales, Jeff. But we have not given specific country numbers on a quarterly basis in the past.

Back to the high efficiency, can you give us a sense of -- I mean is that number higher because of acquisitions or lower? It sounded like there was some puts and takes, or maybe the answer is in the middle.

Jeff, the up 29% on a year-over-year basis that clearly is impacted by acquisitions because that's an all-in number. However, you looked at our high efficiency sales excluding acquisitions, we still had growth on a year-over-year basis. So there was more growth in the high efficiency product sales, across all of our product range.

Great. And then just final one on the HVAC side, I understand your timing was a little bit different on R-22 transition, and maybe you can carve that out. I am trying to understand better over the last couple quarters your growth rates or level of decline versus what the OEMs and distributors are calling out. There just seems to be something more than this R-22 , and maybe help me understand the dynamics there.

We had -- we declined 30% in Q1 and like 11% here in Q2 . Our view had been was that as we anniversaried R-22, that that would decline and that's exactly what happened. We believe it is substantially behind us at this point in time. And as we had mentioned there is a mix shift down. We go from an area where there is less competition to where there is more competition. And so we are impacted by that as well. The combination of that factor plus customer mix, in terms of how they are performing, all impacts our performance.

Thanks, guys. Appreciate it.

Thanks, Jeff.

Our next question comes from Holden Lewis from BB&T. Please go ahead with your question.

Thanks, good morning.

Good morning. (Multiple speakers)

Just want to get a little clarity I guess on the various restructuring and things like that. When you are talking about the capital and expense, this $5.6 million in year one and $7 million in Q -- in year two, are there additional expenses being incurred for some of these other items you are mentioning? Some of the Mexican plant closures, things like that? I am having a hard time figuring out which of your initiatives are related to EPC. Which of your initiatives are related to the simplification, sort of your standard operating model, and what costs you are talking about are associated with all of that?

Holden, this is Jon. I will try to answer that question. The projects that are primarily related to EPC and getting the EPC synergies would include the Juarez restructuring, so the four plants in Mexico I mentioned as well as the warehouse restructuring because that has heavy interaction with the EPC warehousing along with the legacy Regal warehousing. Both of those restructuring efforts are in the synergies and in the capital and expense forecast we showed on the chart.

As you mentioned there are other efforts that we are undertaking related to simplification across the entire company that will continue to drive benefits and will require some expense to implement those as well. We will be putting a little bit more color on that as we go forward.

What Chuck mentioned for the restructuring cost in the third quarter and the restructuring -- what we are forecasting or expecting for the fourth quarter is probably 75% or 80% driven by the EPC synergies, so the vast majority of that for this year is EPC. There are other expenses for smaller simplification programs, but that's what you would expect to see for 2012, the second half.

And are you able to -- so the $38 million in savings you expect to realize, is that just from the Juarez, the warehouse, those sorts of things? Or are there additional savings that you had talked about annually from the simplification that will come from some of these, maybe 20% or 25% of costs that are not related to EPC?

Yes, the $38 million is only from the EPC synergy project. So the warehouse restructuring and the Juarez Mexico consolidation of the manufacturing facility there as well as the things we started on August of last year around logistics and sourcing and SG&A benefits. So all of that together builds up, but it does not include these other simplification projects that I'm referring to.

So there is some annual benefit from simplification presumably that is not included in this $38 million or anything like that?

That's correct, Holden.

Okay, and how are we going to treat these charges? Obviously you are encouraging us to look at the results without them. Is this going to be something which as we go forward every quarter we are going to have more of these things broken out so we are effectively taking out the stuff that hits the P&L? Or is this -- what you are calling out going to be specific to the EPC, and then once the EPC is done in I guess Q4, for the most part (inaudible) in Q1, we will not have any more of these charges to talk and will take costs as we go?

Well Holden, we certain follow the accounting rules , and so we would have the EPC-- we will always break out the EPC restructuring charges separately and those activities. And then the new simplification initiatives, we will call those out and talk about those activities as well so that we don't mix those two processes and activities together for you.

Gotcha. And then on the forex conversation it had a negative impact on you. You don't have a big exposure to Europe. Can you talk about where your forex exposure is , is it mostly the Mexican peso? If that is right aren't you getting some benefits from having costs so heavy in Mexico? Maybe the net of forex and not just the translation affect?

It is an issue in Europe. It is an issue in our India business, our southeast Asia business and our Canadian business, but are you right as it relates to the peso. In some respects that can benefit our manufacturing costs.

And is that something that you have been or are seeing to any significant degree? Is that a contributor to the margin benefits you are seeing?

Probably does contribute a little bit on the margin, Holden. As we try to forecast that for the third quarter it is very difficult. Because those are real, live, real time translation changes. Trying to put that into our guidance on a line item basis becomes difficult as you can imagine.

There is no major boost to margin that is a function of where your costs are and pesos and that sort of thing. It is just not a big number?

I guess I wouldn't call it a big number, but on the margin it does benefit us.

Great, thanks.

Thank you.

Our next question comes from Jaime Sullivan from RBC Capital Markets. Please go ahead with your question.

Hi, good morning.

Good morning, Jaime.

I guess just a follow-up to the question earlier on Asia, maybe you can just help us with the thinking in the guidance. Are you assuming Asia gets worse going forward, or stabilizes at the current levels you are seeing?

We have been seeing sequential quarter-to-quarter improvement in our order rate. Fourth to first, first to second, second to third. But it is still on a year-over-year basis soft. That's the way we are thinking about it, and it gives some optimism on the future, and as you know the Chinese government is trying to do a lot to stimulate that economy.

And then in the electrical segment, how much of that business does North American C&I contribute? Commercial and industrial business in total is about 28% of our total revenue, something like that. Commercial industrial is in total about 28% of our total revenue. Is North America the vast majority of that? Do you know how much is international?

Jamie, the North America piece would be the largest piece of that. We are selling in Canada. We are selling in Europe and China and India and southeast Asia for that matter as well. North America would be the largest single market share.

And then maybe on the HVAC side, do you have a sense of what your percentage, your volume is that sells into SEER13, kind of the low end on a percentage basis?

We would very much follow what the overall HVAC segment is doing. So we wouldn't be any greater or any less than the overall market except for the fact that we offer a premium product in the high efficiency space. So we obviously have a larger position in the high efficiency space.

And then lastly on Unico, the strength there , can you just talk about what is driving that and some of the dynamics in the energy market whether you think that can continue?

So, you know, Unico sells both an electronic drive and a mechanical linear rod pump . So that is the device that actually pumps the oil. That business is a very strong backlog. Our order rate has moderated only slightly. We have been successful in getting our production rates up quarter-to-quarter from fourth to first to second, and we expect even more in the third. We will be adding capacity in that facility to further improve our ability to meet the order rates we have been seeing.

Jaime, this is Jon. I would just add to Mark's comments, that Unico's product range in oil and gas is very diverse. So we have products the teams develop products that work through a wide variety of applications, gas as well as oil, on shore as well as offshore. There is a very broad product offering. When one segment would see a decline it's somewhat offset by the diversity of the other products. And also some other segment segments that are performing well for Unico such as some automotive, with some of the strength we have seen in automotive in North America in particular has helped us.

The other diversity in oil and gas is geography. So it is not only a North America product, but sold in many other regions of the world. And then third point I would add is that the team continues to look at new spaces, new applications where their technology can add value. And we are pretty committed about some of the -- we're pretty excited about the future. We feel good about the outlook for Unico.

Thanks very much.

Thank you, James.

Our next question comes from Bill Dezellem from Tieton Capital. Please go ahead with your question.

Thank you. Relative to the four Juarez facilities that you are going to be closing, what is the split between legacy RBC facilities and legacy EPC facilities ? And what is going to be happening with the production coming out of those four plants? Where is it going?

You know, all four facilities that will be closing are legacy EPC facilities. The production will be moved to either existing EPC facilities or to RBC -- legacy RBC facilities. So a little bit of history on this , the history for the EPC business was they had a number of factories in the Juarez area. As a result of acquisitions that business did over the last, say, seven to ten years, and so there was a opportunity was ripe to consolidate many facilities into other larger facilities that can provide more efficiencies and more leverage.

And the production, is it going to be staying in Mexico, or will it be moving to other parts of the world?

I would say 95% will stay right there in Mexico. I think we have one instance where we are moving some product back to the U.S., but for the most case it will stay right there.

Great, thank you.

Thanks, Bill.

Our next question comes from Upinder Vora from Jefferies. Please go ahead with your question.

Good morning, guys. I am sitting in for Scott Graham.

Good morning.

First question, if you guys can discuss C&I trend especially in North America. That grew 1%. I believe that is a core growth. Can you expand what you are seeing right now in that business?

So, just to comment, these businesses we are seeing on a year-over-year basis 15% growth rate on a year-over-year basis. So it is starting to see tougher comps. The businesses still grew in the second quarter, and we did see that the orders begin to moderate late in the quarter.

Okay. On FX, could you guys give that by segment, I believe totally it declined -- I think FX had an impact of 2%. What was the impact in electrical and mechanical?

The majority of it would be on the electrical segment. We do have some international mechanical businesses. It would be a small portion of that, probably less than 10% of the total FX translation impact, Upinder.

And the last one , you guys have been talking about this additional simplification program. If you can just give us some color, what particular segments or what businesses do you think you are going to take a look at and have this -- apply the program?

Yes, so we have been communicating for the last year, and it will touch every aspect of the Company starting with our corporate brand and going down to our factories and our engineering design platforms, the number of legal entities in the company, and the number of SKUs in the company, and the number of suppliers in the company. We laid out targets for ourselves, that we would substantially simplify all of those and gave ourselves pretty tough targets. I would say the progress is good and there is a tremendous amount of momentum around the Company to rally around this. I think everyone in the Company sees the benefit from both our customers as well as for the bottom line. We started those discussions on our investor day in December of last year, and we will give an update this year in December on how we are performing.

Thanks a lot.

Thank you.

Our next question comes from Zach Larkin from Stephens. Please go ahead with your question.

Good morning, gentlemen.

Good morning, Zach .

First off, can you guys talk about inventory levels you are seeing in the different channels you play into with the slow down? Have they crept up a bit or does things feel rational when you look at that landscape?

The feedback is somewhat mixed on the HVAC side. The distributor channel would -- I think the overall feedback would be that the inventory is up on higher sales, but consistent with those higher sales and somewhat normal. From a specific customer perspective on the HVAC side, we are hearing mixed responses. Some people say the channels are lean. Others are saying the channels are normal.

On the commercial and industrial side, Zach, I would say that the feeling overall is that inventory levels are probably down a bit which would be positive. That coming from what we believe was some of the early reports of the industrial -- the North America industrial businesses slowing a bit as we progress through the second quarter , dealing with some of the distributors who took inventory down in anticipation of lighter order rates. Mark mentioned some of the volatile tee and the orders being week to week basis. We have seen -- Mark mentioned earlier some of the volatility in the orders being week-to-week basis. We've seen some of that rebounding, and it could be a reaction to lower inventory levels bringing them back to more normal levels.

Okay, thanks very much. And then, Mark, you also talked about the acquisition pipeline being fairly full. Could you maybe give color on the type of acquisition, size-wise and the types of products and things like that you guys might be consider?

Sure, in terms of range of businesses anything from a $30 million [bolt on] to an $800 million large acquisition. In terms of the types of businesses we have been very consistent in saying that we are looking for businesses that contribute technology on the energy efficiency side, that expand our global footprint, or that add some incremental value or margin improvement to our overall profile. And in terms of the product categories, we have been focused on motors, electric generators as well as mechanical gear drives. Our last three acquisitions have touched each of those categories, one in motors which was the EPC, one in mechanical drives which was Milwaukee Gear, and then recently we acquired a business with Unico which touches more on the electronic drive space.

Thanks very much.

Thanks, Zach.

Our next question comes from Walter Liptak from Barrington ResearchPlease go ahead with your question.

Hi, good morning, guys.

Good morning, Walter.

Most of my questions have been asked already, but your cash flow looked good during the quarter. Especially inventory coming down even though you had sales up sequentially. Wonder if you could provide us with some guidance on second half cash flow?

You know, we were able to make rather significant improvements as we got into the second -- third quarter of our ownership of EPC. We had real improvements overall as we were able to integrate that business. We expect the third quarter to be similar performance to what we have had, and our overall goal is to have free cash flow exceed net income. That is our goal and as we had mentioned this is the fifth quarter in a row we have been able to achieve that goal.

That doesn't seem like it will be hard with where you were this quarter. With the consolidation of Juarez and the warehouses, do you need to build inventory in advance of it, or your inventory is in good shape to meet demand even with that restructuring going on?

There is -- there are some inventory -- not for the warehousing, but for the manufacturing restructuring in Juarez, while there is some increase in inventory levels required to make sure we cover the transition times and make sure we provide good service metrics for our customers throughout the transition, much of that is -- the impact of that -- much of that is already in our inventory levels today. There will be a little bit as we go forward, but not a significant amount.

And if I can just switch topics to China and you have the two new manufacturing plants that are ramping, and just understanding the comments you made about sequential demand improving out of China, what kind of impact should we be thinking about in the next couple of quarters as these operations continue to ramp? Does it show up in a meaningful way in revenue or absorption of overhead costs ?

In both cases these are moves that were driven mostly by requirements from the Chinese government. They needed the land for one reason or the other. In both cases we made the facility more efficient in terms of its layout and consistent with lean practices. We feel we will get some efficiency gains out of it.

And besides the plant, to be consistent with the growth, we had forecast back a year or so ago, while taking into consideration what we were seeing at that point in time, which was a moderating situation in China which showed up for us in the third quarter of last year. We don't expect -- it is not like we are adding substantial capacity. We don't expect a significant quarter-to-quarter jump in our production levels, but the plants will be a great showcase for our products and capabilities and very efficient.

Got it. Thanks.

Thanks, Paul.

Our next question comes from Josh Pokrzywinski from MKM Partners

Hi, guys, thanks for the follow-up. One quick question. It kind of came up in bits and pieces on the call. I just want to understand once and for all, the mix of the migration from call it 16 down to 13 SEER or middle efficiency down to low efficiency versus maybe this upside surprise on R-410A. Is that a net positive or net negative? Are the markets mixing down on efficiency, but maybe up on refrigerant?

We don't know yet. It is a little too soon to tell. This R-410A comment you are making, we have heard it, but it is not, I wouldn't say, a real strong, consistent message. It is a bit too soon to tell , and exactly what designs the OEMs use to meet is not exactly clear. As Jon mentioned earlier, typically a shift to R-410A requires different plumbing in the whole system and has been in the past a positive contributor for us, and that's the way we see it. In terms of mix shift down overall, most of it has already occurred as a result of the R-22 conversion back, and we've anniversaried most of that. That's our thinking on that.

I would add, Josh, that we did see a little bit better mix in HVAC products in terms of premium products in the quarter than what we saw in the first quarter. Some of that would be the seasonality of the business, but it could also be related to the shift toward R-410A units as well. Hard for us to correlate the two as Mark mentioned, but we did see that dynamic and that is positive for the course.

That's helpful thanks.

Thanks, Josh.

Our next question comes from Holden Lewis from BB&T.

Thanks. So the last I guess year or so you have been in an environment where HVAC has been weak and C&I has been strong and has resulted in relatively stable end markets and the results you put up. And now it looks like we may be shifting to an environment where C&I is weak and HVAC is strong. Assuming that lends itself again to stable revenues, how should we be thinking about the mix? Is there any mix-related benefits from having weak C&I and strong HVAC or are they mixed negatives? How should we think about the mix that you shift your leadership within your mix?

I think the way to think about it is they both perform relatively speaking at the fleet average of the company. So not a substantial change.

But HVAC is performing at the corporate average even though it has the head wind of heavier repair versus replace and heavier R-22 versus R-410. So if that gets better does that improve the mix profile or not really?

It can certainly improve. If the mix gets better, that's going to be an improvement, that will be a help to us.

But HVAC are currently operating at similar margins, but normally HVAC would do better under a more normalized environment?

I am not sure what is normal anymore. Given all of the changes in HVAC. That's tough to say. In the past two quarters they have been similar in their overall performance.

And I guess the last thing is in recent quarters you have been cutting production in HVAC to deal with inventories. Where are you in that process? Are we going to be normalizing production in HVAC? Has that been a drag from an absorption standpoint, and that's going to flip to become a benefit from an absorption standpoint? Or is that a past issue, or how should I think about production cuts and normalizing it?

I would say, Holden, that was a dynamic we were working through in the latter half of 2011. As we enter 2012, the first quarter of course, I would say as we got into the first quarter and as we exited the first quarter we had inventory levels right where we wanted them. With the seasonal pick up in the second quarter and help from the warm weather, I think we are in overall very good shape right now.

Got it. Thanks, guys.

Thank you.

Thank you, Holden.

And with that we will conclude today's question-and-answer session. At this time I would like to turn the conference call back over for any closing remarks.

Thank you. I will just make a few closing remarks. Overall the first half of 2012 was very exciting for our Company. Again we mentioned it for the first half, we achieved record sales and record earnings, and we successfully integrated the largest acquisition in our history. We launched our corporate brand, which we laid out for you, and we began the journey to simplify every aspect of our Company.

From a new product standpoint, we talk about it all the time, we are on track to achieve another record year of new product launches, and most of it focused on energy efficiency. We made major investments in our Chinese factory with an effort to improve our overall performance, and we have made pretty big strides on improving our quality and our delivery which we will talk about . We think that will show up in our annual customer survey.

Really proud of the performance of the Company. We have some uncertainties out there. In spite of that we are very excited about the future. We recognize none of this would be possible without all of the contribution from our Regal employees globally and we sincerely thank them. Thank you again for your interest in our Company and have a great day.

Thank you for joining today's conference call. It has now concluded. You may now disconnect your telephone lines.