Regal Rexnord Corp (RRX) 2012 Q4 法說會逐字稿

Good morning and welcome to the Regal Beloit fourth quarter 2012 earnings conference call. (Operator Instructions)

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

(Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Mr. John Perino, Vice President of Investor Relations. Mr. Perino, please go ahead.

Thank you, Amy.

Good morning and welcome to the Regal Beloit fourth quarter 2012 earnings conference call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, Vice President and CFO. Before turning the call over to Mark I'd like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements.

Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied from forward-looking statements. For a list of those factors that cause actual results to differ materially from projected results please refer to today's filings with the SEC.

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

Now I will turn the call over to Mark.

Thank you, John.

Welcome and thank you for joining the call and for your interest in Regal. This morning I will follow our normal agenda. I will make a few opening comments, Chuck Hinrichs, our CFO, will give you a financial update and then Jon Schlemmer, our COO, will give you color on products, markets and operations and then I will summarize and we will move to Q and A.

Despite softening economic conditions, we achieved performance consistent with our fourth quarter guidance. As you may recall at our Investor Day in early December we confirmed our fourth quarter guidance and communicated that while we were lowering our ETR for the quarter the tax benefit would offset operational challenges. Chuck will walk you through the details to illustrate how that all came together during the fourth quarter.

Market conditions were weak as we exited the third and entered the fourth quarter, putting volume pressure on most of our businesses. However our HVAC business was up slightly in the quarter and our Unico business had another quarter of strong growth. A key highlight for the quarter was our free cash flow at 175% of net income which represents the seventh consecutive quarter where free cash flow was either equal to or greater than net income.

Other noteworthy topics from the quarter include first solid progress on our Synergy plant rationalization programs. Second we celebrated the ribbon-cutting of our new warehouse in Indianapolis which was also a part of our EPC Synergy programs. Also we launched 28 new products during the quarter, making a total of 60 new products for the year. And finally at the end of the fourth quarter we successfully completed a follow-on offering of Regal shares which provided $203 million of capital for future growth.

We have a number of acquisition opportunities that we are pursuing, ranging from $20 million in revenues on up and we intend to continue to be a consistent and successful acquirer. We are appreciative of the support and confidence from both our new and existing shareholders. As we look forward we are cautiously optimistic. We are currently seeing the normal seasonal order rate improvements, as well as improving conditions in a number of our key markets.

We will wrap up our Juarez restructuring Synergy activities during the first half and we are driving our simplification initiative throughout the Company. Further we continue to invest in new facilities, new products and quality improvements that will allow us to continue the great strides we've made in customer care.

With that I will turn it over to Chuck Hinrichs.

Thank you, Mark, and good morning, everyone.

Our fourth quarter results were in line with our earlier guidance. Net sales of $716 million decreased 1.6% from the prior year. Sales in the fourth quarter reflected the normal seasonal slowdown, as well as the economic uncertainty that negatively impacted demand for our products. Also international sales were sluggish and foreign currency exchange rates reduced sales by 0.3% in the quarter.

Our adjusted operating profit in the quarter benefited from the savings from our Synergy program but the savings were offset by lower sales volume and the resulting lower cost absorption at our factories. The LIFO expense in the quarter was lower than expected, but still a large negative variance versus the LIFO benefit of $5.4 million in the fourth quarter of 2011. Our free cash flow generation for the fourth quarter and the full year was outstanding. I will provide more details on this important metric on a later slide.

Earnings per share for the fourth quarter 2012 were $0.70 per share on a GAAP basis. Adding back restructuring charges of $3.9 million, or $0.06 per share produces adjusted earnings per share of $0.76. The $3.9 million of restructuring charges resulted from our Synergy program and simplification initiative. Of these restructuring charges, $3.6 million was in cost of goods sold and $300,000 was in operating expenses. Restructuring charges were less than forecasted for the quarter as some of these expenses were moved into the first quarter of 2013.

The fourth quarter earnings-per-share also benefited from the completion of our tax integration of the EPC acquisition. I will provide more information in the next slide In summary, our fourth quarter 2012 earnings were in line with our guidance for the quarter despite the uncertainty in the global economy during the quarter.

Let me summarize some additional data on our fourth quarter results. In the upper left quadrant we summarize our capital expenditures. In the fourth quarter our capital spending was $24.9 million as we completed the spending on our two new China factories and received $1.6 million of government grants during the quarter to assist in these relocations. Our full-year 2012 capital expenditures were $91 million. Capital expenditures for 2013 are forecasted to be $100 million, which includes the relocation of our new C&I motor factory in China and the Unico plant expansion.

In the upper right quadrant we provide income tax information. Our effective tax rate in the fourth quarter was 15.6% as we completed the tax integration of the EPC acquisition. The full-year 2012 benefit was recognized in the fourth quarter, pushing the fourth quarter ETR to this low level. This integration provides a sustainably lower level of tax expense for the future. The schedule shows our progress in this area. Our ETR was reduced from 30.2% in 2011 to 25.8% in 2012 and is expected to average 25% in 2013. For the first quarter of 2013 we expect our ETR to be 23% as we book the retroactive reinstatement of the R&D tax credit in the US that applies to 2012 but was not approved by Congress until January 2013.

In the lower left quadrant we highlight our strong free cash flow in the fourth quarter of $52 million, equal to 175% of net income for the quarter. This is the seventh consecutive quarter that we generated free cash flow at or greater than net income. For the full-year our 2012 free cash flow was $269 million, equal to 138% of net income. We focused on generating free cash flow for debt reduction to improve shareholder value, to pay dividends and fund our future growth.

In the lower right quadrant we summarize our credit metrics. At the end of the fourth quarter total debt was $818.5 million, a decrease of $47.5 million in the quarter. We continue to drive improvement in our credit metrics with our strong free cash flow, even with a higher level of capital expenditures in 2012. Our debt to EBITDA declined to 1.9 times at the end of the year and our net debt to EBITDA was at 1.0 times. Our debt to capital ratio improved to 29% with the additional $203 million of equity we raised in December.

As we look to the first quarter of 2013 we expect earnings per share on a GAAP basis to be $1.08 to $1.16. Our guidance includes $2.3 million or $0.04 per share of restructuring charges for our Synergy program and simplification initiative. Also included in our GAAP guidance is the $1 million or $0.02 per share tax benefit related to the retroactive reinstatement of the R&D tax credit. Our adjusted EPS guidance for the first quarter is $1.10 to $1.18 after adding back the $0.04 of restructuring charges and deducting the $0.02 of tax benefit to the GAAP guidance.

Our first-quarter sales should see the seasonal recovery in our sales volumes. We continue to execute our controls on cost and expenses to improve our operating results. And our tax expense will be lower, which will improve our earnings. And finally, our guidance reflects 45.2 million shares outstanding, the higher share count after our stock offering of 3.2 million additional shares in December 2012.

Now I'll turn the presentation over to Jon Schlemmer.

Thanks, Chuck, and good morning, everyone.

As Mark mentioned the softer market conditions that we experienced in the latter part of the third quarter continued as we entered the fourth quarter. We believe much of this was related to the general uncertainty in the global markets, including slowing of the US economy in the fourth quarter. Sales in our North America residential HVAC business were up slightly compared to the prior year. Inventories were reported to be slightly elevated in the distribution channel during the fourth quarter, too soon to tell where inventory levels are in the first quarter.

During the quarter it was also announced that there would be a delay in the implementation of the regional energy efficiency standards for gas furnaces. While we're disappointed in the delay, we do remain encouraged that these changes will provide a tailwind for our HVAC businesses in the future.

For the quarter, sales in our North American Commercial and Industrial businesses declined 1.4%. This was an improvement from the third quarter comparisons as orders began to improve toward the end of the quarter. The end markets for commercial and industrial were mixed. We experienced strength in commercial HVAC, commercial refrigeration, and food and beverage. However industrial pump, commercial and industrial equipment, and energy markets were all weak. Overall, distribution was relatively flat in the quarter.

Our sales to regions outside the United States declined 1.5% compared to the fourth quarter 2011. Some of this decline was due to foreign currency exchange rates. This was a considerably better comparison than we experienced in the third quarter. We're seeing some improvement in the China domestic market and stabilization in Europe. However, the India industrial market remains a challenge.

Sales outside the United States represented over 34% of our total sales for the quarter. Sales in our Unico business increased 30% compared to the same period prior year. The prior-year sales were quite strong so we were pleased to see continued growth in this business. Global orders remain strong in oil and gas for Unico, as well as automotive. Unico develops custom test bands that are used by automotive manufacturers to test new power train platforms such as new hybrid vehicles. We are adding capacity at our Unico facility and we remain optimistic about the growth outlook for this business.

We made significant progress on our restructuring programs and simplification initiative in the fourth quarter, helps us reduce our costs, minimize the impact of weaker market-- and minimize the impact of weaker market conditions. Let me give you a quick update on these programs. First I'll touch on our Juarez restructuring synergies. In our Juarez manufacturing operations we are consolidating our facilities and will exit four of the manufacturing plants. Three of the exits are now complete and we remain on track to complete the Juarez restructuring by midyear.

Last quarter we also gave an update on our plans to consolidate our North America warehouses, allowing us to exit three warehouses. We completed these moves in the fourth quarter as planned and on schedule. Again, this is part of the acquisition synergies. As we exited the year I feel great about the progress made in 2012 on the EPC synergies and also the integration of this business into Regal. And we continue to make progress on our simplification initiative.

Last quarter we discussed further rationalization of our manufacturing facilities in Mexico, focusing on our facilities in the Monterey area. The teams are making progress on this consolidation effort and we are identifying opportunities for more improvements in 2013. Will be able to give you more color on these changes as our plans firm up. And we continue to make progress on all other aspects of simplification.

In 2012 we not only reduced 120 direct material suppliers but we also consolidated 150 indirect material suppliers. Our Supply Chain team continues to make progress simplifying our supply base. We set an aggressive target to reduce our supply base by consolidating three suppliers each working day in 2013. Through this consolidation we expect to get better pricing, shorter lead times and improved quality.

Over the past few years we put an increasing focus in investment and accelerating new product development. At the same time, we also significantly increased the amount of rigor in our development process starting with a deep understanding of customer requirements using advanced modeling tools and enhanced reliability testing. In 2007 we launched a record 50 new products, and we're excited to report that in 2012 we increased our launches by another 20%, launching 60 new products across all of our businesses. Many of these new products were developed to improve energy efficiency, improve the value proposition of our products, and to allow us to participate in new applications and end markets. Sales of energy-efficient products during the quarter increased by over 13% compared to the same period prior year and represented 21% of our net sales.

I always wish we had more time to talk about all the new products. Today I'd like to highlight a few of the new products launched in the fourth quarter. First our air moving team launched a new gas premix blower that utilizes our smart air-moving motor technology. This technology utilizes an axial flux permanent magnet motor design that delivers very high efficiency levels, variable speed performance and a compact lightweight package.

The gas premix 4.6 product shown here is the latest launch in our new high-efficiency variable speed gas premix line. The primary application for this new blower is in high-efficient premix burners found in modulating residential boilers, water heaters and food-service equipment. This blower line delivers optimum air to fuel ratios for very clean burns providing an excellent choice where ultra low NOx operation is required. Our advanced technology makes this product smaller, quieter and more efficient than other premix blowers.

The boiler segment is a new segment for Regal. Use of high-efficiency boilers is growing in the US, driven by both energy efficiency and the need to reduce NOx admissions. And since Europe is primarily heated with boilers we will be marketing this product in Europe, as well.

Lastly our generator business launched three new products in the fourth quarter. All three of these new products were designed by our engineering team in China and will be built in our new generator factory in Baoshan, China. In the past, our China-based Generator business was limited in generator size by our material handling capabilities and our older facility. Our new facility in China was sized with the proper material handling and technical capability to utilize larger generators.

As the new plant became a reality our engineering team in China quickly launched three new generators, all larger than anything we produced in China in the past. The new 1,000 frame and the new 850 frame in both medium and low voltage versions expand the growing generator market that we can address in China. To give you a feel for the size of these generators, they are about the size of a compact car. They can provide enough electricity to supply critical power to hospitals, data centers, water treatment facilities and medium-sized manufacturing facilities. And if you're a sports fan, yes, one of these could power half of the Superdome in New Orleans.

Our teams launched 28 new products in the fourth quarter. These are just a few examples that hopefully give you an idea of what we're doing to bring new technology to our customers and grow our Business.

With that I'll turn it over to Mark. Thank you.

Thanks, John.

To summarize, we finished the quarter in line with our guidance pretty much as we communicated at our Investor Day and we are consistently generating solid free cash flow. Our synergy programs and our simplification initiative continues on track and we continue to launch new products to drive growth. With our first quarter guidance, we expect typical seasonal order improvement. The residential HVAC business is projected to experience modest growth while we are cautiously optimistic with improving conditions in a number of key businesses such as commercial and industrial and our China-based business. Finally, our acquisition pipeline remains strong and we continue to actively seek candidates that meet our strategic objectives and financial criteria.

We will now take your questions.

Thank you. (Operator Instructions).

Mike Halloran with Robert Baird.

First, Mark, can we start on the last comment you made about seeing some improving conditions in your C&I trends and in China. Maybe you could just give a little bit of color on how those track through 4Q, what you're seeing from an order rate standpoint at least qualitatively and then any update that-- on how things have started the year out to give you guys a little bit more confidence that you might see little better trajectory there?

Sure. I will make a couple comments and then I will turn it over to John. If you recall as we entered the third quarter we were coming off of six quarters in a row of organic growth in our commercial and industrial business and then it slowed precipitously in the third quarter and that carried through into the fourth quarter. And we were certainly thinking about that as we went into the fourth quarter. I would say our order rates throughout the fourth quarter did better than perhaps we had expected in our commercial and industrial business, but still not enough to put us in a positive note. As we kick off the first quarter we continued to see the strength that we started to see in late fourth quarter. I will let John give you a little bit more color on perhaps specific segments.

Mike, I would add to what Mark said that as I mentioned in the fourth quarter some of the markets that were strong for us were commercial HVAC, commercial refrigeration, food and beverage. Irrigation was also strong for us in the fourth quarter. We also saw improved adoption of variable-speed motors for the [full in] market which is, as you know, one of the new products that the EPC team has launched in the past year. Distribution was also flat but that was improved from Q3 and probably some positive impact from Sandy helping the C&I distribution number in the fourth quarter. As Mark said, we've seen some improvement in the order rates as we exited the fourth quarter and into the first quarter. I would add also though that we've got a pretty tough comp in the first quarter with C&I because we have had a couple first quarters in a row now with very positive growth. So difficult comp but we do feel good about the order rates we are seeing.

And then when you think about the HVAC side of things, maybe you could talk a little bit about customer commentary, what their thought process looks like now and if you've got any updated thoughts since you guys last publicly spoke at the Analyst Day about what growth rates can look like for the residential HVAC business in North America?

Mike, I think what we are hearing is in terms of on a total-year basis mid-single-digit kind of growth rates is kind of the expectation from our customer base. The inventory position throughout the fourth quarter was reported to be relatively high on a year-over-year basis. As Jon mentioned that was most likely as a result of heating products that were carried over from the mild 2011 cooling-- heating season. But I think it is pretty consistent in terms of customer feedback and what people are expecting going into 2013.

Nicole Deblase with Morgan Stanley.

I'm hoping you guys can talk a little bit-- I know you talked about distributor inventories. But within the resi HVAC channel, can you talk about that the inventories of the OEM that you-- the results that you experienced in 4Q and what you expect for 1Q 2013?

Nicole, as you probably know, our lead time with our OEMs is pretty quick. We are literally releasing on a daily basis so relative to our inventory with them it's-- there's not a lot there. Pretty efficient shipping process with our key customers. In terms of their equipment that's not in distribution, we don't have a view of that. As you know, we do get a view of the equipment inventories because it is reported.

Okay, but do you think it is fair to say that based on the sales trends that you saw to the OEMs that it's possible that they were building inventory during the fourth quarter? Or is it too hard to make that comment?

I don't think we really know for sure. Jon, do you have any further comments on that? I'm not sure we know.

I would say that's true. It is hard to gauge the inventory levels at the OEMs. We do know there were some timeouts taken at the end of the year in some of the factories.

It is someone normal though for that part of the-- that time of the year.

And then if you guys could talk a little bit about what you expect for margins going into the first quarter and just refresh us on what typical seasonality is in each of the segments and if you expect any deviations from that this year?

Chuck, do you want to talk about-- I think we laid out at the Investor Day seasonality by business-- by quarter, not by business.

Right. So historically we've had about 22% of our annual sales in the fourth quarter which then increased to 26% in the first quarter. So that's the seasonal pickup that we usually experience in the first quarter. That has a beneficial impact on our margins just as the lower sales in the fourth quarter have a detrimental effect on our margins. In terms of price versus cost we are generally seeing a balance there although pricing is reflective of some of the material price formulas we have with the OEM customers. So as copper, steel and aluminum experience some declines in the second half of 2012 that is ratcheting down those prices to the OEMs in the fourth quarter and first quarter of 2013, still maintaining a consistent gross margin. But the pricing would be down a little bit.

Jeff Hammond with Keybanc Capital Markets.

This is Brett Lindsey in for Jeff. You noted on the acquisition pipeline that being strong, could you just give some directional timing? And when you look to use those proceeds from the recent equity raise and then any specific color on the size or the type of properties that are being contemplated there?

Brett, as you know, you never can predict timing on any of these transactions. You just never know. But we continue to look at transactions anywhere from say $20 million on up and I think the way we phrased it was it could be $20 million, $100 million or perhaps transactions larger than the EPC transaction which was the largest in our Company's history. And we are trying to focus on the four product platforms that we currently manufacture which are electric motors, electric generators, power transmission products as well as custom electronic drives.

Back to residential HVAC, could you just talk about the progress on your low-efficiency product line there? And as you look at 2013 you talk with some of your customers, what's the feedback in terms of mix in what they are telling you to plan for in 1Q as we move through the year here?

This is Jon. I will touch on that. As we announced I think it was Investor Day back in 2011, December 2011, we were shifting our development-- new product development focus to be a balance between premium products, high-efficiency products and also value-based products and we did just that in 2012. We launched a couple of products aimed at improving the value position of our standard products. And we've seen, I'd say, good adoption of those products by many of the-- many of our customers. So I feel like as we head into 2013 we have a good product lineup on both standard products as well as high-efficiency products. We did see after all the dynamics in 2010 with the federal tax credit that we talked about before we did see just overall market shift back more towards standard products in the past year and a half. I would say that that's pretty much what we are expecting in 2013. As I mentioned on the-- earlier in the presentation we did have the delay of the gas furnace regional energy efficiency standard that was to take effect in May so we were a bit disappointed in that delay. But I'd say overall we are planning for a similar mix to what we saw in 2012. There could be a little bit of improvement as our 22 continues to work down-- the levels work down on a year-over-year basis so that shouldn't be a headwind for us and may in fact help us a little bit in terms of energy efficiency mix for the year.

Josh Pokrzywinski with MKM Partners.

Just a follow-up on the mix question. I want to dig in on-- here on the fourth quarter. It seems like we've seen lapping of easy comps here for a couple quarters now. You talk about mix kind of stabilizing here. Would you call fourth quarter the line in the sand where comps are easier and you guys start to perform in line with the market as in-- you've taken your medicine at this point and we shouldn't see any big under performance. Because I guess with the hearty sell through data, mid-singles, a couple of your big customers up even high teens on the quarter with some of that pull through ahead of their price increases. I'm still a little surprised that the HVAC business being more or less flat.

Josh, there probably were a few factors that came into play there. I think we talked a little bit about-- Chuck mentioned our-- the fact that we have material price formulas that kicked in as a result of third quarter adjustments in commodities so there was some element of that during the quarter. Obviously, that catches up over time and we also discussed, as you probably know, the hearty data reported inventory up throughout the quarter from an equipment perspective and so that probably came into play. You always have your own customer mix issue in terms of which customers are winning and losing in the markets. So as we mentioned before there's always shifts of our own position at specific customers with puts and takes over the long-term we continue to expect to be a major player in this space. So that is my view of how to look at the fourth quarter.

But just in terms of thinking about the way this plays out over 2013, are the big variances behind us in your view or should we consider-- or should we continue to expect some modest under-performance there?

As we look at Q1-- I'm not going to talk about the total year but as we look at Q1 our view is that we will have modest HVAC growth in the quarter. I cannot be laser specific on what's the percentage going to be, but our view is we're going to have growth during the quarter.

One little follow-up here on the C&I business. Is seemed like, versus the December commentary, that you guys saw maybe a little bit more stabilization than at least it came across initially. Maybe can you help me understand where that was from?

Jon commented on it a little bit. I will just reemphasize a few key points. I think Jon talked a little bit perhaps there was an effect from the Sandy. We had talked about that at Investor Day that perhaps there was some tailwind there. Also Jon mentioned that we had pretty nice adoption of our variable-speed pool motor that we had launched last year. That was a product that we actually talked about on one of our earnings-- earlier earnings calls and we are starting to see adoption of that product. Then in the commercial HVAC space seem to have picked up in the fourth quarter.

Bhupinder Borat with Jefferies.

Could you guys give us some color on some specific end markets which look better now versus three months ago?

I will talk about geographically first and then if Jon has any commentary I will let him weigh in. First from a China perspective, it certainly feels a little bit better there now than it did perhaps in the early part of the fourth quarter. We were seeing all of the positive commentary on PMI and other information like that coming our of the markets and we are seeing a modest improvement in our own orders in China. So that would be my first comment. Europe seems to have stabilized versus the fourth quarter. I don't know. It is probably too soon to tell, that's point one. And then point two is we have a relatively small footprint in Europe so we're probably not a good proxy for what's happening in the broader market. But in terms of the small slice of the pie that we have we would say it has moderated. Then we commented already on the commercial and industrial markets and Jon can communicate those again just for emphasis. The end markets, Jon.

Sure, Mark. I mentioned that-- of course we talked about residential HVAC and what happened in the HVAC space. Commercial HVAC, commercial refrigeration have been strong, food and beverage, irrigation I mentioned. Pool head has been pretty good for us, especially the high-efficiency products. And then I commented on distribution overall being flat. And I'd say that's pretty much how we are seeing it as we go in the first quarter, but overall for commercial and industrial, we've seen a general improvement in the order rates and that would be across most of the end markets. Oil and gas, I'd say the energy markets are mixed for us. Unico has seen good strength in oil and gas. As you know, they've introduced a lot of new products targeted at specific applications and opportunities. However, on the commercial and industrial and mechanical side, sell into oil and gas-- smaller part of those businesses but we've not seen that kind of strength. And I'd say those are probably more regional plays, again, more North America focused and that could be why we are seeing the difference there versus the Unico oil and gas businesses or products.

One more question on the M&A. Could you just talk about some of the larger deals in the pipeline? You did mention $20 million plus revenues. If you can talk about just how big the deals you have in your pipeline right now?

I will comment in terms of deal size I made the comments from $20 million on up you ought to think about it as $20 million plus or minus $100 million plus or minus. And then I mentioned a few targets that were perhaps larger than our EPC transaction. That's about as much as I can say right now on any particular M&A activity.

Jamie Sullivan with RBC Capital Markets.

You talked a little bit about expecting the normal seasonal ramp from 4Q to 1Q. If you can help us a little bit more with the range of sequential growth that you see as normal. It is a little difficult looking back historically given that the acquisitions and recessions to see what typically happens sequentially there.

Jamie, it is Chuck. It is very difficult to give top-line guidance and we have historically not provided that other than to try to give you a sense of what our quarterly historical sales have been as a percentage of the full year. As Mark mentioned, it is a cautious optimism. We tried to give you a commentary on some of the geographic and some of the end markets and how we're seeing those markets currently and into the quarter. That's about as good as we can do at this time.

Moving on to the standard efficiency product that you talked about. Just trying to understand that a little bit better. The commentary, it sounded as if you felt you had sort of a full offering there in 2012. Just wondering how you're thinking about the season this year versus last year relative to that product and maybe the penetration with customers, is that a benefit or just sort of an overall volume, and mix will stay the same? Just trying to wonder how to think about that.

I think we want-- we told everybody that we would have a low-end product and we did that in 2012. As you know, things don't tend to move super fast with any of these large customers. They tend to be very deliberate in all of their testing and things like that. We have penetrated a few customers, but I don't think you should estimate a significant change in mix as a result of that.

And maybe just lastly on China, you're seeing some improvement there. Just in terms of how easy the comparison might be as we head into 2013, how much-- how did China perform for all of 2012?

We started to see a decline in our China orders back in the fourth quarter of 2011. That is when we first started talking about it and so we struggled throughout most of 2012. It got progressively tougher as we went from fourth quarter of 2011 to first quarter to second quarter to third quarter, etc. So that's the way to think about it.

Are we talking down 20% plus or any numbers you can put on it?

No, Jamie, we don't give specifics on the individual country sales. China still would represent some 8%-ish of our total sales. So that kind of ratio hasn't changed over the year.

Liam Burke with GE Capital Markets.

There was a discussion about reorganizing your after market sales under the EPC organization. Did you see any benefit in the fourth quarter and how does that look for 2013?

I don't recall the discussion but it is a true statement. We did at the time-- I would say over a year ago we recognized from feedback from customers that the business we acquired, EPC, had strong performance in the after market and so we took advantage of that and organized and consolidated our distribution models under the EPC leadership. We did that I'd say back in fourth quarter of 2011 and in terms of the teams operating wonderfully, we-- they are all heading in the same direction. We have a great brand approach to the marketplace. Overall, I would say as we think about the fourth quarter our distribution business was slightly down in fourth quarter. And that related to a number of factors that we already discussed here earlier today.

And Chuck, the working capital numbers were in your favor through 2012. Is that seasonality or do you see that continuing in 2013?

It is always a focus of ours which is one of the key drivers for our strong free cash flow. But the fourth quarter being seasonally weaker we did a better job of pulling down some of those inventory numbers than we had, let's say, at fourth quarter 2011. Thank you, Liam.

(Operator Instructions).

Bill Dezellem with Tieton Capital Management.

A couple of questions. The first one relative to the electrical segment. In the third quarter it was down 9.2% and the fourth quarter was down only 2%. I guess what I'm trying to get my arms around here is is that indication that the environment is not as difficult in Q4 as Q3? Or is that more an indication that you're lapping the fourth quarter of 2011 when China and maybe other businesses began to show some signs of softness?

Bill, they are certainly the seasonality that would play through those numbers. But in terms of a year-over-year basis I think we started to see some of the slowing and the uncertainty in the economy, particularly in North America have an impact on our HVAC, CNI and mechanical business and the third and fourth quarter of 2012.

If I could add, Chuck. I'd say, Bill, that certainly what you said on China is true. As Mark mentioned earlier, we saw slowing in the fourth quarter of our business in China so we have that comparison in the fourth quarter 2012 to take into account in terms of the electrical-- overall electoral performance. But on the other side, C&I certainly did improve on a year-over-year comparison basis, being down-- while the business was down 1.4% in the fourth quarter that was considerably better than the third quarter comparison. And we did not see that type of slowing in the fourth quarter 2000-- fourth quarter 2011 if I recall. So I'd say it's a bit of both of those factors.

Actually, that's a great segue. The relative improvement that you've seen in the C&I business, what are you attributing that to? Is that implying that an inventory draw down in this system is lessening or is that actually an indication that there is some real pickup in end market demand?

Bill, I'm not sure we know that exactly. We don't have a good line on total commercial and industrial inventories. Jon did cover a few of the end markets where we actually saw strength. He mentioned commercial HVAC. He mentioned agriculture. Some oil-- certain parts of the oil and gas space that were strong, so I don't think we really know the answer to your question.

And I'd like to shift to Unico for a moment. You been having success with that business for some time and clearly they operate in a market that is very, very large, especially relative to the size of the Unico business. Does this imply from your standpoint that there is a tremendous amount of runway ahead for Unico and potentially even for years to come?

We certainly feel good about the performance of the Unico business. The team has done an outstanding job with their linear rod pump. The product itself has real customer benefit and our customers are benefiting from that. As you probably recall we made a very small acquisition in Mexico where we acquired our Unico joint venture partner --our joint venture partner that came with the Unico acquisition. We acquired the rest of that partner and tried to position ourselves better for the Gulf markets as well. And we also mentioned that we are in the midst of increasing our capacity for that business. So we are investing in it. We feel good about the direction the team has. They have a number of new products that they've recently launched which allows them to go after deeper wells and then also add unique features for our customers that improves their productivity. We feel good about the business and we're going to continue to invest in it.

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

Thank you. Thank you. 2012 was an exciting year for our Regal employees. We achieved record sales and record earnings while successfully integrating the largest acquisition in Regal's history. With that acquisition we not only executed on the Synergy savings but increased our Synergy targets. We continue to simplify every aspect of our Company in order to improve the customer's experience as well as our margins. We successfully transitioned two new factories in China and we have a third China plant under construction, making us better positioned to serve the Chinese market as it rebounds. We launched more new products in a single year than ever before and we have improved our performance around quality and delivery for most of our customers. We are proud of our achievements and we are excited about our future and we recognize that none of this would be possible without the dedication of our Regal employees and the confidence placed in us by our new and existing investors. Thank you for joining the call and for your interest in Regal.

The conference is now concluded. Thank you for attending today's presentation. Please disconnect your lines. End of Transcript.