Regal Rexnord Corp (RRX) 2013 Q1 法說會逐字稿

Good morning and welcome to the Regal Beloit first quarter 2013 earnings conference call. All participants will be in a listen only mode.

(Operator Instructions)

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

(Operator Instructions)

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

Thank you Laura. Good morning and welcome to the Regal Beloit first quarter 2013 earnings conference call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, our 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 in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results please refer to today's earnings release and our filings with the SEC.

On slide 2 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, adjusted net income from operations and free cash flow. We believe that these are useful financial measures for providing you with additional insight into the 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'll turn the call over to Mark.

Welcome and thank you for joining the call and for your interest in Regal Beloit. To follow our normal agenda I'll make a few opening comments, Chuck will give you a financial update and then John will provide color on our markets and operations, and finally I'll summarize with Q&A.

Despite weaker than expected conditions in our commercial and industrial markets for both our motor and mechanical businesses, Regal achieved performance within our guidance range for the quarter. As we entered the First Quarter, border rates in our C&I markets appeared to be strengthening and we were feeling cautiously optimistic about our outlook. However, by mid-February, orders slowed across our C&I end markets. In the HVAC space, it was a similar story. We started out the quarter strong but then demand fell off in February and then picked up again in March. Our Unico business had another quarter of strong growth, driven mostly by continued penetration into the oil and gas end markets. Free cash flow came in at 92% of net income for the quarter reflecting our normal seasonal inventory build.

We continued to make solid progress on our synergy plant consolidation programs, having now completed three of the four plant transitions in Juarez, Mexico. We are on track to complete these synergy programs by the end of the seconds quarter. To continue to drive our growth we launched 20 new products during the quarter, after launching 60 new products last year. We also completed the acquisition of the ram motor business, a business that complements our commercial hermetic motor business with manufacturing capabilities in Pennsylvania and Brazil. And finally, we are actively pursuing acquisition opportunities that meet both our strategic and financial hurdles and range in size from small bolt-ons to medium and larger size targets. We intend to continue to be a consistent and successful acquirer.

As we look forward to the second quarter, our guidance reflects continued difficulty in our North American commercial and industrial markets. While these markets are expected to rebound in the second half, we don't yet see it in the second quarter. Weakness in our C&I markets, in both our electrical and mechanical segments, is the primary channel -- challenge we are facing in the second quarter.

In HVAC, while residential housing is supporting overall demand, we expect a combination of a cool spring and the demand for more value-oriented products to be a headwind for the quarter. You all know that HVAC market is a competitive space with customers changing technology and changing suppliers. As an example, one of our larger residential hermetic motor customers has recently decided to cease production of certain compressor platforms and instead they will source compressors from a third party. Therefore, this customer will not be purchasing hermetic motors from Regal. In that effect, these types of anticipated changes will result in up to a $15 million reduction in HVAC sales in the second quarter. We expect a similar but declining impact for the next four quarters. We are actively pursuing new commercial opportunities that could substantially offset these expected changes and additionally, John will walk you through new HVAC products that, over time, should position us well for the future. With that I will turn it over to Chuck Hinrichs.

Thank you Mark, good morning everyone. Our first quarter results were in line with our earlier guidance but at the lower end of our guidance range. Net sales for the first quarter of 2013 up $778.2 million decreased 3.7% from the prior year. As Mark stated, sales were weaker than expected as we experienced slower market demand in our C&I and mechanical businesses. International sales were weaker in the quarter, declining 6.8% compared to the prior year. The impact of foreign currency exchange rates reduced total sales by 0.8% in the quarter. To put a finer point on this statistic, the 0.8% is measured against total sales. Recalculating the FX impact on just the amount of international sales explains 2.4% or 35% of the decline in international sales in the quarter.

Despite the decline in sales in the quarter, we increased the gross margins in both of our two reporting segments, the electrical and mechanical segments, as compared to the prior year. This reflects the benefits of our synergy program. Our SG&A expenses increased modestly during the quarter, due to inflation and our compensation and benefits. Our operating profit for the first quarter was 9.8% of sales, stable with our results in the prior year. Free cash flow in the first quarter was $45 million or 91.7% of net income. This is modestly below our goal of greater than 100% of net income and reflects the increase in accounts receivable and inventory as sales increased seasonally from the fourth quarter levels.

Earnings per share for the first quarter 2013 were $1.09 on a GAAP basis. In the quarter we had restructuring charges of $900,000 or $0.01 per share. Restructuring charges were $0.03 below our forecast for the first quarter as some of these plan restructuring activities will be completed in this second quarter. Also in the quarter, we booked the $1 million retroactive benefit of the reinstatement of the 2012 R&D tax credit. This produced a $0.02 EPS benefit in the quarter. The adjusted EPS for the first quarter was $1.08 per share.

Let me provide some additional data on our first quarter results. In the upper left quadrant we provide data on our capital expenditures $20.6 million in the first quarter. We still expect our full year 2013 capital expenditures to be approximately $100 million, which includes the relocation of our C&I motor factory in China and the Unico plant expansion in Wisconsin. In the upper right quadrant, we provide income tax information. Our effective tax rate in the first quarter was 23.2% reflecting the $1 million retroactive reinstatement of the R&D tax credit and the completion of the tax integration of the EPC acquisition in the previous quarter.

This integration provides a sustainably lower level of tax expense for the future. For the second quarter of 2013 we expect our ETR to be 27%. In the lower left quadrant, we highlight our strong free cash flow in the fourth quarter of $45 million equal to 92% of net income for the quarter. We focus 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 first quarter our total debt increased $3 million to $822 million and our cash balances increased $34 million in the quarter. This progress was achieved in the quarter in addition to the funding of the ram motor acquisition. We continue to drive improvement in our credit metrics with our strong free cash flow.

As we look to the second quarter of 2013, we expect earnings per share on a GAAP basis to be $1.17 to $1.25 per share. Our guidance includes $0.02 per share of restructuring charges for our synergy program. Our adjusted EPS guidance for the second quarter is $1.19 to $1.27 per share after adding back the $0.02 restructuring charges to the GAAP guidance. Mark provided a summary of the challenges we are facing in the second quarter in the North America C&I business, our mechanical and our HVAC businesses. Our sales volumes in these businesses will be lower in the second quarter versus the prior year and will have a significant impact on our operating profit. Other head winds in this quarter will be inflation in our compensation and benefit costs and the impact of some negative product mix as compared to the prior year. Now, I'll turn the presentation over to Jon Schlemmer.

Thanks Jeff and good morning everyone. Let me start by giving you some color on the end markets and also on customer demand. As I mentioned on the last call, we did see an improvement in order rates for our North America commercial and industrial motors business towards the end of the fourth quarter. And as we started the first quarter, that same C&I order strength -- we saw the same C&I order strength but as we entered February, we entered a slowing in the order rate.

For the quarter, sales for North America commercial and industrial motors business declined 6.7% compared to the same period the prior year. We saw a weakness in industrial pump, equipment and machinery and overall distribution. We believe industrial equipment and machinery is being impacted by a decline in machinery exports to Europe and also small businesses holding off on making capital investments due to the general uncertainty. Looking forward we would expect that all the rain in the Midwest would help the pump market, and we did see strength during the quarter in a number of end markets including commercial refrigeration, commercial HVAC, irrigation, and leisure pump.

On leisure pump we just launched another version of our high efficiency variable speed offering for the pool market and we're seeing very nice demand from our customers on this new product. Sales in our North America residential HVAC business were up 3.5% compared to the prior year. March orders were stronger than January and February, and we experienced a negative mix, most likely driven by the increase in lower cost housing units. As usual we're ramping up production as we enter the cooling season. Our sales to regions outside the United States declined 6.8% compared to the first quarter 2012. As Chuck mentioned, 35% of this decrease was related to currency. In addition to that, the end markets were challenging in both Europe and Asia, and in Asia we saw this in China, India, and Australia. Sales outside the United States represented approximately 34% of our total sales for the quarter.

Our Unico business delivered another strong quarter in sales. The prior year first quarter sales were up 46% compared to the same period 2011, so we're pleased to see the growth continuing in this business. Global orders remain strong for Unico in oil and gas as well as automotive. The Unico team also just launched a new product that was developed to control large chillers and commercial HVAC applications. They recently signed a multi-year contract with a large commercial HVAC customer for this product. Last quarter I mentioned that we were expanding our Unico facility in Franksville, Wisconsin. This program is on track and it will be completed during the third quarter of this year.

As you know, we communicated that we would complete our Juarez manufacturing synergy projects by the end of the second quarter and that's still our plans. We have still just a few more EPC synergy-related manufacturing moves to make and we'll complete them as planned yet this year. From there we'll move on to our simplification initiative. Let me touch on just a few of the simplification highlights that we've been working on. As we wrap up the Juarez restructuring effort and look forward, we do see a lot of opportunities to further consolidate and simplify our manufacturing footprint and we'll have more to communicate on that front in the future. On the engineering side, we're making very nice progress on five different design simplification programs. On each of these programs, the goal is to consolidate similar designs across the company so we have a standard platform to offer to our customers. Our teams already finished consolidating some of our high efficiency small motor designs as well as a few of our larger industrial motor designs.

As we implement these platform consolidations, the engineering teams are also implementing lean in the office environment by standardizing a variety of design tools and engineering processes. We're only -- I would say we're only about 10% complete with the design simplification task, but we're very encouraged by the potential cost savings that we're already seeing. Last quarter, I mentioned that we had completed a warehouse consolidation effort in the fourth quarter 2012. That effort allowed us to exit three warehouses. Our logistics team is now focused on simplifying our warehouse footprint along the Texas-Mexico border. The plans are to consolidate warehouses in this region to help us improve service and reduce costs. Same thing that we did in the central US warehousing simplification last year. At this point we've identified two warehouse consolidation opportunities and we expect to implement both transitions by early third quarter.

On new products, Mark mention that had last year we launched 60 new products, a record for our company. And this past quarter our teams launched 20 additional new products. That helps us bring new technology to our customers. About two-thirds of these new products are high efficiency products and they cover, really, a wide range of applications including HVAC, swimming pool pumps, oil and gas pumping systems and industrial motors. Sales of energy efficient products continue to grow during the quarter and represented approximately 20% of our net sales. I'd like to highlight just a few of the products today to give you an idea what our engineers are up to.

And I want to start with the HVAC space. We launched two residential and commercial blower products, helping us bring high efficiency solutions to our HVAC customers, starting in Asia. The first is really a forward integration play. We took our ECM technology and added that to existing blower and housing technology so we can provide an assembled, tested system to our customers. This is really great for customers that want to buy solutions and we qualify this product to introduce this in China starting this quarter.

The second launch that you see on the slide here is really a breakthrough in performance. Again, it's a system but now we've advanced both the motor technology and the housing technology to make several improvements including efficiency, size of the product, weight of the product, the noise performance, and cost. We're calling this product Halo. The system utilizes our axial flux motor technology and completely removes the motor from the air stream to provide a really compact lightweight high efficiency solution for our customers. Just compare the two pictures on the slide. The ECM blower system is what you would typically see in an HVAC system. This is the type of blower you would find in really every residential gas furnace and air handler air conditioner in North America. You see the motor mounted on one side of the blower housing. That is a very typical motor blower design. Unfortunately, that motor blocks the air stream on one side of the blower.

On the Halo design, if you didn't know where the motor was actually located you might actually think that the motor's not even installed on the blower. In fact, it's there. The axial footprint is a very thin motor that allows you integrate the motor with the blower wheel itself. So it's fully integrated, it removes the motor restriction on one side of the inlet of the blower, opening up the air stream helping to make the air system more efficient. Both of these new products take advantage of Regal's global technology expertise. We're launching Halo right now in Australia and now we're bringing this innovative technology to the HVAC market in North America.

Next, our Unico team has launched several new products for oil and gas applications and specifically tailored for wells located in Mexico and Latin America. Many of these wells are located in remote areas so there's no utility power available. Unico provides a gas powered lift system along with their innovative progressing cavity or PCP pump system. The gas powered lift system uses gas from the well combined with the Unico drive to provide power to the pump itself, and we're finding a lot of opportunities for Regal technology in these systems from the generators to the Unico drives, high efficiency [hera] gear-boxes and the new sigh max permanent magnet industrial motors and you can see many of those on this picture of this particular application.

Unico's innovative PCP design also eliminates the need for a lot of hardware like belts and clutches and brakes that are commonly found on other pumping systems. Unico developed a new series of remote process control systems as well to help monitor and control oil field pumping units that are manufactured by a wide range of oil field equipment companies. These new units are being installed in Mexico to operate hydraulic PCP systems. We're really excited to see the team continuing to bring out new innovative products for the oil and gas market and so far we continue to see this product be well received by our customers.

And the last example I want to talk about today is the success we're having with one of the new products launched actually a little over a year ago by our HVAC team. In late 2011, our team developed a high efficiency ECM motor that was designed specifically for retro fits and commercial buildings and in large hotels. In late March of this year, I had the opportunity to visit the Westin hotel in downtown Boston where our motors were just recently installed in over 800 of the guest rooms. The retro fit has gone very well. The whole project will save the hotel over 400,000-kilowatt hours of electricity. That's a little over a two year pay back for the hotel operator.

The whole story itself was highlighted on the Green Room, a show that was aired on the Fox business channel on April 20th and we've included a link here for the video. It's a short 5 minute video that gives a very good overview of the benefits of retro fit in hotels like the Westin. I'd encourage you to take some time to watch the video, because it describes the benefits of energy efficient motor retro fits very well. This is really an exciting area for Regal because there's a lot more hotels like the Westin that will and can provide a significant opportunity for our products going forward. With that I'd like to turn it back over to Mark. Thank you.

Thanks, Jon. So to summarize, we finished the quarter within our guidance, but near the lower end. We did experience modest growth in HVAC but those gains were offset by weakness in North American C&I markets. Our synergy programs and our simplification initiative remain on track, we continue to launch new products that drive future growth. With our second quarter guidance we expect typical seasonal order of improvement in HVAC. However, some of these gains are expected to be offset by the head winds I described earlier in residential HVAC as well as by the weakness in the North American C&I markets. Finally, we continue to actively seek acquisition candidates that meet both our strategic objectives and financial criteria.

We will now entertain your questions.

At this time we will begin the question and answer session.

(Operator Instructions)

At this time we will pause momentarily to assemble our roster. And our first question is from Julian Mitchell of Credit Suisse.

Hi, good morning.

Good morning Julian.

Just a quick question on the motors business. I just wondered if there was anything structural that you're seeing in terms of a price down effect or as you said in terms of the sort of supply chain discombobulation in HVAC, you know, is there some risk that the motors problems you have persist beyond just this one customer moving away, and then how does that pertain to the acquisition strategy, you know a lot of M&A has been put into motors? If you're starting to maybe see some slightly strange things happening in terms of procurement and the end market dynamics, you know, how urgently are you going to allocate capital to non-motors M&A for the balance of this year?

Thanks Julian. I don't think there's a major structural change happening, you know, in this particular situation there was something we could quantify that we thought was significant and we wanted to communicate it because we could put quantifiable number around it, what we expected to happen, and put a time line around it. In fact, our price in the quarter basically -- there was a wash between price and materials, so there was no negative effect of that for the quarter. You know, we wouldn't expect a substantial change going forward. You know, relative to our M&A strategy we have said in the past and then we are looking at all four of the kind of product areas that we participate in, electric motors, our mechanic -- products in our mechanical division, our generator division as well as custom electronic drives, so we're going to continue to pound that path.

Got it, thanks. And then just when you're looking at kind of the second quarter guidance in the top line specifically, if you strip out this customer walking away effect in HVAC motors how are you thinking about the organic sort of end market trends excluding that? I mean, do you think that the end markets will be down around the same as they were in Q1? And also just if you could give a little bit more clarity on your comments on the HVAC end market itself? You said March was a little bit better. Maybe that's just seasonal, you know, how are you thinking about the end market growth trends in HVAC for Q2? Thank you.

No problem. In terms of the HVAC, we always see a seasonal build at this time of the year. We're seeing it now. You know, in terms of what we anticipate in terms of the market itself, you know, we -- our best indicator is what our customers are saying, and you know, our -- it depends on the customer you speak to, but you know, that ranges today to, you know, kind of low single digit -- low single digit to mid single digit kind of go forward basis. So that's the way we are thinking about it in terms of a growth rate. That's the way we are thinking about it.

Quite honestly, our challenge for the quarter is not -- I mean HVAC's a part of it, explains part of the lower number for the second quarter, but our bigger challenge is on the commercial and industrial side. You saw that -- you know, if you recall, up until third quarter of 2012, we had six straight quarters in a row of double-digit growth in that -- or nearly double-digit growth in that space, and starting in the third quarter we started to see a decline in that space. It got better in the fourth quarter than the third quarter and we were expecting improvement in the first quarter of 2013. That didn't happen and as we look to the second quarter we're not seeing an improvement. There's a lot of people talking about improvement in the back half, but we don't yet see it in the second quarter.

Okay thanks a lot and then just lastly, the -- you mentioned some reasons around the SG&A expense moving up. I think OpEx was up about 8% year on year. How quickly does that normalize from this point?

It's hard to tell, Julian. A portion of it would be your normal inflation in salaries and that is predictable and measurable, but then some of the other benefits around, insurance costs, medical insurance costs and other related benefits costs can be a little bit lumpy and difficult to forecast.

Okay. Thank you very much.

Thank you.

And our next question is from Mike Halloran of Robert Baird.

Morning, guys.

Morning, Mike.

So could you give us -- the customer on the hermetic side that's moving away from you, can you give us the annualized run rate for the revenue that they would have had either last year or what you guys were expecting?

Well, what we -- what that particular customer is doing again is they were making their own compressors using our motor in their compressors, and now they have decided to go to a third party and actually purchase the compressor itself. So -- and so that's how that particular situation is unfolding. And in terms of quantifying that, we have laid it out there for you, Mike. We kind of, you know, talked about it being a $15 million impact for those types of changes and that's going to happen in this quarter and then on a declining basis over the next four quarters.

Right. So what I was trying to drive at, because this is the seasonally strongest quarter, I would expect that's an out sized gain based on your comments. Are we looking at something like a $40 million impact on an annualized basis in that piece? Just trying to frame that up and put that in the context of what are otherwise going to be, at least it seems like, positive HVAC trends that you're seeing in the other pieces of the portfolio.

Maybe slightly higher than $40 million but not much higher than $40 million.

Okay. Great that makes since. And then kind of building off one of Julian's questions there. Just want to get your sense on the puts and takes when we move beyond the second quarter here. You know, if we take the midpoint of your guidance range, you know, how good of a run rate do you think 2Q represents for the earnings beyond that, and what are the puts and takes there, meaning how do you expect commodities to track out here? You still have the restructuring benefits coming in. I know you're not assuming a lot of improvement on the C&I side or really the HVAC side at this point. I'm just trying to get those puts and takes on a forward basis to figure out how representative you feel that 2Q run rate is.

Morning, Mike, this is Chuck, I'll try to take a few of those points but as you can imagine those are all variables that will affect our future run rate and earnings. The volume -- the sales volume in the second quarter will still be higher on a sequential basis, but we expect a decrease on the year-over-year basis as Mark talked about. A lot of it has to do with how our C&I markets will come back in the second half of the year and into 2014. We think we have a better feel on the HVAC market, adjusting for the impact on the market dynamics. The international markets I think are stabilizing and we may see increases in that as we go through 2013 and '14, particularly as it relates to some of the Asian businesses.

The volume certainly has a big driver on our operating profit basis as we're a manufacturer, and as we've shown over the years we're quite good at controlling our SG&A expenses and getting the benefit of that operating leverage as sales start to recover. In terms of the input costs, as you know, as we are benefiting from some lower copper and expected lower steel prices, many of those commodity costs changes are then adjusted in sales price to our customers particularly with our larger OEMs so over time those things tend to normalize, at least on the larger customers. We also hedge, of course, our costs so that takes some of the volatility out of those periodic spikes, whether they be decreases or increases.

Thanks for the time.

Thanks, Mike.

And the next question comes from Jeff Hammond of KeyBanc Capital Markets.

Hi, good morning, guys.

Good morning, Jeff.

Just on this hermetic share shift, did that impact you in the first quarter? Because it still seems like the OEMs and the tone was better than the kind of plus 3.5 and down 30. I was just wondering if something else is going on there in the first quarter.

You know, the hermetic situation did not happen in the first quarter. The bigger issue for the first quarter was mix, you know, we -- that was probably the biggest contributor for the quarter. The -- you know, as you know, there's new homes that are being built tend to be more value oriented homes ask the and the OEMs are putting in value oriented equipment.

And do you have any line of sight near term -- you said you were looking to replace lost business. Is there anything kind of, you know, closer in the pipeline that would replace that, you know, over the next, you know, six to nine months?

Well, I mean, the answer is yes, but you know, I can't sit here is and tell you that it's all going to happen, but we are not sitting still. You know, we're very quite active with, you know, pursuing alternate pieces of business on a variety of fronts to make up for that issue. So yes we're very active and yes it could happen within the next six to nine months.

And back to this commercial industrial weakness into 2Q. I mean it seems like most other industrial companies are kind of saying, you know, kind of moderate improvement as we've moved through the early part of the year, and you seem to be indicating otherwise, and I think you mentioned one being distribution. It seems like, you know, destocking is more closing to abating than accelerating. Just kind of correlate what you're seeing to what people are more broadly talking about.

You know, at least with the competitors that we have that comment on this space and in this area our more direct competitors as opposed to other general -- other companies that compete in and around the industrial space, we feel like what we're seeing, our competitors are seeing, so I don't think there's any major structural change happening on the C&I side. You know, we feel like we're right in the zip code relative to what the rest of our competitors are seeing in the North American space.

Okay. And then just last one, the decremental margins in the first quarter were, you know, very good. What was kind of impacting that? Because you seem to be indicating, you know, much -- you know, much more pronounced decremental margins into 2Q.

Well, I think on a year-over-year basis, Jeff, we were benefiting from the EPC Synergies that have come over on a year-over-year basis. And those, while they will continue in the second quarter and grow in the second half of the year, the volume change on a year-over-year basis on -- in the second quarter is greater than we experienced in the first quarter.

Okay. Thanks, guys.

Thank you.

And our next question is from Nicole DeBlase of Morgan Stanley.

Yes, good morning, guys.

Good morning, Nicole.

So just -- it would be great to get some additional detail on what you're seeing with an HVAC so can you talk a little bit about any major OEM inventory changes that you're seeing, what you anticipate on that front into 2Q and also have you noticed any big changes in market share?

Good morning, Nicole. This is Jon, I'll just make a couple comments on that. On the inventory side, I'd say we've not seen anything that unusual on the inventory side with our customers and through the channel, but we've had the opportunity to listen in, as I'm sure a lot of folks did, on the Hardi web cast the other day, where it was reported that there was a feeling that inventories were slightly up in the channel. That would not be inconsistent with overall what we've seen and heard as well. If you go back and you look at our first quarter on HVAC with overall HVAC being up 3.5%, you know, what we saw from customers, besides the mix that Mark talked about, what we also saw was that pretty varied reports from customers in terms of what individual customers experienced in the first quarter from low single-digit growth to at least one customer had talked about low to mid-teens growth. So it was quite varied customer to customer, and that also impacted us in terms of where we have stronger positions, you know, on a customer by customer basis.

Okay. Got it. And -- but any comments on like broader market share changes?

Well, Nicole, we're not going to comment on our customers positions in the market obviously, so we won't comment on that.

Oh, no sorry. I meant your own personal market share.

No, we addressed that already in the comments we made. You know, the -- we quantified it for you in indicating that it was $15 million in the second quarter. We expect that -- declining impact like that over the next four quarters.

Okay. Got it. And given where the share price is today, how does that change your evaluation of repurchases versus M&A?

Well, you know, we have not been a company that tends to repurchase shares over time. We try to put the capital to work the way -- the best way we can, so -- but you know we'll watch what happens here and we'll make an assessment over, you know, what's the right decision going forward. But like I mentioned earlier, our intention right now is to remain active on the M&A front.

Okay. Thanks and one more if I could squeeze it in. Can you talk a little bit about how April trended versus your expectations?

Yes, I would say on -- Nicole, on April, you know, we didn't see really other than the seasonal step up in HVAC that we mentioned specifically on the commercial and industrial end markets, what we saw in April was pretty much in line with how we exited the first quarter, so not good from the standpoint that we didn't see a lot of strength, but pretty much what we expected in terms of as we look forward to this second quarter forecast I'd say April has been in line with our expectations.

Thank you.

You're welcome.

Thanks, Nicole.

And our next question is from Josh Pokrzywinski of MKM Partners.

Hi, good morning, guys.

Good morning, Josh.

If I just think about the year-over-year guidance bridge and add up the customer, you know, kind of pursuing a different manufacturing strategy and the change in share count, you're really only down $0.09 year-over-year, which I guess given what you're seeing in C&I sounds about right. It's really not that much volume if you back into it, so I guess my broader question on the heels of that is that when you talk about the customer decision, it has the ring of you know, maybe they were going to do this anyway and it had nothing to do with where you were in the marketplace, but I keep hearing, you know, how mix in the market doesn't really support, you know, your product offering and, you know, obviously high efficiency and new construction don't gel well together.

What is your view that perhaps this is kind of the first of other shifts and that maybe the ones going forward have more structurally to do with where you're in the marketplace. Because I appreciate the color on the $15 million but it also doesn't really seem like it was something you could have controlled, whereas the stuff going further would be much more directed at your product offering.

Yes, you know, the -- in terms of, you know, of what's happening with the mix of the product, I don't think that it's a forever. I mean, I think that energy efficiency is still a long-term secular trend on a global basis, and as you know there's still legislation out there that at some point will -- the courts will settle on and there will be more wind in our sail when all that settles out related to regional efficiency standards just as an example, and there's other things beyond that in the space. I just believe long-term that energy efficiency is the place to go, and we -- you know, the place the industry goes long-term, our customers will continue to get ratcheted up on the targets over time and we will continue to be a leader in the -- on the innovation side having products that can meet those kind of -- those kind of challenges. Now, in the near term, we have to have products that are value oriented products, and we do and we make them in low cost regions so that we can compete. So we're going to be a competitive player in this space for many years to come.

Are you finding that you're needing to make either pricing concessions or, you know, you're seeing OEMs get more aggressive knowing that you're strong suited in high efficiency where the market really isn't, at least for the time being? I guess that was kind of my initial question is that, this hermetic thing, you know, these things happen. It could have happened even in a different market environment, but this notion of low efficiency being the market and you guys still having a lot of business in that even if your focus is on the high end, you know, I guess what's to say that OEMs don't continue to, you know, get aggressive on pricing or on share?

Yes, Josh, you know, we've been in this business for many years, and there's never -- there's never one year when OEMs get more aggressive than the next. They are always aggressive and we have dealt with that successfully in years past and I think we can continue to deal with that on a go-forward basis. You know, as we mentioned before, we tend to have a stronger product offering in the higher efficiency and more competition in the lower efficiency, so you know, naturally it's going to be tougher sledding, you know, during those times when it's less value oriented products, but you know we have a competitive offering in that space, and we'll continue to compete and be okay.

Okay. That's helpful and then just one last one. It just looked like mechanical being pretty challenged there I'd have to imagine that given some of the commentary in the oil and gas space that the Unico was pretty -- I'm sorry. Not Unico, Milwaukee Gear was pretty challenged. Is there any color you can provide around that or how that business has trended?

That's a fair read. Milwaukee gear, as you know, a large portion of their products are into the fracking space and that business has been quite challenged, and that is the single largest contributor to our mechanical downside in the quarter.

Yes, I would add, Josh, the end markets that we talked about for C&I impact not only the electric motor space in C&I but also the mechanical products that go into a lot of those same end market asks then in addition to what Mark just mentioned on fracking was Milwaukee Gear. Those two are the contributors.

Does that change the way you guys look at wanting to get into some of those oil and gas adjacents going forward?

I would say on oil and gas the challenge is do you have a technology, do you have a product that allows you penetrate the space? And if you think about what Unico is going, oil and gas as an end market can be challenging from quarter to quarter, but Unico continues to grow because they're coming out with more innovative solutions to offer customers something that's better than what they have today. So that's how we're thinking about today is how can we take that Unico model and apply it across more of our products.

All right. Very good, guys. Thanks.

Thank you.

And the next question comes from Christopher Glynn of Oppenheimer.

Thanks. Good morning.

Good morning.

So in terms of the low efficiency mix, I hear you on the value housing stock and the new builds, but I think the strong majority of sales is in retro fit, and in the wake of dry ship that kind of down shift in the mix had sort of stabilized. Are you seeing that start to kind of devolve again as well?

No, you're right -- you're right in your assessment that as the -- you know the whole R22 thing came unwound that tended to have a weaker mix, so you're right to think about it that way. You know, I think our customers are reporting that their mix was challenged in the quarter, and I've got to believe that's related to mostly housing, but probably was offset by the R22 phenomena. That's my sense.

Okay. And then in terms of a reversion to high efficiency mix, I fully appreciate the long-term backdrop there, but are you seeing, you know, what the path way and the pieces are where, you know, perhaps this could trigger the market back to 2010 mix over the next six to twelve months?

Well, you know, in 2010 we had a couple things that were really helping with that, and we saw a big step-up as you recall that year with the energy efficiency tax credits for homeowners. So with, you know, without that in place, you know certainly we saw a bit of what I would say is a reset. The good news is, there's still reasonable space for energy efficient products today. It's just that we're not seeing the growth that we have seen in the past compared to the standard products.

You know with the R22, I wanted to add to that comment, with the R22 change, we've always said that when we moved -- start to see a movement away from R22 dry ship it would do two things for us. It opens up the opportunity for a full system replacement, which means more Regal components can be sold, and it also opens the opportunity for a contractor to sell up and sere inefficiency. The first part's definitely happening, as you see the R22 mix change more favorable. The second part we're not necessarily seeing, and that could also be related to the energy costs today, natural gas prices being very low for example, and then as Mark mentioned we had the delay in the regional efficiency standards. So I think those combination of some of those factors we're just feeling that right now. But longer term I think we feel very good about the energy efficiency space and our product technology that we have there as well as some of the new products we're coming out with.

Great, thanks for the color.

Thank you.

The next question is from Jamie Sullivan of RBC Capital Markets.

Hi, good morning.

Good morning, Jamie.

Can you give us your perspective on the mix? You talked about that being in HVAC being a headwind in 1Q, what do you feel like you'll lap that headwind where kind of revenues and volumes sort of grow in tandem?

Well, it would be -- certainly we'll have this headwind that we laid out today which is that we'll have, you know -- we said $15 million in the second quarter and then on a declining basis for the next four quarters so we're going to have that challenge with us for a little -- for the next four quarters for sure. And then in terms of mix, it's tough for me to say. My sense is that the housing build that we'll see right now, that will continue for some time, and that will continue to have demand for, you know --

Value.

Value oriented products, and so I -- it's tough for me to when that switch is over.

The housing demand increase would be a mixed headwind. However, the conversion away from R22 dry shift should be nothing but a positive. The question is how much, as I explained earlier, but should be a positive so those two will somewhat work to offset each other.

Right. And if the housing cycle kind of continues as it is, are you willing to ride that out with your current mix or do you feel like you need to be more aggressive in changing the way that your offering is into that market?

Well, like we mentioned in the past, we're aggressive in terms of the value oriented products we're offering, you know, we launched a few new products on the value side just in the last six months. So, you know, we certainly have positioned ourselves to compete in that space, and we'll continue to do so.

All right. Then one quick last one on the acquisition front maybe you can talk about just sort of the maturation of the pipeline at this point. You also mentioned you're casting kind of a wide net in terms of product exposure. Are you thinking any differently about the portfolio additions in terms of types of businesses, you know, competitive differentiation, things like that going forward.

We've been consistent in, you know, that we would look for energy efficiency products number one. Number two, we would look for businesses that expanded our footprint, number three, businesses that improved our margin -- the margin in our portfolio, so that is our strategic thought. And then from a product standpoint we talked about electric motors, mechanical gear products, custom electronic drives and electric generators, and we'll continue to look in those four spaces. That doesn't say that we wouldn't look outside those four product platforms but our primary focus will be those four spaces.

Thank you.

Thank you.

And next we have a question from Scott Graham of Jefferies.

Hey, good morning.

Good morning, Scott.

If we were to look at what you were maybe thinking about the second quarter, even in December versus kind of what you're thinking now, pushing aside the shift of the customer, would you say that the difference between then and now is maybe two-thirds North American C&I, one-third HVAC mix in that territory?

Well, I'll just comment on what we knew coming -- you know, coming through January. We were as you recall, you know, our C&I markets were down 6% in the third quarter and down 1.5 in the fourth quarter. We came through December and into January feeling cautiously optimistic because of the order rates, and by February, that fell off and it has been the big challenge for both Q1 and Q2. So that, you know, to me was the biggest, you know, change in our thinking. Certainly between the two challenges, HVAC and C&I, C&I is the more primary challenge and then HVAC to a lesser extent.

Okay. That's helpful. Thanks. The other question I have maybe is more for Jon. You know over the last couple of years the organization has had a significant emphasis on new products, and I guess two questions on that. Number one is, you know, are placements of new products tracking in line with your expectations? And secondly, is this -- are such placements or hoped for placements part of your and Marks optimism that you can make some of that up with the lost customer?

Yes, thanks for the question, Scott. Absolutely. You know, we've been as you said we've been very focused on new product development over the past three years and we've seen a nice ramp-up in terms of number of new products launched and a nice mix between the businesses as well. It's not all in one of our business segments. We're seeing better new products generation if you will in the pipeline across multiple businesses and geography. So we have the pipeline that's really been strengthened as well in new products in Asia as well as in North America. You know, we're just -- it's interesting, we're just getting ready enter our long range planning process, where we look at our three year product plans and all the businesses and we looked at each of our businesses to understand what is the new product technologies and products that are being planned and developed to help us offset some of these challenges.

My feeling is we're right on track with what we're doing. We're putting more focus on the growth expectations of the new products, so not just number of launches but the growth expectations from each of the products. So you know, just in general I feel very good about what we're doing on the new product development side and the impact that those programs can have. I mean the two that I showed here today, Halo will take some time to get the penetration and the customer base but it is such a different technology than what's out there today and offers a lot of benefits for newer design platforms for our customers. And the retro fit opportunity is one where we could go right in once you identify the space like we have done over the years on commercial refrigeration and start doing this in premium hotels. Overall, I feel very good about the direction we're going on the new product side.

Then if that's the case, then maybe you can just connect some dots here for me because I'm going to put aside Rezzi because that's kind of a market that's maybe more linked with what's going on out there in the marketplace, but commercial and industrial and mechanical organic sales, you know, in the first half of '12 were up really only modestly and have been declining since that time. And I know a lot of these new product launches are in fact in those businesses, and when I look at some of the pictures that you represent, it looks like there's a significant change in the format of a product involving significant OE participation on that product, which would imply a placement for as a solution. Maybe I just am -- I'm just having trouble connecting those dots and if that's the case and you're on track with new products and some of these products are very specific for a solution and would seem to have a placement set before it's even come out, why have the sales in those businesses been lagging for so long?

Well, I would say in C&I that we did have growth in the first half last year, and that was on a year-over-year basis comparing to quarters the prior year that had growth over the prior year 2011. So we've had, I think Mark mentioned six. I think we've actually had eight quarters in a row of year-over-year quarterly growth in the C&I segment. So we were coming off some pretty -- if you think about our first quarter performance this year that's coming off a pretty tough comparison to the first quarter last year. That's no excuse and we need to find a way to keep growing. But I think we've seen good growth in the C&I business.

No question about it one of the challenges we have with our new product strategy in the C&I business is you have a much more diverse customer base, smaller customers, a balance between distribution and OEM, so it is a little more difficult to develop one product and get a big hit from that out of the gate, but if we develop the right product over time they'll become adapted and we'll see the benefits. But there's no question it is a different challenge than you have say on the HVAC side with large OEMs that they develop a new platform and use one of our products, just like when sere 13 happened in 2006,you can see a big take-off in the new product, you won't see that on the C&I side you have to do a lot more products for a lot more customers.

Okay. Thank you.

Thanks, Scott.

And the next question comes from Liam Burke of Janney Capital Markets.

Good morning Mark. Good morning Chuck.

Good morning Liam.

Mark, how did the after market business perform during the quarter?

We -- you know, we have after market businesses both on the HVAC side, as well as on the commercial and industrial side. I would say on the commercial industrial side, it was down a little bit. And on the HVAC side it was up a little bit.

Okay. And are you seeing any pricing or are you being able to get any better margin on energy efficient products through that channel?

Sure, we have certainly in both cases we have a variety of products that are energy efficient -- an energy efficiency oriented. In fact on the HVAC side where there are replacement opportunities we now have a number of new products in that -- allow consumers to replace their standard motor with an ECM type motor that provides them energy efficiency, so, yes, we are seeing growth with those kind of products as an example.

Okay. Thank you.

Thanks, Liam.

And next we have a question from Bill Dezellem of Tieton Capital Management.

It's Tieton Capital and I'm hoping you will allow me to be a slow pony here. Relative to the C&I business, would you give us your perspective as to what was behind the strength -- strengthening in orders that you saw in terms of what maybe customers were looking to build inventory or whether they thought markets were improving, etcetera? I'm trying to understand that, and then conversely what led to the reversal?

That's a tough one. You know, I can just speak to the general trends in that space as I had mentioned before. We saw -- we started to see an improvement in the fourth quarter and we came through January feeling that same level of improvement in our ordering and as you know this is a very diversified customer base, 1,000s and 1,000s of customers, so hard to pinpoint what was behind it all, but we were feeling -- you know, we did see kind of a change in tone in our order rate sometime in mid-February.

So in terms of your ability to understand the why, it's pretty limited and not a lot of color you can provide there then.

Not really. I mean Jon provided a little bit of color about those particular areas that were up and down. Jon if you want you can just --

Well, one for sure was in towards the tail end of the fourth quarter, we did see what seemed like growing confidence in the distributor base and an uptick in orders and particular in distribution, and it felt like a lot of anecdotal information but it felt like there were customers that were feeling a little bit more confident towards the tail end of the quarter, and they had been holding off on purchasing prior to that, and we'd seen that in the slower order rates and it felt like that was an improvement. There's always a question of how much of that is stocking, how much of that's actually in market demand but that was what we were seeing on the distribution side at least. And also with some of the OEMs as well and C&I. And as Mark said, the order rates were pretty consistent coming into the first of the year from what we experienced at the end of the fourth quarter until we hit February.

That's helpful. Thank you, and I guess that leads to the second question, is this ongoing choppiness in the marketplace, is that leading to more acquisition opportunities because some of your prospective targets, they're just getting tired of the back and forth? Or does that not really enter into the equation?

Well, certainly in the case of private owners, you know, you have that fatigue, so I think that's a fair characterization, and, you know, we are certainly talking to some of those kind of people.

And is that more of a factor today than it say would have been one or two years ago?

Well, you know when he different factors one or two years ago. We had kind of the tax threat one or two years ago that was driving activity then, so I would say it's similar, but just for different reasons.

That's helpful again. Thank you both.

Thanks, Bill.

And that will conclude our question and answer session. I'd like to turn the conference back over to Mark Gliebe for any closing remarks.

Thank you for joining the call and -- today. We appreciate all your questions today. Obviously the second quarter is certainly a challenge. The primary issue for the quarter being in our C&I markets. To a lesser extent the market dynamics that we explained on our second, you know -- that we quantified for you and put a time horizon around in the HVAC space. The Company I want to assure you is doing, you know -- aggressively pursuing alternatives, commercial alternatives in the HVAC space to offset that challenge, something that could happen in the next, you know, three, six to nine months, and the company continues to execute on simplification and new products and we -- as you know we are going to remain active in the M&A space. So again, thank you for joining the call and for your interest in Regal.

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