Regal Rexnord Corp (RRX) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Regal Beloit first quarter 2014 earnings conference call.

(Operator Instructions)

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

Thank you, Emily.

Good morning, and welcome to the Regal Beloit first quarter 2014 earnings conference call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; 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 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 income from operations, organic growth 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'll turn the call over to Mark.

Thank you, Jon. Welcome, and thank you for joining our first-quarter call and for your interest in Regal.

We will follow our normal agenda. I'll make a few opening comments, Chuck will give a financial update, Jon will provide you color on products and markets and then I'll summarize and we'll move on to Q&A.

Overall, Regal performed to our expectations in the first quarter. Our adjusted earnings per share of $1.04 were in line with our earlier guidance. Our revenues for the quarter were up 3% year over year. Sales in our North American HVAC business were, again, up approximately 5%, in spite of the previously disclosed customer dynamics.

In our North American commercial and industrial motors business, revenues were down approximately 3%, driven mostly by weakness in commercial refrigeration and irrigation, as well as disruptions from the extreme weather. Our power generation business had another quarter of continued strength.

As expected, sales into China were strong, while revenues in India and Australia remain challenged. Our sales into Europe are starting to show recovery, with improvement both sequentially and year over year.

Our North American mechanical business was down approximately 7% for the quarter, with the decline coming from our exposure to hydraulic fracturing and our Milwaukee Gear business. And finally, our latest acquisitions, Cemp and Hy-Bon, are off to a great start and performed quite well on a top line.

On margins, as expected, we did see the one point of headwind that was included in our first-quarter guidance. And Chuck will go into that in further detail.

Our simplification projects are progressing well. With both the Springfield and Acuna transitions, we expect to realize some of the benefits in 2014 and the majority of the benefit in 2015. As you know, our simplification efforts include consolidating plants, consolidating design platforms, combining ERP systems and rationalizing suppliers. These efforts are going well and we expect to have further announcements yet this year.

Integration of our two recent acquisitions is going as planned, and we are excited to have both Cemp and Hy-Bon as part of the Regal family. As far as other acquisitions go, our headset and bias towards acquisition has not changed and we are actively seeking attractive targets. We are fortunate to be in the position with a balance sheet where we can pursue acquisitions and return cash to shareholders.

As we look to the second-quarter, in North American residential HVAC, our guidance reflects modest growth on top of typical seasonality. Further, we expect our North American commercial industrial motors business to grow slightly for the quarter and we expect continued strength in our power generation business.

Internationally, we anticipate a continued recovery in Europe, modest sales growth in China, but continued weakness in India and Australia.

And finally, we announced last week a 10% increase to our dividend. This additional $0.08 per share is twice our typical increase and reflects our confidence in the future, as well as our commitment to returning value to our shareholders.

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

Thank you, Mark, and good morning, everyone.

I will start with the reconciliation of our results on a GAAP EPS basis to adjusted EPS. Earnings in the first-quarter 2014 on a GAAP basis were $0.96 per share. Restructuring charges in the quarter were $4.2 million, or $0.06 per share relating to our continuing work on our simplification initiative.

Next, we add back the purchase accounting adjustments and acquisition costs of $0.02 per share. Adding back these adjustments results in adjusted earnings per share for the first quarter of $1.04. This is in line with our earlier guidance for adjusted EPS of $0.99 to $1.07 per share.

Our first-quarter 2014 sales were $801 million, an increase of 3% from the prior year. The impact of foreign currency translation in the quarter was a negative 1% on total net sales, as compared to the prior year.

Sales in the quarter increased $23.4 million from the RAM, Cemp and Hy-Bon acquisitions. The net increase in organic sales growth was 1% in the quarter.

In the first quarter of 2014, our adjusted gross margin was 24.9% compared to the prior year gross margin of 25.7%. Gross margins, as reported, have been adjusted for both restructuring charges and the purchase accounting adjustments. Our gross margin for the quarter was in line with our expectations, given the 1% headwind we described on our last call, including the operational inefficiencies in our plant transitions, and the difficult comparisons at our Unico and Milwaukee Gear businesses.

Our operating expenses in the first-quarter of 2014 were $125 million. This includes $3.9 million of SG&A from acquisitions and $500,000 acquisition diligence expenses. Adjusting for these items, our SG&A in the first quarter declined $3.3 million from the prior year, and declined $2.7 million from the prior quarter.

This slide provides some key financial metrics for the first quarter 2014. Our capital expenditures in the quarter were $22.3 million, including continued progress in the construction of our new industrial motor factory in Wuxi, China, and the expansion of our Unico plant. For 2014, we estimate capital expenditures will be $80 million to $85 million.

Our effective tax rate in the first quarter was 26.2%, in line with our earlier guidance of 27%. We estimate our 2014 effective tax rate to be 27%, consistent with our guidance from last quarter.

In the lower left quadrant, we provide data on our quarter-end balance sheet. Our total debt was $768 million and our net debt was $361 million. Our credit metrics remain strong, as our debt to EBITDA was 1.9 times and our net debt to EBITDA was 0.9 times.

In the lower right quadrant, we present information on our dividends. Last week, we increased our quarterly dividend by 10%, underscoring our confidence in the future and our commitment to returning cash to our shareholders. We are proud of our dividend performance history, having paid 216 consecutive quarterly dividends, and increased our dividend in nine of the last 10 years.

Our second-quarter 2014 earnings guidance is for GAAP EPS of $1.19 to $1.27 per share. On an adjusted basis, that is $1.24 to $1.32 per share, after adding back the estimated $0.05 per share of restructuring charges from previously announced projects. Jon Schlemmer will update you on these projects.

Our guidance does not reflect any impact of a potential devaluation of the Venezuelan bolivar and the P&L impact on our Unico Venezuelan operations. We are accounting for our Venezuelan operations at the official exchange rate of 6.3 bolivars to the dollar, as there is uncertainty about the magnitude and timing of any future change in the official exchange rate. If the exchange rate were to change in the future to the current SICAD 1 rate of around 11, the impact on our Unico Venezuelan operations could be a currency translation loss in the range of $5 million to $7 million.

Now, I will turn the call over to Jon Schlemmer.

Thanks, Chuck. And good morning, everyone.

I'll start by giving some color on the end markets and customer demand. Overall, our sales performance was in line with our expectations for the quarter. We experienced solid growth with our North America residential products.

Sales in our residential HVAC businesses were up approximately 5%, compared to the same period prior year. We experienced sales strength on both the OEM and after-market side of the business. The strength was driven by improved market conditions, a strong heating season benefiting from the cold winter weather and slightly positive mix.

The customer dynamics that we communicated on previous calls negatively impacted our sales in the quarter as expected. We will lapse much of the difficult comparisons as we exit the second quarter. We also had strong double-digit growth of systems sold into other non-HVAC residential applications such as pools, spas and water heaters.

In these applications, we are benefiting from the growing demand of new products that we've launched over the past couple of years. In particular, we continue to experience strong demand for our energy efficient V-Green pool pump motors and controls.

As we look forward, our second-quarter guidance reflects continued modest growth in our North American residential businesses. Sales in our North American commercial and industrial motor businesses decreased approximately 3%. About 1 percentage point of the decline was due to currency, in particular, the Canadian dollar.

Demand in the C&I end markets was mixed. Markets where we saw weakness included commercial refrigeration, industrial equipment and irrigation.

However, our distribution business was up slightly, as well as our OEM sales into industrial pump and air compressor. Both were positively impacted by new accounts. Overall, the adverse weather was a headwind to sales in the quarter.

Orders for our commercial and industrial motors businesses have improved slightly, as we've entered the second quarter, and we expect slight growth in the second quarter.

We had another good quarter in our Global Power generation business, with sales up mid-single digits, compared to the same period prior year. The strength in both generators and switch gear equipment resulted from a combination of new accounts, new products, and strong demand in the data center segment. This is similar to what we experienced in the fourth quarter.

The decline in our North American mechanical business was again driven by the reduced demand for hydraulic fracturing equipment in our Milwaukee Gear business. Excluding Milwaukee Gear, we experienced growth in the rest of our North American mechanical business.

The good news is that we've started to see an increase in order rates from our fracking customers, and, as we move forward, the comparisons are getting easier. Orders in the rest of our mechanical business have seen modest increases and we expect to see slight year-over-year growth in our North America mechanical business in the second quarter.

Sales outside the US were essentially flat to prior-year and represented approximately 34% of our overall sales for the quarter. The impact from currency reduced international sales by 2.9%. The results were mixed, depending on the region, so let me give you some color on each region.

We again experienced solid growth in both our China and European businesses. For China, this was the third consecutive quarter where we've achieved year-over-year growth. In Europe, we continue to experience improving order trends, including the recently acquired Cemp business. Cemp performed very well in the first-quarter and remains on track to meet or exceed our expectations for the full year.

Another positive in the quarter was our continued efforts to grow our business in Latin America. However, the markets in India and Australia continue to be challenging and have offset the strength we've experienced in China, Europe, and Latin America.

On the innovation front, high efficiency product sales grew by approximately 5%, representing 20% of our total sales in the quarter. I continue to feel positive about the impact of our innovation initiative and our energy efficient new products.

Normally I would talk about a few of our new products. While innovation remains an important part of our growth strategy, today I'd like to spend more time updating you on our simplification efforts around our footprint, our supply base and our design platforms.

On the last call, we provided an update on the closure of our Springfield, Missouri, motor and parts operation, where we are consolidating the production from this facility into our existing facilities in Reynosa, Mexico, and McAllen, Texas. We also discussed the consolidation of our hermetic motor operations in Acuna, Mexico, where we currently have two facilities and are in the process of consolidating the operations into one facility and closing the other.

Our teams made a lot of progress over the past three months on both of these programs. Both programs are progressing well and we expect to see benefits near the end of the year and into 2015.

During the quarter, we also launched a program to further consolidate our operations in Australia. The Australia market has remained very challenging and we're making changes in the structure of the business to reduce our overhead and SG&A costs. We've already started making these changes and the program will be largely completed by the third quarter.

We've made tremendous progress simplifying our manufacturing and logistics footprint over the past few years. We will continue to place a focus on footprint simplification and you should expect to see more from us in the future.

We've updated the estimated restructuring expenses to show the actual expenses in the first quarter, the forecast for the second quarter and the remainder of 2014. This includes the Springfield, Acuna, and Australia restructuring programs.

Our supply chain team has been making excellent progress reducing the number of suppliers and simplifying our supply base. In 2013, we launched our supplier alignment program on both direct material, as well as indirect material.

A great example on the indirect side is our MRO spend. We studied our overall MRO spend across all of our North America manufacturing facilities, and, in the first quarter, we awarded the business to two primary suppliers who can meet our overall performance expectations. When completed, this will simplify our supply chain, improve quality and service, and dramatically reduce the number of suppliers.

Over a two-year period, our target is to consolidate our supply base with the reduction of over 1500 suppliers. Supplier simplification will ultimately result in improved delivery and quality performance, lower inventory levels and lower costs.

On the design side, we remain focused on simplifying these five major product platforms. All are active programs and we remain on track to be substantially complete with these efforts by the end of 2015.

During the first quarter, we completed one of these five programs, the worm gear platform. I'd like to spend a little bit of time on this program to give you a better idea of the impact we'll make simplifying our designs.

We produce and sell worm gear drives for multiple brands in the power transmission space. These gears are used in a wide variety of industrial applications. You'll see worm gear drives used in everything from material handling equipment, industrial machinery, and food and beverage processing equipment.

Last year, our team set out to consolidate our two design platforms into one design. The objective of the program was to reduce part count and improve our manufacturing lead times and efficiencies. We can now produce worm gears for multiple brands, utilizing common parts between the brands, but still maintaining our ability to differentiate the products for specific customer requirements. We finalized the new design in late 2013 and launched the new consolidated platform in the first quarter.

Let me touch on a few of the benefits from the effort. First, we were able to reduce part count by nearly 50%, removing 264 unique parts from our system. That's 264 parts we don't have to purchase or manufacture, maintain the drawings, manage the inventory, maintain unique tooling and so on. It's a huge change.

We also utilized the best design and manufacturing features of the two platforms when deciding on the final design. We can now fully utilize our manufacturing capacity to serve customer demand, independent of the design. This is a significant enabler for asset utilization.

With our worm gear products, we're now in full production and realizing the benefits. This is exactly what we expect from the other four design simplification programs.

The outcomes for each program will be similar; fewer parts, less inventory, better asset utilization and lower costs. All of these simplification efforts are yielding positive results now and I'm optimistic about the impact it'll have on our business in the future.

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

Thanks, Jon. Let me summarize.

To finish the quarter in line with our guidance with the top line growing 3%. Our margin performance was in line with our expectations and we expect to see gross margin improvement with the execution of our simplification plans and our continued efforts to offer new and innovative products, primarily around energy efficiency.

Speaking of simplification, as Jon just showed, our simplifications are impacting every facet of the Company. We will continue to move forward aggressively on all fronts and there is more coming.

Our two most recent acquisitions are integrating very well and they will both contribute in the second quarter. Our acquisition pipeline is healthy and we continue to aggressively and yet prudently seek candidates that meet our strategic objectives. We are fortunate to have a balance sheet that will allow us to pursue acquisitions and return cash to shareholders.

Our second-quarter guidance reflects modest growth in HVAC, commercial and industrial motors, power generation, Europe and China, but continued weakness in India and Australia. We expect improvement in gross margins and continued execution by our management team on all fronts.

We will now take your questions.

(Operator Instructions)

Our first question is from Mike Halloran of Robert W. Baird. Please go ahead.

Good morning, everyone.

Good morning, Mike.

So could you just talk about the cadence of orders and trends as you work through the quarter here? Obviously January, February, probably a little tougher. What did you see in March? Has any of that continued into April?

I think that's the right way to discuss it. You know, orders, our March was stronger than our February, and as Jon mentioned, as we came into April, we felt positive about the order rate and kind of reflect it in our guidance. So we certainly believe that weather had an impact, but it's hard to quantify exactly what it was.

And then on the, specifically on the HVAC cooling side of things, what does the inventory environment look like out there? And what are your customers telling you about the cooling season at this point?

Mike, this is Jon. Right now, the feedback we're getting on the customer side is I think everybody is expecting a good cooling season. They're certainly ramping up. We're seeing the normal seasonality in our HVAC business and the feeling is everybody is building and expecting for a solid cooling season. Similar forecast for the year that we talked about in the in the fourth quarter call.

Good, and then last one on my side, the commercial markets. Obviously if you mix things in the quarter here, but just in general, what are you guys seeing in the commercial market? How do you see that playing out through the year?

So, on the commercial side, we were expecting somewhat stronger results as we went into the quarter. We did get a little hurt by the Canadian currency. I think Jon mentioned we had a full point impact to our commercial and industrial sales in the quarter. I guess the two biggest things to call out was we had weakness in both irrigation and in commercial refrigeration. And if you take a look at the public companies that serve that market and what they're saying about the market, it kind of supports what we're feeling.

So those were the two big areas that kind of hurt the commercial and industrial business during the quarter.

Thank you for the time.

Thanks, Mike.

Our next question is from Julian Mitchell of Credit Suisse. Please go ahead.

Hi, thank you.

Good morning, Julian.

Good morning. So the clean gross margin was down around 80 basis points overall year-on-year in Q1. You talked on the call back in February that you would expect gross margin pressure at the beginning of the year from the sort of plant closures and plant transfer process. I just wondered what your updated thoughts on that were and when should we see the gross margin pressure related to those plant migrations starts to abate. Is it in Q2 or it's more in the second half?

Thanks, Julian. We did talk about our full 1 point of headwind margin pressure as we were in Q1 and we had suggested that we thought most of that -- part of that would go away as we moved into Q2. We will have carry-over into Q2, still related to our operational inefficiencies primarily in the quarter. We believe that as we exit Q2, most of that should go away.

Thanks. Then on the operating expenses, I think on a clean basis, those are down $3 million, $3.5 million year-on-year. Is that fairly representative in terms of some of the other cost reduction measures, just laid out in the prepared remarks, is that a good run-rate for the balance of the year?

Hi, Julian. Good morning, this is Chuck. I think we were pleased with our progress in the first quarter. Second quarter, we might see some dollar increase just by the way some of our operating expenses get to be a little bit lumpy. But on a percentage of sales basis, I think you'd be safe in using what we did in the first quarter.

Thanks. And then lastly, just on Europe specifically, just curious how quickly you see the pace of recovery in orders in your business there?

Julian, add a little color, I'm not sure I understand your question there.

Oh, just in terms of, you've talked about Europe improving. I just wondered what the pace of the improvement in your European business is?

Julian, this is Jon. We were really pleased with order performance in our Europe businesses for the most part. There's some mixed result, depending on the type of products we're selling there. But overall, our business saw very nice order strength in the first quarter. That was a carry-over really from Q4. So it's continued now for a couple quarters and as we enter the second quarter, we continue to see strong order performance as well on a year-over-year basis.

Yes, I would characterize it as mostly short cycle businesses where we're seeing the improvement.

Great. Thank you.

Thanks, Julian.

Our next question is from Mark Douglass of Longbow Research. Please go ahead.

Hi. Good morning, gentlemen.

Good morning, Mark.

What was North America HVAC up ex the customer loss?

Well, we don't have that particular, you know, particularly broken out that way. It's hard for us to really get a clean look at that. But, we were -- I guess if you look at what all of our public company customers published on what happened in resi, I think it's somewhere between mid-single-digit growth and kind of upper teens growth would be kind of the brackets of where people reported. From our point of view, we would guesstimate that the overall market growth was high, high-single-digits. That would be kind of the way we would think about it.

And sounds like you were probably in line with that.

Yes, we were probably mid-single-digits. You know, that's -- 5% is approximately what we were up.

Well, I guess that's -- accounting for the customer loss.

Yes.

Right, okay. Chuck, interesting on that comment on Venezuela, how much exposure do you have there in sales? And then why not use at least Sicad-1 -- it's probably virtually no chance you could ever get your money exchanged at 6.3 maybe not even 11. Can you discuss that a little bit? And what maybe the risk is to adjusted EPS, not just, a loss on the -- going forward operationally what you might see?

Sure, Mark. Thanks for your question.

Just a reminder, our Unico business does sales volume in many international oil and gas markets. In Venezuela, we've been managing our risk, trying to do as much in US dollars versus Venezuelan bolivars as possible to balance a little bit the risk versus the returns there. The accounting literature would suggest that unless you have immediate plans to repatriate or dividend some of your cash back into dollars, that the official rate of 6.3 is the appropriate one to use at the end of the first-quarter. So we don't know if and when or what the possible change in the future official exchange rate will be.

So we tried to scope it using the Sicad-1 rate of almost 11. That's consistent with a lot of the other disclosures that we are seeing from other companies that do business there. The impact on the operating profit is probably the most appropriate. It's going to depend on what our current assets in bolivars are at the time of any future devaluation.

In terms of sales, it's meaningful for Unico but in terms of the total Company, I would describe it as immaterial. Again, much of it is in US dollars.

Because you don't -- do they have any production down there? Is it all export into Venezuela?

Well, their oil and gas production is very strong and it's primarily for the export market. But there clearly is some internal consumption.

Okay. Thank you.

Our next question is from Christopher Glynn of Oppenheimer. Please go ahead.

Thanks, good morning.

Good morning, Chris.

Good morning, Mark. I was just wondering if we could get an update on some of your longer cycle specification opportunities inside residential HVAC OEM channels. With respect to some of your innovations the past couple of years, particularly in the Halo and aluminum end of things.

Chris, good morning. This is Jon. I'd say that we continue to feel good about the new products that we've been developing and bringing out to our customer base in the residential HVAC side.

As you mentioned, we went out pretty aggressive about a year ago on all aluminum versions on standard product. We can build those products today in our India operation, so that gives us a very good cost offering for standard products. We're seeing good adoption of those products from many of our customers. Then at the same time, we've been working on the Halo and the DEC star program, which I think I talked about in one of our last calls. That's going to take a while, I would say, to see meaningful impact in terms of adoption. But I can tell you there continues to be a lot of strong customer interest in the product and thinking about how to apply that product in future platforms, our customers' platforms.

So it's quite a bit of a different offering, if you will, from a technology standpoint. So it'll take a little bit longer to be fully adopted. But we feel really good about the potential of product and we're continuing to work on other new product opportunities as well. So long-term, I feel like we're focused on the right balance between consistently on value products, as well as high performing products.

Thanks, Jon. Just as a follow-up, is it fair to think of those two technologies as your biggest incremental commercial opportunities in resi-HVAC in coming years?

Well, I'll take a stab at that. Then Jon should add his own color. I think it's not just products, but there's always opportunities for wins and losses in these spaces, as we've shown in the past. There's opportunities both commercially and with the new products that we offer.

Yes, I think that's -- I was thinking similar, Mark. We've got -- between the new products that we're developing, as well as opportunities to grow the business in terms of market share, just continuing to work with customers on our share position. We've always said there are pluses and minuses and we're aggressively working on share gains at the same time. So I think it's a good balance.

Thanks, guys.

Thanks, Chris.

Our next question is from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Good morning, guys.

Good morning, Jeff.

So just back to the disruption costs, you said a point of gross margin, is that over the electrical business or the total Company? And I think you said half of that for the second quarter, is that right?

Good morning, Jeff. This is Chuck. Yes, it would be total Company was the 1% gross margin headwind that we had talked about in our first-quarter guidance. Most of that is behind us, and then we should enter the third-quarter with all of that behind us.

Okay, great. And then you laid out I think in slide 13, a lot of the restructuring costs for the quarters and the rest of the year. I'm wondering if you could do the same for how you're thinking about the savings coming in from the restructuring that you've announced? What was it in 1Q, what will it be in 2Q, what will it be in second half and if you have a number for 2015?

Thank you, Jeff. The benefits in the second-quarter would be included in our guidance and would be reflected in future quarterly guidance as well. And as we start to think about our agenda for the investor meeting later this year, we'll give a lot more detail on updates on our simplification initiatives, with estimates for future costs and benefits. That's a good question. Thank you.

Okay. And then in terms of additional actions, how far along would you say you are in terms of announced restructuring or simplification and kind of stated savings versus what you think you'll ultimately will get?

You know, I would say overall we're probably in the fourth or fifth inning of kind of the footprint consolidation and relative to the design platform consolidation. Jon showed you that we have one of five that we've now completed and I think Jon made the comment that we expect substantial completion by the end of 2015 of the other four. So that gives you an idea of that.

Okay, great. And then just final question on the HVAC share dynamics, you had pretty good growth in 4Q to1Q and obviously 4Q to1Q is a little more tied to the heating season, where the share dynamic maybe was not as prevalent given the hermetic issue. I'm just wondering, within the context of, 2Q, this kind of modest growth, does that share dynamic look a little worse into 2Q given that we're more into the cooling season?

Yes again, I'll take a pass at it. If Jon wants to add color, he should. You are right to say that we did see a benefit from the extreme weather on the HVAC side. The furnace season was quite strong, so we did benefit there. And that did mitigate some of the pain of the customer dynamic issues that we've discussed in the past.

Jon, do you want to add anything?

What Jeff said is spot-on. If you look at customer dynamics and the impact on the residential hermetic side of the business being cooling product, not heating product, certainly I think it's safe to say that we'll see a little bit more of that impact in the second-quarter. We still feel good that we're going to lapse that issue as we exit the second-quarter, Jeff. But you're right in terms of in the second-quarter, that's why we're saying we do expect to see some growth in resi-HVAC, but I think we'll see a little bit more impact from the customer dynamics in the second-quarter because of the cooling season.

Okay, great. Thanks, guys.

Thank you.

Our next question is from Jamie Sullivan of RBC Capital Markets. Please go ahead.

Hi, good morning.

Good morning, Jamie.

Just a follow-up on the potential savings from the restructuring you're doing. I know you'll give more details later, but I think you said that Springfield would be on the order of $15 million in total that you expected to save from that effort. And that is the largest of the three efforts that you have from Springfield, Acuna and Australia. Is that the right way to think about it?

Yes, you're right. We did communicate in the past that Springfield had a $15 million benefit tied to it. And we also commented that the other two, Acuna and Australia, were not nearly as large, but combined they're still significant. That's why we're communicating it. Finally, our comment has been -- stay tuned.

And Jamie, if I could just add to that, the $15 million would begin in 2015. So we'll be ramping up some of those savings in the second-half. But it's really 2015 and beyond that we'll see that run-rate.

Right. So the majority of the savings are beyond 2014 then?

Correct.

We'll start to see some of it in late Q4 and then after.

Okay. That's helpful. And then you talked a little bit about improving mix in the HVAC business. Just wondered if you could add some color there on what you're seeing?

Overall Jamie, we saw -- we did see slightly positive mix in the first quarter. I think that's consistent when you'll hear some of the manufacturers talk about a bit of positive mix, mix up to 14 SEER. There's also the consensus agreement and the move on the AC side to largely to 14 SEER, depending on the region of the country in 2015. There was a sell-through provision, of course, that'll have some impact on that. But in general, we are seeing a little bit of positive mix in the HVAC side, which is good to see.

And I'll just add that overall for the Company, while HVAC was positive, overall for the Company we had a slight headwind in mix to the Company, mostly driven by the commercial products in the commercial and industrial businesses.

Okay. That's helpful. Then if I could maybe sneak one more in, you had talked about some price increases going in, in 2Q. Maybe just update on your thoughts there. Is success there baked into the guidance and your visibility on that?

So you're right. We did have a price increase, 3.4%, December of 2013. And we said we wouldn't see all of that in Q1. We'd see some of it in Q1. Overall, the way we're thinking about it is the price cost side -- price material cost equation was slightly favorable for Q1 and we expect similar kind of outcome in Q2 and moving forward.

Thank you.

Thank you, Jamie.

Our next question is from Walter Liptak of Global Hunter. Please go ahead.

Hi, thanks. Good morning, guys.

Good morning, Walter.

I want to ask about the weather impacts. I understand that it's difficult to quantify them, but was that -- were you alluding to the C&I business having weather impacts or Unico, Milwaukee Gear?

Mostly on the C&I side. I would not say that the Unico or Milwaukee Gear would have been impacted by the weather as much. In our commercial and industrial businesses we know there were a number of our customers that either had to close their operations or couldn't get components in to run their operations and we had logistics issues, so mostly related to C&I.

I would say, Mark, I'd add that you're right, C&I would be where we saw the largest impact. We would have seen similar inefficiencies with our customer base on the HVAC side. However, the cold weather also helped the heating season, which would offset that, or at least partially offset it, at least. And then on the PT side of our mechanical business would be similar to C&I motors, that same type of customer base.

Okay, great. And you mentioned, too, that distribution part of C&I was starting to pick up. I wonder if you could characterize that, maybe the trend throughout the quarter, how things are looking in April, where inventories might be, et cetera?

I'll comment and then Jon should jump in. Jon mentioned that we did see favorable trends on distribution in Q1. As we go into Q2, we were seeing similar kind of experiences. It's very difficult for us on the C&I side to see inventory at our customers. So I don't think I have a good data point to reflect on there.

Some of the customer feedback that I've seen is that we went through what felt like a destocking period through a good part of 2013. The feeling is that is not happening today. It's more of a one-for-one replacement in the distribution channel. When they get a sale, they're replacing it with the same amount of inventory. So it feels like we're pretty much through that, in fact a more normal behavior in terms of stocking levels.

Okay, great. Sounds good. I guess the last one on the energy business. With well counts and some of the rig counts moving up, it makes sense that you would see more fracking. Wonder if you could characterize kind of what you're expecting in the second-quarter and the back half?

I made a comment earlier. You asked the question, did the weather impact our Unico business, and I said no it didn't. You just reminded me of something there. Actually, we did have -- we had some issues with some of our customers, not doing as much drilling in the quarter simply because of the very cold and extreme weather. I misstated that. So that did impact our orders in Q1 on the Unico side. However, we would expect -- that was primarily North America. However, we expect for the year still solid growth on the Unico side of the business, specifically related to energy.

And on the Hy-Bon side, the growth rates that we had predicted in our pro forma at the time we acquired the business are coming in exactly the way we thought they would and we are expecting strong performance from the Hy-Bon business through the end of the year. We had predicted that $0.03 to $0.06 accretion from Hy-Bon at the time we announced the acquisition and we expect we'll end at the higher end of that, at that guidance.

Okay. Thanks, guys.

Thank you, Walt.

Our next question is from Scott Graham of Jefferies. Please go ahead.

Good morning.

Good morning, Scott.

Mark, you had a comment about you thought that the market in the first-quarter of resi-HVAC was sort of up in the upper single-digit territory. And I guess my question on that is that if we're talking volumes, of course, since I think pricing is kind of benign right now. That would imply I think, unless I'm doing the numbers wrong or you're including things that I'm not -- which is kind of my question. That would imply that May was -- I'm sorry, March was actually down. We're not really hearing that because January and February were up pretty strong. Just wondering if there was something that you're including, not including when you say the industry you think was up upper single-digit? I'm just trying to triangulate a little here.

Yes, no problem. I'm just reacting to the public information from our customers, as well as one-on-one discussions with our customers and what we're hearing from them on how they view the resi market in Q1. I think everything that we've seen in our dialogues with them and their public reporting would say that the guard rails was up mid-single-digits to up high-teens in one customer's case. And from what we could see, we would estimate that it was high-single-digit growth in Q1. There's nothing more than that, is the way we're thinking about it.

It is within that comment. So that's what your customers are implying that they're seeing?

Yes.

Okay. Is it possible that some of your customers are under growing the market?

It's always possible that there's a share mix. I mean, a customer mix, yes.

Okay, thank you. My other question has to do with the restructuring savings. Now, in the last analyst meeting that you had back in 2012, the chart that you put up was that the simplification would get you roughly about maybe a little bit more in savings than the EPC synergies would have. At least that's what the bar chart looked like.

Yes, that's correct.

Is what you're saying here today -- I know -- I'm pretty sure that Springfield was included within that.

Yes, it was.

Right? So what is incremental today?

There would be -- number one, we're going to try to update it near the end of the year as Chuck mentioned. But number two, I would say we have no change in our view from that view that we shared at the end of 2012. Nothing is substantially changed. We will update it near the end of the year.

So even your comment, stay tuned, is more toward the build toward that $45 million-ish? Or is your comment, stay tuned, mean it can be higher than that?

No, the comment, stay tuned, was we have further announcements to make and when we can make them we will certainly let everybody know.

So further announcements beyond what you've already included in that bar chart?

Yes, beyond what we included in today's guidance.

Very good.

The projects that we laid out today and the restructuring that we laid out today.

Okay. Thanks a lot.

Yes, thank you.

Our next question is from Liam Burke with Janney Capital Markets. Please go ahead.

Thank you. Good morning, Mark. Good morning, Chuck.

Good morning, Liam.

Good morning, Liam.

Mark, do you see a recovery in commercial construction market? Or how do you see the recovering commercial construction market affected C&I sales this year?

Well, going into the first quarter, we were thinking that there would be some commercial market recovery. But as I had indicated earlier, we had two of our key segments, commercial refrigeration and irrigation, both underperformed for us in the quarter. And we know it's primarily driven by those end markets. It's nothing happening structurally within our business. So we still would believe, we still believe going through the end of the year that, that will rebound, but we did not see it in Q1.

Okay. And energy efficient products are growing faster than your normal revenue growth rates. How would you see those trends either this year going into the future? Do you see them accelerating or just moving at a similar pace?

Liam, this is Jon. I would say similar pace. I mean, that's been -- it's been a little lumpy, but I would say based on what we saw in the first quarter, my expectation would be we would continue to see that type of pace of energy efficient product sales outpacing our overall sales.

Great. Thank you.

Thank you, Liam.

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

Thank you all for joining the call and for your interest in Regal. Have a great day.

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