Regal Rexnord Corp (RRX) 2014 Q3 法說會逐字稿

Good morning. Welcome to the Regal Beloit third quarter 2014 earnings conference call.

(Operator instructions.)

Please note this event is being recorded. I would like to turn the conference over to John Perino.

Thank you Chad. Good morning, and welcome to the Regal Beloit third quarter 2014 earnings conference call. Joining me today are Mark Gliebe, Chairman and Schlemmer, COO; and Chuck Hinrichs, Vice President and CFO.

Before turning the call over to Mark, I would like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause the 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 mention that we're presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit, adjusted gross profit as a percentage of net sales and adjusted income from operations and free cash flow. We believe that these are useful financial measures for providing you with additional insight into our operating performance. Please read this slide for information regarding these non-GAAP financial measures and please see the Appendix, where you can find reconciliation 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 our third quarter call and for your interest in Regal. Today we will follow our normal agenda: I'll make a few opening comments, Chuck will give a financial update. Jon will CEO, Jon give color on products, markets, and operations and then I will summarize and we will move to Q&A.

Regal had a solid third quarter delivering overall sales growth and strong free cash flow. Our adjusted EPS of $1.15 was in line with our guidance. Our revenues for the quarter were up 8% year over year. Adjusting for acquisitions, our organic growth was 2.6%.

Sales in our North American residential HVAC business were up approximately 8%, representing the fourth consecutive quarter of year-over-year growth in that business. We also experienced solid growth in our mechanical businesses. Revenues in our North American commercial and industrial motors business were down slightly, driven mostly by weakness in commercial and industrial refrigeration and irrigation.

In Asia, sales in the China slowed. Australia remains challenged. But sales in India were up with strong demand in the domestic HVAC market.

Sales into Venezuela were down as we anticipated, as we managed our risk in that uncertain economy. And finally our recent acquisitions, Benshaw, Cemp and Hy-Bon, performed as expected in the third quarter. Cemp is benefiting from the continued growth in oil and gas, while Hy-Bon is benefiting from recent EPA rulings requiring oil producers to either flare or recover vapors from oil storage tanks.

Our latest acquisition, Benshaw, is integrating well into the company and is off to a great start. On operating profit margins, our Op-profit, was in line with our expectations as we laid it out a few months back.

Our simplification projects continue to progress forward. The Acuna consolidation project was just completed and with respect to Springfield we expect to be substantially complete with our production in that factory by the end of February.

Further we are progressing well on the already announced closure of our two Kentucky-based motor parts plants. Also in the quarter we divested our interest in an underperforming joint venture in China.

As you know our simplification efforts, including consolidating plants, consolidating design platforms, combining ERP systems and rationalizing suppliers. When it comes to our progress on simplification, we are in the middle stages of execution but still only in the early stages as it pertains to the expected benefit stream, and there is more simplification to come.

Our free cash flow for the quarter was 135% of net income, making our September year-to-date free cash flow 113% of net income. We expect that 2014 will be the fourth year in a row of reaching our goal of free cash flow to net income of greater than 100%.

We repurchased 500,000 shares out of our 3 million share authorization in the quarter. We are fortunate to be in the position with the balance sheet where we can pursue acquisition, acquisitions and return cash to shareholders. As far as acquisitions go, our headset and bias towards acquisitions has not changed and our pipeline remains strong.

As we look to the fourth quarter in North American residential HVAC, our guidance reflects continued year-over-year growth, driven primarily by a modest prebuild resulting from the regional efficiency legislation. We expect strong continued growth in our mechanical businesses driven by market growth in energy and the power transmission distribution channel.

In our North American commercial industrial motors business we expect overall revenues to be relatively flat for the fourth quarter. The instability in Venezuela continues to be a challenge.

We have included in our guidance weaker sales in Venezuela as we manage through the economic uncertainties, and going forward we expect continued volatility in that country. In spite of the issues in Venezuela, we expect adjusted operating margin to be up year-over-year in the quarter.

I will now turn it over to Chuck Hinrichs.

Thank you, Mark. Good morning everyone. I will start with the reconciliation of our results on a GAAP EPS basis to adjusted EPS.

In the third quarter 2014 earnings on a GAAP basis were $1.05 per share and in line with our earlier guidance. Restructuring charges in the quarter were $3 million, or $0.04 per share, related to our continuing work on our simplification initiative. Then we add back the purchase accounting adjustments and closing costs on the Benshaw acquisition of pre-builder share.

Finally we had a loss on the sale of an underperforming joint venture of $0.04 per share. Adding back these adjustments results in adjusted earnings per share for the third quarter 2014 of $1.15. This is in line with our earlier guidance for adjusted EPS.

Our third quarter 2014 sales were $830 million, an increase of 8% from the prior year. The impact of foreign of currency translation in the quarter was a positive 0.1% on total net sales as compared to the prior year.

Sales in the quarter increased $42.7 million from the Cemp, Hy-Bon and Benshaw acquisitions. Organic sales were up 2.6% in the third quarter versus the prior year.

In the third quarter 2014 our adjusted gross margin was 25.1%, adjusted for both restructuring charges and purchase accounting adjustments. As we previously guided, our third quarter margins were negatively impacted by lower sales into Venezuela as we risk managed our operations in that volatile economy.

Our operating expenses in the third quarter of 2014 were $129.1 million. This includes $8.3 million of SG&A from acquisitions and a $1.9 million loss on the sale of the joint venture in China. This JV was consolidated into Regal's results and represented $15 million of annual sales and generated a modest net loss from operations.

Exiting this JV is part of our overall efforts to improve our operating profit margins. Net of these adjustments, our SG&A expenses in the quarter were essentially flat to the prior year.

Also during the third quarter we repurchased 500,000 shares of Regal stock at an average price of below $70 per share for a total use of cash of $35 million. These repurchases represent 17% of our share purchase authorization and offset the annual amount of equity compensation dilution.

Now I will summarize some key financial metrics for the third quarter 2014. Our capital expenditures in the quarter were $17.6 million, including the completion of our new industrial motor factory in Wuxi, China. For the fourth quarter 2014, we estimate capital expenditures will be approximately $20 million resulting in estimated total year 2014 capital expenditures of approximately $80 million.

Our effective tax rate in the third quarter was 27.1%, in line with our earlier guidance. We estimate our effective tax rate for the fourth quarter to be 25% as we will benefit from a lower tax rate in one of our China plants, which recently received a high technology status.

In the lower left quadrant we provide data on our quarter-end balance sheet. Our total debt declined $90 million in the third quarter to $677 million and our net debt was $350 million. Our credit metrics continue to improve as our debt to adjusted EBITDA was 1.6 times and our net debt to adjusted EBITDA was 0.8 times at the end of the third quarter.

In the lower right quadrant we present information on our free cash flow in the third quarter. We generated $64 million of free cash flow in the quarter, or 135% of net income in the quarter, and 113% for year-to-date 2014.

Our fourth quarter 2014 guidance is for GAAP EPS of $0.83 to $0.91 per share. On an adjusted basis, that is $0.90 to $0.98 per share after adding back in the estimated $0.06 per share of restructuring charges and $0.01 per share in purchase accounting adjustments relating to our Benshaw acquisition.

Our fourth quarter guidance includes the continued headwinds from our Venezuelan operations. Our fourth quarter earnings guidance does not include any impact of possible devaluation of the Venezuelan Bolivar or other write-offs that may be necessary as a result of any potential change in our business operations in Venezuela.

To frame the potential impact of a Bolivar devaluation, if there was a devaluation to the current CCAD1 rate of 12, the impact on our Venezuelan operations could be a currency translation loss in the range of $4 million to $7 million. At the CCAT2 rate of 50, the currency translation rate could be in the range of $8 million to $13 million. This is based on our estimate of net monetary assets in Venezuela of approximately $10 million.

Now I will turn the call over to Jon Schlemmer.

Thanks, Chuck. Good morning, everyone. I will start with some color on the end markets and customer demand.

Sales in our North America residential HVAC business were up approximately 8% in the quarter compared to the same period prior year. The growth was driven primarily by two factors. Overall market strength and the start of the SEER 13 prebuild.

The SEER 13 prebuild is related to the consensus agreement where the minimum efficiency on residential air-conditioning equipment in the south and southwest will increase from 13 SEER to 14 SEER at the beginning of the year. There is a 18 month sell-through period and as a result OEMs are now pre-building of the demand of the SEER 13 product.

For us, this will be a modest prebuild, spread out over both the third and fourth quarters of this year and it is our standard product offering. While it helps our sales in the second half of this year, we will see the corresponding reduction in demand in the first half of 2015. While the prebuild is mostly our standard product, we view the change to SEER 14 as overall positive to product mix over the long-term.

Sales in our North America commercial and industrial motor businesses decreased by approximately 1%, essentially performing as we forecasted. The decrease was driven by continued weakness in the commercial and industrial refrigeration and irrigation end markets. Distribution sales were relatively flat in the quarter.

An end market where we experienced solid strength in the quarter with commercial HVAC, most market indicators have been pointing to improving demands for commercial HVAC equipment and pre-build starting to see that in our orders. Sales increased in our North American Mechanical businesses by approximately 18%. We experienced strength in the power transmission distribution channel as well as strong demand in the energy end market.

Elsewhere, excluding acquisitions, sales were slightly down with mixed results by region. As commented earlier, sales into Venezuela were down in the quarter.

Sales were essentially flat in our European businesses, where we experienced a decline in orders about midway through the quarter. We had strong second -- we had a strong second quarter in our European businesses and had expected to see the pre-buildrength in the third quarter.

Sales slowed in our China businesses, primarily on the industrial side of the business. And market conditions remain challenging in Australia. However we experienced solid growth in Latin America, India and the Middle East regions.

We have placed a focus in growing our business in Latin America, and are pleased with the progress that our team is making. In India and the Middle East, the strength is being driven primarily from demand for air conditioning products.

Let me now give you some updates on simplification. I'll start with our design platforms.

I'm pleased to report that our team has completed the third of five design simplification programs, our HVAC motor design platform. This program consolidates our multiple HVAC motor designs into our standard product platform. In doing so, we eliminated hundreds of unique parts from our operations. This helps us focus our resources and improve our performance to our customers.

We will complete the 3.3 inch small HVAC motor program next, and then we will have one more major program to complete, which is the core C&I product platform. Of the five, this last one is the most complex, but will deliver the greatest savings.

The major restructuring programs of our Acuna, Australia, Springfield, and Kentucky operations are moving forward. The Acuna consolidation is now completed, and by year end will be completed with the largest phase of our restructuring plans in Australia.

We're also making continued progress in Springfield. The unexpected increase in HVAC SEER 13 demand has slowed us down a little, but we expect to be substantially completed with the production move by the end of February. The Kentucky programs are progressing as expected and remain on plan.

During the quarter we also announced our plans to consolidate one of our smaller mechanical businesses in Germany with an existing operation in Italy. This isn't a large move, but it will streamline the operations and improve the overall operating efficiency of this business.

While never easy, both customers and employees understand the need and continue to be supportive of these programs. We have updated the estimated restructuring expenses to show the actual expenses in the third quarter, the forecast for the fourth quarter, and the first half of 2015.

I want to give you some updates on a few previously announced new products. Energy efficiency products continue to provide opportunities for us to retrofit and grow our business while giving our customers the ability to reduce overall operating costs.

Just a few examples of these retrofits are shown on this slide. But it will give you an idea of the breadth of the products and the number of opportunities we are pursuing.

Three years ago we launched the high-efficiency right angle gear, or HERA, targeted to replace standard warm gears with drop-in high efficiency solutions. These gearing systems not only provide an excellent payback on efficiency, but are also much more reliable the standard product.

This year we introduced a stainless steel version targeted for applications such as food processing. Sales on this product line have increased strong double digits this year and we expect similar growth in 2015.

The next example is our line of variable speed high efficiency pool motors and controls. We launched a number of new products over the past year to give customers different power ratings and a number of new features. Sales of these new products are also growing double digits.

Next week at the pool and spa show in Orlando, we will be announcing our new wireless control that allows a homeowner to control the operation of their high-efficiency pool motor using an app on their mobile device through their existing home wi-fi network. This makes it easier for a homeowner to retrofit their existing pool system with one of our variable speed motors and controls. They can therefore reduce their electricity bill and maximize the performance of their pool system.

Our hospitality retrofit initiative is continuing to grow, with a number of hotel properties in North America starting to change out all of their HVAC motors in hotel rooms with our high efficiency offering. Realizing typical paybacks of two years or less.

And finally this quarter we launched our latest high-efficiency commercial refrigeration product. This high efficiency motor control and fan system is designed for both new equipment and for retrofits.

The design is more compact and offers wireless programming capability, making retrofits easier. Commercial refrigeration is a global market and we believe will be a long-term growth market with customers just beginning to realize the full benefits of high efficiency motor and control solutions.

Sales of our high-efficiency products increased approximately 7% and represented over 21% of our total sales in the quarter. Energy efficiency retrofits represent just one of the efforts driving the growth of our high efficiency products.

Across the company our employees are driving simplification and innovation with a sense of urgency and focusing on delivering benefits to both customers and shareholders. We're committed to always be the technology leader for our customers. Further, I'm confident that the simplification efforts is beginning to improve our margins, and will have an even greater impact on margins next year.

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

So let me summarize. We finished the third quarter in line with our guidance with the topline growing 8%. We had yet another quarter where our free cash flow as a percent of net income was greater than 100%, and we now expect to finish our fourth year of cash flow exceeding net income.

As we look at the fourth quarter, we expect adjusted operating margin improvement and we have the Regal team focused on simplification and innovation with the idea of providing greater value to our customers and higher margins for our investors. Regal has had three acquisitions in the last four quarters. The acquisitions are integrating well and performing.

Our acquisition pipeline remains strong. While we did repurchase 500,000 shares in the quarter, we have a bias towards acquisitions. We are fortunate to have a balance sheet that will allow us to pursue acquisitions and return cash to shareholders.

We will now take your questions.

Thank you.

(Operator instructions.)

Our first question comes today from Jeff Hammond with KeyBanc.

Thank you. Good morning, guys.

Good morning, Jeff.

So C&I still a little bit surprised to see declines. You give good color there. I am just wondering, as you look more deeply, how you are feeling competitively, you know, what is your confidence as we move into 2015? Do we start to see growth? What are the big issues there on this ninth quarter in a row of decline?

Jeff, we don't see any structural issues in our C&I motor business. There's always puts and takes in any market. You know, we have a couple end markets that have been haunting us for the year.

As we mentioned, commercial and industrial refrigeration as well as irrigation. You know, we should be -- I think by the end of the first quarter, we will start lapsing that and perhaps some of those markets will begin to turn for us. Most of the indicators that we see are pointing in the right direction relative to that business.

So, you know, we haven't seen it yet, but like I mentioned, there's green shoots out there. We're going to remain optimistic.

Okay. And then just help me on international. In the release you said X acquisitions grew 8%. But in the presentation you're kind of saying down 1%.

Well, I understand your comment there. So, in our North American residential HVAC business that was up 8%, a lot of our customers have operations in Mexico. And so, you know, from a North American perspective, HVAC is still up.

When you look at sales outside of the US, that would include Mexico and bring that number up. Now, if you strip out Mexico from our -- you know, sales outside of the US, if you strip that out, we're still up a few percent.

Okay. Thanks, guys.

Thanks, Jeff.

Our next question comes from Julian Mitchell with Credit Suisse.

Good morning. This is John Schaffer for Julian.

Good morning, John.

Hi. I just wanted to get a little bit of a sense around the margin impact of the SEER change into next year. It's my understanding that, you know, some of the margins for the prebuild may be a little bit lower. Should we start to get some kind of a mix tail wind as 14 SEER plays out through 2015?

John, you're thinking about it the right way. I'll comment and if Jon Schlemmer wants to add any color, we will let him talk. As we looked at the end of the third quarter when the prebuild began and going into the fourth quarter, we're selling more of our standard products. So there will be a little bit of mix down in that time frame.

Then as we move into Q1 and Q2 of next year, obviously there will be a little air pocket because that volume was shipped in 2014 as opposed to 2015. So we will have an issue there in Q1 and Q2 to talk about. But then as we get beyond that, you know, we expect to have a positive mix as we look out into 2014 and beyond.

Now, you shouldn't walk away thinking that every SEER 14 product takes an energy efficient motor. That's not the case. There's a lot of different ways to deliver energy efficiency. However, we do expect a modest mix pick-up as we get into the second half.

Understood. That's extremely helpful. And then just on kind of the M&A versus buyback balance. I understand it's very opportunistic. Should we expect any more buy back this year if we don't see any big deals, or should we start to think of that as a 2015 event.

John, this is Chuck Hinrichs. It's really hard to call that. As you say. It's opportunistic based on market conditions as well as our assessment on the acquisition market. We're not able to provide any further guidance on that.

It continues to be a strategy of ours to return cash to shareholders. As Mark said, we believe that we can create more long-term value through acquisitions.

Thanks very much, guys.

Thank you, John.

Our next question comes from Mike Halloran with Robert W. Baird.

Good morning, guys.

Good morning, Mike.

So sticking on the margin side of things. Obviously some puts and takes there. You laid out the -- call it the mix swing that is happening on the HVAC side of the portfolio. Maybe you could talk about the impact you saw on the OpInc line.

I think you were thinking somewhere in that $5 million from Venezuela this quarter. What kind of impact is embedded into the fourth quarter guidance and how should we think about the impact on a forward basis, if that's the right run rate.

You know, for the third quarter, the quarter unfolded pretty much the way we thought it would. We had discussed two issues on our last call, Venezuela being the biggest one. And it unfolded pretty much the way we had thought it would.

You know, as we look forward, we talked about it. Venezuela continues to be a headwind for us on both the top line and the margin line. So, you know, we're managing our way through that uncertainty. It's tough to predict what follows. But, you know, we're doing our best to manage through that.

Okay. Then on the -- what do the high efficiency trends look like, stripping out the prebuy on the HVAC side? What do the high efficiency trends look on the HVAC piece there?

It was improvement in the quarter. We had -- we saw a pick-up in the quarter in terms of customers choosing a higher, more energy efficient product versus a standard product, and probably we had a little bit of headwind from the SEER 13 prebuy. It was probably a pretty good quarter overall.

You know, we continue to see an overall long-term move towards energy efficient products. We continue to believe that's kind of a tail wind for us long-term.

It was a good -- I would say overall it was a good quarter for high efficiency mix, especially when you consider the prebuild impact on the quarter would be obviously all of our standard products. That's not going to help mix. Yet our high efficiency sales were up 7%.

If you stripped out the prebuild and the HVAC we did have slightly positive product mix. In the base business. So it was a good quarter for high efficiency.

That makes sense. I appreciate the time, guys,.

Thanks, Mike.

The next question comes from Mark Douglass from Longbow Research.

Good morning, gentlemen.

Good morning, Mark.

Mark or Jon, can you just discuss the areas of energy where you were possibly impacted? Is it more up, mid, downstream, any particular regions in the US, Permian Basin, or sales or anything like that?

Yes. So our -- we saw a very nice increase in our Milwaukee gear business in terms of both orders and sales in that business. Sales into the fracking industry, primarily on the upstream processing's, kind of at the well. So, you know, a lot of that was refilling inventory coffers, I believe. Meaning that we had a tremendous amount of inventory that we carried for a long time.

Customer orders did pick up and their inventory had dried up. So we refilled that. It's still positive. Orders are still positive. As we look forward today, we feel pretty good about Q4 and even Q1.

And did that impact -- was this positive impact just on the gear side or did Unico also see some benefit?

So we certainly -- we certainly saw the benefit in our Hy-Bon business. You know, our Hy-Bon business continues. Hy-Bon is benefiting more from the EPA regs.

On the Unico side it was -- They're more focused on oil versus gas. I would say that our Milwaukee gear tends to be more impacted by gas fracturing. Unico not as much. However I would say our North American orders on Unico, just probably seeing a little bit of lift right now.

I would add also, Mark, that there's a number of other mechanical businesses that sell some products into oil and gas similar to Milwaukee gear. They saw the strength as well. They are not quite as great of an impact as Milwaukee gear for us, but certainly we saw the similar strength in those other pockets.

Okay. And then the final question, on your non-motor businesses and electrical, switch gears, alternators, how did those fare in the quarter and what are you seeing in market trends.

Mark, I would say overall we didn't have the same strength that we had in the first half on a year-over-year basis. That business was down a little bit in the quarter. Now, we had a pretty solid second half last year.

We had very solid growth in the second half last year. I think fourth quarter was up double digits. So we won't have quite as favorable comps in the -- in the -- we didn't in the third and we won't in the fourth. But the business is still performing quite well.

Okay. Thank you.

The next question is from Nigel Coe of Morgan Stanley.

This is Drew on for Nigel.

Good morning, Drew.

Good morning. I have a question regarding the core margin in electrical. If you were to strip out the dilutive impact of M&A and the impact from the lower mix with the SEER standard legislation, do you have a sense of what core margins would have looked like on a year-over-year basis?

Drew, this is Chuck. I would say they were a little bit lagged as we took the restructuring charges in the quarter. As we talked about, there's the delay in the benefits principally from the Springfield move, which is the large simplification Initiative we're driving in the second half of this year. But, again, we remain committed to the program and expect those benefits to come into 2015.

Okay. Got it. And then on the M&A pipeline, I know you talked about it a little already. With the balance sheet getting a little bit stronger, where do you size up your deal capacity at this point?

Drew, I think we have consistently said that we have the capacity to -- with our balance sheet and existing cash, to do a transaction in the $1 billion neighborhood.

Okay. Great. That's it. Thanks a lot, guys.

Thank you, drew.

Our next question comes from Josh Pokrzywinski.

Hi. Good morning, guys.

Good morning, Josh.

I guess just first on the -- on the prebuy, can you size up what you think you're getting up in 3Q and 4Q or what you did to that? And on the other end, what that air ball may look like in the first half of 2015 so there aren't as many surprises when we do the rolling guidance for those quarters.

Josh, it's tough for us to really put a number on it. We do believe it helped us in the third and is helping us in the fourth. We can't tell from the product that we ship what product is actually going into the market and what product the customer is holding.

It's tough for us to know exactly what our customer is buying falls into prebuild or not. I think we're characterizing it, the impact on us, as a modest prebuild. You know, it will come out of primarily Q1 and then the early part of Q2 and then would certainly have an issue -- certainly have an impact on our absorption during those two quarters.

Sure I guess it is just order of magnitude though. When you say modest, you make it sound like a low single digit positive impact, not a 10%-plus impact where core HVAC was flat this quarter.

Yes. It's not 10%.

Okay. And then, Chuck, on the restructuring program, or more broadly for the entire team, you guys talked a lot about the margin opportunities and the progress on execution and being a little more middle innings on the plant moves and various actions but early on realization. Have you been able to size up the drag from inefficiencies as you think about this year, actual for the first three quarters, kind of what you're contemplating in 4Q guidance?

Then do you have a sense for what the restructuring savings could look like in the next year? I get that there's been consistent talk about we're on track, we feel good about next year. Is there any number that we can put to that at this point?

Josh, I think we will have a lot more information for everyone on our Investor day on December 9. But we still stand by our previous commitment on the benefits of these savings. For example, the Springfield of at least $15 million in 2015. But we haven't tried to size or quantify those inefficiencies that might have occurred in 2014.

They're in the millions of dollars though, presumably; right?

Yes. It's hard without sizing that number, Josh.

Okay. That's fair. And then just lastly on the balance sheet. I get that you have, you know, pretty healthy capacity there at $1 billion. Maybe a small number of properties kind of reach that threshold.

If you look back at the past couple of years, the deals have been more modest in size. What is your interest in, you know, kind of spending away through buy back, kind of the excess free cash given, at this point the need to build fire power above and beyond that $1 billion is probably not vert prudent from a market perspective, just because there aren't many deals bigger than that.

Josh, I'm not sure if I understand it. Are you just talking about the balance between share repurchases and acquisition opportunities?

Yes. So if you're saying you have $1 billion of capacity right now, you know, maybe there's a property, maybe two out there that gets to that threshold. But to the extent that, you know, those don't become available, why -- why build capacity beyond that?

Why not just say, we're kind of happy with where the balance sheet is today and then we will take all of the excess free cash flow and buy back stock from here, rather than building a bigger war chest?

I think that's certainly a possibility. And as we have said, opportunistically we will be assessing the ability to execute our share repurchase program in the future and then constantly balancing that with our view on acquisition opportunities.

Okay. And then I guess just as an update, the last one, on the status of the pipeline. Would you say that the average deal size that you're looking at has gotten any bigger or smaller since -- since you last spoke?

No. I would say it's been the same. You know, we have opportunities for tuck-ins and opportunities for larger transactions. Nothing much has changed.

Got you. All right. Thanks, guys.

Thanks, Josh.

The next question is from Walter Liptak with Global Hunter.

Hi. Thanks. Good morning, guys.

Good morning, Walter.

I wanted to ask about your -- your overhead expenses, your SG&A. The numbers were a little bit higher than what I was looking for. And if you were looking at like the growth rates or percentage of sales, they were up, especially mechanical. I wondered if you could provide some color on them.

Sure Walt. Our number if you adjust for the acquired companies and the loss on the sale of the joint venture, that number was, you know, a very modest increase over the prior year. And it was 14.3% of sales. So we were pretty pleased with our control over SG&A both in the third quarter and on a year-to-date basis.

So I think just go through those adjustments and I think you will be more comfortable with our control over SG&A spending. And we continue to exercise those controls going into our fourth quarter.

Okay. Got it. So in the fourth quarter we should expect sort of the same year-over-year growth rate, you know, considering those items?

I think on a sequential basis we will see flat to a down number for SG&A in the fourth quarter. On a year-over-year basis, I would -- I didn't look at that number. But I suspect we will see flat to down as well.

Okay. Okay. And as a follow-up I guess in -- and you kind of touched on this already. I just want to get a clarifier from you. You know, in the ONG markets, obviously with the commodities down, you're hearing from your customers that have continued to be at this current rate through first quarter? Is that how we should interpret your comments?

I would say as of now, Walt, that is kind of what we are hearing. I understand your point, though, given the latest news, we will keep our ear close to but that's where we are today.

Okay. But you are not seeing deceleration at this point in order trends.

Not at this point.

Okay. Thank you.

Thanks, Walt.

The next question is from Scott Graham of Jeffries.

Hey. Good morning.

Good morning, Scott.

I want to ask maybe Josh's question a little bit differently. Would it be fair to say, Chuck, that the slide page 14 that the restructuring expenses grabbed here, are we going to recapture those dollar for dollar in savings?

I mean, I think what we did on that slide was showed you the actuals for Q3, the estimate for Q4 and then the estimate for Q -- for the first half. So to the extent that there's not a first half charge that would fall on top of last year's first half charge, yes.

Scott, the issue is always one of timing. The restructuring charges have to occur first. And then the benefits occur later.

Using Mark's analogy of we are in the middle innings of the restructuring program but the early innings of the savings. When we typically analyze these projects, their pay back is one to two years. So they are always attractive drivers on benefits to our savings and improvements in our operating profit margin.

And I do understand that, Chuck and Mark, and I thank you for that response. I'm trying to get not to whether they are one to two years, to whether the restructuring expenses are 1X to 2X on savings.

It would be the reverse. It would be the -- the savings would be a multiple of the restructuring charges. It's just a question of the timing of recognition.

Right. I think we're on the same page. Maybe I asked it a little confusingly. So you're not taking the restructuring charge thinking anything other than you will be getting 100% back of that charge, correct?

That is correct.

All right. Very good. Jon, can you talk a little bit more about your page 13 chart? What is the percentage of sales that these redesigns are impacting?

I haven't thought about it that way, Scott. But if you look at the five programs, there's -- there's the C&I -- the C&I program and the HVAC program, the first one and the last one are substantial components of our HVAC and our C&I motors business. Those are very large programs.

Worm gear is a pretty solid part of our mechanical business. So if I think about it -- if I think about it overall, I would say these five programs probably add up to nearly half of our revenue. It's not an exact number, but it puts you in the ballpark.

That -- Jon, that's really great. That's very helpful. Thank you. My last question is also for you Jon. On the energy efficiency products, the retrofits, you indicated that a couple of these things are running double digits. Of course, that would -- I assume you meant that year-over-year so it would mean that these products have been out in the market for a little bit of time.

Are you at a point right now, Jon, where you are able to give us an idea of what the new product refreshments are adding to the top line in 2014 and perhaps run rate what you're thinking on a -- in the future? Is it adding 1% at this point? Not quite 1%? Are we at 2%? I'm trying to frame for -- for myself what is the new product increment here.

Yes. I don't have that data with me today, Scott. I understand your question exactly. It's something that I think we could pull together and talk about in a future meeting for sure. I do feel good that the new products are giving us benefit on the top line. There's no question about that. I just don't have the data to quantify it today.

That's fine. Thank you all.

Thanks, Scott.

Thanks, Scott.

Our next question comes from Liam Burke with Wunderlich.

Good morning, thank you Chuck, thank you Mark.

Good morning, Liam.

Mark. On the acquisitions you pointed out that you have seen some nice revenue opportunities on the three newest. On the expense side, are there any overlap expenses that you see some low-hanging fruit to lift margin there?

I do think as we look at over the next say 24 to 36 months we do see some opportunity there. But it is consistent with what we communicated at the time that we did the acquisitions. We in each case communicated some level of synergy either on the top line or the bottom line. So far it's playing out the way we had expected in all three cases.

Great. And then just a little color on the C&I energy efficiency. Are you saying the demand trend is consistent or increasing there?

I would say on the energy efficient side for C&I we're seeing a slight improvement over what we have seen in the past. Part of it is because we now have products in that space that we didn't have before. You know, we have a -- Jon showed on page 15 earlier, HVAC ECM products, effectively energy efficient products.

We recently took that technology last year and started offering kind of commercial and industrial versions of that product. And so we're seeing more and more interest in those products.

Great. Thank you.

Thanks, Liam.

The next question comes from Jeff Hammond with KeyBanc.

Hey, guys. My follow-up has been answered. Thanks.

Thanks, Jeff.

The next question is from Randi Edelman with SalesForce.

Good morning, gentlemen. How are you?

Good morning, Randi.

I wanted to ask you a question. You had said something that you wanted to be the technology leader for your customers, to create a greater impact on the margins. I just wanted you to expand a little but on that and understand what areas of the business need the most technological updates and how you plan on making those changes.

I would -- this is Jon Schlemmer. I would say that it is really across the board. We have had an innovation initiative in place for a number of years now and have been very focused on continuing to innovate our products and bring our customers product solutions to help them solve their problems. We have had a strong emphasis in our HVAC business for a number of years and we have been consistent on our push to bring that type of technology out to all of our customers, really in every part of the company.

Wonderful. Thanks, guys.

Thank you, Randi.

(Operator Instructions.)

Our next question comes from Mark Douglass from Longbow Research.

Just quickly, Chuck, on the tax rate. You said 25% for fourth quarter? And some of that is due to a China facility getting some tax breaks.

Is that going to roll through into 2015 such that we should think about 25% being a more normalized tax rate, or should we consider using 27%, roughly for what you had in 2014?

Mark, I would recommend for the time being using 27% and we will provide some additional guidance at our investor day. The 25% in the fourth quarter is kind of a catch-up given the approval of the high tech status of one of our China plants. So it will be embedded into our guidance for next year.

Okay. Helpful. Thank you.

Thanks, Mark.

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

Thank you. Chuck mentioned that we're going to have an Investor Day on December 9th in New York City. We hope to see you all there. As always, thank you for your engagement and interest in Regal. Have a great day.

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