Regal Rexnord Corp (RRX) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to John Perino. Please go ahead.

Good morning, Kate, and thank you. Welcome to the Regal Beloit fourth quarter 2014 earnings conference call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, Vice President and CFO.

Before turning the call over to Mark, I'd like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied 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.

We mentioned that we're presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures for providing you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management. Please read this slide for information regarding these non-GAAP financial measures; and please see the appendix, where you can find reconciliations of these non-GAAP financial measures to the most comparable measures in accordance with GAAP. Now, I'll turn the call over to Mark.

Thank you, John. Welcome, and thank you for joining our fourth quarter call and thank you for your interest in Regal. We'll follow our normal agenda. I'll make a few opening comments, Chuck will give a financial update, Jon will give color on markets and operations, and then I'll come back to summarize and move to Q&A.

Recent changes in the global environment led us to further reduce our exposure in the deteriorating Venezuelan economy, clouding what was otherwise a quarter of performance in line with our expectations. Our fourth quarter adjusted EPS of $0.82 included an $0.11 benefit from inventory accounting and a $0.22 charge to our receivables balance in Venezuela. On Venezuela, the decline in oil prices created a slowdown in demand and customer payments, as well. Accordingly, we took the appropriate actions to reduce our exposure in Venezuela.

Our revenues for the quarter were up approximately 7% year-over-year. Adjusting for acquisitions and FX, our organic growth was the strongest quarter of the year, at 3%. Sales in our legacy Power Transmission Solution business were up approximately 13%. Revenues in our Commercial and Industrial Systems segment were up approximately 5%, driven by acquisitions. We had strong organic growth in North American C&I Motors, offset by weakness in drives and controls sold into the oil and gas market. And finally, sales in our Climate Solutions segment were up approximately 9%, representing the fifth consecutive quarter of year-over-year growth in that segment.

On operating profit margin, our adjusted op profit margins were down from our guidance, primarily related to the Venezuelan AR charge. Excluding that issue, we were slightly ahead of our expectations for the quarter and we are on track to deliver the margin improvement targets that we shared with you in December.

It was another strong quarter for free cash flow, making our total year free cash flow 120% of adjusted net income. 2014 was the fourth year in a row of reaching our goal of free cash flow to adjusted net income of greater than 100%.

As reported in our press release, Regal took a non-cash impairment charge in the fourth quarter, primarily related to businesses with exposure to either oil and gas, Venezuela, or commodities. Chuck will discuss this topic in greater detail in a moment.

On January 30, we closed on the purchase of Emerson's Power Transmission Solutions business. In the first days of ownership, we conducted day one celebrations at 25 PTS locations in 13 countries. Over 1,000 internal and external facility signs were changed over to Regal by day one, and virtually all the employees worldwide welcomed the visiting Regal leadership by wearing their new Regal polo shirts. There was certainly an excitement in the air.

Week two with PTS started last week in Beloit, Wisconsin, with the top 18 PTS leaders joining Regal leadership for three days of formal integration. This event is a critical part of our integration process and helps us accelerate the integration. Coming out of that meeting, I could speak for everyone and tell you we are off to a great start.

Our goals for a flawless integration are as follows. Number one, deliver on the financial pro forma, including the synergies. Number two, ensure we have no customer interruptions. On customers, the PTS employees were pleased to see the focus that Regal places on customer care. And then number three, maximize the integration and utilization of the strong talent that came with the acquisition.

At the time of the PTS announcement, we described the transaction as transformational to Regal. With what we have seen so far, it's that and more. With PTS, we get diversification in end markets, channels, and geographies. We get strong brands with complementary products that will allow us to be a more complete solutions provider to our customers. And we get an outstanding leadership team that will help Regal transform itself again.

Our combined $900 million PTS business will be reporting to Tony Pajk, a 21-year Emerson veteran. Tony and I will be working together to integrate PTS and Regal, allowing Jon Schlemmer to focus on our legacy business. As you can tell, we are excited what we see from the PTS acquisition.

Speaking of acquisition acquisitions, as we think about capital allocation, recall this slide from our Investor Day. At this point, our bias is to use the cash we are generating to strengthen our balance sheet. While we don't control the timing of potential deals and while we will continue to be opportunistic on share repurchases, our near-term bias will be to pay down the debt.

Looking forward, as you may recall, we have shifted from providing quarterly guidance to annual guidance, in order to provide investors a longer term view. As we kick off 2015, we have two key objectives. The first is to deliver on the margin improvement plan we laid out on Investor Day. And I'll add, we are on track. And the second is to execute on the integration of PTS.

Considering the markets in which we participate, in the near term conditions in North America remain robust. As expected, the strong pre-build demand in residential HVAC that we experienced in the third and fourth quarters of last year has created an air pocket this year and would create tough comparisons for us in that segment throughout this year. The recent decline in oil prices will create a headwind for the year. Of Regal's total sales, 7% is sold directly into oil and gas end markets, of which two-thirds of those sales are used in upstream application.

With regards to FX, with over one third of our revenues outside the US, we anticipate the currency to be a challenge to both revenues and earnings for the year. Even with these headwinds, our 2015 guidance will represent a 25% to 35% year-over-year adjusted EPS increase. And now I will turn it over to Chuck.

Thank you, Mark, and good morning, everyone. Sales in the fourth quarter of 2014 were $776 million, an increase of 7% from the prior year. The organic sales growth was a favorable 3%, after adjusting for the impact of sales from acquisitions and divestitures and a foreign currency translation decline of 1%. Our adjusted operating profit margin in the fourth quarter was 7.8%, relatively flat to the prior year.

There were two unusual items in the quarter that merit explanation. The first is a $0.22 per share charge to reduce the carrying value of our accounts receivable in Venezuela by approximately 50%. Although we recently received some payments, payments have slowed; and, combined with the recent decline in oil prices, we thought it prudent to reduce our accounts receivable carrying value.

In addition, we recorded a net benefit of $0.11 per share, primarily from a LIFO benefit in the fourth quarter resulting from the decline in copper prices late in the quarter. The LIFO benefit was partially offset by year-end inventory reserve adjustments.

While these unusual items do not qualify under our definition of non-GAAP adjustments, they are significant enough to be called out to better describe our fourth quarter 2014 operating results. These two items were not included in our fourth quarter earnings guidance. Excluding these two items, our adjusted EPS of $0.82 per share would have been $0.93 per share, within our guidance for the fourth quarter.

Let me walk through the adjustments from our GAAP EPS of $0.66 per share to the adjusted EPS of $0.82 per share, and I will comment on four of the larger adjustments. The first adjustment was a non-cash goodwill and long-lived asset impairment charge of $146 million, or a $2.50 earnings per share loss. The impairment was the result of the annual impairment analysis conducted during the fourth quarter of 2014. The impairment was primarily related to businesses with exposure to either oil and gas, Venezuela, or commodities.

At year end, we recorded the non-cash devaluation on our Venezuelan operations. Although the Venezuelan government had not officially devalued the bolivar at year end, we concluded it appropriate to recognize the impact of a devaluation to the SICAD II rate of 51 at the end of 2014. This resulted in a $0.15 per share expense in the fourth quarter. We are actively managing our business risk exposure in Venezuela and executing a strategy to maintain or reduce our currency and AR credit exposure.

Also, we recognized a gain on the disposal of real estate. In the quarter, we recorded a gain of $0.20 per share on the sale of property and assets in connection with the relocation to our new factory in Wuxi, China.

Finally, there is a $0.09 per share adjustment for the full write-off of accounts receivable and inventory associated with the December 2014 bankruptcy filing of the buyer of our pool and spa motor business. As you will recall, the 2011 divestiture of this business was done pursuant to a court order. This limited our ability to manage our relationship in a typical commercial manner. The adjusted EPS for the fourth quarter 2014 was $0.82 per share.

Now I will summarize some key financial metrics for the fourth quarter of 2014. Our capital expenditures in the quarter were $23 million and $84 million for the full year 2014. Our effective tax rate in the fourth quarter was an 0.8% tax benefit. The ETR was impacted by the goodwill impairment, which is not tax deductible.

In the lower left quadrant, we provide data on our year-end balance sheet. Our total debt was $634 million and our net debt was $300 million. Our credit metrics continue to improve, as our debt to adjusted EBITDA was 1.5 times and our net debt to adjusted EBITDA was 0.7 times at the year end.

In the first quarter of 2015, we closed on the new financing, which added the $1.25 billion term loan to our capital structure to acquire PTS. Our near-term focus will be to generate free cash flow to reduce our debt, as we have successfully and consistently done in the past following a large acquisition.

In the lower right quadrant, we present information on our free cash flow in 2014. We generated $215 million of free cash flow, or 120% of adjusted net income in 2014. This marks the fourth year in a row that we have generated free cash flow greater than 100% of adjusted net income.

Our 2015 guidance includes PTS starting in February, 2015. Our full-year 2015 guidance is for GAAP EPS of $4.91 to $5.31 per share. On an adjusted EPS basis, after adding back the estimated $0.21 per share of restructuring charges and $0.33 per share of inventory purchase accounting adjustments and closing costs for PTS, our full-year 2015 guidance is $5.45 to $5.85 per share.

Some of the key assumptions in our 2015 guidance include we are expecting an effective tax rate to be 26% in 2015. This includes the tax synergies from the PTS acquisition. Our capital expenditures are estimated to be $105 million in 2015. Again, this includes the capital expenditures of PTS.

Specific to PTS, there are two other assumptions I would like to mention. The first relates to our assumption on the 2015 interest expense on the PTS acquisition financing. As I shared with you in December, the PTS acquisition was funded in the bank term loan market at an attractive interest rate of approximately 2.5%. If we decide to refinance a portion of this term loan in the long-term market, our interest rate and interest expense would increase from our current assumption. Of course, the impact of the interest expense will be determined by the market interest rates at that time.

The second assumption regarding PTS relates to the intangible amortization expense. This is still a preliminary estimate until we complete our acquisition purchase accounting valuation later this quarter.

In summary, our guidance for 2015 adjusted EPS is an increase of approximately 25% to 35% over our 2014 results. Now I will turn the call over to Jon Schlemmer.

Thanks, Chuck. As Mark shared, the PTS integration is well underway and we have some great talent joining our team. It's important to note that the integration activity will be largely between PTS and Regal's legacy PT business. The rest of the company will be focused on improving the performance of our C&I Systems and Climate Solutions segments.

I'll start today with an update on the margin improvement plans we detailed in December. You will recall this chart on the left from our meeting in December, where we communicated our three-year operating profit margin expectations and our plans to achieve these improvements. Our target of 11% to 12% adjusted operating margin by 2017 in our legacy business has not changed, and our 2015 annual guidance reflects progress towards this goal.

Our teams continue to make progress on our footprint simplification efforts. During the second half of 2014, we rationalized a number of production facilities in the US, Mexico, Germany, and Australia. By the end of February, we will have completed the production move from our Springfield, Missouri operation to our facilities in Reynoso, Mexico and McAllen, Texas. The benefits of these moves are beginning to show in our performance to our customers and in the performance of these businesses.

At the same time, we are in the midst of restructuring our Kentucky-based motor parts making operations and shifting those operations closer to our assembly facilities in Mexico. We're making those moves to reduce lead times to our customers and to improve our cost position. The transition is well underway and we are on target to complete this move in the second half of this year.

In addition to the Kentucky operations, our teams are actively working to consolidate and close three other smaller manufacturing facilities. These three are all operations in our C&I Systems segment and are aimed at improving margin performance.

On the design side of simplification, you will recall that we completed three of five targeted platform simplification programs in 2014. We expect the fourth program to be completed by mid-year this year, and the fifth and final program is still on track to be completed in 2016.

Our full-year guidance includes approximately $15 million of restructuring expenses to complete these simplification programs in 2015. This is similar to our 2014 restructuring expense, and we would expect the $15 million to be distributed fairly evenly across each quarter.

I continue to feel very positive about the progress on our simplification efforts and our three-year margin improvement goal. When we announced the acquisition of PTS in December, we commented that our three-year margin improvement goal did not include the improvement we would realize from blending in the higher margin PTS business. When you factor in the addition of PTS and the synergies we will realize from the integration efforts, our 2017 operating margin target will further increase.

I want to transition now and talk about end markets and customer demand in each of the segments. Let's start with Power Transmission Solutions. Our legacy PTS businesses had an excellent quarter, with sales up approximately 13%. Strong demand came from a variety of end markets, including energy, transport refrigeration, marine, and rail maintenance. However, as we exited the year, we experienced a softening in orders in our products used in upstream oil and gas applications.

As we look forward, oil and gas and currency will be headwinds for our PTS segment. However, we expect to offset these challenges with strength in a variety of our North America end markets; and we continue to remain optimistic about the integration synergies as we bring the legacy Regal PT business together with the newly acquired PTS business.

Sales in our Commercial and Industrial Systems segment increased approximately 5% in the quarter. We experienced mid-single digit growth in the North American motors business, offset by weakness in oil and gas and softer demand in Europe and Asia-Pacific. The growth in motors came from a number of general industrial end markets, commercial HVAC and distribution.

As we look forward to 2015, we are seeing near-term order strength in most of our North American businesses, but we do expect continued headwinds coming from oil and gas and currency translation. For the businesses with exposure to oil and gas, we are taking appropriate actions to right size our operations for the current market conditions. While this segment does have the most exposure to the headwinds of oil and gas and currency, I'm very encouraged that we've turned the corner in North America C&I Motors, where we posted solid growth in the fourth quarter and we started the year with fairly robust orders.

Sales in our Climate Solutions segment increased approximately 9% in the quarter. The strength was driven by double-digit sales growth in our North America, India and Middle East businesses. We experienced strength in North America in both residential HVAC and water heaters. The growth in residential HVAC benefited from the SEER 13 pre-build, overall market strength, and improved high efficiency product mix.

The impact of the SEER 13 pre-build was pretty much in line with our expectations. Even if you exclude the impact of the pre-build, the Climate Solutions segment grew 5% on a year-over-year basis. This is the fifth consecutive quarter of year-over-year growth for our Climate Solutions segment.

Looking forward to 2015, we've experienced a relatively strong start to the quarter and we forecast the North America HVAC market to be up mid single-digit growth this year. We expect to see positive impact from high efficiency product mix that's a result of the energy efficiency legislation, as well as our efforts on new products. And we also expect the strength in India and the Middle East HVAC markets to continue in 2015.

Offsetting these gains will be the year-over-year impact of the SEER 13 pre-build, the impact of two-way material price formulas due to lower commodity prices, and some from foreign currency translation. The SEER 13 pre-build will have a doubling effect on our 2015 sales performance. The impact will show up across the entire year in our comps, because the product we shipped in the latter half of last year will create an air pocket, primarily in the first half of this year.

The good news is that the higher efficiency end market requirements are a long-term help to our business and we are positioned well to help our customers meet these requirements. I'll now turn it back over to Mark. Thank you.

Thanks, Jon. So let me summarize. Sales were up 7% for the quarter, with growth in all three reporting segments. Setting aside the unusual items that affected us in the fourth quarter, operations performed in line with our expectations and operating margins would have been slightly ahead of our expectations. And free cash flow exceeded net income for the quarter. The PTS integration is now underway and we are very pleased with all that we see.

For 2015, we are on track with our margin improvement targets. Our full-year guidance reflects a 25% to 35% increase in adjusted EPS on a year-over-year basis. On capital allocation, our overall strategy has not changed and our near-term bias will be to pay down debt. We will now take your questions.

(Operator Instructions)

The first question comes from Josh Pokrzywinski of Buckingham Research. Please go ahead.

Good morning, guys.

Good morning, Josh.

Just to start off, maybe a few clarification questions on guidance. You talked about the operating margin improvement. And I get that you're still sticking to the legacy plans that you rolled out in December. Is there a way to calibrate how that should look with the new segmentation, or maybe what the discrete cost savings, like if you had a bucket of X million that should flow through this year, just some way we can help get those in the bottles, knowing that it's a little bit more apples and oranges these days?

In December, I think we talked about a linear impact on the year of our targets. We laid out the three-year targets, and we said our best estimate was that it would be, the effect would be linear across all three years, in terms of the impact. So we didn't -- we haven't laid it out by segment or anything like that at this point. But we would expect improvements in all three segments. Obviously, the closure of our Springfield facility impacts our HVAC business, and that will start to show up first.

Got you. I guess on the HVAC topic, are you able to get your arms around what that air pocket may look like, now that you've had a chance to see orders and revenues come in through the first part of the first quarter?

Well, you know, the good news is that the market is still -- the overall market, our customers are talking about mid-single digit growth rates. And that appears to us what's happening, the market continues to grow. Our expectation is that the pre-build that impacted our Q3 and Q4 will come out in Q1 and Q2. My guess is that it will be an offset. The pre-build benefit will offset the market growth for the year. And it's a double impact, as you know.

Right, right. So we should think about if the market's up mid-singles, you guys are roughly flat on an annual basis.

I think that's a good way to think about it.

I would add, Josh, it's probably two factors that are offsetting. As I mentioned earlier, it's primarily the air pocket from SEER 13 and then also somewhat from foreign currency translation.

And I guess the material price point, as well.

That's a good point. There's really those three factors. This business has -- I think we've typically said about 30% of our revenue is with customers where we have two-way material price formulas that adjust with commodities up and down, as commodities change. And given the current lower copper price, we expect that to be a little bit of a headwind, as well, on revenues, especially in the Climate segment in 2015.

Got you. Will we see that in any of the other segments? Obviously, it's an OE-centric comment, so I would imagine mostly Climate.

Primarily Climate. There's some impact in the C&I systems, as well. And that's the two segments that would be impacted.

Just one last one, since I don't think it was called out. Still the same accretion expectation for PTS here at $0.40 to $0.60 GAAP for 2015?

Josh, as we look at it currently, I think it would be more on the lower end of that guidance range, given the impact of FX currency and some slowdown in the oil and gas end market.

Got you. Okay. Thanks, guys.

Thanks, Josh.

Our next question comes from Mike Halloran of Robert Baird. Please go ahead.

Good morning, guys.

Good morning, Mike.

Good to see the rebound on the North America motors piece. What do you think drove that? Was it distribution, any change on the distribution side? What were you seeing from the customers? Any specific end markets there that you would point to?

Mike, this is Jon. I'd say that, one, the good news is it was fairly broad based. There were a number of, I'd just call them, general industrial markets where we saw strength, markets like air compressors, gate openers, general industrial products. We also had a pretty good quarter for commercial HVAC, the larger motors used in HVAC systems, as well as some of that hermetic-related product.

And distribution also was slightly up in the quarter. And I think we had talked about distribution had been flat to slightly down in a couple of the quarters preceding the fourth quarter. So all those areas helped. Pump overall was relatively flat, so not a help or a hurt to the quarter. And then irrigation continued to be a challenge. It's not a huge part of the segment, but it continued to be a challenge. And we had expected that.

That makes sense. And then lots of puts and takes going through the year here. You're onboarding PTS and you're going to have some different seasonality curves on your HVAC piece because of the pre-buy. Maybe you could just help balance that, how you expect the cadence of earnings to flow through the year for you guys and what some of the puts and takes are there.

Well, Mike, this is Chuck. I think we tried to give you some information at the Investor Day on December 9 on the seasonality of the business. We don't see that changing with the addition of PTS. It would be difficult to try to estimate what the FX impact will be on a year-over-year basis through those quarters.

Mike, I could add something in terms of how you think about maybe the pre-build on seasonality. If you look at the fourth quarter, the pre-build impacted the Climate segment by about 4%, 4% of the 9% we would say came from the pre-build. If you look at that on an overall Company basis, it's slightly over 1%. So we had 3% organic growth, slightly over 1% related to the pre-build. As Mark said, we would expect about the same amount then to come out, primarily in the first half, first and second quarter. Second quarter, obviously is stronger than what we see in the fourth quarter.

So I don't think we'll have a real large impact on overall revenues from the pre-build, given the normal seasonality of the business. It will be there in a similar dollar amount, but percentage-wise, I would say even probably slightly less, certainly in the second quarter.

No, that makes sense. I was just trying to right size for any of the changes. Because if you look across the industrial landscape, first quarter, in particular for folks, is being guided lower, I think, than people's expectations, in part because you've got more puts and takes, and the FX on a year-over-year basis is a bigger impact for most in the first quarter, I suspect for you guys, as well. And just wanted to make sure there wasn't any significant deviations from the normal seasonality for you guys. All right. Appreciate it.

Thanks, Mike.

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

Hello. Thank you.

Good morning, Julian.

Good morning. Just a question on the Commercial and Industrial Systems organic growth outlook. Because I guess organically, your sales were flattish in Q4 in that segment. From here, probably oil and gas gets worse. So how confident are you that you can see some kind of organic growth in 2015 for the year as a whole in Commercial and Industrial?

Well, we're not trying to provide guidance on the year in total in any one segment -- revenue guidance on the year in any one segment. I can give you a little bit of color, though, Julian, on what we were seeing geographically, because that business is certainly the most global in the country and in the Company. As we came out of the quarter, North America was strong in Q4; and as we start off the year, North America continues to be strong.

China was tough in Q4, difficult. And interestingly enough, as we started off the year, it got a little bit better. We're not sure yet if that's sustainable. India was good for us in Q4 and it's starting off good for us, primarily in the HVAC space. And then Europe was also difficult in Q4 and appears to be difficult as we move into Q1. So at least that gives you a little bit of view how to think about it geographically.

Thank you. And then you talked a bit about the revenue impact from raw material price cost and so forth. How do you think about the impact of price cost on your margins this year, whether that's in the Climate Solutions business or Regal overall?

Well, there's a couple things to think about. First of all, when it comes to the Climate Solutions business, we have two-way material price formulas, as Jon mentioned earlier. So as the copper prices go down on the spot market, our pricing goes down. As the copper prices go up, our pricing goes up. So that would clearly be a wash. Relative to the rest of the business, as you know, we hedge for certainty when it comes to copper, and we hedge out five quarters and we've been quite consistent about that strategy over time. So we won't see a big, significant benefit from the sudden drop in copper prices. However, there will be a benefit over time that we would expect to see with the rest of our customer base that will help improve as we head to the back part of the year.

Thanks. And lastly, just very quickly, there was some mention at the December Analyst Day around $150 million worth of sales that may be divested. Any updates on that?

You're right. We did comment that, $150 million over a three-year period. As you know, we divested a joint venture business that was based in China in the third quarter. Other than that, there's nothing else to communicate at this time.

Great. Thank you.

Thank you, Julian.

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

Good morning.

Good morning, Scott.

I had a couple of questions for you guys. One was really more for Jon. What would you say, if we add back the items that get us to $0.93 a share, let's call it $0.93, you had some decent margin expansion. And I was just wondering, Jon, if you could tell us what was more due to volume versus simplification? Because it looks like sales were organically were up [$0.03], which is fine. There was no pricing, I assume, in there -- or I don't know if there was a mix benefit. But give us an idea of what the simplification impact was in the quarter.

Okay. Sure, Scott. So let me focus on Climate. Clearly, Climate was the segment where we had the more significant improvement in margins in the fourth quarter on a year-over-year basis. And I would say there were three factors and all equally weighted in the margin improvement. So the overall volume strength. Se had more volume strength in Climate certainly than in the C&I segment.

And then the second factor was the inventory adjustments. We did see a benefit, primarily from the LIFO inventory adjustments. And then third, the simplification initiative. And when you look at the margin improvement in Climate in particular, I would weight all three of those fairly equally in terms of their impact on overall margin improvement.

That's great. I think the next question I wanted to ask you was about the C&I sales improvement. As we look at that number, it's a fairly -- I'm sorry, I apologize -- the Power Transmission sales improvement. It was a pretty robust number for Regal, the legacy business. Are you seeing that type of improvement taking place on the Emerson side, as well, as that joins the fold?

I would say -- I'll give you my view on that. And Mark may want to add a couple things, Scott. If you look at our sales improvement in Power Transmission in the legacy business in the fourth quarter, it was driven by two factors. First is we had been experiencing, up until the latter -- up until in the fourth quarter, we had been experiencing, in the second and third quarter, an improvement in orders around the energy end market.

And that was benefiting businesses like Milwaukee Gear, for example, and where we had some pretty easy comps because of the tough year we had in 2013. That was improving, and we also benefited from the backlog we were building up in the fourth quarter related to those earlier order strength. That's probably the largest factor impacting the legacy PTS business.

We also had some good, I'd say, general strength in the North America markets for PT-related products, as well, in that legacy Regal PT business. So it's both of those factors. What's happening right now with oil prices and how that's impacting our current orders, that's obviously a change impacting PTS. North America, we still feel good about the end markets in North America. So I would say when you look at the newly acquired PTS business, it's going to be more like the commentary I would give on North America, not the energy side of it. And then there's a little bit more exposure in the acquired business in Europe with the currency translation.

Okay. So you're saying PTS impacted by oil and gas, or not? Maybe I misunderstood.

So the newly acquired PTS business has a similar exposure to the rest of the Company. So roughly 7.5% of their sales are related to oil and gas markets with, in their case, probably half of it upstream, half of it downstream and midstream.

Okay. So you're saying outside of that, North America was pretty positive, you think?

Yes.

Okay. Last question -- and Mark, this one's for you. If the pre-buy affected you -- and it obviously affected others, and I know the data that you get is typically from your OE customers on the industry forecast -- the pre-buy affected them, as well. So if the industry is expecting up mid-single, why wouldn't that be net of the impact of the pre-buy? Why wouldn't that be a B number?

The product we sold our customers didn't necessarily get sold through to their customers. A lot of it went into inventory. That's our view. A lot of their product went into inventory. And then for the part of it that they did ship, it will be inventory in the channel. So I don't think we really know for sure how much of the product we ship ends in our customers' inventory versus what is in their customers' inventory. But it was clearly a pre-build relative to the components that were purchased to make the equipment. They had to make the equipment before year end. So that has to come out. And so I believe it will come out in the first quarter, but some of that will be offset by market growth.

I guess I'm with you. It's just that I'm looking at the size of the industry's turnover in the HVAC season versus the size of the HVAC market in the fourth quarter of any given year. It would seem to me as if that inventory overhang that you're alluding to should be chewed through fairly quickly, if it's a decent HVAC year, which I think most people believe it would be. I guess I'm just struggling a little bit with saying mid-single digit, and then there's that offset. It seems to me that, that inventory overhang would be chewed through. Does that seem right, or am I wrong?

I understand your point. We should probably go over it together. I don't think we'd look at it that way. I think our view is that it will be an offset for the year.

Okay. That's fine. Thank you. That's all I had.

Thanks, Scott.

The next question is from Liam Burke with Wunderlich. Please go ahead.

Thank you. Good morning, Mark.

Good morning, Liam.

Mark, could you give us a sense, you talked about the Emerson Power business giving a lift to the traditional power transmission business of Regal. But do you see any revenue benefit across businesses, like at C&I, with the addition of the Emerson Power Transmission?

We do. We are actually -- in our synergy estimates, we do have some portion of the synergy related to cross-selling benefits, and that would be where we could assist, use the legacy Regal team to assist in selling PTS products and then likewise have the newly acquired PTS selling team sell some of our electric motor products. And then sometimes sell them together as one system or one service. So we do see a benefit in that, and we have included that in our synergy estimates.

Now that you've brought it in-house, do you anticipate this thing rolling out as you'd expected, or is it going to take longer or less time?

We are pretty upbeat about what we've seen so far. The energy from the PTS team is very positive and we're moving ahead rather quickly. As I mentioned earlier, we had an excellent session last week with their leadership team and we all came out of that quite energized. So right now, it feels like it's what we have been saying all along.

Okay. And obviously, the oil and gas market is having its bumpy period here. How does it change your outlook for both Hy-Bon and Benshaw, with the weakening of the oil markets?

I would say in both cases -- Hy-Bon more than Benshaw, Hy-Bon is clearly impacted by this. Their product is used in the upstream area. The good news is that their demand has the benefit of being legislated. So there is the Quad O legislation that went into effect a 1.5 years or so ago that requires the end customers to put in the systems to eliminate the vapor emissions from going into the environment.

So it should help. But I think all of our customers' initial reaction was to pull back on everything, and we're certainly seeing some of that impact on the Hy-Bon business. Benshaw certainly had exposure to oil and gas and they're seeing it, as well. Some of their product is also sold into mid- and downstream, so perhaps not as much impact in that particular business as others. Great. Thank you, Mark. Thank you, Liam.

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 for your questions and for your interest in Regal. I'd like to close today with a summary of 2014 and the progress that we made. Regal posted record sales of approximately $3.3 billion, up 5%, with 2% organic growth in 2014. Free cash flow for the year was 120% of net income. We doubled our normal dividend increase, making 2014 the ninth time in the last 10 years that we have raised our dividend. We launched over 50 new products, rationalized six factories, started the process of consolidating six more, simplified three of five design platforms, and reduced four more ERPs.

Our customer survey scores increased again this year, and the feedback we get from customers on quality, delivery and innovation continues to be encouraging. We made two bolt-on acquisitions and announced the transformational acquisition of PTS. PTS will be transformational in both scale and as a result of the new talent that is joining our team. We are taking the actions needed to make the improvements we discussed with investors in December. We have momentum and I am confident we are on the right track.

Our focus for 2015 will be two-fold, to achieve our margin targets and to execute on the PTS integration. These two key efforts drive our 2015 full-year guidance, which represents a 25% to 35% increase in EPS. Have a great day.

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