Regal Rexnord Corp (RRX) 2015 Q4 法說會逐字稿

Good morning and welcome to the Regal Beloit fourth quarter 2015 earnings conference call. All participants will be in listen only mode.

(Operator Instructions)

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

(Operator Instructions)

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

Thank you operator. Good morning and welcome to Regal Beloit's fourth quarter 2015 earnings conference call. Joining me today are Mark Gliebe, Chairman and Chief Executive Officer; Jon Schlemmer, Chief Operating Officer; and Chuck Hinrichs, Vice President and Chief Financial Officer.

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 factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings.

On slide three, we state that we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures to provide 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 for reconciliations of these measures to the most comparable measures in accordance with GAAP.

Now I will turn the call over to Mark.

Welcome everyone and thank you for joining our fourth quarter call and thank you for your interest in Regal. We will follow our normal agenda. I'll make a few opening comments, Chuck will give you a financial update, Jon will provide color on market operations and the performance of our three segments. After that I'll summarize both the fourth quarter and full year performance and then we'll move to Q&A.

Let's start with the fourth quarter highlights. Despite top line pressures, Regal increased adjusted operating margins to 10.3% in the fourth quarter, representing a 250 basis point improvement over prior year. We'll peel back the onion for you today to illustrate how we obtained such a significant improvement, but no matter how you look at it, this was the fourth quarter in a row with a meaningful increase in our adjusted operating margins.

We increased our adjusted EPS 43% and delivered free cash flow on 169% of adjusted net income and we used the free cash to pay down $77 million of debt in the quarter. As reported in our press release, Regal reported a non-cash impairment charge in the fourth quarter, primarily related to businesses with exposure to either China or oil and gas.

Additionally, due to the continuing economic instability in Venezuela, we recorded a $12.8 million charge, related to the wind down of our operations in that country. We expect no future charges related to Venezuela.

While overall sales for the quarter were essentially flat, year-over-year, acquisitions increased sales $127 million. And currency was a $21 million drag in the quarter, or 2.7% of sales. Organic sales were down 14%, or $109 million, of which roughly half resulted from five fewer shipping days. The five fewer shipping days impacted all three of our operating segments.

In addition to the shipping days, the headwinds in declining oil and gas markets and weaker sales in China weighed heavily on our top line. In the Commercial and Industrial Systems Segment, organic sales were down 14%. The decline was driven by the five fewer shipping days, a steep reduction in oil and gas orders, and weak demand in China. Even with the lower sales in the quarter, our C&I Systems' adjusted operating margins improved 480 basis points on a year-over-year basis to 9.5%.

In the Climate Solutions Segment, organic sales were down 16.5%, driven by the fewer shipping days, the impact of the SEER 13 pre-build, the impact of two-way material price formulas, and weaker sales as a result of a warmer winter. Again, even with the top line challenges, our adjusted operating margin improved 130 basis points for the quarter.

In the Power Transmission Solutions Segment, our recently acquired PTS business contributed $128 million of sales growth in this segment. Organic sales in our legacy business were off 5.1%, with strong headwinds in oil and gas partially offset by increased demand in the renewable energy space.

Speaking of PTS, the integration of the business into Regal is essentially complete. We successfully consolidated our Canadian offices and warehouses during the quarter. While we still have to integrate our ERP systems, the two systems are on a common platform. We plan to make this final ERP transition in early July of 2016.

On synergies, we delivered approximately $12 million in synergies for the year against our $7 million goal. We now expect to achieve the $30 million synergy target that we set back in January 2015, over a three-year period instead of a four-year period.

As we look forward to 2016, we do not see any major catalyst that will improve our end markets. We do however expect that the year-over-year comparisons will improve as we head into the second half of 2016. With these tougher markets as a backdrop, our management focus for 2016 will be threefold.

First, to continued to drive operating margin improvements across the company, second to gross sales even in the face of difficult end markets, and third, to improve our working capital management to generate more cash to pay down debt. Our simplification initiative was a well-timed investment that paid off in 2015 and positions us well to perform in spite of difficult market conditions ahead.

I will now turn it over to Chuck.

Thank you, Mark, and good morning everyone. Sales in the fourth quarter 2015 were $773.5 million, essentially flat from the prior year. We had net acquisition growth of 16.4%. Foreign currency translation in the quarter was a negative 2.7%.

Organic sales declined 14% from the prior year, approximately half of which is a result of five fewer shipping days in the fourth quarter as compared to the prior year. Let me take a minute and explain the fewer shipping days. This is a result of our fiscal calendar, which is based on a 52 or 53-week year.

2014 was a 53-week year. 2015 was the normal 52-week year, and therefore had five less shipping days in the fourth quarter. So we estimated the impact of the year-over-year comparison. As we did last year, we included a schedule of our shipping days per quarter in the appendix of this presentation.

Our adjusted operating profit margin in the fourth quarter was 10.3%, an improvement of 250 basis points from the prior year. The improvement came from the benefits of the simplification initiative, process improvements and cost controls, and lower material costs that contributed to an incremental $4 million LIFO benefit compared to the prior year. Also, last year's results included a $10 million accounts receivable reserve expense. The improvement in our adjusted operating profit margin in the quarter was the fourth consecutive quarter of year over year improvement.

Our fourth quarter 2015 GAAP loss per share was $0.43 per share. There were four adjustments to EPS in the fourth quarter. The goodwill impairment was $58 million, net of tax, or $1.30 per share. The impairment expense related to businesses that operate in China and in the oil and gas and market.

The next adjustment is a write off of our net assets in our Venezuela operations of $12.8 million, or $0.29 per share. This resulted from our decision to wind down our operations in Venezuela due to the difficult economic conditions in that country. We do not expect any future charges on our Venezuelan operations.

The third adjustment was for restructuring charges in the quarter of $2.7 million, or $0.06 per share, relating to our simplification initiative activities during the period. These charges were the final closing costs at our two Kentucky plants and our C&I Systems Segment, and restructuring activities at our Italian plant in the Climate Solutions Segment.

The final adjustment reflects the $2.1 million after-tax gain, or $0.05 per share, on the sale of our Springfield, Missouri property in the Climate Solutions Segment. Our adjusted earnings per share were $1.17 for the quarter, an increase of $0.35 per share or 43% over the prior year.

Now I will summarize some key financial metrics for the fourth quarter 2015. Our capital expenditures in the fourth quarter were $26.8 million, and $92.2 million for the full year 2015, consistent with our earlier estimates. We are forecasting 2016 capital expenditures of $85 million. In the upper right quadrant, we show our effective tax rate information.

The ETR in the fourth quarter is not meaningful due to the pretax laws caused by the goodwill impairment. For the full year 2015, our ETR was 24.6%. Our ETR forecast for 2016 is 25%, which is included in our 2016 guidance.

In the lower left quadrant, we provide data on our year-end 2015 balance sheet. Our total debt was $1,722,000,000 and our net debt was $1,469,000,000. In the fourth quarter, we reduced our total debt by $77 million. Since closing on the PTS acquisition in January 2015, we have reduced our total debt by $213 million.

In the lower right quadrant, we present information on our free cash flow. We generated $87 million of free cash flow in the fourth quarter. Free cash flow represented 169% of adjusted net income for the quarter. For the full year, we generated $289 million of free cash flow, or 135% of adjusted net income.

Speaking of free cash flow, Regal has a history of generating strong free cash flow, consistently above 100% of adjusted net income. In each of the past five years, Regal posted strong free cash flow, which was used to execute our capital allocation strategy. Our near-term goal is to focus our free cash flow on debt reduction.

As our balance sheet is strengthened, we will consider strategic acquisitions, and the return of cash to our shareholders in the form of increased dividends and share repurchases. Our 2016 focus on improving our working capital management will generate additional free cash flow to supplement this strategy.

Now I will review our full-year 2016 earnings guidance. As Mark mentioned, our outlook for 2016 assumes the continuation of weak demand from our end markets. This will pressure our year-over-year sales comparisons, especially in the first half of 2016.

The effect of FX translation will continue to be a headwind on our 2016 sales. We estimate the negative impact of FX to be 1% to 2% headwind in 2016. However, we had momentum from our progress in 2015 in improving our adjusted operating profit margins, which will carry into 2016.

Regarding our refinancing plans, the current bond market conditions are not as favorable as they were in 2015. Given the weaker bond market conditions, it is unlikely that we will refinance in the near term. As a result, our 2016 guidance does not include any incremental interest expense from refinancing.

Restructuring programs in 2016 are expected to result in $10 million of restructuring charges. Our full-year 2016 GAAP earnings per share is $4.66 to $5.06. Our full-year 2016 adjusted earnings per share guidance is $4.80 to $5.20, which adds back $10 million or $0.14 per share of estimated restructuring charges.

Now I will turn the call over to Jon Schlemmer.

Thanks, Chuck, and good morning everyone. Before I discuss segment performance, I'd like to start by giving an update on our margin improvement progress and the benefits coming from simplification.

We had another quarter with significant progress on our margin improvement goals. In spite of the currency drag and a weaker top line, our adjusted operating profit margin was 10.3%, an increase of 250 basis points for the quarter. That's obviously a significant increase in one quarter and I'd like to, as Mark mentioned, peel back the onion to show you how we got there this quarter.

It starts with the fact that last year in the fourth quarter, we recorded a $10 million bad debt reserve equating to approximately 130 of the 250 basis point improvement. From an operation perspective, we delivered a $9 million adjusted operating margin improvement, driven by a LIFO benefit, our simplification initiative, process improvements, and tight cost controls.

Combined, the $9 million improvement from operations represented 120 of the 250 basis point improvement. This was the fourth consecutive quarter of year-over-year margin improvement. Looking back, our simplification initiative was a well-timed investment that is clearly paying off. In 2015, we delivered 150 basis points of margin improvement, and we still have more to do.

Given the weakness in our core markets, we have accelerated our restructuring programs. These programs will deliver additional simplification benefits and PTS-related synergies. In fact, within the last 30 days, we announced four additional programs aimed at further simplifying our footprint.

The first is the closure of our foundry in Wausau, Wisconsin. We already outsource the majority of our castings, and this will get us out of foundry operations, which is non-core to our long term manufacturing strategy. The next two transitions move a portion of our motor assembly and parts production to existing facilities in Mexico.

The final program begins the transition out of our Italian motor facility to our existing factories in China and Mexico. The pay back on all these transitions is less than two years, and we expect to see benefits in late 2016 and early 2017. We are estimating restructuring expenses in 2016 of roughly $10 million, which includes the four programs just mentioned and others yet to be announced.

On PTS synergies, we exceeded our year one target of $7 million and delivered a $12 million improvement in benefits. We now expect to achieve the total $30 million synergy target over a three-year period instead of four years. We are running ahead of the margin improvement goal we communicated in December 2014, when we described our plans to improve adjusted operating margins by 200 to 300 basis points over a three-year period.

As we look at 2016, we expect benefits of the simplification programs and the PTS synergies to continue to help us achieve our goals. Given the top line pressures, however, we expect the rate of improvement to be slower in 2016. The good news is that we are into a rhythm on the simplification and synergy programs, and we have a track record that demonstrates we can deliver even with difficult market conditions.

Now let's get into the segments, and I'll start with Commercial and Industrial Systems. Sales were $371 million, a decrease of 18% from prior year. Foreign currency negatively impacted sales by approximately $17 million or 3.7% of sales. Organic sales declined by $63 million or 14% of sales.

I'll break down the organic sales, explaining both the headwinds and tailwinds. As you can see, the five fewer days negatively impacted sales by approximately $31 million. The market headwinds in the quarter included the decline in oil and gas, slowing in China, and weakness in a number of the North America end markets and channels, including power generation and distribution.

We experienced strength in a few of the end markets, including data center and pool pump. These two end markets, combined with our growth initiatives, positively impacted sales by approximately $8 million in the quarter. Even with the headwinds on the top line, adjusted operating margin was 9.5% of sales, representing a 480 basis point improvement from prior year. The significant improvement in operating margins can be attributed to a number of factors, including a $10 million prior year accounts receivable reserve, benefits from simplification, lower commodity costs, and LIFO.

A few weeks ago at the AHR Expo in Orlando, we displayed our new SyMAX-i product. This new motor drive system scales up the energy savings benefits of our successful ECM products and makes it available to our customers in the commercial HVAC cooling and refrigeration space. SyMAX-i offers our customers a roughly 20% improvement in energy efficiency above the standard industry offering.

With all the attention today on building and refrigeration efficiency, SyMAX-i will help our customers offer more energy-efficient systems to building owners. We already have a number of customers using this product and tremendous interest from others.

Sales in our Climate Solutions Segment decreased approximately 18% in the quarter. Foreign currency negatively impacted sales by $4 million or 1.5% of sales. And organic sales declined by $42 million or 16.5% of sales.

The chart illustrates the walk from prior year sales. As you can see, fewer shipping days, two-way material price formulas, the SEER 13 pre-build, and warmer winter weather were all key drivers impacting our fourth-quarter sales. As we look across the other end markets in the climate solutions segment, we experienced weakness in gas water heaters, as well as the Asia and Middle East markets.

Even with the top line headwinds, we achieved adjusted operating margin in the Climate Solutions Segment of 13.2% of sales. An increase of 130 basis points from prior year. The key drivers to the significant improvement in operating margins included simplification, incremental year-over-year LIFO benefits, and cost reduction efforts.

At the same AHR Expo in Orlando, we displayed our new DEC Star product. This new product helps moves Regal up the value chain, from supplying just a motor to our customers, to now supplying a complete air delivery solution consisting of a motor, a drive, and a housing.

DEC Star offers our customers a 14% improvement in energy efficiency above our current industry-leading high efficiency offering. This will help our customers meet the more stringent energy regulations that will be required in the years to come. The key to this product, is the placement of the motor inside the housing, where it no longer blocks the airstream. We're already shipping this product to a few customers, and other customers have shown real interest in this new offering.

Sales in our Power Transmission Solutions Segment were $193 million in the quarter. The FX impact from our legacy PTS business was negligible. The impact of five fewer shipping days was approximately $5 million in the quarter. Looking at the end markets and channels across this segment, oil and gas, agricultural equipment, and power transmission distribution were all a drag on the top line, but were partially offset by growth in food and beverage, material handling, and renewable energy.

Margins in the PTS segment declined compared to prior year, driven by volume declines. We expect that synergies from the acquisition begin to help offset some of the impact of the volume decline as we enter 2016.

During the fourth quarter, we relocated our Power Transmission Distribution customer service to Florence, Kentucky. This transition was made in response to our customer survey and was implemented in late November. The feedback from our distribution customers has been overwhelmingly positive and we're confident this move will pay dividends in the years to come.

Thank you, and I will turn it back over to Mark.

Now before we go to Q&A, I would like to do two things. First, summarize our fourth-quarter performance, and second, summarize our total year performance.

For the fourth quarter, sales were essentially flat, with weaker markets offsetting the increase from the PTS acquisition. Even with the weaker core sales, margins improved 250 basis points as compared to prior year. The PTS integration is practically complete, and the associated synergies exceeded our first year target. Our cash flow to adjusted net income was 169%, and we used the free cash to pay down $77 million in debt.

Now let's look at our full-year performance. As you can see from the charts, for the year, Regal's sales, adjusted operating profit, and free cash flow are all up as compared to prior year. We delivered these results because we executed on the two objectives that we communicated to investors at the beginning of 2015. To improve our operating margins and to successfully integrate the PTS business.

Adjusted operating margins improved by 150 basis points from 9.5% to 10.9%, and the integration of PTS has gone very smoothly, in spite of the difficult end markets. Behind this performance was an incredible amount of transformation. We consolidated six more factories in the year, simplified our fourth of five engineering design platforms, exited five more warehouses, and converted five more ERPs. And while all these transitions were going on, we launched 45 more new products, our customer surveys scores improved, and we received five quality and performance awards from some of our largest customers.

As you can tell, Regal is operating at an high-speed pace of change in delivering the improvements. And while many other companies are just now getting their restructuring plans out of the starting gates, Regal is at full stride and seeing the benefits. As a result of the accomplishments listed above, 2015 was a record year in both sales and adjusted earnings for Regal, with adjusted EPS up 24% for the year.

We will now take your questions.

Will now begin the question-and-answer session.

(Operator Instructions).

The first question comes from Mike Halloran of Robert W. Baird. Please go ahead.

Good morning guys.

Good morning Mike.

So let's talk about the outlook from where we stand today. From Jon's commentary, it sounds like you think margins have a chance to be up on a year-over-year basis. Is that embedded in the guidance or am I over thinking Jon's comments?

No, as Jon commented, the benefits of our simplification programs and the PTS synergies, we expect to continue to get them in 2016. The issue is we'll be offsetting some of the pressure from the volume declines, so we don't expect another year of the kind of 150 basis point improvement that we had in 2015, because of the top line pressures. But we do expect a benefit from simplification and synergies.

So just to clarify then, is this a point where the benefits from all the internal work you guys are executing effectively on, do these offset those volume pressures or do they just mitigate the volume pressures?

Well, I mean our goal is to have them offset completely and then try to do better, improve. So that is where our head set is at.

Okay that makes sense and that's helpful. And in the implication then that there's a pretty sizable amount of top line pressure embedded in guidance. So maybe you can talk through what you're seeing in some of these end markets in the next year and specifically, is this another case where you've got kind of similar pressures in the China business, oil and gas business, and those but maybe some more positive trends coming on the climate side? And so maybe you can just talk about some of those dynamics as we're looking at next year? Or this year, actually.

Yes sure. We came out of the quarter, even when you adjust for the shipping days, with organic growth down 7%. We don't see a significant catalyst changing the dynamics of the market as we look forward into 2016.

With oil and gas, we will still be, you know it will have less of an effect on us because it's not as big a percentage of the total company. It will still be a sizable headwind to us and we don't at this point see an end to the weakness in China. So those are clearly the two big headwinds as we head into the year.

You know, on the climate side, I think our headset is from a volume perspective. It'll be low single digits up on a year-over-year basis. Of course, we will have some of the headwinds of material price formula on the revenue side that will hurt us. We are expecting a modest mix benefit through the year as people move over to completely SEER 14 versus SEER 13.

Jon, did I miss anything?

No, I think those are the key points. In climate, we would expect the market growth that you mentioned, Mark, we'll have the headwinds of the lower-price, but the material price performance have been fully implemented as the commodities decline during 2015. That's all built into our guidance.

And then I'd say, the other markets in climate, some of the weakness in China will flow into our Asia business in climate as well. Although that's not a large part of the segment, it will be a headwind and we would expect Middle East to be a headwind as well, compared to the strength we had in 2015.

So the thought process there then is core US growth for your HVAC pieces, likely above that low single-digit volume number with some of the refrigeration and global assets taking it towards a low single-digit number? Is that the thought process?

Well, I want to make sure I understand what you said. From a unit perspective, we are expecting low single-digit growth rates, from a units perspective.

That's in the North America RES-E.

North American RES-E. Okay, so that wasn't volumes for the overall climate?

Right. That's right.

Okay. Great. Appreciate it guys thanks for clarification.

Thanks Mike.

The next question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hey good morning guys. Just to go at the growth rates, can you give us a little better sense of how you're thinking about core revenue declines in PT and C&I. It seems like climate, you're saying flat, but your implied guidance, you know, if you hold margins kind of flat, so those other businesses are down high single-digits?

I think I will point to the fourth quarter. We came out of the fourth quarter with revenues down 7% in each of those segments. They were down in and around that area, and we don't see a change in our order patterns. There might've been a slight burst in the early part of January, that probably hasn't sustained itself, but positive out of the gates.

But as we look forward, we don't see a significant change in order patterns from our customers. We're modeling a tougher environment for our end markets in both PT and C&I.

Okay. Are you able to quantify the incremental savings you think you're going to get from simplification, as well as what you think your incremental synergies are, and can you quantify the LIFO benefit in 4Q?

So I'll touch on the first half and I'll let Chuck take the LIFO comment.

So Jon mentioned we have $10 million in restructuring in our guidance. And Jon also made a comment that we expected two years or better payback on all of those, so we'll start to see the benefits on some of those projects in the fourth quarter of 2016. So that's where the projects that we've already done, I'm sorry, that we've already announced. There may be a few others to come. We'll talk about those in the future.

Certainly there should be some carryover as we come into the year from the projects that got implemented midway through 2015. Chuck, you want to comment on the LIFO?

Jeff, for the fourth quarter, the LIFO benefit on a year-over-year basis was about $4 million, a little ahead of our expectations coming out of the third quarter, but copper and steel continued to decline in the quarter.

Okay. Mark, just back to the simplification and the synergies. Are you able to quantify, like you talked about kind of qualitatively, but what are the buckets in terms of millions of dollars where you think the savings are?

No, I don't have that here in front of me, Jeff. I think the comment I'd make is, just qualitatively that the fact we talked about $10 million in restructuring with paybacks of two years or better, and the fact that, as we go into the year we still do expect benefits coming from simplification offsetting the headwinds from volume decline.

Okay. Thanks.

Thank you.

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

Hey guys, it's Ronnie Weiss on for Julian.

Good morning.

Good morning. I just want to touch kind of on the cadence of the guide for the year. Should we expect kind of similar levels of organic decline from Q4, ex the shipping days and should we see the normal seasonality of the EPS at the 22% or 23% that's kind of been the norm for the last couple of years for Q1 or is it a little less for Q1 and more back half loaded?

Well, Chuck should add in, but I'll give you my view. Because number one, we have in the past provided a quarter by quarter percentage of revenue kind of guidance for you. I would say that you can continue to use that as you think about 2016. So as we come out of the fourth quarter and into the first quarter, sequentially you're not going to have the year over year tough comparison as a result of shipping days. And we should see our normal seasonality in the first quarter of the year.

Okay. Great. And I just want to talk on the acquired PTS business and just how the backlog is there in the orders, if you can give any color there and kind of what you're expecting for that acquired piece for 2016?

Well you know, the PTS business is seeing pressure like most of our peer group in the oil and gas space, weakness in agriculture, and weakness in metals. Those would be the three core areas that are putting pressure.

They are seeing benefit in positive order demand, in food and beverage, and material handling, as well as renewable energies. So right now, the upsides don't outweigh the down sides, which is why we're struggling on the top line in that segment.

Got it. And then just one last one. It sounds like debt pay down is going to be another focus going into 2016, and I'm just wondering if you guys had a target leverage goal that you're hoping to get to in 2016 or any color on the amount of depth that's going to be payed down in 2016?

This is Chuck. I think our goal for 2016 would be $200 million to $250 million, consistent with our performance with some improvement from 2015. So that would take our debt to EBITDA down considerably for the year.

Great. Thank you guys.

Thank you Ron.

The next question comes from Christopher Glynn of Oppenheimer. Please go ahead.

Yes, good morning.

Good morning.

Hey Mark. I had a question really about the nature of change at the margin, or lack thereof. So excluding the five days issue, it seems like trends were generally in keeping with the last couple quarters demand in revenue trends, a minus 7 versus a minus 6, kind of a rounding matter there. Is it fair to say, through the fourth quarter and into 2016 that the trend is generally intact and what it is?

Well, yes, the front part of the year is going to be tougher than the back part of the year, just because of easier comparisons. We carried a backlog, a PTS backlog and a Commercial and Industrial backlog on oil and gas into the first half of 2015. So [comps] will be tougher on the front part of the year than they are on the back part of the year

This is Jon, I would say in terms of order trends, there wasn't a real change favorable or unfavorable as we progressed through the fourth quarter. However, I would say that December was probably lighter than we expected. The warm winter weather and climate was a surprise versus what we expected going into the quarter.

And then as Mark mentioned, we had a little bit of a pickup in January. But haven't really seen that sustain itself as we've entered February here. I'd say similar to what, other than normal seasonality, similar to what we experienced the fourth quarter.

Okay. And then on the $4 million LIFO. I just wanted to clarify, I think that was the incremental amount versus the prior year, but I'm wondering what the gross amount is, because if I'm not mistaken I'm pretty sure that the gross amount is the pertinent number to have, as we think about the comparisons when we model out the 2016 quarters.

Right, Chris, this is Chuck. The gross amount of LIFO for the quarter, or for the year, was about $18 million which would've been like $7 million improvement on a full-year basis over 2014.

Okay and do you have that for the fourth quarter, the $4 million net which was gross out of the [$18 million].

Gross was about $15 million.

Okay, and then this $10 million accounts receivable reserve that helped the comparison. I don't recall that last year. Was that separate from the $10 million reduction in the Venezuela carrying value of accounts receivable?

That was the same thing. So in the fourth quarter last year we increased our reserve on our receivables in Venezuela by $10 million. It was not an adjustment to EPS but a call out.

Okay. Got it. Thanks for the help.

Sure. Thank you.

The next question comes from Walter Liptak of Seaport Global. Please go ahead.

Hi thanks good morning guys.

Hi Walt.

Want to ask about the price cost again, a little kind, just trying to back in to the climate. It looks like the material costs were maybe a 3% price cost, was a 3% revenue headwind. I'm wondering if you could tell me what you think about that number, and also talk about PTS and C&I, and what's embedded in 2016 for price cost impacts on top line and bottom line?

So in terms of the impact on margins for the total company, price cost was moderately beneficial in the fourth quarter. And we would expect some benefit from the price cost equation as we head into 2016.

Okay. Great. And so I guess on pricing in PTS and C&I, are you increasing prices this year? Are you able to maintain pricing on your products?

I would say that overall there hasn't been a significant change in our pricing practices from prior years and so we're holding our own in those two segments.

And one, I just want to clarify that. There is some portion of our commercial and industrial business that also has material price formulas, so aside from that, my comments stand.

Okay. And you called out some of the more energy efficient products selling. I'm wondering if we can get an update on any wins with your variable speed motors, and if you're seeing any improvement in the inventory build for the spring season this year?

So I'll start on that and I'll invite Jon in. So there continue to be more regulations in the space, in electric motors than we think we're positioned well for. We're trying to help our customers meet these tougher regulations that will come into play, some in 2019, and some perhaps even before that.

And so the energy-efficient products, we still believe is a long-term secular trend that will aid us as we move forward. So we're positioning ourselves to take advantage of that. Jon do you want to comment on --

I'll comment on the seasonable build as we head into 2016 cooling season. You know we're probably still about a month away from knowing what's actually going to happen with the normal ramp up that we'd see on the AC side. So it's a little early to tell.

We're expecting that we would have normal dynamics. We feel that the vast majority of the pre-build is behind us now, so that won't have a big impact on how we are tied to the manufacturers from a volume standpoint.

There was some feedback in the channel, that the warmer winter weather in the fourth quarter actually depleted a little bit of AC inventory in some parts of the market. And it's hard for us to know exactly what impact that was but if that did happen that would be a little bit of the benefit. We do expect to see little bit of the benefit as we enter the cooling season because there be a little less inventory in the channel. Some of the data that we have would suggest there's a little less inventory in the channel as we progress through the fourth quarter.

Okay. Great. Thank you.

Thanks, Walt.

And the next question comes from Bhupender Bohra of Jefferies. Please go ahead.

Good morning. My question is around the guidance, the EPS number. Could we talk about what's built at the lower end of the guidance and the upper end? In terms of when we think about the top line organic sales growth and kind of the margin that we're looking to for the year? Thank you.

You know I think the key variable will be the top line revenue. So I think that's the key variable for the year.

So if we see a bounce in demand, we will be up toward the northern end of our guidance, and if there's further deterioration from where we are at today, we will be at the bottom end of the guidance. I think from an execution perspective, we've proven in this past year, that with four quarters in a row of operating margin improvement, that we'll get the execution done and I'm confident of that. But the key variable for us is going to be around the top line.

What have you built at the midpoint here? I mean are we looking at flat organic sales, or we have minus 7 or minus 6 for the fourth quarter, and you did say that the first quarter kind of things haven't improved. So how should we think about for the year with the second half [kind of easy comps]?

Yes. I'll take a shot at it, and if anybody else wants to add in you can. Obviously, we're not providing annual revenue guidance, but we're trying to give you as much color as we can here.

We came out of the fourth quarter with roughly minus 7% or minus 8% organic growth. We don't see a substantial -- any substantial change in order patterns from our customers and no catalysts in our future that would say that this is going to change. We know that comps will get easier in the second half because we carried a sizable oil and gas backlog in the first half of 2015.

Okay. And I had a question for Jon actually on the climate solution inventories. We've seen some of the system guys data port numbers and their sales are up kind of like 4 to 5 (inaudible) recorded number on the residential side. What's the disconnect here?

I mean you guys are in line with where the industry shipments are, but those guys actually are kind of getting good numbers here. Could you talk about like inventory challenges basically and where we are and where we should think going into the spring?

I'll give you what I know about the inventory side but I'll tell you what I think is the bigger disconnect from what the industry, the OEMs are reporting is what I mentioned as we went through the slides this morning. Clearly, there's the impact of SEER 13, still impacted us in the quarter which is what you see in the industry selling sales side, revenue side. We also have the two-way material price formulas. There is I believe a pretty significant gap from a pricing standpoint when you look at, we're not expecting to make money when we sell copper and steel so that's built in those two-way material price formulas.

And then the other impact that we had was with the warmer weather, there's where I think we could be a little bit in inventory factor there. We could see production rates change faster than perhaps on the selling side for the OEMs. So what little bit of information we have from an inventory standpoint would suggest that there was some de-stocking of inventory in the channel the fourth quarter and that would be in addition to the SEER 13 factor that would already would've been built into our expectations as we entered the fourth quarter.

Okay. And final question on the de-stocking thing, especially with PTS business and C&I. Did we see, I mean those two businesses have a pretty good distribution channel you know sell through. If you can comment on like what kind of de-stocking we have seen there or give any color onto when it's going to last?

Yes, so on the commercial and industrial side, we do believe that there was some de-stocking going on as we exited the year. Difficult for us to predict when it ends, just because the spread of industries that we hit is so varied.

On the PT side, our customers would say, not a substantial amount of de-stocking being done. I would say, however, the burst of demand that we saw early in the first few days of January would indicate perhaps that's not exactly correct. So there might have been a small amount of de-stocking going on in the PT channel, but I don't think it's significant and I pretty much think it's behind us.

Okay. Thanks a lot guys.

Thank you, Bhupender

The next question comes from Liam Burke of Wunderlich. Please go ahead.

Yes, thank you, good morning.

Good morning, Liam.

Mark, the stronger dollar, has that created significantly more price competition in your overseas markets?

I don't think so, Liam. We've always had tough markets here and it hasn't substantially changed. We obviously have competitors in all major areas in the world, whether it be China or India or even Europe, but it hasn't substantially changed from the other pressures we've seen in the past. So not a big change.

Okay. And obviously, energy efficiency is a big differentiator for your products, so will lower energy prices offset any potential growth rate in that part of your business?

Well, you know if electric rates were to fall substantially, you could argue that. But I got to tell you, there is just such a kind of overwhelming movement towards efficiency no matter where you go in the world. And it has a lot to do with awareness of the climate issues. I don't see a big change in people's behavior right now.

Great. Thank you Mark.

Thanks Liam.

The next question comes from Rudy Hokanson of Barrington. Please go ahead.

Thank you. I was wondering, on understanding the comment that you made at the end of the third quarter about the fact that the oil and gas business for you, you felt you had right sized it for what the market was looking like. Was that primarily the issue of inventory and that, the right sizing that you've done doesn't really protect you from the fluctuations that are going on right now?

Yes it's all driven by demand, and we saw the demand reducing substantially. We started taking aggressive moves in the third quarter. It's not gotten any better and you can argue it's gotten a little worse, relative to demand.

So we're constantly re-looking other more efficient ways of running businesses that have exposure to oil and gas, and constantly looking for ways to do it better. Right sizing is the right way to think about those oil and gas exposed businesses, and that's the way our team is driving those businesses.

Thank you. And then the other question I have has to do with the improvement in margins that are probably expected in 2016. When we look back at the improvement in 2015, there's the simplification program that you have in place, as well as a number of other items that went into the improvement in margins.

Can you give us a rough idea, understanding that there will probably additional reasons for improvement in margins other than just simplification in 2016? How much of a contribution do you think simplification itself could have in 2016? Realizing that is not the final number.

Well, I understand your question. If I had to estimate, I don't have this, we probably need to go back and take a look at it. I would guess that probably half of our benefit for the year was attributed to simplification. There were other factors, you're absolutely right. As we go into the next year, we believe that the simplification effort will continue to deliver op margin improvements but at a slower rate than what we saw this year, simply because of the top line headwinds. You know, we're communicating that we're investing $10 million in restructuring, of which we expect a less than two-year payback and we will start to see those benefits at the end of 2016.

So would it be fair to say that on your longer term outlook and expectations from simplification, that they're on track, it's just that the visibility is difficult in a year with the pressure on the top line but then it could bounce back? You know that you'd see that leverage in such subsequent years if the top line recovered?

Well, there's no question. We said 200 to 300 basis points of improvement back in the third week of December 2014. We're not backing off of that target even with the top line pressures. If the top line were to come back, we would be near the high end of that goal.

Okay. Thank you. That answered my questions.

Thank you.

The next question is a follow-up from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hey guys, I just want to go back on power transmission. It looks like sales were basically flat sequentially 3Q to 4Q and we lost 200 basis points of margin. And so I just want to understand, what drove that on a sequential revenue and what's kind of the trend going forward? Is 4Q the trend or the aberration?

That's a good question. I want to come back to, in my answer and I will invite Chuck to answer in here too, but in my answer want to come back to an earlier question you asked about PTS and I don't think I got it right, Jeff.

You did ask about the PT margins, PTS margins going forward, I think you were asking about synergies in 2016 and beyond. Pulling in our $30 million target from four years to three years would say that we got $12 million in the first year, and we think we'll get the remaining $18 million over the next two years. So that's the way we're thinking about it. Relative -- Chuck, can you help out there?

Yes, on the sales number, Jeff. So the business, the legacy business had a lot of backlog in the first half that was worked through.

And so the third and fourth quarters reflect the lower level of demand coming from the end markets, particularly impacted by oil and gas and by the agriculture market for the legacy business. So as volume declines occur in that business, the decrementals on the margins are on the larger end of some of our businesses, so that causes the impact on the adjusted off profit margin.

But that doesn't really explain 3Q to 4Q because it looks like your base business was flat sequentially.

Yes, I don't have that table in front of me, Jeff, to compare the decrementals.

Okay, maybe just to step back. It looks like PTS contributed $500 million and some, if you kind of run rate that out, that base business is probably down 10%. But I guess the disconnect is, if you kind of take the year on year, plus the synergies and the higher margin kind of acquisition coming in it just seems -- there seems to be a disconnect that the margins are down year on year.

I think it's a fair question, Jeff. We'll get back to you with it. We'll dig in a little deeper and get back to you with it.

Okay thanks.

Thanks, Jeff.

The next question is from Robert McCarthy of Stifel. Please go ahead.

Hi, I guess were getting close to the end of the hour, guys. I hope all is well.

Let's see in terms of the restructuring, the $10 million this year, is there a plan B? If things get materially worse here, can we see kind of the incremental layer of restructuring that you kind of contemplate in a tougher environment?

So Rob, hello there. As I mentioned to you, the $10 million includes the four projects that we already announced, as well as a few others that we haven't yet announced. So the comment that we made, is that we're pulling things forward aggressively already. The plan we have right now, at the pace we're moving, is a pretty aggressive plan.

Okay. And then in terms of the burst, I mean I'm not going to parse this comment too much, but you did talk a little bit about a burst of activity in January and definitely some positive comments, I think, in terms of the inventory, within climate, within HVAC. What other kind of green shoots can you speak to that would give you some reason for maybe a little more enthusiasm for this year or things that you're monitoring, I guess?

Well, you know, we talked about a few of the end markets that are doing well for us. We talked about data centers and we talked about the pool pop market which is kind of more consumer-related. We talked about material handling and food and beverage, which also has a consumer bend to them, so pretty much anything related to the consumer is where we're seeing the green shoots.

It's on the industrial side where we're seeing the headwinds. You know we'll be watching closely, our order rates in China, to see how those turn throughout the year. It's not exactly clear where that's headed.

As you know there's a fair amount of stimulus going into that market, so I believe at some point that can shift on us. We're better positioned in Europe than we have been in the past, so we're monitoring what's happening in Europe. And then you know, climate is always a wild card, relative to weather, and as Jon mentioned, inventory levels held by our customers.

In terms of the decrementals of the core segments now, how should we be thinking about that conceptually? In terms of what the decrementals could be in a downturn, or is there any way you could talk qualitatively, and I'm not obviously thinking of the benefits, I'm just thinking the core business how should we think about the decrementals, how they're set up right now?

Yes, I think you should just think about it, just generally speaking its 30% to 35% and its better than the climate segment than the C&I segments and tougher in the PT segment.

PT segment, okay. And then the final question, is just I think you mentioned the fact that the [prevailing] debt markets changed and that will change kind of your refinancing activities going forward. You know, obviously you're digesting a large acquisition now, but given that and given the negative prospects for lower kind of core EPS delivery over the next couple years and free cash might actually be a little bit better than given and FX does this change or timetable to perhaps for debt pay down and perhaps getting back in the market for M&A? Do you think that extends a year or so in terms of just digesting what you've just bought?

You know, the decision we made on refinancing didn't change the outlook or our view of our capital deployment strategy. We have a history of being an acquisitive company.

Right now our bias is to pay down debt and that is where our focus is right now. The good thing is we're generating a very strong free cash. We expect that to continue throughout 2016 and put us back in position to either use the money to repurchase shares, or use the money to go out and look at other strategic acquisitions.

Thanks for your time guys. Good luck.

Thank you. 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 everyone 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.