Regal Rexnord Corp (RRX) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Regal Beloit first-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thank you, operator. Good morning, and welcome to Regal Beloit's first-quarter 2016 earnings conference call. Joining me today are Mark Gliebe, Chairman and Chief Executive Officer; John 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 3, we state that we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures that provide you with additional insight into our operating performance, and for helping investors understand and compare our operating results across accounting periods 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.

Thank you, Rob, and welcome, and thank you for joining our first-quarter call and 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 Schlemmer will provide color on markets, operations, and the performance of our three segments. After that, I'll summarize and we'll move to Q&A.

It was a tough first quarter from a top line perspective. Organic sales were down in all three segments. At a macro level, there were a few key items that put significant pressure on our top line.

First, sales into the oil and gas and power gen end markets were down roughly $40 million year over year. Second, weaker sales in our general industrial end markets, in both North America and China, dragged sales down another $40 million. Next, demand from Middle East HVAC and North American residential HVAC and water heater markets were off roughly $25 million. And finally, the impact of two-way material price formulas with our larger customers was a $12 million headwind in the quarter.

From an operating profit perspective, as you can see, volume was clearly the issue in the quarter. The decline in our oil and gas and power gen businesses made up over 40% of the $37 million volume-related op profit decline. Fortunately, our ongoing investments in simplification and cost saving activities helped offset the impact of the volume decline. And the final point, after four quarters in a row of year-over-year margin improvement, we lost ground in the first quarter. And nearly all the decline can be attributed to the impact of the oil and gas and power gen businesses.

Back in the late fourth quarter, we recognized the weaker outlook for our markets and started accelerating our plans to further simplify and streamline the Company. Today, those plans are in execution phase. We have numerous active simplification programs underway, aimed at further reducing cost and making it easier to transact business with our customers. We continue to aggressively right-size our oil and gas related businesses, and we expect improved performance from the oil and gas businesses in the second half, both as a result of our cost actions and as a result of the easier comparisons.

Further, we are paring back SG&A costs across the Company. You can see the results of our efforts beginning to show up when you compare year-over-year SG&A costs, which are down roughly 6%.

At our last investor day near the end of 2014, we communicated that over the long term, we would exit non-core or low margin business with sales of $150 million. At the end of April, we agreed to sell our Mastergear branded business, which had revenues of $22 million, to Rotork PLC. Mastergear was a non-core business for Regal, which no longer fit in our PTS segment and will certainly fit better with Rotork.

Additionally, in the last 12 months, we exited roughly $20 million in low margin business, from customers in our climate solutions and C&I segments. In total, we have exited roughly $65 million of the $150 million target of non-core or low margin business set back in late 2014.

Finally, in the early part of the first quarter, we purchased the remaining shares from our European JV partner of our commercial refrigeration, motor and blower systems business. This will allow us to further integrate and streamline this global business.

We improved cash cycle by nearly eight days in the quarter, by reducing inventories $18 million. We expect to continue to improve our cash cycle throughout the year. We generated $43 million of cash in the quarter, which was 104% of net income. We used a portion of the free cash to pay down $17 million in debt.

As we look forward, we are expecting the negative organic growth rate we experienced in the first quarter to moderate throughout the rest of the year. In the second half, we are estimating modestly increased demand from our global industrial businesses as destocking slows. We do expect easier comparisons in our C&I and PTS segments, as we begin to lapse the oil and gas decline, which stepped down for us in the second half of last year. And finally, for the second half, we are expecting a more normal heating season in the residential furnace market versus the warm season we experienced in 2015.

We do expect margin improvements in the second half, as well. The benefits of simplification and synergies, and a better sales mix in our climate solutions segment, should help improve margins on a sequential basis. With the lower sales, we're necessarily very focused on reducing our costs. However, we're continuing to invest in areas such as our sales and engineering teams that can generate long-term growth.

I'll now turn it over to Chuck.

Thank you, Mark, and good morning, everyone. Sales in the first quarter 2016 were $818.2 million, down 10.3% from the prior year. We had net acquisition growth of 3.9%.

Foreign currency translation in the quarter was a negative 1.3%. Organic sales declined 12.9% from the prior year. Our adjusted operating profit margin in the first quarter was 8.6%, a decline of 120 basis points from the prior year. The decline in sales volume pressured the operating profit margin, with partial offsets from the benefit of the simplification initiative and cost controls.

Our first quarter 2016 GAAP earnings per share were $0.93. The only adjustment to EPS in the first quarter was $1.4 million, or $0.02 per share of restructuring and related costs due to restructuring activities in a European business. Our adjusted earnings per share were $0.95 for the quarter.

There are two acquisition and disposition transaction that I want to discuss. The first is our purchase of the remaining 45% of ELCO, our European JV, for $19 million in the first quarter. The business sells energy efficient motor and blower systems for the global commercial refrigeration market.

The business's total operating results were already consolidated, so our current and past sales and operating profit will not be impacted. What changes will be an improvement in the minority interest line on our income statement. We estimated that this is a $0.03 per share benefit to 2016 results, and this was included in our prior 2016 earnings guidance.

The key benefit of this purchase is that it enables us to further integrate and improve the performance of our global commercial refrigeration business. The second transaction is a signed contract to sell our Mastergear business to Rotork PLC for $25 million, which will close in the second quarter of 2016.

Mastergear manufacturers valve gear boxes for industrial applications in the US and European markets. Mastergear's 2015 results were sales of $22 million, an operating profit of $4 million.

Assuming a closing on the sale in the second quarter, the impact on 2016 results is estimated to be a reduction in sales of $11 million and a reduction in earnings per share of $0.03. This impact on our 2016 earnings was not included in our prior 2016 guidance, but is now included in our updated end guidance. The $25 million proceeds from the sale will be used for debt reduction.

I will summarize some key financial metrics for the first quarter 2016. Our capital expenditures in the first quarter were $14.9 million. We expect to spend $85 million in capital for the full year 2016.

In the upper right quadrant, we show our effective tax rate information. The ETR in the first quarter was 23%, lower than our guidance, due to the global distribution of income and income tax differentials. We're revising our ETR forecast for the full year 2016, from 25% to 23%.

In the lower left quadrant, we provide data on our first quarter 2016 balance sheet. Our total debt was $1.675 billion, and our net debt was $1.426 million. In the first quarter, we reduced our total debt by $17 million.

Since closing on the PTS acquisition in January 2015, we've reduced our total debt by $230 million. In the lower right quadrant, we present information on our free cash flow. We generated $43 million of free cash flow in the first quarter, benefiting from our management of working capital, especially our focus on balancing our inventory, which declined $18 million in the quarter.

Free cash flow represented 104% of net income for the quarter. We had strong free cash flow generation, which is generally lower in the first quarter, from the investment and working capital for the seasonal increase in sales.

Now I will update our full year 2016 earnings guidance. Mark already summarized our outlook for the rest of 2016. We are executing on our simplification and cost savings programs to partially offset the weaker market conditions. Our guidance reflects a second half of 2016 that is stronger than the first half.

The effect of FX translation will continue to be a headwind on our 2016 sales. We estimate the impact of FX to be a 1% to 2% headwind in 2016.

Our restructuring programs in 2016 are expected to result in $14 million of restructuring and related expenses for the full year 2016. This is a $4 million increase from our earlier estimate of $10 million, as we accelerate some of our simplification projects. Our full year 2016 GAAP earnings per share guidance is $4.38 to $4.78. Our full year 2016 adjusted earnings per share guidance is $4.40 to $4.80.

The adjustments to the GAAP EPS include the addition of $14 million, or $0.20 per share, of estimated restructuring and related expenses, and the subtraction of the estimated gain on the sale of our Mastergear business, up $12 million or $0.18 per share.

Now, I'll turn the call over to John Schlemmer.

Good morning, everyone. Let's start with segment performance, beginning with the commercial and industrial systems.

Sales were $378 million, a decrease of 17% from the prior year. Organic sales declined by $69 million. The impact of oil and gas in the power generation end markets impacted sales by $30 million in the quarter. During the quarter, we experienced a decline in order rates across our oil and gas businesses and recall that last year, we were still working off a backlog in these businesses.

The general industrial end markets in both North America and China impacted sales by an additional $30 million. In the industrial markets, we experienced soft demand from many of our customers, including the impact of destocking. The two-way material price formulas impacted price, reducing sales by $5 million.

We experienced strength in demand in the residential pool and data center markets. Demand was strong for both standard pool motors and high efficiency variable speed pool motors. And in data centers, we continue to see strength in both orders and sales for our switch gear technology.

With the headwinds on the top line, adjusted operating margin was 5.8% of sales. The decline in oil and gas and power gen accounted for approximately 170 basis points of the margin decrease. The simplification and cost reduction efforts are helping to offset the volume decline.

We have two manufacturing transitions underway, to further simplify and reduce the cost of our manufacturing footprint. And while we've taken significant cost out of our oil and gas businesses, we are planning another phase of restructuring.

Sales in our climate solutions segment decreased approximately 14% in the quarter. Organic sales declined by $37 million. We have a strong position in the Middle East air conditioning market and in the past three quarters, we've experienced weakness in this market, and it was even more pronounced in the first quarter.

There are two factors driving this. The first is the overall market conditions. And the second is a mandated standards change in impacting our customers' products, causing them to slow down production and work off their inventories.

In the US, industry data shows that unit shipments for residential HVAC and water heaters were down mid to high single digits. In the HVAC after-market, we experienced weakness in demand of our heating replacement products due to the impact of the warm winter. We did see some modest strength in unit demand for air conditioning products from our large OEM customers.

Price impacted our sales by $9 million, approximately 3% of sales. This is driven by our two-way material price formulas with our large customers.

As we've entered the second quarter, we're experiencing the normal seasonal increase in demand in the US air conditioning market and looking forward to the second half, we're expecting improved comparisons in the sales of our heating products. Adjusted operating margin was 10.8% of sales, a decline of 80 basis points from prior year. The simplification and cost reduction efforts offset the majority of the volume decline from the US and Middle East markets. We have three active manufacturing transitions in this segment, to help further simplify and reduce the cost of our manufacturing footprint.

Sales in our power transmissions solutions segment were $201 million, an increase of 15%. The PTS acquisition contributed $36 million of acquisition sales, and organic sales declined $10 million, approximately 5%. The decline in organic sales was primarily driven by oil and gas, where the reduction and demand was very similar to what we experienced in the C&I businesses.

Outside of oil and gas, we experienced weakness in the agriculture and metals end markets, as well as our distribution channel. These declines were offset by strength in renewable energy, food and beverage, and unit material handling. Despite the decline in organic sales, adjusted operating margin was 11.5% of sales, an improvement of 10 basis points.

Operating profit benefited approximately 90 basis points, as we finalize purchase accounting in the quarter and we align cost accounting practices in the acquired business. Improved mix, synergies from the acquisition, and cost actions helped offset the impact of lower volume.

Before I turn it back over to Mark, I want to give an overview of our simplification and synergy initiatives. In 2015, we made significant progress on our simplification initiative, exiting six of our manufacturing facilities and five warehouses. We converted five ERP systems and completed the fourth of our five design platforms. We're seeing the benefits of these efforts, as the savings from these programs carry over into 2016.

We now have eight active manufacturing transitions underway. The majority of these transitions take advantage of our low cost manufacturing footprint and affect all three of our segments. We'll start to realize the benefits from these programs in the second half of the year.

We also have two active warehousing programs that will consolidate seven of our warehouses into two larger and more efficient distribution centers. And while we make progress on these fronts, we're working to complete four more ERP conversions over the next 12 months. After those conversions, we'll have nearly 80% of our business on a common ERP platform.

And finally, our fifth design platform consolidation is underway. We'll start to see the benefits in the latter part of this quarter, and continuing into 2017. In total, these programs generate an annual savings of approximately $13 million.

We can see the benefits of all these actions in our staffing levels. Over the past five quarters, since January 2015, we've reduced our non-production headcount by nearly 13%. That's a significant reduction, and it's enabled by the progress on simplification and the ongoing focus on cost controls.

Given the challenging end markets, there's even more we'll take on throughout the remainder of 2016. Restructuring and related expenses from these activities totaled $1.4 million in the first quarter, and we're forecasting approximately $14 million for the full year.

Thanks, Jon. Now before we go to Q&A, I'd like to summarize our first-quarter performance. For the first quarter, sales were down approximately 10%. The biggest headwinds were oil and gas and power generation, as well as the global industrial markets. Margins in our oil and gas and power gen businesses were hit especially hard, and most of our margin rate decline in the quarter can be attributed to these businesses.

The weaker volumes negatively impacted our margins. However, our simplification programs help offset some of the margin shortfall. We are in execution mode on many simplification and cost saving programs that should start delivering benefits in the back half of the year.

[We] improved cash cycle by nearly eight days in the quarter, mostly from reducing inventories. We expect to continue to improve working capital throughout the remainder of the year, enabling further debt reduction. Our cash flow to adjusted net income was 104%, and we used a portion of the free cash to pay down $17 million in debt.

Our guidance reflects a second half that is stronger than the first half. We expect to begin to see the benefits of our more recent simplification and cost saving programs, especially in oil and gas. We expect a more normal heating season and better product mix in our climate solutions segment. And finally, we are expecting a modest recovery in the North America and China industrial markets, as destocking slows.

We'll now take your questions.

(Operator Instructions)

The first question comes from Mike Halloran of Robert Baird.

Good morning, guys. So let's start on the demand side. Could you help me understand how the general industrial, so the North America, China demand, and then the oil and gas demand, tracked through the first quarter and into April here? Did you see weakening towards the back part of the quarter in those end markets?

Mike, we -- as you recall from our last earnings call, we commented that early in the first quarter, in our industrial markets, we saw a burst of demand in North America. We commented that we weren't confident that it was sustainable and in fact, it wasn't. So it slowed during the back half of the quarter.

We saw a little pickup in April, and I would just characterize our industrial demand at this point as stabilized. We do believe that our customers are destocking, as they're reacting to the overall decline in industrial markets and we would expect that destocking to end as we head into the back half of the year.

And so then that begs the question, you guys are calling for some modest improvement in the industrial demand, as you work to the back half of the year. Are you saying the environment gets better? Or are you saying simply that destocking on the OE distributor side dissipates, and so maybe the demand you guys see more accurately reflects what the environment is giving?

Yes, I think it's tough for us to call whether or not the environment starts to improve. I would say that it's more related to the slowing of the destocking.

And then one last one, on the margin side, just to clarify the guidance. Are you guys suggesting that margins are going to track up from 1Q to 2Q, and then up again to 3Q? Or is it just up from 1Q levels?

I'd say we'll see sequential improvement in Q2 and Q3, from where we were at in Q1. You normally would see some of that because Q2 is seasonally a stronger market for us in the climate solutions segment. But I would say that the more significant improvements in margins will happen once we enter the third quarter.

Got it. Thanks for your the time.

The next question comes from Samuel Eisner of Goldman Sachs.

So on the HVAC commentary here, I wanted to better understand your climate solutions business. Can you talk -- or your climate business. Can you talk a little bit about market share in this market?

If you look at -- I know you commented that the data has been down. But if you could talk a little bit about market share, what you're seeing from OEMs? Are you seeing the move towards dual sourcing and away from single sourcing? I think that would help to color in this, arguably, this surprise on the North American HVAC side.

I'll start on the top on HVAC, and I'll certainly address your question. The -- as Jon mentioned, we saw a big drop in the Middle East business for us and it was related to some standards changes in that market, slowing down our customers' demand, as well as to the overall decline in the Middle East as the result of oil prices declining. So that was a $13 million headwind in the climate segment for us.

And then we sized for you the impact of material price formulas being down $9 million. And that's driven by the fact that copper and aluminum are down 15% to 20%, on a year-over-year basis, which drives our material price formula -- two-way material price formulas with our customers down. The rest of the business, as we discussed, Jon mentioned that unit demand, from the industry data that we can see, down 7% in both resi HVAC and the water heater segment, which takes up another $12 million of the decline in the quarter.

Relative to market share, in any given quarter, there's always wins and losses. We did not lose any significant customer, and market share was not the big driver for us in the quarter. Our big issues were the markets we were participating in.

Got it. That's helpful there. And then when I think about inventory management, if I look, your current inventory as a percentage of LTM sales is around 22%. And it's been in that range since the end of last year and the first quarter here now. So can you talk a little bit about inventory management, going forward? It does seem to still be elevated versus historical averages.

Yes, you're correct and we obviously saw that as we exited the year, probably had too much inventory at the end of the year. We were -- as you know, in the fourth quarter, our revenues dropped organically. So we needed to adjust and we did. We took $18 million of inventory out in the first quarter.

And I would remind you, the first quarter is normally a time when we're building inventory. We're building inventory because seasonally, we're heading in to the stronger HVAC season. So at a time when we're normally building inventory, [it's about] $18 million to right size. I expect probably not as substantial as the first quarter, but ongoing improvement in inventory, as we move through the rest of the year.

And then if I could sneak one more in here, on the guidance update, it seems to be about a 40% delta at the midpoint. You called out Mastergear, which is $0.03, but the lower tax rate adds about $0.12 to your prior guidance, so that's a net positive $0.09. Can you talk about the moving pieces of that $0.49 now, versus your prior expectations? Thanks.

So the big drivers were in the C&I segment, primarily related to oil and gas and power gen. So that was a substantial reduction from what we had seen, as the oil and gas markets were further deteriorated and the power gen market further deteriorated for us in the quarter. And the second piece of it, the substantial piece of it, was in our climate segment, as the HVAC unit shipments were down in Q1, and the Middle East was affecting.

Got it. Thanks.

The next question comes from Josh Pokrzywinski of Buckingham Research Group.

Hi. Good morning, guys. Maybe just to talk about the C&I margins a little differently. Chuck, if you wouldn't mind helping us out with the bridge from 4Q to 1Q? Looks like revenues up, profit down, call it $13 million-ish here.

I get that oil and gas mix is a headwind, but you'd think material prices would actually be in your favor sequentially, and that the oil and gas mix wouldn't be dramatically different, 4Q to 1Q. So just given that move, can you maybe help with the sequential (inaudible) [a bit]?

Sure, Josh. Thank you for your question. Certainly, the oil and gas decline in sales had a negative impact on margins. But when you consider the -- you have to consider the LIFO benefit that was taken in the C&I segment in the fourth quarter. So that would explain the largest variance.

Was there any other LIFO benefit or expense in the first quarter?

No, there was not.

Okay. Got you. That's helpful. And on the destocking front, I guess I'm a little surprised to hear that. It seems like there hasn't been as much commentary from that elsewhere. Is it specific end markets? Is it distribution in general? How would you guys characterize destocking from your customers?

So I'll take a shot at that and if Jon wants to add any color, he's welcome to. But the -- if you think about the level of industrial decline, which has been, I think, pretty widely reported around folks with industrial exposure, everybody is resizing their production lines to align themselves with a real demand.

So -- and it's going to be all the markets we've been talking about. Whether it's oil and gas or power gen, or just general industrial markets that are affected by oil and gas.

So Jon, do you have anything else to add to that?

I would just say, we -- to add to that, Mark, we definitely saw it throughout the distribution channel, in both C&I and the climate segments and PTS. So it was pretty much across the board in distribution. And I would say it was spread across a number of end markets, primarily on the industrial side.

Got you. And then if I can just sneak one last one in. On the Middle East climate business, I had that business as being less than 5% of the overall, certainly rest of world, I think you've quantified in the past as being less than 10%. Can you help us size that? I guess a 5 point drag in the quarter would suggest that business was essentially zero?

So the business, Josh, is a little more than that. It's approximately an $80 million business for us, if you look at all the products that we ship directly into the Middle East, as well as where we have known applications where our customers ship directly to Middle East customers. So we size that at about an $80 million business.

It was down significantly in the first quarter. It is a seasonal business, so there's going to be quarters that are much stronger and normally, Q1 is one of the stronger quarters. So -- but it was down significantly in the quarter.

And the standards change, as Mark said, drove a lot of that. Because our customers, that change takes effect at the end of the second quarter, and they are -- they dramatically reduced their production rates to work off inventory, because they can't sell through any prior made product.

So I'll just add for emphasis there, Jon's point about if you just break out sales by -- geographically, we actually will sell to a US customer. But we know where the majority of their demand goes, or where percentage of their demand goes and we have customers that sell substantially into the Middle East, and we know that they're suffering as well.

Got you. All right. Thanks, guys.

The next question comes from Scott Graham of BMO.

Good morning. Mark, I wanted to ask you this question, because in the fourth-quarter conference call, you indicated that you were still seeing some pretty slack demand, and nothing had really changed and the organic in the fourth quarter, excluding the change in number of days, was, call it, about minus 7, and here we are at a minus 13. So I guess my question is, I want to slice this a little bit differently. Not exactly what were the reasons for the decline in sales, but what, from the beginning of February to the end of the quarter, surprised you as a Company?

I would say the big change for us was the further step-down in oil and gas demand. That was -- it dropped further than we had thought as we went into the quarter. That was probably the single biggest change, power gen being right there with it.

And I'd add one more to that, Scott. And that was, I think that on our heating products, especially in the after-market, we saw softer demand than we anticipated going into the first quarter.

Okay. Great. Thank you. The other question I had is about the second quarter now. How have those markets reacted? And really, what are order rates looking like in the month of April?

I know -- thank you for your comment, Mark, that you're seeing sequential improvement, less down, essentially, as we go forward. But could you give us a little bit more color on that for April? Particularly considering that the HVAC season feels a little chilly so far in the Northeast and the Midwest. And I'm wondering what the impact you see on HVAC for that?

So my first comment on that would be, from my experience in selling in this space, is that it's probably too soon to call the heating season. Usually, I start thinking about it when we get to Memorial Day. The cooling -- I'm sorry, the cooling season.

So -- but we're seeing -- in the climate space, we're seeing normal sequential build that we -- seasonal build we'd see at this time of the year. That's doing what we would normally see it do, in terms of our sales. So we'll see an improvement in our revenues, as a result of the seasonal build.

In the commercial and industrial, ex oil and gas and ex power gen, I'd say the order rates have stabilized. So -- and we do expect to see, as we enter into the back half of the year, a slight improvement as a result of destocking.

Would you say that's the case, orders more stable in PTS, as well?

Yes.

Great. Thanks a lot.

The next question comes from Jeffrey Hammond of KeyBanc.

Good morning, guys. Just back to this -- one, can you flush out what is going on in power gen, and why that was so weak? And then maybe just resize these businesses on a run rate basis. Because it seems like, from my math, they were down 40% and it seems like oil and gas would have been already seeing weakness a year ago.

So I'll get at the power gen question first. Our power gen business, on a goal basis, roughly a $140 million business. It was down $10 million for us in the quarter.

So one of our largest competitors in that space recently publicly made the comment that their power gen business was at a 10 year low. So that's the kind of impact we're feeling. It's down dramatically.

Now, part of that is because it supplies both the oil and gas market, as well as the mining market, which are both down. So I think that's why we're seeing such a significant decline in power gen.

And Jeff, on the oil and gas side, I think that when you look back at Q1 last year, we did have -- while orders were very low in oil and gas, that's correct, we still had pretty good backlog to work off of in Q1. So that comparison, plus the further step-down in oil and gas demand, is what we saw in the first quarter.

Okay. And then just on the climate business, the HVAC industry is -- short-term share aside -- has been going through this multi-year growth period, where --good growth, good margin expansion. And your business just has been flat to down, and struggling here. So I'm wondering, as you look at it and step back and deal with these material price formulas, how do you think about it fitting in and belonging in the portfolio, on a long-term basis?

The first comment I'll make is, I think we have a very healthy share position in what, long-term, will be a very healthy market. The fact that we have commodities, the volatility we've seen in commodities in the last year is -- except for perhaps 2008, you don't typically see that. And so that -- [to mark] the volatility in the commodities, which is impacting our material price formulas, which if the commodities go the other way, it will come back the other way. So I still think this is a healthy space for us to be participating in, and we have, I would say, an enviable share position in the overall market, a market that we think will grow long-term.

Thanks, guys.

The next question comes from Robert McCarthy of Stifel.

Good morning, everyone. Rob McCarthy here. So I can square the comments about power gen, because obviously Emerson called that out on their call. The Middle East comments, definitely you see that called out on the call. But just he severity of oil and gas is surprising here, and I hate to go over that again. And could you talk about -- there's an old quote these says, war is God's way of teaching Americans geography.

Is this downturn for oil and gas? Are you learning more about your business, in terms of the relative exposure, whether it's up, mid or down? Could you size the business?

And could you give us a better sense of what the drivers are here? Because there seems to be a material disconnect between what our expectations were for coming out of 4Q and what we're seeing now.

And could you comment on share loss again, or share loss risk? Because the growth here is really materially under-performing the [broad group].

Okay. Thanks, Rob. Appreciate the question. So from an oil and gas perspective, I'll start out with what we've communicated in the past. In the past, we -- I think this was in 2014, we sized the business at 8% of revenues, two-thirds of which was upstream. Today, we'd say it's roughly 4% to 5% of revenues. This is just oil and gas and it's still probably two-thirds upstream.

So when we talk about our oil and gas related businesses, we're talking about businesses that sell directly into the oil and gas space and as we entered into 2015, we were carrying a backlog into 2015. So when we shipped that through, we shipped that down in the first half. And we started to see it downturn in the second half, and then further step down as we entered into the first quarter of 2016.

And as we look at the variances of our orders, on a year-over-year basis, we're down 40% plus and as I read from what all of our peers are doing in that space, it does not seem unreasonable to me that we're down in the same ZIP code. So I don't know of any -- we haven't lost any major customer or anything like that. Obviously, in a down market, it's hard to know exactly what's happening at every different customer level, when there's this much volatility. But we don't know of any share loss in the oil and gas space.

Okay. And then just coming back to the restructuring, I think you upped it for the year. Could you talk about the cadence, to the extent you can, across the quarters of the businesses? And expand upon that for us?

Sure. As we left the fourth quarter, we recognized that we were heading into a tough period, and we accelerated our spending in the fourth quarter of 2015. I think we've spent $4.4 million in restructuring. We're seeing some of that benefits of that now.

We -- just from a timing perspective, we have pulled in to the fourth quarter some of the things that we were planning for the first quarter. So the first quarter was a little light. We spent $1.4 million. So out of the $14 million left, that's roughly $12.6 million across three quarters, you need to spread that evenly across the three quarters.

I'll leave it there. Thank you.

The next question comes from Nigel Coe of Morgan Stanley.

Good morning, gents. Covered a lot of ground. So just wanted to hone in on, obviously the LIFO swing between 4Q and 1Q for both C&I and climates is a big factor. I think the -- Chuck, remind me, I think the LIFO for full year 2015 was $18 million benefit, year over year. How much of that fell into 4Q? And maybe segment it by segment?

Nigel, thanks for your question. The total for 2015 was $18 million. In the fourth quarter, it was roughly $15 million, which was an improvement of $10 million on a year-over-year basis. So that's an accounting true-up, as you know, at the end of the year.

Okay. And did the bulk of that come into C&I?

It was a little heavier in C&I, but also in climate as well.

Okay. And obviously, we spent a lot of time talking about oil and gas, but the headwinds of $30 million in C&I, year over year, is very similar to the $27 million we saw in 4Q. So it seems like the big (inaudible) we saw is in industrial rather than oil and gas for C&I. So number one, is that correct?

And secondly, you've talked about inventory destocking. Do you think we're through that progress, largely, now, on the destocking side?

And maybe comment on the end market? So the sell-through from channel and the OEMs? What is your intelligence, in terms of the trends there? Did that deteriorate [for] the quarter versus 4Q?

Okay, I think there were three questions there, Nigel. I'm going to try to get to all three of them.

So the last question was related -- or the second question was related to destocking. When do we think it will subside?

Our view is that it's -- we have a number of customers, who are industrial-type customers, who are seeing similar kinds of downturns that we are, they're adjusting their inventories. And I expect that to subside as we enter the second half. So that's that piece.

You talked about -- you asked a question about the oil and gas, and the difference between oil and gas demand and industrial demand. We size both of them in the C&I segment -- and I'm just talking about the C&I segment -- both of them down roughly $30 million.

And oil and gas was oil and gas and power gen.

Right, and the oil and gas was down $20 million for us, and the power gen was down $10 million for us. So that made up the $30 million. And then another $30 in global industrial demand, which includes our exposure to China, as well as our exposure to North America.

Did I get all your questions, Nigel?

I think so. I lost count there, but I think so, yes. And then just to, finally, obviously -- I think there's been a few questions shadow boxing around the back end load in the guidance. Can you maybe just help us, in terms of the cadence of the organic? I think we all got a little bit caught up in the 13 down this quarter. How do you see organic developing by quarter?

And if you (inaudible) by quarter, maybe what is your framework for the full year?

Yes, so as I mentioned earlier, we expect it to get better sequentially, quarter to quarter. And that's -- and then we're going to get the benefits -- from a margin perspective, we're going to get the benefits, once we enter the third quarter, from our simplification programs.

So on an organic basis, it will improve sequentially from quarter to quarter. Partially because we expect the markets to be better, and the markets would be the industrial markets, where we expect the destocking to end. Partially because we don't think we'll have another winter of all-time warm temperatures in the winter that we had. We'll have a more normal heating season. And then partially because we'll have easier comps.

Okay. I'll follow up offline. Thanks a lot, guys.

The next question comes from Julian Mitchell of Credit Suisse.

Hey guys, this is Ronnie Weiss on for Julian. Just want to touch on the two-way pricing, the $12 million hit in the quarter. Does that remain pretty much consistent for the rest of the year? Or does it tail off towards the end of the year?

And then on the raw mat side, what's the expectation for the full year? Any change to the benefit there, as well?

I'll answer the [courier] -- I'll answer first part of the question, and then Chuck will comment on our assumptions for copper. So -- and Jon, you should jump in if you have anything.

On the two-way material price formulas, we -- as we -- the first half of the year will look pretty much the same, relative to the material price formulas. It could start to turn, as we head into the back half of the year. So it could be some help to the top line, but we had copper prices go up two weeks ago and now they're back down a little bit. So you don't really quite know what's going to happen to the [stock] prices of copper and aluminum.

There is steel inflation happening today. Not sure how long that will last, but there is steel inflation today, so that would also cause it to turn. So Jon?

And I would just add, on the material price formulas, what we're forecasting, what we're expecting, is that we'll still have a headwind in the second quarter [would be to a]-- but we'll see a similar -- I would say similar in the second quarter to the first quarter. Probably -- maybe a little improvement because of what's happened with seal.

And we'll see, sequentially, some improvement in the second half, assuming -- if our assumptions on copper -- if the copper stabilizes at the level it was, I would say, a few weeks ago, and if we continue to see the steel inflation that we're forecasting. So we -- that's our expectation for the second half. It will still be a challenge, on a year-over-year basis, because we have the cumulative effect of what happened throughout all of last year.

And there's typically a three-month delay from the time that the spot prices adjust to the time that our formulas with our customers adjust. Does that answer your question?

Yes. Got it. Thank you. And then we touched on the cadence of the restructuring cost. On the saving side, does everything that is incrementally done get caught in the back half of the year? Or does some of that ultimately spill over into 2017, as well, now?

Jon mentioned that there would -- from the programs that we're executing on right now, there was going to be a roughly $13 million benefit on an annual basis. And we believe that will start to kick in the second half of the year.

Understood. Thanks, guys.

(Operator Instructions)

The next question comes from Bhupender Bohra of Jefferies.

Good morning, guys. A question on the climate solution business here. In your commentary, you mentioned about weakness in natural gas water heaters. Can you size that market for us? Like and how big that is for RBC?

And what actually drove the weakness in that particular -- we have seen -- if you look at the shipments, electric water heaters have been pretty strong. Natural gas, I think there's some shift that's happening between electric and natural gas. And is that the reason why it was down? Or was there something else?

So Bhupender, our business sells into natural gas water heaters. We do not sell into the electric gas water heater space.

So if I'm not mistaken, I believe the natural gas water heater business in the first quarter was down in the mid-single-digits number. So we were affected by the decline in the demand.

Okay. I'm asking whether it was due to the shift towards the electric water heater? Did you see that in the channels? Or will the [PO] lead the demands?

Bhupender, this is Jon. I don't think we saw any appreciable shift between electric and gas on water heaters in the quarter. If there was, that would affect us, but I think we viewed it as just more overall softness in the market from a unit standpoint, not a shift to electric.

Got it. And lastly, just wanted to get some color on your China business. If you can just give us some -- how big that business is within C&I and power transmission? And what particular end markets do you sell over there, which continue to see the weakness in the quarter?

So we sell primarily into infrastructure and industrial type markets in China, and so that business was down for us. And I'd say, again, it had been down in the past. So when we sized our total industrial exposure between the US and China, I think we sized it at $40 million across the Company. And certainly, China was a sizable chunk of that.

And overall, if you look at last year's revenues, 2015, we'd cite China, for us, is approximately 7% of our revenues, to size it in terms of the impact.

Okay. And when you talk about destocking, was that one of the phenomena which is happening in China?

Yes, I would say it's the same scenario. We have customers, with their revenues are down rather substantially, so they're adjusting their inventories, as well.

Got it. Thank you.

We have a follow-up from Samuel Eisner of Goldman Sachs.

Thanks very much for letting me hop back on. On the inventory question again, and in particular manufacturing levels, can you talk about how much either under-production or under-absorption impacted you guys in the first quarter? And how you're thinking about that through the course of the year? Either related to the cadence of margins increase throughout the course of the year or embedded in your updated guidance? Thanks.

This is Chuck. Yes, it certainly had somewhat of an impact, as it usually does in the first quarter, with lower production. But we have all of that baked into our guidance. The slowing of production, as we work down inventory, is somewhat offset, too, by the benefits of our simplification projects and our cost savings projects. But all of that is in our guidance for the year.

And Chuck, I would add, in the first-quarter bridge that actually Mark talked about as we walked through the slides, that -- any absorption issue that we had in the first quarter, we included that with the overall savings that we saw from all the cost actions in the first quarter. So we were absolutely able to much more than offset any impact to that in the quarter. And that will be our focus through the whole year.

Maybe just a follow-up on that comment, Jon. So the $15 million of cost savings, is there any way to break out how much under-absorption negatively impacted that cost savings, if you want to talk about the individual simplification plans versus SG&A reduction? Just wanted a better handle on that $15 million.

Yes, Sam, it's really -- it's much more complicated than that. So I think the way we bridged it is accurate and reflective of the results in the quarter.

I'll try this offline. Thanks, guys.

We have a follow-up from Robert McCarthy of Stifel.

Yes, could you just comment on the decremental margins you're seeing, and how you think you're going to get restructured to combat that? I would just cite the O&G and power businesses with the C&I and the decrementals you saw there. And talk about what your expectation is for the back half, and how you're going to minimize that? Because it seems to be a big -- quite a healthy decremental there.

I'll give you all the data by segment here in a second. But I would say that we did -- when you take into consideration everything we mentioned relative to oil and gas, and excluding the oil and gas, you can see that we offset a substantial amount of decremental through the existing simplification programs and if -- so there was certainly some positive news there, relative to our execution and our ability to offset those decrementals.

So if you think about the climate business, you ought to think about 25% to 30% decrementals. If you think about the C&I business, you ought to think about 30% to 35% decrementals. And if you think about PTS, you ought to think about 35% to 40% decrementals.

I'll follow up off line.

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