Regal Rexnord Corp (RRX) 2017 Q3 法說會逐字稿

Good day, and welcome to the Regal Beloit Third Quarter 2017 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 Third Quarter 2017 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 3, we state that we are presenting certain non-GAAP financial measures in this presentation. We believe these are usual 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 reconciliation of these measures to the most comparable measures in accordance with GAAP.

Now I will turn the call over to Mark.

Thanks, Rob. Welcome, everyone. Thank you for joining our third quarter call, and thank you for your interest in Regal. We'll follow our normal agenda. I'll make a few opening comments. Chuck will provide a financial update. Jon will provide color on markets, operations and the performance of our 3 segments. After that, I'll summarize and we'll move to Q&A.

Before I get started today, I would like to announce that Regal's Chief Financial Officer, Chuck Hinrichs, announced his planned retirement effective March 31, 2018. In conjunction with Chuck's announcement, Regal's Board of Directors has approved the appointment of Mr. Rob Rehard as Chief Financial Officer of Regal effective with Chuck's retirement. Chuck will be with us through the end of March, so I will save my comments and appreciation until later and focus instead on introducing and welcoming Rob. We are excited to have Rob on the Regal team. Many of you may have already met Rob during recent investor events, but if not, please allow me to briefly share his background.

Rob Rehard joined Regal in January of 2015 as Vice President, Corporate Controller and Principal Accounting Officer. In January of 2017, Mr. Rehard was appointed to his current role as Vice President, Financial Planning and Analysis with responsibility for Regal's global finance organization. Prior to joining Regal, Rob served in various roles of increasing responsibility with Eaton Corporation, Cooper Industries, Masco Corporation, Emerson Electric and Deloitte & Touche. Rob is a veteran of the U.S. Navy and is a former Navy SEAL. For further information on Rob's background and career accomplishments, please refer to the 8-K filed earlier today.

As I said earlier, we are very excited about having Rob on the Regal team. Rob is sitting in with us on today's call.

I will now continue with our normal agenda.

Regal delivered a solid top line performance in the third quarter with organic sales growth of 5.2% and organic growth in all 3 segments. In fact, the third quarter was the seventh quarter in a row where the organic growth rate improved sequentially. At a segment level, organic growth in the Climate segment was up 1.9%, with a tepid residential HVAC end market and strong growth in Europe, the Middle East and Asia.

In the C&I segment, organic growth was up 4%, with broad strength in the North American commercial and industrial end markets and growth in Asia and in oil and gas.

Finally, in the PTS segment, organic sales were up a strong 12.8% for the quarter with robust growth in oil and gas, distribution and renewable energy.

From an operating profit perspective, adjusted operating margins improved sequentially in all 3 segments. However, adjusted operating margins declined 30 basis points year-over-year. The key drivers to the year-over-year op margin rate decrease were, first, the impact of commodity inflation in the Climate and C&I segments; and second, the relatively difficult year-over-year comparisons in both Climate and C&I. On a year-to-date basis, adjusted operating margins are up 50 basis points. The resulting adjusted diluted earnings per share was up 4.6% year-over-year. Free cash flow to net income for the quarter was 114%. Our strong free cash flow helped us pay down $87 million in debt and we repurchased $23 million of our own shares.

As you may recall, we have been working on repatriating $150 million of cash this year. By the end of September, we met our goal. There are other repatriation opportunities we are working on that could yield further benefits in the fourth quarter. Overall, a solid quarter with strong organic sales growth.

Looking forward, as we enter the fourth quarter, we are encouraged that our overall orders remain up year-over-year, and we now expect total year organic growth to be up low to mid-single digits. On margin performance, as I mentioned earlier, adjusted op margins are up 50 basis points year-over-year through September. In the fourth quarter, we are expecting continued pressure from inflation in copper and steel. We do expect material price formulas to continue to increase as a result of the material inflation. And further, we are implementing fourth quarter price increases across most of our businesses.

For the year, we do expect year-over-year adjusted op margin rate improvement. Our total year adjusted earnings per share guidance has been narrowed to $4.80 to $4.90, up 9% at the midpoint over 2016.

I will now turn it over to Chuck.

Thank you, Mark, and good morning, everyone. Sales in the third quarter 2017 were $856.9 million, up 5.8% from the prior year. Foreign currency translation in the quarter was a positive 0.7%. Therefore, organic sales increased a strong 5.2% from the prior year. We were pleased that all 3 of our reporting segments had solid organic growth in the quarter.

Our adjusted operating margin in the third quarter was 10.8%. Sequentially, our margin improved by 40 basis points. Compared to the prior year, our margin was down 30 basis points. This decline was driven by the increased commodity inflation, which drove a $2.7 million LIFO expense and the price/cost headwind in the third quarter.

Our pricing did improve in the quarter, driven by our material price formulas. We partially offset this inflation with benefits from the simplification initiative and cost controls.

In summary, we posted strong organic growth and partially offset a LIFO expense and price cost headwind.

Our third quarter 2017 earnings per share, reported on a GAAP basis, were $1.39. There were 2 adjustments to GAAP EPS in the third quarter. The first adjustment was restructuring and related costs of $1.6 million or $0.03 per share. And the other adjustment was a gain on the sale of closed facilities of $3.1 million or $0.05 per share. Net of these adjustments, the adjusted EPS for the third quarter was $1.37, representing a 4.6% increase from the prior year.

Now I'll summarize a few key financial metrics. Our capital expenditures were $15.3 million in the third quarter. We expect our full year 2017 capital spending to be approximately $70 million.

Also, our full year 2017 depreciation and amortization expense is expected to be approximately $142 million. Our restructuring activities resulted in a $1.6 million of restructuring and other costs in the third quarter. We expect restructuring costs to be approximately $14.5 million for the full year. This is a $1.5 million increase from our previous guidance as we will pull forward some of our 2018 projects into this fourth quarter.

In the upper-right quadrant, we show our effective tax rate information. The ETR in the third quarter was 21.7%, consistent with our earlier guidance. We expect our fourth quarter 2017 ETR to be approximately 22%, excluding any discrete items.

In the lower-left quadrant, we provide data on our third quarter 2017 balance sheet. Our total debt was $1,214.4 million and our net debt was $1,027.8 million. In the third quarter, we achieved good debt reduction, repaying $86.6 million of debt. We continue to make good progress in reducing our debt, and our total debt to adjusted EBITDA ratio declined to 2.6 at the end of the quarter.

In the lower-right quadrant, we present information on our free cash flow. We generated $70.8 million of free cash flow in the third quarter, representing 113.8% of net income for the quarter. This was a good free cash flow number considering the investment in working capital we made to support our sales growth. And we are pleased with achieving our cash repatriation goal. We repatriated $52.8 million in the third quarter and $154.3 million on a year-to-date basis, and we are working on additional opportunities in this fourth quarter.

And lastly, we repurchased 300,000 of our shares for $23.4 million in the third quarter. On a year-to-date basis, we repurchased 576,804 shares for $45.1 million.

Now I will review our full year 2017 earnings guidance. Our guidance for 2017 reflects our expectation of low to mid-single-digit organic sales growth for the full year. We are expecting an improvement in our adjusted operating margin for the full year 2017 as compared to the prior year. We are seeing inflation in our commodity inputs, which is expected to result in a LIFO expense in the fourth quarter slightly higher than the third quarter expense. And this is included in our earnings guidance.

We are narrowing our full year 2017 GAAP EPS guidance to $4.64 to $4.74. On an adjusted EPS basis, we are narrowing our 2017 guidance to $4.80 to $4.90. The adjustments to convert the GAAP EPS to the adjusted EPS are restructuring and related costs of $14.5 million or $0.23 per share and $3.9 million or $0.07 per share from the gain on asset sales. At the midpoint of our guidance, our full year adjusted EPS will be up 9% over the prior year.

Now I'll turn the call over to Jon Schlemmer.

Thanks, Chuck, and good morning, everyone. I'll walk through each of the segments and give more details on organic sales and operating margin performance. In Commercial and Industrial Systems, sales were $408 million with organic sales increasing 4% from prior year. In the quarter, sales were up in several of our North America end markets, with particular strength in commercial HVAC and pool pump. We had another quarter with sales up in our Asia businesses, with strong demand continuing in China. We also saw strength in our oil and gas businesses.

Price improved sequentially and was up over prior year. Adjusted operating margin was 7.5% of sales, up 80 basis points sequentially but down 150 basis points from prior year. We had 2 key headwinds that impacted our margins in the quarter. The first and largest was the impact of commodity inflation. The second was the impact of mix as OEM sales growth outpaced distribution sales. Partially offsetting these headwinds were the positive impact of volume and a number of cost improvement actions.

Chuck mentioned earlier that we are estimating $14.5 million of restructuring costs for 2017. I'll remind everyone that 70% of that restructuring has focused on improving our performance in the C&I segment. And finally, as we look forward to the fourth quarter, we expect margin improvement both sequentially and year-over-year in the C&I segment.

In Climate Solutions, sales were $256 million with organic sales increasing almost 2% from prior year. In North America, sales to our residential HVAC OEM customers were up low single digits, in line with the market. HVAC aftermarket sales declined versus prior year. We believe weather was a factor on our aftermarket demand with a considerable decline in cooling degree days.

Outside of North America, we saw sales strength in Europe, Middle East and Asia. Price improved sequentially and was up over the prior year. Adjusted operating margin was 15.3% of sales, up sequentially 20 basis points but down 160 basis points from prior year. The key margin headwinds in the quarter were mix due to the lower aftermarket sales, commodity inflation and the supply chain disruptions we experienced in the second quarter. The increased volume and other cost actions helped to partially offset these headwinds.

While we expect pricing to further improve in the fourth quarter, margin rates in Climate will be under pressure with continued commodity inflation and the effect of our normal lower seasonal demand.

Sales in Power Transmission Solutions were $193 million, with organic sales increasing nearly 13% from prior year. The sales growth was driven by strength in oil and gas, industrial distribution and renewable energy. It was good to see the strength in distribution where sales were up high single digits over prior year.

Adjusted operating margin was 11.9% of sales, up 20 basis points sequentially and up 480 basis points from prior year. Strong volume and lower SG&A costs were key contributors to the margin improvement. Order rates continued to be up over prior year, and we again expect strong organic sales growth in the fourth quarter. Margins in the fourth quarter are expected to improve sequentially and will be similar to the prior year. It was nice to see the performance of our PTS business significantly improve on all fronts.

I'll now turn the call back over to Mark.

Thanks, Jon. Now before we go to Q&A, I would like to briefly summarize our third quarter results.

Organic sales growth was up 5.2%, and we are encouraged that, overall, orders are up as we enter the fourth quarter. Adjusted earnings per share were up 4.6% as compared to prior year. Our free cash flow to net income was 114% for the quarter. We paid down $87 million in debt and repurchased $23 million of our shares. Our total debt-to-EBITDA now stands at 2.6. Year-to-date, we have repatriated $154 million in cash, and we are working on other repatriation opportunities. We narrowed our 2017 full year adjusted earnings per share guidance to $4.80 to $4.90. And finally, we expect to finish the year with solid organic sales growth, margin expansion and, at the guidance midpoint, a 9% increase in adjusted earnings per share. We will now take your questions.

(Operator Instructions) The first question comes from Julian Mitchell with Crédit Suisse.

This is Lee Sandquist on for Julian. In the slide, you mentioned that orders are up entering Q4. Can you give us a little bit of color on the progression of order trends throughout Q3 and then also entering November?

Lee, sure. This is Jon. I'll try to address that. So I'll kind of walk through each of the segments and talk about how orders progressed through the quarter and as we enter the fourth quarter here, what it looks like. So in Climate, certainly, we believe that weather had a factor on our Climate business here in North America. And we did see as the temperatures cooled we saw a fall in the HVAC sales both the OEM side and the aftermarket as we exited the quarter. In C&I and PTS, we saw demand actually improve through the quarter and was relatively strong going into the fourth quarter. Overall, we would kind of size our orders that were up about mid-single digits right now as we enter the fourth quarter.

And I'll just add back, in residential HVAC, we're entering our normal heating season in orders in the heating side are what we would normally expect for this time of the year.

Understood. And regarding price costs, was the improvement in price in Q3 solely a function of the 2-way material price formula? Or were you able to push through extra price in addition?

Well, it was a little bit of both. So we did have material price formula, as we mentioned in our prepared comments, and we did have some benefits from a general price increase that we had announced earlier in the year. And then as we commented, in most of our businesses, we announce general price increases for the fourth quarter.

The next question comes from Jeff Hammond with KeyBanc Capital Markets.

Chuck, congratulations on the pending retirement.

Thanks, Jeff, but the congratulations go to Rob. He'll do a great job for us.

So it looks like you're raising your top line guidance, pulling forward a little bit of restructuring and kind of tightening the guidance range. Is there -- and it seems like the offset is this material inflation. Is there a way to kind of quantify what you think the incremental inflation is and how you're thinking about that incremental inflation into '18?

I'll take a pass at it and then if Chuck or Jon want to add into it. You have it exactly -- you have it right. We did pull forward some of our restructuring, and as Chuck mentioned, about $1.5 million into the year. We do have 4 major programs from a restructuring perspective that we kind of discussed at our earlier earnings calls but have to do with consolidation of our manufacturing facilities, most of which are in the C&I segment.

So we do expect that our material price formulas are going to continue to help offset inflation. As you know, there's always a little bit of a lag from the material price formulas. And then as we mentioned earlier, we have the price increases that we announced.

Anything else you guys --?

Jeff, I would add that price cost was clearly the headwind in the third quarter. We expect it to be a headwind in the fourth quarter to a lesser degree but still a headwind. And looking forward into 2018, we do see commodity inflation at least through the first half of next year based on our estimates on what's happening right now with commodities and what may happen over the coming months. Obviously, we have the portion of the business that, with timing, will reflect that with the material price formula. And then we have the -- a number of price increases that have already been announced here in the fourth quarter for our noncontracted business. So that's kind of what we are expecting going into 2018.

And Jeff, I'll just add that, clearly, the expected increase -- slight increase in our LIFO in the fourth quarter is an indication of that commodity inflation. In the last 90 days, we've seen copper and aluminum go up 15% over that period of time. So a little higher than we had stated about 90 days ago. But as we've talked about, the combination of the MPFs and our price actions will address that.

And then on Power Transmission, I think you said distribution, up high single digits. It looks like your peers are kind of running more low single digits in that business. Do you think you're driving share gains there? Or is that more the oil and gas mix? Maybe just a little more color?

Yes. It's a little bit of all those things. So number one, oil and gas came back. Number two, we've talked earlier about our renewable energy business being large projects. It can hurt in one quarter and help in another. It was certainly helpful this quarter. But our distribution, which is what you focused on, we were up high single digits, which was nice to see. We think some of that is the result of some of the actions we took very earlier in the year, where we took these steps to add salespeople in targeted markets where we did not have a good representation. So we think it's a little bit of everything.

The next question comes from Christopher Glynn with Oppenheimer.

Wondering if you could talk a little bit about the expected restructuring payback in 2018 in general and for C&I in particular?

Sure. Our history, Chris, is that we have a -- typically a 2-year payback on projects that make it into the restructuring. So that is -- our head's at. So we communicated $14.5 million, of which 70% is in the C&I segment. So a couple of the projects completed just in the third quarter itself. So those will start to show benefits in the fourth and carry over into next year. So that would be the way I would think about it.

And the other 2, look, we've had 4 active projects that we've been working this year. The other 2 that are still active, they'll be completed in the first quarter of '18. So they'll have -- they'll start to impact 2018 results and they'll have carryover in 2019.

And those are just the major restructuring programs. There's a number of ancillary programs that make it all up.

Okay, great. And on the D&A guidance, $142 million for the year, I think implies about $39 million in the fourth quarter, a little above -- it's been $34 million a quarter. Is that right, that the D&A spikes in the fourth quarter?

Yes. I wouldn't call it a spike, Chris, but there would be an increase from the trend we've seen. And again, some of it is due to the fact that our amortization is lower year-over-year as some of the intangibles from previous acquisitions have reached their -- the end of their accounting life. But depreciation of the projects has been declining because we're reducing our footprint and simplifying our operations. So that has a negative push. But then at year-end, we'll see some new projects come on that will impact the timing and the amount in the fourth quarter.

Okay. And then just longer term, wondering if you could give a comment on what's an appropriate margin level for C&I to run at. What's kind of conceptual aspiration there for that segment?

Well, we had communicated in Investor Day that we expected 200 to 250 basis points of margin improvement over the next 3 years, and that we felt that all segments would participate in that improvement. So I mean, that would be the way I would try to get at that, Chris.

(Operator Instructions) The next question comes from Scott Graham with BMO Capital Markets.

Chuck, first of all, congratulations for a good run, very straightforward, easy to work with. Thanks for your time. I wanted to go a little bit deeper on an earlier question, I think, that you answered, Jon. When you were talking about the progression of orders through the quarter, was that an answer on a dollar basis or on a percent basis?

We would be looking at it on a percent basis as we look at how we're performing versus prior year.

Got you. Okay. So you did see a progression in the other 2 businesses as the quarter and through October progressed, yes?

That's correct.

Got you. The other question is really more specifically on PTS, which looks like you had a very good quarter. I know you've got some upstream exposure there in North America. Jeff's question earlier about industrial distribution, you answered. You're running into some really easy comps and you're executing well with margin. Could you kind of tell us what's going on there? Because that's a -- this business has stepped up in the last couple of quarters and maybe you can kind of color that in for us a little bit more, particularly on the sales side.

Well, I think a couple of things have come together. We've discussed our efforts to try to drive organic growth across the whole company. In the PTS space, we did significantly increase the number of sales reps we have covering North America. And so we think we're getting some benefit from that; where in the past, we hadn't. So that would be my first comment.

We are -- we haven't talked about it much, but when we acquired the business back in February of 2015, we set a target to get $30 million of synergies in 4 years, and we actually delivered it in 3 years. And so some of the benefit we're seeing in our margin line stems from the synergies we're getting. And we did get some synergies on the selling side where, normally, we discount that pretty heavily going into an acquisition. But we did get some nice synergies on the selling side, particularly in renewable energy that have paid dividends over the last 2 years.

Okay, that's very helpful. And if I could just sneak one last question here, and it's regarding pricing. This is my estimate, but it seems like the MPFs had more to do with the positive pricing than the actual price increases. And materials have been up kind of all full year, steel, copper, everything on the metal side. And I'm just kind of wondering the timing of the price increases in the fourth quarter. Is there any way that, that could have been done sooner? I know it's kind of a loaded question. Or is that just essentially that's what you think the market will bear?

So your comment is right in terms of this -- we had a second step-up in inflation that occurred in the third quarter, as Chuck mentioned, just in the last 90 days, up 15%. We were dealing with inflation before that. We did increase prices earlier in the year and went ahead and announced a second one for the later in the year. So you're right that we have been facing inflation all year, and we're taking the appropriate actions to offset the inflation.

I would add, in a number of our international businesses, we've had multiple price increases this year, in particular in Asia where we've seen a lot of steel inflation. So it's -- we talk about it when the fourth quarter increases are predominantly our North America businesses, but we've had some international businesses that have had multiple increases throughout the year.

The next question comes from Josh Pokrzywinski with Wolfe Research.

Just to maybe follow up on some of the C&I margin question. Chuck, is the right way to look at this kind of bridging off of the third quarter? Or I know the year-over-year issue with the LIFO charges in '16 become a little hard to compare. But I guess, the way I'm reading this is you say LIFO will be a little higher in the fourth quarter, presumably that's very C&I based. I'm just wondering if this 7.5% margin is kind of the right run rate, give or take some of the price cost and LIFO issues and normal seasonality on revenue.

Well, I think your comments about the LIFO are appropriate. So we had more -- the majority of the LIFO expense from the third quarter was in C&I, and we would expect that same kind of relationship in the fourth quarter. But again, we have a fewer MPFs in the C&I business relative to Climate. And so we'll start to get the benefits of the MPFs in C&I and the general price increase, both in the international operations as well as the North American businesses that will help offset that inflation. So we're not pleased with the margins in C&I, but expect it to grow particularly with the accelerated restructuring projects that we're implementing.

And Josh, I'll just add that Jon did comment that we expect adjusted margin improvement both sequentially and year-over-year in the fourth quarter in the C&I segment.

Got you. I guess, if that's the case, though, it still seems like you guys are going to be down a couple million bucks year-over-year if I back out the LIFO adjustment from '16? Is that just price cost?

Well, probably that is the headwind. I don't have that math in front of me. But certainly, price cost is a headwind in the quarter.

The largest.

Right. Okay. And then just shifting over to Climate. I apologize if you already answered this. I missed some of the comments on it from the first question. But the comp does get quite a bit tougher here. It doesn't seem like weather has really been super cooperative in the early part of a furnace season. Is Climate expected to be up in the fourth quarter?

So from a margin perspective, we commented that commodity inflation would pressure margins in Climate more in the fourth quarter, especially as you look at it on a year-over-year basis.

And I'd say, on the top line, our general assumptions in the quarter are relatively flattish to prior year for Climate.

Okay. So there was no impact of destocking maybe from like a cool end to the third quarter? I'm just -- it just looks like everyone kind of performed in line with this down low singles and maybe the OEMs had higher aspirations, but there's no inventory hangover inventory effect from that.

We don't believe so.

Got you. And then just maybe one last one to sneak in here. On the Power Transmission side, you mentioned some bigger project activity. How much does that normalize or how much is the current top line kind of the run rate given the crosscurrent of maybe -- that some of those bigger projects fall off but oil and gas kind of maybe build some momentum from here?

So the comment on the big project was specifically related to renewables. But as we commented, we expect improvement in the PTS space in the fourth quarter.

(Operator Instructions) The next question comes from Robert McCarthy with Stifel.

I wanted to echo previous people's comments. Good luck, Chuck, and best wishes, Rob. I look forward to working with you.

In any event, I don't want to start off with a Debbie Downer. But just looking back and stepping back at the C&I business as a whole, I mean, you've been anniversarying several years of pretty weak organic growth declines. You have a long-term target of kind of charitably, what, 2% to 4% organic growth through the cycle. We're in a period, it looks like, from the ISM, which would suggest that we're in a pretty robust growth cycle right now. If you back out the strong PTS growth that we saw in the quarter, this is pretty pedestrian growth at this stage of the cycle for your businesses, particularly for C&I and Climate.

Could you just comment, how are you going to look to structurally improve the organic growth of these businesses? And do you feel like you're losing share? Or do you feel like the market is undergrowing the broad industrial market? How would you typify kind of the growth that you're seeing right now? Because if we're at the time of the cycle where we start to see -- where we would expect to see acceleration and strength in underlying economic growth, particularly in North America, it really hasn't borne out in your businesses right now.

A lot there. I'm going to try to pick them apart and try to answer them one at a time. So clearly, we saw 4% organic growth in the quarter, and we talked about what was helping and what was hurting earlier. The -- from a margin perspective, as we mentioned earlier, just in the last 90 days, we had significant inflation from copper and aluminum. And if you look at it on a year-over-year basis, it's much higher. So yes, when you have that kind of volatility in copper and aluminum and steel, there's going to be a timing issue for us on margins. There's no question. It's happened before and it happened again this time.

In terms of what are we doing structurally, I think we commented that we started earlier this year focusing our attention from a restructuring perspective on the C&I segment. Prior to this year, a lot of our attention had been in the Climate segment. And you can see the kind of improvement we've made in Climate over the last number of years. We think we'll get the same kind of improvement in C&I going forward. So we're optimistic that margins in that business will get better. And as we mentioned, we expect the fourth quarter to be the start of it.

Yes. And I want to comment just a little bit on the organic growth side of it. So we had overall 5% organic growth in the third quarter. That was slightly up over what we saw in the second quarter. So we feel very good about the overall organic growth performance of the business on a year-to-date basis. And we're expecting another solid fourth quarter on organic sales growth.

You are right; PTS led the way in the third quarter, clearly, with 13% organic growth. But we felt very good about 4% organic growth in the C&I segment given how global that business is. And in Climate, the 2% was a little -- was lower than what we would have liked to have seen. We had a pretty strong third quarter prior year, so that we're coming off a pretty solid third quarter prior year for the Climate business. And as I mentioned, we believe that weather had -- certainly had some impact on our performance in the quarter. On a year-to-date basis, Climate is performing very well on organic sales growth. So we don't believe that there is any share loss that's impacting our business this year.

We believe that we're performing at least as good as the market, if not a little better, given our focus on organic sales growth; the new people that we've hired in our sales organization to focus on distribution; all the focus that we have put on, in the digital, what we call the digital customer experience, to grow our distribution businesses; the focus on energy efficiency and the new products. We believe all of that is contributing. So my view -- our view is that we're off to a good start this year from an organic sales growth perspective.

Any update on -- I think you've identified, at least internally, a portion of your business, maybe $250 million of sales, if memory serves, up for divestiture that's perceived as noncore. Any update on divestiture activity, particularly given the robust M&A market?

So we're always keeping in front of us those things that are noncore as well as those things that are future opportunities. So nothing to report right now, nothing pending to report right now, but it's certainly still in front of us. Haven't changed our point of view on that topic at all.

And then finally, and then I'll leave it there, in thinking about '18, obviously, there's going to be question about where the organic growth is going to be for '18, and you have not guided. But in the context of kind of a low single-digit organic growth for '18, kind of looking at the cadence of what we're seeing right now, could you just stack rank what would you think -- what do you think qualitatively your incremental margin lift could be among your businesses? Obviously C&I, we could probably see some payback on that restructuring; and PTS, there's probably room for improvement. But any kind of latest and greatest in terms of what we should think about for planning for incremental margin lift in '18?

Well, we haven't changed our view on incremental margins, unless we have the kind of inflation we're having right now. But normally, our incremental margins are 25% to 30% in the Climate space; 30% to 35% in C&I; and 35% to 40% in the PTS segment. That's typically the way it bears out if we're not dealing with significant volatility in inflation.

So given the inflation, we might think about -- thinking about something on the low end of those ranges just given the price cost kind of headwind?

That's fair.

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, operator, and thank you, everyone, for your questions and your interest in Regal. Have a great day.

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