Regal-Beloit's CEO Hosts Investors and Analysts Conference (Transcript)

| About: Regal Beloit (RBC)

Regal-Beloit Corporation (NYSE:RBC)

Investors and Analysts Conference Call

December 4, 2012 8:30 am ET


John Perino – Vice President-Investor Relations

Jonathan J. Schlemmer – Chief Operating Officer

Chuck Hinrichs – Chief Financial Officer

Mike Wickiser – Vice President, Commercial and Industrial

Paul Goldman – Vice President HVAC and Refrigeration

Duke Sims – Vice President Global Mechanical Business

Scott Brown – Vice President of Manufacturing


R. Scott Graham – Jefferies & Co., Inc.

Matt Duncan – Stephens, Inc.

Shawn M. Severson – JMP Securities LLC

Nicole Deblase – Morgan Stanley & Co. LLC

John M. Perino

Good morning and welcome to the Regal-Beloit 2012 Investor and Analyst Day. I am John Perino, Vice President of Investor Relations. I’d like to remind you that the statements made in this presentation that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please refer to today’s filings with the SEC.

On slide three, we mention that we’re presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted income from operations, debt to EBITDA and free cash flow. We believe these are useful financial measures for providing you additional insight into our operating performance. Please read this slide for information regarding these non-GAAP financial measures, and please see the appendix where you can find reconciliations of these measures to the most recent comparable measures in accordance with GAAP.

Today we’ll be presenting two three minute videos. For those people participating via the internet you will not be able to see the videos but you will hear the audio. When the presentation is archived in roughly 24 hours, the video feed will be live.

Now, I’d like to turn the presentation over to Mark Gliebe, Chairman and CEO.

Mark J. Gliebe

Good morning and thank you John, and welcome everybody. It’s great to have you here. This is our third annual investor day and we brought the warm Wisconsin weather here to New York unbelievable weather that we’re having here. So I will now walk you through the agenda, and as I do so, I am going to introduce each of our presenters today. First I’m going to go through the 2012 highlights and walk you through a little bit of discussion about our brand launch we did this year.

Chuck Hinrichs, here to my right is the Chief Financial Officer of the company. He will be doing the financial presentation. Mike Wickiser, over to the left, Mike if you could raise your hand, Mike is our business leader for our Commercial and Industrial business. Paul Goldman is our business leader for HVAC and refrigeration. Duke Sims our business leader for our Global Mechanical Business. Scott Brown will give you an operations updates. Scott is our Vice President of Manufacturing on a global basis, Scott? And then many of you know Jon Schlemmer, our Chief Operating Officer, he will be walking through simplification and the implications of simplification for the company.

We'll come back and do Q&A after each segment. Feel free to ask a question after each segment. We’ll allow a short amount of time and then at the end, we’ll come back and do a general Q&A. The management team will be having lunch, so if you'd like to join us for lunch, we would be happy to spend more time with you during the lunch break.

Jonathan J. Schlemmer

I'm going to start off today here in a second showing you a short video. And this video was presented – actually it was an internal video presented to our employees in late around March or April of 2012. And it was our brand launch, as many of you know, we changed the corporate logo of the company, we did not change the corporate name, but we changed the corporate logo of the company. So this is the way we kicked it off with our employees. Mark?

Mark J. Gliebe

Hello, our company has made a number of bold moves in the past couple of years. We have rewritten our company purpose. We’ve restated our strategic objectives and we laid out five initiatives that will carry us through the 2015. We have completed a number of acquisitions, including the largest acquisition in the Company’s history. We have integrated and launched over 80 new products. We’ve invested in our manufacturing facilities all over the world and we have restructured our leadership team.

We have positioned ourselves for the future. It’s time that we become a more simplified and integrated company. It’s time for us to show the world what we are already now and that is that, we are a contemporary and innovative company that’s on the move. It’s time for us to come together under one powerful brand. So get ready to become one Regal.

So the message I hope came through like I mentioned that was intended for employees only, but the message was all about coming together as one for our employee and one for the customer, with the numbers of acquisitions we’ve made throughout the years. in many cases, our employees were still acting as Marathon employees or LEESON employees or Genteq employees as opposed to acting as Regal employees when it comes to dealing with the customer.

And so it’s always very important as we move forward to make sure that we were coming together. So, what I want to do with the next few slides is share with the manifestation of that brand launch around the world and how it rolled out. So we actually launched it publically in our Annual Report. this is a picture on the left of our Annual Report, and then the inside back cover there on the right which is made up of many of the different brands that we go to market with.

So the number one is obvious, what we’re trying to accomplish there, perhaps the color scheme is not so obvious. So you see the yellow and red and in blue and in purple. The red and the blue are our former colors, and together, red and blue is purple, Regal is purple and purple is actually the sign of unification. So we were driving all of the messages internally, which drove a lot of our thinking.

Here is the number of slides, to just show you how it was rolled out. here is our corporate headquarters in Beloit, Wisconsin. This is a brand-new factory in Taicang, China. and we’re going to talk more about that in a little bit. This is a view from the outside of Taicang, just outside of Suzhou, and here is the look from the inside. And why that’s important is because we want to get the culture of Regal all over the world. And then starting with our values, our purpose and the initiatives we’re driving. So we’re going to have the same look and feel wherever we go around the world.

Baoshan, China is also a site that we have a new facility in and you could see that the role out of the Regal brand in Baoshan and that’s on the outside, here look some of our employees at the front desk. On the inside, again the same look and feel, no matter which facility you walk into.

Tipp City is actually the home of our recently acquired EPC business. We acquired in August of 2011 and if you saw a picture in August of 2011, it would be A. O. Smith on the front of this building, and today, if you’d walk through any part of this facility, it would look very much Regal as you see in this picture. In fact you wouldn’t find A. O. Smith anywhere in the facility and I really applaud our employees in Tipp City for rallying around the Regal launch. In fact a number of the employees from the Tipp City side were on the Regal brand launch, which made it even more exciting for them.

And as part of our EPC synergies, we consolidated warehouses and as part of the warehouse consolidation, we actually worked with an outside developer to construct this new facility and a point though Indiana, which is very close to Indianapolis. Please look at that facility from the outside; probably our largest distribution center in the world and here is a look at that same facility from the inside.

Our fleet, we have roughly 125 trailers that we use, handles roughly 20% of our freight throughout the United States. Over the next couple of years, you will see our fleet change over to the Regal brand, there is a picture one of the early trailers. And here is a typical look at one of the shows in China of the Regal brand rolling out. It will all look this way, but in this particular case we went with the Regal brand front center.

We started off with the goal of wanting something very simple, it ties into our simplification of strategy. We wanted something that was dynamic and bold. We wanted to eliminate the name Beloit off of the front because many people couldn’t spell Beloit, anybody in China couldn’t say Beloit, then we were also often confused with a defunct company in Beloit, Wisconsin called Beloit Paper, and I get call all the time, are you part of that bankrupt company? No, that’s not us. So we decided to take the name Beloit off of the brand name.

Again not changing the name of the company, but simply changing the look and feel of the brands. So couldn’t be more excited about the way it all worked out.

We didn’t spend a whole lot of money on this. Yeah little bit more to do probably another year of changing over some of the facilities, we took a bite of the share in 2012 of the economic, by next June we will be done. But does the energy from our employees is quite strong, so it’s very exciting.

So, now we get it, it’s not just all about nice colorful brands, right? And especially with this audience, it’s very much about okay, that’s nice, how is the company performing. So we understand. What I want to do now is walk through the highlights for 2012. I really get around our execution and our performance in the year and just kind of bring some of it to the forefront.

First off, we had another record year, record year in terms of revenues, record year in terms of earnings, it was record performance. And so that's quite exciting.

We launched, as we have said for record number of new products, and here is the picture of all the new products we’ve launched this year, the team will be walking you through some of the specifics on this page, and what the opportunities will bring you, but we believe that part of the vitality of the company and certainly we believe that innovation is key to succeeding in this space.

We opened a new hermetic facility, a new hermetic motor plant in Taicang, China. The hermetic business came to us from the EPC acquisition and actually this is the first of three facilities we had to relocate over a two-year period. And as I had mentioned before, we were both encouraged by the Chinese government and in some cases financially supported by the Chinese government to make these relocations. But in each case, we started from a Greenfield and we needed to relocate these facilities. Not something that you particularly would want to do, but let me say, we made the most of it. And so about two months ago I was in China and did the ribbon-cutting and two Greenfield facilities that we opened up during the same week. And this is the launch day from our Taicang ceremony.

And here is, later that week that same week that I was there, here is our new electric generator facility in Baoshan, China. So again quite an exciting event in – if you happen to be in the Shanghai area, I would welcome you to come visit either of these sites, these are world-class lean, efficient facilities, and we are quite proud of them.

The last one is our electric motor facilities in Wuxi, China. And you can see the picture there on the left, it looks like a bunch of electric utility lines, actually that the outer structure of the facility now underway, it’s actually farther than that – farther along from that by now. But you can see the artist rendition on the far right of what it will look like when it’s complete. But it will have the same look and feel as our other facilities, and it will be laid out in a lean way. We’ll actually going to utilize less space than we currently have at our current facilities simply because we’re going to laid out in a lean fashion.

And it’s now all about what’s going on in China. We started construction of an expansion in the Springfield Wisconsin for our Unico business, and you can actually see there on the rapid picture taken just this past week of the foundation going in, and you could see the artist rendition on the right, in the upper right hand corner. The main facility is what you see on the left hand side of the artist rendition and the new piece will be on the right hand side. So we expect it start moving into that facility sometime in the April and May timeframe, for those of you, may recall that our business our Unico business has been growing quite nicely over the past year.

This is a picture of John and I with Linda Shaw, Linda was named our Chief Customer Officer, just recently. She is responsible for customer care in the business, and she also has responsibility for logistics. Linda was one of the key drivers of the new Indianapolis expansion that just went up, and we cut the ribbon just 30 days ago in that facility. So as I was speaking about customer care, in 2012 another highlight we had is, we do a survey each year of all of our customers. In 2012, we had another improvement in our customer survey scores driven by the improvements, we made in both our quality and our delivery, so we’re quite proud of our continuous improvement in customer care.

And it’s not just all about openings; we actually did a fair amount of closings in this past year. Closings are difficult and I certainly don’t take them lightly, but in the economy we live in and with the kind of business we operate with the number of acquisitions they are necessary. So we close and consolidated four manufacturing facilities, six warehouses. We rationalized a 120 suppliers. We eliminated 20 legal entities and convert three ERP systems this year.

And to all of those any one of those task is tough, and we got a lot done in a single year. We closed on four bolt on acquisitions; most of you are familiar with the Milwaukee Gear acquisition that we closed in January of 2012. There are three other acquisitions shown on the page, relatively small in size, each of them was acquired to drive growth in a particular part of our business.

Technojar is located in Mexico and was acquired to give us a stronger position with our Unico business in the Mexico regions and going after the oil companies, Pemex in Mexico. Marlin Coast is a distribution business in Australia and Remco a small distribution business in the UK.

And while all of that was going on, we integrated the largest acquisition in our Company’s history. So again we acquired in August of 2011, $700 million business, and couldn’t be happier with the way that business was performing. The leaders of that business are in key positions with us today, many of them were here last year at this very event, and they are still with us today in key important roles in the company and we couldn’t be happier to have them. Both the former EPC business, they certainly brought skills and talents and best practices with them and we merge them with our legacy Regal business, together we are stronger than we were apart.

So it was an exciting year and I couldn’t be prouder of the team and today, we’re going to walk you through how to look forward now and what’s going to be coming in 2013.

So I’m going to turn it over to Chuck Hinrichs, our Chief Financial Officer of the company and he’ll walk you through the financial performance of the company.

Chuck Hinrichs

Thank you, Mark. Good morning everyone let me add my welcome and thanks for your attendance and continued support of Regal. My agenda, I will be providing a summary of our strong record of growth and profitability. I’ll do some comparisons to two different peer groups that we measure ourselves consistently against. I’ll talk a little bit about our focus on generating a strong free cash flow metric. I’ll provide some data on our quarterly sales breakdown and talk a little bit about a change in our operating reporting that we’ll be doing in the fourth quarter, and then I’ll provide an outlook for our fourth quarter 2012.

Our sales have increased over the last seven years at a compounded annual growth rate of 11.9%. This includes the negative impact of the 2009 recession and the recovery to our 2012 estimated sales of $3.1 billion. Our sales growth has driven by our acquisitions and the organic growth of our businesses. We also increased our operating profit over the seven year period, of course the 2009 recession impacted our performance but the recovery and the excellent performance of our businesses drove our profits higher. Our estimated four quarter 2012 operating profit puts our results within our earlier guidance for the quarter.

Our earnings show the same pattern as our operating profit on the previous slide. Our estimate for full year 2012 earnings per share it’s slightly lower than the 2011 results due to the weaker global markets and the uncertainty that we face within our businesses. Our dividends have steadily increased during this period and we are very proud of our 52 year record of quarterly dividends.

Now, I want to talk about some comparisons to two different peer groups. The first is the peer group of 46 US-based industrial companies. We have used this peer group for a number of years to benchmark our operating performance. Our sales growth has consistently outperformed this peer group. But we set our goals very high, so we also compare our performance to the smaller peer group a well respected peer group of diversified industrials including Ametek, Danaher, Emerson Electric, Roper and IDEX. And our total shareholder return exceeded this best-in-class industrial peer group over the past seven years. And looking at that same best-in-class peer group, our sales growth and our free cash flow as a percentage of net income led this peer group over the last five years.

Speaking of free cash flow, we work hard on this important financial metric. We focused on operating profits, managing our working capital and prudently investing in capital expenditures. Our goal is to generate free cash flow consistently above 100% of net income and we are proud of our performance generating free cash flow of an average of 125% of net income over the last eight years.

A busy chart but it delivers three important messages to you: number one, it shows our success in acquiring businesses; number two, it shows we have not taken on an excessive amount of financial leverage in order to acquire these companies and to support our growth; and thirdly, after a big acquisition, we’ve used our free cash flow to quickly reduce our debt.

The callout box at the bottom shows that at the end of the third quarter 2012, our debt-to-EBITDA was up 1.9 times, the third quarter of 2011, following the close of the acquisition of EPC, our debt-to-EBITDA was at 2.8 times, so almost a full turn of leverage in the 12-month period. With the integration of EPC now, we thought we would provide an update of the quarterly sales, which show the seasonality of our business.

I mentioned that we’re changing some of the operating statistics that we’ll be reporting in future quarterly earnings reports. So starting in the fourth quarter with the integration of EPC, we will be including their results as we report on our change in sales over the prior year period in our North American residential HVAC sales and our North American commercial and industrial business sales.

And I will be closing with an update on our fourth quarter results 2012. Our previous guidance is shown here. Our GAAP EPS of $0.58 to $0.66 and our adjusted EPS adding back the impact of the restructuring charges was $0.67 to $0.75, excluding the $0.09 of restructuring charges. We are confirming the guidance range of our fourth quarter 2012. However our operating profit will be at the lower end of that earlier estimate, but our effective tax rate or ETR will be approximately 14% versus our earlier estimate of 26%. This is due as we successfully close on a tax plan that will enable us to lower our tax rate for 2012 and future years, when we close that plan in the fourth quarter that will allow us to take the full benefit of the 2012 lower tax rate into the fourth quarter having dramatic effects on our ETR. So this will lower our tax rate in the fourth quarter and enable us to bring our fourth quarter earnings per share at or above our earlier guidance level.

Now for a summary, Regal has a strong record of sales and profitability, we compare favorably to two important peer groups and a number of important financial metrics. We focused on free cash flow to reduce our debt to fund our dividend and to continue our growth plans through organic growth and through acquisitions. And we provided confirmation of our fourth quarter earnings guidance.

So with that I will take a few questions and John Perino has the microphone, so he will bring that to you, so our participants on the web can hear.

Question-and-Answer Session

Unidentified Analyst

Thanks, Chuck. So could you talk a little bit about the short key shortfall, is it coming from the revenue line, or is it some margin issue? And then if it’s a revenue issue, if you could talk about what you are seeing within C&I versus HVAC?

Chuck Hinrichs

I wouldn’t call a shortfall, it’s just within our guidance, it’s just at the lower end. I think it just reflects the uncertainty that we’ve been talking about in our business. I wouldn’t call out anyone business or one region, the top line it has seen some pressure and that have some impact on our operating margins, but again in line with our earlier expectations.

Unidentified Analyst

Yeah, just to follow on that. I mean, just good math, it seems like a $0.12 swing in the tax rate and you’re still within your guidance. So I mean it seems like a fairly sizable change in the op profit or does the tax rate push it to the higher end of the range?

Chuck Hinrichs

The change in the ETR would be about an $0.08 per share impact. So and if we would be at the high end or above that earlier guidance range that we’ll still keep our operating profit within the guidance range.

Unidentified Analyst

But we should think of that profit as being effectively $0.08 lower?

Chuck Hinrichs


Unidentified Analyst

And then just what’s really changing here with the reporting, is it just, you’re now all are organic with respect to EPC?

Unidentified Company Representative

Yeah, in the past we have not included the EPC numbers, because we didn’t have a prior year result as part of Regal to compare them to. So rather than doing apples to oranges, we were just reporting the legacy Regal business, now that we’ve got a full 12 months integration with EPC those numbers will be included in our residential HVAC and C&I businesses in North America.

Chuck Hinrichs

So we’ll have opportunity for questions later. Now, I’d like to turn the podium over to Mike Wickiser, who is our business leader for our commercial and industrial motors and generator business.

Mike Wickiser

Thank you, Chuck. Good morning, everyone. As Chuck said, my name is Mike Wickiser, and I am the business leader for the commercial and industrial motor and generator business. And I’m going to refer to it as the C&I business to make it easier on both me and you as I go through this today. I’d also like to extend my welcome to you. I know you’re all very busy in those many other places you could be this morning, and we’re grateful that you took the time to spend a few hours of ours.

To talk about our favorite subjects, so I’ll jump right into it. There are four key messages that I would like to give across this morning. I’m going to talk a little bit about the global C&I business. So all of my slides and comments will be about the global C&I business except for long, and I’ll point that one whenever I get there. We will also talk about the growth progress that we’ve been making both in 2012, and then I’ll give you a view of 2013 and how we think a little long with our customers.

Energy efficiency and the increasing need to build more energy efficient products will continue to be a driver within our business and that will be, and we’ll discuss that a bit in terms of how governments around the world are increasing the required efficiencies.

And then finally, we are an innovative company that pride ourselves as Mark showed you the slide of the many new products that we brought to the market this past year. and I will share a group of them with you this morning. So just by way to define the business a bit, I’d like to thank just the main employees on motor and generator business.

So whenever you think of the motor, you’re consuming energy, so we call that the power conversion side of the business, and I that’s where you are taking a motor and you’re spending a piece of driven equivalent to create work in some fashion. And you will see the picture there; we’ll talk more in just a moment about the broad range of motors that we make on the power conversion side of the business.

We also make generators and switch gear. The generators we make range from about 10 kilowatts to 4 megawatts, and they are purchased by genset builders. Now, what does that mean? The generator itself doesn’t really do anything, once you turn it, so a genset assembler buys the generator and then they marry that to an engine of some sort, either gas or diesel or some other fuel and that turns it.

And so therefore you can take that energy and you can put it wherever you need it in that genset and it’s often used in what’s called a standby power, which is used despite the name sounds. It’s the power to go out, the generator comes on and it provides you a power. I don’t need to explain the importance of that to those of you that are in the North East, you’ve experienced that over the last month with the storm.

We also have a switch gear side of the business, so whenever that genset is working, you have to have an effective and safe way to transfer that power on and off the system and that’s what our switch gear business does. So we have a broad portfolio of motors and power generation equipment.

We go a little bit deeper on the motor side of the business. What we have here is an example of the entire motor offering, and you will see it on one side of the wheel that’s the fractional side of the business. And we kind of loosely refer the fractional as anything, a couple of horsepower and down, and those are motors that are small enough that you can hold them in your hand over, a couple examples on the table as you walk in there this morning.

And then we have the integral side, those are more or less standard around the world. They come standardized for North America use with an organization called NEMA that sets those standards and then IEC for the rest of the world, and then there is the large size. So the integral range is around 3 horsepower up to 500 or 600 and then large is greater than that, and we make motors up to around 7,500 horsepower. So what this means to a customer is, it is a broad range that can meet all of their needs. It's very important for them to be able to come through a single company for single brand in order to get all of their needs.

Now, this slide, I will let you look at for just a second here, so we can talk about the segments there, but we tend to talk about the application serve. So the motors and power generation equipment that we build can be put into these segments if you will or these groupings, so that’s what shown on the pie chart on the left hand side. And then on the right-hand side, these are the expectations that we have for 2013, and it is a summary of what our customers are telling us and then what we are putting in to our plans. And you’ll notice that three out of the five there that our plans are actually greater than what our customers are seeing and I would like to give you a little color around why we think that’s the case.

I’ll start with the commercial HVAC business. First of all, the commercial HVAC business is the larger size units that will be used in a building like we are in here. This morning Paul is going to talking to you a little bit later about the revenue side of the business, but these are the larger size units. The customer feedback is relatively flat some puts and takes to pending, but they are saying that partly driven by commercial construction. Commercial construction as you know since the recession has been down significantly, it has been and kind of the long trough, but they are expecting it to grow slightly next year.

We feel like that's going to help us as they begin to see a little bit of strength. But then also they are under the need to produce more efficient products that will be required by 2015, and they’re working on those now, and they’re working on those in conjunction with us. And so they will be bringing those products to market over the next year or so and we feel like that’s going to help drive our sales.

Pump is expected to be up next year. Pump is everything from a sump pump that will be used in the basin of your home, so look very large pump that would be bringing water to this building or taking water away from this building. Pumps are also used to water the fields and crops which has been quite strong this year, and we expect that to be strong next year.

So in the pumping segment, we expect to see some strength. On the sump pump side this year, there was very dry as you know. So they were not as many sump pump sold, but Sandy will have an effect on that as many of those pumps will be replaced in the northeast where there is a high incidence of usage. So we expect to enter next year with reasonable inventory levels in the sump pump segment. So we feel like that we’re going to be right in line with pump.

Machinery is a very broad spectrum. If any type of machine that requires power to make it turn and that is seeing as flat by those customers and we are also seeing it as flat.

On the power gen side of the business, it’s been relatively flat. The customers are calling it flat next year. It perhaps could be up somewhat as you Europe slowed, as China slowed, the demand for energy has slowed also. So that put some pressure on and this past year, we expect that to recover some next year as we’re seeing, there could be a recovery in China.

And then also we’re working with some customers where we hope we will have some gains, as well as some new products which I have one of them posted on the door out there, that I’ll talk a little bit later about.

And then there is a wholesales trade side of our business or the distribution and that also depending on how you would talk, it could be up slightly to down slightly. we feel for us that it’s going to be positive.

We’re going to do the same thing now, but rather than looking at the segments, we’re looking at the regions of the world and you can see that from the business standpoint, we are still very strong in the Americas, slightly from a global perspective, slightly less than the company average. And as you look on the right hand side of the screen, you’ll see that we’re seeing the Americas that’s been up slightly.

We typically follow the industrial production from a manufacturing perspective if you read those indexes and they’re predicting that it will be up low single digits next year. Europe, we’re also predicting that to be up or as the overall economy in that region is not necessarily predicted to be up, but our sales has a large component in the marine, and oil, and gas space, and we’re seeing those as up. So we are predicting our revenues in 2013 to be up in that area, as a result of that.

India will see a slight positive, also Australia, similar to what we see here, and then China. We’re expecting that to be positive. Also there is some good news coming out of China, but last two quarters have been positive. They were in a slowing our Chicago and the last two quarters have been more positive next year. This year I guess in the end of the year, the new government is in place. There will be some stimulus funding programs. So we’re expecting China to be stronger next year than this.

Now this is the one chart that’s not global, and Chuck just talked about in our earnings releases over the past, since Q3 2009 and actually, we were doing it prior to that. But we’ve given the pursuant change per quarter year-on-year for the C&I North American business and what I’ve done is really graft what was in the earnings releases over this period of time.

Going from Q3 2009 to Q3 2012, so you can see what’s happened here and I would like to give you my take on what’s going on. First of all, you will see that there were 10 quarters of improving sales from Q1 2010 to Q2 2012. But then in Q3 it did goes slightly negative, and I’d just like to point out to you the very tough comparisons that Q3 2012 had to Q3 2011 and up until that point there was a very long stretch there.

So what we have seen in the third quarter is some slowing demand across most of the segments, it’s very broad, and then whatever the industrial production came out for manufacturing in the third quarter, it more or less carry the same trend. So we thought we would explain that a bit for you.

We’re going to move to manufacturing, now Scott Brown is going to follow a few people from me here and kind of go into details on it. But I wanted to give you a flavor of where we produce the products with the C&I business sales. So this is a production chart.

And you’ll see that the higher cost regions continue to shrink and the lower cost regions continue to grow, and that will continue on, and on the right hand side are the reasons why. We fee like that the U.S. manufacturing that we have is key to our business. There are always going to be customers that need custom made product quickly. And so it’s good that we have production facilities that are near our customers, so we can provide short lead times to them.

But we’re working even though we have those facilities we continue to work to reduce those costs in many different ways and these are all kind of play in all the facilities, the comments that are on the right hand side of the sheet there. So Scott will talk to you about some of the plant consolidations. We’re also going to a platform simplification. On the fractional motors, we had on the right hand side, there were many of them. Those are really a couple of frame sizes and the frame size is just a relative size of the motor, but we have several different variances of that, several different platforms of it. And they came by way of the companies that we have acquired along the way that built the same product if you will.

So we’re looking at those along with our customers and we’re trying to standardize the components and parts that make those up to try to get those into a single platform to help us in terms of the volume of the parts. We are continually moving the parts production to low cost regions, even if the actual equipment is not manufactured there. So we get the benefit at least on the parts.

Even if we’re not closing facilities, we’re continuing to do product family move, so that’s the four points down. And then we’re investing in equipment, which Scott will show you some pictures of our shaft making machine where we continually drive labor, productivity as well as quality of the product that we build. So we have a focus within the business on cost improvements to increase our margins.

We have talked about energy efficiency of being a driver in this business for quite sometime. This is the chart going back to 2007. What it’s showing is the percent on the left hand side of the products that we built that are energy efficient products. Several years ago, the highest level product efficiency that’s required in this country is given the name and that name is NEMA Premium. And so that’s really what that’s talking about at that level of efficiency, it’s known as IE3 in the rest of the world. Of the products that we build, how many of them are of that efficiency levels.

So you can see as we walk forward in 2007 to 2010, we were acquiring companies outside of the United States, which were not yet covered with a regulation that was requiring as higher efficiency standards. So the present of total products was actually dropping at the time.

At the same time, there was a law in 2007 that was passed from the EISA 2007 law passed by the U.S. government that required a certain family or motors move up to that NEMA premium level and that went into an effect in December of 2010. So you’ll see the jump up at that point.

Canada was expected to follow in 2011, but did not follow until April 1, 2012. So you’ll see a slight increase for Canada there. And then there’s been a lot of legislation, a lot of discussion the DOE continues to work on this, and just as a side that DOE under the EISA law and even the EPAC law that went back before that is required every five years to continue to look at the efficiency levels of these product, and to make a determination how do either expand it or to increase the level. So that’s what’s been happening over the last year or so. And you’ll see out in 2015, there are something called the small motor rule and the EISA expansion, which I’ll talk about on the next slide and then Europe against the phase in IE3 in 2015.

So let’s look at the U.S. regulations specifically in this next slide here. So what you’ll see first is the EISA 2007 rules, which is the purple bar, the purple slice of the pie there and that’s been in place since 2010. The EISA expansion rule which is there were motors that fell outside that the original law that they have gone ahead and included both and that affects about $45 million of our current revenue and that will be affective in 2015.

Then there is the small motor rule, which was DOE rule that is now in place and it will be effective in March of 2015 and that affects $15 million. And as I said before, the Federal government, the DOE will continue to evaluate the rest of these products as time goes forward, we are a supported of higher efficiency standards and we will work with the government as time goes on to pick up more and more families of products there.

So now I’d like to go through a series of products that launched this past year and couple of that will launch early next year, and just kind of give you a feel for what we’ve been doing in terms of bringing innovative products to the marketplace. This is the VGreen product, and let me just going to tell you the story this is a Century branded product that has just come out and just to kind of show you the interest, this is for pools that are smaller, if you go to Florida as you’re flying in, wherever city you’re flying and you look down and its like everybody has a pool on their backyard and it’s a smaller typically kidney shaped pool or something and this is the size of motor that would be required for that pool. This is a 1.65 horsepower motor versus the 2.65 that came out first a year or so, back.

In the picture on the left hand side, you’ll see the folks gathering around that’s not the floor of the New York Stock Exchange, that’s a pool show that was held last month. And in the middle of that group of people right there that is this pump motor and that’s the amount of interest that was generated it stayed that when in most of the day people coming into learn about this product. We were able to create it in about a year and so what we have was from the Century brand, we had a very successful motor business and from Paul’s HVAC business, we have a very successful ECM product using the variable speed control. And these teams came together and they created this motor in a very short period of time. So it’s just one of the great benefits of having us all together.

I’ll go on to the next one here, out on the wall as you walked in you might have seen a big picture, that is a diesel electric propulsion generator. That is almost life size, it’s probably still 50% smaller than what it is. We just can’t bring a picture bigger than the one that’s out in the wall there. So last year we talked about this particular product, we were not in this business. These are used for workboats that’s what these are called, and this is what’s used to create the electricity to drive the propulsion engine.

We have finished the design. We have built and delivered and the ones we talked about last year are already built in boats at this point. They have been quite successful and very, very popular with our customers and they’re encouraging us to expand the range to go higher as well as lower in output rating. And this is a higher output rating that we’re building this year that we’ll launch next year to continue to grow that family.

I mentioned earlier that we’re trying to take advantage of our low cost region manufacturing as well as bringing product to customers quickly in North America and that’s exactly what this story is about. This is a product where we create the components if you will, in our factory in Wuxi China. And we bring them here and we have them ready to be built into a final product and tested and we can do that in about three to four week times versus somewhere in the 12 week period of time if you are bringing it from Asia. So we’re able to provide it quickly with the benefit of parts from the low cost region and satisfy our customer’s needs.

This is another one here, this is a roller table motor, and this goes into the steel industry that’s the picture you’re looking at on the right-hand side of the page, the motors are where the blue areas are pointing to and while it may not be completely evident here the environment at those motors are living in is very, very harsh, you can see that it’s wet there, it’s very hot there, right on top of them so to speak a red hot molten sheet steel running, and the life of the motor that goes there is not that long. So our customers came to us and said, is there a way you can build a motor that last a little bit longer and that's what it can survive in the very harsh environment that it find itself in, it has become quite popular within the steel industry, and we're selling them around the world at this point both here in the U.S. and as well as in other parts of the world.

I talked about the energy efficiency legislation it's coming, it's called IE3 and that's NEMA Premium for the rest of the world, so we need to have a product line ready for that and we have been working on it, it will roll out as a complete product line in 2013 in advance of the legislation requiring it in both Europe and China in 2015. In China, there is currently an IE2 requirement that there have been incentives and there will be incentives going forward to adapt to 2013, the IE3 product in advance of the 2015 requirement. So we are ready and able to supply those customer needs. It's interesting and again one of the values of having the global nature of this business, it is a product that was designed and built by our multiple teams both in Asia as well as here in the States and the motors for use around the world.

This is a generator product. We also have a factory in China that builds these products, a majority of them stay within China and I would say historically the power need in China has been lower than what it has been for the rest of the world, but like all things that is changing rapidly. This is a higher power generator that will be used to meet those needs, so as the banking system develops, the telecommunication systems data centers and all of those things rise to the standard of the world. There is more and more power needed and so we have the products ready for that segment.

As you walked in out there to this is from our Thomson Technology business, they build switch gear and transfer switches. The majority of what they have build in the past have been for higher power commercial industrial use. This is one that is made for home use, so if you happen to have a gen set at your house that runs on either gasoline or in most cases it’s natural gas. There still needs to be a switch to utilize that power effectively, that switch to off the utility and on to your own generator and that’s what this product does. It was launched mid last year and has seen a lot of success, part of it driven by the storm this past month.

And then finally this is the Unico product we talked a lot about this, this is the Linear Rod Pump. So this is the first version of this product that they build. It has a motor and a gear box and then the pump itself. The motor is called out in the picture there as well as the gear. When it was first designed the motor and the gear were just utilized off the shelf, if you will and we have gone back and looked at that Duke is going to talk about the mechanical side of our business in a moment, and we have worked together, the mechanical team, the electrical team, and we have optimized the system to build a more robust and efficient products, so we are looking forward that the continued growth in the sales of the LRP, which includes both of those Regal products, the motor and the gear.

So in summary here, here is the C&I business outlook, there are some headwinds, but more tailwinds. There continues to be uncertainty in the U.S. economy and then the European recession. On the positive side, we are seeing and feeling the benefits of the synergy savings and we will continue it to grow that as we go into next year. I mentioned the simplification efforts that are underway at this time, we will continue to see benefit from that. We are seeing positive signs from China, the energy regulations while there is no regulation that will come in force in 2013, we’ll see the continued growth from Canada’s change this year, and then the early adoption next year as people begin to prepare. We will continue the growth in our new products, there will be some effect from the storm. And then finally, the oil and gas segment continues to give us lift in certain areas of the world.

So with that, I have a few moments for a question or two.

Question-and-Answer Session

Unidentified Analyst

Good morning (inaudible).

Unidentified Company Representative

Good morning Paul.

Unidentified Analyst

I’m trying to get sort of, this is one of my why questions. We’ve known about the energy efficiency of variable speed motors for quite a long time, if you grant me in all the simplification, but nobody cared until five or six or seven years ago. Why is that these energy regulations are coming into place, or why is the marketplace demanding variable speed motors and their efficiency now and not prior, what is it – is it the outside environment, is it something that you’re doing, or is it a combination of both, I mean just kind of give me a philosophy and the best answer to that question? Thank you.

Unidentified Company Representative

Sure, sure, at the end of the day it probably goes back to cost, I mean you’ve been around a long time, you probably remember back to the oil shocks of the ‘70s and the concern that everyone had about energy at that time. And so it whacks us in range, with the cost of energy, but I believe everyone feels like the cost of energy is now up and it will continue to be up. And it's been up for a sustained period of time where people to look at the past and they begun to go to work on how that we reduced the consumption, the price of energy can’t be dealt with or change this much is the cost or the amount of energy that you are consuming.

So as everyone becomes more and more aware of that whether they’d be a commercial or industrial customer or in the case of pool motor that I’ve just shown the residential customer more and more people are saying that their savings here we can reduce the overall customer business. And that could go more and as people look at to sustainability the 3P reporting plan it is one of them and I just believe there is a much stronger feeling towards those thing including our company to be consciousness about that.

Unidentified Analyst

Hi, question on China, you had talked about that being headwind this year potential tailwind going into next year. Can you give us the sense of the magnitude on how much China has been down this year for your business just thinking about how the comparisons can get easier and if there is a pickup what kind of benefit you can have?

Unidentified Company Representative

David we haven't given the specifics about our year-over-year change in China, so we've been starting in the fourth quarter of last year started this season slowdown in order rates, definitely a nice (inaudible) in China.

Unidentified Analyst


Unidentified Company Representative

In some of the quarters, it was the slowing of the growth rate plus other quarters it was an actual decrease from the prior year period.

R. Scott Graham – Jefferies & Co., Inc.

Yes, Mike, hi, it’s Scot Graham from Jefferies.

Mike Wickiser

Hi, Scott, good morning.

R. Scott Graham – Jefferies & Co., Inc.

The graph that you have in page 51, you indicated here that your forecast for the Americas which is about 70% of sales is up for 2013. I was wondering if you can tell me what the company is thinking on drivers for that business particularly since the first half of 2013 you’re facing tougher comps.

Mike Wickiser

Yeah, get to page 51. Okay. So you mean 51 or 52.

R. Scott Graham – Jefferies & Co., Inc.


Mike Wickiser

Yeah, so. If I take, let’s look at 52 first, I think that’s where you started, why do we feel like the Americas will be up, or the U.S. will be up at 70% is that all right. We have looked for an industry that we can follow that will give us a some predictor, and we’ve looked at the manufacturing industrial production and it’s forecast, it is depending on when you look at it, to be up about 3 next year, down slightly three points down slightly from 2012, so that’s a piece of it. We kind of start there and then I can do this right. So then if we go back there are some things within our business and I won’t go through them all again here. But we see some tailwinds or some lift within the commercial HVAC business those things that I mentioned before getting ready for the energy regs. We are already seeing some of that this year, so we expect that to grow as we get closer to 2015.

The pump market it was incredibly dry this year. So while there were a lot of people, a lot of people you’re dealing with, fields we expect that to be more of those customers that provide the equipment that have been talking to us about the news for next year. The power gen business has been down some, we expect that to recover too. so those are kind of the big movers as well as the wholesale trade or the distribution piece. We are talking with customers about some different programs that are going to help us out there too.

R. Scott Graham – Jefferies & Co., Inc.

Thank you. One last?

Unidentified Company Representative

Yes sir.

R. Scott Graham – Jefferies & Co., Inc.

You guys, so I mean dramatically, a little more segment on China than you did, call it three, six, nine months ago. should I interpret that as, you guys are calling the bottom, it’s kind of piece to be a headwind here near-term or is that just the expectation that comps have gotten easy to the point where it has to grow next year simply, because it can’t go down anymore. I’m just trying to calibrate where you’re at on that?

Unidentified Company Representative

Well, I’d say in the last couple of weeks, we have seen a little bit turn-up in our ordering, which is what we’re paying attention to. We’ve seen that before and then got disappointed again. We’re a little bit more upbeat by the fact that now we’re not doing one, we’re not only watching our order rate, we’re watching the PMI, and the PMI for the last couple of months has been positive and upbeat. So you got three things that are kind of giving us a little bit more positive feeling. Number one, we’ve been talking about the government stimulus, and hoping that that would deliver; number two, we see it in the PMI; and number three, we see a little uptick in our own orders.

So those three things are giving us little bit more positive outlook on China. we aren’t seeing that in India or anywhere else in Asia yet.

R. Scott Graham – Jefferies & Co., Inc.


Unidentified Company Representative

Look in China is not enough to move that needle yet.

R. Scott Graham – Jefferies & Co., Inc.


Mike Wickiser

Okay. I want to thank you for your questions. And now, I would like to introduce Mr. Paul Goldman, business leader for HVACR. Paul?

Paul Goldman

Thank you, Mike. Good morning everybody. It’s a pleasure to be here, nice to see all of you again, thanks for your time and attention this morning. Here is the few of the key messages I'll cover with our brief time together this morning. First, I want to again remind you what HVAC and refrigeration is. What our customers do kind of ground you on the types of equipment and the different aspects where we participate with them. And I’ll spend a little bit of time on the products that we've acquired over the last few years and how it's given us a very nice portfolio into those segments.

I'll spend a little bit of time on a global HVAC and refrigeration view, what our sales are in those channels, and from both the global standpoint and the channels into them. And then finally I’ll spend a little deeper dive in to trends on the North American base, quite a bit of interest on the stimulus or consensus agreement or status of that R22 and Dryship efficiency regulations, several interesting dynamics that continue to go on in that aspect.

And I'll spend a little bit of time on new products and wrap up on a couple of interesting segments that I'll say that we’re creating new opportunities for us going forward.

So here is the reminder, our biggest participation in this space is still in space conditioning, so what most of our customers resided, most of the product and innovation that we have developed over the number of years is the top half of the chart, everything from package, air conditioners, through rooftop units, very broad presence and split, air conditioners so this would be the condenser outside your house, or the furnace that you’re handling or adding to your basement, and very large parallel rack systems, shown on the far right. And then also bath vent fans. We have been a participant and I’ll say lower standard efficiency bath vent fan motors and I’ve got an exciting update for you before we’re done here, about what we are doing to even innovate that product type.

Water heating came to us as a result of the FASCO acquisition, the A.O. Smith acquisition even helped us long further, so we are in the powered vent, a strong player in the power gen segment of residential and commercial hot water heating. There is a movement underway in North America, it’s very predominant in Europe and other parts of Asia, which is instantaneous hot water heating, and we are developing some new products in that area and I will give you an update on that.

And then refrigeration, we really got a strong position in this segment as a result of the moral acquisition a number of years ago. That was a primary focus there as we continue to develop that may be remind you a comment I made last year, we’ve retrofitted or changed out over 1 million refrigeration display case, walking coolers motors across North America. These are motors that were operating fine, I guess you asked earlier why are our people retrofitting. It’s about awareness. Do you have a product that can do something, it’s about payback, face at all of our customers are looking about how to save money, energy is a very large cause, whether you are residential consumer or a commercial consumer, energy is very high up there.

So we continue to develop products and expand into that space and again the most recent A.O. Smith acquisition helped us along even further in that. They brought along some nice technology on transport refrigeration, so these are containers that go on ships across the ocean or trucks down the road, had a very nice position. And that so we are starting to have a very nice portfolio around stationery, walk-in cooler display case and also transport and we are taking that from I’ll say, our existing market places and as the emerging economies grow and refrigeration continues to be more important, we will be there for that.

So I feel very good about the portfolio of products that we both brought together for HVAC and refrigeration space. the product types again, on the left, combustion again, really Fasco strength that came to us a number of years ago. So this is integrating a motor and blower technology, we continue to advance that by, Mike talked about taking the ECM foundation that we had a number of years ago. We just continued to proliferate that.

so now we’ve got highly efficient variable speed control, combusting motors down the center has been our bread and butter of a standard induction mid-tier ECM, and then in premium ECM products under residential commercial HVAC. And then again, on the far right, we started with the small display case motor there, a number of years ago and have been very successful. And we just continue to innovate those product lines under those prior application.

So I thought it’s been a little bit of time from a global view of how we go to market. So on the left, OEM, that’s approximately 82% of our sales go into OEM, our original equipment applied products. So we’re a heavily focused customer relationship technology about how to innovate for their benefit, we’re a component and to a system, and we feel we have a big enabler into how these products provide better value to the end users.

We’ll continue to have that kind of focus. it provides a lot of insight into us to what does the future trends and where we need to be, and what we can then do in the aftermarket, that’s an important development for us. It’s 18% today, two years ago, would have been single digits. So it is a result of organic growth in that space and the key acquisition of A.O. Smith. last year, we had a very nice position there. we’ve got a better position now to service the installed base and I’ll talk later about actually retrofitting even further that installed base.

Sales by geography, obviously predominantly North America, I think that’s a good thing. Mark talked about the strategic acquisitions that we’re making around the globe. and in most cases, those acquisitions have channels and approach to customers that are an opportunity for these products. So we’ve got a lot of untapped opportunity on a global basis to take what we’ve done in North America and expand it around the globe.

So a little bit of update now on what’s going on in the industry. I’ll start with the consensus agreement of regional efficiency standards. For those of you that are not aware, the industry came together couple of years ago and said let’s agree on how to advance the efficiency regulations in North America and simply put it, let’s have a regulation for higher heating or gas consumptions and furnaces in the north, and let’s have a higher agreement for higher efficiency air conditioning in the south.

The way that unfolds is that furnace is supposed to happen in the second quarter of next year followed two years later by air conditioning. there is a little challenge underfoot, sometimes industry doesn’t want to change. there has been a lawsuit filed by our American Public Gas Association. I can tell you, I can give you a very current update that they are in settlement or negotiating talks with the Department of Energy right now. I don’t know the inside story, but I suspect that these regulations will go through. There is no way we’re going backwards. We transfer only pushing forward. There is too much momentum in this area and I think it’s a question of time. So can’t be specific about that. We thought that we would have an impact for when we sell, higher efficiency gas furnaces that pulls through an improvement on the combustion side for us when we sell higher efficiency air conditioners that pulls through a circulating roller motor for us. It’s just a matter of time for these.

In addition to that, there is a number of other things underway. Energy Star as a result of these recent dynamics and continue to push the efficiency up, continues to raise the bar on the Energy Star qualified products. Don’t see that trend changing in the near-term. There is also, if you’re not aware, there is a pending furnace fan standard requirement.

It’s too be ruled on and completed next year and what this would require is that, independent of the efficiency of the system this ruling would mandate or require a specific type of efficiency on the motor, independent of the system. In all cases, it’s going to result in higher efficiency motors. We’ll see how that plays out. It should be result next year and then it will be implemented a number of years later.

And then finally, there is some recent European fan efficiency standard requirements that are now essentially mandating high efficiency and motor technology in Europe. So we see these trends gets continuing going forward and then in and all cases they continue to be favorable for our business model.

And the next one, I’ll give you a little update on the R22 dynamic referred to as dry ship, so little bit of background there. If you recall the EPA, it’s now regulating the phase up of R22. They put an end of production on version R22 refrigerant in 2020 and then they mandated from a new equipment standpoint for our customers to sell equipment that they can no longer provide a charged R22 condenser or component starting in 2010. There was a loophole and the requirement that allowed for a system an outdoor condenser to be shipped dry and charge to dry, so that's the dryship phenomenon. And you can see the units, an estimated number of units that have been sold into the industry here on the upper right started out at about 0.5 million units for first year, it really shot up last year estimating about 1.2 million units.

By all indications that peaked and it is now moving back down. The cost of that refrigerant has gone up. The awareness I’d say of predominantly our contractor base we talk to you as the consumer and certainly the consumer itself are becoming aware of, yeah I can get buy with a lower cost replacement with the dry unit and charging it on-site with R22, but that's a net some gain, that's going to cost me in the long-term. So we are seeing that the education awareness and trends going forward that's going to continue to drop.

So it won't be a year-over-year negative impact for us, it’s our prediction when the industry and then shifts to following the intent to the spirit of the requirement which was to shifting to R 410A, which is a non-HVAC has the lower global warming potential. In that case it requires the change out of both the outdoor unit and the indoor unit, so now we get back to selling a complete system and that’s more favorable for us going forward.

And then the last chart on kind of the Resi HVAC dynamics is just a summary of indicators. I mean what we look at, we see that we feel the consumer confidence is generally moving up and relation to the HVAC space. Feel like housing prices have plateaued on the bottom. Currently mortgage rates are the lowest they have been since 1973 and the home inventory is down to its lowest level since its been 2007 and right now building permits for new residential construction are up around 30% on a year-over-year basis.

So we are seeing a positive trend. We will get back to the glory days of 2005 and 2006 I don’t think anytime soon, that was obviously an unsustainable position for us and we had a lot of impact on our many different segments, but it’s going back to a favorable year-over-year growth. And we also saw – so that’s obviously a good thing. That’s a complete system cell, may even pull through other HVAC products. That advance for instance that we’ve now participate in, so it’s a good pull through dynamic for Regal.

And then we’ve also seen that when the housing market is favorable, you see inventory of existing homes is down. We start to see that sell through that the new occupant is willing to make a larger investment and the efficiency and the payback of the equipment in the home. So we see a high correlation between how that pulls through equipment. And then in addition, there is a pent-up demand out there. It’s hard to size it, but we’ve gone on for a number of years here where equipment has been serviced longer than it should have and is in a need of complete replacement, a long term trend would show that there is a buildup bubble there. So that’s going to work its way through eventually, so feel pretty good about the near term trends for HVAC Resi.

Unidentified Company Representative

I’ll spend a little bit of time talking about an update from last year. So last year I stood in front of you and said, the company in this space is making some significant investments in cost and innovation. First, cost, cost is about operational excellence and I couldn’t be happier with what I have seen the company invest in and I think it will fair to see Scott Brown’s update here shortly.

We have a maniacal focus on lean, driving outlays, simplifying our operations it results in the higher performing products, lower cost of operations material and in addition we’re advancing the design technology. So electric motors typically are made of copper winding and we’ve taken on a very large effort to replace that copper winding with aluminum. The financial dynamics are significant. There are technical challenges. We work through them, and we’re taking to our customers to significant step function of cost improvement on, I’d say, entry level product.

On performance, it’s about continuing invest and continuing to have leadership position. EON is our latest generation full featured ECM product. I’m happy to announce that it’s now fully deployed. This is the product that replacing the industries flagship. For those of you they maybe be little more aware of the ECM 2.3, it’s what all of our customers build the highest efficiency comfort made systems on in this industry. It’s been very successful. We’ve made over 10 million copies over the last 15 years and we’ve just revised it, updated it and made it even better and fully deployed it.

And we’re not done. I want to give you a little update about how well we’re continue to move beyond motors, motors controls and air moving systems. So this is a little bit about where we’re taking that. But first I need to set it up of what we provide today. So, on your left, this is standard blower. So this is the blower housing typically stamp, cheap not only the well that are rebated together. There is a standard 48 frame type of motor that has set of mounting brackets that’s on one of the inlet size and then it’s attached to a squirrel cage steel wheel. In this case, the motor spins counter clockwise, so air is drawn in and around the motor and then it’s accelerated through the fan blades and out that discharge opening over some sort of heat exchanger or ventilation. And this has been a typical industry standard for how these products have been made for ever.

We are overhauling, revising, significantly innovating this footprint. The product on the right and you may look at it for a moment, where is the motor. This is the same view from the same side, we didn’t turn it around. So there is a motor. It’s a pan cake motor. This is part of the FASCO acquisition, a number of years ago. A number of very talented people in Australia have developed an axial topology where rather than a rotor rotating inside of a motor cylinder, these are like two plates.

So one plate is affixed to the center plate of the wheel and the other plate is affixed to a back plate right down the center of the blower. So this motor is only an inch or inch and a half thick. It’s very efficient. It uses where with material. It’s an ECM product, so it’s fully programmable and controllable. The motor is now out of the air stream, so there is not the blockage of a large obstruction.

It allows better laminar flow, since it’s more efficient, it takes less horsepower, since it’s less horsepower, it takes less wait, because we’re designing it, building it, and delivering it as a system, the tolerances are tighter, so there is less, I’ll say variation in air slippage. But we’ve also advanced the design of the housing it settled, but the exit angles and the way that houses, the air, exit out of that housing is more efficient. It creates less turbulence, less turbulence creates less noise. So we have a breakthrough in cost, size, efficiency, and noise for our customers. We are in the market in Australia, and we’re bringing it to North America, so we are once again raising the standard of the performance in this HVAC industry.

And what I just do it on the high end. I’ll remind you that seven years ago, we launched X13. X13 was a mid tier, ECM product, it was targeted in helping our customers move from the Gen 10 to 13 series challenge. So it was very successful broad-based application. Seven years later now, we are revising it with 6 generation ECM technology. So this is the latest technology in electronics, construction design methodology, which is smaller size, less weight, and even a better value for our customers, and we are brining this to the market place now.

And we are also taking the same technologies and getting into these other applications and spaces that I described earlier. So commercial refrigeration, this is a great marriage again how Regal combines its talents and efforts, so on the left is 56 strength, this would come out of Mike’s business. This is a larger diameter motor typically in these commercial parallel rack refrigeration systems, you would have number 8, 12, 16 motors on the rooftop. They would be standard efficiency. They run either on or off.

So what we’ve done is, we’ve taken Mike’s and the C&Is position with larger motors in the space, added ECM technology, given our customers fully programmable control. They are now able to optimize the refrigeration to the air flow saving them operating cost, improving the performance of the cooling of the product.

And then last new product, growth in this segment. Last year I wrapped up with a discussion with you all about Evergreen. Evergreen is the motor that we brought to market a couple of years ago, where if you have an HVAC system, and you want that features of benefits of an ECM, but are not ready to replace your total system, you could take off the standard motor and put an Evergreen in.

So here is another opportunity for you that advance are typically noisy and very inefficient, we worked with the key partner here, Brown, they have a leadership position in, that advance we developed with them. An ECM motor fully programmable has a better air mover and together, we’ve reduced the sound out of these systems about 50% and improved the efficiency at the same time by 50%. So even back to advance, an opportunity for us and we’ll continue to move in other places, because there are many, many motors installed around this world that are a great opportunity and our customers are looking for these types of solutions.

So last couple pieces I want to share with you now are, what are we doing in other segments? so this is an exciting new area for us and it’s around hydronic gas boilers. so the boiler is the customers’ product on the lower left. this is an application where it uses water, comes it through a water comes in and then instantaneously heated from a gas combustion and then hot water is put out into the home either for consumption or for heating.

It’s emerging in North America, it’s actually a more efficient technology, instantaneous in the combustion processes are being started and to be pushed, in California, those things start to move across North America, it’s very broad based in Europe. It’s used extensively for commercial and also residential heating. But the part that we provide is the premix blower, and you can think of this is a turbo charger for a car engine. so typical car or wholesale carburetion fuel and air is drawn into the engine and most of the combustion systems in North America on the HVAC or water heating side typically work the same way. This is like a turbo charger. so now the fuel and the air mixture are premixed and injected into the burner, that’s to do, that is why it’s more efficient, that’s why it is lower emissions.

For us what’s exciting is, we have – the synergies of our companies that have an air moving expertise and actually a motor expertise. This is at same pancake constructions were that lowers the overall size, this allows our customers to continue to downsize equipment, and then you bring ECM, electronic control together and we have a very nice product. We’ve got existing customers in North America that are anxiously working with us, and then we’ll take it to Europe where it’s a very broad based market segment and we think we’ll be successful there also.

And then last kind of segments that we’re doing something on I’ll say out of the box are unique. It will continue to be a focus on the aftermarket and retrofit. so this is a view of [exist] motors installed that we should probably more accurately say motors installed fit an opportunity for products that we have today to go into retrofit. there are more motors installed in this in North America, but today our portfolio of products, if you look at about 360 million motors in North America, there’s an opportunity, it is a very large opportunity of low efficiency motors and applications where we’re developing products to replace them.

Our approach is that we’ve combined three sales teams in North America through the result of the acquisitions and coming together, we now have a very broad based talented pool of people geographically dispersed in the right places that can go in and talk to customers about large scale energy retrofits, and the result of that is that we continue to develop smart products, specific duty to go and make it easy to install to replace the installed base of low efficiency products.

By the end of the next year, we’ll have a cumulative nine products specifically designed building on the Evergreen successes we’ve seen in the residential HVAC going into commercial HVAC, commercial refrigeration that I’ve talked to you about in the past. So we feel very good about creating a new sustainable business model here. This segment, this team grew their business 22% last year. So it’s all about as fast as we can run out and make it happen we can go out and grow the business.

So I’ll wrap up now with my balanced view of the headwinds and tailwinds in the HVAC industry. I feel pretty good about some other trends and signals that we’re getting, but it’s all about our customers be it, the consumer or the OEM themselves, the distribution channel, and how they’re going to approach opportunities. So there’s always potential for more cautious approach, and that’s a possible headwind to our future outlook.

And I spent a fair amount of time talking about the regional standards and the possible delay. I don’t see it going away, it’s possibly a delay, I can’t predict that exactly though. And then from my competitive standpoint, the last couple of years, we’ve had a shift back after the stimulus bill expired, which was clearly a mix up for us in 2009 and 2010. We had a shift back into lower efficiency standard products, that’s clearly a more competitive marketplace for us. We need a positive lift back into systems and higher efficiencies that’s the better position for us to be in.

However, from the tailwind standpoint, I do feel good about the housing recovery and general improvement, R22 appears not to be a year-over-year delay for us anymore going forward. Energy retrofits, that’s a model that we’ll create and grow, it’s not dependent on other market dynamics like so many things are. The long-term efficiency trends are only moving up, there’s just too much momentum, there’s just too much energy that’s wasted in this country and in this world for motors to not continue to have a very strong trend and upward efficiency, and we play very nicely there. And then there is a large number of units that need to be replaced and those will start to be – will come through over the next few years.

Thank you for your time. It’s pleasure to be here. Do I have a few minutes?

Mark J. Gliebe


Paul Goldman


Matt Duncan – Stephens, Inc.

Hey, Paul, Matt Duncan with Stephens. Quick question on the energy efficiency change in AC, the 10th year to 13th year versus 13 going to 14 of the sound belt through different standards change before it was the manufacturers had to stop making them now; you can’t sell through at what changed that. How do you think that’s going to impact you guys in terms of the timing of how that shift could impact your business?

Paul Goldman

Yeah, so thank you. So it’s an installed base requirement. Those systems can obviously be produced and sold in other regions after that date. But it will be a hard stop, assuming whatever data gets implemented, it’s going to be a hard stop. So I don’t see a prebuy in those regions of the lower efficiency. in fact, there is some communication that further looking at the furnace regulations, first coming up that some contractors, there’s some distributors taking about cash up front per unit, because we’re not going to – we as a distribution, not us, the distributor through channels from us are not going to hold inventory and anticipation of that change. So well, we had a big prebuy in late ‘09. I don’t see that happening. It’s not obviously a country wide change. So it’s hard to size it, but that our miles would say in both cases, [CDs and crewing] it’s a positive for us. I just can’t size it for you right now.

Shawn M. Severson – JMP Securities LLC

Hi, Shawn Severson from JMP Securities. Just wondering if you could address a little bit more of the if you go back to competitive dynamics and the situation there, what are the key hurdles I think that you’re looking for to kind of move out of what obvious these slightly more competitive situation today and to your point, three or four things that might kind of get you out of the lower end most competitive parts of that market?

Paul Goldman

Okay, when we participate at the low end, again it’s about costs excellence and I’ll leave that to Scott, I think we’re doing the right things and taken the right steps. But to your point, we want to sell a higher value product. Impala, I think it’s a big answer to that.

We’ve done a nice job over the years of improving the efficiency level of electric motors. The next frontier is that blower. That blower is a pretty poor efficiency translation of rotational energy into air velocity. So we’ve got a lot of I’ll say entitlement as an industry to improve that and we’re going to be a leader in that position.

So coming to our customers with something that’s proven simple, smaller, programmable, less noise, allowing them to downsize their equipment and satisfy their issues which are typically noise and right next to consumer comfort, I think that’s going to give us a leadership position for some time to come.

Shawn M. Severson – JMP Securities LLC

Paul just to dive in on the R22 and how things starts to start there, kind of hard to tell from the scale, but maybe you guys are forecasting, I don’t know 150,000 or 200,000 unit reduction in R22 next year, presumably your content is significantly higher on R410A. So just kind of breaking that down into your mix of business there, maybe three to four points of growth comes from that mix going down.

And the housing starts again, it hard to see what you guys are forecasting, but if you assume 20% growth another kind of two to three points. You guys are talking about mid single digits right off the back kind of irrespective of what replacement markets do and what mix may do and it seems like you’re signaling the mix is probably closer to a bottom and not? Is that an unfair way to think about it and I guess maybe as a follow on to that, you guys have referenced R22 a lot throughout the year as a headwind, but it does look like it’s lower than in 2011? Does that signal that maybe mix was even worse than you thought as you moved through the year?

Paul Goldman

You asked a lot there Josh. R22 volume, it’s very hard to get one hands on. So I think its relative, it’s a relative scale there of where we think the peak was in 2011 and it’s going to improve. You could debate me to how much on a go forward basis. Sorry, so you attempting to pull me into a conclusion of mid single digit growth going forward, I think our customers are a little – they’re not quite as bullish of that. So maybe I’m a little more.

I think that from the industry, we are probably low single digits to maybe mid. So you’ve got to work through all these dynamics of the R22, the housing, future possible issues with the fiscal issues in the start of next year. So there were a lot of dynamics going on.

My message is generally favorable versus this year. You can’t pin me down to what percent that’s all going to workout to be from an industry standpoint.

Shawn M. Severson – JMP Securities LLC


Paul Goldman

We ourselves, okay with that.

Mark J. Gliebe

I think Paul laid out for you exactly what we’re doing across the company to try to drive the business going forward. And he has laid out what the tailwinds and headwinds are going to be, I think that swings and it stands for itself.

Shawn M. Severson – JMP Securities LLC

This is kind of the lender just start bidding your life question. I’m really struck by the fact that only 18% of your businesses from the aftermarket. I know it’s double what it was a few years ago. So that we can understand what are those you need to change in your thinking, in your strategy, why was it was only 9% two years ago sort of philosophically? And then can you be very specific about where you would like it to go over some nonmaterial timeframe like three to five years?

Chuck Hinrichs

Okay, good question. The manufacturers pick target segments to participate. So the legacy behind the HVAC acquisitions, the acquisition that I came with part of GE business focused on the major HVAC OEMs from original equipment standpoint.

Other manufacturers picked other niches and that was just the go-to-market strategy and where people wanted to participate. We’re seeing that it’s healthier to have a more balanced, I’d say approach to equipment and the replacement of that equipment from an installed base and then I’ll say thirdly this proactive retrofit, which is we sell it through that channel and use that sales force, but it’s a completely different dynamic, it’s about payback or retrofitting an operating unit.

So could you say where you would like to have on a go forward basis that’s a great question, I hadn’t thought about that. it will continue to be a bigger piece. it will be a bigger piece in the U.S. We’ve got a better focus in South America. Our penetration in Europe is going to grow. I’d say we have a very little aftermarket model in the Asia-Pacific region, but as we continue to look at that installed base and first that they had for an energy efficiency, I mean that’s I’d look forward to follow-up discussion on that at a later time, if it’s going to be a larger part of our business going forward.

Shawn M. Severson – JMP Securities LLC


Mark J. Gliebe

The question is how does that impact the other participants in the aftermarket channel with us taking on a larger focus in that area? So if you remember correct, the part of that doubling is just simply pulling together the acquisitions that we’ve made. so we are all ready technically in that space. Making in a bigger focus of ours, sure that’s going to have some dynamics. I think we’re very good at it working through channels and how we work with channel partners, but of course, it’s our case-by-case partnership dynamic that takes place. Okay. Thank you everybody, I get to announce the break, we’re going to take 10 minutes or what time would that be in 10:15. thank you very much. We’ll see you back in 10:15.

[Break-out Session]

Mark Gliebe

Okay we start off with the couple of straggles coming in, but we're going to try to stay on schedule, and turn it over to Duke with mechanical move.

Duke Sims

Thanks John. Good morning, my name is Duke Sims, I’m responsible for the Mechanical Group within Regal. I’ll spend a few minutes talking about my favorite passion. Three topics I really would like to cover, the first is a brief infill to the Mechanical Group. Second would be kind of where we are? Where we have been? And then spend most of the time on here’s where we are growing and how we continue to grow our segment.

Make a statement, we are profitable business, we kind of proud of that, and we’ve accomplish that over the years, we are a somewhat mature segment. The customers we serve are in mature markets, but we have managed to grow at about twice the rate of inflation over the last few years. Much of that is driven by new products, and more recently expansion into other geographic regions of the world. Last trailing 12 months we are running at about 13% that’s a little bit of our normal rate. We took some restructuring charges in our Australian division as well as in one of our divisions in the UK. We expect to return to mid-teens our profit fairly quickly.

Just like Mike did, I’m going to divide our segments or applications up into three main areas. First is the Power Transmission Group, which you are probably most familiar with, most of these products are driven by an electric motor. They go to market either through major distributor chains or independent distributors or in some cases sold directly to OEMs. We have some specialty products brands, these are more niche market players, typically maybe driven by diesel engine or a gas engine, go to a market in a different way many times through hydraulic distributors or again to direct OEMs in our mid segments. But our third segment probably looks a little different. there is no [Gary], it’s our Electrical Power group and we actually transmit power in control boxes through fuse holders, power blocks, terminal switches.

We too serve a large variety of applications, and many of these applications can be broke down into many different sub segments. As Mike mentioned, one of our primary drivers is Industrial Machinery & Material Handling group, this is a very conventional mature market where to grow; we will continue to take new products. Our Oil & Gas segment is growing, and the recent introduction of Milwaukee Gear into the family will help us achieve that goal. Construction & Allied Equipment is also a growth market for us as we apply new products as the Agriculture segment.

If you look over 2013 expectations, the customers are telling us it’s a little bit uncertain economy, I’ll use Mike’s words or few puts and takes, but overall, a little bit flat year-over-year. Our own outlook is a little more positive. we expect our segments to grow, and the main drivers for that are new products, which I’ll cover in just a few minutes and expansion of those products in the other regions of the world.

Today, we continue to be very strong in North America; Europe is about 10% of our sales, and with the acquisition in Australia few years ago, our rest of the world sales continue to grow as well. We’re fairly balanced in our delivery of our products to our end market segments. About half of our products go through normal distribution chains. this is many times our standard catalog products or modified standard products in their particular segments.

In addition, we do take some OEM sales through our distributor channel. About 40% to 45% of our products are delivered directly to an OEM. this is specific customer solutions for specific customer problems. This is a distinct competitive advantage for our group.

Finally, we’d take a very small amount of our product mainly in the Valve segment directly to our end users with our products and applications. We have very strong brands. we are participating in the brand consolidation. we’ve actually consolidated for this year that those brands that you see on the sheet are household names in the segments that they serve. The most recent acquisition is Milwaukee Gear, which brings high precision, high efficiency gearing, which will allow us to continue to grow in energy markets and high high-torque applications where efficiency is critical.

We’re fully proud of our new product sales as well. this has been our product engine for the last few years. We were developing products before 2008, but around that timeframe, we introduced a very disciplined tollgate process to help monitor and grow our new product sales. As we close the end of this year, we’ll be on pace to introduce more than one new product per month.

But I’m proud of the team about is that; every one of my brands or every one of the brands is participating in this growth segment. We also track on the right, sales of new products introduced in the last three years. and we are approaching close to 30% of our total revenue is derived from new product sales. We also segment that it’s not shown in the graph and what I’ll call revolutionary and evolutionary sales. Revolutionary being those patent protected, very unique first to market and that’s approaching 11% of our total revenue in some pretty much lower segments.

There are several broad catalysts, now I am going to move forward into the future a little bit. The first as you might guess is expand our new product sales. I am going to break that down into three separate bullets if you will. The first is continue to enhance our high efficiency platform. You’ve heard about high efficiency all morning, we too participate in that initiative.

Second, we will continue to focus that new product growth in the segments that has sustainable growth. And then finally, and this is where the acquisitions will continue to help us, we will begin or continue to leverage the legal foot print to increase our global sale.

The second bullet is growth driver, it is to finalize simplification of our design platforms. We quietly have been consolidating and nationalizing our platforms about the last five years. We only have about two left to do. We plan to complete those by the end of calendar 2013.

Selling system solutions is also a key driver where we can bolt the gear box to a motor, attach a drive, have a generator on the side, or bundle it with other auxiliary products. And finally which is really one of our – really is the lifeblood of our growth is to continue to focus on custom product sales, where you need specific solutions, you need short lead times, and you need quality there on very low volumes, that’s a key driver for us.

I won’t go through all of these products, but this is just a pictorial of all the new products at the mechanical group has or will launch by the close of 2012. A couple of key takeaways, first, we are focused on the segments that I mentioned very early on, on those that have sustainable growth. Second, all of our brands are participating in new product development. By the time, I could tell you which one with the products are that we want. Third, over 50% of our new product launches in this year are considered high efficiency products or energy saving products in the segments that they serve. We plan to continue this acceleration in our new product launches.

One of those products and I believe you’ve heard about it before in the earnings call is HERA or the High Efficiency Right Angle box. This is a direct drop-in for the worm gear products out in the marketplace. Worm Gears today are about a $400 million segment annually and the installed base is in the billions. At this time, I’d like to introduce what we – a short video, it’s a sale tool for our teams. Once again for those of you on the webcast you will only be able to hear the audio; the video will be available within the next 24 hours on the Regal website.

[Video Presentation]

Duke Sims

Hope you will agree with me. This is a very exciting introduction for our segment. The only thing I might change in that video is don’t wait for the Worm to wear out, throw it away, put in the new one and start getting the savings immediately.

We’ve actually taken that concept to what we call the HERA-MAX Drive System, which is another new product working with the C&I team where we take the HERA product and port match it to a high efficiency motor to get the same benefits that HERA does that you saw in the video.

Once again it is interchangeable nearly all leading brands, twice the torque density and I will refer to the picture. The grey would be the typical traditional solution and then the HERA with the high performance with the high performance motor would be the new footprint. This is very appealing for OEMs where space is a constraint. As the video said, almost half the energy savings, if you have a 3 horse motor, you can replace it with a 1.5 horse, it’s a very exciting product for the mechanical world.

Product simplification, again, was one of other initiatives. Now just to highlight example here, this is actually in the Allied Equipment segment of an (inaudible) brand, it’s a pump drive. We’ll give you a short tutorial on what a pump drive is. A pump drive takes energy from the diesel engine that’s powering in this cases large square and it transmits power out to a hydraulic motor that will operate the swing booms on the device like this. So it’s converting energy in this case from a diesel engine to a hydraulic motor.

Over the years, we’ve had about three different platforms to acquisition. We actually consolidate with that into one, very significant benefits. Part counts were reduced by almost 75%, huge advantage. Today then less than 100 parts are required to make the entire model range of the pump drive, when this allow us to do, take inventory out and the last bullet part being the most critical.

What used to take weeks in lead time, now takes three to five days. But this allowed us to do is very strategically go to distributors with an aftermarket product. These do ware out and in the first year of sales, we actually grew pump drive sales by over 30%. Today, we’re taking that design both into Europe and to China as well.

We actually use the same approach in another Allied Equipment product line, a Transfer Case. Again brief tutorial and have you that has the four wheel drive vehicle, you have a Transfer Case. So it converge two wheel drive to four wheel drive for increased traction. That’s exactly what this device does. We use a very similar approach, but had one added benefit. We’re actually able to use many of the common components from the slide I just showed you, 55% fuel parts. In this case, shorter lead times was absolutely the key. this is an OEM product, it’s like your transmission a car, you buy it, typically unless you are unlucky you never replace it. So this an OEM play, and if you can get there with the growth first and the prototype, which we can with standardization, you have a very likelihood of getting the order.

As I mentioned, custom products really are one of the life bloods of our growth, very unique solutions to unique customer problem, low SKUs, quick lead times, quality has to be there like the first time. you don’t get a second chance. This is an example, actually out of the energy segment, a turning gear. and the picture on the right, you can’t really see it, but that turning gear is buried in that giant steam turbine, which could be as long as a city block, you can see the relative size of the human being standing there.

But at turning gear, once every two to three years accelerates or decelerates of turbine as it goes down or comes up either before or after a maintenance situation. They are sold in quantities of one. so again, for us, it’s a very competitive advantage, because of barriers of entry are a bit high.

In this case too, we’re able to work with the C&I teams, this happens to be the world’s largest turning gear, and package it with a torque matched marathon motor combining into a system sale. The last example, if you will, is an other system solution, Mike preferred to it earlier as well, the slide on the right, it is working with Unico team and C&I, we replaced a competitive gear box where one that’s more highly performing and obviously, we bought that whole in house. the one on the left is for Unico’s new progressive cavity pump application in their new product segment where again, in this case, we take one of the [harrow] products, because of its high performance, small size and match it with a torque match motor to provide a system solution.

I’d like to close too with the mechanical business outlook. the good news is, there are more potential tailwinds than potential headwinds. there are a few on the left hand column. the European economy is a concern. we have about 10% of our business there, and we’re trying to grow that segment. So that’s a bit of a concern, but we have the new products, we expect to overcome that.

The segments that we serve are mature. they are bit slow to change. so we have to work hard even with new products to get that to a quick turnaround. Here is a pretty good example took off a bit slow, but it is gaining some significant traction as we speak. the tailwinds, I’m happy to report are more prevalent, the restructuring that we continue and are close to being accomplished will provide us benefits.

We consolidated one of our facilities in Europe. we actually divested one of our brands earlier this year that will contribute going forward. Every one of our teams is focused on growth in the key segments, and that is a significant tailwind for us, as we introduce new products and new geographic regions for those products.

And as I said now a couple of times, custom product sales are absolutely the life blood of our growth engine. As I mentioned before, simplification, we are almost to the point where we can say, we can take full advantage of that like I said quietly in the last five years, we’ve been rationalizing platforms too remaining, as I expect to begin to see those benefits.

All in all, our teams are really, the new product engine is on the tracks. it’s a key to our growth as we look forward into the future.

With that, I say thank you. and it’s time for a few questions. Okay.

Question-and-Answer Session

Unidentified Analyst

You’ve talked about oil and gas, being a growth market. can you just bifurcate what you’re seeing in the Unico business along those lines versus the Milwaukee Gear business in the frac pump market into 2013?

Mark J. Gliebe

So Unico had very strong growth through most of the year, now we’re going to start coming up on some more difficult comps for that business, right they were growing 40% for each of the last three or four quarters. and so we’re going to start coming on tougher comps, we’re not going to have that kind of growth rate. Unico’s business is more oil than it is gas, however they do have exposure into the gas wells as well. so certainly, they were impacted by the slowdown in fracing that as the Milwaukee Gear business was also impacted by the slowdown in the fracing. We have not yet seen that rebound. our customers are still optimistic and hopeful and confident that I guess given this predominance in the discussions about natural gas and the role that we play in our economy. so I think everybody is optimistic that it’s going to come back, but we have not yet seen a rebound in those orders.

Unidentified Analyst


Mark J. Gliebe

The question is why? So if that’s the case where is the growth going to come from? And Duke you want to color.

Duke Sims

Yes. It’s actually – we do expect to see some favorable comps later in the year from the Milwaukee Gear business, but the real growth is going to come from other segments. Our Allied Equipment business also serves oil and gas, and the additional new products sales out of those brands will support that growth.

Unidentified Analyst

Yes. Thank you. Maybe, we can go back to page 86 and we have a lot of up arrows there I guess, and talk about that a little bit. That’s pretty optimistic; it looks like relative to the industry more so even than the previous slide from the C&I?

Mark J. Gliebe

Yeah. It’s optimistic, because I think the key word there is Regal forecast and the reason those are turned to be more up is there are new product introductions, and a growth outside North America. So we have some specific new products targeted at each one of those segments.

Unidentified Analyst

And could you just talk about the custom side, what’s share of total and what’s the margin in that business?

Mark J. Gliebe

We don’t break out the actual percentages, but the margins are a little bit above the fleet average.

Unidentified Analyst

I’m sure you constructed the age preference and I’m sorry. I’m sure you constructed the presentation today via different things that Regal-Beloit was doing, but I think of the word [Yarker 10] spreading the best practices, because a lot of your markets are mature, you are driving a new product business. Is that a skill set that is, I don’t want to use the word unique for your division, but how do you make sure that what you’re doing because of the necessities of your markets translate into your colleagues and markets.

That question had about 40 words to many, but I can tell from your expression you know what I’m trying to get at.

Mark J. Gliebe

Go ahead.

Unidentified Analyst

No, go ahead.

Mark J. Gliebe

So I think I would say that you’re right, Cliff. Every segment we have in the company, we’re trying to have fundamental disciplines and rigors whether it’d be around simplification on new products and hopefully, you are getting that thing today. Duke showed you that while they were certainly launching new products in the past, they put a certain rigor around it in 2008 and discipline to it and he is now at a point where he’s got 30% vitality in his new product launches.

And we are a matrixed organized company. and so our functions crossed our business and we believe that allows us to quickly share the best practices around the company. So that is the head start.

Duke Sims

I’ll add to that. Yeah, I focus most of this on new products. You’re right, but I mean we have the same rigor; the simplification has driven manufacturing simplicity in all of our facilities. I mean we have on occasion new products for me that’d be to gain the leverage and the cost savings as a result of that simplification. So that’s to equal our focus of new products is driving the cost out through these facilities.

Unidentified Analyst


Mark J. Gliebe

Okay, all right. with that, thank you very much. At this time, I’d like to introduce Scott Brown, our Vice President of Manufacturing. He will talk about some of those benefits.

Scott Brown

Thanks, Duke. Good morning, everyone, and thanks for coming. I’m going to touch on four areas in this operation update. I’m going to give you an update on the EPC synergy integrations and we’re reporting that we’re on target to deliver on our integration savings. I’ll give you a little bit more color on the China plant relocations that we’re doing and those are going very well on time and on budget. And then I’ll share with you some of the operation, simplification that we’re doing in Europe and in Australia to get those operations to serve customers better and have the right cost structure. And then, I will end showing you the great progress that we’re making with our continuous improvement journey inside Regal.

First, I’ll start on the EPC integration. This is a slide that some of you should be familiar with, it’s been used in some of our past earnings calls and just to refresh your memory, the structure of the slide. On the left hand side is what we committed at the time of the EPC deal back in August of 2011, and on the right hand side shows our most recent commitments of what we will deliver. And what you see there is $38 million and also this chart is broken out on a run-rate by year, since the time of the deal. So the deal was in August, so the years are from August to August as you go forward. So we committed $38 million and that was $3 million more than what we committed at the time of close and we are also one year ahead of schedule of what we said at the time of the close.

Now some of you asked us to break this out and sense it from a run rate into kind of an effect by calendar year, so we put this chart together for you. So you can see the impact as you go through each year and if you go through the 2014, you can see that’s the $38 million annualized run rate that I just talked about on the previous slide.

Now we have most of these synergy savings in place in our sourcing and logistics group, and that includes the heavy listing of warehouse rationalizations that we had to do and I’ll talk about that in a little second here. And we already exited the two plants, and we had two other plants that are underway and there is process as we speak moving into their catch locations. And that will be all completed by mid 2013.

Let me touch a bit on that, what we're doing with the warehouse rationalization and with the manufacturing plants. So in the Central U.S. we went from five warehouses and move that down to two. And you can see that we got significant reduction in our overhead structure as a result of doing that. And we were able to improve service at the same time with that going on, and we are doing that in two ways.

One, is we have consolidated all our aftermarket teams and been able to actually utilize a very strong team that came in the EPC deal. And then, the two locations that we’re in, our final two locations, they have more open truck routes, there is more truck routes to our customers carrier routes than what we had before some of other locations, some of the carriers were not served and now we have those openings we can actually more flexibility to serve customers.

And as you can see the picture on the right hand side that Mark alluded to this before, we have a modern new facility that we put up as part of those two facilities that we've rationalized down to.

Now here is what we are doing in manufacturing in Juarez, Mexico. We went from 10 to five rooftops so that's the four plants that I just talked about and there was a fairly large office area there that we are able to exit. And we’ve been taken volume out of some of these plants and move them to other plants inside Regal that are better suited for that scope of work. And when we did that that opened up space to do the rationalization in Juarez itself. And then what we did is, as we did the rationalization to those five locations you see on the top there, the final plants we were able to align those plants with specific businesses inside Mike Wickiser’s C&I business. And whenever we were able to get a plant fairly tightly aligned we call it a focus factory, we have much better service to customers. It's just better alignment with the business and they get it for this specific business that they are dealing with.

Now a spin-off benefit that is not an EPC synergy savings, but this is the type of thing that when we do simplification we are able to consolidate things and bring them all together, in one spot. We are able to make some investments and equipments that really opens up some big doors for us, and this is here what you see on the left hand side, it’s some new technology that we invested in and put down in Juarez, that actually machine shafts. And before we will not be able to make this kind of investment because we were fragmented over too many plant operations and the volumes for this work was spread over too many plant, anyone could justify pulling this together with this kind of technology, and this is great technology. You can see the precision there from the machine and the shafts, now just to put that in perspective that is about a 1000 times smaller than the thickness of the human hair. This is what we’re machine on these particular shafts that go through this business, and huge reduction in cycle time, labor costs, and footprint. And that we are getting our Six Sigma quality levels that which equates into life and reliability for our motors. So, again something that the consolidation simplification is opening the doors for us.

Let me talk about the three relocations of three of our China plants. As Mark alluded to that we’ve been encouraged and partially and financially supported by the Chinese government to relocate these facilities. Our Hermetic motor plants in Taicang, and our generator plant in Baoshan, they both finished up their relocations in Q4. And there were on time, on budget and transparent to customers, which is always a big thing that we want to make sure happens here whenever we’re relocating a facility. And there is our integral horsepower motor plants in Wuxi, China and we’ll start moving out of the existing location at the end of Q4, 2013 and finish up the complete relocation by Q1 of 2014.

And we’re taking advantage at this point in time, so not just kind of relocate as it is. We’re actually upgrading the whole look and the whole layout of the facilities that promotes LEAN methodologies and approaches, which is going to have the effect of reducing cycle of times, improvement quality there and a better work environment for employees, it’s been much more attractive place to work.

And I’ll take you through and show you a couple of pictures inside the plants. Mark mentioned this before, we have got the Regal look and feel all throughout the office areas, all throughout the lobby and in various parts of the plant as well. and this is one part of getting the brand loyalty and getting the one culture’s having your works around has been reinforcing that all the time with the Regal brand.

This was shot in the Baoshan generator plants, and what you see here is single piece flow, which is very important for us to manufacture, we don’t see any inventory in front of these workstations, every operator has one work piece as they’re working on and you don’t see any inventory queuing up after them. So we’ve made point to make sure that all of the lines are what’s called balanced, I mean every step in the operation has almost the same cycle time. so you get work flow going through very quickly. and that equates into lower inventory and better cash performance for the plant.

This is a shot of the Taicang plants, Hermetic Motors plant. At the time, just as we were starting to commission it up and what you can see here is it’s a cellular structure to the manufacturing operations. So it’s individual manufacturing sells, traditionally what you would see in many plants is big long lines, if you’ve ever went to manufacture plants, you see a big long straight line where everybody tries to put as much volume on that one line as possible.

Well, our experience has been that gets pretty unwieldy to manage and what happens in as a result is, you can’t coordinate all the materials there, there’s a lot of work-in-progress inventory, a lot of extra cycle time. and it’s not a central team work that’s built with that kind of structure, because every person has only a tiny little bit of the responsibility for the job. In the cellular structure, each cell actually creates a subassembly, there is ownership for that subassembly and that promotes the team work that we need as we move forward. Where ever we’ve done this, we have hired much better quality levels in cycle times. And we’ve got performance boards all throughout in these facilities.

I will see Europe few years ago when I talked about us bringing performance board down to the shop floor and promoting teams and getting teams understand how they are performing. We put them all throughout the China facilities. So we are very proud of these facilities. We think these could stand tall with any other facility in the world and sort of any customer that we do business with.

Now, let me switch gears a bit here and start talking about the simplification of our operations in our Europe and Australia. What we’ve been able to do is form one C&I motor business in Europe by consolidating many other smaller operations that we had. And then we merge, there is a three different UK sites in manufacturing that we got to emerge that altogether and utilize our manufacturing sites that came with the EPC deal.

And so overall, we exited five facilities, took down our SG&A 25%, and because we’ve got this one C&I motor business in Europe now, we have a better, it’s better opportunity to bring the broader portfolio products and have one phase of the customer where we need to have that, and we leveraged the facility, you see there is our rotor business in the Netherlands. We really utilize a lot of the capabilities that’s in that facility, it’s a very strong team.

In Australia similar kind of stories in Europe, we moved to the motor production from plants in Australia to our Bangkok, Thailand plant, which is in fact a lower cost plant and a much better performance, where we merged three assembly operations all into one, to get that one phase and bring a broader portfolio of products to our customers, and do the same thing with the distribution business. And look at the effect we had in Australia, so we got better services that’s going on there. We believe as we are exiting 12 sites and eliminating 12 legal entities and 19% headcount reduction.

Now, let me end talking about our continuous improvement journey that we are on. As many of you know, our continuous improvements program inside Regal is built upon Lean Six Sigma tools and methodologies. And we started back in 2005, and what we’ve been doing since that time is we have built up a critical mass of a lot of people with Lean Six Sigma skills. And you can see the results of that through that period of time. And we are continuing to do that through extensive training and a lot of problem solving that we are doing.

But what it’s doing for us is, now that we’ve got that critical mass on the field, more and more of the continuous improvement has been driven from the field in less essentially. As well, we’ve been able to start to build some best practices of ways to work in our Lean Six Sigma way that we can now start spreading across the company, and I’ll share some of those approaches with you.

If you went through Regal a few years ago, you would see not as many U shaped cells what you see today as you go through Regal. And this is an example of one here and even some of the most smallest packages of work we’d like going to U shaped cell versus that big long straight line that I was talking about before production lines where it gets very unreality, instead break it out into these word packages, again it promotes teams where we do this, we have better quality.

We have a lot of innovative approaches going on in the company where people are trying to manage much tighter and better, the work in progress inventory between cells or different parts of plant. This example here shows two U shaped cells at the top of the picture, and that care of cell that’s there when some of the blowers are taken off of that care of cell, it actually creates a space opening and that is a signal to the feeder cells to actually make the parts to replenish. There is no open space, we don’t make any feeder parts. That’s different than working for schedules, trying to get a whole plant to be working to multiple schedules and keeping those schedules all up to date any movement and what inherently happens in those type of plants is, it’s very difficult to get the sequence of all the materials and you get lots of working progress inventory, lots of extra cycle time, and much poor cash performance of the plant.

This is a bigger U shaped cell and here, there is no working progress inventory between anyone of those production operators. And as the work location itself all there is the, for the order they are working on right now, you can see in those card board boxes all you see is the work that, the order that we are working on right now and the next order, that’s all the material that is at the work location; much simpler, less clutter, as a result higher quality, better performance.

Some of our plans transforming into instead of being these big and I call it monolithic straight lines that I have mentioned before. They are turning into this cluster of cells like you see in this blower plant, that’s in wire and in the Piedras Negras Mexico. And again where ever we do this, we get much better performance.

I was here a couple of years ago and I talked about the importance of taking performance for us down to the production floor and how that was going to unleash a whole bunch of employees to get involved in continuous improvement that we are not as that much active participants at that time.

Well, there’s a way of life now in our plants, if you go in any of our plants you will see these boards. Here is one of plants and you can see it’s right off of the main isle and what happens is, it measures speed, quality and cost everyday in ways that the team can relate to it, and there is huddles in front of the board everyday. So and I ever shift everybody understands whether they had a good day or not, what was in the way, and this is way the continuous improvement ideas come up. This is a place where employees are recognized and this is how we start to get more and more orders in the water for continuous improvement.

There is another example that best practice we want to spread. This is what’s called an hand on, what an hand on is, is it indicates that there is an abnormal events going on in side to a manufacturing cell. And what we like about this approach is most plants in that just use some lights and somebody has to go and try to see the light and find a way to get to the location and then find what the problem. These are simple flags. They indicate the type of problem. So that the person that comes and give you help and in the cell, it’s the right kind of person that comes there.

And is that working progress inventory goes down, getting quick response and respond quickly is very, very important. And then if you do your plant layout the right way and you think of your plant layout the right way like this particular plant, you can see this blue isle that goes along, get you what’s going off of that blue isle through that whole length or U Shaped cells. They start and they end right on that isle.

And then every one of those cells on the right hand side, you’ll see that white board there with the flag on, it’s got further information about what’s going on in that cell at anytime and it’s got its flag, its hand on flag hanging up. And if you look in the picture in the middle, you could kind of look the way down there, you can see all the flags. You can manage a big plant visually, very simply this way with this kind of plant.

This is the exact same machine in these pictures. But the machine on the right hand side has been through the first stage of our total productive maintenance program. About a year-ago, we went outside of the benchmark, some of the best maintenance programs in the world. We came in and developed our own Regal’s total productive maintenance program.

And we’ve got this now rolling out all across the company. And what this is doing for us is some older assets, has given extra life to those. And then as I mentioned before, as we start to improve our cycle times with few step working progress inventory that’s going on, we have the very liable equipment, very liable equipment and that’s what this program is doing for us.

This is a picture of a standard work construction, and what it dose is it basically describes in large detail about how to make a part and it breaks up the steps as you can see. It highlights certain points are and which is new for us and we think is really one of the big things that’s important both our particular standard work construction. It explains why you are doing this step? Many manufacturers would not involve the production operators and why are you doing this step, why is it important to do this step and make it critical and understand the impact that it could have sound quality.

And then there is some photographs that help people illustrate how it actually we put the parts together. We made a big deal just to make sure to try to avoid quality escapes. We launched 5,000 of these in 2012. We filed that up with certification of our production operators to the standard work construction and then layered audit of all the management staff to make sure that it’s a habit working so the standard work construction. We will probably launch another 5,000 through 2013 and again big deal for us to avoid quality escapes.

So Kaizens, just to refresh, remember what Kaizens is, it’s a way to get quick improvements on the front lines that’s the way to think of it. So it’s not the study something for months and that is to get real quick improvements and make them happen, so it’s very action oriented. And you can see we use the count Kaizens, number of Kaizens going on in the company. And there is so much, it’s now the way of life in our company. So we don’t count Kaizens, we can’t even keep up with it. It would just be administratively difficult even do it now. We have 60% to 70% of our employees are actively involved in Kaizens. So it’s a way of life.

So in every team and any week there will be Kaizens going on improving their area. There is actually a Friday call that we have, we purposely have certain Kaizens reported out, and we have many of the plant managers and other people across the company on that call to see some best practices and being able to feel some things that are going on with Kaizens that’s going on across the company. And I’m amazed that the quality of the Kaizens and also the complexity of the problems that there are actually solve in these days. I’ll take you through an example of one that just happened recently at our Monterrey, Mexico plant.

So here is the problem, you can see that belt is one, and that the bottom means meantime between failure, so around 5000 minutes. So this was failing like every five days this particular issue. Now the traditional way, the non-lean way with somebody would come up probably a maintenance person and take a look at just what you see in this picture right here and that’s all they would know about the process. This is actually a belt used on what’s called the lean making machine. And they just look at this picture right here and try to fix this. And they won’t be able to do it, because that’s only perspective of this problem, you won’t be able to do it, so you start replacing belt.

And so one thing we’ve learnt about lean in our journey is when people say there is not a problem that is a problem. And what’s happened with this, one is we just start to replace house every five days that was the easiest and quickest things to do it. But overtime there was definitely times when you have a belt there and it would start have even bigger effects on the operation like down time there.

Lean way, we pull the team together, and the team has a broader perspective of the whole situation. So for some production operators, there is a maintenance leader in that picture. Actually they bought a supplier in for those Kaizens. There is a belt supplier and somebody from the plant step that has some events problem solving skills.

Now what this team did and this is done very quickly, they’re able, because if we’ve got these Lean Six Sigma skills in everybody now to quickly get this highlighted down that there was three things we had to fix. One was the misalignment of the wires that you see going into the machine there. And they found a neat solution that they actually help the operator how to do that alignment, but also that you cannot run the machine unless the alignment is right, that’s called the (inaudible) Lean. So there is no way to make a mistake in that situation. They did find some alternative belt materials, and they found that the some of the setups could be improved and they embedded that right in the control system.

And what was before failing every five days, is now 60 days and still going and doesn’t indicate that belt is going to ware out anytime soon. So what did this all means? This is going on across our company everywhere now, right. So there is just way more people engaged in continuous improvement. And the pace of doing continuous improvement we believe is a differentiator. And all of these type of solutions if you look at from that people are going after have big impact on the velocity of orders going through our operations. And that ends up being much better cash performance. If you look at some of our businesses and operations that are the farthest on the journey here, they have much better cash performance. And this is all contributing over time all these individual smaller projects contributes to our cost reduction program still.

So let me recap, we are in good shape and we will deliver on the $38 million of the EPC synergies. We are finding ways of simplifying our operations at the same time improving service, which is usually that difficult to say in the same sentence, but that is what’s going on what I just showed you. Our lean plants conserve any customer world are based up on lean principles and continuous improvement inside Regal, we just continue to accelerate and there is more to come. There is work that we are doing today on simplifying products and simplifying on some of our other operations that I hope to talk to you soon in the future, that will deliver some of these same benefits.

So with that, we will open it up for some questions.

Question-and-Answer Session

Unidentified Analyst

Hi, Scott, this question is for I guess both you and Mark and I’m looking at the EPC deal, and it seems to be a significant enabler for cost savings, I think many people believe maybe even more than what you are saying here, and I guess that I’m looking at the long-term goal of the company of mid-teens margins, which was established before EPC. So I’m wondering why isn’t that goal maybe a little bit higher, particularly based on everything you’re seeing here Scott with the velocity and the throughput yields and what have you?

Scott Brown

Yeah. I mean we’ve never backed off with the mid teens operating profit goal and we’re going to continue to turn forward and acquisitions have always been a part of our company. and when we established a goal, we knew we would continue to do acquisitions. Today, we know we’ll continue to do acquisitions and we’ll continue to be chasing that target that we set out for you. John is going to talk a little bit more about the components of the mid-teen targets here in a second and what makes it up and how we think we’re going to get there. But I think if you look around at our peer groups and other businesses like ours that is the appropriate target for us, and that we are going to layout for you the assumptions that it takes for us to get there.

Nicole Deblase – Morgan Stanley & Co. LLC

Thanks Scott, Nicole Deblase from Morgan Stanley. So it seems like you’ve made a lot of progress at the manufacturing footprint. you’ve done a lot over the past five years plus. Can you talk about what actions you have planned for 2013, and how happy you are with manufacturing footprint as it stands today?

Unidentified Company Representative

Yeah. There is still more opportunity that when we are actively working on things, we can’t really talk about details of some of that, our policy in the company has been that when we do workout some plant rationalizations, first people we talk to is employees. so there’s more things that we’re working on. So it’s not where I wanted it to be yet.

Unidentified Company Representative

And Jon is going to talk a little bit more about that.

Nicole Deblase – Morgan Stanley & Co. LLC

I appreciate the color here on the EPC restructuring on a calendarized basis. Not to get too deep in the weeds. but is this a net savings or gross or does it include, because it looks like expenses are coming down as well in 2013, is that netted out in the number?

Chuck Hinrichs

The expenses for – to do the synergies and sales, you’re saying?

Nicole Deblase – Morgan Stanley & Co. LLC


Chuck Hinrichs

No, that does not include the expenses to do get the synergies.

Nicole Deblase – Morgan Stanley & Co. LLC

Do you have that number on the top of your head?

Chuck Hinrichs

It’s about same as what we’ve reported in our last earnings. We’re still targeting that.

Nicole Deblase – Morgan Stanley & Co. LLC


Chuck Hinrichs

And we are still tracking to that.

Nicole Deblase – Morgan Stanley & Co. LLC

And again I don’t want to put you up on a point on it, but with those restructuring update, I’m assuming there are other components of synergies beyond restructuring is that incremental to the 14 or that is just a nomenclature issue?

Mark Gliebe

Well, what we wanted to do today was, focus our right in on – at the EPC synergy restructuring. There was a specific question on our last earnings call to calendarize it and that’s what we did today. So this only discusses the EPC synergy piece, and I’m sure, there are other things happening in the company trying to get cost out across the company.

Unidentified Analyst


Mark Gliebe

I’m sorry, I don’t understand.

Unidentified Company Representative

The $38 million they got by calendar includes all EPC synergies?

Unidentified Company Representative


Unidentified Company Representative

Yeah, the $38 million is all EPC.

Unidentified Analyst

Okay. But the $14 million is just restructuring, not indirect items or things like that.

Unidentified Company Representative

$14 million would be all, and it comes from the four areas that Scott laid out. It’s their sourcing synergy that comes, if it’s going to be in the $14 million, if there is physical plant restructuring, it’s in the $14 million.

Unidentified Analyst

Scott, can you just share with us if there is a general theme, when you introduce Lean in places like China or Europe, what the reaction of the work force, how does it differ from the U.S. or Mexico with specific reference to middle management. If there is a point to me made, there I would love to hearing.

Scott Brown

You know, I’ve not seen that there is a major difference between the two. Everyone has got the same goals and when we talk this, very focused on speed of the velocity the products through the operations everybody understands and get behind that, and that’s been the same, I don’t see the major difference.

Okay, thank you very much. I would like to introduce now Jon Schlemmer, our COO and he is going to give you a simplification update.

Jonathan J. Schlemmer

Thanks, Scott. You see all the things that Scott has going on in the manufacturing team, I wish we could have this meeting at one of our plants, so you can see the first hand, it’s hard to really adjust to some slide to see the changes and improvements that’s been made across our business. Any how those on the webcast can’t see it, but Scott obviously is a pretty tall gentleman and its actually requirement to be manufacturing and leader in our company without those changes had to be at least six foot eight or taller, so he actually don’t have to be, but you have to think your six foot eight. So today what I would like to do is give you an update on simplification and so let’s jump right into it.

It’s the holiday season. So we thought it would be appropriate besides the M&Ms to bring a couple of guests along with us today. Scott already talked a lot about the synergies shown on the left with EPC synergies as we stated, we are on target to deliver the $38 million over a three-year period, and we laid that out by calendar year to show the actual savings. We’ve also given overview of how we are accomplishing the savings in those four key areas and the benefit that we expect to achieve. But even better news is had shown on the right, we believe there are additional synergies to be had from our simplification initiative. So I want to spend some time talking about this initiative in more detail than we have in the past, show you our progress that we’re making in several the areas and our expectations going forward.

Many of you have seen this chart before. This chart lays out a view of how we’re reducing complexity across our business in almost every area and every aspect of the company. The goal is very straightforward with simplification, we want to make it easier for our customers to do business with Regal, very important objective of our simplification initiative, but at the same time helping us reduce our cost structure. These targets reflect the complexity that we expect to eliminate in each of these areas. So there are reduction targets.

Much has been accomplished in 2012, you can see that in each of the areas shown in the middle column. We have a lot of momentum across the company in simplification. I feel very good about the progress we’ve made and the excitement that we have. Certainly more to come and so I want to show you in most of these areas more detail of what we are driving and how we expect to get those improvements going forward.

I’ll start with the brand. We’ve always used multiple product brands on our company as part of our selling strategy, and we’ll continue to do that, but at the same time we’re going to reduce the number of product brands that we have. We feel that there is room to simplify and we have plans over this time period to eliminate at least 14 different product brands across the company.

So we started of course by rebranding the company this year to Regal with a one Regal theme across the business and that’s very important with our simplification initiative, because the one Regal team sends the message about simplifying the company and unifying our business, unifying our teams, and all of our employees across the company. It sends a strong message about working together. It sends a strong message about sharing best practices, using common processes, and overall the need and importance to simply the company. It really has helped build a lot of energy and momentum and excitement in the business about the overall simplification initiative.

But it doesn’t stop with the corporate brand in the messaging. We’re diving right into the product brand. So our strategy on private brands is straightforward. We are going to elevate three product brands to be our global brand, and that’s something was not done in the past. So we’ve made these three important product brands, Marathon, Genteq and Fasco to be our global product brands. We will invest in these brands as we use them across the company and similar business and similar products. So no longer will the brand be designated for one business, the brand like a global brand will be shared across the company to help build the image and the importance of that brand.

So I will give you an example with Marathon. As Mike gave you an overview of our global C&I motor and generator business, we’re using Marathon today not just as a lead brand in North America, but we’re using Marathon on our C&I products in Europe. We’re using Marathon in India. We’re now introducing Marathon in China and Australia, and even South Africa. So Marathon is growing to be a much, much larger, more utilized brand in our commercial and industrial business.

This helps build obviously stronger, more recognized brands in the company and at the same time, we’ll maintain a number of important brands on a regional basis. So these other brands that we will maintain will be utilized either in a specific technology or application or in a specific region in the world and a great example of that was Unico. We have no plans to eliminate Unico brand. It’s a great brand. It’s just simply not at the same level as one of our global brand.

And then that leads to the other brands that we will rationalize, the 14 or so brands that will eliminate and that will come as part of the impact of moving and migrating towards these three global brands. And there was a number of brands, Duke talked about that in his business and many of our teams are already moving forward and making progress in that area.

So next I want to talk about our supply base. Now we’ve been very focused on consolidating our supply base this year alone, we will eliminate 120 suppliers from our global supply base. and then I’ll talk a little bit about our objectives going forward. So the chart on the left shows direct material suppliers. This represents a magnitude, the number of suppliers that we have today where we purchased direct materials, materials that are used in the product that we sell today. So a wide variety of components and sub (inaudible) in materials.

The simplification initiative we have underway, we expect to reduce another 500 suppliers from our direct material base. It’s really coming from three key focus areas. first, we’ve been focusing on simplifying our ERP systems across the company and that’s been a big enabler for supplier consolidation. Second, the benefits from manufacturing and design simplification, as we reduced our manufacturing footprint, as we reduced the number of design platforms we have, that helps drive and accelerate supplier consolidation. And then third is the leadership that we brought over from the EPC acquisition.

We felt great about the sourcing the supply chain organization that was in place with EPC that teams actually help perform the leadership for our company-wide supply chain organization today, in fact, the gentleman who runs that organization was leading the supply chain team at EPC is now running our supply chain organization for Regal.

So we’ve really brought in some nice talent and resources that we didn’t have before and that helped put more momentum into our supplier consolidation effort.

What’s interesting is the charts in the right are indirect material suppliers. So there is actually hard to see in this chart, but actually there’s more indirect material suppliers than our direct material suppliers. So these are materials that we purchased not to put in the motors or generators, but materials we need to run our operation. So it could be shot supplies, tooling, packaging material, a wide variety of materials that we purchase today. It’s not nearly as consolidated as the starting point. so there is more opportunity there and we expect to see even more benefit from the supplier consolidation in terms of number of suppliers we can consolidate over the next three years in that space as well.

So certainly, a lot happening on the supply chain side. I’d just tell you one simple example, we purchased lead materials. So these leads are used basically, as our customers could connect the electrical power to say a motor or to a generator. now all of our motors have external leads, but many of them do almost every motor plant purchases in some quantity and type of specification of lead material for the motors.

And so we have a many, many plants purchasing material. We’ve had a large number of suppliers in the past, somewhat consolidated, but more room to consolidate. Now what drives the variation in lead material obvious, there’s motors range from a very small motor to a very large motor, so the different size material of power ratings, and then the applications they go into kind of like different types of material as well that’s utilized. So there is some variety that drives some of that complexity to begin with.

So what our teams were able to do it by focusing on consolidation in this area as you can see. we cut the number of suppliers into half. We almost cut the lead time into half. So not only that we get an improvement in our cost size, 11.5% material reduction, but also reduce the lead time from the suppliers who are participating today, and at the same time, we’re able to reduce rate by 40%. So really nice improvement by focusing on one area, a lot more of this as we can do and that we will do and help drive more benefits in the company.

And next, I want to talk about design, consolidation or design simplification. To me, it’s really the most exciting part of our simplification initiative. It drives so many benefits in the business. Today we have a really broad product offering, which is a great thing. We can offer a wide range of products to our customer today in every one of our platforms, but we have duplicate designs today inside those platforms, and I’ll show you a couple of examples of that. And that duplication of design really doesn’t add anything to the customer. We can get to the variety of that we need without having the duplicate designs and that’s what we have right now to get rid of that complexity in our design platforms.

We have five programs underway today. so five programs that we’ve identified, we have clear targets on simplifications for those design platforms, and we have resources, engineers applied to those programs to drive out the complexity, I’ll show you three of the five here, and just give you a high level overview.

So Duke mentioned that the mechanical team has been after simplification on the design side for sometime, and they have made great progress. At one time, we had six different design platforms for just warm gears. So you can imagine the complexity of that within the business, the mechanical team went after standardization, consolidation and today we only have two. But we’re not happy with that. and so there is an active program right now to eliminate one of the two and go to a single design platform across the mechanical division.

That will allow us to eliminate 300 unique components. So you think about the 300 unique components that drive supply chain, additional supply chain simplification with consolidation opportunity as well as our manufacturing footprint. And I will address you to the takeaway common on this slide. You can see the same common on all three of these programs.

What we love about design simplification is that, it really helps enable the supply chain savings. It also helps us reduce inventory because we have fewer component less complexity in the supply chain and it improves our asset utilization in manufacturing. No longer Scott need to have multiple facilities, multiple fueling, multiple production lines to do the same thing for the customer. And we can do this and still offer the variation to our customers that they are looking for. So we don’t think we are going to give up anything in terms of variation and variety to a customer in terms of the choices that they get today.

We think they are going to have essentially the same number of choices. We can just do it with a more structured platform. And Duke showed you a great example of where the same effort done right can also help us grow our business by bringing that simpler, more standard platform to the distribution channel as well.

So here is an example of – same example but second of those side programs on 56 Frame motors. 56 Frame is not important where the 56 Frame motors, but its a designation for standard motor size that’s used on a commercial and industrial business. Actually there is a couple of examples of these on the table just outside the door to give you an idea of the size of these motors. And we look all – work force of the CN&I business on the fractional side of the business, very common motor that’s used in a real wide range of application. So virtually every business that we’ve acquired that have a C&I component of the business at a 56 Frame platform. That’s why we have 7 of them today and far too much complexity with this product range.

Now, we are taking a little bit different approach with this program for doing what we are calling a best of the best strategy. So the idea is whether 7 different platforms, there is something unique and good about each of those platform. So our engineers are looking at each one of them and pulling out the best characteristics of each of the 7 platforms, and then we will create one Regal call it a Regal platform for the company. And that’s what the objective with this design team is set out to do to build the best of the best platform and then we’ll utilize that across the business, and we can sell it under multiple brands across the company still provide a variation to the customers.

We’ll begin production of the new platform next year in 2013, and then it will take us we think a few years to phase out all the production of the existing seven platforms and it gives us some time to work with customers as they convert to the new platform. It’s good timing with the energy efficiency change coming for small motors that impacts 56 free motors. so with that change coming in 2015, many of our customers are going to be looking for new options anyway. so we can offer them a better platform at the same time.

And then finally I want to touch on our international IHP or interval horsepower motors. Mike mentioned it’s a little bit in his presentation, but I want to point out we have one global design team working on this platform. In the past, what we would have done is, India one at the design, the India team would have designed it and produced it in their facility. China would have done the same thing. our team in Europe would have probably approached it the same way.

So today what we have done is we put a team together, comprised of engineers in Europe, China, India and Australia, they’re working together as one team to design one platform and initially, we’ll build it in one plant. so we won’t proliferate it and build it in multiple locations now. We get enough, when we get to a scale that justifies regional production, we can tool up the same platform in another region, but we won’t be tooling up a completely different design, because everybody who has been built up the same standards in the same product. That feel great about this example to exactly the heads that we want to do going forward when we develop new platforms.

So in summary, the design simplification, not only does it help us drive out cost in our design, but it really builds momentum for manufacturing supply chain consolidation. these all three go together design, manufacturing and supply chain. I’d imagine what Scott can do with the manufacturing facilities when we start driving out complexity in the design side. he can do a lot more with footprint consolidation.

I’ll touch based on warehouses and we’re making good progress. we’ll have six this year alone that will be reduced and we’ve got lots more opportunity in the future in this area. You saw a very good example of our central U.S. manufacturing as part of the EPC synergies. We went from five warehouses to two and improved service at the same time.

We feel we can do this in more places in the company. there was other regions where we can do exactly the same thing and then we can also look at consolidating warehousing across businesses. This idea of the one Regal theme. We don’t need to have separate warehouse and logistics operations through different businesses we can consolidate.

So that’s our focus right now. In addition for regional warehousing, what we’ve seen some improvements that the space that’s been opened up with our Lean manufacturing allows us also to bring in some regional third-party warehouses into our manufacturing operations that we have the space, we’ll nicely utilize the asset, and improve our costs at the same time.

And then our manufacturing, a great question asked about where are we going next with manufacturing, certainly a lot of heavy lifting being done and we’re as right now. and then Scott also showed the improvements that we’ve been making in Europe and Australia with our manufacturing footprint. So let me just talk a little bit about where we see this area of simplification going next. no question, our first priority is the warehouse restructuring. We want to get through those programs, manage that extremely well and make sure that we deliver on the 38 million of synergies, but next to whereas we’re going to start looking in the couple of other key areas.

So first area will be in North America around our commercial and industrial business and also our fractional horsepower motors. those are really the first two that are shown on the chart and right now, as we started to put teams around this and look at our footprint, look at some of the other simplification programs were driving. We targeted about four facilities that we think are opportunities for consolidation. So those to be four additional facilities in North America, and then we’ve looked across China, same idea if you look at commercial, industrial versus the smaller fractional motors there is at least two more facilities that we feel we can focus on. This would be our next step for manufacturing consolidation.

Now you might say with all the facilities we have, why aren’t there more opportunities, and I think we'll continue to find more opportunities that these are all very large complex transition programs, we're moving customers business from one plant to another possibly changing design platforms at the same time.

So they have to all been manage very carefully so to make sure there is no disruption to customers. But the good news is we have a lot of experience with this we've been doing as we've seen in the presentation today in many different areas of the company. And so we know how to manage the programs, but we're going to take it in steps and so we look at North America next for these two areas of business, and then we'll be probably in parallel be looking at China, because we have different resources and teams that we can deploy in China at the same time.

And then last I want to wrap up on our ERP systems, we’ve certainly been focused on consolidating ELR systems across the company at Kaizen nicely with the rest of our simplification efforts. Really about every acquisition we've done it feels like we’ve typically brought on a new ERP system. So our acquisition strategy has really added some complexity from an ERP standpoint, but that's why we’re focused on consolidating to common platform.

Standardized and help us transition plants factor were on the same system you can make a transition like that faster helps us consolidate designs programs faster, because if the engineering teams were on the same ERP systems, everything just goes smoother and goes faster, so certainly it's a very important aspect of what we are trying to do overall.

So I'll just show you some of the progress that we’ve been making. These charts show our ERP consolidation efforts in two different views. The chart on the left shows the percentage of sites that are on a common ERP platform today, that’s by far in the middle of 56%.

The chart on the right shows, broken out a little bit different, it shows the percentage of our revenue that’s on one of those common ERP system. So it’s slightly different metric, but we look at it both ways as we try to drive towards the 100%.

So you will see two points here, one we have made tremendous progress in the last three years. Every year we convert two to three ERP systems to our standard platform and we’re going to keep doing that. And in the next three years we will put ourselves in a position were about three-fourth of the company would be on the common platform. So not where we want to be yet, but at a point we will have an enough critical math that will help really accelerate these other efforts in the company and bring other benefits to the business. And still leave more room for improvement.

So I know that after all that what you would like me to do is put a dollar figure on it and size up the simplification initiatives and so I am not going to do that today, but only because it’s really difficult to do it right now from a couple of perspectives. One, we are going to stay focused on delivering on to get on the left. We are going to make sure that we get the 38 million. It is our first priority.

So while we are making very good progress on simplification, the priority is clear to our teams right now to get the EPC synergies and make sure we capitalize on all of those opportunities. But we are having good gains on simplification, we love the momentum that we see and we absolutely feel like it’s going to be a very strong contributor to our target to mid-teens operating profit. So they are both very important in terms of the direction and where we want to grow our operating profit performance.

So, I will wrap up with this slide. It’s similar to the slide that we showed last year. The points are very clear, we remain focused to get the mid-teens operating profit, that target is not changing for the company. We have updated the chart to reflect our current view of each of the drivers to get from our current performance levels to mid-teens operating profits, and so I'll talk about each of those just quickly. Certainly, there are some benefit from volume. We have some, I think reasonable volume assumptions in this model not unreasonable, and that will help us, because we have very good controls on SG&A cost in the company, and with our footprint what we're doing, we’ll have some nice leverage from volume.

But we have additional benefits. If you look at the energy efficient new products, that you’ve heard many examples of today, those will help us improve the operating margin performance of the company. We have the EPC synergies, so while we are through 2012, we still have the benefits of the remaining of the $38 million in 2013 and 2014, and then we have the simplification initiative. And we try to size up our best view over the next three years and what simplification can deliver and certainly help us in the past to mid-teens.

And then last, you'll see variable costs productivity or VCP, and Lean Six Sigma and you might say what that seems like a small step on your past to mid-teens, but I'd show that the net out labor inflation and other variable inflation that you have every year in your operation. So our goal with those efforts at a minimum it’s a net out the impact of that type of inflation in the business. And we feel very confident that we can do that and that those steps get us from where we are today to mid-teens operating profit. That's what we remain committed to deliver on. So teams are working hard as our teams are working very hard in every one of these areas and we feel good about the progress that we are making.

So with that, I think what I will do is, I'll turn it back over to Mark who will wrap up and then we will open it for questions.

Mark J. Gliebe

Thanks, Jon, nice job. In 2010 we had our first Annual Analyst Meeting in this room and this was the final chart that I presented. In the blue, was the revenue target that we put out there for 2015. We’ve took a look back one year, at that time, our revenues were $1.8 billion in 2009 and we said we would grow compound average growth rate at 14%. When you update that chart for 2011 and our current estimate for 2012, you had the green to it and you can kind of see we are right on track with the chart that we put out there for ourselves back in 2010.

Still not an easy path to get there, to get that kind of growth rate, but that is what we’re targeted for. It’s going to take more acquisitions to get there and that we think we have a pretty good track record around acquisitions. So our head set around acquisitions as Chuck mentioned, our debt-to-EBITDA is now 1.9.

And as we look forward in terms of the pipeline, we have opportunities that are bolt-ons, slightly larger bolt-ons than the ones we talked about earlier today and opportunities that are larger than the EPC acquisitions, not such a bolt-on in that case. But we’re looking at all four product platforms, electric motors, electronic drives, businesses in Duke’s space, in the power transmission space as well as our power generation business, so all four product platforms in place. So we are very active out there and investigating many, many different alternatives.

To wrap up, my closing thoughts, I hope you get a feeling today like holy cow, this team is going after every possible angle you can go after, because I can tell you there is just an enormous amount of activity and energy in the company, and I couldn’t be prouder of the accomplishments that we’ve had in a very uncertain environment. We had a record year for tremendous operational accomplishments and virtually every function of the company. Our new products continue to be fuel for organic growth. We understand we need more of that and we are focused on trying to drive organic growth in the company.

Energy efficiency, I hope you see this is what we see, and we’ll continue to be a long-term growth driver in the company. We are delivering on the synergies, simplification benefits as Jon mentioned, there is still to come. And we believe that there and no doubt end markets remain uncertain today, we do believe that from a China perspective perhaps we are seeing the tail end of that. We got the three comments that I made earlier about number one, you got our own orders perhaps turning north. We have the PMI go in the right way, so perhaps we are seeing the benefit, and we are seeing the upturn there and then we need our own markets here in North America and turnaround. And I just think this company is in a great position to have that kind of environment.

We will take your questions. Go ahead please?

Question-and-Answer Session

Unidentified Analyst

A quick question on the tax rate, the changes in 4Q to be the lower tax rate as the benefits going forward? How should we think about the tax rate between now and 2015?

Mark J. Gliebe

Great, so we are going to answer that question. Before I go there, and I appreciate you bringing it up. I’m going to ask Chuck to step up and give the clarification on a question that was answered earlier today. He will clarify then you can touch on that panel as well, Chuck?

Chuck Hinrichs

Thank you, Mark. So just to clarify I think Jeff Hanman asked whether the fourth quarter represented a decrease in 8% in our $0.08 per share in our operating profit. The answer to that is no. I did say our operating profit is expected to be at the lower end of our expectations. The $0.08 per share was the improvement in the income tax expense from implementing the tax plans that we are doing in the fourth quarter. So, that 8% improvement will take us through the higher end or above of the earlier guidance range. So we are confirming that the GAAP earnings per share for the fourth quarter $0.58 to $0.66 a share which will include that $0.08 per share tax benefit.

And with respect to your question about the 2013 ETR effective tax rate, as we said before we would expect that 2013 ETR to be in the 27% range, so the benefits that were generated in 2012 will be sustained into future periods, at least into 2013. So you can use a 27% effective tax rate for 2013.

Unidentified Analyst


Unidentified Company Representative

You’re asking the additional guidance beyond 2013 that would depend upon the tax regulations that would be impacting many of our businesses around the world. But without any of those changes then it should be at that 27% rate or lower.

Unidentified Analyst

Hi, Chuck and Mark. With the mid-teens target you briefly hit on a earlier, how are acquistions going to play in that, they could add – do you see runway for more acquisitions that can be even added it to mid-teens target help holding you up over time, new product areas perhaps or just how to think about that.

Unidentified Company Representative

Great question. So when it comes to acquisitions what we’ve experienced in the last couple of years is the acquisitions that we’ve made tended to be below our fleet average and drag us down.

And as we’ve stated many, many times that when we’re doing an acquisition, we’re looking at three things. we’re looking at number one; do we get some benefit to energy efficiency; number two, do we expand our footprint and market exposure, do we change it beneficially to the company, and then number three, do we get some type of net margin improvement to the company. That’s kind of three screens we use, and I would say to you, that right now some of the targets we’re looking at could drag it down and some of the targets we’re looking at could pull it forward. So it could go either way depending on which acquisition comes through. You asked about new products. Most new products tend to be above fleet average margins.

Unidentified Analyst

Hi this is, I guess on the mid-teens margin target. I think last year, you gave this the waterfall chart indicating a pretty large non-recurring tailwind to the margin expansion. So I’m just curious what that was and why that’s not included this year, and then also in the simplification strategy, just curious about which one of those I guess five or six different line items will be the largest savings for the company without actually giving numbers to it.

Unidentified Company Representative

So the non-recurring tailwind started to jump in was related to the acquisition of EPC.

Unidentified Company Representative

So we’ve started with our base of 2010 and 2011 average operating profit. So that would have included the cost to incur on the EPC closing, purchase accounting et cetera, and the quality issue, the increase in the warranty expense that we took in 2011.

So taking those out and by doing it this way, we’ve started with our year-to-date 2012 operating profit of 11%.

Unidentified Company Representative

(Inaudible), he had a second part to his question. can you repeat it please?

Unidentified Analyst

Yeah. and just on the simplification line items, I guess which one of those six line items would be the largest benefit or maybe, if you could rank them, just trying to understand what the biggest levers are there?

Unidentified Company Representative

Yeah, manufacturing consolidation is obviously going to be by far the biggest beneficial. And then after that it’s going to be a close tie between warehouse consolidations, supplier based consolidations and then platform design, those three would run for second.

Unidentified Analyst

Thanks. So the first question is on simplification. I know you’re not willing to give a long-term target of what the real benefits could be and that’s understandable. But could you witness any benefits from simplification during 2012 in your margin? And then the second question is, how comfortable would you be with doing a large, perhaps bigger than EPC sized acquisition while you start integrating EPC?

Unidentified Company Representative

So, on the first piece of it, if we got any benefits in the call it would be relatively small in 2012 to from a simplification perspective, it would probably be too early to declare a financial benefit. And the second question was related to how do you feel about making another large acquisition while you’re still integrating EPC and so when we’re talking about the EPC integration, the heavy lifting that’s got to be done is related to factory consolidation. And we are moving very nicely down that path and my sense is that relative to the EPC integration even from the heavy lifting, as Scott indicated, will be done by mid-year. So the answer to your question is, yes, we’re ready.

Unidentified Analyst

I have a question to Mike and Duke’s presentation. I think you talked about energy efficiency being a driver and so in 5% of sales being in the U.S. and can help to notice that energy prices have been gone down in 2012, they are actually substantially down versus the 2011. So is that a driver, how much of an impact was in 2012 as a negative to your growth, ROEs coming down, I am assuming a lot of business C&I world, these are calculations done based on ROEs whether we’re going to replace equipment or not, can you kind of help us quantify?

Duke Sims

You are right. The biggest driver, Mike did talk about energy costs, being a driver in that equation. The biggest driver is the one that’s currently shut and in 2012, we have the, we were coming off of in part helping, we were coming off of I think 2009 and 2010 where we had the benefit of the $2,500 tax incentive that was going to consumers. And so we had that going against us in 2011 and 2012. We also have the R22 impact outside of HVAC. Okay, so in the industrial space we have the, in 2010, we have the law passed, that impacted 8% of the company in terms of revenues and then we got the Canadian version of that law passed this year.

So anything that would have been a drag which I mean very tough for us to figure out what that would be, what have been hidden behind the fact that we have legislation driving us up. Am I, did answer your question, I don’t feel like I am.

Unidentified Analyst

That’s not being up, but I am sure, bigger down cycles in 2012 than, I don’t know how much variability really gets energy consistency in that, that’s kind of my question?

Undignified Company Representative

Thanks, so once you repeat this comment?

Unidentified Analyst

The question was around, with energy prices being down in 2012 versus 2011, was that a headwind that we observe this year and our efforts to introduced energy efficient products retrofit those types of initiatives on the C&I side of the business, and mechanical. There is no question if energies prices are low, if it’s not driven by legislation or regulation it’s driven by payback return. So there is a couple of factors that I think may be have helped to offset any of that change. We are talking about programs, in a lot of cases they have a payback well under two years with today’s energy prices, so the (inaudible) example is a great example, you get roughly one year payback even with fairly cheap electricity. It’s still a great payback, because the current product is just so inefficient.

So there is probably some impact there, but my view would be it’s not a significant change, the change anyway it’s a change that we’ve seen say ’12 versus ’11. It’s not like energy free obviously, there is still cost there, there is still a very good payback equation. It sets the bar a little bit higher for our design teams to come up with the right compelling message in return for the end user, but I think we’ve been able to still continue to show that with a lot of these products.

Unidentified Analyst

Hi, thanks. First question is how do you define mid-teens?

Unidentified Company Representative

Well, it’s between 10 and 15, I am sort of kidding, I’m being suspicious. Most of the analysts that have models out there are in the range of 12.5 and 13.5, I would say to the upper end of that, it’s probably we will think about it.

Unidentified Analyst

Okay, great. That’s helpful and then on the Waterfall chart you have volume looks like it’s the biggest chunk in that chart maybe a third just by looking at the size of it. Can you get that other let’s say two-thirds of the margin you’re looking out through 2015, without volume growth?

Mark J. Gliebe

If you look at the bottom of the page, we put some assumptions in there, because these questions come up often from you folks about what are your assumptions on volume, and we did put a volume assumption at the bottom of the page there and that's the way we are thinking about it.

Unidentified Analyst

And that's the so contribution from volume, it’s everything else you can get without volume essentially is what you say?

Mark J. Gliebe


Unidentified Analyst

Right. Okay, thank you.

Unidentified Analyst

Couple of questions. First of all, there was a reference in one of the earlier questions about the $38 million and some assume that might be low relative to the EPC savings. If in fact that is low we ever hear it as such well those numbers melt into the simplification of message, and so that's kind of the top end there, so that's the first question, I actually have a couple of more.

Mark J. Gliebe

Okay. So the first question, we've been pretty consistent with our message around that. But we acquired EPC. We didn't acquire a public company. We acquired a division of a public company. We did not get public company cost. We bought an existing motor business that has closed on, I think 15 U.S. facilities in the last five years. So this was a business that had done a lot of the heavy lifting on savings, what they had not gotten to is they had not gotten to the Mexican plant. And so the reason, I hadn't gotten to and the benefit wasn't all that great, in fact that we were able to merry the two companies together and legal legacy and all of these facilities sitting there that had like products made that make a lot of sense. But what we repeat up to you the $38 million that is the benefit we're going to get and there's nothing more coming from EPC synergies.

Unidentified Analyst

And the other two questions, one was relative to your platform consolidation, I think John you had referenced one example where you go from seven different platforms to invest in best of each down to one platform. Does that actually run the risk of ending up with a higher cost platform, because if you do take the best of each in theory, that’s not the cheapest of each. And then the other question is relative to the marine market and the motors driving the marine historically, I think that’s been driven by cash. And what opportunity is there really to displace CAD and how do you all view that that?

Unidentified Company Representative

Fair, we’ll address the CAD question here and second, I’ll let Jon touched on.

Jonathan J. Schlemmer

So great question on the platform consolidation, do we give up anything I think is a question on by going to one versus some of those unique benefits that are buried inside the each of the seven. We don’t think so. We think that while that is a very typical barrier to simplification someone who look at it will say, well my design for this particular application is the best cost solution, the standard platforms and add costs. But you may have an example of an application or two, well that’s a bit of an issue, but across the family, we feel like it’s a very good cost reduction, and we’ve been looking at that today within the seven families and then looking at the one that we are moving towards and we feel like we are going to see a nice benefit across the board.

So and it’s really driven by the other simplification or standardization that it drive, getting volume into the supply chain, getting at those other benefits. So you might look at it and say and announce more of a particular material, but there is so many other benefits that are way down.

Unidentified Company Representative

You had a question now, did you get the question Mike?

Unidentified Analyst

Just to a little to clear something, as you said motors assuming motors or assuming generators?

Unidentified Company Representative

All right, I did the actual engines.

Unidentified Analyst

Okay, so maybe you should repeat the question if you can (inaudible).

Unidentified Analyst

And maybe the assumption in my question is incorrect, but I have assumed that in the marine business is that the CAD engines are basically nearly a 100% share to just proliferate that in a very broad and deep way.

Mark J. Gliebe


Unidentified Analyst

And yeah, you’ve talked about some applications where with the supply vessels and they want to see you do more.

Mark J. Gliebe


Unidentified Analyst

So what are the competitive dynamics there that that are barriers and maybe opportunities that you were maybe thinking at, but not addressing that too progressively?

Mark J. Gliebe

All right. I think I understand the question now. So thinking it this way, there are new ships being built, and there are a lot of ships that are existing today, that will be rebuilt. And so there are several channels to get our products into that space. It could be actually the owner of some of these ships. It could be the purchase around new ships. Our customer could be the shipyard, and then there are the systems folks that put all the pieces together, beyond just the engine and the generator, but the system that controls the ships. So any of those could be our customer and all of them can express a preference in whose generator gets used. So we’re seeing full from several of those channels if you will.

And as I mentioned last year and this year too, we’re just getting started here and they will account from the robust nature of the products that we built. and it’s suited very, very well. It just needed to be water cooled. The generators that we use previously were air cooled, so these are now water cooled and that’s what brought us into the space.

Unidentified Analyst

And just to be clear, we don’t make a diesel engine as you know. Right?

Mark J. Gliebe


Unidentified Analyst

CAD makes the diesel engine. We would be a supplier to – we make the alternator that’s the way to think about it. We don’t make the genset, somebody else supply with the diesel engine. We supply the alternative, gets put together as the genset typically. CAT is a current customer and a potential customer in this application that we may not have the business.

Jonathan J. Schlemmer

And in fairness, there are others to make engines that are used even in the same place.

Mark J. Gliebe

Yeah, do you have anything?

Unidentified Analyst

Mark, could you talk a little bit about, and I know you’re not ready to put numbers to it, maybe the timing and simplification. Should we think that as being fairly linear over the next couple of years or maybe biased out or just any color there would be helpful, first question?

Mark J. Gliebe

Yeah. I understand your question. I mean you were still in the early stages. so I think later push, it’s more of a step-up as opposed to linear way to think about it.

Unidentified Analyst

Okay. And then just the second one, if you look at this last tiny silver in the operating profit improvement in waterfall, the variable cost productivity and lean Six Sigma over the inflation? How has that trended historically, so how to do it back over five years, is that a positive or negative?

Mark J. Gliebe

Hence that offsets the inflation other than material inflation. So we’re talking about all other inflation that you would have in a business, obviously material inflation we tend to offset with price one way or the other. So I would just tell the over time it offsets inflation.

Unidentified Company Representative

Just for instance, four or five years ago, I started talking about a phenomenon that I called re-onshoring that became an elegant phrase, and Harry Moser taught me to say onshoring. But there is a decided dissatisfaction by a lot of manufacturers to 12 to 15 weeks supply chains, coming from Asia when you’re supplying to U.S. And I understand you can cut that to three to four weeks, five weeks whatever your example was, but sourcing components, but the inventory is still in the value chain. To what extent is this phenomenon of bringing the stuff back to U.S. meaningful of your company?

Unidentified Company Representative

So I think it’s a good observation Cliff from in terms of the trend towards not wanting a deep supply chain, so I think that’s a good observation. And the driver to this is, most companies are driving lean like we are. And everybody is at a different point in the journey, but lean by nature does not have long supply chains. So that’s the starting point. I would say, however, that the best of both worlds is when you could take high volume products, and still have the manufacturer in Asia, but have them supported by duplicate capability here in the North America to address the volatility in your demand stream.

So you may just startup a facility in Asia and have a turning up of standard products at some constant levels and have the volatility in the chain offset by other North American-based factories. So I don’t see it personally as a contributor to onshoring in the U.S., that’s my view.

Unidentified Analyst

This is more of a question for your business unit guys.

Unidentified Company Representative


Unidentified Analyst

I guess I was a little bit surprised pleasantly that all of the customers you arose were either flat or up, it was not one down for 2013. Given where we are today with what’s going on in the U.S. as you are largely the U.S., what do you make of that? And then secondly, do you fashion your thinking of what they’re thinking?

Mark J. Gliebe

Well, I will answer the question, but these guys are welcome to step up and address it, I mean what you saw there was and virtually every time we have our customers telling us it’s going to be flat. And so what's happening there is that all these guys are putting together our operating plans for next year, right. And all of them don't want to bring in a plan that say’s we are going to be down. And so I just think, I think it's a reflection of the real uncertainty out there. I don't think they know what's going to happen. And some of the answer to your supplier is, do you had a plan on flat, that's my sense for what we’re being told. I can tell you in the past, but the answer is normally we're going to be up 4% or 5%.

So, now how do we plan them? How do we plan by? Its one input into the way we think. It's one input. We're going to look at all the external measurements as well, but Paul laid out a number of indicators in the HVAC space, Mike mentioned the manufacturing component of industrial production, the forecast there is that that’s going to be up next year, that would be another indicator kind of offsetting the earlier view. I just think out there right now, nobody knows where this is heading. You have a lot of volatility in demand, it’s swinging both ways and the ISM indicator of October – of November sales, what we saw after a pretty good October. So it's going up and down.

Thank you so much for all of your attention. The management team is going to be available for lunch. You’re welcome to grab any one of us. And lunch is going to be served, the line is out here, and then there is a room across the hallway. We’ll all be back there having lunch. So again thank you so much for your interest in Regal-Beloit.

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