Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Regal Beloit Corporation (NYSE:RBC)

Q4 2013 Earnings Conference Call

February 11, 2014 10:00 a.m. ET

Executives

Mark J. Gliebe – CEO and Chairman of the Board

Jonathan J. Schlemmer – COO

Chuck A. Hinrichs – VP & CFO

John M. Perino – VP, IR

Analysts

Mike Halloran – Robert Baird

Christopher Glynn – Oppenheimer & Co.

Joshua C. Pokrzywinski – MKM Partners LLC

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

Mark Douglass – Longbow Research

Walter Liptak – Global Hunter Securities

Liam Burke – Janney Capital Markets

Operator

Good morning, and welcome to the Regal Beloit Corporation Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to John Perino, Vice President of Investor Relations. Please go ahead.

John M. Perino

Thank you, Andrew. Good morning, and welcome to the Regal Beloit fourth quarter 2013 earnings conference call. Joining me today are: Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, Vice President and CFO.

Before turning the call over to Mark, I'd like to remind you that the statements made in this call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our filings with the SEC.

On Slide 2, we mention that we are presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit, adjusted gross profit as a percentage of sales, adjusted income from operations and free cash flow. We believe that these are useful financial measures for providing you with additional insight into our operating performance. Please read this slide for more information regarding these non-GAAP financial measures and please see the appendix, where you can find reconciliations of these measures with the most comparable measures in accordance with GAAP.

Now I'll turn the call over to Mark.

Mark J. Gliebe

Thank you, John, and welcome and thank you for joining our fourth quarter call and for your interest in Regal. As usual I’ll follow the normal schedule. I will make some opening comments. Chuck will give you a financial update. John will give color on products, markets, recent acquisitions and operations. And then I'll summarize before we move to Q&A.

Before I get into the details, impairment charge in the fourth quarter primarily related to businesses competing in difficult economical market environments. Chuck will discuss this topic in greater detail.

To better address our operating performance I’ll discuss our results on an adjusted basis. From an operating standpoint, revenues were up slightly year-over-year in the quarter. Sales in our HVAC business were up approximately 5% in spite of the previously disclosed headwinds. As expected sales in the China experienced strong while revenues in India and Australia remained challenged.

Again as expected, revenues in our North American commercial and industrial motor business were down slightly offset by growth in our power generation business where we experienced real strength in the datacenter and market.

Our North American Mechanical business was down 7% for the quarter, with the decline coming primarily from our exposure to hydraulic fracturing in our Milwaukee gear business. We were pleased with our 2 point improvement in gross margins which were aligned with our expectations and driven by EPC synergies, our simplification programs, our new products and stronger sales of high efficiency products.

For the fourth quarter Regal’s adjusted EPS was up 46% on a year-over-year basis and while our operating performance was within our guidance, our adjusted earnings were well ahead of our guidance. Chuck will get into the details about unanticipated tax benefits in the quarter resulted in adjusted earnings exceeding our guidance.

On an adjusted basis, free cash flow for the quarter came in at a 118% of net income and for the year we finished at a 115% of net income achieving our goal of free cash flow greater than net income for the third year in a row.

Our simplification program continues to move forward, the relocation of our Springfield facility to McAllen Texas and also Mexico is on schedule to be substantially completed by the end of 2014. Recently we announced to our employee that combination of our Acunia Mexico facilities. This restructuring move will be completed by year end and will right size the facility given the current conditions while providing an attractive payback. There is more to come from our simplification efforts and John will discuss this in more details.

Just for growth we launched 20 new products during the quarter making it 71 new products for all of 2013. We’re focused on continuous innovation on our energy efficiency to help drive organic growth and improve our margins. We acquired Cemp at the beginning of the fourth quarter. The integration is going it’s plan and we’re excited to have Cemp part of the Regal family. As expected the acquisition was $0.02 diluted in the quarter due to normal purchase accounting practices. Consistent with our earlier guidance we expect Cemp to be accretive in 2014 $0.03 to $0.05 with minimal contribution in the first quartet.

And finally, as you may have seen from our press release this past Friday, we signed and closed on the acquisition of Hy-Bon a $57 million U.S. based manufacturer of vapor recovery units or VRUs in the oil and gas space. VRUs captured gases from storage tanks that would otherwise be vented or flared and transfers them to nearby pipelines. Hy-Bon is an excellent bolt-on addition to our Unico business and we expect two way sales synergies as well as modest cost synergies. We like the oil and gas end market and we like the fact that Hy-Bon’s products recapture energy that benefits the customers and meets all state and EPA regulations.

As far as other acquisitions go, we continue to have solid pipeline and we intend to be a consistent and successful acquirer. Speaking of Unico, we’ve substantially completed our expansion of our Wisconsin facility. The final relocation of the production line is underway and we expect continued growth in this business in 2014. And speaking of plat relocations, we began the relocation of our facility in (Wusi) China into their new home. This will be our third and final major China plan relocation in the last three years. We expect relocation to be complete by the end of the year.

In the fourth quarter the Board reauthorized the repurchase of up to 3 million shares. With our consistent strong free cash flow and our strong balance sheet we’re in a position to continue our growth through acquisition strategy and repurchase shares sure than our valuation the market conditions warrant. Our bias will be to continue to pursue acquisitions as we believe it creates the greatest long term shareholder value.

As we look to the first quarter, our guidance reflect typical residential HVAC seasonality as well as low single digit residential market growth offset however by the customer dynamics we previously discussed. Further we expect our North American commercial and industrial motors business to grow slightly for the quarter and we expect continued strength in our power generation business. Internationally we anticipate sales in China will be up as well but offset by continued weakness in India and Australia.

We are expecting a 1 percentage point market rate headwind in the first quarter driven by a number of factors. First, our two recent acquisitions will contribute roughly $15 million of incremental revenue on a year-over-year basis with minimal margin contribution due to normal purchase accounting. We expect both businesses to begin to contribute in the second quarter.

Next while Unico had another good year with revenues up 20% and we expect Unico to have growth in 2014, the first quarter of 2013 was particularly strong. So the year-over-year comparisons are difficult. Also as we mentioned earlier our Milwaukee gear business has one more quarter of difficult comparisons in front of us. The good news is that Milwaukee gear is beginning to see more customer enquiries and code activity is up higher than we have seen throughout 2013.

Next we’re expecting operational inefficiencies related to our Springfield HVAC plant consolidation efforts. The program is on track, we expect to complete the transition by year end and begin realizing the benefits in the second half of 2014.

Finally, we’re expecting modest price costs gap in Q1. In early December we did announce a 3.4% general price increase to our North American customers. While we expect this price increase to begin to have an impact in Q1, the full impact won’t be realized until Q2 and beyond.

With that I’ll turn it over to Chuck Hinrichs.

Chuck A. Hinrichs

Thank you, Mark and good morning everyone. I’ll start with the reconciliation of our fourth quarter 2013 results on a GAAP and EPS basis to adjust the EPS. Earnings in the fourth quarter 2013 on a GAAP basis were loss of $0.74 per share. We add back the impairment expense of a $1.65 per share adjusted for taxes. The next adjustment in the fourth quarter was purchase accounting adjustments and closing costs for Cemp totaling $0.02 per share.

Restructuring charges in the quarter were $2.7 million or $0.04 per share related to our continuing work on our simplification initiative. Adding back these adjustments results in adjusted earnings per share for the fourth quarter 2013 of $0.97, up 46% from the prior year.

Our fourth quarter sales were $727 million, an increase of 1.6% from the prior year. The impact of foreign currency translation in the fourth quarter was a negative 0.9% on total sales and a negative 2.5% on international sales as compared to the prior year. Sales in the quarter increased 1.3% from the Cemp and (RAM) acquisition as compared to the prior year.

In the fourth quarter of 2013 our gross margin of 24.5% represents a solid improvement over the prior year gross margin of 22.5%. In the fourth quarter 2013 we had LIFO expense of $3.1 million, an increase of $3.4 million over the prior year and $2.7 million of restructuring expenses, a net decrease of $800,000 from the prior year. The gross margin improvement resulted from the benefits of the EPC synergy program and sales of new products at higher margins.

Our SG&A expenses in the fourth quarter 2013 were $125 million. This was an increase from the prior year and previous quarter impacted by the SG&A expenses and closing costs from Cemp, higher health care, IT and audit related costs. In the fourth quarter 2013, we performed our annual goodwill impairment analysis. We concluded then an $81 million impairment expense for goodwill intangible and related items was required.

Net of the tax benefit, the after tax impact is $75 million or a $1.65 per share. This write down was primarily due to the difficult economic market conditions in the India, Europe and Australia markets and in the natural gas fracturing market in the U.S. The impairment expense is a non-cash expense and does not impact future sales, margins or liquidity.

Our income tax provision in the fourth quarter 2013 was at $3.7 million tax benefit substantially lower than our earlier guidance of an 18% ETR. The tax benefits resulted from two adjustments. The first adjustment was related to the impairment expense as the write downs of the intangibles and related items were deductible for tax purposes. Second adjustment recognized was December 2013 change in the Mexican tax law which required an adjustment to our deferred tax account and the reduction in the tax provision for the quarter. Also there were changes in the global distribution of earnings which impacted our tax provision. This resulted in a $0.12 per share benefit versus our guidance for the quarter.

This slide provides some key financial metrics for the fourth quarter and year-end 2013. Our capital expenditures in the quarter were $17.3 million, and $81.1 million for the full year 2013. For 2014, we estimate capital expenditures will be $80 million to $85 million as we complete our (Wusi) China motor plant and invest capital for the simplification projects.

Our effective tax rate in the fourth quarter was a 10.3% benefit which was below our earlier guidance of 18% as I explained earlier. We estimate our 2014 ETR to be 27% consistent with our guidance from last quarter.

In the lower left section we summarize our adjusted free cash flow. We posted another strong quarter and full year in our adjusted free cash flow performance. 2013 was the third year in a row with free cash flow greater than a 100% of adjusted net income. In the lower right quadrant we provide data on our quarter end balance sheet. Our total debt was $767 million and our net debt decreased to $301 million. Our credit metrics are strong as our debt to EBITDA was 1.8 times and our net debt to EBITDA was 0.7 times.

Now, I would like to discuss our priorities for capital allocation. Our first priority is to continue to investment in our current businesses to enable organic growth and investments in new capital projects with the favorable return on invested capital. To supplement our organic growth, we continue to pursue acquisitions that lead our strategic and financial criteria.

The third priority is our consistent dividend strategy to return a portion of our free cash flow to our investors. We’ve increased our dividend eight out of the last nine years. And finally, we will consider opportunistic repurchases of our stock. As Mark mentioned our Board reauthorized the 3 million shares repurchase program. All our decisions on capital allocation are focused on driving long term shareholder value.

Our first quarter 2014 earnings guidance is for GAAP, EPS of $0.90 to $0.98 per share. On an adjusted basis that is $0.99 to a $1.07 per share. After adding back the estimated $0.07 per share of restructuring charges and $0.02 per share of purchase accounting adjustments for both Cemp and Hy-Bon. Excluding these purchase accounting adjustments, Cemp and Hy-Bon’s results will be neutral to first quarter’s results but will be accretive to future earnings. As Mark mentioned we expect to see headwind on our first quarter gross margin of approximately 1%. There are couples of factors driving this margin pressure.

Two of our businesses, Unico and Milwaukee gear have difficult prior year comparisons. Secondly, we’re experiencing some operational led efficiencies as we execute our plant closures and production transfers. These will abate in the second half of 2014.

Lastly, we’re experiencing some pressure on our price cost margin. Capital prices have been volatile and steel prices and other input costs are increasing. This margin pressure is being addressed with our price increase which will be fully realized in the second quarter of 2014. We will hold our SG&A expenses flat in the first quarter of 2014 excluding the impact of the acquired businesses. And finally, we expect our effective tax rate to be 27% in the first quarter of 2014 and for the full year 2014.

Now, I’ll turn the call over to Jon Schlemmer.

Jonathan J. Schlemmer

Thanks Chuck and good morning everyone. I’ll start by giving some color on the end market and customer demand. We saw improved performance in our North America residential HVAC with sales up approximately 5% compared to the same period prior year. The sales strength was involved the OEMs and the aftermarket side of our business. The cold weather across much of the country in the fourth quarter drove an increase in furnace related motor demand that improved our sales and our mix.

The customer dynamics that we communicated back in early 2013 negatively impacted our sales in the quarter as expected, however, I would remind everyone that the seasonality of our residential HVAC businesses results in less of an impact for the fourth quarter versus other periods throughout the year.

Sales in our North America commercial and industrial motor businesses decreased approximately 2% excluding the impact of divested pool and spa motor business. Overall order performance was stable throughout the quarter. We experienced strength in a number of end markets including commercial and industrial pump and commercial ventilation.

Commercial and industrial equipment and machinery sales declined in the quarter as seen that a number of OEMs for reducing their year end inventory levels. Sales through distributors were slightly down in the quarter.

We had another good quarter in our global power generation businesses with sales up strong double digits compared to the same period prior year. The strength involve generators and switchgear equipment resulted from a combination of new customer wins, new products and strong demand in the datacenter segment.

The decline in our North America mechanical business was driven by the reduced demand for hydraulic fracturing equipment in our Milwaukee Gear business. Excluding Milwaukee Gear we experienced slight growth in the rest of our North American mechanical business. As we mentioned on our last call, we’ve one more quarter of difficult year-over-year comparisons in the mechanical business driven by the demand for hydraulic fracturing equipment. While we’ve not seen an increase in our order rates, our fracing customers are somewhat more optimistic and we’ve seen an increase in inquiries and code activity.

Unico had a very good quarter with sales up approximately 20% driven by increased demand for Unico’s oil and gas products. We experienced growth in North America, South America and Europe. We substantially completed the expansion of Unico’s manufacturing facility and (Indiscernible) and have made a lot of progress increasing both the production output as well as the efficiency of the operations.

I’ll talk more about Unico later when we discuss our recent acquisition. On international front sales outside the U.S. increased approximately 1% compared to the same period prior year in spite of currency which impacted our international sales by 2.5%. For the quarter sales outside the U.S. represented approximately 36% of our total sales.

We experienced continued growth in Latin America and solid growth in our China businesses. Conditions in Europe seem to be improving where we experienced much better order rates as we exited the quarter. The India and Australia markets continue to be very challenging.

During the quarter our teams launched another 20 new products that makes 71 new products launched in 2013 another record year for new products. High efficiency sales increased approximately 7% compared to the same period prior year and represented 22% of total sales. The increase in high efficiency sales was partially driven by greater demand for energy efficient gas furnaces as well as an increase in demand for new products.

Last month we showed our latest residential and commercial HVAC products at the AHR Expo in New York City. There was tremendous interest in the new (Dec star) blower system and the new (Simax I) 36 frame ECM motor and control. Dec star is a latest innovation through efficient air movement and residential HVAC applications. Dec stands for Dual Efficiency Configuration. The axle permanent magnet motor combined with a high efficiency blower. The new design is more efficient, lighter, more compact and quieter. All features that are important to our customers. We have a number of launch customers and even more are evaluating Dec Star in their labs.

The (Simax I) 56 frame ECM motor and control brings our proven ECM technology to larger motors for higher horse power, air-conditioning, refrigeration and ventilation applications. The new motoring and control can reach nearly 4 horse power, while today the HVAC ECM motors are limited to approximately 1 horse power. The I and Simax I stands for integrated where the motoring control are integrated into one system for reliable, efficient, compact and cost effective performance.

This opens up the door for a wide variety of new emerging applications such as commercial and air-conditioning and commercial refrigeration. Like Dec Star we have lot of customers evaluating the new product and we’ve launched with several of these customers. Both of these new products are examples where we’re offering a system solution. The integration of a motor and electronic control in the case of Simax I, and even the addition of the blower in the case of Dec Star.

In the fourth quarter we announced acquisition of Cemp, a manufacturer of industrial motors designed specifically for hazardous duty applications with revenues of approximately $35 million. Approximately 85% of Cemp products are used in oil and gas and marine applications. In the fourth quarter we started the integration process and put in a growth plan behind a $10 million of sales synergies that we’ve targeted for this business. The expectation is to realize the sale synergies over the next three years and the team is off to a great start. The idea is to use our sales footprint to expand Cemp’s customer reach in North America, Latin America, the Middle East and Asia.

We also kicked off a lean event at Cemp to streamline the operation to help increase capacity, reduce lead times and improve costs. On our last call we projected $0.03 to $0.05 EPS accretion in 2014 and $0.06 to $0.08 impact in 2015. We’re off to a great start and we continue to feel confident about these estimates.

Today, we’re pleased to talk about our latest acquisition, HY-Bon. The Hy-Bon business is a manufacturer of paper recovery units based in Midland Texas with sales of approximately $57 million. The majority of the sales are in the oil and gas segment. Hy-Bon’s products are used to capture and convert gas vapor emissions that come from oil field storage tanks. Not only are there ever increasing environmental regulations to deal with the vapor emissions but there is also an attractive payback equation that helps to drive demand for Hy-Bon’s products and services. We’re excited about the team, the products and there are now in oil and gas space. This is a great fit with our Unico business and we see sales synergies with Hy-Bon service centers to help sell and service our Unico products in North America as well as using Unico sales footprint outside of the U.S. to help expand Hy-Bon’s customer reach.

Here is a picture of one of Hy-Bon’s larger systems installed in the field. Hy-Bon system range in size and complexity depending on the size of the storage tanks and the overall demand on the system. Expected impact from earnings in 2014 is accretive $0.03 to $0.06 per share and 2015 accretive $0.08 to $0.12 per share.

In the first quarter as a result of normal purchase accounting, we expect no EPS contribution from Hy-Bon.

I would like to wrap up with an update on our simplification efforts. Last year we announced our plans to close our Springfield Missouri motors and parts operation consolidating the production into our existing Reynosa, Mexico and McAllen, Texas facilities. This decision was all about simplifying our manufacturing footprint to drive efficiencies and improved lead times. A portion of the product has already been transferred and we’re on plan to be completed by the end of 2014.

While we’re on schedule the Springfield restructuring is creating manufacturing efficiencies, inefficiencies that were impacted from the first half. Once completed, we expect savings of roughly $15 million. We recently announced to our employees the decision to consolidate our residential hermetic motor operations located in Acunia Mexico. We currently have two production facilities in the Acunia and we will be consolidating operations into one facility and closing the other. These facilities supply residential hermetic motors to a number of our customers primarily in North America. The consolidation will require approximately $1.6 million of restructuring expenses with an estimated $1 million of restructuring in the first quarter and the remainder in the second quarter.

We expect the consolidation to be completed by year end. This simplification effort will better align our capacity and our overhead structure with our current level of demand in this business. We have updated the estimated restructuring expenses to show the impact on 2014. This includes both the Springfield and the Acunia restructuring programs.

Our engineering teams are making excellent progress on our design platform simplification programs. We have identified five major product lines where we will consolidate our existing design platforms to simplify our product offerings. These are major programs. They involve literally thousands of designs and hundreds of customers. When completed, these programs will not only simplify our designs, but will also help to further consolidate and simplify our supply base and our manufacturing footprint. The benefits include improved quality, shorter lead clients, lower inventory levels and ultimately a more competitive cost structure.

We are now finalizing the new platform designs and we are targeting to be substantially complete with the conversions by the end of 2015. One of the five platforms simplification programs is the high efficiencies, IEC industrial motor product line called Mark 3. In this case we are developing a common IEC product line that will be used to serve customers and markets that offer us an opportunity such as Europe, Asia and the rest of the world. Here we are taking the best of our current product offerings and combining those features and capabilities into one common platform. We are actually consolidating four of our existing IEC products into one common platform. Initially the platform will be produced in our new (Wusi) China Industrial Motor facility.

This new facility will produce industrial motors ranging in size from 1 KW to 5000 KWs for both the China market as well for export. All of the products currently produced under (Wusi) China business will be relocated to this new facility. The (Wusi) facility was previously a state on enterprise with multiple rooftops that move allows us to put all of our operations under one rooftop and establish the lean production flow. We are actually able to decrease the overall square footage with this move yet still make significant improvement in the efficiencies and capabilities of the operation. The new facility is nearly complete and we started relocation of the manufacturing processes. And relocation would be completed by year-end. As you can see our teams are making excellent progress on both our innovation and simplification initiatives. I am confident that these efforts will make a significant impact. With that I will turn it back over to Mark.

Mark J. Gliebe

Thanks Jon. So to summarize our top line grew in the fourth quarter and our adjusted earnings per share were up 46% year-over-year. While our performance was in line with our guidance, with the added tax benefits our results finished well ahead of our expectations. We made a 2% growth improvement in the fourth quarter margins driven by our key initiatives. And we are pleased with our continued progress on free cash flow which finished the year at a 115% of adjusted net income.

As John mentioned our simplification efforts are focused on footprint and design platform consolidation and we are moving forward aggressively. In addition to the recently announced spring field and the Acunia consolidations you should expect more in the future from these constructing (ph) efforts. We continue to launch new products to innovate our product offering and drive growth and margins improvement.

The fourth quarter Cemp acquisition is going well and well contributing EPS growth beginning in the second quarter. We are very excited to welcome Hy-Bon to the Regal family, Hy-Bon will be a nice tuck in with Unico and we like the Hy-Bon products platform in oil and gas space. Our acquisitions pipeline is healthy and we continue to aggressively and yet prudently seek acquisition candidates that need both our strategic objectives and financial criteria.

We are fortunate to be in the position with the balance sheet, where we can pursue acquisitions and make appropriate share repurchases through the opportunities presented to us. As we look to the first quarter we are expecting modest growth in our commercial and industrial markets both in North America and China. And we are expecting HVAC business to be flat but slightly up.

Further we project more challenging conditions in India, Australia and with Novaky here. Our margins as we explained will have a 1% point headwind in Q1 but we do expect these challenges to be mostly behind us by the end of the second quarter.

And finally we expect SG&A as a percentage of sales to improve in the first quarter compared to prior year. And before we go to questions we understand there are a lot of moving products here in both the fourth and first quarters. And we are convinced that we are on the right path. We will anniversary the HVAC customer losses we had in 2013, we believe our simplification efforts will pay off and we expect that our new products will drive organic growth. All these efforts point to margin improvement and we expect to continue to acquire businesses both in current and adjacent (Ph) product platforms. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Mike Halloran of Robert Baird. Please go ahead.

Mike Halloran – Robert Baird

Good morning guys.

Mark J. Gliebe

Good morning Mike.

Mike Halloran – Robert Baird

So I just want to dig in on the margin comments and how you guys expect those to lay out through the year assuming the revenue expectations come in largely as you guys expect. So obviously the purchase accounting stuff that will be behind you when you past the first quarter year as well the Unico Milwaukee gear commentary. So when do you expect the operational efficiencies to start turning into a benefit for you guys. In other words the operational efficiencies go away and then the gains from the restructuring efforts are lining in. Is there a Q3 event or is that it will start happening little bit in Q2?

Mark J. Gliebe

I think as you mentioned Mike, Q2 is probably the way to think about it and it could happen a little earlier but right now we are going to say it looks like Q3, we will start to see the shift over during the quarter from getting the inefficiencies behind and starting to realize the stray (Ph) things.

Mike Halloran – Robert Baird

And then the price cost gap obviously with the price increase we expect you’re normalized on that. What about things you haven’t talked about, for instance the IT side and you guys had a little bit of spend to increase here maybe on the R&D, engineering side. How those costs look would reflect in the year as well over there?

Mark J. Gliebe

We have been and we will continue to invest in IT certainly through the end of 2015. We have some catch-up to do and in fact we had a conversion just as past weekend and pretty major one, that one, it is quite well so far so good. And we have got a few more ahead of us so we will continue to do that. Our goal by the end of 2015 is to have 75% of the revenues in the company and 2 IT platforms and we are heading towards that goal. As I mentioned earlier as we look at Q1, our SG&A on a Quarter-to-Quarter basis would be flat as we look at percentage basis we expect that it actually has been improved in the first quarter.

Mike Halloran – Robert Baird

And when you think about the opportunities in the SG&A line to chip away from that as you worked through the years. Is that the type of thing where 125ish is kind of flattish, 123-125 kind of range, is that the thought process for the year or expectation that as you said anniversaring some of these things? And as some of them efficiently, not efficiently but as some of the restructuring issues come through maybe you can start chipping away that a little bit lower?

Mark J. Gliebe

Well, we certainly don’t expect to be increasing that’s for sure. But in terms and I would say through 2014 probably be flat with our first quarter.

Mike Halloran – Robert Baird

Okay. That makes sense and then lastly just on a 1% gross margin headwind, if I think about that in dollar terms, it sounds based on the prepared remarks that if I look at that 1% dollar gross margin headwind pressure that substantially all that will go away by the end of the second quarter. Is that the one way to think about it?

Mark J. Gliebe

Yeah, that’s correct Mike.

Mike Halloran – Robert Baird

All right. Great guys I appreciate the time.

Mark J. Gliebe

Thank you Mike.

Operator

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

Christopher Glynn – Oppenheimer & Co.

Thanks. Good morning.

Mark J. Gliebe

Good morning Chris.

Christopher Glynn – Oppenheimer & Co.

Hey, just wondering if you could give us some more color on the improvement you are seeing in the gas tracking outlook, just kind of pass that -- any detail?

Mark J. Gliebe

Well, you know as we mentioned on the call it hasn’t shown up on our orders yet but there are a lot more activity coding activity and enquiries but like I said there is no substantial change in our order base. Now Milwaukee Gear seat business has seen a little bit of improvement on the industrial side on a year-over-Year basis but not yet on the tracking side. But we have a little bit of optimism there given the change in natural gas prices and some of the activities that is occurring in that space but too soon to talk.

Christopher Glynn – Oppenheimer & Co.

Okay. And then on the 12 cent tax benefit, it looks like some of the parts to do with Mexico will call one time but the part related to the mix of profits had a core organic thing I think, am I looking at that correctly?

Mark J. Gliebe

Yeah, of course, that’s really just a forecasting issue as we said our tax provisions. But that’s a smaller amount relative to the change in the Mexican tax cover which was the principal driver for that change from the guidance.

Christopher Glynn – Oppenheimer & Co.

Okay. And then in terms of the North American where we expect market from some of the other reports looks like maybe low double digits for the end market. Just wanted if we can just bridge from the five with formula pricing last customer, any other pieces?

Jonathan J. Schlemmer

I would say Chris this is John, I would say that if you look at our fourth quarter performance we pretty much saw I think what most others would expect to see from the market with mid to high single digit market growth. We had the sheer dynamics, the customer dynamics that we talked about with our second quarter earnings call last year that did impact our results in the fourth quarter. But as I mentioned to a lesser degree just because of the seasonality of the business and then the price versus cost pressure that we saw overall in the business certainly did impact at HVAC as well over the quarter. So those were the three, the three main factors.

Christopher Glynn – Oppenheimer & Co.

Okay. Great. Thank you.

Jonathan J. Schlemmer

Thank you.

Operator

The next question comes from Joshua Pokrzywinski of MKM Partners. Please go ahead.

Joshua C. Pokrzywinski – MKM Partners LLC

Hi. Good morning guys.

Mark J. Gliebe

Good Morning Josh.

Joshua C. Pokrzywinski – MKM Partners LLC

If I could just follow up on the Q1 guidance, any issue from whether adversely impacting the business due to shut down or any ranch closers on the distribution side?

Jonathan J. Schlemmer

Josh, good morning this is John. I would say that that’s certain the first week of January, probably the first one to two weeks of January the weather probably had an impact on our business probably three to four days in terms of just overall shipment performance to customers. Some of that you would say will come to back overtime, some of that could be a loss depending on the particular business that we are talking about. I think our business has recovered pretty well though coming through the month of January including because we are not out completely yet because we continued to have some pretty harsh weather across the mid west but that’s how I would characterize it in terms of impacted us. Some benefit on the aftermarket side of the healing side of the business but otherwise some challenges with customers operations and transportation logistics.

Chuck A. Hinrichs

Yeah I just saw on that data this morning John and I do know that our transportation suppliers are about three days behind and even now in the given some of the weather that they are facing and they are digging out. So I don’t believe it had an impact on our revenues but it certainly has an impact on some of our deliveries.

Joshua C. Pokrzywinski – MKM Partners LLC

Okay that’s helpful and then I guess on the other side of weather, some of the OEMs and HBSC talked about perhaps a little bit of pull forward in 4Q, anything you guys saw on your end? Did that help the quarter at all and are you seeing the backside of that in 1Q?

Jonathan J. Schlemmer

Josh, I would say that we did hear some of that from the industry about question whether there was a pull forward or not. Hard for me to really say we saw that in our business. We had some mixed reports from customers about the hardy performance versus the OEM shipments. So we don’t really feel like there was much of pull forward in Q4 that will have an adverse impact on Q1 as we come into the first quarter most of our customers are talking about loaded mid single-digit market growth in residential HVAC, as I mentioned we are seeing some nice strength and furnishes especially in the aftermarket side of our business related to the cold weather. So that’s what how I would summarize it.

Joshua C. Pokrzywinski – MKM Partners LLC

Okay that’s helpful. And then just one last question on the capital allocation you guys mentioned buyback is the possibility and I understand that the holistic comment that you are making and maybe not over emphasizing buyback over anything else, but how should we interpret that in terms of your guys do you want on the landscape and maybe kind of doing a Monday morning quarter back on the capital raise in 2012 and the ability to identify properties.

Chuck A. Hinrichs

Well Joshua, this is Charles as Mark said the acquisition pipeline is still strong and we believe that that can create a stronger long-term shareholder value than share repurchase but we continue to evaluate that and as we communicated the board, we authorized the 3 million share commitment. So it's just one of the four ways that we intent to deploy our capital going forward to drive and improve shareholder value.

Joshua C. Pokrzywinski – MKM Partners LLC

But I guess where I am going this is there, is there a timeframe which you guys say okay we haven’t got enough done, and look more seriously buyback or is it just kind of always on the table as an option and you will continue to prosecute deals first?

Mark J. Gliebe

Yeah I think it's always on the table as an option and we don’t know how buyers will continue to put the money to work and that our pipeline is healthy and obviously we just closed on two acquisitions in the last two to three-and-half months. So you kind of know where our heads are. So it's always up and we are always going to evaluate it on a month to month basis.

Joshua C. Pokrzywinski – MKM Partners LLC

Alright, it's helpful, thank you.

Mark J. Gliebe

Thank you Josh.

Jonathan J. Schlemmer

Thank you Josh.

Operator

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

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

Hey guys. Chuck, I am wondering if you could bucket the three headwinds that they come up with the point the gross margin headwind and I guess most particularly the inefficiencies?

Chuck A. Hinrichs

Jeff we don’t have that kind of detail to discuss today. I think the best way to say it is that, that comes against prior year would not be as significant as the operational inefficiencies and the pressure on price versus cost. But as we said, we are working everyday on that. We are implementing the price increase and we would expect the operating inefficiencies to abate in the second half.

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

Okay. So maybe just to go through some of the – so can we talk about what your incremental savings are in 2014 from EPC and what you actually capture from simplification in ‘14?

Jonathan J. Schlemmer

Sure Jeff. Going back to the original EPC synergy benefits there was a final incremental $8 million of savings in 2014. And that was certainly contributor to our fourth quarter gross margin performance relative to the prior year. Savings on the simplification, we are kind of netting them against some of the cost that we are experiencing in 2014, a total amount as it goes through 2015 would be $28 million. The current initiatives we are working on would be the closure of the Springfield plant which will generate $15 million in savings beginning in 2015.

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

Right. So I guess what I am asking is this 28 million identified how much do you get in ‘14 and how much do you get in ‘15?

Mark J. Gliebe

As Jack mentioned we have the 8 million infinity savings from EPC, synergies and some portion, a good amount of 28 million broken down by here but some portion of the 28 million from the simplification benefits could hit in the back after a year, big chunk of that could be some portion of 15 million savings from the Springfield. But I don’t have the exact amount here Jeff, we can go, work on that and try to come up with the better answer.

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

Okay. And then I guess it sounds like there is more to go on simplification. So is there anything that you can do as you take these additional steps to prevent some of these operational efficiencies. It seems like you are talking those lot about savings and now we are kind of surprised with these inefficiencies. And so we expect some of these inefficiencies as we do other activities or do we see better execution?

Mark J. Gliebe

In the case of Springfield, I mean that’s a pretty difficult task move and for something like that we typically thinking that we will experience something like that. We had a similar experience in the (warrens) move where we were moving five different facilities. So it’s not unusual in my experience to have some of that. In the Acunia situation these two facilities are located right next to each other. We are going to employ the same people who are going to use the same equipment. We wouldn’t expect, did the same degree have operational inefficiencies in that move. It is going to be different on a case by case basis depending on the complexity and size of the move.

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

Okay. And then just final thing, back to buyback. You mentioned it still seems like it is much lower on the West but if you look at kind of your peer group and significant number of your peers are seen significant multiple expansions. It feels like deals out in the space to run in at much higher multiples. So why is now not the time to be more opportunistic with buyback?

Jonathan J. Schlemmer

Well Jeff, I think it gets to our valuation of the acquisition pipeline and the opportunities that we see and we still believe that a portion of our capital is going to be in that area. That would be our preference as Mark said. If the dynamics and the valuations in the acquisitions market and the pipeline slows down then I think we would as we said consider the share repurchase opportunities.

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

It just seems like if you take your free cash flow, this year your free cash flow, last year the capital raised. You have room for both and your stock here has been a big under performer. So I don’t understand why you don’t have room for both.

Jonathan J. Schlemmer

I think we did say we do have room for both, we are pursuing both of those initiatives. It’s really not a binary decision.

Jeffrey D. Hammond – KeyBanc Capital Markets Inc.

Okay, that’s all folks. Thanks guys.

Mark J. Gliebe

Thanks.

Jonathan J. Schlemmer

Thank you Jeff.

Operator

The next question comes from Mark Douglass of Longbow Research. Please go ahead.

Mark Douglass – Longbow Research

Hi good morning gentlemen.

Mark J. Gliebe

Good morning Mark.

Mark Douglass – Longbow Research

Mark, you mentioned the price increase is 3.4%?

Mark J. Gliebe

Yes.

Mark Douglass – Longbow Research

So I assume that’s a blended average, is it going to be little higher in commercial industrial lower HVAC or can you pass that out little bit more?

Mark J. Gliebe

It is different in different parts of the world but I would say generally in North America 3.4% was kind of number we were with, in North America.

Mark Douglass – Longbow Research

Just an American number?

Mark J. Gliebe

Yes, there are different things happening in different economies. With the currency fluctuation for instance in one account or the other, I am sorry, one country or the other you may have different price increases but in North America it’s 3.4%. And the other thing I mentioned is you may recall that, roughly 30% of our revenues are through customers that participate in two-way material price formulas with us. Their pricing is dependent on commodities so those customers would obviously not be impacted by this price increase.

Mark Douglass – Longbow Research

Great. Okay and then pricing in your international sales assume it’s relatively stable?

Mark J. Gliebe

No, India is an example is experiencing inflation, South Africa as an example is experiencing big inflation, those price increases could be substantial. It all depends on the different economies we are participating in.

Mark Douglass – Longbow Research

It would be fair to say that you expect by Q2 to be price cost neutral, is that fair?

Mark J. Gliebe

Yeah, that’s fair.

Mark Douglass – Longbow Research

Okay, helpful. On Hy-Bon, first how much was paid and then secondly the big jump in EPS accretion of ‘14 and ‘15. Is that integration cost in ‘14 rolling off or is that savings generated in the ‘15 or can you describe that a little bit?

We won’t be disclosing the price every pay for Hy-Bon relative to the change in earnings. So here a big chunk of that could be related to purchase accounting in first fall over and the second piece if it’s kind of related to the growth of the business things.

Mark Douglass – Longbow Research

Okay. But in the repurchase accounting, I think it says $0.02 next quarter or whether it is a majority Hy-Bon?

Jonathan J. Schlemmer

Yes Mark, the majority of Hy-Bon are still a little bit of chunk that would flow through in the first quarter.

Mark Douglass – Longbow Research

Okay, good. Really things in Hy-Bon includes the first accounting cost so a talk of closer to

$0.05 to $0.07 X and maybe –

Jonathan J. Schlemmer

Yeah, probably more $0.04 to $0.06 there is almost a penny from Cemp and then the rest would be Hy-Bon. And the EPS accretion numbers that we referred to would be net of those cost for the full year 2014.

Mark Douglass – Longbow Research

Okay. And final question on Novaky, you mentioned it still faces tough count. But I remember in Q1 ‘13 there was a double digit economic, mechanical part of it was justified as it slowed down and tracking. So you had already been seeing in Q1. Was it just beginning then or can you discuss why it is still a tough area to come?

Jonathan J. Schlemmer

Mark, this is John what you said is correct. It was beginning but it was just beginning in Q1 so it had some impact on our mechanical performance not to the same degree we saw than through the second quarter and on to 2013 and we will see now in Q1 of 2014. And then we expect those more difficult comps to be behind us as we exit the first quarter.

Mark Douglass – Longbow Research

Okay. Thank you.

Mark J. Gliebe

Thanks Mark.

Operator

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

Walter Liptak – Global Hunter Securities

Thanks. Just a quick one on the pricing, when was the price increase announced and any cover on like the effective date or how it’s been accepted by customers?

Mark J. Gliebe

It was announced in December of this past year at the early part of December, it’s to take a fact in typically January-February timeframe of the first quarter. And it’s been probably too soon to comment on how it’s being or anything like that at this point.

Walter Liptak – Global Hunter Securities

Okay, fair enough. And then your commentary on the CNI business being stable and kind of the outlook, I think sounds pretty decent going in the 2014, I wonder if you just comment, provide a little bit more color you said distributors were down, machineries down, you are seeing indications of those might be picking up as the year goes on?

Mark J. Gliebe

We are seeing a lot of bit of improvement and strong improvement on the commercial side versus the industrial side overall. And as we came out of the fourth quarter, orders in this period slightly better than they were going into the first quarter than they were going into the fourth quarter.

Jonathan J. Schlemmer

Wow, I would add that comment on stable order performance. Yeah, we had a decent level all throughout the quarter, we didn’t see a drop that maybe be related to other than distribution point a little bit. But that was a pretty small drop on a year-to-year basis. And then as we entered into the first quarter that kind of stabled order performances continued.

Walter Liptak – Global Hunter Securities

Okay, got it. And we move over to China, we are getting mixed data points out there something your business is pretty strong. I wonder if you could talk a little bit about the sectors or what you are saying on China in more detail?

Mark J. Gliebe

We saw, we have seen two scores now of good year-over-year performance in our China business and fourth quarter was as we mentioned earlier on the call strong quarter for China businesses. I would say in terms of the product both commercial and industrial motors as well as power generation similar to what we saw in the third quarter performance. As you said there is a lot of news out right now on China, so far our business is looking okay from an order standpoint but as you know it can change very quickly in China.

Walter Liptak – Global Hunter Securities

Okay, great. Okay. Thank you.

Mark J. Gliebe

Thanks Walter.

Operator

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

Unidentified Analyst

Hi guys this is John (Indiscernible) for Julian.

Mark J. Gliebe

Good morning John.

Unidentified Analyst

I was just wondering if you give a little more color just around kind of North American HVAC. It seems like the trend is significantly improving here about 5% growth this quarter. And that is also kind of excluding, not considering the customer impact. If you can add that kind of things like you are probably growing in that area around high single digit. So we expect that kind of strength essentially to continue into ‘14?

Mark J. Gliebe

John, a couple of things. What we saw in the fourth quarter, certainly we felt like the overall market did perform well in the fourth quarter for the HVAC. In addition to that we did see pretty good strength on the furnace side of business rightly related to the extreme cold weather throughout not much of the country and we had a little bit of headwinds on price. Mix was probably slightly positive but not a strong contributor to our performance in the quarter and again that mix was likely driven by the cold weather and the demand for furnaces, especially high efficiency gas furnaces.

And then the sheer dynamics that we had that I briefly talked about, no surprise there from our view in the fourth quarter other than the fact that it’s the seasonal low for HVAC. So we expect to see that kind of impact in the same expectations we have been talking about before in Q1 and Q2, no change there.

Now the market, how well the market perform in 2014 compared to what we saw in the fourth quarter, the projections from our customers would not be as quite as robust as what we saw on the fourth quarter. But most are same low to mid-single digit growth in the markets so that should be a positive feel in that business. And we got to get through the first half of the customer dynamics. And as we consistently say we expect to be operating with the market in the third quarter and on.

Unidentified Analyst

That’s very helpful. And just on the high efficiency side, as a percentage of sales it seems like that you are continuing to improve. Should we expect further improvement kind of initiative sales from high efficiency and then just as a second part to that will that contribute positively to marginal roll?

Mark J. Gliebe

There clearly has been our goal to drive high efficiency sales some of the fourth quarter performance has again was related to a stronger mix HVAC but John mentioned related to our furnace, did relate to furnace demand in the quarter. Very clearly that is what we are driving to that 75% of all of our new products are high efficiency kinds of products and so that is the goal.

Unidentified Analyst

Thanks a lot.

Mark J. Gliebe

Thank you John.

Operator

The next question comes from Nigel Coe of Morgan Stanley. Please go ahead.

Unidentified Analyst

Hey guys, this is (Indiscernible) for Nigel. You mentioned a little bit on the raw materials, see a little bit of (indiscernible) I think you said on headwinds and steel. Just wanted you to give the outlook for 2014 and then what you had hedged?

Mark J. Gliebe

First of all, obviously copper pretty volatile lately was up a little bit there in the last few months and then kind of came down a little bit. And then steel we did see, here we are seeing some headwinds on steel going into 2014. Relative to hedge we do hedge copper and Aluminum and we typically hedge down five quarters on a decline step basis.

Unidentified Analyst

Okay. Great. Thanks.

Mark J. Gliebe

Thanks.

Operator

And due to time constraints it’s the last question for today will come from Liam Burke of Janney Capital Markets. Please go ahead.

Liam Burke – Janney Capital Markets

Thank you. Good morning Mark, good morning John.

Mark J. Gliebe

Good morning Liam.

Chuck A. Hinrichs

Good morning Liam.

Liam Burke – Janney Capital Markets

Mark, could you add little more color on the commercial market. It looks like there were some orders were pretty consistent throughout the quarter is that retrofit side or you are saying any list in the new built side of that market?

Mark J. Gliebe

Well I mean certainly retrofit continues to be an area of excitement for us. There would be to have the opportunity to supply both our small fans and blower systems into the commercial refrigeration side and now more recently our larger HVAC residential motors and (indiscernible) into the residential side, we get the opportunity to go into facilities. We just had one in L.A. where we were going to retrofit at Hilton hotel in L.A. with our residential HVAC motors and we were seeing more and more of that so that’s pretty exciting. We often don’t really know where the product ends up. But it's time for us to say whether we went into a new build or retro fit but there is certainly a lot of excitement out there for us in retrofit.

Liam Burke – Janney Capital Markets

Great. Thank you. Chuck, working capital specifically receivables and inventories were up I think from a year ago, is there timing, is it the mix of international business or –?

Chuck A. Hinrichs

I think it's probably a combination of those two OEM and typically what the plant moves or building some inventories buffer safety stock and I think that would account for some of the increase in inventory.

Liam Burke – Janney Capital Markets

Great. Thank you.

Chuck A. Hinrichs

Thank you Liam.

Mark J. Gliebe

Thanks for your continued interest in the company. We appreciate all the questions. Have a good day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Regal Beloit's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts