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REGAL-BELOIT CORPORATION (NYSE:RBC)

Q4 2011 Earnings Call

February 7, 2012 10:00 am ET

Executives

John M. Perino – Vice President-Investor Relations

Mark Joseph Gliebe – Chairman, President & Chief Executive Officer

Charles A. Hinrichs – Chief Financial Officer & Vice President

Jonathan J. Schlemmer – Chief Operating Officer

Analysts

Mark Douglass – Longbow Research

Joshua Pokrzywinski – MKM Partners

Jeff Hammond – KeyBanc Capital Markets

Stephen Sanders – Stephens Inc.

Walter Liptak – Barrington Research Associates

Holden Lewis – BB&T Capital Markets

Jamie Sullivan – RBC Capital Markets

William J. Dezellem – Tieton Capital Management

Operator

Good morning and welcome to the REGAL-BELOIT’s Fourth Quarter 2011 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Perino. Mr. Perino, please go ahead.

John M. Perino

Thank you, Amy and good morning, and welcome to the REGAL-BELOIT fourth quarter 2011 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 statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of these 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 mentioned we’re presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit, adjusted gross profit as a percentage of net sales 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 information regarding these non-GAAP financial measures and please see the appendix where you can find reconciliation of these measures to the most comparable measures in accordance with GAAP.

Now, I'll turn the call over to Mark.

Mark Joseph Gliebe

Welcome and good morning everyone, and thank you for joining the call and for your interest in REGAL-BELOIT. We will follow our normal agenda. I will make some opening comments, Chuck will give you the financial update, Jon Schlemmer will provide you color on products, markets, and operations. I’ll summarize our prepared comments, we will move to Q&A and then I’ll give a few closing comments.

Overall we felt good about our operating performance for the fourth quarter as our results exceeded our guidance. Chuck will go over the details of why our performance exceeded our expectations, but the bottom line from an operating perspective is that EPC along with a number of our other businesses performed well in the quarter offsetting weakness in HVAC in China.

With regards to the EPC acquisition, we are now deep into the integration process working on mining synergies while rationalizing productions and platforms and we continue on the track to meet or exceed our expectations. As you know, this is the largest acquisition in the company’s history and the integration continues to go well.

In terms of our operating performance during the quarter, we achieved record fourth quarter revenues and record fourth quarter free cash flow. Our C&I, Mechanical, Unico and EPC businesses performed well in the quarter offsetting headwinds in our HVAC and China businesses.

In HVAC, our volume was down related to an unusually warm winter, the reduction of high efficiency consumer incentives, and the R22 dry ship, mix shift. Outside of our operating performance, highlights in the quarter included; first, launch of 20 new products, nine of which were energy efficient products.

Second, we were awarded supplier of the year, and most innovative supplier of the year by two of our top 20 customers. Third, we were able to reduce the warranty accrual that we took in the second quarter by $15.4 million.

Fourth, we restructured portions of our European and Australian operation to yield benefits in 2012. And finally, we continued a smooth integration of EPC and we are on track to achieve our first-year synergy run rate target $10 million.

With that, I will turn over to Chuck Hinrichs.

Charles A. Hinrichs

Thank you, Mark, and good morning everyone. I will start with slide number six, comparing our actual fourth quarter 2011 results to our earlier guidance. You recall, our earlier fourth quarter EPS guidance was $0.70 per share, excluding the EPC inventory purchase accounting adjustment estimated at $0.25 per share. Our actual adjusted EPS of $0.93 per share compares very well to our earlier EPC guidance – EPS guidance of $0.70.

Both EPS numbers then exclude the EPC inventory purchase accounting adjustments as shown.

The schedule then adjust the actual fourth quarter EPS by adding the $0.23 decrease in the incremental warranty reserve expense and deducting the $0.10 per share restructuring charges neither of which were in our original guidance. The last row reconciles to our GAAP EPS, the actual fourth quarter EPS of $0.80 and the GAAP guidance of $0.45 per share.

Next slide provide some color on our fourth quarter results compared to our guidance. First, EPC performed very well in the quarter. We started to realize synergies and EPC had lower SG&A expenses during the fourth quarter.

As I mentioned during the third quarter call, it is difficult to dissect our results between EPC and the legacy REGAL-BELOIT results, as we are integrating the businesses and working as one company.

The fourth quarter also benefited from better product pricing relative to our expectations on cost inflation, and we continue to execute on our productivity and cost reduction initiatives. We put these initiatives in place in the fourth quarter to address the challenging industry conditions.

And finally, we recorded a $5 million LIFO benefit in the fourth quarter, as spot copper prices were lower than forecasted. On slide number eight, we chart our fourth quarter results. Sales increased 31% over the prior year as sales from EPC and the other acquired businesses offset the slower sales demand in our U.S. HVAC and China businesses. As Mark mentioned, the diversification in our businesses enabled our top line sales to grow despite some of the economic challenges faced in our other markets.

Looking at adjusted income from operations, we posted growth of 52% above the prior year, and our adjusted income from operations improved to 8% of net sales in the fourth quarter. The adjustments to income from operations are shown in the appendix of this presentation.

Slide number nine, provides the same charts for our full-year 2011 results. Net sales increased 25% from the prior year with 3.4% from organic growth and the rest from the acquired businesses. Adjusted income from operations increased 30% from the prior year and represented 11% of net sales. Again, the adjustments to income from operations are included in the appendix.

On slide 10, we provide some additional financial highlights. In the upper left quadrant, we summarize our capital expenditures for the fourth quarter and the full-year 2011. We expect our capital spending in 2012 to approximate $110 million, which includes $25 million for the relocation of two of our factories in China. We expected the spending on these projects in 2011, but they were delayed into 2012.

In the upper right quadrant, we summarized our effective income tax rates in 2011 and expect the ETR to be in the 30% to 31% range in 2012.

In the lower left quadrant, we highlight our strong free cash flow results with full year free cash flow of $208 million or 136% of net income in 2011. We are focused on generating free cash flow for debt reduction, improving shareholder returns and funding our future growth.

In the lower right quadrant, we show our year-end 2011 cash position and total debt of $919 million.

On slide 11; we summarized our first quarter 2012 EPS guidance of $1.07 to $1.13 per share. Of course, our guidance includes the operating results of EPC, but without any inventory purchase accounting adjustments as we completed all of these adjustments in 2011. We expect to see continued strength in our commercial and industrial, mechanical, Unico and India operations, which will partially offset the weakness in our HVAC and China businesses.

We expect to continue to benefit from our productivity initiatives, which when combined with pricing will offset cost inflation forecasted in the quarter. And finally, our guidance excludes the impact of the acquisition of Milwaukee Gear. Although we expect the acquisition to be accretive in 2012, the first quarter will be a minor EPS loss due to the inventory purchase accounting adjustments. These adjustments are still being finalized.

Now I will turn the presentation over to Jon Schlemmer.

Jonathan J. Schlemmer

Thanks, Chuck, good morning everyone. Our operating teams performed well in the quarter executing on cost reduction efforts, synergy projects and on all of our initiatives. In spite of a tough residential market environment, our team still performed better than expected in the quarter. Needless to say we’re very pleased with everyone’s efforts.

During the quarter our mechanical businesses continue to perform well with 8.5% sales growth. Our mechanical businesses saw strong demand in both agriculture and power related end markets. North America commercial and industrial sales from continuing operations were up 5.1% that represented seven straight quarters of year-over-year growth.

Commercial and industrial saw strong demand in a variety of end markets including power generation and industrial equipment and machinery. Meanwhile, our North America residential HVAC sales decreased by 16% in the quarter.

Our HVAC business continues to experience tough year-over-year comparisons. This is being driven by the reduction of the consumer incentives per high efficiency HVAC systems, the use of R22 condensers to repair systems and an unusually warm winter. We continue to focus on developing more energy efficient, yet cost-reduced products to help our customers in this difficult environment.

For the quarter, sales outside the U.S. grew by 25% and represented 35% of our total sales. For the full-year, sales outside the U.S. exceeded $1 billion for the first time and represented 36% of our total sales. Today we’re more diverse than ever and we expect our global business to continue to grow.

During the quarter, sales of energy efficient products increased nearly 18% from the prior period, representing 13.4% of our total sales. We continue to see energy efficiency as a significant opportunity. We’re developing new products to help our customers meet energy efficient regulation, to differentiate their products and reduce energy costs. In 2011, our engineers developed and launched 50 new products across the company, more than any previous year. 20 of the 50 were launched in the fourth quarter. Today I’d like to talk about two of the new products that our team launched in the fourth quarter.

First, our hermetic business launched their very first variable speed, high efficiency Permanent Magnet Motor for hermetic compressors used in air conditioning systems. This slide shows the typical example of an application for one of these motors.

Compressors consume a large percentage of electricity used by air conditioning systems, so there is a very good opportunity to increase system efficiency through the compressor motor itself. The new designs have been developed for residential air conditioning and heat pump applications rated up to 5 tons. The higher motor efficiency plus the ability to operate at variable speeds can increase SEER ratings by up to 80%. SEER stands for seasonal energy efficiency ratio, and is the common efficiency measure for air conditioning equipment. We’re excited about the opportunity for this technology, and our customers are showing interest as a result of the energy savings they can achieve and offer to their customers.

Second, our air moving team introduced a new energy efficient air-circulating fan. These types of fans are used in a wide variety of commercial and industrial applications where air circulation is needed for comfort. The design combines high efficiency fan blades with our high efficiency variable speed ECM motors.

Compared to a standard fan, one of these new fans can reduce annual energy costs by $50 to $100 per year, resulting in a payback of approximately two years. The energy savings really adds up when you consider that a large number of these fans are typically installed in a single installation. This is a great example of the opportunity to bring energy efficient technology to yet another application.

Last year, we had the opportunity to highlight two new products, and I want to give you a brief update today on those products.

During our investor’s conference in December, we talked about a new energy efficient ECM motor designed for commercial HVAC retrofit applications. In December, we had received an order to retrofit the HVAC motors in the Chrysler building located in New York City. Phase one of this retrofit project has now been completed, and we remain upbeat about the available retrofit opportunities for this brand new product line.

Last year we also talked about Unico’s Linear Rod Pump platform for oil and gas applications. In the fourth quarter, our Unico business experienced a 55% increase in year-over-year sales, a $10 million increase. The increase was driven primarily by increased demand for Unico’s oil and gas products.

Customers continue to show strong interest in Unico’s technology. In the fourth quarter Linear Rod Pumps have been installed for the first time in the Congo, China, and in the U.K., and all these systems are performing well. The pictures show the actual installation of their very first Linear Rod Pump in China, the machine that you see in blue is the standard pump jack at the well in China that’s being replaced. You can see the Unico Linear Rod Pump being installed; this is the smaller machine in light brown color.

Although not visible in the picture, a Unico variable speed drive is also being installed at the site. The electronic drive provides precise control for the Linear Rod Pump. We couldn’t be more pleased with the new technology developments from this team, the customer interest and the order strength in this area.

Let me spend a few minutes to give you an operations update in a few others areas. As you recall, in August of 2011, we announced a $28 million warranty reserve related to a manufacturing quality problem at our Reynosa, Mexico facility. For the past five months, we’ve been working closely with our customers to minimize the impact on our customers and thereby reduce our costs. As a result of these efforts, we’ve been able to reduce the warranty reserve by $15.4 million. This is obviously very good news, however this was a significant issue for us and we are working hard to implement long-term corrective actions in our overall quality systems. These changes will make us a better company.

You may recall that in 2010, we made simplification one of the five key initiatives in the company. We want to simplify the company in order to make us more customer-friendly and to reduce our cost.

In the fourth quarter we launched restructuring efforts in both our Australian and European operations. We transferred motor production from our Melbourne, Australia plant to our facility in Thailand lowering our cost, while at the same time freeing up space to enable further consolidation efforts in Australia. These moves were planned at the time of our CMG acquisition.

In Europe, we’ve consolidated our operations in the UK allowing us to exit three small facilities. We also closed a small warehouse in Spain, and we merged the front end of our two commercial and industrial motor companies in the Netherlands. All of these changes helped to simplify the business making it easier for our customers to do business with us, and at the same time reducing our cost. We’ve also begun to simplify and refresh our brand. During the quarter, we announced that the recently acquired HVAC and hermetic products from EPC will be re-branded Genteq, one of our strong global brand.

This will make our go-to-market strategy very clear for both our customers and our employees. We will continue to use the well-recognized Century brand on the pump, general industries and aftermarket products sold by EPC team. Speaking of the EPC acquisition as Mark mentioned, we continue to feel great about the team, our progress on the integration and the performance of the business. The business performed better than expected in the quarter, and we continue to track – we continue to be on track to meet or exceed our goals on the integration activity and on the synergy projects.

In fact, we recently announced the consolidation of two of our Juarez, Mexico manufacturing facilities. This move will streamline our operations in Juarez and improve our performance for our customers. Also, our newly acquired employees are now attending Lean Six Sigma training programs side-by-side with other employees. Through these exchanges, we are transferring best practices that will improve the overall company.

Finally, we really appreciate the talent that came with the acquisition and the added knowledge, energy, and excitement that this team brings to REGAL.

Now, I would like to comment on the Milwaukee Gear announcement that we made this past Friday. Milwaukee Gear is a Milwaukee, Wisconsin-based manufacturer of highly engineered precision gear products that are sold into the oil and gas, commercial HVAC and other industrial markets. In fact, 60% of Milwaukee Gear’s $60 million in revenue is sold into the oil and gas space for wellhead applications.

We believe that Milwaukee Gear is an excellent fit. Not only does the business provide us more presence in the growing oil and gas market, but it is also an excellent fit with our more profitable mechanical segment.

Milwaukee Gear has experienced significant growth in the past two years and the management team led by Rick Fullington has done an outstanding job of gearing up their factories for future growth. The business has mad sizable investments and high precision equipment that gives the business the capabilities to meet their customer’s exacting requirements. This is the first acquisition in our mechanical segment in quite some time and we’re elated to have Milwaukee Gear joined the REGAL family.

To wrap up, overall, we had another very solid quarter. Our long-term strategy to diversify our business in both the end markets and our global footprint combined with strong execution from all of our teams really paid off. Even with the difficult North America HVAC market, we achieved a record year. We remained focused on marking REGAL the preferred choice for our customers, our employees and our shareholders. I couldn’t be more proud of our team.

With that, I’ll turn it back over to Mark.

Mark Joseph Gliebe

Thanks, Jon. So to summarize, we felt good that we’re able to finish above our guidance in the quarter. As Jon mentioned, a few of the businesses were able to perform above the expectations in spite of a tough of economic environment.

As you heard, we executed very well in the quarter on both our initiatives and our acquisition integration efforts. Our simplification initiative will result in a business that is more customer friendly and more efficient. You heard Jon talk about our restructuring efforts that are coming as a result of our planned acquisition synergies. These projects are heavy lifting that requires thoughtful planning. But in the end, we will experience real benefits.

Jon also mentioned our brand rationalization efforts, where we have chosen the Genteq brand to be our global HVAC brand. There is more to come on this [term], so stay tuned. We will make it easier for both our customers and our employees to understand and interact with one REGAL-BELOIT

We are deep into the integration of EPC and we feel great about our progress and we’re excited to have the key leaders’ position in leadership roles throughout the company.

We are pleased that we’re able to reduce our incremental warranty expense. there was a lot of hard work and learning that went into that end result. Our stream of new products continues to rollout with exciting energy efficient technology for virtually all of our businesses and it is great to talk about new energy efficient products from our newly acquired businesses.

On Milwaukee Gear, we like the oil and gas presence, we like the high-precision automation capabilities, we like the margins, and we like the fact that it is an investment in our mechanical segment. The management team is strong and we look forward to welcoming them into the REGAL family.

Our first quarter guidance reflects continued weakness in HVAC and China. Again, recall that we had a very strong Q1 2011 in HVAC. however, strength in many of our other businesses as well as recent acquisitions (inaudible). We expect the recent acquisitions to meaningfully contribute in both the top and bottom line and we expect to begin to see real synergy benefits.

Finally, we expect the business to continue to generate strong free cash flows, which we planned to use to delever the balance sheet and to continue to seek our strategic acquisition opportunities.

And with that, we will take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Mark Douglas with Longbow Research.

Mark Douglass – Longbow Research

Good morning, gentlemen.

Mark Joseph Gliebe

Good morning.

Mark Douglass – Longbow Research

All right, nice quarter. You mentioned in China, how big is China now with EPC, and what’s the mix between HVAC and C&I, lately what are you seeing in China now? Do you see some improvement in the various markets that you serve?

Charles A. Hinrichs

Mark, this is Chuck. China would represent just under 10% of our sales. The three markets would be – C&I would be the largest part of our China market, then generator sales, and then residential HVAC would be the smallest segment.

Mark Douglass – Longbow Research

And what are you seeing right now and expecting in those three markets?

Charles A. Hinrichs

I would say, overall the biggest change has been in what I’ll call in infrastructure spending. We’ve seen a slow down in that space, which would fall into our C&I type businesses.

Mark Douglass – Longbow Research

Okay. Thank you. And then, with the guidance that you gave last quarter, clearly under appreciated the savings and performance of EPC, it sounds like that was the main driver of it. What are the chances that you’re doing it again or how much of a sequential improvement have you baked in the first quarter ’12 with continued rationalization and restructuring?

Charles A. Hinrichs

Mark, I think you're right; EPC would have been the largest contributor to the above guidance performance in the fourth quarter. But I would call your attention to the other items that are on the slide that I spoke to. It’s difficult to forecast in our business, the visibility on the markets and demand continues to be difficult for us. But I think, we’ve done a good job in forecasting what our first quarter results will be.

As we integrate EPC into our results, it becomes increasingly difficult to look at those results on a stand-alone basis. So we’re moving customers, products as we integrate and generate synergies, those could be on the EPC column, and they could be on the legacy REGAL-BELOIT column. So we’re operating as one business, and therefore we’ll be reporting as one business going forward.

Mark Douglass – Longbow Research

All right, you’re working on multiple fronts there. And then finally, what do you – do you have anything baked in for LIFO benefit or expense?

Charles A. Hinrichs

No, we haven't planned on anything, because we’ll reset our expectations in the first quarter. So we don't have any pickup or LIFO expense expected. Of course, the stock market as we saw in the fourth quarter can be very volatile.

Mark Douglass – Longbow Research

Okay.

Charles A. Hinrichs

And is already up $0.40 to $0.50 per pound on copper since year-end 2011.

Mark Douglass – Longbow Research

Great. Okay, thank you.

Operator

Our next question is from [Mark Halloran] with Robert W. Baird. Please go ahead.

Unidentified Analyst

Good morning, everyone.

Mark Joseph Gliebe

Good morning.

Unidentified Analyst

So first, just on the bridge, when I think about the upside that was putout on the fourth quarter on the acquisition side, and then on the price cost side as well, anything assuming commodities don’t run too far one way or another, anything there that you don’t think is sustainable from a seasonality standpoint on a go-forward basis?

Mark Joseph Gliebe

Not really, Mark. I think we try to…

Charles A. Hinrichs

[Mike].

Mark Joseph Gliebe

[Mike], I’m sorry.

Unidentified Analyst

She got the name wrong, that will be okay.

Mark Joseph Gliebe

All right, I was just following up with the operator calling you Mark. I think we’ve got those forecasted correctly, but as I’ve said, we found a great deal of volatility particularly in copper. Steel is up in the first quarter on a year-over-year basis. And we continue to see inflation in a lot of the other components that we use in our motors and other products.

Unidentified Analyst

And I know seasonality has become kind of a tough word, particularly in HVAC side of things, but when you think about the fourth quarter guidance range, fourth quarter numbers, your first quarter guidance, is that a pretty normal seasonal trend you’re assuming on the revenue line there?

Mark Joseph Gliebe

Yeah, I would say it’s normal except for the fact that as we came into the first quarter and came out of the year, the uncertainty in HVAC related to, I would just say the unusually warm winter and is putting a little damper on normal seasonality.

Unidentified Analyst

Yeah, that makes sense. And when you think about full-year expectations, could you just talk a little bit about what your customers are saying, and how you’re thinking about demand as a trend for the year, more from a qualitative standpoint than anything, and specifically address the HVAC side as well as the C&I side?

Mark Joseph Gliebe

Sure. On HVAC, our customers are a little concerned about the first quarter. So I think they’re a little bit more conservative than they were probably in the fourth quarter. So I think our customers today would say, swap to low single-digit kind of growth rates in the year. And again, with the first quarter being concerning to that. On the C&I side, right now, we continue to see order strength in our commercial and industrial businesses in North America.

Unidentified Analyst

That makes sense. And then, just a housekeeping question, could you guys break out the restructuring expenses by – kind of where they landed in the fourth quarter mechanical versus electrical?

Jonathan J. Schlemmer

Sure, [Mike]. The majority of it is in the electrical products group, electrical products segment.

Charles A. Hinrichs

Yeah [Mike], it’s about $4 million in electrical, $1.8 million in mechanical.

Unidentified Analyst

Okay, great. As always, I appreciate the time.

Mark Joseph Gliebe

Thank you.

Jonathan J. Schlemmer

Thanks, [Mike].

Operator

Our next question is from Josh Pokrzywinski from MKM Partners. Please go ahead.

Joshua Pokrzywinski – MKM Partners

Hi, good morning guys.

Mark Joseph Gliebe

Good morning.

Joshua Pokrzywinski – MKM Partners

Just trying to understand first, more of a housekeeping item. Was there any LIFO benefit baked into fourth quarter guidance?

Jonathan J. Schlemmer

We had very little expected, Josh, so the $5.5 million pick up really occurred in the – late in the fourth quarter as copper prices declined to around $3.40 at the end of the year.

Joshua Pokrzywinski – MKM Partners

Gotcha. Okay, that's helpful. And then, thinking about kind of the transition into the first quarter. I mean, can you give kind of the sequential puts and takes on price cost getting better. You kind of spoke to EPC additional accretion there, maybe anymore de-stocking or restocking at the OEM level. Just any kind of sequential color on some of the – I guess, more on esoteric items that could help us with that bridge?

Mark Joseph Gliebe

Well, as we were coming through the fourth quarter, our biggest concern throughout the quarter was clearly HVAC, and we continue to see our customers taking time out as we progressed through the quarter. So it was weighed heavily on our minds as we progressed through the quarter. And as I would say, as we finished the quarter in terms of inventory levels, it feels to us from the feedback we get, that inventory levels appeared higher than normal in the HVAC space.

Joshua Pokrzywinski – MKM Partners

Gotcha. And then, I guess just one follow-up, on your last call you mentioned that there might have been some share slippage as in the HVAC world, as customers kind of teared down and maybe there was a bit more competition at those levels. Is that largely behind do you think, or do you think that lingers on through parts of 2012?

Mark Joseph Gliebe

As you go from the R22 mix shift goes, takes the mix away from the more energy efficient products to the most standard products, there is more competition for us in the most standard products. And so, as long as the R22 mix shift is in play, which we will believe we’ll be well into the second quarter, we will continue to experience that issue.

Joshua Pokrzywinski – MKM Partners

Gotcha. Okay, thanks, guys. Very helpful.

Operator

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

Jeff Hammond – KeyBanc Capital Markets

Hi, good morning guys.

Jonathan J. Schlemmer

Good morning.

Charles A. Hinrichs

Good morning, Jeff.

Jeff Hammond – KeyBanc Capital Markets

Just, can you give me a sense of – if you take the acquisitions collectively in the quarter, would those have been dilutive or accretive to gross margins?

Charles A. Hinrichs

They would be accretive to margins in the fourth quarter.

Jeff Hammond – KeyBanc Capital Markets

Okay. So just my back of the envelope taken out the acquired revenues and op expenses, and just using kind of actually flat comparable gross margins, I get something in the order of magnitude of $0.25, $0.30 accretion from these deals. And I appreciate Unico being particularly strong, but it just seems like versus your initial guidance of – kind of a net neutral EPC that it is just – why are we outpacing expectation?

So, I know Chuck, that you talked about, looking at this, it’s hard to kind of see it individually, but I just want to get a better sense of, if you originally thought this was a $0.35, $0.45 accretion type of deal in 2012, directionally or rough numbers, how should we think about EPC, today?

Charles A. Hinrichs

Okay. Well, Jeff, going back to your comments about the fourth quarter, our guidance for the third and fourth quarter for EPC was, call it flat on an EPS basis because of the impact of purchase accounting. Purchase accounting adjustments came in $1 million higher than we had forecasted. And as we said, EPC performed better in the four and half months of 2011 that we had anticipated.

So we think we had captured that upside certainly in our first quarter results, but at this point, I’m not sure we could give you any better information on the full year guidance of $0.35 to $0.45 per share accretion from EPC, it’s just too difficult to go out that far, and as I said before, we’re really managing the company as one company.

Jeff Hammond – KeyBanc Capital Markets

But can you maybe just dive into what – may be a little bit more of what is surprising you to the upside, I mean how much is the demand curve, where are you finding upside on the synergies?

Charles A. Hinrichs

Well, I think on the sales side, I think it was about what we had anticipated for the fourth quarter, and we had generated some synergies, and lower SG&A expenses on the EPC side in the fourth quarter. The synergies though going forward could be on the EPC results, and it could be on the legacy REGAL-BELOIT results. So I would say, it’s not yet top line growth ahead of our expectations, it would be expense control and generation of synergies from the integration.

Jeff Hammond – KeyBanc Capital Markets

And those – the synergy upside, I mean that – is that feel sustainable or is that – just that you got it a little bit earlier, or is it coming in higher?

Charles A. Hinrichs

Well, we had commented earlier that it’s coming in a little bit earlier, and that we had revised our synergy target to exit 2011 at a run rate of $10 million. So we feel good about it. Most of those synergies came initially from sourcing and logistics. And as Mark mentioned, we’re now about to start the heavy lifting of the plant rationalization and integration.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then just – just shifting gears, can you give us what you think the mix impact was from this whole kind of R22 dry ship dynamic in 4Q?

Mark Joseph Gliebe

Well, I mean I think I could characterize it for you. I mean, I don't have the actual numbers in front of me, but I mean what happens is, we were – as you know in 2010, we were – because of the consumer incentives, because of R22 shifting to R410a it was demanding higher efficiency kind of 16 SEER and greater kind of systems. And the demand for those systems went down, and the shift went away from energy-efficient systems and over to more standard systems lower SEER rating. And as that occurred, it moved away from our ECM type motors over to our standard 48 Frame type motors, where the prices are lower and the margins are lower.

Jeff Hammond – KeyBanc Capital Markets

And does your 1Q guidance indicate kind of a similar mix as 4Q?

Charles A. Hinrichs

We have, yes a similar – similar impact in the first quarter, it’s lower demand and not as positive mix. And as I had mentioned in my prepared comments is, first quarter 2011, our performance in that business was up 18% on a year-over-year basis. We had a very strong first quarter in 2010, we hadn’t yet started to see the R22 mix shift hit our business.

Jeff Hammond – KeyBanc Capital Markets

Okay. Thanks, guys.

Mark Joseph Gliebe

Yeah.

Operator

The next question is from Steve Sanders with Stephens Inc.

Stephen Sanders – Stephens Inc.

Hey, good morning, guys.

Mark Joseph Gliebe

Good morning.

Stephen Sanders – Stephens Inc.

Sticking with HVAC, Mark, I think at the Analyst Day, you talked about working on some broad cost reductions and some new products that might offset some of the R22 headwinds. You didn’t give a lot of color at that time, I just wanted to see if you give any more color now, it seems like you’re targeting some opportunities here that might help market share and also the sales and margins?

Jonathan J. Schlemmer

Good morning Steve, this is, Jon. You’re right. We talked about that in the Investors and Analysts Day conference in New York in December. Those projects are underway. They’re very important for our customers right now, as we’ve been talking about our customers continue to see the mix shift more back to standard products. And so they are looking for ways that we can help them, and from their entire supply base helped them with the cost issues, with the standard products.

So there is still opportunities with energy efficient products, but we’re also working on cost reduction initiatives for not just our standard products, but as well as some of our high efficiency product. So, what I would say is, those programs are underway, they are redesigned efforts in some cases that take some time for us both to complete the designs, qualify the products and for customers to qualify the product, but those programs are absolutely critical to us this year and they are well underway.

Stephen Sanders – Stephens Inc.

Okay. So that is something that might have an impact in what the back half?

Jonathan J. Schlemmer

Well, there is – some of the programs would be in the fourth quarter, when we start to see the – customer is actually using those products. There are other cost reduction efforts that are actually going into play later this quarter on some of the standard products.

Stephen Sanders – Stephens Inc.

Okay. And then on the restructuring, did you get the payback on the $6 million that you spend in Australia and Europe. And then the second part of that is, as we look into ’12, how should we be thinking about additional restructuring charges as you do some of the facility consolidations and other things around EPC and other acquisitions?

Mark Joseph Gliebe

On the front half of your question, on the payback our best view that’s probably less than two years on the European and Australian restructuring that we did, and I’m sorry, can you repeat the second part of your question?

Stephen Sanders – Stephens Inc.

Yeah, just the outlook for additional restructuring charges in ‘12, any color on that?

Mark Joseph Gliebe

We do expect as we go into the second and third quarter, we do expect that there will be further restructuring charges related to the execution of our synergy plan. We don’t have them nailed down or not ready, we’re not in a position yet where we can communicate, but we would expect them in the second, third quarter.

Stephen Sanders – Stephens Inc.

Okay. And then, on the price cost side, I know commodities won’t hold here. But if they did, would you need more pricing over the next quarter or two or do you feel like they’re in pretty good shape right now?

Mark Joseph Gliebe

Well, as you know, we do hedge. And our normal hedging is out five quarters and we don’t really try to time, but we hedge out 75% in the first quarter, 50% in the next quarter and then on down to a minor position in the fifth quarter out. So we are a little bit in a situation of, I’ll just term it as a hedge hangover, we’re paying back a little bit that’s not unusual when you have volatile commodities. So we are slightly inflationary on copper in the quarter. So that’s the position we’re in right now.

Stephen Sanders – Stephens Inc.

Okay. And then last question, I think you mentioned some of the areas on the domestic C&I side that were strong agg, power generation et cetera, any areas of weakness that kind of got your attention?

Jonathan J. Schlemmer

I would say that overall, we’ve seen pretty good strength across most of the markets on the C&I side of the business. The ones that I mentioned in my comments were the ones that stood out, it’s the strongest, there are some that we’re seeing growth, but in the single-digit area. The aftermarket I'd say, in general, related to – we think related to the mild winter condition is impacting commercial HVAC in some cases as well as residential.

Stephen Sanders – Stephens Inc.

Okay. Thanks very much.

Mark Joseph Gliebe

Thanks, Steve.

Operator

The next question is from Walt Liptak with Barrington Research.

Walter Liptak – Barrington Research Associates

Hi, thanks. Good morning, guys. Great quarter.

Mark Joseph Gliebe

Good morning.

Walter Liptak – Barrington Research Associates

I wanted to ask about the comments that you made of meeting – I know I’m beating the dead horse on this cost out for EPC. But, I wonder if we could drill down into the – you mentioned two [ORS] plants that were consolidated? Is that complete and is the heavy lifting that you’re talking about doing consolidating some of those many Mexico plants?

Mark Joseph Gliebe

We – Jon made the comment that we were – just recently announced the consolidation of two of our [ORS] facilities, and so it’s not complete yet, that’s still to come. And in terms of the heavy lifting, we have been communicating that there is $35 million in synergy benefits, and over a 4-year period, and the heavy lifting comes in executing to get to that target, and client rationalization is part of that equation.

Walter Liptak – Barrington Research Associates

Okay, and just to push a little further, to get to the targets for cost savings from EPC this year, is it – these two [ORS] plants that get consolidated or is there more behind that?

Mark Joseph Gliebe

That would not be the only part of our 2012 plants, there would be additional activities.

Walter Liptak – Barrington Research Associates

Okay, great. And then if I could just switch to Milwaukee Gear, you mentioned that margins on this business are good, could you give us a ballpark of where gross or operating or EBITDA margins are?

Mark Joseph Gliebe

It would be fleet average for the mechanical business.

Walter Liptak – Barrington Research Associates

Okay. And multiple of the EBITDA that you paid, could you give me a range or a number?

Charles A. Hinrichs

We didn’t provide that.

Walter Liptak – Barrington Research Associates

Okay. And in 2011, what kind of sales growth that you had in Milwaukee Gear?

Charles A. Hinrichs

It was up strong double-digit. I don’t have the precise number on my hand, but we can get that for you after the fact.

Walter Liptak – Barrington Research Associates

Okay. Are you expecting it’s going to keep growing at double-digits in 2012?

Charles A. Hinrichs

Yes, we are.

Walter Liptak – Barrington Research Associates

Related to the accretion numbers that you talked about?

Charles A. Hinrichs

Yes, we do expect 2012 will have a strong double-digit growth.

Walter Liptak – Barrington Research Associates

Okay. All right, great. Thanks.

Operator

The next question is from Holden Lewis with BB&T.

Holden Lewis – BB&T Capital Markets

Thank you. Good morning.

Charles A. Hinrichs

Good morning.

Holden Lewis – BB&T Capital Markets

I guess, I have a question just about the approach towards some of these reports going forward. I mean – it seems like when you guys closed the EPC deals that you incurred just – the sort of think about neutral to slightly diluted, because of the purchasing accounting. And in the last couple of quarters you’ve encouraged us to look at earnings, stripping out that purchasing accounting. And then, is it related to sort of the restructuring, I mean as I understand the simplification. I mean, that should be an ongoing kind of staying, continuous improvement, but you said it’s not a one quarter deal, meaning that – sorry I guess it's not clearly why are we stripping out those types of cost, when I think about the performance of your quarter, just seems like they are going to keep on going in future. So I guess I am just kind of curious, I mean historically REGAL-BELOIT, they are very conservative and how it’s presented those numbers. Are we going to be more aggressive in terms of taking out or highlighting some of these matters that we have been in the past?

Jonathan J. Schlemmer

Well Holden, I will try to answer that. I mean that the guidance we gave for the third and fourth quarter of 2011 included some $26 million purchase accounting adjustments, those we thought were material enough that we wanted to estimate those, and then call them out when we reported on those results. So those are behind us now in 2011 and we’ve provided the additional amortization of – and higher depreciation for EPC going forward.

So we're trying to give you that information for future guidance for the results. At the same time though after giving you that detailed information, well I admit we’re also telling you that we're running EPC as part of REGAL-BELOIT as one business and as synergies are obtained, it could be at the REGAL-BELOIT level and it could be at the EPC level, and we really don’t want to encourage separate reporting of those businesses going forward. They’re being merged and integrated today, and therefore we’ll be reporting in the future on that basis. And the restructuring activities could easily be on the REGAL-BELOIT side that would benefit EPC. So I hope you understand the issue we’re trying to deal with running it as a combined company, and yet still trying to provide you the information you need for your earnings models.

Holden Lewis – BB&T Capital Markets

Okay. And then just I want to get back I guess the walk from Q4 to Q1, I mean what I kind of heard is that EPC accretion should be more positive, but I mean, can you talk specifically about what are pieces that should be better in Q1 versus Q4 that kind of get to you that, I guess from your $0.93 to your $1.10 that get to you that $0.17 walk?

Charles A. Hinrichs

Yeah, Holden. We don’t really provide that guidance. I mean, we would see a pick up in revenues from a seasonal basis fourth quarter to first quarter. Mark, Jon and I talked about the continued strength in the C&I business, Mechanical, Unico in India and that would be partially offset by the weakness in HVAC in China. So, we’ll see some positive impact on pricing versus cost assisted by productivity for the quarter, so that would contribute some earnings growth. And then as we mentioned, we don’t really see Milwaukee Gear contributing in the first quarter, because of those purchase accounting adjustments. So, EPC is certainly a piece of it, but it’s all of the businesses would be contributing to that improvement.

Holden Lewis – BB&T Capital Markets

Okay. And then just lastly, historically, you sort of indicated what your productivity gains per year have been, sort of in the ballpark. Can you give a sense of how much productivity did you bank in 2011, and do you expect the same level going forward or more?

Mark Joseph Gliebe

Productivity for 2011 was below our historical performance. Now, key end of the part of that was, because of two activities. One was because of the incremental warranty accrual that we took, and then other piece was that a lot of our attention was being paid to the EPC acquisition. But on a go-forward basis, we would expect to return the performance to past levels. Now, the other comment I’ll make is, we did have lower volume in a number of our key businesses that would also pushback our productivity.

Holden Lewis – BB&T Capital Markets

Okay. Thank you.

Operator

The next question is from Jamie Sullivan with RBC Capital Markets.

Jamie Sullivan – RBC Capital Markets

Hi, good morning.

Mark Joseph Gliebe

Good morning.

Jamie Sullivan – RBC Capital Markets

Mark, your commentary about the inventory in HVAC being elevated, does that mean you’re factoring in some destocking in the first quarter?

Mark Joseph Gliebe

We are expecting not as quite a robust first quarter in terms of normal seasonality than we would have seen in the past. And part of that impact, is that our customers are not planning on building as much, because they don’t need to.

Jamie Sullivan – RBC Capital Markets

And then, the impact of the mix in the HVAC segment, just trying to understand that a little bit more, should we think about it that we’re still seeing volume down less than revenues and then the mixes and additional headwind in the segment.

Mark Joseph Gliebe

Volume down – well, I’m not sure I understood. Can you say it again, please? I’m not sure I understood your question.

Jamie Sullivan – RBC Capital Markets

So the HVAC down 16%, the – just thinking about mix and volume, was mix being an additional headwind, so was volume down less than that and the mix shift cost an additional headwind there. I know you had that the price increases as well, so I’m just trying to gauge how much of an impact mix is having on that growth number?

Charles A. Hinrichs

Jamie, in comparing it to the first quarter last year, we would certainly have headwinds of both volume and mix. On a sequential basis, the volume picks up a little bit in the first quarter, mix would probably be about the same and then, pricing would not be different on a sequential basis, but on the year-over-year basis, there would be some improvement.

Jamie Sullivan – RBC Capital Markets

Okay. That's helpful. And then, when you talk about some of the value engineering and targeting some new products, do you expect those to be ready for the seasonally strong periods of 2Q, 3Q?

Jonathan J. Schlemmer

Jamie, yes. Some of those products as I mentioned, especially some of the design efforts on our standard products will be ready for the stronger HVAC season, the cooling season. Some of the larger redesign project especially on our energy efficient platforms would be later in the season.

Jamie Sullivan – RBC Capital Markets

Okay, thanks. And just one last quick one on the high efficiency products, you mentioned 18% growth. Is that an organic number and do you have one if its not?

Charles A. Hinrichs

Yes, that would be an organic number.

Jamie Sullivan – RBC Capital Markets

Organic number, great. Okay, thanks a lot.

Operator

Our next question is from (inaudible) with Jefferies Company.

Unidentified Analyst

Hi, good morning guys.

Mark Joseph Gliebe

Good morning.

Unidentified Analyst

Hi, I am sitting in for Scott Graham here. Just a question on – could you give us what was the new products as a percentage of sales for this quarter?

Mark Joseph Gliebe

New products as a percentage of…

Unidentified Analyst

(Inaudible)

Mark Joseph Gliebe

(Inaudible) we generally don’t release that. They start pretty slow of course, and then build momentum. Then of course there will be the factor, the cannibalization. But I think we have talked in the past about what we call our vitality index in that the products, new products introduced over the last five years represent approximately 30% of our current sales.

Unidentified Analyst

Okay. And the second question, the productivity and cost reductions in 4Q, are they being applied more to the acquisitions or to the core business, essentially, basically, are you pulling forward earning synergies from acquisitions?

Mark Joseph Gliebe

Once we have the acquisition in place we apply the same model and productivity to all of our businesses. So, I would say that any productivity we get is coming from all – contributing from all businesses, whether they’re acquisitions or legacy.

Unidentified Analyst

Okay. Thanks a lot.

Mark Joseph Gliebe

Thank you.

Operator

The next question is from Bill Dezellem with Tieton Capital Management. Please go ahead.

William J. Dezellem – Tieton Capital Management

Yeah, thank you guys. It’s Tieton Capital Management. First of all, I would like to start with the high efficiency business. Would you please explain what appears to be a very strong seasonal trend, where the dollars and the percentage of revenues in the high-efficiency business drops in the Q4 versus the Q3?

Jonathan J. Schlemmer

Bill, good morning, this is, Jon. Some of it is seasonal. Some of it is the impact of the fourth quarter seasonality compared to the demand in the rest of the year. However, a larger factor that you need to weigh in is the impact of the acquisitions and the acquired companies, and the percent of high-efficiency sales in the acquired companies, and how that has impacted our business.

So, while revenue of high-efficiency was up significantly in the quarter, it was down as a percentage of sales, because we’ve mentioned before, we acquired – some of the companies we’ve acquired have less percentage of high efficient products and that’s why we’re ramping up our innovation efforts in those businesses to increase the percentage of high-efficiency sales in the acquired companies.

William J. Dezellem – Tieton Capital Management

Okay. I don’t think I asked my question very clearly. I was specifically looking at the Q4 versus the Q3 and not this year only going back to last several years. The dollars in high-efficiency sales and actually as a percentage of revenue have consistently dropped in Q4 versus Q3. And I know in my mind can’t grasp why that would be?

Jonathan J. Schlemmer

That would be related to the fact that – a greater percentage of our energy efficient product historically have been in our HVAC business. And historically, HVAC has greater seasonality than any of our other businesses. Now I say that, but I would also call your attention to some of my other comments that I made today about how excited we were that – now, all of our businesses are coming forth with energy-efficient products and we’re excited about that, and hopefully they’ll start contributing at the same level as our HVAC business has.

William J. Dezellem – Tieton Capital Management

Great. That’s very helpful, thank you. And then, second, China, would you please discuss the weakness that you experienced in China in the fourth quarter, and your thoughts going forward?

Mark Joseph Gliebe

As I’ve mentioned earlier the weakness that we see in China is – I would characterize this primarily related to infrastructure type building, because that’s mostly related to our commercial and industrial sales in that market. Our belief is that this will be temporary that it’s slowing in the economy, and at some point it will come back. As of yet, we have not seen it.

William J. Dezellem – Tieton Capital Management

And is it your sense that as at least half of this phenomenon is inventory reductions in the Chinese channel as a result of a little bit of slowing in construction or is it your sense that most of the sales softness you’re experiencing truly is in consumption reduction?

Mark Joseph Gliebe

I can’t be sure, but my guess is that there is an adjustment of inventory accruing.

William J. Dezellem – Tieton Capital Management

Thank you. And then finally, you’d mentioned that you’re taking Genteq brand to be your global HVAC brand, and that there was more to come. Are we to read into that, that you’re going to be consolidating additional brands so that you have less cases where you are essentially competing with yourself in various markets with multiple brands?

Mark Joseph Gliebe

Our goal is to have a more of simplified approach for both our customers and our employees and make the company easier to understand. And so, as we move forward, our intention is to pick global brands that we think we’ll have a long-term position within the company, and focus on those global brands. And so that’s the more (inaudible) part that we’ll be talking about in the future?

William J. Dezellem – Tieton Capital Management

Thanks to all of you.

Mark Joseph Gliebe

Thank you very much.

Operator

I apologize. This concludes our question-and-answer session. I would like to turn the conference back to Mr. Gliebe for any closing remarks.

Mark Joseph Gliebe

Thank you. And thanks for everybody’s interest. Our fourth quarter performance was a strong close to what was a pivotal year, and the continuing transformation of REGAL-BELOIT.

In 2011 we accomplished record sales and record adjusted earnings per share. We closed the largest acquisition in the company’s history, and we are well down the path of integration. We launched more new products in a single year than ever before. Companywide, we improved our on-time deliveries to our customers and we improved our scores on our global customer survey. And we did all of that in spite of uncertain markets, a weak residential HVAC environment, a lengthy regulatory delay in the EPC acquisition, and a valuable commodities market. None of this would be possible without the dedication and commitment of our employees. We are proud of our accomplishments in 2011, and we are genuinely excited about our future. Thank you for joining the call and for you interest in REGAL-BELOIT.

Operator

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

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