Regal Beloit (RBC) Mark Joseph Gliebe on Q4 2015 Results - Earnings Call Transcript

| About: Regal Beloit (RBC)

Regal Beloit Corporation (NYSE:RBC)

Q4 2015 Results Earnings Conference Call

February 09, 2015, 10:00 AM ET

Executives

Robert Cherry - VP of IR

Mark Gliebe - Chairman and CEO

Chuck Hinrichs - VP and CFO

Jon Schlemmer - COO

Analysts

Mike Halloran - Robert W. Baird

Jeff Hammond - KeyBanc Capital Markets

Ronnie Weiss - Credit Suisse

Christopher Glynn - Oppenheimer

Walter Liptak - Seaport Global Securities

Bhupender Bohra - Jefferies

Liam Burke - Wunderlich Securities

Rudy Hokanson - Barrington Research Associates

Robert McCarthy - Stifel

Operator

Good morning and welcome to the Regal Beloit Fourth Quarter 2015 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. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Robert Cherry, Vice President, Investor Relations. Please go ahead.

Robert Cherry

Thank you, operator. Good morning and welcome to Regal Beloit's fourth quarter 2015 earnings conference call. Joining me today are Mark Gliebe, Chairman and Chief Executive Officer; Jon Schlemmer, Chief Operating Officer and Chuck Hinrichs, Vice President and Chief Financial Officer.

Before turning the call back to Mark, I would like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements.

For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings.

On Slide three, we state that we're presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management.

Please read this Slide for information regarding these non-GAAP financial measures and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with GAAP.

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

Mark Gliebe

Welcome everyone and thank you for joining our fourth quarter call and thank you for your interest in Regal.

We'll follow our normal agenda. I'll make a few opening comments. Chuck will give a financial update. Jon will provide color on market's operations and the performance of our three segments. After that, I'll summarize both our fourth quarter and full year performance and then we'll move to Q&A.

Let's start with the fourth quarter highlights. Despite topline pressures, Regal increased adjusted operating margins to 10.3% in the fourth quarter, representing a 250 basis point improvement over prior year.

We'll peal back the onion for you today to illustrate how we obtained such a significant improvement, but no matter how you look at it, this was the fourth quarter in a row with a meaningful increase in our adjusted operating margins.

We increased our adjusted EPS 43% and delivered free cash flow of 169% of adjusted net income and we used the free cash to pay down $77 million of debt in the quarter.

As reported in our press release, Regal recorded a non-cash impairment charge in the fourth quarter primarily related to businesses with exposure to either China or oil and gas.

Additionally, due to the continuing economic instability in Venezuela, we recorded a $12.8 million charge related to the wind down of our operations in that country. We expect no future charges related to Venezuela.

While overall sales for the quarter were essentially flat year-over-year, acquisitions increased sales $127 million and currency was a $21 million drag in the quarter or 2.7% of sales. Organic sales were down 14% or $109 million of which roughly half resulted from five fewer shipping days. The five fewer shipping days impacted all three of our operating segments.

In addition to the shipping days, the headwinds in declining oil and gas markets and weaker sales in China weighted heavily on our topline.

In the commercial and industrial systems segment, organic sales were down 14%. The decline was driven by the five fewer shipping days, a steep reduction in oil and gas orders and weak demand in China. Even with the lower sales in the quarter, our C&I Systems' adjusted operating margins improved 480 basis points on a year-over-year basis to 9.5%.

In the Climate Solutions Segment, organic sales were down 16.5%, driven by the fewer shipping days, the impact of the SEER 13 pre-build, the impact of two-way material price formulas and weaker sales as a result of a warmer winter. Again even with the topline challenges, our adjusted operating margin improved 130 basis points for the quarter.

In the Power Transmission Solutions Segment, our recently acquired PTS business contributed $128 million of sales growth in this segment. Organic sales in our legacy business were up 5.1% with strong headwinds in oil and gas partially offset by increased demand in the renewable energy space.

Speaking of PTS, the integration of the business into Regal is essentially complete. We successfully consolidated our Canadian offices and warehouses during the quarter. While we still have to integrate our ERP systems, the two systems are on a common platform. We plan to make this final ERP transition in early July of 2016.

On synergies, we delivered approximately $12 million in synergies for the year against our $7 million goal. We now expect to achieve the $30 million synergy target that we set back in January of 2015 over a three-year period instead of a four-year period.

As we look forward to 2016, we do not see any major catalyst that will improve our end markets. We do however expect that the year-over-year comparisons will improve as we head into the second half of 2016.

With these top four markets as a backdrop, our management focus for 2016 will be three-fold. First, to continue to drive operating margin improvements across the company. Second, to grow sales even in the face of difficult end markets and third, to improve our working capital management to generate more cash to pay down debt.

Our simplification initiative was a well-timed investment that paid off in 2015 and positions us well to perform in spite of difficult market conditions ahead.

I will now turn it over to Chuck.

Chuck Hinrichs

Thank you, Mark, and good morning, everyone.

Sales in the fourth quarter 2015 were $773.5 million, essentially flat from the prior year. We had net acquisition growth of 16.4%. Foreign currency translation in the quarter was a negative 2.7%. Organic sales declined 14% from the prior year, approximately half of which is a result of five fewer shipping days in the fourth quarter as compared to the prior year.

Let me take a minute and explain the fewer shipping days. This is a result of our fiscal calendar, which is based on a 52-week or 53-week year. 2014 was a 53-week. 2015 was the normal 52-week year and therefore had five less shipping days in the fourth quarter. So we estimated the impact of the year-over-year comparison.

As we did last year, we included the schedule of our shipping days per quarter and the appendix of this presentation. Our adjusted operating profit margin in the fourth quarter was 10.3%, an improvement of 250 basis points from the prior year.

The improvement came from the benefits of the simplification initiative, process improvements and cost controls and lower material costs that contributed to an incremental $4 million LIFO benefit compared do the prior year.

Also last year’s results included a $10 million accounts receivable reserve expense. The improvement in our adjusted operating profit margin in the quarter was the fourth consecutive quarter of year-over-year improvement.

Our fourth quarter 2015 GAAP loss per share was $0.43 per share. There were four adjustments to EPS in the fourth quarter. The goodwill impairment was $58 million net of tax or $1.30 per share. The impairment expense related to businesses that operate in China and in the oil and gas end market.

The next adjustment is the right-off of our net assets in our Venezuelan operations of $12.8 million or $0.29 per share. This resulted from our decision to wind down our operations in Venezuela due to the difficult economic conditions in that country. We do not expect any future charges on our Venezuelan operations.

The third adjustment was for restructuring charges in the quarter of $2.7 million or $0.06 per share relating to our simplification initiative activities during the period. These charges were the final closing costs at our two Kentucky plants in our C&I systems segment and restructuring activities at our Italian plant and the climate solutions segment.

The final adjustment reflects the $2.1 million after tax gain or $0.05 per share on the sale of our Springfield Missouri property in the climate solutions segment. Our adjusted earnings per share were $1.17 for the quarter, an increase $0.35 per share or 43% over the prior year.

Now I will summarize some key financial metrics for the fourth quarter 2015. Our capital expenditures in the fourth quarter were $26.8 million and $92.2 million for the full year 2015, consistent with our earlier estimates. We're forecasting 2016 capital expenditures of $85 million.

In the upper right quadrant, we show our effective tax rate information. The ETR in the fourth quarter is not meaningful due to the pretax loss caused by the goodwill impairment. For the full year 2015 our ETR was 24.6%. Our ETR forecast for 2016 is 25%, which is included in our 2016 guidance.

In the lower left quadrant, we provide data on our yearend 2015 balance sheet. Our total debt was $1.722 billion and our net debt was $1.469 billion. In the fourth quarter, we reduced our total debt by $77 million. Since closing on the PTS acquisition in January 2015, we’ve reduced our total debt by $213 million.

In the lower right quadrant, we present information on our free cash flow. We generated $87 million of free cash flow in the fourth quarter. Free cash flow represented 169% of adjusted net income for the quarter. For the full year, we generated $289 million of free cash flow or 135% of adjusted net income.

Speaking of free cash flow Regal has a history of generating strong free cash flow consistently above 100% of adjusted net income. In each of the last five years, Regal posted strong free cash flow, which was used to execute our capital allocation strategy.

Our near term goal is to focus our free cash flow on debt reduction. As our balance sheet is strengthened we will consider strategic acquisitions and the return of cash to our shareholders in the form of increased dividends and share repurchases. Our 2016 focus on improving our working capital management will generate additional free cash flow to supplement this strategy.

Now I will review our full year 2016 earnings guidance. As Mark mentioned, our outlook for 2016 assumes the continuation of weak demand from our end markets. This will pressure our year-over-year sales comparisons especially in the first half of 2016. The effect of FX translation will continue to be a headwind on our 2016 sales.

We estimate the negative impact of FX to be 1% to 2% headwind in 2016; however, we have momentum from our progress in 2015 and improving our adjusted operating profit margins, which will carry into 2016.

Regarding our refinancing plans, that current bond market conditions are not as favorable as they were in 2015. Given the weaker bond market conditions, it is unlikely that we will refinance in the near term. As a result, our 2016 guidance does not include any incremental interest expense from refinancing.

Restructuring programs in 2016, are expected to result in $10 million of restructuring charges. Our full year 2016 GAAP earnings per share, excuse me, is $4.66 to $5.06. Our full year 2016 adjusted earnings per share guidance is $4.80 to $5.20, which adds back $10 million or $0.14 per share of estimated restructuring charges.

Now I will turn the call over to Jon Schlemmer.

Jon Schlemmer

Thanks Chuck and good morning, everyone.

Before I discuss segment performance, I’d like to start by giving an update on our margin improvement progress and the benefits coming from simplification.

We had another quarter with significant progress on our margin improvement goals. In spite of the currency drag and a weaker topline, our adjusted operating profit margin was 10.3% an increase of 250 basis points for the quarter.

That’s obviously a significant increase in one quarter and I’d like to as Mark mentioned, pill back the onion and to show you how we got there this quarter.

It starts with the fact that last year in the fourth quarter, we recorded a $10 million bad debt reserve equating to approximately $130 of the 250 basis point improvement. From an operations perspective, we delivered a $9 million adjusted operating margin improvement driven by a LIFO benefit, our simplification initiative process improvements and tight cost controls.

Combined the $9 million improvement from operations represented $120 of the 250 basis point improvement. This was the fourth consecutive quarter of year-over-year margin improvement.

Looking back, our simplification initiative was a well-timed investment that is clearly paying off. In 2015 we delivered 150 basis points of margin improvement and we still have more to do.

Given the weakness in our core markets, we've accelerated our restructuring programs. These programs will deliver additional simplification benefits and PTS related synergies. In fact within the last 30 days, we announced four additional programs aimed at further simplifying our footprint.

The first is the closure of our foundry in Wausau, Wisconsin. We already outsourced the majority our castings and this will get us out of foundry operations, which is non-core to our long-term manufacturing strategy. The next two transitions move a portion of our motor assembly and parts production to existing facilities in Mexico.

The final program begins the transition out of our Italian motor facility to our existing factories in China and Mexico. The payback on all these transitions is less than two years and we expect to see benefits in late 2016 and early 2017.

We are estimating restructuring expenses in 2016 of roughly $10 million, which includes the four programs just mentioned and others yet to be announced.

On PTS synergies, we exceed our year one target of $7 million and delivered a $12 million improvement in benefits. We now expect to achieve the total $30 million synergy target over a three-year period instead of four years.

We're running ahead of the margin improvement goal we communicated in December 2014 when we described our plans to improve adjusted operating margins by 200 to 300 basis points over a three-year period.

As we look at 2016 we expect the benefits of the simplification programs and the PTS synergies to continue to help us to achieve our goals. Given the topline pressures however, we expect the rate of improvement to be slower in 2016.

The good news is that we’re into a rhythm on the simplification and synergy programs and we have a track record that demonstrates we can deliver even with difficult market conditions.

Now, let’s get into the segments and I'll start with Commercial and Industrial Systems. Sales were $371 million, a decrease of 18% from prior year. Foreign currency negatively impacted sales by approximately $17 million or 3.7% of sales.

Organic sales declined by $63 million or 14% of sales. I'll break down the organic sales, explaining both the headwinds and tailwinds. As you can see the five fewer days negatively impacted sales by approximately $31 million.

The market headwinds in the quarter included the decline in oil and gas, slowing in China and weakness in a number of the North America end markets and channels including power generation and distribution.

We experienced -- strengthened a few of the end markets including data center and pool pump. These two end markets combined with our growth initiatives positively impacted sales by approximately $8 million in the quarter. Even with the headwinds on the top line, adjusted operating margin was 9.5% of sales representing a 480 basis point improvement from prior year.

The significant improvement in operating margins can be attributed to a number of factors including a $10 million prior year accounts receivable reserve, benefits from simplification, lower commodity costs and LIFO.

A few weeks ago at the AHR Expo in Orlando, we displayed our new Simex I product. This new motor drive system scales up the energy saving benefits of our successful ECM product and makes it available to our customers in the commercial HPAC cooling and refrigeration space.

Simex I offers our customers a roughly 20% improvement in energy efficiency above the standard industry offering. With all the attention today on building and refrigeration efficiency, Simex I will help our customers offer more energy efficient systems to building owners. We already have a number of customers using this product and tremendous interests from others.

Sales in our Climate Solutions segment decreased approximately 18% in the quarter. Foreign currency negatively impacted sales by $4 million or 1.5% of sales and organic sales declined by $42 million or 16.5% of sales.

The chart illustrates the walk from prior year sales. As you can see fewer shipping days, two way material price formulas, the SEER 13 pre-build and warmer winter weather were all key drivers impacting our fourth quarter sales.

As we look across the other end markets in the Climate Solutions Segment, we experience weakness in gas water heaters as well as the Asia and Middle East markets.

Even with the topline headwinds we achieved adjusted operating margin in the Climate Solutions segment of 13.2% of sales, an increase of 130 basis points from prior year. The key drivers to the significant improvement in operating margins included simplification, incremental year-over-year LIFO benefits and cost reduction efforts.

At the same AHR Expo in Orlando, we displayed our new DEC Star product. This new product helps move Regal up the value chain from supplying just a motor to our customers to now supplying a complete air delivery solution consisting of a motor, a drive and a housing.

DEC Star offers our customers a 14% improvement in energy efficiency above our current industry-leading high efficiency offing. This will help our customers meet the more stringent energy regulations that will be required in the years to come.

The key to this product is the placement of the motor inside the housing where it no longer blocks the air stream. We’re already shipping this product to a few customers and other customers have shown real interest in this new offering.

Sales in our Power Transmission Solution segment were $193 million in the quarter. The FX impact from our legacy PTS business was negligible. The impact of five fewer shipping days was approximately $5 million in the quarter.

Looking at the end markets and channels across this segment, oil and gas, agricultural equipment and power transmission distribution were all a drag on the top line, but were partially offset by growth in food and beverage, material handling and renewable energy.

Margins in the PTS segment declined compared to prior year driven by volume decline. We expect that synergies from the acquisition begin to help offset some of the impact of the volume decline as we enter 2016.

During the fourth quarter we relocated our power transmission, distribution customer service to Florence, Kentucky. This transition was made in response to our customer survey and was implemented in late November.

The feedbacks from our distribution customers has been overwhelmingly positive and we're confident this move will pay dividends in the years to come.

Thank you, I’ll turn it back over to Mark.

Mark Gliebe

Now, before we go to Q&A I would like to do two things. First, summarize our fourth quarter performance and second, summarize our total year performance.

For the fourth quarter, sales were essentially flat with weaker markets offsetting the increase from the PTS acquisition. Even with the weaker core sales, margins improved 250 basis points as compared to prior year.

The PTS integration is practically complete and the associated synergies exceeded our first year target. Our cash flow to adjusted net income was a 169% and we used the free cash to pay down $77 million in debt.

Now let’s look at our full year performance. As you can see from the charts for the year Regal’s sales, adjusted operating footprint and free cash flow are all up as compared to prior year. We delivered these results because we executed on the two objectives that we communicated to investors at the beginning of 2015, to approve our operating margins and to successfully integrate the PTS business.

Adjusted operating margins improved by a 150 basis points from 9.5% to 10.9% and the integration of PTS has gone very smoothly in spite of the difficult end markets.

Behind this performance was an incredible amount of transformation. We consolidated six more factories in the year, simplified our four -- five engineering design platforms, excited five more warehouses and converted five more ERPs and while all these transitions were going on, we launched 45 more new products and our customer survey scores improved and we received five quality and performance awards from some of our largest customers.

As you can tell Regal is operating at a high speed pace of change and delivering the improvements and while many other companies are just now getting their restructuring plans out of the starting gates, Regal is at full stride and seeing the benefits.

As a result of the accomplishments listed above, 2015 was a record year in both sales and adjusted earnings for Regal with adjusted EPS up 24% for the year.

We will now take your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mike Halloran of Robert W. Baird. Please go ahead.

Mike Halloran

Hey, good morning, guys.

Mark Gliebe

Good morning, Mike.

Mike Halloran

So, let’s talk about the outlook from where we stand today. From Jon’s commentary, it sounds like you think margins have a chance to be up on a year-over-year basis. Is that embedded in the guidance or am I over-thinking Jon’s comments?

Mark Gliebe

No, as Jon commented, the benefits of our simplification programs in the PTS synergies, we expect to continue to get them in 2016. The issue is we'll be offsetting some of the pressure from the volume declines.

So we don’t expect another year of the kind of 150 basis point improvement that we had in 2015 because of the topline pressures, but we do expect a benefit from simplification and synergies.

Mike Halloran

So, just to clarify now when they marked in, is this a point where the benefits from all the internal work you guys are executing effectively on do these offset those volume pressures or do they just mitigate the volume pressures.

Mark Gliebe

Well, our goal is have them offset completely and then try to do better, improve. So that's where our headset is.

Mike Halloran

Okay. That makes sense and its helpful there and then the implication and if there is a pretty sizable amount of topline pressure that's embedded in guidance, so maybe you could talk through what you’re seeing in some of these end markets into next year?

And specifically is this another case where you’ve got similar pressures in the China business, oil and gas business in those, but maybe some more positive trends coming on the climate side and so maybe you could just talk about some of those dynamics as we work into next year for this year actually?

Mark Gliebe

Yeah sure. So we came out of the quarter even when you adjust for the shipping days with organic growth down 7%. We don’t see a significant catalyst changing the dynamics of the markets as we look forward into 2016.

Oil and gas will still be while it will have less of effect on us because it's not as big a percentage of the total company, it will still be a sizable headwind to us and we don’t at this point see an end to the weakness in China. So, those are clearly the two big headwinds as we head into the year.

On the climate side, I think our headset is from a volume perspective it will be low single digits up on a year-over-year basis. Of course we’ll have some of the headwinds of material price formula on the revenue side that will hurt us.

We're expecting a modest mixed benefit through the year as people move over to completely SEER 14 versus SEER 13, Jon, did I missed anything.

Jon Schlemmer

No I think those are the key points. In climate we expect the market growth that you mention Mark we'll have the headwinds of the lower price but the material price formulas have been fully implemented as the commodities decline due 2015.

That’s all built into our guidance and then I’d say the other climate, the other markets and climate, some of the weakness in China will flow into our Asia business in climate as well. While that’s not a large part of this segment, it will be a headwind and we would expect Middle East to be a headwind as well compared to the strength we had in 2015.

Mike Halloran

So the thought process there that is core U.S. growth for your HVAC pieces likely above that low single digit volume number with some of the refrigeration in global assets taking it towards the low single digit number that's the through process?

Mark Gliebe

Well, I want to make sure I understand what you said. From a volume -- from a unit perspective, we're expecting low single digit growth rates from a unit's perspective from…

Chuck Hinrichs

That’s in the North America resi.

Mark Gliebe

North American resi space, right.

Mike Halloran

Okay. So that North American resi. Okay. So that wasn’t volumes for the overall climate.

Mark Gliebe

Right. That’s right.

Mike Halloran

Okay. Great. Appreciate it guys. Thanks for the clarification.

Mark Gliebe

Thanks Mike.

Operator

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

Jeff Hammond

Hey, good morning guys.

Mark Gliebe

Good morning, Jeff.

Jeff Hammond

Maybe just to go at the growth rates, can you give us a little better sense of how you're thinking about core revenue declines in PT and C&I and it seems like climate, you're kind of seeing flat, but your implied guidance if you hold margins kind of flat, so those other businesses are down high single digits?

Mark Gliebe

I think again I’m going to point to the fourth quarter. We came out of the fourth quarter with revenues down 7%. In each of those segments, they were in and around that area and we don’t see a change, a change in our order patterns.

There might have been a slight burst in the early part of January that probably hasn’t sustained itself, but positive out of the gates, but as we look forward, we don’t see a significant change in order patterns from our customers. So we're modeling a tougher environment for our end markets in both PT and C&I.

Jeff Hammond

Okay. Are you able to quantify the incremental savings you think you're going to get from simplification as well as what you think your incremental synergies are and can you quantify the LIFO benefit in 4Q?

Mark Gliebe

So I’ll touch on the first half and I’ll let Chuck take the LIFO comment. So Jon mentioned we have $10 million restructuring in our guidance and Jon also made the comment that we expect two years or better pay back on all of those.

So we’ll start to see the benefits on some of those projects in the fourth quarter of 2016. So, that’s where the projects that we’ve already done. Of course, I’m sorry, that we’ve already announced.

There maybe a few others to come. I’ll talk about those in the future. Certainly there should be some carryover as we come into the year from the projects that got implemented midway through 2015. Chuck you want to comment on LIFO?

Chuck Hinrichs

Yes Jeff for the fourth quarter, the LIFO benefit on a year-over-year basis was about $4 million a little ahead of our expectations coming out of the third quarter, but copper and steel continued to decline in the quarter.

Jeff Hammond

Okay, Mark just back to simplification and the synergies, are you able to quantify like you talked about kind of qualitatively, but what are the buckets in terms of millions of dollars where you think the savings are?

Mark Gliebe

No, I don’t have that here in front of me Jeff. I think the comment that I would make is just qualitatively, but the fact that we talked about $10 million of restructuring with paybacks of two years or better and the fact that as we go into the year, we still do expect benefits coming from simplification, off cutting of the headwinds from volume decline.

Jeff Hammond

Okay. Thanks.

Mark Gliebe

Thank you.

Operator

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

Ronnie Weiss

Hi. Guys this is Ronnie Weiss on for Julian.

Mark Gliebe

Good morning, Ron.

Ronnie Weiss

Good morning. I just wanted to touch kind of the cadence of the guide for the year. Should we expect kind of similar levels of organic decline from Q4 ex the shipping days and should we see the normal seasonality of the EPS that 22%, 23% that’s been the norm for the last couple of years for Q1 or is it a little less on Q1 and more back half loaded?

Mark Gliebe

Chuck should add in, but I'll give you my view. Number one we have in the past provided a quarter-by-quarter percentage of revenue guidance for you. I would say that you can continue to use that as you think about 2016.

So as we come out of the fourth quarter and into the first quarter, sequentially you’re not going to have the year-over-year tough comparison as a result of shipping days and we should see our normal seasonality in the first quarter of the year.

Ronnie Weiss

Okay. Great. And then I just wanted to talk on the acquired PTS business and just how the backlog is there and the orders if you can give any color there and kind of what you're expecting from that acquired piece for 2016?

Mark Gliebe

Well the PTS business is seeing pressure like most of our peer group in the oil and gas space, weakness in agriculture and weakens in metals. Those have been the three core areas that are putting pressure.

They're seeing benefit in the positive order demand in food and beverage and material handling as well as renewable energies. So right now the upsides don’t outweigh the downsides, which is why we're struggling on the topline in that segment.

Ronnie Weiss

Got it. And then just one last one, sounds like debt pay down is going to be another focus going into 2016. I was just wondering if you guys had a target leverage goal that you were hoping to get you in 2016 or any color around the amount of debt that’s going to be paid down in 2016?

Chuck Hinrichs

Ronnie this is Chuck. I think our goal for 2016 would be $200 million to $250 million consistent with our performance with some improvement from 2015. So that would take our debt-to-EBITDA down considerably for the year.

Ronnie Weiss

Thank you, guys.

Mark Gliebe

Thank you, Ron.

Operator

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

Christopher Glynn

Yes. Good morning.

Mark Gliebe

Good morning, Chris.

Christopher Glynn

Hey Mark, I had a question really about the nature of change at the margin or lack thereof. So excluding the five days issue, seems like trends were generally in keeping with the last couple quarters, demand and revenue trends are minus seven versus minus six kind of a rounding matter there. Is it fair to say that through the fourth quarter and into 2016 the trends generally intact than what it is?

Mark Gliebe

The front part of the year is going to be tougher than the back part of the year just because of easier comparisons. We carried a backlog, a PTS backlog and a commercial industrial backlog on oil and gas into the first half of 2015. So caps will be tougher on the front part of the year than they are on the back part of the year.

Jon Schlemmer

And Chris, this is Jon. I’d say in terms of order trends, there wasn’t a real change favorable or unfavorable as we progress through the fourth quarter. However, I would say that December was probably lighter than we expected.

The warm winter weather and climate was a surprise versus what we expected going into the quarter. And then as Mark mentioned, we had a little bit of a pickup in January, but haven't really seen that sustain itself as we've entered February here. So similar, I would say, similar to what we were other than normal seasonality. Similar to what we experienced through the fourth quarter.

Christopher Glynn

Okay. And then on the $4 million LIFO, I just wanted to clarify, I think that was the incremental amount versus the prior year, but I wondering what the gross amount is because if I am pretty sure that the gross amount is the pertinent number to have as we think about the comparisons when we model out the 2016 quarters.

Chuck Hinrichs

Right Chris, this is Chuck. The gross amount of LIFO for the quarter or for the year was about $18 million, which would have been like a $7 million improvement on a full year basis over 2014.

Christopher Glynn

Okay. And do you have that for the fourth quarter, the $4 million net which the gross or the…

Chuck Hinrichs

Gross was about $15 million.

Christopher Glynn

Okay. And then if 10 million accounts receivable reserve that helped the comparison, I don't recall that last year. Was that separate from the $10 million reduction in the Venezuela carrying value of accounts receivable?

Chuck Hinrichs

That was the same thing. So in the fourth quarter last year we increased our reserve on our receivables in Venezuela by $10 million. It was not an adjustment to EPS, but a call out.

Christopher Glynn

Okay. Got it. Thanks for the help.

Chuck Hinrichs

Sure. Thank you.

Operator

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

Walter Liptak

Hi, thanks. Good morning, guys.

Mark Gliebe

Good morning, Walter.

Walter Liptak

Wanted to ask about the price cost again a little, just kind of back into the climate it looks like the material cost were maybe a 3% price cost is a 3% revenue headwind and I wonder if you could think about the number and also talk about PTS and C&I and what's embedded in 2016 for price cost impacts on topline and bottom line?

Mark Gliebe

So in terms of the impact on margins for the total company, price cost was moderately beneficial in the fourth quarter and we would expect some benefit from the price cost equation as we head into 2016.

Walter Liptak

Okay. Great. And so I guess on pricing in PTS and C&I are you increasing prices this year? Are you able to maintain pricing on your products?

Mark Gliebe

I would say that overall there hasn’t been a significant change in our pricing practices from prior years and so we're holding our own and that is one, I just want to clarify that, there is some portion of our commercial and industrial business that also has material price formulas. So aside from that, my comments stand.

Walter Liptak

Okay. And then finally you called out some of the more energy efficient products selling. I am wondering if we can get an update on any wins in with your variable speed motors and if you're seeing any improvement in the inventory build for the spring season this year?

Mark Gliebe

Yes, so I'll start on that and I'll invite Jon in. So there continue to be more regulation in the space on electric motors that we think we're positioned well for. We're trying to help our customers meet these more -- these type of regulations that will come into play some in 2019 and perhaps some even before that.

And so the energy efficient products we still believe is a long-term secular trend that will aid us as we move forward. So we're positioning ourselves to take advantage of that. Jon, you want to comment on…

Jon Schlemmer

I'll comment on -- I'll comment Walt on the seasonal build as we head into 2016 cooling season. We're probably still about a month away from knowing what's actually going to happen with the normal ramp-up that we see on the AC side.

So it's a little early to tell. We're expecting that we would have normal dynamics. We feel that the vast majority of the pre-build is behind us now. So that won't have a big impact and how we're tied to the manufacturers from a volume.

There was some feedback in the channel that the warmer winter weather in the fourth quarter, actually it depleted a little bit AC inventory in some parts of the market and it's always hard for us to know exactly what impact that was.

But if that did happen, that would be a little bit of a benefit. We expect to see a little bit of a benefit as we enter the cooling season because there will be a little less inventory in the channel. Some of the other data that we have would suggest that there is a little less inventory in the channel as we progress through the fourth quarter.

Walter Liptak

Okay. Great. Thank you.

Mark Gliebe

Thanks Wall.

Operator

And the next question comes from Bhupender Bohra of Jefferies. Please go ahead.

Bhupender Bohra

Hey, good morning guys.

Mark Gliebe

Good morning, Bhupender.

Bhupender Bohra

Hi. My question is around the guidance of the EPS number. Could we talk about what’s built at the lower end of the guidance and the upper end in terms of when we think about the topline organic sales growth and kind of the margin development here for the year? Thank you.

Chuck Hinrichs

I think the key -- the key variable will be topline revenue. So I think that’s the key variable for the year. So if we see a bounce in demand we'll be up towards the Northern end of our guidance and if there is further deterioration from where we're at today we'll be at the bottom end of the guidance.

I think from an execution perspective, we’ve proven in this past year that four quarters in a row of operating margin improvement that we’ll get the execution done and I’m confident of that, but the key variable for us is going to be around the topline.

Bhupender Bohra

What have you built at the midpoint here? Are we looking at like flat organic sales or we have like minus 7% or minus 6% for the fourth quarter and you did say that first quarter, things haven't improved. So how should we think about for the year with second half kind of easy comps?

Mark Gliebe

Yeah, I’ll take a shot at it and if anybody else wants to add and you can, but obviously we're not providing annual revenue guidance. But we’re trying to give as you as much color as we can here.

So we came out of the fourth quarter with roughly minus 7% or 8% organic growth. We don’t see a substantial -- any substantial change in order patterns from our customers and no catalyst in the future that would say that this is going to change. We know that comps will get easier in the second half because we carry the sizable oil and gas backlog into first half of 2015.

Bhupender Bohra

Okay. And question for Jon actually on the Climate Solution inventories. We've seen some of the system guys, they report numbers and their sales are up like four to five recorded number on the residential side.

What’s the disconnect here? You guys are in line with where the industrial shipments are, but those guys actually are giving good numbers here. Could you talk about like inventory channels here -- in the channel inventory basically, where we are and where we should think going into the spring?

Jon Schlemmer

I’ll give you, what I know about the inventory side, but I'll tell you what I think is the bigger disconnect of that from what the industry, the OEMs are reporting is what I mentioned as we went through the slide this morning.

Clearly there is the impact of SEER 13 still impacted us in the quarter versus what you see on the industry selling sales side, revenue side. We also have the two-way material price formulation. There is I believe a pretty significant gap from a pricing standpoint when you look at -- we’re not expecting to make money when we sell copper and steel. So that’s built in, in a two way material price formulas.

And then the other impact that we had was with the warmer weather that is where I think we could be a little bit of an inventory factor there. We could see production rates change faster than perhaps on the selling side for the OEM.

So little bit if information we have from an inventory standpoint, we suggest that there was some destocking of inventory in the channel in the fourth quarter and that would be in addition to the SEER 13 factor that would have already built -- would have been built into our expectations as we entered the fourth quarter.

Bhupender Bohra

Okay. And then final question on the destocking thing especially with respect to your PTS business and C&I, did we see those two businesses have a pretty good distribution channel sell through, if you can comment on like what kind of destocking we're seeing there and if any color until when it's going to last?

Mark Gliebe

Yes. So on the commercial and industrial side, we do believe that there was some destocking going on as we exited the year and difficult for us because our -- to predict when it ends just because the spread of industries that we hit are so varied.

On the PT side, our customers would say not a substantial amount of destocking being done. I would say however the burst of demand that we saw early in the first few days of January would indicate perhaps that's not exactly correct.

So there have been a small amount of destocking going on in the PT channel, but I don't think it's significant and I pretty much think it's behind us.

Bhupender Bohra

Okay. Thanks a lot guys.

Mark Gliebe

Thank you, Bhupender.

Operator

The next question comes from Liam Burke of Wunderlich. Please go ahead.

Liam Burke

Yes. Thank you. Good morning.

Mark Gliebe

Good morning, Liam.

Liam Burke

Mark, the stronger dollar, has that created significantly more price competition in your overseas markets?

Mark Gliebe

I don't think so Liam. We've always had tough markets here and it hasn’t substantially changed. We obviously have competitors in all major areas in the world whether it be China or India or even Europe, but it hasn’t substantially changed from the other pressures we've seen in the past, so not a big change.

Liam Burke

Okay. And obviously energy efficiency is a big differentiator for your product. To lower energy prices offset any potential growth rates in that part of your business?

Mark Gliebe

Well electric rates were to fall substantially you could argue that, but I got to tell you there just is such a kind of overwhelming movement towards efficiency, no matter where you go in the world and it has a lot to do with awareness of the climate issues.

I don't see a big change in people's behavior right now.

Liam Burke

Right. Thank you, Mark.

Mark Gliebe

Thank you, Liam.

Operator

The next question comes from Rudy Hokanson of Barrington. Please go ahead.

Rudy Hokanson

Thank you. I was wondering and understanding the comment that you made at the end of the third quarter about the fact that the oil and gas business for you, you felt you had right-sized it for what the market was looking like?

Was that primarily the issue of inventory and that the right-sizing that you've done doesn’t really protect you from the fluctuations that are going on right now?

Mark Gliebe

Yes, for us it's all driven by demand and we saw the demand reducing substantially. We stated taking aggressive moves in the third quarter. It's not gotten any better and you could argue it's gotten a little worse relative to demand.

So we're cast and we're re-looking other more efficient ways of running businesses that have exposure to oil and gas and constantly looking for ways to do it better. So right-sizing is the right way to think about those oil and gas exposed businesses and that's the way our team is driving those businesses.

Rudy Hokanson

Thank you. And then the other question I have has to do with the improvement in margins that are probably expected in 2016. When we look back at the improvement in 2015, there is the simplification program that you have in place as well as a number of other items that went into the improvement in margins.

Can you give us a rough idea understanding that there will probably be additional reasons for improvement in margins other than just simplification in 2016? How much of a contribution you think simplification itself could have in 2016, realizing that is the final number?

Mark Gliebe

Well, I understand your question. If I had to estimate, I don't have this. We probably need to go back and take a look at it. I would guess that probably half of our benefit for the year was attributed to simplification.

There were other factors, you're absolutely right. As we go into next year, we believe that the simplification effort will continue to deliver Op margin improvements, but at a slower rate than what we saw this year, simply because of the topline headwinds.

We're communicating that we’re investing $10 million in restructuring of which we expect less than two-year payback and we’ll start to see those benefits at the end of '16.

Rudy Hokanson

So would it be fair to say that on your longer term outlook and expectations for simplification that they're on track. It's just that the visibility is difficult in the year with the pressure on the topline, but that it could bounce back that you see that leverage in subsequent years if the topline recovered?

Mark Gliebe

Well there is no question. We said 200 to 300 basis points of improvement back in the third week of December of 2014. We’re not backing off of that target even with the topline pressures. If the topline were to come back, we would be near the high end of that goal.

Rudy Hokanson

Okay. Thank you. That’s all my questions.

Mark Gliebe

Thank you, Rudy.

Operator

The next question is a follow-up from Jeff Hammond of KeyBanc Capital Markets. Please go ahead,.

Jeff Hammond

Hey, guys just want to go back on power transmission, it looks like sales were basically flat sequentially 3Q to 4Q when we lost 200 basis points of margin. And so I just want to understand what drove that on a sequential revenue and what’s the trend going forward? Is 4Q the trend of the aberration?

Mark Gliebe

Okay. That’s a good question. I want to come back to -- in my answer and I’m going invite Chuck to answer in here too, but in my answer I want to come back in a earlier question you asked about PTS and I don’t think I got right Jeff.

So you did ask about the PT margins, PTS margins going forward and I think you were asking about synergies in 2016 and beyond pulling in our $30 million target from four years to three years would say that we got $12 million in the first year and we think we’ll get the remaining $18 million over the next two years. So that’s the way we’re thinking about it relative, Chuck can you help out to answer?

Chuck Hinrichs

Yeah, on the sales number Jeff, so the business, the legacy business had a lot of backlog in the first half that was worked through and so the third and fourth quarters reflect the lower level of demand coming from the end markets particularly impacted by oil and gas and by the agriculture market for the legacy business.

So as volume declines occur in that business the detrimental on the margins are on the larger end of some of our businesses. So that causes the impact on the adjusted Op profit margin.

Jeff Hammond

But those are already explained 3Q to 4Q because it looks like your base business was flat sequentially?

Chuck Hinrichs

Yeah, I don’t have that table in front of me Jeff.

Mark Gliebe

To compare the detrimental.

Jeff Hammond

Okay. Maybe just to step back, it looks like PTS contributed $500 some millions. It looks like if you run rate that out, that base business is maybe down 10%, but I guess the disconnect is if you take the year-on-year plus the synergies of a -- and the higher margin acquisition coming in, it's just seems -- there seems to be a disconnect that the margins are down year-on-year.

Mark Gliebe

I think it's a fair question Jeff. We’ll get back to you. We’ll dig in a little bit deeper and get back to you with it.

Jeff Hammond

Okay. Thanks.

Mark Gliebe

Thanks Jeff.

Operator

The next question is from Robert McCarthy of Stifel. Please go ahead.

Robert McCarthy

Hi, I guess we're getting to the close to the end of the hour guys. I hope all is well. Let’s see, in terms of the restructuring the $10 million this year, is there a Plan B. I think it materially worse here. Or could we see an incremental layer restructuring that contemplate in a tougher environment?

Mark Gliebe

So Rob, hello there. We, as I mentioned to you that the $10 million includes the four projects that we’ve already announced and as well as a few others that we haven’t yet announced. So if the comment as we made is that we're pulling things forward aggressively already.

So the plan we have right now at the pace we're moving is a pretty aggressive plan.

Robert McCarthy

Okay. And then in terms of the burst, I am not going to parse this comment too much, but you did talk about a little bit of a burst of activity in January and definitely some positive comments I think in terms of the inventory within climate with an HVAC.

What other kind of green shoots or anything you can kind of speak to that will give you some reason for maybe a little more enthusiasm for this year or the things that you're monitoring I guess?

Mark Gliebe

Well, the -- either we talked about a few of the end markets that are doing well for us. We talked about data centers and we talked about the pool pump market, which is kind of more consumer related. We talked about material handling and food and beverage, which also has a consumer bend to them.

So pretty much anything related to the consumer is where we're seeing the green shoots. It's on the industrial side where we're still seeing the headwinds. We'll be watching closely order rates in China to see how those did turn throughout the year.

There is not exactly clear where that's headed. As you know there is a fair amount of stimulus going into that market. So I believe at some point that can shift on us. We're better positioned in Europe than we have been in the past. We're monitoring what's happening in Europe.

And then climate, there is always a wild card relative to weather and as Jon mentioned inventory levels held by our customers.

Robert McCarthy

In terms of the detrimental of the core segments now, how should we be thinking about that conceptually in terms of what the detrimental could be in a downturn or is there any way you can talk qualitatively?

And I am not -- obviously I am not thinking of the benefits, I am just thinking the core business, how should we think about the detrimental, how they're set up right now?

Mark Gliebe

Yes, I think you should just think about it as generally speaking it's 30% to 35% and it's better in the climate segment and the C&I segment and tougher in the PT segment.

Robert McCarthy

PT segment, okay. And then the final question is just or just I think you had mentioned the fact the trailing debt markets have changed and that's going to change kind of your financing activities going forward.

Obviously, you guys are seeing a large acquisition now, but given that and given maybe the prospect for lower core EPS delivery over the next couple of years and attainable free cash maybe it might actually do a little bit better given CapEx, but does this change your time table to perhaps for debt pay down and perhaps getting back in the market for M&A, do you think that extends a year or so in terms of just by adjusting what you've just bought.

Mark Gliebe

The decision we made on refinancing didn't change the outlook or our view of capital deployment strategy. We've been -- we have a history of being an acquisitive company. Right now, our bias is to pay down debt and that is where our focus is right now.

The good thing is we're generating very strong free cash. We expect that to continue throughout 2016 and put us back in position to either use the money to repurchase shares or use the money to go out and look at other strategic acquisitions.

Robert McCarthy

Thanks for your time guys. Good luck.

Mark Gliebe

Thank you.

Operator

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

Mark Gliebe

Thank you for your questions everyone and for your interest in Regal. Have a great day.

Operator

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

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