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Regal Beloit Corporation (NYSE:RBC)

Q1 2012 Earnings Call

May 2, 2012 11:00 am ET

Executives

John Perino – Vice President of Investor Relations

Mark J. Gliebe – Chairman & Chief Executive Officer

Jonathan J. Schlemmer – Chief Operating Officer

Chuck A. Hinrichs – Vice President & Chief Financial Officer

Analysts

Jeff Hammond – KeyBanc Capital Markets

Christopher Glynn - Oppenheimer

Zach Larkin – Stephens, Inc.

Mark Douglass – Longbow Research

Joshua Pokrzywinski – MKM Partners LLC

Jamie Sullivan – RBC Capital Markets, LLC

Michael Halloran – Robert W. Baird & Co. Inc

Walter Liptak – Barrington Research Associates

Scott Graham – Jefferies & Company

Samuel Eisner – William Blair& Company

William Dezellem – Tieton Capital Management

Operator

Good morning and welcome to the Regal Beloit First Quarter 2012 Earnings Conference Call. All participants will be in listen only mode. 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 John Perino. Please go ahead.

John Perino

Thank you, Andrew. Good morning and welcome to the Regal Beloit first quarter 2012 earnings conference call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, our Vice President and CFO.

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

On slide 2, we mentioned that we are presenting certain non-GAAP financial measures related to the 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 measures 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 J. Gliebe

Thank you John and welcome everyone. Thank you for joining the call and for your interest in Regal Beloit. I will follow our normal agenda here. I’ll make a few opening comments; Chuck Hinrichs will give a financial update; Jon Schlemmer will add color on products, markets and operations. At the end, I’ll summarize and then I’ll also add a few comments on the recent change to our corporate brand and then we’ll move on to our Q&A.

Overall, we felt good about our performance in the first quarter. The bottom line as that our businesses preformed pretty much as we would expected, plus we have the added benefit of a gain on the property sale, as well as a one time benefit from a tax provision. In terms of our operating performance during the quarter, we achieved record first quarter revenues and record first quarter net income.

Our North America C&I, mechanical and our global Unico businesses grew, I mean quarter offsetting headwinds in our HVAC and China businesses. Outside of our operating performance, recent highlights included first this past Monday, the company declare a 5.6% dividend increase representing our seventh increase in the last eight years. Second was the acquisition of Milwaukee Gear.

Third, we began to move into our new hermetic motor facility in China. Fourth also in China we began construction of our new generator facility, Jon will cover both of those areas here in a few minutes. Fifth, we continue to smooth integration of EPC and we are on track to achieve our performance targets and finally consistent with our customer care and simplification initiatives. We launched a new corporate visual identity that we’ll discuss at the end of this call.

With that, I will turn it over to Chuck Hinrichs.

Chuck A. Hinrichs

Thank you Mark and good morning everyone. My first slide summarizes some of the highlights of our first quarter 2012 results. Net sales increased 21.9% over the prior year reflecting the inclusion of sales from the acquired businesses, including seven weeks of sales from our most recent acquisition, Milwaukee Gear. Sales in the quarter reflected continued growth in our North American commercial and industrial motor and mechanical businesses and Unico. This growth helps to offset weak sales in our HVAC, China and European businesses.

As we said on our previous calls, the EPC business is being integrated with our other businesses. We are not providing standalone results, but the EPC results continue to be excellent, reflecting good seasonal sales growth and operating profit in the first quarter. Our first quarter results benefitted from two non-operating items. First, we sold a parcel of land at a facility closed several years ago. The sale resulted in a gain of $1.3 million or $0.02 per share, which reduced our SG&A expenses in the quarter. Secondly, our income tax expense in the quarter benefited from a $1.4 million tax decrease at a non-U.S. entity. This represented a $0.04 per share benefit in the quarter.

In summary, our first quarter 2012 earnings per share of a $1.16 included the benefit of these two non-operating items, which totaled $0.06 a share. Excluding these non-operating items, our earnings per share would have been $1.10 inline with our earlier guidance for the quarter.

The next slide charts the growth of first quarter 2012 net sales, operating profit and diluted earnings per share compared to the prior-year. The takeaway here is that we generated strong growth in all key operating metrics as we grew our mid and late cycle businesses and added the acquired businesses, which offset the weak market demand in our HVAC and China operations.

Let me note that in this chart, we use the GAAP results to be consistent with the 2012 results. We subsequently adjusted the first quarter 2011 operating profit and earnings per share to add back the EPC diligence costs of $6.3 million and $0.12 per share respectively to the 2011 results.

On the next slide, we provide additional financial highlights. In the upper left quadrant, we summarize our capital expenditures for the first quarter 2012 and our guidance for the full-year 2012, which includes $25 million for the relocation of two of our factories in China, Jon will comment on these projects later. In the upper right quadrant we summarize our effective income tax rate in the first quarter of 2012. We expect the ETR to be in the 29% to 30% range for the rest of 2012, driven by the estimated distribution of our global earnings.

In the lower left quadrant, we highlight our strong free cash flow results in the first quarter of $48.7 million equal to 100% of net income for the quarter. 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 provide our quarter end total debt position of $986 million, which increased $67 million during the first quarter with the acquisition of Milwaukee Gear at February. We also provide our credit metrics as of the end of the quarter.

On the next slide, we summarize our second quarter 2012 earnings per share guidance of $1.42 to $1.48. Our second quarter guidance includes higher sales over the prior year and the prior quarter benefiting from the acquired businesses and as our seasonal businesses experienced their typical growth. We expect continued strength and sales in our mid and late cycle businesses, our C&I and mechanical and Unico operations. Milwaukee Gear will contribute to our earnings in the second quarter.

The business should offset its remaining inventory purchase accounting adjustments and make a contribution to our profits in the quarter. In the second half of the year, Milwaukee Gear should be accretive to earnings as we previously communicated. Our integration activities at EPC are ongoing and will accelerate in the second half of this year. We do not expect to incur any material amount of restructuring charges in this second quarter.

Now, I will turn the turn the presentation over to Jon Schlemmer.

Jonathan J. Schlemmer

Thanks Chuck. Good morning everyone. As we progressed through the quarter, we were very pleased with the order strength and performance of our commercial and industrial businesses including the EPC commercial and industrial products, our mechanical businesses in North America and Unico. Very stronger performance is help to offset the weakness in residential HVAC as well as the continued weakness in our China businesses. The combined effort enabled us to meet our guidance for the quarter.

Commercial and industrial sales were up 7% driven by a strong demand and a variety of end markets including distribution, agriculture, industrial equipment. Our Unico business performed very well with 46% sales growth. The strength was from a variety of applications including oil and gas and we continue to be excited about the stream of new products coming from this business.

Orders continue to outpace sales in our Unico business and we’ve initiated efforts to increase capacity to meet the increasing customer demand. During the quarter, our mechanical businesses continue to perform well with sales in North America up 8.7% offsetting sales declines in our European mechanical operations. In mechanical, we saw strong demand in industrial, agriculture and power related application.

As Mark mentioned we also closed on the acquisition of the Milwaukee Gear business this quarter. Milwaukee Gear is a great addition to our mechanical business expanding our product range and opening up some new segments for our products. The integration is well underway and we feel great about the leadership team, the products, the process technology and the segments where Milwaukee Gear participates.

Our residential HVAC business experience a decline in sales compared to the prior year, driven by several factors. First, sales in the first quarter last year were up 18%, so we had a tough comparison. Second, we believe the overall equipment market was down double-digit in the quarter, and third we continue to experience a negative mix shift to less energy efficient products as a result of the R22 conversion.

Despite slowing in China for the quarter sales outside the U.S. grew by 13% compared to the previous year and represented 34% of our total sales. Our acquisitions and their global sales are driving the increase, our China businesses continue to experience weaker sales demand, similar to what we experienced in the fourth quarter of 2011. However, our orders started to improve after the Chinese New Year, and we are cautiously optimistic as we entered the second quarter.

We remain committed to investing and then growing our global businesses to further diversify the company. We like the diversity in our business and the footprint in the emerging markets. Long-term this is where we will see stronger organic growth for our products. While we are on a subject to China, I’d like to give you an update on the construction of our new manufacturing facilities. We are in the process of building two new world class manufacturing facilities, one for hermetic motors and one for generators. While we have the opportunity to build these new facilities, we’re making the investments to plan for a long-term capacity requirements, quality and productivity improvements and optimize lean layouts.

Construction of the new hermetic motor plant is now complete, and we’re beginning to move equipment from the existing side into this new facility. We will work with our customers to qualify the new site and we’ll be starting production soon. During the past quarter we also completed the vast majority of the construction on our new generator plant. We will complete the construction this quarter and we’ll have the facility fully operational by the fourth quarter of this year. These investments in China will improve the operating performance of these businesses and position us for a long-term growth.

During the quarter, sales of energy efficient products including our acquisitions represented approximately 18% of total sales. We’re pleased to see the demand for energy efficient products with our latest acquisitions including EPC, Unico and even high efficiency gearing from Milwaukee Gear. The growth also continues to be driven by the legislation, just last month for example Canada enacted a change required in industrial motors to meet the more stringent NEMA Premium efficiency levels.

You may recall this is a same change it took place back in the U.S. in December of 2010. We had a great range of NEMA Premium products and we’re in an excellent position to support this change in Canada. This is exactly what we expect to continue happening all around the world.

To meet these ever changing requirements and to help our customers differentiate their products, we continue to develop new products with a focus on both energy and energy efficiency. Today, I’d like to talk about two more new products that our teams launched in the first quarter, both from our commercial and industrial business. First, our Marathon team launched a new line of energy efficient vertical pump motors. These new motors are designed to perform in a wide range of pumping application such as irrigation, water treatment plants, marine and cooling towers.

The special design is capable of meeting the high threshold inherent in these applications. NEMA premium motors operate with up to 20% fewer efficiency losses and can offer a pay back in less than two years. These new pump motors further expand are already wide range of high efficiency NEMA premium industrial motors.

Second, our Marathon generator team introduced a new hydraulic power generator for used in oil and gas applications. The increased production from oil and gas wells more and more sophisticated electronic monitoring equipment is being used to record and understand well performance.

Electricity is needed to power this equipment at remote sites and that’s were a generator comes into play. Our generators are design to meet the need for increase safety and certification levels in the harsh oilfield environment. We’re excited about adding this generator offering to our other oil and gas products from Unico, Master Gear, Marathon and Milwaukee Gear. I always wish I had more time to talk with you about the new technology and products being developed all across Regal. It’s really exciting to see what our teams are doing to help our customers.

I’d like to spend a few minutes now to talk about the progress we’re making with our simplification initiative. Last quarter, I talked about our restructuring programs in both Europe and Australia. And we also mentioned the consolidation of two of our Juarez manufacturing facilities. These programs are progressing well and we’re developing the plans for the next phase of our manufacturing simplification efforts.

During the quarter, we also held our first ever global supplier meeting. The goal of the meeting was to align our supply base with the initiatives underway in our company. During the session we communicated our expectation that our suppliers will support our manufacturing and design platform optimization efforts and our aggressive delivery in quality improvement plans.

Our restructuring efforts will require changes and consolidation in our supply base and we will definitely align ourselves with the strongest suppliers. Not only we simplifying our operations in supply chain, but we’ve also been on a consistent path to consolidate our IT systems and get the entire business on standard ERP platforms. To get there, we’ve been executing two to three ERP conversions every year for the past several years. In the past two quarters our teams executed on two more ERP conversions, both in our Asia businesses.

We executed these conversions without disruption and we expect efficiency gains for years to come. We still have more to do, however, by the end of this year we will have approximately 70% of our sales on our standard ERP platforms. These efforts drive efficiencies and they act as an enabler for additional simplification efforts around the company.

I feel really good about the path we are on with our simplification initiative, and look forward to sharing more details with you in the future. None of this of course happens without a talented and dedicated team. This week we kicked off our fourth executive leadership program which is an intense three weeks development program targeted for the top leaders in our company. We have 29 leaders from seven different countries and nearly every business including many of our most recent acquisitions represented in the class. I’m really proud, how our team delivers and I feel great about investing in them. With that, I’ll turn it back over to Mark.

Mark J. Gliebe

Thanks Jon. So to summarize, we felt good that our team was able to perform to our expectations in the quarter. I’d like to reemphasize the progress we're making in both our initiatives and our acquisition integration efforts. Our simplification efforts will result in a business that is more customer friendly and more efficient. You heard Jon talk about our building and restructuring efforts.

Our progress on shifting the common IT systems and the efforts we were making to consolidate and improve our supplier base. I am confident that these investments will deliver real value over time. We are deep into integration of VPC and we are seeing great progress. We have firmly integrated the leadership team and the employees into their new roles throughout the company, and we are certainly operating as one team.

On Milwaukee Gear, we like the oil and gas presence, the high precision automation, the operating margins and the fact that it is an investment in our mechanical segment. The management team is strong and integration is well under way. With our second quarter guidance we expect the recent acquisitions to meaningfully contribute on both the top and bottom line and we expect to begin the heavy lifting on the next phase of our synergy benefits.

Finally, we expect the business to continue to generate strong free cash flows which we plan to use delever the balance sheet and to continue to seek out strategic acquisition opportunities. And as I mentioned earlier this week we announced the dividend increase which represents the seventh increase in the last eight years.

And before we go into Q&A, I would like to take a few minutes and walk you through the change we announced with the release of our annual report. As you compel from the allowable on the upper left hand corner of the slide we made change to our visual identity. This change was an outcome of the strategy refresh process that our management team completed at the end of 2010.

We set a vision of how we wanted the company to be viewed by the end of 2015. More customer driven, one face to our largest customers and one unified Regal team. We wanted cultural clarity in all of our communications driving our five initiatives and our core values.

We want to people to see as a business that is lean, simple and efficient. We also recognized that many of our stakeholders already referred to us as Regal primarily because the word Beloit was somewhat difficult to spell and pronounce especially in other languages. So our plan going forward is to refer to the company as simply Regal. Our official corporate name will not change, however, and will not change however, you will hear as used Regal much more often.

There is obviously a visual change, we believe our new logo is bold, contemporary and yet simple. The change to our visual identity is part of a larger brand simplification effort where we are elevating a few global product brands and rationalizing a number of less relevant brands.

The change in our visual identity has been a significant effort, but we know that with this investment we are sending strong messages to our stakeholders that are consistent with the long-term direction of the company. We feel great about how it all turned out so far.

With that, we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Jeff Hammond – KeyBanc Capital Markets

Hey, good morning guys.

Mark J. Gliebe

Good morning, Jeff.

Jeff Hammond – KeyBanc Capital Markets

Yeah, so really focusing on the HVAC side from, I mean, we’ve heard some real favorable commentary from the OEMs in the margin into April and you are kind of saying normal seasonal uplift. So I’m just wondering what your customers telling you why we are not seeing better than kind of normal seasonal uplift, what are the customers kind of saying about inventory and maybe just hit on how this R22 mix is coming in relative to how you thought it would.

Jonathan J. Schlemmer

Okay. Jeff, good morning, this is Jon, I’ll try to touch on those questions. In general, as we mentioned we are seeing the seasonal pickup in HVAC as we enter into the second quarter of course. What we are hearing from our customers I would say in regards to overall outlook on inventory is a bit mixed right now, some of our customers are saying that inventory in the channel is somewhat normal for this time of year. Others are saying its a little bit light for the cooling products as they enter into the cooling season.

And there is some signs that it could have some customers who have built up a little bit of ahead expecting being prepared and being ready for the cooling season. But I’d say overall the feeling we would say in general as does normal inventory levels for this time of year, which should be a good time, because I would say that with consumer demand, we expect to see a pretty good correlation to production volume impacting us. We had the early heat in March which was probably good and we saw some indications of that, but then some of the cooling off in April had been an offset to that as we have got into the second quarter.

On R22 of course, we saw a big change as we entered through the second quarter of last year, and we had the more than normal mix in the first quarter last year, making for the tough comp in the first quarter. And then we saw that entering the second quarter and then a change as we exited the second quarter last year, as more and more of the manufacturers began to start producing and selling the R22 dry ship units.

Overall our feeling is that there won’t be a big change in the industry on a year-over-year basis, but we’ll see that impacted the second quarter. And then there’ll some puts and takes in the second half based on specific customers and their participation level last year versus this year, but that should be less of the year-over-year impact for us in the second half.

Jeff Hammond – KeyBanc Capital Markets

Okay great. And just overall for electrical are you thinking in Q2 that business is up? Could you mention, I guess on a core basis, could you mention, commercial and industrial favorable, HVAC may be unfavorable.

Chuck A. Hinrichs

Good morning, Jeff, this is Chuck. We would expect that the seasonal pickup from the sequential quarter and year-over-year will benefit from the inclusion of EPC, but it remains too early to try to predict what the overall sales will be coming out of the HVAC or the electrical business, a lot of it will be determined by weather.

Jeff Hammond – KeyBanc Capital Markets

Okay, but within kind of the guidance range are you on a core basis thinking around flat?

Chuck A. Hinrichs

We typically don’t provide guidance on the top-line Jeff, but may be we can talk with year after the call.

Jeff Hammond – KeyBanc Capital Markets

Okay. I’ll get back in queue, thanks.

Jonathan J. Schlemmer

Thank you, Jeff.

Operator

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

Christopher Glynn - Oppenheimer

Thanks. Good morning.

Chuck A. Hinrichs

Good morning Chris.

Christopher Glynn - Oppenheimer

So just wondering with the two new facilities coming online in China? Are you currently recording some redundant costs in the P&L?

Chuck A. Hinrichs

Yeah, Chris, we are, but we haven’t tried to accumulate or call those out.

Christopher Glynn - Oppenheimer

Okay. And then, on R22 the chatter about production cuts coming on the way, I think Connie wells mentioned to me that they’ve cutback pretty significantly. And any thoughts on if that’s when not if benefit and, any color on that?

Jonathan J. Schlemmer

Chris, this is Jon, could you elaborate a little bit more on production cuts related to R22?

Christopher Glynn – Oppenheimer

Yeah my understanding Jon is that R22 production cuts are have been implemented by regulation or at least coming and to further that Honeywell is totally they have in fact cut their R22 production, which would suggest that may be the installed base takes all the R22 available in the new units that mix headwind goes away from you.

Jonathan J. Schlemmer

Okay, I understand Chris, thanks for explaining that. What we saw in the first quarter is that certainly were price increases with R22 coming into the year and that could have some impact. There was a delay in the allocation levels that were given in terms of R22 production that had a little bit of disruption at the beginning of the year. Since then now though that has been determined while there is a schedule of production cuts on going out in the out years, we don’t believe that there is any significant impact this year to R22 supply versus the demand that’s required to support what’s going on to dry ship right now. But we don’t see that having a material impact to R22 production units this year.

Christopher Glynn – Oppenheimer

Okay. And then just to get a little bit more color on the HVAC bridge that Jeff approached. I’m wondering, if you could try to say what the piece was from R22 and may be how much you outperformed equipment shipments in the first quarter last year because I think we’re bridging from a low double-digits equipment down in the first quarter versus your down 30 just to kind of quantify some of the pieces a little bit?

Mark J. Gliebe

Yeah, let me see if I can add a little bit to that. So last year as we mentioned, we certainly did have the strong quarter, first quarter last year if you recall, we were up 18% first quarter of ‘11 compared to first quarter of 10 and that was driven by overall demand, strong units as well as very strong mix, we have the stronger high efficiency mix a year ago and what we experienced in the first quarter of this year. So certainly, we’re seeing it’s a combination of both units as well as the change in mix moving more towards the standard efficiency products away from the high efficiency, in the first quarter. So I would say we don’t have really quantified the impact of both of those but they both had a significant impact and why way we were down 30% in the quarter.

Christopher Glynn – Oppenheimer

Okay, great. Thank you.

Mark J. Gliebe

Thank you, Chris.

Operator

The next question comes from Zach Larkin of Stephens. Please go ahead.

Zach Larkin – Stephens, Inc.

Hey, gentlemen congrats. Thanks for taking my question. First up, I wondered as you talk about being a little bit more optimistic in China. Are there is certain segments within China that are perking their heads up or any additional color there would be helpful?

Jonathan J. Schlemmer

It’s our view right now is that again the improvement in order rates kind of started some of our right after the Chinese New Year. And our businesses in China that we’re seeing an uplift out are mostly infrastructure related or more industrial related. And the improvement in order rate we’re seeing on a sequential basis, overall still softer than we would hope, but we are seeing an improvement that give us some reason for optimism.

Zach Larkin – Stephens, Inc.

Okay, thanks very much. And then I also wondered if you could give us some of the puts and takes on gross margins this quarter obviously versus a year ago. You had a very strong gross margins in 1Q ‘11, but are you expecting margins to be stable around these levels as we moved through the year? Should we think about maybe a little bit of the improvement given the integration efforts or what’s the best way to think about that?

Jonathan J. Schlemmer

Sure, Zach I’ll try to give you a little bit more color. You may recall that we had our second price increase in April of last year. So on a year-over-year basis 2012 first quarter benefitted from that price increase relative to last year. That would tend to normalize in this second quarter of 2012. There might be a little bit of pickup but probably not material. So I would think that margins would be stable in the second quarter over last year. We are seeing some increased inflation in some of our commodity inputs and general costs but that would be somewhat offset by the carryover impact of last year’s price increase. So I…

Zach Larkin – Stephens, Inc.

Thanks, very much.

Jonathan J. Schlemmer

I hope that helps. Thanks Zach.

Zach Larkin – Stephens, Inc.

Yep.

Operator

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

Mark Douglass – Longbow Research

Hi, good morning gentlemen.

Mark J. Gliebe

Good morning Mark.

Mark Douglass – Longbow Research

Can we talk about the high efficiency sales and they seem to step up on an absolute basis than in percentage of sales from 4Q pretty nicely. Can you provide some details as to where that’s coming from as Milwaukee Gear does that have an impact on that?

Mark J. Gliebe

I’ll make a few comments and then perhaps Jon wants to jump in Mark. So first of all as we go from Q4 to Q1, Q4 tends to be our weakest quarter and then at least gone to Q1 our HVAC business tends to grow and then second quarter is the strongest quarter for HVAC. And as HVAC picks up, it tend to get a better mix of products overall in spite of the R22 shift that’s going on. So that is certainly impacting. The other thing that’s impacting as we did acquire Milwaukee Gear and by the nature of product that they manufacture a lot of that product is that they have is a high efficiency. So that helped to increase our number during the quarter. Jon is there any comments you want to make?

Jonathan J. Schlemmer

Just a couple more I would add Mark. We mentioned the strong growth in Unico the 46% sales increase. A big part of Unico is variable speed products and it’s all about energy efficiency. So that certainly helps us as that business continues to grow. And then we also have been continuing to focus our efforts on expanding our NEMA Premium lines as I mentioned with the Vertical Pump Motors and that’s just one example, but we continue to put a strong focus on how we can expand our business. And as you know the C&I business as we mentioned on the continuing operations were up 7% and a good part of that is NEMA Premium Motors, industrial motors.

Mark Douglass – Longbow Research

Okay thank you for that. And then second question with the China, can you explain a little bit, is it partly relocation you are also expanding capacity, and there has been some delays here, has this hampered your ability to respond say the R22 challenges, a mega mix shift towards your efficiency systems?

Mark J. Gliebe

No these businesses supplied primarily China. I would say the majority of our generator business is China volume and when they’re as same as true with our hermetic business, a big chunk of that gives this sole right inside China and unrelated to R22 as an example or in anyway. So that certainly has had no impact on our ability to supply products.

Mark Douglass – Longbow Research

These thoughts bring more capacity expansion, or but you are talking about this well. Can you just clarify that?

Mark J. Gliebe

Sure. So there’s a couple of things going on in the case of our generator business as we did need capacity in that facility. But in both situations, we had some encouragement from the Chinese government in terms of land that they would like to have for other uses. So we have as part of the driver to us relocating our facilities.

Mark Douglass – Longbow Research

Okay, thank you.

Operator

Thanks Mark. The next question comes from Josh Pokrzywinski of MKM Partners. Please go ahead.

Joshua Pokrzywinski – MKM Partners LLC

Hi, good morning guys.

Mark J. Gliebe

Good morning, Josh.

Joshua Pokrzywinski – MKM Partners LLC

To go back to HVAC for a moment, a couple of questions on the 2Q guide. I recall a couple of quarters ago, we talked about with the mix down in the industry may be some lower cost or foreign players were becoming a little more prominent you were seeing them more in the competitive landscape. And does that explain I guess may be a bit of a disconnect between what is going on at the OEM level and may be a bit more weakness with what you guys are seeing?

Mark J. Gliebe

Well certainly as we have mentioned in the past, as you go from energy efficient products in the HVAC space to more standard products and there certainly is more competition in that space. It’s not clear to me Josh and exactly how the quarter ended up and I think January, the market data would have said that shipments from OEMs were down 29% in the month and from publicly available data and February was down nearly 20%, March seem to improve slightly but the data is not out. So it’s not exactly clear to me that there is much of a difference in terms of what we’ve reported and what our customers experienced.

Joshua Pokrzywinski – MKM Partners LLC

Okay, I guess from may be on a customer by customer basis not to get into specific ones obviously but are you seeing internally any differences among customers that would suggest that there may be something isn’t work, it’s may be not at in uniform acceleration here into the selling season?

Mark J. Gliebe

Well, Josh there is always puts and takes with customers. So certainly there are customers where we could lose a piece of business and there certainly our customers where we will gain a piece of business and that just happens regularly.

Joshua Pokrzywinski – MKM Partners LLC

Okay, that’s fair. And then shifting over to China and some of the capacity expansion there moving into the new factories, to the extent that we kind of stay sluggish here are there going to be kind of a couple of quarters of absorption issues moving into the new factory and may be volume coming in or I guess lingering here for a awhile? Is there specific demand level that you need those to come in and I guess how is that trending based on what you’re seeing in the 2Q?

Jonathan J. Schlemmer

Josh, good morning, this is Jon. I’ll comment on that. As we planned these facilities, we certainly did try to size the facilities to allow us to have the long-term growth that we expect in our business in China in particularly in these two businesses. We were very careful with what we did from an equipment standpoint in terms of that any kind of overheads that will end up in the facilities given the current outlook in the business. I also would point out that in some cases as we plan, we can actually improve capacity without even increasing square footage because we can optimize the lean layout and the lean principles and the operations and that’s actually a pretty big opportunity for us in the plants in Asia. So I feel pretty good about what we’ve done in terms of the impact from a standpoint of overhead rates and the current conditions we’re seeing right now in China and how we size these facilities for the long-term growth.

Joshua Pokrzywinski – MKM Partners LLC

Gotcha, that’s helpful. If I can seek one more here or just going back to HVAC for a moment. We haven’t talked about in a couple of quarters but are you seeing anything competitively where folks might be getting closer on having a viable ATM product beyond just a bench test?

Mark J. Gliebe

We’ve had competition of ECM for some time now. I mean there have been competitors with competing products and that’s been in place for at least for a year or two now. We still have a very strong position in that space, but we will have competition.

Joshua Pokrzywinski - MKM Partners LLC

I guess may be to ask it a different way, has there been any recent change that says that their folks would be coming are advancing up the maturity curve there or is it still kind of status quo as done over the past couple of quarters?

Mark J. Gliebe

Well, I think competitors are always going to try to go after that space. It is still on a very important space even though R22 has made it somewhat less important as of today, so I would expect competition to continue to try to go after that space.

Joshua Pokrzywinski – MKM Partners LLC

Okay, thanks a lot guys.

Jonathan J. Schlemmer

Thanks, Josh.

Operator

The next question comes from Jamie Sullivan of RBC Capital Markets. Please go ahead.

Jamie Sullivan – RBC Capital Markets, LLC

Hi, good morning.

Mark J. Gliebe

Good morning, Jamie.

Jamie Sullivan – RBC Capital Markets, LLC

Question on HVAC, R22 that the low end mix, I think you had mentioned in the past maybe some potential new offerings or altered offerings to participate there, just wondering whether you feel like you’re fully participating in that market now and as the mix goes there you can benefit from it?

Jonathan J. Schlemmer

Good morning, Jamie, this is Jon, I’ll take that question. We did talk about especially in our December Analyst Day meeting in New York, we talked about balancing our product offerings with both value based products as well as high performing or energy efficient guidance for the HVAC space. And we’re continuing to put the focus there, I feel like we’ve made very good progress with bringing our customers other alternatives both on premium products as well as more value driven products. So I feel like we have a great product offering today, a great range of products, we continue to try to find ways to make our products even more cost efficient to help our customers and we’ll continue to do that as we go forward, but in terms of what we had laid out late last year, we’re making good progress on those fronts.

Jamie Sullivan – RBC Capital Markets, LLC

Okay, thanks. And then on the restructuring that you mentioned wondering, which ones are maybe incremental from what we knew about last quarter, if there is any relative size or timing on whether you expect to see some benefits from those?

Jonathan J. Schlemmer

Jamie, we’ll have more information in the future, as we mentioned we’re accelerating the phase of the synergy and restructuring activities that will be in, and that will increase in the second half of the year. So we’ll provide more on that information in the future, but we continue to drive towards our stated synergy goal of $35 million from EPC.

Jamie Sullivan – RBC Capital Markets, LLC

Okay, thank you.

Operator

The next question comes from Mike Halloran of Robert Baird. Please go ahead.

Michael Halloran – Robert W. Baird & Co. Inc

Good morning guys.

Mark J. Gliebe

Good morning, Mike

Michael Halloran – Robert W. Baird & Co. Inc

So, and are you see any differentiation in the HVAC trends between your legacy business and then the Smith business that you guys brought in the EPC business different mix between the two companies just wondering if you’re seeing much differentiation?

Mark J. Gliebe

Hi, good morning. The one difference that is there in the – I’ll call EPC HVAC products versus the legacy Regal HVAC product is that there is certainly a lower mix of energy efficiency in those products in terms of the ECM related products, so they are more driven by standard products. So this change for example R22 has lesser than impact on that business for the residential products. And that’s true on both the motor side as well as hermetic motors. Hermetic motors of course and building R22 unit or R410A units so lesser than impact there in terms of mix of products another difference is also a mix of commercial versus residential business stronger mix of commercial products both in motors as well as hermetic motors, fans motors and hermetic motors for the EPC HVAC segment for the HVAC business.

Michael Halloran – Robert W. Baird & Co. Incorporated

Makes sense, and then the margin performance in the quarter, pretty healthy relative to the declines in revenue particularly in the HVAC side, why relative to amortization increases on the EPC side and the volume loss or the volume decline, how are you guys able to hold margins and increase, was it simply price cost curve or you guys starting to see some acceleration, on the synergy side with the A.O. Smith deals any other factors involved there?

Jonathan J. Schlemmer

As we have talked about we exited 2011 with approximately $10 million of synergy savings from EPC. So those start to build in the first quarter, but as you know, we have the price increase of April of last year. And so we where able to benefit from that in this first quarter, and while we continue to experience some increased inflationary costs of our inputs that the price versus cost and productivity that we are getting from our operations continue to hold our profit margins at acceptable levels.

Michael Halloran – Robert W. Baird & Co. Incorporated

Thanks guys, appreciated.

Jonathan J. Schlemmer

Thanks Mike.

Operator

The next question comes from Walt Liptak of Barrington Research. Please go ahead.

Walter Liptak – Barrington Research Associates

Hi, thanks good morning guys. Just a follow-on the question that was just asked the – what kind of hedges did you have in place, for this quarter and what do they look like for next quarter, especially on a copper.

Jonathan J. Schlemmer

Well, our hedging strategy has not changed substantially overtime, we pretty stay, pretty disciplined, we tend to hedge up five quarters and the nearest quarter end where hedged more than we are the far this quarter out. And that’s pretty much the way we are sitting today.

Walter Liptak – Barrington Research Associates

Got it.

Jonathan J. Schlemmer

Chuck, do you have any other comments.

Chuck A. Hinrichs

Yeah, Walt I would add that as you seen a lot of volatility and say the copper market our price in the second quarter it is not for all of these spot price, that we currently see in the market $3.82 or so a pound.

Walter Liptak – Barrington Research Associates

Okay. Okay and then I can’t remember from the analyst day, but the - if you had talked about supply chain alignment and optimization, if there’s any cost out number, or cost savings for deliver quality, any consolidation that you can help us with them and you might start seeing the benefit..

Jonathan J. Schlemmer

Well the, on the supply chain side, what we did talk about was the synergies with the EPC acquisition and also our simplification initiatives and at a same particular the initial synergies, the $10 million run rate that Chuck talked out about a good part of that is driven by supply chain. We went after that right away being passion the ground running in August when we closed on the EPC acquisition. So that’s been it’s already helping out our synergies. But what I was talking referring to just a little bit ago was, our focus on further consolidation efforts in supply chain and aligning our suppliers with all the changes that we’re making from a simplification standpoint both on design platforms, as well as our manufacturing footprints. So there is more there and we need our suppliers of course lined up with us to support those and help us with those changes.

Walter Liptak – Barrington Research Associates

Okay. So you haven’t provided any numbers yet and how much do you think you’ll save from this newer supply chain alignment?

Mark J. Gliebe

I know we’ve not lost.

Walter Liptak – Barrington Research Associates

Okay. Okay thank you.

Mark J. Gliebe,

Thank you.

Jonathan J. Schlemmer

Thank you Walt

Operator

The next question comes Scott Graham of Jefferies. Please go ahead.

Scott Graham – Jefferies & Company

Good morning.

Chuck A. Hinrichs

Good morning Scott.

Scott Graham – Jefferies & Company

How big is the Unico platform right now?

Chuck A. Hinrichs

Sales at about a run rate approaching a $100 million Scott, and that’s what the growth that we’ve talked about from when we acquired it in December of 2010.

Scott Graham – Jefferies & Company

Okay. Additionally the hermetic you’re doing some things there on the manufacturing side. What are you plans with hermetic? And it just seems like there is a lot of untapped opportunity, a lot of revenue left on the table from the old regime?

Mark J. Gliebe

I would say the hermetic business has two pieces to it. One is residential and the other is commercial and we think the business is positioned well to address both markets. The facility that we’re investing in China in Suzhou is primarily, commercially related. So it’s a sizable and significant investment into the commercial hermetic market which we think has opportunity for us going forward.

Scott Graham – Jefferies & Company

Got it. Thank you. I think the last question was simply you’ve highlighted some of the markets that were strengthened C&I and mechanical. I was just wondering if you can highlight within those same businesses of markets that maybe were one the other way. And obviously I’m talking Europe, I’m not talking HVAC, just some of the general end markets that you serve you listed some good wins maybe first a couple of bad wins?

Chuck A. Hinrichs

Yes Scott, absolutely Scott. So, let me just touch on that. A couple of areas I point out, good news is not many as we look across our commercial and industrial business we’re seeing good strength in many of the end markets. A couple though where we’re seeing some weakness I would say non-leisure pump, so water pumping when you think about the dry weather that we’ve had across most of the country, the pump side of the business were non-leisure, so non Pool and Spa has definitely seen some weakness. And we need a lot more rain to help support that.

And the good news is in that business. So inventory levels are typically low and when it does rain we will see the demand right away in our product demand from our customers, and other one as we’ve seen some slowing in natural gas. So well oil and gas in total has been very strong for us and specially the mix of products we have at Unico any products that are specifically for natural gas with the lower natural gas prices, we definitely have seen some pullback and some slowing on, in the natural gas part of oil and gas. Those are two I guess I would highlight.

Mark J. Gliebe

In addition the revenue HVAC.

Chuck A. Hinrichs

Revenue which we’ve talk about right in the North American market.

Scott Graham – Jefferies & Company

That’s all I had. Thanks.

Chuck A. Hinrichs

Thanks Scott.

Operator

The next question comes from Samuel Eisner of William Blair. Please go ahead.

Samuel Eisner – William Blair& Company

Good morning everyone.

Mark J. Gliebe

Good morning.

Samuel Eisner – William Blair& Company

Just going back on the pricing of raw materials how much was your net pricing benefit in the quarter either on the top line or even on the margin.

Chuck A. Hinrichs

Sam we generally don’t provide that but we saw some increase in the first quarter and steel cost on a, year-over-year basis. And then we would see a little bit of increase on a sequential basis in the second quarter. Copper was down from last year, but it was up from the fourth quarter. And then what we’re just seeing kind of creep in inflationary cost. Fuel costs will be generally working through prices of some of our inputs. I think those are some of the, that the highlights that I would bring up.

Samuel Eisner – William Blair& Company

Okay. And then switching gears to the China business how much was China as a percentage of revenue in the quarter. And I guess what was the growth rate or declines that you saw in that business?

Chuck A. Hinrichs

For the full year 2011, it was, it’s below 10% of our total sales.

Samuel Eisner – William Blair& Company

Okay. And how much was it down year-on-year?

Chuck A. Hinrichs

We don’t generally break those out specifically.

Samuel Eisner – William Blair& Company

Okay. And then just on Milwaukee Gear obviously you guys expect to at least some margin benefit or at least profits in the second quarter. As we think about they are going forward? Obviously, be the Milwaukee gear business is, in my mind a higher margin business, so it should be some margin lift in the second half of the year?

Jonathan J. Schlemmer

Yes, Sam. The second half of the year will going through the remaining purchase accounting adjustments and we would expect that to contribute to earnings. Our initial guidance when we acquired it was that it would be $0.03 to $0.06 per share for 2012. And that would be principally in the second half of the year.

Samuel Eisner - William Blair& Company

All right, thank you very much.

Jonathan J. Schlemmer

Thanks, Sam.

Mark J. Gliebe

Thank you, Sam.

Operator

The last question for today comes from Bill Dezellem of Tieton Capital Management. Please go ahead.

William Dezellem – Tieton Capital Management

Thank you, guys, Tieton Capital. Couple of questions, the first one is relative to China you mentioned the modest improvement in order that you’re seeing there. Is it your sense that there was extra inventory in the channel that is now being consumed? And does that happened your getting those orders or is that more function of which you think is an improvement in actual and consumption?

Mark J. Gliebe

Good morning, Bill. Our view was that there was slowdown in demand overall. And then that started to backup inventory in the channels. And we saw that pause throughout the late fourth in early first quarter and our view is that is starting to improve and it’s still little bit early to call, to call that one, but that’s why we can make the comment that were cautiously optimistic.

William Dezellem – Tieton Capital Management

So you do feel was there you’ve been working through inventory and then the question Mark really in your mind, whether the end market demand is actually improving or whether it’s a constant level of consumption with just the inventory burn taking place?

Jonathan J. Schlemmer

That’s right.

William Dezellem – Tieton Capital Management

All right. Thank you. And then the other question that I have is on the high efficiency revenue front you had a good growth there, which often times I have assumed the high efficiency ties with residential HVAC and that in fact was down. So would you help us understand, where the growth in the high efficiency came from?

Jonathan J. Schlemmer

Sure. So first of all, are you talking about on a sequential basis Bill, quarter-on-quarter?

William Dezellem – Tieton Capital Management

Actually, sequential and versus the prior year, I believe there is a percentage of revenue that there was a decent improvement.

Jonathan J. Schlemmer

Bill, let me touch on a few of those that definitively would show up both sequential as well as the year-over-year. So we mentioned master gear and the new company we acquired in the first quarter. I am sorry Milwaukee Gear. The new company we acquired in first quarter, Milwaukee Gear has a nice mix of high efficiency gearing. So all of that would be upside both sequential as well as the year-over-year, the growth in Unico, with their variable speed products that are all about driving efficiency in the end systems.

So those products, those variable speed products coming out of Unico, with the growth in Unico both sequentially as well as year-over-year, especially year-over-year, with the 46% sales growth there. The ongoing kind of growth that we’ve been seeing in C&I, the C&Is first quarter is stronger than the fourth quarter as well as the year-over-year growth that we talked about and there is nice mix of high efficiency industrial motors and our C&I business as well as some other end application.

Certainly, we’ve seen a good demand with efficiency pump motors, pool motors from our EPC pump business. And that’s all year-over-year growth as far as since we acquired EPC in August of the prior year. And then our mechanical growth, the North American mechanical growth that we talked about there is while now large part, there is some high efficiency product in that business that would be growing as well. So that’s a good point that you mentioned is that, its not all resi HVAC, resi HVAC is an important part of course for high efficiency mix, but there is, we’re beginning to build much, a much stronger diversity if you will in the high efficiency products.

Mark J. Gliebe

I will just add the fact that we have been launching new products every quarter, every year of most of the energy efficient products that also is adding to our personnel.

William Dezellem – Tieton Capital Management

So as we look out when, when the residential HVAC does return to a more normal level you most likely will be looking at a record level of high efficiency product revenues as a percentage of sales, as that bounces back would that be fair though process?

Mark J. Gliebe

Assuming that the mix was up, and HVAC which we believe as be as good it has been in the past but it will still be better than a typical business so I think the answer to your question is yes.

William Dezellem – Tieton Capital Management

Great, thank you both.

Jonathan J. Schlemmer

Thanks Bill

Mark J. 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 J. Gliebe

Thank you for all of your prior interest in our business. Our first quarter performance was a good start to the year we achieved a record first quarter sales and record first quarter net income both of our recent acquisitions are progressing well. As you can tell we are busy simplifying very aspect of our company while building our future in China, improving our performance for our customers and quality and deliveries. We are proud of our achievements and excited about our future and we recognized that none of this will be possible without the dedication and commitment of all of our Regal employees. Again thank you joining the call and for your interest in Regal. Have a good day.

Operator

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

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