Regal-Beloit Corp. Q4 2007 Earnings Call Transcript

Feb. 6.08 | About: Regal Beloit (RBC)

Regal-Beloit Corp. (NYSE:RBC)

Q4 2007 Earnings Call

February 6, 2008 1:30 pm CST

Executives

Henry Knueppel - Chairman, Chief Exec.

Mark Gliebe - Pres, Chief Operating Officer

Dave Barta - Chief Financial Officer

Analysts

Alexander Paris Sr. - Barrington Research

Robert Lagaipa - Oppenheimer & Co.

Jeffrey Hammond - Keybanc Capital Mkts

Michael Schneider - Robert W. Baird & Co., Inc.

Holden Lewis - BB&T

Ken Kaplan

Good afternoon everyone and welcome to the Regal-Beloit Fourth Quarter Earnings Conference call. Joining me today are Henry Kneuppel, Chairman and CEO and Mark Bliebe, President and COO. Before I turn the call over to Henry, 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 these factors that could cause actual results to differ materially from projected results, please refer to today’s earnings release and our filings with the SEC.

Now, I will turn the call over to Henry.

Henry Knueppel

The agenda today will be as we have followed in the past, I will make a few opening comments, Dave Barta, our Chief Financial Officer will talk about the financial aspects of the quarter in the year, Mark Gliebe, our Chief Operating Officer will give you some color on products, markets and operations and then I will finish with a few comments about the quarter ahead in the outlook.

For the quarter, we were very pleased with our record financial performance especially in light of this lower than expected residential HVAC market, $4 million of inflation uncovered by prices that we talked about last quarter and $1 million foreign exchange. We believe that investors and potential investors should take note of this record performance. Put in perspective with the housing market in its position in decades, our record performance speaks to the fundamental transformation that has taken place in the company and the strength of our disciplines and initiatives.

We are also pleased with our record cash flow performance and the progress that our team has made on improving our cash cycle days. Cash flow speaks to the purity of earnings and cash cycle days to the fundamental disciplines in place. We are also please to report that our four acquisitions Fasco, Jakel, Morrill and Alstom are all off to a great start. Our integration teams have teamed well with the talented people that came from each acquisition and we are currently at or ahead of where we expected to be at this time and we are confident of achieving the targets that we laid out.

For the year, we experienced solid internal growth in North America and all of our commercial and industrial businesses. Further, our bookings remain solid even as we speak. North America was exceptional up 50% for the year and nearly 300% over the last three years. In addition, our 2007 acquisitions further strengthened our global selling and manufacturing platforms. Innovation has been and continues to be a key initiative.

In 2007, we introduced a record number of new products that were aimed at the mega trends within our businesses. As we have told you before, the mega trends are energy efficiency, variable speed and embedded intelligence. We could not be more pleased with the strength of our new product pipeline. In fact, we will roll out substantially more new products in 2008 affecting every business.

We believe that this pipeline of new products aimed at improving motor and perhaps more importantly system efficiencies is on target with what our customers and consumers both want and need.

With the increases in the energy demands expected to exceed energy capacity additions and with our products at the epicenter of energy use, we are positioned to help solve a growing global problem. As we look at 2007, it was a year when our shareholders were not rewarded as they should have been. Record financial performance, excellent strategic acquisitions and record new product introductions were offset by a nervous market in a one size fits all headset regarding the companies that participate in residential markets. It is unfortunate that the market has not been able to look beyond the headlines.

We are optimistic, however, that as the residential market nears the bottom and the steady and growing HVAC replacement market becomes better understood, and as we get credit for the fact that we achieved record performance during this down cycle, a more appropriate valuation will return.

With that I am going to turn it over to Dave Barta.

Dave Barta

I want to briefly discuss the financial results for the quarter and touch on the outlook for first quarter of 08.

Sales for the fourth quarter were $474.7 million which is 29.5% increase as compared to the fourth quarter of 2006. Included in our results as Henry mentioned were the new acquisitions, the Fasco, Jakel, Morrill and Alstom businesses and those sales were $101.4 million contribution in the quarter.

Touching on the segments, in the electrical segment, sales were $426 million, 32.9% increase versus the fourth quarter of 2006. Included in this segment are all four acquisitions, they all roll up in to the electrical group. Segment growth in the electrical group was paced by power generation business once again as it experienced about 14% year-on-year growth as we continue to see strong worldwide demand for our generator products. We are particularly pleased with the China generator business that grew even at a faster pace. Commercial and industrial motors increased 3.1%, which reflected a strong industrial growth rate, which was countered somewhat by a some softer commercial end markets and those were primarily those that are being impacted by the residential market challenges.

HVAC, motor sales as we mentioned in the release were down 8.5% as the tough market conditions continue throughout the quarter. The sales in our mechanical segment increased by 0.7%, a nice performance from the mechanical businesses.

Gross margins for quarter were 22.2%, as compared to the prior year fourth quarter gross margin of 24.3%. Excluding the impact of the acquisitions, gross margins would have been $88.4 million or 23.7% of sales. So this pro forma result is in line with our expectations and included inflation versus price gap that we have mentioned in the third quarter call that was approximately $4 million. While we are not pleased with the inflation price gap, we continue to be very pleased and encouraged by our productivity and Lean Six Sigma activities which continue to have a positive impact on our results. Operating expenses as we reported were $60.2 million and that includes $10.7 million from the acquired businesses.

Income from operations was $45.3 million or 9.5% of sales as compared to $39.5 million or 10.8% of sales reported in the fourth quarter of 2006. Excluding the impact of the acquisitions, income from operations would have been $38.9 million or 10.4% of sales, a slight decrease from the prior year.

The tax rate for the quarter was 35.1%, an increase over the third result with distribution of income and yearend true up of reserves. Additionally, when you compare to this with the fourth quarter of 2006, the considerable increase was due to the fact that the fourth quarter of 2006, we recorded all of the full year impact of the R&D tax credit that was passed by the government on a retroactive basis, so that artificially, it took our fourth quarter’s ’06 tax rate down.

Net income for the quarter was $24 million as compared to the as compared to the $23 million reported last year and fully diluted earnings per share were $0.71 which compares to the $0.68 reported in 2006.

Turning to the balance sheet, keeping with our prior practice, the cash flow statement will be indicated and was not published with the release, however, we want to touch on several areas.

As you might recall, we set out a goal over a year ago for a ten day reduction in cash cycle days. We thought it was an aggressive target for our teams, but we are very confident that at this point, we had in place will allow us to hit that goal. We achieved almost a 13-day reduction based on the yearend numbers.

This performance was paced by a significant reduction in inventory even though the year softened a little bit late in December, particularly in HVAC, the yearend inventory was $261.5 million after stripping out the $56.7 million from the acquired business, so it is also a great reduction in absolute dollars and days invested in inventory.

Days payable performance was deeply impressive. Our teams have just done a phenomenal job after eliminating the acquisition payables of $52.4 million, accounts payable finished at $130.8 million which again is a significant improvement in terms of dollars and days.

In accounts receivable, improved slightly in terms of day sales and finished at $223.3 million after adjusting the $74.3 million for the acquisitions. Overall, it is a good performance. I would tell you however, we are not done. We see opportunities for more improvement and we think we will fully address these areas through the Lean Six Sigma projects that are underway.

Some other cash flow items, appreciation and amortization of about $16 million for the quarter and capital spending was approximately $13million for the quarter. We ended the year with total debt of $564.3 million versus the 2006 yearend level of $373.3 million. The increase is a result of the financing of the 2007 acquisitions which total approximately $335 million plus the impact of the strong cash flow results. So net debt to total cap is just under 37%, debt to EBITDA given the effect to the pro forma, EBITDA from the acquisitions will finish just over two. Both measures continues to fall within our comfort zone and certainly, it will give us a lot of flexibility as we move forward.

Now turning to the forecast for the first quarter, our EPS guidance as presented in this morning’s release was $0.92 to a dollar per share. Our guidance reflects to have solid sales environment with almost all of our businesses forecasting growth. We again continue to see fairly strong markets. The sales contributions from the acquired business is expected to be about a $115 million to $120 million in the first quarter and with regard to margins, as we have previously communicated, we expect to continue to see a price inflation gap well into the first quarter. If you recall, I think it was about a year ago this time when copper was at its lowest level in 2007, so on a spot price basis, there is significant cost inflation which again, we talked about in our third quarter call.

So despite what was expected to be a $7 material price gap, we are expecting our productivity activity from Lean Six Sigma contributions to lead us to again record results.

The tax rate used in our guidance is 34.7%, and if we add it, I think it is a pretty good rate to use at this point for ht full year, so they should change based on our global distribution of income that we are including in this assumption that the US R&D tax credit will be continued.

A few more outlooks into ’08, we currently expect capital spending in the first quarter to be $10 million to $15 million and full year capital spending to be in a range of $60 million to $65 million and we expect full year depreciation amortization also to be in the range of $60 million to $65 million.

While we are not going to deviate from our practice of giving rolling quarter guidance, we do believe that given the uncertainties that exist in the business and investment communities today, we should comment on our view of the year and based on our forecast of experts, our customers forecast and our business leaders, we do believe that as of today that we will continue to see growth in our sales, albeit not at the same pace that we have seen in the recent years, and I would add that there is also some variance depending on the end markets. However, this is coupled with the full year impact that the acquisition sets the stage for another record sales year for the company.

We also believe that we will see modest improvement in margins which will however be impacted by the acquired companies that are less than our traditional level of margins on a percentage basis will also be impacted by the continued material inflation pressures that we have discussed.

Now I will turn the call over to Mark.

Mark Gliebe

The fourth quarter of 2007 was a time of integration. With four acquisitions occurring in the late third and early fourth quarters, we put a lot of our energy in integrating the new businesses into our company culture and into our business processes. We could not be happier with the progress we are making in the integration front and we feel great about the management teams, the products and probably, most importantly, the customer solutions that came along with these acquisitions.

As we were spending time integrating our teams, we continued to deal with the difficult residential housing market. Inspite of the housing market segment, our business has performed very well and we are very pleased with the execution of our team.

In the fourth quarter, we saw strong sales growth in our Asian based businesses up 19% in our LEESON and Marathon brand businesses, we also saw the strength up 6% and in our global generator business which was up 13.5%. Talking about our generator business, it continues to enjoy robust command for our newer line of 2.5 megaWatt to 3 megaWatt generators that we introduced just three years ago.

The strong demand for these larger generators is driven by orders from the Department of Defense, the Oil Patch and telecommunication and data centers. We are also seeing strengthening in our international orders aided by the weaker dollar. In terms of our HVAC segment, as Dave mentioned, our sales were down 8.5% for the quarter with December being a more difficult month given that our customers started their holiday shut downs earlier than predicted. The struggling housing industry continues to put pressure on this segment of our business and we expect this will continue in the near term.

However, with the launch of many new products, our focus on green solutions, the addition of the recent acquisitions and our continued expansion internationally, we are taking the appropriate steps to mitigate the impact of the domestic housing industry.

Across the company, we continue to look for ways to improve our cash flow and profitability. As Dave mentioned, we have been able to sustain the working capital improvements that we made throughout the year. We finished the year with a cash to income ratio of well over a hundred percent, and while we do not expect to reach numbers like that year after year, we will continue our focus on delivering incremental improvements in cash each quarter.

As we have stated in the past, our strong organic growth opportunities will be driven by innovative energy efficient products. We are working hard to maintain leadership and energy efficiency as evidenced by the steady stream of new product announcements throughout 2007.

Last quarter, we announced three new products, one in commercial refrigeration, one in RHVAC segment and one in our power generation business. This month, we plan to announce two more new products. The first focused on energy efficiency and comfort and the second that delivers improved reliability.

First, the impulse motor is our first effort at utilizing our energy efficiency, intelligent ECM technology in the water movement market.

We launched impulse this past November at the National Spa Show in Orlando. The motor drives a water pump in a 64% more efficient than the motor it replaces while producing the same water flow. Additionally, the programmability of the motor allowed the spa manufacturers to deliver unique therapeutic water massage profiles, thereby allowing the user to select from a variety of massage experiences.

Further, the wide speed range of the impulse motor allows the spa to run with less noise by reducing water turbulence. We will be shipping our first motors during the first quarter of this year. We are confident that this is the right technology from a market that continues to demand more energy efficiency and additional consumer comforts.

Next, our LEESE and motor business recently announced a new encapsulated stainless steel motor that was designed to meet the stringent sanitation requirements of the food processing, pharmaceutical and beverage industries. We call the motor Extreme Duck because the motor is built to last longer than competitor’s products and survive the severe and frequent chemical wash down processes typically employed in the food processing and pharmaceutical and beverages industries. We believe this is the industry leading product for this application.

Across all of our markets, we are working on a number of new products and new technologies that deliver energy efficiency and cost savings to our customers. Some of our new products are replacing existing products while others are pursuing new spaces. When we talk again at the end of the second quarter, we expect to introduce additional, new and exciting products that we will bring to our customers yet this year.

Now, I would like to shift gears and discuss our recent 2007 acquisitions.

As we have stated before, our goal is to be a consistent acquirer of high quality companies that add value to our customers. During the second half of last year, RBC completed the four acquisitions totaling roughly $477 million in sales. The last acquisition we completed in 2007 was the Alstom motor business in India which was our 31st acquisition in the last 25 years. I would like to give you a quick update on each of these acquisitions.

Our Fasco and Jakel acquisitions have been combined into one air moving business unit and we are now selling under only the Fasco brand. The business is performing up to our expectations and we have been able to obtain the upfront synergy benefits that we had predicted. Longer term, we are confident that we will reach our target of $15 million of cost saving synergies over the first three years of ownership. The Fasco air moving business is now formulating plans for new air moving products that promise to deliver significant energy efficiency savings to our customers. We plan on rolling these products out to our customers late in 2008.

Our acquisition of the Morrill motor business gave us an even stronger position in the commercial refrigeration segment and brings us another line of air moving systems and additional high efficiency motor technology that we can offer to our customers.

We are now in the middle of combining our GE branded commercial refrigeration business with our Morrill branded products. Together, this business has the most complete and most energy efficient product set in the industry.

Finally, our latest acquisition Alstom, India. Globalizing our business has been one of the company’s five key initiatives for the last three years. We want to participate in faster growing international markets. We want to be in Asia to support and grow with our customers who are moving their operations internationally and we want to continually enhance our ability to produce products in the lowest cost regions of the world. While 80% of our sales are US based, our sales in Asia have increased almost 300% in the last three years and the addition of Alstom will further diversify our exposure.

Alstom manufactures and sells industrial motors and industrial fans in the India market. Alstom is a good strategic fit and provides an opportunity for Regal-Beloit India to become a full range IEC motor supplier from fractional horsepower motors to medium voltage horsepower motors.

The acquisition of Alstom further extends our international exposure, broadens our product offering in India and makes one of the largest motor manufacturers in India, a market that is expected to grow 8% to 10% annually.

All of the four recent acquisitions brought with them some global manufacturing capability. Fasco has operations in both Mexico and Thailand. Jakel and Morrill have operations in China and as I have just mentioned, Alstom’s operations are in India.

In each case, we now have plans to maximize the capabilities of these lower cost manufacturer’s locations.

We are consolidating product platforms and consolidating manufacturing facilities. Like the new generator plant we have started in 2007 in Monterey in the closure of our Lima, Ohio facilities, these are not quick and easy hits. They take time and tremendous talent to get it right, but we are up to the task and as we get closer to implementation in late ’08 and early ’09, we will be discussing our progress in more detail.

In summary, our performance during the fourth quarter highlights the benefit of touching a variety of diverse end markets which balances demand across our business. We continue to be excited about the benefits that our new products and our initiatives are delivering to both our customers and to our business performance. I feel great about the progress we are making in our air moving businesses. We are pleased to have Alstom India join the Regal-Beloit family and we are looking forward to the benefits of growing with our customers around the globe.

Henry Knueppel

Let us take a brief look forward. As we look at the first quarter, we expect another record quarter. The positive factors included continued strength in the commercial and industrial markets aided by strong export demand, continued strong power generation demand globally, energy efficiency legislation, new product introductions, productivity programs, strengthening HVAC replacement market, improved margins in our newly acquired businesses due to the realization of synergies and continued rapid growth in our business outside of North America.

In total, we are very optimistic about what the future holds for Regal-Beloit. At the same time, we are conscious that we must constantly assess the best methods of not only delivering record and improving performance, but ensuring that value gets delivered to our investors. To accomplish that key objective, we believe that we have to run every business with an operational excellence model. We benchmark ourselves against the universe that investors can choose from. We believe that three measures stand above the rest, growth, cash flow and return on invested capital.

Over the last three years, we have steadily improved in these metrics against that universe of companies. Secondly, we need to be a consistent acquirer that is recognized for acquisition excellence, long strength of Regal-Beloit. To this end, we have strengthened our business development team and our processes substantially in 2007. The addition of people, investing class processes. We have now a solid and active pipeline of opportunities with global scale.

Finally, we must properly leverage the company to maximize returns to allow us to respond appropriately to changing stock market conditions as well as to a healthy acquisition pipeline, our directors approved an additional million shares of stock repurchase capacity to bring our current approved level to 2.2 million shares.

While we do not believe that stock buybacks are part of a long term strategy, they do play a tactical role in leverage in total returns. We will therefore use buybacks as a tool to help enhance shareholder returns and buybacks, any buybacks will be through an open market approach. We will do so by constantly assessing the best use of capital and leverage.

This much we can assure you, we never lose sight of the fact that it is our job to create solid returns for the people who trust us to do so.

As we start 2008, it is incredibly rewarding to have a global business platform, great people who are individually growing and who are dedicated to personal and company excellence and a strong Board of Directors dedicated to creating shareholder value.

With that, we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Representing Barrington Research, our first question, we go to the line of Alexander Paris, please go ahead.

Alexander Paris Sr. - Barrington Research

Could I just get a little bit more information on the HVAC business? You were down 8.5% in the quarter year-over-year, what does that amount to in dollar sales in HVAC.

Henry Knueppel

We have not been breaking up specifically the segments that way. I do not actually have it in here either.

Alexander Paris Sr. - Barrington Research

The spa motor, the new motor, would say that is still significantly sensitive to housing activity or is that more after market consumer?

Henry Knueppel

It does go into new units, so I am sure it is impacted by the spa market and the spa market is down today, but this is kind of a new space for us that we have not been a major player in that space, so I think there are ample opportunities for us to penetrate that space.

Alexander Paris Sr. - Barrington Research

I guess, we have asked this question before in different ways, since you have been talking about the after market, do you have just a rough idea how much of your HVAC market is tied into new construction rather than remodeling and repair? Is that half and half or something like that?

Henry Knueppel

We have set that new home construction accounts for about 30% of it and 70% is due to the replacement market.

Alexander Paris Sr. - Barrington Research

The $101 million sales from the acquisitions that you gave us and that is for the first quarter, can you give me just a rough estimate of what the incremental sales would be for those four acquisitions for all of 2008?

Mark Gliebe

I want to say it is around, for the full year of 07, around $129 million in total and we are looking for that to be, I think the guidance we gave was $477 for the full year 08, about $350 million to $345 million increase.

Alexander Paris Sr. - Barrington Research

In 2008? But that is not all incremental, you got some in the third quarter, right?

Mark Gliebe

Right, so 07, the contribution from acquisitions was I think $129 million. We are looking at the guidance we gave was $477 for the full year of 08.

Alexander Paris Sr. - Barrington Research

Do you have a broken out total generator sales?

Henry Kneuppel

No we have not.

Alexander Paris Sr. - Barrington Research

Just in terms of the overall strategy, can you remember what your incoming business was like the last time you had some of these economic numbers like this? Like the ISM below 50 implying a contraction in domestic industrial activity? Were you doing better then or worse then or are you doing better now?

Henry Kneuppel

I think we are doing better this time. You have to always kind of look at whether what is really in there and what is not. In the late 80’s, when the dollar was weak and we had some stock market jitters that all of us remember, we did not even see it and so, I do not know if we will see that same repeat situation or not, but that was very different than ’91 or 2002, so I am not sure that we can just look at the ISM and say that what that means or the kind of jitters we are seeing in the market.

Operator

Next in queue, we go to the line of Robert Lagaipa representing Oppenheimer, please go ahead.

Robert Lagaipa - Oppenheimer & Co.

If we could just start out with the acquisitions, obviously, several months have passed and so you have originally given us a forecast with regards to the sales and the accretion. It sounds like the sales expectation is still the same and I am sure there is probably some puts and takes within the accretion, can you maybe just talk about, I know with Fasco, Jakel and Alstom if you take the midpoint of the previous accretion estimate, it is rihg around $0.30. I am not sure what you expected from Morrill, but can you just talk about if we are still on track for that level of accretion and what the puts and takes are moving into 2008 here?

Henry Kneuppel

You are right, the sales number and so is their independent plan was right on the guidance we gave, so we are very comfortable that we understand that, and from an EPS standpoint, again, we are very comfortable with the previous guidance we gave. I think the good news is, we had very detailed plans around what the synergies were that we would see and when we would see them and to date, those are coming in just as we planned, so we feel very comfortable with both the top line and bottom line contributions from the acquired businesses.

Robert Lagaipa - Oppenheimer & Co.

What kind of struck me here this quarter was the commercial and industrial orders in terms of the growth, obviously, it decelerated quite a bit. I mean, if I look here, the comp for that particular business went from 20% to 9%, meanwhile the sales from the third quarter to this past fourth quarter went from 9% to 3%, so even though you had a much easier comp the sales decelerated quite a bit. You talked a little bit about the commercial market being under a little bit of pressure, it sounds like the effects of the housing weakness out there, is there anything else in there, maybe if you can just provide us with a little bit of color there in kind of what you are expecting moving forward.

Henry Kneuppel

When you talk about the comp is easier, certainly it was not in commercial and industrial because last year in the fourth quarter, we were very strong, but in terms of the commercial market, the pump market specifically is somewhat impacted by residential new housing starts and it is affected by clearly things like floods and so on, and we have of course had a very dry spell in the latter part of the year in the Southeast and no substantial water drop anywhere else, so that particular arena was the weak spot that pulled us back a little bit in the commercial and industrial.

Robert Lagaipa - Oppenheimer & Co.

And you are not saying anything else anywhere else?

Henry Kneuppel

Orders are up, so far, this year for the month of January, orders were up over last year in commercial and industrial and we are looking like everyone else is as you are going to drop some place because of all of the noise in the economy, but again, I would tell you that I think exports are a very strong underpinning to what is going on in our economy today and I think the manufacturers alliance recently put out a study that shows the percentage of manufactured goods that end up being export in the areas that we participate, those are nice percentages and those percentages are strong due to the dollar, so there is no apparent drop off.

Robert Lagaipa - Oppenheimer & Co.

This is related to your comments about the pipeline, can you maybe just provide a little bit of color there as well just to how large the pipeline is, are there several larger acquisitions, is it a few small ones, geographically where they might be, within which business, maybe if you could just give a little color there and along with that, maybe just talk about the acquisition environment from the standpoint of valuation as well that would be very helpful.

Henry Kneuppel

First of all, geographically, we have a priority on outside of North America so we have a very active slate of opportunities that are outside of North America and what I would tell you is you need a very active slate because a lot of those fell through, but we have a very active pipeline there and it really falls in all of our businesses. We have a reasonable pipeline in North America mainly of smaller businesses that would be technology oriented and not necessarily down the middle of the plate with what we currently do.

From a business standpoint, I would say all of our businesses are touched by our current pipeline, size, we really have quite a gamut in size from fairly significant to small product line, with almost like well done product line additions, but I would say a lot of more like before that we announced in 2007 size wise and what they would bring to the party.

Valuations, multiples have come back a little bit from where they were two years ago for sure and the year ago, but they have not dropped off the face of the map.

Operator

(Operator Instructions)

Next in queue representing Keybanc Capital Markets, we go to the line of Jeff Hammond, please go ahead, sir.

Jeffrey Hammond - Keybanc Capital Mkts

You gave a little bit of color on kind of a full year 08 look which we appreciate, but wanted to get a letter more granular on that or get a clarification, you said modest growth, I assume that is an organic number and you said slower than previous years, and I guess, I just wanted to get a better sense of are you comparing that to the robust growth of 05-06 because 07 was a little bit anemic on the organic side, along the lines of 2%, so I wanted your clarification there and then margins, it sounds like you think they are going to be up and is that excluding the impact of acquisitions.

Mark Gliebe

On the first question, I guess to give you a flavor, we look at all of the forecast that are published by a variety of sources and what we have seen and I think everyone has seen it is the GDP and industrial production numbers that have pulled back. I think you are seeing that those projections now have slightly over 2% type growth rate, we are probably growing a caveat of potential or possibility of a recession so you kind of get good news and bad news, so we are looking at those and feel like that for a lot of our businesses, those were pretty good general indicator obviously that has to be specific to the business. HVAC, we do see the units as most of our customers believe to be down again year-over-year. So our initial assumption there is HVAC units down for the year, so we are working off that base and obviously have, we are not sitting still, but we are looking at market share opportunities, new products, improving the mix and so forth.

I think something else that is important as you look at our business as well and we kind of touched on it, but we will touch on it once again, our company has changed a lot in our geographic footprint from a commercial standpoint has risen three or four years ago, probably 95% of our sales were North America, and the market Henry both touched on the international component, we finished last year just under 20% of our sales being outside the US and the vast majority of that is in the Asian region and we look for that with the full year of Fasco and Morrill and the Jakel acquisitions to be slightly over 20%. So we do have an expanding footprint and higher growth geographies which even at 20% growing, when those economies are growing double digits, it makes a difference on the whole company, so summarizing, with that component, we have got commercial and industrial where we see again some what decelerating growth from what we have seen in the last several years including’07 on a kind of an overall sales environment basis and we see HVAC as the industry is having another down year.

And those are organic based in my comments and then on top of that, you would layer of course, you would layer of course the acquisition guidance that we have recently provided.

Jeffrey Hammond - Keybanc Capital Mkts

But I take that the HVAC just on comp should be down less on a year-over-year basis on 08 versus what you saw in 07?

Henry Kneuppel

Yes. Again, I just want to make sure that we distinguish for all the investors on the line, when you use words like anemic, it kind of cross brands everything we are doing. It was one part of our business and it is obviously a significant part of our business that was down that pulled everything back. The other segments of our business experienced nice growth and I just want to call everyone’s attention to the fact that, yes, we have been having some business segments that were down, certainly the housing market has been beat to death and all of these have been lumped in to that lump, but the reality is that that business will come back and the replacement market is a growing market and is a very good market and it is 70% of what we do and last year, it had everything going against it and we do not expect to have a repeat of that.

So, when we talk about growth rates, I would say that it was not a broad based kind of anemic growth.

Jeffrey Hammond - Keybanc Capital Mkts

I am just trying to get a sense, you said a moderation from previous years, so your organic growth was about 2% in 07, so when I think of modest growth, I think of in the low single digits, but I just want to understand whether it is a moderation from 2% or from those higher levels in earlier years?

Henry Kneuppel

I guess that is a hard one to answer. I would say, without trying to give you early guidance that we think we will see growth that is going to be at every business good as we saw this year and maybe better.

Jeffrey Hammond - Keybanc Capital Mkts

On the margins, do you think margins are up on an operating margin basis year-on-year inclusive of the acquisitions?

Mark Gliebe

Yes. A couple of things, we think by the acquisition specifically as you are aware there is a purchase accounting related to inventory step up, $200,000.00 of that is behind us so we are about $3 million of the amortization of that step up at this third or fourth quarters of 07, so you have got that improvement and then you have got the synergies that we announced impacting the acquisitions and again, as we have just said that is all on the plans. We are very comfortable with that and then, we are going to see some material cost challenges in the first quarter, probably at the end of the second quarter of the year, but we have gotten very active, probably without doubt, a record number of productivity in Lean Six Sigma projects that are in process and we will start delivering results so we think we are going to be able to offset that over the long term.

Jeffrey Hammond - Keybanc Capital Mkts

If your margins are up, year-over-year, inclusive of the acquisitions, what would that imply in terms of margin improvement for the base business?

Mark Gliebe

I will say it this way again, keeping Henry’s comment of we do not want to stray into annual guidance, but they are improving as well. And it can get us back on towards the path that we need to be on as a company.

Operator

Next in queue, we go to Mike Schneider representing Robert W. Baird, please go ahead sir.

Michael Schneider - Robert W. Baird & Co., Inc.

Maybe first just sticking with the theme of commercial and industrial motors, the growth of 3.1% this quarter, do you have a sense, was that mainly price at this point given the price increase you put through over the last 12 months and those that imply the volumes rushing down this quarter?

Henry Knueppel

Mike, we announced the price increase in the commercial and industrial side in January of this year. I think that was real growth.

Michael Schneider - Robert W. Baird & Co., Inc.

With that in mind, again, I will follow up on an earlier question, if you take into account the comparisons, the comparisons got substantially easier from Q3 to Q4, but yet the growth rate in the commercial and industrial motors went from 9% in Q3 to 3%, I guess, what is maybe a little confusing is, you are talking optimistically about 2008, yet some of the commentary, Henry in press release has been about an especially challenging market, and I presume you are focused on HVAC, and then if you look at commercial and industrial decelerated by six points just even from Q3 to Q4 against an easier comparison, to the extent you can, give us some more color on why you believe the business really is not seeing an industrial slow down in particular in the commercial and industrial motors.

Henry Knueppel

Typically, we do see a slow down in commercial and industrial markets in the fourth quarter, so that is not an unusual phenomenon. I do not look at last year as being some easy comp, so I am not sure where that difference is coming from.

Mark Gliebe

And I think, if I can add as well, and again, the press release is the level of detail we go into generally by brand or by application, but it really was a tale of kind of two sides. The commercial motor business that we talked about which is heavily influenced by I would say, tied to residential water whether that is some pump application or a pool or spa motors which we did participate was actually down in the quarter, whereas the industrial motor business and our other large commercial motor business were up and one of them was up 10%, 7%, so there was still some pretty good numbers, but it really was and again, the CAC business, being the one that participates in some of those touch residential end markets where the challenge was.

Michael Schneider - Robert W. Baird & Co., Inc.

Then HVAC as well, a year ago, HVAC sales were down 25%, so the comparison was about as easy as it has been in this trough. The trends you mentioned in December specifically were off because of the greater shut down days at your OEMs, were October and November also weak, in other words, was there a trend line through the quarter or was it just vacation schedule that really crunched the quarter?

Henry Knueppel

I would say, we were kind of on track through October and November and then December was especially tough.

Michael Schneider - Robert W. Baird & Co., Inc.

And then in HVAC, at least give some of your existing product lines, as you look into 08, what type of pricing have you been able to secure to at least offset some of the raw material cost that we have talked about.

Henry Kneuppel

Clearly, in a down market, it is always tougher in the down market to get price, no doubt about that, but as you know, the number of our contracts we have it built in and with copper moves, it gets adjusted, so we are going to our customers and we are trying to get the price to offset just the material inflation and so it does not happen all the time, and it is always tougher in a down market, but we have been having some success.

Michael Schneider - Robert W. Baird & Co., Inc.

And if you achieve those, if you get the full run rate of the pricing you put in, does that make you hold for materials at least as they stand today?

Mark Gliebe

I would say, no. It would no.

Michael Schneider - Robert W. Baird & Co., Inc.

And do you go out because these are OEM’s, is it an annual pricing cycle or are you able to then to go back in mid year and finalize the gap?

Henry Kneuppel

It depends on the customer. In some customers, there is multi-year contracts and in some customers, the pricing is built in to tie to copper and some customers with annual.

Michael Schneider - Robert W. Baird & Co., Inc.

Dave as far as the acquisition goes, you mentioned $3 million on inventory step up, what was the actual Q4 amount for the inventory step up?

Dave Barta

I do not have that break down. I just have the full year and I would have to get back to you on that.

Michael Schneider - Robert W. Baird & Co., Inc.

Given the timing, is it probably $2 million or more of the $3 million?

Dave Barta

Yes. I think this is my rough number.

Michael Schneider - Robert W. Baird & Co., Inc.

Henry, just take a step back and you recalled the recession earlier this decade and then in the early ‘90s, when you look at the business model now with the age gap influence and obviously that is going through its own recession already, what type of recession sensitivity analysis have you guys done if indeed HVAC is bottoming as we speak and we are indeed headed into a recession for industrial, maybe in the middle or latter part of this year. Can the business hold flat in organic growth in earnings or could you give us some color of what you plan for at least in terms of worst case scenario or maybe be base case scenario on a recession.

Henry Kneuppel

I think like every business, we have done multiple looks at different cases of what might happen and if you put together some plans around what you would do if, a lot of what you will decide to do is going to depend upon when you actually see it happening, what you believe is going to be the extent and the depth, but we are fundamentally quite a different company than we were during the last one.

In the last recession, if you recall, it was a recession that was there in the industrial marketplace in North America and we were a North American company all in the industrial market, so we were right at the center point of what was going on and none of that positive. We were closing facilities and doing a lot of things that added to the pain if you will. We have really changed substantially our footprint. We have changed substantially where our sales are taking place. Yes, we are still predominantly in North America, but over 20% are now outside the North America that is a big plus.

We have more balance in commercial and industrial and residential markets, that is a big plus, and I think that with all of the programs that we have going on in the company, if the active productivity that we have, if things slow down, we would speed up some of those things that are harder to get at when you running full out, so my sense is that we would fair much better than we did during the last recession, for those reasons, nobody comes by. I am not going to pretend we would come out unscathed because I do not think anybody in the right mind would say that and I have never really actually seen it happen to a company if they are really impacted by a severe recession.

My personal view is I do not think manufacturing is in for nearly as difficult a time this time around if we go into one and I am not sure we will, but if we do, I do not think it is going to be as bad primarily having to do with the dollar and again I would call your attention to some of the things that happened in the late ‘80s, which is the last time we saw this kind of a currency situation.

Michael Schneider - Robert W. Baird & Co., Inc.

What are you seeing as far as your distributor demand goes? Are they depleting inventory at this point? Are they getting down as January and February for a recession? Just what do you make of their actions?

Henry Kneuppel

We have not seen anything that I recall remarkable. I do not think that they have bloated inventories as much in the cycle. We probably saw over the last year maybe pulling back little bit out of inventory, but we just do not get the sense that there is any major change taking place.

Operator

Our next question comes from the line of Holden Lewis with BB&T, please go ahead.

Holden Lewis - BB&T

I guess, I should ask about your repurchase, I have to unhide a whole lot of columns in my model to find the last time you actually did a repurchase and yet you are upping your authorization. Can you give a little color as to why it even warranted a mention or how should we read that?

Henry Knueppel

Technically, we did increase the authorization that we have so we felt that that was material enough that we needed to tell you about it. In terms of our view, I think you know our view has been that buybacks are not necessarily our strategy, however, that said, we are intent upon delivering value to shareholders, so we intend to look continuously as we go forward here particularly at these kinds of market levels at the pipeline, our uses of capital, appropriate leverage for where we are in the cycle, and we are prepared to start using it as a tool to provide value to our shareholders.

Holden Lewis - BB&T

Have you been active in it this year? I am just trying to get a sense?

Henry Knueppel

No, we have not been active at all. I guess the last time we actually used any of it, it was during the convert.

Holden Lewis - BB&T

But I mean, are you more inclined to? I mean it has kind of sat out there for a while and it can still sit out there in a while just in a larger form. Should we just interpret this that you are in fact more inclined to and the likelihood of you actually using it? Is it higher today than it was even six months ago?

Henry Knueppel

Yes.

Holden Lewis - BB&T

You had also commented I think, obviously about the weakness in December. I think you or Dave that made the comment that you had seen some weakness especially in December. I am assuming that that related primarily to HVAC or did you see weakness in December in your commercial and industrial as well, across the board, is that just HVAC and then, how are you seeing HVAC in January. Did that weakness seem to be contained specifically to December? January has come back with a little like October a and November or have we continued to see that carry through?

Henry Knueppel

Everything you said is correct. It was HVAC, a little bit of pump in commercial, which is probably more related as Dave said to housing and we have not seen a repeat of that in January.

Holden Lewis - BB&T

And were October and November actually positive and then December, kind of sunk the HVAC business or just less negative?

Henry Knueppel

Well, everything is relative, right? They were where we expected them to be. We expected them to be slower than they were in the summer because that is the traditional cycle. The only difference really in December was that some of our customers chose to close down earlier than they had anticipated when we went into the quarter and we think that that was just inventory adjustments, nothing that was great new news.

Holden Lewis - BB&T

And so far, in January, you have kind of returned to October and November levels. And can you just comment about how the ARI shipment data, obviously, it has been positive, I think for six over the last eight quarters and that is obviously unit shipment number, just give a little insight into how your HVAC number should dovetail with that data and why there seems to be such divergence between what the OEMs are saying they are shipping and what you are saying you are getting?

Hnery Knueppel

The ARI data is one large component that represents what we saw. There is another organization that publishes information called Gamma and that is more related to the gas furnace market and we obviously shift into the furnace market and the two are linked very closely and if you were to combine the two sets of data, you would see a pretty different set of information, it would actually be a negative in the fourth quarter as opposed to what you saw in ARI alone. So ARI is mostly cooling related, Gamma mostly furnace related, it is not easy, but you can combine the two and when you do, you get a different picture.

Just for your benefit, the two organizations have agreed to merge, I do not know what that means, but the information going forward, I would guess that they will combine it, but I do not know that.

Holden Lewis - BB&T

But the furnaces are a lesser portion of the overall mix? Is that right?

Henry Knueppel

Yes, that is correct. I do not have the exact percentages, but yes.

Holden Lewis - BB&T

And then just lastly, the cost of materials items, the pricing you are referring to, that is January 08, right? You put another round in?

Henry Knueppel

For some of our businesses, that is correct. I guess when I look at again the copper price since early 06, it is basically kind of been in the 330 level that we have been in for some time and I understand that you hedge and so you are always rolling forward the hedges, but you have been putting price increases through and you have another one in now and you have been rolling these things forward for a while and the copper price really has not moved for the last three quarters or so and yet, the drag in Q4 and the drag in Q3 were largely equal and now we are talking about drag in Q1 and into Q2 as well. Can you just give us a sense of why this is dragging on so long and when really at this level we can expect to see it at least neutralized.

Henry Knueppel

I know we said it last quarter and we may have even said it at the quarter before that we expected to have a negative drag through the first quarter if copper stayed in the $3.00 or $3.25 area and that if it was up from that, we would see a drag through the second quarter as well before we finally got to parity. So it is not new news and we have been saying that for some time.

And that just has to do with what you already mentioned and that is that you are contracting out copper well ahead and we have a pretty disciplined system, but the reality is that we have been replacing lower priced hedges with higher priced hedges and when we were fairly confident, the prices were going to go up, we moved out a way which saved us and our customers a lot of money to do that. But the reality is, at some point, we have to catch up and we are still in the process of catching up. So that is what is going on and it again depends on what happens with the prices from hereon out, we are not as far out as we were at one time because we think there is more likelihood of prices going down than up, but we kind of thought that a year ago and just so you remember correctly, as we went through the year last year, we were not the beneficiaries of most of the European at $3.25 where most of the year was actually $3.50 to S$3.70 range. It was only the first quarter that it was really down.

Operator

And thank you very much, Mr. Lewis and with that, Mr. Knueppel and our host panel, I will turn the call back to you for any closing remarks. There are no further questions.

Henry Knueppel

Great! Thank you and thank you all again for joining the call. Just a few final thoughts. First of all, 2007 was another record year despite some pretty solid head winds and we hope that you will take that into account as you look at what kind of a performance we had. 2008 is off to a solid start. We feel good about what we are seeing. We think that it is being aided a lot by a hidden strength in exports and again, we would remind you that we never lose sight of our obligation to deliver value to our shareholders. So thank you for joining the call and for your interest in Regal-Beloit.

Operator

Thank you. Very nicely said, gentlemen and thank you very much and ladies and gentlemen, Mr. Knueeppel is making today’s conference available for digitized replay for ten full days starting at 3:30 pm. Central Standard Time, February 6 all the way through 11:59 p.m. February 16. To access AT&T’s executive replay service, please dial toll free (800) 475-6701 and at the voice prompt enter today’s conference ID 909428. And that does conclude our earnings release for this fourth quarter and full year 2007. Thank you very much for your participation as well as for using AT&T’s executive teleconference service, you may now disconnect.

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