RBC Bearings Incorporated
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good morning, and welcome to the Regal Beloit First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there'll 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 Rob Cherry, Vice President, Investor Relations. Please go ahead.

[Robert Cherry:]

Great. Thank you, Gary. Good morning, everyone, and welcome to Regal Beloit's first quarter 2020 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, Vice President and Chief Financial Officer.Before turning the call over to Louis, 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 the forward-looking statements.For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings. On slide three, we state that we are presenting certain non-GAAP financial measures in this presentation.We believe that these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management.Please read this slide for information regarding these non-GAAP financial measures, and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with GAAP.Now, let me briefly review the agenda for today's call. Louis will lead off with his opening comments, which are more in-depth than usual given the extraordinary circumstances we're operating in today.Rob Rehard, our CFO, will then provide a first quarter financial results in more detail and discuss how we're thinking about the remainder of the year. We will then move to Q&A.After which, Louis will have some closing remarks. And since our prepared remarks are a little bit longer than usual, if needed, we will extend the call a bit to ensure adequate time for Q&A.And now, I will turn the call over to Louis.

[Louis Pinkham:]

Thanks Rob and good morning, everyone. Thanks for joining us to discuss our first quarter earnings and to get an update on our business and thank you for your interest in Regal.We have a lot we'd like to cover today. But before discussing our results and providing a recent business update, I'd like to thank all my Regal colleagues around the world for their hard work, for their resourcefulness, for their adaptability, and for their sense of duty as they work to serve and support our customers during this unprecedented period of uncertainty and heightened anxiety. Thank you.Our prepared remarks this morning will go well beyond what we would normally discuss or disclose. But during periods of elevated uncertainty, like the one we're in now, we think it's important to provide as much transparency as reasonably possible about how our business is operating and about how we're navigating during these turbulent time to keep our associates safe, support our customers, and produce the best possible returns for our shareholders.Before turning to our first quarter results, which demonstrates strong execution despite increasingly challenged markets, and about which I'm eager to discuss, I'd like to touch briefly on a number of topics that I'm sure are top of mind.What we're doing to keep our employees safe; the essential nature of our products; an update on our manufacturing operations and supply chain; first quarter orders and how April is tracking, guidance; sharing some bright spots because there are some; a few words on free cash flow, which remains very strong; and lastly, how we're thinking about our mid-term strategy.The short answer on that front is our strategy is unchanged, and we remain focused on executing what we can control. In fact, that theme is something I hope you'll take away from our call today.We are responding to how the virus is impacting our business, but our primary focus is executing on what we can control; controllable execution around cost, around process improvement and, as much as possible, around looking for opportunities to outperform versus how our end markets are tracking.The first topic I want to discuss is employee safety. Keeping our associates healthy and safe remains our top priority always, but especially in face of the coronavirus. We've implemented a host of measures to help our associates stay safe from COVID, such as

[Robert Rehard:]

Thanks Louis and good morning everyone. We feel we had a solid start to the year, especially on the metrics we can control. We did have topline headwinds in the quarter, as noted by our sales being down 9.8% on an organic basis.Much of the decline was related to record-breaking unseasonably warm winter weather in our HVAC business and sluggishness in general industrial applications globally, coupled with the negative impact of the coronavirus, which became progressively more severe as we ended the quarter.But despite these headwinds, Regal de-levered at 12%, well below our historic norm, helping to minimize the volume impact to our operating profit. At this point, I'll provide comments on each of the segments and end with more detail on the total company. In lieu of our normal guidance discussion, I'll share some of our scenario plans.Starting with Commercial, organic sales in the first quarter were down 12.5% from the prior year. The decline was largely volume-driven by end market. Headwinds were very broad-based. But the business saw particular pressure in pool pump, commercial HVAC, Europe air-moving market, and to a lesser extent, to our proactive approach to pruning low-margin accounts, as we continue to execute on our 80/20 initiative.The impact of this pruning initiative was approximately 110 basis points of the organic sales decline. Let me give you a little more color on two of the headwinds I just mentioned.In pool pump, COVID-related production delays at one of the company's facilities in China limited our ability to meet customer demand. But that facility has resumed operations and has seen positive momentum in April.Similarly, in Europe, we experienced COVID-related production delays at our air-moving factory in Italy, which was shut down for three weeks as mandated by the government, but this facility has also resumed operations and has seen positive momentum in April.The adjusted operating margin in the quarter for Commercial Systems was 7.8%, down 230 basis points compared to the prior year. This margin was primarily down due to the volume decline.We were able to partially offset the impact of these volume headwinds with cost initiatives we described in the second half of 2019. As we entered the latter half of the first quarter of this year and saw the impact of COVID-19 on our businesses, we worked to escalate many of the cost savings activities to ensure we could minimize the impact of the lower demand on our operating profit. Our deleverage in the first -- in the quarter was 25.3% in this segment.However, when comparing results in this segment on a year-over-year basis, which have been heavily impacted by tariffs, we should highlight the impact of the annual cost roll which affects the first quarter results of each year.In the first quarter of 2019, we saw a net favorable operating profit impact of approximately $1 million from the annual cost roll versus an unfavorable net operating profit impact of approximately $2 million in the first quarter of this year.When we consider this $3 million year-over-year unfavorable impact on our deleverage in the quarter within this segment and adjust for comparability purposes between years, we would see deleverage at a rate closer to 15%, well below the 25% to 30% deleverage we've historically seen in this segment.Orders in Commercial for the quarter were down approximately 11%, reflecting broad-based weakness. But with Asia, a bright spot, in April, orders were down 39%, again, on broad weakness, but with Asia tracking up slightly year-over-year.Some of the customer segmentation initiatives Louis referenced earlier are contributing to the growth we're seeing in Asia. In Industrial, organic sales in the first quarter were down 4.5% from the prior year. The segment saw double-digit, largely COVID-related declines in the power generation and core industrial end-markets. This was partially offset by our stronger sales into the data center market where our products provide standby power as previously stalled data center projects move forward.To a lesser extent, we also saw bright spots in the food and beverage, healthcare, and municipal end-markets. The decline in sales was also impacted by our proactive approach to pruning low-margin accounts as we continue to execute on our 80/20 initiative.The impact of this pruning initiative was approximately 300 basis points of the organic sales decline. The adjusted operating margin in the quarter for Industrial was 0.8%, up 230 basis points compared to the prior year.We still have a lot of work to do to raise our industrial operating margin to an acceptable level, but we are happy to see this result moving firmly in the right direction.And we have a path to further gains this year even with some of the pressure on the topline. The margin improvement was driven by favorable mix, favorable price cost, and continued cost reductions, partially offset by the impact of lower volume. And similar to our Commercial segment, the year-over-year impact of the annual cost roll as the Industrial segment was most impacted by tariffs.Orders for Industrial in the quarter were down almost 9%, would have -- but would have been down further were it not for the strength of the Data Center business. The headwinds from COVID-19 quickly became more pronounced as Q2 began, with April orders down 27%.Again, the pressure was broad-based across end-markets and geographies, with the exception of our business providing standby power and parallel and switchgear into the data center market, which remained a bright spot.Turning to Climate Solutions, organic sales in the first quarter were down 14.8% from the prior year. The decrease was primarily driven by the mild winter weather and COVID-related weakness, especially in Europe, plus softer general industrial end-markets and, to a lesser extent, lower price.For context, heating degree days were down 20% year-over-year in the first quarter, with January the warmest on record, and February, the second warmest on record, resulting in a severe weather-related headwind in HVAC.Similar to the comments I made related to our European operations in the Commercial segment, our Italian factory serving our Climate segment customers was also shut down for three weeks, but has now resumed operations.The decline in sales was also driven by our proactive approach to pruning low margin accounts as part of our 80/20 initiative. The impact of this pruning initiative was approximately 250 basis points of the organic sales decline.The adjusted operating margin in the quarter for climate was 15.2%, down 50 basis points compared to the prior year. We are pleased with the segment's ability to limit margin declines in the face of severe topline pressures. Deleverage in this segment was 18.3% in the quarter, well below the 25% deleverage we've historically seen in this segment.The margin decline that did occur was primarily driven by lower volumes, partially offset by favorable price cost, continued cost reductions and favorable mix, the majority of which was driven by our FER transition.Orders in the Climate segment for the quarter were down just over 7% on weaker demand in Europe and North America, partially offset by stronger demand in Asia. In April, orders were down 40%.We believe our reluctance by HVAC distributors and dealers to implement normal HVAC inventory builds into the summer cooling season is reverberating through the supply chain and is apparent in our weak climate orders in April. In addition, lower demand in the restaurant end-market is weighing on our Commercial Refrigeration business.Turning to Power Transmission Solutions or PTS, organic sales in the first quarter were down 4.2% from the prior year, reflecting relatively stable to even modestly higher markets in the early part of the quarter before more broad-based COVID-19-related headwinds started to impact March. Those effects were most impactful in oil and gas end-markets, which weighed heavily on our bearing and rotating businesses.The decline in sales was also driven by our proactive approach to pruning low-margin accounts as part of our 80/20 initiative. The impact of this pruning initiative was approximately 80 basis points of the organic sales decline.Partially offsetting these headwinds was an estimated two to three points of market -- above-market growth, including significant gains in the renewable energy end-market. The adjusted operating margin in the quarter for PTS was 15.7%, up 130 basis points compared to the prior year. Favorable price cost, improved productivity, continued cost reductions, and 80/20 actions more than offset modest volume and mix-related decline.Operating profit dollars grew by 4.1% despite the 4.2% organic sales decline in the quarter. Orders in PTS for the quarter were down approximately 23%, which mostly was planned due to the lumpiness of the segment's orders and strong orders in the fourth quarter.However, we started to see broad-based weakness toward the end of the quarter, we believe, most -- much of it COVID-related in markets that showed particular weakness, including oil and gas, both up and midstream, as well as metals and general industrial in China and in the U.S.Looking at April, orders were down 11% on broad-based weakness across most end-markets, with share gains in conveying and unit material handling as a bright spot. Additionally, we had strong aerospace orders driven by a large onetime purchase.For reference, Regal exposure to the aerospace market is small, but large orders in that market can create some lumpiness in our PTS segment. Our ModSort conveyor equipment offering continues to gain nice momentum, a lot of which we attribute to share gains, especially in the warehouse and food end markets.A ModSort sales opportunity funnel that we noted had tripled in the last three months of 2019 is starting to translate into orders, including a significant order received just after quarter closed from a key distribution center customer. We're excited about this truly differentiated technology moving forward.Now, I will summarize a few key financial metrics for the first quarter for total Regal. Our capital expenditures were $10.9 million in the quarter. We continue to be focused on ensuring that we deploy capital that drives returns above our weighted average cost of capital and, ultimately, to improve shareholder value.We are monitoring capital expenditures very closely, as we move through this difficult time. We have lowered our full-year expected capital expenditures from $75 million to $50 million, and we'll continue to reevaluate as we progress through the year. Our simplification and footprint consolidation activities resulted in $5.6 million of restructuring and related costs in the quarter.And we now expect $18 million of restructuring spend for the full year. We expect our 2020 restructuring actions to result in more than $38 million in annualized savings.As a reminder, coming into 2020, we had planned on realizing $29 million of 80/20 and restructuring-related cost savings this year. We estimate that we realized approximately $4 million of these savings in the first quarter, which was in line with our expectations.Not surprisingly, some of our planned restructuring actions have been delayed due to COVID-19. For example, around executing facility closures or product loops. But other initiatives are actually ahead of schedule. So, for now, we believe we are on track.Looking forward, the impact of COVID-19 continues to reverberate through the business. And so it's possible that some of our actions, particularly those involving our manufacturing operations in Mexico, could be delayed.On the flip side, we are actively identifying and implementing certain actions that can be accelerated, including potentially pulling forward some savings tied to action plan for 2021.While we are still working on these cost acceleration and pull-forward plans, we have identified approximately $3 million of additional actions we expect to benefit 2020, bringing our total cost savings in 2020 to $32 million.The restructuring actions I have been discussing underpin our goal to realize 300 basis points of operating margin expansion by 2022, what we referred to as our 303 initiative at our recent March 3rd Investor Day.In addition to these midterm initiatives which we expect to drive permanent savings, we have taken some additional temporary cost actions, which Louis briefly touched on earlier, to respond to the known pressures COVID-19 is already placing on our business.We believe these items, such as the salary -- such as salary pay cuts and furloughs and organization-wide discretionary spending measures, will result in an additional $6 million of savings in the second quarter, bringing our total savings in 2020 to $38 million; $32 million related to the cost savings we discussed in 2019, and $6 million related to the discretionary cost savings in Q2 I've just described. Now let's move on to tax.The adjusted effective tax rate in the quarter was 22.1%. We've provided a table in the appendix of this presentation to reconcile the GAAP ETR to the adjusted ETR. Our full year adjusted ETR is expected to be 21%. Our total debt at the end of the first quarter was $1.365 billion, and our net debt was $760 million. We ended the quarter with our net debt to adjusted EBITDA ratio at 1.6, slightly below how we ended 2019 and well within our comfort zone of 1.5 to 2.0.Moving to free cash flow, we achieved $91.8 million of free cash flow in the quarter. Our first quarter free cash flow resulted in a conversion rate of 196% of adjusted net income and speaks to the cash-generating capability of the business.Trade working capital was a source of cash in the first quarter, driven primarily through decreases in inventory, a strong start to the year. Also in the first quarter, we purchased approximately 315,000 of our shares for $25 million.The balance remaining on our share purchase authorization is $210 million. We remain committed to returning excess capital to shareholders over time, but have temporarily paused our share purchase program to conserve capital during the COVID-19 pandemic.As Louis mentioned in his prepared remarks, we have decided to pull our guidance for 2020. Given the uncertainty created by COVID-19 makes it difficult to produce a meaningful forecast. Instead, we thought it made more sense to share with you some of our scenario planning. We'll discuss Q2 and the full year.First, on Q2, based on the short-cycle nature of our business, the forecast for Q2 is the only projection where we have any real level of visibility, and even that is very limited. We looked at how the P&L will look under scenarios of sales being down 20% and being down 35%. The sensitivity analysis indicates that with sales in the second quarter down 20%, we would still control deleverage at a rate below historical levels.We estimate at a high-teens to low-20s rate. Under the down 35% scenario, we'd expect to deleverage rate in the mid-20s to low-30s range. While we are not providing guidance for the year, if the impacts of COVID-19 remain beyond Q2, we would expect the deleverage rates provided for Q2 to be consistent as we move through the year or could even get slightly better with the continued progression of the cost-out initiatives I described earlier, barring any unforeseen project delays.In short, similar to the way we manage through the headwinds of -- in Q1, we will proactively manage discretionary spending across our businesses and within our plant to ensure we effectively manage utilization to mitigate the impacts of potential under-absorption and drive to achieve the cost-out saving we've discussed.The key takeaway from these scenarios is that even under significant topline pressure, we believe that benefits from our reorganization, restructuring, and 80/20 efforts, in addition to new cost actions we had taken in the last month and further actions we have identified should conditions deteriorate further, should allow us to delever at rates below those we've experienced historically.We also expect to maintain a strong balance sheet and cash position under these scenarios. We continue to expect free cash flow as a percentage of adjusted net income to exceed 100% for the year. I've included a few other modeling assumptions on this slide for your reference.Finally, I thought it made sense to make a brief comment on how we believe the business can perform when our sales start to grow again. We feel very strongly that through our 80/20 initiatives, our supply chain moves, and our other restructuring actions, we are building a business that has a fundamentally different cost structure versus in recent cycles.That means we expect a strong performance we've been executing on deleverage now for the last four quarters will also translate into stronger leverage rates versus history, which we think can be in the mid-30s range. I want to provide some additional color on our balance sheet and liquidity as well as updated thoughts on capital allocation in this environment.First, on our net leverage, we ended Q1 at 1.6 net debt to adjusted EBITDA. This is a slight improvement from the 1.7 level at the end of 2019 and brings us further within our comfort zone of 1.5 to 2.0. Some of you may have seen that on April 1, we drew down $255 million under our revolving credit facility.Combined with prior borrowings, the company has now borrowed the full $500 million under our revolver. These recent borrowings were done as a proactive measure to increase the company's cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from COVID-19.Regal has a strong balance sheet and cash flows. And we do not currently intend to use the borrow proceeds, but believe in abundance of caution regarding our cash position is prudent at this time.As of May 1st, 2020, we have cash and cash equivalents of approximately $890 million on our balance sheet. We also wanted to highlight that we have no material near-term debt maturities with the majority of our debt outstanding not coming due until 2023.Moving to capital allocation, as I noted previously, we lowered our CapEx forecast from $75 million to $50 million, or down 35%. We have temporarily suspended share repurchases. We also recently decided to maintain our dividend at the same level.Regarding M&A, we will continue to evaluate strategic opportunities, but we do think it's fair to say that doing deals becomes less likely in the current environment. From a trade working capital perspective, we are selectively building strategic inventory in parts of our business to manage the risk of potential supply chain disruptions and to bolster service levels for our customers.Bigger picture, we continue to manage all the elements of our trade working capital and target trade working capital to be a source of cash in 2020. Before I conclude our prepared remarks, I want to, once again, thank all of our Regal associates for everything you are doing to navigate these difficult times.Our results in Q1, despite the COVID-19 pandemic, showed strong execution as demonstrated by a very respectable 12% deleverage rate and strong free cash flow. And with that, I'll turn it back over to the operator.Operator, we're now ready to take questions.

[Operator:]

We will now begin the question-and-answer session. [Operator instructions]Our first question comes from Mike Halloran with Baird. Please go ahead.

[Mike Halloran:]

Good morning, everyone. Hope everyone's doing well.

[Louis Pinkham:]

Yes, good morning, Mike.

[Mike Halloran:]

So, first just on what you guys are seeing from a channel perspective, what the inventory levels look like in the channel? Is there any element of pre-buy? And where are you seeing sell-in, sell-out kind of match from an end market perspective?

[Louis Pinkham:]

Yes. Hey Mike this is Louis. I'd say there's no consistent view here. It's spotty given the demands in the market. So, through Q1, and as we had talked about destocking in the channel through 2019, we actually were seeing a good process and felt like that that had stopped.Now, going into April, with what's going on, we do not see pre-buying in a significant manner. And certainly, a slowdown, because we have visibility to our distributors and their inventory as well as their sales out, there's certainly clearly a slowdown.So, I wouldn't say that we're seeing any pre-buy and clearly a deceleration. Now, if you compare that to the OEM side of our business, OEM is down slightly more than distribution from an order rate.

[Mike Halloran:]

And then lots of moving pieces here when it comes to the capital usage, but maybe just some thoughts on what the organizational capital allocation and usage philosophy is here.Obviously, you're preserving liquidity in the short-term. But how are you managing still driving R&D and innovation over the long-term, some of these structural things with -- that you're managing, you know, both what's already announced and as you alluded to, which is yet to come, as well as potentially being opportunistic with that liquidity over time, whether it's buybacks or if the market opens up on the M&A side? Maybe just a philosophical conversation about how you're weighing all those puts and takes.

[Louis Pinkham:]

Yes, it's a great question, Mike. And it's certainly front of mind and certainly in some of my discussions, and Rob and my discussions with the Board. So, how do we think about it? First of all, right now, we're being conservative. And with an abundance of caution, we pulled down our revolver, and we're managing cash tightly.Now, from an investment perspective, if it's a capital investment and it's related to safety first, business continuity, second, absolutely. We're moving forward. Now you heard from Rob that we are bringing down our forecast of capital expenditures this year by about a third to $50 million.But listen, if it's the right project and it has the returns that we need, and if those returns are, we say, less than-a-year return, we're going to make those investments even if we slip over the $50 million of CapEx.You asked about growth. We are not cutting growth at all right now. This is the time to invest in growth to make sure that we are stronger coming out from an organic perspective, and hopefully, win some opportunities from that.So, my teams and the leadership are absolutely committed to continuing our investment in our technology, in our product roadmap to better position us to serve and differentiate with our customer base.And then you talked about our thoughts on -- we have -- one of the strong tenets of this company is our strong free cash flow, even during difficult times. So, there could be opportunities.I would say from a share buyback perspective that would be opportunistic. Again, right now, we're being conservative, and we're not going to consider it in second quarter, perhaps that it gets reconsidered going forward.And I would hope that there would be some M&A opportunity that would fit for us. And you know, as I shared at our Investor Day, we are developing a very professional approach.We have a new leader of that -- of our business development and strategy that was brought on about two months ago. And I'll tell you, we're thinking about acquisitions in a much more disciplined structured way.So, yes, I would hope that there might be an opportunity there. So, nothing's off the table, Mike. And we evaluate what's going to bring the best returns for our shareholders. And we can be flexible. And again, our cash flow position helps us with that.

[Mike Halloran:]

Great. Appreciate the color there as well as all the detail in the deck and the prepared remarks. Thank you.

[Louis Pinkham:]

Thanks Mike.

[Operator:]

The next question is from Chris Dankert with Longbow Research. Please go ahead.

[Christopher Dankert:]

Hey, morning, guys.

[Louis Pinkham:]

Morning Chris.

[Christopher Dankert:]

I guess, first off, I understand you kind of can't get too deep in the weeds by segments. I won't pepper you too much there. But when we're looking at, Industrial Solutions, specifically. Can we hit breakeven there in 2020? Or should we kind of expect some short-term losses, just to kind of level set for next year?

[Robert Rehard:]

Yes. Thanks, Chris. This is Rob. Absolutely. We have a path to improving that business. And certainly, getting the breakeven plus is part of that plan. As we talked about at Investor Day, this is one of those businesses where we said there's so much cost-out opportunity that we don't need the topline to improve in order to get that benefit on the bottom-line and we are still in that category. We haven't changed or come off that position. And as you saw in the first quarter, we are making progress.

[Christopher Dankert:]

Great to hear. Great to hear. Thank you for that. And then just a follow-up. In PTS, nice numbers there. Just looking at orders, I guess, excluding the big aerospace win, you know, did other orders fall off closer to that, the 30% range? Any commentary that would kind of pull out some of the lumpiness. I know that's kind of hard to do.

[Louis Pinkham:]

No, that's Okay, Chris. And I understand the interest. Yes, if you pull that one-time aerospace order out, our orders would have been down in the high 20s. And so not inconsistent to what we're seeing in the rest of the business.

[Christopher Dankert:]

Thanks so much. I'll pass it along.

[Robert Rehard:]

Thanks Chris.

[Louis Pinkham:]

Thanks Chris.

[Operator:]

[Operator instructions]The next question is from Julian Mitchell with Barclays. Please go ahead.

[Trish Gorman:]

Hey, good morning. This is Trish Gorman, on for Julian. So, one question on April orders. Thank you for the segment detail. And I know you mentioned Asia was a bright spot within Commercial. But can you talk a little bit more about the regional trends, kind of how that's down 30% splits out by region?

[Louis Pinkham:]

Yes. And I'm not going to give you a lot of good color here, Trish, other than to say, April was stronger in Asia-Pacific and in China than the rest of the regions. You know, different by segment. For example, Commercial Refrigeration in Europe was down significantly more than the other segments.So, I would tell you, Europe and North America are fairly consistent, although there are spots that are a little weaker and spots that are a little stronger. So, a little stronger is our data center market and orders were quite strong in the first quarter, and we felt really good about that. That's a bit more North American-centric.So, it's really where the businesses play and where they support. But I'd say, Asia has certainly recovered faster from this than Europe and United States, we're seeing. Hopefully, that helps.

[Trish Gorman:]

That's helpful. Yes, thank you. And then just one more for me on free cash flow. Working capital is a cash tailwind. I think it's typically a headwind in the first quarter. I know you said it'll be a source of cash for the year. But how should we be thinking about those movements throughout the year and maybe the seasonality of your free cash flow?

[Robert Rehard:]

Yes. So, thanks, Trish. This is Rob. You know, free cash flow is typically in the first quarter a little more of a headwind. That's because a lot of quarters, the first quarters, we're building inventory in anticipation of the season. This year, we actually made great progress through our 80/20 initiative to pull down, which had a great impact on pulling down our inventory levels in the first quarter.We do expect that to continue throughout the year. We would expect our second and third quarters to also be quite strong. That's why we're saying we'll still be above 100% for the year despite the fact that, you know, the headwinds that we have in the business right now.So of course, a lot of that comes through the management of trade working capital. And so, source of cash for the year, absolutely, most of which is coming from inventory.

[Trish Gorman:]

Great. Thanks guys.

[Louis Pinkham:]

Yes. Thanks Trish.

[Operator:]

The next question is from Robert McCarthy with Stephens. Please go ahead.

[Robert McCarthy:]

Hi, it's Robert McCarthy, on for Robert McCarthy. How are you doing?

[Robert Rehard:]

Hey Rob.

[Louis Pinkham:]

Hey Rob.

[Robert McCarthy:]

This is always dangerous because I was on another call, so I have not heard virtually anything anybody else has said, but it never stopped me before. To actually to follow up on that free cash flow question, Louis, in terms of some of the divestiture activity here ongoing and some of the select kind of pruning of the portfolio for lack of a better term, has there been working capital benefit accruing from that as well in addition to cost improvement?

[Louis Pinkham:]

Absolutely. As we look at 80/20, you know, and we had shared at the investor day that we have a very -- focused on SKU reductions in the business. And that in a Commercial Motors, we're going to see nearly a 50% reduction over a three-year period. Industrial Motors, it's about a third. That is absolutely driving down our inventory needs and requirements. So, simplifying our business helps not only from a cost perspective, but absolutely from an inventory management perspective.

[Robert McCarthy:]

And then I think this has probably already been well-traveled ground, but I'll continue. Maybe you could just give us some help around the impressive decrementals that you've been able to execute so far. What is your embedded expectation, you know, across the segments?What would you expect those decrementals to be? I think you gave an overall number that you expected for the company for the back half of the year. But just any kind of color or contour around that by reporting segment would be helpful.

[Robert Rehard:]

Sure, Rob. It is Rob. So, you're right. We did give you some ideas on decrementals going forward on our -- in our sensitivity analysis. The way to think about that by each one of our segments is you -- you know, we previously shared how Climate, you know, leverage or incrementals is around 20 to 25, Commercial and Industrial both around the 25 to 30, and PTS is about 30 to 35.The decrementals on those business, we would expect, given the 80/20 benefit that we've seen and the deleverage we've seen as we've gone through the last four quarters should be below the low-end of each one of those segment ranges. So, for example, in Climate, you know, if it's 20 to 25, we'd expect to be sub-20 and so forth. So, that's the way to think about it going forward.

[Robert McCarthy:]

Congrats on the performance, and congrats on the squeeze.

[Louis Pinkham:]

Yes. Thank you very much. Thank you.

[Robert Rehard:]

Thank you. Appreciate it.

[Operator:]

[Operator instructions]Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Louis Pinkham for any closing remarks.

[Louis Pinkham:]

Thank you, operator. To summarize the quarter, we did face some unique challenges across our business, which weighed on our sales and depressed our April orders. The coronavirus also impacted our associates personally in many ways. But when it comes to factors under our control, I think the Regal team executed extremely well, and I thank them again for their efforts.We de-levered at 12% in the quarter, showing significant progress on this metric for the fourth quarter in a row. We also generated very strong free cash flow, and we even realized some pockets of share gain in various parts of our business.There's still a lot of work left to do as we execute toward our mid- and long-term goals, but we're well on our way, and we won't let COVID deter us. Our 2020 restructuring and 80/20 initiatives are slightly ahead of schedule.We remain focused on serving our customers with differentiated products and services while keeping our associates healthy and safe. And our long-term strategy articulated at our March Investor Day remains firmly intact. Thank you all for joining our call and please stay safe.

[Operator:]

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