RBC Bearings Incorporated
Q2 2017 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Good day, everyone, and welcome to the Regal Beloit Second Quarter 2017 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please do note that today's event is being recorded. I would now like to turn the conference over to Mr. Rob Cherry, Vice President of Investor Relations. Please go ahead, sir.

[Rob Cherry:]

Thank you, operator. Good morning and welcome to Regal Beloit's second quarter 2017 earnings conference call. Joining me today are Mark Gliebe, Chairman and Chief Executive Officer; Jon Schlemmer, Chief Operating Officer; and Chuck Hinrichs, Vice President and Chief Financial Officer. Before turning the call over to Mark, I would like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings. On Slide 3, 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 a reconciliation of these measures to the most comparable measures in accordance with GAAP. Now, I will turn the call over to Mark.

[Mark Gliebe:]

Thanks, Rob. Welcome everyone. Thank you for joining our second quarter call and thank you for your interest in Regal. We'll follow our normal agenda. I'll make a few opening comments. Chuck will provide a financial update and then Jon will give color on markets, operations and the performance of our three segments. After that, I'll summarize and then we'll move to Q&A. Regal delivered a solid performance in the second quarter with adjusted earnings per share of 13.2%, ahead of prior year. Organic sales growth was up 4.8% and it was great to post organic growth in all three segments. In fact, the second quarter was the sixth quarter in a row where the organic growth rate improved sequentially. At a segment level, organic growth in the Climate segment was up 6.5% with low teens growth in residential HVAC partially offset by softer sales in the HVAC aftermarket and into the commercial refrigeration end market. In the C&I segment, organic growth was up 4.3% with growth in oil and gas, power generation and in our Asia business. Finally, in the PTS segment, organic sales were up 3.5% for the quarter, driven mostly by growth renewable energy and oil and gas end markets. From an operating profit perspective, adjusted operating margin improved 70 basis points year-over-year resulting from three key drivers. First was the impact of volume leverage, second was the rightsizing of our oil and gas businesses, and third was, the benefits of simplification and SG&A cost controls. These gains were partially offset by commodity inflation in our Climate and C&I segments. Free cash flow to net income for the quarter was 154% and cash cycle days improved sequentially by 3.5 days in the quarter. Our strong free cash flow helped us pay down 70 million in debt and we have repurchased $21 million of our shares. As you may recall, we have been working on repatriating $150 million of cash this year. Through July, we have made great progress, repatriating 110 million of cash. Overall, the first half of 2017 was solid. Looking forward, as we entered the third quarter we are encouraged that orders remain up year-over-year across all three reporting segments. The key drivers effecting second half forecasted sales include; first, broad based end market growth in both North America and Asia; next, we have anniversaried last year's decline in the Middle East and in oil and gas; and finally, our residential and commercial HPAC customers are predicting continued growth for the remainder of 2017. Overall for 2017, we continue to expect low single digit organic growth for this year. Our margin performance, we are off to a great start in the first half with 80 basis points of adjusted margin year-over-year. In the second half, we are expecting a more modest year-over-year margin improvement as compared to the first half. To start, we are experiencing commodity inflation across all three segments. Additionally, in the Climate segment, we are overcoming supply chain challenges as we ramp up our facilities. We have been protecting our customers without a cost. We will get through these challenges and overall we still are expecting to improve our adjusted operating margins for both the second half and the total year. We raised our 2017 guidance which now reflects total year adjusted earnings per share of $4.70 to $5, up 9% at the midpoint over 2016. I'll now turn it over to Chuck.

[Chuck Hinrichs:]

Thank you, Mark, and good morning everyone. Sales in the second quarter 2017 were $869.2 million, up 3.6% from the prior year. Foreign currency translation in the quarter was a negative 0.7%, and the impact of the 2016 divestiture reduced sales by 0.5%. Therefore, organic sales increased 4.8% in the prior year. Our adjusted operating margin in the second quarter was 10.4%, which is a 70 basis points improvement from the 9.7% in the prior year. The strong improvement in the second quarter was driven by three factors. The first was the operating leverage on the sales increases in all three segments. The second factor was the benefits from the rightsizing of our oil and gas businesses. And finally, we continue to generate benefits from the simplification initiative in SG&A cost controls. Consistent with our strategy to selectively prune non-core businesses, in the second quarter, we exited an equipment leasing business in our C&I segment that was underperforming. As a result, we have 3.9 million of restructuring and related cost. We also recorded 1.2 million of SG&A expenses related to this business that does not qualify as restructuring expenses. In 2016, this business had 5 million of sales and operated at a loss. In summary, we had a good second quarter performance as we grew sales and improved our adjusted operating margin. Our second quarter 2017 earnings per share reported on a GAAP basis were $1.18. There were two adjustments to the GAAP EPS in the second quarter, the first adjustment was restructuring and related costs of $7.7 million or $0.12 per share and the other adjustment was the $0.01 per share of gains on sale of assets. Net of these adjustments, the adjusted EPS for the second quarter was $1.29 per share, representing a 13.2% increase from the prior year. Now, I will summarize a few key financial metrics. Our capital expenditures were $16.7 million in the second quarter. We expect our full year 2017 capital spending to be approximately $75 million. Depreciation and amortization expense for the full-year 2017 is expected to be approximately $145 million. Our restructuring activities resulted in $7.7 million of restructuring and other costs in the second quarter. We expect restructuring costs to be approximately $13 million for the full year. This includes the previous guidance of $9 million and the approximately $4 million from the exit of the business in the C&I segment in the second quarter. In the upper right quadrant, we show our effective tax rate information. The ETR in the first quarter was 22.5% and we expect our full year 2017 ETR to be approximately 23% excluding any discrete tax items. In the lower left quadrant we provide data on our first quarter 2017 balance sheet. Our total debt was $1.4 billion, and our net debt was $1.1 billion. In the first quarter, we achieved solid debt reduction, repaying $43.5 million of debt. The total debt to adjusted EBITDA ratio dropped below 3 times to 2.9 times at the quarter end. We expect our net interest expense for the full year 2017 will be approximately $51 million, a modest increase from our previous estimate. In the upper right quadrant we show our effective tax rate information. The ETR in the second quarter was 21.6%, excluding the impact of the restricting cost and the related tax effect, our ETR was 22.5% in the second quarter consistent with our earlier guidance. We expect our full year 2017 ETR to be approximately 22% excluding any discrete items. In the lower left quadrant, we provide data on our second quarter 2017 balance sheet. Our total debt was $1.3 billion, and our net debt was $1.56 billion. In the second quarter, we achieved god debt reduction, repaying $70.3 million of debt. We continue to make good progress in reducing our debt and our total debt to adjusted EBITDA ratio declined to 2.7 at the end of the quarter. In the lower right quadrant, we present information on our free cash flow. We generated $81.7 million of free cash flow in the second quarter, representing a 154.2% of net income for the quarter. We continue to be successful in managing our networking capital even with the growth in sales. And we are pleased with our success in executing in our plan to repatriate a $150 million of cash from our businesses in Asia. We repatriated $41.8 million in the second quarter and we have repatriated a $109.7 through July. And lastly, we used $21 million of cash to repurchase our common stock in the second quarter. This is consistent with the more balanced approach in our capital allocation strategy as we communicated at our Investor Day. Now, I will review our full year 2017 earnings guidance. Our guidance for 2017 reflects our expectation of low single-digit organic sales growth for the year. We are expecting a modest improvement in our adjusted EBITDA operating profit margin in the second half of 2017, as compared to the first half. We are raising our full year 2017 GAAP EPS guidance to $4.51 to $4.81 per share. On an adjusted basis, we are raising our 2017 guidance to $4.70 to $5 per share. The adjustments to convert the GAAP EPS to the adjusted EPS are restructuring cost of 13 million or $0.21 per share and $0.2 of gains on asset sales. We are also updating our forecast for our full year 2017 effective tax rate to 22% from our previous forecast of 23%. This change matches our actual ETR of 22% in the first half of 2017, reducing the ETR to 22% for the second half of 2017 accounts for approximately half of the increase in the midpoint of our earnings guidance. Now, I'll turn the call over to Jon Schlemmer.

[Jon Schlemmer:]

Thanks, Chuck, and good morning everyone. Let's first start by walking through each of the segments. In Commercial and Industrial Systems, sales were $407 million with organic sales increasing 4.3% from prior year. This represents the fifth consecutive quarter of improving organic growth rates. In the quarter, sales were up in our Asia businesses with particularly strong demand in both China and India. We also saw strength in our oil and gas and power generation businesses. We had another quarter with sales up in commercial HVAC however sales into our distribution channel were slightly down in the quarter. Price improved sequentially and was slightly up to the prior year. Adjusted operating margin was 6.7% of sales, up 20 basis points from prior year. The margins benefited from the rightsizing of our oil and gas businesses as well as the strong Asia performance. However, we had three headwinds that partially offset these benefits. The first relates to the challenges of ramping up of our production just after the recent plant consolidations. Second is the impact of commodity inflation on our margins. And the third is the exit of a non-core business that Chuck referenced earlier. Even with these challenges, we do anticipate sequential margin improvement in the second half of the year. In Climate Solutions, sales were $271 million with organic sales increasing 6.5% from prior year. This represents the sixth consecutive quarter of improving organic growth rates. We had another quarter with strong demand in our North America residential HVAC business with sales up in the low teens from prior year while sales to our HVAC OEM customers were strong in the quarter. Our HVAC aftermarket sales were essentially flat to the prior year. Sales were down in our commercial refrigeration businesses in both North America and Europe where we had a difficult comparison with strong prior year sales. Price was slightly up to the prior year improving sequentially due to the two way material price formulas. Adjusted operating margin was 15.1% of sales, up 70 basis points from prior year. Margin rates benefited from the strong North America HVAC volumes, the ongoing simplification efforts and improved product mix. However, commodity inflation partially offset the gains. We are working through supply chain challenges that started to impact our business in the second quarter. While these issues are largely behind us, the impact from these challenges in addition to commodity inflation will put pressure on our margins in the second half of the year. Overall it was another solid quarter for our Climate business with strong organic sales growth and improved operating margin. Sales in Power Transmission Solutions were $191 million with organic sales increasing 3.5% from prior year. Sales were in line with our expectations as we turn the corner to positive organic sales this quarter. This was our fourth consecutive quarter of improving organic growth rates in the PTS segment. In the quarter, sales were up in renewable energy, oil and gas, and the commercial HVAC end markets. Sales into distribution were essentially flat to the prior year. The order rates continue to be up over prior year and we are expecting positive organic growth in the second half. Adjusted operating margin was 11.7% of sales, up 160 basis points from prior year. Higher volume, price, synergies and ongoing cost controls all contributed to the margin improvement. We expect second half margin rates to be similar to the first half. It was a solid quarter for our PTS business with positive organic sales growth and improved operating margin. Now, I'd like to give you a quick update on some of the topics we discussed at Investor Day. At Investor Day, we discussed the focus we are replacing on both commercial excellence and the digital customer experience to help drive organic growth. We’ve made some terrific progress over the past quarter on both of these fronts. We have now filled the majority of the new sales positions targeted to improve our sales coverage across all three segments. We also recruited new talent and the key sales leadership roles across the Company, and we rolled out a new compensation plan this year that provides more upside for our highest performing sales team members and scenting and rewarding growth. We're also placing a significant investment in the digital customer experience or DCX for short. We've purchased a TIM, a product information management tool that allows us to gather and store our digital product information and syndicate the data to our customers. We're investing and taking high resolution 360 degree spin images of our top selling distribution products, and to-date we've completed over 70% of the first 20,000 SKUs we targeted to capture in 2017. The data has been provided to our distribution customers to increase their ability to help their customers search, find and buy our products. And just last month, we launched a refresh regalbeloit.com website and a refresh marathon motors product website. We're making it easier for our customers to find the products they want from Regal. We continue to receive very positive customer feedback on both the direction and progress we're making in this area, and all of this effort is about focusing on our core businesses to drive organic sales growth. Now, before I turn the call over to Mark, I'd like to give you a quick update on our innovation efforts. At Investor Day, we talked about our new UlteMAX motor and control. The new product utilizes our disruptive axial technology and is targeted for the high volumes C&I motors space. Our initial focus is on air moving, commercial HVAC applications and the interest level from our customers remains very high. Last month, we started production on our new manufacturing line, set up in one of our existing North American motor facilities. We've shipped the first product units and the feedback remains very positive. We will be ramping up the production line throughout the second half of this year and into 2018 to meet customer demand. As you can see from the three awards, our innovative new product has received some excellent recognition over the past quarter. This is helping to bring awareness to the new technology and is creating new leads for future business.

[Mark Gliebe:]

Thanks, Jon. Now, before we go to Q&A, I would like to briefly summarize our second quarter results. Adjusted earnings per share were up 13.2% as compared to prior year. Organic sales growth was up 4.8% and we are encouraged that orders remained positive as compared to prior year in all three segments as we entered the third quarter. Margins were relatively strong in the quarter, up 70 basis points. Our free cash flow and net income was 154% for the quarter. We paid down 70 million in debt, repurchased 21 million of our shares. Our total debt to EBITDA now stands at 2.7. Year-to-date, we have repatriated $110 million of cash of our 150 million target. As Jon mentioned, we are continuing our enterprise strategy outlined at Investor Day to focus, innovate, simplify and driver organic growth. And finally, we raised our 2017 full year adjusted earnings per share guidance to $4.70 to $5 which represent the 9% increase at the midpoint. Overall, it was a solid first half. We will now take your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be Julian Mitchell with Credit Suisse. Please go ahead.

[Julian Mitchell:]

Just first question may be on the -- you talked about commodity inflation a bunch relating to C&I and Climate in particular. Is there any way that you could quantify what impact that had in terms of dollars or margins in Q2? And where do you see that impact getting worst in Q3? Or does it start to ease back quickly?

[Mark Gliebe:]

Well, certainly commodity inflation was a headwind to the first half. What we can tell you Julian is that as we head to the back half of the year, it's lesser the headwind, still a headwind but lesser the headwind than it was on the front half of the year. Some of that related to the fact that we continue to get the benefit of material price formulas.

[Julian Mitchell:]

And then just honing in on the Climate division specifically, should we take from your comment in the prepared remarks that the operating margin in Q3 is probably down sequentially? Or is the last few years it's been up sequentially in Q3?

[Mark Gliebe:]

Well, I think the comment that we made is that as you look at the back half of the year, it's going to -- the margin rate is going to improve both sequentially in the back half of the year and year-over-year. I think those are the comments we made.

[Julian Mitchell:]

For total the Company?

[Mark Gliebe:]

For the total company. And Climate last year was a pretty strong performance in the third quarter of last year. And the comments that Jon made, we had some supply chain issues that are now largely behind us that we're protecting our customers, so no issues for our customers. But there is a cost to it and we're going to pay some of that back as we get into the third and fourth quarters.

[Julian Mitchell:]

And then just a final one from me on capital deployment, some buyback in Q2, how you're thinking about capital deployment in general today acquisition versus buyback? And what's the appetite there given the successful deleveraging since the PTS deal?

[Mark Gliebe:]

Thanks Julian. So, you may recall at Investor Day, we made a subtle change in our thinking on a go forward basis and that was we wanted to as opposed to thinking -- acquisitions first, we wanted to thanking our organic first and kind of we got the credit company marching in that direction today, and it seems to be paying back in a lot of different ways, some of the thing we've been doing with seeing some of the benefits for us. So we like that, we want to continue to drive organic growth, and as not the same we won't do M&A, we will do M&A and our pipeline is building. We are committed to a more balanced approach when it comes to capital deployment and as you saw we've repurchased 21 million shares in the quarter. So, it's a more balanced approach.

[Operator:]

And the next questioner today is going to be Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

[Jeff Hammond:]

Just want to be clear on Climate seasonality. So margins, is it fair to say overall your margins are up sequentially in the second half versus the first half, but they are down sequentially for Climate given what a tough comp in 3Q last year as well as some of these headwinds?

[Mark Gliebe:]

Yes, I think that's a right way to think about it. Overall for the Company as I've mentioned earlier, operating margins would be better in not in the second half both sequentially and year-over-year and, but Climate will be a headwind to that to that trend.

[Jeff Hammond:]

Okay, that's helpful. And then just top line seasonality more normal I guess last year we had the softer start and then the stronger finish, it seems maybe the reversal or more normal?

[Mark Gliebe:]

I would say it's a more normal. Jon, do you want to add anything? It's more and more growing to more normal.

[Jon Schlemmer:]

Yes, I would say outside the Climate seasonality, no big change that we are seeing year-over-year for the Company. But in Climate that's correct as we recall last year, we had a slower start and the cooling season, but a stronger finish and it carried over stronger in Q3 than what we had typically see and we're seeing a bit more of the normal cooling season this year.

[Jeff Hammond:]

Okay, and then on supply -- it seems like you had supply challenges in C&I and Climate. I'm just curious what surprising you guys, it sounds like the growth is robust. We're just kind of going back into a more normal mid-single digit. So, what's kind of surprised you there? And how do we feel that those don’t creep up again? Thanks.

[Mark Gliebe:]

Yes, I'll take a pass at that, Jeff, and then Jon will add some color to it. So, we did not have supply chain issues in the C&I segment. We did -- as Jon mentioned, we did have in both -- in one of our key commodities in the Climate area as well as in the electronics space. So, the stuff was the issues that we were faced, but it's not unusual as you probably know electronics are longer lead time items and that we know we're dealing one phase in those issues, but we did not have supply chain issues on the C&I side.

[Jon Schlemmer:]

Yes, the strength off course was better in Climate, up low teens for the North America residential HVAC and that's where we had the supply chain challenges that Mark mentioned, Jeff. In C&I, it was more ramping up our facilities right on the hills of some of the recent plant consolidations and that created some challenges for us in the C&I business, while the organic sales weren't strong and C&I they were in Climate. When you look at it from an operational standpoint and the amount of inventory that we took down last year when the markets were down, operationally, though we're seeing quite a bit of higher unit production in those facilities, so that's created some of those challenges for us, nothing that we can't work through, but were some of the as challenges in the second quarter.

[Operator:]

And the next questioner today will be Josh Pokrzywinski with Wolfe Research. Please go ahead.

[Breindy Goldring:]

Breindy Goldring on for Josh. I would like to ask about the peso impact. I know your components are still in U.S. dollars and you hedge a peso exposure. So when does the spot rate start to hit your P&L? And how big is that impact? Thanks.

[Chuck Hinrichs:]

I'll try to answer that. This is chuck. So, we have a consistent approach on foreign currency hedging and so we have our hedges in place for pesos that go our 2.5 plus years. So we will still be enjoying deflation area effects as a result of those hedges for the next 2 years plus. That the spot transactions would be occurring at that spot level, but we have a nice supply of pesos that we will be purchasing at a more attractive rate.

[Breindy Goldring:]

And just as a follow-up. When you last spoke about resi HVAC inventory in 1Q, you said the feedback has been that inventory channel spin, so can you give us an update there? Thanks.

[Jon Schlemmer:]

Sure, this is Jon. So in Climate, I would kind of separate it in two areas, our aftermarket business and our OEM business. On the OEM side, I think we would say that inventories are somewhat normal that maybe slightly light given the strong demand that we have experienced through the quarter. But overall, I would characterize it is in line with the normal. On the aftermarket side, we -- I commented in the -- on the slides that we had weaker demand in the aftermarket through the quarter. And in particularly, it was in the back half of the quarter with June not be in a very strong month. So, our checks that we've done in the channel and the aftermarket that would indicate the inventories are little higher for aftermarket parts.

[Operator:]

And the next questioner today is Robert McCarthy with Stifel. Please go ahead.

[Robert McCarthy:]

So a couple of questions. One, maybe you could just talk a little bit about seems that you have pretty decent OEM strength across the Board, but distribution was called out as being flat. I mean just coming out from a slightly different way. Is there any commonality to that in terms of the weakness you are seeing? Or how would you just kind of typify what we are seeing in terms of difference?

[Mark Gliebe:]

I'll break the comment up into the three segments so that will help put some color. I think Jon just did a nice job of talking about what we're seeing in the Climate space with it's kind of following off at the end of the quarter. Basically, there is more new equipment being sold in the aftermarket space than there is component. Now, let me get the C&I and the PTS segment, sales were actually flat in the second quarter with some customers and some down. I think the important point there as we look forward with the growth rates pursuing we do expect positive growth in the third quarter given the order trend that we see.

[Robert McCarthy:]

In the distribution channel?

[Mark Gliebe:]

Yes, in the commercial, industrial and PTS segments in the distribution channel.

[Robert McCarthy:]

In the distribution -- okay, so you expect there is bit of timing and then you expected it to improve. Okay. And have you quantified year-to-date how much price you have gotten across the Board? You embedded your organic growth rate, even at the total company level or the segment level, and what's your expectation is for price in the back half?

[Mark Gliebe:]

We haven’t quantified it but we've given a fair amount of anecdotal data about it. It's been a headwind, price cost has been a headwind to us when you take in the consideration, both the price are getting and the inflation we're seeing, it's been a headwind and it'd be less of a headwind in the back half of the year. And then importantly the timing of our material price formulas is such that it increases as we move through the year.

[Robert McCarthy:]

So you expect more probably better contributions from price your organic growth rate in the back half obviously.

[Mark Gliebe:]

Yes, slightly more and we have more in the second versus the first will have slightly more in the third and fourth than we did in the second.

[Robert McCarthy:]

And just remind us and obviously this is something I should know, so shame on me. But any days issues in the third quarter and fourth quarter to be mindful for modeling purposes with update?

[Mark Gliebe:]

We had one less shipping day in the quarter.

[Robert McCarthy:]

Shipping day in Q2 but for the back half, and are the days same for third quarter and fourth quarter?

[Mark Gliebe:]

Hold on one sec, I'll get that, so yes exactly the same as prior year. '17 is the same as '16.

[Operator:]

And the next questioner today is Scott Graham with BMO. Please go ahead.

[Scott Graham:]

Kind of same question as Rob's on the days. Yes, I had calculated that the days probably cost you guys a 0.1 to a 1.05 half of organic. First of all, was that correct Chuck?

[Chuck Hinrichs:]

I'm sorry Scott can you say that again please.

[Scott Graham:]

Did the loss of the day it seem like it cost you somewhere between a 0.1 and 1.05 of organic sales?

[Mark Gliebe:]

I would -- I mean, certainly, when you lose a day, there is probably some impact. But I would, I don’t -- we didn’t take the time to quantify it, Scott. So, certainly that was…

[Scott Graham:]

Either way, but it was something, right?

[Mark Gliebe:]

Yes.

[Scott Graham:]

So that kind of dovetails into my next point here is that you have a pretty good quarter of organic in 2Q which was a little bit better than advertised of the day sales thing. Yet here you are, saying that with -- even with orders up as you exit the quarter in all 3 segments, that the low single-digit organic sales guidance is maintained, which would almost suggest that the second half will come off on growth versus the second quarter. Is that what you're messaging here?

[Mark Gliebe:]

Well, we also talked about in the Climate space low kind of a teens kinds of growth rates. You don't get that a lot. So yes, that's exactly what we are saying it was low single-digit in the part half of the year and it will be a low single-digit as we had into the back half of the year.

[Chuck Hinrichs:]

I think if you look at the performance year-to-date Scott, our organic sales are up just slightly under 3% so with half of the year behind us that's where we are sitting at the midpoint. And with six sequential quarters of improving organic growth rates. Clearly, the comp starts to get a little bit more difficult as we continue to move forward. But we're still pleased to see the order strength versus prior year across the three segments.

[Scott Graham:]

Right, and that's kind of where maybe I would just -- maybe asking you for a little more clarity than even that, because if you're saying that distribution, which is a big channel for you looks better in the second half of the year, and again, you're exiting with good orders, I guess, I'm just having trouble getting to low single-digit organic in the second half off of those statements?

[Mark Gliebe:]

I understand the challenges and believe me, we hope were that to the upside. But the best view we have is low single-digit growth for the year.

[Scott Graham:]

All right. Fair enough.

[Chuck Hinrichs:]

Scott, I'll mention to that the last page in the appendix gives you the shipping days for the past and the future.

[Scott Graham:]

Yes, no, I'm aware. The other question I had for you was on the characterization of your second quarter operating margin. Is this just semantics or is there something more -- you've mentioned that the oil and gas resizing was second. You mentioned that second after leverage for the margin drivers in the quarter, yet that only affected the one business whereas simplification effects two segments and you've listed that third. Is -- was the oil and gas rightsizing a larger benefit to the margin events than Simplification and SG&A?

[Chuck Hinrichs:]

Certainly, the oil and gas rightsizing was a significant contribution to margin improvement for the Company, and while it's predominantly in the C&I segment, there also work that we did across the PTF business where we had similar impact from the downturn in oil and gas. So, I would say it's contributing to both of those segments probably larger in C&I and PTF. But it was a considerable benefit to our margin progress.

[Scott Graham:]

And you would say the second behind volume then.

[Mark Gliebe:]

Yes, behind volume. Right.

[Operator:]

[Operator Instructions] And the next questioner today will be Chris Dankert with Longbow research. Please go ahead.

[Chris Dankert:]

I guess just kind of following up on the last question here. Are you guys want to break out or able to breakout what that impact was for the simplification issue in the second quarter?

[Mark Gliebe:]

We haven’t provided that information Chris.

[Jon Schlemmer:]

I think, Chris, it certainly is flowing through in the benefit of all the businesses, lower depreciation and amortization reflects the progress in simplifying our manufacturing footprint globally. So, that was a nice contributor, but it really just also enhances the operating leverage that you will see in volume.

[Chris Dankert:]

And then I guess backing up to a much higher level. At the Analyst Day you guys had mentioned automation was kind of an initiative as far as cost saving going forward. I guess any update there or any the initiatives that have going on in automation front?

[Mark Gliebe:]

Thank you, Chris. So, we did discuss that our Investor Day that over the next three years while we are already doing some form of automation in the Company that all hard work we have been doing on simplification for the last number of years is going to put us in a position to shift some of our work and our restructuring investments into automating manufacturing processes. We are starting that in earnest and we have got some great plans as we go into 2018. We are doing a few things this year, but I would say we are heavily into planning mode as we head in the '18.

[Operator:]

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

[Mark Gliebe:]

Thank you, William. You may recall Jon commenting on our new regalbeloit.com website. We would encourage you to check out the new site. We have updated the Investor page and we welcome your feedback. Thank you for your questions and for your interest in Regal. Have a great day.

[Operator:]

Ladies and gentlemen, the conference has now concluded. Thank you all for attending today's presentation and you may now disconnect your lines.