RBC Bearings Incorporated
Q1 2008 Earnings Call Transcript

Published: 1 May 2008

[Operator:]

Ladies and gentlemen, thank you very much for standing by and welcome to the first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. (Operator instructions) As a reminder, today's call is being recorded. I would now like to turn the conference to your host, Mr. Dave Barta, please go ahead.

[Dave Barta:]

Thank you very much and good afternoon everyone. Welcome to the Regal-Beloit first quarter earnings conference call. Joining me today on the call are Henry Knueppel, Chairman and CEO; and Mike Gliebe, President and COO. Before I turn the call over to Henry, I would like to remind you that the statements made in this conference 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 those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our filings with the SEC. Now, I will turn the call over to Henry

[Henry Knueppel:]

Thank you, Dave. I want to welcome all of you and thank you for joining our call. We're going to follow our normal agenda. I will make a few opening comments. Dave will give you financial highlights of the quarter. Mark will put some color into the products, markets and operations, and I'll finish with a brief second quarter outlook. First of all, let me say that we are very pleased to announce another record quarter, despite the deteriorating residential market and continued materials cost pressures. We're also pleased to announce the acquisition of Hwada, a major addition to our commercial and industrial motors businesses, and also pleased to announce an increase in our dividend, the fourth in as many years. Dave and Mark will give you more color on the quarter. But, at the 50,000 foot level, the company is achieving solid success despite difficult conditions. We continue to face two serious headwinds. First, as we came into the year, the residential market was projected to be down 4% to 5%, against a double digit decline in 2007. We can now see the forecast was optimistic and the market appears to be headed toward a down 10% to 12 % number, consistent with what we saw in the first quarter. The caveat is weather and replacement market, which could still be a plus in the next two quarters. The second serious headwind is materials, not a new subject, but as we entered the year, we like others expected to see key materials like steel and copper remain high but relatively consistent. The fact is that they are now hitting new highs. And in the case of steel, the spot price has nearly doubled in 90 days. These types of erratic and unpredictable cost changes create problems throughout the supply chain. We like others are taking pricing actions. They are difficult, but necessary and they are never matched perfectly to the cost push. It appears we will fight this drag on earnings for the foreseeable future. Fortunately, we also have some strong tail winds. Our productivity programs are robust and are delivering. Our industrial business, our power generation business, and our international businesses have remained strong and the outlook continues positive. And our four 2007 acquisitions are performing. They are meeting our expectations, even in light of the same headwinds we talked about earlier. In total, we are pleased with our performance for the quarter and we believe that our balanced end markets and globalization initiatives are showing their strength. As I mentioned, we are very pleased to announce the acquisition of Hwada in Wuxi, China. Hwada makes motors from 1.5 to 6,700 horse power in both IEC and NEMA designs. Hwada is considered one of the premier industrial motor companies in China and has been growing rapidly. 2007 sales were approximately $115 million. Half of their sales are in China, with the other half comprised of large export volume to Europe and smaller amounts to the U.S. and elsewhere. Hwada has an excellent management team and a product development staff and we're excited about with this addition. With that, I'm going to turn it over to Dave Barta.

[Dave Barta:]

Alright, thanks Henry. I'm going to go ahead and review the results for the first quarter and discuss our outlook for the second quarter. Sales for the first quarter were $536.3 million, which is a 28.1% increase as compared to the first quarter of 2007. Included in our results are $111.9 million from the Fasco, Jakel, Morrill and Alstom businesses that we acquired towards the end of 2007. Looking at it by segment, electrical segment, sales were $481.2 million, an increase of 31.2% versus the first quarter of 2007, including the sales for the acquired businesses, which all roll up in the electrical segment. Segment growth, as Henry mentioned, was paced by the power generation business that experienced globally 17.5% year-over-year growth, as we continue to see strong worldwide demand for our generator products. Industrial motor sales increased 6.8%. HVAC motor sales were down 3.3%, as the tough market conditions continued throughout the quarter. I would comment however that this rate was better than what we saw in the overall market. Given the mix of products, we saw a much stronger demand for our higher efficiency products during the quarter. Sales in mechanical segment increased 1%. I should add that you might notice in this morning's press release, there was a re-class last year from electrical to mechanical for some product sales that were moved from electrical business to mechanical business, so 1% growth in the mechanical segment. From a geographic perspective, which is certainly a big focus with the company, our China-based businesses grew over 30% in the quarter, which we are very pleased with this growth story. This growth coupled with our expanding geographic footprint resulted in sales outside of the U.S. being 25.6% of our sales versus 19.2% for the first quarter of 2007. We feel that we are really gaining traction in our globalization efforts. Gross margin for the quarter was 22.8% as compared to the prior year first quarter gross margin of 23.2%. Excluding the impact of the acquisitions, gross margin would have been $98.8 million or 23.3% of sales. This result is in line with our expectations and included inflation that exceeded the impact of price by approximately $7.7 million, which again was in our previously announce guidance of $7 million to $9 million. While we are not pleased with the inflation price gap, we continue to be pleased and encouraged by our productivity and Lean Six Sigma activities, which continue to have a positive impact on our results. Operating expenses were $64.5 million and included $15.9 million from the acquired businesses. We saw income from operations of $57.6 million or 10.7% of sales, as compared to $47.3 million or 11.3% of sales reported for the first quarter of 2007. Excluding the impact of acquisitions, income from operations would have been $47.4 million or 11.2% of sales, a slight decrease from the prior year. The tax rate for the quarter was 35.5%, which was slightly above our guidance – slightly above the fourth quarter last year. The increase over the fourth quarter is really a result of distribution of income and the impact of certain statutory rate increases in Mexico and China, and also reflects the impact of the expiration of the United States research and engineering tax credit, which at this time has not been extended for 2008. Net income for the quarter was $32.2 million, as compared to $26.8 million reported last year. And finally, fully diluted earnings per share were $0.97, which is a 21.3% increase, as compared to the $0.80 a share reported in the first quarter of last year. Turning to the balance sheet and cash flow, we're very pleased with the improvements we made throughout last year and reducing working capital has continued into this year. Cash from operations was $34.9 million, as compared to $10.4 million in the first quarter of 2007. We typically are adding to inventory at this time of the year and accounts receivable, as our business is somewhat seasonal. This year, we actually were successful in reducing inventories during the quarter, while continuing to supply our customers. We continue to believe that we still have room to go in cash cycle and we will be making more improvements as the year moves on. Depreciation and amortization was $14.2 million for the quarter and capital spending was $13.7 million. Also during the quarter, we repurchased 110,000 shares of our common stock during open market purchases at an average cost of $38.10 per share. With good cash generation, we ended the quarter with total debt of $555.9 million versus the year-end level of $564.3 million, which was an $8.3 million decrease. Based on this level of debt, our net debt to cap is just under 35%, so again well within the comfort zone we like to operate within. Now, turning to the forecast for the second quarter, as we mentioned in this morning's earnings release, we're looking at EPS range of $1.10 to $1.18 per share. This forecast is based on a very similar view of the sales environment that we experienced in the first quarter. We expect non-HVAC, residential related and HVAC motor sales to be down mid-single digits. However, we also anticipate that the industrial motor business, generator business, mechanical businesses, will continue to experience growth into the second quarter. The sales contribution from the acquired businesses, including Hwada are expected to be approximately $100 million to $135 million for the second quarter. With regard to margins, we hope that the material price gap would close or certainly be less than the beginning of the second quarter. However, with copper remaining in the current zone of around $3.70 to $4 a pound and steel prices being up substantially, we continue to expect the price inflation gap to continue in the second quarter and both – and baked into our guidance is a gap of between $7 million and $9 million. We are confident however that our productivity and Lean Six Sigma activities will help minimizing this challenge. Tax rate used for arriving at the guidance was 35%. Some other forecast data for the second quarter, we are forecasting capital spending of approximately $10 million to $15 million. We continue to estimate full year CapEx spending of $60 million to $65 million and full year D&A to also be in the range of $60 million to $65 million. I'd add that Hwada acquisition is included for a portion of the quarter in this guidance, but will be neutral to earnings giving the impact of purchase accounting. We also believe that given some of what we see going on particularly in the raw material arena, we should comment on our outlook for the remainder of the year to some degree. We continue to stay very close to our markets and customers regarding the sales outlook. At this point, while we would agree that certain markets are and will likely remain soft, for example, the residential HVAC markets, overall we do see the opportunity to continue to grow our sales, particularly given our industrial motor and generator strength and our growing global commercial presence. The other obvious concern is raw materials. We do believe that copper will likely remain well above our average cost for 2007, that steel increases that we're seeing will continue through the year and will likely get even worse. We're aggressively addressing the margin impact of this unprecedented inflation. Based on our current assumptions, if we were to stop with assumptions as we have them today, we'd anticipate a price inflation gap in the third quarter similar to what we were anticipating for the second quarter. For the fourth quarter, which seems like a long way off, and certainly we believe a little bit early to predict, without taking additional actions, we'd continue to see a gap in the fourth quarter as well. Again, we are aggressively addressing this issue in every way possible, including productivity, Lean Six Sigma projects and harvesting the synergies that we are getting from the acquisitions. With that, I'll turn the call over to Mark.

[Mark Gliebe:]

Thanks, Dave, and good afternoon everyone. I'll give you a little bit color around our operations and tell you what's happening around the globe in our businesses. During the first quarter of 2008, we focused on continuing the integration of the four acquisitions we made in the late third and early fourth quarters. We put a lot of energy into integrating the new businesses into our company culture and business processes. The integrations are going quite well and we feel great about the management teams, their products, and the progress these teams are making mining the synergies of our combined companies. As we were spending times integrating our teams, we continue to deal with difficult residential housing market in the U.S. In spite of the housing segments, our businesses performed very well and we are very pleased with the execution of our team. In the first quarter, we saw strong sales growth in our leasing and marathon branded businesses up 7%, and our global generator businesses up 20%, and in our Asia-based businesses up 39%. Our generator strength this quarter was aided by robust demand out of China, where the severe snowstorms that hit China earlier this year caused a strong increase in demand for emergency power. That sudden surge in demand will carry through the second quarter, as our facilities catch up on the backlog that was created in the first quarter. While we were talking about generators, I'd like to give you a quick update on the operations of that particular business. Our new Monterrey generator facility continues to run very smoothly. If you recall, during 2007, we transitioned the mid sized generators from Lima, Ohio to Monterrey, Mexico. That transition is behind us and we're now in the process of transitioning other mid-sized generators from Wausau, Wisconsin to Monterrey. Further, we have also begun the transition of the assembly of our transfer switches from Langley, Ontario facility to Monterrey. We expect both the Wausau move and the Langley move to be completed by the end of the third quarter. When we are finished with the generator transition, we will be producing large generators in both Wausau and in Shanghai and small and mid-sized generators in both Monterrey and in Shanghai. It is a strong multisite line-up that gives us the flexibility to serve local markets while taking advantage of shifts in labor markets and in currencies. Less than a mile away from our Monterrey generator facility, you can see a new factory being constructed. We call it Monterrey II. During the first quarter, we announced the closure of our Neillsville, Wisconsin facility that produces smaller integral horsepower motors. Our plan is to move the production of these motors from Neillsville and other U.S. plants to Monterrey by year-end. When that move is completed, we'll have the capability to produce small integral horsepower motors in Mexico, India and China, again giving us the capability to serve growing local markets and the flexibility to take advantage of shifts in labor and in currencies. Now, I'd like to move on and address our HVAC segment. In HVAC, our sales were down 3% for the quarter. Obviously, we do not like any performance that is down year-over-year, but given the decline in the residential housing industry, we felt pretty good about our HVAC performance in the quarter. We've benefited from stronger demand in our energy saving ECM motors. Our customers are getting some help with a better mix of energy saving, high comfort HVAC systems that utilize our ACM technology. We are also beginning to see new ECM demand from products we launched in 2007 such as the Arctic 59, which is used in walk-in cooler refrigeration applications. The struggling housing industry continues to put pressure on this segment of our business and we expect the market pressures to continue for quite some time. However, with the launch of new products, our focus on green solutions, the addition of Fasco and Jakel businesses and our continued expansion internationally, we are taking the appropriate steps to mitigate the impact of the domestic housing industry. In our 2007 annual report, we used the theme, Do More Use Less. That theme is appropriate for the actions we are taking across our operations, as we consolidate to the most productive design platforms, lean out our facilities, transition certain product lines to low cost regions, and introduce new energy efficient products for our customers. As you know, we have been working very hard to maintain our leadership and energy efficient products. For over a year now, during each quarterly call, we've introduced to you new products that we've recently launched in the marketplace. During the February call, we told you about our new impulse motor which was our first effort at utilizing our energy efficient, intelligent ECM technology in the water movement market. We're beginning to get traction with that product in the North American spa segment and we're optimistic that we'll have additional customers integrate this motor system into their offerings yet this year. During that same February call, we also announced Extreme Duct, a new encapsulated stainless steel motor that was designed to meet the stringent sanitation requirements of the food processing, pharmaceutical and beverage industries. That product is now being sold through our leasing channel distribution and the interest among a number of major food producers is very high. Today, we'd like to tell you about two new energy saving motors that we have just recently put into production. The first is our new Evergreen ECM motor. Evergreen is an HVAC aftermarket product that is intended for homeowners who already have an existing HVAC system, but would like to upgrade the performance of the system to either reduce energy consumption or to improve the comfort of their home through better heating and cooling. We have two versions of the Evergreen motor, one designed only for air handlers which are typically used to cool homes in warmer climates, and one for furnaces which are typically used to heat homes in cooler climates. The air handler version is already in the market and the contractors who service these homes are giving us positive feedback. The second Evergreen motor will be available by the end of the third quarter this year and we're optimistic that the two evergreen motors will give us a unique advantage in the motor aftermarket and help contribute to the global energy consumption challenge by truly doing more and using less. The other product that we are introducing to you today is our new energy saving Empower motor. Empower like Impulse that we just talked about earlier is an energy saving motor that utilizes our ECM technology to deliver energy savings and unique features to customers who need to move water. While Impulse initially targets the North American spa segment, Empower will initially target the Australian pool pump segment. Empower is 15% more efficient than the motor it replaces due to both ECM technology and the use of a new motor construction technology that came along with the Fasco acquisition. The new motor construction allows us to reduce the size and the cost of the motor while delivering improved efficiency. We'll start shipping Empower to our first customer by the end of this second quarter. An area of concern for the quarter was the continued material inflation that the business is experiencing due to the higher prices of key input materials such as steel, copper and aluminum. Steel costs increased strong double digit for the quarter and further inflation in the third and fourth quarter is expected. Additionally copper and aluminum spot prices also continued to rise. While we hedge our copper and aluminum through a disciplined hedge process, our current hedge positions are being replaced by more costly hedges and the effect is continued copper and aluminum inflation. To combat the inflation, we have aggressively raised prices in every brand in our business. Price increases vary by business and are dependent on the amount of steel, copper and aluminum in our products. In our mechanical businesses, we have announced price increases of 4%, with the view that we will most likely be raising prices again in the second half if steel continues to increase. In our HVAC business, we've announced increases of 8% to 10%. And in our commercial and industrial businesses, we have announced price increases of 6% to 10%. Given the economy, it is certainly not an easy time to be raising prices, but we know there's really no place to go to recover this type of inflation, and so we'll be forced to take tough positions with our customers. Meanwhile, we're continuing our disciplined efforts at taking costs out of our operations through variable cost productivity programs and Lean Six Sigma projects. Now, I'd like to shift gears and discuss our recent acquisition of Hwada. 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 four acquisitions adding $477 million in annual sales. The Hwada acquisition gives RBC an integral horsepower or IHP motor manufacturer in the fast-growing Chinese market. The Hwada business is very complementary to our Marathon India IHP motor business that we acquired at the end of 2007. The products from these businesses are utilized in applications such as energy, steel, paper, water, and other process industries. The infrastructure buildup in both India and China should position these businesses to continue to experience strong growth for years to come. Like our other acquisitions, our intention is to maintain the brand and the management team of Hwada. We will add Hwada to our existing portfolio of businesses in China, which is now under the leadership of Fred Yang, our President of RBC China, who started with the company in December of 2007. Adding Hwada to the RBC family brings our total sales under Fred's leadership to $275 million. Fred will be tasked with integrating Hwada, while utilizing the RBC operating system to improve the operating performance of all our China business units. In summary, our performance during the first quarter highlights the benefit of participating in a variety of geographic regions and diverse end markets. The effect is the smoothing of economic volatility in our businesses. 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. We feel great about the progress we are making in the four acquisitions we made in 2007 and we are pleased to welcome Hwada business and have them join the Regal-Beloit family. And finally, we're optimistic that the second quarter will be another opportunity for the RBC team to prove to you that we can consistently perform and deliver to your expectations. Thank you and now back to Henry.

[Henry Knueppel:]

Thank you, Mark. As we look forward at the second quarter, we expect another record quarter. That said, we'll accomplish it with brawn due to our acquisitions and strong productivity programs. The materials cost push will squeeze margins and while we're taking pricing actions now and may be required to take more by quarter-end, we will experience margin compression. We continue to see solid bookings rates in our commercial and industrial businesses fueled by U.S. equipment exports due to the dollar, and we continue to see exceptional strength in our demand in Asia. Accordingly, we have projected earnings in the range of $1.10 to $1.18 per share for the second quarter. We are also active on the acquisition front with a solid pipeline of opportunities strategically on point. We started buying back stock in the first quarter and expect to continue albeit cautiously this quarter. As we have previously stated, we'll balance our acquisition opportunities and stock buyback opportunities with our strong cash flow. While we are comfortably leveraged currently, we believe it is appropriate to remain somewhat conservative given the uncertainty in the economy. I'll close my comments by giving credit to our employees around the globe. They are energized by the challenges and they are delivering despite the headwinds. With that, we will take questions.

[Operator:]

Thank you. (Operator instructions) Our first question comes from Alexander Paris with Barrington Research Association.

[Alexander Paris:]

Good afternoon. Great quarter.

[Henry Knueppel:]

Thank you, Alex.

[Alexander Paris:]

So much information, I'm still processing it here. But could you just give a rough idea of – you had given estimates of the accretion to earnings from the four acquisitions last year. Could you give a rough idea of how much they contributed in the first quarter and/or what is your – do you still have the same forecast for the full year?

[Mark Gliebe:]

We do have the same forecast, if you go back and revisit what we said, we said that in terms of sales, about $477 million as compared to $130 million last year. If you take the mid point of the range of all those acquisitions, it's about $0.34 for this year. And again, we feel very confident that that is where we'll be. And I think, I don't take it all the way down to net income, with all of the moving pieces certainly below margin, but I think we were certainly in the line with kind of the pro rata portion of that for the quarter.

[Alexander Paris:]

Okay. And the raw material price – your price increases, I presume your competitors, are you seeing maybe what your competitors are doing, that you are pretty comparable with their price increases?

[Dave Barta:]

I think all the competitors are seeing the same thing we're seeing and we see price increases from most of our competitors.

[Alexander Paris:]

And looking at the housing vulnerability, I would imagine, I think it's nine quarters in a row now, residential constructions being down. Isn't there some point here, or maybe you can identify where your year-over-year comparison starts getting a bit easier?

[Henry Knueppel:]

By the book, it was easier this time last year and easier now than last year, but the book doesn't work in this situation Alex, as you know. Our customers are seeing down 10 to 12 for this year, and next year I would say they're expecting to see either flat or up. And there's no perfect science as you know to that.

[Alexander Paris:]

I guess if we look at the quarterly seasonal pattern, you'd think right off the bat the high building season, the second and third quarters, is that pretty much where you've got the most exposure or maybe they start ordering before that?

[Henry Knueppel:]

I mean, it is – the business is somewhat seasonal and the second and third quarters are the big quarters. The third quarter is typically a lot dependent upon temperature and heat in the Midwest and Northeast in the replacement market.

[Alexander Paris:]

And just one more question, I think you answered most of it, your total international is now getting over close to 25% to 26% I think you said, right?

[Henry Knueppel:]

Yes, I think it's little over 25% in the first quarter and with the acquisition of Hwada, we are going to be pushing pretty close to 30%.

[Alexander Paris:]

And that Chinese sales, $225 million, that was adding the full $115 million or so from Hwada?

[Dave Barta:]

Looking at last year, it's more like $275 million pro forma for the acquisitions.

[Alexander Paris:]

For 2008?

[Henry Knueppel:]

That was the impact of the acquisition.

[Dave Barta:]

Pro forma for the acquisition.

[Alexander Paris:]

And the rest of Asia, I see you picked up at least $5 million or $6 million with Hwada. How big is that relative to China?

[Henry Knueppel:]

I'm sorry, Alex, can you ask that question again?

[Alexander Paris:]

The rest of Asia, what are your sales roughly?

[Mark Gliebe:]

Probably, if you consider we do business in both India and in Thailand, and if you throw Australia in there, probably another $200 million to $250 million.

[Alexander Paris:]

So, you're getting close to $250 million or so on a run rate in Asia.

[Henry Knueppel:]

Yes.

[Alexander Paris:]

Good, that's very good. Thank you very much.

[Henry Knueppel:]

Actually run rate is closer to $400 million.

[Operator:]

And our next question comes from Jeff Hammond with KeyBanc Capital. Please go ahead.

[Jeff Hammond:]

Hi, good afternoon guys.

[Henry Knueppel:]

Hi, Jeff.

[Jeff Hammond:]

Can you remind us what's in the commercial motors that get sold into residential applications and how big that business is?

[Mark Gliebe:]

We sell into pumps, compressors and then other general purpose applications. So, after pumps – pumps and compressors and then in our business, there's a bit of HVAC in there and then after that, those are the three big categories. Then it goes to a very wide, diverse, general purpose motors. Pumps and compressor motors are going to end up selling in the residential big box, while our customers are selling to big box retailers.

[Jeff Hammond:]

How big is that business that was down 16.9%?

[Mark Gliebe:]

Roughly $180 million.

[Jeff Hammond:]

Okay. Just on the residential side, better performance versus the market. Can you give us a sense of price mix in the quarter and really maybe a little more color on why you think that mix is sustainable?

[Mark Gliebe:]

Let's see, we did have stronger delivery of our higher-end ECM products, so I think you know, we've talked about that a number of times. I think you guys have a feel for the sales mix impact of selling that product. And it's all about energy efficiency in that story, energy efficiency and comfort. So the products that are being sold by our customers, it appears that more are being sold on the higher end and so they're shifting either to get energy efficiency or to get home comfort or in some cases, they'll use our motor to reduce their system cost because it is cheaper to get energy savings using the motor than by adding copper, aluminum or steel. So those would be the three reasons that would drive the use of our product and we certainly saw it in the first quarter and we're seeing it in the second quarter.

[Jeff Hammond:]

It just seems that that mix, dynamic or your outperformance versus the market wasn't as prevalent in '07. So I'm just trying to understand what you see that's changing?

[Mark Gliebe:]

You are right, it wasn't as prevalent in '07. In fact, I think we had actually said that '07 was a down year for all our products. I think that has something to do with the comparison point of '06 in all of the SEER legislation and the inventory build-up that was happening late '05, early '06. As new designs came out in '06 for the first time using ECM motors, there was a build-up of inventory that must have occurred. But you are right that we did not get that benefit in '07.

[Jeff Hammond:]

So maybe it's somewhat the inventory adjustments finely worked through in the higher end?

[Mark Gliebe:]

Could be. Could be. I would agree to you that it's not crystal clear to us.

[Jeff Hammond:]

Okay, and then just on the commodity front. It sounds like the $7 million to $9 million dynamic, price versus cost, continues through the rest of the year. What do you need to get, as a percentage of those aforementioned price increases, to be able to maintain that $7 million to $9 million?

[Dave Barta:]

Well, I think my comments on the $7 million to $9 million, obviously the second quarter, we're well into it. So we've got a pretty firm grasp on the effective materials and price to come up with that. I think as you look forward and I guess maybe I should have been a little clearer qualifying the comments. If we were to stop pretty much today with what we've done and how we view materials, that's the gap we would see. If you look at the math regarding the comments Mark made, certainly, we have to get those type of increases across all of our business and what materials, where they are today, that will certainly mitigate a large portion of that hit.

[Jeff Hammond:]

So if you get the majority of your price increases, that $7 million to $9 million get's better, or you're able to maintain that?

[Dave Barta:]

If we get the majority of the price increases that we were talking about, that will pretty much mitigate the entire knock. The $7 million to $9 million kind of assumes we put a stick [ph] in the ground where we are today.

[Jeff Hammond:]

Okay, thanks.

[Henry Knueppel:]

Thanks, Jeff.

[Operator:]

Thank you and our next question comes from Mike Schneider with Robert W. Baird. Please go ahead.

[Mike Schneider:]

Thank you and good afternoon.

[Henry Knueppel:]

Hi, Mike.

[Mike Schneider:]

Guys, maybe we could start with the industrial motor business. It looks to me like the business actually accelerated during Q1 because a quarter ago, we were talking about the fact that industrial motor growth was fairly tepid against an easy comparison. This quarter, you did 6% plus organic growth against a much tougher comparison. What's your read on the market? Is this just distribution restocking or was there a true change of business tone here?

[Henry Knueppel:]

We never quite agreed with the characterization that the fourth quarter was against an easy comparison, Mike.

[Mike Schneider:]

Okay.

[Henry Knueppel:]

That said, I mean we continue to see solid strength here and a good piece of that in high-efficiency motors and a good piece of it in just larger motors in general. So, we did not sense that there was a stocking up.

[Mike Schneider:]

Okay. And that split between the large and what I'll call general purpose motors, can you characterize the degree to which larger motors are actually carrying the day right now, or is it a fairly balanced split of growth?

[Mark Gliebe:]

I would say, Mike, it's balanced across both our smaller motors and our large motors.

[Mike Schneider:]

Okay. And just in commercial HVAC, we spent a lot of time talking about residential and the numbers given in the release focus on residential. Are you broadly defining that and including commercial within that or could you give us an update just on what you've seen in commercial HVAC specifically?

[Mark Gliebe:]

On the residential side, Henry used the number 10 to 12 down for the year. That would be residential. On commercial, we're hearing a similar response from customers which is, it's not as good as they had hoped for and I'd say what we're hearing is anywhere down three to down five for the year.

[Mike Schneider:]

Okay. What implications did that have for the mix? I presume commercial are larger frame sizes and higher margin?

[Dave Barta:]

When we talk commercial in our business, we have very little volume on what the market would refer to as commercial. So we should be using actually light commercial. Our motors tend to be smaller than our competitors' when serving the commercial HVAC business. We see the larger commercial market has a future opportunity, especially given some of the recent acquisitions.

[Mike Schneider:]

Okay. And then the Hwada acquisition, you mentioned it has been growing rapidly. Do you happen to have just a rough sense of what the three-year CAGR has been in growth? When was the company founded out of curiosity?

[Henry Knueppel:]

The company itself has been around a long time. Originally, it was a government-owned company that went private about ten years ago. At that time, it was pretty small. It's been growing 20% plus a year for the last three years.

[Mike Schneider:]

Because they do export a fair amount of their sales, are you intending or is there even an opportunity that would benefit margins to more balance the production such that you've got plants in the U.S. taking some of their production and vice versa, or is that not really possible with the different SKUs and designs?

[Dave Barta:]

Our intention will be to, and I kind of led to it a little bit in our discussions, our intention is to manufacturer these motors in multiple locations. Monterrey Mexico, and in China – Shanghai, China and in Calcutta, India. Our thinking is that we're going to serve both local markets in all cases, serve the local markets out of the factory that is closest. But we'll have the flexibility, once we can consolidate design platforms to have capability to adjust in case currency or labor markets shift.

[Mike Schneider:]

Okay .

[Henry Knueppel:]

I think specifically, as you look at the Hwada product that's going into Europe, that's all IEC design. We're not currently making IEC design in North America.

[Mike Schneider:]

Okay. And then, just as you look now at the changing cost structure in China with labor costs, lower VAT tax rebates and just the general currency swing. Have you seen any change in the pricing, I'll call it, aggression of some of your Chinese-based competitors here in the U.S.?

[Henry Knueppel:]

I think it's easier to speak to what we see directly, which is, everything from component suppliers to in some cases, some complete assembly suppliers that we deal with, and we've certainly seen a more aggressive pricing front.

[Mike Schneider:]

Okay.

[Dave Barta:]

When you say more aggressive, they've raised their prices because of currency. Because of the currency and labor inflation happening in China, our component suppliers and finished product suppliers have raised their prices to us here.

[Mike Schneider:]

Okay, and then a final question just on new product. Do you have a metric that you're tracking that you can share with us in terms of percentage of new products being that have been rolled out over the last two years, however you guys look at it, so we can start to track indeed the impact of these new products?

[Mark Gliebe:]

We do. We measure both evolutionary and revolutionary new products. We only go through the effort to pull it all together once a year. We do that in kind of the July, August timeframe. At that point in time, we'll have the updated data and we'll communicate it.

[Mike Schneider:]

Okay, thank you and congratulations on a great quarter.

[Henry Knueppel:]

Thank you, Mike.

[Operator:]

Our next question comes from Nigel Coe with Deutsche Bank. Please go ahead.

[Nigel Coe:]

Good morning.

[Henry Knueppel:]

Hi, Nigel.

[Nigel Coe:]

Should I say good afternoon? So, it looks like (inaudible) some pretty aggressive pricing across the boards. What was the weighted average price realized during the quarter and how does that roll through 2Q and 3Q, based on the actions you have taken so far and actions you are planning through the year?

[Dave Barta:]

The effective price increase in the first quarter, without being overly specific, was low single digits. And again, I think it really reflected our view of where we thought commodities would be this year, entering the year, so those have been price increases that went into effect late last year and into the first quarter. So price increases Mark was talking about are in addition to that and price increases that are out in the market now. So we'll see low single digits kind of roll through and then we have got incremental pricing or in a case where brand had not gone out with pricing, their targeted price increase obviously is much larger than low single digits.

[Nigel Coe:]

Okay. Was there any – I mean, as I said, just following up on Jeff's question of the price mix and volumes in HVAC. It's fair to see the price mix was a much bigger impact during the quarter than it was maybe last year.

[Mark Gliebe:]

Without a doubt. Last year, if you think back to '06, we kind of had the same phenomena going on, where the high-efficiency products, partially due to the launch of the X motor, were allowing us to outperform on a sales basis, what you saw in units in the industry. And '07, the high-efficiency products were more in line with the market, in some cases slightly down. This year, the high-efficiency products are actually outpacing what we're seeing with the standard products.

[Nigel Coe:]

Okay. And then to clarify the points on commercial versus residential HVAC, I understand the bulk of commercial HVAC would be in industrial motors, is that correct? HVAC would be primarily residential?

[Mark Gliebe:]

For us, it's kind of peppered in throughout. There is some of it in industry and there'd be some of it also in that commercial business that we called out separately.

[Nigel Coe:]

Okay, great. And then was there any change or break in the way trading occurred during the quarter? Did it start off very strong and then trailed off, or did it go the other way around? Maybe comment on the April trend so far in terms of orders?

[Henry Knueppel:]

Well, the first quarter actually followed pretty much traditional path which for us the first quarter ramps up toward the end of the quarter, primarily due to HVAC and normal industrial demand that ramps up during the quarter. The second quarter is off to a pretty solid, not pretty solid, but solid start. It's where we kind of expected it to be and there aren't any new surprises so far in the various markets from what we saw in the first quarter.

[Nigel Coe:]

Okay, and then just finally from me. Generators used to be a $2 million business I'm sure it's bigger than that now. What's the current size of that business on an annual basis?

[Henry Knueppel:]

I'm sorry, Nigel, which business?

[Nigel Coe:]

The generator business.

[Mark Gliebe:]

What's the question?

[Nigel Coe:]

The revenue size of that business right now?

[Henry Knueppel:]

We've never made that public and broken it out separately.

[Nigel Coe:]

Okay, but somewhere between$0.2 billion and $0.3 billion?

[Henry Knueppel:]

As I said, we've never broken it out separately.

[Nigel Coe:]

Okay, great, thanks a lot.

[Henry Knueppel:]

Thank you, Nigel.

[Operator:]

Thank you and the next question comes from Michael Corelli with Barry Vogel & Associates.

[Michael Corelli:]

Hi, good afternoon.

[Dave Barta:]

Hi, Michael.

[Michael Corelli:]

Congratulations. You guys are doing a great job in a tough environment.

[Henry Knueppel:]

Thank you.

[Michael Corelli:]

A question about the Hwada acquisition, you said in the release you put out earlier this week that you were expecting $75 million to $85 million in sales and $0.04 to $0.06 accretion and obviously that is over an eight-month period and you have some purchase accounting adjustments. How should we be looking at those revenues more annualized and how should we be looking at that accretion, excluding purchase accounting on an annualized basis?

[Dave Barta:]

I think, as Mark mentioned, it's about a $115 million business last year. Again, we hope to maintain the type of growth that they've historically seen. So seeing high-teens to 20% type growth rate going forward and I think baked into our guidance was a couple million dollar impact of the write-up of inventory. So, certainly pull that out if you're looking at a more normalized type performance.

[Michael Corelli:]

Okay, and as far as acquisitions and your comfort with leverage here and obviously you're cautious due to economic uncertainties. Are you going to make mostly small to mid-size type acquisitions in the short-term or would you still look at something larger here?

[Henry Knueppel:]

We would certainly look at something larger if we thought that the impact and risk were appropriate for the business. We have capacity to do more but, realistically, right now, I would say they're more like the ones we've announced most recently that seem to be in the game.

[Michael Corelli:]

Okay, thank you. Keep up the good work.

[Henry Knueppel:]

Thank you, appreciate it.

[Operator:]

Thank you and our next question comes from Chris Bamman with Morgan Joseph. Please go ahead.

[Chris Bamman:]

Good afternoon, gentlemen.

[Mark Gliebe:]

Chris.

[Chris Bamman:]

Just I guess real quick. Looking at this Hwada acquisition, is the margin profile lower than yours is? The strategy going forward is going to be to try and boost those margins to what you guys like to generate historically over time or what you target?

[Henry Knueppel:]

Yes. I think that's a fair characterization. We are an EVA driven company and we look at return on invested capital as pretty much the capstone. There's a lot of way to get there. One is with accelerated growth. One is with high margins, flat growth. So there are a number of different ways to get there. But this business, we think is a good business and over time we'll be able to improve the margins. It may be a while before we would get them up to (inaudible) average.

[Chris Bamman:]

Okay. And I guess when you're looking at your manufacturing capabilities and facilities across the globe, I guess particularly in China, is that benefit of manufacturing overseas starting to wear a little bit? Is there some wage inflation going on over there, so you're not maybe getting, extracting what you used to get out of there?

[Dave Barta:]

Let's just revisit the priorities; I think, it is important, Chris. Number one, our reason for global platform is to sell globally and there's nothing on the horizon that says that trying to sell in China or Indonesia or Malaysia or any other location, or India or Middle East or whatever, it is going to be better served from over here. So that's our number one goal. Our number two goal is to be there to catch customers who are moving their operations, either globalizing or doing it for other cost reasons. There is a fair amount of that that goes. And third and the lowest priority really is just cost-driven manufacturing. That said, I mean we do it and we do try to optimize the value equation for our customers. We think that there's good reason for us to have multiple different places that we can produce these products, as Mark lined out in his discussion, because there are changing economics. Certainly, the edge has come off of China and to some degree India, because of the wage inflation, because some of the changing rules, because of the currency inflation. So those things are going to come and go. That's why we feel pretty good about the platform we have that allows us some flexibility to make changes as they're required.

[Chris Bamman:]

Okay. And then just with regard to price increases, I mean, do you hit a point where you start to get pushed back or is the money that the customer can save through energy efficiency over the longer term enough to offset the higher price?

[Dave Barta:]

Well, let's break that one in into two pieces too. A price increase is charging more for the same product and that is never easy. I can tell you there's nothing about it that we like. It creates difficult situations for our customers. There's no way that that doesn't translate into difficult situations for us and for our suppliers, so that's (inaudible). When you were talking earlier about energy-efficient product, where someone's paying more but they getting something more, that's a much different situation. They're doing that because it makes sense to them. So that's not nearly the problem.

[Chris Bamman:]

Okay, that's it from me. Thank you.

[Henry Knueppel:]

Thank you. We'll take one more question.

[Operator:]

Okay. Our next question is from Holden Lewis with BB&T Capital Markets. Please go ahead.

[Holden Lewis:]

Great, thank you, good afternoon.

[Henry Knueppel:]

Hi, Holden.

[Holden Lewis:]

Couple of things, first just to shore the up the model, the share count looks like it was down a fair bit more. Was that just stock price and sort of dilution related, or just trying to get some feel for that.

[Mark Gliebe:]

Yes, the share count, obviously got the impact of the convert. So the share price being down would reduce the dilutive impact of the convert.

[Holden Lewis:]

Okay. And then, if my notes are correct, I think you had indicated originally that you thought that acquired revenues would be in the neighborhood of $115 million to $120 million. I think they came in about $111 million. You said you were comfortable with the accretion. Are we talking now maybe about low end of accretion or are you getting more savings to offset the revenues being a little light? How should we sort of look at that?

[Mark Gliebe:]

You're right, we were a touch off where we thought in terms of sales. Obviously those businesses, particularly the Fasco/Jakel are participating in the residential arena. So certainly that's driving that. I think we're still comfortable with that range and feel pretty comfortable about our prior comments. The business is performing quite well. I think if you look at any one of those businesses, the leadership team of Fasco is doing a phenomenal job with the business. This is an acquisition where you couldn't be more happy with the execution of the team and they are hitting on all cylinders, they are driving the synergies and I think we have confidence that they understand what their objectives are. And softness in sales, they're making up for in performance and true it's more a smaller business, it's still very important. True with our Marathon, India business, the team has really stepped to the plate and understands why they're here and again they are offsetting any sales difficulties they're seeing in the market with things they can control.

[Holden Lewis:]

And then just lastly, you sort of talked in the past about your efforts to drive productivity, efficiency, those sorts of things. Last couple years, you've done a very good job using that. You referenced again sort of being part of your strategy to offset the raw material increases. Can you (inaudible) show up in your third year of your original three-year effort, can you talk a little about expectations this year in terms of efficiency, productivity, how much that may be contributing this quarter and in the second quarter in guidance to sustaining margins? Just put a little bit of detail to that.

[Henry Knueppel:]

Yes, we'll try to do a little here. First of all, I mean, what we've been able to accomplish, frankly, has outpaced what we thought we were going to be able to accomplish in productivity when we set out to do those things three years ago. There is no end in site. We're going to – we have a full plate of projects we're working on and new opportunities surface daily. So I think the great news is that everything we thought we could do that way, we accomplished, for example, in two years what we thought would take us three years in our Lean Six Sigma program and our variable cost productivity deck has been fantastic. So, everything we thought there, no way we could anticipate what's happened in the HVAC market and there's little way that we could have anticipated what would happen in materials. And so as I said, we're replacing a lot of – we're doing a lot with brawn, we're not getting any gifts given to us with material. So it's significant. Dave, I don't know if you want to comment on what it might mean in the second quarter or not, I think we've been giving it our as a separate breakout per se.

[Holden Lewis:]

Well I think in the past you've talked about sort of $30 million over three years and like you said, you probably got close to that or got that a year ahead of time.

[Henry Knueppel:]

Yes.

[Holden Lewis:]

So it's kind of like a $15 million type of annual rate. Do you think we continue on with that sort of rate indefinitely? Or how do we sort of look at that sort of number.

[Henry Knueppel:]

We certainly don't see any let-up in it.

[Holden Lewis:]

Okay.

[Henry Knueppel:]

And that really pertains to the Lean Six Sigma projects and do not some of the other cost productivity there. We run at a faster rate than that in total.

[Holden Lewis:]

Okay. Lastly, can you reference China and sort of the potential Olympics impact. I know there are questions surrounding that, if you can just sort of give us your perspective on that.

[Henry Knueppel:]

Well, there are a lot of interesting things to talk about there, but we don't anticipate at the moment any significant impact. We're having to do some shuffling to avoid any material issues, because of some of the businesses that may be closing down in the surrounding 200-mile area. So, there is some shuffling around. We certainly think we're on top of that. We work on it daily to make sure that there are no surprises. So, we don't expect it to be a significant impact on us.

[Holden Lewis:]

Thank you.

[Henry Knueppel:]

Thank you, Holden and thank all of you for joining the call and for your interest in Regal-Beloit. I'd sum it up by saying we have a great company. We're delivering in a very difficult environment. We have an excellent cash flow and active acquisition pipeline, strategically focused and an attractively valued stock. Thank you for your interest. Have a great day.

[Operator:]

Ladies and gentlemen, this conference will be available for replay starting today at 3