RBC Bearings Incorporated
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good morning, and welcome to the Regal Beloit Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Perino. Please go ahead, sir.

[John M. Perino:]

Thank you, Chad. Good morning, and welcome to the Regal Beloit Third Quarter 2014 Earnings Conference Call. Joining me today are Mark Gliebe, Chairman and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, Vice President and CFO. Before turning the call over to Mark, I'd 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 those factors that could cause the actual results to differ materially from projected results, please refer to today's earnings release and our filings with the SEC. On Slide 2, we mentioned that we're presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit, adjusted gross profit as a percentage of net sales and adjusted income from operations and free cash flow. We believe that these are useful financial measures for providing you with additional insight into our operating performance. Please read this slide for information regarding these non-GAAP financial measures, and please see the appendix where you can find reconciliation of these measures to the most comparable measures in accordance with GAAP. Now I'll turn the call over to Mark.

[Mark J. Gliebe:]

Welcome, and thank you for joining our third quarter call and for your interest in Regal. Today we'll follow our normal agenda. I'll make a few opening comments; Chuck will give a financial update; Jon will give color on products, markets and operations; and then I'll summarize and we'll move to Q&A. Regal had a solid third quarter, delivering overall sales growth and strong free cash flow. Our adjusted EPS of $1.15 was in line with our guidance. Our revenues for the quarter were up 8% year-over-year. Adjusting for acquisitions, our organic growth was 2.6%. Sales in our North American residential HVAC business were up approximately 8%, representing the fourth consecutive quarter of year-over-year growth in that business. We also experienced solid growth in our Mechanical businesses. Revenues in our North American commercial and industrial motors business were down slightly, driven mostly by weakness in commercial and industrial refrigeration and irrigation. In Asia, sales into China slowed, Australia remains challenged, but sales in India were up with strong demand in the domestic HVAC market. Sales in the Venezuela were down, as we anticipated, as we managed our risk in that uncertain economy. And finally, our recent acquisitions, Benshaw, Cemp and Hy-Bon, performed as expected in the third quarter. Cemp is benefiting from the continued growth in oil and gas, while Hy-Bon is benefiting from recent EPA rulings, requiring oil producers to either flare or recover vapors from oil storage tanks. Our latest acquisition, Benshaw, is integrating well into the company and is off to the great start. On operating profit margins, our up profit was in line with our expectations, as we laid it out a few months back. Our simplification projects continue to progress forward. The Acuña consolidation product was just completed, and with respect to Springfield, we expect to be substantially complete with our production in that factory by the end of February. Further, we are progressing well on the already announced closure of our 2 Kentucky-based motor parts plants. Also in the quarter, we divested our interest in an underperforming joint venture in China. As you know, our simplification efforts including consolidating plants, consolidating design platforms, combining ERP systems and rationalizing suppliers. When it comes to our progress on simplification, we are in the middle stages of execution, but still only in the early stages as it pertains to the expected benefit stream and there is more simplification to come. Our free cash flow for the quarter was 135% of net income, making our September year-to-date free cash flow 113% of net income. We expect that 2014 will be the fourth year in a row of reaching our goal of free cash flow to net income of greater than 100%. We repurchased 500,000 shares out of our 3 million share authorization in the quarter. We are fortunate to be in the position with a balance sheet where we can pursue acquisition -- acquisitions and return cash to shareholders. As far as acquisitions go, our headset and bias towards acquisitions has not changed, and our pipeline remains strong. As we look to the fourth quarter, in North American residential HVAC, our guidance reflects continued year-over-year growth, driven primarily by a modest prebuild resulting from the regional efficiency legislation. We expect strong continued growth in our mechanical businesses driven by market growth in energy and the power transmission distribution channel. In our North America commercial and industrial motors business, we expect overall revenues to be relatively flat for the fourth quarter. The instability in Venezuela continues to be a challenge. We have included it in our guidance weaker sales into Venezuela, as we managed through the economic uncertainties, and going forward, we expect continued volatility in that country. In spite of the issues in Venezuela, we expect adjusted operating margin to be up year-over-year in the quarter. I will now turn it over to Chuck Hinrichs.

[Charles A. Hinrichs:]

Thank you, Mark, and good morning, everyone. I will start with the reconciliation of our results on a GAAP EPS basis to adjusted EPS. In the third quarter 2014, earnings on a GAAP basis were $1.05 per share and in line with our earlier guidance. Restructuring charges in the quarter were $3 million or $0.04 per share, related to our continuing work on our simplification initiative, and we add back the purchase accounting adjustments and closing costs on the Benshaw acquisition of $0.02 per share. And finally, we had a loss on the sale of an underperforming joint venture of $0.04 per share. Adding back these adjustments results and adjusted earnings per share for the third quarter 2014 of $1.15. This is in line with our earlier guidance for adjusted EPS. Our third quarter 2014 sales were $830 million, an increase of 8% from the prior year. The impact of foreign currency translation in the quarter was a positive 0.1% on total net sales, as compared to the prior year. Sales in the quarter increased $42.7 million from the Cemp, Hy-Bon and Benshaw acquisitions. Organic sales were up 2.6% in the third quarter versus the prior year. In the third quarter 2014, our adjusted gross margin was 25.1%, adjusted for both restructuring charges and purchase accounting adjustments. As we previously guided, our third quarter margins were negatively impacted by lower sales into Venezuela, as we risk-managed our operations in that volatile economy. Our operating expenses in the third quarter of 2014 were $129.1 million. This includes $8.3 million of SG&A from acquisitions and a $1.9 million loss on the sale of the joint venture in China. This JV was consolidated into Regal's results and represented $15 million of annual sales and generated a modest net loss from operations. Exiting this JV is part of our overall effort to improve our operating profit margins. Net of these adjustments, our SG&A expenses in the quarter were essentially flat to the prior year. Also, during the third quarter, we repurchased 500,000 shares of Regal stock at an average price of below $70 per share, for a total use of cash of $35 million. These repurchases represent 17% of our share purchase authorization and offset the annual amount of equity compensation dilution. Now I will summarize some key financial metrics for the third quarter of 2014. Our capital expenditures in the quarter were $17.6 million, including the completion of our new industrial motor factory in Wuxi, China. For the fourth quarter 2014, we estimate capital expenditures will be approximately $20 million, resulting in estimated total year 2014 capital expenditures of approximately $80 million. Our effective tax rate in the third quarter was 27.1%, in line with our earlier guidance. We estimate our effective tax rate for the fourth quarter to be 25%, as we will benefit from a lower tax rate in one of our China plants, which recently received a high-technology status. In the lower left quadrant, we provide data on our quarter end balance sheet. Our total debt declined $90 million in the third quarter to $677 million, and our net debt was $350 million. Our credit metrics continued to improve, as our debt to adjusted EBITDA was 1.6x and our net debt to adjusted EBITDA was 0.8x at the end of the third quarter. In the lower right quadrant, we present information on our free cash flow in the third quarter. We generated $64 million of free cash flow in the quarter or 135% of net income in the quarter and 113% for year-to-date 2014. Our fourth quarter 2014 guidance is for GAAP EPS of $0.83 to $0.91 per share. On an adjusted basis, that is $0.90 to $0.98 per share after adding back the estimated $0.06 per share of restructuring charges and $0.01 per share in purchase accounting adjustments relating to our Benshaw acquisition. Our fourth quarter guidance includes the continued headwinds from our Venezuelan operations. Our fourth quarter earnings guidance does not include any impact of a possible devaluation of the Venezuelan Bolivar or other write-offs that may be necessary as a result of any potential change in our business operations in Venezuela. To frame the potential impact of a Bolivar devaluation, if there was a devaluation to the current SICAD I rate of 12, the impact on our Venezuelan operations could be a currency translation loss in the range of $4 million to $7 million. At the SICAD II rate of 50, the currency translation rate could be in the range of $8 million to $13 million. This is based on our estimate of net monetary assets in Venezuela of approximately $10 million. Now I'll turn the call over to Jon Schlemmer.

[Jonathan J. Schlemmer:]

Thanks, Chuck, and good morning, everyone. I'll start with some color on the end markets and customer demand. Sales in our North American residential HVAC business were up approximately 8% in the quarter compared to the same period prior year. The growth was driven primarily by 2 factors

[Mark J. Gliebe:]

So let me summarize. We finished the third quarter in line with our guidance, with the top line growing 8%. We had yet another quarter where our free cash flow as a percent of net income was greater than 100%, and we now expect to finish our fourth year of cash flow exceeding net income. As we look at the fourth quarter, we expect adjusted operating margin improvement, and we have the Regal team focused on simplification and innovation, with the idea of providing greater value to our customers and higher margins for our investors. Regal has had 3 acquisitions in the last 4 quarters. The acquisitions are integrating well and performing. Our acquisition pipeline remains strong. And while we did repurchased 500,000 shares in the quarter, we have a bias towards acquisitions. We are fortunate to have a balance sheet that will allow us to pursue acquisitions and return cash to shareholders. We will now take your questions.

[Operator:]

[Operator Instructions] Our first question comes today from Jeff Hammond with KeyBanc.

[Jeffrey D. Hammond:]

So C&I, still a little bit surprised to see declines. You gave good color there. But I'm just wondering, as you kind of look more deeply, kind of how you're feeling competitively, what's your confidence as we move into '15? We start to see growth. What are the big issues there on kind of this ninth quarter in a row decline?

[Mark J. Gliebe:]

Jeff, we don't see any structural issues in our C&I motor business. There's always puts and takes in any market. We have a couple end markets that have been haunting us for the year. As we mentioned, commercial and industrial refrigeration, as well as irrigation. We should be by -- I think by the end of the first quarter, we'll start lapsing that, and perhaps some of those markets will begin to turn for us. Most of the indicators that we see are pointing in the right direction relative to that business. So we haven't seen it yet, but like I mentioned, there's green shoots out there. So we're going to remain optimistic.

[Jeffrey D. Hammond:]

Okay. And then just help me on the international because I think in the release you said x acquisitions that grew 8%. But in the presentation, you were kind of saying down 1%.

[Mark J. Gliebe:]

So I understand your comment there. So in our North American resi HVAC business, that was up 8%, a lot of our customers have operations in Mexico. And so from a North American perspective, HVAC is still up. When you look at sales outside of the U.S, that would include Mexico, and bring that number up. Now if you strip out Mexico from our sales outside of the U.S, if you strip that out, we're still up a few percent.

[Operator:]

Our next question comes from Julian Mitchell with Credit Suisse.

[Jonathan Shaffer:]

This is Jon Shaffer for Julian. I just wanted to get a little bit of a sense around the margin impact of the SEER change into next year. It's my understanding that some of the margins for the prebuild may be a little bit lower. But should we start to get some kind of a mixed tailwind as '14 SEER plays out through '15?

[Mark J. Gliebe:]

I think, Jon, you're thinking about it the right way. I'll comment and then if Jon Schlemmer wants to add any color, we'll let him talk. So as we looked at the end of the third quarter when the prebuild began and going into the fourth quarter, we're selling more of our standard products. So there'll be a little bit of mix down in that time frame. And then, as we move into Q1 and Q2 of next year, obviously, there'll be a little air pocket because that volume was shifted in 2014, as opposed to 2015. It -- so we'll have an issue there in Q1 and Q2 to talk about. But then as we get beyond that, we expect to have a positive mix, as we look out into '14 and beyond. Now you shouldn't walk away thinking that every SEER 14 product takes an energy-efficient motor. That's not the case. There's a lot of different ways to deliver energy efficiency. However, we do expect a modest mix pickup, as we get into the second half.

[Jonathan Shaffer:]

Understood. That's extremely helpful. And then just on kind of the M&A versus buyback balance, I understand it's very opportunistic, but should we expect any more buyback this year if we don't see any big deals? Or should we start to think of that as a '15 event?

[Charles A. Hinrichs:]

Jon, this is Chuck Hinrichs. It's really hard to call that. As you say, it's opportunistic based on market conditions as well, as our assessment on the acquisition market. So we're not able to provide any further guidance on that. But it continues to be a strategy of ours to return cash to shareholders. And as Mark said, we believe we can create more long-term value through acquisitions.

[Operator:]

Our next question comes from Mike Halloran with Robert W. Baird.

[Michael Halloran:]

So sticking on the margin side of things, obviously, some puts and takes there. You laid out the, call it, the mix swing that's happening on the HVAC side of the portfolio. Maybe you could talk about the impact you saw on the op incline. I think you were thinking somewhere in that $5 million from Venezuela this quarter. What kind of impact is embedded into the fourth quarter guidance? And how should we think about the impact on a forward basis, if that's the right run rate?

[Mark J. Gliebe:]

For the third quarter, the quarter unfolded pretty much the way we thought it would. We had discussed 2 issues on our last call, Venezuela being the biggest one and it pretty -- it unfolded pretty much the way we had thought it would. As we look forward, as we talked about it, Venezuela continues to be a headwind for us, on both the top line and the margin line. So we're managing our way through that uncertainty. It's tough to predict what follows, but we're the doing our best to manage through that.

[Michael Halloran:]

Okay. Then on the -- what are the high-efficiency trends look like? Stripping out the pre-buy on the HVAC side, what do the high-efficiency trends look like on the HVAC piece there?

[Mark J. Gliebe:]

Well, it was an improvement in the quarter. We had a -- we saw a tick up in the quarter in terms of customers choosing a higher and a more energy-efficient product versus a standard product. And probably, we had a little bit of headwind from the SEER 13 pre-buy. So it was probably a pretty good quarter overall. We continue to see an overall long-term move towards energy-efficient product. So we continue to believe that that's a kind of a tailwind for us long term.

[Jonathan J. Schlemmer:]

It was a good -- I would say, overall, it was a good quarter for high-efficiency mix, especially when you consider the prebuild impact on the quarter would be, obviously, all of our standard products. So that's not going to help mix, yet our high-efficiency sales were up 7%. If you stripped out the prebuild and HVAC, we did have slightly positive product mix in the base business. So it was a good quarter for high-efficiency.

[Operator:]

The next question comes from Mark Douglass with Longbow Research.

[Mark Douglass:]

Mark or Jon, can you just discuss the areas of energy where you were positively impacted? I mean, is it more up, mid, downstream? Any particular regions in the U.S.? Permian basin or sells if [ph] anything like that?

[Mark J. Gliebe:]

Yes. So our -- we saw a very nice increase in our Milwaukee Gear business, in terms of both orders and sales, and that business sells into the fracking industry, primarily on the upstream processes, kind of at the well. And so a lot of that was refilling inventory coffers, I believe, meaning we had a tremendous amount of inventory that we carried for a long time. I think our customers orders did pick up and their inventory was -- had dried up. And so we refilled that. But it's still positive, Orders are still positive. As we look forward today, we feel pretty good about Q4 and even Q1.

[Mark Douglass:]

Did that impact -- was this positive impact just on the gear side? Or did Unico also see some benefit?

[Mark J. Gliebe:]

So we certainly saw the benefit in our Hy-Bon business. Our Hy-Bon business continues -- Hy-Bon is benefiting more from the EPA rags. On the Unico side, it was -- they're more focused on oil versus gas. I would say that our Milwaukee Gear tends to be more impacted by gas fracturing. Unico, not as much. However, I would say our North American orders in Unico just have probably seen a little bit of lift right now.

[Jonathan J. Schlemmer:]

I would add also, Mark, that there's a number of other mechanical businesses that sell some products into oil and gas similar to Milwaukee Gear. They saw the strength as well. They're not quite as great of an impact as Milwaukee Gear for us, but certainly, we saw the similar strength in those other pockets.

[Mark Douglass:]

Okay. And then, final question, on your non-motor businesses and electrical, switch gears, alternators, how did those fair in the quarter and what are you seeing in the order trends?

[Jonathan J. Schlemmer:]

Mark, I'd say that overall, we didn't have the same strength that we had in the first half on a year-over-year basis. That business was down a little bit in the quarter. Now we had pretty solid second half last year. We had very solid growth in the second half last year. I think fourth quarter was up double-digits. So we won't have quite as favorable comps in the -- we didn't in the third and we won't in the fourth. But the business is still performing quite well.

[Operator:]

The next question is from Nigel Coe of Morgan Stanley.

[Andrew Ronkowitz:]

This is Drew, on for Nigel. I just want a question regarding the sort of the core margin in Electrical. So if you were to sort of strip out the dilutive impact of M&A and sort of the impact from lower mix with the SEER standard legislation, do you have a sense for what core margins would've looked like on a year-over-year basis?

[Charles A. Hinrichs:]

Drew, this is Chuck. I would say they were a little bit lagged, as we took the restructuring charges in the quarter. And as we talked about, there's the delay in the benefits, principally from the Springfield move, which is the large simplification initiative that we're driving in the second half of this year. But again, we remain committed to the program and expect those benefits to come into 2015.

[Andrew Ronkowitz:]

Okay, got it. And then on the M&A pipeline, I know you talked about a little already, but just with the balance sheet getting a little bit stronger, where do you sort of size up your deal capacity at this point?

[Charles A. Hinrichs:]

Drew, I think we'd consistently said that we have the capacity to -- with our balance sheet and our existing cash, to do a transaction in the $1 billion neighborhood.

[Operator:]

Our next question comes from Josh Pokrzywinski.

[Joshua Charles Pokrzywinski:]

So I guess, just first on the pre-buy. Can you size up what you think you're getting in 3Q and 4Q related to that? And then, I guess on the other end, what that air ball may look like in the first half of '15, maybe just so there aren't as many surprises when we do the rolling guidance for those quarters?

[Mark J. Gliebe:]

So Josh, it's tough for us to really put a number on it. We do know -- we do believe it helped us in the third and it's helping us in the fourth. Because we can't tell from the product we ship what product is actually going into the market and what product the customer is holding. So it's very tough for us to know exactly what -- that our customer is buying, falls into prebuild or does not. I think we're characterizing it, the impact on us, as a modest prebuild. And it will come out of primarily Q1 and then the early part of Q2 and then would certainly have an issue -- certainly have an impact on our absorption during those 2 quarters.

[Joshua Charles Pokrzywinski:]

Sure. I guess just order of magnitude though, when you say modest, I mean, you make it sound like kind of a low single-digit positive impact, not a 10-plus percent impact, where maybe core HVAC was flat this quarter.

[Mark J. Gliebe:]

Yes, it's not 10%.

[Joshua Charles Pokrzywinski:]

Okay. And then Chuck, on the restructuring program, or I guess maybe more broadly for the entire team, you guys talk a lot about the margin opportunities and the progress on execution and being a little bit more middle innings on the planned moves and various actions, the early on realization. Have you been able to size up the drag from inefficiencies as you think about this year actual for the first 3 quarters? Kind of what you're contemplating in 4Q guidance and then do you have a sense for what the restructuring savings can look like in the next year? So I get that there's been kind of consistent talk about we're on track, we feel good about next year. Is there any number that we can put to that at this point?

[Charles A. Hinrichs:]

Josh, I think we'll have a lot more information for everyone at our Investor Day on December 9, but we still stand by our previous commitment on the benefits of these savings. For example, the Springfield of at least $15 million in 2015. But we haven't tried to size or quantify those inefficiencies that might have occurred in 2014.

[Joshua Charles Pokrzywinski:]

They're in the millions of dollars though, presumably, right?

[Charles A. Hinrichs:]

Yes, it's hard without sizing that number, Josh.

[Joshua Charles Pokrzywinski:]

Okay, that's fair. And then just lastly on the balance sheet, I get that you have pretty healthy capacity there at $1 billion, maybe a small number of properties kind of reached that threshold, and I think if you look back the past couple of years, the deals have been more modest in size. What is your interest in kind of spending the way through buyback kind of the excess free cash given at this point the need to build fire power above and beyond that $1 billion is probably not very prudent from a market perspective, just because there aren't any deals bigger than that.

[Charles A. Hinrichs:]

Josh, I'm not sure if I understand it. Are you just talking about the balance between share repurchases and acquisition opportunities?

[Joshua Charles Pokrzywinski:]

Yes. So if you're saying that you have $1 billion of capacity right now, maybe there's a property, maybe 2 out there that get to that threshold. But to the extent that those don't become available, why build capacity beyond that? Why not just say we're kind of happy with where the balance sheet is today and then we'll take all the excess free cash flow and buy back stock from here, rather than just building a bigger war chest?

[Charles A. Hinrichs:]

Well, I think that's certainly a possibility. And as we've said, opportunistically, we'll be assessing the ability to execute our share repurchase program in the future and then constantly balancing that with our view on acquisition opportunities.

[Joshua Charles Pokrzywinski:]

Okay. And now, I guess just as an update, as a last one on the status of the pipeline. Would you say that the average deal size that you're looking at has gotten any bigger or smaller since you last spoke?

[Mark J. Gliebe:]

No, I would say it's been the same. We have opportunities for tuck-ins and opportunities for larger transactions. Nothing much has changed.

[Operator:]

The next question is from Walter Liptak with Global Hunter.

[Walter S. Liptak:]

I wanted to ask about your overhead expenses, your SG&A. The numbers were a little bit higher than I was looking for. And you if you look at like the growth rates or percentage of sales, they were up, especially in mechanic. I wondered if you could provide some color on them.

[Charles A. Hinrichs:]

Sure, Walt. Our number, if you adjust for the acquired companies and the loss on the sale of the joint venture, that number was a very modest increase over the prior year and was 14.3% of sales. So we were pretty pleased with our control over SG&A both in the third quarter and on a year-to-date basis. So I think just go through those adjustments, and I think you'll be more comfortable with our control over SG&A spending. And we continue to exercise those controls going into our fourth quarter.

[Walter S. Liptak:]

Okay, got it. So on the fourth quarter, we should expect sort of the same year-over-year growth rate, considering those items?

[Charles A. Hinrichs:]

I think on a sequential basis, we'll see flat to a down number for SG&A in the fourth quarter. On a year-over-year basis, I would -- I didn't look at that number. But I suspect we'll see flat to down as well.

[Walter S. Liptak:]

Okay. And as a follow-up, I guess in -- and you kind of touched on this already, I just want to get a clarifier from you. The O&G markets, obviously with the commodities down, you're hearing from your customers that, I mean, continue to be at this current rate through first quarter. Is that how we should interpret your comments?

[Mark J. Gliebe:]

Yes. I would say, as of now, Walt, that's kind of what we're hearing. I understand your point though given the latest news. We'll keep our ear close to it, but that's where we're at today.

[Walter S. Liptak:]

Okay. But you're not seeing deceleration at this point in order trends?

[Mark J. Gliebe:]

Not at this point.

[Operator:]

The next question is from Scott Graham of Jefferies.

[R. Scott Graham:]

I want to ask, maybe, Josh's question a little bit differently. Would it be fair to say, Chuck, that the slide Page 14 that the restructuring expenses graph here, are we going to recapture those dollar-for-dollar in savings?

[Mark J. Gliebe:]

Well, I mean, I think what we did on that slide was showed you the actuals for Q3, the estimate for Q4 and then the estimate for Q -- for the first half. So to the extent that there's not a first half charge that would fall on top of last year's first half charge, yes.

[Charles A. Hinrichs:]

Scott, the issue is always one of timing. The restructuring charges have to occur first and then the benefits occur later. Using Mark's analogy of we're in the middle innings of the restructuring program, but the early innings of the savings. When we typically analyze these projects, their payback is 1 to 2 years. So there are always attractive drivers on benefits to our savings and improvements in our operating profit margins.

[R. Scott Graham:]

And I do understand that, Chuck and Mark, and I thank you for that response. I'm trying to get not to whether they're 1 to 2 years, to whether the restructuring charge expenses are 1 to 2x on savings.

[Charles A. Hinrichs:]

It would be the reverse. It would be -- the savings would be a multiple of the restructuring charges. It's just a question of the timing of recognition.

[R. Scott Graham:]

Right. That's -- I think we're on the same page. Maybe I asked it a little confusingly. So you're not taking the restructuring charge thinking anything other than you'll be getting 100% back of that charge, correct?

[Charles A. Hinrichs:]

That's correct.

[R. Scott Graham:]

All right, very good. Jon, can you talk a little bit more about your Page 13 chart? What is the percentage of sales that these redesigns are impacting?

[Jonathan J. Schlemmer:]

I haven't thought about it that way, Scott. But if you look at the 5 programs, there's the C&I program and the HVAC program, the first one and the last one are substantial components of our HVAC and our C&I motors business. So those are very large programs. And worm gear is a pretty solid part of our mechanical business. So if I think about it -- if I think about it overall, I'd say these 5 programs probably add up to nearly half of our revenue. It's not an exact number, but it'll put you in the ballpark.

[R. Scott Graham:]

Jon, that's really great. That's very helpful. My last question is also for you, Jon. On the energy efficient -- efficiency products, the retrofits, you indicated that a couple of these things are running double-digit, of course. That would, I assume, you meant that year-over-year. So it means that these products have been out in the market for a little bit of time. Are you at a point right now, Jon, where you're able to kind of give us an idea of what the new product refreshments are adding to the top line in 2014 and perhaps run rate, what you're thinking on -- in the future? Is it adding 1% at this point? Not quite 1%? Or are we at 2%? I'm just trying to frame for myself what the new product increment here.

[Jonathan J. Schlemmer:]

I don't have that data with me today, Scott. I understand your question exactly. It's something I think that we could pull together and talk about in a future meeting for sure. I do feel good that the new products are giving us benefit on the top line. There's no question about that. I just don't have the data to put -- to quantify it today.

[Operator:]

Our next question comes from Liam Burke with Wunderlich.

[Liam D. Burke:]

Mark, on the acquisitions. You pointed out, you've seen some nice revenue opportunities on the 3 newest. On the expense side, are there any overlap expenses that you see some low-hanging fruit to lift margin there?

[Mark J. Gliebe:]

I do think as we look out over the next, say, 24 to 36 months, we do see some opportunity there. So -- but it's consistent with what we communicated at the time we did the acquisitions. We, in each case, communicated some level of synergy either on the top line or the bottom line. So, so far, it's playing out the way we had expected in all 3 cases.

[Liam D. Burke:]

Great. And then just a little color on the C&I energy efficiency. Are you seeing the demand trends consistent or increasing there?

[Mark J. Gliebe:]

I would say on the energy efficiency side, for C&I, we're seeing a slight improvement over what we've seen in the past. Part of it is because we now have products in that space that we didn't have before. We have a -- Jon showed on Page 15 earlier, HVAC, ECM products, effectively energy-efficient products. We recently took that technology last year and started offering kind of commercial and industrial versions of that product. And so we're seeing more and more interest in those products.

[Operator:]

The next question comes from Jeff Hammond with KeyBanc.

[Jeffrey D. Hammond:]

My follow-ups been answered.

[Operator:]

The next question is from Randy Edelman [ph] with Salesforce [ph].

[Unknown Analyst:]

I wanted to ask you a question. You had said something that you wanted to see the technology leader for your customers to create a greater impact on the margins. I just wanted you to expand a little bit on that and understand what areas of the business need the most technological updates and how you plan on making those changes.

[Jonathan J. Schlemmer:]

I would say -- this is Jon Schlemmer. I would say that it's really across the board. We've had innovation initiatives in place for a number of years now, and have been very focused on continuing to innovate our products and bring our customers product solutions to help them solve their problems. And we've had a strong emphasis in our HVAC business for a number of years, and we've been consistent on our push to bring that type of technology out to all of our customers, really, in every part of the company.

[Operator:]

[Operator Instructions] Our next question comes from Mark Douglass with Longbow Research.

[Mark Douglass:]

Just real quickly, Chuck, on the tax rate. You said 25% for fourth quarter. And some of that is due to China facility getting some tax breaks. Is that going to roll through into 2015, such that we should think about 25% being more normalized tax rate? Or should we consider using 27%, roughly what you had in 2014?

[Charles A. Hinrichs:]

Mark, I would recommend for the time being using 27% and we'll provide some additional guidance at our Investor Day. The 25% in the fourth quarter is kind of a catch-up, given the approval of the high-tech status of one of our China plants. So it will be embedded into our guidance for next year.

[Operator:]

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

[Mark J. Gliebe:]

Thank you. Chuck mentioned that we're going to have an Investor Day on December 9 in New York City. So we hope to see you all there. And as always, thank you for your engagement and your interest in Regal. Have a great day.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.