RBC Bearings Incorporated
Q3 2015 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Good morning and welcome to the Regal Beloit Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mark Gliebe, Chairman and Chief Executive Officer. Please go ahead.

[Mark Joseph Gliebe:]

Welcome and thank you everyone for joining our third quarter call and thank you for your interest in Regal. Before we begin today, I would like to welcome Robert Cherry to Regal. Rob has taken the role of Vice President of Investor Relations, previously held by John Perino, who recently took the role of Vice President of Financial Planning and Analysis for Regal. Rob brings years of Investor Relations experience to Regal and we are glad to have him on our team. Rob will now take you through our introduction and Safe Harbor statements.

[Robert Cherry:]

Thank you, Mark. Good morning and welcome to Regal Beloit's third quarter 2015 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 back 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 four, we state 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 Joseph Gliebe:]

Thank you, Rob, and again, welcome, everyone. We'll follow our normal agenda. I'll make a few opening comments; Chuck will give you a financial update; Jon will provide color on markets, operations and performance of our legacy segments, and then I'll do the same on our PTS Segment. After that, I'll summarize and then we'll move to Q&A. Let's start with the third quarter highlights. Regal grew sales 6% and we increased adjusted operating margins to 11.5%, representing a 180-basis-point improvement over prior year. We increased our adjusted earnings 24% and delivered free cash flow of 175% of net income and we used the free cash to pay down $79 million of debt in the quarter. While sales for the quarter were up 6% year-over-year, acquisitions increased sales 15%, while organic sales were down 6%. Currency was a $25 million drag in the quarter or 3% of sales. The headwinds in declining oil and gas markets, weaker sales in China and the SEER 13 pre-build weighed on our top line. In the Commercial and Industrial Systems Segment, organic sales were down 5%. The decline was driven by a steep reduction in oil and gas orders and weak demand in China. Even with the challenging demand profile, our C&I Systems' operating margins improved 140 basis points on a year-over-year basis to 9.3%. In the Climate Segment, organic sales were down 7%, driven by the impact of SEER 13 pre-build, the impact of two-way material price formulas and weaker sales in the Asia and Middle East markets. We believe that the SEER 13 pre-build is largely behind us now. However, as we previously communicated, we still face difficult comparisons in the fourth quarter of 2015. Additionally, while we had a slight top line benefit from mix in the quarter, our customers' revenues are benefiting from both price increases and the shift to 14 SEER. Again, even with the top line challenges, our adjusted operating margin improved 320 basis points in the quarter. In the Power Transmission Solutions Segment, our recently acquired PTS business contributed a $129 million of sales growth in this segment. Organic sales in our legacy business were up 7% with strong headwinds in oil and gas partially offset by increased demand in the renewable energy space. Speaking of PTS, the integration of the business into Regal is on track. As you can see from the pictures, we integrated both our Manila and Pune sites during the quarter and we expect the PTS site integrations to be complete in the fourth quarter. After that, the only key item left will be the integration of our ERP systems, which we expect to complete by the end of the third quarter in 2016. On synergies, we are making great progress. And we expect to exceed our year one $7 million synergy target with benefits coming from operational integration, procurement, logistics, cross-selling, and tax. I recently had the opportunity to meet a number of our customers at a power transmission distributor conference. The feedback from our customers on the integration continues to be quite positive. Not surprisingly, however, customers' feedback on their end-market was downbeat. Phasing into these weaker PTS end-markets, we are accelerating our synergy plans, so that we can deliver the benefits earlier than originally planned. As we look forward, it is important to take a closer look at the three key market headwinds that are a drag on our sales growth. First, let's consider the oil and gas markets. Our businesses continued to be hit very hard in the third quarter with orders in some businesses off by more than 60%. For the quarter, sales were down approximately $30 million. And for the year, we estimate sales to be down by $90 million to $100 million. These declines impacted our Commercial and Industrial Systems and Power Transmission Solutions Segments. While it's still too early for us to predict the bottom of our oil and gas businesses, we expect by the end of the second quarter 2016, the comparisons will begin to improve. Now, let's discuss SEER 13. As we move into 2016, we expect the SEER 13 headwind to turn into a tailwind with better comparisons and a slight mix benefit. And finally, China. Sales in China across all three reporting segments were weak in the third quarter and we expect the weakness to continue through the remainder of the year. The good news is that our major China plant transitions are behind us and we are in a good position to capitalize when the markets improve. In summary, comparisons of all three of our reporting segments should get easier as we progress through 2016. Further, as we continue to deliver on simplification and cost synergies, we expect further operating margin improvements in 2016 on top of what we already delivered in 2015. With the backdrop of what many are calling an industrial recession, our 2015 guidance, while slightly off our expectations, still represents a 22% to 24% year-over-year adjusted EPS increase, reflecting progress on the two key objectives that we laid out for the year; margin improvements in our legacy business and a successful integration of the recently acquired PTS business. And given this guidance, as we close out 2015, we expect to end the year with record sales and record earnings. I will now turn it over to Chuck.

[Charles A. Hinrichs:]

Thank you, Mark, and good morning, everyone. Sales in the third quarter 2015 were $882 million, an increase of 6.3% from the prior year. We had net acquisition growth of 15%. Foreign currency translation in the quarter was a negative 3%. Organic sales declined 5.9%, reflecting the market headwinds we faced in oil and gas and China and the SEER 13 pre-build impact. Our adjusted operating profit margin in the third quarter was 11.5%, an improvement of 180 basis points from the prior year. The improvement came from the benefits of the simplification initiative, cost controls and the accretion from the PTS acquisition. Our third quarter results also included $4.9 million in GSP refunds. GSP, or the Generalized System of Preferences, is a U.S. trade law that reduces the tariffs on goods imported from designated developing countries. The GSP expired in July 2013, but was then retroactively reinstated in June 2015 and companies were permitted to file refunds for the prior periods. Of the total $4.9 million received, $3.8 million were refunds for the tariffs paid in 2013 and 2014. $1.1 million or approximately $600,000 per quarter relates to 2015. The majority of the GSP refunds were booked in the Climate Segment in the third quarter. The GSP refunds were included in our previous guidance. Our adjusted earnings per share in the third quarter were $1.43, up $0.28 per share, or a 24% increase over the prior year. Overall, we had another clean quarter. Our third quarter 2015 GAAP earnings per share were $1.41. Restructuring charges in the quarter were $1.2 million, or $0.02 per share, relating to our simplification initiative activities during the quarter. Our adjusted earnings per share were $1.43 for the quarter. Now, I'll summarize some key financial metrics for the third quarter 2015. Our capital expenditures in the third quarter were $21 million and $65 million for year-to-date 2015. We are forecasting capital expenditures of $90 million for the full-year of 2015. In the upper-right quadrant, we show our effective tax rate in the third quarter as 25.2%. We expect to maintain a 26% ETR in 2015. The ETR includes the PTS acquisition and the $5 million of tax synergies. In the lower-left quadrant, we provide data on our third quarter balance sheet. Our total debt was $1.814 billion and our net debt was $1.559 billion. In the third quarter, we reduced our total debt by $79 million and our net debt by $86 million. As we have mentioned before, Regal has a successful history of taking on additional debt to fund transformational acquisitions and then using our strong free cash flow to reduce the debt. Since closing on the PTS acquisition in January 2015, we've reduced our total debt by $136 million. In the lower-right quadrant, we present information on our free cash flow. We generated $111 million of free cash flow in the third quarter. Free cash flow represented 175% of net income for the quarter. On a year-to-date basis, our free cash flow was a 124% of net income. In the third quarter, we used $12 million of cash to repurchase a 180,000 shares of Regal stock to offset the dilutive effect of our stock compensation program. Our goal is to generate free cash flow in excess of a 100% of net income and we expect to perform well against this goal in the future. Now I will review our full-year 2015 earnings guidance as well as the results and fourth quarter earnings estimate. Our fourth quarter 2015 GAAP earnings per share estimate is $0.98 to $1.08 per share. Full-year 2015 GAAP earnings per share guidance is $4.59 to $4.69. To calculate our adjusted earnings per share estimate in the fourth quarter, we add back $7 million or $0.10 per share of estimated restructuring costs for adjusted earnings per share of $1.08 to $1.18. Our full-year 2015 adjusted earnings per share guidance is $5.25 to $5.35. Let me mention three of the key assumptions in our 2015 guidance. As Mark mentioned, we expect continued sales headwinds in the oil and gas end markets, weaker demand in China and the effect of the SEER 13 pre-build. Secondly, foreign currency will continue to be a headwind on our results in the fourth quarter. We estimate the negative impact of FX to be $20 million in the fourth quarter and $90 million in full-year 2015. And finally, our guidance excludes any refinancing of a portion of the PTS bank financing, although we continue to evaluate this opportunity. Future credit market conditions will drive the timing of this decision and the impact on our interest expense. Additionally, this fourth quarter has five less shipping days, or 8% fewer days, versus the fourth quarter 2014, because of our fiscal year calendar. In the appendix, we included a chart on the number of shipping days to provide additional details. In summary, our guidance for our full-year 2015 adjusted earnings per share is an increase of 22% to 24% over our 2014 results. Now, I will turn the call over to Jon Schlemmer.

[Jonathan J. Schlemmer:]

Thanks, Chuck, and good morning, everyone. Before I discuss segment performance, I'd like to start by giving an update on our margin improvement progress and the benefits coming from simplification. We had another quarter with significant progress on our margin improvement efforts. In spite of the currency drag and a weaker top line, our adjusted operating profit margin was a 11.5%, an increase of a 180 basis points for the quarter. Our simplification initiative, our cost control efforts and the PTS acquisition, all continue to contribute to the improved performance. This was the third consecutive quarter of year-over-year margin improvement and we expect similar performance in the fourth quarter. During the quarter, we completed our largest ERP conversion to-date, converting over $500 million of business to a Single Global Instance of Oracle. I would characterize our team's execution as near perfect. On average, our team has been converting three ERP systems every year and now we have nearly 75% of our global sales on our standard ERP platform. Simplifying our ERP systems makes it easier for our customers to transact business with us and also enables our continued efforts to improve our internal efficiencies. In terms of footprint simplification, as planned, we completed the restructuring of our Kentucky-based motor parts making operations. We have ceased production in our Mt. Sterling and Winchester, Kentucky facilities and we are now making motor parts in our Mexican manufacturing facilities near where our motors are assembled. And given the weakness in our core market, we've made the decision to accelerate future restructuring programs. These programs will deliver additional simplification benefits in 2016 for our legacy businesses and synergy benefits for our recently acquired PTS business. We are estimating $7 million of restructuring expenses to be incurred in the fourth quarter. While the fourth quarter has seasonally lower demand, we expect to show year-over-year margin rate improvement in the fourth quarter and we expect to show continued, but more gradual improvements throughout 2016. As we look at our progress through the first three quarters of this year, adjusted operating margins have improved by 110 basis points. We are running ahead of the margin improvement goal we communicated in December of 2014 when we described our plans to improve operating margins by 150 basis points to 250 basis points over a three-year period. As we look into 2016, we expect the benefits of the simplification programs and the PTS synergies to continue to help us achieve our goal. Now, let's cover the segments. I'll start with Commercial and Industrial Systems. Sales were $427 million, a decrease of 10% from the prior year. Foreign currency negatively impacted sales by approximately $19 million, or 4% of sales, and divestitures decreased sales by $3 million, approximately 1% of sales. Organic sales declined by $24 million, or 5% of sales. I'll break down the organic sales, explain both the headwinds and the tailwinds. The headwinds in the quarter included the decline in oil and gas, slowing in China and slowness in a number of the North America end-markets, including power generation and distribution. We experienced strength in a few end-markets including Commercial HVAC and Pool Pump. Oil and gas negatively impacted sales by $24 million and China negatively impacted sales by $6 million. All of the other end-markets, combined with our growth initiatives, positively impacted sales by approximately $6 million in the quarter. Even with the headwinds on the top line, adjusted operating margin was 9.3% of sales, representing a 140-basis-point improvement from prior year. As I mentioned earlier, we completed the simplification and restructuring of our Kentucky-based parts making operations at the end of the quarter. We also made significant progress right-sizing our businesses, most exposed to oil and gas. And finally, the lower commodity costs are also benefiting our margins in this segment. Sales in our Climate Solutions Segment decreased by 9% in the quarter. Foreign currency negatively impacted sales by $5 million, about 2% of sales and organic sales declined by $20 million, or 7% of sales. We estimate that our customer sales grew by mid-single-digits in the quarter. While we predicted early in the year that our sales would be disconnected from the market in 2015, we believe it would be helpful to explain the difference between the growth in our customer sales and the decline in our sales. As expected, SEER 13 is the obvious and biggest driver of this difference as the pre-build impacts our year-over-year comparisons. We believe our customers still have some inventory of SEER 13 units they are selling through the channel. In addition to the pre-build, there are two other key factors that are not as obvious. First, we believe our customers are realizing a sizable mix benefit as a result of the shift to SEER 14, while Regal achieved only a slight mix benefit in the quarter. Second, our customers have been raising prices this year, while Regal's pricing with our customers are tied to two-way material price contracts. As we look across the other end-markets in the Climate Solutions Segment, we experienced weakness in commercial refrigeration as well as the Asia and Middle East markets. In spite of the top line headwinds, adjusted operating margin in the Climate Solutions Segment was 15.5% of sales, an increase of 320 basis points from prior year. Much of the benefit can be attributed to our simplification initiative and overall cost reduction efforts. And similar to the second quarter, some of the year-over-year improvement comes from the inefficiencies we experienced last year when we were transitioning our factories. We also realized the benefit from GSP, as Chuck mentioned earlier. Much of the GSP benefit impacted the Climate Solutions Segment, and obviously, the catch-up portion, which was approximately 140 basis points of the 320-basis-point improvement, will not repeat going forward. We continue to be pleased with the margin improvement in this segment, and we're not finished with the simplification improvements. I'll now turn it back over to Mark to cover the PTS Segment.

[Mark Joseph Gliebe:]

Thanks, Jon. Sales in our Power Transmission Solutions Segment were $191 million in the quarter. The FX impact from our legacy PTS business was approximately 1%. Looking at the end-markets across the segment, oil and gas, agricultural equipment, and Power Transmission distribution were a drag on the top line, but were partially offset by growth in food and beverage, material handling and renewable energies. Margins in the PTS Segment declined, as compared to prior year, driven by volume declines in the combined business. We expect that the synergies from the acquisition begin to help offset some of the impact of volume decline as we enter 2016. Overall, our new Power Transmission Segment is in great shape and we continue to be optimistic about the future of these combined businesses. Now I would like to summarize our third quarter and year-to-date performance. For the quarter, sales were up 6%, driven by the PTS acquisition. Even with weaker core sales, margins improved 180 basis points, as compared to prior year. The PTS integration and the associated synergies are on track. Our cash flow to net income was 175% and we use the free cash to pay down $79 million in debt. As you can see from the charts, on a year-to-date basis, our sales, operating income and free cash flow are all up substantially as a result of the PTS acquisition and the strong margin improvement in our legacy businesses. We will now take your questions.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Julian Mitchell of Credit Suisse. Please go ahead. Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Hi. Thank you. Just a question around the GSP impact. So, I guess, in Climate Solutions, most of the adjusted income increase year-on-year was GSP related in Q3. Looking forwards, how big should the GSP impact be do you think?

[Charles A. Hinrichs:]

Good morning, Julian. Thanks for the question. The GSP refund for the total company was about a third of the improvement, and about 75% of that goes to Climate. Going forward, we would expect – and, of course, this is based on volume, but we would expect about $600,000 per quarter of GSP benefit, which is included in our guidance.

[Jonathan J. Schlemmer:]

Julian, I would add, too. For the Climate Solutions Segment, the 320-basis-point improvement, 140 basis points did come from the catch-up portion of GSP. So we had about 180-basis-point improvement in the Climate Segment, excluding the GSP improvement. So we had another nice quarter of margin gain in the Climate Solutions. Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Thank you. And then, just looking out into next year, you announced, there's some higher restructuring charges in Q4 than they were in Q3. I just wondered if you could put an overall figure around the sort of incremental savings from restructuring going into 2016?

[Mark Joseph Gliebe:]

Julian, as you know, in December of last year, we laid out a three-year plan. And Jon reminded everybody in his prepared remarks, but the center point of the commentary we gave back in last December was roughly a 70-basis-point improvement each year for three years beginning in 2015. And that we laid out what piece we thought was going to come from simplification, what piece we would – come from other areas. So that's still the way we view it. Nothing's changed relative to that. Obviously, we have some market headwinds in front of us that are causing pressure. But as we sit here today, we still believe on average a 70-basis-point improvement a year for three years. Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Got it. So the restructuring has only been stepped up sort of slightly in light of the top line challenges?

[Mark Joseph Gliebe:]

Well, I would say, with the restructuring we have planned we're still on pace. As you know, it's been a pretty aggressive pace that we've been executing the restructuring. The synergy targets that we have for PTS, our intention is to pull those forward. Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Great. Thank you.

[Mark Joseph Gliebe:]

Thank you, Julian.

[Operator:]

The next question comes from Josh Pokrzywinski of Buckingham Research. Please go ahead.

[Joshua Pokrzywinski:]

Hi. Good morning, guys.

[Mark Joseph Gliebe:]

Good morning, Josh.

[Joshua Pokrzywinski:]

So if you could just kind of walk us through – I know you don't like to break these things down individually, but if I had to lump them all together, kind of price cost, the peso and any movements around LIFO, how that might have come in third quarter versus what you thought and how we should think about those sequentially into the fourth quarter as a group, kind of, either better or worse than where we were in the third quarter?

[Mark Joseph Gliebe:]

Well, from a company basis, price cost was slightly favorable in the quarter. So we would expect that to continue through the end of the year. In terms of the peso, as we communicated, as you know, we hedge the peso. And we tend to hedge out years in advance. So while – if you look at the immediate point in time, our hedges on the peso may be actually underwater, given the very quick drop of the peso. If you look over a three-year period, we've effectively smoothed and locked in those peso improvements. And the benefit for us is because we manufacture substantially in Mexico. So we'll get the benefit as we move forward. We'll get deflation kind of locked in for the next two years to three years. And then, I'll let Chuck comment on the LIFO portion?

[Mark Joseph Gliebe:]

Thank you, Josh. The LIFO was about $2 million for the quarter, a modest amount and it was a nominal amount in the third quarter of last year.

[Joshua Pokrzywinski:]

And will that be bigger or about the same in the fourth quarter?

[Charles A. Hinrichs:]

I think it will be a comparable amount. But it really depends on where copper and steel prices are at the end of the year, which drives that calculation. And you'll recall that in the fourth quarter of last year, we had an $8 million of benefit for LIFO benefit and other inventory charges. So it'll be still be a headwind in fourth quarter against prior year.

[Joshua Pokrzywinski:]

Got you. That's helpful. And if I can just ask one more, Chuck, can you remind me on the refi that you guys are starting to talk about a little bit more? It sounded a couple of quarters ago or even the last quarter like there was an intention to maybe look at that into year-end. Has the posture on that changed at all? And that's moving to the right? Or how should we think about that?

[Charles A. Hinrichs:]

I think it hasn't changed, Josh. We still think that it would be in the near term, but it really is dependent on credit market conditions, interest rates. We can be opportunistic when we choose to execute. So we want to be – we want to do the right thing at the right time.

[Joshua Pokrzywinski:]

Understood. All right. Thanks, Chuck.

[Charles A. Hinrichs:]

Thanks, Josh.

[Operator:]

The next question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

[Jeffrey D. Hammond:]

Hey, good morning, guys.

[Mark Joseph Gliebe:]

Good morning, Jeff.

[Jeffrey D. Hammond:]

Hey, just on the guidance change. One, did you have this GSP in your guidance? Or is that kind of a new add? And then, just as we look at the headwinds, it seems like oil and gas, if anything, isn't a little less bad; margins seemed to be coming in better. Can you talk about maybe the biggest areas that drive the $0.20 reduction in guidance? And maybe just speak specifically to PTS, because that seemed particularly weak in the quarter?

[Mark Joseph Gliebe:]

So the answer on GSP is we have had that in our guidance. We never really could predict the timing of when we would be reinstituted and we'd start receiving the payments, but it has been in our guidance all along. And so, as Chuck mentioned, the way to think about it is going forward a $600,000 positive margin impact each quarter going forward. So it's good news. We should think about it that way. Relative to the quarter, the biggest issue for us is top line in all the areas that we described. PTS – the business – both the business, legacy business and the business we acquired is exposed to oil and gas. And we carried a backlog into the year and that backlog held up our first and second quarters certainly. And so we burned that backlog off. And we're dealing with the realities of markets being down substantially. So that's putting a drag on those two businesses. Fortunately, we have some offsets, renewable energies that are helping, but not enough to offset the entire impact.

[Jeffrey D. Hammond:]

Okay. And then, just back to the peso. So it sounds like you're getting a modest benefit near term, but the greater portion of the benefit from the weaker peso just gets spread over multiple years based on your hedging?

[Charles A. Hinrichs:]

Right. That's correct, Jeff. And it really depends upon, of course, what that future spot price will be. But we've locked in decreases in our peso expense through our hedging program for the next two years to three years.

[Jeffrey D. Hammond:]

Okay. And then, just finally can you give us an update on how you think about free cash flow for the year?

[Charles A. Hinrichs:]

Yeah. I mean, we had another good quarter in the third quarter. Fourth quarter seasonally generally provides additional free cash flow as we lower our working capital investment. So I think we're going to be something in the $200 million to $250 million range of debt reduction, and then the free cash flow number would be above that.

[Jeffrey D. Hammond:]

Okay. That would imply pretty low free cash flow quarter for 4Q?

[Charles A. Hinrichs:]

No, it should be a very strong free cash flow number.

[Jeffrey D. Hammond:]

Okay. I'll follow up offline. Thanks, guys.

[Mark Joseph Gliebe:]

Thanks Jeff.

[Operator:]

The next question comes from Bhupender Bohra of Jefferies. Please go ahead.

[Bhupender Bohra:]

Hey, good morning, guys.

[Charles A. Hinrichs:]

Good morning.

[Mark Joseph Gliebe:]

Good morning.

[Bhupender Bohra:]

So I just wanted to go through if you can go through the monthly progression of the orders in C&I, I don't know how it started in July, August and September, but what we heard from most of the industrial company, kind of, September was pretty weak. So if you can give us some color. And especially, the next question would be how it happened actually in China?

[Mark Joseph Gliebe:]

Okay. I would say, as we moved through the year, it got progressively tougher as we went through the quarter. I will say, however, it was choppy. We'd have a week of up, a week of down. China, I'll now comment on China. China was certainly choppy through the quarter. As we entered into October, we were actually feeling a little bit better, but then only to see a down week this last week. So China is pretty choppy overall.

[Bhupender Bohra:]

Okay. So, as you saw the weakness coming in, like, did you guys, kind of, move some cost reduction initiatives like from fourth quarter, like, to cover the third quarter?

[Mark Joseph Gliebe:]

Well, as you probably know, we've been working on simplification now for a number of years and these are big moves and, kind of, well signaled. We've been communicating what we've been doing with our two Kentucky facilities now for quite some time. The good news is we completed them in the quarter. And we've ceased production in those Kentucky facilities. That business – the impact there will be felt in both C&I and a little bit in our Climate Solutions business. I would say, where we got more aggressive was anything related to oil and gas. We've got very aggressive in right-sizing businesses related to the oil and gas, because of the steep decline in orders.

[Bhupender Bohra:]

Okay. And how big is – if you can remind us, how big is that business and...

[Mark Joseph Gliebe:]

Yeah. So oil and gas is roughly 7% of total company sales and roughly two-thirds is upstream.

[Bhupender Bohra:]

Okay. And just a follow-up question for Jon on new efficiency product here, if you can just give us a number, like, how much of the highly efficient products have contributed to sales and anything in this particular quarter?

[Jonathan J. Schlemmer:]

We've been consistently running in the – I'd say, in the 20% to 23% range when you look at high efficiency product sales as a percent of overall sales. So it's been pretty consistent is the way I would describe it. We did have in Climate a slight mix improvement in the quarter. That was all about high efficiency sales. And I would say, that was related to, one, you have a little bit of a benefit because of the pre-build we did on standard product prior year, but also the SEER 14 and higher SEER units tend to be a slight improvement for us on mix. And that's what we expected to see. And we're seeing some of that. The other area, I would say, that I've been quite pleased with is, our Pool segment, our Pool market was one of the positive end-markets in C&I. And a lot of that's being driven by high efficiency pool motors and controls. And we're feeling very good about that product line. We've been continuing to bring out new products in the Pool area. So those are a couple that I would highlight, but overall sales in the 20% to 23% range for high efficiency sales.

[Bhupender Bohra:]

Got it. Thank you.

[Jonathan J. Schlemmer:]

Thanks, Bhupender.

[Operator:]

The next question comes from Nigel Coe of Morgan Stanley. Please go ahead.

[Nigel Coe:]

Yeah. Thanks. Good morning, guys.

[Mark Joseph Gliebe:]

Good morning, Nigel.

[Nigel Coe:]

Yeah, morning. Just wanted to – obviously, the theme here is sales weakness offset by very strong margin trends. 4Q, there is some puts and takes, but you'll probably exit the year well north of a point of margin expansion. You've got a 150 basis points to 200 basis points margin expansion target over three years. How you think about that target in relation to what you've done this year? Is it more of a head start on that target? So do you feel more confident in the higher end of that range? I mean, how do we think about that target here?

[Mark Joseph Gliebe:]

Yeah. I don't – really nothing's changed relative to the target. We commented as we went through the Investor Day that it was going to be, on average, 70 basis points over a three-year period. We're still sticking with that target. And we'll get the benefit of further restructuring. And some of the restructuring we just completed, we'll get that benefit as we go into 2015. We should also – we'll see headwind in the PTS Segment from volume loss, but then some offset from the synergy. So there are some key variables related to volume that we have to overcome. So I think even though – if we end the year slightly over our 70-basis-point target, I think the 70-basis-point target over a three-year period is still the right way to think about it.

[Jonathan J. Schlemmer:]

And, Nigel, I would add that if you recall earlier in the year, when we announced the PTS acquisition, we made it clear that the PTS would be accretive to that 150-basis-point to 250-basis-point target. That's still our expectation. And I agree with Mark; we're running slightly ahead of the three-year plan, which is good news, especially, given the volume headwinds.

[Nigel Coe:]

Okay. Great. That's fantastic. And then, switching to Climate, the bridge is comparing and contrasting your sales with the OEM customers is helpful, but a couple of questions there. First of all, obviously, the material price formulas, pass-throughs would have been an impact on the top line. So I'm wondering, was the 3Q impact of the MPFs significantly different to 2Q in terms of the top line impacts? And then secondly, I'm a bit surprised there wasn't a more of a mixing benefit for you year-over-year given that you had a higher mix of 13 SEER shipments versus this year. So I'm just trying to understand why there was a mix of benefit this year?

[Jonathan J. Schlemmer:]

So the MPF question, I would say that there was a slightly larger impact in the third quarter versus second quarter. And that's simply just because of the timing. As the commodities fall, we've said that we typically lag back three months to six months, one to two quarters depending on the specific contract. So that would have been the reason; not any other reason, just the timing.

[Mark Joseph Gliebe:]

And then, on the mix, relative to the mix, we did see a slight improvement in the quarter as related to mix. And so that's where our customers will be up-selling now to, say, perhaps a 15 SEER or a 16 SEER system more likely to using an energy-efficient motor in those applications. So in a 13 SEER or 14 SEER system, in most cases, you're going to use the same kind of motor; typically, not an energy-efficient one. Yes, some applications that do require it, energy-efficient one. But for the most cases, it's the same motor.

[Nigel Coe:]

Understood. Then just a final question on PTS. I think, Mark, you mentioned, you're still on track with your targets. So I assume you're still on track to $0.70 of accretion this year. If that's the case, do we think about this as a pull-forward on cost synergies from prior year, so therefore, we should moderate out year synergies? If you just confirm those two questions?

[Mark Joseph Gliebe:]

Yeah. You're right. We did guide to, on an adjusted basis, $0.70 to $0.90 kind of range, and then throughout the year, we pointed everyone towards the lower-end as we saw the top line challenges. So in and around that $0.70 is the right way to think about it for the year. And then, we did set out a $30 million four-year plan on synergies. And our intention is to try to pull that forward and we're aggressively heading down that path.

[Nigel Coe:]

Okay. Thanks, Mark.

[Mark Joseph Gliebe:]

Thank you.

[Operator:]

The next question comes from Liam Burke of Wunderlich. Please go ahead.

[Liam D. Burke:]

Thank you. Good morning, Chuck. Good morning, Mark.

[Mark Joseph Gliebe:]

Good morning. How are you doing, Liam? Thank you.

[Charles A. Hinrichs:]

Hi, Liam.

[Liam D. Burke:]

Good. Thank you. Chuck, on the PTS side, you mentioned cross-selling is part of the contribution on the synergies. How have the revenue synergies been with the new organization? And do you see that accelerating?

[Mark Joseph Gliebe:]

So I'll take that one. So, yes, we do include cross-selling. And we are seeing nice cross synergy benefits. We used as an example on our last call the benefit of the solar application in the renewable energy space. We're seeing benefits as a result of the two companies coming together. As you combine our capabilities, it gave us more opportunity than we've had in the past. So that's just one example. There are many others. But we feel good about what's happening there.

[Liam D. Burke:]

Okay. And, Chuck, on the CapEx, do you forecast any need for any significant incremental capital projects as you look through 2016?

[Charles A. Hinrichs:]

No, we see nothing large on the horizon, Liam. And we'll be updating that CapEx number when we give our 2016 guidance next quarter.

[Liam D. Burke:]

Great. Thank you very much.

[Mark Joseph Gliebe:]

Thank you, Liam.

[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 Joseph Gliebe:]

Thank you, everyone, and thank you for your interest in Regal. At the beginning of the year, we told our investors that in 2015, we would be laser-focused on two objectives

[Operator:]

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