Regal Beloit Corporation ( RBC) Company Conference Call December 6, 2011 8:30 am ET Executives Mark Gliebe – President, Chief Executive Officer Chuck Hinrichs – Chief Financial Officer John Schlemmer – Chief Operating Officer Scott Brown – Vice President, Manufacturing Mike Wickiser – Vice President, Commercial and Industrial Paul Goldman – Vice President, HVAC Steve O’Brien – Vice President, Pump and General Industry John Perino – Vice President, Investor Relations Presentation John Perino
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During this conference, we will mention that we are presenting certain non-GAAP financial measures. We believe these are useful measures for providing you with additional insight into our operating performance. You can find a reconciliation of these measures to the most comparable measures in accordance with GAAP in the appendix to this presentation and on our website.Now I’ll turn the call over to Mark. Thank you. Mark Gliebe Good morning everyone and thank you so much for being here and joining us this morning. It’s great to have you all here and we really genuinely appreciate your interest in the company. We have a great day set up for you today and a chance to expose our deep bench, our management team; and this year, a special added addition, we get to have some of the management team from the recent acquisition of A.O. Smith. Those folks are here with us today and you’ll get a chance to talk to them and hear yourself what the experience has been like joining the company. So first I’ll start off with just a little discussion about our leadership team and who you’re going to be hearing from today. This is our organization at the top with my direct reports showing at the top, and then John Schlemmer, who is the COO of the Company, his team right below that. So today, Chuck Hinrichs, our CFO, will be speaking to you; John Schlemmer, our Chief Operating Officer. Sarah Sutton – Sarah, if you can raise your hand – Sarah is the former CFO of EPC and today she is Vice President of Financial Planning and Analysis. Scott Brown, Vice President of Manufacturing, and Scott is one of the two key leaders in the integration process. Mike Wickiser, Vice President of our commercial and industrial business; Paul Goldman, Vice President of our HVAC business, and Steve O’Brien, who is the Vice President of Pump and General Industry business. And again, Steve O’Brien also came from the EPC transaction and Steve was the other half to the two-part team that has been leading the integration process of EPC into the Company. So you’ll be able to get to hear from both of those individuals today and I think you’ll really enjoy the experience that we’ve all been going through.
For those of you that are not familiar with the Company, just very briefly as we go into next year on a pro forma basis, the Company will be 3 billion-plus in revenues – quite a change over the last number of years. We have roughly 25,800 employees and you see a comment up there that there’s four CEOs, and I have to apologize – somebody actually asked the question, do you mean you have four CEOs running the Company? So that’s not the case. The point is that the Company is roughly 56 years old and in that span of time, we’ve had four CEOs and I am the fourth CEO. Just last year, Henry Knueppel, as many of you know, was up here, and Henry has retired since May.Over the last seven years, the Company has been growing at an average annual growth rate of 24%, and in that same seven-year period total shareholder return in that time frame was 142% - so pretty good and consistent performance throughout the past seven years. In terms of the products that we sell, you can see we manufacture electric motors, the small motors that literally fit in the palm of your hand or would be the size of a large toaster; large motors that would be as tall as this room and the size of two of these tables put together. We manufacture blowers that use a motor but move air. Generators – and Mike will talk about the range of generators that generate power. Our mechanical gear drive business, our electronic drives business, and then a number of other electrical products. In terms of our footprint and where we make our product, you can see we’re global in terms of our footprint. Over 75% of our product is made outside of the U.S. in places like Mexico and Asia. So today, if you just stop and say how would you describe the company, we’re a solid, midcap diversified industrial, truly a global manufacturer. We do use Lean Six Sigma as our continuous improvement platform, and for those of you that have had a chance to go our Wausau facility on a recent visit, I’ve gotten some of the feedback and it’s the same experience that I’ve had, which is as you walk into the facility, you just don’t recognize it from what it looked like just a few years ago. And that’s true about many of our facilities – we’re on the Lean journey and it makes a significant difference in the performance of our manufacturing facilities, so we’re very excited about the direction there.
We’re a company innovating around energy efficiency. We continue to see even through the short-term blips with R22 and some of the stuff going on there, we still see long-term energy efficiency as a long-term secular trend that plays well for our company. We are a leader in energy efficiency technology and electric motors continue to consume a big portion of the power that is generated on this earth, so to the extent that you have that technology, no matter where you’re at in the world, it plays well for us.We have been and will continue to be a consistent and successful acquirer. Obviously the EPC transaction that we closed back in August, the largest acquisition in the Company’s history. And as you acquire, you get the opportunity to get great talent, and you’re going to get a chance today to meet some of that great talent. They’ll be up here talking to you. Here is another just quick view of the pictures of the products that we manufacture – again, the range of electric motors on the left, the range of electric generators in the second column, our custom electronic drives, and then our power transmission or mechanical products. If you look at the Company from just an overall model perspective, we’re well balanced, we’re well diversified, and we’re performing quite well when you compare us to peers. I showed you earlier our production by geography. Here’s a look at our revenues by geography – roughly 68% of our sales in the U.S., the rest outside of the U.S. Our goal over time, as we’ll talk about later, is to make it 50/50 – 50 in the U.S., 50 outside of the U.S. In terms of where we sell our product, we’re pretty diversified in our footprint which allows us to get through the kind of difficult times we’re seeing in the housing industry and still perform well. We have a pretty good split between commercial, industrial and residential.
Similarly, we have a good mixture of businesses that are either in early, mid or late cycle businesses. Obviously the residential-related businesses would be in the early cycle. Our commercial and industrial businesses tend to be mid cycle; our mechanical and then very large motor businesses tend to be late cycle.And then over on the far right if you take a look at just our five-year EPS kegger and we compare ourselves to some pretty respected companies there, you can see that we kind of hang right in there from a growth rate around earnings per share. Similarly as you look at the next slide, again we’re comparing ourselves here where the dark blue and the light blue is a very respected peer group, including Danaher, Roper, AmoTech and three or four others, but we have performed well over the last seven years as you look at total shareholder return. So we like to say that we’re keeping up with some very good talent there. Our third quarter, just as a snapshot, was a very good quarter. We exceeded our own expectations. We felt good about the way the quarter closed on virtually all key metrics, whether it be EPS, revenue growth, our operating margins on an adjusted basis were up and our free cash flow has been performing quite well, so it was a great quarter. We felt good about it as we head into the end of the year. As we look back at 2011, it was a great year in terms of the Company’s performance. We’ll close the year with record sales of 2.8 billion-plus. From an adjusted earnings perspective, our operating profit will be 290 million-plus, and our EPS given our last guidance will be somewhere between $4.31 and $4.37, again a record for the Company. Our price capture throughout the year exceeded inflation. We felt very good about that. We had some catch-up to do as we left 2010. In 2010, we had given up more on the inflation side than we captured on price. In 2011, we gained some of that back and we had two price increases, one in late 2010, one in first quarter 2011, and felt very good on the fact that those price increases stuck and we were able to, like I said, outpace the inflation.
We closed the EPC acquisition finally after 259 days of trying to get through that process. That closed in late August and, like I said, it’s the largest acquisition in the Company’s history, and rather than stealing the other team’s thunder, they’re going to talk all about it and explain how it’s going.We’ll launch 50 new products this year and you saw a flavor of those in the product showcase room. If you didn’t go back there, either on your break or at lunch, please feel free to go back and the team will answer any questions you have. But some great new products and some exciting ones that I think you’ll share our excitement over them. We restructured our debt, locking in long-term attractive interest rates. The cash flow of the Company is doing quite well. It’s going to allow us to pay down the debt for our EPC acquisition and in very short order and allow us to continue to fund other acquisitions. That cash flow is again expected to be greater than 100%. That is our internal target to always have cash flow greater than 100% of net income, and we believe we’ll do that this year. If you think about a year ago, for those of you that were here, we talked to you about a refreshed set of initiatives for the Company and we talked in great detail on how we were going to try to focus on improving our customer care scores. We made that the number one initiative in the Company and we actually hold ourselves accountable to our Board on our performance around quality delivery and net promoter score. For those of you that aren’t familiar with that concept, net promoter score is a commonly known surveying tool to measure how a customer feels about you, and so we’ve been using that now for five or six years and I’m proud to say that we improved our net promoter scores this year and it’s going in the right direction. So the team is very rallied around customer care all throughout the Company.
So for today, just a quick look at our agenda, Scott Brown is going to come up and talk to you about the RBC EPC integration, and just a very short story – as soon as we had made the decision and as soon as A.O. Smith had accepted our final offer to acquire EPC business, Scott Brown, who you’ll meet, came to me and said, I want to lead the integration. So when you have a guy like that step up, you just can’t help but feel very excited about having that kind of talent on your team and that kind of initiative. Similarly, Steve O’Brien made the same comment to Chris Mapes, who was the former leader of the EPC business. So two great talents here who you’re going to hear from. These two guys met each other for the first time about a year ago and they’ve just been knocking it out of the park in terms of our integration. Sarah Sutton is also here and I encourage you to ask Sarah your own questions about how the integration is going overall. She’ll give you an interesting view on the whole experience.Paul Goldman is going to talk about our HVAC business and our air moving business. Mike Wickiser is going to touch on our global commercial and industrial business. He’s going to give you a global perspective that is a business that while we have it broken up internally, we act globally from that perspective. Chuck’s going to talk about the financials, and then John Schlemmer is going to come back and give you an overall wrap-up and talk a little bit about the operations. We’ll have Q&A at the end but we’ll also have time for Q&A—about five minutes of Q&A after every presentation, so if you have questions right at the end of each presentation, we’ll have about five minutes and we’ll take your questions then. And then at the end, we’ll come back and have another opportunity.
There will be the opportunity for those of you that would like to stay for lunch, you’re welcome to. Management will be here to have lunch with you if you’d like to just sit down and do that. So get ready for a great day. We’re excited to be here and, again, thanks for your interest.Now, I’d like to introduce Scott Brown. Scott Brown Thank you, Mark. Good morning everyone. It’s a pleasure to be here. As Mark said, the EPC acquisition is the biggest acquisition that Regal Beloit has ever made and really critical to our success. And part of why I volunteered to be part of it, I wanted to be right in the middle of the action there. I knew there was going to be a lot of parts to it related to manufacturing, so naturally I was going to be there because it’s so important for the Company. I wanted to make sure that it was a success, and I’ve really enjoyed working with Steve O’Brien from EPC. He’s got a lot of experience and he ran some businesses inside EPC, and a very successful leader there. We’re having lots of fun and we’ll take you through how things are going so far. True to our Lean Six Sigma kind of headset, we decided that we have to measure success in the integration in measurable ways, so we developed these three areas. We call them the Key Performance Indicators – KPIs – and it starts first with customer retention. So we had a goal to not lose a single EPC customer account. As well, we wanted to retain 100% of the EPC business. Now, we’re trying to grow the business as well and we have growth opportunities all over, and later on I’ll talk about some synergy targets and synergy goals that we’re driving for. I did not include those growth initiatives. We’re looking at the growth initiatives as on top of all of this, and we do have a healthy deck of growth initiatives, but our goal here is to net out have zero lost business from EPC as a result of the integration.
On the talent front, we’re measuring—we have an HR team that is very focused on looking if we lose anybody in the company from Regal Beloit or EPC, whether we lost that talent due to the integration, and we go through a pretty rigorous exercise of staying close to that and our goal is to not lose anybody through the integration in Regal Beloit or with EPC. And then we have, of course, the synergies that we want to capture that we committed at the time of the deal. So I’ll take you through how we’re doing on these three fronts.To avoid becoming internally focused, the first thing we thought we should do is actually go out and see what’s on our customer’s minds about the integration. So we did that two ways, and we also thought that was great way to introduce actually customer care, which is a strategic initiative with Regal Beloit to all these new EPC employees. So we did it two ways – one at a kind of personal level at our largest accounts. We have over 30 very large accounts that we had executive one-on-one meetings to see what their thoughts are and what they would like to see come out of the integration, and then we used an established Regal Beloit customer survey tool that we’d been using for years to reach out to over 4,000 of EPC’s customer contacts and get their feedback. Overall, it was encouraging, the feedback. There are some things for us absolutely to work on. In general, a couple of comments – for the distribution customers, they told us that they liked the EPC model. They thought it was working well and would like us to figure out how to continue to spread that, and then with the larger OEMs, Regal Beloit has got much more experience. The larger OEMs, we’re hoping that Regal Beloit could share some of our best practices with the EPC teams.
So armed with that feedback from customer, we molded that into how we looked at any organization changes that we were going to make and also how we looked at the integration plans; and I’m happy to say that we have not lost a single customer count. We have retained 100% of the business. I know it’s very early right now, so we’re not claiming victory, but we’re very focused in this area. In many integrations, if you don’t keep a focus here as you go after the synergies and other things, this could be very damaging and you don’t get the net gain out of the acquisition. So this is priority number one for us moving forward.When we make an acquisition, one of the biggest things we’re acquiring is the talent and the people that actually run the company. And so we made a big deal of making sure that the EPC employees and teams really felt good about coming to Regal Beloit, and we sent a strong message that we loved to have them come to the company and we were really looking forward to it. So we made Day 1 to be a very big, special day, and we called it the Welcome Celebrations. And what did is all throughout the world – so in Mexico and China and the United States – we had all-employee meetings. We posted Regal Beloit leaders at all those different sites and played a DVD video for everybody through the all-employee meetings that have various locations all throughout Regal Beloit welcoming the EPC employees to the Company. There was a little bit of discussion by the leaders about what it’s like to work for Regal Beloit. We actually didn’t make a canned script for this. We let the Regal Beloit leaders just talk off the top of their heads about how they were feeling. There was a celebratory luncheon at the sites and just a good chance for everyone to try to get to know each other. Read the rest of this transcript for free on seekingalpha.com