Regal-Beloit's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Regal-Beloit Corporation (RBC)

Q2 2012 Earnings Call

August 1, 2012 10:00 AM ET

Executives

John Perino – VP, IR

Mark Gliebe – Chairman and CEO

Chuck Hinrichs – VP and CFO

Jon Schlemmer – COO

Analysts

Mike Halloran – Robert W Baird

Christopher Glynn – Oppenheimer

Mark Douglass – Longbow Research

Josh Pokrzywinski – MKM Partners

Jeff Hammond – KeyBanc

Holden Lewis – BB&T

Jamie Sullivan – RBC Capital Markets

Bill Dezellem – Tieton Capital

Bhupender Bohra – Jefferies

Zach Larkin – Stephens

Walt Liptak – Barrington Research

Presentation

Operator

Good morning everyone and welcome to the Regal-Beloit Second Quarter 2012 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions)

At this time I would like to turn your conference call over to Mr. John Perino, Vice President of Investor Relations. Sir, please go ahead.

John Perino

Thank you, James, and good morning. Welcome to the Regal-Beloit Second Quarter 2012 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 actual results to differ materially from projected results, please refer to today’s filings with the SEC.

On slide two, we mention 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 free cash flow. We believe these measures are useful financial measures for providing you with additional insight into our operating performance. Please read this slide for information regarding non-GAAP financial measures, and please see the appendix where you can find reconciliation of these measures to the most recent comparable measures in accordance with GAAP.

Now, I’ll turn the call over to Mark.

Mark Gliebe

Good morning, everyone and thank you for joining the call. Today, I’ll make a few opening comments. Chuck will provide a financial update. Jon Schlemmer will give color on products, markets and operations and then I’ll summarize and we’ll move to Q&A.

Regal posted another quarter of record sales and record earnings in the second quarter. Most of our businesses performed at the high end of our expectations and our HVAC business slightly outperformed our expectations, driven mostly by the warm weather. The combination of these results allowed us to exceed our guidance for the quarter.

A key highlight for the quarter was our free cash flow at 177% of net income, which represents the fifth consecutive quarter where free cash flow exceeded net income. Other noteworthy topics for the quarter include first, the announcement of our Juarez plant consolidation. Second, we now believe we will exceed our $35 million EPC synergy target and deliver it one year earlier. Third, completing 85% of our transition into our new hermetic motor facility in Taicang, China.

Fourth also in China, we began our move into our new generator facility. And finally, we closed on a small Mexican-based acquisition, buying out our existing Unico JV partner with the idea of growing our Unico presence in the oil-rich Mexican Gulf area.

As we look forward, we see uncertainty in the macroeconomic environment, which could result in softer demand in our commercial and industrial and mechanical businesses. Additionally, we expect to see a negative impact on our sales and operating profit from foreign currency translation in the third quarter. Our HVAC business has substantially anniversaried the R22 conversion, and should benefit from better year-over-year comparisons as well and as well from the warmer weather.

With that, I will turn it over to Chuck Hinrichs.

Chuck Hinrichs

Thank you, Mark. Good morning, everyone. As Mark stated, our second quarter results exceeded expectations. Net sales increased 26.7% over the prior year, reflecting the inclusion of sales from the acquired businesses. Sales in the quarter reflected continued growth in our North American commercial and industrial motor and mechanical businesses and Unico. This growth helped offset weaker sales in our HVAC, Asia, and European businesses. Also, sales were negatively impacted by foreign exchange rates, which reduced sales by 2.1% in the second quarter.

Our second quarter results included $0.5 million or $0.01 per share in restructuring charges related to plant closures to generate the EPC synergy savings. We will talk more about these activities later. In comparing our second quarter results against the prior year results, please recall that in the second quarter of 2011, we took a $28 million charge for a warranty expense item.

In summary, our second quarter 2012 earnings per share of $1.49, or adjusted earnings per share of $1.50 per share, were above our guidance for the quarter driven by a stronger than anticipated performance from our HVAC and C&I businesses.

This chart shows the growth of second quarter 2012 net sales, adjusted operating profit and adjusted diluted earnings per share as compared to the prior year. The takeaway here is that we generated growth in all key operating metrics as we benefited from the acquired businesses and grew our mid and late cycle businesses, offsetting the weak market demand in our HVAC, Asian and European operations.

Let me provide additional color on our financial performance. In the upper left quadrant, we summarized our capital expenditures for the second quarter of 2012 and our guidance for the full-year 2012, which includes $25 million for the relocation of three of our factories in China. Jon will comment on these projects later.

In the upper right quadrant, we summarized our effective income tax rate in the second quarter of 2012. We expect the ETR to be approximately 30% for the second half of 2012 driven by the estimated distribution of our global earnings.

In the lower left quadrant, we highlight our strong free cash flow results in the second quarter of $111 million, equal to 177% of net income for the quarter. This is the 5th consecutive quarter that we generated free cash flow equal to or greater than net income. We are focused on generating free cash flow for debt reduction to improve shareholder value, pay dividends and fund our future growth.

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