U.S. markets closed

Edited Transcript of RBC earnings conference call or presentation 4-Nov-19 3:00pm GMT

Q3 2019 Regal Beloit Corp Earnings Call

BELOIT Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Regal Beloit Corp earnings conference call or presentation Monday, November 4, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Louis Vernon Pinkham

Regal Beloit Corporation - CEO & Director

* Robert J. Rehard

Regal Beloit Corporation - VP & CFO

* Robert K. Cherry

Regal Beloit Corporation - VP of Business Development & IR

================================================================================

Conference Call Participants

================================================================================

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Christopher M. Dankert

Longbow Research LLC - Research Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst

* Julian C.H. Mitchell

Barclays Bank PLC, Research Division - Research Analyst

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

* Robert Paul McCarthy

Stephens Inc., Research Division - MD & Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Regal Beloit Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would like to now turn the conference over to Robert Cherry, Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Robert K. Cherry, Regal Beloit Corporation - VP of Business Development & IR [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning, and welcome to Regal Beloit's Third Quarter 2019 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Vice President and Chief Financial Officer.

Before turning the call over to Louis, 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 3, we state that 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 reconciliations of these measures to the most comparable measures in accordance with GAAP.

Now let me briefly review the agenda for today's call. Louis will lead off with his opening comments and an overview on the quarter; Rob will then provide our third quarter financial results in detail and provide an update on our 2019 outlook. We will then move to Q&A, after which, Louis will have some closing remarks.

Now I'll turn the call over to Louis.

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Rob, and good morning, everyone. Thank you for joining Regal's third quarter earnings conference call, and thank you for your interest in Regal.

We continued to experience tough macro conditions in the quarter. Our third quarter financial results reflected the ongoing slowdown in industrial markets, particularly in the U.S. and China; the ongoing global trade uncertainties; and the reduction of inventories in the industrial distribution channel as well as in the HVAC and pool pump markets. Regal posted negative 9.6% organic growth in the quarter, with overall orders down at approximately the same rate.

Despite this challenging sales environment, we generated an adjusted earnings per share of $1.35 and delevered well below our normal rate at 20.7%. I am proud of our Regal teams that have been using the principles of both 80/20 and Lean to simplify the business and ensure that we make good, timely decisions based on data and analytics.

Now Rob's going to provide more detail in his section, but I want to take a few minutes to share my perspective on each of the segments' performance. Starting in Climate, we saw the expected negative sales impact from the first half pre-buy of standard efficiency motors ahead of the July implementation of the fan energy rating regulation for furnaces. The overhang from the FER pre-buy, the relatively mild summer weather and the resulting customer inventory destocking resulted in North America residential HVAC being down mid-single digit, slightly below our expectations.

Timing of a large retrofit project last year in commercial refrigeration, along with our ongoing proactive 80/20 account pruning efforts to improve margin mix in this vertical, also puts some sales pressure on the quarter. We saw a negative 4.8% organic growth in the segment. However, encouragingly, we saw improvement in our EMEA and Asia Pacific markets, which are a smaller part of the Climate segment, but an area where we plan to grow. We are well positioned for growth as demand returns and destocking subsides.

As we see the market today, given the current adverse weather conditions, which are a benefit for this segment, we could see demand return to normal levels in early 2020. The impact of 80/20, along with favorable price/cost and positive mix up from FER-compliant high-efficiency motor sales, resulted in a 70 basis point year-over-year improvement in adjusted operating margin, overcoming the sales headwinds.

Now switching to PTS. We faced a tough comparison, having grown 8% organically in the prior year. Approximately 70% of our sales in PTS go through the industrial distribution channel, which we estimate is higher than industry average. The distribution channel was particularly aggressive in accelerated destocking in the quarter in anticipation of the slowdown in North America as industrial markets cooled and trade uncertainty continued to weigh on the end market. When compared to our direct OEM sales, distribution was down significantly more due to this destocking, which explains the higher rate of sales decline for the PTS segment in the quarter.

As I've stated before, while we do not see much of a direct impact from the tariffs in this segment, we do feel the indirect impacts. Also hampering PTS sales were challenging end markets in agriculture and beverage equipment, along with upstream oil and gas, where we saw a year-over-year 37% decline in demand, which had nearly a 3% impact on our Q3 sales. However, we believe that we are holding our position in these verticals, leveraging our strong brand and differentiated product solutions, as this is a market-driven impact only.

Partially offsetting these headwinds was a strong quarter for sales in the renewable energy end market. The overall net impact drove organic growth down 9.3% in the segment. We feel confident that this segment has gained share over the past 2 years, in particular, through our additional investment in sales resources and digital customer experience, and that the inventory destocking is what is putting pressure on this segment for Q3.

Volume pressure had the largest impact on our margins, which we partially offset with improved productivity, positive price/cost, 80/20 margin management and SG&A reductions. The segment still experienced a 190 basis point year-over-year decline in adjusted operating margin in the third quarter. However, the PTS segment results can be lumpy by quarter as, year-to-date, the segment margin is relatively flat year-over-year on lower sales, and we are confident the cost actions taken this quarter will pay dividends in the fourth quarter and in 2020.

Finally, in the Commercial and Industrial Systems segment, we saw a continued weakness in multiple end markets, and we also faced a difficult comparison of 5% organic growth in the same period of the prior year. In our pool pump business, the impact from customer inventory destocking that we saw in the second quarter continued in the third quarter as demand declined double digits.

In China, the impact on the industrial economy from the ongoing trade dispute resulted in a mid-single-digit reduction in sales. The commercial HVAC market has been particularly challenging for us as certain sectors such as transport refrigeration, commercial chillers and commercial HVAC in China have been -- have seen a demand slowdown, while at the same time, we are executing on account pruning in this market as part of our 80/20 efforts to improve our margin profile. These 2 factors combined led to a double-digit decline in our commercial HVAC sales.

Lastly, we saw a decline in the distribution channel, again, driven by distributor inventory destocking. Altogether, these sales headwinds contributed to organic sales growth being down 12.7% in the segment. Although we have experienced some temporary tariff-related market share erosion, especially in our industrial motors business, we believe that our North American investments in assembly improve our cost competitiveness and give us a supply and service advantage with our customers going forward, which positions us well to take advantage of market rebounds in the future and recapture lost share.

The adjusted operating margin in C&I was down 210 basis points from the prior year. While we saw positive price/cost and progress on 80/20 efforts in the quarter, the significant volume reduction, in addition to some negative mix, led to the margin decline.

From a total company perspective, our free cash flow was an impressive 240% of adjusted net income. Through a renewed data analytic approach to inventory management, our teams drove an inventory reduction of $40 million in the quarter. We are now over 112% year-to-date for free cash flow, and expect that we will be above 150% -- 115% of adjusted net income for the full year.

In the quarter, we continued to deliver on our balanced capital allocation strategy. In addition to our quarterly dividend, we purchased almost 1.3 million shares for $94 million. That brings us to over 2 million shares purchased year-to-date. Looking forward, we are lowering our adjusted earnings outlook for the year from a range of $5.50 to $5.80 to a range of $5.45 to $5.55.

The 2.7% reduction of the midpoint is driven by the ongoing weakness in end market conditions and the continuing global trade uncertainties. While we are seeing a slightly positive inflection in fourth quarter order trends, we are still laser-focused on accelerating our restructuring efforts given the market conditions. We have recently announced 5 plant closures that are expected to result in $17 million of annualized savings. The reorganization that we announced last quarter, along with our restructuring efforts, have already resulted in a 16% reduction in personnel and a 17% reduction in SG&A costs compared to the prior year. We are systematically deploying our 80/20 approach into the organization, which we expect to improve gross margins.

In the third quarter, we conducted training for 40 of Regal's top management, most of whom have been trained previously, but this renewed effort will ensure alignment across the organization. Each of these 40 leaders is now responsible to train 30 to 40 additional personnel within the next 6 to 9 months, ensuring that we touch 1,200 to 1,600 Regal associates, more than 6% of our resources. I personally will be training a team of 40 global leaders early in the first quarter.

As we further leverage our new decentralized organization, we continue to find and drive more cost-out opportunities around footprint synergies and product rationalization and consolidation, especially in the C&I segment. It is also clear that there are additional value-creation opportunities around simplification at Regal. Hence, we are now executing on a simplification Phase 2 program, which we will -- which we expect to provide additional opportunities to reduce our footprint in the future.

While our cost initiatives are compelling, we also have clear growth opportunities in all of our businesses. We are in position to provide differentiated energy-efficient products and solutions to solve our customers' challenging application needs. At the same time, we can provide best-in-class ease of doing business, from order placement to shipment to service, with the strongest channel to market and an effective e-commerce approach.

During the quarter, I met with all of our business groups to review their strategies and feel confident in the growth potential in new markets with new products and with value-added solution selling across all of our businesses.

As part of my ongoing review of the business, the focus is clearly on improving earnings, ROIC and, ultimately, shareholder returns. The dialogue with Regal's Board is in process. However, with the market slowing, we expect to only make portfolio moves that make sense and are accretive to shareholder value. We plan to share more with you on our strategy in the fourth quarter call and then provide a full rollout at our Investor Day in March.

In summary, our reaction to market headwinds and the way Regal delevered in the quarter, along with strong free cash flow at 240% of adjusted net income, make me proud of all of our teams and their performance. Weak industrial market trends, trade tariff uncertainty and inventory destocking headwinds across the segments, as Regal sales are heavily weighted to distribution, put pressure on revenue in Q3 and is driving a slight decrease in our 2019 guidance expectations. We are well positioned for growth when demand returns and destocking subsides.

Our ability to move quickly on restructuring, drive cost-out additions -- cost-out initiatives, and reduce SG&A is clearly setting up the business to achieve profitable growth for the long term, as demonstrated by our 20.7% deleverage rate in Q3 and our expectation for improved deleverage in Q4. I remain very excited about our prospects in the future.

I will now turn the call over to Rob, who will provide more details on our financial performance.

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Louis, and good morning, everyone. As Louis mentioned, we had some significant top line headwinds in the quarter that saw weakness in several end markets and regions. Despite these sales headwinds, Regal delevered at 20.7%, below our normal rate, helping to minimize the impact to our operating profit. I will start by providing comments on the segments and end with more detail on the total company and our guidance.

Starting with Commercial and Industrial Systems. Organic sales in the third quarter were down 12.7% from the prior year. The segment saw double-digit declines in North American pool pump and the commercial HVAC business, and single-digit declines in China and industrial distribution. The decline in sales was also driven by our proactive approach to pruning low-margin accounts as we continue to execute on our 80/20 initiative.

The adjusted operating margin in the quarter for C&I was 5.6%, down 210 basis points compared to the prior year but relatively flat sequentially. This margin was down almost entirely due to the volume decline experienced in the quarter. However, despite the volume headwinds, we were able to partially offset the impact with favorable price/cost and discretionary cost actions.

Deleverage in the C&I segment was 21.2%, well below the normal deleverage in this segment. Orders in C&I for the quarter were down approximately 12%, reflecting weakness in a number of our end markets. The inventory destocking in the pool pump market, weakness in the China industrial markets and the impact from project delays and cancellations in our project generation business all drove the decline in orders. Lastly, we are seeing some improvement in fourth quarter order rates, but it's too early to determine if this improvement is sustainable.

Turning to Climate Solutions. Organic sales in the third quarter were down 4.8% from the prior year. The decrease was primarily driven by the impact of the FER pre-buy in the first half of the year along with mild summer weather in the North American residential HVAC market. Other headwinds in the quarter primarily came from commercial refrigeration and the impacts from account pruning as we further deploy 80/20. We also started to see some of our material price formulas turn negative due to commodity deflation. On a positive note, we saw improved sales in our Asia Pacific region during the quarter.

The adjusted operating margin in the quarter for Climate was 17.1%, up 70 basis points compared to the prior year. The margin expansion was driven by productivity improvements, positive price/cost and our 80/20 activities. These efforts allowed us to overcome the margin headwind from the volume decline. Deleverage in the Climate segment was a very low rate of 2.5%, partly impacted by the timing of certain variable expenses relative to the prior year, but more significantly impacted by the discretionary cost actions as well as other -- the other favorable drivers shown on this slide.

Orders in the Climate segment for the quarter were down slightly. As previously mentioned, the mild weather, along with the impact of the FER pre-buy in the first half of the year, dampened our residential HVAC demand in the quarter. As we enter the fourth quarter, we continue to see order rate headwinds in our residential HVAC and commercial refrigeration end markets. While it is still early, and weather will surely play an important part on order rate performance, we are currently projecting year-over-year order rates to be down slightly in the fourth quarter.

Turning to Power Transmission Solutions. Organic sales in the third quarter were down 9.3% from the prior year. The primary headwind in this segment was a continued slowdown in North American industrial markets, which impacted our distribution sales due to the destocking of inventory in the channel. Upstream oil and gas also continues to be a significant sales headwind. Partially offsetting these challenges was positive growth in the renewable energy end market.

The adjusted operating margin in the quarter for PTS was 11.9%, down 190 basis points compared to the prior year. However, the PTS segment results can be lumpy by quarter as, year-to-date, the segment margin is relatively flat year-over-year on lower sales. Favorable price/cost, SG&A cost reductions and improved productivity could not fully offset the significant volume decline. However, we do expect discretionary cost actions implemented late in the third quarter will provide significantly improved performance in the fourth quarter.

Orders in PTS for the quarter were down mid-teens. Again, the main driver was a slowdown in the industrial distribution channel. As we enter the fourth quarter, we continue to see the impact of distribution destocking on our year-over-year order rates and expect orders to be relatively flat to the prior year for the fourth quarter.

Now I will summarize a few key financial metrics for the third quarter. Our capital expenditures were $21.1 million in the quarter. We expect capital expenditures of $90 million for the full year 2019. We are focused on ensuring that we deploy capital that drives returns above our weighted average cost of capital and ultimately improve shareholder value.

Our simplification activities resulted in $7.3 million of restructuring and related costs in the quarter. We now expect $19 million of restructuring and related costs for the full year 2019, an increase of $6 million from our prior guidance, most of which is due to the recent plant closure announcements. We expect the plant closures will result in annualized savings of approximately $17 million, bringing our total annualized savings resulting from both the announced plant closures and the business reorganization to more than $32 million.

The adjusted effective tax rate in the quarter was 16.3%. The lower effective tax rate in the quarter was due to lower-than-expected operating income in higher-tax regions. We're adjusting both the third quarter and the full year ETR for the tax effect of the businesses divested and assets exited. We provide a table -- provided a table in the appendix of this presentation to reconcile the GAAP ETR to the adjusted ETR. We now expect our adjusted ETR to be approximately 19.5% for the full year 2019.

Our total debt was $1.201 billion, and our net debt was $908 million. We ended the quarter with our net debt-to-adjusted-EBITDA ratio at 1.9.

We achieved $119.5 million of free cash flow in the quarter, and our free cash flow as a percentage of net income was 239.5%, driven in part by a $39.6 million inventory reduction in the quarter. We now expect to be above 115% for the full year 2019. Also in the third quarter, we purchased 1,282,000 of our shares for $94.1 million at an average of $73.40 per share. This brings our year-to-date purchases to just over 2 million shares. We continue to execute on our balanced allocation strategy.

Now I will provide an update on our full year guidance for 2019. Our updated guidance assumes organic sales growth to be down mid-single-digit for the full year due to the ongoing impacts from the U.S. industrial slowdown, the global trade uncertainties, excess channel inventories and the continued overall economic slowdown in Asia.

We are lowering the range of our full year 2019 GAAP EPS guidance from a range of $6 to $6.30 to a range of $5.85 to $5.95. On an adjusted EPS basis, we are lowering our full year 2019 guidance from a range of $5.50 to $5.80 to a range of $5.45 to $5.55. The reduction is driven by the volume deleverage, which we partially offset with productivity, positive price/cost, discretionary cost actions and our 80/20 efforts. The resulting fourth quarter adjusted EPS guidance range is at $1.21 to $1.31, or $1.26 at the midpoint.

Although we are not anticipating this slowdown to be dramatic, to better align our cost structure with the near-term dynamics, we continue to accelerate cost reductions. We also expect to see benefits from our reorganization and restructuring, allowing us to operate more efficiently, help offset some of our sales headwinds and set us up for future profitable growth.

In addition to the cost actions noted above, we are also making improvements to our financial and business processes to ensure better forecasting accuracy, speed of decision-making and accountability across our entire organization. Through a disciplined cadence of monthly business reviews and a deep P&L and cash optimization focus at every level of the organization, we are driving improved visibility and accuracy in our orders, sales, costs and trade working capital forecasting. This new business review process is already improving our ability to react faster to changes in market and business conditions, providing a clear path to sustained financial performance. We expect to continue to realize the benefits of this new process well into the foreseeable future.

Operator, we are now ready to take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Mike Halloran with Baird.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [2]

--------------------------------------------------------------------------------

So a couple of questions here. First on the cadence on the underlying demand side, a lot of moving pieces in the fourth quarter here. Could you talk about what end markets you're seeing sequential stability in versus ones that are maybe still deteriorating? And then I know you got a lot of pockets of different destocking that are materializing, but could you talk about where we are in the cadence of the destocking? And if you're at the point where maybe the inventory sell-in and sell-out have kind of started to match again?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [3]

--------------------------------------------------------------------------------

Yes. So Mike, I'll take that one. So there was a lot in that question. So let me try to answer a few points there. First of all, inventory destocking, it's definitely improved inventory levels, improved in Q3, but there's still a ways to go. And so whether that's in our power transmission channel with our distributors or in our pool pump, we do believe through -- this will continue through Q4.

Now sequential orders and expectations. I would say we're, quarter-over-quarter, pretty stable at this point from a sequential orders perspective. But we're -- we've got some tough comps from a year-over-year -- when you think about our PTS segment was up 8% in Q3 of last year. And so that's driving some challenges. Now recognize that our PTS segment has 70% of business goes through distribution. We absolutely saw a greater reduction in orders in that distribution channel than we did in the OEM channel.

When you look at our Commercial and Industrial Systems business, we had a tough comp last quarter, a year-ago quarter as well, 5%. And we're definitely seeing that the China market pool and trade uncertainties as well as the commercial HVAC, transport refrigeration and commercial chillers being a headwind for us, but not getting worse. Not getting worse.

And then lastly, Climate is pretty much what we expected. There was the FER pre-buy in the first half of the year. So there clearly was an overhang from that. And then I would tell you that we saw some OEM inventory reduction, which probably took the better part of the decline. But overall, we feel strongly that our share position is stable in both our PTS -- in particular, our PTS and Climate business and overall in C&I, although a little bit of pressure on the industrial motors segment because of our supply chain, which is improving through this year. Hopefully, that helps answer your question, Mike.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [4]

--------------------------------------------------------------------------------

No. that was -- yes, that was very helpful. And then much better deleverage seen on some of these revenue pressures, the market -- the market-driven pressures. Could you just help with the $32 million, I think, is the combined cost-out between what was announced last quarter and this quarter? How much of that is this year versus next year? And if I'm layering -- beyond that $32 million, if I'm layering out other potential things you're working on, it's the -- maybe you could just go through that list one more time. It's the Simplification 2.0, it's the incremental acceleration of restructuring. Any other kind of buckets that you would point out to us as well?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [5]

--------------------------------------------------------------------------------

So Mike, this is Rob. So you're right. The 2 primary buckets are the one related to the reorganization or the realignment of our organization, which we commented in the last call was approximately $15 million. And now we've announced the additional 5 plant closures, which is another $17 million. So that's how you get the $32 million combined. Now we do see -- that's an annualized number, and we should see most of that come through in 2020. Of course, we are seeing a portion of that come through as we exit the third quarter and go into the fourth quarter as you would expect, especially on the realignment of the organization. So that -- those savings are coming through, and those are the 2 primary buckets that we're referring to.

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [6]

--------------------------------------------------------------------------------

Yes, Mike. You know what? I want to just add a comment. I don't want to share too much of the strategies that we'll be outlining in the fourth quarter and at the Investor Day, but we feel there's more runway here as well. And so Rob rightfully captured the 2 items that make up the $32 million. But I'll tell you that there's also a big piece of product rationalization that you will hear, especially in our Commercial and Industrial business that we are focused on, and then just 80/20 overall and margin management and making sure that we are either cost competitive or getting paid for the value that we bring to our customer.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question comes from Julian Mitchell with Barclays.

--------------------------------------------------------------------------------

Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Maybe just the first question around -- just wanted to home in on the commentary around sort of flattish orders in PTS in Q4 after that big drop. And also in C&I, you did talk about that slight -- the better start to the quarter, I think, in Q4. I just wondered, looking at those 2 comments, were there any particular geographies or end markets that you would call out? Or it was simply a point around most of the destocking in general is done, and that's why Q4 has started off or is looking better?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [9]

--------------------------------------------------------------------------------

So Julian, I'll take the PTS part of that question, but honestly, I didn't quite hear the C&I part. So I'll ask you to repeat that in a second. But from a PTS perspective, it's really the inventory destocking. Now we saw definitely secondary effects from the trade uncertainty. Our ag market, our bev market and our oil and gas markets are down. We feel really strongly about our alternative energy and unit material handling markets. But from a Q3 perspective and why we feel better about Q4, it's definitely the slowing down of the destocking levels. And then Julian, I apologize, I missed your question on C&I.

--------------------------------------------------------------------------------

Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

Oh, sure. No, it was just -- I think you had mentioned that C&I had started off Q4 a little bit better than what you've seen in Q3 in terms of order intake. Was that just the same phenomenon of less destocking? Or was there something else happening?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [11]

--------------------------------------------------------------------------------

The same phenomenon. Definitely the same.

--------------------------------------------------------------------------------

Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

Okay. And then my second question would just be around -- if you look at the -- the measures on cost control have been extremely effective already, it seems, and there's more to come. I just wondered if you are thinking about the overall organic growth of Regal Beloit. Obviously, that's been a challenge for several years now. Are you spending much time trying to think about that enhancement to medium-term growth in the future? Or is most of your energy right now spent on lowering the cost base and making sure decremental margins stay narrow?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [13]

--------------------------------------------------------------------------------

Julian, it's really a tale of two cities, if you will. Our C&I business, it's very cost-focused. Now do I see pockets of growth opportunity? Yes. But our focus is cost. Our PTS and Climate Solutions business, I am really excited about our opportunities there. We've got good product, differentiated product. We've got strong product and technology road maps where we're developing, and we're moving into new markets. And so I believe we're going to be able to accelerate our organic growth, in particular, in those 2 segments. So I'm bullish about our ability to step up organic growth at Regal.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

The next question comes from Joe Ritchie with Goldman Sachs.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [15]

--------------------------------------------------------------------------------

Louis, can you maybe touch on what's happening in the resi HVAC market? Some of the OEMs reported pretty decent results this quarter from a growth standpoint. And I guess I was a little bit surprised to see that be a negative for you guys. So maybe just touch on that a little bit.

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [16]

--------------------------------------------------------------------------------

Sure, happy to. And really, Joe, it's really the FER overhang and some inventory reductions at the OEMs. So when you think about the $9 million of pre-buy in the first half that really emptied out the channel in Q3, that certainly put pressure on us. And then we definitely saw some inventory reduction at our OEMs, but nothing of significance.

And then we had one other, which is, in our commercial refrigeration space, we had a tough comp from last year because of a retrofit -- a fairly large retrofit project, which had probably about 1% of pressure. But we're not worried at all here on Climate. If anything, I feel confident we're gaining share, especially in our variable-speed motor solution.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [17]

--------------------------------------------------------------------------------

That's good to hear. And the inventory overhang on Climate, specifically, that subsides in 4Q?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [18]

--------------------------------------------------------------------------------

We would expect it does, although it really is -- there's one other piece to this story, which is weather. And if the weather continues cold, which it is, right now, at least where we are, that's a good thing. But -- so weather will have some impact.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [19]

--------------------------------------------------------------------------------

Got it. And then one other question, just maybe sticking on Climate and you calling out the material price formula turning negative this quarter. I guess with a lot of our companies, deflation usually turns out to be a positive thing to margins. Just remind us again how this impacts your overall growth in margins in the business as we get into a little bit more of a deflationary environment.

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [20]

--------------------------------------------------------------------------------

Sure, Joe. This is Rob. Certainly, two-way material price formulas that we have in place have started to turn negative, especially in our Climate segment. However, as you mentioned, the way the math works, that can be margin-accretive for us as we work through that deflation in our -- in the segments.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [21]

--------------------------------------------------------------------------------

Got it. So negative to growth and then positive to margins is the way to think about it?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [22]

--------------------------------------------------------------------------------

Correct. That is correct.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

The next question comes from Robert McCarthy with Stephens.

--------------------------------------------------------------------------------

Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [24]

--------------------------------------------------------------------------------

I guess the first question, I was intrigued by your comments around consultations with the Board around potential divestitures and the fact that, given where we are in the cycle and some of the concerns going into 2020, that you don't want to do anything that's potentially value-dilutive, I suppose. But I mean you're kind of in a tough position because there's probably going to be certain assets that perhaps selling -- the absence of a negative may be worth it from just the ability to take cost out, organizational focus, the ability to move on from some problem children. I mean how do you reconcile that?

And part of that also is, do you think you could just shut down some businesses? I mean obviously, you're doing a lot of product and portfolio pruning, but could we even see something larger like you just exiting a business?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [25]

--------------------------------------------------------------------------------

Yes. So I'll take that one. I would say, first of all, all those variables that you talked about, we would weigh in any consideration. Now I believe, as I commented earlier, there's runway for us to improve operational performance in all of our businesses, and we are laser-focused in doing that. And so from that perspective, I think there's going to be a benefit, and we will not move forward in a situation where we don't think it makes sense for shareholder value creation. But we are talking to the Board about multiple options and considerations. And so my perspective is, right now, our operating folks need to keep their heads down and focused on performance, and we'll manage the portfolio with our Board dialogues.

Now specific to your question of whether or not we could see any businesses shut down. No. I mean we're not in a position -- certainly, not any of our significant business is in any position where we would need to even think about a shutdown. Perhaps, a small entity somewhere around the world, perhaps, but we're -- that's not being considered.

--------------------------------------------------------------------------------

Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [26]

--------------------------------------------------------------------------------

Okay. And then on the positive side, it looks like you're sticking to at least some near-term bottoming in orders that might be due to an absence of destocking, other issues. But as we kind of go into next year, we're going to have some businesses that are going to be tied to the fortunes of OEMs in terms of their initial expectations for 2020 and beyond in terms of what they're thinking about for their order cycle.

So given the fact that you could have some -- as you've alluded to in prior questioning, some tough compares coming up despite the fact that sequentially, we could be kind of bottoming here, how do you think directionally about the course of growth and earnings in 2020, if possible? I mean is it possible that we're going to see a down year or another down year?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [27]

--------------------------------------------------------------------------------

Yes. So I'll take that one as well. At this point, we're just coming out of strat plan. We're going into operating plan actually starting tomorrow, so actually, the day after tomorrow. And so I'll be working with our business groups. Rob and I will be working on with our business groups to understand the assumptions going into 2020. And so it's a bit too early for us to comment on growth in 2020 or expectations for revenue.

What I can tell you is there is absolute opportunity for us in runway on cost in 2020, and we feel very excited and confident there. Now clearly, the markets have a huge influence on that. But what that will certainly help us with is, at a minimum, delevering at a much better weight -- rate than we have historically delevered. So that's about all I'm ready to state regarding 2020 right now, but hopefully, that gives you a perspective of how we're thinking about it.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

The next question comes from Christopher Glynn with Oppenheimer.

--------------------------------------------------------------------------------

Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [29]

--------------------------------------------------------------------------------

Wondering about the -- a little color, complexion, sizing on the account pruning impacts you talked about at Climate and C&I. How should we think of those beyond the pro forma basis for the divestitures and exits, which you gave us pretty detailed tables on that front?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [30]

--------------------------------------------------------------------------------

Yes. So -- and I've said this previously with regards to our 80/20 approach, it's all about margin management. And we look at it from the perspective of, does our customer value what we bring to the marketplace, and therefore, we should be paid fairly for what we bring? Or are we cost-competitive? And if we're not cost competitive, are we going to be able to be positioned for success long term? And if not, then perhaps we need to exit that product or that customer for what we provide.

Now specific to the impact of 80/20 on the performance of the business, we're really -- we haven't broken that out historically, and we don't plan to do so. But it certainly has some sales headwind for us, in particular, in our Climate and our C&I business. But in the end, what I can assure you is it will help us mix up, therefore, improve our margins. So hopefully, that, Chris, gives you a little help in understanding how we think about it.

--------------------------------------------------------------------------------

Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [31]

--------------------------------------------------------------------------------

Yes. It sounds a little more towards the rounding side than model-worthy. And then on the PTS side, you noted again, share trends are actually favorable looking through the destock. Just wondering, order of magnitude, how are you thinking about where you are in that process? And how much more visibility you have to generate further runway there?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [32]

--------------------------------------------------------------------------------

Yes. So a couple of things I would say here. First of all, we have very close relationships with our distributors, and we see their sales out, we see their inventory levels, and we're -- believe it's in a better position in Q3 than it was in Q2, but there's some opportunity there from an inventory perspective.

From a share growth perspective, definitely confident. We've seen share growth over the last couple of years, partially through our commercial investments, more feet on the street, more partnering with distributors, and also through our digital commercial -- or digital customer experience. I would argue that Regal has the best connectivity of our products and solutions with our distribution through distribution channels through our digital customer experience.

But lastly, which we'll elaborate more on in the March time frame, is I'm very excited about our products and our solutions that we are bringing out, and we'll do so in 2020, in particular. One is -- that we're excited about, is our gear motor solution, and working with OEMs to provide a package, which Regal is perfectly situated to do so with both the gearing side of PTS and our motors business. So providing a package to our customer with a full solution rather than individual components. So more to come on PTS in growth opportunities, but there's definitely a runway there.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question comes from Jeff Hammond with KeyBanc.

--------------------------------------------------------------------------------

Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [34]

--------------------------------------------------------------------------------

So I just want to come back to the cost saves, and maybe if you can just sharpen the $32 million, what you think you've gotten to date? And what you think the incremental cost saves are in 2020?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [35]

--------------------------------------------------------------------------------

So Jeff, we haven't necessarily quantified the cost saves that we've had in 2019. We told you what the annualized number was for 2020. However, in -- as I said earlier, Q3, we certainly saw a bit of that benefit come through. We will expect to see a greater portion of that, particularly the $15 million that we alluded to in the -- after the second quarter. More of that will come through in the fourth quarter on an annualized basis, if you will, than the $17 million that we just commented on from the plant closures. So hopefully, that helps you to size it a little bit.

--------------------------------------------------------------------------------

Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [36]

--------------------------------------------------------------------------------

Okay. And then you mentioned in the presentation, SG&A being down 17%, but I see first half kind of SG&A up, and I think this quarter, it was down 3%, 4%. Is that more of a prospective number? And is a good portion of that captured in that $32 million?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [37]

--------------------------------------------------------------------------------

No, it's on our -- our SG&A is down, certainly, at that rate. It is not -- it does include the cost savings that we've discussed on this call, and we'll continue to include that going forward.

--------------------------------------------------------------------------------

Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [38]

--------------------------------------------------------------------------------

Okay. So that 17% down captures the go-forward cost saves?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [39]

--------------------------------------------------------------------------------

No. Just the cost saves that we've had thus far.

--------------------------------------------------------------------------------

Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [40]

--------------------------------------------------------------------------------

Okay. Okay. And then just commercial HVAC, I just want to understand the weakness there, because we're -- outside of transport, we're hearing things are still generally pretty stable, and I think you cited some severe weakness there. So is that all transport? Or is there something else going on there?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [41]

--------------------------------------------------------------------------------

No, it's mostly transport refrigeration and commercial chillers. We have also taken some action, 80/20 pruning in that space, taking out very low-margin business. But from a market perspective, it's mostly transport refrigeration.

--------------------------------------------------------------------------------

Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [42]

--------------------------------------------------------------------------------

Okay. And then just one final kind of housekeeping item. Can you give us the ending share count? Or what you think the share count is going to be just given the size of the buyback in 3Q?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [43]

--------------------------------------------------------------------------------

So we have our share count -- so we had -- we did repurchase, as we said, a good portion of our shares in the third quarter with -- and we will continue to expect to repurchase going forward opportunistically, as we've talked about in the past. We do have a new authorization in place, replacing the old, for $250 million. So we can expect to continue on our balanced capital allocation going forward.

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [44]

--------------------------------------------------------------------------------

So we bought back 1.2 million shares in Q3, and I think the question was also correct me if I'm wrong, Jeff, that you were looking for, what our share count would be?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [45]

--------------------------------------------------------------------------------

Yes. So if you look at our current share count that we had at the end of the 9 months, and then the diluted share count at the end of the 3 months ended 2019, we would expect our fourth quarter to be fairly representative of that number at the end of the third quarter. Because -- just as a point of clarification, most of that was purchased throughout the quarter, and quite a bit of it was early in the quarter. So from a weighted basis, you're going to get most of that benefit flowing through.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

The next question comes from Walter Liptak with Seaport Global.

--------------------------------------------------------------------------------

Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [47]

--------------------------------------------------------------------------------

Just a follow-on from Jeff's question on the share buyback. Did you use any of the new $250 million authorization this quarter? Or was that just cleaning up on the prior authorization?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [48]

--------------------------------------------------------------------------------

Walt, thanks. This is Rob. No, we didn't use any of the new $250 million in the third quarter. That authorization was as of October 25, and it did replace the previous authorization.

--------------------------------------------------------------------------------

Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [49]

--------------------------------------------------------------------------------

Okay. And you were fairly aggressive with the share repurchase this quarter, but then your comments said, we're talking about balance. Do you mean that you're going to be reducing the rate? Or can you go pretty aggressively again with the $250 million authorization?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [50]

--------------------------------------------------------------------------------

We'll continue to look at paying down debt as well as paying dividends and all the things -- and share repurchases going forward. So I think it's just good practice to put in a new authorization since we only had $47 million left on the previous authorization. So again, we will continue to look at this opportunistically moving forward.

--------------------------------------------------------------------------------

Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [51]

--------------------------------------------------------------------------------

Okay. Great. And I wanted to ask you a question on -- your inventory levels came down, and with the plant restructuring there, the reorg, I wonder if you need to carry more inventory. Yes, I guess the question is, can you continue to draw down on your inventory levels? And at what point are you going to be producing to the market rate of demand? Or are you there yet?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [52]

--------------------------------------------------------------------------------

So we certainly do continue to focus on reducing working capital, and inventory certainly is the biggest lever we have to reduce it. Is it sustainable? Absolutely. We have new process and practice, a new cadence of review that we have implemented across our organization. We see plenty of low-hanging fruit here, and we will continue to expect that, that will be a good source of cash moving forward.

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [53]

--------------------------------------------------------------------------------

Even with the plant moves -- I'll just add on. So to Rob's comment, there is opportunity here. And even with plant moves where you naturally need to increase safety stocks to be able to successfully make the move, we have made a path for inventory reduction at Regal.

--------------------------------------------------------------------------------

Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [54]

--------------------------------------------------------------------------------

Okay. Great. And then just a last one for me, in your opening remarks, you mentioned you're doing decisions based on data at this point. I wonder if you've done like a full review now of the data for Regal Beloit. And what do you think the operating margins could be once you've optimized the business a couple of years down the road?

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [55]

--------------------------------------------------------------------------------

Yes. It's a great question, Walt, and it's one that I will hold until March 3. But you're absolutely right. That's where our analysis is, and we'll be coming out with some clarity of our path forward on March 3.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

The next question comes from Chris Dankert with Longbow Research.

--------------------------------------------------------------------------------

Christopher M. Dankert, Longbow Research LLC - Research Analyst [57]

--------------------------------------------------------------------------------

I apologize if I missed it, but did you give any kind of split as far as where the savings from the plant closure is going to be? You said predominantly C&I. But is there like a chunk of that, that falls into PTS at all?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [58]

--------------------------------------------------------------------------------

Thanks, Chris. This is Rob. We didn't give any real visibility by segment, but I can tell you that it's -- we expect to see savings across all segments as we move forward on those plant closures.

--------------------------------------------------------------------------------

Christopher M. Dankert, Longbow Research LLC - Research Analyst [59]

--------------------------------------------------------------------------------

Okay. Okay. But again, I assume at least can you give us a sense if it's similar weighting to like the $15 million you already announced. Is that fair? Or is this completely separate and [major] approach?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [60]

--------------------------------------------------------------------------------

It's completely separate. The first $15 million was related more towards the realignment of the organization, and certainly, it was more evenly spread across the segments, if you will, from a savings perspective than it would be from the plant closures.

--------------------------------------------------------------------------------

Christopher M. Dankert, Longbow Research LLC - Research Analyst [61]

--------------------------------------------------------------------------------

Got it. Got it. And then just any update on the power generation order that kind of got pushed from the first half into the back half now? That's still expected to, I assume, show up in the first half of '20. Or is there a risk of a cancellation? Just any update on that order would be helpful.

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [62]

--------------------------------------------------------------------------------

Yes. Again, this is really driven by large data center projects. And historically, orders have been rather lumpy anyways. But several of the orders we expected in Q2 and Q3 have either been delayed into 2020 or, in a few cases, canceled. Capacity is not as constrained in the data center market as originally forecasted, which is the driver, of course, for this business, which is what's impacting the change. But I'll tell you, within that space, in that business, we are well positioned. We are growing share, and it's a great business for us.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from Robert McCarthy with Stephens.

--------------------------------------------------------------------------------

Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [64]

--------------------------------------------------------------------------------

Yes, just a follow-up, and more of a comment than a question -- or maybe it's a question, who knows? Pricing in the quarter and for the year, anything you'd say qualitatively across the businesses? And how are you going to use pruning and some of these other measures to kind of improve it? And I guess when we fast forward to March 3, 2020, do you think we'll -- you'll provide some better historical narrative around the pricing within your subsegments and businesses so we have a good sense of the relative value-add across the segments?

--------------------------------------------------------------------------------

Robert J. Rehard, Regal Beloit Corporation - VP & CFO [65]

--------------------------------------------------------------------------------

Rob, this is Rob. Thank you for the question. So yes, price/cost was positive in the quarter, and we expect it to remain positive as we exit 2019. We've had 7 quarters in a row with positive price/cost. The 80/20 process that we're deploying is also having a positive impact on price, and we expect that to go for -- in the future as well.

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [66]

--------------------------------------------------------------------------------

Yes. And Rob, I'd add to it. I doubt we're going to give you a ton of detail. It's all around driving gross margin improvement. What I can tell you is 80/20 is helping us for sure. I mean our -- the analytical approach. For those of you who are familiar with 80/20, in particular, looking at Quad 4, B customers, B products and our opportunity to grow margins there, that's what Regal is doing today. We're getting into that detail.

I receive a scatter chart on customer margin and sales every month from every business unit, and we talk about it in detail. Perhaps that wasn't as much of a focus in the past. It is in the future and today. And so we absolutely see price, product, customer margin, management, critical to our forward-looking success.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Louis Vernon Pinkham, Regal Beloit Corporation - CEO & Director [68]

--------------------------------------------------------------------------------

Thank you, operator. To summarize, in the quarter, we faced some difficult comps, but also challenging end market conditions. We feel that we met those challenges and delevered well. We also believe that we will delever even better in the fourth quarter.

Looking forward, we are energized about our reorganization, executing our 80-20 approach throughout the business and driving improvement in profitability through cost-out while staying laser-focused on exceeding customer needs with differentiated product, solutions and service while driving profitable organic growth.

Lastly, on March 3, 2020, at our Investor Day, I plan to provide additional details on our strategy and portfolio management. Thank you for joining the call and your interest in Regal.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

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