Good morning and welcome to the Regal Beloit Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Rob Cherry, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Regal Beloit's second quarter 2018 earnings conference call. Joining me today are Mark Gliebe, our Chairman and Chief Executive Officer; Jon Schlemmer, our Chief Operating Officer; and Rob Rehard, our Vice President and Chief Financial Officer. Before turning the call over to Mark, I would like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees, since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings. On slide 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 reconciliation of these measures to the most comparable measures in accordance with GAAP. Now, I will turn the call over to Mark.

Thanks, Rob. Welcome, everyone. Thank you for joining our second quarter call and thank you for your interest in Regal. We'll follow our normal agenda. I'll make a few opening comments. Rob Rehard will provide a financial update. Jon Schlemmer will provide color on market's operations and the performance of our three segments. After that, I'll summarize and we'll move to Q&A. Regal delivered a solid performance in the second quarter with organic sales up 5.7%, adjusted operating margin up 70 basis points and adjusted earnings per share up 24%. At a segment level, in Commercial and Industrial, organic sales were up 5.7% with broad strength in the North American Commercial and Industrial end-markets, power generation, oil and gas, and most Asian end-markets. In the Climate segment, organic sales were up 2.4%, with sales in our North American HVAC business up mid-single-digits. Finally, in the PTS segment, organic sales were up a strong 10.4% for the quarter, with robust growth in oil and gas, material handling, and generally strong end-markets globally. From an operating profit perspective, the adjusted operating margin improved 70 basis points year-over-year. The operating margin benefited from strong volume, incremental price and productivity, but was held back by commodity inflation. Resulting adjusted earnings per share was up 24%. That's a $0.31 year-over-year increase, with little benefit coming as a result of the recent tax reform. For the quarter, free cash flow to net income was 122% and we used a portion of that cash to repurchase $46 million of our shares in the quarter. Our board has recently approved a new share repurchase authorization up to $250 million. Overall, it was a solid quarter with strong organic sales growth and further progress on our march to improve operating margins. Looking forward, as we entered the third quarter,…

Thank you, Mark, and good morning, everyone. Before we get started, I would like to remind everyone that any reference to prior-period comparisons has been adjusted to reflect the adoption of the new GAAP pension accounting rules that went into effect at the beginning of this year. Please refer to the appendix in the earnings call presentation for the details. Sales in the second quarter 2018 were $959.7 million, up 10.4% from the prior year. Acquisitions contributed 3.5% and foreign currency was a positive 1.3% in the quarter. Therefore, organic sales increased a solid 5.7% from the prior year with all three segments contributing. Our adjusted operating margin in the second quarter was 11.1%. Our margin was up 70 basis points compared to the prior year. Margins benefited from both volume growth and productivity improvements. Price/cost was slightly positive in the quarter. In addition, we incurred $2 million in LIFO expense, which was split between the C&I and Climate segments. In summary, we had strong organic sales growth and we continued to show improvement in our adjusted operating margin in the second quarter, both sequentially and year-over-year. Our second quarter 2018 earnings per share reported on a GAAP basis were $1.50. There were three adjustments to GAAP EPS in the second quarter. The first adjustment was restructuring and related costs of $1.5 million, or $0.03 per share. The second adjustment was purchase accounting and transaction costs related to the Nicotra Gebhardt acquisition of $5.1 million, or $0.08 per share. The third adjustment was a gain on the sale of assets from a previously closed business of $0.01 per share. Net of these adjustments, the adjusted earnings per share for the second quarter were $1.60, representing a 24% increase from the prior year. Now, I will summarize a few key financial…

Thanks, Rob. Good morning, everyone. Before I cover the normal update on the segments, I'd like to walk you through how the tariffs impact our business and the actions we're taking to offset the impact. Regarding the Section 232 tariffs on steel and aluminum, most of our steel is purchased from U.S. suppliers. And while we do purchase a portion of our aluminum from suppliers outside of the U.S., it has a relatively low impact. So, overall, there is not a large direct impact on our business. We are experiencing overall commodity inflation on both steel and aluminum, likely resulting from the tariffs. In addition, we are seeing the secondary impact on some purchase components which utilize imported steel or aluminum. On the Section 301 tariffs, I'll first address the $50 billion of U.S. imports from China. These tariffs include a number of electric motor product categories, a few of the power transmission products, and a number of related components used in the manufacture of our type of products. The majority of products we sell to our U.S. customers are not manufactured in China. For Regal, roughly 5% of our U.S. business is directly impacted. In addition, similar to the Section 232 tariffs, there is a secondary impact on some of our purchase components. We are also in the process of evaluating the $200 billion list of Section 301 tariffs that are being proposed by the U.S. Government. There are two main actions we are taking to mitigate the impact. First, we are implementing price increases, beyond what we already executed in April, to help offset the impact of tariffs. Second, we are implementing actions to allow us to manufacture some of these products in Regal facilities outside of China to negate the impact of the tariffs. We have a…

Thanks, Jon. Now, before we go to Q&A, I would like to briefly summarize our second quarter results and highlights. We had a solid second quarter and our outlook remains optimistic. Organic sales increased 5.7%. Price/cost was slightly positive in the quarter, and we expect price/cost to remain at least neutral for the remainder of the year. Our adjusted operating margins were up 70 basis points for the quarter and our adjusted earnings per share were up 24% as compared to prior year. The $0.31 earnings per share increase was driven almost entirely from operations with little impact from tax reform. Our free cash flow to net income was 122% and, on capital allocation, we repurchased $46 million of our shares in the quarter and we've repurchased $72 million year-to-date. Additionally, our board has approved a new share repurchase authorization up to $250 million. As we entered the third quarter, orders were up year-over-year and generally our markets remained strong. The tariff situation is dynamic, but we expect that our mitigation actions will offset the tariff impact. We have announced our intent to exit the residential hermetic components business, which will allow us to better focus on our core and improve our overall performance. Finally, we narrowed our annual adjusted earnings per share guidance, which now represents a 20% increase year-over-year at the midpoint. Our total year adjusted earnings per share guidance reflects a record year for Regal in both sales and earnings. We will now take your questions.

And our first question will come from Julian Mitchell of Barclays.

Hi. Good morning.

Good morning, Julian.

Maybe just the first question on the free cash flow expectation for the year. You've got a sort of a 20% earnings growth guidance aspiration on an adjusted basis. Free cash flow was flattish year-on-year in the first half. How much do you think we'll see free cash flow grow in the second half?

Hi, Julian. This is Rob. Thanks for the question. We do continue to expect free cash flow to exceed net income over 100% in the year. So we certainly are coming off of that expectation, which certainly means that your back half should be fairly strong relative to the first half.

And is there something around working capital liquidation that accelerates dramatically or some excess build-up in the first half that you think has to unwind quickly?

Well, we certainly do see trade working capital as a source of cash in the year, despite the growth projections that we have. So, yes, we do have programs in place to reduce inventory levels. Also, we have different programs in place to address terms for both AR and AP, and that should also drive trade working capital improvements throughout the remainder of the year.

Thank you. And then, just a follow-up question on the Climate Solutions business. Very strong margin performance in Q2. Was there anything exceptional within that or do you think that that degree of year-on-year price increase, up 90 bps I think in Q2, you can hold a very healthy rate of increase through the second half as well?

Well, as you know, Julian, the second and third quarters tend to be our seasonally high quarters and we tend to have stronger margins in those two quarters relative to what happens in the fourth and the first quarters. And our expectation for the year is no different.

Okay. So we should still see margins up year-on-year in the second half in Climate probably?

Yeah. I think that's fair.

Great. Thank you very much.

Thanks, Julian.

And our next question will come from Scott Graham of BMO Capital Markets.

Hi. This is Katya (24:44) on for Scott.

Good morning.

Morning. Can you talk a little bit about how orders were in each of the segments?

Well, as we commented on the call, as we entered the third quarter, orders were up year-over-year for most of our businesses across the world. So we felt pretty good as we entered the third quarter, similar to the way we felt going into the second quarter, which is what drives our optimism for the back half of the year. Jon, do you want to add any color?

Just a couple of things. I would say that, as we progressed through the second quarter, I would characterize the orders performance as somewhat stable through the quarter. No real change sequentially as we progressed through the second quarter.

Do you hear anything from your customers about demand being impacted by the tariffs?

Well, I would say it's a very dynamic time and our products, as Jon mentioned, are definitely impacted by the tariffs. And so there's a lot of discussions going on with customers about both the headwinds of the tariff itself as well as opportunities. But we're dealing with those, as we mentioned, either with price increases or with potentially taking advantage of our global footprint and relocating our production to a location that doesn't have the tariff.

And I would add that, from an orders standpoint, as we entered the third quarter, as Mark said, we continue to see order strength versus prior year. A lot of discussion about the tariffs and how that may or may not impact the end-markets, but we continue to see order strength.

Okay. Thank you very much.

Thank you.

And our next question will come from Nigel Coe of Wolfe Research. Mr. Coe, your line is open. We'll move on to the next question which is from Jeff Hammond of KeyBanc Capital Markets.

Hey. Good morning, guys.

Morning, Jeff.

Hey. So, on HVAC, did you see any kind of material pre-buy ahead of any kind of pricing actions? And then, just back on the margins, can you quantify the FX benefit in the quarter?

So, Jeff, this is Jon. On the pre-buy question, I would say we don't believe we saw any material impact from a demand standpoint on getting ahead of price increases. And I think you're probably referring to price increases that would be with our customers and whether that created a pull ahead that we would have seen.

Yeah.

Yeah. And I would say – it's always hard for us to quantify that, but based on just commentary in the channel and talking to our customers, we don't believe that there is any significant impact for us in terms of our demand.

Okay. And then, just back on tariffs. One, can you just – it seems like maybe some of your foreign competition might be more impacted than you guys. Any opportunities you really see to capture share or price as a result? And then just maybe speak to the complexity of moving to some of these other locations, if you choose to do so.

Yeah. So I'll take that one, Jeff, and then Mark can add any comments he'd like to. I think that when you look at our competition, it varies based on whether we're talking about the $50 billion list of tariffs or the $200 billion list. We have competition that are impacted in both of those product categories but to a different degree. So it'll be interesting to see what happens with the $200 billion list in terms of timing and actual impact. We do see that we have a number of cases where we have competitors that we believe have a greater impact than Regal does. While we're directly impacted, we know that we have some competitors that have what we would see as even a greater impact. And I mentioned the growth opportunities that we're pursuing. That's exactly what's creating those growth opportunities. And that's happening in the $50 billion list, and we would expect that that would happen maybe even more so in the $200 billion list. In terms of the difficulty for us to mitigate and relocate, transfer some of this product, we're looking at that on a case-by-case basis. And I would say that the good news is, is I'll take for example some of our larger industrial motors where we have capacity and capability in our North America operations, and that's an advantage for us to be able to utilize that capacity with, I would call it, a modest investment, not a large investment. And we're watching that closely because, of course, no one really knows long-term what's the impact of the tariffs are going to be. So we're trying to manage that appropriately in terms of how much investment we would make.

Okay. Great. And then, just finally on PT margins, I think you mentioned mix, but maybe just talk about expectations into the back half and a little more color on why it was more – I mean, it seems like you've just had really good runway and then maybe a little bit of a hiccup here. So, just talk about expectations going forward. Thanks.

Yeah. That is kind of how we see it. The first quarter was a really, really good quarter for the PTS business in terms of margins. And like you said, we had a little bit of a headwind in the second quarter. We do believe the impact was because of the mix with the OEM sales strength, versus sales strength in distribution but not at the same pace. We do expect that – our first half margins were 12.4%. That's pretty much the kind of target we're looking at for the second half. And so we're kind of seeing as a more of a blend of what we saw in the first quarter and second quarter in terms of how that segment will perform in the second half.

Okay. Perfect.

Thanks, Jeff.

Thanks, Jeff.

And next we have a question from Christopher Glynn of Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc.: Hi. Good morning, and thanks for taking the question.

Hey, Chris. Christopher Glynn - Oppenheimer & Co. Inc.: Hey. On the C&I margin, continue to talk about more progress on the way. Just curious to kind of stress test that in a scenario of flatter markets in 2019 hypothetically. How would you characterize the non-volume-related runway for your initiatives to drive volume-neutral improvement there?

I'll take a pass at it and then Jon can add any color. So, if you recall, we commented a few quarters ago that we had been focusing our restructuring efforts and simplification efforts on the C&I business in an effort to improve our margins, and that hasn't changed. And I would expect that we would continue to see benefits in that business kind of regardless of what happens to – now, obviously, if the volume were to start declining, that'll be different, but in a flat environment I think we will continue to see benefits.

Yeah. The three primary actions are everything we're doing around simplification in those efforts, what we're doing with price and what we're doing with productivity through our manufacturing operations. All three of those are going well and they will contribute even without the help on volume. Christopher Glynn - Oppenheimer & Co. Inc.: Great. And then, on your distribution trends, I think in the past at Investor Day you've talked about strategies around distribution penetration and runway. I think the growth was a little light there in C&I in the quarter and the mix tilted away from it in PTS. So, just wanted to get a higher level comment on how you'd issue the report card on your distribution strategies.

I would say that, in terms of the scorecard how we're doing, we're doing well on execution. We outlined a number of strategies to drive growth in distribution. Digital was a big part of that. Our investments in commercial excellence, specifically with our sales team adding to our sales organization to strengthen our coverage and distribution both for PTS and for Climate, all of those investments are ongoing and we're doing well. And if you look at the quarter, actually it was a little deceiving because of the comments on mix in PTS in particular, but we actually had good sales strength in PTS and distribution. We just happened to have a really strong quarter for OEM that created a little bit of that mix headwind, but distribution was clearly up over prior year. Distribution was quite good in HVAC and we did have some growth in distribution in C&I. It wasn't quite at the pace we would have liked to have seen, but we were growing in C&I as well. So I would say, overall, we feel good about the progress we're making around the strategy of strengthening and growing our distribution business. Christopher Glynn - Oppenheimer & Co. Inc.: Okay. And then a last one. With the hermetic exit, what sort of diminution you're expecting to impact the Climate segment in the second half and what kind of tail should we think about for 2019 as we kind of timeframe the exit process?

So I'll just comment on how we're thinking about it. So we outlined for you the first half revenue and operating margin for the business. So, that gives you kind of a sense for the scope of that business. We're talking to our customers now and we'll support them through the transition. And I would expect that sometime in early 2019, we would be out of production completely. We'll be looking at potentially using the facility for different purposes, but in terms of serving this residential hermetic business, I would expect to be out in early 2019.

And I would say that the timing here in the second half is going to be very dependent on what our customers need from us in terms of transition. We're having those discussions right now. I would expect by the time we get to our third quarter earnings call, we'll have a much better handle on what that's going to look like for the remainder of 2018. Christopher Glynn - Oppenheimer & Co. Inc.: Great. Thanks, guys.

Thank you.

The next question comes from Michael Halloran of Baird. Mike P. Halloran - Robert W. Baird & Co., Inc.: Good morning, everyone.

Good morning, Mike. Mike P. Halloran - Robert W. Baird & Co., Inc.: Hey. So, just taking onto that, are you guys keeping that in the Climate segment or are you guys going to report that in disc ops on a forward basis?

I think it's too soon to tell. As we mentioned, this just happened at the end of the month. We will call it out for sure. So you'll know exactly where it was, but whether or not it goes into discontinued ops, we haven't gotten that far yet. Mike P. Halloran - Robert W. Baird & Co., Inc.: Okay. Makes sense. And then cadence here for capital. Obviously, you guys upped the share repurchase program, re-upped to $250 million there. You made the NG acquisition earlier this year. How are you guys thinking about balancing those going forward? What's the pipeline look like for M&A? How aggressive are you guys willing to be on buyback? Maybe just give some context around that.

Yeah. So we're kind of following what we've consistently been saying, which is, back in March of 2017, we commented we wanted to be more balanced in our capital allocation, not simply doing M&A, but doing both M&A and buybacks, and we have been actually doing that. Four out of the last five quarters, we have repurchased our shares. And so we want to be balanced on our approach, but obviously M&A is definitely a part of our long-term strategy. And I would characterize our pipeline as being in good shape with some very interesting things that we're looking at. Mike P. Halloran - Robert W. Baird & Co., Inc.: Thanks. I'll leave it there.

Thank you.

And next we have a question from Walter Liptak of Seaport Global.

Hi. Thanks. Good morning, guys.

Good morning, Walt.

Some of my questions have been asked, but around the discontinued ops, the $31.9 million year-to-date, is that revenue trailing off as you look at the exit, and how much is it down year-over-year?

Well, I would say that – we mentioned that in the second quarter it was down mid-teens. So that gives you an idea of how it performed in the second quarter. I would say that, in general, what we would expect to see is it trailing off because of the announcement from our largest customer. But the big question mark that we don't really have the answer to yet is, is what might the near-term demand be to support customers with the transition program. So we could see a little bit of an uptick in demand just because of that requirement, but underlying demand is declining.

Okay. And you mentioned that this is manufactured in one factory.

Yeah.

So, presumably, you can take out all the costs related to the product?

Yes. That's our assumption.

Okay. All right. Great. And then, I wanted to ask a pools question. I think some of the other OEs around the pools market and the distributors were showing sort of higher growth. I wondered if there were some – what was it about your business that had demand down?

Yeah. We had demand up on the OEM side in pool. What I talked about specifically was the aftermarket. We have an aftermarket business that's a good business, part of our pool business, that was down in Q1. It was also down in Q2, not to the same degree as Q1. And we did see demand improve. So our view is that there's a couple of factors there. Q1 and probably early Q2 was more weather-related. But also for us in particular, a bit of an inventory factor as well in the channel that impacted the demand that we saw in the second quarter. But, like I said, the good news was we saw a demand pickup through the second quarter and entering into the third quarter. So I think it's going to be more of a timing issue we saw in the first half.

Okay. Great. And just one last follow-up for me. It seems like you guys are stepping up with the discussion about simplification and looking at how profitable the different products are. My understanding was in C&I the simplification that you're doing is sort of a one-off for this year. Are you finding new programs to work on to do simplification or is this going to be done by the end of the year?

Walt, as you know, we've been at simplification here for a while. In 2017, we had a number of programs where I'm going to say 75% of the money we spent was focused on the C&I space. That continued into 2018 and there is still more to do, so maybe perhaps not at the same pace, but there is definitely still more to do. And so we see a continued benefit stream from our simplification efforts moving forward.

Okay. Great. All right. Thank you.

Thanks, Walt.

And our next question will come from Bhupender Bohra of Wolfe Research.

Hey. Good morning, guys.

Good morning, Bhupender.

Hey. So I just wanted to dig more into the Climate Solution business here. I think Jon mentioned about U.S., North America, resi HVAC was up mid-single. I think you guys talked about some weakness in the commercial refrigeration business. Can you just – was there some kind of a pull-forward or how did we see the demand actually as we entered, like, third quarter and the cadence through the second quarter, if you can just comment on that commercial refrigeration?

Yeah. So, in the quarter, you're right, North America residential HVAC was up mid-single-digits. Commercial refrigeration was relatively flat in the quarter, if you look at it versus prior year. Commercial refrigeration was actually down in Q1 versus prior year, so flat in Q2. The trend that we're seeing in our commercial refrigeration relative to prior-year performance is improving. So we're expecting growth in the second half of 2018 from commercial refrigeration, year-over-year growth.

Okay. Got it. Got it. And I mean is it just the first half weakness was – was there anything in the underlying demand or any other concerns during the first half within that market or if you can just give some...

Well, in the commercial refrigeration?

Yes.

I think, in commercial refrigeration, based on our discussions with our customers and what they're communicating, it's the demand in their market that has caused us to be down in Q1 and flat in Q2, but I think it's improving and we'll see the benefit in the back half.

And one of the things that we're doing that will help improve sales is wellness (42:21). We have some really exciting new products that are coming out in commercial refrigeration, all around energy efficiency and some other improvements that'll help our customers that we're seeing really strong interest there, and that's part of what we'll see in our strength in the second half.

Okay. Okay. And my follow-up actually was on the price/cost. I mean, if you dig into like the price actions, you did a price increase in April. You actually mentioned about some other price increases coming up. And historically, you have mentioned you have contractual customers, about like 30% of your customers are contractual, and the rest of them are actually spot. How did that pass-through actually work like in the second quarter? I mean, I was thinking you should be a little bit more positive in the back half, but it seems like you mentioned about neutral? If you can just give some color on that?

Yeah. Let me give you a little bit more background on that, Bhupender. So I'll take it back just a little bit. We entered the year expecting that we would turn price/cost neutral by the second quarter. Actually we ran about a quarter ahead of that. We were neutral in the first quarter. We were slightly positive is the way we would characterize it for the second quarter. We are expecting to remain at least neutral, neutral to slightly favorable for the remainder of the year. If you look at from a pricing standpoint, there is incremental pricing in C&I and Climate with the April price increase. There is also some incremental pricing that we'll see from the two-way material price formulas with the 30% of our business that's contracted. However, there is also some incremental inflation that we have coming at the business. So, that's why we would characterize it as remaining neutral to slightly favorable for the remainder of the year.

Okay. And the price increases which you mentioned, would that be C&I and Climate, or all across the board?

When you think about how we're looking at the business, what we've done, as well as the actions takings on tariffs, I would characterize it as across the board.

Okay. Okay. Got it. Thanks a lot. That's all I had.

Thank you, Bhupender.

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

Just thank you, everyone, for your questions and for your interest in Regal and have a great day.