Good morning and welcome to the Regal Beloit Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Cherry, Vice President of Investor Relations. Please go ahead.

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 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 to differ materially from those expressed or implied in forward-looking statements. For a list of factors that could cause the actual results to differ materially from projected results, please refer to today's earnings release in 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 a reconciliation 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 of 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 will turn the call over to Louis.

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 continue 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 in pool pump market. 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 adjusted earnings per share of $1.35 and delivered 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 going to provide more detail in his session, 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 put some sales pressure on the quarter. We saw negative 4.8% organic growth in the segment. However encouragingly, we saw improvement in our EMEA and Asia Pacific market, which are…

Thank you, Louis, and the 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 them minimize the impact to our operating profit. I will start by providing comments on the segments and in 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 declining sales was also driven by our proactive approach to printing 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 almost entirely due to the volume decline experienced in the quarter. However, despite the volume headwinds, we were able to partially offset the impact of 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 the Climate Solutions organic sales in the third quarter were down 4.8% from the…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mike Halloran with Baird.

So, a couple of questions here, first on the cadence and the underlying demand side, a lot of moving pieces in the fourth quarter here. Could you talk about what end markets you're seeing the 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 selling and sell out is kind of starting to match again?

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 ways to go. And so whether that's in our power transmission channel with our distributors or in our pool pump, and we do believe through, this will continue through Q4. Now, sequential orders and expectations, you know, 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 comp 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 recognized that our PTS segment has 70% of business goes through distribution, and 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 in 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 will 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 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 to your question, Mike.

That was very helpful. And then much better deleverage seen on some of these revenue pressures, the market driven pressures. Could you just help with the 32 million I think is the combined cost opportunity was announced last quarter, this quarter, how much of that is this year versus next year? And if I'm layering beyond that 32 from layering out other potential things you're working on, it's the, maybe if you could just go through that at least 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?

So Mike, this is Rob. So you're right, the two primary buckets are that 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 five 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 comes through and 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 two primary buckets that we're referring to.

Yes, Mike, you know what I want to just add a comment to it. I don't want to share too much of the strategies that will be outlining in the fourth quarter and then Investor Day, but we feel there's more runway here as well. And so Rob, rightfully captured the two 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 in margin management, and making sure that we are either cost competitive or getting paid for the value that we bring to our customer.

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Maybe just a 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 slightly better start to the quarter I think in Q4? Just wondered, looking at those two comments. Were there any particular geographies or in 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 for is looking better?

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 that and our oil and gas markets are down. We feel really strongly about our turning of 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.

Oh, sure, it was just -- I think you'd 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?

The same phenomenon, definitely to say.

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

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 roadmaps 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 two segments. So I'm bullish about our ability to step up organic growth at Regal.

The next question comes from Joe Ritchie with Goldman Sachs.

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 as I guest, I was a little bit surprised to see that being negative for you guys, so maybe just touch on that a little bit.

Sure, happy to. And really Joe it's really the FER overhang and some inventory reductions of the OEM. 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 in 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 of fairly large retrofit projects, which had probably about a percent of pressure. But we're not worried at all here on Climate, if anything I feel confident, we're gaining share especially in our variables these motors solutions.

And the inventory overhang on Climate, specifically, that subsides in 4Q?

We would expect it does although it really is there's one other piece to this story which is weather. And 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.

And then one other question just maybe sticking on Climate and you're 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 and margins in the business as we begin to a little bit more of a deflationary environment?

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

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

Correct. That is correct.

The next question comes from Robert McCarthy with Stephens.

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 to 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, organization 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 the business?

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 a shareholder value creation. But we are talking to 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 shutdown, no. I mean, we're not in a position -- certainly not any of our significant businesses is in any position where we need to even think about a shutdown. Perhaps a small entity, somewhere around the world, perhaps, but we're, that's not being considered.

And then on the positive side, it looks like you were 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 OEM in terms of their initial expectations for 2020 and beyond in terms of what they're thinking about for the 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?

Yes. I'll take that one as well. You know, 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 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 and 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 delivering at a much better rate than we have historically delivered. So, that's about all I'm ready to state regarding 2020 right now, but hopefully that gives you a perspective that's how we're thinking about it.

The next question comes from Christopher Glynn with Oppenheimer.

Wondering about the 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 give us pretty detailed tables on that front?

Yes. So, when I 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. Hopefully that Chris gives you a little help and understanding how we think about it.

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

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 valves we see the 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 years, partially through our commercial investments, more feet on the street, more partnering with distributors. And also through, our digital commercial, our 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 will elaborate more on in the March timeframe 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 OEM is to provide a package which Regal is perfectly situated to do so with both of the gearing side of PTS and our motors business, so providing a package to our customer with a full solution rather than individual component. So, more to come on PTS than growth opportunities, but there's definitely a runway there.

The next question comes from Jeff Hammond with KeyBanc.

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?

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'll expect to see a greater portion of that particularly the 15 million that we alluded to enough after the second quarter. More of that will come through in the fourth quarter on an annualized basis, if you will, then the 17 million that we just commented on from the plant closures. So hopefully that helps you sizes a little bit.

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

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

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

No, just the cost saves that we had thus far.

And then just commercial HVAC, I just want to understand the weakness there, because we're here 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 transporters, there's something else going on there?

So 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.

And then just one final kind of housekeeping item, can you give us the ending share count or what you think the share counts going to be just given the size of the buyback in 3Q?

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

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

So if you look at our current share account, that we had at the end of the nine months and then the diluted share count at the end of the three months ended 2019. We would expect our fourth quarter to be fairly representative of that number at the end of the third quarter.

Okay. Thank you, guys.

Because just as a point of clarification, most of that was purchased throughout the quarter, quite a bit of it was early in the quarter. So from a weighted basis, you're going to get more most of that benefit volume through.

The next question comes from Walter Liptak of Seaport Global.

Just a follow-no from Jeff's question on the share buyback. Did you use any of the new 250 million authorization this quarter? Was cleaning up on the prior authorization?

Well, thanks, Rob. No, we didn't use any of the new 250 millions in the third quarter that that authorization was as of October 25th, and we did replace the previous authorization.

Okay. And you are fairly aggressive with the term repurchase this quarter. But then your comment says we're talking about balance, you mean that you're going to be reducing the rate, or can you go pretty aggressively again, with the 250 million authorization?

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

Now, I'm going to asked me a question on your inventory levels came down and with the plant researcher the reward, I wonder if you need to carry more inventory. 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?

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

Even with the plan move. So I'll just add on 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 a path for inventory reduction at Regal.

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 wondered 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?

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

The next question comes from Chris Dankert with Longbow Research.

Apologies, if I missed it. But you could have any kind of split as far as where the savings from the plan closes is going to be? You said predominantly C&I, but is there like a chunk of that falls into PTS at all?

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

But again, as soon as you get the sense of the similar waiting to like the 15 million you already announced, is that fair? Or is this completely separate and in your approach?

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

And then just any update on the power generation order they kind of got pushed from in the first half into the back half. Now that's still expected to assume show up in the first half '20 or is there risk of the cancellation, just any update on that or be helpful?

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 is originally forecasted, which is the driver, of course, for this business, which is what's impacting the change. But I'll tell you in that space, in that business, we are well positioned, we are growing share and it's a great business for us.

[Operator Instructions] The next question comes from Robert McCarthy with Stephens.

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

Rob, this is Rob. Thank you for the question. So yes, price cost was positive in the quarter, and we expected 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, it's also having a positive impact on price and we expect that to go in the future as well.

And Robert, 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 the analytical approach for those of you are familiar with 80/20 in particularly looking at Quad 4, B customers, B products and our opportunity to grow margins there. That's what Regal's doing today. We're getting into that detail. I received a scatter chart on customer margins and sales every month from every business unit. And we talked about 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.

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

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 delivered well. We also believe that we will deliver 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, and 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.

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