Good morning, and welcome to the Regal Beloit First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there'll 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 Rob Cherry, Vice President, Investor Relations. Please go ahead.

Great. Thank you, Gary. Good morning, everyone, and welcome to Regal Beloit's first quarter 2020 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, 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 the 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 three, 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, which are more in-depth than usual given the extraordinary circumstances we're operating in today. Rob Rehard, our CFO, will then provide a first quarter financial results in more detail and discuss how we're thinking about the remainder of the year. We will then move to Q&A. After which, Louis will have some closing remarks. And since our prepared remarks are a little bit longer than usual, if needed, we will extend the call a bit to ensure adequate time for Q&A. And now, I will turn the call over to Louis.

Thanks Rob and good morning, everyone. Thanks for joining us to discuss our first quarter earnings and to get an update on our business and thank you for your interest in Regal. We have a lot we'd like to cover today. But before discussing our results and providing a recent business update, I'd like to thank all my Regal colleagues around the world for their hard work, for their resourcefulness, for their adaptability, and for their sense of duty as they work to serve and support our customers during this unprecedented period of uncertainty and heightened anxiety. Thank you. Our prepared remarks this morning will go well beyond what we would normally discuss or disclose. But during periods of elevated uncertainty, like the one we're in now, we think it's important to provide as much transparency as reasonably possible about how our business is operating and about how we're navigating during these turbulent time to keep our associates safe, support our customers, and produce the best possible returns for our shareholders. Before turning to our first quarter results, which demonstrates strong execution despite increasingly challenged markets, and about which I'm eager to discuss, I'd like to touch briefly on a number of topics that I'm sure are top of mind. What we're doing to keep our employees safe; the essential nature of our products; an update on our manufacturing operations and supply chain; first quarter orders and how April is tracking, guidance; sharing some bright spots because there are some; a few words on free cash flow, which remains very strong; and lastly, how we're thinking about our mid-term strategy. The short answer on that front is our strategy is unchanged, and we remain focused on executing what we can control. In fact, that theme is something I hope you'll…

Thanks Louis and good morning everyone. We feel we had a solid start to the year, especially on the metrics we can control. We did have topline headwinds in the quarter, as noted by our sales being down 9.8% on an organic basis. Much of the decline was related to record-breaking unseasonably warm winter weather in our HVAC business and sluggishness in general industrial applications globally, coupled with the negative impact of the coronavirus, which became progressively more severe as we ended the quarter. But despite these headwinds, Regal de-levered at 12%, well below our historic norm, helping to minimize the volume impact to our operating profit. At this point, I'll provide comments on each of the segments and end with more detail on the total company. In lieu of our normal guidance discussion, I'll share some of our scenario plans. Starting with Commercial, organic sales in the first quarter were down 12.5% from the prior year. The decline was largely volume-driven by end market. Headwinds were very broad-based. But the business saw particular pressure in pool pump, commercial HVAC, Europe air-moving market, and to a lesser extent, to our proactive approach to pruning low-margin accounts, as we continue to execute on our 80/20 initiative. The impact of this pruning initiative was approximately 110 basis points of the organic sales decline. Let me give you a little more color on two of the headwinds I just mentioned. In pool pump, COVID-related production delays at one of the company's facilities in China limited our ability to meet customer demand. But that facility has resumed operations and has seen positive momentum in April. Similarly, in Europe, we experienced COVID-related production delays at our air-moving factory in Italy, which was shut down for three weeks as mandated by the government, but this facility…

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Mike Halloran with Baird. Please go ahead.

Good morning, everyone. Hope everyone's doing well.

Yes, good morning, Mike.

So, first just on what you guys are seeing from a channel perspective, what the inventory levels look like in the channel? Is there any element of pre-buy? And where are you seeing sell-in, sell-out kind of match from an end market perspective?

Yes. Hey Mike this is Louis. I'd say there's no consistent view here. It's spotty given the demands in the market. So, through Q1, and as we had talked about destocking in the channel through 2019, we actually were seeing a good process and felt like that that had stopped. Now, going into April, with what's going on, we do not see pre-buying in a significant manner. And certainly, a slowdown, because we have visibility to our distributors and their inventory as well as their sales out, there's certainly clearly a slowdown. So, I wouldn't say that we're seeing any pre-buy and clearly a deceleration. Now, if you compare that to the OEM side of our business, OEM is down slightly more than distribution from an order rate.

And then lots of moving pieces here when it comes to the capital usage, but maybe just some thoughts on what the organizational capital allocation and usage philosophy is here. Obviously, you're preserving liquidity in the short-term. But how are you managing still driving R&D and innovation over the long-term, some of these structural things with -- that you're managing, you know, both what's already announced and as you alluded to, which is yet to come, as well as potentially being opportunistic with that liquidity over time, whether it's buybacks or if the market opens up on the M&A side? Maybe just a philosophical conversation about how you're weighing all those puts and takes.

Yes, it's a great question, Mike. And it's certainly front of mind and certainly in some of my discussions, and Rob and my discussions with the Board. So, how do we think about it? First of all, right now, we're being conservative. And with an abundance of caution, we pulled down our revolver, and we're managing cash tightly. Now, from an investment perspective, if it's a capital investment and it's related to safety first, business continuity, second, absolutely. We're moving forward. Now you heard from Rob that we are bringing down our forecast of capital expenditures this year by about a third to $50 million. But listen, if it's the right project and it has the returns that we need, and if those returns are, we say, less than-a-year return, we're going to make those investments even if we slip over the $50 million of CapEx. You asked about growth. We are not cutting growth at all right now. This is the time to invest in growth to make sure that we are stronger coming out from an organic perspective, and hopefully, win some opportunities from that. So, my teams and the leadership are absolutely committed to continuing our investment in our technology, in our product roadmap to better position us to serve and differentiate with our customer base. And then you talked about our thoughts on -- we have -- one of the strong tenets of this company is our strong free cash flow, even during difficult times. So, there could be opportunities. I would say from a share buyback perspective that would be opportunistic. Again, right now, we're being conservative, and we're not going to consider it in second quarter, perhaps that it gets reconsidered going forward. And I would hope that there would be some M&A opportunity that would fit for us. And you know, as I shared at our Investor Day, we are developing a very professional approach. We have a new leader of that -- of our business development and strategy that was brought on about two months ago. And I'll tell you, we're thinking about acquisitions in a much more disciplined structured way. So, yes, I would hope that there might be an opportunity there. So, nothing's off the table, Mike. And we evaluate what's going to bring the best returns for our shareholders. And we can be flexible. And again, our cash flow position helps us with that.

Great. Appreciate the color there as well as all the detail in the deck and the prepared remarks. Thank you.

Thanks Mike.

The next question is from Chris Dankert with Longbow Research. Please go ahead.

Hey, morning, guys.

Morning Chris.

I guess, first off, I understand you kind of can't get too deep in the weeds by segments. I won't pepper you too much there. But when we're looking at, Industrial Solutions, specifically. Can we hit breakeven there in 2020? Or should we kind of expect some short-term losses, just to kind of level set for next year?

Yes. Thanks, Chris. This is Rob. Absolutely. We have a path to improving that business. And certainly, getting the breakeven plus is part of that plan. As we talked about at Investor Day, this is one of those businesses where we said there's so much cost-out opportunity that we don't need the topline to improve in order to get that benefit on the bottom-line and we are still in that category. We haven't changed or come off that position. And as you saw in the first quarter, we are making progress.

Great to hear. Great to hear. Thank you for that. And then just a follow-up. In PTS, nice numbers there. Just looking at orders, I guess, excluding the big aerospace win, you know, did other orders fall off closer to that, the 30% range? Any commentary that would kind of pull out some of the lumpiness. I know that's kind of hard to do.

No, that's Okay, Chris. And I understand the interest. Yes, if you pull that one-time aerospace order out, our orders would have been down in the high 20s. And so not inconsistent to what we're seeing in the rest of the business.

Thanks so much. I'll pass it along.

Thanks Chris.

Thanks Chris.

[Operator instructions] The next question is from Julian Mitchell with Barclays. Please go ahead.

Hey, good morning. This is Trish Gorman, on for Julian. So, one question on April orders. Thank you for the segment detail. And I know you mentioned Asia was a bright spot within Commercial. But can you talk a little bit more about the regional trends, kind of how that's down 30% splits out by region?

Yes. And I'm not going to give you a lot of good color here, Trish, other than to say, April was stronger in Asia-Pacific and in China than the rest of the regions. You know, different by segment. For example, Commercial Refrigeration in Europe was down significantly more than the other segments. So, I would tell you, Europe and North America are fairly consistent, although there are spots that are a little weaker and spots that are a little stronger. So, a little stronger is our data center market and orders were quite strong in the first quarter, and we felt really good about that. That's a bit more North American-centric. So, it's really where the businesses play and where they support. But I'd say, Asia has certainly recovered faster from this than Europe and United States, we're seeing. Hopefully, that helps.

That's helpful. Yes, thank you. And then just one more for me on free cash flow. Working capital is a cash tailwind. I think it's typically a headwind in the first quarter. I know you said it'll be a source of cash for the year. But how should we be thinking about those movements throughout the year and maybe the seasonality of your free cash flow?

Yes. So, thanks, Trish. This is Rob. You know, free cash flow is typically in the first quarter a little more of a headwind. That's because a lot of quarters, the first quarters, we're building inventory in anticipation of the season. This year, we actually made great progress through our 80/20 initiative to pull down, which had a great impact on pulling down our inventory levels in the first quarter. We do expect that to continue throughout the year. We would expect our second and third quarters to also be quite strong. That's why we're saying we'll still be above 100% for the year despite the fact that, you know, the headwinds that we have in the business right now. So of course, a lot of that comes through the management of trade working capital. And so, source of cash for the year, absolutely, most of which is coming from inventory.

Great. Thanks guys.

Yes. Thanks Trish.

The next question is from Robert McCarthy with Stephens. Please go ahead.

Hi, it's Robert McCarthy, on for Robert McCarthy. How are you doing?

Hey Rob.

Hey Rob.

This is always dangerous because I was on another call, so I have not heard virtually anything anybody else has said, but it never stopped me before. To actually to follow up on that free cash flow question, Louis, in terms of some of the divestiture activity here ongoing and some of the select kind of pruning of the portfolio for lack of a better term, has there been working capital benefit accruing from that as well in addition to cost improvement?

Absolutely. As we look at 80/20, you know, and we had shared at the investor day that we have a very -- focused on SKU reductions in the business. And that in a Commercial Motors, we're going to see nearly a 50% reduction over a three-year period. Industrial Motors, it's about a third. That is absolutely driving down our inventory needs and requirements. So, simplifying our business helps not only from a cost perspective, but absolutely from an inventory management perspective.

And then I think this has probably already been well-traveled ground, but I'll continue. Maybe you could just give us some help around the impressive decrementals that you've been able to execute so far. What is your embedded expectation, you know, across the segments? What would you expect those decrementals to be? I think you gave an overall number that you expected for the company for the back half of the year. But just any kind of color or contour around that by reporting segment would be helpful.

Sure, Rob. It is Rob. So, you're right. We did give you some ideas on decrementals going forward on our -- in our sensitivity analysis. The way to think about that by each one of our segments is you -- you know, we previously shared how Climate, you know, leverage or incrementals is around 20 to 25, Commercial and Industrial both around the 25 to 30, and PTS is about 30 to 35. The decrementals on those business, we would expect, given the 80/20 benefit that we've seen and the deleverage we've seen as we've gone through the last four quarters should be below the low-end of each one of those segment ranges. So, for example, in Climate, you know, if it's 20 to 25, we'd expect to be sub-20 and so forth. So, that's the way to think about it going forward.

Congrats on the performance, and congrats on the squeeze.

Yes. Thank you very much. Thank you.

Thank you. Appreciate it.

[Operator instructions] Showing no further questions, 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 the quarter, we did face some unique challenges across our business, which weighed on our sales and depressed our April orders. The coronavirus also impacted our associates personally in many ways. But when it comes to factors under our control, I think the Regal team executed extremely well, and I thank them again for their efforts. We de-levered at 12% in the quarter, showing significant progress on this metric for the fourth quarter in a row. We also generated very strong free cash flow, and we even realized some pockets of share gain in various parts of our business. There's still a lot of work left to do as we execute toward our mid- and long-term goals, but we're well on our way, and we won't let COVID deter us. Our 2020 restructuring and 80/20 initiatives are slightly ahead of schedule. We remain focused on serving our customers with differentiated products and services while keeping our associates healthy and safe. And our long-term strategy articulated at our March Investor Day remains firmly intact. Thank you all for joining our call and please stay safe.

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