Good morning. Welcome to Regal Beloit’s Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Robert Barry, Vice President of Investor Relations. Go ahead.

Great. Thanks, Kate. Good morning, everybody. Welcome to Regal Beloit’s Second Quarter 2020 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our 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 be leading off with his opening comments. Then Rob Rehard, our CFO, will provide our second 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. Now I will turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our second quarter earnings and get an update on our business, and thank you for your interest in Regal. To be direct, this was a challenging quarter as the impacts of this unprecedented global pandemic weighed heavily on our orders and sales, constrained some of our key manufacturing operations and supply chain and presented an array of professional and personal challenges for our associates. So before going further, I want to take a moment to thank all of my Regal colleagues around the world for their hard work, their resourcefulness, and their sense of duty as they work to serve and support our customers with essential products during this challenging time. I also want to thank them for their sense of discipline, and in some cases, I might even say sacrifice, enduring pay cuts and adhering to strict safety measures, which may be uncomfortable at times to ensure not only their own health, but also the health and safety of our entire Regal family as well as our company’s ability to be there for our customers. While second quarter was tough, I’m also extremely proud of all that we accomplished through a relentless focus on what we can control and by delivering very strong execution. Indeed, controllable execution was our mantra in second quarter and will remain so for the foreseeable future. And so despite having to navigate many challenges presented by COVID-19, the Regal team delivered on a wide range of targeted cost actions resulting in a 15% deleverage rate for the quarter. We also made progress on working capital, which, along with the low deleverage rate and our CapEx discipline, drove just under $80 million of free cash flow in the quarter for a cash…

Thanks, Louis, and good morning, everyone. I’ll start by echoing Louis' comments about second quarter being particularly challenging on a number of fronts, but also that our Regal associates remain focused on purposely executing what was under their control. And we’re successful in doing so, achieving a 15.5% deleverage rate, favorably below what we had referenced coming out of our first quarter earnings call, especially given the COVID cost headwinds at our facilities and $77 million of free cash flow for a cash conversion rate of 255%. The top line story was largely about first and second derivative impacts of the coronavirus. In our first quarter, the geographic impacts of COVID were weighted to Asia and Europe, where we generate about 25% of our sales versus in the second quarter, when COVID-19 impacts weighed more heavily on the Americas, where we generate 75% of our sales. In the second quarter, we saw some recovery in Asia, but Europe remained under pressure, and North America was heavily impacted, evident in our sales being down 24.7% on an organic basis. The good news is that as the quarter progressed, our order rates improved, with July coming in even stronger at down 7%. In our more consumer-driven business, such as resi HVAC and pool, we’ve seen a much more dramatic recovery in orders. I’ll provide more details as I walk you through our segment results. Starting with commercial. Organic sales in the second quarter were down 23.6% from the prior year. The decline was largely volume driven, with particular headwinds in our North America general industrial and commercial HVAC markets and in our Europe air moving business. However, we did see an increase in our backlog in this business as we worked to best serve our customers, while managing challenges at our plants…

[Operator Instructions] Our first question is from Julian Mitchell from Barclays.

This is Trish on for Julian. So [indiscernible] color on residential HVAC, I was just wondering if maybe you can talk a little bit more about what you’re seeing out of the commercial HVAC market. Maybe order of magnitude there for what that business did in terms of orders and sales in the quarter? And then just kind of given what you’re seeing in resi HVAC, do you think this segment could return to growth as a whole in the second half?

Yes. So Trish, this is Louis. I’ll take this one. So commercial HVAC, which is actually in our commercial segment, it is not in our climate segment. Commercial HVAC orders were down pretty significantly in the quarter, down 38%. Now going into July, we have seen a rebound, but still down. So overall, I would say that side of our business is not seeing the recovery that we’re seeing on the residential HVAC side. Residential HVAC, we’re getting the benefit of consumer demand, stay-at-home demand and also a warmer second quarter. April, May was slightly weak, but June -- certainly, June and July have seen a strong rebound. So I would say from a commercial HVAC side, will settle down high single, low double digit. Hopefully that helps.

Yes. And then just maybe 1 follow-up on the cost savings. How should we be thinking about that by segment? And then it seems like it’s been weighted more towards industrial given the incremental actions, are there any changes to how we should be thinking about incremental margins on the upturn? And maybe, can industrial do 30%, 35% incremental margins, do you think?

Trish, this is Rob. I’ll take that one. So first of all, on the split by segments, all segments have their share of the cost savings. And of course, the industrial segment, as we’ve communicated previously, does have a good percentage of those cost savings in their expectations. Certainly, we’ve communicated how in industrial most of the improvement plan is cost savings related as opposed to growth related on the top line. So that’s really the way to think about it. In terms of industrial coming out of this and working towards higher margins, we have a -- as we showed in our Investor Day, we have a plan to get industrial margins above our weighted cost of capital over the term, as we pointed out in that presentation. So that’s really the way to be thinking about it. Should industrial lever up 35% or so? I think just maybe around 30%, maybe slightly just south of that, that’s kind of the way to think about it.

Our next question is from Mike Halloran from Baird. Go ahead.

So first on the climate side, could you help put a lot of those moving pieces into context for us? We’re certainly hearing of some pretty robust residential trends in that June, July time period, you’re certainly talking about some sequential improvement, you’ve got other pieces in there, some FER comps and other -- and some other pieces that are constraining that, but maybe talk a little bit about that trend, if you’re keeping up with what you think the end markets are looking like right now. Any commentary on what inventory looks like through the channel to help understand the comparative performance between what you’re looking like and maybe what the sell-out from the industry is looking like?

Yes, Mike, this is Louis. I’m happy to share. We provided a lot of information in our prepared remarks and a lot of numbers. And hopefully, not to confuse, but to provide as much transparency in detail. But to give you our perspective on HVAC in our climate segment, in particular, certainly, weak demand in April and May. We saw significant destocking by our customers as well as in the channel in early parts of second quarter, certainly through early June. In addition, when you look at the mix of that business, roughly 10% of the sales are our commercial refrigeration that served the hospitality end market, and those orders were down significantly in the quarter, and we’re not seeing them rebound. And then to your point, there was the tough compare of FER, which we believe has probably about a 3-point impact in second quarter. Now you -- when you asked the question of how do you compare that maybe to some of the OEMs that have provided results already, clearly, we’re upstream of those OEMs. Those OEMS were -- we would say, have taken their inventory levels down in second quarter. But we are starting to see them restock. And so that justifies some of the upsides we’re seeing. Now sales in -- excuse me, orders in April were down 40-plus percent in that segment year-over-year. And then we saw a consecutive improvement of 9 in May and 25 in June and July, another 26. And so overall, we’re seeing for the month of July, pretty much flat from year-over-year perspective. I’m bullish, actually, of what’s going on in this segment. I’m also very positive about the relationships we have with our OEMs and the partnering that we have going on. We’re in the middle of a couple of long-term agreement negotiations that I would tell you are going positively. In the end, our responsibility as a supplier to this segment is to provide good product technology, great service, which we do and be cost competitive, and I believe we’re doing all of that well and partnering with our OEMs to help them be successful in the future with new products and technology. So overall, a tough Q2, no question, orders in April, May, tough. Definitely rebounding, and we feel good about third quarter and beyond. This is why also in our prepared remarks we made the comment that we feel our operating margin should improve because of this -- the sales increases we expect in the second half. So hopefully, that answers your question.

Yes. No, that does. And so what I’m hearing is pretty stable on the share side. And it’s just a question of timing on the inventory side from where we sit here today?

That’s exactly right. That’s exactly right.

Okay. And then the second question is then, just when you think about the back half of the year and the framework that you put up for the third quarter, excluding the commentary we just had on the residential climate side and probably the pool side as well, are you embedding pretty normal sequential trends from what you saw in the kind of June, July time period from here? Or is there a different thought process internally for some of those core industrial and commercial markets?

Yes. So a couple of comments there. Overall, Regal’s orders in July were down 7% year-over-year. And we believe our sales will be down roughly 8% to 12%. I will comment that our backlog did grow in second quarter. And so from a consecutive orders rates, we’re not looking for a great improvement, if anything, maybe even July was a little bit of a bump. August -- we’re not expecting August and September to be anything stronger at this point.

Our next question is from Christopher Glynn from Oppenheimer.

So nice milestone on the traction with the industrial margin. The time is kind of interesting now. Is it just really a lot of the traction hitting in this quarter that you’ve been working on for the past year, two years? Or were there any timing factors that helped the margin rate? Or do you expect to continue to build off the 2Q level for industrial margin?

Yes, really, Chris, no one-timers in the quarter. A slight impact because of the furloughs and pay reductions. But this is the outcome of the hard work that the industrial team has been putting into driving the performance of the business. This is all of our cost-out initiatives. This is, as we’ve talked on previous calls, all about coming out with a new global TerraMAX industrial motor solution that’s had a much better cost position. And we’re actually, I’d say, in the early days of reaping the benefits of that as well -- as well as taking significant cost out of our alternator and generator business so we can be more cost competitive. So I’d say very limited onetime impacts, which should allow us to continue to improve on the operating margins in this segment as we proceed through the year.

And then just wanted to visit the pruning initiatives, just a brief overview of the state of play there, types of accounts. And in particular, at climate, where it’s a little bit higher.

Yes. I mean this is our 80/20. This is who we are. This is understanding our customers, understanding the value they place in our offering, and providing the best solution. Now if we can’t do that competitively and we can’t make appropriate margins, then we’ll make those tough decisions. I would say historically, as I’ve commented on other calls, that perhaps Regal hasn’t done this in the level of analytical detail that we are doing today, which is raising this need to do pruning. Where our focus is, is around having 80/20 drive us so we can focus on our highly valued customers and grow with them. And we’ll define those highly valued customers as those that value us as well. In addition, it allows us to focus on what we define now as our perfect prospect customers and segments. Those customers, again, that value our technology and our differentiation and are willing to pay for that appropriately. And so I’ve talked about a couple of our segments and regions that are gaining some nice momentum here. Our commercial motors business in China has gained some fantastic momentum. Our hermetic business is gaining some momentum. Because we’re focusing our teams on where we’re going to get the best returns. And so I’m not surprised by -- we had said before that we thought pruning would be between 1% to 2% for Regal. It was 1.9% in the quarter, a little bit higher in climate, but again, I’m okay with it. And because it’s -- we’re putting our focus on the right places and where we need to go with the business long term. Hopefully, that helps.

Our next question is from Michael McGinn from Wells Fargo.

Congrats, Mr. Barry on the new seat.

Thank you.

So if I could just jump into the incremental margin discussion. It seems like you got some really good trends here within climate heading into July. It’s a large segment for you, highly profitable. So are there any considerations that would push that deleveraging to the high end of the range? It seems like maybe a little conservative? I mean is there a currency or FX piece in that? Any color would be greatly appreciated.

Yes. I think that the deleverage rates that we’ve highlighted on our third quarter here are pretty consistent with what we would expect. There’s nothing that we see as kind of an outlier from that perspective. Our climate business does tend to delever around that 25% range, where we certainly see them delevering better than that as we go through this next quarter, aligned with the framework that we’ve provided. So no, there really isn’t anything that stands out as a big headwind to offset that impact.

Okay. And then I think you mentioned some repo considerations, maybe the back half of this year. Shares have had a good, a really good run here. I think you’re trading above pre-COVID levels. So can you just talk about what you’re baking into -- what is more market considerations versus your own return on capital metrics? How do you see that playing out through the back half of this year?

Right. So as I talked to during the call, we are still suspending the share repurchase program. However, the things that will cause us to actually open that back up and reinstate the program would be things like, hey, the continued stabilization of our order rates, for example. As we go through the year, we saw a really nice uptick sequentially in our orders, as we commented on the call. And so that continuation will certainly be one of the factors that we’re looking to in order to reinstate that program. The other would be market as you said. The demand side -- as the market starting to stabilize more going forward and is that our expectation. It’s that sort of confidence that would trigger our decision to potentially open back up and reinstate the repurchase program.

Okay. Very helpful. And if I could just sneak 1 more in on the PTS because I don’t think it’s gotten a lot of color thus far. Some other OEMs noting strength in the center of the aisle, grocery. I know you have some conveying, parcel, food exposure there. Any comment on the long-term end market drivers that maybe you see as we get through these -- this choppy waters here?

Yes. So if you look at our PTS business and our conveying business, it’s a bit more focused on beverage and then material unit handling. We are incredibly bullish on material unit handling. This is even pre-COVID, which the driver now is around social distancing. But pre-COVID, it was around safety and automating that last mile of package distribution, and we have a great technology. It’s differentiated with solid accuracy in the sorting process. And so very, very bullish there. On the beverage side, we tell you we’re -- during 2019, there was a bit of a lull, and it was really what’s going on in the marketplace around plastics and what’s going to be the replacement packaging for plastic bottling, et cetera. That hasn’t been worked out, and we’re in the middle of COVID. So right now, we are seeing some nice aftermarket business. But I would say, once we get through COVID and there’s a clarity on the path forward for packaging, I believe bev is going to be strong as well. But our -- where we’re putting our 80/20 focus is material unit handling.

Our next question is from Nigel Coe from Wolfe Research.

This is Brian on for Nigel. Maybe just to start off. Could you just maybe recap some of those supply chain moves that you mentioned in your prepared remarks as far as moving some of that capacity to, I think, Southeast Asia?

Yes. No, happy to. Again, as I emphasized in those remarks, this is a core capability of Regal, is our global supply chain. And so we have the ability to manufacture in multiple facilities, and it really just comes down to working with the customer to get their approvals and certifications from the manufacturing site. And so we’ve actually transferred quite a bit of our production capacity into our China and Southeast Asia facilities to be able to support the demand in the marketplace and the service levels as we were -- through Q2 did have challenges in Mexico in our supply chain. And so again, I think it’s a core differentiator for Regal and makes us as strong as we are in the market.

Great. And then maybe just any changes on how you look at the portfolio or any different pieces of it going forward. Obviously, really strong performance from industrial this quarter? Just any changes there?

Not really. We have a path with every one of our businesses to drive continuous improvement and performance improvements. And so we have, I’d say, compelling stories to bring shareholder value creation in each of our segments. So nothing changes for us at this time.

Our next question is from Jeff Hammond from KeyBanc Capital Markets.

Just back on -- so the guidance is 8% to 12% down. I think you said PT at the better end, commercial at the lower end. Should we assume that the other 2 businesses are kind of square in the middle and why would climb -- or why would commercial be at the lower end given kind of order rates and the backlog build?

Yes. Well, I think that’s the reason they would be at the lower end because on the -- they do have -- on the deleverage standpoint, we would expect them to have a little bit of -- a little bit of an uptick in terms of -- or improved deleverage as we move through the third quarter.

No, I’m asking...

Just on revenues. Yes. So the low end for commercial is because we have that backlog sitting there along with the improved order rate. So the backlog that we said we’ve built within the second quarter was largely in commercial. So it provides that level of protection. And that’s why you’ve got maybe a lower sales decline for commercial.

Okay. So commercial is at the better end of the decline and PT is at the worse end of the decline? And the other two are in the middle?

They’re in that, yes, within that range, yes, they’re within the middle.

Okay. So then just moving back to climate because I’m still confused. So I think you said July orders down 6% overall. And resi HVAC, which I think is 40% to 45% of the segment is up 26%. Can you just go through the piece -- because I understand refrigeration is weak, you said that, but that’s only 10%. Can you go through these other pieces like general industry, combustion, aftermarket? Like it just seems like that other 60% is just really, really bad still.

Yes. So just to be clear, from a segment perspective, we are combining our HVAC in combustion, and that’s overall roughly 55% to 60% of the segment, so not the 40% that you referenced, Jeff. So it’s a larger part of the segment. Now distribution. Distribution is also roughly about 10% to 15% in the segment. The rest of the segment, I remind you that we do have a small India business, and India orders were weak in second quarter. And then general industrial and commercial refrigeration are the other two. Commercial refrigeration absolutely down. And so to that point, we saw orders down 40-plus percent in second quarter. And then general industrial down as well, but in the mid-20s from a Nordic perspective. So that 40% is -- actually, it’s more like 30% are definitely down.

It just doesn’t seem to add up to down 6% for July given that mix you talked about, but I can follow-up offline. So just -- just on -- so I think clearly, the OEMs destocked, and then they saw rapid demand. So it seems like channel inventories are very, very lean and demand is very, very high. I mean are you -- is there any indication that there’s not only some catch-up in demand, but a view that inventory levels need to catch up as well and you continue to see kind of this sharp restock and recovery kind of continue into 4Q or at least continue through the third quarter?

Yes. I mean, definitely, we expect restocking to go on, inventories were brought down. I’ll remind you, our perspective, the underlying demand, the underlying consumer demand, and we at least believe we heard this in the OEM’s earnings call, are still down that high single-digit 10% rate. So it’s not a full rebound there yet. But -- so you add that to the positive of some restocking, but then the negative of roughly 30% of the segment being in commercial refrigeration and general industrial. And I do think it comes up well because our numbers came out at 5.5% orders down in July. We certainly expect a better third quarter, but we are planning for that roughly 5% to 8% down.

Okay. Yes. Because -- I mean the distributors and the distributor data, which would represent sell-through indicates June and July were like closer to plus 20, so where is the negative underlying consumer demand coming from?

Yes. Well, April and May were significantly lower. So if you look at April and May results for distribution, it was quite a bit lower than that. So down 47% in April, down 29% in May for us. This is for us, Jeff, down 29% in May, down 3% in June, up 24% in July. So from a second quarter perspective, orders were quite weak, down 26% overall in second quarter, but absolutely rebounding in July.

Our next question is from Chris Dankert from Longbow Research.

I guess, if we can update, and my apologies if I missed it, there was a lot of data out this morning. Did you guys specify were there any actual plant closures in the quarter kind of driving those permanent savings? And then maybe just in the past, we’ve talked a lot about automation driving some of these savings. Just any update on where we are with the pace of automation in the business would be great, too.

Thanks, Chris. This is Rob. I’ll start and then Louis can also add on, on the automation side. But when it comes to the additional savings that we highlighted during the call, those are really more around the reduction in force and the voluntary retirement program that we laid out -- implemented at the end of Q2. So that’s the $7 million annualized with roughly $4 million of that coming in the back half of this year. So that wasn’t really plant related. The plant-related restructuring actions that we’ve taken were already embedded in the $38 million or the $32 million in the year that we talked about last quarter.

Yes. So I’ll add on to that as well. Rob’s right on. I’ll reemphasize, though, as we talked about at our Investor Day that we have a clear path for footprint consolidation. And we’re on our plan that we communicated, which was going to be a 23% reduction in our square footage over the next 3 years. And so we did close a couple of facilities in second quarter, specific to that question. But to Rob’s comment, that’s not part of the incremental $6 million of savings. It was already embedded in what we’ve communicated in the past. But we feel really bullish about the opportunities to drive 80/20 at Regal and to simplify our business. So a 23% reduction in footprint, we’re driving a 42% reduction in product rationalization. So SKU count, we’re improving our best value country sourcing significantly over this period. All of these things are with our path of 3 basis points of improvement in three years. Now specific to your question on automation, and you may recall in earnings call -- three or four earnings calls ago, we changed our direction a bit here. Regal was going down the path of large automation implementations. And we’ve pulled that back and we said, where it makes sense and we can put a solution in that results, like a cobot, lesser cost investment but a faster return, we’re going to do that. And we’ve done that at many of our facilities, and we continue to do that in many of our facilities. And so Rob made the comment in his prepared remarks around our capital investment. An investment like that is going to pay back in less than a year and we’re driving it in many of our facilities. And so that’s where our focus is, not on a big bang automation solution, but on tailored, customized solutions in our manufacturing lines that drive safety, quality and then cost. Hopefully, that helps, Chris.

No, that’s very helpful. And then just to follow-up. Again, we’ve heard from a lot of companies so far. With the downturn in volumes kind of revisiting the go-to-market commercial excellence, just given the kind of air pocket here, any thoughts from you guys in terms of shifting direct versus indirect growth strategy? Just any comments more broadly on go-to-market would be great.

Yes. So no changes in our approach to go-to-market other than 80/20, and it’s all about servicing our highly valued customers and providing them better service solutions and then leveraging our digital customer experience, which we’ve invested significantly in over the years, that I’ve reinforced investment in since I’ve been CEO, to make it easier to do business with Regal. So beyond that, no changes in our go-to-market plans.

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

Thank you, operator. To summarize, second quarter was tough as we expected it would be, confronting the unique challenges posed by COVID-19 across our business. And as I mentioned in my opening remarks, the virus also impacted our associates personally in many ways. But when it comes to factors under our control, I’m pleased with how our Regal team executed in the quarter, achieving 15% deleverage, very strong cash flow and even a few bright spots on the share gain front. I thank them again for all of their efforts. With the challenges of second quarter now hopefully largely behind us and some encouraging signs that our business is inflecting towards the positive, the Regal team will continue executing on our near, mid- and long-term goals, guided by the priorities of SQDCG; safety, quality, on-time delivery and cost, which will achieve profitable growth for our associates, for our customers and for our shareholders. Thank you for joining our call, and please stay safe.

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