Q3 2019 Earnings Call
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I'd like to now 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 third quarter 2019 earnings Conference call. Joining me today are Louis Pimco, our Chief Executive Officer and robbery heart.
<unk>, President and Chief Financial Officer.
Before turning the call over to Lewis 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. So if there are inherent difficulties are 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 these earnings release and our S. E C filings.
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.
For helping investors understand and compare operating results across accounting periods and in the same manner as management.
Please read Thislife for information regarding these non-GAAP financial measures and please see the appendix reconciliations of these measures to the most comparable measures in accordance with gap.
Now let me bring free reviewed the agenda for today's call.
Lewis will lead off with his opening comments and an overview on the core.
Rob will then provide our third quarter financial results in detail and provide an update on our 2019 outlook.
And then moved to queuing day, after which Lewis will have some closing remarks.
Now I'll turn the call over to Lewis.
Thanks, Rob and good morning, everyone.
Thank you for joining Regal third quarter earnings conference call.
Thank you for your interest in Regal.
We continued to experience tough macro conditions in the quarter.
Our third quarter financial results reflected the ongoing slow down in industrial markets, particularly in the U.S. in China.
I'm going global trade uncertainties, and the reduction of inventories in the industrial distribution channel as well as in the H.B.A.C. and coal pump market.
Regal posted negative 9.6% organic growth in the quarter with overall orders down at approximately the same right.
Despite this challenging sales environment, we generated an adjusted earnings per share of a dollarsthirty five and de Levered well below our normal right at 20.7%.
I am proud of our Regal teams that have been using the principles are both 80 20 ethylene to simplify the business and ensure that we made good timely decisions based on data and analytics.
No rotce going to provide more detail in his section, but I want to take a few minutes to share my perspective on each of the segment's performance.
Starting in climate.
We saw the expected negative sales impact from the first half Prebuy Upstander deficiency Motors ahead of the July implementation of the fan energy writing regulation for furnaces.
The overhang from the FBR pre buy the relatively mild summer weather and the resulting customer inventory de stocking resulted in North America residential H.B.C. being down mid single digit slightly below our expectations.
Finding of a large retrofit project last year in commercial refrigeration, along with our ongoing proactive 80, 20 account pruning effort to improve margin mix in this vertical also put some spare sales pressure on the corridor.
We saw negative 4.8% organic growth in the segment.
However, encouragingly, we saw improvement in our EMEA and Asia Pacific markets, which are smaller part of the climate segment, but an area, where we plan to grow.
We are well positioned for growth as demand returns and de stocking subsides.
As we see the market today, given the current adverse weather conditions, which are a benefit for this segment.
We could see demand returned to normal levels in early 2020.
The impact of 80, 20, along with favorable price cost and positive mix up from FBR compliant high efficiency motor sales.
Resulted in a 70 basis point year over year improvement in adjusted operating margin overcoming the sales headwinds.
Now switching to P.T.S., we faced a tough comparison, having grown 8% organically in the prior year.
Approximately 70% of our sales and P.T.S. go through the industrial distribution channel, which we estimate it's higher than industry average.
The distribution channel was particularly aggressive and accelerated de stocking in the quarter in anticipation of the slowed down in North America as industrial markets cooled and trade uncertainty continued to weigh on the end markets.
When compared to our direct OEM sales distribution was down significantly more due to this de stocking.
Which explains the higher rate of sales declined for the Pts segment in the quarter.
As I've stated before while we do not seem much of a direct impact from the tariffs in this segment, we do feel the indirect impacts.
Also hampering P.T.S. deals were challenging end markets and agriculture, and beverage equipment, along with the upstream oil and gas, where we saw a year over year, 37% decline in demand, which had nearly a 3% impact on our Q3 sales.
However, we believe that we are holding our position in these verticals leveraging our strong brands and differentiated product solutions. As this is a market driven impact only.
Partially offsetting these headwinds was a strong quarter for sales in the renewable energy end market.
The overall net impact drove organic growth down 9.3% in the segment.
We feel confident that this segment has gained share over the past two years in particular through our additional investment in sales resources and digital customer experience and that the inventory de stocking is what is putting pressure on this segment for Q3.
Volume pressure had the largest impact on our margins, which were partially offset with improved productivity positive price cost.
20 margin management and SGN <unk> reductions.
The segment still experienced a not 190 basis point year over year decline in adjusted operating margin in the third quarter. However.
The Pts segment results can be lumpy by quarter as year to date. The segment margin is relatively flat year over year on lower sales and we are confident the cost actions taken this quarter will pay dividends in the fourth quarter and in 2020.
Finally in the commercial and industrial systems segment. We saw continued weakness in multiple end markets and we also faced a difficult comparison, a 5% organic growth in the same period of the prior year.
And our pool pump business the impact from customer inventory de stocking that we saw in the second quarter continued in the third quarter as demand declined double digits.
In China the impact on the industrial economy from the ongoing trade dispute resulted in a mid single digit reduction in sales.
The commercial H.B.A.C. market has been particularly challenging for us as certain sectors, such as transport refrigeration commercial chillers and commercial H.B.A.C. in China have been has seen a demand slowed down while at the same time, we are executing on account pruning in this market.
As part of our 80 20 efforts to improve our margin profile.
These two factors combined led to a double digit decline in our commercial H.B.A.C. sales.
Lastly, we saw a decline in the distribution channel again, driven by distributor inventory Destocking.
Altogether. These sales headwinds contributed to organic sales growth being down 12.7% in the segment.
Although we have experienced some temporary terrorists related market share erosion, especially in our industrial motors business.
We believe our North American investments in assembly improve our cost competitiveness and give us a supply and service advantage with our customers going forward, which positions us well to take advantage of market rebounds in the future and recapture lost share.
The adjusted operating margin in seeing I was down 210 basis points from the prior year.
While we saw positive price cost and progress on 80 20 efforts in the quarter. That's significant volume reduction. In addition to some negative mix led did in the margin decline.
From a total company perspective, our free cash flow was an impressive 240% of adjusted net income.
Through a renewed data analytic approach to inventory management, our teams drove an inventory reduction of $40 million in the quarter.
We are now over 112% year to date for free cash flow and expect that we will be above 150% hundred 15% of adjusted net income for the four year.
In the quarter, we continued to deliver.
On our balanced capital allocation strategy.
In addition to our quarterly dinner dividend, we purchased almost 1.3 million shares for $94 million.
That brings us to over 2 million shares purchased year to date.
Looking forward, we're lowering our adjusted earnings outlook for the year from a range of $5.50 to $5, an 80 cents to a range of $5 in 45 cents to $5 in 55 cents.
The 2.7% reduction of the midpoint is driven by the ongoing weakness in end market conditions and the continuing glow global trade uncertainties.
While we are seeing a slightly positive inflection in fourth quarter order trends, we're still laser focused on accelerating our restructuring efforts given the market conditions.
We have recently announced five plant closures that are expected to result in $17 million of annualized savings.
The reorganization that we announced last quarter, along with our restructuring efforts have already resulted in a 16% reduction in personnel and a 17% reduction in SG net cost compared to the prior year.
We are systematically deploying our 80 20 approach into the organization, which we expect to improve gross margins.
In the third quarter, we conducted training for 40 of read those top management.
Most of whom have been train previously, but this renewed effort will ensure alignment across the organization.
Each of these 40 leaders and now responsible to train 30 to 40 additional personnel within the next six to nine months, ensuring that we touched 1200, the 1600 Regal associates more than 6% of our resources.
I personally will be training a team of 40 global leaders early in the first quarter.
As we further leverage our new decentralized organization, we continue to find and drive more cost out opportunities around footprint synergies and product rationalization and consolidation, especially in the Cnine segment.
It is also clear that there are additional value creation opportunities around simplification at Regal.
Since we are now executing on a simplification phase two program, which we will.
We expect to provide additional opportunities to reduce our footprint in the future.
While our cost initiatives are compelling we also have clear growth opportunities in all of our businesses.
We are in position to provide differentiated energy efficient products and solutions to solve our customers' challenging application needs.
At the same time, we can provide best in class ease of do is doing business from order placement to shipment to service with the strongest channel to market and an effective e-commerce approach.
During the quarter I met with all of our business groups to review their strategies and feel confident in the growth potential in new markets with new products and with value added.
Solution selling a clock across all of our businesses.
As part of my ongoing review of the business. The focus is clearly on improving earnings ROI C and ultimately shareholder returns.
Log with Regals board is in process.
However, with the market slowing we expect to only make portfolio moves that make sense and are accretive to shareholder value.
We plan to share more with you on our strategy on the fourth quarter call and then provide a full rollout at our Investor day in March.
In summary.
Our reaction to market headwinds and the way Regal de levered in the quarter, along with strong free cash flow at 240% of adjusted net income.
Make me proud of all of our teams and their performance.
Weak industrial market trends trade tariff uncertainty and inventory destocking headwinds across the segments as Regal sales are heavily weighted to distribution.
Put pressure on revenue in Q3 and is driving a slight decrease and our 2019 guidance expectations.
We are well positioned for growth when demand returns and de stocking subsides.
Our ability to move quickly on restructuring.
Drive cost out in addition.
Cost out initiatives.
And reduced SGN today is clearly setting up the business to achieve profitable growth for the long term.
As demonstrated by our 20.7% de leverage rate in Q3.
And our expectation for improved de leverage in Q4.
I remain very excited about our prospects in the future.
I will now turn the call over to Rob will provide more details on our financial performance.
Thank you Lois and good morning, everyone.
As Louis mentioned, we had some significant top line headwinds in the quarter that saw weakness in several end markets and regions.
Despite the sales headwinds Regal de levered at 20.7% below our normal rate, helping to minimize the impact to our operating profit I.
Ill start by providing comments on the segments and end with more detail on the total company and our guidance.
Starting with commercial and industrial systems organic sales in the third quarter were down 12.7% from the prior year.
The segment saw double digit declines in north American pull pump and commercial HVAC business and single digit declines in China and industrial distribution.
The decline in 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 foresee Eni 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 with favorable price cost and discretionary cost actions.
Deleverage in the Cninety segment was 21.2% well below the normal de leverage in this segment.
Orders in see an eye for the quarter were down approximately 12%, reflecting weakness in a number of our end markets.
The inventory de stocking in the pool pump market weakness in the China industrial markets and the impact from project delays and cancellations and our project generation business all drove the decline in orders.
Lastly, we are seen some improvement in fourth quarter order rates, but it's too early to determine if this improvement is sustainable.
Turning to climate solutions organic sales in the third quarter were down 4.8% from the prior year.
The decrease was primarily driven by the impact of the FBR pre buy in the first half of the year along with mild summer weather in the North American residential HVAC market.
Other headwinds in the quarter, primarily came from commercial refrigeration and the impacts from account pruning as we further deploy 80 20.
We also started to see some of our material price formulas turned negative due to commodity deflation.
On a positive note we saw improved sales in our Asia Pacific region during the quarter.
The adjusted operating margin in the quarter for climate was 17.1% up 70 basis points compared to the prior year.
The margin expansion was driven was driven by productivity improvements positive price cost in our 80 20 activities. These efforts allowed us to overcome the margin headwind from the volume decline.
Deleverage in the climate segment was a very low rate of 2.5% partly impacted by the timing of certain variable expenses relative to the prior year, but more significantly impacted by the discretionary cost actions as well as other the other favorable drivers shown on this slide.
Orders in the climate segment for the quarter were down slightly.
As previously mentioned the mild weather along with the impact of the Fcr pre buy in the first half of the year dampened our residential HVAC demand in the quarter.
As we enter the fourth quarter, we continue to see order rate headwinds in our residential HVAC and commercial refrigeration end markets wallet is still early and weather will surely play an important part on order rate performance. We're currently projecting year over year order rates to be down slightly in the fourth quarter.
Turning to power transmission solutions organic sales in the third quarter were down 9.3% from the prior year.
The primary headwind in this segment was a continued slowdown in north American industrial markets, which impacted our distribution sales due to the destocking of inventory in the channel.
Upstream oil and gas also continues to be a significant sales headwind.
Partially offsetting these challenges was positive growth in the renewable energy end market.
The adjusted operating margin in the quarter for Pts was 11.9% down 190 basis points compared to the prior year.
However, the Pts segment results can be lumpy by quarter as year to date. The segment margin is relatively flat year over year on lower sales.
Favorable price cost SGN, a cost reductions and improved productivity cannot fully offset the significant volume decline. However, we do expect discretionary cost actions implemented late in the third quarter will provide significantly improved performance in the fourth quarter.
Orders npts for the quarter or down mid teens again, the main driver was a slowdown in the industrial distribution channel as we enter the fourth quarter. We continue to see the impact of distribution destocking on our year over year order rates and expect orders to be relatively flat to the prior year for the fourth quarter.
Now I will summarize a few key financial metrics for the third quarter.
Our capital expenditures were $21.1 million in the quarter.
We expect capital expenditures of $90 million for the full year 2019.
We are focused on ensuring that we deploy capital that drives returns above our weighted average cost of capital and ultimately improve shareholder value.
Our simplification activities resulted in $7.3 million of restructuring and related costs in the quarter.
We now expect $19 million of restructuring and related costs for the full year 2019, an increase of $6 million from our prior guidance most of which is due to the recent plant closure announcements. We expect the plant closures will result in annualized savings of approximately $17 million, bringing.
Our total annualized savings, resulting from both the announced plant closures and the business reorganization to more than $32 million.
The adjusted effective tax rate in the quarter was 16.3% the lower effective tax rate in the quarter was due to lower than expected operating income in higher tax regions. We're adjusting both the third quarter and the full year MTR for the tax effect of the businesses divested and assets exited.
We provide a table provided a table in the appendix of this presentation to reconcile the gap EMR to the adjusted TR.
We now expect our adjusted EBITDAR to be approximately 19.5% for the full year 2019.
Our total debt was $1.201 billion and our net debt was $908 million. We ended the quarter with our net debt to adjusted EBITDA ratio at 1.9.
We achieved $119.5 million, a free cash flow in the quarter and our free cash flow as a percentage of net income.
Was 239.5% driven impart by 39.6 million dollar inventory reduction in the quarter.
We now expect to be above 115% for the full year 2019.
Also in the third quarter, we purchased 1.282 million of our shares for $94.1 million and an average of $73.40 per share.
This brings our year to date purchases to just over 2 million shares.
We continue to execute on our balanced allocation strategy.
Now I will provide an update on our full year guidance for 2019.
Our updated guidance assumes organic sales growth to be down mid single digit for the full year due to the ongoing impacts from the us industrial slowdown the global trade uncertainties excess channel inventories and the continued overall economic slowdown in Asia.
We are lowering the range of our full year 2019, GAAP EPS guidance from a range of $6.
To $6 in 30 cents to arrange a $5.85 to $5.95 on an adjusted EPS basis, we are lowering our full year 2019 guidance from a range of $5.50 to $5.80 to a range of $5.45 to $5.55.
The reduction is driven by the volume deleverage, which we partially.
Offset with productivity positive price cost discretionary cost actions and our 80 20 efforts.
The resulting fourth quarter adjusted EPS guidance range is at $1.21 cents to $1.31 cents or one dollar and 26 cents at the midpoint.
Although we are not anticipating this slowdown to be dramatic to better align our cost structure with the near term dynamics. We continue to accelerate cost reductions. We also expect to see benefits from our reorganization and restructuring, allowing us to operate more efficiently help.
At some of our sales headwinds and set us up for future profitable growth.
In addition to the cost actions noted above we're also making improvements to our financial and business processes to ensure better forecasting accuracy speed of decision, making at accountability across our entire organization.
Our disciplined cadence of monthly business reviews, and a deep PNM and cash optimization focus at every level of the organization, we are driving improved visibility and accuracy in our orders sales costs and trade working capital forecasting.
This new business review process is already improving our ability to react faster to changes in market and business conditions, providing a clear path to sustained financial performance.
We expect to continue to realize the benefits of this new process well into the foreseeable future.
Operator, we're now ready and take questions.
We will now begin the question and answer session to ask a question you Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset the four pressing the keys.
To lift try your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
The first question comes from Mike Halloran with Baird. Please go ahead.
Good morning, everyone.
Good morning.
So a couple of questions here first on on the cadence on the underlying demand side lot of moving pieces in the fourth quarter here could you talk about what end markets, you're seeing sequential stability in versus ones that are maybe still deteriorating.
And then I know you've got a lot of pockets of different distress destocking that that are materializing, but could you talk about where we are in the cadence of the destocking and if you're at the point, where maybe the inventory sell in and fell out of kind of started to match again.
Yes, so Mike I'll take that one.
So there was a lot in that question. So let me let me try to answer a few points. There first of all inventory Destocking. It's it's definitely improved inventory levels improved in Q3, but theres still a ways to go and so whether that's in our power transmission Chan.
So with our distributors or in our pool pump.
We do believe through this will continue through Q4, no sequential orders and expectations. You know I would say were quarter over quarter pretty stable at this point from a sequential orders perspective, but we're we've got some tough comps from a year over year per.
When you think about our Pts segment was up 8% in Q3 of last year and so that's that's driving some some challenges.
Now recognized that our Pts segment has 70% of business goes through distribution and we absolutely saw a greater a 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 year.
After a year ago quarter, as well, 5% and we're definitely seeing that the China market pool and trade uncertainties.
As well as the commercially JC 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 where there was the FBR pre buy in the first half of the year. So they are clearly was an overhang from that and then.
I would tell you that we saw some OEM inventory reduction, which probably took the better part of the.
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 season I, although a little bit of pressure on the industrial motors segment up because of.
Our supply chain, which is improving through this year.
Hopefully that helps answer.
No that was very helpful and then.
Much better de leverage CNN and some of these revenue pressures the markets that the market driven pressures.
Could you just to help with the 32 million I think the combined cost out between what was announced last quarter. This quarter. How much of that is this year versus next year and if I am layering beyond that 32 from layering out other potential things you're working on its the.
Maybe you could just go to that list one more time, it's the simplification 2.0, it's the incremental acceleration of restructuring any other kind of buckets that you wouldn't you would you would point out to us as well.
So Mike this is Rob so you're right. The two primary buckets or that are the one related to the re organization 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 thats, how you get a 32 million combined now we do see that's an annualized number.
And we should see most of that come through in 2020 of course, we are seeing a portion of that come through as we exit the third quarter and go into the fourth quarter.
As 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 were referring to.
Yes, Mike you know what I want to just added comment it.
I don't want to share too much of this strategies that will be outlining in the fourth quarter and an investor day, but we feel there is 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 Theres also a big piece of product rationalization that you will hear especially in our.
Commercial and industrial business that we are focused on and then just 80 20 overall and margin management and making sure that we are either cost competitive or getting paid for the value that we bring to our customer.
Thank you appreciate it.
Sure.
Thanks. Good luck to next question comes from Julian Mitchell with Barclays.
Please go ahead.
Hi, good morning.
Morning, maybe just maybe just the first question around.
Just wanted to home and on the commentary around sort of flattish, losing Pts in Q4 off to that big drop.
And also in C and you did talk about that slight.
The benefits start to the quarter I thinking Q4.
Just wanted to looking at those two comments were there any particular geographies or end markets that you would call outdoor it was simply a point around most of the de stocking in general is done and Thats why Q4 starts at awful is looking better.
So Julian I'll take the Pts part of that.
Question, but honestly I didnt quite hear the Cnine part so I'll ask you to repeat done in a second but from a Pts perspective, it's really be inventory destocking now we saw.
Definitely secondary effects from the trade uncertainty our AG market our bed market.
And our oil and gas markets are down we feel really strongly about our our alternative energy and unit material handling markets.
But but from a Q3 perspective and why we feel better about Q4, it's definitely the.
Slowing down of the de stocking levels.
And then Julian I apologize I missed your question on Cnine Oh sure no. It was just I think you'd mentioned that see an I had started off Q4 and little bit better than what you'd seen in Q3 in terms of order intake was that just the same phenomenon of less de stocking goal was there something else happening.
The same phenomenon definitely.
Thank you and then my second question would just be around.
If you look at the images on cost control have been extremely.
Effective already it seems and there's more to come I just wanted.
If you're thinking about the overall organic growth of Regal Beloit.
Obviously, that's that's been a challenge for several years now.
Are you spending much time trying to think about that in enhancement to medium term growth in future or is most of your energy right now spend so on.
Lowering the cost space and making sure decremental margins stay narrow.
Julien, it's really a tale of two two cities. If you will RCM business, it's very cost focused no do I see pockets of growth opportunity, yes, but our focus is cost.
Our Pts and climate solutions business I'm 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 be able to.
To accelerate our organic growth in particular in those two segments. So I'm I'm I'm bullish about our ability to step up organic growth at Regal.
Great. Thank you.
The next question. The next question comes from Joe Ritchie with Goldman Sachs.
Please go ahead.
Thank you good morning, guys.
Good morning.
Hello can you maybe touch on what's happening in the Red the track market some of the Oems reported.
Pretty decent results this quarter from a growth standpoint, and as I guess I was a little bit surprised to see that being negative for you guys, maybe just touch on that a little bit.
Sure happy to and really Joe, it's really the FBR overhang and some inventory reductions at the Oems. So when you think about.
$9 million a pre buy in the first half that really emptied out the channel in Q3.
Certainly put pressure on us and then we definitely saw some inventory reduction at our RV Oems as.
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 fairly large retrofit project, which I'd probably about a percent of pressure, but we're not we're not worried at all here on climate if anything.
I feel confident we're gaining share, especially in our variable speed motor solution.
That's good to hear Andy any inventory overhang on climate, specifically that subsides in Fourq you.
We would expect it does although you know it really is there's 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 so whether we'll have some impact.
Got it and then one other question just maybe sticking on climate and you calling out the material price formulas turning negative this quarter, you I guess with with a lot of our company's deflation usually turned out to be a positive thing to margins just just remind us again, how this impacts your overall growth and margins in the business.
As we begin to little bit more of a deflationary environment.
Sure. Joe This is Rob a certainly two way material price formulas that we have in place have started to turn negative, especially in our climate segment. However, as you mentioned the way the math works that can be margin accretive for us as we work through that.
That that deflation and are in the segments.
Got it so net negative to growth and positive to margins as a way to think about correct that is correct. Okay. Great. Thanks, guys are getting Q.
Great. Thanks.
The next question comes from Robert Mccarthy with Stephens. Please go ahead.
Good morning, everyone.
Hi, Rob, Yes, I guess the first question I was intrigued by your comments around consultations with the board or around potential divestitures in 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 your kind.
I'm going to talk position, because there's probably going to be certain assets that perhaps selling the absence of a negative maybe worth it from just.
Ability take cost out organizational focus the ability to move on from from some problem children. I mean, how do you how do you reconcile that and and part of that also is do you think you could just shut down some businesses I mean, obviously you didn't so 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 I would say first of all all those variables that you you 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 theres going to be a benefit and we will not move forward in a situation, where we don't think it makes sense for shareholder value creation.
But we are talking to board about multiple options and considerations and so my perspective is right now our operating folks need to keep their heads down focused on performance and we'll manage the portfolio with with our board dialogues no specific to your question of whether or not we could see any businesses.
Shut down no I mean, we're not in a position.
Certainly not any of our.
A significant businesses 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.
Okay. Thank you for that and then on the positive side. It looks like you're speaking to you at least some near term bottoming in orders that might be due to an absence of destocking other issues as we kind of go into next year.
We're going to have some businesses that are going to be tied to the fortunes of Oems in terms of their initial expectations for 2020 and beyond in terms of what they're thinking about order cycle. So given the fact that you can have some as you've alluded to and in prior questioning some tough compares coming up despite the fact that sequentially.
We could be kind of bottoming here.
How do you think you directionally about the course of growth and an earnings in 2020, if possible. I mean is is it possible that we're going to see you know.
Down year over another down year.
Okay.
Yes, so 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 Robin I will be working on our business groups to understand the assumptions going into 2000.
On a in 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 the.
Markets have a huge influence on that but what that will certainly help us with is at a minimum delevering at a much better what rate than we have historically de levered. So that's about all I'm ready to state.
Regarding 2020, right now, but hopefully that gives you a perspective of how we're thinking about it.
Ill leave it there for now thank you.
Yes. Thanks.
The next question comes from Christopher Glynn with.
Sponheimer. Please go ahead.
Thank you good morning, everybody.
Good morning, I was wondering wondering about the.
A little color complex and sizing on the account pruning impacts talked about it.
Climate and seeing.
How should we think of those beyond the pro forma basis for the divestitures and exits, which you can you give us.
Pretty detailed tables on that front.
Yes, So you know and I've said this previously with regards to our 80 20 approach, it's all about margin management.
And we look at it from the perspective of does our customer value.
What we bring to the marketplace and therefore, we should be paid fairly for what we bring or are we cost competitive and if we're not cost competitive are we going to be able to be positioned for success long term and if not then perhaps should we need to exit that product or that customer for what we pay.
Provide no 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 RCM business, but didn't need them. What I can assure you is it will help us mix up therefore improve our margins. So hopefully that Chris gives you a.
Little help in understanding how we think about it.
Yes sounds a little more towards the rounding side than model.
Are they.
And then on the Pts side.
No it again share trends are actually.
Favorable looking through the destock just.
Wondering order order magnitude, how you're thinking about where you are in that process and.
How much more visibility you have to generate further 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 out we see the inventory levels and and were 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 definite.
Really confident we've seeing share growth over the last couple of years.
Partially through our commercial.
Investments more feet on the street more partnering with distributors and also through our digital commercial or digital customer experience.
I would argue that Regal has the best connectivity of our products and solutions with our distribution through a 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.
We'll do so in 2020 in particular, one is that we're excited about is our gear motor solution in working with Oems to provide a package, which regal is perfectly situated to do so with both the the gearing side of PT and our motors business, so providing a.
Package to our customer with a full solution rather than individual components, so more to more to come on Pts in growth opportunities, but there's definitely runway there.
Thank you.
Sure. Thanks.
The next question comes from Jeff Hammond with Keybanc. Please go ahead.
Hey, good morning, guys.
Good morning, Jeff So I, just want to come back to the cost saves.
Maybe if you can just sharpen that 32 million, what you think you've gotten to date and what you think the incremental cost saves are in 2020.
So Jeff we havent 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 in up after the second quarter more of that will come through in the fourth quarter on an annualized basis. If you will then a 17 million that we just commented on from the plant closures. So.
So hopefully that helps your size it a little bit.
Okay and then.
You mentioned in the presentation as junaid being down 17%, but I see first half kind of asked DNA up and I think this quarter was down three 4%.
Is that more of a perspective number and as a good.
None of that captured in that 32 million.
Okay.
No. It's an it's on our Rs DNA is down.
Certainly at that rate.
It is not it does include the cost savings that we've discussed on this call and we'll continue to include that going forward.
Okay.
Okay. So.
So that 17% down captures the go forward cost saves.
No just the cost saves that we've had thus far.
Okay. Okay.
And then just commercial HVAC I, just want to understand the weakness there because what we're here outside of transport. We're hearing things are still generally pretty stable.
And I think you cited some some severe weakness there. So is that all transport or is there something else going on there.
No, it's mostly transport refrigeration and commercial Chillers. We have also taken some action 80 20 pruning in that space, taking out very low margin business.
But from a market perspective, it's mostly transport refrigeration.
Okay, and then just one final kind of housekeeping item can you give us the ending share count or what you think the share count is going to be just given the size of the buyback in threeq.
So we have.
Our share count. So we had we did repurchase as we said.
A good portion of our shares in the third quarter with.
And we will continue to expect to repurchase going forward Opportunistically.
As we as we've talked about in the past, we do have a new authorization in place, replacing the old for two or 250 million.
So we can expect to continue on our our balanced capital allocation going forward.
So we bought back 1.2 million shares in Q3, and then I think the question was also correct me if I'm wrong, Jeff that you were looking for what what our share count would be.
Yes, so if you look at our current share count.
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. Thanks, guys.
Because I am just as a as a point of clarification. Most of that was purchased throughout the quarter quite a bit of it was early in the quarter for from a weighted basis, you're going to get more most of that benefit flowing through.
Okay. Thanks, guys.
Got it.
Thanks, Jeff.
The next question comes from Walter Liptak with Seaport Global. Please go ahead.
Hi, Thanks.
Morning, just a follow on from Jeffs question on the.
Share buyback did you use any of the the new 250 million.
The results in this quarter was that just cleaning up on the the prior authorization.
Well, thanks, as Rob noted, we didnt use any of the new 250 million in the third quarter.
That that authorization was as of October 20, Fiveth and what did replace the previous authorization.
Okay, and you are fairly aggressive with the with the share repurchase this quarter.
Within your comments that 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 and share repurchases going forward. So I.
I think it's just good practice to to put on new authorization since we only had $47 million left on the previous authorization. So.
Again, we will continue to look at this opportunistically moving forward.
Okay great.
Now let me ask a question on your inventory levels.
Came down with the.
Plant restructuring.
The Reorg I Wonder if you.
I need to carry more inventory I guess the question is.
Can you continue to drawdown on your your inventory levels and at what point are you gonna be producing to the market rate a demand.
Where are you there yet so.
So we certainly do continue to focus on on reducing working capital.
And inventory certainly the biggest lever we have reduced it is it sustainable absolutely we have we have new.
New process and practice a new cadence.
Of review that we have implemented across organization.
We see plenty of low hanging fruit here and we will continue to expect that will be a good source of cash moving forward.
Even with the plant moves I'll, just I'll just add on so to Rob's comment there is opportunity here and even with plant moves were you naturally need to increase safety stocks to be able to successfully make the move we have a path for inventory reduction that regal.
Okay, Great and then just a last winter me in your opening remarks, you mentioned you're doing.
Decisions based on data at this point I Wonder if you've done like a full review now.
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.
Yeah, It's a great question wall and it's one that I will hold until March 3rd.
But you're absolutely right, that's where our analysis is and will will be coming out with some clarity of our path forward on March threerd.
Okay. Thank you.
Thanks.
Thanks Walt.
The next question comes from Chris Dankert with Longbow Research.
Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
Hey, Chris.
Apologies, if I missed it but could you give any kind of split as far as where the savings from the the plant closure is going to be used predominantly cnine, but is there like.
But falls into Pts at all.
Thanks, Chris This is Rob we didn't give any.
In any real visibility by segment, but I can tell you that it's you know we expect to see savings across all segments as we move forward.
On this plant closures.
Okay. Okay.
But I guess I assume at least you give a sense of the similar waiting to like the the 15 million you already announced is that fair or just completely separate 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 from a savings perspective than than it would be from the at the plant closures.
Got it got it thanks.
And then just any update on the power generation order that kind of got pushed from the first half into the back half now that's still expected to I assume show up in the first half 20 or is there a risk of of the cancellation just any any update on that or be helpful.
Yes, you know again this is.
Really driven by large datacenter projects and historically horn orders have been rather lumpy anyways.
But several of the orders we expected in Q2 in Q3 have either been delayed into 2020 Warner few cases canceled.
Capacity is not as constrained in the datacenter market as originally forecasted which is the driver of course for this business, which is what's impacting the change, but I'll tell you in that space in that business. We are well positioned we are growing share.
And.
It's a great business for us.
Got it thanks for the color there well good luck into the fourth quarter here, guys and look for to catching up in March.
Wonderful Thanks, Chris.
Again, if you have a question. Please press Star then one.
The next question comes from Robert Mccarthy with Stephens. Please go ahead.
Yes, just a follow up and more of a comment that a question or maybe it's a question who knows.
Pricing in the quarter for the year anything you stick audit qualitatively across the businesses and and how are you going to use pruning and some of these other measures to kind of improvement and and I guess when we fast forward a March through 2020 do you think will you will provide some better historical narrative.
Around the pricing within your sub segments in businesses. So we have a good sense of.
The relative value add across segments.
Hey, 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, it had seven quarters in a row with positive price cost.
The 80 20 process that we're deploying is also having a positive impact on price and we expect that to Gulf.
In in the future as well.
Yes, Rob I'd add to it I doubt word and 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 are the analytical approach for those of you are familiar with 80 20 in particular looking at Claude for be customers be products and our operating.
We need to grow margins there that's what regals doing today, we're getting into that detail I receive a.
Scatter chart on on customer margin 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.
Thank you.
Thanks, Rob.
This concludes our question answer session I would like to turn the conference back over to.
It was pink and for any closing remarks.
Thank you operator.
Summarized in the quarter, we faced some difficult comps, but also challenging end market conditions.
We feel that we met those challenges and de Levered well.
We also believe that we will de lever 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 Threerd 2020 at our Investor Day, I plan to provide additional details on our strategy and portfolio management.
Thank you for joining the call and your interest in Regal.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.