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Regal Beloit Corp (RBC) Q3 2018 Earnings Conference Call Transcript


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Regal Beloit Corp (NYSE: RBC)
Q3 2018 Earnings Conference Call
Nov. 05, 2018 , 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Regal Third Quarter 2018 Earnings Conference Call. All participants today will be in the listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. And with that, I'll turn the conference over to Mr. Rob Cherry, Vice President of Business Development and Investor Relations. Please go ahead.

Robert Cherry -- Vice President of Business Development & Investor Relations

Thank you, operator. Good morning, and welcome to Regal Beloit's Third Quarter 2018 Earnings Conference Call. Joining me today are Mark Gliebe, our Chairman and Chief Executive Officer; Jon Schlemmer, our Chief Operating Officer; and Rob Rehard, our Vice President and Chief Financial Officer.

Before turning the call over to Mark, I would like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings.

On Slide 3, we state that we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods 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, I will turn the call over to Mark.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks, Rob. Welcome, everyone. Thank you for joining our third quarter call and thank you for your interest in Regal. We'll follow our normal agenda. I'll make a few opening comments, Rob Rehard will provide a financial update, Jon Schlemmer will provide color on markets, operations and the performance of our three segments, and then after that, I'll summarize and we'll move to Q&A.

Regal delivered another solid performance in the third quarter with organic sales up 5.2%, adjusted operating margin up 60 basis points and adjusted earnings per share up 23%. At a segment level, in Commercial & Industrial, organic sales were up 6.1% with strength in a number of end-markets including distribution, power generation, oil and gas and commercial HVAC. In the Climate segment, organic sales were up 1.4% with strength in North American residential HVAC and commercial refrigeration, partially offset by weakness in international market. Finally in the PTS segment, organic sales were up a strong 8.1% for this quarter with robust growth in oil and gas distribution and material handling.

From an operating profit perspective, the adjusted operating margin improved 60 basis points year-over-year. The operating margin benefited from volume, incremental price and variable cost productivity, but was held back by commodity inflation and tariffs. The resulting adjusted earnings per share was up 23% with little benefit coming as a result of the 2018 tax reform. For the quarter, free cash flow to net income was 133%. We use the majority of the cash to pay down approximately $54 million of debt and we also repurchased roughly $6 million of our shares. The third quarter was the fifth quarter of the last sixth that we have repurchased shares.

Overall, it was a solid quarter with strong organic sales growth and further progress on our march to improve operating margins. Looking forward, as we enter the fourth quarter, we are encouraged that we continue to see year-over-year order strength in most of our end markets. Additionally, price cost was slightly positive in the third quarter and we expect price cost to remain at least neutral for the remainder of the year. With regards to the tariffs, Jon will provide more details; however, the summary is that, with our mitigation plans, we expect to continue to offset the impact of tariffs. For the full year 2018, our guidance assumes organic growth to be up mid-single digits. We are expecting our top line to benefit from continued growth in residential and light commercial HVAC end-markets, strong North American commercial and industrial end-markets and positive incremental pricing. And margin performance, we will continue to expect year-over-year, adjusted operating margin improvement for the year. We expect to see benefits from volume leverage and our simplification efforts for the rest of 2018.

We are narrowing and raising the midpoint of our total year 2018 adjusted earnings per share guidance to $5.85 to $5.95. At the midpoint, our guidance now represents a 21% increase over 2017 adjusted earnings per share and a record year for Regal in both sales and in earnings. I will now turn it over to Rob.

Robert Rehard -- Vice President, Chief Financial Officer

Thank you, Mark, and good morning, everyone. Sales in the third quarter of 2018 were $925.4 million, up 8% from the prior year. Acquisitions, net of divestitures contributed 4.1%. The business to be exited was a negative 0.4% and foreign currency was a negative 0.9% in the quarter. Therefore, organic sales increased a solid 5.2% from the prior year with all three segments contributing. I used the term business to be exited to describe the exit of the residential hermetic motor components business we referenced at the end of the second quarter. We've included a table in the appendix of this presentation to reconcile these adjustments.

Our adjusted operating margin in the third quarter was 11.6%. Our margin was up 60 basis points with all three segments showing improvement compared to the prior year. Margins benefited from both volume growth and productivity improvements. Price/cost was slightly positive in the quarter. Additionally, we incurred $5.9 million in LIFO inflation expense, which was split between the C&I and Climate segments. In the summary, we had strong organic sales growth and we continue to show improvement in our adjusted operating margin in the third quarter, both sequentially and year-over-year.

Our third quarter 2018 earnings per share reported on a GAAP basis were $1.17. There were four adjustments to GAAP EPS in the third quarter. The first adjustment was restructuring and related costs of $2.3 million or $0.03 per share. The second adjustment was purchase accounting and transaction costs related to the Nicotra Gebhardt acquisition of $200,000 or $0.01 per share. The third adjustment was related to the provision of benefit of the new US tax legislation of $6.6 million or $0.15 per share. The fourth adjustment was related to the impairment and related costs resulting from the exit of the residential hermetic motor components business of $34.9 million or $0.61 per share. Net of these adjustments, the adjusted earnings per share for the third quarter were $1.67, representing a 23% increase from the prior year.

Now, I will summarize a few key financial metrics. Our capital expenditures were $18.7 million in the third quarter. We continue to expect capital expenditures of $80 million for the full year 2018. Our simplification activities resulted in $2.3 million of restructuring and related costs in the third quarter. We expect restructuring and related costs of $8 million for the full year 2018.

In the upper right quadrant, we show our effective tax rate information. The adjusted ETR in the third quarter was 20.2%. We're adjusting the ETR for the effect of the provisional benefit of the new US tax legislation I mentioned on the prior slide. We've provided a table in the appendix of this presentation to reconcile the GAAP ETR to the adjusted ETR. We continue to expect our adjusted ETR to approximate 21% for the full year 2018.

In the lower left quadrant, we present information on our third quarter 2018 balance sheet. Our total debt was $1.279 billion and our net debt was $1.095 billion. In the third quarter, we achieved good debt reduction repaying $54.4 million of debt. Our total net debt to adjusted EBITDA ratio now stands at 2.1 at the end of the third quarter.

In the lower right quadrant, we present information on our free cash flow. We generated $87.3 million of free cash flow in the third quarter, representing 133% of adjusted net income for the quarter. And lastly, we repurchased just over 77,500 of our shares for $6.2 million in the third quarter. Through the first three quarters of 2018 , we have repurchased over 1 million of our shares for $78.3 million.

Now, I will provide an update on our full year guidance for 2018. Our guidance assumes mid-single digit organic sales growth for the full year. We are expecting a meaningful improvement in our adjusted operating margin for the full year 2018, making this the second consecutive year of improvement. Our full year 2018 GAAP EPS guidance is $5.11 to $5.21 per share. On an adjusted EPS basis, we've narrowed our full year 2018 guidance to $5.85 to $5.95 per share. The expected adjustments to convert the GAAP EPS to the adjusted EPS total $0.74 per share.

I will provide some color on a few of the key adjustments in the quarter. Those are impairment and exit related costs of $34.9 million or $0.61 per share, a provisional benefit of the new tax legislation of $6.6 million or $0.15 per share, restructuring and related costs of $8 million or $0.14 per share and purchase accounting and transaction costs of $6 million or $0.10 per share. The other adjustments are included on the slide for your reference.

In summary, at the midpoint of our revised guidance, our full year adjusted EPS is expected to be up 21% over the prior year. Now, I will turn the call over to Jon.

Jonathan Schlemmer -- Chief Operating Officer

Thanks, Rob, and good morning everyone. Before I cover the normal update on the segments, I'd like to walk you through an update on the tariffs as well as an update on our simplification and automation efforts. During the last earnings call, we discussed how the Section 232 and Section 301 tariffs are impacting our business. During the third quarter, we did see the additional $200 billion list of the Section 301 tariffs take effect. The majority of products we sell to our US customers are not manufactured in China. With the effect of the $200 billion list, approximately 10% of Regal's US business is manufactured in China and directly impacted by the 301 tariffs. We're mitigating the impact with two main actions. First, we're working to transfer the manufacturing of some of these products to existing Regal facilities outside of China. This picture taken earlier this month and one of our Mexico facilities is a great example. Industrial motors like these were previously manufactured in one of our China facilities for the US market. Earlier this month, we started the production of these motors in one of our existing facilities in Mexico. We have plans in place to do more transfers in the future.

The second mitigation action is pricing. Across all the segments, we have implemented additional price increases over the past three months to offset the impact of the tariffs. Today, we have offset the tariff impact and we expect to continue to offset the tariff impact in the future.

Now, I'd like to give you an update on the simplification and automation initiatives and how this is helping us to drive margin improvement and deliver more value to our customers. In 2018, we will spend approximately $8 million on restructuring expense and we're scoping additional programs for 2019. The majority of these programs are aimed to further simplify our footprint. While there remains more opportunity for simplification improvements, the work we've done to simplify our operations is opening up the opportunity for automation. We implemented a number of automation programs in 2018 and we're seeing a positive impact on our margins from these programs. Shown on this slide are a couple of examples of the investments we're making. It's important to note that these investments have been made across the company, including operations in the US, Mexico and Asia. Typical payback for these programs is in the range of two to two-and-a-half years. In addition, we see benefits from automation as the labor markets tighten as well as improvements in both quality and safety. We will invest approximately $10 million to $12 million in automation programs in 2019. We expect to fund this within our normal level of CapEx spending. This is an area of opportunity that will carry well beyond 2019. Overall, we are making excellent progress on both simplification and automation and there's more to come.

Now, I'll walk you through each of the segments and give more details on organic sales and operating margin performance. In Commercial & Industrial Systems, sales were $462 million with organic sales increasing 6.1% from prior year. In the quarter, we experienced broad-based sales strength across a number of the C&I end-markets including distribution, power generation, oil and gas and commercial HVAC. The distribution strength was in both the general industrial space as well as the pool motor aftermarket business. From a regional perspective, we did experience weakness in Europe and Southeast Asia. Price improved sequentially and was up over prior year. Price/cost was slightly favorable in the third quarter, similar to our performance in the second quarter. Adjusted operating margin was 8.1% of sales, up 40 basis points sequentially and up 60 basis points from prior year. Volume, productivity from our simplification programs, price and mix all had a positive impact on our margins. Inflation was a headwind and partially offset these benefits. Year-to-date organic sales were up 5.8% and our C&I segment and adjusted operating margin is up 60 basis points over prior year. We expect to continue to deliver year-over-year margin improvement in the fourth quarter.

In Climate Solutions, adjusted sales were $244 million with organic sales increasing 1.4% from prior year. In North America, sales to our residential HVAC OEM and distribution customers were up low- to mid-single digits to prior year. One of our larger HVAC customers was impacted by a natural disaster reducing their demand in the quarter. Over time, we expect to return to normal demand patterns from this customer. We also experienced sales strength in commercial refrigeration. The strength in North America was partially offset by headwinds in the international markets across Asia, Europe and the Middle East. Price was up over prior year and price/cost was slightly favorable in the third quarter, similar to our performance in the second quarter. Adjusted operating margin was 16.7% of adjusted sales, up 50 basis points from prior year. Productivity in our manufacturing operations, mix and price all had a positive impact on margins. Inflation was a headwind and partially offset these benefits. Year-to-date, organic sales were up 3.3% in the Climate segment and adjusted operating margin is 15.7%, up 20 basis points over prior year. The third quarter adjusted operating margin of 16.7% was a strong performance for the Climate Solutions segment.

Sales in Power Transmission Solutions were $208 million, with organic sales increasing a strong 8.1% from prior year. In the quarter, we experienced strength across a number of end-markets, including oil and gas, distribution, material handling and commercial HVAC. Sales were down in renewable energy, driven by the timing of large projects and we also experienced weaker demand in agriculture. Price was up over prior year and price/cost was slightly favorable in the quarter. Adjusted operating margin was 13.6% of sales, up 180 basis points sequentially and up 170 basis points from the prior year. The higher volume, price, productivity in our manufacturing operations, all had a positive impact on margins. However, mix and inflation were headwinds and partially offset these benefits. Similar to the second quarter, mix was a headwind because while sales were up in both OEM and distribution, OEM remains stronger. Year-to-date performance in our PTS segment has been solid with organic sales up 9.1% and adjusted operating margin of 12.8%, up 160 basis points from the prior year.

I'll now turn the call back over to Mark.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks, Jon. Now, before we go to Q&A, I would like to briefly summarize our third quarter results and highlights. We had a solid third quarter and our outlook remains optimistic. Organic sales increased 5.2%, and as we entered the fourth quarter, orders were up year-over-year in most of our end-markets. Price/cost was slightly positive in the quarter and we expect price/cost to remain at least neutral for the remainder of the year. The tariff situation remains dynamic, but we expect that our mitigation actions will continue to offset the tariff impact. Our adjusted operating margins were up 60 basis points for the quarter and we expect to finish the year with adjusted operating margins up meaningfully for the full year. Our adjusted earnings per share were up 23% as compared to prior year, with little contribution from tax reform. Our free cash flow to net income was 133% and on capital allocation, we paid down roughly $54 million of debt and repurchased just over $6 million of our shares or $78 million on a Q3 year-to-date basis. We narrowed and raised the midpoint of our annual adjusted earnings per share guidance , which now represents a 21% increase year-over-year at the midpoint.

Our total year adjusted earnings per share guidance reflects a record year for Regal in both sales and earnings. And finally, before we go to Q&A, I would like to address the recent announcement on my retirement. As you know, I will be stepping down as Regal's Chairman and CEO at the time that a new CEO was hired. A committee comprised of members of Regal Board of Directors is leading the search and I am assisting in the process. We expect the new CEO to be in place in the late first, early second quarter. I will continue to lead the company until that time and I will remain as an advisor for a short period after the new CEO is named to assure an orderly transition. The company continues to pursue the focus simplify-innovate strategy that we laid out at the 2017 Investor Day with good alignment between our management and our Board. The organization has responded very well to the announcement and all of our energy is focused on delivering for our stakeholders. We will now take your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) Today's first question will come from Nigel Coe with Wolfe Research. Please go ahead.

Bhupender Bohra -- Wolfe Research -- Analyst

Hey, good morning, guys.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Hi, Nigel.

Bhupender Bohra -- Wolfe Research -- Analyst

This is Bhupender here for Nigel.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Good morning, Bhupender.

Bhupender Bohra -- Wolfe Research -- Analyst

Jon talked about the mitigation plan from the tariffs in place. Could you expand on how tariffs basically have changed some of the competitive dynamics here and if there was a pre-buy over the last end of September or like in October, which you saw in the marketplace and any concerns about like market share losses here in the near term as we try to move it outside China to some of the places? Thanks.

Jonathan Schlemmer -- Chief Operating Officer

Yeah. Bhupender, good morning. I'll take that question on and then Mark can add some color if he has anything additional to add. So on the pre-buy question. We don't believe that there was any significant impact from a pre-buy related to the tariffs and our actions are competitive reactions to the tariffs going into effect. The big change in the third quarter for us was the additional $200 billion list the tariffs that took effect in September. During the last earnings call, we said that we were keeping an eye on that, but at that time on our last earnings call, had not yet been implemented. Now, of course, that's in effect, so the full $250 billion list is an effect. That affects a number of products for us as well as our competitors and most notably would be electric motors. In terms of, how it's impacting some of our competition where we compete anyone who is making electric motors in China is going to be impacted by the tariffs -- by the China tariffs if they're making that product in China and importing into the US. Our view is that while it's still too early to call, we still view that, it is actually a net positive for Regal as we look at over the long term. We had a number of customers who have been coming us talking us about how we might build to help them given that we've got a global manufacturing footprint, and we're working a number of those opportunities right now. But we see that more of a probably a net benefit in 2019 and not much of an impact to 2018.

Bhupender Bohra -- Wolfe Research -- Analyst

Okay, got it. The follow-up question here on the pricing, can you kind of give us like what was pricing in the quarter and how basically broke out between the NPS (ph) and the regular pass through, the spot price? Thanks.

Jonathan Schlemmer -- Chief Operating Officer

So you're right to say that there was benefit in pricing from both the announced price increase, general price increases as well as the material price formulas. So, as you know, 30% of our revenues are covered by two-way material price formulas tied to commodities and we see those benefits as the as the commodities go up our price increases get passed along. It's a three- to six-month benefit and we had been seeing the benefits of those two-way material price formulas. And then also John, we commented before that we have raised our prices in 2018 three times, once in December of '17, once in the early part of '18, and then once in the third quarter of '18. So those price increases are being passed along and appeared to be sticking.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Okay, thanks a lot.

Jonathan Schlemmer -- Chief Operating Officer

Thanks, Bhupender.

Operator

(Operator Instructions) Our next question will be from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell -- Barclays -- Analyst

Hi, good morning.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Good morning, Jullian.

Julian Mitchell -- Barclays -- Analyst

Mark, it sounds like you'll be CEO for another few months; I'm sure we'll talk again, but just wanted to say congratulations on the retirement news.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thank you, Jullian.

Julian Mitchell -- Barclays -- Analyst

In terms of I guess the first point, maybe just following up, Jon, you alluded, I think some more efforts step-up cost cuts perhaps into next year. It looks like though the restructuring charge guidance for 2018 is unchanged from before, so maybe help us understand how meaningful some these extra cost cutting measures could be and when we might hear more information on them?

Jonathan Schlemmer -- Chief Operating Officer

So you're right. Our guidance, Julian, for the year hasn't changed, so we're still viewing the total restructuring expenses for 2018 to be $8 million in total. Given the timing of some of the programs, we're going to see a little bit more of the restructuring expense come through in the fourth quarter and that's why we still view $8 million as the the right guidance for the full year. We don't have an estimate yet for 2019, but we certainly will provide more color on that during our fourth quarter earnings call in terms of what we might expect to see for 2019 on restructuring expense. When we had our Investor Day meeting in March of 2017, we talked a lot about how -- while we still have more work to do on simplification, we saw that as we were implementing a lot of the simplification programs and making very good progress, we saw that opportunity now for automation to start taking a larger and larger role in terms of our margin improvement efforts. That's exactly what's happening right now. We continue to make progress on restructuring and simplification, got to automations, having them a larger play. The capital investment that we will make in 2019 that $10 million to $12 million that I referenced, that'll represent the biggest year for us in terms of automation, investment and the kind of payback we're getting on that I mentioned was in the two to two-and-a-half year period. So just like we communicated at Investor Day, we're starting to see now or more of a split between automation and simplification is what's driving the margin improvement and we had been citing that in the 35 to 40 basis point range for a combination of both those initiatives, and that's still the kind of the overall impact that we expect to see from these efforts.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

I'll just add on that, Julian. We fund our simplification efforts our footprint efforts through restructuring and we fund our automation efforts through CapEx and Jon mentioned that our CapEx, we don't see a significant change in our CapEx investment levels for the future and that's because a lot of the work we've been doing in the past on ERPs we're approaching the end of the requirement in the necessity to make large capital investments in ERP consolidations. So that's the way will shift of funding over to automation.

Julian Mitchell -- Barclays -- Analyst

Got it. Thank you. And then my second question, maybe just switching to the top line. I think for Commercial & Industrial Systems, as well as Climate Solutions, you talked about soft demand in various non-US regions, particularly Asia and Europe and a little bit, the Middle East. Maybe just explain you did those get worse as you went through the third quarter and into Q4 or was that a sort of a steady decline you saw since the middle of the year. Maybe just any any detail on how weak those markets are and if they're still deteriorating.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Well, in Asia and in particularly in China, Julian, when we saw the impact from an order standpoint was in the third quarter. So it hadn't been a steady decline through the year, it was a change that we saw in order demand in the third quarter. So we actually had in C&I sales were actually up in the third quarter in China, but we did see the drop in orders -- the lower orders in the third quarter and as we've entered the fourth quarter. You're right, Europe was an area of weakness for both C&I and Climate and the Middle East, in particular, was a weak area for the Climate segment. We think the Middle East is driven largely by the economy, most of our exposure there is in Saudi Arabia.

Julian Mitchell -- Barclays -- Analyst

Great, thank you.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thank you, Julian.

Operator

Next question will be from Christopher Glynn with Oppenheimer. Please go ahead.

Christopher Glynn -- Oppenheimer -- Analyst

Thanks. Good morning.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks very much.

Christopher Glynn -- Oppenheimer -- Analyst

And best of luck on the transition.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thank you, Chris.

Christopher Glynn -- Oppenheimer -- Analyst

I was interested in your comments on tariffs up and up and up, offering up an opportunity for kind of a net positive competitive benefit in customer interest noted there. Wondering if you think about that dynamic qualitatively in 2019, could that be material or more Just on the lines of reinforcing what organic might otherwise have play out as?

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

So, yeah, you're right. Jon commented on tariffs that it could be a net benefit to us, and the way to think about it is, look, we have -- these these products fall into two categories. You know, there's category one, where our competitor makes the product in some place other than China and we make it in China. In those cases Jon shows you how how we're trying to transfer that product over to other parts of our footprint, perhaps, in Mexico or India or somewhere else. And then to he's up (ph) we are also increasing prices there. And then there is the second category of products where our competition makes it in China but we make at some place else. And Jon commented on how customers are coming to us and there are opportunities out there. Our view is that over the time frame, it's more likely to be a net benefit to us. I think it has to play out. It's too soon to tell, but it's active and those discussions are happening real-time.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And then on the C&I, you know, you have some FX and pass-through and some acquisition dollars, but just wondering how the organic incremental margins are performing year-to-date. I think your target is 30%. What's the measure up there?

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

The incrementals in C&I, you're right, the acquisition and the FX, are all in there when you look at overall incremental margins for C&I in the quarter. But as we look at the core business and look at how the incremental margins performed on that core business in the quarter, it was a very good quarter for C&I. We were quite pleased with the progress we're making on margins in the base business, and Nicotra Gebhardt is also performing well, so it's good to see that bit -- the new acquisition also performing to our expectations.

Jonathan Schlemmer -- Chief Operating Officer

We were up 40 basis points sequentially and 60 basis points versus prior year. And we do expect year-over-year improvement in the fourth quarter, but we don't necessarily expect sequential improvement in the fourth quarter in C&I.

Christopher Glynn -- Oppenheimer -- Analyst

Got it. Thanks for the color.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thank you.

Operator

Next question will be from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Patricia Gorman -- KeyBanc Capital Markets -- Analyst

Hey guys, this is Trish on for Jeff Hammond.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Good morning, Trish.

Patricia Gorman -- KeyBanc Capital Markets -- Analyst

So can you guys talk a little bit more about what drove margin strength in Power Transmission, and what we can expect to see from that in 4Q and into '190?

Jonathan Schlemmer -- Chief Operating Officer

So, yeah, Trish, good morning, this is Jon. So the key drivers of the margin performance in the third quarter for Power Transmission Solutions was a higher volume. So clearly, the organic sales growth that we had in the quarter, 8% -- a little over 8% drove a lot of the benefit. We also had the benefit of price and we had good variable productivity in our manufacturing operations. So productivity, volume and price all were contributions. We had some offset of course with the higher inflation and we had a little bit offset in mix; mix was just driven based on the fact that OEM sales were up more than distribution and we enjoy a better margins in the distribution side of the business.

Robert Rehard -- Vice President, Chief Financial Officer

I'll just add SG&A was slightly beneficial in the quarter. And as you think about the fourth quarter, you should look at our first half margins for PTS to kind of gauge what the quarter might be.

Patricia Gorman -- KeyBanc Capital Markets -- Analyst

That's helpful. Thank you. And then, I'm not sure, is there any way guys, can you quantify the key customer with the weather event. Can you quantify that impact in the third quarter and how we should think about that in the coming quarter?

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

So we commented in our prepared comments that we had a large residential HVAC customer who was affected by severe weather. We're not going to comment on any specific names of customers. However, we did also say that we expect that customer to return to normal demand patterns as -- on a go-forward basis, so over the next quarter or so.

Patricia Gorman -- KeyBanc Capital Markets -- Analyst

Okay, great. Thanks guys.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks, Trish.

Operator

Next question will be from Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Hi. Yeah. Thank you. Good morning, everyone.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Good morning, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

So as I think about the -- just maybe the composition of the 4Q guide, it seems like your guidance is implying low-single digit organic growth. And if I think about the different sub-segments, given some tougher comps, both in Climate and in C&Is, are we -- are you assuming that like both of the segments could see negative growth in the fourth quarter? I'm just trying to get a sense for how to think about the trajectory there.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

No, no. First of all, you probably know we don't provide quarterly guidance. The third quarter came in slightly ahead of our expectations principally driven by PTS and as we look for the fourth quarter, it's still -- we see the fourth quarter as expected and unchanged in our outlook on the the fourth quarter. In terms of revenue, no, we don't see a year-over-year decline. We commented that we expect mid-single-digit growth rates --

Jonathan Schlemmer -- Chief Operating Officer

For the year.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

For the year --

Jonathan Schlemmer -- Chief Operating Officer

And we would expect that each of the segments to contribute with organic sales growth in the fourth quarter.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay, all right. Got it. That's helpful. And then my follow-on question is around capital deployment. I know that you guys have some floating-rate debt. It looks like you paid a little bit down this quarter, but obviously the markets (inaudible) in October as well. And so I'm just curious how you're thinking about that toggle between paying down debt versus doing more share buybacks at this point in the market?

Jonathan Schlemmer -- Chief Operating Officer

Well, I'll comment and then Rob can jump in as well. As you know, we commented back in March of 2017 that we'd be more balanced in our approach, on capital deployment, and five out of the last six quarters, we repurchased our share, and as you know, we also did an acquisition earlier this year. It's going to be a balanced approach as we go forward. We -- our Board just did authorize $250 million share buyback authorization last quarter, so consistent with our balanced approach. So we're very aware of the valuations out there and -- however, I would say to you that our pipeline continues to build and we feel good about some of the things that we're looking at.

Robert Rehard -- Vice President, Chief Financial Officer

Right. And I would just say that, as Mark alluded to, we will continue to remain balanced, and as we look to the fourth quarter, we will continue to look to pay down additional debt.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay, guys. Thank you.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks, Joe.

Operator

(Operator Instructions) Next question will be from Walter Liptak with Seaport Global. Please go ahead.

Steve Friedberg -- Seaport Global -- Analyst

Hi, this is Steve Friedberg filling in for Walt.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Good morning, Steve.

Steve Friedberg -- Seaport Global -- Analyst

Hey, guys. I wanted to touch upon Power Transmission, little bit higher organic sales growth and we are expecting, you guys say, oil and gas and material handling -- was the growth due to a channel fill or I don't if you guys can can give some more color on the end-markets?

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

So I'll comment and then Jon can jump in as well. A large -- 60% to 70% of our sales in PTS goes through distribution. So we do have a good handle on what's happened in distribution markets. So right now, we don't think there's channel fill happening. We think we're seeing real demand. So we feel good about that as we look into 2019. Jon anything to add?

Jonathan Schlemmer -- Chief Operating Officer

The only thing I would add is that we commented about the mix. So it's important to note that the sales strength was actually greater in OEM than distribution, and Mark is right, we don't believe we saw any channel fill dynamics in the quarter. We think we're seeing real demand on the distribution side. But a larger driver of our growth in the quarter while distribution was up, we also had very strong OEM sales in the quarter.

Steve Friedberg -- Seaport Global -- Analyst

Okay, great, thanks. And then one more on the simplification and automation initiatives, are there going to be any headwinds due to exiting any businesses, taking out product lines in Q4 and then I'm not sure if you can give any color in 2019 as well?

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Yeah. As we look forward, Jon laid out the planned spending on both simplification and automation so that as we go into next year, there certainly will be at a level of self-help that's driving our continued march toward our our targets -- our margin improvement targets. In terms of headwinds, I don't -- there is nothing I could see right now other than the ones that we've talked about in terms of the tariffs that we think will offset with the actions that we have in place.

Steve Friedberg -- Seaport Global -- Analyst

All right, thanks.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks, Steve.

Operator

Next question will be from Mike Halloran with Baird. Please go ahead.

Mike Halloran -- Baird -- Analyst

Hey, guys. Good morning.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Good morning, Mike.

Mike Halloran -- Baird -- Analyst

So first off, congratulations Mark.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks. Thank you.

Mike Halloran -- Baird -- Analyst

And then a couple of questions here, one, just with the unwinding of the hermetic motor business, could you just talk about how that cadence is over the next few quarters here, probably 2Q is when it completely wraps up, but wouldn't mind some context on how the customers are phasing out as of now and if that accelerates or slows down the process, how quickly you guys think you can exit?

Jonathan Schlemmer -- Chief Operating Officer

Mike, I'll take that question. You're right to think about it is, second quarter is likely how we we think about when that business completely ramps down. We're in the process right now of supporting our customers as we exit the business. So as you can imagine it varies a little bit customer by customer in terms of what their plans are and what that entails for us in terms of production requirements. It will likely last into the first half of 2019. We don't have an exact time line, but that is the time frame that we're looking at. We'll continue to provide the information on what the revenue and margin was in that part of the business just like we did this quarter, so you can see exactly what's -- what the impact is each quarter, but we're pretty much operating the business with a few exceptions. We're pretty much operating the business to support these customers as they ramp down or make changes in their supply chain.

Mike Halloran -- Baird -- Analyst

Makes sense. And then second one, obviously order strength barring a couple areas here, China was the main one mentioned. Could you just give some context around how you're seeing sequentially trends playing out as you go in the fourth quarter? China has slowed in the quarter. Have you seen stabilization at the low level yet? And then maybe talk about some of the areas where you might have improving sequentials beyond normal seasonality or there might be some end-market challenges that you might see some headwinds from?

Jonathan Schlemmer -- Chief Operating Officer

I would say that the biggest challenge that we saw from an order standpoint was the change in China orders, the demand in the third quarter. I don't know that we've -- as we've entered the fourth quarter, we'd say that we've seen any further decline in the China orders, it's probably been more stable after the downturn in the third quarter. Most of the other end-markets, as we've entered the fourth quarter, still show order strength over prior year, and I'd categorize as fairly stable from a trend standpoint working through the third quarter into the fourth quarter. There's been a couple of exceptions, I would say, like the ag market, which is probably a reaction to the tariffs that have been put in place. But for the most part, we have seen market strength in the fourth quarter on a year-over-year basis and stable as what I would characterize it as we work through the third quarter into the fourth quarter.

Mike Halloran -- Baird -- Analyst

Thanks, Jon. Appreciate it.

Jonathan Schlemmer -- Chief Operating Officer

Thanks, Mike.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thanks, Mike.

Operator

(Operator Instructions) With no questions in the queue, I'd like to turn the conference back over to Mr. Mark Gliebe for any closing remarks.

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Thank you, operator. Thank you all for your questions and for your interest in Regal. Have a great day.

Operator

The conference is now concluded. We want to thank everyone for attending today's presentation, and at this time, you may now disconnect.

Duration: 45 minutes

Call participants:

Robert Cherry -- Vice President of Business Development & Investor Relations

Mark Gliebe -- Chief Executive Officer & Chairman of the Board

Robert Rehard -- Vice President, Chief Financial Officer

Jonathan Schlemmer -- Chief Operating Officer

Bhupender Bohra -- Wolfe Research -- Analyst

Julian Mitchell -- Barclays -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Patricia Gorman -- KeyBanc Capital Markets -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Steve Friedberg -- Seaport Global -- Analyst

Mike Halloran -- Baird -- Analyst

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This article appears in: Personal Finance , Stocks
Referenced Symbols: RBC



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