RBC Bearings Inc (RBC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 RBC Bearings earnings conference call.

My name is Shanelle and I'll be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Adam Sigel.

Please proceed.

Good morning, and thank you for joining us today for RBC Bearings's fiscal year 2010 third quarter earnings conference call.

On the call today will be Dr.

Michael J.

Hartnett, Chairman, President and Chief Executive Officer; and Daniel A.

Bergeron, Vice President and Chief Financial Officer.

Let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those projected or implied due to a variety of factors.

We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial conditions.

These factors are also described in greater detail in the press release and on the Company's website.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's website.

Now I would like to turn the call over to Dr.

Hartnett.

Thank you, Adam.

And good morning to all and welcome.

During the third quarter, our sales were $67.5 million, a drop of 20.9% from last year.

Adjusted operating income was $8.9 million versus $14.5 million a year ago.

For the first nine months, these comparisons were $194.9 million in sales versus $272 million last year, and adjusted operating income of $25.9 million this year versus $48.6 million a year ago.

Free cash flow from operations was a strong $27.3 million, measured on a year-to-date basis versus $15.4 million during the same period last year.

Because our spending on capital equipment was modest during the period, our debt less cash level, or net debt, was reduced to about $13.2 million.

We saw demand for our products bottom in the second quarter and then turn positive late in the period.

Overall sales expanded 6% quarter-to-quarter sequentially.

This increase was mitigated to some extent by lead-times.

Certainly, this bodes well for the period ahead.

Demand for our industrial products at the OEM level was up 30% on orders while sales increased 13%.

This is all measured on a sequential quarter-to-quarter basis.

Industrial distribution sales and orders on that same basis increased 19% for sales and 25% on orders.

Although versus the same quarter last year, consolidated industrial sales are off by 38%.

Clearly, the industrial markets are showing expansion at an encouraging rate, and this reflects the turnaround in industrial production rates nationally we all read about.

We see strong market improvement in large construction equipment, industrial distribution, semiconductor machinery, and machine tool products in Europe.

We also saw demand strengthen further and substantially in January.

On the aircraft and defense side of our business, which represented 57% of our third quarter total, sales were off 23.8% from last year.

The aircraft aftermarket continued to suffer from destocking actions and the continued postponement of the Boeing 787 production.

We do see some evidence of mitigation here, but not to the extent demonstrated by the industrial products.

It's not unusual for all volume expansion in the industrial products to lead us out of recessions.

In fact, this has been the norm as we exited recessionary periods for the last two decades that I've been doing this.

I expect that the aircraft aftermarket and distribution demand will improve each quarter next year, as inventory liquidations come to an end, the economy strengthens, and the production of Boeing 787 aircraft commences.

Gross margin for the quarter on an adjusted basis was 31.5%, a full 2 percentage points under last year.

The primary reason for this drop was cost absorption issues in our industrial plants.

We certainly expect to see volume improvement here in the fourth quarter, with the increased volumes that are currently planned today.

Adjusted operating income was $8.9 million or 13.2% of sales versus $14.5 million last year.

There's no question that plant absorption issue caused a few points of degradation here, and another percent or two was given up in the SG&A burn rate for the quarter.

In both cases, these expenses are not fixed, but elective.

We elected to leave many of these costs in place to preserve our ability to respond quickly to a more robust economy and larger volume demands.

This was the plan under the theory of what comes down fast can return just as fast, and we want to preserve the robustness of this franchise.

I do expect us to clean up some of this EPS bar bill in the fourth and first quarter by holding expenses down on increasing volumes.

The good news today is that we are seeing a well-demonstrated pickup in demand for industrial products, a plateau of demand for products in the aircraft area, and a net increase in defense orders.

This bodes well for a stronger fourth quarter and very positive for our FY '11.

Looking ahead, we expect to see fourth quarter sales to be in the low to mid-teens expressed as a percentage basis, better than those of the third quarter; some gross margin expansion and tight control demonstrated on the SG&A burn rate.

I will now turn the call over to Dan who can provide more color on the quarter.

Thank you, Mike.

Since Mike's already discussed sales, I'll jump down to gross margin.

Gross margin for the third quarter fiscal 2010 was $20.4 million compared to $28.5 million for the same period last year.

Gross margin as a percentage of net sales was 30.3% at third quarter fiscal 2010 compared to 33.4% for the same period last year.

The decline in gross margin percentage was mainly driven by the drop in volume due to the current economic downturn combined with startup costs associated with the Company's expansion into large bearing products.

Gross margin as a percentage of net sales, excluding $0.6 million of startup costs associated to Houston was 31.2% compared to 34.4% for the same adjusted period last year.

SG&A for the third quarter fiscal 2010 decreased $2.5 million to $11.9 million compared to $14.4 million for the same period last year.

As a percentage of net sales, SG&A was 17.7% for the third quarter fiscal 2010 compared to 16.9% for the same period last year.

The decrease in SG&A year-over-year was mainly due to personnel-related cost reductions and reductions in general expenses.

Other net for the third quarter fiscal 2010 was $0.4 million compared to $1.3 million for the same period last year.

This was comprised of $0.3 million of amortization of intangibles and $0.1 million of restructuring and moving costs associated to consolidation of our Houston facility.

Operating income was $8.1 million for the third quarter fiscal 2010, a decrease of 36.4% compared to operating income of $12.8 million for the same period in fiscal 2009.

Operating income excluding startup costs associated with the expansion into new bearing products, and restructuring and moving costs was $8.9 million, a decrease of 38.6% compared to adjusted operating income for the same period last year of $14.5 million.

Interest expense net for the third quarter fiscal 2010 was $0.4 million, a decrease of $0.3 million from $0.7 million for the same period last year.

For the third quarter fiscal 2010, the Company reported net income of $5.2 million compared to net income of $7.7 million for the same period last year.

Diluted earnings per share was $0.24 for the third quarter fiscal 2010 compared to $0.35 per share for the same period last year.

Excluding the after-tax impact of the startup costs associated with the expansion into new bearing products, restructuring and moving costs, and the benefit of the CDSOA payment, net income was $5.6 million in the third quarter fiscal 2010 compared to an adjusted net income of $9 million for the same period last year.

Diluted earnings per share, excluding the after-tax impact of these items, was $0.26 for the third quarter fiscal 2010 compared to $0.41 for the same period last year.

Turning to cash flow, the Company generated $13.6 million in cash from operating activities in the third quarter fiscal 2010 compared to $8.6 million for the same period last year.

For the nine-month period ended December 26, 2009, the Company generated $35 million in cash from operating activities compared to $32.6 million for the same period last year.

Capital expenditures for the nine-month period were $7.5 million compared to $17.7 million for the same period last year.

In fiscal 2010, we expect capital expenditures to be in the range of $9 million to $11 million.

Total debt minus cash and short-term investments for the period ended December 26, 2009 was $13.2 million compared to $39.1 million for the same period last year, and compared to $21.4 million for the second quarter fiscal 2010.

The Company ended the quarter with $40.5 million in cash and short-term investment on the balance sheet, and borrowing capacity of $91.7 million under its credit facility.

At December 26, 2009, the Company's net debt to total capital was 4.6% compared to 13.5% for the same period last year, and are net debt to equity was 4.8% compared to 15.6% for the same period last year.

I'd now like to turn the call back over to the Operator for a Q&A session.

(Operator Instructions).

Fred Buonocore, CJS Securities.

This is actually Larry Solow calling in for Fred.

(multiple speakers) On -- it sounds like the industrial trends, it sounds like things are picking up.

I mean, is it -- would it be a good way to characterize bookings as -- are you seeing, like, a steady sequential improvement through the months and into January?

Or is it sort of lumpy?

No, it's a sequential improvement.

It's a substantial sequential improvement.

Okay.

And then on the aerospace market, do you think that inventory reductions have actually bottomed?

Or you expect that to happen soon?

Or -- and was there any year-end more inventory reductions as some companies attempted to dress up their balance sheets?

You know, I suspect that those inventories are pretty close to bottom, if they're not at the bottom now.

And normally, the way that marketplace seems to have always worked in the past is, once it reaches bottom, it stays there too long.

And then it becomes a buying frenzy once the economy picks up in that sector.

So it's sort of important to know that and to sort of be a little bit ahead of the game in that marketplace.

Right.

So, essentially, it could kind of square up against the bottom for a couple of quarters or what-have-you before it starts to pick up?

Yes, and then when it takes off, you almost can't catch up to it.

Right.

Okay.

And then you guys have talked about in the past -- I'm trying to get more into European market -- any update on that?

On the aerospace side?

You know, it's -- not much -- things are normal.

Mainly, the European market for us is an OEM market.

And that's OEM to the engine makers and the airframe producers.

I'd say things are very normal there.

There's -- we're working on a number of large contracts that roll over either this year or next year, that we anticipate being successful on.

Okay.

And then just last question -- you've done a nice job of reducing your net debt.

Historically, you've been relatively acquisitive, I know.

You've done a couple of complementary deals over the last 12 months, but anything out there -- larger opportunities or -- and are you seeing -- how's that looking?

There's sort of opportunities across the waterfront.

I think right now our bias is to do something larger than has been the historical norm for the last 36 months for us.

And so we're sort of measuring twice and cutting once on that whole thing.

And so we are actively looking at things that are a little bit larger.

Got it.

Okay, great.

Thank you.

Walt Liptak, Barrington Research.

My first one is on the -- if you look at the backlog trends, you're down sequentially and it's been trending that way for about five quarters.

But it appears that your revenue is starting to trend upward.

Could you -- what's the difference in the trend here?

And, I guess, what's coming out of backlog and why isn't the backlog beginning to build up a little bit?

Well, Walt, I think a lot of it for us is just timing.

I think our backlog at the end of January -- I'm looking at our end of January report -- is north of $170 million.

So, for us, it's not a concern right now.

I think it's just timing between industrial orders, what goes in and out in a month, and what was being loaded up for aircraft orders in the quarter.

Okay.

Is there a mix that tends to be heavier towards aerospace that goes in the backlog?

There is to some extent.

I think one of the things that's going on now is we're into a period where a lot of the aircraft orders, particularly for the Boeing supply system, are turning over, like, for the last three or four months to the next three or four months.

So, these contracts are sort of running out and being renewed.

And so you definitely have that kind of activity superimposed on the backlog.

Okay.

And Dan, did you provide balance sheet numbers like Accounts Receivable, inventory and payable?

No, but if you'd like to know them, I can [get them].

Yes.

Our accounts receivable, $46.2 million; inventory, $138.2 million; and Accounts Payable, $16.4 million.

We'll be filing the 10-Q on Monday.

Okay, all right.

No problem.

And the balance sheet's in great shape.

You talked about acquisitions.

What about share repurchase with the stock bottoming out down here in the low 20s?

It's not a bad idea.

Okay.

And there is a share repurchase that's been authorized, right?

There has been.

Yes, we have a small program, about $10 million.

I think, left under that program is around $6 million to $7 million, so we do have availability to acquire back some company stock.

Okay, thanks.

I'll get back into queue.

Edward Marshall, Sidoti and Company.

My first question -- I'm sorry to ask you to do this, but could you repeat what guidance that you gave in your prepared remarks?

Oh, we didn't -- I don't think we gave guidance.

But I did say that I thought our sales in the fourth quarter would be sort of mid-teens above our third quarter.

Right.

And was there any additional -- I thought there was something additional on the cost side that you had mentioned.

Well, we're -- the issue there is to -- we're going to see better absorption in the industrial businesses, given the amount of demand now coming in for industrial products.

As a matter of fact, the issue now has become reestablishing some of the production cells that were dormant, and re-staffing those and trying to get all this product made, and maintaining the SG&A levels.

I think Walt's numbers are pretty respectable.

I only have the Barrington numbers in front of me, but they look like pretty respectable numbers to me.

I see.

And you had mentioned -- or rather, I'm looking at the model here and it looks like with the sequential increase in sales, there was a step down in the percentages of gross margin.

Was there something that happened in there?

Was there something unique to the quarter?

Or was it just kind of restarting up some of the lines that were shut down that caused that effect?

No, it's just that -- it was just absorption.

It was having more factory expense than you were running the product -- product volumes versus factory expense were a little out of balance.

And so that should come right back into balance in the fourth quarter.

I would have thought with the sequential pickup in sales, that would have meant a sequential volume increase?

But am I missing something?

I mean, was there pressure on pricing, or --?

No.

I think you're missing lead-times.

I see.

And I mean when we see -- we had a pickup in demand, orders in the late -- late in the second quarter, and we just can't turn around that fast because you have to order materials, and to buy materials at the right cost base, you're probably talking about 10, 12 weeks to get materials in.

So there's just an entire inertia in restarting the increased volumes through these plants.

And that's what we've been going through, through the third quarter.

And did you have breakdown for the individual segments -- the industrial and the aerospace business in the quarter?

[Being] topline sales?

Yes, if you can give me the industrial and the aerospace.

Yes, total -- industrial was $29 million for Q3 and aerospace was $38.5 million.

Thank you very much.

Steve Barger, KeyBanc Capital Markets.

I just want to try and frame the environment up.

You've made some pretty positive statements on industrial demand.

We also know you always have a seasonal increase in your fourth quarter.

I know this is hard to quantify, but how much of what you're seeing in this double-digit revenue increase you're talking about is the normal seasonal increase, and how much of it's actual demand recovery that you're seeing?

It's -- I'd say it's 90% demand/recovery.

There's not a lot of -- the seasonality in our numbers, Steve, is a result of the number of production days in a quarter.

Right.

And our third quarter is probably 60 days or less; and our fourth quarter this year, actually because of some lunar event, there's an extra week, so there's almost 70 days in the fourth quarter.

So it's -- the historic seasonality there is a matter of production days and lack of holidays in the fourth quarter versus the third.

So it's just -- it isn't an order rate thing.

But these order rates that we've seen, particularly on the industrial side of the business, are -- I've never seen that before.

Yes, it's -- it does -- I mean, we're not hearing other companies have gone through the reporting season talking in that positive term or sense about the order demand coming back.

And specifically, I want to go to one point you made -- as I talked to construction equipment dealers, they're saying there's too much inventory out there and not enough work right now.

Can you talk more specifically about the increase you're seeing for a large -- for bearings for large construction equipment?

Yes.

I mean, I -- we -- bearings for the small construction equipment and the -- used in residential housing and commercial development is still soft for us.

I mean, we don't see a big pickup there.

The bearings for the large equipment that goes into mining and oil and gas -- that's very strong.

I understand.

Okay.

And one last one.

In late December, I think you dropped one of your aerospace distribution partners.

Do you expect any -- what's been the shakeout of that?

Are there any near-term losses or disruptions in market share from that?

And if there have been, how are you going about replacing some of that?

No, there's been really not much of a shakeout there.

We'd expect to see that volume replaced with the other distributors.

We think that the market had too much representation for our products and too much coverage.

And so we had to rationalize who we were going to go to market with.

And that was a consideration.

Got it.

Thanks.

I'll jump back in line.

Samuel Eisner, Sterne, Agee.

Just had a couple of questions.

Most of mine have been answered.

But I just -- as you guys are looking out -- I mean, is it -- face any kind of pricing pressure?

Have you been able to raise prices at all?

Is there any -- I guess, what's the relationship on the price/cost side?

Well, I think there's been a general industrial distribution price increase effective January.

I don't remember what it was, Sam; it's somewhere between 4% and 6%.

We haven't really -- I would say the pricing environment for our products has been reasonably normal.

We are going through negotiating a lot of contracts right now on new business or renewed contracts on business that we had.

And the situation there is normal.

I mean, you get price in some areas, you give price in other areas.

It's a true negotiation.

But there's nothing extraordinary.

And then, I guess, on the cost side, scrap sales increased, I guess, from this time last year.

Have you seen any kind of crimping or any pricing pressure that hasn't been taken up yet?

No, you know, for the large contracts, we try to look at it on an 80/20 basis based on who our accounts are.

And where -- 80% of your revenues come from 20% of your accounts.

That's the historical norm.

So with those accounts, if you have contracts with them, you try to negotiate inside the contract a collar on material.

So if material goes above a certain trigger point, then there's a readjustment of the pricing in some form.

And if -- in the 80% of the accounts that generate 20% of the revenues, the only way to handle that is with a periodic general price change.

All right.

And I guess as you -- as much as you can comment on this -- looking out until 2011, I mean, is this -- you mentioned that the aerospace business is kind of going to bounce along the bottom here for a little while and then maybe pick up in the latter half of 2011.

But as far as industrial goes, I mean, are we working off a really, really low base that we could see pretty significant, I guess, year-on-year comparisons in 2011?

Or, I guess, how are you guys starting to put your framework together for that?

Well, let's go back to the aerospace first of all.

I think the aerospace has two components -- the OEM component and the distribution component.

And we expected to see the distribution component, the aftermarket and general distribution component increase gradually over the course of the year until it becomes -- there's a trigger point, at which time it will increase in a step function.

And where the trigger point will be in the year, I'm not sure, but it will be there.

It will probably be there once Boeing announces its production -- firms up its production rate on the 787.

You will definitely see a big industry bounce when that occurs.

Our OEM business for FY '11 is sure and secure and steady as she goes.

So we're not seeing a decline there at all on commercial OEM for aircraft.

And, in fact, we're picking up additional businesses in certain areas on mix that we didn't have.

So we should see some -- I can't quantify it for you exactly, but we should see some improvement in our aircraft OEM volumes throughout the year until that 787 is announced again, where we're probably going to see another step function.

On the industrial business, I just don't -- I don't think that the industrial distribution marketplace can continue to -- will continue to buy product from us at this rate.

I think we'll probably get back to normal in terms of what our volumes were to that marketplace.

And then RBC has always been able to grow its industrial distribution business in the two times GDP rate in normal environments.

And I suspect we'll get back to that rate on the industrial distribution business.

On the industrial OEM business, that's -- right now, it's highly commodity-driven.

And there's just a lot of demand for bearings for big equipment.

And so, if you know more about commodity demand in FY '11 than I know, you could probably answer this question better than I can.

But we are seeing a lot of demand.

I think the article that Caterpillar had in the Wall Street Journal two days ago -- I mean, that's how this marketplace has been forming up around our FY '11.

Fair enough.

That's definitely a valid point on the commodity stuff.

And, I guess, lastly, you mentioned that you're looking to do something -- you know, a more substantial acquisition.

Could you put a goal post maybe around the size that you're looking?

Obviously, you did the Lubron deal, that was about $2 million.

I mean, are we talking something that's $30 million to $50 million here?

Or even larger than that?

And that would be it for me.

Yes, I'd say that we're looking in the $30 million to $90 million range.

And I say that on this conference call and we'll probably end up doing another $3 million deal.

But we're doing -- we're looking in the $30 million to $90 million range.

All right.

Thank you very much.

Peter Lisnic, Robert W.

Baird.

I guess I just want to clarify on the industrial side again, these comments about the strength that you're seeing.

You talked about orders being up 30%, I think I heard on the OEM side sequentially, and then 25% in distribution.

Can you maybe translate those into year-over-year numbers?

And then on the OEM side, it's large diameter mining kinds of applications where you're seeing the strength, correct?

On industrial?

Yes.

I believe that's correct.

Yes, that's correct.

I mean, there's other markets we're seeing some strength but I think that strength is coming from share gain.

Okay.

And then when you look at those numbers, the plus 30 and the plus 25 in terms of orders, how exactly does that translate into a year-over-year basis?

Because I think that helps us remove some of the seasonality that I think we all think may be there.

Well, I think on a year-to-year basis, in terms of order growth rate, I would have to go back and study that, but my guess would be that on a quarter-to-quarter basis in a normal year, through that period, you wouldn't see much of a change in order growth rate.

Maybe a quarter of GDP kind of growth -- maybe GDP kind of growth.

Oh, I'm sorry, I'm probably not asking the question the right way.

I'm just wondering how that plus 30% order comp would translate into a year-over-year number.

Because that plus 30% is second versus third quarter.

I'm wondering what third quarter versus third quarter last year in terms of orders was.

Well, third quarter of last year, the orders -- that's when the world was in trouble and suffering.

So our third quarter order rate last year was way off.

And I don't think it's a good comparison, but it was way off.

Okay.

Is there a way to maybe call out what piece of this unprecedented demand, I guess, is sort of just re-filling the inventory?

I mean, you referred to the Caterpillar article.

So are we at sort of that first wave of the bullwhip where --?

Yes, I think so.

On industrial distribution?

Yes, I think they're replenishing.

I think they just got -- they took too much out and now there's a replenishment going on.

And part of it -- we had more demand in the third quarter than we actually had product for.

So we actually ran out of some of our top products.

And we do a pretty good job trying to -- on a line item by line item basis, trying to determine what to have in stock and how much of it to have in stock.

So, we certainly had -- it rarely happens that we're stocked out of our top items.

Okay.

All right.

And then switching gears a little bit -- on the aerospace side, you gave us the total cap number down, I think 24%, that was in the press release.

What was the -- do you have the distribution or the aftermarket number?

No.

Okay.

And then shifting gears yet again -- on the wind business or the wind energy side, kind of hearing projects getting pushed out maybe, or maybe not as robust from a Capex standpoint this year from some of the utilities.

How's the order book or the backlog shaping up for you?

Any new customers?

How is that large diameter wind business progressing?

Well, we're seeing the same kind of thing.

I mean, the -- what used to be a frenzy is now turned into certainly an anti-frenzy.

It looks like there's a big delay in that market in terms of financing and financeability of some of these programs.

So, I think people aren't really expecting the industry to line up until 2011, 2012.

And we're definitely seeing that.

I mean, we're working with a number of customers.

We have -- we're making prototype orders and pre-production orders and that sort of thing through the plant now.

But we're really anticipating that our FY '11 will have very little wind revenue in it.

Okay.

That is very helpful.

Thank you very much for your time and color.

Walt Liptak, Barrington Research.

Two more things, guys.

First, on the cost side, where are you with cost take-out programs?

Even with revenue down here at the low level, have you found any other cost consolidation or cost-out activities that you could do?

I think we're where we want to be right now, Walt, based on where we think we are in the cycle.

So, as Mike said earlier, we should be able to hold the SG&A line so that we get some leverage in the fourth quarter and the first quarter of next year.

And the plants, we're always working on method improvements and cost reduction programs.

So, when the volumes start coming back, we should be able to see our gross margins improve quicker this time around than it did in the last cycle.

Okay.

I think I got that.

I want to follow-up on the last question, on wind power.

And we saw that tax credit come through for $4 million a couple of weeks ago.

And the expectation I think was that some more of the government money was going to be flowing through to wind power.

But some of the other data points that we picked up provide kind of a mixed outlook.

What do you think is going on with, like, grant programs and project financing and things like that?

Do you have a read into that?

Well, I think the guys that have -- the big guys probably have no trouble getting financing for their wind projects.

And the smaller wildcatters can't get financed.

And so I think there's just a lot of angst right now with people who want to get into the industry but can't.

And so, I think that -- we're hearing that the financing of these projects has to jell before these programs will inflate -- the volumes of these programs will inflate again.

And that jelling won't occur for another 12 to 18 months.

Okay, thanks, guys.

Marty Pollack, NWQ Investment Management.

I wonder if -- back to industrial, if you could kind of maybe define a little bit two things.

One, you're saying a normal seasonal trend is a small part of this and demand recovery is 90% of it.

Can you, in effect, break down into what would be apparent demand or real demand, with maybe the inventory being -- essentially one of the things that's clearly -- you're seeing across the board.

So as far as demand, is that really replenishing even there?

Or is it real demand?

And with that, if you don't mind, kind of describe that condition via the end markets themselves, that industrial business that serves, so we can get a sense of where there is a real pickup where it's coming from.

Are you there?

(multiple speakers) Yes, we're here, Marty.

I just had to get another paper.

You ask very -- I have to go into calculus sometimes to answer your questions.

Well, I think the demand -- it's pretty obvious on the industrial distribution side of the business, what's happening, what's driving demand.

And what's driving demand there is the reduction initiative -- inventory reduction initiative taken by the big, major industrial distributors in the earlier part of calendar '09 as a result of lack of demand for their customers.

And if you look at the industry production rates that occurred in the first and second quarter of 2009, they were a negative 19% and a negative 10.3% for those two quarters.

So these people had no demand from their customers.

And clearly, they were trying to improve the liquidity of their company -- companies, by just hitting the brakes hard and living on the cash in their inventories.

Those kinds of industrial contraction numbers -- frankly, I have never run a business in those kinds of industrial contraction.

I've never seen numbers like that before.

I mean, if you go all the way back to 1991, 1992, I mean, those were like a negative 5%, negative 6% number.

And we thought at that time it was the end of the world.

I mean, no one's ever tried to run a business in a negative 20% industrial contraction market.

So then in the third quarter, third calendar quarter of 2009, all of a sudden we have an industrial expansion number of 5.2%.

So you're going from the second quarter, a negative 10.3%, to the third quarter, a plus 5.2%; so you've got a 15% swing in industrial production.

So now all of a sudden these guys don't have enough inventory to satisfy their customer base.

And then in the fourth quarter, that's projected to be 4.5%.

So there's way -- there was just way too much liquidation going on as a result of total lack of demand for these things.

And now things have swung far in the other direction.

Now the projections that I'm looking at say that 2010, the industrial production rates, for what these projections are worth, are about 4% per quarter.

Now 4% per quarter, RBC can normally expand its volumes and its sales line, and do very, very well in those kinds of environments.

So I'm hoping that these projections for 2010 are right.

But I think what we've seen in our fiscal third quarter, calendar fourth quarter, is an over-reaction to what happens to the industrial economy in the first two calendar quarters of the year.

Yes, well, that's helpful.

In a sense, I know my -- maybe my question was perceived to be complex, but the point about real demand -- and is some of this growth, clearly, you're projecting forward -- is that still the inventory you restock?

Or are we getting back to some normalization for --?

It is getting back to normalization.

It's restocking and it's just getting back to normalization.

And therefore, beyond, let's say, the next quarter, will the real test be -- once you get, I don't know, the economy to an operating rate of 70% plus or whatever that number would be, that we will not know -- we still can't necessarily read whether this is real demand recovery at that point.

But clearly, right now, you've got the momentum of the restock.

Yes, well, I think it's restocking.

And I think there is -- if these industrial production numbers are right, and the projections are right, there is demand recovery.

And if I may, just the -- that point about just the end markets within the industrial [segment], clearly, you said power -- the wind side is a little bit more of a sluggish here.

But just some of the other markets.

You mentioned oil and gas being strong.

It seems that we're getting a lot of cross currents on the strength there.

Some companies are clearly seeing backlogs coming off there.

Just if you could define a little bit the end markets that you serve and how they're performing.

You know, we have seen sort of the oil market, the oil and gas market be reasonably soft through most of our third fiscal quarter.

I mean, it's there but it's not as strong as it used to be.

And then -- now moving into January, we're seeing quite the opposite.

So we're seeing a lot of demand coming out of that sector just as we turned into January.

So I'm not exactly up to speed on why that is, but I think it's probably the same thing as this large industrial contraction; even the OEMs liquidated their inventories.

I see.

Some of the other markets you serve there, just more feel for that?

You said mining is strong, mining looks to be strong -- just some of the other end markets.

Yes, well, the other end markets that we serve would be class 7 and 8 truck.

We are seeing a slight pickup there.

We'll take it.

Hydraulics -- hydraulic pumps, we're seeing a nice pickup in that market.

Those pumps go into things that drive hydraulic cylinders that end up on trucks and wherever a hydraulic cylinder goes -- refuse trucks and dump trucks and things of that sort.

Okay, thank you very much.

(Operator Instructions).

[Jeff Ruey], Cramer Rosenthal.

Hey, guys, I wanted to follow up a little bit on the normal cadence of backlog through the year.

Is it normal to build backlog in January versus the fourth quarter?

Do you have any old contracts would account for some of that?

Or is that just a sign of, as you said, returning industrial demand?

Yes, it's not normal.

Normally I would -- it's just -- it's my memory serving here, but as I remember the previous years, it's -- normally, we go into the fourth quarter and we're probably staying even with our backlog, because we have a big production cycle in that fourth quarter.

And the improvement would be on the industrial side not on the aerospace side?

Yes, for the most part.

Industrial and defense.

Industrial and defense.

And also, just a question on -- did you -- I didn't see the operating profit by segment breakout in the release.

Do you have those, normally provided in the 10-Q?

I don't have them right with me but we're going to be filing the 10-Q on Monday, so we'll have them.

Okay.

Any big surprises by segment or just kind of --?

No, not at all.

And -- all right, that's it for now.

Good quarter, guys.

There are no further questions.

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

Okay, well, that concludes our conference call for January 2010.

We appreciate everybody for their questions and look forward to talking with you again after our completion of the year.

Thank you.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation.

You may now disconnect.

Have a great day and enjoy your weekend.