Regal Rexnord Corp (RRX) 2008 Q3 法說會逐字稿

Good morning. My name is Marcy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Regal-Beloit third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Barta, you may begin your conference.

Thank you, Marcy, and good morning, everyone, and l welcome to the Regal-Beloit third quarter conference call. Joining me today are Mark Gliebe, President and COO, and Henry Knueppel, Chairman and CEO. Before turning the call over to Henry I'd like to remind you that 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 inherit difficulties in predicting future results and actual results to differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please prefer to today's earnings release and our filings with the SEC.

Now I'll turn the call over to Henry.

Thank you, Dave, and welcome, everyone. Thank you for your interest in Regal-Beloit. We will follow our normal agenda. I'm going to make a few opening comments and Dave will cover the financial aspects of the quarter, Mark will talk about the products -- our products and markets and operations, and then I'll make a few comments regarding the look forward. While we are clearly operating in a turbulent environment we are extremely please to announce yet another record quarter. Our teams deliver excellent growth in our power generation and industrial motors businesses, as well as solid growth in our power transmission and international businesses. We also achieved another stellar quarter of operational performance, which yielded strong productivity improvement, and we achieved earnings accretion from the successful integration of the acquisitions we completed over the past year. We achieved these record results thanks to our strong fundamentals lead by our growing diversification in international markets and strong product platforms that benefit from substantial replacement opportunities and growing demand for energy-efficient products.

In addition, we continue to ramp our Company into a lean enterprise. While we have a long journey ahead of us, the results are now becoming clearly visible in all aspects of our Company and we are driving costs out of business while improving our operational execution. However, like most companies, we are not immune to the economic headwinds to continued to strengthen during the quarter. The most significant headwind was commodity cost increases, which totaled $29 million for the quarter. While we achieved significant price increases, the combination of timing and capture rates created a net negative impact of $13 million. Secondly, the overall HVAC market, which was down 8%, continued to negatively impact our business. However, we are very pleased to report that our HVACR business, which includes commercial refrigeration, turned positive for the quarter, our first positive on a year-over-year basis in seven quarters. The improvement in revenue was driven by weather-related volume increases in July, as well as a continued shift to more energy-efficient products. All things considered the third quarter was a very good quarter for us. Without the net negative impact of commodity costs it would have been an incredible quarter.

In today's uncertain market investors are clearly asking themselves why would they want to own Regal-Beloit or any other company for this matter. We think our investment thesis is rather simple but very compelling. It's based on three key points; strong fundamentals, accelerated growth levels and significant unrealized value. Our strong fundamentals include: A sufficient liquidity and flexibility to operate in a challenging economic environment; our balance sheet is strong, with debt to total cap of 37.8% and debt to EBITDA of less than 2%; strong free cash flow in 2007 $165 million and year to date in 2008, $117 million, or 109% of net income; an unused revolver of $500 million with a bank group that can and will fund; fixed debt termed out in seven and ten years in October of 2007 at attractive rates; excellent diversity in end markets; excellent and growing diversification into international markets; strong product platforms in markets where the demand is high, due to substantial replacement opportunities; and lastly, an experienced management team tested under some of the most challenging environments and attuned to running a tight ship with a focus on operational excellence, cash flow optimization and physically responsible spending controls.

Our level -- levers for accelerating value growth include: A global selling platform and manufacturing platform; an unmatched suite of energy-efficient products that provide short cycle payback and substantial long-term benefit; an experienced management -- an experienced lean, Six Sigma company with solid history of demonstrating in -- and improving productivity; recent acquisitions that open up new markets, expand our presence and market share, and provide significant cost out opportunities, and a strong track record of quickly and successfully integrating acquisitions, yielding significant synergies, earnings accretion and return on investment while maintaining a flexible, healthy balance sheet. Finally the significant unrealized value is driven by strong cash flow generation that allows us to create sustainable shareholder value by consistently funding our dividend for 194 consecutive quarters and a high return on investment -- and high return-on-investment initiatives, such as our research and development that generates substantial profitable growth. When factoring in the upside opportunities as just discussed with the context -- within the context of our current valuation, which is low by historical and current industry standards, we think our investment thesis is sound for the near and long-term.

Now let me turn the call over to Dave Barta.

Thanks, Henry. Given that we put more of an emphasis on including more information in the release and published the release last night I'm going to spend less time on the results by just touching on the highlights of third and fourth quarters, then spend a little more time on debt and liquidity given recent events in the financial markets. First, on the highlights of the third quarter, we had a solid third quarter from a sales perspective, with volumes slightly above our expectations. We saw solid results as noted in release for almost every business unit. Overall, organic sales increased 10%, in part due to price, but also driven by the favorable mix of energy-efficient products and volume.

A further breakdown. Commercial and industrial motor sales in North American increased 9.1%, which compared to 4.6% in the second quarter. Generator sales increased worldwide 25%. And sales for the HVACR business, as Henry mentioned, were also positive for the first time in many quarters. Sales in the mechanical segment increased 5.3%. I should add that we did reclassified approximately $2.7 million of sales from the electrical group to the mechanical group for the third quarter of 2007, as a result of transfers of certain products sales to the mechanical segment from the electrical segment. As mentioned in the release our sales outside of the US were 26.8% of total sales versus 19.4% for the third quarter of 2007.

And excluding the acquired sales, sales in Europe increased 16%, Canada 4%, and Asia 8.5%. Sales in Asia were again impacted by the loss of the business that we discussed in the second quarter. If we exclude that issue our Asian sales would have increased 24%. High-efficiency product sales increased to 13.6% of total sales, which excluding the acquisitions was a 28.4% increase. To clear up any questions we have includ -- we include in the high-efficiency category all motor and mechanical products that offer an efficiency advantage; example, high-efficiency HVAC motors, [Nema] premium and other high-efficiency industrial motors, high-efficiency commercial refrigeration motors, high-efficiency generators and high-efficiency gear products.

Gross margins for the quarter were once again pressured by material cost inflation, with material inflation exceeding the impact of pricing by approximately $13 million. This gap reflects the steel cost that continued to rise in the third quarter and will increase again in the fourth quarter, and increases in copper and finish good purchases and component purchases. The gap also exceeded the top end of our guidance on both the price and cost side of the equation. The tax rate for the quarter was 36%, which was above our guidance. While he we did receive the benefit of the repatriation of profits from one of our foreign subs that we had included in our guidance, this benefit was offset by the distribution of income between certain foreign-based businesses and higher tax locations, such as the US.

Turning to the forecast for the fourth quarter, our EPS guidance as presented in this morning's release is $0.67 to $0.75 per share. Through October the order rate was holding up well. That that being said, we are certainly in interesting times. For the fourth quarter sales are expected to be in a range of $535 million to $550 million including the impact of the Dutchi acquisition. Because of continued increases in steel and the fact that we will not see much relief in copper prices we are expecting the material price gap to be in the ranch of $6.5 million to $8.5 million. We're using a tax rate of 36.2% for the fourth quarter, which includes the continued unfavorable distribution of income that we've seen over the past two quarters netted against the positive benefit that we'll receive from the Federal R&D tax credit, which has been extended retroactively to January 1, 2008. We are forecasting capital spending to be approximately $10 million to $15 million in the fourth quarter, resulting in full-year CapEx of $54 million to $59 million. And we'd expect depreciation and amortization to be very similar to the $15 million reported in the third quarter.

Overall we continue to remain as confident as we can be in these times. We believe that our global commercial footprint, portfolio of energy-efficiency products and innovation capabilities will all continue to fuel the top line as markets get more difficult. As well our approach to productivity, including lean Six Sigma, our global manufacturing footprint and the opportunities that that presents, and the fact that we're already addressing avoidable expenses will be a support to margins lessening the impact that market softness may have on the Company as compared to prior slow downs or soft periods.

Finally I'd like to spend a few minutes to talk about our debt and liquidity position, a topic that's certainly very important in today's market. We ended quarter of $571.2 million of debt, which is only slightly above where we were at the end of '07 and at the end of the second and includes, obviously, the funding of the Hwada acquisition we completed in Q2. Net of cash our current debt was $457.5 million. To give some clarity on the composition of the gross debt amount, at the end of the quarter we had $165 million in a term loan completed during the second quarter of this year, which is a floating -- which are floating rate notes due in 2013. We had $250 million outstanding under the private placement completed a year ago. There's two tranches; $150 million due in 2014 and $100 million due in 2017. Both of these have been swapped to fixed rate. We have the $115 million in convertible notes that were issued in 2004 and are due in 2024. And we only have $13 million outstanding on our $500 million revolver. That revolver we established in the spring of 2007 and it's due in 2012.

To look at this at another angle, 97% of our debt is classified as long term and 68% of the outstanding debt at the end of the quarter was at a fixed rate with 32% at a floating rate. And our average interest rate weighted at the end of the quarter was 4.8%. From a covenant standpoint we have two primary covenants; debt to EBITDA and interest coverage. At the end of the quarter our debt to EBITDA was 1.9 to one when compared to our covenant of 3.75 to one and interest coverage was 10.5 to one versus the covenant of three to one. To touch briefly on the revolver, I mentioned that we had $13 million outstanding at the end of the quarter. That leaves us $487 million at the facility at the end of the quarter. We have a solid group of banks participating in that revolver and no significant concern about their ability to participate in funding, although a couple may certainly have new homes after the current bank mergers are complete. But to summarize we feel extremely good about our debt structure, including rates and maturities, and our ability to continue to fund projects that will drive shareholder value into the future.

Now I'll turn the call over to Mark.

Thanks, Dave. Good morning. During the third quarter we experienced sales growth in almost all segments. In spite of continuing difficulties in the housing segment and in the overall economic uncertainty the majority of our businesses delivered attractive top-line growth. During the third quarter we experienced sales growth in our mechanical businesses, up 5% from the third quarter of 2007, and in our commercial industrial motor businesses, up 9%. Additionally, we saw continued strong growth in our global generator businesses, up 25% from the same period in 2007. Robust growth in our generator business came from both China and North America. In HVAC our sales were also up for the third quarter, driven by two catalysts. First, we are seeing a continued demand shift to our more energy-efficient products that we offer both in the HVAC segment and particularly the new products we launched last year in the commercial refrigeration segment. Second, we experienced much stronger demand in our HVAC market as a result of our more focused efforts in that segment.

In the very beginning of the third quarter we spent a considerable amount of time raising prices to offset steel inflation that had a significant impact on our margin. By the end of the quarter we raised prices in every segment of our business. One of our main challenges, however, was the timing of our price increases as compared to the timing of the steel inflation. The delay in our price increases put real pressure on overall margins. We were able to offset a portion of this margin erosion by aggressively driving productivity in all of our manufacturing facilities, and I'll touch on that area more in a minute.

As you know, we have been working diligently to maintain and expand our leadership position in energy-related products. During the second quarter call we talked about the increase in demand for our new generators serving the refurbished locomotive market. We continue to ship our initial orders for these new generators and we are optimistic that the locomotive refurnishment segment will result in continued growth in 2009 and in 2010. During the third quarter we took our first order of yet another new product from our generator business, the new 1040 frame generator. The 1040 frame now represents our largest generator and produces up to 3.8 megawatt of power. This leading-edge generator marries up to a 20 cylinder diesel engine and allows the gen set end user to optimize the cost of their gen set power array. The customer interest in this product has exceeded our initial expectations, and we will be showcasing the 1040 frame at the Power-Gen Show in Orlando in December of this year. Our new product focus continues to be around energy efficiency and energy related technologies. We have a strong pipeline of innovative new products that will allow our customers to reduce their system costs through the use of more energy-efficient technologies. We plan to launch these new products in every quarter over the next five quarters.

From an operations perspective, we are delivering significant improvements in our factories. Both our customers and our shareholders will continue to benefit from design platform consolidations, product transitions to lower-cost locations, and the implementation of lean in every facility. During the third quarter of 2008 we took three more critical steps to improve our operations. First, we transferred over 300 motor models from our Missouri facilities to our Juarez, Mexico facility. Next, we moved the production of our transfer switches from Langley, Ontario to our Monterey one facility. And third, at the tail end of the third quarter we started up our Monterey two facility and began the transition of our smaller integral motor out of our Wisconsin facility to Monterey two. We will continue to deliver productivity improvements by driving the Regal-Beloit operating system. This means a rigorous discipline around finding lower-cost approaches every year. It means establishing a lean culture at every location and it means having a global footprint to take advantage of low-cost regions. The result is that we will continue to provide excellent service to our customers, while improving the return from our operations.

In August, we also implemented three significant IT projects that took us one step closer to our ultimate goal of putting the Company on one single IT platform. First, we transitioned our Marathon Motors business from our legacy IT platform to our common Oracle ERP platform. This moves gives the Marathon Motor business the necessary IT tools to better plan and manage their inventory and production. Additionally, Marathon Motors now has the capability to transact business in an on-line customer friendly environment. Second, we established a data warehouse that allows us to aggregate information across a number of brands. And finally, we improved our logistics operation in Indianapolis through an implementation of a new warehouse management tools. This also gives us the capability to better serve our customers while more effectively managing our cast assets. These progez -- projects were investments that we made for long-term growth of our existing brands and businesses. We are now better positioned to improve our operations and to more efficiently and effectively service our customers.

In September, we were very pleased to announce the acquisition of Dutchi. Dutchi is a $70 million motor distributor located in the Netherlands. While we already have sales of $50 million in Europe today, the Dutchi acquisition gives us a Pan European sale force that we can leverage to get a better foothold in this important geographic region. Additionally, Dutchi has sales offices in Singapore, Malaysia and Indonesia. These various geographies hold promising growth opportunities for our businesses and we are eager to expand our products and services to new customers in these under-served markets. We are currently in the process of integrating the business and we are very excited to have Cutchi as part of our Company.

In summery, we were pleased with our execution in the third quarter, which lead to record results for our shareholders and our employees. For the past several years we have been driving a performance culture around innovation and operational excellence throughout our organization. Our teams have done a great job of implementing these strategies, as our record demonstrates, both in this quarter and in the last several quarters. As we move into the fourth quarter we are optimistic that it will be another opportunity for the RBC team to prove to you that we can consistently perform even in the most difficult economic environment.

Back to Henry.

Thank you, Mark. As we look at the fourth quarter, the landscape has changed and not necessarily for the better. The fact that our order rates have held up and we have great new products and new market opportunities, doesn't change the fact that we, like all businesses, will be impacted by the economy. We have fully felt the brunt of the housing market over the last two years and we will be impacted by what happens in the North American and Asian industrial markets in the months to come. Fortunately, the housing market led the downturn and is likely to lead in the upturn, thus turning a recent disadvantage into a future advantage. We will face additional headwinds from materials in the fourth quarter. Despite the fact that copper prices have fallen we will get little benefit due to our disciplined hedging processes. Further, steel will not come off as a tie for us during the quarter, and in fact, we will suffer an additional hit from reduced scrap prices. We will, on the other hand, continue to gain from productivity improvement process and from additional synergies from recent acquisitions.

Of all these puts and takes the big swing is the general industrial economy, which unfortunately offers less clarity than at any time in the last the five years. As we speak order rates remain solid. Our fourth quarter projection of $0.67 per $0.75 per share represents a normal seasonal sales curve, a known continued materials cost escalation, offset to a significant degree by excellent operating performance. While there is not great clarity in our markets, we can see that credit markets are beginning to free up. Additionally, we see promising growth in Asia and there's still need to improve efficient in residential and industrial applications. We have an outstanding team of people that have been delivering excellent results all year against significant headwinds, and they will continue to capitalize on the opportunities in front of us. We believe that to the shroud investmer -- to the shroud investor this is a time of opportunity, and we believe that we have strong fundamentals, accelerating growth levers and a great value proposition to offer. We believe that the time immediately ahead offers some added risk, but also incredible opportunities for companies and investors that are prepared. We are confident in our ability to navigate these uncertain time effectively and efficiently.

And with that, we will open for questions.

(OPERATOR INSTRUCTIONS) You're first question comes from the line of Mike Schneider with Robert W. Baird.

Good morning, guys.

Good morning Mike.

Good morning.

Maybe first we can just start with the order rates comments. Henry, you've mentioned that they've held up, but can you give us a sense is that inclusive of price or maybe just some clarity as to what actually unit trends have done through the third and then through October?

Sure. The -- as you look at unit volumes we would have to say that, in the industrial marketplace and industrial and commercial markets that we participate in, unit volumes have been relatively flat through the last quarter, and as we're starting into the fourth quarter. Certainly HVAC has been negative in unit volumes, mix has been helpful and particularly commercial refrigeration has been helpful, as well as, I think, a very significant replacement market. When you take a look at power generation, unit volumes are up strong.

Okay. When you say commercial industrial was flat, you mean flat in units or flat sequentially at same growth rate?

Flat in units, and in terms of sequentially we always -- there is a seasonal trend. As you know, from past years we'll see a normal seasonal trend for fourth quarter.

Then you're guidance for Q4, are you assuming those trends continue into Q4 or have you assumed a deterioration in unit volumes from those levels?

Right now based on our order rates we would say it's going to be a normal seasonal kind of quarter.

Okay. And then distributors versus OEMs, do you get a sense that distributors have destocked during the quarter or they will during Q4 based on their commentary?

We saw some destocking, I would say early -- well, late last quarter in the second quarter and early in the third quarter, but at this point they seem to be pretty steady.

All right. And then on the hedging, Dave, you mentioned -- so a $13 million net impact on materials this quarter did I hear you correctly that the net impact is $6.5 million to $8.5 million in Q4?

Correct

Okay. So the headwind is fading, at what point do the lines cross? Is it Q1 or Q2 based on current spot prices and you're hedge position?

Well, let's make the assumption that current spot prices hold and we would have to say that the fourth quarter is probably the peak, but it will not come off of that very quickly.

So are you -- can we put some numbers around it? Are you hedged for half your copper needs in '09 or something less than that, and then steel, as well?

Well, I think Mike, the way to think about it really is we will see -- the fourth quarter actually will continue to be a headwind. First quarter steel will be a headwind on a year-over-year basis. Copper should start to be a small plus. And then in the second quarter, if things hold with the way they're going right now, we would expect to see a tailwind and by the second half we would be gaining full advantage of, of whatever the costs are.

And have you actually seen your surcharges on steel and list prices on steel begin to decline?

No. Unfortunately what we are seeing is scrap prices decline, so it's more of a -- it will be a bigger negative in the fourth quarter.

Okay. And then if you can, just revisit the last recession for us, because investors are focused on basically what's happened at each specific company during the last recession, and I think it at least bears some time to emphasize what's new or different this time versus what occurred in 2001, 2002. Because margins at that point in electrical went from 11.5 to 7.5 -- call in round numbers -- so about a 400-basis point decline. What was -- you laid out what you've been doing in the past 12 months and even most currently with the business, but can you describe what may have been different in 2001, as well, just about the timing or the path of that recession versus what we have today?

Sure. I'll try, at least. I'll start and let Dave and Mark jump in wherever they would like. First of all, the recession in 2001 was a North American manufacturing industrial recession and we were a North American manufacturing industrial company. So -- and arguably, the capacity utilization rates in that recession were the worst they've been since the depression. So it was a broadside at us at a time when we were pretty much single market oriented. Today, as Dave talked about, we're nearly 30%, with Dutchi, I think, a little over 30% of our sales are outside of the US, number one.

Number two is the platform that we manufacture on is no longer a US platform. Over 60% of what we produce is in a low-cost region. And if you take a look at even the markets that we are in within North America, we're not single market, we're in (inaudible) diversification, so I think those are big differences. The global platform that we produce from today gives us continued opportunities to reduce cost. Mark mentioned some of the things that are going on during the quarter. This is a very active program, has been all year, has been for two or three years and will continue. So as you take a look at some of our lower-cost region locations, and the fixed cost as a percentage of our total cost is lower, so our ability to respond to changing demands is, perhaps better than it was when we were just US focused. Any other -- I think the only other -- well, I think those are the key points, Mike, that I would make.

Okay. Thank you, guys.

Thank you.

You're next question comes from the line of Andrew DeAngelis with KeyBanc Capital.

Hi guys.

Hi Andrew.

Just want to hit back on this price cost dynamic. I think coming into the quarter you talked about a net headwind being more in the range of being $3 million to $5 million million and it coming in at $13 million is clearly a sizable delta versus your initial expectations, so I'm just -- I guess I'm wondering where that $9 million net change versus your initial assumptions came from? I know you mentioned timing on the price increases, was it more on the pricing side or was it more where the cost fell out?

It was on both, and on the price side, as Mark mentioned, it's a difficult environment. We've said repeatedly, price is something that, that we don't rush out and try to figure out how to execute price first, but certainly it's a discussion we have to have, and that's a tough discussion from our standpoint and certainly from the customers, so on the price side, timing was a problem. And on the cost side, where we had a good handle on steel costs and copper costs coming into the quarter, I think we experienced more inflation on purchased products, whether that be a complete product or components, given again the pent-up impact of material and cost inflation on those suppliers to us. So it was more of in those areas and again on a worldwide basis. This is something that we're seeing the commodity cost increases roll through all of our businesses around will world, so a little bit -- I guess a surprise there. And as Mark said, timing more than anything on the pricing side.

Got you. And then how comfortable do you feel with your estimate at this point of $6.5 million to $8.5 million for the fourth quarter? Do you feel that you have the pricing in place in terms of meeting that range or --?

Yes, we do. We've -- obviously, when you have a number that you put out in guidance and you're not there you spend a little more time with it, so at this point with the visibility we have into the different variables we're comfortable with that guidance.

Okay. And I guess overall, just looking through the release, hearing you guys on the call today, things sound relatively more positive versus maybe some of our other motor competitors. I'm just wondering what you're seeing out there in the way of competitive dynamics, particularly with some of your competitors more highly levered?

Well, I think from a competitive standpoint, North America has a pretty rationalized set of competitors. They're all good quality companies and good competitors in every sense. We may have a more diversified set of end users, which may give us a little bit more comfort, but I would be hard pressed, I think, to come up with a lot of other reasons why there'd be big differences.

Okay. And then I guess just last question for me, any changes in terms of the acquisition landscape, and your intentions with respect to acquisitions here in the near term?

Well, we continue to have our head up and looking at what the opportunities are. We are not in a hurry. Certainly in the environment we're in, we want to be cautious, frankly, from a cash standpoint and, and a leverage standpoint, but we do think that there will be some pretty good opportunities that will come available during the course of this cycle and certainly we have a pipeline that has some good opportunities in it, so we're going to continue to watch that very, very closely and going to be cautious but not closed for business.

Super. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) You're next question come from the line of Christopher Glynn with Oppenheimer.

Thanks, good afternoon.

Good afternoon.

Just, looking at the volumes a little bit more closely, did you notice any buying ahead of price increases in there at all?

I would say that as we were increasing price, we always give our normal 30 or 60 days lead time, and I would say there was some activity in the July timeframe where we saw some of that behavior.

Okay. That probably came back within the quarter then?

That would be correct.

Okay. And then the energy efficiency really seemed to accelerate versus 2Q. Just in terms of understanding the dynamics around that, was that just a good season or did your share gain accelerate there? .

Well, as, I think Dave talked a little bit about the growth rate in energy-efficient products. We have a tremendous array of energy efficient products and we've been pouring R&D dollars into that the last few years and our teams have really great job of understanding what the markets require and how we can add real value. So we're very positive about where we're headed with that and we believe that, frankly, almost regardless of what the economy does, the need to reduce cost through better efficiency of energy usage is going to continue to be a critical component. So we're pretty bullish on what those opportunities are, and they are growing and they're growing strong double-digit rates.

Okay. And then just on the operating expenses from the acquisitions, good detail on the gross margin differential in the press release, can we get at the overall operating dollars or performances of the acquired sales?

I'd just -- not in the release, but I believe all the acquisitions came in around -- I don't have it in front of me, but I want to say about a 7% Op margin, plus or minus a little bit.

Great. Thanks a lot.

Thank you.

You're next question comes from the line of Nigel Coe with Deutsche Bank.

Hi, guys, good morning. This is actually Nicole Siblas asking questions on Nigel's behalf..

Morning, Nicole.

A couple for you. It looks like your inventory levels spiked quite a bit in the third quarter, is that just normal seasonality or is there anything else we need to worry about there?

No the inventory levels did come up a little bit in the third quarter but nothing out of the ordinary.

Okay, got it. And was there a favorable impact to gross margins on the back of that?

Again, nothing significant.It was, again, more normal production, so nothing of any significance.

Okay. Okay, got it. And then was there any impact on third quarter power and demand due to hurricanes?

I would say that there was limited improvement in our business because of the hurricanes. We had a little bit in -- with the hurricanes if you have the product in inventory you're going to sell it at the time that the hurricane hits, and it comes in two flavors. One, to provide back up power -- or emergency power, and then two, some people buy them after the hurricane comes because they feel a little naked. So we did see a little bit, but I wouldn't say it was a significant driver.

Okay, got it. And then one last one for you. On the mechanical side, mechanical power transmission was obviously very strong. How much of that was pricing?

We would say unit volume was relatively flat.

Okay, great. Thanks.

You're next question comes from the line of Holden Lewis with BB&T.

Hi, Holden.

Hi. Good morning -- or good afternoon now. Thank you. I just wanted to get a little bit more color on the revenue. If you look at your organic trends, proceeding Q3, the six prior quarters, you really have been low single digits and then in Q3 it really popped up into the low double digits and then you're kind of looking at low to mid single digits again in Q4. I guess I was wondering also if there was some hurricane effect. I guess also HVAC improving way the way it did, does it that look durable or does it appear that maybe there's some units being built up ahead of new refrigerant rules or -- it just seems odd to have gone from so flat to such a big number and then assuming it goes back toward trend again. I'm trying to get a feel for the moving pieces there?

Well I'll comment on the HVAC side. There is -- we don't believe there's any build up going on because there is no near-term legislation that would affect a build up going on there. In terms of our products, as we commented, there were -- it was a shift to the -- to a better mix of energy-efficient products, both in the HVAC segment and in the commercial refrigeration segment. On the commercial refrigeration segment that's a new product that we launched last year that's gaining some traction supported by energy legislation in California and the rest of the US. And then -- and we also saw some lift in the after market, during the quarter, most likely as a result of people tending to repair HVA systems -- C systems as opposed to replacing them.

I think another comment on HVAC. If you recall, we left the second quarter with a pretty strong HVAC market driven by primarily by weather. It ended up finally getting hot and as we said in our call for the second quarter that continued into July, so I think there was a little bit of a favorable weather impact late second quarter, early third quarter, as well. But at this point there is, as Mark said, very efficient customers and very efficient distribution channel where they won't hold extra inventory if it's not needed.

Okay. And the reason you see it coming off in Q4, the growth rate, is just because of the absence of the weather or is there anything else that contributed to that?

No, as you probably know in the thir --, fourth quarter is normally our seasonal low in HVAC segment so nothing different from what we've experienced in the past.

And certainly beyond the HVAC piece there's the rest of the story, and I think generators had just an outstanding quarter, up 25% worldwide. That's at the higher end of what we've seen. If you go back, certainly we've had some quarters above, but our normal view is that business is probably more of a plus 10% to 20%, so they had an outstanding quarter, and don't see quite that strength repeating in the fourth. And on the commercial industrial side our view, again, beyond the seasonality is that whether a recession is there or whether we've talked ourselves into it, it's probably going to be a little more cautious market conditions starting in the fourth quarter and moving forward.

Okay. And then you talked a little bit about the -- some of the organic metric, but do you have a sense of what the acquisitions wound up contributing at the bottom line?

And again, I didn't bring that in. For sales numbers out in the gross margin, again, I think the Op margins was somewhere around 7%, so I didn't run that down to an EPS contribution.

Okay. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) You're next question comes from the line of Bill Dezellem with Tieton Capital Management.

Thank you. Circling back to the fourth quarter -- and you may have already a tested this bit I'm going to try just from a little different angle -- to what degree do you have visibility into the sales for the fourth quarter versus really a need to step back and, and make an assumption about how difficult the economic environment will be and then apply that to your business?

Well, we don't have fantastic visibility. About 70% of what we ship in a month we book in a month -- book that same month. So we don't work off of long lead times and big backlogs. That said, October is pretty much done, so we can say that our current order rates are continuing to be what we would have expected in the fourth quarter. But we don't have a crystal ball that will look that far forward.

Thank you.

You're next question comes from the line of [Sherap Patel] with Jefferies & Company.

Hi, I wanted to cover just the operations real quickly and just the efficiencies you've been getting from that. Can you quantify the amount that you might have been picking up from just the initiatives throughout this year and what the expectation is then for the full year?

We haven't broken that out separately, and I think at this point we probably won't. I think the one data point maybe we have given just on the lean Six Sigma is that over the first couple of years it was a $30 million benefit as far as cost take-out across the board, but beyond that, haven't discussed any gross numbers on productivity.

Okay. And then on the acquisitions, we've discussed the operating -- I'm sorry, the gross margins were below the rest to business, what's your expectation for where you can get that up to and over what time period?

When we completed the, the major one last year, we said that we thought over a three-year period we could get them up to our Company average and at that time our Company average was in the 11% to 12% area and we got a piece of that in year one, which we did get, and met or exceeded what we said we would do. The remainder has to do with platform consolidations and those take longer.

Thanks, well I appreciate the color.

-- the schedule over the next two years to hit the number that we talked about.

Thanks a lot.

You're next question comes from the line of [Ryan Wick] with Systematic Financial.

Hi, this question is for Henry, Dave or Mark. You mentioned that the credit markets are freeing up, just wondering, what your hearing from your customers with respect to that? And thanks, that's my only question.

I don't think we've been hearing a lot from customers per se. We didn't see customers get locked up in general, but I think it's more coming from our discussions with other companies and in the general marketplace, whereas a month ago I would say it was reasonably frightening to have some of the discussions about what was going on and what banks were doing and not doing. I would say today that thing are starting -- what we see and what we hear and what we hear out of our banks and our discussions with them and what we hear out of other people is that credit is certainly more expensive but it's available, and banks are lending.

Yes, we've met with the majority, Ryan, of our banks obviously with a self interest, but certainly understanding how that impacts our business, although, people generally aren't financing any of our particular products. They obviously will be financing what our products go into, whether that's a large piece of capital equipment or a home HVAC system. I think it's gone from a period of what I would describe from our viewpoint of complete chaos, where really even the lenders didn't even have an idea what their cost to funds were going to be and how to price things, what kind of credits they could look at, to where I think there's been some stability re-enter as far as from an availability and pricing perspective. And I think certainly they're taking a hard look still at the credit quality of the borrower. At least a couple of the variables I think are starting to stabilize a bit, and we think are positives as far as our customer's ability or the end users ability to financial a purchase with our product in it

This's great. Thank you.

Take one more question.

You're last question is a -- it comes from the line of Andrew DeAngelis with KeyBanc Capital.

Hey, guys, I just want to follow up real quick on the scrap steel issue. I was wondering, did you see any negative impact from that in the third quarter and what is implied within that $6.5 million to $8.5 million net headwind in terms of scrap steel in the fourth quarter?

We did in the third quarter. Obviously the scrap market seemed to be a move on the front end of what the steel markets overall do, so the scrap market started declining during the third quarter and I don't have a specific number on that, but going into the fourth quarter, that is going to be a couple million dollar roughly hit to the Company, just because again, the scrap prices are down, but our raw steel purchase costs are still up.

Is that something that you look on a net basis after looking at your steel purchases or is that something that you break out separately?

It really -- it hits on different lines of P&L, if you will. The scrap cost, obviously net of recoveries, is reflected as scrap at the manufacturing location, and the purchases are inventory and material price variance, so it is something that is somewhat separable and separated in our financials.

Got you, thanks for that color.

Okay.

Okay. I want to thank everyone for joining the call and for you're interest in Regal-Beloit. As you know we are in the midst of turbulent market conditions and economic uncertainty, yet in spite of the challenges we face in the short term we remain confident in our ability to deliver strong results in a difficult market. Our great market diversity, continuing focus on innovation and expanding global footprint have us excited about the future. We will continue to take the steps necessary to remain the market leader in our industry and provide great value for our customers and shareholders. We appreciate your continued interest in our Company and we look forward to talking to you again at the end of the year. Have a great day.

This conclude today's conference call. You may now disconnect.