Regal Rexnord Corp (RRX) 2011 Q3 法說會逐字稿

Good morning and welcome to the Regal-Beloit conference call. (Operator Instructions). I Would now like to turn the call over to Mr. John Perino.

Thank you, Valerie. Good morning, and welcome to the Regal Beloit 3rd quarter 2011 earnings conference call. Joining me today are Mark Gliebe, President and CEO, Jon Schlemmer, COO, and Chuck Hinrichs, VP and CFO. 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 these factors that could cause actual results to differ materially from projected results, please refer to today's earnings release in our filings with the SEC. On slide two, we mentioned we are presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit and an adjusted gross profit as a percentage of net sales and free cash flow. We believe that these are useful financial measures for providing you with additional insight into our operating performance. Please read this slide for information regarding these non-GAAP financial measures and please see the appendix where you can find reconciliation, of these measures to the most comparable measures, in accordance with GAAP. Now I will turn the call over to Mark.

Welcome, everyone. And thank you for joining the call and for your interest in Regal Beloit. We will follow our normal agenda, I will provide a few opening comments. Chuck will give a financial update. John will add color on products, markets and operations, and then I will summarize and we will move to Q&A. Overall, we felt good about our operating performance for the third quarter. Excluding both the gain on the divestiture of our pool and spa business as well as the impact of the purchase accounting charges from the acquisition of EPC, we exceeded the high end of our guidance. Chuck will go over the details of why our performance exceeded our guidance, but the bottom line from an operating perspective is that a number of our businesses including our newly acquired EPC business performed well in the quarter offsetting weakness in our HVAC segment.

With regards to the EPC acquisition, we owned and operated the business for 40 days during the quarter, and as I mentioned the business performed well. As you know we had a long wait between announcement and close. We used that time very wisely and we were ready on day one. We are now deep into the integration process working on mining synergies while rationalizing products and platforms, and we are on track to meet or exceed our expectations. John will add more color on the entire process, but given that this is the largest acquisition in the company's history, we are very pleased with our progress. In terms of our operating performance during the quarter, again excluding the acquisition related charges, we had a record quarter in terms of revenues, EPS and cash generations.

We saw strength in our C&I, Mechanical, International, and EPC businesses offsetting head winds in our HVAC business that were related to the R-22 dry ship mix shift as well as the reduction and high efficiency consumer incentives. Free cash flow in the quarter was $61 million, representing 133% of net income. Following past practices, we will be using the cash to de-lever our balance sheet and position the company to again pursue strategic M&A opportunities. Excluding the acquisition related IM's, our margins continue to climb in the quarter, and we would expect to see further margin improvement from the acquisitions as we implement synergies and drive improvements in the business.

As for the highlights in the quarter, obviously the EPC acquisition and integration is an important accomplishment for the company. Next we were pleased with the strength in our C&I, Mechanical, International and EPC businesses. We had great, strong free cash flow in the quarter and we had a stream of new energy efficient products that will fuel our future growth. And finally the combination of price increases that we announced earlier in the year as well as productivity improvements helped us fully offset inflation for the quarter. With that I'm going to turn it over to Chuck.

Thank you, Mark, and good morning, everyone. Let me start with the reconciliation of our third quarter 2011 GAAP earnings per share to adjusted earnings per share. Our GAAP earnings were $1.13 for the third quarter. During the quarter we closed on the sale of the pool and spa business with a gain of $6.5 million or $.10 cents per share. Also during the third quarter we expensed a total of $17.4 million or $.30 cents per share related to the EPC acquisition. The break down of the $17.4 million is shown on the bottom half of slide 6. Deducting the gain and adding back the EPC acquisition expenses results in adjusted EPS of $1.33 for the third quarter.

The adjusted EPS of $1.33 is well above the third quarter guidance we provided. The next slide provides some color on our better than expected performance. Let me first say that it will be more difficult to dissect our results into the EPC results and the RBC results because the businesses are being integrated, and we are working as one company. First let's discuss the results of EPC. The third quarter included only 40 days of EPC's operating results, making it difficult to forecast this stub period. We estimated that EPC would be break even to a modest loss in the quarter, excluding the purchase accounting adjustments and acquisition costs.

Excluding these expenses, EPC performed well above our expectations. The principal drivers to EPC's performance were improved sales mix and lower operating costs than forecast. And looking at RBC's third quarter results, our C&I business produced higher sales and operating profits. The combination of the strong performance of EPC and the C&I businesses provided the majority of our performance above expectations. We also implemented cost and spending controls during the quarter which started producing benefits. Our gross margin was higher than expected as we benefited from foreign currency gains as the dollar strengthened late in the quarter. And some commodity prices such as copper declined in the quarter.

As we have discussed in the past, we follow a disciplined approach to commodity hedging so the majority of our copper purchases were hedged in the quarter, but we did realize a slight benefit from the declining spot prices for copper. These better than expected results more than offset the weakness in the HVAC sales we experienced in the quarter. On slide 8 we provide some additional financial highlights. Our sales growth of 24.7% compared to the prior year was principally due to including sales of EPC and the other acquired businesses. Higher prices in the quarter provided some increase in sales and foreign currency translation provided a 1.8% gain to sales. Moving to the right on this slide, our adjusted gross profit was up 140 basis points to 25.8% of sales in the quarter.

The margin expansion resulted from improved pricing and productivity gains which exceeded cost inflation. As mentioned earlier, we added the EPC inventory purchase accounting adjustments or adjusted gross profit. And we continue to generate synergies from the acquisitions made in 2010 and 2011. In the lower left quadrant we provide some additional operating data from our third quarter results.

In the lower right quadrant, we discuss our free cash flow results. In the third quarter we generated $61.5 million of free cash flow or 133% of net income in the period. We are focused on producing free cash flow for debt reduction and incremental shareholder value. On slide nine we discuss our fourth quarter guidance. We project our adjusted earnings per share for the quarter to be $0.67 to $0.73 per share. This guidance includes EPC results, but excludes approximately $15 million or $0.25 cents earnings per share of inventory purchase accounting adjustments at EPC.

We expect lower sales volumes in the fourth quarter due to three drivers. First is continued weak demand in the HVAC business. Second issue is slowing sales in China. And thirdly, as we discussed on our last call, the fourth quarter is seasonally the lowest sales quarter at EPC. Commodity costs are moderating and should provide some lower cost inflation in the fourth quarter. Spot copper prices should be lower in the quarter. Steel prices in the fourth quarter will be higher than the prior year, but will be lower than experienced in the third quarter. Both of these will provide a modest cost reduction on a sequential basis. Now I will turn the presentation over to John Schlemmer.

Thanks, Chuck, and good morning, everyone. During the third quarter of 2011, we experienced strong double digit sales growth over the prior year period in our mechanical businesses, our North America Commercial and Industrial businesses and also our Asia businesses. The strength we have seen in the prior six quarters in our North America Commercial and Industrial businesses continued through the third quarter with sales up nearly 15%. Sales in our Global Generator business also grew by 31%. Our Mechanical businesses continued their strong rebound in the quarter with 10% sales growth.

The growth in these businesses is driven by a combination of demand in these later cycle businesses, new energy efficient products and pricing actions to offset commodity inflation. Sales outside the U.S. grew by 44% and represented 36% of our total sales for the quarter. The increase was driven by acquisitions as well as organic growth in many of the international businesses. Our North America residential HVAC sales decreased by 20% in the quarter. Our HVAC business has experienced tough year-over-year comparisons. As you think back to the third quarter of 2010, we were struggling to keep up with the demand that was created by both the federal stimulus and the R410A conversion. Now compare that with today where the stimulus has been significantly reduced and more systems are being repaired with R-22 condensers.

The resulting motor demand has been reduced and has shifted to more standard motors. Over time we still expect the demand for energy efficient motors to increase. The catalyst will continue to be further increases in energy efficiency regulations, consumer demand for home comfort as well as energy efficiency, and an eventual improvement in the US housing market. In the meantime, we won't sit idle. We not only have plans for more energy efficient products, but we have plans for lower cost standard products as well. Our customers are struggling through this difficult environment, and we are confident we can make further improvements in our business to support their needs. During the quarter sales of energy efficient products were approximately 15% of total sales.

Impacted somewhat by the acquired businesses while we are still ramping up innovation efforts. We continue to focus our engineering development efforts on new products, especially in the area of energy efficiency. Our goal is to launch 50 new products in 20 and we are on pace to reach this goal. During the third quarter we launched 12 new products. Today I would like to talk about two of these products. First our air moving business launched the new E-Star Water Heater Blower.

This new blower system helps our gas water heater customers to meet the energy star efficiency ratings on their products. When equipped with this blower system, the water heater efficiency can improve by as much as 17% while also nearly doubling the hot water output. The unique design also allows our customers to develop energy efficient water heaters that readily adapt to homes where traditional gravity vented gas water heaters are installed.

This is a great example of how our team can help our customers improve the energy efficiency of their products. Second our marathon team has introduced a new, energy efficient, ventilation motor for high end residential bath fan applications. The motor utilizes had cost effective ferrite permanent magnets, and a variable speed low voltage electronic control. The use of electronics enables airflow control and time delays in the application to optimize system performance. This new energy efficient motor can reduce power consumption by up to 75% over a standard motor and also operates at lower noise levels. We are excited also about applying the technology developed for this design and other high efficiency motor applications around the company. As for EPC, we couldn't be more excited about how the business is performing and the integration progress made during the first two months.

As both Mark and Chuck mentioned, the EPC business performed better than expected in the first 40 days, and I am pleased to report we are running ahead of schedule on our integration activities and synergy projects as well. The talent of EPC's leadership team is just tremendous and these leaders are now placed in key leadership roles within the company. Over the past two months we focused on meeting directly with EPC customers to inform them about our integration plans and to solicit their direct feedback. We also sent out our customer survey to over 4,000 EPC customers to baseline our performance from their perspective. The participation rate was very good on the survey and our customers have been telling us what's working well, and what needs to be improved. Our goal is to keep the focus on our customers throughout the integration process. During our call, announcing the close of the EPC acquisition on August 23rd we described our goal to achieve 35 million of synergy savings over a four year period. In just two months, we're off to a great start. Teams have been assembled to identify and implement synergy projects in several areas including procurement, logistics, manufacturing operations, engineering, and back office SG&A savings.

Over 400 opportunities have already been identified and many have already been implemented. The commercial teams have been busy identifying cross selling opportunities as well to drive growth where we can provide additional products to our customers or offer system solutions by combining our capabilities throughout the company. The integration is off to a great start and we are optimistic that we will either meet or exceed our acquisition targets. In terms of our outlook for the fourth quarter, we are anticipating that we will see continued strength from our North America Commercial and Industrial businesses, the Mechanical businesses and our India based business.

Further the EPC business will experience their normal seasonality as Chuck mentioned. The head winds for the quarter will be continued, weakness in the HVAC business, and slower than expected demand in China. During the quarter we expect to implement more synergies stemming from the EPC integration so we can enter 2012 with real momentum. Overall we had a very solid quarter. The balance of industries that we serve again allowed us to meet our third quarter guidance even as HVAC continued to slow. I want to thank our team for their efforts in the quarter. They did a great job executing on all of our objectives and initiatives getting off to a great start with EPC integration and focusing on improving our performance for our customers. With that, I will turn it back over to Mark.

Thanks, John, and to summarize and highlight, we were pleased about the performance in the quarter, especially given the weakness of our residential HVAC business. As John mentioned we are deep into the integration of EPC, and feel great about our progress and we are excited to have the key EPC leaders positioned in leadership roles throughout the company. Between our pricing actions and productivity actions we were able to cover third quarter inflation. Our stream of new products continues to roll out with an exciting energy efficiency technology for virtually all of our business.

We expect that the combination of our EPC and RBC technology teams to continue to yield energy savings solutions for our customers. Our fourth quarter guidance reflects continued strength in most of our businesses except for HVAC and our China based businesses which are both slower than expected. We expect that the final purchase accounting charges related to the EPC acquisitions will occur in the fourth quarter. And finally the business continues to generate strong free cash flow which we plan to use to de-lever the balance sheet and position ourselves for additional future acquisition opportunities.

With that we will take your questions.

We will now begin the question and answer question. (Operator Instructions). Our first question comes from Christopher Glynn of Oppenheimer & Co.

Question on the dry ship the big issue this year. How do we thing about the comparison into next year? Is it more neutral or still a headwind at least in the first half given the timing of some OEM participation in that?

Yeah, Chris, I think you're thinking about it the right way. The conversion from our customers did not all occur at the front half of the year, it was feathered in throughout the year so I do believe we will see some of that comparisons be a little tougher in the front part of the year.

Okay. And then just looking at the third quarter versus your fourth quarter guidance, you know at the mid-point it is a little better than half the third quarter adjusted. Did the third quarter have a [LIFO] benefit or anything? Just trying to understand that drop off a little better.

It was a modest benefit, not significant enough to be called out and to the extent commodity prices would continue to decline in the fourth quarter, that would be reflected in our fourth quarter forecast.

And in the guidance, what do you have North American [resi] HVAC doing? And do you look at it as a net benefit into the first quarter with the weakness running itself to some restocking?

Yeah, a couple things going on. First of all, normal seasonality in HVAC in fourth quarter tends to be weaker. We expect as we go into the first quarter we will see normal seasonality which is at the back half of that first quarter. There will be some inventory starting to build preparing for the season. But overall we are dealing with the R-22 loophole issue that is kind of making it a little bit harder to understand overall.

Got it, thanks for the help.

Our next question comes from Steve Sanders of Stevens.

Good morning, guys.

Good morning.

First I just wanted to see if you could provide some more color on what you are seeing in China?

Good morning, Steve, this is Jon. You know, in general in China we are seeing slowing in our business there, and it is really in two areas. One is primarily related to non-residential construction where we have demand for our products both motors and generators. And we are also seeing slowing demand in the residential segment. Primarily residential HVAC. Those are the two significant areas we are seeing slowing demand in this quarter.

Thanks, for that. And then a bigger picture question as we think about 4Q earnings versus 3Q. I know you called out seasonality HVAC in China. Can you rank those? Or just give us a relative magnitude on how those are impacting 4Q versus 3Q?

Well, Steve, I guess there is a lot of things going into that number. We commented on the weaker HVAC market in the fourth quarter. Some of which is seasonal. The comment on slowing volumes in China. EPC, of course, has seasonal slow down in the fourth quarter. It is the slowest quarter of its calendar year. And then below the line, we've got the higher interest expense. We've got the higher share count. And then on the positive side we will benefit from lower legal costs than we have been expensing in the first three quarters of the year. Commodity costs, as I mentioned, will be down a little bit, but because of our discipline hedging program we won't see the full benefit of the spot declines. I think those would be some of the puts and takes for the fourth quarter coming out of the third.

Okay. And then last question, I don't know if this is Mark or Jon, but Mark, maybe you can talk about how the EPC and the other acquisitions affect your ability to respond quickly if we see a significant slow down particularly in North America. Second, what is implied in your fourth quarter guidance about the domestic C&I business relative to what you have seen in 3Q and 2Q?

Well, I will answer your first question, Steve, first. I actually think we are best positioned, given the acquisitions we have done, because we can move even more aggressively if we see a significant slow down to execute synergies. If your manufacturing facilities slow down, it gives you the ability to move faster. So, I think we will be better positioned if we hit a significant slow down to take advantage of those synergies. Relative to the C&I business, third quarter was relatively strong as you can see from our press release, and while it is not quite as strong as the fourth quarter, some of it is just tougher comparisons on a year-over-year basis, and there has been some moderation in demand, but overall is pretty healthy.

Thanks very much, guys.

Thank you.

Our next question comes from Jeff Hammond of KeyBanc Capital markets.

Good morning, guys.

Good morning.

Just trying to understand the variances better. You said EPC was going to be flat to be modestly dilutive. Can you quantify what you thought the rough numbers, the accretion was in the quarter? And is there a way to quantify what the commodity and [FX] gain benefit added up to?

Well, in terms of EPC, Jeff, we tried to provide a little color, but as I mentioned as we are integrating it into the business we lose some of that ability to track that amount. As I said it is really EPC and C&I representing the majority of the improvement over the guidance on a combined basis. It is sprinkled with the foreign translation on the sales. All of the units benefit from the some improvement on the commodity costs, full realizations on the price increase. Beyond that it is difficult to provide on a penny by penny basis those improvements over the guidance. And the second part of your question, Jeff?

Yes, it is just without a little more color on the moving pieces it is hard to bridge the 3Q to 4Q which I think seems to be the preponderance of the questions. Maybe shifting gears, on HVAC what are your OEM customers telling you about channel inventories?

The feedback we are getting is the channel inventories are in pretty good shape going into the fourth quarter.

They are in good shape going into 4Q or will be in good shape post 4Q? It seems like some of the distributors and [trains] seem to be aggressively de-stocking into 4Q.

I think it is always true in the fourth quarter that your customers tend to take inventory down near the end of the year. But I don't see any significant abnormality in inventory levels or different tone from our customers than I have seen in prior years at this point in time.

Okay, thanks, guys. I will get back in queue.

The next question comes from Mike Halloran from Robert Baird.

Good morning, guys.

Good morning.

So on the HVAC side, but specifically on the heating product side, can you talk more about how the blowers and the other items have started what is going to be more their peak season and how you see that playing out on a forward basis?

You know, as you know we do have a part of our business on the draft inducer side that sells more into furnaces. And this is the furnace season. As you can tell from the AHRI data, we came into the furnace season with units declining for the year. I would say our demand has rebounded slightly from that downturn. But I wouldn't say significantly.

And then on the EPC side, could you talk a little about how that increases your seasonality components through the year, and with that in the fold down, not having a piece of bigger HVAC relatively overall, what that does to the sequential 3Q to 4Q normally, or if it is really all that different at this point?

Mike, That's a great question. We will provide that detail at the analyst day on December 6th. I would just remind you that historically EPC sales in the 4th quarter averaged about 12% of the total year sales. The slow down in the fourth quarter from a seasonal basis is quite pronounced. We will aggregate that for the total business with EPC and present that in December.

Okay. That will be helpful. And then on the R-22 loophole, when did you guys really start seeing that this year? I think it was more in the second quarter because the HVAC lines were pretty positive in the first quarter. When you think about lapping that initial down swing and lapping those comparisons, do you think, when you hit 2Q next year that the R-22 loophole at least on a normalized basis is less of a year-over-year issue, or could there be more degradation when you get to lapping that on a year to year basis?

Mike, you are right. We did start to see the impact of the R-22 growth in the second quarter. As you recall in the first quarter we entered the year with a pretty similar mix of our products and demand as what we saw exiting 2010. So that part absolutely you are thinking about it the right way. But the other factor we have to also look at is if you recall last summer in 2010 we had pretty significant demand for energy efficient products related to both the dynamic of the R410A systems, but also the federal stimulus. That's the other dynamic we have to look at when we do the year-over-year comp.

Do you think that is still going to be a drag when you hit 2012 though? Or do you think the lack of federal stimulus going from 1500 down to whatever it is now, or do you think that change will still be a lingering year-over-year issue when you hit 2012?

It is a good question. It is reduced from $1500 to $500. It will go away next year. We really don't expect that to be a significant drag on a year-over-year basis.

All right, gentlemen. Appreciate it.

The next question comes from Josh Pokowinski of MKM Partners.

Hi, good morning, guys.

Good morning.

Staying on HVAC here for a moment, you commented on lapping a comp last year where you had a hard time keeping up with demand. I guess as I look through the numbers you are comping up 5% in 3Q 2010 vs. 2Q 2010 being up 21. And we came in more. Is that the market realizing R-22 is more of an issue 2Q to 3Q? Is it inventory draw down at the OEM level? Is it share loss? Just trying to understand that comment because it really doesn't seem like the comp 3Q to 3Q is that difficult.

Well, it is a good question. We did have carry over from Q2 to 3Q in demand that we couldn't serve in the quarter. We had about three or four months, May, June and July that were extremely strong in 2010 where we struggled keeping up with demand. By the end of August we were pretty much through the issue of being able to keep up back in 2010.

That's helpful. I know you guy don't usually like to give revenue guidance, but any help with what we are looking as a sequential move, EPC in 3Q 2011 versus what you are framing up in the 4Q guide? I understand stub period in 3Q and seasonally light period in 4Q and there is obviously some absorption at the plant level and all of that, but framing up with the revenue difference maybe help people focus on what is EPC and what is base business.

That is a good question. I'm sorry, I don't have any more detail. We typically have not provided that kind of guidance as a top line number. And I'd say given the stub period as you said compared to the fourth quarter makes it even more difficult.

Thanks.

The next question comes from Mark Douglass from Longbow Research.

Hi, good morning, gentlemen.

Good morning.

Again I'm looking at 4Q. You mentioned it is 12% of the yearly sales for EPC, what is it historically for for RBC?

That number is a little dated, but as I recall it is the slowest quarter read roughly 21'ish percent.

Ok, so it is significantly more seasonal than you will at 4q. How big is China at this point?

In total what we've looked at for Asia is approximately 18% of our revenue is Asia with China being the largest of our Asia businesses.

And right now you are seeing still moderate growth in C&I. No real major fall back in customers ordering patterns or anything like that?

That's correct. As Mark mentioned, the comp gets a little bit more difficult because we have had six quarters of growth in the C&I business. But in terms of on a quarter to quarter basis that's correct.

Ok, and finally looking out into 2012, do the comp's also get a little more challenging in C&I too because of the pricing that was implemented in 2011 with the legislation coming on line in December 2010? You'd expect that to be a further drag, I guess, on the ability to grow C&I in 2012?

I would say certainly since 2012, 2011 was a good year for commercial and industrial, it is going to be a higher borrow for us to get through. So, no doubt.

Can you quantify what the pricing was in C&I so far?

We announced two price increases. One in November and the other in March. They were both in the 4% to 6% range increases. That's what we announced publicly.

Okay. Thank you.

The next question comes from Scott Graham of Jefferies & Company .

Good morning.

Good morning.

Could you break out on the minus 20 on the HVAC number, what was volume?

We haven't laid all that out. So I don't have a specific answer for you. But I can tell you it was a combination of both volume and mix for the quarter. You get the mix down as you move into less efficient motors and more standard motors. And as you go from high efficiency motors to standard motors, obviously, there is more competition in that space. So, it was a combination of both.

Do you think that coming down the line like that with low cost competitors much more pervasive to the lower price points you may have lost share this quarter?

Like I mentioned, as you go from high efficiency motors to standard motors, there is definitely more competition in the standard motors area. So we don't have the same share position in standard motors that we do in high efficiency motors.

Okay. Separate question. On the EPC acquisition, I know that you are now 40 days into it which probably gives you a pretty good look at things, I was wondering what synergies you were seeing that may have been incremental to what you are talking about. I am not going toward the numbers because I am not going to go there. But from what you see that perhaps EPC does better than you, and that you can assimilate that things along those lines or maybe things you do much better than them that you weren't aware that they were actually kind of weak in. Could you talk about at the margin what you have seen versus what you thought?

I would say everything you described is absolutely happening. There are things EPC does better than RBC and we are trying to take advantage of those items. And there are clearly things that RBC does better than EPC and we are trying to take advantage of those items. That's what we expected going in, and that's exactly what we are seeing. We feel very confident that we will be able to either meet or exceed the targets that we've provided. It is happening in our procurement area. It is happening in our logistics and freight area. We are seeing nice benefits there and we have a great slate of manufacturing opportunities as well. So feel good about the progress we are making.

Very good. That's all I have. Thanks.

Thank you.

The next question comes from Bill Dezellem of Teton Capital Management.

Thank you. I had a couple of questions. First of all, to begin with relative to acquisitions I think you have made it pretty clear you are not going to be doing any larger acquisitions anytime soon, but how about the smaller acquisitions that you have done many of over the last couple three years? Are those on hold for now also or help us with your mind set there please.

I would say we will continue to look at all opportunities, large and small. Obviously if the markets remain volatile or uncertain, that will obviously influence our thinking in making a very large acquisition. We are looking at them both and I would say the pipeline is strong and there is a tremendous number of opportunities out there. Clearly we are going to be mindful of the economy and the volatility.

The next question is a great segueway relative to the economy. I mean there has been over the last few months many concerns about the economy. And if we are hearing you correctly, the only area of your business where you are truly seeing an economic impact would be China. Is that a correct interpretation or are we missing another piece where the economy is having a notable impact?

Well, if you think about the US housing industry being an economic impact to HVAC the business, I would say there is clearly an economic impact there. And then you mentioned as well China. Now, we have relatively small exposure in Europe, but I would say that the exposure we do have there, we would see similar weakness in Europe.

That's helpful, thank you. And then following up with China, and then I will be done here. Are you actually seeing the China rate of growth slowing or are you actually seeing China down to where it is actually a negative comparison?

You know, for a very short period of time, we are actually seeing year-over-year decline in a few of our businesses. But I would say it is way too early to call that a trend. We are not even through a quarter yet. So too early to say for sure that that's where this is headed. But certainly we have seen a slowdown in demand. And as John mentioned, non-residential construction and then the residential market as well. Those would be the two key segments where we see it.

Thank you.

The next question comes from Samuel Eisner of William Blair & Company.

Good morning.

Can you briefly discuss, at least on the residential HVAC side, how R-22 and 410A's of the overall mix of the industry have shifted from the beginning of the selling season I guess through the remainder of the summer and basically what the OEM's are communicating to you regarding how that is looking in 2012?

Well, Samuel, as we said earlier what we saw in the first quarter was very similar in mix to what we experienced in 2010. So I think what we experienced in the first quarter was an anticipation of not a dramatic change in buying patterns. As we entered into the second quarter we clearly were seeing an impact of R-22 drive shift and how that was impacting both numbered units as well as the mix of products. And there is of course a combination of factors with not only the dry ship, but also the reduction in the federal stimulus on a year-over-year basis. We saw that continue through the third quarter, and anticipating a similar impact in the fourth quarter our view as we look at 2012 is not necessarily a change on a sequential basis. In other words, what we are experiencing now we would expect to see similar dynamics in 2012.

Okay. That's great. And then on EPC, about 50% of that business is residential HVAC related. Can you maybe just discuss based on what you are seeing and based on a no change for the drive ship phenomenon hanging into 2012, how that flushes out with your EPS guidance for the acquisition?

I think it is important when you think about the EPC residential HVAC business, there is less of an impact of dry ship because the nature of the products with the EPC business. For example, a large part of the business is hermetic compressors. A compressor motor goes into an R-22 or an R410A unit and there is little impact when you think about the dry ship phenomenon and an outdoor unit is still an outdoor unit for EPC. So I think our view would be that impact has is a lesser impact to the EPC residential HVAC business.

Great. And then just on the charges that you have in the quarter, were there any issues or benefits from a tax, any changes in the tax rate for either the gain or the charges you received?

Sam, this is Chuck. There are no real changes from our expectations.

Great. Thank you very much.

Thank you.

The next question comes from Holden Lewis of BB&T.

Thank you. Good morning.

You had made some reference, I think in your preamble, about putting in cost controls implemented during the quarter. Can you talk a little more about those cost controls and sort of the timing of why you implemented those or if they are standard procedure or how that works?

Sure. As we were coming through the quarter, getting pretty volatile market that we were seeing around us, and so it was kind of, I would say, normal contingency planning for the business, and normal cost and control spending just to make sure we were prepared for any sudden downturn if one were to occur.

Okay, and does that just involve putting plans in place, or was there a meaningful amount of costs that were taken? What is the nature of the exercise, and are you feeling better and therefore sort of taking those, sort of, exercises off now?

No, I would say they were meaningful to us, those actions were taken, and they are in place, and I would expect to start helping probably in late fourth, early first quarter and normal spending controls around the company.

And then can you talk a little about, back to the comp issue, on generators in this case. It has been growing consistently north of 30%. Are we still in the after affects of Japan's earthquake here, or is there something more going on? Does that create a tough comp next year or does this seem like it's a sustainable level of activity?

It tends to be a later cycle business. That's not unusual for this business to see these kinds of increases on the tail end of the cycle. At this point the in time the demands are still strong going forward.

Okay. And then this last thing on the EPC you commented that you thought the EPC would be a bit more durable given the system stuff. But did you see a build up or, again, sort of the comp question. When inventories were built up to go back to the R-22 it just got lost on me that your growth in EPC seems to be exceeding your growth in your organic HVAC business in the first half of the year. Was that impacted by rebuild of inventory, and is that something that does not re-occur in 2012?

You know, there is another segment of EPC that is related to the commercial hermetic business that performed very well throughout the year. And so there would be no similar type of business within the legacy Regal Beloit business to compare that to. But that business performed well throughout the year.

You don't feel like there was any sort of inventory build that was unique to 2011 for those motors related to R-22 or anything?

No. As John mentioned there would be less of an impact in the EPC business than the RBC business.

Okay. Thanks.

Thank you.

This concludes our question-and-answer session. I would like to turn the call back over to Mark Gliebe for any closing remarks.

Thank you all for joining today and for your interest in the company. Just to close I want to remind you of our investor and analyst day in New York on December 6th that Chuck mentioned. If you do need more details around that, please call John or Chuck. Thank you for joining the call and thank you for your interest in Regal-Beloit.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.