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Executives

John Perino - VP, IR

Mark Gliebe - President & CEO

Jon Schlemmer - COO

Chuck Hinrichs - VP & CFO

Analysts

Christopher Glynn - Oppenheimer & Company

Steve Sanders - Stephens

Jeff Hammond - KeyBanc Capital Markets

Mike W. Halloran - Robert Baird

Josh Pokrzywinski - MKM Partners

Mark Douglas - Longbow Research

Scott Graham - Jefferies

Bill Dezellem - Tieton Capital Management

Samuel Eisner - William Blair & Company

Holden Lewis - BB&T

Regal-Beloit Corporation (RBC) Q3 2011 Earnings Call November 1, 2011 11:00 AM ET

Operator

Good morning and welcome to the Regal-Beloit Third Quarter 2011 Earnings Conference Call. All participants will be in listen only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to John Perino. Please go ahead.

John Perino

Thank you, Valerie. Good morning and welcome to the Regal-Beloit Third Quarter 2011 Earnings Conference Call. Joining me today are Mark Gliebe, President and CEO; Jon Schlemmer, COO; and Chuck Hinrichs, Vice President 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 and our filings with the SEC.

On slide 2, we mentioned we are presenting certain non-GAAP financial measures related to adjusted diluted earnings per share, adjusted gross profit, and 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 insights 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’ll turn the call over to Mark.

Mark Gliebe

Welcome everyone and thank you for joining the call 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, Jon 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 at 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 have mentioned, the business performed well. As you know, we had a long wait between announcement and closed, we used that time very wisely and we were ready on day one. We are now deep into the integration process, working on main synergies, by rationalizing products and platforms, and we are on track to meet or exceed our expectations.

Jon 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 generation. We saw strength in our C&I, Mechanical, International, and EPC businesses, offsetting head wins in or HVAC business that were related to the R22 dry ship, mix shift, as well as the reduction in 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 delever our balance sheet and position the company to again pursue strategic M&A opportunities. Excluding the acquisition related items, our margins continue to climb in the quarter, and we would expect to see further margin improvements from the acquisitions, as we implement synergies and drive improved mix 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 business. We had a 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.

Chuck Hinrichs

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 $0.10 per share. Also during the third quarter, we expensed a total of $17.4 million or $0.30 per share related to the EPC acquisition. The breakdown of the $17.4 million is shown on the bottom half of slide six.

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 tough 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 principle drivers to EPC’s performance were improved sales mix and lower operating costs than forecasted.

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 costs 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 stock 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 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 for 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 9; we discussed 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 earnings per share of an inventory purchase accounting adjustment 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 our last call, the fourth quarter is seasonally the lowest sales quarter at EPC.

Commodity cost 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 Jon Schlemmer.

Jon 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 that 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 businesses 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 American residential HVAC sales decreased by 20% in the quarter. Our HVAC businesses 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 conversation.

Now compared to that, with today, where the stimulus has been significantly reduced and more systems have been repaired with R22 condensers. The resulting motor demand has been reduced and has shifted to more standard motors. Overtime, 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 U.S. 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 that 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 2011 and we are on stage 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 efficiently 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 and improve the energy efficiency of their products.

Second, our marathon team has introduced a new energy efficient ventilation motor for high-end residential HVAC applications. The motor utilizes cost effective ferried permanent magnets and a variable speed low voltage electronic control. The use of electronic 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 in other high efficiency motor applications around the company.

After 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 that we are running ahead of schedule on our integration activities and synergy projects as well. The talent of EPC’s literature 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 4000 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 EPC acquisition on August 23rd, we described our goal to achieve $35 million of synergy savings over a four-year period. And just two once, we are off to a great start, teams have been assembled to identify and implement synergy projects in several areas, including our 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 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 American Commercial and Industrial businesses, the Mechanical businesses and our India based business.

Further to the EPC business, we will experience very normal seasonality, as Chuck mentioned. The head wins 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 synergy 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 served 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 our objectives and initiatives, getting off to a great start with the EPC integration and focusing on improving our performance for our customers.

With that, I will turn it back over to Mark.

Mark Gliebe

Thanks Jon and to summarize and highlight, we were pleased about the performance in the quarter especially given the weakness of our residential HVAC business. As Jon 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 through out the company. Between our pricing actions, and productivity actions, we were able to cover third quarter inflation. Our stream of new products continues to rollout with exciting energy efficiency technology for virtually all our business. We expect that the combination of our EPC and RBC technology teams to continue to yield energy saving solutions for our customers.

Our fourth quarter guidance reflects continued strength in most 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 delever the balance sheet and position ourselves for additional future acquisition opportunities.

With that, we will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Christopher Glynn of Oppenheimer & Company.

Christopher Glynn - Oppenheimer & Company

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

Mark Gliebe

Yeah, Chris, I think you’re thinking about at the right way. I think the conversion from our customers did not all occur at the front half of the year; it was kind of feathered in throughout the year. So, I do believe we’re going to see some of that, comp comparisons be able to talk for in the front part of the year.

Christopher Glynn - Oppenheimer & Company

Okay. And then, just looking at the third quarter versus your fourth quarter guidance, at the midpoint it’s little better than half the third quarter adjusted. Did the quarter have a LIFO benefit or anything, just trying to understand that drop-off a little better?

Chuck Hinrichs

Yeah, Chris, it was a modest benefit not significant and up 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.

Christopher Glynn - Oppenheimer & Company

Okay. And if you could just were, 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 kind of running itself to some restocking?

Mark Gliebe

Well, yeah a couple of things going on. First of all, normal seasonality in the HVAC is fourth quarter tends to be weaker. We would expect that as we go into 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’re dealing with the R22 loophole issue that’s kind of making it a little bit harder to understand overall.

Operator

Our next question comes from Steve Sanders of Stephens.

Steve Sanders - Stephens

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

Jon Schlemmer

Good morning Steve. This is Jon. In general, in China, as we mentioned we are seeing a slowing in our business there. And it’s really in two, I would say in two areas primarily. One is related to non-residential construction, where we have a demand for our products, both motors and generators. And then we’re also seeing slowing demand in the residential segment, primarily residential HVAC. Those are the two significant areas where we’re seeing slowing demand in this quarter.

Steve Sanders - Stephens

Okay. Okay, 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 kind of relative magnitude on how those are impacting 4Q versus 3Q?

Jon Schlemmer

Well Steve, I guess there are 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 slowdown in the fourth quarter. It is the slowest quarter of this calendar year. And then below the line of course we’ve got the higher interest expense. We’ve got the higher share count. And then on the positive side we’ll benefit from lower legal costs than we’ve been expensing in the first three quarters of the year.

Commodity cost, 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. So I think those would be some of the puts and takes for the fourth quarter coming out of the third.

Steve Sanders - Stephens

Okay, okay and then last question, I don’t know if this is to Mark or Jon, but Mark maybe you can talk a little bit about how the EPC and the other acquisitions affect your ability to respond quickly if we do see a significant slowdown particularly in North America? And then second what’s kind of implied in your fourth quarter guidance about the domestic C&I business relative to what you’re seeing in 3Q and 2Q?

Mark Gliebe

Well I’ll just answer your first question Steve first. I actually think we are best positioned given the acquisitions that we’ve done because we can move even more aggressively if we see a significant slowdown to execute synergies. If it, when your plants, if your manufacturing facilities slowdown, it gives you the ability to move faster. So I think we will be better positioned if we had a significant slowdown to take advantage of those synergies.

Relative to the C&I business, this third quarter was relatively strong as you can see from our press release and while if not quite as strong as the first quarter, some of it just tougher comparisons on a year-over-year basis and there has been some moderation in demand but overall it’s pretty healthy.

Operator

Our next question comes from the Jeff Hammond of KeyBanc Capital Markets.

Jeff Hammond - KeyBanc Capital Markets

Just to get back to -- just trying to understand the variances better. So you had said EPC was going to be flat to modestly dilutive, can you quantify what you thought the rough numbers the accretion was in the quarter and then is there a way to quantify what the commodity and FX gain benefit added up to?

Chuck Hinrichs

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

Jeff Hammond - KeyBanc Capital Markets

Yeah it’s just without a little more color on the moving pieces it’s 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?

Mark Gliebe

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

Jeff Hammond - KeyBanc Capital Markets

They are in good shape going into 4Q or they will be in good shape post the 4Q? So it seems like, some of the distributors and trend seem to be aggressively destocking into 4Q?

Mark Gliebe

Well I think as we, it’s always true in the fourth quarter that your customers tend to take inventory down near the end of the year. But in term, 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.

Operator

The next question comes from Mike Halloran of Robert Baird.

Mike Halloran - Robert W. Baird

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

Mark Gliebe

As you know, we do have a part of business on the draft inducer side that sells more into furnaces and this is the furnace season. And as you could 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.

Mike Halloran - Robert W. Baird

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

Chuck Hinrichs

Mike, that’s a great question. We will provide that detail at the Analyst Day on December the 6th, and I would just remind you that historically EPC’s sales in the fourth quarter averaged about 12% of the total year sales. So the slowdown in the fourth quarter from a seasonal basis is quite pronounce. We will aggregate that for the total business with EPC and present that in December.

Mike Halloran - Robert W. Baird

Okay that will be helpful. And then, on the R22 loophole, when did you guys really start seeing that this year. I think, it was more in the second quarter because the HVAC lines are pretty positive in the first quarter. And so, when you think about lapping that that initial downswing and lapping those comparisons do you think when you hit 2Q next year that the R22, the R22 loophole at least on a normalized basis is what sort of a year-over-year issue or do you think that there could be more degradation from that even when you get to lapping that on a year-over-year basis?

Jon Schlemmer

But Mike, you’re right, we did start to see the impact of the R22 growth in the second quarter. As you call recall in the first quarter, we entered the year with pretty similar mix of our products and demand as we excited 2000 as what we saw actually in 2010. The other – so that part absolutely I think, you’re thinking about it the right way but the other factor we have to also to look at is, as you recall last summer 2010 we had pretty significant demand for energy efficient products related to both the dynamic of the R410a systems but also the federal stimulus. So that’s the other dynamic that we have to look at as well when we do the year-over-year comp.

Mike Halloran - Robert W. Baird

Do you think that’s still going to be a drag when you hit 2012 though or do you think that that there is a lack of federal stimulus or that going from 1500 down to whatever it is now or do you think that that change actual will still be a lingering year-over-year issue when you hit ’12?

Jon Schlemmer

A good question. It’s reduced from $1500 to $500. Well our goal right next year. We really don’t expect that to be a significant drag though on a year-over-year basis.

Operator

The next question comes from Josh Pokrzywinski of MKM Partners.

Josh Pokrzywinski - MKM Partners

Just want to, staying on HVAC here for a moment, you commented on kind of lapping a comp last year, where you had a hard time keeping up with demand. And I guess, as I just work through the numbers, you’re comping up 5% in 3Q ’10 versus 2Q ’10 being up 21%. And we kind of came in more, is that the market realizing R22 as more of an issue 2Q to 3Q, is it inventory brought down at the OEM level, is it share loss, just trying to understand that comp because there really doesn’t like the comp 3Q to 3Q is that difficult?

Mark Gliebe

I mean it’s a good question. We did have some carryover from Q2 to 3Q in demand that we couldn’t serve in the quarter. And the -- we had about three or four months, May, June, and July that were extremely strong back in 2010, where we struggled keeping up with demand. And by the end of August, we were pretty much though the issue of being able to keep up back in 2010.

Josh Pokrzywinski - MKM Partners

Okay, that’s helpful. And then I mean I know you guys don’t usually like to give revenue guidance but any help of what you’re looking at as kind of sequential move EPC in 3Q ’11 versus what you’re framing up in the 4Q guide. I understand the stub period in 3Q and seasonally light period in 4Q and there is obviously some absorption at the plant level and all that. But just kind of framing up with the revenue difference maybe how people focus on what’s EPC and what’s base business?

Chuck Hinrichs

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

Operator

The next question comes from Mark Douglas of Longbow Research.

Mark Douglas - Longbow Research

Again I’m looking at 4Q. You mentioned it’s about 12% of the yearly sales for EPC. What is it historically for RBC?

Chuck Hinrichs

Same that number is a little bit dated. But as I recall I think it’s the slowest quarter at roughly 21ish percent.

Mark Douglas - Longbow Research

Okay. So it’s -- EPC is significantly more seasonal than in all in 4Q. With China, how big is China at this point?

Jon Schlemmer

Well in total, in total what we have looked at for Asia is approximately 18% of our revenue is in Asia, with China being the largest of our Asia businesses.

Mark Douglas - Longbow Research

Currently largest. And right now you are seeing some moderate growth on C&I. No real major fallback in customers ordering patterns anything like that?

Jon Schlemmer

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

Mark Douglas - Longbow Research

Okay and then finally looking out into ’12, do the comps also get a little more challenging in C&I too just because of the pricing that was implemented in ‘11 with the usual legislation going online in December 2010. Do you expect that to be a further drag I guess on the ability to grow C&I in ‘12?

Mark Gliebe

Well I would say since certainly since 12/2011 was a pretty good year for Commercial and Industrial. It’s going to be a higher bar for us to hit through, so no doubt.

Mark Douglas - Longbow Research

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

Mark Gliebe

I would tell we announced two pricing increases. Both of them got one in November and the other in March. And they were both in the 4% to 6% range kind of increases. And that’s what we announced publically.

Operator

The next question comes from Scott Graham of Jefferies.

Scott Graham - Jefferies

Could you breakout on minus 20 resi HVAC number what was volume?

Mark Gliebe

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

Scott Graham - Jefferies

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

Mark Gliebe

Well, like I mentioned, as you go from high efficiency motors to standards 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.

Scott Graham - Jefferies

Okay. Separate question on the EPC acquisition, I know that you’re 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, not even getting I am not going toward the numbers to site, I am actually 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 that you do much better than them that you weren’t aware that they were actually kind of weakened. Did you kind of talk about at the margin what you’ve seen versus what you thought?

Mark Gliebe

Well, I would say everything that you described is absolutely happening. There are things that EPC does better than RBC and we’re trying to take advantage of those items. And there is clearly things that RBC does better than EPC. And, we’re trying to take care and advantage of those items and that’s what we expect of doing it and that’s exactly what we’re seeing. And, we feel very confident that we will be able to either meet or exceed the targets that we provided. So, and it’s happening in our procurement area its 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’re making.

Operator

The next question comes from Bill Dezellem from Tieton Capital Management.

Bill Dezellem - Tieton 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 large acquisitions anytime soon. But how about the smaller acquisitions, as you’ve done many out over the last couple or three years. Are those on hold for now also or help us with your mindset there please?

Mark Gliebe

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

Bill Dezellem - Tieton Capital Management

Thank you. And the next question is actually a great segway relative to the economy. I mean there has been over the last few months many concerns about the economy and if we’re hearing you correctly the only area of your business where you’re 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?

Mark Gliebe

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

Bill Dezellem - Tieton Capital Management

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

Mark Gliebe

For a very short period, we were actually seeing year-over-year decline in a few of our businesses. But I would say, it’s way too early to call that a trend, it’s we’re not even through a quarter yet. So too early to say for sure if that’s where this is heading. But certainly we have seen a slowdown in demand. And, as Jon mentioned, non-residential constructions and then the residential market as have, both could be the two key segments where we see it.

Operator

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

Samuel Eisner - William Blair & Company

Can you briefly discuss at least on the residential HVAC side, how R22’s and 410a’s of the, I guess the overall mix of the industry have shipped it from say the beginning of the selling season, I guess through the remainder of the summer and basically what the OEMs are communicating to you regarding how that’s looking into 2012?

Mark Gliebe

Well Sam, what we said, 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 ever 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 R22 dry ship and how that was impacting both number of 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.

Samuel Eisner - William Blair & Company

Okay that's great. And then on EPC about 50% in that business in residential HVAC related and can you maybe just discuss what, based on what you’re seeing and based on I guess a no change for the dry ship phenomenon ahead into 2012 kind of how that flushes out with your EPS guidance for the acquisition?

Mark Gliebe

Well I think it's important when you think about the EPC residential HVAC business. There is less of an impact of dry ship because of the combination -- because of the nature of the products that's with the EPC business. For example, a large part of that business is hermetic compressors, which go into a compressor go motors goes into R22 or an R410a unit. There is a little impact when you think about the dry ship phenomena and an outdoor unit is still an outdoor unit for EPC. So, I think our view would be that impact is a lesser impact to the EPC residential HVAC business.

Samuel Eisner - William Blair & Company

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

Chuck Hinrichs

No, Sam this is Chuck. No real changes from our expectations.

Operator

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

Holden Lewis - BB&T

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

Mark Gliebe

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 that we were prepared for any sudden downtown, if one were to occur.

Holden Lewis - BB&T

Okay. And does that just involve putting plans into place or is there a meaningful amount of talks that were taken. I mean it’s more towards the nature of the exercise, and are you feeling better and therefore sort of taking those of exercises off now?

Mark Gliebe

Well, now I would say, they were meaningful to us and we -- those actions were taken and they are in place. And I would expect that’s helping probably late fourth early first quarter in just normal spending controls around the company.

Holden Lewis - BB&T

Okay. And then can you talk a little about sort of back to the comp picture I guess on generators in this case, it’s been growing consistently north of 30%, are we still sort of, in sort of the after-effects of Japan’s earthquake here or is there something more then and that’s create a top complex to you or just seem like it’s a sustainable level of activity?

Mark Gliebe

It tends to be a later cycle business. And so that’s not unusual for this business to see these kinds of increases on the tail end of the cycle. So, at this point in time the demands are still strong going forward.

Holden Lewis - BB&T

Okay. And then just last thing. On the EPC you commented that you felt EPC would be a bit more durable, you had given a system stop but I mean did you see a build-up in or so against to the comp question, when inventories were build up to sort of go back to the R22’s, yeah, just now last you told me that your growth at EPC seems to be exceeding your growth in sort of your organic HVAC business in the first half of the year. Would that impacted by sort of rebuild of inventory and is that something that does not recur in 2012?

Mark Gliebe

Well there is another segment of EPC that’s related to the commercial or medic business that performed very well throughout the year. And so that there would be no similar type of business within the legacy Regal-Beloit business to compare to. But that business performed well throughout the year.

Holden Lewis - BB&T

Okay. Here you don’t feel like there was any sort of inventory bill that was sort of unique to 2011 for those motors lead R22 or anything?

Mark Gliebe

No, Holden, as Jon mentioned there would less of an impact in the EPC business than the RBC business.

Operator

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

Mark Gliebe

So, 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, as Chuck mentioned. If you do need any more details around that please call Jon or Chuck. Thank you for joining the call and thank you for your interest in Regal-Beloit.

Operator

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

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