Rory MacLellan – IR, Senior Consultant, FTI Consulting Michael J. Hartnett – Chairman, President & CEO Daniel A. Bergeron - VP & CFO.

Edward Marshall – Sidoti & Company Walt Liptak – Global Hunter Securities Samuel Eisner – Goldman Sachs Josh Chan – Robert W. Baird Jeff Ruey – Cramer Rosenthal McGlynn.

Good day ladies and gentlemen and welcome to the First Quarter Fiscal 2014 RBC Bearings Earnings Conference Call. My name is Gillian and I'll be your operator for today. At this time, all participants are in listen-only mode. At the end of the speakers’ remarks, we will have a question-and-answer session.

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Rory MacLellan, Investor Relations. Please proceed..

Good morning and thank you for joining today for RBC Bearings’ fiscal 2014 first quarter’s earnings conference call. On the call today will be Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer and Daniel A. Bergeron, Vice President and Chief Financial Officer.

Before beginning today’s call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to variety of factors.

We refer you to RBC Bearings’ recent filings with the SEC for a more detailed discussion of the risks that could impact the company’s future operating results and financial condition. These factors are also described in greater detail in the press release and on the company’s website.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of press release and is available on the company’s website. Now I would like to turn the call over to Dr. Hartnett..

Thank you, Rory. Good morning. Net sales for the first quarter of 2014 were $102.7 million versus $103.3 million for the same period last year. Our Industrial Markets were down 22% on a year-over-year basis and our Aircraft and Defense products we are up 22.2% over the corresponding quarter last year.

For the first quarter of fiscal 2014, sales of our Industrial Products represented 41% of our net sales with Aerospace and Defense at 59%. Gross margins for the period came in at 39.4% versus 37.2% in fiscal ‘13. Adjusted operating margins were a record 22.3% for the quarter versus 21.3% for the same period last year.

Our first quarter of fiscal 2014 show the industrial OEM business down 29%, net of Ground Defense, the industrial OEMs were up 24% from last year. Relative to industrial distribution in total we are off 3.4% most of this shortfall was in Europe as our U.S. Industrial Distribution Business was up 6%.

Demand for our products from the industrial markets this quarter was off and some of the construction machinery, oil and gas producers lighten their OEM build schedules and the buildup of military ground vehicles in the U.S. is currently for the most part on pause. Although our major U.S.

based military programs have cycled down, the ramp up that is ahead of us for other parts of the world is now at its early innings. In the first quarter demand for the construction aftermarket help fill some of the new build shortfall and formed a solid base for these products.

The good news is we are starting to see the bottom of the industrial side with some positive order momentum building which should result in some nice sequential from our first quarter into our second quarter. We are expecting a small but meaningful balance from our industrial business in our second quarter.

Relative to our Aerospace and Defense business, these markets grew at 22.2% in the first quarter of 2014 and showed sequential growth of 8.8%. We continue to see strong interest in our core products and continued encouragement from our customers to accept and approve our new designs.

Interests in our extensive offerings expressed at the Paris Air Show this year was overwhelming at times. These products were developed for aircraft, airframe and engine applications as well as the helicopter markets.

Our defense business continues to perform as we expect to see some growth in this sector in fiscal 2014, and that including the Ground Defense initiative that we spoke about earlier. We did end the first fiscal quarter of 2014 with a $128.2 million in cash and short-term investments.

The current quarter, our second quarter, we are completing the consolidation of our large bearing manufacturing operations into South Carolina adding new capacity predominantly to our Aerospace operations in North America and Europe as we prepare for further expansion in these markets and two new designs.

Finally, our activity on the acquisition front has been brisk and I trust we’ll have some good news to report over the next few quarters in this regard. In summary, we ended the first quarter of fiscal 2014 with $218.9 million in backlog compared to $211.5 million for the same period last year and $216.5 million for the fourth quarter of 2013.

Looking ahead, we expect the second quarter of fiscal 2014 net sales to be in the same neighborhood as the first quarter in the $103 million range. Our second quarter is normally a weak one because of summer holidays schedules and shutdowns, but this year that’s clearly not the case.

I’ll now turn the call over to Dan, who can provide more details on our financial performance..

Yeah, thanks Mike. Since Mike’s already covered sales and gross margin, I’ll jump down to SG&A. SG&A for the first quarter fiscal 2014 increased by $0.9 million to $17 million compared to $16.1 million for the same period last year.

As a percentage of net sales, SG&A was 16.5% for the first quarter fiscal 2014 compared to 15.6% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $0.4 million in personal related expenses, $0.1 million in incentive stock compensation, $0.2 million in professional fees and $0.2 million in miscellaneous expenses.

Other net for the first quarter fiscal 2014 was expense of $1.2 million compared to expense of $0.4 million for the same period last year.

For the first quarter fiscal 2014 other net consisted of $0.6 million associated with the large bearing consolidation restructuring, $0.4 million of amortization of intangibles and $0.2 million in costs associated with other expenses.

Operating income was $22.3 million for the first quarter fiscal 2014 compared to operating income of $22 million for the same period in fiscal 2013. As a percentage of net sales, operating income was 21.7% for the first quarter of fiscal 2014 compared to 21.3% for the same period last year.

Including operating income was $0.6 million in expense associated with consolidation and restructuring of our large bearing facilities excluding these expenses operating income would have been $22.9 million compared to $22 million for the same period last year or 22.3% of net sales compared to 21.3% for the comparable period last year.

Income tax expense for the first quarter fiscal 2014 was $7.1 million compared to $7.9 million for the same period last year. Our effective income tax rate for the first quarter fiscal 2014 was 32.1% compared to 31.6% for the same period last year.

The effective income tax rate for the first quarters of fiscal 2014 and 2013 included $0.4 million and $0.9 million of tax benefits due to the reverse of unrecognized tax benefits associated with the conclusion of Federal and State income tax audits.

The effective income tax rates without these discrete benefits would have been 33.8%for the first quarter fiscal 2014 compared to 35% for the same period last year. For the first quarter fiscal 2014, the company reported net income of $15.1 million compared to net income of $17.2 million for the same period last year.

Excluding the after-tax impact of the restructuring expenses the CDSOA payment last year and the discrete tax benefits in both years net income would have been $15.2 million for the first quarter fiscal 2014, an increase of 8.7% compared to $13.9 million for the same period last year.

Diluted earnings per share was $0.65 per share for first quarter fiscal 2014, compared to $0.76 per share for the same period last year.

Excluding the restructuring expenses, the CDSOA payment last year and the discrete tax benefits diluted EPS for the first quarter fiscal 2014 would have been $0.66 per share compared to $0.62 per share for the same period last year an increase of 6.5%.

Turning to cash flow, the company generated $17.4 million in cash from operating activities in the first quarter fiscal 2014 compared to $26.5 million for the same period last year. Capital expenditures were $5.8 million in the first quarter fiscal 2014 compared to $6.1 million for the same period last year.

And the company ended the first quarter fiscal 2014 with $128.1 million of cash and short-term investments and $10.2 million of debt on the balance sheet. I would now like to turn the call back to the operator for Q&A session..

Thank you. (Operator Instructions) Your first question comes from the line of Edward Marshal, Sidoti & Company, please proceed..

Hi guys, good morning. Good quarter.

Questions, first I kind of want to touch on the aerospace business and maybe is forward-looking but you’ve heard with some of the material companies that I cover that they talk about some of the rate readiness that they prepped for last year starting to push back on some inventories a little bit, the stocking and the chain, I just kind wanted to discuss whether or not and I haven’t heard from any of the other suppliers yet, but whether or not you are seeing any destocking in that business or whether it’s just forego at this point.

Just stocking on one of the nickel, as well as the aluminum products, you’re seeing a little bit of destocking, I know that’s not necessarily what you consume, but it’s like Boeing and Airbus through the rate readiness program really made a lot, raw material get pushed up into the system and I just want to make sure that it is not going back to some of the supplier base.

I mean, based on the revenue growth that you have in this quarter doesn’t look like just destocking, but I just wanted to get your point of view?.

We have no issues or difficulty getting the materials that we need and as a matter of fact we are probably, if anything wrong on those material internally, as we secured our position for performance on long term contracts to our customers. So, we are, I think from the material side we are in very good shape..

I think, maybe I should have been more clear, I think, referring to maybe your customers’ inventory levels of your product?.

Yeah, now, we are not, we didn’t see it in the first quarter and we are not seeing much of that in the second quarter, actually our first quarter, industrial aircraft aftermarket in distribution business was very strong. So, no, we are not seeing it..

Okay.

And then, switching gears a little bit, I mean, you did a great job again on the margin and then I’m kind of curious as to how maybe the profile looks is maybe the industrial volume start to come back and I know you said you expect kind of modest sequential growth as we progress through the year, but I understand the product mix little bit richer on aerospace than maybe it is in industrial from a margin perspective, but how does the margin profile kind of look if some of the industrial volume comes back and soaks up some of the fixed cost, I mean taking note that you have done some restructuring and you have lowered your fixed cost base a bit..

Yeah, well that’s a good question, I think, we don’t see any major diluting effect by those increased industrial volumes. So, I don’t think we are going to see any margin dilution if that’s the nature of your question..

Yeah, I think that’s the route of it..

Yeah, because actually the industrial OEM business is probably is not as profitable as the aircraft OEM business but, the industrial aftermarket is probably more profitable than the aircraft aftermarket, so kind of balances out..

I see.

And you said, you saw sequential improvement and maybe the order book filling up a bit, can you kind of talk maybe about which end markets, because you highlighted the mining and oil and gas as being a big decline in the quarter are responsible for the decline, but what’s responsible maybe for the order book as it starts to fill, is this same markets or are there other markets that are starting to improve a little bit stronger than you would have anticipated?.

I think, the mining and the oil and gas, we don’t see major sequential improvement in those markets, but just in the other general industrial markets, we do see a pickup in volume and we see an improvement in Europe..

That to say that mining, oil and gas, have they bottomed their…?.

Yeah, I think they have pretty much bottomed. They were down substantially in our first quarter and we are not expecting them to be up in any material way in the second quarter..

Right, thanks for your responses..

Yeah..

Thank you, your next question comes in the line of Walt Liptak, Global Hunter. Please proceed..

Hi, thanks good morning and good quarter.

My question is on the gross margin too and maybe just to follow on the last one, with some of these markets down, oil and gas and mining, have you been able to maintain price?.

Yes, yes we have..

Okay, and then maybe just to ask you kind of directly, as you look into towards the 2014, is this, last year, your first quarter gross margin was low for the year, is it kind of what you are thinking on that well may be at a new level for gross margin for 2014?.

Our internal targets, remember on last call Tony Bergeron will tell you what our internal target is on this call, we are looking at, at least a one percent improvement over last year and we ended last year 37.94%.

So, I think it’ll be a little lumpy in the middle two quarters, like it always is because we have shorter production days, but we should be able to achieve a 1% improvement over fiscal 2013..

Okay. I thought that was the guidance last quarter was 100-150 basis points of margin improvement.

Am I remembering that wrong?.

Yeah, I think that was two quarters ago..

Okay. And I wanted to ask you about the aerospace. It appears that sequentially it’s improving.

I wonder if you could talk about the sequential trends that you’re seeing, maybe leading up to the Paris Air Show and maybe talk about some of the products that you alluded to on your opening remarks?.

Sequential trends, well, we’re seeing what everybody else is saying in terms of the increased production rates for particularly Boeing. Airbus has pretty much stayed with their current rates, but Boeing has an objective. They told us two weeks ago to get two 6737s by some day.

It’s such an incredible number for me, I didn’t even write down the date, but clearly Boeing is going to make the jump from 38 to 42 next year and 777 business is good, the 787 business now is through its problems, and net volumes increasing.

So, the Boeing people are running all the subcontractors, doing rate readiness studies to make sure that they understand that there is capacity in the industry to support their buildup. And they certainly have been here and we’ve gone through it with them.

So, clearly, there is just a volume increase because of OEM demand on the Boeing side of the picture. Now, in addition to that, there are all sorts of new products that we have that are going into the 777 and the 787, which historically, we haven’t been the supplier of in the past.

So, we have additional content on those planes, both in the airframe and on the engines. So, we’re going to be tested with regard to our ability to produce all this hardware. Certainly, the test will be an incremental one. It will be a ramp, but certainly next year at this time, we’ll be in graduate school, taking tests on production volumes..

Okay, good, sounds good.

And, maybe a last question is just on the backlog is up a little bit sequentially from the March quarter and it sounds like that it’s coming through a little bit better on the industrial side, I wonder if you can talk a little bit about the mix of what you’ve got in backlog?.

Yeah, I think most of the backlog you’re looking at is because of the nature of other product is probably heavily distorted towards the Aircraft business there’s so much in that aircraft businesses is under contract. And so, as a result of being under contract it rolls right into that backlog calculation for us.

And, in the industrial business is typically not so contract driven. And so, it’s representation in the backlog is much smaller. So, what you’re really seeing there is an increase in demand for Aircraft business..

Okay, good. And, okay, maybe this will be the final one.

On the industrial side, some of the machinery makers like Caterpillar and others are pretty weak right now, I wonder if you comment on what you’re seeing from the big machinery OEs and if your comments about industrial, are they related to aftermarket in industrial distribution more so than the OE side?.

Well, the OE demand is mixed and yeah, I think Caterpillar’s demand is on the OEM side is definitely down and down substantially were less, and but on the aftermarket side of Caterpillar it’s steady and you can kind of tell based upon where your shipments are heading, which markets those are being consumed in.

Now, the other construction of mining guys are stronger than Caterpillar and so there is certainly not down as much and have formed for us a pretty good base and I suspect a lot of that base is supporting aftermarket equipment.

And we look at, we look pretty closely year-to-year at the tonnage of copper that’s mined and to determine, just how much as a proxy, how much of this equipment is being utilized and copper is a good proxy for the other minerals and that’s holding up. So, the equipment is being used. Bearings are wearing out. The aftermarket business is strong.

There’s more population in the construction fleet to consume these bearings and so we’re feeling reasonably good about where we are in that market right now..

Okay, good. All right, I’ll give someone else a chance. Thanks..

Yeah..

Thank you. Your next question comes from the line of Samuel Eisner, Goldman Sachs. Please proceed..

Good morning everyone..

Good morning, Sam..

Good morning..

So, just back from the gross margin, you know, the 220 basis points of expansion, is there any way to parse out what the different buckets are there between price and cost savings and maybe absorption? Kind of, how do you guys think about that as far as the expansion is concerned?.

Well, we try to save it wherever we can Sam. It’s – the way our business operates and there are so many discrete business units, it’s really a matter of considerable calculus to figure out, are you getting it with price. I would say subjectively there is a price component to it.

How much is that component is contributing to gross margin is probably small, but there is a price component to it. I’d say the bigger component is execution, because basically for any product that you make there are so many burdened hours in that product. If you can figure out – and most of your production cost is labor, burdened labor.

It’s mainly burdened with fringe benefits and all the rest of that stuff, and some minor overhead accounts. So, if you can figure out how to take the time to produce a product, reduce the time to produce a product, you expand your margins substantially.

So, each one of our operations has a list of operator basis of those products that generate the greatest revenue to those products that generate the least revenue and against that list, we determine where we feel the margins can be moved the most with the least amount of work. So, we do the easy things first and then the harder things next.

When you keep working on that list and you revisit the list every months and have a meeting with the folks talking about progress and objectives, you can make good progress and I would say that's probably a large part of the difference.

I would say, the third part of the difference is over the period we have been – we have had a lot of vendors supplying various outside operations that we weren't internally tool for, add substantial cost premiums.

And over the years, as we have gone through that list of how to improve the margins in our products, we have moved a considerable amount into some of our own plants and tool them accordingly. So, I would say those are the three big components..

Great. Now that's excellent color.

And then just on the industrial business I assume there is a level of, kind of absorption that is also benefiting, can you talk maybe about the differences in utilization rates on aerospace and the defense business versus your industrial I assume as you’re adding capacity in aerospace, you are running pretty high there.

I am just curious how the industrial business is booking maybe the bookings of that throughout the quarter?.

Well you know, its mix dependent. Certainly the industrial business has more capacity than we are utilizing right now. That's because of the cycles in our core markets. And so, as those markets cycle back in, we will use the machine tool capacity that's available to us. Now the machine tool capacity is just one sort of static element of capacity.

The more dynamic element is how many hours you put into the plant per month to produce its product. So, you can manage with a budget how many hours have to go into each plant in order to generate the targeted margins out of that plant. And those hours are the big cost element for the plant.

A lot of the machinery is fully depreciated or just has a depreciation curve that's very minor in the overall overhead component. But, the hours are major.

So, we vary the hours plant by plant based upon what production rates we want out of a given plant in a quarter which is based upon order book and market outlook and then basically the margins pulls out of it at the bottom as a result of that..

Great.

And, just on the industrial business you mentioned distribution was up 6% year-on-year I think I heard that correctly – in the U.S., how did that play out throughout the course of the quarter, were you stronger as you exited, did it kind of ramp throughout the quarter just trying to understand the progress there?.

It ramps through the quarter, yeah, it started – part of that is fiscal year driven and we always start April as – April is always a little soft in our world because it’s our first fiscal month and I swear everybody is just trying to catch their breath from finishing up the previous fiscal quarter.

Most people say that’s not true, but I still adhere to that vary. But as that quarter builds, people for us, the industrial distribution business built with it..

Great. Thanks so much for the commentary..

Yep..

Thank you. Your next question comes from the line of Peter Lisnic, Robert W. Baird. Please proceed..

Hi, good morning, this is Josh Chan filling in for Pete. My first question is on the impressive growth at Aerospace, Mike talked about the OEM growth.

But, could you talk about so the aftermarket growth as well, how do you think of yourself there competitively, do you believe you’re gaining share in the aftermarket or is it the timing thing just kind of a little more color on the growth there?.

Yeah, well, are you interested mostly in the aerospace aftermarket growth?.

Correct, yes..

Okay, our aerospace aftermarket as we measure it and define it, it’s basically a number of distributors who service not only aftermarket, but they really service small OEMs, they’re building out, supplying the larger subcontractors to the airplane builders.

So, these OEMs are so small that they would be as a customer too small for us to handle, so they go through this other channel. So, when we see volume pickup in that group it’s a little difficult for us to tell without an interview process whether that volume was OEM driven or aftermarket driven.

I suspect given the profitability that the airlines are showing right now, they’re actually starting to maintain the planes again.

So, I suspect if we went out and surveyed our distributors to find out what the break was between OEM and aftermarket, we’d probably see a bump in the aftermarket consumption and because there’s been a lot deferred maintenance in the industry for years, we haven’t done that. So, it’s only my theory right now..

Okay, great. Thanks for the color there. And then, on the aerospace outlook, I think usually your sales steps up a little bit from 1Q to 2Q just seasonally, but it sounds like your guidance suggested that might not be the case this year.

So, is there something unusual about the growth in aerospace this quarter that makes that seasonality trend not true this year, perhaps?.

Well, normally our strongest quarters are our fourth-quarter and our first quarter.

Then the second and third quarters are typically weaker because they’re shorter in terms of the number of production days in our accounting calendars and there are a lot of holidays and vacations and planned shutdowns and all that sort of nonsense that has to clear in order to make the year come out.

So, our second quarter typically would be smaller in revenues than our first quarter as a result of that. Now, this year, we’re not saying that because we’re seeing considerable strength from the aircraft people and we’re seeing somewhat of a bounce from the industrial guys. So, it’s a little bit of an unusual year for us..

Okay. And then, the last question is on potential acquisitions.

Given that your cash balance has increased steadily, are there any changes in terms of how you think about what’s the sweet spot in terms of the target size or scope of business relative to the past, by any chance?.

Well, the sweet spot for us is our businesses that accrue to our customer base, it would make us – it would give us more volume with certain targeted customers and have good management teams, so there weren’t a burden on the rest of the company’s management so that we could keep focused on our growth objectives and our margin expansion objectives inside of RBC and so it doesn’t matter.

That business can be anywhere from $10 million to $50 million in revenue and if it fit that profile we would be interested in it..

Great. Thanks for the color and congrats on the quarter..

Thank you..

Thank you. (Operator instructions) Your next question comes from the line of Steve Barger, KeyBanc Capital Markets, please proceed..

Hey! Good morning guys. This is actually Tejus (ph) filling in for Steve. I just wanted quickly follow up on the last question.

Can you just, kind of, talk about what the pipeline looks like there?.

Pipeline in term of –.

Just on the targets that you are currently possibly viewing..

Well, do you want names? Pipeline is healthy. Pipeline is healthy and productive. .

Okay, thank you.

And just another one on margin, just trying to think about it in terms of incrementals and decrementals, how should we think about that by segment? I would imagine on the industrial side given that the weaker volumes when that does come back, it would be stronger than on the aero side, would that be fair? And then, just numerically how do you think about that internally?.

How do we think about improving industrial margins internally relative to our consolidated overall margins, is that your question?.

No.

just kind of thinking about it in terms of incrementals and decrementals, so as volume comes back, you are going to have the fixed cost kind of spread over a larger unit, if you will?.

Right, right..

So, I guess, I am just thinking about it what is that? Do you think of it that way internally and if so what is that numerically?.

You know the way I think of it is this way, is the real cost of running a plant is once you get by the material aspect is the hours, the direct hours invested in making the product. The rest of the costs in the plant are not substantial for that. That's where all your, on our 80:20, 70:30 basis whatever plant you are looking at.

That's where your costs are. So, your fixed cost absorption is really in your SG&A line.

And so, as you generate more volume for a given gross margin you get better, you certainly get better absorption to your sales and administrative expense and you get – so your operating income is the benefit of that but your gross margin sees much less benefit with increased volume.

Now, other people think about that differently, I mean, if you are running a plant in Germany or in Europe where your labor expense is a fixed cost expense then the whole equation is upside down, but in the U.S. and other parts of the world that’s not the case..

Okay, no, thank you, that makes a lot of sense. And then, just one more if I could on the trends in the quarter. So, if you could excluding aero, just kind of talk about how the trend was geographically as well as end markets, I know you kind of already addressed the construction and mining.

But, just kind of looking at what your order book looks like, what do you think to have ‘14 can look like for you, especially given the easier comps that you will run into?.

Well, some of the business that we have and we didn’t talk about, last year in our first quarter we had a big lumpy sales going to some of our nuclear customers in Asia and that big lumpy sale doesn’t come out until later this year. So, I would say that’s almost the big reason why year-to-year comparison was down a little bit.

So, some of our sales are very lumpy based upon the programs that we are working on..

Yeah, sure..

And come out different quarters this year than they did last year and I’m sure next year we’ll be talking about that again..

Yeah. And, just lastly and you may have already addressed this, I’m sorry if I miss this.

What do you expect the full year tax rate to be?.

34.5% excluding the street tax benefits..

Great, thank you, guys..

Thank you. Your next question comes from the line of Jeff Ruey from Cramer Rosenthal McGlynn, please proceed..

Hi, thank you. Do you mind circling back to your comments from your prepared remarks on defense and just industrial because I think you said that net of defense your industrial markets were up and wanted to see how that would square with your comments on mining and things like that on the OE side or if that was indeed what you said.

And then, following up with the commentary that you thought that the quarter could have had a bottom on the non-defense industrial orders at least and what kind of strengths and why did you think that the quarter could have been a bottom? Thank you..

Well, Jeff, following into the first part of that for you. For, our industrial business it was down 22% and in there we do have the military vehicle volume, so if you pull that out our industrial business was down 17.5%.

What Mike said was up was our industrial distribution if you pull out the European piece, our industrial distribution domestically was up..

Okay, that makes more sense..

Okay..

And then on the order side, like why would, what were you referring to when you thought it may have been a bottom?.

We expected larger industrial product sales in the second quarter than the first..

On the OEC, is that for just OE or is that OE and aftermarket?.

It’s everything, yeah it’s everything..

So, driven by better aftermarket activities still and are you seeing any OE order pickup or is that still kind of bouncing along the bottom?.

Well, for mining and oil and gas it’s still bouncing along the bottom, for other markets it’s better than that..

All right, thanks a lot..

Thank you, you have no other questions at this time..

Okay. Well, then in closing I want to thank everyone for their continued interest and support of RBC Bearings, for participating in today’s discussion and for making our RBC Bearings part of your investment strategy. Thanks and will speak to you again after our second quarter..

Thank you for your participation in today’s conference, this concludes the presentation and you may now disconnect. Have a wonderful day..