Good day, ladies and gentlemen. Welcome to the Fourth Quarter Fiscal 2014 RBC Bearings Earnings Conference Call. My name is Kim, and I will be your operator for today. [Operator Instructions] 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 us today for RBC Bearings' Fiscal 2014 Fourth Quarter Earnings Conference Call. .

On the call today will be Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; and Daniel A. Bergeron, Vice President and Chief Financial Officer. 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 a variety of factors. We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial 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 the release and is available on the company's website. .

Now, I'd like to turn the call over to Dr. Hartnett. .

Thank you, Rory, and good morning, and welcome. Net sales for the fourth quarter 2014 were $113.7 million versus $103 million last year, a 10.4% year-over-year improvement. .

Our industrial markets were up 7.3% on a year-over-year basis and our aircraft and defense products were up 12.9% over the corresponding quarter last year. .

For the fourth quarter of fiscal 2014, sales of the industrial products represented 44% of our total sales. Sales of aircraft products represented 56% of our total sales. .

Gross margins for the period came in at a record 39.8% versus 35 -- 39.5% last year. Operating income was 22.1% of sales, which is about the same as it was last year. And that we -- you would have to look at last year on an adjusted basis to that comparison. .

Our fourth quarter of fiscal '14 showed the industrial OEM business up 5%, overall on a quarterly comparison. This is net of a large ground defense program that ended last year. Sequential quarters tell a different story.

Net of the same ground defense program, we saw an OEM expansion of 19.2% during the period, so there's both volume and a different number of production days that serve to complicate that measure. .

Relative to industrial distribution on a full year basis, we're up 14.9%. On a quarterly comparison year-over-year, we were up 23.9%. .

As we reported in previous quarters -- previous sessions, we have seen the bottom of the industrial demand and are now seeing momentum turning favorably for our products in several markets including mining, oil and gas, and industrial distribution. .

Relative to our Aircraft and Defense business, we definitely saw continued demand and sales were up 12.9% for the quarter and 14.6% for the full year. Obviously, we're very pleased with the performance this quarter and in the market recovery being demonstrated in most of our industrial markets.

Continued demand of our aircraft products coupled with recent acceptance of several large product programs now in their infancy, gives us a great deal of confidence for this year and beyond. .

At this point, I'll turn it over to Dan, who will give you a little bit more color on the quarter. .

Okay, thanks, Mike. SG&A for the fourth quarter of fiscal 2014 increased by $2.3 million to $19.6 million, compared to $17.3 million for the same period last year. As a percentage of net sales, SG&A was 17.2% for the fourth quarter of fiscal 2014 compared to 16.8% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $1 million associated with the addition of 3 acquisitions, $0.6 million in personnel-related expenses, $0.3 million in incentive compensation expense and $0.4 million in other expenses. .

Other net for the fourth quarter of fiscal 2014 was expense of $0.5 million compared to expense of $7.6 million for the same period last year. For the fourth quarter fiscal 2014, other net consisted mainly of $0.5 million of amortization of intangibles. .

For the same period last year, other operating expense consisted of $6.7 million related to the consolidation in restructuring of large bearing facilities, amortization of intangibles of $0.4 million, and $0.5 million in costs associated with asset disposals and other items. .

Operating income was $25.2 million for the fourth quarter fiscal 2014 compared to operating income of $15.8 million for the same period in fiscal 2013. As a percentage of net sales, operating income was 22.1% for the fourth quarter fiscal 2014, compared to 15.3% for the same period last year. .

On an adjusted basis, operating income for the fourth quarter of fiscal 2014 was $25.2 million compared to an adjusted operating income of $22.7 million for the same period last year. .

As a percentage of net sales, operating income was 22.1% compared to an adjusted 22% for the same period last year. .

Income tax expense for the fourth quarter fiscal 2014 was $6.7 million compared to $5 million for the same period last year. Our effective income tax rate for the fourth quarter fiscal 2014 was 26.7% compared to 32% for the same period last year.

Excluding discrete tax benefits in the fourth quarter fiscal 2014 and 2013 of $1.1 million and $0.2 million respectively, our effective income tax rate for the fourth quarter of fiscal 2014 would have been 31.1% compared to 29.1% for the fourth quarter of fiscal 2013. .

For the fourth quarter of fiscal 2014, the company reported net income of $18.2 million compared to net income of $10.6 million for the same period last year. On an adjusted basis, net income would have been $17.1 million for the fourth quarter fiscal 2014, an increase of 7.6% compared to an adjusted $15.9 million for the same period last year. .

Diluted earnings per share was $0.78 per share for the fourth quarter fiscal 2014, compared to $0.46 per share for the same period last year. On an adjusted basis, diluted earnings per share would have been $0.73 per share compared to $0.69 per share for the same period last year. .

Turning to cash flow, the company generated $12 million in cash from operating activities in the fourth quarter fiscal 2014, compared to $17 million for the same period last year. Capital expenditures were $6.3 million in the fourth quarter of fiscal 2014 compared to $11.2 million for the same period last year.

The company ended the fourth quarter fiscal 2014 with $123.6 million of cash and short-term investments and $10.5 million of debt on the balance sheet. .

I'd like now to turn the call back to the operator for questions-and-answers session. .

[Operator Instructions] The first question comes from the line of Edward Marshall from Sidoti & Company. .

So my first question, I guess, is looking at the Industrial business and seeing the good improvements you had in the quarter here on a year-over-year basis, the first, I guess, in some time.

I'm curious about the sustainability, because when I -- maybe we can look at that backlog, and you can kind of parse out backlog and maybe what's happened there on the Industrials side, but I seem to remember your Industrial business is short order kind of business.

What kind of visibility do you see there that we can see maybe this double-digit growth kind of continue as we go forward?.

Well, I think the Industrial business, most of the backlog is aircraft just because of the way the Industrial business books. But we are expecting to see continued strength in the markets of oil and gas.

One of the stronger market performances for us recently has been mining, and that turned up sort of in the middle of the third quarter last year and is definitely sustaining its demand. And overall, it's hard to predict, but Europe has been very good for us, and particularly in the areas of trains and trams, and that business continues to be strong.

So I think we're going to have a good Industrial year this year. .

Yes, I mean from my seat, I guess, it's tough to look at, I mean I understand the Industrial markets are improving, but you've got some easy comps, the seasonality in the fourth quarter.

It's kind of really -- it's difficult for me to see kind of what the real number is here kind of I know the year-over-year improvement, but I think there's some easy comps in the fourth quarter last year and then, of course, the seasonality, so the sequential kind of improvement is tough to kind of look at as well.

So how do I parse this business out kind of just think about on a run-rate basis on the Industrial side? Any help you could provide there?.

Yes, I think year-to-year, we should be up in the low single-digits percentage-wise. .

Okay. And then when we look at the margins, I mean you had a good year of gross margins as you've done over the last several. I'm just kind of curious about -- as we look out to fiscal '15, what you kind of anticipate from a margin kind of improvement year-over-year.

Any help there?.

Yes. Let me -- I said, low single digits, I meant high single digits. I was going to say low teens, but I wasn't that brave. .

High single on Industrial growth year-over-year?.

Yes, yes. Sort of mid to high. .

Mid to high, okay. I can hear Dan in the background. .

I didn't say anything. On gross margins, we finished the year at 39.3%, and our target this year internally is to try to get up to 39.8% to 40%. And it's going to be lumpy quarter-to-quarter, but we're feeling good that we'll be in that range by the end of the year. .

And the book end quarter is higher, the 2 in the middle kind of lower and the [indiscernible]... .

Remember Q3 is always the shortest amount of production days so that's always a bigger challenge than the other quarters. .

And if I look -- I turn to cash and the balance sheet real quick and I understand you paid the special dividend. Just kind of want to just quickly touch on maybe your thoughts on cash, maybe thoughts on acquisitions, it's been earmarked for acquisitions as -- for some time.

I'm assuming that larger acquisitions are probably, I won't say remote, but less of a target right now as you're putting cash back to shareholders, is that a fair assumption?.

I don't think it is. I think, the company generates a lot of cash, and it sort of has a cash cycle that's a little bit longer than 12 months, it appears, just because of the things that go on with taxes and the rest of it.

So it didn't appear to us that paying that dividend would be difficult from a cash replacement standpoint, and we probably be right back into that previous cash level in a couple of quarters.

So in terms of acquisition size, we look for a certain characteristic in the acquisitions that we make and the characteristic is one where we'd like to see acquisitions that help us in our core markets or move us into targeted markets. We see and we've done, as you know, many small ones.

If we were to do something that cost us $100 million and had $15 million of EBITDA and $70 million of revenue, we would have absolutely no problem financing that off of our balance sheet with either our cash or a blend between cash and debt. So, and that size of an acquisition would be sort of out of the ordinary for us.

So there's just no inhibitions as a result of paying that dividend that we would incur based upon historically where we've been and currently what we're looking at in terms of candidates. .

And Ed, just to add a little to that, I mean, post dividend based on today's cash, we're going to have a net cash balance still of $100 million. But we started beginning of fiscal 2014 with $110 million, and that's surely -- and completed during that period in 2014, two acquisitions.

So it's surely not changing our model at all from what we've done in the past and what we expect to do in the future. .

Now, you said $100 million, I think that you're talking as of the end of May or the end of April or?.

Well, as of today. Based on my cash position today, my back [indiscernible] cost me $46 million for a dividend payment on June 13, so it's going to be sitting here with $100 million of cash. .

So for the first say, 45 days of the Q1, you've had a pretty good cash year so far?.

Yes. .

Your next question comes from the line of Walter Liptak from Global Hunter. .

I wanted to ask about the organic revenue growth and see if we could talk about sequentially the improvement that you might have seen in the different parts of the business last quarter versus this quarter. .

What we've seen in different parts of the business?.

Yes, I guess, Industrial versus Aerospace. .

Okay, well, just sort of big picture point of view. From the industrial point of view, starting there, we've seen the mining sector come back very strong. It was clear to us that most of the OEMs had liquidated their inventories over 12 months prior to our third quarter last year and some of them are in crisis mode to recover those inventories.

So I think we're going to be feeling those kinds of pressures through much of this year. And what happens to the OEM side of the mining business in our fiscal '16 sort of remains to be seen. Oil and gas is very strong.

We have significant volume, we see coming online for us for the balance of this year, so we're pretty well going to book out much of our capacity in that sector this year. In previous years, that sector has been dilutive to our margins, because we were in startup and we were early in the program on a lot of sizes.

We're much more mature than that today, and things are better. So we've seen margin improvement, volume expansion and improvement in demand from the entire cross-section of that sector. So we are really happy about what we see there. And if I look at Europe has been very strong for us.

Part of the strength from Europe comes from their industrial aftermarket, which to a certain extent, supplies the machine tool base in Europe and the United States that are making automobiles, so that's behind some of that.

To another extent, the precision watchmaking industry in Europe, and particularly in Switzerland is extremely strong and provides a nice strong demand for our products.

And thirdly, we've initiated some marketing initiatives in Asia to follow some of the Swiss machine tool companies that move to Asia and market their products there, and that's been successful for us.

And we have some new products that are being well received that are being absorbed by the overall world marketplace at a rate that's very encouraging to us.

So we're seeing some really good things that -- out of Europe that -- some of them are being generated because of economic improvements in the world, and others are being generated internally because of programs through our development cycle. The aircraft side is very steady and strong for us.

I mean, I think everybody knows what the aircraft makers are reporting in terms of assembly builds and stepping up production rates. We're definitely part of that. Our base business is seeing volume -- quarter-to-quarter volume enhancements as a result of those stepped up rates.

It's a little lumpy because there's so many subcontractors in the system and some of them are small and they don't plan well and become -- go from crisis to crisis in terms of what they want from us, in terms of their planning. So that's the source of some of that lumpiness.

Superimposed on top of that is we have some several large new programs, both in the U.S. for the plane makers, the engine makers and in Europe for the plane makers and the engine makers that are going to substantially improve our offering, expand our offering and increase our -- significantly increase our revenues as some of these new designs mature.

So we're very busy both in the development cycle and in the production side in this entire airframe and engine business. And that's the -- that's sort of the major part of it. .

Okay, that sounds good.

So sequentially, you'd say that things, with the commentary on oil and gas mining, et cetera, that the organic growth rates are improving from last quarter?.

Yes, yes, in all cases. .

Okay, okay, good. When do those -- you mentioned the new large programs on the aircraft side.

When do those start generating revenues? Is that this year, in the next 12 months?.

It depends upon the program. I mean, if you look at when does the 787 hit its full 10 planes per month production cycle and when does the A350 come online, and what engines are essential to those plane systems.

And so if you start to look at that, you see that by calendar 2017, you're starting to see -- you'll see a little bit of volume in '16, but it's not material. In '17, '18, '19, it becomes very significant for us. .

Okay, got it. And Dan, just one, I think, you could probably address is, on the gross margin comments you made, the 39.8% to 40%.

Can you talk about the components of that? Pricing, you touched on volume, mix, and especially given the acquisitions that were done, how does -- any mix change from the acquisitions change the gross margin?.

Yes, for us, it's based on volume improvement and cost efficiencies that we're working on in each of our 24 manufacturing facilities. That's how we came up with our internal goal. .

Okay, so no gross margin dilution from the acquisitions?.

Well, we still have a little going into the first quarter, but it all kinds of cleans itself out by the second quarter. And on a total basis, it's just not that big. .

Your next question comes from the line of Samuel Eisner from Goldman Sachs. .

Just to start off with, you gave some guideposts on the Industrial business, as well as gross margin. I was wondering if you could maybe talk a bit about the Aerospace business and your expectations again from a guidepost standpoint for this upcoming year. .

Yes. Well, we certainly expect the Aerospace business to be up probably the same percentage as it was in our fiscal '14. We don't see much of a change to that.

I think a certain amount of that growth will come from -- most of that growth will come from mature products that we've been supplying for some period of time, and the good part of that is the more time that you have to make these products, the more ideas you have on how to make your production processes more efficient.

And the better your margins as a result. So we expect to see that kind of performance out of Aerospace this year. And then as our new products start to phase in, a little bit in '16, '17, we'll see, we should see that growth accelerating. .

Understood. And the -- going back to Industrial, the -- I think you said almost 24% year-on-year growth in distribution. I think last year you were about flat in distribution, so a fine comp.

But just curious how much of that growth was organic and how much of that was potentially the acquisition aiding in that distribution growth year-on-year?.

Yes. The organic part of that was about 2.4%. .

That's helpful. And then in terms of the new facility that you guys have coming online in Poland. I believe, last quarter, you mentioned that you were nearly there, but it was under-absorbed. Perhaps just getting an update there on what the expectations are for volume coming through that facility.

Is it being -- are you paying all the D&A on it now, just kind of an update on that facility. .

Yes, well that facility is producing. It's still under-absorbed. That facility pretty much will be targeted for some of these new products that we talked about for the aircraft side of our business coming online in '16 and '17.

So as those products come online, Poland will play a bigger and bigger role and the absorption will -- the under-absorption will actually turn to gross margin. And so I think this year, if we come out of the fourth quarter fully absorbed, it would be a nice achievement. .

Great. And then just lastly, in terms of the new product introductions, I don't know if you have given a statistic like this in the past. But have you ever looked at kind of new product or I guess product vitality index, new products as a percentage introduced over the last 3 years, the percentage of the total revenue.

Any kind of number that you maybe can put behind to give us a kind of goalpost here of what you're trying to get to in terms of new product introduction?.

I don't have a metric on that, Sam, that's easy to grab, that would be meaningful to anybody.

I would say this, most of our oil and gas business on the industrial side is new product, and a fair amount of programs right now on the aircraft side are new product, but they're very early in their revenue cycle, so they're not sort of meaningful to our top line.

And as you know, on the aircraft cycle, it probably -- it takes forever to get your products approved, tested, endorsed, certified and specified on the drawings. So we've been working through that for the last number of years on several programs. I don't have an easy answer -- easy percentage to give you in terms of content. .

Understood. Just one last one here.

Is it right to assume that new products carry higher prices and also higher margins as well?.

No, it's not. It depends upon the nature of the new product. I mean if it's a totally new, innovative design that you originated and have a patent around it, then, yes.

If it's a component that you've worked with the OEM on, and the design is sort of co-owned between you and the OEM, then you're probably going to be challenged on the manufacturing side to achieve your margins.

And I'd say we'd have a mix of both of those, and so inevitably, when you start up a large program on the OEM side, your margin is tight and because you're early in the maturity cycle. And as you work through your processing and performance issues, you're able to achieve your targeted margin.

So fortunately, these programs start small, so the margins - the margin bite to the consolidated numbers is a small nibble, and if you have the program well enough defined and engineered, you should, over your plan cycle, be able to achieve your targeted margins, and that's the basis for a lot of our programs. .

[Operator Instructions] Your next question comes from the line of Kristine Liwag from Bank of America Merrill Lynch. .

So I guess, you talked about margin improvement a little bit earlier. You had said that 39.8% to 40% for the year. I guess, when I kind of look at my model, it's a little bit shy of the historical 1% target improvement that you guys had before.

So if we are seeing the bottom in industrial cycle and volume really recovered and you get to that mid- to high-single-digit growth in Industrial, and Aerospace continues to be stronger, what is preventing you from getting to that historical 1% target? Is this conservatism built in, or is there some sort of pricing headwinds that we should be aware of?.

No, Kris, I think the conservatism is our CFO, because I wanted to go with the 1% improvement and he doesn't want to do that. He wants to use a smaller number than I wanted to use, so we went with his number for this call. But I'm pretty confident that we're going to see some pretty good margin expansion this year. .

Great. And then... .

I have more confidence than my CFO, let's put it this way. .

So really, I'll put down 1%. So in legacy Aerospace programs, you had talked about the proprietary content versus the build-to-print for the OEMs.

How is the new aircraft development program shift between your proprietary versus build-to-print differ from the legacy programs? Do you have more proprietary content or less? And how should we think about the ramp-up in margins there as these programs ramp up?.

Okay. Let's take it one at a time.

The first part of your question, could you ask that again?.

The mix between proprietary content versus build-to-print?.

Okay, well, yes, the -- there's a lot of -- I would say that our content is -- when I think over the field here, there's content both build-to-print and proprietary content. So the proprietary content, obviously, we prefer because it's easier on the pricing side.

The build to print, in order to achieve your margins on the build-to-print, you -- the proprietary nature of your business becomes that of your manufacturing processes.

So typically, we'll look at a sort of a build-to-print opportunity, determine who our competitors are, what our advantage might be against those competitors, what the customer is trying to achieve, how committed the customer will be to our business over a multiple of years, and that will tell us how much engineering effort we should put into process development to secure the kind of margins that we expect RBC Bearings to generate over that period of time.

And if we feel that we can participate in an OEM build-to-print and come up with some innovative processes in order to achieve our margin objectives with a customer who is going to be committed to us over multiple years, then a green flag will come up and we'll begin the program.

And that's -- so we weigh these programs very carefully, and if they don't weigh out appropriately, we won't invest the time, effort or talent in order to achieve the goal.

So we've been able to identify several really important programs for us that we could participate in, that have -- of a build-to-print nature where the proprietary aspect of the build-to-print nature is our processing technology and our net performance out of those opportunities, on a pro forma basis, appears to be very acceptable to us. .

Great.

And the second part of my question is really, what is the shift between proprietary versus build-to-print, and legacy versus the development programs? And if the development programs have more proprietary content or more build-to-print content?.

I would say the development programs are split. If I had to guess, and this is truly a guess, it's probably 50-50, thinking of all the meetings that I sit in, in terms of development meetings, the products that we talk about, the nature of those are on both sides of that street.

Our legacy products -- are we talking simply the aircraft side of the business?.

Yes. .

Yes. Our legacy products are very -- a lot of them are standards, but we're the standard bearer. And so it's a place that you really want to be. So, yes. .

Your next question comes from the line of Walter Liptak from Global Hunter. .

I wanted to ask about some of the income statement and cash flow numbers for 2015.

What are you thinking about for SG&A expenses? Are you managing it now to percentage of sales or how should we look at that?.

Yes. We ended fiscal year '14 at 17.2%. I think the first half this year, we are going to be closer to that range, but hoping by the end of the year for fiscal year '15 that we're closer to 16.5% to -- range as a percentage. .

Okay, great.

And how about tax rate for 2015?.

34%. .

Okay.

And any meaningful changes, CapEx should be a little bit lower for 2015, right?.

Yes. All of our major capital buildouts of brick-and-mortar have been done, so we should get back to our normal 3.5% of sales-type number and that's basically what our depreciation's running at. .

Okay, got it. And then cash flow has been very good and, obviously, it's nice to see the special dividend.

Is there any change that we might see, continued dividend payments or share repurchase, any other uses of cash that benefit shareholders?.

There's no immediate plans. I mean, it's on a -- we, from time to time, the board will evaluate where we are and what we have on the docket in terms of acquisition opportunities and what our cash position is. And we're trying to demonstrate that we are shareholder-friendly, and I think we demonstrated that. .

Okay, ladies and gentlemen, that concludes our question-and-answer session. I will now turn the call back to Dr. Hartnett. .

Thank you.

Well, just before we leave, because of the timing of this call, we're obviously very deep into the first quarter of our fiscal '15, and so we basically have a few more weeks to wrap up the quarter, and to the largest extent possible, we see the first quarter of our '15 to be almost identical to the fourth quarter of our '14 with I'm sure some minor changes here and there that can't be targeted right now, but the business is strong and healthy, performing well, and we're very pleased about today's position and where we are going.

And we thank everyone for participating in the call, and look forward to our next one. .

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day..