Michael Cummings - Alpha IR Group Dr. Michael Hartnett - Chairman, President and CEO Daniel Bergeron - Vice President and CFO.

Samuel Eisner - Goldman Sachs & Co. Shivangi Tipnis - Global Hunter Securities.

Good day ladies and gentlemen. And welcome to the Second Quarter 2015 RBC Bearings Earnings Conference Call. My name is Katina and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Michael Cummings of the Alpha IR Group. Please proceed..

Thank you. Good morning and thank you for joining us today for the RBC Bearings fiscal 2015 second 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, Mike and good morning and welcome. As is our usual format, I’ll give an overview of the company’s operations and then Dan will go into some specific details. Net sales for the second quarter of fiscal 2015 were $112.6 million versus $102 million last year for the same period.

Our industrial markets increased 16.5% on a year-over-year basis and our aircraft and defense products were up 6% over the corresponding quarter last year. For the second quarter fiscal 2015, sales of industrial products represented 44% of our net sales with aerospace and defense at 56%.

Adjusted gross margins for the period came in at 38.6% versus 39.8% in fiscal year ‘14. Operating margins were 21.9% for the quarter versus 22.4% for the same period last year. Our second quarter of fiscal ‘15 showed the industrial OEM business up 15.1% from the same period.

Relative to industrial distribution, we saw a total increase of 19% and organic growth was 9.1%. The 9% increase was attributed to steady growth across most of our general industrial markets and was especially strong in Europe.

Again this quarter demand for our products from the industrial OEM markets was driven by the oil and gas producers, mining and construction, and steady demand over the general industrial markets in the U.S. and Europe. We were encouraged to see our European industrial OEM business up by 40% and our aircraft business there up a solid 14%.

The good news, we now see a base is formed in our mining market driven by the industry’s MRO needs. At some point last year, we saw demand well exceed our capacity but now everything seems to be balanced. And we see normalized demand from the broader construction sector, which remained steady.

On the industrial side, we’re experiencing positive order momentum across the broad base of industries, which are showing solid growth going into our third quarter.

We saw continued demand from our OEMs producing equipment for the development and completion of oil and gas fields, heavy trucks, construction, semiconductor equipments, trains, ground defense vehicles and machine tools.

Relative to our aerospace and defense business, these markets grew 6% in the second quarter of fiscal 2015, with a 10.7% growth of sales of aircraft OEMs offset by a contraction of 10.5% in aerospace distribution.

The contraction is due to impart to a shift of buying OEMs, some of OEMs we are now buying direct and some softening in the defense spending on programs that were supported by the distributors.

We continue to see strong demand for our core products and continued encouragement from our customers expressed in the form of contracts to accept and improve new designs. Adjusted gross margin for the second quarter was $43.5 million or 38.6% compared to $40.6 million and 39.8% for the same period last year.

Our overall gross margin was impacted largely by new product start up in industrial products and product mix. We remain confident on where the margins start is going and we continued new product introductions moving to our manufacturing programs. We did end up the second quarter of fiscal 2015 with a $109.4 million in cash and short-term investments.

We ended the second quarter of fiscal 2015 with $218 million in backlog compared to $222.3 million for the same period last year and $218 million for the fourth quarter of fiscal 2014. Our distributable sales never hit backlog in a meaningful way.

So, as that portion of our business grows or we had acquisitions like Climax, this won’t be reflected in the larger backlog.

Further, giving our outstanding reputation for planning and on-time delivery, in fact we were just awarded Supplier of the Year at Embraer for the second year in a row and hold a Gold Supplier rating at Boeing, which means 24 months of perfect delivery and quality on many tens of thousands of bearings that we shift to Boeing.

Our customers have learned that lead times can be shortened leaving us with the execution burden. And that seems to be a bit more than we’re doing right now. Looking ahead, please remember our third quarter is the shortest in terms of operating days and it’s seasonally the weakest for most folks in this industry that includes RBC Bearings.

Nevertheless, we expect to show year-on-year growth of 6% to7% for the period and our fourth quarter is shaping up smartly and we are planning a strong finish to our year. I’ll now turn the call over to Dan who will provide more details..

Okay, thanks Mike. SG&A for the second quarter of fiscal 2015 increased by $1.4 million to $18.5 million compared to $17.1 million for the same period last year. As a percentage of net sales, SG&A was 16.5% for the second quarter of fiscal 2015 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 $0.8 million associated with the addition of two acquisitions, $0.5 million in personnel-related expenses, $0.7 million in incentive comp expense and this was all offset by a decrease of $0.6 million in other expenses.

Other net for the second quarter of our fiscal 2015 was expense of $2.9 million compared to expense of $1.9 million for the same period of last year.

For the second quarter fiscal 2015, other net consisted of $2.7 million in cost associated with consolidation and restructuring; $0.5 million of amortization of intangibles offset by $0.3 million of other income.

Operating income was $18.3 million for the second quarter of fiscal 2015 compared to operating income of $21.5 million for the same period in fiscal 2014.

Excluding the consolidation and restructuring costs of $6.4 million, operating income would have been $24.7 million for the second quarter of 2015 compared to an adjusted $22.8 million for the same period last year.

Excluding these adjustments, operating income as a percentage of net sales was 21.9% for the second quarter of fiscal 2015 compared to 22.4% for the same period of last year. For the second quarter of fiscal 2015, the company reported net income of $13.2 million compared to net income of $14.1 million for the same period last year.

Excluding the asset tax impact of the cost associated with construction -- consolidation and restructuring of our facilities, net income would have been $16.5 million for the second quarter of fiscal 2015 compared to an adjusted net income of $14.8 million for the same period last year.

Diluted earnings per share was $0.57 per share for the second quarter of fiscal 2015 compared to $0.61 per share for the same period last year.

Excluding the after tax impact of the cost associated with consolidation and restructuring facilities, diluted earnings per share for the second quarter of fiscal 2015 would have been $0.70 per share compared to an adjusted diluted EPS of $0.64 per share for the same period last year, an increase of 9.4%.

Turning to cash flow, the company generated $17.8 million in cash from operating activities in the second quarter fiscal of 2015 compared to $4.2 million for the same period last year. On a six-month basis for fiscal 2015, the company generated $44.7 million in cash from operating activities compared to $21.5 million for the same period last year.

Capital expenditures were $8 million in the second quarter fiscal of 2015 compared to $8.8 million for the same period last year. On a six-month basis, fiscal 2015 capital expenditures were $11.5 million compared to $14.6 million for the same period last year.

The second half of the year, the company expects capital expenditure to be in the range of $7 million to $10 million. The company ended the second quarter of fiscal 2015 with a $109.4 million of cash on the balance sheet. And as of the end of the second quarter fiscal of 2015 the company had $9.6 million of debt on the balance sheet.

I’d like now to turn it back over to the operator for Q&A session..

Thank you. (Operator Instructions). Your first question comes from the line of Samuel Eisner representing Goldman Sachs & Company. Please proceed..

Hi. Good morning everyone..

Good morning Sam. .

Good morning Sam. .

So, just going on the gross margin here, obviously down about 120 bps year-on-year. Can you talk about -- you mentioned that new product introductions as well as mix impacted the margin this quarter.

Can you maybe give us some kind of guidance about how much those impacted mix or impacted the gross margin this quarter?.

Yes, I probably can. Let me see. Yes, I would say the -- let me just run a few numbers here Sam. So, it’s probably -- the start up affected it just less than 1%..

And to that point, is that expected to hold on here for the next few quarters or is that only a one-time effect? Just trying to understand how much of a drag the new products are going to be for the business for the year..

Right now, we’re expecting to get that back by the end of the year. I think I’m being a little bit conservative in that statement, because our guys are telling me that we’re going to get most of that back next quarter, but I never believe them..

That’s helpful there. And Mike, to the comments just about industrial here, it seems pretty strong on the industrial OEM. You called out, both oil and gas, and mining as the main drivers. If you could just provide some additional context there, we’ve been hearing from other manufacturers that certainly oil and gas has been weakening.

So, curious how do you think about that as you look forward..

Well, yes, I think it’s too early to tell on the oil and gas side what exactly is happening in terms of demand. Now, I mean you saw the article in today’s Wall Street, right.

And that article was -- talked about what the outlook for demand was for the big oil and gas producers; and until oil got to something like $60 a barrel, it wouldn’t really affect demand for most of the major producers who have capitalized. So, I hope they’re right.

Right now I think the history has been too short to see whether that kind of a drop of oil price to $80 a barrel is really going to have a much of an effect on the industry. The consensus is, it isn’t. Right now we’re not seeing it. So we can possibly go along..

Understood. And the comments on distribution and even Europe -- you actually mentioned that Europe was really strong for you in the quarter with industrial OEM up over 40%. Is that just an easy comp on a year-on-year basis, wins that you’re having that are helping you out. Just any additional color there would be helpful..

Yes. Well, it’s really in part -- it’s our distribution business in Europe is strong. Now, we make, in -- Europe our distribution business by and large is heavily driven by machine tool components to go into Swiss style machines that are made in Switzerland and exported to the rest of the world. And when the U.S.

auto industry is strong, those MRO components are consumed. And so I suspect some of our industrial distribution business is in part being driven by that. And the industrial OEM business, we have some new products that go into rail. And so, there is some retrofits going on around the world in terms of repairing rail lines.

And we’re benefiting from those retrofits..

And if I can just sneak one more in here on the heels of that. You’re doing very well it sounds like, but yet you guys are restructuring the consolidated facility in the UK.

Just curious what the decision-making was behind that and obviously you call that charges, so if you can just provide some more details on that that will be great?.

Yes. The UK economy is definitely not the [flywheel] of Europe. And so, it’s been a little tasty in terms of demand for the kind of products that we’ve produced over there. And so, those products would be better made and so from the U.S. given the demand profile. And so, that’s why we consolidated those bearings the U.S. And the U.S.

has been sort of recapitalized to produce those bearings. You can’t recapitalize everything. So we recapitalized our lines in the U.S. and consolidated Europe into those lines..

Great. Thanks very much..

(Operator Instructions). I’m sorry. You do have another question from the line of Shivangi Tipnis representing Global Hunter Securities. Please proceed..

Hello guys. Michael, my question is from the Airbus orders that recently we heard of. So, I believe Airbus orders are quite a big part of your organic growth. And I was wondering from the 260, I think it was about from -- let me just check, I am sorry about that.

I think it was a big order from Indigo that Airbus received and it’s about $26 billion from sales. So, I was wondering when do you guys get these kind of orders.

I mean how long does it take for these orders to actually get into your books for any manufacturing side?.

Well, we’re sort of in a steady state mode, manufacturing our products for Airbus. And as Airbus demand increases or the rate of plane production increases, we’re in a perfect position to increase our demand accordingly.

So, we would receive a signal from Airbus that they would want more product from us in accordance to a certain day if they brought their build schedules up, which appears that they’re going to have to do that. And we have those products stocked in Switzerland ready to supply them immediately.

So, we’re in very good position to support the build-up schedule that Airbus will probably announce over the next few months..

Your next question comes from -- as a follow-up from the line of Samuel Eisner representing Goldman Sachs & Co. Please proceed..

Hi guys. So, just to follow-up on cash flow here. It looks as though your purchase activity picked up pretty significantly this quarter.

So, curious if that’s a change in the way that you guys are thinking about using cash going forward; should we expect more repurchases over the next -- over the balance of the year or are we still kind of in cash maintenance mode of around this $100 million level?.

No, I’d say we’re in cash maintenance mode. I mean we have this share repurchase program in place basically to try to offset the dilution from our incentive stock option program. And so when we have the opportunity, we go in some market and buyback some shares to keep that program balanced. So, it’s not hurting our EPS number.

So, we actually bought around I think it’s around 80,000 shares in the second quarter..

That’s helpful. And then just Mike as you think about using the balance sheet going forward, I know Dan said $100 million is what you guys are looking to maintain. But are you in the market actively pursuing transactions? How do you think about M&A? Is the environment right for that? Any kind of updates there would be helpful..

Well, we’re obviously in the market pursuing transactions and reading books and making proposals and we’re very active, I wish some of these businesses were a little larger. But there are some nice small businesses out there that we’re speaking with right now..

Great. Thanks..

There are no further questions at this time. I would now like to hand the call back over to management for closing remarks..

Okay. Well, we appreciate the questions and the support and the interest in RBC Bearings. And look forward to our next conference call and I suspect at late January. And in the meantime, we’ll deliver you pretty good quarter. Thank you very much..

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day..