Michael Hartnett - Chairman and CEO Dan Bergeron - VP, CFO and COO Chris Donovan - IR, Alpha IR Group.

Kristine Liwag - Bank of America Merrill Lynch Peter Skibitski - Drexel Hamilton George Godfrey - C.L. King.

Good day ladies and gentlemen and welcome to the Q4 2018 RBC Bearings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the call over to Chris Donovan with the Alpha IR Group. You may begin..

Good morning and thank you for joining us for RBC Bearings fiscal 2018 fourth quarter earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; and Daniel A. Bergeron, Vice President, Chief Financial Officer and Chief Operating 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 web site.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the company's web site. Now I'll turn the call over to Dr. Hartnett..

Thank you and good morning. Net sales for the fourth quarter of fiscal 2018 were $179.9 million versus $160.2 million for the same period last year, a 12.3% increase. Excluding the surge in Canada sales from last year, organic growth for the quarter was 13.5% and 10% for the full fiscal year 2018.

For the fourth fiscal quarter of 2018, sales of industrial products represented 40% of our net sales with Aerospace products at 60%. Gross margin for the fourth quarter of fiscal 2018 was $69.7 million or 38.8% of net sales. This compares to $63.2 million or 39.5% for the same period last year, a 10.3% increase.

On a full-year basis, gross margin as a percentage of net sales, in fiscal 2018 was 38.2% compared to an adjusted 37.9% for the same period last year. Adjusted operating income was $38.3 million versus $34.4 million last year, and a 11.5% increase.

On a full-year basis, fiscal 2018 ended at $136.1 million adjusted or 20.2% of net sales compared to $121.4 million or 19.7% of net sales operating income. Clearly, this was a nice quarter for the company and an excellent year all around.

Industrial products showed a 26.4% year-over-year growth rate, and we continue to see strong overall demand for these products. Industrial OEM was up 29.9% and distribution and aftermarket was up 19% on a year-over-year basis.

Mining, oil and gas, semiconductor machinery, machine tool, and general industrial equipment continued to demonstrate exceptional strength during the period. On the aerospace and defense side, the fourth quarter net sales were up 6.7% and normalized revenues generated by Canada last year. This was mainly driven by OEM.

Aero and defense OEM was up 9.1% on an organic basis. We see our aerospace volumes building through subsequent quarters, as we add additional capacity, floor space, equipment and staff. This is in order to support expansion in volumes driven by new contracts as well as the additional airframe and engine builds scheduled for the coming years.

There is no question that our aerospace margins were impacted this quarter by startup expenses related to new programs being introduced at several facilities, in both the airframe and engine product segment.

The impact here was approximately0.5 plus percent, probably larger and will likely continue for the next few quarters as these programs are simulated, tooled, and brought to maturity. Another 0.5 point plus was mix related as aftermarket spares volume was lower than normal.

This aftermarket demand can ebb and flow quarter-to-quarter, but is expected to strengthen as a result of the new defense build with increased spending budgeted for repairs and readiness.

Regarding our first quarter, we are expecting sales over the period to be between $171 million and $174 million compared to $160.8 million last year net of Canada, an increase of 6.8% to 8.7%. I will now turn the call over to Dan who will give you more detail on our financial performance..

Thanks Mike. SG&A for the fourth quarter of fiscal 2018 was $29.6 million compared to $26.2 million for the same period last year. The increase was mainly due to higher personnel costs of $2.2 million, $0.3 million of additional incentive stock compensation, and $0.9 million of other items.

As a percentage of net sales, SG&A was 16.4% for the fourth quarter of fiscal 2018 compared to 16.4% for the same period last year. Other operating expense for the fourth quarter of fiscal 2018 was expense of $2.2 million compared to expense of $2.6 million for the same period last year.

For the fourth quarter of fiscal 2018, other operating expenses were comprised mainly of $2.3 million in amortization of intangible assets offset by $0.1 million of other items. Other operating expense for the same period last year consisted mainly of $2.4 million in the amortization of intangible assets and $0.2 million of other items.

Operating income was $37.9 million for the fourth quarter of fiscal 2018 compared to operating income of $34.4 million for the same period in fiscal 2017. On an adjusted basis, operating income would have been $38.3 million for the fourth quarter of fiscal 2018.

Adjusted operating income, as a percentage of net sales would have been 21.3% for the fourth quarter of fiscal 2018 compared to 21.5% for the same period last year. For the full year of fiscal 2018, adjusted operating income was 20.2% of net sales compared to 19.7% for the same period last year.

For the fourth quarter of fiscal 2018, the company reported net income of $26.7 million compared to net income of $21.6 million for the same period last year. On an adjusted basis, net income would have been $26.4 million for the fourth quarter of fiscal 2018 compared to net income of $21.6 million for the same period last year.

Diluted earnings per share was $1.09 per share for the fourth quarter of fiscal 2018 compared to $0.90 per share for the same period last year. On an adjusted basis, diluted EPS for the fourth quarter of fiscal 2018 was $1.08 per share compared to adjusted diluted EPS of $0.90 per share for the same period last year, a 20% growth rate.

Turning to cash flow, the company generated $37.8 million in cash from operating activities and spent $7.4 million in capital expenditures in the fourth quarter of fiscal 2018 compared to $26.7 million for the same period last year.

For the full year fiscal 2018, the company generated $130.3 million in cash from operating activities and spent $30 million on capital expenditures.

In the fourth quarter of fiscal 2018, the company paid down $25.1 million of debt; and for the full year of fiscal 2018, the company paid down $98.2 million of debt and ended the year with $54.2 million of cash on hand compared to $38.9 million of cash on hand for the same period last year.

I will now turn the call over to the operator to begin the Q&A session..

[Operator Instructions]. And our first question comes from the line of Kristine Liwag from Bank of America. Your line is now open..

Hey, good morning guys..

Good morning Kristine..

Mike, you mentioned that you had wins in the quarter in commercial aerospace; but I thought that with your significantly higher content on the MAX and NEO, revenues would have been even higher in the quarter than they were.

With the announced production race from Boeing and Airbus, are you at the volume that you expected to be, or is there something going on in the supply chain either with inventory in the pipeline that's preventing you from being at the volume that you had expected it to be?.

Well, the MAX is really in its early production phases, Kristine, right now, so we are not really seeing the matured numbers. I mean, that's ahead of us and our content on the MAX is really good. But you know, at RBC, there was just a lot going on this quarter in our aircraft business, and both in the new engines and new airframe categories.

And we are moving from an initial lot production phase in some of our plants to a mature production phase once these airframes and the engines start to get into significant numbers. And the other thing is, there’s a number of contracts that are rolling over in the next couple of years, and we expect to benefit substantially from that.

So during this quarter, one of our plants was asked to develop and deliver -- design and deliver over 50 new products for the 777x, and there is just a big acceleration at Boeing on that ship, and so, of course, we had to put everybody on it, and turn the plant upside down and move heaven and earth and needless to say, this does not have a positive impact on production efficiency when your plant is focused on making 50 plus samples.

So I think we delivered 45 of the 50 plus during the quarter, and we have a few left this quarter to finish, and we will be through that phase. But the plant was -- we had one plant that was really distracted as a result of that, and I think we chose the right priority to get on that ship, and take care of that customer. And so we did.

So that was one example of some of the startup expenses that we had, and we have similar examples in two other plants where we are starting up other programs, which I can't talk about..

I see.

As these samples tail off and as the initial lots transition to mature production, how should we think about gross margins into fiscal year 2019? Does this mean that fiscal year 2019 should see gross margin expansion of greater than one percentage point?.

Well, you know, if we were through the production startup on some of these projects, that would certainly be the case, but we are not going to be through the production startup.

I mean, we have another -- we are expanding two other plants to accommodate some of the business that we have been contracting on structural components, and so I think the startup will be -- those plants are both in the United States and in Mexico; so I think the startup of those programs is going to also have some impact on us through the quarter as through the fiscal year.

I am thinking probably it's going to be -- the byte is probably going to be at least half a point during the fiscal year as we ramp up these volumes. But the volumes are significant.

We are going to basically triple revenues from between now and 2022, and we expect these revenues to be in the low eight figures, and so you know, we are applying manpower and capital and talent to put in these production systems. So I think the byte will be about 0.5% going forward next year..

And is that 0.5% incremental to the fiscal year 2018 numbers or is that already included in the fiscal year 2018 numbers?.

Yeah, that's included in the fiscal 2018 numbers. So I think you can use fiscal 2018 as a baseline.

Where we normally try to expand our margin, a percentage point a year, I think we now are probably going to say, okay, we are going to expand it a percentage point a year but back it off to 0.5 percentage point, because we have startups on these various programs..

Actually, that makes sense.

And then, if I could squeeze in one more question, can you discuss the effects of higher steel prices in your business? Is that relevant or not relevant? Is that the pass-through cost or can you increase pricing to adjust?.

Yeah, it's kind of mix and match. I mean, in some cases, we have contracts where we have negotiated a collar. And so, if the material moves plus or minus 5% from baseline, we can debit or credit accordingly.

In some cases, where we don't have that collar, the material component of the cost is very low, so it's just not administratively worthwhile –to worry about the collar.

And in some cases, we have made extensive material buys and brought in material early before these tariffs, and so we have sort of a cache of material that will at least last us through next year..

Great. Thank you very much..

Thank you. And our next question comes from the line of Pete Skibitski from Drexel Hamilton. Your line is now open..

Good morning guys. Nice year..

Thank you, Pete..

Dan, would you be able to gives us the full year EBIT by segment for fiscal 2018?.

Pete, I just don't have it in front of me, but we will be filing the 10-K in about three hours, so you will have it..

Okay, great. Great. You guys win an award for speedy 10-K filing there.

Hey Mike, when you were talking about the tripling of revenue to 2022 to the low eight figures, was that specifically sort of moving from 777 to 777x, I wasn't quite sure what you were referencing?.

No it's -- that has more to with structural components for older ships..

Specifically, for structural components, as opposed to bearings?.

Structural components with bearings. We like to make sure that they have bearings with them. So -- all these structural components have bearings..

Okay. Got you.

And then, just was wondering if we could do some housekeeping, maybe your expectations in fiscal 2019 for CapEx and D&A and wasn't sure if you give tax rate or not, either?.

Yeah. On CapEx, we will still be in that 3% to 4% range, and we will probably spend a little more money in fiscal 2019 than we did in 2018, because we are building out a few more plants to handle the capacity that's coming toward us. On the depreciation, it will be running around $7.7 million a quarter, that's depreciation and amortization..

Okay, great.

And the tax act -- the tax rates?.

22%..

22%, okay, great. Okay. And then, Mike, just closing out on A&D and overall, you have grown kind of low single digits the last couple of years, but it sounds like you are implying that, the best of the narrow body ramp for sure is ahead of you, and, we have got the fiscal 2018 defense still signed as well.

So does it make sense to think that on the A&D side you will be accelerating in terms of growth the next couple of years?.

Yeah. I would expect so. I mean, we have some really good programs that are lined up in our inbound, which is one of the reasons right now, we are going through expansions in four plants.

We probably should be working on six, but how much can you work on at once, right?.

Yeah, understood..

Right. So yeah, I think, there is -- these new engines are very important to us, and of course, the build numbers on the leap [ph] and the gear triple fan are basically low. I mean, they really haven't hit their mature numbers. They have started to hit those mature numbers in this year and 2019 and 2020. They have become very perky.

So those are important engines to us, and we have good content in those places. And also, we have been advised that a major European engine builder has selected us to be a supplier of some major components, beginning into 2020. So I think, we will probably be expanding our plant in Poland a little bit, once we take care of the U.S.

and Mexico to accommodate some contracts over there. So our content on these engines and on these airframes is going up..

That's great. And I have been struggling to think about the industrial side as well, because you have got explosive growth here in fiscal 2018. The PMIs that you talked about a lot, are still fairly high.

With the more difficult comp, does the growth slow down or are things just still so good out there, that we can maybe still do double digit type of growth in industrial, how do you think about that?.

You know, industrial is, because of the way industrial works, through so many different sectors that we are servicing. You have to be a Bernanke level economist to figure out what the future is going to hold. So we try to make sure that we have the capacity that our customers require, and right now, we are definitely taxing our capacity.

So if it slowed down to the low double digits, it might be a good thing..

Got it. Got it. Very good. Appreciate the color guys. Thank you..

[Operator Instructions]. Our next question comes from the line of George Godfrey from C.L. King. Your line is now open..

Thank you. Good morning Michael and Dan. Nice quarter and finish to the year..

Thank you..

Just wanted to drill down on that industrials; the aerospace is very clear, with the billing rates with Airbus and Boeing, and you highlighted that.

On net industrial segment, if we can go into the mining, oil and gas or machinery or segments that are -- do you see trends that are specifically benefitting now, that perhaps won't continue in the future? Are they projects, larger scale projects, I just would like to get a little more granularity on the 26% -- I would not think of that as sustainable at such a strong growth number.

So I am just wondering, if there are moving pieces that you can see that are visible today, before the Bernanke PhD? Thanks..

Well, I will let Dan answer that one..

Okay. So George, in that segment, we have, as Mike talked about, oil and gas, construction, mining, general industrial. And general industrial just goes all over the industrial complex in the U.S. and in Europe, and then we have our polyp business in Europe. So all of them are behaving very nicely.

I think as Mike said, six months into the year, the comps are going to get more difficult, all right, because we had a really good year this year on an -- in the industrial side.

But other items that are in our industrial segment would be submarine, and so we are going to see some nice growth on the Virginia and the Columbia subs coming in, in two to three years from now. So that's a nice growth story that we will continue to see.

And military vehicles, where we are just starting to see some good activity from the Department of Defense on newbuilds and repair work on military vehicles.

So I think on the industrial side, right now, oil and gas has been really strong, and we think that's going to continue and I think for us on mining, we are always talking about large haul interrupts for Caterpillar, Komatsu, Liebherr, folks like that. I think that's continuing to go in the right direction..

Great. Thank you for taking my questions..

Yeah we have one other sector that we can talk about, and that is, there is just an awful lot going on in China, building out the rail complex for high speed trains and for city trans.

And so, our products for those systems are very well accepted, and to the extent that we have had to build out an office in Shanghai with engineering customer service people this year, in order to support that network of demand, and also, mapping across that is our machine tool business, and now our largest consumers of machine tool products is China, and the growth there seems to be -- and the acceptance of our products seems to be extremely good.

And so, the mechanism for what's driving the economy over there, if -- or if anybody has a good idea of where the Chinese economy is going, we are going with it..

Understood. Thank you for the commentary and the color..

I am showing no further questions at this time. I would now like to turn the call back to Dr. Hartnett for closing remarks..

Okay, well. Thanks everyone for participating in the call today, and we look forward to speaking again in the mid-summer. Good day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day..