Good day, ladies and gentlemen, and welcome to the Q4 2019 RBC Bearings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce to your host for today’s conference, Mr. Chris Donovan with the Alpha IR. Mr. Donovan, you may begin..

Good morning, and thank you for joining us for RBC Bearings' fiscal 2019 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 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 will turn the call over to Dr. Hartnett..

Good morning and welcome to the RBC conference call. Net sales for the fourth fiscal quarter of 2019 were $182.2 million, versus $179.9 million for the same period last year. Excluding the sales from Avborne, Miami a business that we recently sold, organic growth for the quarter was 4%.

The fourth quarter of fiscal 2019 sales of industrial products represented 37.2% of our net sales, aerospace products 62.8%. Gross margin for the quarter was $73 million or 40.1% of net sales on an organic basis. This compares to $69.8 million or 38.8% for the same period last year, a 9.6% increase.

Adjusted operating income was $41.2 million versus an adjusted $38.5 million last year, 22.6% of sales. For the full-year, adjusted EBITDA was $195.5 million or 27.8% of revenues, which is a record.

The business performed very well for the quarter as we are beginning to overcome our own production supply constrains, which are the same as those currently [plugging] (Ph) much of the aerospace industry. Industrial product showed a 5% organic year-over-year declined, during the period against the strong comps of a year ago.

Industrial OEM sales expanded 6% in distribution and aftermarket was up 7% for the full-year. Aerospace and Defense showed a 10.2% expansion on an organic basis. Shipments on the Defense side were up 11.8% while aero commercial OEM was 11.2%.

Aerospace was up a total of 7% for the year, the increased build rate and new content at the major airframe and engine producers continues to drive very strong demand as we raise to bring capacity and processes online across our manufacturing network.

We saw no impact from the 737 Max problem in Q4 and at this stage of the quarter we don’t expect to see any in this period. We are making good progress on big business development across the breadth of both the aerospace and Defense sectors which will be reflected in our results throughout FY 2020 and beyond.

We remain on-track to bring additional plan capacity online, this year to address the increases in demand as well as internalize many processes that have been traditionally outsourced to our subcontractors.

The purpose here is to augment industry capacity in support of the unprecedented expansion in the aircraft industry and to create an infrastructure that is more responsive to the needs of our customer base. Aerospace demand drivers this year will be the major airframe and engine builders.

We continue to see supply of ever expanding range of products including of course bearings as well as the bearing integrated structural components, fasteners, engine seals and hydraulic actuators among other products.

Today, we are preparing to support the accelerate build rates of the 737 Max and the 787 Ships as well as the introduction of the Boeing 777x which will be a very important shift to RBC Bearings.

On the Defense side, the submarine business continues to show strong current demand and future promise as plans for the expansion of future sub-builds become firm. As funding for the nine Block 5 is underway there is a movement underfoot for an 11 Block 5 which will mean a three Virginia Class builds starting as early as 2020.

The joint Strike Fighter build rate increases again this year another high profile program for us and more funding is allocated for offensive weapon systems including missiles and advance bombers. Both systems used products for our business.

Last but not least the space, we are working with the major rocket system and satellite manufactures on the new century of space technology, new designs for bearings and actuating devices to be used and rocket guidance, rocket engine turbo pumps and communication satellite are being created turn into the operating hardware and solar in low production quantities to the principle manufacturers.

Our belief is that this will be a very productive area for our products in the future, it’s very high to put a limit on the future business that could be develop if inter plant terry travels becomes a reality. However, the explosion of disposal communications satellites is very close to hand.

Regarding our first quarter, we are expecting sales to be between $182 million and a $184 million compared to a $171 million last year net of the Airtomic Miami contributions. I will now turn the call over Dan who will give you more detail on our financial performance..

Yes. Thanks Mike. SG&A for the fourth quarter of fiscal 2019 was $29.5 million compared to $29.6 million at the same period last year. As a percentage of net sales, SG&A was 16.2% for the fourth quarter of fiscal 2019 compared to 16.4% for the same period last year.

Other operating expense for the fourth quarter of fiscal 2019 was expense of $3.2 million compared to expense of $2.1 million for the same period last year for the fourth quarter fiscal 2019 other operating expenses were comprised mainly of $2.3 million and the amortization of the intangible assets and $0.9 million of restructuring expense.

Other operating expense for the same period last year consisted mainly of $2.3 million in amortization of intangible asset offset by other income of $0.2 million. Operating income was $40.3 million with fourth quarter of fiscal 2019, compared to operating income of $38.1 million for the same period in fiscal 2018.

On an adjusted basis, operating income would have been $41.2 million for the fourth quarter of fiscal 2019, compared to an adjusted operating income of $38.5 million for the fourth quarter of fiscal 2018.

For the fourth quarter of fiscal 2019, the Company reported net income of $31.4 million, compared to net income $26.7 million for the same period last year. On adjusted basis, net income would have been $32.9 million for the fourth quarter of fiscal 2019, compared to adjusted net income of $26.4 million for the same period last year.

Diluted earnings per share was $1.27 per share for the fourth quarter of fiscal 2019, compared to $1.09 per share for the same period last year. On an adjusted basis, diluted earnings per share for the fourth quarter of fiscal 2019 was $1.33 compared to adjusted diluted EPS of $1.08 for the same period last year. Turning to cash flow.

The Company generated $29.5 million in cash from operating activities in the fourth quarter of fiscal 2019, compared to $37.8 million for the same period last year and $180.5 million in cash from operating activities for the full-year fiscal 2019, compared to $130.3 million for the same period last year.

Capital expenditures were $12.1 million in the fourth quarter of fiscal 2019, compared to $7.4 million for the same period last year. On a 12 month basis, CapEx was $41.3 million, compared to $28 million for the same last year.

In the fourth quarter of fiscal 2009, the Company paid down $70.1 million of debt and for the 12 month period, paid down $130.5 million of debt. Total debt as of March 30, 2019 was $43.6 million and cash on hand was $29.9 million. I would now like to turn the call back to the operator to begin the Q&A session..

Thank you. [Operator Instructions]. Our first question comes from Steve Barger of KeyBanc Capital Markets. You may proceed with your question..

Hey. Good morning guys. This is [Ken Newman] (Ph) on for Steve..

Hi, Ken.

How are you doing?.

Good. Just curious, could you just talk about the decline in industrial obviously you had a really tough comp this - or in the prior year and the comp gets a little tougher or is still tough into the first quarter of fiscal year.

Could you just talk through which end market categories were down versus what those showing strength?.

Sure. Remember last year Q4, we grew the industrial business at 26.4% in the quarter, so it's really tough comp.

But probably just down a little oil and gas, marine, semiconductor and machine-tool Collis and so it’s kind of evenly spread across those four end markets for us, but we are still confident in fiscal year 2020 that we will be able to achieve that normal goal of two times GDP on growth on the industrial side of the business..

Okay, that is helpful. And then switching gears here, I just want to talk about free cash flow. Obviously, there has been a lot of CapEx geared towards some of the capacity additions and other restructuring actions that you took this year. As we think about free cash flow in your fiscal 2020.

Do you think conversion could kind of return back towards that 100% or better that you have done a more normalized portion of the cycle?.

Yes. As you know Ken, we consider ourselves a growth Company. So we are going to invest in growth so I means organic growth and acquisitions.

I think on the organic growth side we are pretty much there, well it all depends on how much more capacity we want to put in, depending on what is going on with some of these new programs that are coming at us over the next 24 months. But I don't think we will be at $41 million next year on CapEx. It will be less than that.

And we did end this year with a little bigger investment in working capital, mainly AR has that big pick up in revenues in the fourth quarter, and in strategic inventory coming out of this year to prepare us for fiscal year 2020 and 2021. And that that will normalize over the next 12 to 18 months, also.

So we will be back to that conversion of over 100% of net income of cash..

Got it. And then lastly, before I jump back into queue. I just wanted to ask about the margin profile. In past years, I think you had always had a goal for about 100 basis points in gross margin expansion.

First, do you think that is still possible with tough comps in industrial in fiscal 2020? And I'm also curious, did you see anything unusual in the quarter to drive operating income dollars higher than the revenue growth in the quarter? I'm trying to think about, how you think about the forward mix of industrial versus aerospace growth?.

I will answer the first part of your question and let Mike answer the second. So, remember when we began this year, we gave the street our point of view on what our internal goal was on growing gross margin, it was 50 bps. And we ended the year at about 108.

And a part of that came from the sale of our Miami division as it was a lower gross margin product offering. But a big chunk of it came from more efficiency and better price and marketplace.

Our target internal target for fiscal year 2020 is around 50 bps again, because we have a lot going on, we have started all these new facilities that will be coming through and so we do have some headwinds on those expenses as we as we go through the year. I will ask Mike to answer, did you see anything unusual? I don't….

Unusual in the in the past quarter or looking forward?.

I mean, looking specifically at the quarter, but I mean, the takeaway on the forward look would be great as well..

Well, you know we had several businesses over the quarter, this past quarter, actually, for the year where our book to bill was 150%. And that leads to a very strong environment for pricing..

Perfect, that is very helpful. I will jump back in queue..

Thank you. And our next question comes from Michael Ciarmoli of SunTrust. You may proceed with your question..

Hey, good morning guys. Thanks for taking the question, real nice margin performance in the quarter. Maybe just to go back to Ken’s line of question on industrial. I mean I know last quarter semi was softening and you have some other end markets leveling off. Can you give us color to the trends outside the tough year-over-year comp.

Did any of the trends worsen in any of those end-markets.

And maybe if you could talk about the - you had nice backlog growth was industrial kind of strong on the booking side or what drove that backlog growth?.

Yes. I think on the industrial side, I mean with oil and gas when you get to that certain level, it’s just get a little lumpy now right from quarter-to-quarter since we grew that business over 20% something over the last year and a half.

And then none of these are really kind of connected on the machine tool collets for us, that is mainly our European business that serves in the industrial business and Germany and Switzerland and in China.

And then on the marine side, that is just - we are transitioning off a Block 4 which is just coming into an end on the marine Virginia Builds and we are transition into the Block 5 which is starting off as a one boat build and then going to two and then hopefully to three.

And we discussed that on the last call, I think in that what we felt was going to be impact in the marine was going to be. Going into April, our order book was very strong on the industrial side and then it calm down again a little and May.

So, I think it’s always going to - when you get to that certain level on the industrial side after growing the business that will digit for two years. It’s going to be get back to a normalized growth rate where we need to focus very hard on market share gains, which we are doing..

Got it. What about, you mentioned the Virginia Class again, does the three boat - the same at two versus three have any implications. I know the House Appropriations Committee just kind of made a surprise move in cut that third boat and it looks like they are moving more money into ship maintenance.

Does that have any impact on what your run rate would be in that business that the third boat doesn’t come through?.

Well, we would love to see the third boat come through, but it doesn’t have - that would have influence on our run rate for sure, because that boat is probably worth anywhere depending how it’s configured from $12 million to $15 million to us. So, yes that would have a reasonable impact.

So with that said, since we don’t stock in aerospace we have never were in a position where they are three boat a year. That is all we can tell..

Got it. Got it. And then just more on the 737, I know we have got the summit today and it certainly looks like this is going to be more of an extended downtime. I know it’s a pretty important platform for you guys. Are you seeing any indications from some of your customers? It sounds like everybody is still shipping at 52 per month.

But how are you sort of framing that risk in your fiscal 2020 planning horizon if you see any risk. It seems like there is a big on unknown right now and I guess spirits continuing to produce the 52. I just don’t know how a lot of these suppliers are managing this unknown. So any more color you could see there. Any discussion with any of your customers.

What the cadence of production might look like or how you are framing out risk in unknown?.

Well, it's a simple question with a complicated answer. First of all, the demand in the industry right now to produce components for this system is right at its maximum. I mean, if there is a delay in the 737 production for a few months, which we expect there is going to be, it would be a blessing more than anything else.

Because as I said earlier, when you are booking these businesses that are 150% book-to-bill ratio, the back of it is completely filled to the brim with water industry-wide in terms of capacity versus demand. So to move from the 52 ships to the 57 ships is going to be very difficult for the infrastructure to support that demand.

Do I think result Boeing can solve the technical problem relative to the system - actually I don't - the system - the question is did the system malfunction or did they have incompetent pilots and that is a question, I think that it will go around and around forever, but to make the system more sailor proof should we say, is I think Boeing is very capable of doing it.

It has the technology to do that. And now as they are focused on it, no question will apply their skills to making that system sailor proof.

The question is why wasn't that done in the past, I mean who is ever putting the airplane to together is product - program manager made a choice that may be he wish he didn’t make much right now, but, I think the problem has moved from one of a technical problem to one of a political problem.

Obvious the political problems get solved by politics overtime, we are expecting that timeframe to be sometime over into the fall. Will 737 Max fly again? Yes. Will it be a successful ship? Yes. Will Boeing catch up their production rate? Yes. So, the industry stumbled trying to support Boeing to these production rate? Yes. That is how we see it..

Got it.

Last one, and just I mean if they stay at 52 a month for through may be May or June of next year, does that have an impact on your growth rate?.

No. It absolutely will not. If they go to 57 a month, it will be extremely difficult for us to achieve that - that is where we -. Basically, what happens in this industry is when the other suppliers can't supply the product, the subcontractor base comes to RBC to the supply.

And that is one of the reasons why we are up 150% versus where we expected to be last year is that the industry is sort of defaulting to RBC for supply requirements and at 57, I don't think we can take on and everybody's requirements..

Got it. No. That is really helpful color. I will jump back next queue guys. Thanks..

Thank you. Our next question comes from Kristine Liwag of Bank of America. You may proceed with your question..

Hey, guys, good morning..

Good morning, Kristine..

Good morning..

Gross margins are pretty much at the highest level you have had in history.

When you look at margin expansion opportunities from here, how reasonable is it for you to get another one percentage point each year?.

Are you going put present into your model, Kristine. [Multiple Speakers]..

Well, that is what you said in the past, and you have pretty much delivered on it. So I want to see where the future lies..

Yes, well, I think, given the given the products that we make, and given the environment that we were in right now. I would say that that is - other things aside, that is probably achievable. Dan just thinks that let me help him across the floor here.

But offsetting that, we have start up costs on new plants, and it's very hard to predict the impact in the timing of these costs. And when those plants will be sort of big margin contributors. And so that is a little bit of an unknown, so we are not so terribly bullish on the 1%.

Although, if we resist the steady state running our business against our current mix and turn volumes, that is eminently achievable. But we are not. So we are growing volume, we are going to grow margin, it's hard to tell you if it's going to be 1% it will probably be 0.5% for the next year..

Great. And then looking at that plant, I think what you guys have said before is that you expect 150,000 square feet of capacity additions to come online by the first half of fiscal year 2020. So that is about three quarters of the capacity additions you had announced.

So I was wondering, does that mean that first half of 2020 should bear the brunt of the startup costs? And then at what point would those facilities be accretive? I mean, these are I think a lot of the pieces you are in-sourcing because of supply constraints in the market.

So presumably, you should get a pretty healthy margin from those additions in the long run..

That is exactly how we see it too. It will be the first six months. We are a little ahead in some areas, and a little behind in others. And I would say six months, kind of clear the deck..

And then the net of it is basically as you said, one percentage point gross margin for the business. And then you have startup costs, but it nets out to about 50 basis point gross margin improvement for fiscal year 2020. But margins kind of backend weighted.

Is that fair?.

That is fair..

Great, thank you..

Thank you. And our next question comes from George Godfrey of C.L. King. You may proceed with your question..

Good morning and thank you for taking the question..

Good morning..

Good morning. Hi there.

I just wanted to understand on the capacity constraints, what you can ultimately control and then when you are under the subject of other suppliers and thinking the processes that you want to bring in-house, the lead times in the equipment and machines you need, versus other suppliers that you really can't alter their process of production, you just have to wait Can you quantify where you are in control into constraints that you have control over the next nine months versus what you can.

Thanks..

Yes. We are in very good shape George. We have most of these processes coming online, it’s not to say that we are not going to buy some of these processes from subcontractors going forward.

We are but, we can see industry wide a lot of these subcontractors are small people, they don’t have the big balance sheets, they are conservative, they are not willing to expand their businesses that are happy with what they have got. But it doesn’t interest the industry problem of meeting more supplier of these products.

So, the capacities that we are adding sort of augment the industry capacity and takes care of their problem. The other issue is, because of the products that we make are very high category products that have to have processes done only by certain specified agents in the country. So, we make variance in Connecticut.

So this variance have to go to California for some of their treatments and then back to Connecticut for the next step in their process and sometimes back to California again for subsequent treatment and then back to Connecticut for finishing. So, the bearing has to travel 5,000, 6,000 miles in its journey from raw material to finished goods.

So, internalizing those processes the bearing is completed in the same plant.

And it’s just going to have an amazingly positive effect not only on rate of throughput, but also on obviously when you have a bearing going back and forth to California with frequent flyer miles it ends up having a lot of extra whip in the system, because your lead times are expanded for those travel delays..

So treatments that you are bringing in-house, do you think that process of bringing the treatment and getting that certification is completed which is my understanding and that is done - so that by the December quarter is what I’m trying to get at that you are not capacity constrained on customer orders on what you can control that is what I was trying to get at.

Thanks..

Yes. December ending quarter or is it the January beginning quarter..

I was thinking that the December ending quarter.

So, your fiscal third quarter of 2020?.

Yes. I mean we should be in that kind of position by then. Yes, certainly by December ending quarter. The only fly in the ointment there is can we get the approval by the OEMs for each one of these processes in place. We have the processes effectively in place today and we are working through the approval cycle with these OEMs now.

That is a little bit out of our control..

Understood. Thanks for taking the question..

Thank you. And our next question comes from Pete Skibitski of Alembic Global. Your may proceed with your question..

Nice quarter guys..

Thank you..

Mike, I just want to talk about revenue a little bit more, so for the full-year fiscal 2019 your revenue of about 4% a backlog are about 13.5%. So, do you just feel a lot comfortable heading into fiscal 2020 in terms of your visibility? And the nice guidance you gave for the first quarter, I think it’s 6% to 7% organic growth.

Is that kind of the growth you are expecting for the full-year or do you think it kind of accelerate as the capacity comes online?.

It should accelerate as capacity comes online. Given our backlogs, it almost has to and our backlog really isn’t that reflective of our business anymore. Because a lot of the orders that we get, we get through a Internet portal that are released by the big OEMs.

So the OEMs you know for part XYZ ship me 50 pieces and so we know that is coming because it's under contract. So, we have to 50 pieces we shipped it right away. A lot of our business is done through those portals..

Great. Okay. Okay.

And just to put a final piece on it, should aerospace grow faster do you think than industrial in fiscal 2020 just because you have got that Virginia class, how do have been industrial?.

Well, aerospace will grow faster just because we need to get product out of here to take care of our customers..

Okay. Okay. And then I have other question capacity as well.

It wasn't clear to me, as the capacity comes online by kind of mid fiscal 2020, are you able to hit 57 a month at this point or would you have to add even more capacity in order to get to 57 a month, should it be required to?.

You know if we talk about the existing mix that we have and the existing business in the contracts and so on and so forth that we have, yes, we won't have any trouble with 57 a month. The problem is we keep getting more and more business and more and more contracts on top of the ones that we already have.

You know it's because the other guys whoever those other guys are, they are having difficulty supporting the build rates. So we are, they are defaulting on their contract and we are picking up their contracts. So, you know we can't handle the entire industries default position, we can handle our own size a little bit..

Tough spot to be right?.

Yes..

Last question for me, I was curious, just to put it broadly, would you think it is Parker acquisition of the Lord, do you think that is going to impact to you guys and then more broadly just how the M&A funnel and the environment look like?.

Well, I think that is an nice acquisition Parker. I mean, Lord is a highly respected company, they have some great products you know and we saw and we acquired them, so congratulations Parker. I think they will do very well with Lord. Our acquisition pipeline is very productive right now and we should be talking about it soon..

Got it. Okay. Okay.

Was Lord one of those companies that was having troubles executing and may be they will be doing better as part of a company with a better balance sheet?.

No. You know Lord isn't really in our space. We like a lot of their product offering. We don't have those products. We don't make those products, but we cut at those products..

Got it. Thanks so much guys..

Thank you. [Operator Instructions] Our next question comes from Josh Sullivan of Seaport Global, you may proceed with your question..

Hey, good morning..

Hey Josh. Good morning..

Just a question on the A320 platform, there has been some comments that you know forging sides constraining deliveries. Are you seeing anything, either on the engine or airframe side on A320 as it relates to the RBC, and then just tying that together, you mentioned that getting to 57 on the 737 has some challenging hurdles.

But what about the A320 plants here to raise plant production? Are there any similar type hurdles for the A320 plants?.

No, I would say on the A20, we don't see any issues with forging. We are not aware of any of that. But on the A320, I mean that plane pretty much uses a standard mix that we produce and we have plenty of capacity for that standard mix..

Okay. And then just with regard to the aerospace aftermarket. Are you seeing any changes in demand for older model parts on the aftermarket this point.

Just looking at, are you seeing a response to the grounding of the 737 for increased usage of older aftermarket parts? And then how do those margins for those legacy platforms kind of compared to the average of this plane?.

Well, we are seeing continued increasing demand in the aftermarket. And the margins are very favorable. We are focused on fight engine groups, and our, our business which is small, but growing. I don't have the number in front of me right now, but something like 20$ 25% a year.

As a matter of fact, we just added 30,000 square feet to one of our aftermarket plants to support the growth in new business. So margins are good, volume is good. The impact is at 737 isn’t a factor..

Good. Thank you..

Thank you. And our next question comes from Michael Ciarmoli of SunTrust. You may proceed with your question..

Hey, thanks for taking the follow-up. Just you were hinting at those share gains, other suppliers, you defaulting.

Do you guys see these as temporary gains or is this new sort of permanent market share gains going forward?.

This is, this is how works. Glad you asked that question. This is how it works. If we have a customer, and we have customers that are driving through, and that are with us through the good times, and the not so good times, right. And then we have other customers that we only see at time like this.

And they have a crisis, they need parts, they have a crisis, and we can help them with their crisis. But if the parts worth a $1 and we can sell it for $10 and solve their crisis. We don't want to do that. What we what we would do want to do is we want a commitment from them contractual commitment to their business for five years.

Then we will help them with their crisis..

Got it. Got it. That is really helpful.

Last one, any updated views on tariffs and ability to pass through pricing?.

The pricing environment has been very, very good. And the tariffs are very weak voice in a strong pricing environment..

Got it. Helpful. Thanks a lot guys..

Thank you. And I’m not showing any further question at this time. I would now like to turn the call back over to Mike Hartnett for any further remarks..

Okay. Well, I think that concludes our conference call for today. I appreciate everybody’s interest and support for our RBC Bearings. And we will be looking to talk to you again in July. Good day..

Thank you. Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day..