Good day, ladies and gentlemen, and welcome to the RBC Bearings Fourth Quarter 2015 Earnings Conference Call. My name is Tia and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session. I would now like to turn the conference over to your host for today, Mr. Mike Cummings, Alpha IR Group. Please proceed.

Good morning and thank you for joining us today for RBC Bearings' fiscal 2015 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 would like to turn the call over to Dr. Hartnett.

Thank you, Mike, and good morning and welcome. Net sales for the fourth quarter 2015 were $113.4 million versus $113.7 million last year. Operating income was 22.3%, or $25.3 million resulting in an adjusted EPS of $0.73 per share versus $0.73 per share last year. I am very pleased with our execution this quarter. On a full year basis, sales were $445 million versus $415 million last year, up 6.3%. For the full year, adjusted EPS was $2.74 versus $2.58 last year, up 6.2%. Adjusted EBITDA of $30.7 million was generated during the quarter and $120 million for the full year. Gross margins for the period came in at 39.6% versus 39.8% last year. Aerospace and defense sales were up 2.2% for the full year and basically flat with last year on quarter comparisons. For the quarter, there were a lot of noise in the aerospace and defense revenue line. Some of it as a result of timing where shipments were made early in the year in support of government programs; some of it as a result of weak aftermarket demand at the beginning of the year and government program run out for maybe earlier periods. During this quarter, revenues for the aircraft aftermarket expanded 11% and some of it as a result of the Swiss currency strengthening. It is better to look at this as a full year episode and that will normalize some of these issues. The base OEM business in support of airframe and engine makers continues to expand at the low double-digit pace and we continue to bring on new products in support of new designs for future production of aircraft and engines which today are at the early stage. For the fourth quarter of 2015, sales of the industrial products represented 44% of our total sales. Sales of aircraft products represented 56%. Our industrial markets were up 0.1% on a quarter-over-quarter basis. Net of the (4:20) product sales, which were impacted by the currency shift, our North American market expanded between 3.5% and 4% for industrial products. Dan will talk more about this subject in a minute. For the full year, industrial sales were up 11.9% over last year. Obviously, our recent acquisition of Sargent Aerospace and Defense will impact these results in a favorable manner going forward and we expect to see sales ending our first quarter in the $140 million range as we had less than two months of operating performance to include here and also many issues to resolve on the accounting side, to integrate the performance of Sargent with RBC's calendar. Now I'll turn the call over to Dan.

Thanks, Mike. SG&A for the fourth quarter of fiscal 2015 just decreased by $0.5 million to $19.1 million compared to $19.6 million for the same period last year. As a percentage of net sales, SG&A was 16.9% for the fourth quarter of fiscal 2015 compared to 17.2% for the same period last year. The decrease in SG&A year-over-year was mainly due to a decrease of $1.2 million associated professional fees, personnel related expenses and other expenses offset by an increase of $0.7 million in incentive stock compensation expense. Other operating expenses for the fourth quarter of fiscal 2015 was expense of $0.5 million compared to expense of $0.5 million for the same period last year. For both periods in fiscal 2015 and 2014 other operating expense consisted mainly of amortization of intangibles. Operating income was $25.3 million for the fourth quarter fiscal 2015 compared to operating income of $25.2 million for the same period in fiscal 2014. We had a small amount of acquisition expense in the quarter, $60,000. Excluding this cost operating income would have been $25.4 million in the fourth quarter of fiscal 2015 compared to $25.2 million for the same period last year. Excluding this adjustment operating income as a percentage of net sales was 22.4% for the fourth quarter fiscal 2015 compared to 22.1% for the same period last year. Other non-operating expense for the fourth quarter fiscal 2015 was $3.2 million. This is mainly comprised of $3.1 million associated with the translation and re-measurement of non-functional euro currency on our Swiss balance sheet. Income tax expense for the fourth quarter fiscal 2015 was $7 million compared to $6.7 million for the same period last year. Our effective income tax rate for the fourth quarter fiscal 2015 was 31.9% compared to 26.9% for the same period…

The first question comes from the line of Walter Liptak with Global Hunter. Please proceed.

Hey, good morning, guys. Good quarter.

Good morning, Walt.

Hi. Let me ask first about the aerospace business and your comments about better to look at the annual rate. I wonder as you look out over – if you grew a couple of percent this year, if you look at over the next 12 months, is that sort of the growth rate that you're expecting excluding the Sargent deal?

Good question. Let's see the – looking out over the next 12 months, we don't expect the currency shift to hit us again, so that ought to be good news. And I think last year, we had a sort of a weak demand from the aerospace distributors in the aftermarket and that seems to be normalized and strong now. So, I think the defense programs are sort of tepid. So, I would expect that the overall, we are going to be in the high single digits in terms of expansion rate driven principally by the major OEMs for airframe and engine and sort of offsetting some of the defense weakness and no more currency impact.

Okay. That sounds great. Are you expecting the Sargent business to see revenue growth over the next 12 months?

From their last 12 months?

Yeah. I think they were at about 195 was the number that you guys press released?

Yeah. I would expect them to be overall flat with the last 12 months.

Okay. And then, Dan maybe just to help with modeling some of the overhead expenses, can you give us a number on what you think overall SG&A is going to be including Sargent in 2016?

Yeah. I think it's – we'll be closer to around 15.5% to 16%.

Okay.

But our assumptions haven't changed since what we presented to you about a month ago, when we announced the deal. As you know, we're just in the process of preparing or beginning balance sheet valuations with our experts to make sure that our assumptions that we did give everybody are correct. So I think when we report our first quarter earnings, the first week of August, everybody will get a good view of what we have on the books in the way of amortization and interest and debt deferred amortization cost.

Okay. So it's sounds like the accretion numbers that you talked about previously are still – those are still good numbers?

Yeah. It's only been four weeks.

All right. Good. Congratulations. All right. Okay, thanks guys.

The next question comes from the line of Kristine Liwag with Bank of America. Please proceed.

Hi. Good morning, guys. Great quarter.

Thank you.

Thank you.

Not to rush or anything, because I know you're in the initial stages of integrating Sargent, but post deal, I think you have about $130 million less in your revolver and your net debt to EBITDA is about 2.6 times. Could you maybe provide some color on your appetite for doing other deals? And what you think about your priorities for capital deployment this year and maybe next year?

Well, let's start with the – start at the top there, Kristine. I think we won't probably do a deal this size this year. I think we're looking at the process of sort of integrating the Sargent activities with the RBC activities and getting the accounting homogenized with RBC's accounting and getting our sales and marketing people lined up and working on improving their execution and margin expansion. So I think we're going to be pretty busy with Sargent for this year. And I would think by the end of this year, we'd be in a much better position to answer a question like that.

Great. And then, for your gross margins, I mean, historically you guys have guided to about a 1% gross margin improvement in an annual basis. When we think about the business, maybe without Sargent on a go-forward basis, is that 1% still what we should be looking at? And then now with Sargent, what should that 1% look like?

Well, I think the 1% is still good for the base business and we have some really good programs that are maturing now and starting to show their strength. I think I defer the gross margin expansion with Sargent included until our August conference call, so that we have more time to spend with the Sargent people understanding where their opportunities are.

All right. Great. Thank you so much.

The next question comes from the line of Larry Pfeffer with Avondale. Please proceed.

Good morning, gentlemen. Congrats on the quarter.

Thank you.

So just kind of trying to dive into the industrial side of the business, what are you guys thinking about for growth rate there, do you think the 3.5% to 4% you saw in the underlying North American business this quarter is a decent run rate for fiscal 2015, fiscal 2016?

Yeah. Let's see. Well, I think the industrial business – it's got some strong spots and some not-so-strong spots. So I think we look at the general industrial business that we service and it's strong, and it's good, and it's growing, and it's got sort of some exciting new programs with substantial scale, which will be phasing in slowly this year and more – and with more mass next year and the year following. So I think general industrial was good. I think the mining business we expect that to start off weak in our first two quarters and strengthen in our last two quarters. So, mining is sort of touch and go right now. And on the oil and gas side of our business, I think everybody kind of has a view of what's happening there. That market isn't wonderful. We're kind of in a sweet spot in that market where our volumes have some protection around them, for some of the OEMs that we service. And so, I think we don't see any growth occurring in that market next year and that we're going to be happy to maintain sort of a flat revenue number. So, I think the heavy lifting in our industrial business next year is going to have to be done in the general industrial markets.

Okay. And then, do you have a feel for kind of a split between the OEM and aftermarket side of it?

Yeah. That's kind of a 50-50 deal really. It maybe – Dan is searching for the right numbers, but I'm guessing it's – what is it, 70-30?

Yeah. This year for the full year, we did $72 million and a $126 million to the OEM.

Okay. That's all I had. Thank you very much, guys.

Yeah.

The next question comes from the line of Samuel Eisner with Goldman Sachs. Please proceed.

Hey, guys. Thanks for taking my questions. This is Nick Stuart on for Sam.

Hi, Nick.

Hello, Nick.

I just had one quick one piggybacking off of that prior question, can you talk about what you are seeing in mining that is giving you confidence in kind of a back-half recovery?

What we see in mining right now is the aftermarket is pretty much propping up the whole mining world. And so we look at the tonnage of copper and steel produced each quarter and see how well the mines are running, and they've been pretty consistent. So any OEM growth that you'd see out of some of the big producers would benefit those volumes. On the smaller side of the mining business, which we might classify as mining, but is really residential construction and street and highway construction and we just categorize it broadly as mining. That business really responds well to how things starts in GDP growth, so a little pick-up in that GDP area. And a little pickup in housing starts is going to help that business year-end and we're subscribing to an increasing GDP growth rate as the year ages.

Got it. That's helpful. That's all I had. Thank you.

The next question comes from the line of Edward Marshall with Sidoti. Please proceed.

Good morning.

Good morning, Ed.

So when you gave the split-out of the industrial and aerospace growth in the press release, you talked about $1 million – you excluded $1 million of foreign currency. Is that all on the industrial side of the business, I assume?

No. It hit both sides.

Could you give the growth rates ex that currency?

Yeah. So the growth rate for industrial for the quarter was 0.1%, and for aerospace and defense, it was minus 0.5%.

Okay. And in the prepared remarks, we talked about maybe timing being and to look on a 12-month basis. Over the full year, it looks like it was up about 2%, 2.5% for aerospace. Do you have the mix between what the impact in commercial and what defense was for either the full year or the fourth quarter? That'd be helpful.

No. We don't have that broken down yet.

Okay. And in the backlog, when I look at it down 4%, what's responsible for the decline? Is it aerospace or is it industrial?

Well, first, about $4 million is just re-measurement due to the drop in the exchange rate.

Okay.

And then the other side of it is aerospace, mainly defense.

Okay.

And that's mainly timing.

Yeah. It's mainly timing. We had a delayed contract sort of coming in in our fourth quarter and actually came in in our first quarter, which amounted to about $2 million to that change.

Okay.

In this year, we have a substantial number of three-year to five-year contracts rolling over in the aircrafts business. And since they're rolling over this year, you don't have a years' worth of backlog as you normally do to roll into your backlog numbers. So we're very busy negotiating and extending contracts through the next cycle and that is having a substantial impact on that number too.

When we exclude maybe Sargent from the content discussion and generally my experience suggest that when these three-year to five-year contracts come up, it's pricing and content awards that you win. If the index is 1 today or 100 today, a year from now, what do you anticipate your content will be on kind of the commercial programs, excluding Sargent?

The index representing our base business?

Yes.

We don't expect to lose any.

Great.

We haven't heard of any of that. We actually have picked up some new accounts that are meaningful that we didn't have previously. And then you have the A350, the Joint Strike Fighter and the 787 sort of building in volumes and an increase in the 737 rates. So we're going to pick up share and we're going to pick up mass.

Okay. So is it a content discussion about these contracts or is it a pricing discussion?

It's both. It's both. Certainly, the new airframes, there's a lot of new content in the new airframes and a lot of new designs in the new airframes. So there's substantial content discussion going on around that, and the rest of it is about pricing and terms. Terms are a big deal, and terms are hard to negotiate and seems like everybody has been schooled on that to an art form. So, these contracts are taking time to put in place.

So, I assume some of these new larger aircraft like the 787, I assume they're not coming up for the three-year to five-year awards, or are they?

They are.

They are. Okay.

Yeah.

Okay. And do you – you're not seeing any impact from partnership for success?

We are.

Okay. And then, Dan, I guess you talked about the accounting of Sargent and you talked about the SG&A in 2016 being 15.5% to 16% of revenue. And historically when you make acquisitions, the SG&A ticks up, I think the last one was up about 100 basis points. Is it because of the size of this deal that it's not or is it because of the mix, it's aerospace and therefore you are actually seeing a decline because, I guess, it's been running around 17%. So, you expect it to fall?

Well, their SG&A as a percentage of sales runs a little lower than ours.

Okay.

Until we finalize beginning balance sheet, find out where the amortization is falling to depreciation, we're not going to have a good number to give you until we talk again in August.

Okay. And the number you provided though, that was for Sargent or that was for the entire business?

Entire business.

I see. Okay. Thank you, guys.

Sure.

We have follow-up question from Kristine Liwag with Bank of America. Please proceed.

Hi. I just wanted to follow-up on that question prior on Boeing Partnering for Success. I was wondering if you guys could provide a bit more color on what that means for you? Does that mean you can get more share, but at a lower price or I mean any color would be helpful?

Well, that means if you can reach an accommodation with Boeing on that program that your current Boeing business here is protected for three years to five years, I think it's three and I'm sure it's three. So, you'll have no competition on your current business direct to Boeing, which is not a lot of our business, direct to Boeing, most of our business is to Boeing subcontractors.

And so does that mean in three years time there is room for negotiation for pricing step down or is that contract up for renegotiation or re-competition?

I think it's very dependent up on how long they hang on to McNerney. This is the same drill he did at GE, Evendale in 1994, almost exactly the same playbook, probably gathered a little dust and gained a few pages, but this is McNerney's playbook. I think in three years he's gone and it's a new era for Boeing.

Sure. So is Boeing trying to move, I mean, I understand that a lot of your commercial aerospace builds are to the suppliers. Is there a desire for them to move to some sort of Boeing master contract where then your negotiated price with Boeing is what the supply chain would buy?

There is an attempt to do that. They have done that with fasteners with some success and there is an attempt to do that for other commodities, which are sort of more highly engineered products that they buy for their planes. Whether they can actually do that or not effectively is anybody's guess.

Great. Well, thank you so much.

Thanks. All right. Kristine.

I'd now like to turn the conference over to management for any closing remarks.

Well, we thank everybody for participating in the call today and the interest that you have in RBC Bearings. And we'll certainly have a more definitive and tuned up discussion in August after we have solidified the accounting figures on Sargent and have a good pro forma on its impact to RBC, but it's – we're very pleased with the acquisition. We're very happy with the strength of the management team. I think Sargent's going to be a – it's going to be easy to integrate with the RBC resources, and I think the RBC resources will help Sargent accelerate their programs in many ways. So, that's what we're working on and we'll report back in August. Thanks. Thanks for your time.

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a great day.