Good morning, ladies and gentlemen, and welcome to the Q1 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 session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Chris Donovan with Alpha IR, please go ahead.

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

Thank you, Chris, and good morning, everyone. Net sales for our first quarter fiscal 2019 were $176 million versus $163.9 million for the same period last year, a 7.45% increase. Excluding the Sargent Canada sales from last year, organic growth for the quarter was 9.4%. We consider that a very good start on fiscal 2019. For the first fiscal quarter of 2019, the sales of industrial products represented 41% of our net sales with aerospace products at 59%. Gross margin for the quarter with $67.7 million or 38.5% of net sales. This compared to a $62 million or a 37.8% for the same period last year, a 9.2% increase. Operating income was $36 million versus $32 million last year, a 12.5% increase. EBITDA was $47.1 million, an 11.3% increase over last year. Clearly, this is a nice quarter and it follows an excellent year for the company and we continue to develop momentum in all of our major markets. Industrial products showed an 18.7% year-over-year growth rate and we continue to a see strong overall demand for these products. Industrial OEM was up 18.1% and distribution and aftermarket was up 20.3% on a year-over-year basis. Mining, oil and gas, semiconductor machinery, machine tool and general industrial equipment continue to show remarkable strength. On the aerospace and defense side, our first quarter net sales were up 3.9% when normalized for the revenues generated last year by Canada. This was mainly driven by OEM. Aero and defense OEM was up 5.6% on an organic basis. Supply chain constraints, both internal and external; contract timing and short-term plateau and aircraft build rates driven by supply constraints and engine availability are the reasons, this growth rate was not solidly in the double-digits. In some of our aerospace plants, if we could have made 10% or 20% more product in the quarter, we would be able to sell it, but we can't. We're bumping up against production constraints that are mainly driven by external concerns. We see our aerospace volumes building through subsequent quarters for at least the next eight quarters as we add additional capacity, floor space, equipment and staff. This is in order to support the expansion in volumes, driven by new contracts as well as the additional airframe and engine builds scheduled for the coming years. We expect to see some meaningful variance from our normally demonstrated expenditures for machinery and floor space as we add capacity to address the industry demands for our products, primarily aerospace platforms where we see growth include the 737 MAX, the Airbus A320, Boeing 787, Boeing 777X, the Joint Strike Fighter and, of course, the supporting interim programs, LEAP, and the geared turbofan. Regarding our second quarter, we're expecting sales over the period to be between $171 million and $174 million compared to $161.2 million last year net of our Canada sales, and an increase of 6.1% to 7.9%. I'll now turn the call over to Dan for more detail on financial performance.

Yeah. Thanks, Mike. SG&A for the first quarter of fiscal 2019 was $29.6 million compared to $27.8 million for the same period last year. The increase is mainly due to higher personnel costs of $1.2 million, $0.5 million of additional incentive stock compensation and $0.1 million of other items. As a percentage of net sales, SG&A was 16.8% for the first quarter of fiscal 2019 compared to 16.9% for the same period last year. Other operating expense for the first quarter of fiscal 2019 was expense of $2.2 million, compared to expense of $2.3 million for the same period last year. For the first quarter of fiscal 2019, other operating expenses were comprised mainly of $2.4 million in amortization of intangible assets offset by $0.2 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, offset by $0.1 million of other items. Operating income was $36 million for the first quarter of fiscal 2019 compared to operating income of $31.8 million for the same period in fiscal 2018. Other non-operating expenses was $1 million for the first quarter of fiscal 2019 compared to $0.4 million for the same period last year. For the first quarter of fiscal 2019, other non-operating expenses was comprised primarily of $1 million in loss on early extinguishment of debt and other non-operating expenses for the first quarter of last year consisted of a $0.3 million of foreign exchange translation losses and $0.1 (sic) [$0.2] (00:07:24) million of other income. For the first quarter of fiscal 2019, the company reported a net income of $27.5 million compared to net income of $21.8 million for the same period last year. On an adjusted basis, net income would have been $28.1 million for the first quarter of fiscal 2019, compared to an adjusted net income of $22 million for the same period last year. Diluted earnings per share was $1.12 per share for the first quarter of fiscal 2019 compared to $0.90 per share for the same period last year. On an adjusted basis, diluted EPS for the first quarter of fiscal 2019 was $1.15 per share compared to an adjusted diluted EPS of $0.91 per share for the same period last year. Turning to cash flow. The company generated $33.8 million in cash from operating activities in the first quarter of fiscal 2019, compared to $39.8 million for the same period last year. Capital expenditures were $7 million in the first quarter of fiscal 2019 compared to $5.7 million for the same period last year. In the first quarter of fiscal 2019, the company paid down $30.1 million of debt and ended the quarter with $55.7 million in cash. I would now like to turn the call back to the operator to begin the Q&A session.

Your first question is from the line of George Godfrey with C.L. King. Pleased go ahead.

Good morning, George.

Mr. Godfrey, your line is open. Please go ahead. Your next question is from the line of Michael Ciarmoli with SunTrust. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions here. Maybe – I think the comments you used regarding some of the supply chain constraints was plateauing build rates. Can you maybe just elaborate a little bit on the supply chain constraints? I mean, most of the programs are ramping. I know there's been definitely some challenges on the engine side but maybe a little bit more color in terms of what you're seeing there regarding kind of progression for the rest of the year and into early next year on terms of the build rates and sort of your internal constraints?

Sure. I think what I said is we got both internal and external constraints. And actually the external constraints are creating internal constraints because we can't get the product turned around quick enough from our subcontractors. We have to shuttle other product in its place and manufacture that in order to keep the plant in its efficiency mode. So, typically, our subcontractors do special processes and they're very – for the most part, they're unique industry processes for the aerospace industry. And these processes require a substantial amount of pedigree and OEM approvals. And as a result of that, there is not many people that have these pedigree and there's not very many choices of suppliers that you can go to. So right now, what we see is in the supply chain is there's considerably more demand on these special processes than there is capacity. So, in answer to that, we've been working for some time on insourcing some of these processes to remedy the situation and we are adding machinery and floor space to four of our plants to address these requirements and expect to have beginning in our fourth quarter of 2019, we're going to be phasing in that capacity beginning in one of our plants in Connecticut. So, it is what it is, and there's not much you can do about it. We've been working for a couple of years on planning – planning to in-source at least to augment the capacity requirements that we see are needed. And so, fortunately, we are in a pretty good position in terms of planning to execute this and we didn't expect the industry to be bound up the way it is, but it is what it is.

Got it. That's helpful. And then just I mean – maybe even seguing in there to the insourcing and bringing that capacity online. I think you called out sort of some expense variance. I mean coupling the new capacity to new equipment being layered on with just some of the program startup costs. I mean should we be calibrating ourselves for some potential margin headwind and I think you guys called out previously some headwind there, but has anything changed in regarding to the level of expenses or what you think we might see flow through the P&L?

No I think we're okay there. I think we're – it's because we've been incurring these expenses and sort of fleshing them through the P&L all along. So I mean, in terms of any changes to our rates, you probably won't see that. So, as I said, we have about 200,000 square feet of new floor space coming online next year and that should materially address this. On the other hand, we have also some major new contracts coming online next year. So it will be a race.

Got it. And then last one for me and I'll just jump back here. You didn't really comment on aerospace aftermarket or spares, and I know there was some – I think it was a little bit lower than normal last quarter. Any color on what's happening in the broader aftermarket?

For us, our aftermarket supplies some MRO requirements, but they also supply, to a large extent, the smaller OEMs that are subcontractors to the industry in general. And so I don't know if you could call that true aftermarket. We do see some shifts going on between our traditional suppliers, aftermarket customers and OEM is coming to us directly or Boeing coming to us directly or Airbus coming to us directly that would normally have, in the past, gone through those people. So it's been fairly flat and what was the last quarter, Dan?

Yeah. In Q1 it was $20.6 million compared to Q1 last year of $21.1 million, excluding Canada. So it's been pretty flat year-over-year for the last quarter.

Got it. That's helpful. Thanks a lot, guys.

Yeah.

Your next question is from Kristine Liwag with Bank of America Merrill Lynch. Please go ahead.

Good morning, guys.

Good morning.

Good morning, Kristine.

Mike, following up on the constraints question. In the past, you've highlighted that you're in-sourcing plating, heat treating and high-velocity oxygen fuel techniques. Are the capacity that you're adding today adjusting these items or are there new items that are coming up that you're looking at?

Well, they're definitely addressing those items. And there is what did you list? You listed heat treating, plating and HVOF?

And high-velocity oxygen (sic) and fuel [fuel] (00:16:11) technique.

Yeah. We'll also add certain quality inspections that we outsource today also and dry film and aluminum pigment. So these are all sort of bottleneck operations, external.

And then, when you add this capacity, I think you've said before that you got approved by Boeing to do this in-house already? Have you gotten the other OEMs, like the engine guys to approve this in-sourcing as well? And then when you mentioned that 4Q is when you're going to get these online, is that when they're qualified or is that when you'll be at full rate?

Well, we won't be at full rate in the first quarter. I mean, we'll start to phase this activity in that quarter. And until that activity is in on the plant floor is demonstrated and we can show that we have the appropriate quality procedures and management that's when the OEM comes in and signs us off. So, that's on the new plant where we're in-sourcing all this business. For some of the existing plants where we're doing some of the plating and some of the HVOF already, those have already been signed off. So what I'm saying is we're adding capacity, a substantial amount of capacity that to our existing capacity by establishing a new facility.

Great. And maybe to take a step back, the capacity that you're adding today, I guess maybe taking a step back before that, your existing capacity today, are you able to produce the contracted volume that you need to deliver to your customers or are you starting to see some sort of backlog buildup because you don't have this capacity in place yet?

Yeah. You were breaking up pretty good there, Kristine, but I think what you asked was do we have the amount of capacity we need to service our existing customers? We definitely could use in some of our plants more capacity. And so, in this new facility – in one of the new facilities that we're adding, we're adding additional manufacturing capacity beyond the coating technologies and then let's see two of the plants that we're adding are to support new contract demands that really begin in calendar 2019 in a substantial way. So, two of the plants will be consumed immediately with new contract demands and so it won't be incremental capacity to the RBC base business.

That's really helpful. And maybe if I can squeeze one last one. I mean, at this point, when we look at Sargent, we look at your gross margins today, it looks like you have completely absorbed that business, your margins are right back up to where you were before you did the deal and you've now also de-levered as well. What are your plans for uses of cash generated because at this point, it seems like you already have the capacity in place to build the production rates and you have that in order. Do you have an appetite to do more deals at this point?

Yeah. Well, I think our first use of cash is going to be obviously going into expanding our capacity – our existing capacity to take care of our current customer base. And beyond that, we've considered a number of acquisitions; some small, some not so small and we would expect some of those to convert over the next six to nine months.

Great. Thank you.

Your next question is from the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.

Hey, good morning.

Good morning, Steve.

Good morning, Steve.

Mike, what are the lead times for the machine tools you need right now and do you have enough on order for current visibility? And just broadly-speaking, how do you plan for where you need to take machine capacity right now given the environment?

Okay. Yeah, I think you asked three questions there, Steve.

I think, just two.

Yeah, it depends – the machinery lead time is dependent upon what kind of machinery you want to install. I mean if you're installing machining equipment that cuts metal and turns chips, that's basically readily available unless it's highly specialized and the lead time on that is typically less than 90 days. Often, it's available immediately, so there isn't much of an issue there. If you're looking for specialized grinding equipment, that's probably a year. We're not looking for too much of that. What we are – we are the grinding equipment that we're putting in place has been on order for some time. So we're good there and if you're looking for specialized heat treating and heat treating equipment, that's a year cycle also and that can be a tricky cycle because the equipment has to be tested and demonstrated in place before it's disassembled and shipped to your site. So that's kind of where we are. And for the long lead time items, we've been in contract with our suppliers for some time, so we're good there. In terms of timing, normally when we contract new business and what happens there is if there's an existing supplier and we're displacing the existing supplier, the existing supplier will have a contract and that contract will phase out over 18 months to 20 months something like that and our contract will begin at that point and then go for typically five years. So there's a number of contracts that we have today that are in that mode where we have plenty of runway here to plan through our production needs and establish the footprint and establish the capital equipment needed to support that contract and get it all in place well ahead of the performance period, which is really important to do because you don't want to be behind on the performance period because my experience has been you never catch up. So it's all part of the cycle and we're in good shape in terms of planning to the extent that I know of.

Great. And, in the past, you've talked about the bigger issue around capacity being skilled labor. Do you have the workforce available to man the machines as they come in or what are you doing to recruit those guys?

Well, we've provided and we're really focused, disproportionately, on automation. And so as we automate our processes, it frees up labor and that labor can go to work elsewhere in our plant to work on other projects or it's just through attrition, it just leaves the plant and that's been very manageable for us.

Okay. And then just last question on this issue, but a similar question in terms of engineering and design, do you have program managers that can take on new quotes or are you limited at all on that front?

It's – for the most part, we're not limited, but that's very business unit-dependent. Some of them are overwhelmed with what they have on their plate today and some of them have more capacity than what they have on their plate, so my job is to run around and make sure their plate is full.

Got it. You mentioned several industrial end-markets that remain really strong. Can you talk about the forward look for pricing for existing or new programs and just, in general, how sensitive are industrial customers to price right now?

Well, we have a lot of industrial customers calling us up, asking us about these tariffs and when we're going to give them a price increase and so we're doing our best not to disappoint them.

And last one for me. Dan, you went through your numbers pretty fast. Did you talk about free cash flow expectations for the year given the required investments that you guys need to take?

Yeah. I think CapEx – normally our CapEx runs around 3.5% to 4% of sales, so I think this year it will be a little higher at 4% to 4.5%. A lot of these projects are kind of going to be folding over this fiscal year and 2020, so I kind of think that's where we'll be in that range.

And operating cash flow will convert at a similar metric net income as it has in years past, you think?

Yeah. So I think we spent a little more in Q1 on getting some raw material and whip (00:27:19) on the floor, so we've build a low inventory in Q1. So I don't see that type of investment going for each quarter for the rest of the year. So I think we should be in pretty good shape and our goal, internally, is once again at least to pay down at least $100 million of debt.

Perfect. Thanks.

I'm hearing no further questions at this time. I would now like to turn the conference back to Dr. Hartnett.

Okay. Well, thank you. I appreciate everybody's interest today and we look forward to speaking to you again after the second quarter. Good day.

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