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Edited Transcript of ROLL earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q1 2020 RBC Bearings Inc Earnings Call

OXFORD Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of RBC Bearings Inc earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel A. Bergeron

RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director

* Michael J. Hartnett

RBC Bearings Incorporated - Chairman, President & CEO

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Conference Call Participants

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* George James Godfrey

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* Joshua Ward Sullivan

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

* Kristine Tan Liwag

BofA Merrill Lynch, Research Division - VP

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Peter John Skibitski

Alembic Global Advisors - Research Analyst

* Robert Stephen Barger

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Chris Donovan

Alpha IR Group LLC - Assistant VP

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Q1 2020 RBC Bearings Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would like now to turn the conference over to your host, Mr. Chris Donovan.

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Chris Donovan, Alpha IR Group LLC - Assistant VP [2]

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Good morning, and thank you for joining us for RBC Bearings Fiscal 2020 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 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'll turn the call over to Dr. Hartnett.

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [3]

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Thank you, and good morning. Net sales for the first quarter of fiscal 2020 were $182.7 million versus $176 million for the same period last year, a 3% -- 3.8% increase. Organic growth for the quarter was 6.5%, and we think that's a respectable start for FY '20.

For the first fiscal quarter, sales for the industrial products represented 36% of our net sales with aerospace products at 64%. Gross margin for the quarter was $70.7 million or 38.7% of net sales. This compares to $67.7 million or 38.5% for the same period last year, a 4.4% increase. Operating income was $38.5 million versus $36 million last year, a 6.9% increase. EBITDA was $50.8 million, a 7.9% increase over last year. We are very pleased with the performance for this quarter and it follows an excellent year for the company.

During the year -- during the first quarter, industrial products lost some ground over the period, and we're down about 7.2%. Last year, the expansion in that quarter was 18.3%, so we were up against some pretty difficult comps. Industrial OEM was down 7.2% and distribution in the aftermarket was 7.1% down year-over-year.

On the aerospace and defense side, the first quarter organic net sales were up 16.3%. This was driven by both OEM and aftermarkets. Aero and defense OEM were up 14.6% on an organic basis. Supply constraints internal and external have been significantly mitigated as a result of our internalizing many processes certified to date. More internalization of the processes will follow. This sector will likely continue to perform at double-digit growth level for the foreseeable quarters as we introduce additional manufacturing capacity and convert new contracts currently in the breach.

At this point in our year, we enter our second quarter, most of our aerospace businesses are booked at or beyond fiscal 2020. If the 737 MAX receives its FAA certifications in calendar Q4 and production is accelerated, it may be difficult to support the demand by the subcontracting base. We continue to add capacity to support our customers' future requirements and should be well positioned for FY '21 in this regard.

Regarding our second quarter, we are expecting sales to be between $180 million and $182 million, which results in organic growth rate of 6.5% to 7.7% over last year. If we can produce more, it will have a greater turnout in sales, but it's largely on the aerospace and defense side capacity constraint.

I'll now turn over the call to Dan for more detail of the financial performance.

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [4]

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Thanks, Mike. SG&A for the first quarter of fiscal 2020 was $30.1 million compared to $29.6 million for the same period last year. The increase is mainly due to -- on $1 million of additional incentive stock compensation and $0.1 million of other items, offset by $0.6 million of lower professional fees. As a percentage of net sales, SG&A was 16.5% for the first quarter of fiscal 2020 compared to 16.8% for the same period last year.

Other operating expense for the first quarter of fiscal 2020 was expense of $2.1 million compared to expense of $2.2 million for the same period last year. For the first quarter of fiscal 2020, other operating expenses were comprised mainly of $2.3 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 amortization of intangible assets, offset by $0.2 million of other items.

Operating income was $38.5 million for the new first quarter of fiscal 2020 compared to operating income of $36 million for the same period last year. Other nonoperating expenses were $0.2 million for the first quarter of fiscal 2020 compared to $1 million for the same period last year.

For the first quarter fiscal 2020, other nonoperating expenses just comprised of $0.4 million of foreign exchange loss, offset by $0.2 million of other items and other nonoperating expenses for the first quarter of fiscal 2019 consisted primarily of $1 million loss on early extinguishment of debt.

For the first quarter of fiscal 2020, the company reported net income of $30.5 million compared to net income of $27.5 million for the same period last year. And on an adjusted basis, net income was $30.5 million for the first quarter of fiscal 2020 compared to an adjusted net income of $28.1 million for the same period last year.

Diluted earnings per share was $1.23 per share for the first quarter of fiscal 2020 compared to $1.12 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2020 was $1.23 per share compared to an adjusted diluted EPS of $1.15 per share for the same period last year.

Turning to cash flow. The company generated $40.1 million in cash from operating activities in the first quarter of fiscal 2020 compared to $33.8 million for the same period last year. CapEx was $12 million in the first quarter of fiscal 2020 compared to $7 million for the same period last year. In the first quarter of fiscal 2020, the company paid down $17.1 million of debt and ended the quarter with $32.7 million of cash.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Pete Skibitski of Alembic Global.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [2]

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Can you give us maybe a sense of where you saw the weakness in industrial OEs? Kind of is it across the board, general economic weakness? And do you sense that things could get worse? Or maybe by the fourth quarter, by that point, I think maybe things would normalize on a comp perspective. So would just be interested in your thoughts there.

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [3]

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Yes. It's the same 4 major industries that we discussed in Q4. It's mining; energy, which is oil and gas for us; semiconductor; and general distribution were mainly impacted. I think if you look quarter-to-quarter, our industrial OEM Q1 compared to Q4 is actually up 1.8%, so we continue to push hard on the OEM side.

Distribution, I think there's a lot of restocking and inventory deleveraging that the distributors in the industry had gone through over the last 4 months and so that impacted the business. We're starting to see long-term orders actually picking up into our Q3 and Q4. And so for us, it's really going to count on our in and out business within the quarter to see how the quarter comes out. We count on about at least 30% of our revenue on the industrial side on an in and out activity within the quarter.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [4]

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Got it. Okay. I'll just ask one more and I'll get back in the queue. Can you talk about the strong first quarter margin? You guys had talked about a good pricing environment in the past and the margin benefits of insourcing and automation, so is there one thing that you can maybe point to, to pin down what the driver was of the great margin? And I'd love to hear more about kind of trends going forward as well on that front.

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [5]

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Yes. I think the margin could have been better, Pete. The -- we have several programs that are still in start-up and these are major programs for us. And we continue -- we're going to see margin expansion all the way through the rest of this year. And I just came back from Southern California spending a week with the operations over there. And I think we're making really good progress on several -- in several of our sites on major programs in terms of execution and getting approvals on key processes that we need to in-source. And so that's going to all accrue to better margins in the future. So the margins were strong this quarter and -- what do they say, "You aren’t seen nothing yet."

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [6]

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That's great news. So you guys are actually talking about insourcing even more beyond what you had previously planned and talked about over the last year.

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [7]

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Well, we probably just didn't talk about it in the -- with the detail that maybe was needed. But yes, I mean if you look at the kinds of things that we're insourcing -- I mean, we're insourcing cad plate, copper plate, chrome plate, heat treatment, HVOF processing, zinc-nickel plate, aluminum pigment coating, powder lubrication and elastomeric bearings. We're insourcing all of that stuff and we're pretty far along in terms of the industrialization of those processes and the certification with the OEMs to supply from those internal processes.

So I think we're about maybe 1/3 of the way through the process approval with the OEMs, which is sort of the long pole in the tent. And -- but I think that's accelerating now. I think the more difficult processes have been approved. And we -- I'd expect by the end of December, we'll be 2/3 of the way through approval. We have some new equipment coming in, which can't be approved until it's cited. And so that will be cited in our third quarter. And probably those processes approved in our fourth quarter. So it's significant. It's a big deal.

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Operator [8]

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And your next question comes from the line of Steve Barger of KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [9]

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I'm going to stick with the industrial question. We've seen revenue coming in light, but not so negative year-over-year for some end markets. Are you able to track market share? Or do you think there has been any shift in the served end markets, any aggressive pricing from competitors or new products that are getting some momentum?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [10]

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No. I don't think we have, Steve. I think it's just some of these markets are fairly big for us. And they're all for oil and gas and mining. Both of them are 10 to 15 plus size markets for us. And we had a really nice quarter last year, so it's put a little bit of pressure on that comp. But -- and distribution was down. Offsetting some of this was our Marine business and -- which is -- as we talked about on the Q4 conference call was going to be a light year on growth. It's still going to have growth because we're only down to 1 boat build with Newport News on the Virginia-class subs, but that's going to definitely jump up in the coming years and 2021.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [11]

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Okay. And so just from a mix standpoint, as I think about next quarter, would you still expect down revenue industrial and more like a double-digit growth rate for aerospace? Or are you starting to see aerospace moderate more and maybe more of a recovery in industrial? How should I think about that for the quarter coming up?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [12]

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I think, once again, industrial had another tough comp, so we'll be down on industrial and we'll have double-digit growth somewhat like we've experienced in Q1 for aerospace and defense.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [13]

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Got you. Any -- you talked about those 4 big end markets for you. We are seeing some construction orders start to moderate -- is that -- construction equipment. Is that a big market for you historically? Or what are you seeing there through the channel?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [14]

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It's not a huge market for us. On -- mining for us would be heavy haul trucks for Caterpillar, Komatsu, Liebherr, folks like that. And we're starting to see that coming back in again, but it's booking into our Q3 and Q4. Those lead items are a little longer than the normal in and out business that we get in the quarter.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [15]

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Got you. But the cranes, aerial work platforms, that sort of thing, not as big?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [16]

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No.

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Operator [17]

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And your next question comes from the line of Kristine Liwag of BofA Merrill Lynch.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [18]

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On the 737 MAX today, could you discuss the volume that you have and the implied production rate that you're currently producing? And then also, if Boeing were to go ahead and have a temporary pause in the program, what would that mean for you?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [19]

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Let's see. So our current -- we're currently feeding the 737 MAX at the 42 ship per month rate. Some operations a little more, some operations a little less. I don't know why that occurs that way, but it is what it is. We noticed in some operations that the demand rate is 32. And in other operations, the demand rate is 52. So it's a little confusing.

The -- from the information that we're getting from Boeing, they expect to turn that ship on in October. Now I'm sure they know more than I know, so I have no comment on that. But they're telling the supply base to get ready to turn that ship on in October at such and such rate. And to bring that rate up substantially quarter after quarter. So let's hope that's the case. If it doesn't -- if there is a pause, I'm not sure how that's going to affect us because really our schedules are loaded and we have new contracts that we're -- we expect to be signing soon, which will more than offset any of the pushouts that we would expect as a delay. So I think our aerospace business is really kind of locked and loaded for the balance of fiscal '20.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [20]

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That's helpful. And maybe switching gears. You ended the quarter with a net cash position and your stock's pretty close to record highs. So you've got currency there if you want to use it as well. Can you discuss the pipeline then for M&A? And what are your strategic and financial requirements?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [21]

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Well, the pipeline for M&A is good. And so we continue to look at small and large M&A options. And we expect to actually complete something small in our second quarter. Whether that actually occurs or not is anybody's guess, but it looks like -- it looks pretty positive. The -- what was the second part of your question?

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [22]

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What are your hurdles, the strategic hurdles, financial hurdles that you're looking at either return on invested capital or some sort of metric?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [23]

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Well, Kristine -- for us, Kristine, we look at it to have a business that we can bring in that will have the same synergies and products that we can bring across to our current customer base. And we're looking for it to be accretive in the first year and to be able to meet and exceed our current targets on return on invested capital, which is a little north of 12% now. And from a leverage standpoint, we -- when we did Sargent deal, we levered up to a little close to 3x. So that wouldn't scare us. And we told The Street we'd pay that down in 5 years and we paid it down in 4. So if we could find another Sargent deal, that would be great. And in the meantime, we're also looking at a lot of -- like Mike said, a lot of tuck-in opportunities that are really nice product line extensions to our current business model.

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Operator [24]

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And next question comes from the line of George Godfrey of CL King.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [25]

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Two questions. The first one is, just for the sake of argument, if Boeing on the 737 were to lose customers to the Airbus A320, would it be a difficult issue for you to ramp up A320 production for your ship set versus the Boeing 737? Or would that take time to reconfigure factory and volume floors?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [26]

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Well, we have substantial content on the A320 also, so it would move not as much content. We probably have 80% of the content on the 320 as we have on the -- yes, on the MAX. So...

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [27]

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From a production standpoint, it wouldn't be difficult to then ramp up that production versus in pushing down the 737. That's what I was trying to get at.

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [28]

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It's pretty much what we're tooled on. Actually, a lot of the parts that are used on both ships are virtually identical. Many parts are not, but a lot of them are. And so it wouldn't be difficult. And obviously, the LEAP engine is the same engine on both ships. And the geared turbofan is the engine on the 320. And we have presence -- substantial presence on both engines.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [29]

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Got it. And then the second part is, on the capacity constraints, I just want to delineate between shop floor space and equipment versus OEM certification. By the end of September, from an infrastructure standpoint, will you have the equipment and shop floor space ready to go and now you're just waiting for the OEM to be certified or the process to be certified? Or do you -- would that also need more equipment and more space in the December or March quarter next year?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [30]

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Well, on an 80-20 basis, 80% of the equipment is in place. The plants are built. The processes have been installed. Some have been certified already. More than 1/3 of them have been certified already. And we have OEM representatives in here every week working to certify the other sites.

So I think we're kind of where we need to be. It's -- we have some very substantial contracts that we're expecting to be -- to convert over the next 8 weeks, which will push the machinery issue a little bit in some of the plants and we'll have to tool some of the plants with more of the same.

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Operator [31]

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And next question comes from the line of Michael Ciarmoli of SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [32]

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Just back to the 737. I mean, it sounds like even if we get certification, Boeing potentially talking picking up, it sounds like it's going to take about 2 years to burn down the inventory of 737s. I mean does that have any impact on how you guys are looking at sustaining the double-digit growth rate scenario if even in the best case, we see a flattish production rate of 52?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [33]

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Yes. I mean I don't see a 2-year burn down rate. I mean that's -- because they've only been out of -- only been -- I mean they've got the backlog and they just have been out of shipping the ships for the last 3 or 4 months -- 4 months.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [34]

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Well, that's -- I mean that's what -- I mean Spirit AeroSystems' going to have -- even into October, they're going to have close to 100 fuselages. And they basically said they're going to be at 52 all of next year, regardless if Boeing -- if they get that plane. So -- I mean the unfinished product is going to be out there. Again, the airline's ability to take delivery of these planes is going to slow that process as well.

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [35]

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Yes. Well, I don't think this subcontracting base can be put together -- back together that fast because some of these guys stayed in production at the 52 rate. Some of them didn't have the working capital to support the 52 rate. Some of them didn't believe Boeing that they were going to come back that strong. I mean everybody had their own opinion on how to run their operation. And so to put Humpty Dumpty back together again is going to take some time and a lot of glue.

So I think if they can get back to the 52 rate next year, they'll be doing good. Their objective is obviously higher than that, so -- as it should be. Frankly, if they get back to the 52 rate, we're still -- we have got so much content on some of the other platforms that are new and tooled. We'll -- I suspect we're still going to be in that double-digit range.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [36]

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Okay. Is that -- and you mentioned the content. I mean because as we look into these coming quarters, there's quite honestly not that much growth in terms of deliveries. The 787 is at rate, 350 is at rate, 777 looks to be delayed. I mean we just covered 737. A320 might have a little bit. So are you -- I mean it sounded like from the last call too, market share gains, content expansion. Is that going to be the supporting driver behind the double-digit growth rate?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [37]

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Yes. Yes. It's market share gains and the content expansion. It's exactly right.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [38]

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Got it. And then just last one on the industrial. Can you give us -- you talked about the 4 key OEM markets. Can you just give us a sense from last quarter to this quarter, which one got better sequentially and which ones got worst sequentially?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [39]

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No, I can't because I don't have last quarter in front of me. I'd have last year Q1. And it's just the ones we talked about, but I'm sorry. I just don't have the Q4 numbers in front of me.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [40]

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Okay. Got it. But I mean, everything we -- do you believe that sequentially that the ordering trends -- I think you mentioned you've got some pretty good line of sight. You haven't seen any erosion in any of those end markets? I mean I know semi has been having a pretty trying time, but nothing that really jumps out?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [41]

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No. And matter fact, we're starting to see semi starting to point up again, so it won't impact Q2. We'll feel it more in Q3 and Q4, but it's more positive.

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Operator [42]

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(Operator Instructions) And your last question comes from the line of Josh Sullivan from Seaport Global.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [43]

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Just on the aerospace side, to follow-up on the various 737 shipping rates you mentioned. I think you said anywhere from 32 to 52 per month. Are your products -- do these products carry large inventories? Or are these short cycle products? And I guess what I'm getting at, is there any preproduction inventory for these products, 32 per month, that's pretty low -- that still needs to be burned off at this point?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [44]

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Yes. I'm trying to think of what the answer to that is. We try to maintain an -- there's so many line items that we're in production on that we try to maintain an inventory position, a finished goods inventory position on most of these line items, so that we can ship them from the stock and have MRP flexibility on the plant floor. I don't see any burn down issue. I think the issue is, if they -- if and when they turn the MAX on and it looks like it's more and more likely to be sooner rather than later, are the inventory positions deep enough.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [45]

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And then I think last quarter you mentioned the tightness in your markets here. Even getting to 57 per month next year was a challenge. I mean do you still see that dynamic? Or do you think that it can get to that 57 by next year?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [46]

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I don't see how that happens. I'm not a believer that it can get there. We'll get there. I mean we'll have the capacity to support it, if they do get there. But there's an awful lot of subcontractors in the system here and I suspect -- I'm hearing that they still have shortages on the 737 on the current build rate.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [47]

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Okay. And then just switching gears over to the industrial side. What are your thoughts on the PCD getting market? Is that an area where you guys have some applications? Are you seeing PCDs take any meaningful share of traditional markets at this point?

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [48]

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What's a PCD?

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Daniel A. Bergeron, RBC Bearings Incorporated - VP, CFO, COO, Assistant Secretary & Director [49]

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I'm not sure we understand.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [50]

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Yes. The synthetic crystal bearings that are coming to the market particularly in some energy applications.

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [51]

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No. I'd love to read about them. Maybe I'll go to YouTube and see what the hell those things are.

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Operator [52]

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And I'm showing no further questions at this time. I would now like to turn the call over back to Dr. Hartnett.

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Michael J. Hartnett, RBC Bearings Incorporated - Chairman, President & CEO [53]

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Okay. Well, thank you again for your interest in RBC Bearings and your participation in the call today. And we look forward to speaking to you again in October.

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Operator [54]

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Thank you so much presenters, and thank you for everyone who participated in today's conference call. And this concludes today's your conference. You may now disconnect.