NN Inc (NNBR) 2015 Q2 法說會逐字稿

Welcome to the NN, Inc. second-quarter 2015 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, August 6, 2015.

I would now like to turn the conference over to Mr. Robbie Atkinson. Please go ahead, Mr. Atkinson.

Thank you, operator. Good morning, everyone, and thanks for joining us. I am Robbie Atkinson, Corporate Treasurer and Investor Relations Manager. And on behalf of our team, I'd like to welcome you to NN's second-quarter 2015 earnings conference call.

Our presenters this morning are President and Chief Executive Officer, Richard Holder; and Senior Vice President and Chief Financial Officer, James Dorton. Also here is Tom Burwell, Vice President and Chief Accounting Officer.

If anyone needs a copy of the press release or the supplemental presentation, please call the Financial Relations Board at 212-827-3746, and they will be happy to send you a copy. Before we begin, I would ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and the risk factors section of the Company's 10-K for the year ended December 31, 2014. The same language applies to the comments made on today's conference call, including the Q&A session as well as the live webcast.

Our presentation will contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flows, tax rate, acquisitions, synergies, future operating results, performance of our worldwide markets, and other topics. These statements should be used with caution, and are subject to various risks and uncertainties, many of which are outside the Company's control.

This presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. First, we'll give an update and an overview of the quarter, and then afterwards, we will open up the line for questions.

With that said, Rich, I'll turn the call over to you.

Thanks, Robbie, and good morning, everyone. The second-quarter was an exciting time in our Company's history. We successfully completed a $182 million equity raise. That's so our offerings would close at better than three times subscribed.

This offering was strategically critical, as we repositioned for our flexibility to execute on our acquisitions on the acquisition we have in our pipeline. Be advised, the absence of the announcement of the deal should not be interpreted as any sort of change in the execution of our acquisition pipeline.

We continued the transformation of our plastics business with a focus on diversification, and building a business that meets our operational and strategic expectations. The Caprock acquisition expands our engineering and manufacturing capabilities base, while also increasing our general industrial presence with their focus on electrical and aerospace components end markets.

As I look at the quarter, we were pleased with our overall performance. Excluding Brazil, our business continued to hit or exceed their targets. Net sales for the quarter and first half were in line with our expectations, while foreign currency translation and economic conditions in Brazil masked our legacy businesses' organic and adjacent market growth.

Acquisitions contributed $64.3 million of net sales during the quarter and $126.3 million for the first half. We continue to integrate the acquired businesses in the second quarter, and remain ahead of our synergy targets. Our European businesses remain strong in the second quarter and helped offset some of the impacts of Brazil. And North America and Asia continued to meet our expectations.

Specific to Asia, since we planned the region at a lower rate from the outset, we believe that the current market softness that we are seeing in Asia will still be in line with our full-year plan. So we don't have a lot of angst around Asia at this stage of the game.

During the second quarter, we saw further evidence of value created by the NN operating system. For the second quarter, excluding Brazil, this focus on disciplined execution and operational excellence drove an additional 50 basis points of improvement in our adjusted operating margins compared to Q1, as well as a 240 basis point improvement in adjusted operating margins relative to Q4 2014.

As we turn and look at the three business groups, and starting with the Autocam group, as I mentioned earlier, the Autocam integration remains ahead of plan. And we are confident we will achieve our stated [$15 million] in synergies for the year. Within the APC group, our North American and European operations continue to operate above our expectations, with Asia performing as expected.

Relative to the Brazilian economic conditions, we believe the actions taken by our team in Brazil and the reductions that we've made in our revenue guidance earlier this year will cover any and all changes in that business. It's very important to note that we continue to believe and invest in the region while some of our competitors have already made the decision to exit the area.

Lastly, inside APC, our joint venture continues to deliver the expected net income to our bottom-line, and we remain very positive on the growth of the joint venture. As we turn to the MBC group, excluding the effect of foreign currency translation, our business continues to grow organically into adjacent markets. We continue to see new product platform wins within the business and we expand our offerings.

Also, during the quarter, we continue to progress on our various custom outsourcing programs for tapered rollers and related components. As a highlight, the group's adjusted operating margin expanded 120 basis points to 13.6% compared to Q1 of this year.

Finally, our plastics business. The second quarter was an important time in its transformation. We closed the Caprock acquisition and saw the operating margins expand 60 basis points to 5.1% compared to last year. With the Caprock acquisition, we expect those margins to continue to improve as the year goes on.

With that, I'm going to turn it over to Jim to walk through the financials, and I'll return with the closing comments.

Thanks, Rich. Good morning, everyone. As Rich said, the results of our second quarter were consistent with expectations -- our expectations. And we continue to work toward our -- achieving the goals in our strategic plan.

We had adjusted earnings-per-share of $0.37 in the quarter with net sales of $165 million. This was consistent with our revised plan for the year. Weakness in Brazil was offset by strength in the US and stable demand in Europe and China. Adjusting for currency, and excluding Brazil, we had growth in all of our businesses versus the previous year. The growth in our fuel efficient -- efficiency technology components in adjacent markets are allowing NN to grow in a relatively flat market.

Rich mentioned the Brazil guidance. On June 18, we did revise guidance -- revenue guidance for the weakness in the Brazilian economy. And that -- if you missed that press release, it's on our website. Compared to Q2 of last year, adjusted EPS were up 12% from $0.33 to $0.37. This is including the weakness in Brazil. On a currency-adjusted basis, the comparison is $0.33 last year to $0.42 this year or a 27% actual increase. We calculate that our acquisitions from the past year were $0.11 per share accretive during the quarter.

Regarding the impact of foreign exchange, you may recall that we revised our euro exchange rate used in our 2015 guidance during the first quarter. So, currency was not a significant factor in our results and expectations. However, for the prior-year comparison, the lower euro rate reduced sales by $9.3 million and EPS by $0.05 per share.

Gross margins were up 0.9% compared with Q2 of last year from 21% to 21.9%, and we remain on track to achieve our strategic profitability targets. SG&A totaled $14 million for the quarter, up from $10.1 million for the same quarter last year. And this compares with the guidance we gave you last quarter that we would be at or a little above $13 million in SG&A.

We did have 700,000 -- approximately 700,000 of M&A-related costs in SG&A in the quarter. And the rest of the increase came from SG&A added with our acquired companies and an increased administrative scale. We will have M&A costs again in the third quarter, but we do not know the amount at this time.

Adjusted operating margins were 9.7% during the quarter, excluding Brazil, which was in line with our expectations. This was a 0.8% improvement versus Q2 of last year.

Our tax rate on adjusted income was 22% for the quarter, the same as in Q1. If you include nonoperating items, primarily the M&A costs, our rate would have been 21.4%. The effective tax rate for the quarter is a result of the average of our tax rates around the world. There are no unusual adjustments to income taxes in this quarter.

It's just simply a fact that we have lower pretax earnings in the high tax rate countries and higher earnings in the lower countries, making the average come to 22%. We do now expect that the tax rate for the full-year will be in the 23% to 25% range, which is down from our previous guidance of 26% to 28%.

And going from GAAP earnings to adjusted earnings, we excluded two items for a net impact of $0.01 per share. The first item was the already-mentioned 700,000 -- approximately $700,000 in M&A-related costs, which was $436,000 after-tax or $0.02 per share. The other item was the net impact of foreign exchange translation gains on intercompany loans for $232,000 after-tax or a gain of $0.01 per share.

For the quarter, we had positive cash -- positive free cash flow of approximately $13 million, excluding what we spent on acquisitions. And this is following our normal first-quarter negative cash flow due to seasonal working capital build. Capital spending totaled $7.8 million during the quarter and $16.2 million year-to-date, which is in line with our plan. This is a similar phasing of our capital plan as we had last year.

The CapEx plan for 2015 remains unchanged at $45 million to $55 million. And well over half of that is for growth projects on new business already secured for 2016.

In the supplemental slide presentation posted on our website, we have shown the sales and operating profit margins of each of our business segments in the second quarter. In the Autocam Precision Components segment, sales were up $61.2 million due to the two acquisitions that occurred in 2014 and growth in new sales programs. Operating margins were well above last year at 11.8%, including the China impact of the China JV, versus 9.1% last year. And this is due in part to our solid performance in China.

For the Metal Bearing Components segment, sales were at $69.3 million, down from $73 million last year. But this reduction is due to the translation effect of a weaker euro. Adjusting for the currency affect, sales were actually up 7.7%. Adjusted operating margins rose from 12% last year to 13.6% this year.

In the Plastic and Rubber Components group, revenue was up 8%, due primarily to the acquisition of the Caprock Company that was partially included in the quarter. Operating margins improved from 4.9% to 5.5%, and these margins will continue to improve as the full impact of the acquisition is felt.

So, just to summarize, the second quarter was in line with our expectations, as revised for Brazil. And excluding Brazil and the currency impacts, we had growth in all of our businesses. The remainder of the year appears to be solid, and we are excited about our very active acquisition pipeline.

That concludes my comments. Now back to Rich.

Thanks, Jim. To conclude, the second quarter was in line with our expectations. Ex-Brazil, and negative effects of currency translation, we remain on track to hit our organic and adjacent market growth numbers.

The ramp of new platforms continued into the quarter, as we began to see the results in our adjusted operating margins as well as the continued effect of the NN operating system taking place. Three of our four geographies are performing at or above expectations. And we remain focused on the disciplined execution of the business, along with driving our performance in our end markets and strategic growth.

To close, I'd like to thank my entire team for their focus and dedication during what has undoubtedly been one of the most busiest quarters of their lives. With that, we'll open it up for questions.

(Operator Instructions) Daniel Moore, CJS Securities.

In recent dialogues with investors, you've kind of broken the acquisition pipeline into Plans A, B, and C. Maybe just talk -- are you still in discussions or in the running regarding Plan A? Maybe discuss the range of potential deal sizes and how high you would be willing to go in terms of multiple for larger acquisitions.

Yes, I think, obviously, we are in discussions with all of the above -- Plan A, B, and C. We are still very much -- deep in discussion around the A plan, which is a larger deal, more in line with something around the size of an Autocam or maybe even a little larger. That is still in discussion. It's still at the ready. However, as I've said multiple times, we have multiple contingencies. So we are -- we feel very secure in our pipeline and the efficient utilization of the cash we've recently raised.

Okay, very good. And then switching gears, you've also grown historically, obviously, by some of your larger customers outsourcing big pieces or chunks of their business to you. Update us on some of those opportunities you are exploring, and whether or not we are likely to hear more on that front between now and year-end.

Yes, I think -- I'm not sure there is -- between now and year-end I'm not sure there is a lot more new programs to be captured in terms of the outlook, but I think we are in execution mode. You know, on the Timken side, it is for us, over the course of the next year let's call it, trying to drive in a $30-million-ish chunk, which is only a part of what would be a potential $250 million program.

Well, let me be clear. The program itself is $300 million. Where we would play is probably net about half of that. The program is separated into rollers and also into rings, and not all of the rings are precision. So our market window, if you will, would be about $100 million of that.

And I think the way to think about it, it's about $30 million over the course of the next year continuing into 2017 and more than likely 2018. Because this is just the first wave of multiple programs they are putting out there. We have a few other customers that we feel confident that we secure the outsourcing program. And we are working through the scheduling now to start to roll those things into the business. So the MBC group will be very busy over the course of the next year in bringing those things in-house.

Very helpful. And then just maybe one more on the APC Autocam, the precision components. You mentioned new customers are ramping and hitting their operating targets as we got to the end of the quarter. What kind of expectation should we be thinking about for operating margins as we look out to Q3 and Q4?

I think the Autocam -- well, let me explain that, just in case folks don't know. We've said many times that we've had new programs that we brought in, and as those programs hit their optimum production volume, and we sort of weaned all the quality issues and so on in the process, we'll be looking at margins in the high-30s to the mid-40s. And we expect to hit those numbers middle of this year.

We have, in fact, hit those numbers on those programs. Once you look at our current margin expectations around Autocam, I think we think all-in for the year, we'd probably be somewhere around 12%, maybe slightly north of that, which is in line with the plan. So we are making up at least from a -- an operating perspective, an operating yield perspective, we are making up for result.

Because candidly, Brazil was a fairly profitable business as well and contributed quite a bit to the equation. So short answer is we think we'll be somewhere around 12%. We still think the overall Company, if we don't hit 10% again, I think we'll be dangerously close to it. So, we are still standing firm. So we think APC at 12%, we think NN will be somewhere around 10%. We think MBC probably 13.9% to 14.1%.

Very good. Thank you again. I'll jump back in queue.

Justin Long, Stephens.

I think the seasonality of the business has changed a bit pro forma for Autocam. So I was wondering how we should think about the sequential progression of revenue and operating income in the third and fourth quarter? Is there any additional color you can share on at least the directional trends from here?

I think that, over time, we still -- with the amount of business that we still have in Europe, we'll always have that seasonal dip in Q3 and Q4 for the European business and some for the auto business. But this year in particular, it should be much less pronounced because we have programs ramping up, the new programs ramping up.

And so I think you will see a much less seasonal dip in Q3. Not really sure about Q4, but we assume it's going to be fairly equal quarters this year. But going forward, I think that we'll still have that automotive and European seasonal change. This year is just masked by the ramp-up in new programs.

Okay, great. That's helpful. Second question, Brazil and China are two areas where some of the macro data points have been weak. In order to better understand your near-term exposure, what's the revenue and/or EBIT contribution you are assuming from both of those geographies in the back half of the year?

I'm not sure we would dive quite that deep, but I will say this. We cut Brazil by 50%. So we took Brazil down by roughly $25 million, call it $30 million. So we cut that business in half. It only manifested itself roughly $15 million on the top because of the outperformance of the balance of the businesses, which includes China.

So, in the first half, China outperformed, we think, the softness in the market of Chinese, just going to bring it right back into line with our plan. So we think full-year, China will be right where we expected it to be. Don't think we've given a specific number to Asia, but I would say, on a net basis, the effect that we feel around the world on economic conditions really manifests itself as a -- call it a 20% reduction in Brazil on a net basis.

Okay. Okay, that's helpful. And Rich, maybe this is one for you, but I was wondering if you could just walk through some of the items that are on your checklist as you evaluate acquisitions and kind of look at these three different potential plans? Clearly, a strategic focus is to diversify your end market exposure, but from a financial perspective, are you targeting year-one accretion? A certain return hurdle? A synergy amount? Could you just provide some more color on your typical financial framework for a deal?

I think you said it well. The number one hurdle is that perfect strategic fit. Right? We've talked about building out a diversified industrial, having balance in the Company. We've talked about the end market medical, general industrial with aerospace and fluid power and those kinds of things. We've talked about that in some detail.

When we look at the financials, we are targeting year-one accretion, that I will tell you quite a few of the properties in our pipeline probably can be judged as immediately accretive. But certainly we are targeting year-one accretion. We are targeting IRR rates typically somewhere starting with a 2. You know, depending on the business, we'll flex down maybe slightly if there is work -- some work to be done in the business to get it to where we want to be.

We are targeting candidly some areas that are -- that have a much more efficient capital model than we do. So, the range of cash generation is -- in our current pipeline, is actually better than we have today. Today, we have a business that's about $0.70 on the dollar at peak production levels. We're looking at things that are more like 40% to 50%, maybe some as low as 20%.

So the cash generation model changes for us. We are stingy buyers to some degree. At least we try to be. Everything we've done so far has been something less than 8% or less. We probably don't have an appetite to get to the double digit. But for the right property, we would probably go to -- we would go to 9% or maybe into the 9's, but highly unlikely that we could find a scenario to go to double digits. I think that's kind of it in a nutshell.

Yes, that's all really helpful. I'll pass it on and I appreciate the time.

Steve Barger, KeyBanc Capital Markets.

Rich, as it relates to Asia, you said you plan for in our production rate at the outset. Just to flesh that out, we've heard some talk from some of the Tier 1's about production cuts to get inventory in line with demand over there. Just to confirm, your internal plan already anticipated that. And is there any more detail on what you are hearing from customers in that region?

Yes, so our internal plan initially, we planned to ease it at around 5%, you know, year-over-year growth. And I think the numbers really -- macroeconomically on The Street were 7% to 7.2%, which by the way, we sort of saw that in the first half. We saw that bump up but now we see that market retrenchment. So we think all-in for the year, it will come in probably right around that 5%, maybe 4.5% kind of number.

So we think it's going to fall in line with our plan. When you think about inventory, we are in our operations in China both on the ball business as well as the APC business very close to the customer. So, we have been making our inventory adjustments on a monthly basis. AND one of the benefits, especially in the APC business, of being in that JV, is we have an inordinate amount of customer intelligence. So we don't think -- barring a collapse -- right?

You know, we've got to sort of put that out there that we'd have much of an inventory issue on the APC side. On the -- I will tell you on the ball side, we are adjusting a little bit. Because, in part, we service Brazil from China, part of that business. So, when we brought back the number in Brazil, it affected volumetric Lee China on the ball side. But we think we've kind of bled through that.

And we think we are good on inventory going forward. So we are watching it like a hot button right now. Today, we think we are pretty much in line inventory-wise in China.

Thanks. That's great color and just to remind me, that JV is 100% auto?

Yes.

Okay. And so based on what you can see right now, should we be thinking differently about JV income just from a modeling perspective as we go into the back half?

No, not at all.

Shifting gears to some other customers going through earnings season, SKF and Timken had weaker demand commentary for their broader business, even though some of their auto I think was okay. Any change to how you're thinking about the direct relationship there? How do you think the bigger picture for those companies affects the pace of outsourcing initiatives?

Yes, I -- for us, we don't think there is much of a change. Again, we feel, on a macro basis, as they find themselves under, let's say, a little bit more pressure for profitability, it's helpful for us candidly, because what they do is they push us. Because we are candidly taking costs out of their business. Our issue will be, can we move as fast? Is it wise for us to move as fast as they may want us to?

But I think it's helpful for our top line, as they have to disaggregate and drive more profitability into their business. Now, when you think about the general end markets, as we look at our customers, again, automotive has been fairly stable, fairly healthy. The big problem has been in general industrial, and even more specifically, those markets tied directly to oil and gas.

Those are certainly something less than stellar right now. Fortunately for us, we didn't have a lot of prior -- I think we had 2% of our product going into oil and gas. So, as those markets sort of dwindled down, we are less -- we have less exposure to that demand hit. I chalk that one up to better to be lucky than smart because -- but we don't have that exposure. So that's part of the disconnect you are seeing with their demand drop versus ours.

Got it. And I think in your prepared comments, you had alluded to some other outsourcing opportunities. Any idea of the size or how we should think about that, understanding that they are not -- nothing is maybe signed yet?

Well, actually I have to tell you we do have a deal that is roughly an additional $20 million deal with, call it, the cost of the next two years with a Japanese bearing manufacturer, which is amazing to us. We've been working on the Japanese angle for a long time. And we are now getting the opportunity with a lot of discussions for follow-on orders.

It's new to us, it's new to them. We are working through this slowly, but that came to us towards the end of the quarter. We are pretty excited about it. We can't put the name out there. We haven't specifically asked for permission to do so.

But still, that's pretty impressive. If you sign that deal, would that affect 2015 at all? And would you service that out of your China facilities?

It may have a little bit of an effect in Q4 2015, probably not much. It would be a big 2016 play and probably the second half of 2016. Understand, the processes you have to go through to move these products into the plant takes us three to six months to get everything homologated and passed, and everything else.

So it's probably the latter half of 2016 for any real revenue. Any revenue before that will be low production costs for test purposes and so on. We will probably service those parts out of Europe -- more than likely Eastern Europe, our Slovakian operations. I think we're still working through where the best place is to do that. But it is delivery into at least in part into North America.

Got it. And just one last one on this topic. So it sounds like you've obviously got some stuff in the can in terms of outsourcing that will come in over the next few years. You've got some new initiatives in place. This should all be really positive for absorption through your facilities as that ramps up in 2016, 2017, 2018. Is that all already captured those longer-term margin targets? Or is some of this kind of outside what you had expected?

No. We've had optimal utilization of our capacity modeled in. And it accounted for about 1.7 -- almost 2 points of margin. If you recall, the margin buildup chart that we have shown quite a bit at some of the conferences and we talked about that. So we had manufacturing footprints and then we had volume utilization, and then volume utilization was primarily in the European plants. So as Europe comes back and we look at our Italian plant, we see really attractive incrementals as we utilize those plants.

That's great. I appreciate the time. Thanks a lot.

Keith Maher, Singular Research.

I had a question about the capital you raised. Just like what you are going to do with the money in the short-term? Do you just invest in short-term securities? Do you pay down debt? Just trying to help with the modeling going forward as to how that's going to impact the earnings-per-share.

Yes, so we, in the short-term -- what we did, to be very specific, we paid down $130 million on our term loan B. We paid down $17 million on our revolver. So our revolver is now undrawn, and we held back roughly $25 million in cash for projects going forward. We went ahead and executed that simply because our timing on some of the other things we are working was pushed to the right a little bit.

So if it does manifest itself, we can come back and restructure our debt and get out there to -- you know, with the banks and raise the appropriate capital to close any deal we may have in the pipeline. I would -- just in general, I think that's a great question. I would encourage anyone out there who hasn't already done so to update their models, because I think there's a few models on The Street that have not taken into account the new -- the equity offering and the changes we've been trying really hard to communicate.

So, great question. I appreciate it.

And will there be a little more information in the Q? Some pro forma numbers perhaps?

No. I don't know that there is a lot more we --

Okay, okay, okay.

Keith, the funds are received on July 1. And then -- so they were put to use in the month of July, so you wouldn't see anything in the Q until third quarter.

Yes. I was just saying if you had some sort of forward-looking statement related to that. But that's fine. And any change to your long-term? Like debt goals? In terms of I know you had some goals; just as to how much debt you'd take on?

We have financial policy. We've not changed that. It's -- if we need to push that envelope a little bit for the appropriate deal, we'd suddenly -- we do certainly communicate that. But as of now, we stand fast on our policies. As we get bigger, we have to do things a little differently and then create more elegant debt structures. And we are looking at all that.

Okay, all right. And maybe just a couple of questions on the Caprock acquisition. I can perhaps back into some of the numbers, at least revenue numbers. If that contributed roughly a month, that Caprock could be contributing maybe $1 million in revenue for the year. I don't know if that's the case, if you could burn that, maybe any -- do you think?

For this year? No. It could contribute -- not for this year. No. It would contribute more in line --

I was thinking of a run rate number. But yes, I understand --

Oh, a run rate number. I think a run rate number would be a little -- probably a little higher than $8 million.

Okay. Any color on just the profitability of that business and what you paid for it?

That business is a double-digit operating profit business. It's aimed at primarily general industrial. The electrical business servicing quite a few utilities. A little bit of medical and aerospace making modules that go into the PC flow of Boeing next-gen aircraft. On a payment scale, right in line with everything else we've done. Somewhere between something less than $8 million. Let's put it that way.

There will be some information in the 10-Q on those, that acquisition in the -- within the footnotes that you saw this morning.

And -- okay. In terms of just the overall acquisition pipeline, is there any one particular area where you think you are going to be more acquisitive? I mean now that some action here in the plastics should we assume that we will see more action there? More deals?

Yes, well, I think that we always go right back to our strategic plan, right? We said a couple of things in our strategic plan. We talked about the end markets we wanted to add to the portfolio. So that's general industrial defined as electrical and fluid power. That's medical. And that's aerospace. So we wanted to add in a very disciplined way those pieces to our portfolio.

So when you think about our acquisition strategy, know that in part at least that's a focus of ours as we think about it. We continue to talk about building a diversified industrial and a balanced business. So the likelihood of us making an acquisition on the auto side of the business is slim unless we are doing a technology buy. Because part of the strategic move is to balance the Company -- 50% light auto, 50% other, which is made up of those additional pieces of the portfolio that I just mentioned. So I hate to sound like a broken record, but we always come back to the discipline of the strategic plan.

All right, thanks. That was really helpful. That's all I have.

Larry Pfeffer, Avondale Partners.

So just a question on the kind of the revenue growth run rate. From the numbers you guys gave, it sounds like Brazil may have been a $6 million or so headwind. So the kind of trend organic growth rate I have is about 8%. I know you've already got the guidance range reaffirmed, but is that kind of the run rate you think for trend growth in the back half?

Yes. I mean we are standing by our 8% number. Right? So 3% of it is actually what we would call pure organic; 5% would be really what rose up in adjacent growth. So, taking new products into different end markets or opening up new product lines into our current end markets. So we are standing by that.

I think if you look at the forecast right now, we feel pretty good about hitting that number or at least coming dangerously close to it in spite of the headwind that is Brazil. I think your numbers are about right on Brazil. We were counting on -- there's quite a few new programs in Brazil that we were hopeful would be ramping up this year, and of course now have been pushed to the right. So, I think with that, we probably would've exceeded our organic and -- well, certainly our adjacent growth rate, because our biggest Fiat program down there was a pure adjacency.

Right. And some of the contract wins you guys have detailed, do you think, as you exit the year, that MBC will actually be outgrowing APC?

You know, it's looking that way, which is pretty exciting to see, you know, mostly on the strength of some of the outsourcing opportunities. And as we ramp up Mexico -- which is an extremely exciting location for us and for our customers -- yes, that possibility certainly exists that MBC could outpace the growth in APC. And that would be -- that's a quality problem to have right now for us.

Absolutely. And then looking at the JV, I know you guys talked about kind of a similar run rate earlier here in the call, in the back half. What do you think the dividend you could get from that business will be this year? Do you think it will be flat? Up?

Yes, it's -- compared to last year, it was all about flat.

Yes.

Yes.

Okay. And then just lastly, I mean, there's been a lot of noise obviously this year with currency, Brazil, the M&A costs. What do you think some normalized incremental margins would look like this year and into next year?

Well, our -- I'm trying to see if I'm understanding the question. Our normal incremental is around 32%. And so, we kind of hold that. I think we drift up within a strategic period to somewhere around 35%, but that's where we play right now. That includes significant investments that we are making back into the business that our -- we figure those investors will continue for some time as we build out our infrastructure. So, until things like our IT is done and a few other things are done, we don't see anything much beyond 30% -- 32%, 35%.

Got you. Well, thank you for taking my questions.

Daniel Moore, CJS Securities.

Part of this has been covered, but maybe just talk a little bit about Caprock, how it's performing relative to your expectations? And then more generally, in plastics and rubber, are you in discussions with other plastics components manufacturers from an M&A perspective? And are we closer to a sale or divestment of rubber than maybe we were six or (technical difficulty) 12 months ago?

Yes. As I've said before, our strategy always was if we couldn't turn this thing into $100 million double-digit operating profit business, we'd have to do something different. We felt that, and we feel that, we need plastics and we can grow plastics. And there's a lot of benefit there. We can make this thing a $100 million-plus business performing at 10% or 12% operating profit.

We don't think we can service the rubber side appropriately. We are in discussions with customers and others around the right thing to do with the rubber business. We -- it's a necessary business for our customers. So it's not something that -- we can't close up shop and run. These are the same customers that we service on the plastics side and, in some cases, in the metals side of the business. So, we are working through, let's call it, our elegant exit of the business while making sure our customers are taken care of.

Relative to Caprock, it is a good business. It is actually performing better than we expected. And what's more, the most exciting part, obviously, for us are the end markets. So we now have utilities as our customers. We are in the electrical space with the ability to expand. We have the capacity to expand.

We're also in the aerospace space. And the good part about it is we are on next-gen Boeing aircraft. So we are on 737-8 and 777EX and 78-Stretch. So, it's a good place to be. It's a small business. We've got to put some SG&A around it, add a little bit more engineering to it, and begin to grow those platforms. But obviously, at least in part, we know that we will continue to acquire in that space to accelerate that capability.

Very good. And I eagerly anticipate the next communication. Thanks again.

(Operator Instructions) Steve Barger, KeyBanc Capital Markets.

One quick follow-up. Looking at your revenue pie chart, you have about 8% commercial transportation. Just -- is that all on-road?

No. That's -- we have recreational vehicles. So we do steering mechanisms, warm gears and so on for Rex vehicles. We've got a little heavy truck, mostly in Europe. So if you wanted to do the crossover, it would be more like a Class 6 for us, but a Class 8 in Europe. What else is there? Construction -- construction and ag products.

So it is kind of a mixed bag? How -- okay. And some of the obviously construction and ag markets have been challenged. Any just general view on what that commercial segment looks like in the back half? And --?

Yes, I think we're pretty well -- we are calling that market flat. I mean, we're not a big player in the market. And the biggest chunk that we have is in the recreational vehicle side. And believe it or not, that's doing pretty well, especially since at least part of that is in the aftermarket side. So it's pretty -- we feel pretty good about that. We think it's flat going forward.

For us, it's a little bit interesting because the European truck market has actually held up fairly well. And so we see that coming through our Veenendaal, Netherlands facility. And we are actually trying to make some moves to see if we can't get into the current build for NAFTA truck, which -- you know how that cycle works. That's a -- it's a beautiful thing on the way up, and not so beautiful on the way down. But they are moving up now.

And so we think we have some products that can get in there. We are trying to do some work to get in there right now, but that's not in the plan.

Okay. So it sounds like there's more pluses than minuses to that segment, but overall, you've captured it in the forecast?

Yes, yes, absolutely.

Okay, that's all I have. Thanks.

And there are no further questions in the queue at this time. So I'll turn the conference back to management for any additional or closing remarks.

Okay, Robbie?

Thank you, operator. And thank you to everyone who joined us today. That concludes our call.

This does conclude today's conference. Thank you for your participation.