RBC Bearings Inc (RBC) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 RBC Bearings earnings conference call.

My name is J.D.

and I'll be your conference coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

I will now turn the call over to Michael Cummings from Ashton Partners.

Please proceed.

Thank you, J.D.

Good morning, and thank you for joining us today for RBC Bearings' fiscal fourth quarter 2008 earnings conference call.

On the call today will be Dr.

Michael J.

Hartnett, President -- Chairman, President and Chief Executive Officer; and Daniel A.

Bergeron, Vice President and Chief Financial Officer.

Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those projected or implied due to a variety of factors.

We refer you to RBC Bearings' recent filings with 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'd like to turn the call over to Dr.

Hartnett.

Thank you, Mike.

I'd like to welcome each of you and thank you for taking the time this morning to listen to our call.

As always, we appreciate your continued interest in RBC Bearings.

Today, we're going to follow the usual format.

Dan Bergeron and I will be sharing the duties.

I'll touch on the highlights of the year and Dan will go into some of the details on accounting treatments for a specific point.

This morning, we released our results for -- for the fourth fiscal quarter of 2008.

If you haven't seen our release, let me review it in detail now.

Our highlights for fiscal 2008, which proved to be another exceptional year for the Company, we posted record sales of $330.6 million, roughly 8% higher than fiscal 2007, and adjusted operating income grew 12% from last year.

We were extremely pleased to once again deliver the results that exceeded our expectations.

Importantly, our results for the -- for the year highlight our continued success in delivering strong, consistent financial performance.

In fact, since our IPO in August of 2005, we have delivered compounded annual sales growth of over 18% and achieved double digit adjusted operating income growth each year for our history as a publicly traded company.

We believe that our success validates the core growth initiatives we have been pursuing for many years.

Our accomplishments during the year were more than just continued execution in our core markets.

We made significant progress on long-term initiatives to accelerate our participation in larger size bearings market to meet [secularly] strong demand, particularly for wind, oil, construction, and process industries.

We believe these markets, fueled in part by world emerging growth economies and in part by a change in energy sources through green initiatives, represent expanding opportunities for us in the years ahead.

Consider the wind market alone, as discussed in our last call.

In order to meet the government stated objectives of producing 100 gigawatts of electrical power generated in North America from wind turbines by the year 2020, we estimate that a range of approximately $700 million to over $1 billion worth of bearings must be consumed per year in the United States in each of the next 12 years to get close to this objective.

Even if this national objective were achieved, wind would still produce less than 10% of the electrical power consumption in the year 2020, but for the U.S., probably a story of too little, too late.

The opportunity is even larger, given the growing need for clean energy.

Simply put, this market obviously represents one major and significant growth market for RBC Bearings.

Consequently, we have begun to expand our production capacity in our Houston plant and other places accordingly.

To address these significant and growing market opportunities, we made several strategic investments in fiscal 2008, highlighted by our acquisitions of Coastal Bearing Services in Houston and Phoenix Bearings in the United Kingdom.

The integration of these small, but important, acquisitions provided us with additional products, technology, and expertise in the large bearing segment.

We are progressing well, and all companies are contributing as expected.

Large industrial bearings were not the only hot markets in 2008.

Aerospace and defense were equally demanding of our attention and production capabilities.

To put this in perspective, the industry booked three times more large commercial aircraft than it sold in 2000 -- in calendar 2007.

We were busy in our design and marketing offices with proposals and designs for new systems.

In fact, the demand is so strong that in some cases bearing industry lead times have now reached 110 weeks for some aircraft products.

New systems under development and/or redesigns of existing machinery where we have made measurable participation include the Airbus's A350, A400 and A380, Boeing's 787 and 737 ships and Boeing's CH-47 and AH-46 helicopter ships as well as Lockheed's F-35, to mention only a few of the major programs.

A quick year-end analysis of our air rich content for Boeing ship has moved from $75,000 per year -- per ship last year to over $90,000 per ship this year, a 20% increase.

Finally, at the end of our fourth quarter we acquired two companies that produce products for our aircraft customers.

These are the Georgia based A.I.D.

and BEMD companies.

We expect to integrate these businesses into our plans over the next 18 to 24 months.

A word about our defense business.

Overall, defense business performed well this year.

On a year-to-year basis, we were up approximately 10%, and we expect similar performance in the year ahead as we introduce new products as a result of maturing projects for helicopters, guided weapons, and satellites.

Now, let me provide you with a few financial highlights for fiscal 2008.

As I mentioned earlier, our fiscal 2008 sales were $330.6 million.

This was a 8% increase from $306 million in fiscal 2007.

Excluding Class 8 truck bearings, our sales growth for the year was approximately 12%.

Strong sales growth was primarily driven by aerospace and defense products, which represented 53% of total sales, or $174 million, up 14.5% from last year.

Industrial product sales, excluding Class 8 truck bearings, were up 8.8% to $140 million for the year.

Gross profit for the year of $113.6 million represented a 13.5% increase compared to last year.

In past quarters, we expressed our confidence that we could achieve year-to-year consolidated gross margin improvement of 150 basis points, and I'm happy to report that we delivered on that expectation.

In fiscal 2008, gross margin as a percentage of sales was 2 -- 34.4%, an improvement of 170 basis points over last year's 400 -- and 420 basis points over the past two years.

We were able to achieve this margin expansion as a result of facility consolidations, which increased our overall efficiency, combined with improvements made in our pricing, products -- product mix, and channel positioning.

While we have been successful in expanding gross margins in each of the last three years as a public company, we expect margins to stabilize in fiscal 2009, particularly in the first half of the year, as we work to integrate our recent acquisitions and expand capacity to meet the emerging growth market objectives for large bearings.

As you know, our acquisition strategy has always been focused on high-quality franchises that have significant long-term margin expansion potential.

But in the short term, some of these acqui -- acquisitions can compress margins, as in the case of our recent acquisitions, until we reach the targeted margins for the business.

Operating income of $62.9 -- $62.9 million for fiscal 2008 increased 21.1% on a GAAP basis and 12.0%, or $6.9 million, on an adjusted basis versus fiscal 2007.

Full year GAAP net income was $40.2 million compared to $28.5 million last year.

Adjusted net income increased 22.3% to $40.8 million, or to $1.87 per share compared to $33.3 million, or $1.56 per share for the same adjusted period last year.

Dan will provide more color on a year-to-year comparison later in the call.

During 2008, the continued strength of our primary markets including aerospace, defense, construction, industrial distribution, oil, and wind was highlighted by an order book expansion of 23.3% to $217.7 million from $176.6 million at the end of fiscal 2007.

It was this -- it is this continued strength and demand that has led us to add staff to meet the welcome increase and request for proposals, designs, and quotes for new projects that were challenging our infrastructure all during the year.

We also saw funding for several government programs announced during the year, which positively added to our EOEMs where we have specific and identifiable content.

Our debt minus cash for the year ended March 29, 2008, was $47.9 million, which decreased 11.7% over the last 12 months.

During this period, the growth of -- growth and investment we have been able to maintain a leverage ratio on a trailing 12-month basis above under one time.

Operating cash flow for the last 12 months totaled $27.1 million.

We remain confident that our cash flows from operations will continue to support our strategic investments with room left over to continue paying down our debt.

Our capital expenditures for the year were $17.8 million, which were part of our previously announced $25 million to $30 million initiative to expand internal capacity for large bearings, including bearings for the wind industry.

As I stated early in the call, we successfully completed four acquisitions in fiscal 2008, which will add approximately $19 million to our total revenues in our fiscal 2009.

As we have discussed in the past, we will work to position ourselves in markets with strong and continuing prospects for profitable expansion of our business exists, and defensible franchises can be created.

While we like where we are today in terms of product offering, markets, and our ability to execute, we remain proactive in seeking to increase our capacity and further enhance our efficiencies to meet demands of the many new programs that now integrate RBC Bearings components into their original designs.

As I mentioned at the beginning of today's call, we are very pleased with the results of fiscal 2008, and we believe progress we made in fiscal 2008 on our expansion into large diameter bearing market and a healthy backlog generated throughout the year positions us well for continued performance in fiscal 2009.

Once again, we were able to maintain a high level of service and assurance to our customers during extremely busy times.

I want to personally thank each member of the RBC team for their continued hard work and dedication to our customers.

Now, I'd like to ask Dan to review the financials.

Thanks, Mike.

Net sales for the fourth quarter fiscal 2008 were $92.1 million.

This is an increase of 13.7% from $81 million for the comparable period last year.

Net sales for the fourth quarter of fiscal 2008 of $92.1 million slightly exceeded the Company's quarterly guidance range of $88 million to $92 million.

Excluding the decline in the Class 8 truck market, net sales for the fourth quarter fiscal 2008 increased 15.7% over the same period last year.

Net sales for fiscal 2008 were $330.6 million, an increase of 8%, from $306.1 million for fiscal 2007.

Net sales for fiscal 2008 increased 12%, excluding the impact of the decrease in the Class 8 heavy truck market.

During fiscal 2008, the Company had net sales growth in all four of its business segments driven by strong demand in its end markets, the supply of new products to existing and new customers, and the inclusion of four acquisitions.

Gross margin for the fourth quarter fiscal 2008 was $32.3 million, an increase of 13.3% from $28.6 million for the comparable period in fiscal 2007.

As a percentage of net sales, gross margin was 35.1% for the fourth quarter fiscal 2008 compared to 35.2% for the same period last year.

Gross margin for fiscal year 2008 was $113.6 million, an increase of 13.5% from $100.1 million for the comparable period last year.

For fiscal 2008, gross margin percentage was 34.4% compared to 32.7% for the same period last year.

As Mike has already mentioned, this margin improvement exceeded our internal goal to increase fiscal year 2008 gross margin percentage by 1.5%.

SG&A for the fourth quarter fiscal 2008 was $13.7 million compared to $11.3 million for the same period last year.

As a percentage of sales, SG&A was 14.8% for the fourth quarter fiscal 2008 compared to 13.9% for the same period last year.

The increase of $2.4 million was mainly due to increase of $1.9 million for personnel necessary to support increased volume in our expansion into large bearings, higher stock compensation expense of $0.2 million, and $0.3 million due to the inclusion of four acquisitions -- Phoenix Bearings, Coastal Bearings, A.I.D., and BEMD.

In fiscal 2008, SG&A was $48.9 million, an increase of $6.6 million compared to $42.3 million for the same period last year.

As a percentage of net sales, SG&A was 14.8% for fiscal 2008 compared to 13.8% for the same period last year.

The increase of $6.6 million was mainly due to an increase of $5.4 million for personnel necessary to support the increased volume in our expansion plans, higher stock compensation expense of $500,000, and $700,000 associated with the four acquisitions completed during fiscal 2008.

Other net for the fourth quarter fiscal 2008 was $0.7 million.

This mainly included a loss of $300,000 of disposable fixed assets and $400,000 of amortization of intangibles.

Other net for fiscal year 2008 was $1.8 million compared to $5.9 million for the same period in fiscal 2007.

In fiscal 2008, other net included $1.3 million of amortization of intangibles, $500,000 of moving expenses related to the relocation of our aerospace division in Connecticut, and a loss on disposable fixed assets of $400,000, offset by other miscellaneous income of $400,000.

Operating income was $18 million for the fourth quarter fiscal 2008, an increase of 56.5% compared to operating income of $11.5 million for the same period in fiscal 2007.

Operating income, excluding plant [moving] and consolidation costs and disposable fixed assets was $18.4 million, an increase of 8.3% compared to the adjusted operating income for the same period last year of $17 million.

Operating income, excluding these items, for the fourth quarter fiscal 2008 of $18.4 million was within the Company's quarterly guidance range of $18 million to $19 million.

For fiscal year 2008, operating income was $62.9 million, an increase of 21.1% compared to operating income of $51.9 million for fiscal year 2007.

Operating income, excluding plant moving and consolidation costs and disposable fixed assets, was $64 million, an increase of 12% compared to adjusted operating income of $57.1 million for the prior fiscal year.

As a percentage of net sales, operating income, excluding these items, was 19.3% for the fiscal 2008 compared to 18.6% for the same adjusted period last year.

Interest expense net for the fourth quarter fiscal 2008 was $700,000, a decrease of $400,000 from $1.1 million for the same period last year.

And for the full fiscal year, interest expense net was $3.4 million, a decrease of $2.4 million from $5.8 million for fiscal year 2007.

The decrease in both the fourth quarter and fiscal 2008 is mainly due to debt reduction from free cash flow.

For the fourth quarter fiscal 2008, the Company reported net income of $12 million compared to net income $6.7 million for the same period last year.

Diluted earnings per share was $0.55 for the fourth quarter fiscal 2008 compared to $0.31 per share for the same period last year.

Excluding the after tax impact, the plant moving consolidation costs, and disposable fixed assets, net income increased 20.8% to $12.3 million in the fourth quarter fiscal 2008 from an adjusted net income of $10.2 million for the same period last year.

Diluted earnings per share, excluding the after tax impact of these items, was $0.57 for the fourth quarter fiscal 2008 compared to an adjusted $0.47 per share for the same period last year, an increase of 21.3%.

For fiscal 2008, the Company reported net income of $40.2 million compared to net income of $28.5 million for the same period last year.

Diluted earnings per share was $1.84 for fiscal 2008 compared to $1.33 per share for the same period last year.

Excluding the after tax impact of the plant moving and consolidation costs, disposable fixed assets, loss on extinguishment of debt, and a CDSOA payment, net income increased 22.3% to $40.8 million in fiscal 2008 from an adjusted net income of $33.3 million for the same period last year.

Diluted earnings per share, excluding the after tax impact of these items, was $1.87 for fiscal 2008 compared to an adjusted $1.56 per share for the same period last year, an increase of 19.9%.

Net income for the quarter and year were favorably impacted by state and federal R&D tax credits and the manufacturing deduction benefit during the year.

Cash provided by operating activities for fiscal 2008 was $27.1 million compared to $55.7 million for the same period last year.

Capital expenditures for fiscal 2008 were $17.7 million compared to $16.2 million for the same period last year.

The increase in CapEx was mainly driven by the construction of our new aerospace manufacturing facility in Torrington, Connecticut and investment in new machinery for our large bearing expansion.

We expect capital expenditures in fiscal 2009 to be in the range of $15 million to $20 million, mainly driven by the expansion into large bearing capacity.

During fiscal 2008, the Company used approximately $2.2 million of cash to pay down debt, $13.9 million for acquisitions, and $2.5 million for the repurchase of common stock.

Total debt minus cash on hand for the period ending March 29, 2008, was $47.9 million compared to $54.2 million for the same period last year.

At the end of fiscal 2008, the Company's net debt to total capital was 17.6% compared to 24.4% for the same period last year.

I'll now turn it back to Mike to discuss the first quarter fiscal 2009 guidance.

Thanks, Dan.

And in closing, I want to take a moment and share our thoughts on our position heading into fiscal 2009.

We remain optimistic about our core markets and we expect them to continue to support a strong business plan in fiscal 2009 and beyond.

Clearly, this is being demonstrated in our order book, and bearing all these factors in mind, combined with the understanding that our fourth quarter of fiscal 2008, and traditionally our fourth quarters are the strongest quarters, we're providing the following guidance for our first quarter of fiscal 2009.

We expect sales to be in the $91 million to $93 million range, and operating income to be between $17 million and $18 million.

I'd like now to turn the call back over to the operator and ask for any questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Your first question will be from the line of Peter Lisnic of R.

W.

Baird.

Please proceed.

Good morning, everyone.

Good morning.

Morning, Peter.

Excuse me, I guess my first question is on the -- your gross margin commentary and the fact that it looks like in your -- for your guidance, the best that we're going to do from at least an operating margin perspective in the first quarter is flat.

Can you maybe give us a sense as to what sort of spending that you're incurring in the first half of the year that's going to -- to temper operating or gross margins for that first half of the year?

Yes, I'll -- you know what, I'll -- I think Dan is prepared to answer that question.

Well, there's a few factors, Pete, that -- that do impact the margins in the first six to nine months of the year.

One is our expansion into large bearings, so we have spending going into setting up these new machines and -- and new factory capacity to start making these bearings.

The second is we do have some acquisition expense on these -- acquisition accounting, I should say, on these four acquisitions that we did that are coming through.

And typically the margins on these acquisitions are lower, and so it takes us a good 12 to 24 months to get the gross margins up to where we'd like to see them.

And so that's pulling back the margin performance a little also.

And is there any way of quantifying either -- any of those three?

Well, I see on the -- on the acquisitions, that's probably eroding our margins about 1%.

And that's why we still feel we'll be in that -- in that 33.5% to 34% range for the year.

Okay, fair enough on that one.

And then if I look at the -- the backlog number, do you have the backlog number excluding acquisitions?

No, I didn't -- not on me, so we can get back to you with that information.

Okay, no, that's fine.

But even without that, it looks like the order growth was really strong in the fourth quarter.

Can you maybe give us a sense as to where the -- where the real strength was from an end market perspective on the order growth front?

Well, certainly I -- we're seeing great strength in the aircraft products area right now, and it's -- I think 90%, 80% of the -- of the backlog growth is coming from aircraft products.

Okay, that is very helpful.

Thank you very much.

Your next question will be from the line of Andrew Obin of Merrill Lynch.

Please proceed.

Yes, good morning.

Morning, Andrew.

Just a couple of questions.

Just looking at the higher SG&A, how long do you think it will persist as we sort of model 2000 -- well, calendar '08, '09?

Do we have to -- are we permanently now at a higher SG&A spend as we ramp up wind capacity or will it calm down?

I think in terms of absolute dollars it will probably stay where it is, but in terms of percentage of sales, it will -- it will calm down.

Is it likely to come down over the next couple of quarters or do we need to wait longer for that?

Four quarters.

Yes, I -- Andrew, I think we'll start seeing improvement in that in the fourth quarter when we start actually seeing some shipments in revenue generated by the large bearing business.

Then I'm correct to associate high SG&A spending with your growth investments?

Yes.

And then another one in terms of working capital use, a similar question.

It seems that this year was not as good as last year's in terms of free cash flow.

Is it the same story effectively?

Well, yes, and also I think we had a very -- a big quarter in way of shipments and -- in February and March.

So, just -- we invested probably $6 million just in AR in working capital.

And that definitely will come out pretty quickly in the first quarter of '09.

And some of it's inventory build, which we'll be working down through fiscal year 2009.

And some of that is associated to what we're doing on the large bearing expansion side.

But -- but I guess the question is -- is do we now, because we are in a high growth mode, does it mean that we now require more working capital?

Is it a one-time working capital use or will it be reversed next year?

I -- I think there's a couple of things going on there, Andrew.

I think first of all on the -- on the free cash flow number, there's an -- there's a change in account -- accounting policy which distorts that number to -- for a period, which I'll probably never understand.

And secondly, I think the -- when -- in areas where we have great order book expansion, and that's probably in aircraft products, I think we got a little bit ahead of ourselves in terms of bringing in materials to support the order book.

Yes.

So, we were -- we just got a little ahead of ourselves in terms of MRP management.

Yes.

And so we have very intense activities right now at -- at correcting some of that.

So, we don't expect to see that kind of working capital growth this year.

Okay, and what was the accounting change, I'm sorry?

It fits with the tax benefit from stock options.

It gets reclassed out of operating income.

You'll -- when you look at our cash flow and you see it's down in finance and activity.

So, how much was that?

That was close to $10 million for the year.

Okay, got you.

And a last, last question and I'll let somebody else take it.

Just -- my aerospace analyst tells me that fleets have started to retire older models, like MD-80s, just because of where energy prices are, and I was just wondering if you are overexposed on any of the older models that could cause some revenue shortfalls next year.

No, I -- we don't foresee any revenue shortfalls next year in the aircraft business whatsoever.

Okay.

Thank you very much, Mike.

Your next question will be from the line of Edward Marshall of Sidoti & Company.

Please proceed.

Good morning, gentlemen.

Morning, Ed.

Morning, Ed.

I was looking at the tax rate here.

You've got a benefit in the quarter it looks like.

I mean, it's a lower tax rate than we've seen in a trend -- on a trend line here.

Can you comment on that?

Is there any benefits in the quarter that you may have seen?

Yes, it was the R&D -- we have some state and federal R&D tax credit coming through and we -- since now that we've gone through most of our NOLs last year, we're actually able to benefit from the manufacturing deduction this year, so that helped our rate this year also.

So, I think from a modeling standpoint, we -- for '09 we should be looking at a rate close to 34%.

Right, okay.

To touch on the gross margins again in the range of 33% to 30% -- 34% or 33.5% to 34% for fiscal 2009, is there anything to do with cost of raw materials?

I mean, is there any pushback on prices that you guys charge on the surcharges that go to the clients?

Is there any pushback on those price increases that you may be sending to the clients?

Because you're -- you're -- you're predominantly using what, nickel and cobalt; is that right?

Yes, chrome and [moly].

Chrome and moly are big -- big drivers.

Nickel -- nickel's in there too.

It's sort of industry by industry, account by account issue, and I think it's by and large manageable.

Although, we're anticipating a -- maybe a delay in some of the -- in some of the billings in order to -- in order to normalize the -- normalize the material change.

But -- but basically we try to construct our contracts so that the -- so that the pricing floats on a material adjustment, if you know what I mean.

Sure.

Now, a question on the aerospace, going back to Andrew's question.

You see -- you see companies like American Airlines and so forth taking some planes off line.

These are older aircraft, generally in for maintenance more often.

As a bearing producer that supplies quite a bit to the aftermarket, do you anticipate somewhere down the line that you may feel an impact from the aerospace market maybe slowing slightly since a lot of your bearings go to the aftermarket?

And it may be too early to tell.

It's -- we have -- we have no really great way of putting our finger on that.

I think the best way is to look at our order book expansion and see what's happening there.

We have -- that's -- there's really good growth, and that strong growth in order book expansion is continuing in this quarter.

So, we're not -- we're not seeing -- if there's some effect to that, Ed, it's being masked by the OEM demand.

Okay.

And last question, debt's -- debt's been coming down substantially through the past two fiscal years, and it tipped up here at the end of the year.

And I was just curious if you could comment.

Is that just working capital needs or --

No, our debt down -- is down for the year.

Down year-over-year, but up -- up sequentially.

Oh, for the quarter?

Right, right.

I think it was $50 million long-term and now it's $57 million.

Right, that's because we acquired A.I.D.

and BEMD in the month of March.

Okay, okay.

So, we should assume that there's no change, that debt will continue to be repaid?

That's correct.

Okay.

Thank you, guys, very much.

Your next question will be from the line of Marty Pollack of NWQ Investment Management.

Please proceed.

Hi, very nice -- nice results.

Just, if you would, can you just elaborate about the wind business, give us a little sense of what -- what that -- those sales are today and with these acquisitions where are you effectively for fiscal '09, and also elaborate on the margins, how comparable they are to the other segments.

The other question just about ball bearings.

Are you finding that particular part of the market is more difficult to get price -- price -- price pass-throughs?

And just a little bit more granularity of what those sales are.

Okay, well, let's start with the wind business.

I think -- I think the wind business for us right now, Marty, is at most $2 million a year, and I would be surprised that -- that it's that high.

So, there's -- there's plenty of -- there's plenty of upside there.

From everything that we've seen in terms of the bearings that go into the -- into the blade and in what they call the pitch (inaudible) ring bearings are these -- which are approximately 10 foot ball bearings, we think that the margins in that sector, once the -- once the manufacturing operations are stabilized and mature, should be pretty close to our corporate average.

And that's kind of the way we're looking at it and the way we're -- we're modeling the thing.

And I think the margins on the -- on the gearbox side of the [business], which are probably the other half of the volume in the wind business, are -- are certainly close to -- close to where our corporate average is once that side matures.

And that actually is a little bit easier side of the business for us to mature right now, given we're producing bearings that are in that -- in that size range today.

So, we see a demand cycle there that's probably going to continue for years, and -- and a supply cycle which is always going to be short.

So, unless -- unless I'm missing economy -- economics 101, there should be some pretty fair margins in those products for the immediate future.

Okay.

The ball bearing business, in terms of pass-throughs, I mean, we -- our -- mainly our ball bearing business is -- is very non-commodity, and so we don't -- we really don't make any ball bearings that are electric motor, or automotive, or anything for markets like that.

And so, we typically haven't had any -- much difficulty on a -- on a consolidated basis pricing through what we needed for margin.

Okay, thank you.

Your next question will be from the line of Walt Liptak of Barrington Research.

Please proceed.

Hi, good morning, guys.

I wonder, Dan, if you could quantify the amount of the R&D tax credit.

Let me see if I -- I'd say it was probably -- doing a little research here, Walt.

This is in the quarter?

Okay, yes, maybe while we're looking for that we can -- I can ask you about the defense business.

You talked in your commentary about government programs, and I wonder if you were alluding to defense and if you could provide a little bit more color on that.

Yes, well, the -- our defense -- our defense business for the trailing year or the looking out?

Yes, I think looking forward, I mean, are there programs that are rolling on?

Are there programs that are rolling off?

Certainly, well, there's not too much rolling off that I can -- that immediately jumps to mind, but the programs going forward are certainly the guided weaponry where we have some pretty good positions in -- those systems.

Certainly helicopters are -- there's lots of major helicopter programs now that are being funded that Boeing produces and Bell produces where we have some pretty substantial contents and some expanding contents, depending upon where the ship is in its life cycle.

And -- and so we're -- and so we're feeling pretty good about -- and in the joint strike fighter, the F-35, we continue to expand our content there.

And as that program matures and comes online in the -- in the early 2011, 2012, 2013 period, we're going to be -- we're going to be well positioned.

So, we're feeling -- we're feeling pretty good about where we are relative to defense positioning.

Okay.

Are any of these programs large enough that they'll be -- there's a meaningful incremental revenue contribution in '09 on the defense?

I think we'll see close to the same kind of growth that we saw in -- this year in '09, but I I think the substantial -- more substantial growth comes in '0 -- in '10 and '11.

I mean, we really have some -- some really good products coming through for '10 and '11.

Okay, that sounds great.

Okay, and I wonder if you could comment a little bit about the general industrial.

The growth seems like it's -- it's holding up ex-truck.

We've been talking a lot about recession and a manufacturing slowdown.

What do you -- what kind of color can you provide about general industrial?

Well, in total, our industrial distribution business was -- for the entire year, including the Class 8 truck business, was up like 24%.

Some of the acquisitions get classified into that group.

So, net of -- net of the acquisitions, we were even up over 10%.

So, we're seeing good continued strength coming from our -- from our core industrial distributors.

And certainly that's the sector that you -- that I watch the closest in terms of industrial production rates and GDP expansion and that sort of thing because that -- that usually is where it -- where it's first felt.

Now, even -- even when the -- in previous times where we -- where we had some contraction in industrial production rates, we never saw negative growth.

We saw maybe flat year-to-year sales per -- sales performance, but we never really, over the last 18 years that I've been doing this, we've never seen a contraction in that sector because we really work that sector pretty hard from a sales and marketing perspective.

Our industrial OEM business for the past year has been about flat, net of the effects of Class 8 trucks.

And I think, to some extent, that's a result of some of that capacity going into defense and some of that capacity going into industrial distribution products.

So, there, there was more a decision on just exactly where best to place your capacity.

So, I think the industrial OEM side of our business, once we turn on the larger bearing sector, will -- will do very nicely.

Okay, okay, good.

And in your Europe business I think you do quite a bit of work with some of those collets as well as couplers for the rail industry.

Yes, well, Europe, the collet business is -- it's as strong as it gets.

They -- everything we make they buy, and we just can't make it fast enough.

And it's been that way ever since we bought the company, with minor quarterly exceptions to that statement.

So, that's -- that's been a very good performing business for us.

The industrial side of the European business is, at this point, stable.

We're not expecting a lot of growth in the industrial side in Europe next year -- industrial OEM side, but we are expecting flat year-to-year comparisons.

Okay, okay, and if I could ask just one more.

What was your -- your wind power CapEx in fiscal '08 and what do you expect that CapEx to be in '09?

Yes, let's see, I don't think we've spent very much in fiscal '08 because of the lead times associated in buying -- in specking and buying this equipment, which are -- the lead times to buy some of this equipment are out as much as 24 months.

So, we probably, at the most, spent a couple of million dollars on the wind business.

If we include the large bearing business in that definition, we're certainly in the $4 million range for the total large bearing business group.

This year we will receive -- we're beginning to receive machinery for these larger bearings now, and we'll receive that machinery all the way through December.

So, this year we'll probably see at least $6 million to $8 million go -- of investment going into that -- to that sector.

Okay, okay, great.

Thank you very much and, Dan, I don't -- did you get that tax credit number?

Yes, it's about $600,000.

Okay, okay, great.

Have a great day.

Thanks, Walt.

Your next question will be from the line of Steve Barger of KeyBanc Capital.

Please proceed.

Hi, good morning.

Morning, Steve.

So, I mean, in the past I think you're talked about $25 million to $30 million in total CapEx for the wind business.

Is there upside to that number then as you look further out?

And have you put yourself in queue for more large diameter bearing fabrication machines, given the lead times?

Yes, and -- yes and yes.

Yes, we're -- there's going to be upside to that -- to that number.

I -- we don't have it firm yet, but to think that that's probably going to be a CapEx number that totals somewhere around $40 million or $50 million is not -- over a few years, is not going to be outside the box.

We are currently discussing our next -- our next positioning for that machinery as a matter of fact.

We have most of the --most of the operating guides here in Oxford today with -- and that's -- that's this afternoon's agenda.

Excellent.

So, I mean, theoretically what kind of dollar capacity would a $45 million to $50 million investment support in terms of large diameter bearings?

I think that's kind of a two to one best case ratio.

So, that implies that by your FY '10 or 11, probably more like 11, you could be doing $90 million in large diameter wind bearings relative to that $700 million to $1 billion market you talked about?

Yes, why don't you cut that in half and make it -- make it easier for us to achieve it.

Cut the $90 million in half?

Yes.

So -- okay, so you're saying it would be a one to one based on the dollars you're spending or you're saying that relative to 2012 or 11?

Yes, relative to 2012.

It just --

Okay.

-- a whole lot of things that have to -- have to be done and a whole lot of things have to -- have to be done right.

Okay, no, that -- that's fair.

But, so there's significant upside to what you -- where -- certainly where you are right now or where you'll be in '09 or '10?

We -- yes, we -- we -- that's -- that's how we see it.

And if your wind sales right now are a couple of million at best and you can get into the gearbox right now, where can wind sales be in a dollar basis for FY09 inclusive of large diameter and gearbox?

In '09?

Yes.

Well, '09 is not going to be -- is not going to feel that much -- maybe we'll double.

If it's two now, maybe we'll go to four.

It's not going to -- this is not going to be the year where that's going to be felt.

All right.

Well, is there a hindrance to getting more gearbox sales right now in 2009 since you're already in that bearing size?

Yes, well, there -- yes, there's the whole issue of pedigree.

So, in order -- if you have a bearing design and you have a customer that you want to sell it to and who wants to buy it from you and has the demand, there's also an approval process that you have to go through, not only with the customer, but with some of the agencies in Europe that regulate the design for -- of these bearings for wind applications.

Right.

And so you have to get your ticket stamped.

And so we're working on that now.

I mean, we have people going back and forth to Belgium now working on -- working with the government agencies to approve our designs.

Okay.

It's -- it's not a -- it's more a timing issue than it is anything else.

Thanks.

Going back to a previous question, you had mentioned that pricing floats on material adjustments.

Does that mean that you get recovery in the same or the following quarter when you see raw material price increases?

Well, it -- we have lots and lots of accounts and lots and lots of contracts and each one is negotiated independently.

And actually the administration of all these contracts becomes really challenging.

What we like to do -- what I like to do is to -- is to have a retroactive -- an adjustment based upon a retroactive change in material costs.

Right.

So, if you -- if your material costs change X% over 90 days and your contract is based upon one number and you have actually experienced a different number, a higher number over the trailing 90 days, then there's a -- there's a surcharge adjustment that takes place in order to true it up.

That's our preferred way of doing this and that way we're not -- we're not the brokers -- the material brokers for that 90 days.

In some cases, customers will accept that, in some cases they don't accept that, but they give in other parts of the contract and we accept the other parts of the contract that they give on.

And so we reach some accommodation, but that's the preferred method.

Okay, and given that that's a fairly -- it seems like a fairly high visibility process relative to the material cost increase, does that limit your ability to get pricing on top of that?

Again, it's market dependent and it's -- if you're in -- if you're in markets where there's a shortage and there's a projected shortage of bearings for many years to come, it usually doesn't -- it usually doesn't inhibit pricing.

Okay, thanks.

One other and I'll jump back in line.

You said the average content per ship, I think the Boeing rate is up to $90,000 versus $75.

How much of that is price versus material passthrough, or is it all price?

No, no, we've got -- we -- we've increased our mix.

We've increased the number of sizes that go on each ship last year.

We expect that number to grow again this year.

So, it -- it is in our price.

It's -- it's probably -- the pricing is -- yields sort of the corporate average consolidated margins, maybe a little bit better, and it's mix.

Mix as in expanded content?

Right.

Okay, and can you break that out on wide body versus narrow?

No, we can't.

And we've tried and it just -- Boeing tells us it's impossible and we're about concurring with their conclusion that it's pretty hard to do.

All right.

Thanks very much.

Thanks.

Your next question will be from the line of Vincent Damasco of The Colony Group.

Please proceed.

Yes, thank you, gentlemen.

Just a follow-up on the wind discussion.

If I recall, you guys were discussing or having discussions with GE and I'm not sure whom -- whom else, but have any of those agreements or those discussions kind of moved to an agreement stage or are there signed contracts in hand for you guys to move forward with the capital investments at hand?

And then secondly, can you just give us the -- the inventory balance at the end of the quarter?

Okay, total inventory?

Yes, please.

Okay, yes, the -- well, I don't know if we've ever actually discussed GE as a customer because I'd be surprised if we did because GE is -- is not our customer.

And we don't expect them to be a customer for these particular products.

They're customers for other -- they're a good customer for other products that we -- that we make.

With regard to where we are with contracts with other producers of wind turbines, there's been quite a lot of activity in the contract development stage that's taken months and -- to negotiate and we're -- we think we're concluding those negotiations in the very, very near future.

There's lots of issues -- contractual issues to supply these bearings to various OEMs that we find disagreeable.

And so as we sort of exclude those disagreeable concepts from the contract language, it takes more time to ink the piece of paper.

So, I think we're coming down to the last and final sessions of the contract language, and I think we've, with several customers, have pretty much agreed to the language that's in place.

So, I think we're pretty close.

Close being that you expect in this current quarter you'll have something signed or are we referring to Q2, Q3 type of timeframe?

I think Q2 -- Q2, Q3 at the outside.

Okay.

And on the inventory balance, at the end of March it was $123.8 million.

Okay, thank you very much.

Your next question will be from the line of Seaver Wang of Utendahl Capital Partners.

Please proceed.

Hi, good morning.

Just wanted to touch on the Class 8, and it's going to drag for awhile.

Wondering if you're seeing any bottoming of that from your customers and maybe even a possible tailwind in the near future with maybe emissions coming up and -- new emissions standards coming up, your views on that.

Well, we think the -- it's an interesting situation.

I think it's a -- it seems to be a market that's been abandoned by most of the manufacturers that supply it right now.

And I think when the -- when the volumes come back, I think the -- manufacturing capacity is going to be elsewhere.

We see those volumes coming back sort of gradually over the next 12 months.

We've rededicated a good part of the capacity to other products.

And so it's really not our intention to capacitize the upside of that business.

And we're going to make a specific mix of product for a short list of customers and we're going to have a fixed amount of capacity to supply that -- support that pricing that we feel is consistent with the investment requirements.

And that's -- and that's where we're going to be.

So -- okay, so the -- basically the volatility of that business is just not unappealing to you?

Yes, that's absolutely right.

Okay, and then just what is the CapEx for '09?

Do you have a estimate for that, total CapEx?

'09 I -- let me just pull out here -- we're expecting a range of $15 million to $20 million.

$15 million to $20 million.

Okay, thank you.

And our last question will be from the line of Edward Marshall of Sidoti & Company.

Please proceed.

Generally, you don't answer this question, so before I ask it I'm going to give you the out.

Once the acquisition expenses subside, margins on the lower acquisitions is improved as you go forward, what does fiscal 2010 look like?

And maybe I'm not looking for a specific number, I mean, if you could provide that, that would be great, but if you can give me a direction as far as your -- gross margins are concerned.

Do you have any indication as to where that would be trending?

I suspect it will be -- unless -- assuming that we don't do another acquisition that distorts the page here --

Sure.

-- I expect that that will go back towards the 34% to 35%, maybe 35% to 36% range.

Am I right to assume the 35% to 36% is kind of the -- the peak of your margins or do you see yourself eventually getting above 36%?

Well, there's -- I always think that there's not really any peak on margin.

It's -- it's your own mental constraint that peaks out your margin as far as I'm concerned.

I think the -- I think realistically there's only so much that can be done over a certain timeframe in order to get back -- get back to the -- to those margin levels.

There's always more that you can do.

There's always other ideas in terms of how to go to market and approach the market, what additional efficiencies you can bring to your manufacturing operations and how better to price your product to your -- to your customers.

So, I think we shouldn't be running out of ideas on how to expand our margins when we get to 35%.

I see.

And the last question I guess is when you mentioned the $600,000 benefit of the R&D tax credit.

But even factoring out that $600,000, it's still the lowest tax rate that we've seen in the last 11 quarters or so.

Was there any other benefits, net -- net operating losses or anything in there that would have been an added benefit to your tax rate?

And I'm sorry to harp on that, but--

That's okay.

We actually got the benefit from the manufacturing deduction, which helped our margin, and then our differential rate from Europe is lower, and they contributed nicely in the year.

And so that also impacted the rate for the quarter and the year.

So, that's why I think we're looking at next year we should be in that 34% range, and maybe that -- that's a little on the conservative side, but that's where we're -- we're projecting it to be.

I see.

Okay, thank you very much.

And due to time constraints, I'll turn it back over to management for closing remarks.

Okay, well, I would like to thank everybody today for their interest in RBC Bearings, and we have a whole new year in front of us to execute, so we'll go about executing our year and look forward to speaking to you again in the next call.

Thank you very much.

Thank you for your participation in today's conference.

This concludes our presentation and you may now disconnect.

Have a great day.