RBC Bearings Inc (RBC) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter 1 2016 RBC Bearings earnings conference call.

My name is Matthew and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

And now I'd like to turn the call over to Monica Gupta, Alpha IR Group.

Please proceed.

Good morning and thank you for joining us for RBC Bearings fiscal 2016 first-quarter earnings conference call.

On the call today will be Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer, and Daniel A. Bergeron, Vice President and Chief Financial Officer.

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

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

We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition.

These factors are also described in greater detail in the press release and on the Company's website.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's website.

Now I would like to turn the call over to Dr. Hartnett.

Thank you and good morning.

Net sales for the first fiscal quarter of 2016 were $142.3 million versus $113 million last year, up 26% from a year ago.

Adjusted operating income was 20.7%, or $29.5 million resulting in an adjusted EPS of $0.78 per share versus $0.69 per share last year.

This quarter we had approximately two months of contribution from Sargent Aerospace & Defense.

The breakdowns of revenue components this period were 63% were aerospace revenues, 37% were industrial revenues.

We're trending to 70/30 breakdown between industrial, and aerospace being the 70 and industrial being the 30 going forward.

Adjusted EBITDA of $37.3 million was generated during the period.

Adjusted gross margin came in at 38.7% versus 38.8% last year.

Pre-Sargent RBC margins were 39.8% versus 38.8% last year.

Consolidated aerospace sales were up 45% for the quarter.

On RBC aerospace revenues pre-Sargent, let's refer to them as RBC classic revenues, these were down 3.4%.

This was driven mainly by defense.

Last year defense was unusually strong in the first quarter.

The timing of orders this year versus last year played a role here, plus the small impact from currency.

Looking ahead we see this sector strengthening each quarter this year as both the major plane OEMs have announced a step up in production rates in calendar 2016 and demand from defense customers normalizes and actually that demand will increase.

RBC classic aerospace OEM revenues were up a few percentage points.

And the aftermarket revenues were 11% better than last year.

Turning to our industrial market, sales expanded 2.1%.

Net of the contribution of Sargent, the Sargent acquisition, sales were down 5%.

Industrial distribution sales were off 8%, 8.1% driven principally by lower demand from our Swiss business.

Demand for Swiss industrial products are off nationally as a result of the currency strengthening last January and the effect overall on industrial demand in Switzerland.

Industrial demand for us is steady but it's off.

Lower requirements for bearings from the oil aftermarket was also a contributor to the decline.

And finally currency played about 1% role in this equation.

Total industrial OEM products were up 9.3%.

Net of the Sargent contribution sales were down 3.2% with currency playing a small role and mining OEMs contributing to most of the decline.

As you remember last year our mining sales were strong in the first quarter as OEM recovered inventory positions that have been depleted and that's no longer happening.

Integration of the Sargent acquisition has begun with no surprises to report.

We expect to see this business realignment as we integrate this business with RBC.

Some of the units will be more efficiently aligned with RBC management strengths, markets or geography and will fall more with the RBC management alignment than the historical Sargent management alignment.

Sargent has become a very active participant in the RBC of today.

Early benefits are increased penetration at core accounts with additional products, new account introductions with immediate critical mass, a long list of product in-sourcing opportunities that fall well within our production competencies, design and texting expertise in important markets such as aerospace and defense that are well complemented by RBC's manufacturing skill base and substantial new contracts at early stages of startup that will be important contributors to the future.

I will now turn the call over to Dan who will provide more color on the quarter.

Thanks, Mike.

SG&A for the first quarter of fiscal 2016 was $23.7 million compared to $19 million for the same period last year.

As a percentage of net sales SG&A was 16.7% for the first quarter of fiscal 2016 compared to 16.8% for the same period last year.

Excluding the impact of the Sargent acquisition of $3.7 million, SG&A year over year increased $1 million which was mainly due to $0.4 million of stock compensation expense, personnel-related expenses of $0.4 million and other expenses of $0.2 million.

Other operating expense for the first quarter of fiscal 2016 was expense of $6.7 million compared to expense of $0.6 million for the same period last year.

For the first-quarter fiscal 2016 other operating expense was comprised mainly of $4 million in acquisition-related cost, $0.8 million in integration and restructuring cost and $1.8 million in amortization of intangibles and $0.1 million in other items.

Operating income was $22.4 million for the first-quarter fiscal 2016 compared to operating income of $24.2 million for the same period in fiscal 2015.

On an adjusted basis operating income would have been $29.5 million for the first-quarter fiscal 2016 compared to $24.2 million for the same period last year.

Adjusted operating income as a percentage of net sales would have been 20.7% for the first quarter of fiscal 2016 compared to 21.4% for the same period last year.

For the first quarter of fiscal 2016, the Company reported net income of $13.4 million compared to net income of $16 million for the same period last year.

On an adjusted basis net income would have been $18.5 million for the first quarter of 2016 compared to net income of $16 million for the same period last year a growth rate of around 15.3%.

Diluted earnings per share was $0.57 per share for the first quarter of fiscal 2016 compared to $0.69 per share for the same period last year.

On an adjusted basis diluted earnings per share for the first quarter of fiscal 2016 would have been $0.78 per share compared to diluted earnings per share of $0.69 for the same period last year, a growth rate of 13%.

Turning to cash flow, the Company generated $22.2 million in cash from operating activities in the first-quarter fiscal 2016 compared to $26.9 million for the same period last year.

Capital expenditures were $5.3 million in the first-quarter fiscal 2016 compared to $3.5 million for the same period last year.

In the first quarter of fiscal 2016 the Company entered into a new senior credit facility and borrowed $425 million to finance the acquisition of Sargent.

The Company ended the first-quarter fiscal 2016 with $61.6 million in cash on the balance sheet.

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

(Operator Instructions) Walter Liptak, Hunter.

Hi, thanks, good morning guys.

I wanted to ask about the classic aerospace trends.

The growth in aftermarket double digits, was there any sort of a channel build there or is that a sustainable growth rate?

I don't think it sustainable.

I think it's one of these things that those aftermarket folks deplete their inventories and then seem to all build them back up in the same quarter.

So I think it's usually been steady, it's surprising to see it up that strong.

Okay.

And is aftermarket how are the margins on that, is that above where the OE margins are?

Not really.

They're about the same.

Some of the OEs are better, some of the after markets are better.

It's a mix.

Okay.

And if I could ask about the OE trend of plus two I wonder how OE classic trended for you during the quarter?

Were there any supply chain issues or disruptions that you care to comment about?

For which sector just in general?

For the classic aerospace.

OE.

You know, there are in the classic RBC business it's been steady and there's no snags or bottlenecks or logistics holdups anywhere in the Sargent business, there are constraints in some of those, in some of our vendor base that inhibits the ability to produce the product efficiently.

And so we're in-sourcing some of that work.

And I think on the Sargent Aerospace business we have some pretty large contracts and we're at the very early stages of those contracts.

And there is specification protocols that are being worked out between us and the end customers that are important to maintain production and improve production rates.

So there has been a delay in the Sargent business as a result of a delay in resolving those production protocol issues and I think those will be resolved this quarter.

I guess with those production rates going up are you expecting that you'll have a better shipment period for the Sargent business I guess on a monthly basis?

Yes, I think it will build all year.

I think so.

I'm pretty confident about it.

Okay good.

Now if I could switch gears to the mining and oil and gas, I wonder if you've got I'm sure the percentage of sales is much lower now with Sargent, but can you refresh us on what oil and gas is now as a percentage of ROLL's revenue and mining?

You know, Dan is running some numbers here.

While he's doing his calculations I think those sectors are off and they are going to be off.

If you look at oil and you divide oil into two components, recovery and exploration, recovery is fairly steady for us.

There's the US is still using 10 million barrels of oil a day and so there is still a certain amount of wells being fracked to recover the oil that's needed.

So the consumption of our product in the recovery side of the business is steady.

On the exploration side of the business it's down.

It's certainly from what industry folks are saying it's going to be down as long as oil is less than $60 a barrel, so how long the Saudis can hold out is anybody's guess.

Their national budget breaks even at $90 a barrel and at 10 million barrels a day at $50 a barrel you can calculate what it's costing them a day against their national budget.

So how much -- how long can they hold out is anybody's guess.

So it will be sometime I'm sure.

We're not expecting much from the exploration side.

We're expecting the mining side to be down but steady going forward as just OEM builds are down but MRO usage is reasonably steady.

I think net-net the impact on our revenues per quarter going forward is about $2 million.

Okay.

As we're waiting for Dan on the percentage numbers, are you seeing any pricing pressure on the production side?

I think a lot of the producers are trying to reduce their cost per barrel and they are asking suppliers to drop price.

Is that something that you do or do you push back on pricing?

Well, you know it's the guys on the exploration side that are having those discussions.

So we're trying to -- it's hard for them to have those discussions when they don't have any volume to offer right now and you have existing contracts in place.

So we're trying to work with these guys but there's nothing material has been achieved yet.

Okay, fair enough.

And then Walt, on oil and gas based on a full-year run rate at these levels it's probably around 3% of total.

That's great.

3% of oil and gas and mining?

No, just oil and gas.

Mining is probably another 5% at these levels.

Okay thanks.

Kristine Liwag, Bank of America Merrill Lynch.

Hi, good morning.

Mike, you brushed upon this on your prepared remarks earlier but I just wanted to clarify what were the organic growth rates for industrial and aerospace in the quarter?

And as a follow-up to that, what was the organic growth rate in your backlog?

Okay.

For the organic growth rates for the industrial for combined or RBC alone, the original RBC business?

Both.

If I could have both numbers.

Okay.

So for the industrial -- I've got the aerospace here, in the industrial markets with the Sargent addition for the quarter expanded 2.1%.

Net of the contribution of that Sargent acquisition we were down 5%.

Industrial distribution sales, there is not much industrial distribution sales coming from Sargent the way we classify things.

So we were down 8.1% there and that was driven principally by a lower demand rate in our Swiss business.

And for aerospace?

For aerospace the sales were up 45% of the quarter with Sargent.

Without Sargent the revenues were down 3.4% driven mainly by the timing of defense orders.

And then your backlog without Sargent?

It was around $205 million.

I guess in this past quarter we've seen more signs of global macroeconomic weakness.

How should we think about the base case for your industrial business for the full-year fiscal year 2016 and which end markets are you more particularly worried about?

And as a follow-on to that, could you offset some of this revenue decline with better performance in margins?

Well I'll take them one at a time.

One of our largest sectors here, Kristine, is just the general industrial sector and that is smaller OEMs and hard to categorize them into any particular market and the aftermarket.

There's really steady demand there.

We're seeing the businesses that don't have the mining and the oil exposure growing at two times GDP kind of rate and we see interesting new business coming into those sectors.

So I think our general industrial business is fine outside of mining and oil.

Another question for me, this quarter we also saw some weakness from Sikorsky because of I guess weakness from their customers from oil and gas generated wells.

Can you quantify what percent of your sales are from commercial helicopters and what you think, how you think that kind of weakness will affect you?

A very small amount of our sales are from commercial helicopters.

It's just not what we not a big factor in our revenues.

I mean it, maybe 1% or 2%, it's a number like that.

Lastly for Sargent is your aerospace exposure in Sargent pretty similar to the aircraft exposure that you have from legacy RBC Bearings aerospace and defense?

The aircraft type and also shipset type?

You know it's across the 737s, 47s, 67s, 77s the A350s, the A320s, that's the bulk of the aerospace exposure at Sargent.

And then there's the whole aftermarket sector that services airframes and engines across that same commercial fleet.

From an aerospace point of view that Sargent's principal business.

From a marine point of view, a defense marine point of view which is sort of a different market, that's a very strong sector for them also.

And defense aerospace which is mainly hydraulics is a very promising market for them.

Great, thank you very much.

(Operator Instructions) Edward Marshall, Sidoti & Company.

Hey guys, so down 3.4% in aerospace for the core RBC.

I'm curious if you can break out the components of commercial and defense there.

I know you said it was defense timing that led to that decline.

But was it flat commercial down 3 defense or was it up 10 commercial, down or rather down 10 defense and up 7 commercial?

What do those core products look like underneath?

Well you know, the underlying exposure for commercial aerospace is fine.

It was strong.

So that was up.

Defense was really strong.

We had some really strong orders out of one of our division's last year that were in last year's numbers and we had some big contracts that came in last year for that same division that our commercial aerospace contracts, which will probably flow into our fourth quarter this year and not our first quarter this year.

So those are the sort of offsetting factors there.

But if I look at the June quarter it's roughly I guess $61 million or so from core aerospace sales which if I look back over the last trailing 12 months with the exception of the December quarter which I guess is the seasonally weakest it is the weakest result of those four quarters.

But you're saying commercial was up and strong.

What was the growth rate on the commercial side of the business?

If I look at the businesses that are commercial aerospace only on my sheet here they were up 3% to 5% in total.

Okay, 3% to 5%.

And I heard earlier when you were talking about the industrial business you talked about Sargent in that and I thought it was 100% aerospace.

Is it ground defense that's in that that you're including in the industrial side?

Marine and ground defense.

Okay.

And what is the contribution of those two businesses in total from a percentage of revenue?

Total dollars were $4 million in the quarter.

$4 million, okay.

When I look at in the 8-K that was filed regarding Sargent and you look at the decline in aerospace in the revenue year over year of roughly 10% I'm wondering if you can and more importantly I guess aftermarket being down 23%, I am wondering if you can walk me through what happened in the prior year?

And I know you didn't own the business then but obviously you must have dived into those results.

I'm just curious what occurred then?

And maybe what the growth rate you saw in the quarter from just Sargent alone.

I think the biggest item is they are in between two programs on their marine business for the Virginia sub.

The old program was ending and there's no volume really flowing through and now the new program is just starting.

And that's what Mike was talking about on getting the timing on this new program up and running to be a nice contributor to the business this year.

Plus a little bit of their aerospace business on the defense side was down during that period of time also.

But is the Virginia sub in the aftermarket?

No.

No.

So what happened in the aftermarket business?

I mean that was down, what, 26%?

Well, that's the aircraft, commercial aircraft aftermarket business.

And the commercial aircraft aftermarket business did not perform well for Dover and so for us it's a turnaround.

It's a turnaround for you guys to, I'm sorry, you're just going you need to spend some time and some money to repair it?

Well yes, it needs -- it isn't contributing to the overall profitability of the Company nor was it before we bought it.

So the question is can we make it a contributing citizen and so that's the puzzle that we're trying to solve right now.

Got you.

Are you prepared to be able to talk about maybe what are some of the needs of that business and then maybe the steps necessary to rightsize it?

Someday I will be but that's not today.

I see.

Okay, guys, thanks.

I appreciate it.

Steve Barger, KeyBanc Capital Markets.

Hey, good morning guys.

I just wanted to talk about the sequential change in revenue.

I think for last quarter you had guided to $140 million or so which is basically what we got.

Thinking about how Sargent flows through sequentially do we add in another $10 million or $15 million given the extra month and given what you see on organic growth rates, is that the best way to think about it?

It would be under normal circumstances Steve.

I think in this case it's not because when I was talking about the new contracts, new programs, specification protocols I don't believe those specification protocols will be resolved to the point that we can have good revenue recovery this quarter.

Okay.

So I do think that the revenues that should be in this quarter will be in our third quarter and fourth quarter.

I think we have plenty of people and our customers are working on resolving it.

And basically our customers are overloaded with demand from other suppliers to get all the purchase orders out and all the specifications right and all of the designs updated that need to be updated in order to produce these additional subs.

It's just there is a long queue and I think we're at the head of the queue now.

So does that mean that 2Q looks more like 1Q from a revenue standpoint?

It will be better, it will be better.

I think the second quarter is going to be in the $150 million to $155 million range.

Okay.

And given the puts and takes you're talking about it is it reasonable to think that you maintain margin or do you get some of the extra expense without the revenue, is that going to be a drag on the margin line?

I don't think so.

I think the way I think we'll be fine there.

Okay.

Now that you've had Sargent for a few months and you've obviously been able to get in there and see what things look like, what's been surprising either positive or negative versus the call you had a couple of months ago when you first announced it?

You know I think it's pretty much -- I don't remember the call perfectly but we didn't probably discuss in great detail the Sargent makeup or the issues and certainly we've been into the issues quite deeply since.

There's really been no surprises that we didn't discover during our diligence period.

I think it's what we saw when we made that acquisition was Sargent is -- it's a mix of different companies and those different companies align really well for the most part with RBC's markets.

But because they're different companies when Dover acquired them they have different business models.

And some of the business models are somewhat similar to RBC's where they're sort of vertically integrated and they start with product from raw material source and they finish it, they bring it through to completion.

And some of their business models which are some of their larger businesses are design, subcontract manufacturing and assembly and then back to Sargent for assembly.

Some of those larger businesses that they have they don't have a strong manufacturing skill base.

RBC has a very strong manufacturing skill base and it really complements well Sargent's design and testing skill base, so RBC is going to be able to in-source a lot of product into our existing plants that currently are outsourced to subcontractors in many different states.

So I think there's going to be really good absorption in the RBC plants as over time as we integrate those product needs into our manufacturing base.

So I think that's going to be significant and I think it's going to be significant for Sargent on the other side because in some markets they it's been very difficult for them to compete with that business model because they're subcontractors that's where the money is made.

And there's not much left in some of those product lines after you sell it to a Boeing or an Airbus are one of those people.

We know how to do that, so we can make them much more competitive in some of their important markets where they don't participate to the extent that they should participate.

So we see that as a good alignment with our marketing and sales side of our business as well as the manufacturing side of our business and to have acquired their design and testing expertise, it's really going to be magical.

So yes, it's a great comment.

As I think back to your FY11, FY12 and FY13 you averaged about 200 basis points per year of gross margin expansion.

Some of that or maybe a lot of it was you pursuing those same kind of things.

I think you were in-sourcing a lot of expense of outsourced activities.

Do you think you can drive that same level of margin, gross margin expansion at Sargent in those businesses that are structured that way?

You know, I think Sargent's business is in many cases has more proprietary ability than RBC, some of RBC's bearing businesses, so we ought to be able to get to better margins than RBC.

Wow, okay, good.

Switching gears a little bit, you alluded to this on the distributors stocking and destocking within quarters, any more color on what's going on in the distribution channel because we've seen some choppiness in other companies that have reported as well.

Why is this happening and how long do you expect it to go on?

You know, we're talking now about aerospace distribution and not industrial distribution.

Right, right.

And industrial distribution normally doesn't act like this but aerospace distribution in our businesses does act like this.

And for our case it's maybe outside the norm because it's such a small population of distributors that when they can distort behavior quite a bit.

In one case there was a management change and it was such a change in management that believe it or not they forgot to order bearings.

So when we reminded them that they are going to run out of bearings they figured out that we were right and so they ordered a lot of bearings.

So I mean that's just how this thing works.

And there's been major management changes at all of our major distributors and there's been ownership changes at least one of them.

So to some extent you're working with the new guard who and you're training them on what they ought to have in stock in order to service their markets.

And once you convince them of that then the situation changes and that's what's happened this quarter.

Okay, so that should diminish as you go forward, as you just get people on the right track again?

Right.

It should normalize.

It's not going to expand like that every quarter.

Right.

And then one more forward-looking question, we should get a JLTV decision at some point fairly soon.

That program obviously won't get into production run rates for a couple of years, but do you expect that you will have content on JLTV?

Yes, yes we will.

Is it similar to what you had on some of the MRAP M-ATV programs on that content for unit basis?

It should be depending upon who gets the award.

Right, okay.

So probably too much to ask for you to say who you're skewed more to from a producer standpoint?

Well, there are some guys that we're hoping for more than others, let's put it that way.

I got you.

Okay, thanks very much for the time.

Kristine Liwag, Bank of America Merrill Lynch.

You've mentioned how Sargent margin's way better than legacy RBC Bearings' margins.

Can you provide timing on when we should see this materialize in your earnings results?

We should see a point of gross margin expansion every quarter for the next five years.

Now don't work that into your model.

I would suggest -- it's really hard to say but it's going to -- it's one of those exciting things for me about the acquisition when I was doing the diligence.

There's just so many things that we can do to improve their margins it's it gave me goose bumps.

I can't really give you timing but it will be sort of a steady but maybe jerky flow.

And I guess for modeling purposes, historically legacy RBC was more like 1% gross margin improvement.

So would it be -- per year, not per quarter.

So would it be prudent to say that if we look at Sargent and we look at the gross margins there that gross margins for that business should increase more than 1% gross margin's per year, is that a fair statement, maybe 1% to 2%, something like that?

I think you can use 1%, I don't know if you can use 2%.

I think it's a sizable acquisition given our scale and there's five different business units.

And so there's a lot to do to get there but 1% should be modest.

And then when we think about the cadence of revenue for the full year you already mentioned your $150 million to $155 million range for 2Q.

Should we think about 3Q and 4Q to have that same cadence in growth rate with Q2 versus 1Q?

Well, I think 3Q we have a plan but until you march up to the threshold of the quarter it's hard to say that the plan is executable.

So we're pretty careful on that.

And the third quarter is usually a short quarter.

Between the third and fourth we should see some pretty nice revenue expansions.

And particularly in the marine defense business and RBC's classical aerospace business I think everybody has a pretty common outlook of building revenue in succeeding quarters here.

And lastly for me and I promise it's really the last one, if you look at Boeing's production rates you've got the 737 announced production rates going to 47 a month from 42 for 2017 and then 52 in 2018.

When do you think you will start seeing that increase in production rate pulling your numbers?

Is it still a six-month leadtime, nine-month leadtime, can you just give us some sort of outlook there?

Yes, we always use the rule of thumb that the offset for bearings is six months.

So we would expect to have to deliver bearings to Boeing's subcontractors or Boeing itself six months ahead of that step-up.

And as it applies to Sargent those leadtimes are extraordinarily long.

It's like a year, so that's one of the things that we're talking to Boeing about is how to shorten leadtimes for Sargent's products because it is such a long, the industry that's the way the industry works and it's a gas tank for Boeing.

So we're talking to Boeing now and gave them some ideas on how leadtimes could be reduced but right now it's a year.

Great, thank you very much.

Larry Pfeffer, Avondale Partners.

Good morning, gentlemen.

So I know there's a lot of moving parts right now but just looking at the second half of the fiscal year would you look at aerospace and defense all-in being a mid-single-digit year-over-year growth rate and the diversified industrials piece being down low single digit?

Is that including the Sargent?

So ex-Sargent kind of an organic trend growth rate.

Could you ask that question again?

So is aerospace and defense kind of mid-single digit in the back half of the fiscal year excluding Sargent and then diversified industrial is down low single digit excluding Sargent?

Yes, I think that would be fair.

Okay.

That is all I had.

Thank you, guys.

Edward Marshall, Sidoti & Company.

Just two quick follow-ups.

Dan, any chance you have an idea of what the consolidated business on an SG&A line would look on a quarterly run rate if you were to do $150 million to $155 million in revenue?

Yes, we'd be about 16.5%.

16.5% of sales.

Okay.

And it just listening to your comments, Mike, throughout the year and as I parse that into the model, does it make sense to think about $620 million in revenue?

And I guess I'm asking for guidance but with the acquisition of Sargent it's kind of hard -- there's a lot of moving pieces.

So I'm just wondering if directionally that's the appropriate direction?

Well, I will let Dan answer that question.

As you know we just don't give full-year guidance.

Sure.

So that's the answer to the question.

Do you have any idea what to expect from maybe Sargent this year from a revenue prospective?

Yes, actually I'd say in that $180 to $190 million range.

It would be 11 months.

11 months, okay.

All right, guys, so really no improvement off of the core business from the prior year?

Maybe modest if anything?

I don't think -- I think industrial will be down a few percentage points on the core business, the core RBC business and I haven't really put the two years together for the rest of the relative to aerospace.

But all of the aerospace units are feeling pretty good about the rest of their year.

So I would think we're going to be up to the high single digits on the rest of the year for aerospace.

I see.

I was referring I guess to the core Sargent business.

Dan, your comments were $180 million to $190 million and so I think to that it's probably if the math is right it's flat to up 5% is year over year based on what they did last year.

Well I think there's a couple of things going on here.

I think one is we're trying to get this the marine business producing and we have to work our way through those specification protocols that I talked about.

That would definitely make a big difference to the year.

The other thing that we're doing is we have one business in California which is a Sargent business which really has so much demand on that business it can't produce at all.

So we have several -- we have products flowing into several of the local RBC plants to complement their production capacity.

And it's just hard to see how all that's going to come together and work from a revenue standpoint but there's definitely upside here.

And the California business, is that a function of maybe efficiencies that RBC can go in and use the secret sauce to improve or is this a capacity issue?

It's efficiencies, it's definitely efficiencies and yes, we are going to improve that business.

I see and the specifications on the marines, I'm sorry the marine contract, how big is that for you?

Not the contract but how big is the issue for you?

And I guess how far along are we?

How do I put a frame around scale?

It's a large contract.

It probably amounts to something when it's running steady state, something like $20 million a year and it's flowing out at $2 million, $2 million a quarter now or less.

So that's the scale of the issue.

And as far as how far along are we I think we're pretty far.

I think it's a matter of bureaucracy.

Okay.

All right, thank you.

Ladies and gentlemen, I'd now like to turn the call over to Mike Hartnett for the closing remarks.

Okay, well I appreciate everybody everyone's participation today and I hope we were able to answer most of your questions satisfactorily.

And we will expect more questions in our October call.

Thank you very much.

Thank you for joining in today's conference ladies and gentlemen.

This concludes the presentation.

You may now disconnect.

Good day.