RBC Bearings Inc (RBC) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen.

Thank you for standing by, and welcome to the RBC Bearings Q1 2006 earnings conference call.

[Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Lauren Murphy (ph), with Action Partners.

Please proceed, ma'am.

Good morning and welcome to the fiscal 2006 first quarter conference call for RBC Bearings Incorporated.

Thank you for joining us.

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

Before beginning today's call, I must preface all comments with the Safe Harbor statement.

Some of the comments 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 all of you to RBC Bearings' recent filings with the SEC, in particular, the Company's final prospectus for a more detailed discussion of the risks that could impact the Company's future operating results and financial conditions.

These factors are also described in greater detail in today's press release and on the Company's web site at www.RBCBearings.com.

In addition, a reconciliation between GAPP and non-GAPP financial information is included as part of the release and is available on the Company's web site.

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

Thanks Lauren.

Good morning and thanks to everyone for joining us today.

With the end of our quiet period at hand, we are now able to address many issues and questions that I know many of you have.

The topics Dan and I will cover in our formal remarks will be as follows: first, I'll provide an overview of the quarter, and review a few recent market & Co. developments.

Then Dan will update us on the first quarter results and provide detail on our recent IPO.

Then I'll give a brief commentary on our outlook for the second quarter.

Then finally, and most importantly, we will go to a question-and-answer period.

With that said, I am proud to share a number of highlights from our first quarter of our fiscal year.

In that quarter, RBC reported a 17.4% growth in revenue, to $66 million.

Secondly, we reported a 26.1% growth in gross margin, to $19.3 million.

Third, a 37.1% growth in adjusted operating income, to 10.6 million, and a net income of 3.3 million compared to a net loss last year of 3.8 million in the same period.

So as you can see, RBC Bearings' first quarter was a very strong one.

All sectors performed quite well, with aerospace and defense leading the way.

The performance of these groups helped drive both our top line and our bottom-line for the quarter, and really boosted our confidence that 2006 will be a very good year for RBC Bearings.

Before I move on, I'd like to make note of one item, and as many of you know, Boeing is a major customer of ours, and one of our largest aerospace customers.

They announced on September 1st that they are going to halt production of commercial airplanes as a result of the strike that's being conducted by the IAM.

It's important to remember that not all Boeing employees are represented by the IAM, and the Company continues to support their customers and in-service leads with little or no work stoppage.

However, this is clearly a serious situation for Boeing, and one that we are monitoring closely.

We are disappointed with the news, but believe that this strike serves to reinforce the importance of the diversity within our business, and we believe our broad revenue streams and extensive customer base have positioned us well for continued strong performance throughout the year.

We do see this strike will have only a minimal, if any, affect on our second quarter.

And only a small, if any, affect on the third quarter.

Now, I'd like to quickly point out two other developments during the period for RBC.

First of all, as many of you know, RBC recently completed its initial public offering.

We sold approximately 10.5 million shares including the underwriter's over allotment, priced at $14.50, and raised approximately $102 million.

While Dan will cover this in greater detail during his comments, I just wanted you all to know that I'm very excited about the opportunities that lie ahead for us as a public Company.

Also in our press release this morning, we announced the acquisition of Southwest Products Company.

This acquisition was our first as a public Company, and represents a great addition to RBC's portfolio of offerings.

It strengthens our position in the defense and aerospace industries, with additional highly engineered custom products.

Southwest generated revenues of approximately 5.4 million in the most recent calendar year, and we acquired the Company's assets for approximately $2.2 million.

The new business units will be named RBC Southwest Products Incorporated and will be a welcome new member to the RBC Bearings family.

While revenue contribution won't be material this year, we believe the Company's product offerings provide RBC with a great new platform for bearings and for applications that we didn't have.

Finally, I want to express my confidence in the future of our Company.

With the IPO behind us, we remain committed to our growth strategy.

Specifically, continuing to develop innovative bearings solutions for our customers.

Secondly, expanding our customer base, and our reach within our end markets, and third, increasing our aftermarket sales.

And of course, we intend to pursue selective acquisitions like the Southwest Products Company that we announced today when we can find them.

We've taken important steps to change RBC Bearings to a public Company over the last few months, and are excited about what we see as the future developing for our Company.

Now I'm going to ask Dan to give a little bit more detail on the financials.

Thank you Mike.

Net sales for the first quarter of fiscal year 2006 were 66 million, an increase of 17.4% from 56.2 million for the comparable period in fiscal year 2005.

Organic growth for the period was 16.8%.

Our net sales for diversified industrial customers increased 10.5% in the first quarter of fiscal year 2006, compared to the same period last year, and our net sales to the aerospace and defense customers increased by 29.4% compared to the same period last year.

Gross margin for the first quarter of fiscal year 2006 was 19.3 million, an increase of 26.1%, from 15.3 million for the comparable period in fiscal year 2005.

As a percentage of net sales, gross margin was 29.2% for the first quarter of fiscal year 2006, compared to 27.2% for the same period last year.

This margin improvement was mainly driven by mix, pricing, and manufacturing efficiencies.

SGA for the first quarter fiscal year 2006 was 8.5 million, an increase of 0.9 million from 7.6 million for the comparable period in fiscal year 2005.

As a percentage of net sales, SGA was 12.9% compared to 13.5% for the same period last year.

Operating income excluding compensation expense for employee stock options of 0.1 million and management service fees of 0.1 million was 10.6 million for the first quarter fiscal year 2006, compared to an adjusted operating income of 7.7 million for the comparable period in fiscal year 2005.

As a percentage of net sales, adjusted operating income was 16% compared to 13.8% for the same period last year.

Cash flow from operating activities for the first quarter fiscal year 2006 was 5.2 million, compared to 2.0 million for the same period last year, and capital expenditures for the first quarter fiscal year 2006 were 2.6 million compared to 1.5 million for the same period last year.

In August 2005, the Company completed its initial public offering and the refinancing of its senior credit facility.

The Company yielded approximately 94.9 million in net proceeds from the offering of repayment of the underwriting discount, and 40 million of proceeds from the amendments to the senior credit facility.

In the net proceeds of 134.9 million were used to one, redeem our 13% discount debentures, 38.6 million in principal and 2.5 million and accrued interest and call premiums.

Two, to repay our second lien loan, 45 million in principal and 0.7 million in accrued interest and early payment penalty.

Three, to redeem our series C preferred stock in the amount of 30.6 million.

Four, to redeem our series D preferred stock in the amount of 4 million.

Five, to repay 5.1 million outstanding under our senior revolving credit facility.

And six, to pay fees and expenses associated to the IPO of 2.7 million, and fees and expenses associated to be amended credit facility of 1.4 million.

As of August 15th 2005 (inaudible-background noise) debt netted cash on hand decreased to approximately 167.1 million from 220.1 million at April 2nd 2005.

The interest rate on the amended senior credit facility decreased by 100 basis points to LIBOR plus 275.

As of August 15th 2005, fully diluted shares outstanding were approximately 19.3 million, of which approximately 16.5 million were basic shares outstanding, and 2.8 million were options outstanding.

On a fully diluted basis, the ownership is as follows: public market, approximately 54.8%, Whitney & Co. approximately 29.2%, and management and insiders approximately 16%.

I'd like now to turn the call back to Mike so he can discuss the second-quarter outlook.

Thanks Dan.

This period RBC Bearings will continue to execute our plan and build value for our customers, business partners, and shareholders by delivering differentiated highly engineered precision bearings and components.

Based on current market conditions, the Company expects financial performance in the second fiscal quarter of 06 to be as follows: net sales in the range of 62 to 65 million, and adjusted operating income in the range of 10.0 to $10.4 million.

That concludes our prepared opening remarks, and now, we'd like to open up the line to questions.

Thank you.

Thank you sir.

[Operator Instructions]

Sir, our first question is from the line of Andrew Obin, with Merrill Lynch.

Good morning.

Good morning Andrew.

Just a question on cash flow.

What definition of cash flow are we using for operating cash?

Is this just the GAPP number that you would have in your 10-Q?

Yes, this is the GAPP number right off the cash flow statement.

Cash provided by operating activities.

And historically, the question is what's the seasonal pattern for cash flow?

And I guess what time trying to understand...will this cash flow gain in the first quarter be reversed in the second half of the year?

Is it sustainable?

How should we be thinking about cash flow for the year given what we saw in the first quarter?

I think it's sustainable.

We've done a lot of work on driving down our working capital requirements in the business.

Over the last six months, we centralized our AR efforts in our headquarters here in Oxford Connecticut for all of our domestic entities, and we continue to drive our DSO down and we've been working hard to drive our inventory levels down.

So I think if you look at our inventory levels, today compared to last year, and the previous year as a percentage of sales, you'll see that we're carrying a significantly less amount of inventory to support a higher volume of activity in the business.

And just a technical question, I understand that there's going to be a tax benefits associated with the options expensing.

That's correct.

Could you quantify it?

And just when should we expect to see it?

And how is it going to appear?

Is it going to just appear on the cash flow?

I mean how should I be thinking about the impact of this benefit on free cash flow statement, and your net income?

Well, it's pretty well defined in the S1 and the pro forma statements, and the impact goes to equity.

It doesn't go through the P&L, so it's going to be you know a debit to deferred tax assets and a credit to equity.

And what it does is it will generate NOLs, and then those NOLs will be used against our income over this year and fiscal year 07.

So we should see that cash impact in part of this year and the early part of 07.

What's that?

That's roughly 4 or 5 million in free cash flow?

That's correct.

Thank you.

And sir, our next question is from the line of Walt Liptak, with KeyBank Capital Markets.

Hi, thanks, Good morning Mike and Dan.

Good morning.

Morning.

Thanks for a nice quarter.

My question is on the guidance that you give for sequential revenue and operating profit.

Can you talk about the seasonal factors that may be impacting that?

Sure.

We're not seeing the normal seasonality that we would often see in the summer.

The business climate is just much stronger from -- than that all the way around with the exception of Europe.

Europe seems to be in the normal cycle, so where we would normally see a little bit of dip in sales and performance in the second and third quarter as a result of the number of production days, the climate is different than that this year.

OK, and with sales -- I mean the guidance that you're providing is for sequentially down sales.

Is that's related to the going mechanics strike or machinist strike?

Down sales from the first quarter?

That's right.

Yes, no, that's just the seasonality effect.

Usually, it's down a little bit more than that.

OK, I see.

And the -- can you quantify for us the impact of the strike?

You said it was going to be minimal.

I mean does that mean it's going to be $1 million, $5 million?

In sales?

In sales, right.

Yes, I think roughly and the second quarter it's going to be, you know, if any, in the million dollars category on the sales line.

And in the third quarter, I would expect that those people would be coming back to work and being behind the curve on making airplanes and burning a lot of overtime trying to catch up.

So you know we're not expecting too much in the third quarter, although the ink isn't dry in that yet.

But your hearing that the strike short, you know, settle out within the quarter?

Yes, I mean we're planning on something no shorter than 30, no longer than 60 days, and we're not receiving any other direction from Boeing then to continue shipping the order book.

OK.

And then Dan, just a couple of questions.

On the interest expense, what would have the pro forma interest have been for the quarter?

For the first quarter?

For the first quarter, right.

I'd say around 3 million.

OK, and the tax rate was slightly lower than I was expecting.

It came in at it looks like 36.5, I was looking for 37.3.

What kind of tax rate should we use for the full year?

I think that's 37 to 38% rate is a good rate to use.

We have some NOLs that we're still using up in the first, second, and third quarter that are still flowing through, and that's about it.

OK.

OK, I'll get back on queue, thanks.

Thanks.

[Operator Instructions]

And sir, and next question is from the line of Andrew Weiss (ph), with Chilton Partners.

Hi, it's Adam Weiss.

Hi Adam.

Nice quarter.

Thank you.

Two questions.

One, do you think there was any forward buying by Boeing in the quarter in anticipation of this strike?

By Boeing commercial airplanes?

You know, I think they are a little -- they got a little ahead of their build schedule.

Not a lot ahead of their build schedule, so there might have been a small amount of that.

That's you know more instinctive and factual.

And to the other -- your other customers that are kind of in that supply chain?

Yes, it would drive them all.

But just a small amount?

Right.

OK, and looking at the final prospectus the pro forma diluted share camp was 17.4 million, and now you're saying we should be using 19.3 going forward?

Yes, the S1 did not assume the exercise of the shoe, so the shoe was exercised, the overallotment, so you should be using on a fully diluted outstanding.

We have basic shares of 16,468,006 and options outstanding of 2,829,235 and that will be -- a lot of those details will be in the 10-Q when we file it for you tonight.

So there was 1.1 million ...

Yes, the overallotment was 1,243,200.

It was 761,516 of primary shares and 481,684 secondary shares.

Of the difference in the prospectus, the difference between basic and diluted was about 2 million -- you know, one point -- just under 2 million, and now -- but that hasn't changed?

No.

OK, because 17.4 plus the 1.2 overallotment gets me to 18.6.

And now you're saying it's 19.3?

Right, with all the options in there.

Are there more options now than there were before?

No, I have to look where you -- you know, on ...

It's page 34 of the final prospectus.

Yes, I'll just pull it out for you.

You can circle back with me if you need to.

Yes, let me circle back to you because I've just got to do a quick reconciliation and I just need to call and give you the difference.

That's fine.

... call and give you the difference.

And one more question, can you talk about steel pricing and I know it's been a pretty volatile market the last couple quarters, coming down and going backup, and how do you feel about your ability to manage those costs and pass whatever inflation you're seeing on to your customers?

Yes, I think you know in the first quarter, you know, prices were still flat from the fourth quarter of fiscal year 05.

We're expecting that we may see some inflation in Q2 Q3 given the results of the hurricane and the increase in scrap, but we have a mechanism in place that we put in place in the first quarter of fiscal year 05 and it's working well, and that mechanism will continue to address any increases in steel prices with increases in surcharges to our customers and through pricing.

Great, thank you.

And sir question is from the line of Ward Jones with Friess Associates.

Yes, actually Frank Okineski (ph).

From a replacement or an aftermarket standpoint, what impact, if any, are you guys seeing from the existing domestic airline operators and the two new ones that just filed yesterday on your business?

Thanks.

On the replacement side, Ward, we're seeing a very strong business climate for our aircraft distributors, and we are not see any dampening of that as a result of these bankruptcies.

I think we've talked to some of our distributors to determine how these bankruptcies will affect them, and they tell us that they've pretty much mitigated the affect through -- by diversifying their business into other sectors over the past few years.

So we aren't seeing anything yet.

Yet?

Yet.

How does that change?

Pardon me?

How does -- what happens you know 6 to 8 months down the road?

Well, I think -- you know, I think ultimately somebody -- unless the revenue of passenger miles -- the usage of the airlines by the public dampens, some other carrier will pick up the volume and ultimately use the spare parts that the maintenance requirements demand.

So I think it's really just going to be a reallocation of capacity and I'm not expecting anything -- it to have any effect on our business, provided that that traffic level and that capacity utilization remains where it is.

Thanks.

And sir our next question is from the line of Johnny Guerry, with Clover Partners.

Hey, how are you guys doing?

Good.

Good.

Just a quick question regarding acquisitions.

Do you all have a specific metric or target metric that you use in assessing potential candidates?

I mean do you have a timeframe for how long they need -- or for how quickly they should be accretive?

Or just a specific metric that you use?

Well, we like to see them accretive right away, and they normally are.

I think one of the most important metrics that we use is sort of a non-financial one.

We like to see companies that are going to expand our market position in those areas of the market that we feel have a lot of potential and ability to strengthen our existing relationships with our existing customers.

So we've been focused pretty much on sort of the defense aircraft side of the business over the years, and that's why a number of our smaller acquisitions have come from that sector.

OK.

So no specific pressed sales are anything like that that you really can -- I mean obviously you consider them, but you know, have a specific metric that you have on a go for basis?

No, I mean if you've followed us, most of our acquisitions are small, and normally we have been buying them at the purchase price of about half their annual sale, and they've been pretty much accretive for us since the day that we've purchased them.

So I think we're probably going to continue along that mode.

OK, thanks.

And again, ladies and gentlemen, as another reminder, you may press star one at any time to submit a question.

Star one please.

And sir, our next question is a follow-up from the line of Walt Liptak.

Hi, thanks.

My question is about the gross margin and you mentioned the gross margin improvement of the 200 basis points as mixed pricing and efficiencies.

Can you break that out?

How much was it pricing how much mix?

No, I really don't have that broken out, Walter, but you know, as we talk about you know during fiscal year 2005, when we continued to adjust our pricing to offset raw material costs, you know, we always had a significant backlog that's shippable within 12 months and there's a catch-up period, and some of that is coming through from that catch-up on the pricing of that backlog.

But no, I don't have a breakdown between the three components.

OK, all right.

And then on the acquisition you mentioned, Mike, that your deals are typically accretive.

This is a small one.

Is this accretive to operating profits?

Yes, we expect it to be.

That's how we've budgeted the business going forward Walt.

Where do you think it'll be accretive in the next 12 months?

Will it be accretive in the next 12 months?

No, I mean in dollar terms how much incremental operating profit do you think you'll get out of it?

You know, I think that would be a great question to ask in the next conference call because we've owned this for just a few weeks now, and we are in there trying to verify the initial budgets that we established, and if I gave you a number now it would probably change more than I'd like it to.

So all I can say is I'm confident it'll be accretive, but I can't give you an exact number.

OK, is there any kind of integration that might go on as a result of a deal like this moving machines around or plants et cetera, that might have a cost attached to them?

No, you know, one of the considerations when we made this acquisition is that of course we have a very successful plant in Santa Ana in Orange County, and the business climate is very strong for that plant, and our ability to add a workforce in Orange County is somewhat limited because of the employment rate, which is very low or unemployment rate is very low, and so this is in an area of Los Angeles where it's easier to build your workforce and also we have a number of trained bearing makers that we've acquired, so we have additional business to put into this facility as well as the business that already operates there.

So this is added capacity in that sector also.

OK.

OK, so there are synergies obviously.

Yes.

OK, great.

And Dan, could we get -- I didn't see any inventory accounts receivable or accounts payable numbers.

I know you'll be filing your Q soon, but can we get that data?

Yes, the Q will be filed today, so you know you will have that night.

Or I can give you a call after the call and give you that information.

OK, that's fine.

All right, thanks again.

And sir our next question is a follow-up from the line of Adam Weiss.

Hi, can you give me an idea what the interest expense would have been had you done the IPO at the beginning of the quarter?

Yes, I think that would be around -- what did I say?

About -- let me just calculate it one more time, hold on.

Would have been around 3 million.

3 million?

OK.

Yes, because we are at LIBOR plus 275, so we have to adjust down for that.

You know, the extensive hoko debt and 13%.

The debentures would be gone.

The 45 million second lien that was 11% money, so that would be gone.

Then we would have 150 million term, and then we'd have about 16.5-million of IRB's at a low interest rate and then we'd have a 6 million revolving credit facility in Switzerland at a low interest rate.

So if I add -- you know, if I take the difference there and I tax effect it and I add it back to net income and use 19.3, that will kind of get me to a ...

A pro forma number.

Pro forma EPS.

I can do the calculation and then ...

I get like $0.25.

I don't know if that's where you wind up.

Yes, I didn't do the -- I don't have the calculation right in front of me, but that sounds close.

OK.

Thank you very much.

OK.

And sir we have no further questions at this time.

OK, well, I'd like to thank everyone for participating in this quarter's conference call.

And, you know, we're excited about our first quarter and being part of the NASDAQ national market, and we look forward to speaking with many of you later in the fall when we announced the second quarter results, and we hope to meet many of you face-to-face through some of our planned proactive investor relations outreach programs that we are developing now with Ashton Partners.

So thanks again to everyone.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.