RBC Bearings Inc (RBC) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the 3rd quarter 2006 RBC Bearings earnings conference call.

[OPERATOR INSTRUCTIONS] I would now like to turn the call over to Ms. Lauren Murphy with Ashton Partners Investor Relations Group. Please proceed, ma'am.

Thank you. Good morning and welcome to the fiscal 2006 third 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 Chief Financial Officer.

Before beginning today's call, I must preface all comments with a 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 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 website at www.rbcbearings.com. In addition, a 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 over the call to Dr. Hartnett.

Good morning and I'd like to welcome everyone to this morning's call and thanks for joining us. I am pleased to report the results of our third quarter of fiscal 2006 were strong. This morning I'd like to walk everyone through some of the highlights of the quarter and review the trends that we see in our business. Then, Dan will talk about our financial results in more detail and finally we will open up the call to field your questions.

To start off, I would like to draw your attention to the results RBC reported this morning. During the third quarter of our fiscal '06 the company achieved a 15.9% growth in revenue year-over-year to $67.4 million, a 21.7% growth in gross margin year-over-year to $20.4 million, a 28.4% growth in operating income to $10.8 million, and a 107.1% growth in net income to $5.1 million. Our diluted EPS was $0.29 a share for the quarter.

These results represent a continuation of the strong performance we have seen throughout fiscal 2006 and since our IPO in August. We're very pleased at what we've accomplished and we believe that RBC is well positioned for continued growth.

While I'll review our financial guidance for the fourth quarter shortly, I would first like to give you a bit more insight into how our third quarter shaped up, why it was stronger than the guidance we discussed in our last call, and I will also talk about the trends reflected in our forward expectations. First of all, let's start with sales for the third quarter. We continued to benefit from strong underlying macroeconomic trends in our markets., similar to the results we saw in the first six months of 2006, continued expansion in most of our end markets, including oil and gas, construction and mining, and aerospace and defense. These markets continue to provide strong demand for our products. Our product positioning, service levels and new products introduced for these sectors continue to be important performance drivers for us.

On the industrial side, sales growth continued at a steady pace. We target a growth rate in excess of 2 times the industrial production rate for these businesses, which we more than achieved during the period.

Sales in the aerospace and defense side of our business were robust during the quarter. Here we were up 29% on year-to-year revenue comparisons. Our revenue mix continues to shift from its historic levels of 60% of our sales generated from industrial products towards a more even 50/50 split between industrial and the aerospace/defense sectors.

Our ability to realign capacity both in the field, in our service centers, and in the plants to support this trend continues to challenge us. In my opinion, RBC's response to this demand shift continues to be outstanding. We expect these mix changes and their favorable implications will remain an important element of our revenue story in the coming quarters.

Before I move on to gross margin, I'd like to address the sales level we achieved in the quarter more fully. As you probably already noted, our sales of $67.4 million came in above the guidance range that we had discussed in our last call. Most of our business is booked well before the quarter begins; consequently, we have a high degree of visibility into the forward quarter. This means, from a logistics point of view, materials are ordered and products are passing through the manufacturing sequences that will result in quarterly sales before the period begins.

During the third quarter, because an acceleration of business activity is occurring in several of our end markets, many customers shortened their product request date. This created the Q-3 demand at the expense of our fourth quarter where we could satisfy the logistics. Fortunately, we were in a position to accommodate many of these requests because of the position of the materials in the system and the number of holidays during the third quarter where the plants would normally be closed.

Over the next few quarters, we believe that we will continue to see this trend from our end markets, but it's hard to model the effects and the intensity of these effects into our projections. Consequently, we did not build much of this acceleration mechanism into our forward projections. For the most part, these projections are based on an original sales plan for the two-quarter period and a revenue shift from the fourth quarter to the third quarter. The shift in revenues between quarters is approximately 2 to $3 million.

Now let's talk about gross margin performance. I am pleased with what we have recorded here for the quarter. Gross margin continues to improve, fueled by increasing manufacturing efficiencies, continued tight control on costs, and a generally favorable pricing environment. These are the big three for performance and I'd say those three elements are performing well for us right now.

Our management team of 1700 employees at 18 facilities worldwide maintains a strong focus on driving performance improvements through cost control, methods improvements, and price mix management. I would like to take this opportunity to recognize and commend their work. RBC's operations should continue to benefit from this commitment.

Our operational initiatives are both additive to the near term results and central to improving our long term positioning and competitiveness. Our progress has been strong and we continue to work on other opportunities to drive both sales and margin growth. You will see the results of some of these efforts in future quarters.

Overal,l the demand we've experiences across our end markets demonstrates that we are well aligned with the right industries and these are those that are the backbone of industrial growth worldwide. However, and I think the strong performance we've reported also reflects some of the changes we've made to the business over the past 36 months, both operational and strategic. These structural changes as well as a few planned next year will result in continued improvement in performance for RBC over the intermediate to long term.

We continue to strengthen our market positions and expand our already strong customer relationships by providing process engineering and operational expertise, innovative product designs, and a high level of service, through which we solve complex problems of movement for our world class customers, and further our reputation as a [inaudible- background noise].

Going forward, we will focus on expanding our product offering with innovative bearing solutions. For example, in Europe we've developed a proprietary bearing for the new jumbo A380 aircraft that incorporates the titanium wing strut member, which we will produce as an integral part of the bearing, reducing weight and increasing strength. This concept has wide applications.

Number two, we will increase our aftermarket sales in the semi-conductor machine industry. A major producer of equipment has recently selected many of our products as first choice for both his legacy and new equipment. This will be new business for us beginning in 2007.

And of course, pursuing selective acquisitions. We continue to work on finding companies that integrate well with our markets and can become stable contributors to RBC's business plan. This part of our strategy was productive this year and remains promising for next year.

There are many growth opportunities ahead and we have international market access, dynamic markets, outstanding product offerings, and important engineering strengths. This gives us a very optimistic view of our future.

Based upon the current market conditions, the company expects financial performance in its fourth quarter of fiscal 2006 to be in the following range. For sales, we expect the quarter to come in between 73 and $75 million in sales; and the fourth quarter operating income will be in the range, we're projecting, of 11.4 to $12 million.

I am now going to ask Dan Bergeron, our CFO, to give us a little bit more detail on the financials. Dan?

Thank you Mike. Net sales for the third quarter of fiscal 2006 were $67.4 million, an increase of 15.9% from $58.1 million for the comparable period last year. Net sales for the third quarter of fiscal 2006 of $67.4 million were over the company's guidance range of 61 to $65 million.

Organic growth for third quarter was 14.2%. Net sales toward diversified industrial customers increased to 7.5% in the third quarter compared to the same period last year and our net sales to aerospace and defense customers increased by 28.9% compared to the same period last year.

Gross margin for the third quarter of fiscal 2006 was $20.4 million, an increase of 21.7% from $16.7 million for the comparable period in fiscal 2005. As a percentage of net sales, gross margin was 30.2% in the third quarter of fiscal year 2006 compared to 28.8% in the same period last year. This margin improvement was mainly driven by manufacturing efficiencies, continued cost control, and favorable pricing.

SG&A for the third quarter of fiscal 2006 was $9.2 million, an increase of $1.2 million from $8 million for the comparable period in fiscal 2005. The increase of $1.2 million was mainly due to higher costs to support our increase in volume and higher costs associated with being a public company. As a percentage of net sales, SG&A was 13.7% for third quarter of 2006 compared to 13.8% for the comparable period in fiscal 2005.

Operating income was $10.8 million for the third quarter of fiscal 2006 compared to an operating income of $8.4 million for the same period in fiscal 2005. Operating income for the third quarter of fiscal 2006 of $10.8 million was above the company's guidance of 9.8 to $10.1 million. As a percentage of net sales, operating income was 16% for the third quarter of fiscal 2006 compared to 14.5% for the same period last year.

For the third quarter of fiscal 2006, the company reported net income of $5.1 million compared to net income of $2.5 million for the same period last year. Diluted earnings per share was $0.29 based on a weighted average common share of 17.7 million.

Cash provided by operating activities for the third quarter fiscal year 2006 was $9.9 million compared to cash provided by operating activities of $2.1 million for the same period last year. Capital expenditures for the third quarter of fiscal 2006 were $1.9 million compared to $2.7 million for the same period last year.

Net sales for the first nine months of fiscal 2006 were $198.8 million, an increase of 16.4% from $170.7 million for the same period last year. Organic growth for the nine month period was 15.3%.

Net sales to our diversified industrial customers increased 8.1% for the first nine months of fiscal 2006 compared to the same period last year. Our net sales to aerospace and defense customers increased by 28.8% for the first nine months of fiscal 2006 compared to the same period last year.

Based on the fourth quarter guidance that Mike has just talked about, net sales for fiscal year 2006 will be $271.8 million at the low end of guidance and $273.8 million on the high end of guidance. This would put our growth rate between 12% to 12.7% for fiscal year 2006.

Gross margin for the first nine months of fiscal 2006 was $59.6 million, an increase of 25.8% from $47.4 million for the comparable period last year. As a percentage of net sales, gross margin was 30% for the first nine months of fiscal 2006 compared to 27.8% for the same period last year. This margin improvement was mainly driven by manufacturing efficiencies, cost control, and pricing.

SG&A for the first nine months of fiscal 2006 was $32.3 million, an increase of $9 million from $23.3 million for the same period last year. The increase in $9 million was mainly due to non-recurring compensation expense of $5.2 million, a higher cost to support our increase in volume, and higher costs associated with being a public company.

Operating income for the first nine months of fiscal year 2006 was $26.3 million compared to $21.7 million for the same period last year. Operating income excluding non-recurring compensation expense of $5.2 million, stock option compensation expense of $0.2 million, and non-recurring management fees of $0.2 million was $31.9 million for the first nine months of fiscal year 2006 compared to an adjusted operating income of $24.2 million for the comparable period last year.

As a percentage of net sales excluding these charges, adjusted operating income was 16% for the first nine months of fiscal year 2006 compared to 14.2% for the same period last year.

For the first nine months of fiscal 2006, the company reported net income of $6.5 million compared to net income of $0.3 million for the same period last year. Net income, excluding the after-tax impact of the non-recurring compensation expense, stock option compensation expense, non-recurring management fees, and loss on disposable fixed assets, and loss on early extinguishment of debt, was $12.6 million for the first nine months of fiscal 2006, an increase of 100.3% compared to an adjusted net income of $6.3 million for the same period last year.

Cash provided by operating activities was $13.2 million for the first nine months of fiscal 2006 compared to $4.7 million for the same period last year. Cash flow for the nine month period ended December 31, 2005 was mainly impacted by non-recurring compensation expense and the loss on extinguishment of debt.

Capital expenditures for the nine month period ended December 31, 2005 was $7.8 million or 3.9% of net sales compared to $6.6 million or 3.9% of net sales for the same period last year.

Excluding the Southwest acquisition, the company converted 83% of net income to free cash flow in the nine month period ended December 31, 2005. This percentage would have been closer to 90% based on an adjusted net income number.

Total net debt, which is our debt minus cash on hand, for the period ended December 31, 2005 was $158.7 million compared to $220.6 million for the same period last year. Cash on hand for the period ended December 31, 2005 was $10.3 million compared to $1.7 million for the same period last year.

I'd like to now turn it back to Dr. Hartnett.

Okay. I think that leads us into the question and answer period.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Walt Liptak of KeyBanc Capital Market.

Hi. Thank you. Good morning. Nice quarter, guys. My first question is about the acceleration that you talked about during the quarter. Can you drill down into that and talk about what kind of end markets or what customers that came from? And also, you alluded to the fact that that is continuing in your fiscal fourth quarter. Is that the case?

Yes. I think the primary end markets there, Walt, have been airframe and defense. Probably more airframe than defense. We had some special circumstances in the third quarter in that we had all these materials in the right position and we had obviously in the third quarter, because of the holidays, had many plant days available to bring people in and run the operations that aren't available in the fourth quarter.

Fourth quarter has very few holidays so you don't have that latent capacity. Although we expect to see a little bit of that on the demand side, whether we can respond to it with materials and capacity or not. We'll probably respond to some of it, but not to all of it. I think that and given the fact that Boeing is still tapping the brakes in terms of production rate for the first six months of the year in order for their supply base to catch up to their order book and then is going to hit the gas on the second six months of the year. I think as we move into calendar 2006, we're going to see increasing demand like that.

Okay and you've got the capacity in the second half of 2006 to meet Boeing production schedules.

Yes. The capacity isn't the problem. It's more getting all the materials and logistics in place at the right time. That can be a bit of a scramble.

Okay. I'd also like to talk to you about your tax rate, what the tax rate looked like for the fourth quarter and during 2007.

I think in the fourth quarter, Walt, it's going to be around that 35 to 36% and then next year we should be back up to that 37% rate.

Okay. You talked about some of your cost control. Was there a restructuring that was done during the quarter and are there any expenses associated with that that are going to hit in the March quarter?

Nothing that's anticipated that isn't already accommodated for to the best of our ability to accommodate for those things.

Okay. That's fine. As we look out into 2007, the mix of aerospace defense presumably is going to continue. Would we expect gross margin above 30%?

I expect it above 30%, Walt. I'd be very disappointed with our organization if we couldn't start stepping up into the above 30%.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]

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

Very nice quarter. Wondering if you could provide a little bit more guidance on the 2007. Sounds like you've got significant organic growth already and maybe vis-à-vis that and how pricing is part of that equation of net pricing.

I think the organic growth I know is looking like what we've modeled all along with the industrial side being 2 times GDP kind of growth and maybe a little bit stronger. Some of those markets are incredibly strong; however, we're taking the opportunity to re-price some of the mix given this situation.

There may be some price pruning going on but we still think we're going to net north of the 2 times GDP kind of rate for the industrial side. On the aircraft side, to the best of our ability, is probably going to be in the low teens. That's what we're thinking about for 2007.

Is that again bias towards the commercial side versus defense?

Yes. The commercial side is just a bigger component of that pie, although the defense business is very strong for us right now also.

Can you talk about your bookings for aerospace/defense? What is the current backlog and what is the prospective for some programs you might be bidding on that we'll see next year or this year?

I'll have to refer to another page here, Marty. Our total backlog year to year is up from 133 million on January 1, 2005 to 152 million December 31, 2005 and because of the way that that falls, the longer lead time items, which are normally the aircraft defense stuff, would get in there disproportionately.

I don't break it down from that number to a pure industrial aircraft defense split. Maybe I should to anticipate your question next time. What we see here is some of our business on the defense side is booked through 2007 and now is booking into 2008. We see major pieces of our business that are very valid from that perspective.

From the airframe side, number one, we're anticipating a ramp up in Boeing's schedule that will meaning for us in the second half of this year, so we'll begin seeing orders, I suspect, later in this quarter supporting their last two calendar quarters of 2006.

On the airframe side, we've also reached a significant agreement with Airbus to be a substantial provider of bearings for their planes and we will bring through that volume all through next year, all through 2007. We've got a lot of elements creating pressure on the volume side of that business.

Just back to the industrial piece, the pricing there you're saying to what extent when you talk about the twice GDP growth? How much, is that strictly volume? How do you define that volume and price here?

Which is volume and which is price?

Yes.

I can just tell you the general price climate for the industrial products has been overall very favorable and we've seen other people in our space putting through annualized increases in the 5 to 8% range. We certainly don't discourage that. Where we're number two or number three in a market, we love to be a follower.

All right. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question is a follow up from Walt Liptak of Key Bank Capital Market.

Thanks. This is a follow up to the questions about 2007. It sounds like if we look at your 2007, the organic growth, including price on the industrial side and the aerospace/defense side, would be somewhere in the 10% range and the reason I ask is you're going to have lower than that in the fourth quarter, but it looks like it will be re-accelerating for the full year. Is that right?

Yes. I think we're right in that range, Walt. I think we're obviously putting together our 2007 final touches on our budget now and without actually providing guidance for 2007, Walt, I think you're in the zone.

Okay. Dan, if we can get some balance sheet items, accounts receivable, inventory accounts payable?

Yes. The Q will be filed in the next hour, but inventory 105.1; AR 46.7 and what else were you looking for?

Accounts payable.

Accounts payable 17.7.

Okay. Thank you.

At this time there are no further questions. I would like to turn the conference over to Dr. Hartnett for closing remarks.

Thanks again for participating in this quarter's conference call. We're pleased with the results and believe that the strength of our end markets and our continued focus on driving performance improvements is going to position us well to certainly complete 2006, which only has six weeks left, and I'd like to point that out to all the RBC people listening. We have six weeks to complete this quarter so let's do the best possible job we can do on that. We're very optimistic about 2007. We look forward to speaking to you again about 2006 results at our next call. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.