RBC Bearings Inc (RBC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 RBC Bearings earnings conference call.

My name is Janelle, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS].

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

I would now like to turn the presentation over to your host for today's call, Ms. Lauren Murphy with Ashton Partners.

Please proceed, ma'am.

Thanks, Janelle.

Good morning, everyone, and thanks for joining us today for the RBC Bearings first quarter 2007 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, 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 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, 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, Lauren, and good morning.

This morning I am pleased to report that the first quarter of 2007 was another strong one for RBC Bearing.

Hopefully by now you've seen the press release and had a chance to review our results.

During our call today, in addition to looking at a few performance highlights for the quarter, I'll ask Dan Bergeron to walk us through the numbers in greater detail, and then we'll return and I'll discuss the projections for our second quarter.

During our first quarter, we saw sales growth of 14% over last year from 66 million to 75.2 million.

Gross margin improved by 22% in the quarter to 23.5 million, or 31.2% of sales.

We are pleased to report that operating income was up 30% to 13.5 million, from 10.4 million in the period a year ago.

Net income and earnings per share were also strong at 5 million, or $0.24 per share.

When we exclude the impact of the tax-affected non-cash losses related to the early extinguishment of debt, which Dan will go into later in the call, net income improved nearly 120%, while earnings per share grew at 84%.

Clearly, this has been another great quarter for the company, and I'm very proud of the outstanding performance we've been able to achieve.

More importantly, these results come during a period when we are expanding our product offering and strengthening key elements of our sales and product management infrastructure.

I'd like to take a moment and congratulate our team on their continued commitment to our business, strong execution, outstanding designs, which provide our customers with solutions to so many of their problems and an unparalleled level of service, quality and support.

Keep up the good work.

Today there are a few areas I'd like to cover in greater detail.

First, market trends and market demand, and, second, our commitment to operating efficiency.

Let's just talk a little bit about the demand side of our business now.

The first quarter of 2007 exceeded our expectations and our guidance.

We experienced increased demand from sectors of aircraft and defense and in European industrial markets that were beyond our internal forecast for the period.

Given the current environments, we believe that our core sectors, such as oil and gas, construction and mining, aerospace and defense and our industrial businesses in Europe will continue to demonstrate positive trends through the fiscal year and beyond.

But we expect that some of the positive variance in revenue related to our expectations experienced in the first quarter will moderate somewhat during the second quarter.

Simply stated, we believe that there was a shift of a few million dollars of sales to the first quarter from the second that will not be repeated in the July through September period.

The main reason for this is that the summer in Europe is traditionally slow economically and that's what we're using in our projections right now.

And both the U.S. and Europe schedule less production over the three months because of vacations.

In some plants, we could ship more if the labor were available, but because of scheduled vacation and holiday periods, the labor isn't available, so we have some seasonality there that's affecting our top line to an extent.

We are selectively adding capacity to address some of these constraints, and we can talk about that at another time.

While timing was clearly a factor in the first quarter, we believe that a continued mix shift helped us expand our operating margins to approximately 18% of sales.

As we mentioned on past calls, shifting our revenue mix from the industrial sector to a more aerospace-defense offering has been the focus of our team.

Remember that in fiscal 2006, the aerospace and defense side of our business grew at an annual rate of 24%, and the industrial side exceeded our expectations by growing at more than twice GDP, when the fluctuation of Class 8 truck volume was normalized.

We believe that the shift in end markets and towards more highly engineered and proprietary products represent an opportunity to permanently improve our profitability.

This will ultimately bring us closer to our long-term vision for the business, where we believe our operating margins should be more in the 20% neighborhood.

Our ability to respond to new demands continues to be a great benefit to us, and we ended the quarter with 53% of our revenues coming from the industrial sector and 47% from the aerospace-defense sector.

There's been quite a lot of discussion in the news media about Airbus and the postponement of the 380 program and the need for them to redesign the 350 ship to be more competitive with Boeing and what all that means to RBC Bearings.

Well, Airbus and the European aerospace market is an important area for us and a place where we are growing our business and see good future opportunities.

However, for us, the postponement of the 380 program has very little effect.

In fact, today, we have five times the content in a Boeing ship as in Airbus planes.

Boeing's incredible successes in general with the new Dreamliner, which is the most successful launch of an airframe in the history of the industry, and their continued success on the 737 program is obviously very positive news for us.

Just a little bit about cost containment and some of the operating efficiency initiatives that we have at work today.

The macro environment has been strong and we continue to believe that our market trends are very encouraging.

And it's in this environment that we continue to focus on our priorities internally on expanding profit margins and monitoring and improving our operating efficiency, and you can see that in the expansion of our gross margins.

Over the year, RBC management team has initiated a number of efficiencies, or some people call these Six Sigma projects, which continue to bear fruit for us.

One is mix management, and we've talked about that a little bit already.

Another is methods improvement, and we spoke about that in previous calls.

And next in the lineup is cost control, and cost control remains a continued priority for our company.

And to the extent that we know that the devil is in the details, we've introduced a system where we publish a report to all divisions every day, which shows daily cash consumption by major category.

We found that real-time monitoring enables real-time cost control.

Of course, this allows closer management of material, labor and overhead components of our cost to some preset objectives, all tied to our quarterly budgets, and it quickly identifies excursions from budgets long before the month-end accounting report is issued.

It immediately draws our attention to activities that are value destructive.

It's been a valuable tool wherever we've introduced it.

Another cost control focal point for us is plant consolidation.

During the first quarter, we combined the U.S.

Bearings an Southwest products operations into a single plant and focused management strength into a single operating unit and achieved both synergy and manufacturing efficiencies simultaneously.

We continue to study other plant consolidation options for further improvement to our margins, but will leave these details for a later time.

Continued efforts such as these helped us to expand our gross margins during a period of significant time for our products.

These operational initiatives will not only continue to benefit us in the short term, but continue to provide us with a competitive advantage over the long term.

These kinds of activities are reflected in our margin expansion.

Today, the aircraft industry, in terms of moving now to market outlook, today, the aircraft industry is a very busy place and many of our customers are establishing long-term sources of supply for materials for a period that appears to all involved to be an extended time of expansion.

We are currently in discussions with many of our major customers, who wish to secure their supply position with us today.

The activity is good news, and I expect to have much more to report on this subject at our next session.

Right now, I'm going to turn it over to Dan Bergeron, and he's going to give us a little more detail on the financials, and then I'll come back with guidance for the upcoming quarter.

Thank you, Mike.

Net sales for the first quarter of fiscal year 2007 were 75.2 million, an increase of 14% from 66 million for the comparable period last year.

Net sales for the first quarter fiscal year 2007 of 75.2 million exceeded the company's quarterly guidance range of 71 to 72 million.

Net sales to our aerospace and defense customers increased 32.5% in first quarter fiscal 2007 compared to the same period last year, and net sales to our core industrial markets - construction, mining, semiconductor capital equipment and industrial distribution - were up 8%, offset by a decrease in year over year volume in our Class 8 truck market, resulting in an overall growth of 1.4% for the diversified industrial group in the first quarter fiscal 2007.

Aerospace and defense was 47% of net sales in the first quarter 2007, compared to 40.4% for the same period last year, and the diversified industrial group represented 53% of net sales in the first quarter 2007, compared to 59.6% in the same period last year.

Gross margins for the first quarter fiscal 2007 were 23.5 million, an increase of 22% from 19.3 million the comparable period in fiscal 2006.

As a percentage of net sales, gross margin was 31.2% for the first quarter fiscal 2007, compared to 29.2% for the same period last year.

This margin improvement was mainly driven by manufacturing efficiencies, product mix, continued cost control and pricing.

SG&A for the first quarter fiscal 2007 was 9.6 million, compared to 8.5 million for the same period last year.

As a percentage of sales, SG&A was 12.8% for the first quarter fiscal 2007, compared to 12.9% for the comparable period in fiscal 2006.

Other net for the first quarter fiscal 2007 of 0.4 million was flat with the comparable period in fiscal 2006.

For the first quarter fiscal 2007, other net included 0.2 million of plant shutdown expenses related to our RBC [Night Bearings] plant consolidation and 0.2 million of amortization of intangibles.

For the first quarter fiscal 2006, other net consisted of expense of 0.1 million of management fees, 0.1 million of bad debt expenses and 0.2 million of amortization of intangibles.

Operating income was 13.5 million for the first quarter fiscal 2007 compared to an operating income of 10.4 million for the same period in fiscal 2006.

Operating income for the first quarter fiscal 2007 of 13.5 million exceeded the company's quarterly guidance range of 12 to 13 million.

As a percentage of net sales, operating income was 17.9% for the first quarter fiscal 2007, compared to 15.7% for the same period last year.

In the first quarter fiscal 2007, the company recorded a loss in early extinguishment of debt of 3.6 million.

This was a non-cash writeoff of deferred debt issuance cost associated with the early termination of the senior credit facility, which was replaced by a new $150 million senior secured revolving credit agreement.

The new facility lowered the company's revolving rate from LIBOR plus 2.75% to LIBOR plus 1%.

And the company can continue to lower the margin over LIBOR as it delevers the business in the future.

For the first quarter fiscal 2007, the company reported net income of 5 million compared to net income of 3.3 million for the same period last year.

Excluding the tax-affected non-cash loss on early extinguishment of debt of 2.3 million, net income would have been 7.3 million, an increase of 119.4% over the same period last year.

Diluted earnings per share was $0.24 per share for the first quarter fiscal 2007, compared to $0.19 per share for the same period last year.

Diluted earnings per share, excluding the tax-affected non-cash loss on early extinguishment of debt would have been $0.35 per share compared to $0.19 per share for the same period last year, an increase of 84.2%.

Cash provided by operating activities for the first quarter fiscal 2007 was 12.9 million, compared to cash provided by operating activities of 5.2 million for the same period for the same period last year.

Capital expenditures for the first quarter 2007 were 2.6 million, compared to 2.6 million for the same period last year.

In the first quarter fiscal 2007, the company raised 57.8 million of net proceeds from its secondary equity offering.

The 57.8 million was used to pay down outstanding debt.

The company also paid down an additional 17.4 million of outstanding debt from free cash flow.

Total debt minus cash on hand for the period ended July 1st, 2006, was 81.7 million, compared to 214.4 million for the same period last year.

And cash on hand for the period ended July 1st, 2006, was 9.1 million, compared to 1.1 million for the same period last year.

I'll turn it back to Mike now.

Thanks, Dan.

We're pleased with our first quarter performance in fiscal 2007 and we see many opportunities for expansion of our business in the coming quarter.

And we believe the outlook for our key end markets, aerospace, defense, construction, mining and the aftermarket look strong and any slowdown in the Class 8 truck market, which is projected, will have minimal impact on our overall performance.

At this point, we see, looking ahead for the second quarter, based on the current market conditions, we expect our sales to be in the 68 to $71 million range, and we expect operating income to be in the 11 to $12 million range, and that means that after six months our non-Class 8 truck business is up about 14% and the total business, with Class 8 truck, is up 10%.

So it's pretty much right on the targets that we've set, to be in the low double-digit revenue growth range for the business after six months.

And we feel we're right on track for our year, given where the first six months is coming in.

So right now I'd like to turn it over to the operator and see if there's any questions.

Thank you.

[OPERATOR INSTRUCTIONS].

And our first question comes from the line of Walt Liptak from Barrington Research.

Please proceed.

Hi, thanks.

Good morning, Dan and Mike.

Good morning, Walt.

Congratulations on a really nice quarter.

My first question is on the second quarter guidance and it sounds like you had revenue that was pulled forward, but it also sounds like it's coming out of Europe and it sounds like it's industrial.

Is that right?

I guess could you provide some color on where you saw the pull forward and why you expect that to continue?

Well, we saw the pull forward.

We did see some of that in Europe.

I think Europe, we're a little bit surprised at the strength of the European industrial business - and pleased - it's a little stronger than we planned.

And the pull forward, the major pull forward, though, was in the United States in the aircraft airframe business.

And, basically, I think that's likely to continue.

The lead time on those kinds of products, because of just the manufacturing process sequence and the availability of raw material has to be carefully planned, and those lead times are often in the 20 to 30-week range.

And so when we do get a pull forward like that, it's sometimes hard to replace the revenue in the next quarter because you've sort of drained that quarter of the materials.

And the second quarter is particularly hard because of vacations.

Okay, vacations in Europe.

But your Europe business is small.

Roughly 90% of our revenue is U.S. based.

Right, vacations in Europe and the United States.

So I would think that - okay, all right, fine.

When you look out, you've got good visibility in the second half of your year I would think, too, especially with aerospace.

Could you talk at all about what you're seeing in the aerospace sector for the second half?

Obviously, we set up a full plan for the year when we budget these businesses, and the aerospace is probably a little stronger than our plan [inaudible].

Okay, the gross margin was a little bit better than I expected, with the 200 basis points of improvement.

The comps I think start getting a little bit more difficult as you get into the rest of the year, but can we expect to see that sort of improvement in gross margin in the following quarters?

Improvement from?

From the prior year.

You should see the gross margin sort of either stabilizing at where it was in the first quarter or improving slightly from there as the quarters click by.

Okay, okay.

And I wanted to ask you also about the acquisition environment.

You have talked before about deal activity.

I'm wondering what the pipeline is looking like.

And we've heard about some pricing improving.

Can you talk about likelihood of deals?

Well, we have nothing to announce today, but we hope to be talking to you sometime soon.

Okay, fair enough.

I'll get back in queue.

[OPERATOR INSTRUCTIONS].

And our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Please proceed.

Good morning.

Good morning, Steve.

I just wanted to get a little more color on the Airbus comments, given their setbacks, can you give us your view regarding progress with increasing content per plane?

Do you view this as a slowdown to what you had anticipated there?

No, I don't.

I think it's very normal.

I think although they've had their troubles, their book to bill is still way positive year to date.

And the order book, the planes that they're building over the next 24 months, all those materials are moving through somewhere right now.

There's not any change in that kind of an environment.

So I think what you see at Airbus sort of affects the years maybe late 2008, 2009, 2010 for them and how that changes that time period is the question.

I think the next few years, it's business as usual.

Just to follow up, you think you can increase content per plane in a directional way like you have at Boeing?

Yes, absolutely.

No question about it.

Okay.

Can you give us a little color on progress at the heavy truck facility down in South Carolina now that volume has dropped off a little bit, what you're doing to kind of make that transformation?

I really can't speak about that, Steve.

That's a very sensitive issue internally right now that we have a number of internal issues to resolve before we can speak about that publicly.

Okay.

Gross margin expansion, can you talk a little bit about how much was mix shift versus plant consolidation that you did in the first quarter?

Well, certainly, the mix shift is very helpful to that margin improvement, and the fact that our Class 8 truck business to the aftermarket is down in volume, was down in volume in the first quarter, where our margins are particularly tight, also helped that blend.

I have no numerical, analytical instruction to give you relative to what component contributed the most benefit.

Okay, and one final and I'll jump back in the queue.

One of your major competitors talked about a huge opportunity in wind energy.

I know that's not really the strength in your thin wall bearings area, but do you view that as a market you may move into?

Well, I think it's a market that shouldn't be ignored.

It's a market that we're reviewing right now.

I have nothing to say that we're going to move into it. these are bearings that are sized much larger than we currently manufacture.

Right.

And so it would take some major equipment investment for us, and so we're trying to determine whether or not that market really deserves another player.

Okay, thanks.

Great quarter, and I'll jump back in line.

And our next question comes from the line of Peter Lisnic from Robert W. Baird.

Please proceed.

Good morning, gentlemen.

Good morning, Peter.

A quick question on price versus volume.

Do you have that breakdown for top line in the quarter?

No, we don't, Peter.

Okay, and then maybe some commentary, I guess, on what you're seeing in terms of materials cost and any kinds of headwinds you might be facing there in the second half of the year.

Yes, I think, for the most part, the material issue seems to have stabilized and although we're paying more for materials now than we've ever paid, I think everybody in the industry feels the same way.

It's a stable but high price.

But you're able to pass that through, essentially.

Yes, we're able to pass that through.

We worry about some of the current suppliers and whether or not they're going to stay in the business and that's one of the - there's a lot of movement in our supply base right now, so that's the more difficult issue to deal with.

So does that mean there's areas where you're seeing potential shortages?

Well, there's areas where if you don't cover your requirements early and think it through ahead of time you could have a shortage problem, and I think we're on top of those issues.

Okay, and are you seeing yourself have to go out and, I guess, procure supply for a longer term, then?

I mean, are you carrying more inventory than you have in the past because of some of these supply chain constraints?

Slightly, yes.

In some of the specialty areas we have increased our internal stocks because the lead times are in some cases out more than 50 weeks.

Okay, and then forgive me if I missed this, but you alluded to some capacity expansions for the company.

Can you maybe give us a sense as to whether that's to address current markets you're involved in, or whether that would be ancillary markets?

Well, it's to address our current markets, and we've built and equipped a second plant in South Carolina to make bearings, and that came online in our first quarter and it was productive in our first quarter.

And in the first quarter we also bought a new facility in Connecticut, about 120,000 square feet on 27 acres that we are going to fit out for our existing markets.

Okay, great, fair enough.

Thank you very much.

And our next question comes from the line of [Joe Mobar] from Loomis Sales.

Please proceed.

Good quarter.

A couple question as it relates to the small secondary offering that you did back in April.

For Q2 and beyond, interest expense, which was running about 2.2 million in Q1, would you anticipate that to drop a little bit going forward?

And the second question was on the share count of 20.9 million, is that a good number to use going forward?

Thanks.

Okay, Joe, on the first one, the interest after we redid the debt deal also, we include in the amortization of deferred finance fees, you should be looking at about 1.6 to 1.7 million per quarter, assuming that the LIBOR rate doesn't go crazy.

And right now our LIBOR rate is 5.735 30 days out.

So if that holds, or if that just goes up another quarter point, we should still be in that range.

And on the share count, I think that 21.2, 21.3 is a better range, assuming that we may have options that get exercised over the next three months and don't know where the stock price is going to be.

Okay, great, and then a follow-up on the tax rate.

I think it was 35% in the quarter.

Is that a good rate?

No, you should be using 37%.

37%.

Okay, great.

Thank you.

And our next question comes from a follow-up from Walt Liptak from Barrington.

Please proceed.

Thanks.

I wanted to ask about the plant consolidation, just if you can help me recall.

Were the costs associated with that taken in a charge previously or were there extra expenses during the quarter from that?

Well, the [Knight's] facility, the majority of the charge was taking in Q4 last year, and we took about an additional 200,000 in the first quarter of this year some incremental costs that had gone through.

And that building is on the market, for sale for about $4 million and we have two pretty firm offers on the building and are hoping in this fiscal year we can sell the building and the land, which would - if we sold it for around 4 million would gross around 1.2 million of positive income.

Okay, but the incremental costs related to the consolidation is 200,000.

That's it, and that will drop down dramatically in Q2 and Q3.

Now it's just the cost of maintaining that facility until we sell it.

And then, Mike, you mentioned the expanding SG&A related to adding management infrastructure and new products.

I wonder if you could provide a little bit more detail about where you're adding the managers.

Is it on the sales or design side?

And then on the new product development, it sounds like there might be some new opportunities where you're making some investment into the future.

I wonder if you could talk about sectors and customers, et cetera.

Sure.

I think the SG&A as a percentage of sales is going to be reasonably stable.

I don't see where that is going to change very much, but within that it's a - we are budgeting money to expand our sales force domestically and internationally, and our internal marketing team.

And so that work is already underway.

The second part of your question, Walt?

Just related to, I guess, investment in new product development.

Are there specific opportunities that you're going after or is this just a general increase?

Normally, our product development expense, we don't break it out as an R&D expense, we just expense it through to either the plant side or the SG&A side, depending on where it hits and treat it as a period cost, so that's just our business as usual model.

Obviously, my background is product development, so there's always a lot of product development going on in our divisions.

And so, within our existing margin performance, is already budgeted a considerable amount of time and effort spent on product development.

Obviously, some of the new products that we're developing have some very high potential areas are being targeted at the aircraft engine market.

And that seems to be right now a very interesting area for us to do work.

Okay, great.

Okay, thank you.

At this time, there are no further questions.

I would like to turn the call over to Dr. Hartnett for closing remarks.

Please proceed, sir.

Okay, thank you.

My only - we were very pleased at how our first quarter turned out.

I think the outlook for our year is we're very encouraged about the outlook and things are running pretty much at or a little ahead of plan, and so that's our report.

I'd like to thank everybody for participating in the conference call and we look forward to speaking to you again, probably with a little bit more specificity on some of these programs, in our second quarter call.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.