RBC Bearings Inc (RBC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 RBC Bearings Earnings Conference Call. My name is Latasha, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to Miss Lauren Murphy with Ashton Partners. Please proceed, ma'am.

Thank you. Good morning, everyone, and thanks for joining us today for the RBC Bearings Second 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, 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 the call over to Dr. Hartnett.

Thank you, Lauren. And I'd like to add my welcome to each of you, and thank you for taking the time this morning to listen to the conference call. We appreciate your continued interest in RBC Bearings, and today, we're going to follow the same format as we've done in the past. Dan Bergeron and I will be sharing the duties, and I'll go through some of the highlights of the quarter, and Dan will go into some of the details on specific points.

This morning, we released our second quarter results, and I have -- hope you've had an opportunity to look at them. For those of you who haven't, let me give you a few highlights. Sales for the quarter were 73.2 million, which was up 12% from a comparable period last year. Gross margin improved 18% to 23.5 million from 20.0 million in the second quarter of '06. Operating income increased nearly 150% on a GAAP basis and 25% on an adjusted basis year- over-year. Net income was $7.4 million, or $0.35 a diluted share, as compared to a loss of 2 million, or $0.18 a diluted share, last year, and that loss was a result of some one-time charges.

Our net debt, ending September, was 78.6 million, which equates to a leverage ratio trailing 12 months of about 1.3 times. For the quarter, operating income covered interest 10.5 times. Our backlog increased to $175 million. Last year's was 152.6 million at this point. Operating cash flow for the six months totaled $27.4 million, and we completed the acquisition of All Power Products into our aircraft component group.

So, we're very pleased with our strong results and earnings results this quarter. We were able to get good operating leverage and net income up significantly on solid sales growth. And we continue to make good progress on our initiatives and that is expanding our product offering. And we added to our sales and product management infrastructure. Both operationally and strategically, we are tracking to the plan that we set for the year, maybe a little beyond, a little better than that, and we expect continued solid performance for the balance of this year and into next.

As always, our teams remain committed to drive solid execution, produce winning designs, and provide an outstanding level of service, quality, and support to our customers, and we'd like to take this moment here to thank everyone from RBC who is listening to this call for their efforts. During the second quarter, we continued to see heightened demand for our products, which exceeded our expectations and, as you know, our guidance. We experienced strong demand across a number of our end markets.

The strongest, by far, was Commercial Aircraft, followed closely by our defense products. Our industrial businesses showed strength, too, where the year-to-year sales growth approached 10% when normalized for the effects of the Class 8 aftermarket slowdown. This is particularly encouraging, given some of the new product and channel initiatives, and expansions we have introduced over the past 12 months. Our industrial distribution sales growth in the second quarter led the Industrial Products group both here, and in Europe.

Turning to some of our internal initiatives, we continue to make good progress expanding profit margins. In fact, our gross margin expanded 150 basis points on a quarter-to-quarter measure. This expansion is a result of methods improvement designed for manufacturability initiatives, mixed pricing, and we are starting to feel more of the effects of a plant consolidation effort that we completed last June. As we have discussed in prior calls, we're deriving a greater revenue from our Aerospace Defense offering and this has been the focus of many of our teams.

During the quarter, 53% of our revenues came from the Industrial side, and 47% from the Aerospace Defense segment. The financial results of this continued blend from Industrial towards Aerospace Defense, combined with our efficiency initiatives, should be the achievement of our target operating margins, which we want to see in the 20% neighborhood as one of our operating goals.

Our strategy is also focused on new product development, and deeper channel penetration across our various end markets. Our engineering and service levels continues to differentiate us in the marketplace and has enabled us to further solidify our partnerships with many old and some new blue chip customers. During the quarter we signed a number of important new long-term contracts with our customers, which will provide us expanded volumes and some new markets beginning as early as this year.

We continue to gain traction through our Six Sigma projects. Last quarter we talked about plant consolidation efforts and the use of a reporting system that allows us to track daily cash consumption by major category, which gives us cost controls in real time. These activities continue to contribute to our operational improvements. And, further, we are planning additional consolidation of our Class 8 business we expect may occur later this year. This consolidation will cut across several of our plants.

During the quarter, we announced our acquisition of All Power Manufacturing Company. All Power represents a great addition to RBC's portfolio of offerings and it further strengthens our position in the Aerospace market. All Power generated revenues of approximately $12.2 million in the most recent year, and we acquired the company's assets for approximately $9.9 million. The financial results of All Power will be reported as part of RBC's Plain Bearings segment. Since the acquisition was made in September, it was not a major contributor to the quarter, but we expect solid performance from this group going forward.

In addition, as many of you know, last week we announced an investment in the new aircraft products facility in Torrington, Connecticut. We expect to relocate operations to this new 137,000-square-foot facility in 2008. We are using CONNSTEP, which is a state-sponsored agency, in the planning of the plant with an eye towards maximizing manufacturing efficiencies, and we expect to invest between 8 and $10 million in renovating, upgrading production assets and expanding capacity of this facility over the next three to five years.

Finally, I want to quickly discuss the authorization of our stock repurchase plan, which we also announced this quarter. This stock repurchase program underscores our belief in our long-term prospects. The repurchase program will help us offset delusion from outstanding options, warrants, and restricted stock, while allowing us to continue to execute our operational and strategic growth initiatives. We believe opportunistically repurchasing shares is a prudent use of cash, and represents an opportunity to enhance value. In summary, our core markets are strong and we expect that to continue. We are expanding the portfolio in terms of product mix, growing our customer base, managing costs, and executing a growth strategy that will position the company well in the long term.

That's a quick recap of our quarter, and now, I'm going to ask Dan to review the financials.

Thank you, Mike. As Mike just mentioned, in the second quarter, we acquired the stock of All Power Manufacturing Company for approximately 9.9 million. The purchase price consisted of 8.8 million in cash, a $700,000 one-year notes payable, and approximately $400,000 in transaction costs. Our second quarter results include approximately one month of results for All Power, so I'll discuss that as I go through the numbers.

Net sales for the second quarter fiscal 2007 were 73.2 million, an increase of 12.1% from 65.4 million for the comparable period last year. Net sales for the second quarter of fiscal year 2007 of 73.2 million exceeded the company's quarterly guidance range of 60 to 71 million. Excluding All Power's net sales contribution of 1.3 million, the company would have reported net sales of 71.9 million.

Net sales to the Aerospace and Defense customers increased 17.2% in the second quarter of fiscal 2007 compared to the same period last year. And net sales to our core industrial markets of construction mine and semi-conductor capital equipment, general industrial and industrial distribution, were up 10%, offset by a decrease in the year-over-year volume in our Class 8 truck aftermarket result in an overall growth of around 7.8% for the diversified industrial group in the second quarter of fiscal 2007.

Gross margins for the second quarter of fiscal 2007 were 23.5 million, an increase of 17.6% from 20 million for the comparable period last year. And as a percentage of net sales, gross margin was 32.1% for the second-quarter fiscal 2007, compared to 30.6% for the same period last year. This margin improvement was mainly driven by manufacturing efficiencies, volume product mix, and continued cost control.

In the second quarter earnings press release, I included a reconciliation of operating income, net income, and diluted earnings per share for the fiscal year and last year, which excludes certain special items and charges for comparison purposes. If you don't have the press release, you can find this reconciliation on our website. The rest of my comments on SG&A, operating income, net income, and diluted earnings per share, will exclude the impact of these special items and charges.

SG&A for the second quarter fiscal 2007 was 10.4 million compared to 9.4 million for the same period last year. As a percentage of sales, SG&A was 14.1% for the second quarter of fiscal 2007, compared to 14.3% for the same period last year. For the six months of fiscal 2007, SG&A is running at 13.5% of net sales, which is on target to our internal plan and our full-year expectations. Operating income was 13 million for the second quarter of fiscal 2007, compared to an operating income of 10.4 million for the same period in fiscal 2006. Operating income for the second quarter fiscal 2007 of 13 million exceeded the company's quarterly guidance range of 11 million to 12 million.

Excluding All Power's operating income contribution of 0.3 million, the company reported -- would have reported operating income of 12.7 million. As a percentage of net sales, operating income was 17.8% for the second quarter fiscal 2007, compared to 16% for the same period last year. Interest expense net for the second quarter of fiscal 2007 was 1.2 million, a decrease of 3.3 million from 4.5 million for the same period last year, and this decrease is mainly due to the reduction of debt from the proceeds from the IPO that we did back in August, and the secondary offering that we did in April, and continued debt reduction from free cash flow.

For the second quarter of fiscal 2007, the company reported net income of 7.6 million, compared to net income of 3.7 million for the same period last year. Diluted earnings per share was $0.36 for the second quarter fiscal 2007 compared to $0.23 per share for the same period last year, an increase of 57%. Cash provided by operating activities for the second quarter fiscal 2007 was 14.5 million, compared to cash used by operating activities of 1.9 million for the same period last year.

The company continues to drive down the working capital needed to run the business. Inventories are down approximately 1.6 million from year-to-year -- from yearend sorry, excluding All Power, and our days outstanding continue to decrease with total company DSO at approximately 64 days, and domestic DSO at approximately 59 days. Capital expenditures for the second quarter of fiscal 2007 were 2 million, compared to 3.2 million for the same period last year.

In the second quarter of fiscal 2007, the company used 8.8 million of cash for the acquisition of All Power and paid down debt by 4.9 million. Total debt minus cash-on-hand for the period ended September 30th, 2006 was 78.7 million, compared to 167 million for the same period last year. And cash-on-hand for the period ended September 30th was 7.9 million, compared to 4.5 million for the same period last year.

I'll just turn it back to Mike now, to go through our guidance.

Thank you, Dan. So, that's the recap of our second quarter results. Sales up 12%, adjusted net income up over 100%, and adjusted earnings per share up 56%. We feel that we've performed well through the period and for the first six months of 2007, and we're in very good position for the balance of the year. Based upon what we see now in -- for business conditions for the third quarter, which ends in December, we expect our sales to be in the range of 72 to 75 million, and operating income to be in the range of 12 to 13 million.

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

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Walt Liptak with Barrington. Please proceed.

Hi, thank you. Good morning, and congratulations on a nice quarter. The first question I have is on the guidance for revenue. If we take the midpoint, it looks like, excluding All Power, you're looking for a sequentially down revenue number. Is that the case?

I don't believe that's the case, Walt. I don't know how you got there.

Okay. Let me ask the question this way. All Power sales, you said, were 1.3 million in the quarter?

That's correct.

Okay.

A month.

And that was one month?

It was one month.

Okay. And I didn't hear the backlog numbers. Could you repeat those?

Yes, the backlog numbers were, let's see, currently 175 million, and last year was 152.6 million.

Yes, Walt, I think at the top end of the guidance we'd be looking at around 9% growth in Q3, excluding All Power.

Okay. And then, if I could do -- ask a second question. On your heavy truck exposure, what progress has been made to the consolidation there? How long are you, and what positive impact do you think you'll get next quarter as a result on the gross margin?

Let's see, on the first part of your question there, Walt, as you know, the Class 8 truck market is projected to slow in calendar '07, and we've already seen this in the last of our two quarters in the Class 8 truck aftermarket. So, we're using the opportunity to re-plan and reengineer our production systems and our use of facilities. And so, we're studying several scenarios, but the ink isn't quite dry on any one of them. Most of the scenarios show a range of one-time charges that are going to be in the 4 to $5 million range, and two-thirds of which are non-cash. But we're not really finalized on any specific strategy, although we're narrowing it down.

Okay. And the impact on gross margin, it sounds like that's out further in 2007, or maybe in year 2008?

Yes, that should start showing up in 2007. I think our goal there on gross margin was to expand, I think, 150 basis points a year. I think the first 150 basis points has been done on a year-to-year basis after the end of our second quarter, and so the -- one of the components of growth, gross margin expansion, is this reengineering of this particular product sector, and so that's -- that contributes to the 150 basis points that we're trying to get out of next year.

Okay, thank you.

Your next question comes from the line of Peter Lisnic, with Robert W. Baird. Please proceed.

Good morning, everyone. Nice quarter.

Thank you.

Dan, if I could, or Dr. Hartnett, you gave us a nice breakdown of the revenue by segment or market for the quarter. I'm just wondering what the order book looked like for the quarter in terms of -- did you see any slowing in certain end markets for industrial, and what the order book looked like for truck?

The order -- let's see, in total, the order book quarter-to-quarter exceeded book sales. So our book to bill was still --

Still above 1? Yes.

Yes. It was over 1. It wasn't 1.1, but it was probably 1.05, 1.06, something like that. A lot of the contracts that we signed and pleaded with our customers over the quarter have not resulted in bookings yet because of the lead time associated with changes and sources supply with those customers. So, we expect to see that -- those phase in sort of over the next quarter, maybe the next two quarters. The Class 8 business for the quarter, the bookings were very soft. They were probably down 40%.

Okay. So, if I exclude that and if I kind of read in-between the lines, it sounds like maybe a temporary pause, if you will, in terms of orders on the industrial side. And I don't want to -- pause is probably not the right word, but just maybe slowing. But you expect it to probably reaccelerate as some of this new business gets booked. Safe to say?

I think net of the Class 8 business, the industrial bookings were very good for the quarter.

Okay. And then if --

We're really pleased with the strength of the industrial segment for the quarter. Now, you have to look at that quarter, and the IPI for the quarter was extremely strong also.

Yes. Well, that was my next question, is there's been kind of this inkling that -- or worries that things might be slowing. I'm just wondering what your, without providing a forecast for the quarter after the next or the year out, just kind of what you're hearing or what your pulse is in terms of the market past the next quarter?

If you look at where we're generating a significant amount of our revenues, it's construction mining. I expected to see the small side of the construction business weaken during the quarter, as everybody would, right?

Right.

It didn't. It strengthened during the quarter. I'm confused about that.

Okay.

I don't have an answer for that. The large side of the construction business, which sort of goes into the mining area, wasn't as strong as I expected it to be for the quarter. But when I investigated that, it was because just order timing from customers. It is a strong sector. The other part of the business that falls into the industrial group that's a major contributor is the industrial aftermarket, sort of the general U.S. distributors.

Okay.

And that was very strong. I mean, that was incredibly strong. I -- we were really surprised at the strength of that sector during that period.

Do you have any sense as to whether or not that is more share gain on your part, or whether it is just the market being stronger than you expected, or a combination of both?

You know, we're still investigating the reason for that. I don't -- I think when the durable goods orders were good and industrial production was good, and that's really -- that really coordinates extremely well with demand for us in those out of that sector. And so, the general economic indicators for the sector were positive and you would expect a strong result. Now, our results were a little bit stronger than we expected. We are expanding, as I said, our sales and product management infrastructure in that part of our business, and so we're reaching into more geographic regions of the world than we have been able to reach into before. So, I think that's also providing us some volume.

Okay. Okay, great. Thank you, very much.

And your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed.

Hey, good morning.

Good morning.

A question on the Aerospace side. I believe the 787 -- Boeing 787 is supposed to start delivery in '08. Typically, how soon do you start to see the benefit of the ramp in production? Will that fall into your calendar '07 -- or fiscal '07?

Yes, it will. When in '08 is it supposed to start?

I think it might be mid to late, so it's mid '08.

Yes, it will come very much at the end. You know, there's probably a three- to six-month offset.

Okay.

It's no more than three -- it's no less than three and no more than six.

Okay, thanks. And, to be clear, you said that some of the contracts you signed have not generated bookings. Is that more on the Aerospace side?

Yes.

And one question about airbus, given their manufacturing issues. Are they -- is this giving you more opportunity to penetrate airbus to increase your content per plane, or are they really more in bunker mentality right now?

Well, you know, they want to do business in dollars.

Right. Okay.

They're selling planes in dollars. The dollar is very competitive right now, in terms of a place to make these products. They want a stable -- they want to get out of the Euro and all of those other currencies, so they find that part of our -- of us very attractive. The fact that they're delaying their production, I think, helps us because there's an approval process that we have to go through to get into some of their mature applications, and we're going through that approval process now. So, the news on airbus for us and the European engine producers for us is very positive.

And just one final question on pricing. You had said that some of the industrial end markets were still very strong. Is, I guess, of the 12% sales increase, can you break out pricing and how you view pricing going forward?

Yes. On the industrial side or in general?

Industrial and in general.

Well, I think the raw material component of our cost has settled down in terms of year to year. Beginning of last year was more of a -- more demanding in terms of how to manage and pass those through in terms of pricing. So, the pricing side of our business is, for us -- to our customers, has settled a bit, and has -- is more normalized. So, on a general industrial basis, you're probably seeing price increases in the -- for much of your customer base in the 4% to 5% range.

Very good. Thanks, that's all I have.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Marty Pollack with NWQ Investment. Please proceed.

Yes, very nice quarter. Just a couple questions. If you would, just elaborate on the Torrington investment. Just want to give, in terms of capacity, what does it do for the company, and where is your capacity at the moment so that -- are there some efficiencies to be gained over the next few years with that? Additionally, I just want to -- SG&A, unlike gross margin, seems -- gross margins have been going up in the last couple of years. Is SG&A an opportunity to break that down at all as a way of, certainly, improving margins? And lastly, just about acquisitions, anything else on the pipeline at the moment?

I'll let Dan take the SG&A question first, Marty.

Marty, on SG&A, our internal forecast still there is 13.5% this year. We're on target to meet that. I think this year our number is a little higher, mainly due to the additional compliance audits that we have going on for Sarbanes, because we'll be compliant by -- we have to be compliant by the end of March, and so we have some additional professional fees at our impact in that number this year. But then, yes, we should start seeing, in '08, to gain more leverage off that number going forward.

Okay.

Okay, and -- and Marty, in terms of the capacity and efficiency question as it relates to this Torrington Plant. Right now we have a plant that's on -- where we manufacture product, which was -- it was built in the 1800s sometime, so we had a lot of little rooms and several floors to move product around. So just putting all of that manufacturing operation under one roof where you can lay out the product flow properly is going to create efficiency for us.

And so, we haven't narrowed it down to exactly how many points of gross margin improvement we're going to see as a result of this change in layout, but the manufacturing and management team for that business has a gross margin objective, which is several points higher than today's performance, and they're using this layout as one of the ways of getting to their gross margin objective.

It's an increase in the floor space that we have, by about 30%, in terms of operating usable floor space, and we see the -- that 30% expansion being an area where we're going to put some new products. And we're talking with several customers, particularly in Europe, about people -- with people who want to buy their products in dollars and not euros, and would like to sign contracts with us to fill that capacity. So that's work that's in process right now. I don't know if I answered --

Yes, that's actually -- I appreciate that answer. On the M&A front, is there -- this -- you're likely to involve some additional niche acquisitions. What are the opportunities in terms of getting the kind of properties you tend to buy in really depressed evaluations?

Well, what you call depressed we think we're paying up for, Marty. But right now I would say that the -- we have some ideas that are small, and we have some ideas that are big, and we're pursuing both avenues. And in the ideas that are small category, it's -- if we do a small acquisition, it will be in order to acquire skills in markets that we feel that we do not have skills -- manufacturing skills in today.

So, we see some important growing markets out there that we feel that we'd like to participate in, but today, we have holes in our skill sets, and if we make some small acquisitions that have those skill sets, it would allow us to participate in growing markets. So, we do have a few of those that we're actively discussing prospects with right now. And I'd say if we did anything this year, it would probably be a smaller skill set expansion kind of a program.

Okay, I appreciate that. Just one last question, if I may, in terms of the question about the persistence, I guess, of fairly strong trends in industrial. I want to get -- are you seeing some of that from the metal side, I believe on the coal mining side we're seeing some slowdown, but metals continues to be fairly strong. Have you been able to fine-tune that -- engage that at all?

Well --

What -- where are you positioned?

Well, we're seeing strength in semiconductor equipment as one sector that's very strong. Obviously, oil and the oil aftermarket, none of that has slowed down for us at all. And so that's as brisk as it can be, and that's even. And I think there's products that -- in the oil business that we don't manufacture that are under allocations from other people that manufacture those products, so we're being asked to manufacture them on an exclusive basis, and we're kind of looking at that. So oil is still strong.

We think the big mining areas are still strong. We know that the big equipment is still under capacity constraints from its component suppliers, and some of those constraints are bearings. So we like that part of our business, and the machine tool business in Europe, for us, out of Switzerland, is just red hot. It's an extremely strong sector for us, and so we -- we're enjoying an expansion of our business there.

Thank you, very much.

Your next question comes from the line of [Joe Postler] with OFI Institutional. Please proceed.

Hi. I'm wondering -- I apologize if this has been asked and answered, but I had to step out for a second. On the long-term agreements, could you talk a little bit -- are they only in the Aerospace industry or military? And then, are they all renewals, or are they new agreements? And if they are renewals, could you go into a little -- or, could you elaborate on if it's -- if there's been a change in pricing or penetration? Thank you.

Well, I think for this quarter -- was more the season for Aerospace Defense than it was the season for industrial in terms of these agreements, so there's -- these sectors phase in and out, and this was sort of the Aerospace Defense churn. So more of the contracts were done in the Aerospace Defense sector. These are, in some cases, renewals, in most cases, expansions to our business, and I think the -- with regard to pricing, I would say, in all cases, the pricing is better.

Okay, thank you.

I show no further questions in the queue. I would now like to turn the call over back to Dr. Michael Hartnett for closing remarks.

Okay. Well, I thank everybody today for participating in the call, and we'll go back to work here, and go back to our business of running our business, and we'll look forward to speaking again after our -- in the December time frame. Thank you.

This concludes the presentation. You may all now disconnect. Good day.