RBC Bearings Inc (RBC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RBC Bearings Earnings Conference Call.

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

(OPERATOR INSTRUCTIONS)

At this time, I would turn the presentation over to Steve Calk, with Ashton Partners.

Please proceed, sir.

Thank you, Leticia.

Good morning, everyone, and thank you for joining us today for the RBC Bearings fourth quarter and fiscal year 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 you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition.

These factors are also described in greater detail in 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'd like to turn the call over to Dr.

Hartnett.

Doctor?

Thank you, Steve.

I would 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.

Today, we'll use the same format that we've done in the past.

Dan Bergeron, our CFO, and I will be sharing the duties.

I'll go through some of the highlights for the quarter, and Dan will go into some of the details and accounting treatments on specific points.

This morning we released our fourth quarter results.

I hope you've had the opportunity to look at them.

For those of you that haven't, let me give you a few highlights.

Sales for the quarter were $81 million, which was up 7% from the comparable period last year.

Sales for the year were $306 million, up 11.5% from last year's $274.5 million.

For the quarter, aerospace and defense products represented 53% of our total sales, up from 50% in FY07 -- up to 50% for FY07 and 46% last year.

Gross margin improved 23% to $28.6 million, from $23.3 million in the fourth quarter of '06.

Gross margin as a percent of sales for the quarter was 35.2% versus 30.8% last year.

Adjusted operating income increased nearly 28% on a year-to-year measure to $17.2 million.

The fourth quarter is always our strongest of the four.

In this case, it was much stronger than our guidance.

Please remember this when we talk about the first quarter guidance later in the call.

Excluding one-time charges, net income was $10.4 million or $0.48 a diluted share, compared to $6.7 million or $0.38 a diluted share last year.

Gross margins for the full year were $100 million, approximately 32.7% of sales.

Last year, gross margins were 30.2% of sales.

We experienced a margin expansion here of 20.7% in absolute dollars on a year-over-year basis.

Full year adjusted operating income was up 27.5% from last year, to $57.8 million.

Full year adjusted earnings per share were $1.59 versus last year's $1.23, an improvement of 29.3%.

In addition to the profitability improvement drivers previously discussed, we had a reduction in debt of approximately $100 million, which improved EPS performance by about $0.12 a share.

Our debt net of cash ending March of '07 was $54.2 million.

Our backlog increased to $176.5 million from last year's $160.7 million.

Operating cash flow for the 12 months exceeded $55 million.

Clearly, we are very pleased with the results this year, and feel that the company has very good momentum as we move into the first quarter of fiscal '08.

Our financial performance for the fourth quarter and total year was very good and beyond our plan.

We continue to benefit from strong spending in defense for replacement parts and continued expansion of Boeing and Airbus order book.

The orders for aircraft today are at an all time high, and a cycle extending beyond 2012 is expected now by many.

And industry projection makes the case that over 27,000 planes must be produced between 2005 and 2025, valued at over $2 trillion.

These are needed to support the growth in world trade and traffic.

We hope they're right.

Sales to our aircraft and defense customers were up 25.6% for the year, and 31% for the quarter.

Over the past year, we have been using this period of strong economic demand for our products to tune up our industrial product line and to strengthen its profitability.

This required eliminating minor products that were non-strategic, and showed low profit potential, and in some cases, changes our approach to the marketplace.

The net effect of some of these changes were demonstrated in our fourth quarter both in margin expansion, and year-to-year volume changes.

Net of these effects and excluding products to Class 8 markets, we saw an expansion of our industrial distribution business of 20% between '06 and '07, and an expansion of our industrial OEM business of 4.4% over the same period.

The combined effects here were 9.2% expansion of industrial products for FY07.

I'd like to congratulate our management who may be listening today for the continued attention to detail they demonstrate during these very busy times in achieving the service needs of our customers.

This is a very important element of our successful performance.

Thanks to all of you and keep up the good work.

During our fourth quarter, demand for our aircraft and defense products continued to be very strong and we achieved some broadening of our offering with the introduction of new products for Boeing, Airbus and the U.S.

government.

I am pleased to say this quarter capped a tremendously productive year in aerospace and defense markets for RBC.

We now have completed over 170 supply contracts with numerous companies, representing approximately $400 million of business, all of which is deliverable between now and 2012.

Most of the volume is deliverable in the early years.

We have a significant presence at the Paris Air Show next week, where we will display many of our products and have representatives present to answer questions.

Anyone listening today who plans to attend the show is invited to stop by our booth H-1 in hall 2-B.

With regard to our industrial business, as I stated earlier, our industrial business represents 50% of our business in FY07 and 47% in the fourth quarter of FY07.

There is definitely a " Goldilocks " story here, with some elements of the market too hot and some too cold.

To align everyone with the macroeconomic demand in the U.S., the U.S.

industrial expansion in calendar year '06 was 4.1% in total, and 5.1% in the first calendar quarter of '06.

U.S.

industrial expansion in the first quarter of '07 was 0.5%, a very big year-to-year, quarter-to-quarter change.

U.S.

industrial expansion in the second quarter of '07 is now projected by many to be about 2.3%.

As it relates to RBC, we saw our business net of special programs and Class 8 volumes up 10% in the industrial distribution sector and 0.5% for industrial OEMs in our fourth quarter.

We are pleased with the progress demonstrated in the distribution business, and know that our OEM business would have been much stronger, but we had capacity limitations on some of our larger products.

I'm sure most of you are aware that the markets for products for the oil, wind, steel and basic commodity sectors, among others, are extraordinarily strong and many believe the cycle of demand will be extended well into the next decade.

In terms of offering, RBC is positioned now and will be better positioned in the future to participate in a more substantive manner in these markets, both in terms of capacity to produce existing designs and expansion of the offering.

In this regard, last year we extended our complex in South Carolina by adding a plant and a new distribution center, and we have doubled the size of our plant in Mexico.

This fall, we will move into a new reconditioned facility for aircraft and industrial products in Connecticut, which is a 40% expansion in floor space for that business alone.

In May of this year, we acquired Phoenix Bearings in the UK.

This new subsidiary, RBC Phoenix, specializes in larger diameter ball and roller products.

We expect to begin to see the impact of these initiatives phase into our performance over the next three quarters into FY09 and beyond.

With regard to our internal initiatives, I'm very pleased to see the expansion of our gross margins this year.

To recall, they were 32.7% this year versus 30.2% last year, and 35.2% in our fourth quarter.

This is a result of improved operating performance, improved designs for manufacturability, methods, purchasing, planning, improved pricing and mix.

So we are hitting on all cylinders here, and achieving what we set out to achieve at the beginning of the year.

Although I expect to see continued margin improvement in FY08 on a consolidated basis, I believe it will be closer to 1.5% versus the 2.5% expansion we saw in '07.

The priority now is to add new products and expand in the dynamic markets we spoke about and, in this regard, we are adding product designs, sales and engineering personnel to support several new product initiatives we have underway.

More to come on this in future calls and some of these products are displayed and demonstrated at the Paris Air Show.

Relative to our guidance for Q1 '08, we are projecting sales and operating profit to be as follows.

Sales of $79 million to $80 million, and operating profit is projected to be between $14 million and $14.9 million.

That completes my briefing on RBC's business today.

Now, I'd like to turn the call over to Dan Bergeron to give some of the highlights of our financial treatments.

Thank you, Mike.

As we discussed on the third quarter conference call, the company discontinued manufacturing tapered bearings in its Glasgow, Kentucky facility in January and has consolidated that production into other RBC facilities.

The consolidation went smoothly and was basically completed by the end of March, and as we have discussed on previous calls, the consolidation is anticipated to result in gross margin improvement for that product line over the next 12 months.

The consolidation resulted in the charge of approximately 5.1 million in the fourth quarter, of which approximately 2.2 million was non-cash disposable fixed assets.

Net sales for the fourth quarter fiscal 2007 were 81 million, an increase of 7% from 75.8 million for the comparable period last year, and net sales for the fourth quarter of fiscal 2007 of 81 million exceeded the company's quarterly guidance range of 78 million to 80 million.

Gross margins for the fourth quarter of fiscal 2007 were 28.6 million, an increase of 22.4% from 23.3 million for the comparable period in fiscal 2006.

As a percentage of net sales, gross margin was 35.2% for the fourth quarter fiscal 2007, compared to 30.8% for the same period last year.

For the full year fiscal 2007, gross margin as a percentage of net sales was 32.7% compared to 30.2% in fiscal year 2006.

In the fourth 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, charges and gains for comparison purposes.

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 fourth quarter of fiscal 2007 was 11 million, compared to 9.5 million for the same period last year.

As a percentage of sales, SG&A was 13.6% for the fourth quarter fiscal 2007, compared to 12.5% for the same period last year.

For the full fiscal year of 2007, SG&A was 13.6% of net sales, which was in line with our full year expectations.

Operating income was 17.2 million for the fourth quarter fiscal 2007, compared to an operating income of 13.5 million for the same period in fiscal 2006.

Operating income for the fourth quarter fiscal 2007 of 17.2 million, exceeded the company's quarterly guidance range of 13.5 million to 14 million.

As a percentage of net sales, operating income was 21.2% for the fourth quarter fiscal 2007, compared to 17.8% for the same period last year.

Interest expense net for the fourth quarter fiscal 2007 was 0.9 million, a decrease of 2.3 million, from 3.2 million for the same period last year.

This decrease is mainly due to the reduction of debt from proceeds from the secondary offering, and continued debt reduction from free cash flow.

For the fourth quarter fiscal 2007, the company reported net income of 10.4 million, compared to net income of 6.7 million for the same period last year.

This is a 54% increase year-over-year.

Diluted earnings per share was $0.48 for the fourth quarter fiscal 2007, compared to $0.38 per share for the same period last year, an increase of 26%.

For the full year fiscal 2007, diluted earnings per share was $1.59, compared to $1.23 per share for the same period last year, an increase of 29%.

Cash provided by operating activities for the fourth quarter fiscal 2007 was 13.5 million, compared to 11.5 million for the same period last year.

Capital expenditures for the fourth quarter of fiscal 2007 were 8.1 million, compared to 2.6 million for the same period last year.

The increase in capital expenditure in the fourth quarter was mainly driven by the purchase and construction of a new aerospace manufacturing facility in Torrington, Connecticut.

The cost of this new facility is partly offset by the $3.9 million of cash proceeds received from the sale of our Nice facility in Kulpsville, Pennsylvania, which was recorded in the third quarter of fiscal 2007.

In the fourth quarter 2007, the company used approximately $10 million of cash to pay down debt, and $1.1 million to repurchase our common stock.

Total debt minus cash on hand for the period ended March 31, 2007 was $54.2 million, compared to $149.6 million for the same period last year.

And cash on hand for the period ended March 31, 2007 was $5.2 million, compared to $16.1 million for the same period last year.

I'll turn it back to Mike.

Okay.

Thank you, Dan.

Now, I'd like to open the floor for questions.

(OPERATOR INSTRUCTIONS)

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

Please proceed.

Thank you.

Good morning, Mike and Dan.

Good morning, Walt.

Good morning.

Congratulations on a great year.

Thank you.

And my first question is on the -- Mike, during your comments on aerospace.

I think you said aerospace was up 31%.

Right.

Versus 25.6% for the full year.

Correct.

What was the organic revenue growth in the fourth quarter?

Let's see.

I think, Dan, is that fourth quarter?

I've got it for the full year.

I don't have it for the fourth quarter, Walt.

Okay, that's fine.

The organic in total was 8.4% and without Class 8, the truck influence, was 11%.

Okay.

In the fiscal fourth quarter, did you see an acceleration in aerospace?

Yes, absolutely.

And what do you attribute it to?

Is it volume, or is it price, or a combination?

I'd say the price is a minor contributor.

It's certainly volume.

It's people that -- it's Boeing and Airbus and their subcontractors that are trying to supply this tremendous order book that they've developed over the last couple of years.

So you see, on the Boeing side of the picture, a gradual buildup of demand.

Airbus seemed over the period to be reasonable steady state.

And then we also saw some interesting defense programs beginning to come to life that we'd been developing for a period of time.

Good.

That sounds very positive.

I have to ask this one.

The gross margin looked excellent during the quarter, and I wonder how much of that is related to the heavy truck restructuring, and how much of it is related to leverage in the strong aerospace markets you just talked about.

And if I can ask you a forward-looking statement, what can we expect for gross margin in the coming 12 months?

I think we're expecting to see, over the next 12 months, about a 1.5% improvement over the consolidated results for FY07.

That's kind of where we're targeting.

Now, the fourth quarter, obviously, already got it there.

So I think your idea of a mix -- some mixed improvement because of the reduction in Class 8 truck volumes is absolutely right.

But on the other hand, you see more of the sales going into the aircraft defense products, which are traditionally a little bit better on the margin side.

So I think that 150 basis points over the next year on top of the consolidated result for FY07 is a very achievable number.

Okay.

That sounds excellent.

And then you talked about the industrial part of the business as being -- I think you talked about it being mixed.

Is that correct?

Well, in terms of demand, it's mixed, yes.

You have some of the markets are very hot, oil, steel, wind, the construction for the basic commodities, and then some of the markets being really cold.

Class 8 truck is going to be off this year.

And so, obviously, we're orienting our capacity towards the stronger markets.

Okay.

That's fine.

But when you talk about slower industrial, obviously, Class 8, that's been projected to be slow for the last couple of years.

So that's no surprise.

Is there anything else?

No.

I think the important underlying factor here is when you pare that all back, and you look at the performance in our industrial distribution sector, and you see that kind of year-to-year performance, even given the weaker state of the overall U.S.

economy, it's very encouraging.

So if we can take and build on top of that some strong OEM programs in productive sectors, we're going to do real well.

Okay.

And then, last, if you wouldn't mind commenting on Europe and the recovery that's taking place over there.

Europe has been a very pleasant surprise for us all the way around.

Our industrial business in Europe is extremely strong.

Particularly, much of it is the nonbearing business.

It's certainly beyond our capacity over there, has been beyond our capacity during the fourth quarter of '07.

So we have really strong demand for our products in Europe, and through Europe, Asia.

So we're adding capacity to satisfy some of the demand there.

And on the aircraft bearing side, we've just signed a contract with a major customer in Europe to supply products for the 777 program, which is close to EUR17 million, EUR18 million over the next I think it's four years, which is part of that, those 170 contracts that we talked about earlier.

So, Europe has been doing extremely well for us.

Okay.

Thanks very much, and congratulations again, guys.

Okay, Walt, thank you.

And your next question comes from the line of Peter Lisnic representing Robert W.

Baird.

Please proceed.

Good morning, gentlemen.

Good morning.

Good morning.

I'm wondering if I could just go back to Walt's question on gross margin, and I guess, the forecast improvement of 150 basis points.

If I kind of reconcile the numbers that you've put out for the first quarter, either I'm not assuming the right numbers for SG&A, maybe there's some increased cost there that I'm not capturing.

Or, your -- it just doesn't seem like you're baking in anything for the first quarter with your guidance relative to that 150 basis point target you set out.

So, can you help me understand kind of where I might be missing the understanding that you're going to see that sort of gross margin improvement?

Is it all in the back half of this fiscal year, or just what am I missing there?

I think we like to be conservative with our guidance, Peter, simply because we have a lot of customers, a lot of different products, a lot of plants online that have to make these products and the expected can happen.

A shipment can move from one quarter to the next, or a mix shift can happen that you didn't anticipate.

So we obviously don't bake the best case into our guidance.

Okay.

But, presumably, the risk to your forecast is relatively low, because you have -- I don't know, 20 days left in the quarter.

Correct.

Okay.

Fair enough.

And I also have some customers on credit hold that represent significant sales and I don't know if that credit hold will clear, whether their credit will be approved, whether we'll get cash in advance.

So, there's many little details.

Yes.

There's timing issues and --

So you're trying to give a reasonable number, but not a number that is your best case number.

I totally appreciate that.

I just didn't want to get too aggressive on the second half, or I wanted to get the assumptions right, I guess.

And then, can you help me understand how significant the heavy-duty truck business is in terms of a drag on the numbers?

I know you've thrown out some color commentary there, but is it simple as heavy-duty truck was a 260 basis point hit on organic growth?

Peter, this is Dan.

For the first quarter guidance, we gave sales of 79 million to 80 million.

Yes.

Compare that to the first quarter of '07, at the low end, that's about 5% growth and, at the high end, that's about 6.3% growth.

If you take out the Class 8 truck impact year-over-year, the growth rate is 9.8% to 11.3%.

So that will give you some idea of the magnitude, the impact on the first quarter.

The nice thing is now that we've done this restructuring, for the last six months of fiscal year '07, that heavy truck market was actually contributing a negative gross margin to the business.

So some of this gross margin improvement that Mike has talked about will come over the next six to nine months, as the heavy truck market settles down and bottoms out and we're manufacturing that product in different locations.

Okay.

And that was actually my next question was -- out of that 150 basis points, how much of that improvement is just driven by truck alone?

That I don't have.

We can take a look at that and let you know, but I don't have that in front of me.

Okay.

All right.

And then the last question, anything to be concerned about or happy about on the materials cost side of the equation?

Nothing to be concerned about.

Anything to be happy about?

Well, the fact that nickel is probably going to become normal again, that's a minor, very minor player in our lineup.

But, no, I would say there's nothing either way, Peter.

It's very -- the situation is normal.

I'd say, if anything, on the materials side, the availability of materials is always the thing that you have to manage.

Okay.

Lead time on materials, especially a lot of the special steels, is always beyond our customer's expectation.

Understandable.

Okay.

Thank you very much, and congrats on a great year.

Thank you.

Your next question comes from the line of Steve Barger representing KeyBanc Capital Markets.

Please proceed.

Hi.

Good morning, gentlemen.

Good morning, Steve.

Good morning, Steve.

Just to follow-up on Peter's question, the guidance does show a pretty big drop in operating income sequentially.

And normally, and over the last couple of years, it's been flat or up.

So that guidance is based on conservatism, and just seeing how things play out versus any fundamental problem with production or end markets.

Absolutely.

Okay.

That's great.

As [aero] deliveries accelerate, how should we think about the split of total aftermarket and OEM?

Is that going to create a margin headwind or a benefit?

Could you ask that again?

Yes.

We know that OEM business at aerospace is accelerating, and there'll be aftermarket in there, as well.

Is the change in mix going to be beneficial to margin or a problem?

I think it'll be neutral.

Okay.

So the margin story going forward, as you've described it on gross margin, should just drop to operating and we're going to see a continuation of the same margin expansion story.

That's correct.

I think in terms of going from gross margin to operating, we're probably going to set the SG&A level at about 14%, try to keep it under 14%, which funds some additional resources into our product development groups.

Very good.

And one last question.

In terms of the industrial, are you seeing anything negative in mining and construction or energy?

What are the customers kind of telling you as they look into two-half '07 on a calendar basis and into '08?

The only thing that we're seeing right now is very positive.

In several of the markets, there's a shortage of bearings.

I think there's probably a half a dozen markets where those markets are constrained by bearing shortages, and that's both at the OEM and the MRO level.

So it's a very -- the picture that we have through the various market channels that we get information is a very encouraging one.

All right.

So really it sounds like aerospace and industrial end markets are solid.

You'll still be able to get operating margin expansion, and fundamentally, the story is on track.

Am I missing anything?

Not a thing.

Okay.

Great.

Thanks for your time.

Get to Paris.

I'd love to.

And your next question comes from the line of [Edward Marshall] representing Sidoti & Company.

Please proceed.

Good morning, gentlemen.

Good morning, Ed.

Good morning, Ed.

I'm wondering if you could discuss a little bit on the acquisition front.

I know we were discussing acquisitions maybe going to a little bit larger sizes.

I know we just completed one with Phoenix Bearings.

But could you discuss what you guys are seeing as far as the acquisition front has gone?

Well, I think in terms of candidates, Ed, I have to say there's -- I've seen more candidates lately of all different sizes than I have ever seen since I've been in this business and I'm not sure exactly what's driving it other than people feel, in some cases, it's the right time to sell their business.

But we don't have any shortage of candidates.

So we're methodically proceeding to evaluate each one on its merits, and determine which ones are the best fit with markets that we feel have significant growth opportunities and good fits with what we know how to do and who we sell to.

And so, I would say that you'll see more acquisitions from us over the next -- this current fiscal year, and the size could be anywhere from another Phoenix kind of size to somewhere between $50 million and $100 million.

Okay.

So, pretty much your strategy there hasn't changed at all then.

No, it hasn't.

Okay.

Now, as far as the revenues are concerned, it looks like you guys had a pretty good revenue quarter.

How much of that is market share, and how much of that is just strength in your overall business?

Well, it's always good to have strength in your overall business so that everybody that's servicing the market is enjoying the prosperity.

So, certainly, in some markets, that's definitely the case.

I would say the market where we probably are picking up market share is in the industrial distribution sector, because the underlying performance there is much better than what we see for the industrial expansion in total.

The aerospace market, very hard to tell, because the demand for aerospace products is so great for everyone, everyone servicing that market today.

And on the industrial side, is there any particular segment that you would think that is picking up shares?

Probably construction and mining.

And one last question.

The backlog, sequentially, it looks like it fell a little bit, about 1% or so.

Can you kind of discuss that?

Is that mostly due to heavy truck or --?

It's probably due to heavy truck, and I think there's some timing issues.

We had big purchases from the government, big contracts with the government on certain series of bearings that we worked through.

Those are going to be renewed in the not too distant future.

So, it's more a timing thing than anything else.

There's absolutely nothing, no dark cloud on our business plan whatsoever.

Excellent.

Thank you, gentlemen.

Ladies and gentlemen, this now concludes the question-and-answer session.

At this time, I will turn the call over to Dr.

Hartnett for closing remarks.

Okay.

Well, my closing remarks are to thank everyone for participating in the conference call today.

I hope we've made it clear exactly where our business is headed and what our performance was over the last quarter and the last fiscal year.

We feel very good about the position we're in, the momentum that the company has, and I think we're ready to have an outstanding FY08.

Thank you.

Thank you for your participation in today's conference.

Ladies and gentlemen, this concludes the presentation.

You may all disconnect, and have a good day.