RBC Bearings Inc (RBC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RBC Bearings First Quarter 2008 Conference Call.

At this time, I would now like to turn the call over to Mr.

Steve Calk.

Please proceed.

Good morning and thank you for joining us today for the RBC Bearings fiscal first quarter 2008 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, let me remind you that 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 would like to turn the call over to Dr.

Harnett.

Thank you, Steve.

I'd like to add my welcome to each of you and thank you for taking time this morning to listen to the conference call.

We appreciate your continued interest in RBC Bearings.

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

Dan Bergeron and I will be sharing the duties.

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

This morning we released first quarter results.

I am pleased to give you the following summary.

Sales for the quarter were $79.8 million, which was up 6.1% from the comparable period last year.

Less the influence of the Class A truck products, sales were up 12.1% in total.

We got good order flow for the quarter and, to some extent, sales were constrained by a few million dollars as a result of product availability, which we are now working to correct.

For the quarter, aerospace and defense products represented 53% of the total sales or $42.1 million, up 19.1% from last year.

Sales of industrial products, less Class A truck bearings, were up 3.9% from last year, with the industrial aftermarket up 7% and OEM up about 2.5%.

Gross margin improved 16.6% to $27.4 million from $23.5 million in the first quarter of '07.

Gross margin as a percentage of sales for the quarter was 34.3% versus 31.1% last year.

Our gross margin was slightly depressed as a result of some plant relocations currently underway, which will be completed this quarter.

Dan will provide detail on this matter later in the call.

We are committed to further gross margin expansion through improved manufacturing and planning methods, further plant consolidations, moderate capitalization, market channel positioning, new product introductions and pricing.

We are making good progress in each of the areas mentioned.

The gross margin expansion of over 300 basis points demonstrated over the past 12 months is the cumulative effect of these efforts to date.

Compared to the first quarter last year, operating income increased nearly 17% to $15.7 million or 19.7% of sales.

Our performance for the quarter was within our guidance on sales and a bit ahead on operating income.

Net income was $9.8 million or $0.45 a diluted share as compared to $5 million or $0.24 a diluted share last year.

Dan will also provide more color on this comparison later in the call.

Our total debt net of cash ending June '07 was approximately $51 million.

We expect that this debt reduction will continue for the balance of the year.

This, of course, is based on the assumption that we will not convert any major acquisitions.

This is truly hard to predict, as we are currently active here, as you know.

Our backlog increased to $185 million, last year's was $167.5 million.

Operating cash flow for the period was $13.4 million.

This brings our operating cash flow for the trailing 12-month period to over $56 million.

We are pleased with the results this year and feel confident that the Company is squarely on the path to achieve its fiscal '08 objectives.

I'd like to give you a short update on where we are with some of our key markets.

Over the past year, we have seen some very good demand for our aerospace and defense products.

A look at the book-to-bill ratios for the top producers in the industry for the last six months shows Airbus at 294%, Boeing at 250%, Bombardier at 283%, and Embraer at 139%.

These are tremendous numbers and they follow two years of record bookings for this industry.

These are very favorable signs for the future years.

These continue to be outstanding markets for our existing products and we are finding them to be productive places to extend our offering.

Today we feel extremely good about our product positioning and the development of our customer relationships in these markets and what this means for our future.

Currently, the industry is issuing production rate increase alerts, as the manufacturers increase throughput in order to respond to this unprecedented level of demand for aircraft.

To accommodate these demands, we are currently planning capacity expansions in several of our plants.

Today, there are many product developments passing through RBC's design, engineering and testing laboratories to address the needs of these industries and satisfy the requirements for lighter and green-friendly aircraft and for bearings with enhanced corrosion resistance, as well as extended re-lubrication period.

I am sure we will talk more about these developments on future calls as their potential matures.

The industrial side of our business continues to show modest expansion in response to our two times GDP growth initiatives, even with a relatively soft U.S.

GDP performance in the first fiscal quarter.

We saw a 4% expansion here, less the influence of Class A trucks.

This was primarily driven by an expansion of line bearings we supply to the industrial lift and agricultural markets, larger bearings for heavy equipment, and one month of contribution from the acquisition of Phoenix Bearings.

The market for our larger bearing products continues to be constrained by supply problems.

The markets for mining, oil, heavy trucks and earth-moving equipment, construction, aggregates and wind are currently creating an extraordinary demand for large bore industrial bearing products.

This is driven primarily by the macro forces of world GDP expansion, which has exceeded 5% growth in each of the last three years, multinational green initiatives, the expansion of global trade, which has tripled since the mid-'90s, and the spectacular development of third world economies.

These changes in the economic status quo appear to many to be unique and permanent long cycle forces that are reshaping human industrial history in a manner similar to that which occurred following World War II.

In any event, what does this mean for RBC Bearings?

It means the world requires more industrial bearings of a larger bore to satisfy its material and energy needs and objectives.

The acquisition of Phoenix Bearings in the U.K.

and coastal bearings in Houston, which we completed in July, will add important increments of capacity and know how to serve our current customer base and provide additional growth to support the expansion of the world economy in industrial markets important to RBC.

Coastal and Phoenix had approximate sales of $3 million and $4 million for their fiscal years ending December '06, respectively.

In the coming quarters, you should expect to see solid integration of these acquisitions and expansion of these businesses as we align their capacities with our markets and new opportunities emerge.

These acquisitions allow us to offer industrial markets ball and roller, as well as taper roller bearings from ten inches to over 120 inches in bore diameter.

Finally, we were pleased to renew and expand our share repurchase program, which is now authorized for up to $10 million.

This replaces the $7.5 million program that expired at the end of our fiscal year in March.

Taking all this into account, we expect to see our second quarter '08 sales to be in the range of $78 million to $80 million and operating income to be between $13 million and $14 million.

Remember that our second quarter is normally our slowest as a result of summer vacation holidays by both us and our customers and, as a result, it's one of the most challenging ones to predict.

You hear me say this often, but I don't want to miss the opportunity to say thank you to our management team.

Their skill and dedication is what truly makes RBC a great operation.

Please keep up the good work.

Now, I'd like to turn the call over to Dan Bergeron to provide some additional color on the financials.

Thank you, Mike.

Net sales for the first quarter fiscal 2008 were $79.8 million, an increase of $6.1 million from $75.2 million for the comparable period last year.

Net sales for the first quarter of fiscal 2008 of $79.8 million was within the Company's quarterly guidance range of $79 million to $80 million that we discussed on the last conference call.

Excluding the Class A truck bearing impact, net sales for the first quarter of fiscal 2008 increased 12.1% over the same period last year.

Gross margin for the first quarter fiscal 2008 was $27.4 million, an increase of 16.7% from $23.5 million for the comparable period in fiscal 2007.

As a percentage of net sales, gross margin was 34.4% for the first quarter fiscal 2008 compared to 31.2% for the same period last year.

This margin improvement is in line with our internal goal to increase fiscal 2008 gross margin percentage by 1.5% to 34.2% from 32.7% in fiscal 2007.

We did experience some margin erosion associated to the move-in of our aerospace business in Connecticut from a leased facility to the newly built facility.

This impact will be greater in Q2 as the majority of the move-in activity will take place and be complete by the end of September.

SG&A for the first quarter fiscal 2008 was $11.3 million compared to $9.6 million for the same period last year.

As a percentage of sales, SG&A was 14.2% for the first quarter fiscal 2008 compared to 12.8% for the same period last year.

The increase of $1.7 million was mainly due to additional personnel necessary to support our increased volumes and $400,000 of stock compensation expense.

Operating income was $15.8 million for the first quarter 2008 compared to an operating income of $13.5 million for the same period in fiscal 2007.

Operating income in the first quarter of fiscal 2008 of $15.8 million exceeded the Company's quarterly guidance range of $14 million to $14.9 million.

As a percentage of net sales, operating income was 19.8% for the first quarter fiscal 2008 compared to 17.9% for the same period last year.

Interest expense net for the first quarter fiscal 2008 was $900,000, a decrease of $1.3 million from $2.2 million for the same period last year.

This decrease is mainly due to the reduction in debt from the proceeds of the secondary offering in April 2006 and continued debt reduction from free cash flow.

For the first quarter fiscal 2008, the Company reported net income of $9.8 million compared to net income of $5 million for the same period last year.

This is a 95.6% increase year over year.

Diluted earnings per share was $0.45 for the first quarter fiscal 2008 compared to $0.24 per share for the same period last year, an increase of 87.5%.

Excluding the loss and early extinguishment of debt in the first quarter of last year, net income increased $2.5 million to $9.8 million in the first quarter fiscal 2008 from an adjusted net income of $7.3 million for the same period last year.

This is a 33.9% increase year over year.

Diluted earnings per share was $0.45 for the first quarter fiscal 2008 compared to an adjusted $0.35 per share for the same period last year, an increase of 28.6%.

Cash provided by operating activities for the first quarter fiscal 2008 was $13.4 million compared to $12.9 million for the same period last year.

The Company invested approximately $3.4 million in working capital, mainly trade receivables and inventories, in the first quarter of fiscal 2008.

Capital expenditures for the first quarter of fiscal 2008 were $6.6 million compared to $2.6 million for the same period last year.

The increase in CapEx was mainly driven by the construction of a new aerospace manufacturing facility in Torrington, Connecticut and investment in new and refurbished machinery and our funding of the new aerospace facility was partly offset by the $4 million of proceeds received from the sale of the [Nice] manufacturing facility in Kulpsville, Pennsylvania reported in the third quarter of fiscal 2007.

Given our current expansion plans, we expect capital expenditures to be in the range of $13 million to $17 million in fiscal 2008.

In the first quarter fiscal 2008, the Company used approximately $4 million of cash to pay down debt and $4.4 million to acquire Phoenix Bearings.

Total debt minus cash on hand for the period ended June 30, 2007 was $50.8 million compared to $81.7 million for the same period last year.

I'll turn it back to Mike or over to Q&A.

Okay.

Thank you, Dan.

I think now we're ready to take questions and comments.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Peter Lisnic.

Please proceed.

Good morning.

It's actually John Haushalter for Pete.

Hi John.

I just have a couple of questions for you.

On the 12.1% sales increase, kind of excluding what heavy duty truck did in the quarter, could you split that out between price and kind of unit volumes?

I just don't have that in front of me, John, but I would say that, rough estimate, that probably around 70% was volume driven.

Okay.

Then I guess kind of turning to the gross margin front, it seems like there's a definite benefit you're getting from mix as kind of the heavy duty truck business has fallen off this year, which is not surprising, given what you're planning to do there.

But is there kind of a way to quantify what it's done or, alternatively, kind of for a base, like an aerospace type bearing, what you guys have been able to do kind of year on year for margin and something that isn't related to truck?

Let's see.

Yes, John.

What are you...

I'm just trying to get an idea of how much gross margin is, just a function of kind of the low margin truck business kind of falling off.

How much of that is the year-on-year improvement and how much is kind of core operational improvement in the other businesses?

We can estimate it here and probably get it wrong or work up some numbers and probably give that to you, but those are easy numbers to accumulate.

There is definitely margin improvement going on in the aircraft business and there is some margin improvement going on also in the industrial businesses and the loss of the heavy truck volume, which is probably or a $10 million or $15 million per year loss, it's easy to put a number around that.

But I think that's something we'd have to get back to you on.

Okay.

But the businesses outside of truck are improving operationally, also.

Yes.

They are improving operationally, absolutely.

And keep in mind we did a few other consolidations besides the heavy truck factory in Kentucky.

We did the Nice Bearing facility in Pennsylvania a year and a half ago into our West Trenton facility and we consolidated USB, an acquisition we did about two years ago, into Southwest Products.

So it's a continuation of these consolidations and continued work on improving our cost base.

Okay.

And I guess the final question is turning to Coastal Bearings.

Given the demand you're describing for kind of the larger diameter bearings, are multiples that you're paying there different than things you've kind of acquired in the past or are valuations still reasonable for kind of wanting to grow into an area that seems higher growth or structurally advantaged right now?

No.

The multiples are very similar to our historical multiples.

Okay.

So there's really no difference, despite kind of the end market being favorable.

Yes, that's correct.

That's correct.

Thank you.

I'll get back in queue.

Your next question comes from the line of Andrew Obin with Merrill Lynch.

Please proceed.

Good morning.

Just a question regarding outlook for the next quarter.

I'm just a little bit surprised by how much operating leverage we have relative to what we've posted over the past couple of years and I guess we've sort of gotten spoiled by terrific operating leverage numbers you guys have been showing for the past couple of quarters.

I was just wondering, is there something going on?

What is the street missing, I guess?

Well, I think, Andrew, in Q2, as I mentioned when I was speaking, that we're consolidating -- we're actually moving now the aerospace division from its leased facility in Torrington, Connecticut to its new facility, and that's going to erode margins a little in Q2 on us.

But I think we're still right on track to increase our gross margins 150 basis points this year like we thought we would and that goal will be achieved and we should see the majority of that on down to the operating income line.

But I guess my only question is we have been doing restructuring over the past several years and if I look at the numbers, you have consistently achieved incremental margins, and I understand that these are sort of non-GAAP measures, of sort of north of 30% fairly consistently and here my calculations indicate that we're sort of dropping below 20%.

I also would like to note that your other competitors, like Timken and NSK, have also been posting margins in the industrial business that have been somewhat disappointing and sort of represent the lack of operating leverage.

Granted, you're in a different sort of category in terms of operations.

You guys are doing a better job.

But I'm just wondering, are we facing some sort of industry capacity constraint here?

What's going on, I guess?

I think the margin in the second quarter is normally a little bit tougher to predict, because the way we do our accounting, we don't put any accruals in to offset a quarter for a shorter amount of production days.

So, basically, you have the same overheads over fewer days, just because of the vacation schedule.

So that typically tends to pull down margins in that quarter and it's always a little bit of a guessing game with regard to how much of that is actually going to happen.

In terms of bearing capacity constraints -- did I get to your answer on the first part of the question?

I guess if you could just -- maybe it would help.

Looking, the stock is down, I guess, around 10%.

So, obviously, I think I'm not the only one asking this question.

I'm just wondering if you could quantify, I guess, impact from different days from the restructuring.

If you could just put it in buckets to understand if there is, in fact, deterioration in core operating performance here or we just have a lot of noise and things will resume, we're just facing a speed bump.

I would say that there's absolutely no degradation in core operating performance whatsoever.

But can you quantify just a couple of items that are impacting the incremental margin in the second quarter?

The incremental margin being the gross margin.

No.

Incremental margin, what I'm doing, I'm looking at the change in revenue, change in operating profits versus the change in revenue and I guess what I'm looking for is just operating leverage indicator.

Part of the great story here is that you guys have delivered a lot of sort of bang for the buck as revenues went up and if I run through numbers for the second quarter, what I find surprising is, given the revenue increases, I would have expected more increase in operating profit than your guidance suggests.

And I think given where the consensus is, it seems that that's where the street is, as well.

And I don't mean to put words in other peoples' mouths, but I think that's what's really going on here.

We're just a little bit puzzled, I think, by the outlook for the quarter given the revenue growth.

Well, probably we shouldn't give guidance.

That's probably the right answer.

I think we don't see any degradation in core operating performance at all.

We have some divisions that are flashing us projections for the quarter which we don't quite understand.

Negative or positive?

Negative.

So we've rolled those projections into our overall analysis until we can sort of get to the bottom of their math.

Are there specific industries that stand out?

It's Europe.

It's Europe.

Europe is on vacation in July.

So in August we should have them all back together again.

Okay.

Thank you very much.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Walt Liptak with Barrington.

Please proceed.

Thanks.

Good morning, Dan and Mike.

Good morning.

Good morning, Walt.

Let me ask the similar question, but maybe in a different way.

How much were the moving expenses in the quarter?

In the Q1?

Yes, in Q1.

It was about $150,000.

Okay.

It wasn't big, but it should be a little bigger in Q2.

What's the estimate for how much it's going to cost?

Probably around $300,000 to $400,000.

And during the quarter, you talked about some of the new product development as you get into large diameter bearings.

Is there incremental R&D expenses or other costs related to large diameter?

We've just acquired two companies and be it their small, but like all these companies that we acquire, their margins aren't at our target margin level and it takes us 12 to 18 months to get them to our target level, where we'd like to see them.

So that's part of the erosion on margins.

And, thirdly, I think Mike already talked a little bit about Europe and we're still studying that.

But, no, the second quarter always is our slowest quarter.

I think we went through this last year when we were going into the second quarter.

You had low guidance.

You were cautious on Europe and then it's rendered better than expected and everything was fine.

How was Europe trending going into this slow holiday period?

The order demand is just fine.

It's not an order demand thing.

It's more to do with plant operating expenses, which we are currently investigating.

Okay.

And a question about alternative energy.

Are you developing product now for some of the alternative energy companies out there?

Do you have any sales coming from that yet and when would you expect to have something?

Well, Coastal does sell into that market now, as does Phoenix, Phoenix more in the gearboxes and Coastal more in the yaw and pitch bearings.

But it's a small amount, but it's a good place to start.

Good.

Okay.

Thanks very much.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Steve Barger with Keybanc Capital Markets.

Please proceed.

Good morning.

Hi, Steve.

To follow-up on that last question, are you getting inquiries from customers for other types of bearings and products beyond gearbox and yaw and pitch?

The answer is yes.

There's an exceptional amount of demand out there and not a great amount of supply.

So customers are coming to people like us for parts that we don't normally supply.

And is it your expectation that there's enough demand to support a CapEx move in that direction?

Are you considering entering into new markets to compete there?

Absolutely.

We have that under study now and we don't have any announcement to make today, but we are working diligently on a program there.

Okay.

Perfect.

And sorry if I missed this, but in the question before last, I think there was a follow-up in terms of capacity constraints.

Did you discuss that or are you seeing any significant capacity constraints that would prevent you from getting normal pull-through at a rate that customers want?

Constraints within RBC?

No, no, industry.

Right.

There's still constraints on large bearings and tires for the big mining trucks and for cranes and big earth-moving equipment and for oil.

I mean, there's plenty of constraints out there right now.

On the aerospace side, given the complexity of the supply chain there, if the OEMs decide to increase, do you think the supply chain can handle it or are they already stretched?

I think the supply support system now has a lot of demand on it and I think the aircraft people are balancing off the ability of that supply system versus the demand from their customers on the other side and trying to get something to meet in the middle.

There are certainly constraints in the aircraft side of the business and there's constraints in the bearing aircraft side of the business, also.

Right.

One last thing.

Sorry if I missed this, but did you mention how much revenue benefit you got from the All Power acquisition in the quarter?

No.

That's probably around -- let me just check -- about a little over $2 million.

So if you were trying to calculate our organic growth without heavy truck, we'd be about 8.5% to 9% of that 12%.

That's exactly what I was looking for.

And based on what you can see, and we know you want to grow industrial two times GDP, can you grow the entire business at high single digit organic from here or how should we think about that growth rate going forward, given that it's a lumpy business?

I think the story hasn't changed there at all.

Our objectives are to grow the aircraft defense business in the mid-teens and the industrial business, short of any major program that we might be talking about, in the two times GDP range, and the blend being someplace in the low double digits.

And based on the guidance that Mike gave on the sales for Q2 of $78 million to $80 million, that would be a growth range of 6.5% to 9.2%, but if you back out the Class A, that's a growth of 8% to 12%, in that range.

All right.

Very good.

Thanks, gentlemen.

At this time, there are no additional questions in queue.

I would now like to turn the call back over to Dr.

Hartnett for closing remarks.

Okay.

Thank you.

Well, I'd like to thank everybody for participating in the call today and we will speak again at the end of our second quarter.

Thank you.

Ladies and gentlemen, this concludes the presentation.

You may now disconnect.

Thank you and have a good day.