RBC Bearings Inc (RBC) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to today's RBC Bearings First Quarter Fiscal Year 2009 Earnings Results Conference Call. Just as a reminder, today's call is being recorded. With us today are Dr. Michael Hartnett, Daniel Bergeron, and [Adam Siegel]. At this time, I'd like to turn the conference over to Mr. Seigel. Please go ahead, sir.

Good morning. Thank you for joining us today for the RBC Bearings Fiscal First Quarter 2009 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 statements 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 conditions.

These factors are also described in greater detail in the press release and on the Company's website. 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.

Thank you, Adam. I'd like to welcome each of you and thank you for taking the time this morning to join us. As always, we appreciate your continued interest in RBC Bearings. Today, we'll follow exactly the same format as previous meetings. I will hit the high spots about our business and our financial performance. And Dan will fill in with some of the highlights of the accounting treatments.

This morning, we released our results for the first fiscal quarter of 2009. If you haven't seen our release, you can see it in more detail on our website. Overall, we were pleased with our results for the first fiscal quarter of 2009 and we are off to a very good start of what promises to be another strong year for RBC Bearings.

Sales growth for the quarter was 15.7%. Adjusted operating income growth was 11.3%. Cash flow from operations was $21.7 million. And free cash flow before acquisitions was $17.1 million. Late in the period, we announced the acquisition of Precision Industrial Components, which was made to complement our industrial product offering and expand our product offering into precision gears. Sales for the quarter of $92.4 million was driven by top-line improvements in most of our major markets. This represents a 15.7% increase from the same quarter last year.

Our Aerospace and Defense segment represented 54% of the total sales or $50.1 million. This segment achieved growth of 18.9% driven by the commercial aerospace market and continued expansion of our product offering and our content per plane. During the year, our content per Boeing airplane increased from approximately $75,000 per plane last year to over $90,000 per plane in fiscal 2008. Boeing currently has over 3,400 planes in their backlog.

Our Industrial segment, which represents 46% of our total sales or $42.3 million grew 12.2%, led by industrial distribution, which improved by 23.6% overall on a quarter-to-quarter basis and approximately 10% of that was organic growth.

Our gross profit was $30.6 million for the quarter, up over 11.3% from the first quarter fiscal 2008. Gross margin as a percentage of revenue was 33.1%, down slightly from 34.4% for the same quarter a year ago. And I'll revisit the reasons for this later in the call.

Operating income, of $17 million for the first quarter of 2009, increased 8% on a GAAP basis and on an adjusted operating income basis to $17.6 million, 11.3% over the same period last year. The adjustment is made primarily to identify the impact of start-up costs for our large bearing businesses, principally for the markets of oil, construction and wind.

First quarter GAAP net income was $10.7 million compared to $9.8 million for the first quarter of 2008. Adjusted net income of $11.2 million increased 14.4% over adjusted net income of $9.8 million for the same period last year. Earnings per diluted share were $0.49 on a GAAP basis and $0.52 on an adjusted basis for the first quarter of 2009 versus $0.45 on a GAAP and adjusted basis for the same quarter a year ago. This represents a year-over-year increase of 8.9% and 15.6%, respectively. Dan will provide more colorful comparisons to the quarter's adjustments later in the call.

Now, I'd like to speak for a moment about our gross margins. Last quarter, I told you we exceeded our internal expectations and delivered a gross margin expansion of 170-basis points in fiscal 2008 and that was up 620 basis points since fiscal 2005.

However, I also mentioned that we expect gross margins to decline slightly in the first half of fiscal 2009 to somewhere between 33% and 34%, as we work to integrate our recent acquisitions and expand our large bearing capacity. And this is what happened in the first quarter, as gross margin turned out to be 33.1%. Approximately half of this reduction was resulted adding four new companies during that period and, thereby, diluting the margin performance. And the other half is a result of product line start-up costs for the large bearing businesses.

Let's just talk a little bit now about current market conditions. Most of our primary end markets remain strong during the period. As you know, these markets are aircraft, defense, oil, construction of both large and small machinery and industrial distribution. The latter showed very good organic growth during the period.

And this strength is reflective of strong demand for our machine tool products in Europe, where there is a very solid industrial expansion underway in Switzerland, combined with the introduction of our offering of larger bearing products and our improved coverage of the U.S. market with sales and marketing people. In total, for the first quarter, our business demonstrated an order book expansion of 29.7% to $239.9 million from $185 million as of June 30, 2007. In fact, we saw this expansion continue in July.

With regard to our balance sheet, our debt, net of cash for the quarter ending June 2008 was $37.9 million, which decreased $9.9 million from March 29, 2008. We continue to see strong cash flow generation and remain confident that our cash flows from operations will continue to support our investments to expand our business and take the other initiatives that we have underway. Of course, with the excess cash, we intend to continue to pay down the debt.

In summary, we are very pleased with the result of the first quarter of 2009. We believe the progress made in 2008 on our expansion into large diamond or bearings, will positively affect our business as soon as this Fall. And we are encouraged by the continued inflow of requests for proposals from customers across our market spectrum. We remain confident that our current backlog in both aerospace and industrial segments combined with additional gains in these markets will continue to drive our organic growth during the year.

Once again, we are able to maintain a high level of service and assurance to our customers during what continues to be an extremely busy time for us. And again, I want to thank, personally, every member of the RBC team for the continued hard work and dedication to our customers. Now, I'd like to turn the call over to Dan and he's going to review the financials.

Thanks, Mike. Since Mike has already discussed sales and gross margin, I'll jump right down to SG&A. SG&A for the first quarter fiscal 2009 was $13.1 million compared to $11.3 million for the same period last year. As a percentage of sales, SG&A was 14.2% for both the first quarter as a fiscal year 2009 and 2008, respectively.

The increase of $1.8 million was mainly due to an increase of 1.2 million personnel necessary to support the increased volume and our expansion plans, higher stock compensation expense of $0.2 million and $0.4 million due to the inclusion of four acquisitions, Coastal Bearings, A.I.D., BEMD and Tech Design. Other net for the quarter fiscal 2009 was $0.4 million, which was flat with the same period last year. This mainly included facility moving costs of $0.1 million and $0.4 million of amortization of intangibles, which was offset by other miscellaneous income of $0.1 million.

Operating income was $17 million for the first quarter fiscal 2009, an increase of 8% compared to operating income of $15.8 million for the same period in fiscal 2008. Operating income excluding the facility moving costs and start-up costs associated with the expansion into large bearings was $17.6 million, an increase of 11.3% compared to operating income for the same period last year of $15.8 million.

Operating income excluding these items for the first quarter fiscal 2009 of $17.6 million was within the Company's quarterly guidance range of $17 million to $18 million. Interest expense net for the first quarter fiscal 2009 was $0.7 million, a decrease of $0.3 million from $1 million for the same period last year.

In the first quarter fiscal year 2009, the Company redeemed [15.5 million] of industrial revenue bonds and recorded a non-cash charge of $0.3 million for the early extinguishment of this debt. For the first quarter fiscal year 2009, the Company reported net income of $10.7 million compared to net income of $9.8 million for the same period last year. Diluted earnings per share was $0.49 for first quarter fiscal 2009 compared to $0.45 per share for the same period last year.

Excluding the after-tax impact of the facility moving costs, the costs associated with the large bearing expansion and the loss on early extinguishment of debt, net income increased 14.4% to $11.2 million in the first quarter fiscal 2009 from net income of $9.8 million for the same period last year. Diluted earnings per share excluding the after-tax impact of these items was $0.52 for the first quarter fiscal 2009 compared to $0.45 per share for the same period last year, an increase of 15.6%.

Turning to capital expenditures, we expect to be in the range of $15 million to $20 million in fiscal 2009, mainly driven by the expansion into large bearing capacity and our normal CapEx runrate. During the first quarter fiscal year 2009, the Company used approximately $6.6 million of cash to pay down debt, $6.6 million for the acquisition of Tech Design, $0.3 million for the repurchase of common stock.

Total debt minus cash on hand for the period ended June 28, 2008 was $37.9 million compared to $50.8 million for the same period last year. At the end of the first quarter fiscal 2009, the Company's net debt to total capital was 13.9% compared to 21.9% for the same period last year. I'll turn the call back to Mike now to discuss the second quarter guidance.

Thanks, Dan. I'd like to take a moment now and talk to you about what we see for the second quarter of our fiscal 2009. And we continue to remain optimistic about our core markets and we feel we have a very strong business plan for 2009, consistent with our management plan. And at this point, we have pretty good visibility to the balance of our year.

So we expect sales in our second quarter to be between $95 million and $97 million, which equates to a growth rate of between 21% and 24%. And we see operating income between $16.5 and $17.5 million. So now, I'd like now to turn the call back to the operator and answer any questions you might have.

(OPERATOR INSTRUCTIONS)

And our first question will come from Andrew Obin with Merrill Lynch.

Yes, good morning.

Good morning, Andrew.

Just a question about -- this is more a philosophical question about yield margin, as you continue to make investments and make acquisitions. Should we be thinking that the second half of the year, looking into next year, the margin improvement will be slower than in the past?

Yes, I think that's a good thought. I think I would use that thought, Andrew. I think to continue to build up the large bearing business, it looked to us like total charges for the year are going to be somewhere between $1 million and $1.25 million, which we consider investments. Basically, we have to hire engineering and manufacturing people before the volume. And so, we end up with that kind of investment.

But should I be thinking that the payback with the investment will be something of a step-function down the road? Or will this just continue because the Company is growing, which will just make it more and more investment?

I think that's -- I would think of it more as a step-function in the sense that once you make the initial investment and the plants or the machine tools are up and systems and the processes are what they should be to perform, you're over the hurdle. On the other hand, there's always new projects and new business that you're looking at to tackle. So, I'm not sure exactly how to advise you on that. I think we'll always be in the business of expanding our business.

And just a more technical question based on the acquisitions that you've made so far. What should I be thinking about full-year contribution from M&A in '09 and also 2010?

For the existing acquisitions?

Yes.

Well, I'll answer the next question. I'll let Dan work those numbers up for you.

Okay, thank you.

Anything further, Mr. Obin?

No. I'll just wait until the Company gets [back to me].

Oh, okay.

Andrew, I think that number would be -- just based on the acquisitions we just did over the last seven months -- it's around $20 million to $26 million of incremental revenue.

In '09?

No, no. In '10. In '09, it's probably close to $20 million.

So $20 million in '09 and another $20 million, 26 million in 2010.

Yes. And then if we do additional acquisitions, then, obviously, that's going to change that number [some].

Thank you very much.

And our next question will come from Peter Lisnic with Robert Baird.

Good morning. It's actually John Haushalter on for Pete.

Hi, John.

Had a couple of questions. First off, the second quarter guidance on the operating income line -- is that excluding the charge for the facility move and also any growth-related investments in large diameter bearings?

No, it doesn't.

Okay. And then, just if you look at the growth rate in orders for the quarter, I mean it was -- or the implied growth rate in orders, given the backlog number. I mean it was up, almost kind of 29%, 30%. How much of that was related to acquisitions? And what are the organic numbers both in orders and in your 20-plus% revenue forecast for the second quarter? What's the implicit organic growth forecast on that?

Well, I don't have it on the backlog number. But on the first quarter, on the order number, organic growth was just a little over 10%. And the second quarter, we're looking at that same type of growth rate.

Okay. And then just on the large-diameter bearing expansion, is that still the initial thrust in terms of the customer base is going to be oil and gas. And then kind of migrating over time to wind or areas that are little further away from what you do currently? Or are the quotes coming in from all across the board at this point?

Yes, certainly, oil and gas is something that we -- and construction is something we currently do. But, it's across the board. I mean there's a considerable amount of activity going into the wind business, both for the very large bearings and for the smaller bearings that go into other components of the turbine.

Okay. And when you say shipping in fall, is that just kind of a trial production run? Or that full revenue production from what you've invested there?

Oh, no. That's just the beginning of completing orders that we've taken for bearings that are working they're way through the system.

Okay. Thank you.

And our next question will come from Barrington. We'll hear from Walt Liptak.

Hi, good morning, guys.

Good morning, Walt.

I wonder if, going to the last question, if you could break out, in the organic, how much is price versus volume?

You know, Walt, we don't do that.

Okay. All right. And then, also following up on that last question with the backlog, if I back out, say $20, 25 million from backlog for the acquisitions, it looks like you're order book accelerated this quarter, which kind of contradicts what we've been reading about in the papers and seeing from some other industrial companies. What got better during the quarter?

What got better during the quarter? I mean, basically, all of our markets are very strong. And so we're -- despite what you're reading, we're seeing good demand. There's still bearing shortages in many of our major markets. So we're still seeing good demand coming in from those areas. We have a new program that we're starting up with a major engine maker for products that we typically didn't make in previous years, which will be a nice boost to one of our California operations -- a meaningful boost to those operations.

And in that regard, we were looking at what's in our backlog for aircraft products over the last month and for the commercial zone. And we looked at what we had on contract and what the large airframe builders had in their backlog. And in the large airframe builders, they're reporting backlogs that -- between Boeing and Airbus and Embraer and Bombardier, as the major big plane builders -- if you take what they're reporting as planes in their backlog and you take our content on those planes and you roll it through our numbers, we probably have less than $40 million of our backlog. It's reflected in our numbers and represented in their backlog, is over $400 million of our products. So, it's a very good situation for RBC.

Okay. All right. Thank you for that. And if I can ask about the Aerospace aftermarket, with Delta and American -- some of the routes being cut -- do you expect that that's going to have an impact on your business later on this year?

You know, actually, the aircraft aftermarket we saw last year was a little slower than it was the year before. And we didn't have any difficulty in replacing that business with other business that was coming in on other programs. And I suspect that if the aircraft distribution business becomes softer as the year goes out, I don't think we're going to have too much difficulty replacing it with other businesses coming in on other programs. So it's something that -- we're reading the papers, too and kind of wondering about it. But it's really a small part of our overall -- the MRO part of the aircraft distribution business is a smaller part of our total aircraft business.

Okay. Great. Thanks and great quarter.

Thank you.

And our next question will come from Steve Barger with KeyBanc Capital Markets.

Hi, good morning.

Good morning, Steve.

You talked about the guidance. It doesn't exclude charges. But should we read any material pressure issues into there? Or is it mixed? Or is the implied guidance more a function of start-up issues for large diameter bearings, in terms of the operating margin as a percent of sales?

I think it's both the start-up costs that are in there and also the integration of these four acquisitions that we're bringing the system that start off at lower gross margins and take us a good 12 to 24 months to get those margins to the levels that we expect those businesses to run at. But I think if you looked at the operating income at the low end of the guidance, it's around 17.4% of sales. And at the high end, it's about 18% compared to our second quarter last year, which was around 17.9% on a GAAP basis. So, that's kind of what's driving it.

Okay. As you're working to integrate these acquisitions, are you finding that the number of acquisitions, which is higher than you've typically done concurrently, has kind of taxed you beyond what you expected? Are you ahead of schedule or how has that processed played out?

Yes, I'd say the acquisitions are a little bit smaller than we had anticipated. They were sort of right in our sweet spot, so they were easier for us to justify internally in terms of actually doing them. But I'd say they were a little ahead of plan in terms of numbers, a little behind plan in terms of scale. And whenever you make an acquisition, it always tends to consume your management team and you have to make sure that you have enough management coming through the system in order to deploy them.

So we've had a very active program for a number of years, developing what we call our Manufacturing Engineering Training Program. And we'll have maybe 30, 40 people a year, either in the first year or the second year of that program coming through and being trained by various divisions. So we're pretty active in terms of developing our management. I don't think any company has what they consider enough good management. But you have to active in that area in order to be able to expand the business. And we are.

Okay. You talked about willingness to do bigger deals. And clearly, the balance sheet will support that. But the pattern has been a series of the smaller properties. Is it reasonable to think that we could see a bigger acquisition? And can you talk about deals crossing your desk with revenue above $30 million, if they're out there? Or what's that environment look like?

Yes, I mean they're out there. To this point in our history here, they have been more expensive. We haven't been the -- we've made bids on some of them. We haven't been the successful bidder. So we do see them. We're recently disciplined with regard to what we pay for them. And we want to make sure that they are aligned with our markets and strengthen our market position. So I would say that it's not impossible. I would say that, right now, we don't have anything of that scale on our desk.

Okay. And one last one -- how many facilities do you have right now? And what's the footprint going to look like when you're shifting capacity around? How do you see that playing out relative to the factories or facilities that you have?

Yes, I think we're probably up to about 23, 24 countries.

23, now. So I mean this one that we're looking at, it will just bring us down to 22. And you're always looking for the opportunity where we can to get the benefit of a consolidation.

Do you expect that you'll go below 20, at some point? Is that easy for you to see? Or is it too early to know what the final footprint -- or not final, but a future footprint could look like?

You know, I'd say it's unlikely, simply because there will be more acquisitions of some scale over the next 24 months. So on the other hand, it is possible that there's more consolidation. If you look at the businesses that we do have, they're very well aligned in the markets that we participate in. But they're very different in terms of the product design and manufacturing skills needed to produce their products.

So the integration of those facilities is not an easy thing to do because you don't have duplicate skills to be able to do it. On the other hand, because of that diversity, the pricing of those products is very, very much better because there isn't competitor pressures.

Great. I'll ask one more and then get back in the line. Can you talk about what the organic growth was in revenues and orders in 1Q and maybe what you expect for 2Q?

In orders, I don't have it in front of me. But I mean on order sales, it was a little more than 10%, organic growth in Q1. And we're expecting that same level in Q2.

Very good. Thanks.

(OPERATOR INSTRUCTIONS)

And we'll pause for just a moment. And our next question will come from Edward Marshall with Sidoti and Company.

Good morning, guys.

Good morning.

Good morning, Ed.

The implied margins on the operating income from the guidance, here, like we said, is about 17.4% to 18.4%. And generally, that's a seasonally weak quarter, anyway. Are we looking into it too much to say that $5 million to $6 million above the consensus in a revenue rate and kind of in line on an operating income? I mean we should just look at this of more of just a seasonally hard-to-predict quarter. Would that be accurate?

Yes, I think there's definitely some credibility to that statement. I mean the summer is always a difficult period in the manufacturing businesses because of shutdowns and vacations. And if you're doing business in Europe, it just requires a whole new level of understanding of shutdowns and vacations. So, it will be definitely more a production-constrained quarter on the sales and the margin side than it will be a sales-constrained quarter.

And I guess where I was leading with that question is we shouldn't see this kind of -- the margin compression that you're seeing in the first -- in this particular quarter -- as regards to operating margins, sequentially, to carry through as to be the new benchmark, going forward, for the rest of the year and into next.

No, I shouldn't think so. I think there is some dilution in the margin as a result of some of these new acquisitions. They don't have the margin powder as the businesses that we've owned for a long period of time and have improved have. And so there's some dilution there and we saw that dilution in the first quarter. And I shouldn't get any worse than that.

Okay. Thanks for clearing that up. I thought that would be your answer. You know, in your prepared comments, you talked about the gross margin compression in the first half of the year, between 33% and 34%. I thought that was kind of a year-end guidance in the first quarter. Has that been revised? Are we suggesting that the full-year may be a little bit better than the 33% to 34% range?

No. I think we'll be in that 33% to 34% range. I think that what we're trying to say is that it's probably a little weaker in the first six months and then we should see a little bit of strains come back in the second six months. And that's why we have that range of 33% to 34%.

Okay. Fair enough. And going back to Walter's question, it looks like some of the competitors -- or at least one in particular -- that announced some -- said there was some slow down in industrials. And I think you talked to it a little bit. But have you seen any weakness in industrial markets? And I know it's probably a quick turnaround, as far as that order coming in and the product being shipped. Can you kind of talk to that a little bit further?

Yes. I would say that, certainly in the first quarter -- we have only the first quarter in July to look at. And July is kind of a funny month in terms of order placement in our industry. So we look at it in the first quarter. We saw the competitor say the same thing. So we dug into our numbers to see if we could find it. We couldn't find it.

Good. Okay. Thank you very much.

Okay.

(OPERATOR INSTRUCTIONS)

And our next question will come from NWQ Investment Management. We'll hear from Martin Pollack.

Yes. Just if I may, maybe you could just explain how the -- when you say $40 million of current backlog on that commercial aerospace of [$400 million] where that number is the number actually that is on their backlog. Can you provide a perspective on the lead-time and how much of that business actually runs through in '09 or the next couple of years?

So, just if you have an idea of whether there is some visibility that is limited or just for a short period of time, so that if, let's say, deliveries next year are reduced as some of these backlogs are by the airlines are cut, does that translate into the same kind of cut back on your numbers -- essentially, on your revenue outlook? Just trying to get a better sense of that relationship.

Sure. Well, I mean if you look at what we see in our backlog now, which we are estimating -- and it's a rough estimate -- in the $40 million range. And you look at Boeing and Airbus and the other big manufacturers' backlogs and knowing what our content is per plane. And that's a number that, if you just roll it through, comes out somewhere between $400 million and $450 million.

Their plane backlogs are, on average, about five years. So in rough terms, that's about $80 million a year for us. Now, their production rates step up and there are mixed changes. And that change in mix favors us. So, I mean we haven't actually found the fulcrum on that yet, Marty. But we've been looking for it. So I think the $90,000 per Boeing plane that we have today, when the 787 is introduced in a serious production way, that moves to over $100,000 per plane, on average, for that mix.

So if you take the $400 million and divide it by five, that's $80 million a year. Well, some of that is backend loaded. We have $40 million in our current order book, based upon what we see for the next 12 months. But as people produce planes, they release more schedule to us. And we don't have a 12-month lead-time on bearings. We have maybe a 26-week lead-time on bearings. So that just keeps rolling through our order book. So that's -- I don't know if that helped.

You're suggesting, though, that the $80 million is the number that could happen, even though, at this point, you're limited by that shorter lead-time. It's about $40 million in business. You could actually see another $40 million potential revenues coming from that.

Yes, I mean we have probably $40 million in our backlog today. And none of these plane builders give us 12-month lead-time. So they're all around 26 to 30 weeks of lead-time. So I suspect that we'll see $70 million to $80 million rolling through this year.

And just on a defense side, just if you would, provide some comments on visibility there in terms of some of the programs you're on or that you think, basically, are going to come out now next year -- again, I guess fiscal '09. At this point, we're already in it.

Sure. Well, on the defense side of the business, we certainly have a very good position on the Joint-Strike Force Fighter, [VF-35]. Now, I don't have the exact numbers in front of me. But I think that that comes on in a significant way in about the 2012 time period. In addition to that, there are other systems that we're on in terms of guided munitions and vision systems for attack helicopters, which continue to be funded.

And there are other programs that we have that are significant programs that are reflective of, sort of, the remanufacturing cycle for some of the major troop carrying helicopters which, actually, have been pretty steady for us for, at least, the last ten years. We did see a surge a couple of years ago with what went on in the Mid East. But that surge moderated, maybe, 18 months ago. And it's just been normal volume since then.

Okay. Thanks so much.

Okay.

And at this time, there appears to be no further questions in the queue. I would like to turn the conference back over to Dr. Michael Hartnett.

Okay. Well, I would like to thank everybody for their interest in RBC Bearings today. And as you can tell, our agenda is still very full. And we're very positive about the full-year outlook. And we look forward to talking to you and briefing you again in the fall on our next conference call. Thanks for your participation.

That does conclude our teleconference for today. We'd like to thank everyone for your participation and have a wonderful day.