RBC Bearings Inc (RBC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 RBC Bearings earnings conference call.

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

At this time, all participants are in listen-only mode.

We will be conducting a question-and-answer session towards the end of the conference.

(Operator Instructions)

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

I will now turn the presentation over to your host for today's conference, Mr.

Adam Sigel.

Please proceed, sir.

Good morning, and thank you for joining us today for RBC Bearings' fiscal 2011 first quarter 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 condition.

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 would like to turn the call over to Dr.

Hartnett.

Thank you, Adam, and good morning.

I'm pleased to report that our first quarter continued to show improvements in order volumes that was started in the fourth quarter of our last fiscal year.

During the first quarter, our sales were $82.4 million, an increase of 29.3% from the same period last year.

Adjusted operating income was $13.9 million versus $8.5 million a year ago.

Cash flow from operations was strong at $15.9 million for the first quarter of 2011 versus $16.8 million during the same period last year.

I'm pleased to report that we have finally reached the point where we have more cash in short term investments on our books than debt.

Our cash and short term investments totaled $37.9 million at the end of the first quarter and our debt was $31.4 million.

The strength in our industrial market continued to the first quarter with sales of industrial products to OEM were up a remarkable 132% year-over-year, and sales to industrial distribution followed with a 40% increase on the same year-over-year comparison.

Sales of industrial products in the period represented 54% of our total revenues this quarter.

A major driver in our OEM sales increase this quarter was the sale of RBC proprietary-bearings products developed for ground offense.

Because of their extreme durability, these products quickly became preferred for several ground defense military tactical vehicles.

Our Q1 order rate for these bearings was very strong.

And we spent much of the quarter responding to these increased demand.

Sale of these products represented about $7.8 million during the period.

Our demand for industrial OEM products net of these defense items was up over 70% for the period from last year.

We expect to see continued demands for these bearings for ground defense equipment throughout the year but at levels that become more moderate with time.

We were encouraged by the strength of our industrial markets and see sustained strong market demand in large construction and mining equipment, industrial distribution, semiconductor machinery, military vehicles and machine tool products in Europe.

Whenever the purchasing manager's index is above 50, volume expansion has been historically demonstrated by our business.

In the trailing quarter, the PMI was reported to be over 55 and industrial expansion in the US during the period is currently estimated to exceed 7%.

These are very proud numbers and obviously good news for the environment an industrial company like RBC operates within.

In the aircraft and defense side of our business, sales dropped 8% from last year.

This year-over-year drop was mainly due to lower demand from the aircraft aftermarket and the commercial business jet market.

We see some positive developments for these markets as a result of the announced plans to step up production of the 737 ships from today's 31.5 rate per month to 35 ships per month beginning in 2012.

Also there's a planned -- an announced increase of the 777 production from two seven ships per month from the current four ships, and that's expected to take place this year.

We see firming deliveries of the 787 and also there is parallel sets of news relative to the airbus mix of planes and we see increasing flight hours for the business jets.

So that factor looks like it's coming back over time too.

And all this optimism is built on the projections that air traffic will double over the next 15 years.

And let's hope they're right.

We've discussed in previous calls the importance of these ships to our business performance and strategies.

I continue to expect that our fiscal '11, the aircraft aftermarket and distribution demand will continue to improve modestly each quarter.

Relative to company margin performance, gross margin for the quarter on an adjusted basis was 31.9% compared to 31.2% for last year.

This is an improvement of 0.7%, percentage points better than last year's first quarter.

As I've said in our previous call, I expect this improvement to increase throughout the year.

And we expect to achieve more historic levels demonstrated by RBC in past times.

Adjusted operating income was $13.9 million or 16.8% of sales versus $8.5 million or 13.3% of sales last year.

Looking ahead, we expect the second quarter of fiscal 2011 to be close to the first quarter, perhaps as little lighter, mainly driven by fewer production days due to the summer season.

On a year-over-year basis, the second quarter should provide good leverage for our cost base with noticeable improvements falling to the operating income line.

I'll now turn the call over to Dan, who'll provide more color on the quarter.

Thanks, Mike.

Since Mike's already discussed sales and gross margin, I'll jump down to SG&A.

SG&A for the first quarter fiscal 2011 increased to $0.9 million to $12.5 million, compared to $11.6 million for the same period last year.

As a percentage of net sales, SG&A was 15.2% for the first quarter of fiscal 2011, compared to 18.2% for the same period last year.

The increase in SG&A year-over-year was mainly due to a $0.6 million increase in personnel related items and higher professional fees and a $0.3 million increase in incentive stock compensation expense.

Other net for the first quarter of fiscal 2011 was a gain of $0.3 million, compared to a loss of $0.5 million for the same period last year.

This was mainly comprised of a $1.1 million net gain on the sale of assets offset by $0.3 million of amortization of intangibles, $0.4 million in bad debt expense, and $0.1 million of other cost.

Operating income was $14 million for the first quarter of fiscal 2011, an increase of 80.6% compared to operating income of $7.8 million for the same period in fiscal 2010.

Operating income, excluding costs associated with the expansion to large bearing products and a net gain on the sale of assets, was $13.9 million, an increase of 64%, compared to an adjusted operating income for the same period last year of $8.5 million.

For the first quarter of fiscal 2011, the company reported net income of $9.1 million compared to net income of $5.1 million for the same period last year.

Diluted earnings per share were $0.41 for the first quarter fiscal 2011, compared to $0.23 per share for the same period last year.

Adjusted net income was $9.2 million in the first quarter of fiscal 2011, compared to adjusted net income of $5.3 million for the same period last year.

Diluted earnings per share adjusted was $0.42 for the first quarter of fiscal 2011, compared to $0.25 per share for the same period last year.

Turning to cash flow, Mike has already hit on some of these numbers.

The Company generated $15.9 million in cash from operating activities in the first quarter of fiscal 2011, compared to $16.8 million for the same period.

Last year, capital expenditures were $2.1 million, compared to $4.3 million for the same period last year.

The Company reduced debt by $7 million in the first quarter fiscal 2011.

Total debt for the period end of July 31, 2010 was $31.4 million, compared to $68.2 million for the same period last year.

And the Company ended the quarter with $37.9 million of cash and short term investments on the balance sheet, which succeeds our total debt by $6.5 million.

I would now like to turn the call back over to the operator to begin our question-and-answer session.

(Operator Instructions)

We will stand by for our first question.

Your first question comes from the line of Edward Marshall from Sidoti & Company.

Please proceed.

Good morning, guys.

Thanks for taking my call.

Yes.

Good morning, Ed.

In previous quarters you've given us the industrial order trend.

Can you give it to us, for both OEM and distribution business, so we can have an idea of how those orders trended?

Is it close to the sales number or -- assuming they're relativity quick book-and-ship type orders?

Yes.

I think the industrial distribution business is probably right on the sales number, Ed.

And the industrial OEM business is -- I don't have that exact number here, but it's greater than the sales number.

So some of those entered backlog then, I guess.

Right.

Okay.

The military vehicles that you were shipping on -- did any of that enter backlog in the quarter?

Is that a backlog type of order?

Just probably a small piece in the backlog, Ed, but nothing too material because it comes in and goes out pretty quickly.

And you mentioned several vehicles, can you talk about which vehicles these are?

I'm assuming they're MATVs, MRFs weapons?

Well, they're ground defense vehicles.

And without doing too much targeting for my competition here, Ed, it's pretty much across the board.

I mean everybody know who built those vehicles, and where they are.

But it's pretty much across the board for people to build those vehicles.

Okay.

And then, we've talked about in the past capacity constrained.

As volume start to come back, are you nearing towards capacity or some of the cost structure will go up?

Can you comment on that in any direction?

No.

I think we're not near capacity in terms of machinery.

I think we won't see a substantial requirement to increase capitalization -- CapEx for equipment.

We're well capitalized to execute.

I think it's a matter of adding hours and adding materials and maybe training some additional people.

So I'd say we're significantly below our capacity constraint.

Are you running second or third shifts at this point?

No.

Light second in some plants.

There's plenty of room to grow there.

So the cost structure won't necessarily come up as fast as the sales number could?

That's right.

Thank you.

Your next question comes from the line of Peter Lisnic from Robert W.

Baird.

Please proceed.

Good morning, every one.

Good morning, Peter.

Good morning, Peter.

I guess, first question, I may have missed this, but on the aerospace aftermarket side, can you tell us what the count was in the quarter on a revenue basis?

No.

We don't break that out and give that number.

Just aerospace and defense total was down 8% year-over-year.

Okay.

But probably it's safe to assume, given what we've seen from other competitors, that that aftermarket number is probably down?

Yes.

It's at least flat.

I don't know if I'd expect it to be down too much.

It might be down a little.

I think it's still being compared against a fairly weak quarter.

Okay.

All right.

Then as you look forward, that comparison along with this, I guess, it's getting a little bit better.

How does that impact the gross margin and the operating margin outlook that we should have, presumably that's perhaps higher margin business.

So should we see better or higher incremental than what we've seen in the past few quarters as that higher margin mix business gets better?

Yes, the aircraft business, as the volumes recover there, the margins gets better.

That's nothing.

Okay.

And is there -- can you give us a little bit of a ballpark plan in terms of how much better?

From an incremental basis, is that business 30%, 40%, 50% incremental margins compared to the industrial?

How should we -- how do we think about that?

Yes, well I think the -- on a consolidated basis?

Yes.

Yes.

That's a tough one.

I think we're pretty much driving towards a mid-30 gross margin number, whether we get all the way there this year or not remains to be seen.

But certainly, the increase we expect to see in the aircraft volumes would be wind in our back.

Okay.

Perfect.

And then just corollary to that question would be there obviously has been spending to get on some of these programs and gain content.

What is the outlook there in terms of spending for the rest of '11 and into '12?

Is that a step up in terms of spending, a step down, and how that might play out would be helpful as well.

We saw some spending in the first quarter that won't recur.

I think it was modest.

I'm not sure that it would have any significant effect on your numbers of your projections.

I don't see any significant startup expenses that aren't funded by our customers in future quarters of this year.

Okay.

All right.

That is very helpful.

Thank you very much for your time.

Your next question comes from the line of Fred Buonocore from CJS Securities.

Please proceed.

Yes, good morning.

Good morning, Fred.

Just a follow-up on Peter's question about the aftermarket.

I think you were talking year-over-year comparisons.

But as it relates to the aerospace after market on a sequential basis, did you start to see a pick-up in orders from the last quarter?

A small one, yes.

Okay.

And then -- oh go ahead.

We do see some improvement in that sector.

And we have a very good understanding of what our customers' requirements are.

And so, we see -- we definitely see that sector getting a little better each quarter through the rest of this year.

Very good.

And then, on the large bearing facility, can you give us an update on where we are there in terms of -- are you starting to ship a little bit more, get some more orders.

I realized the domestic wind turbine market is a little bit challenged, but there might be -- maybe there are opportunities for you to get on some programs for -- in Asia, where there's been a lot of growth in that area.

Yes.

Well, I think in terms of the domestic wind market, right now, we don't -- there's not a breeze blowing.

And so, I think the market is stalled.

And I think it -- until there's some legislation that helps the wind energy become a little bit more subsidized or cost effective and that's -- that will be the case.

We watch closely those -- that legislation and relative to the progress its making.

So we are working with a number of customers in the wind business today.

We continue to add customers over the period.

We're still in the engineering and sample phase relative to that sector.

We don't see it contributing at all this year to us.

We're using the capacity that's installed there to service other industrial markets.

But the lead time to start up on with -- and those are highly engineered products.

It takes some time to gain the approvals and gain the design initiative, and start-up the production.

And that's the phase that we're in right now.

Well, it won't be a contributor.

Okay.

That's helpful.

And then finally, just on the acquisition with your balance sheet now and the net cash position and you haven't financed a transaction in a number of months, I'm wondering if you're starting to see opportunities, maybe even for some larger acquisitions.

Yes.

I would say that the -- we're active in reviewing opportunities.

We do see probably more than we've seen in the past.

We have small opportunities that have presented themselves, which we worked on.

And we haven't been able to be successful in the offers yet.

And we see -- we do see larger opportunities that we are working on currently.

And whether it will be successful there remains to be seen.

They are attractive.

Very good.

Thank you very much.

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

Please proceed.

Thanks.

Good morning.

Just a follow-on to the last question, what -- with your cash position and the balance sheet in great shape, could you give us an idea of the priority for acquisitions and maybe the deal size, and what kind of pricing multiple you're looking at?

Yes.

The deal size ranges from the small to the, for us, the intermediate-sized and the (technical difficulty), but close to $100 million range.

The immediacy, was that another part of your question?

Yes, just how high priority is that for usage?

Well, we're canceling vacations to make trips.

Is that high enough, Walt?

Yes, okay.

Fair enough.

Pricing, are prices reasonable?

What kind of multiples are you willing to pay?

Well, we're willing to pay a reasonable multiple if we see good synergies and we were convinced that the acquisition will help us in the marketplace some way and position us better with the -- in certain markets we'd like to grow in.

So the multiples have been high, highest that I've seen in terms of what people expect to sell their business is for.

It's a little surprising.

I think the 7-plus EBITDA multiple is not unexpected in this market right now.

Okay.

Yes, thanks very much for that.

And the product types you're looking for are bearings.

Bearings are a great way to get started.

They're not exclusively bearings, but bearings certainly gain our attention right away.

Okay.

Great.

Then on the -- with the stronger demand, I wonder if you could talk a little bit about the material costs.

Are you seeing material costs come up?

And your product pricing, have you instituted price increases this quarter?

We try to institute price increases every quarter, Walt.

That's part of managing the business.

But we see reasonable stability in material costs right now.

So that hasn't been an issue.

I think the industry, in some sectors, has announced price increases recently in the, oh gosh, 5% to 7% range, which are general increases across certain market sectors.

And we're discussing internally whether we're going to follow suit this year or not.

Okay.

Got it, okay.

Thanks very much, great quarter.

Thank you.

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

Please proceed.

Good morning, everybody.

It's actually [Joe Baxton] for Steve.

Hi, Joe.

I'm just hoping to dig a little bit more into the aerospace numbers.

This is actually the second quarter in a row where you've seen sequential backlog growth.

It seems like the year-over-year declines and backlog growth are starting to narrow significantly.

I'm just wondering, would it be reasonable to expect to see positive year-over-year sales comps or sales growth, I should say, in 2Q versus last year, just on the aerospace business?

We just don't have that in front of us, Joe.

Joe, I don't think so.

I don't think it's -- I think it's probably going to be flat with this quarter if I had to guess.

So flat sequentially relative to 1Q, but do you think that it'll be relatively up over the prior year?

I think the prior year was, early week, it probably -- I don't know.

Joe, I don't know.

We'll have to get back to you on that.

I just don't know.

Okay.

That's fair.

I have one follow-up on the defense side.

Obviously, there're a lot of moving pieces going on there with your large contract that's rolling off and some headwinds on the budget side, probably offset somewhat continued share gains and your PAR.

Can you just maybe give us a little bit more color on how we should think about the defense environment this year versus last year, how net-net it's going to shake out?

Yes.

Well, for us, the defense environment is going to be stronger net-net.

We're going to probably trade some air defense for some ground defense.

And I think this will be a dollar-to-dollar gain on the ground defense side.

But I think next year, if we look at defense next year, I think there'll be -- the net gain will come back to air defense.

Although we see some of the positions that we're on in air defense, those volumes are declining slightly.

We also see -- and have been working for several years on increasing our mix in certain ships.

And we're being very successful there.

We're optimistic for next year.

Okay.

And just a follow-up to that, Mike, if you exclude -- I think it was $7.9 million that came in the first quarter on the ground side.

Right.

Would you still expect your defense business to be up for the full year?

Not much.

It might be flat if you exclude that.

Okay.

There're a lot of parts there.

There's a lot of different -- there's a lot of different companies that we have that -- I think different parts of that.

And some are going up, and some of it's going down.

That's a bit hard -- a little bit difficult to answer.

But I would expect it to be -- if you exclude that $7.9 million, I expect it to be -- I would expect it to be flat to up slightly.

Okay.

Thank you, guys.

(Operator Instructions)

Your next question comes from the line of Samuel Eisner from Sterne Agee.

Please proceed.

Good morning, everyone.

Good morning, Sam.

Good morning.

I have a question about the distribution -- industrial distribution business.

You mentioned that was up about 40% year-on-year.

Is that all self grew or are distributors actually building inventory at this point?

That's self grew.

So no restocking coming forward.

Is that fundamental demand or is it just a little bit of restock.

It's fundamental demand.

For us, in terms of the size of the overall bearings distribution market, we're fairly small.

And so, relative to the larger guys that are supplying those -- that industry, the product that they buy from us normally passes right through the market and isn't stocked or it's not stocked very deeply.

Okay.

And then, just going forward -- and Fred has touched on this, the cash position.

How do you guys plan on outgrowing your end markets?

It seems as though that the industrial has rebound and you guys are doing well there.

Aerospace is still kind of weak, but it should rebound.

What's the plan going forward to pass -- surpass your previous peak levels?

What's the plan?

The plan is -- for industrial, or aerospace, or overall?

Just total company.

Total company.

Well, if I talk about the -- start with the aerospace, the plan on aerospace is to penetrate more applications and more -- and introduce more new products.

So by penetrating more applications, first of all, the aerospace volume in the Boeing ships, the 787, 737, we talked about 777, we have large new applications on the 777 that we haven't enjoyed in previous years that retooled.

And we're starting -- we're in production on.

And we're down the learning curve on manufacturability.

So as volumes come in those existing ships, the work of previous years will now start to pay dividends because we've expanded our mix on those ships.

We're also introducing new products in the aircraft side of the business that have to do with both airframe and engine, but they are in either have-been-recently-approved or in their final stages of approval.

That will be significant for us in terms of future revenues for both commercial and defense aircraft.

On the industrial side of the business, we've targeted certain large OEMs as strategic partners for us because of the -- our engineering and manufacturing capability or products that they use in a lot of -- and most of our competitors are also the competitors for these large OEMs.

Though it's hard for these OEMs to align with our competition because in doing so, they lose control of their intellectual property.

But we try to identify who those large OEMs are and decide whether or not our offering is -- and our abilities are consistent with their needs.

And if they are, we work pretty hard to trying to establish a relationship.

And we've been fairly successful with large -- some large industrial OEMs in that regard over the past 24 months.

And that tree should bear fruit in the next 24 months.

On the industrial OEM -- on the industrial distribution side of our business, we have -- we are in the process of reorganizing our sales force.

Although we have more feet on the street, industrial distribution sales people are calling on targeted accounts.

And those accounts have been identified using a certain screening process that tells us where the business is and how likely that mix will fall across the lines that we currently offer.

So that's a pretty active program.

And it's in its initial stages right now.

And it seems to be reasonably productive.

Though we have -- we're hitting on all cylinders in all these major markets there, Sam.

And I'm pretty confident -- I'm highly confident that we're going to be in a normalized 3% EDP growth economy that we're going to be very successful.

That's very helpful.

I appreciate that.

And just a quick cleanup question on the tax rate, tax rates seems to be down year-on-year and down sequentially.

Is there anything structurally different about your tax structure going forward?

No, we should be in that -- for the rest of the year around that 35% rate.

But our effective rate in the first quarter is around 32%.

And that was impacted with by about a $0.5 million of unrecognized tax benefits due to the completion of an IRS tax examination for fiscal years 2007 and 2008.

So without that discreet item, the effective tax rate would have been around 35%.

Thank you very much.

Excuse me?

He said thanks.

Oh, thank you.

Sorry.

Your next question is a follow-up question from the line of Edward Marshall.

Please proceed, sir.

A couple of follow-ups here, the expanded mix that you discussed on the aerospace side of the business, is it -- can you give us a little bit of guidance as to -- sorry to use that word, but a little bit of guidance or directionally-speaking about the -- can you grow faster than the production rates?

And if so, what -- at what multiple of production rates?

Ed, if I had an answer, I would -- I'd have this job so dialed in.

I'd have my feet on the deck.

Yes.

I think our goal is to grow faster than the production rates.

And I don't know how much faster.

I mean we -- what we do is we target certain areas of the ship where we feel that are fruitful areas for us to invest engineering and development efforts, fruitful in the sense that, if achieved, it generates a significant amount of revenue for us.

And we also try to identify, why us, for that particular position on a mature ship.

And does the market need us?

Does the customer need us?

Is our relationship with the customer one that is so strong and beneficial that we can -- that if we invest the engineering efforts and development efforts that we'll benefit from a contract award?

In some cases, that box gets checked off.

And it's green.

In some cases, it's not green.

For example, our ability to support a sophisticated application in Europe on a platform that we might have a lot of expertise on in the United States would be lower than it would be in the United States just because of our infrastructure and our design and our manufacturing people here for that particular application.

On the other hand, if you look at Boeing commercial aircraft in Seattle, we're just a Gold Star vendor in terms of our performance at that kind of an account.

And so, we work very hard to maintain extremely good service levels.

Though, we're the go-to-guy when there's a new design or there's a problem that occurs.

So that's important to us.

So getting back to your -- how many significant new product applications do we have in the works right now, it's a dozen.

It's more than a dozen.

And they're highly selected.

And they're well chosen.

And a lot of them are in the advanced stages of development.

So yes, we've got to grow more than market can grow.

And I'm sure we will.

I guess you're explaining your strategy for additional programs as we go forward.

And I'm asking a little bit -- somewhat backwards saying, "Well, how have you executed on a strategy in the last year or so?

And therefore, how's your content per aircraft on?

And does the growth rate, going forward, offer production?

And how much faster could we look at the market?

I mean, is your content going up to 110 per ship set on the Boeing aircraft?" Maybe we can discuss that a little bit.

I think you've given us those numbers in the past.

Yes.

It's certainly on the 777 or 787, the new ship.

It's significantly above that.

So it's been good.

Getting content on an airplane is years and years and years of work.

And you need to be there when the plane is designed and built because getting back-engineered into something is 10 times harder.

And certainly, for the 777 -- the 787, we've been there.

Okay.

And then, on another question that was asked, switching gears a little bit, you said last air defense this year, more ground defense.

Is either of those better margin than the other?

It's hard to answer that.

It's hard to answer from the standpoint that this ground defense business is -- has rolled-in so quickly that I don't think we're completely stable from the manufacturing cost perspective.

In other words, you've got to -- usually you -- this is a business where you have a theoretical cost.

You win the award.

And then, you work your tail feathers off trying to get the actual cost to converge to the theoretical cost over a few quarters.

And that's certainly where the ground defense thing is right now.

On a mature program, I would say they're about equal.

Okay.

And then, you also mentioned about the air defense picking back up.

Is that because ground defense falls of a little bit as we rush orders this year?

Or is that something like the aircraft at the JSF or something like that that's coming out next year that you have some additional content on?

Well certainly, the JSF is -- we're one year closer to the production of the JSF.

And we're certainly going to pop the champagne cork when that thing gets in production because we're -- our content is high.

But at the same time, for the more conventional air defense systems, we've done a lot of mix development -- application development work that's coming to fruition this year.

It'll increase our content and the existing platforms.

Okay.

Excellent.

Thank you, guys very much.

There are no further questions at this time.

This does conclude the question-and-answer portion of the call.

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

Michael Hartnett for closing remarks.

Okay.

Thank you.

In closing, I want to thank everyone for their interest and support of RBC Bearings and for participating in today's discussion.

We'll talk again in a quarter -- in another quarter.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.