RBC Bearings Inc (RBC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 RBC Bearings Earnings Conference Call.

My name is Laura, and I will be your operator for today.

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

Later, we will conduct a question and answer session.

(Operator Instructions)

Once again, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Adam Sigel.

Adam, please proceed.

Good morning, and thank you for joining us today for RBC Bearings' Fiscal 2012 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.

Now, I would like to turn the call over to Dr.

Hartnett.

Thank you, Adam, and good morning.

We started our fiscal year of 2012 off on good footing, with solid growth in both of our industrial and aerospace and defense markets.

We continue to see strong order volume across most markets, with the exception of defense.

Our business managers continue to perform well on execution including manufacturing methods improvement, price management, business contracting, cost reduction and material planning.

I'm pleased to report today that the Company is well positioned for a very nice second quarter.

During the first quarter, our sales were $93.3 million, an increase of 13.3% over the same period last year.

Operating income was $17 million, versus $14 million a year ago.

The strength of our industrial markets continued through the first quarter, with sales for our industrial products up 11.9% on a year-over-year basis.

The increase was driven by strong demand from both distribution and OEMs, with year-over-year growth of 12.9% and 11.5% respectively.

If we exclude military vehicles the industrial markets grew 30% year-over-year and industrial OEM, an impressive 38% compared to the same period last year.

Our major markets continue to respond well to our product offering, support and service levels.

Sales of industrial products in the period represented 54% of our total revenues, and aerospace and defense at 46%.

We remain impressed by the strength and breadth of our industrial market demands.

As an example of what's happening in one of our markets, today the need for equipment to support oil and gas recovery is probably the best it has ever been.

And it looks like that environment, given the capital plans announced recently by the major oil company is here for an extended period of time.

We are very pleased with the acceptance of our new products for these applications, and see this as a productive area for further development.

As I stated on my last call, there is continued strong demand for our bearings from our traditional core industries.

These include large construction and mining equipment, industrial distribution, semiconductor machinery, heavy trucks and consumable, or machine tool products in Europe.

Relative to our aerospace products, these markets grew 15% in the first quarter compared to the same period last year.

Positive developments in the aircraft market continue.

I think all of you are aware of the extraordinary order rates for new planes that major builders such as Boeing and Airbus have seen.

Planned production rates for these companies are now projected to grow for commercial aircraft as follows.

Boeing delivered 462 aircraft in 2010 and plans to deliver 691 in 2013, a 50% increase.

Airbus delivered 510 planes in 2010 and plans to deliver 675 in 2013, a 32% increase.

In addition, new entrants in this market from Brazil, Canada, and China placed additional demand on the manufacturing infrastructure that supports this worldwide industry.

We continue to be active, productive and participative in all of these regions.

This demand is explained by the continuing worldwide growth in revenue passenger miles each year, at an unrelenting compounding rate of 5% per year and the replacement of aged fleets.

To support our European customers, we continue to expand our European engineering and sales structure and have become more and more integrated into Europe's design and manufacturing base.

We have respectable positions on existing aircraft, where unit volume is growing and are very well positioned on the A350 ship, which is moving through the design phase now.

We are busy at the prototype and testing phase on several components of this aircraft and are expecting to achieve record content per ship when it is introduced in 2013.

These planes makers continue to survey our plans to be certain our capacities are sufficient to support their needs; a very encouraging signal.

In this regard, we are implementing strategy to protect deliveries and reserve capacity in the face of what will be unprecedented demand for our largest and most important customers.

Further encouragement can be seen from our 12 month booking history for aircraft products, where our 12 month rolling average on bookings is 42% of July 2010.

We considered -- we continue to see considerable improvement in our sales through our aircraft after market distributors, as we're expecting this sector to grow -- to show continued growth over this year.

Our first quarter order rate for this sector was more than 30% greater than the first quarter last year.

We ended the first quarter of fiscal 2012 with $206.4 million in backlogs, compared to $167 million in the same period last year, and $196.7 million at the end of fiscal 2011.

Gross margin performance for the first quarter was 34.1% compared to 31.9% for the same period last year.

This is an improvement of 2.2 percentage points better than last year's first quarter.

As we discussed last call, our internal priority is to add one to 1% to 1.25% of gross margin in fiscal 2012 over '11 an additional 1% for 2013.

These margin improvements are the result of improved pricing on new contracts as well as process improvement and, of course, greater production volumes.

Looking ahead, we expect the second quarter of fiscal 2012 to look very much like the performance we've seen the first quarter, perhaps a little better.

The summer quarter is normally a seasonally weaker period, it looks like this year will be an exception.

I will now turn the call over to Dan, who will provide you more color on the quarter and the full year.

Thanks, Mike.

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

SG&A for the first quarter fiscal 2012 increased $2 million to $14.5 million, compared to $12.5 million for the same period last year.

As a percentage of net sales, SG&A was 15.6% for the first quarter of fiscal 2012, compared to 15.2% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase in personnel related items and higher professional fees.

Other net for the first quarter fiscal 2012 was a loss of $0.3 million, compared to income of $0.3 million for the same period last year.

For the first quarter of fiscal 2012, other net consisted of $0.4 million of the amortization of intangibles, offset by miscellaneous income of $0.1 million.

For the same period last year, other net consisted of a gain of $1.1 million on the sale of assets, offset by $0.3 million of amortization of intangibles and $0.5 million of other expenses.

Operating income was $17 million for the first quarter, fiscal 2012, an increase of 21.1% compared to operating income of $14 million for the same period in fiscal 2011.

As a percentage of net sales, operating income was 18.2% compared to 17.1% for the same period last year.

Income tax expense for the first quarter fiscal 2012 was $5.6 million, compared to $4.2 million for the same period last year.

Our effective income tax rate for the first quarter, fiscal 2012, was 34.5% compared to 31.8% for the same period last year.

The difference in the effective tax rate year-over-year was mainly due to $0.5 million of tax benefit taken in the first quarter last year, associated with the conclusion of the Company's IRS audit.

For first quarter fiscal 2012, the Company reported net income of $10.7 million, compared to net income of $9.1 million for the same period last year.

Diluted earnings per share was $0.48 for the first quarter fiscal 2012, compared to $0.41 per share for the same period last year.

Turning to cash flow, the Company generated $12 million in cash flow from operations in the first quarter fiscal 2012, compared to $15.9 million for the same period last year.

Capital expenditures were $2 million, compared to $2.1 million for the same period last year.

We expect our capital expenditures to be approximately $11 million to $14 million in fiscal 2012.

In the first quarter of fiscal 2012, we paid down $30 million on our revolving credit facility, leaving the Company with total debt of $1.1 million compared to --

(Operator Instructions)

-- total debt by $50.1 million.

I would like now to turn the call back to (inaudible) question and answer session.

(Operator Instructions)

Your first question comes from the line of Peter Lisnic, company not mentioned.

Thank you.

Company not mentioned equals Robert W.

Baird.

Good morning, everyone.

Good morning, everyone.

Good morning.

Peter.

I guess the first question, if I look at the gross margin -- good leverage in the quarter, I'm just wondering if you can maybe give us a sense as to where price cost was in the first quarter and what sort of the outlook is that you've embedded in that 100 to 150 basis point improvement that you're planning on for the year.

Peter, are you asking how much is in price and how much is in amortization of fixed?

No, I'm just wondering the price versus commodity cost relationship.

Whether or not you're seeing any commodity costs that you cannot recover and what the impact of that might be?

Or, are you neutral at this point and not all that concerned that you won't be able to recover inflation?

You know I think -- the commodity cost is certainly not neutral.

I mean, we're seeing an increase in costs on all the commodities.

Normally that's -- we've put ourselves in a situation where that's very manageable because most of our contracts where there is significant material intensity have collars on them, where if we exceed -- if the material content of the product exceeds a certain agreed upon collar, then we will either adjust the price or surcharge the differential to the customer and that's basically for most of our major contracts, that's the way we organize them.

The -- for the parts of the Company that aren't under contract, the pricing is really based on maybe published price sheets or effective at the time of order placement so it's manageable if you're alert.

Okay, good on that.

And then if I look at the industrial business up 30% or so, ex military vehicle, pretty -- obviously very robust growth.

Any lead time or supply chain issues that you're having on your end trying to meet that demand for your customers?

Well, certainly the -- there's supply chain issues associated with the availability of steel today.

So we've had to do some out of the ordinary things to make sure that our steel supply was sufficient and some of the inventory growth you'll see on our balance sheet is a result of putting in sort of a strategic steel positions into these plants that -- to buffer the availability of that commodity.

Also, the -- in many cases the subcontracting supply base is becoming saturated and so we have to bring on new subcontractors to supply a lot of our pre grinding and finishing for many of the plants.

So, it's certainly not business as usual, but it's manageable.

Peter?

It says that he dropped off of the queue.

Would you like to take the next question, sir?

Yes.

All right, your next question comes from the line of Edward Marshall.

Edward, please proceed.

From Sidoti and Company, I'm sorry.

Hi, guys.

Hey, Ed.

Hello, Ed.

Prior cycles, when I look at the aerospace business, you've reached kind of growth rates of 20% plus.

I think there's a few things going on there, but you look like you're starting to approach that range.

What are your thoughts kind of on how fast your aerospace business is going to grow, because I think you had some pretty good commentary on that?

Well, in certain plants where we supply the products directly to the commercial airlines, we're a little concerned that the demand of product for those plants is going to exceed the plant's capacity.

And so, we -- we're wrestling with concepts of how to manage through that and protect important customers in the interim.

So we're adding capacity to the extent that we can, as quickly as we can in those plants, but clearly, I think this aircraft business will have -- create more demand than we're going to have capacity in some sectors of our business.

What does that -- if I think about that, what does that do to the margin structure for you guys?

Because I initially I would imagine you're running a pretty much -- I won't say 100% capacity because I think that's tough, but you're running all out.

I mean, that's got to be a positive for kind of your margin structure.

But at the same time, I think what you're saying is you may have to outsource some of that work which could have kind of a little bit of an alternative effect.

How should I think about that?

Yes, we're probably not going to outsource the finished product.

Okay.

That's something we normally do.

We're probably going to have to develop more subcontractors for the input side of the plants.

Or expand some of our -- our relationship with some of the subcontractors that we have, and we're actually doing that.

And we're putting this certain subcontractors that we have onto a -- onto a program so that we make sure that we have product available when we need it, even if it's outside the normal planning demand profile.

I think the -- I think it's -- it's a nice problem to have and to work your way through it.

I think the -- if you look at the [paradox] of your revenues for any one of these businesses, 80% of your revenues are with 20% of your customer base.

So those customers are very core and important and strategic normally.

And so, you need to come up with a strategy to satisfy their needs and their demands by increasing your capacity and by being very close to them in terms of planning requirements.

So, that's exactly what we're doing right now.

20% of your revenues that are generated by 80% of your customers are probably -- fall more into the opportunistic pricing regime than it does strategic planning and logistics management.

In your industrial business, it seems its holding in there.

The commentary that you are hiking production to kind of meet demand I thought was particularly interesting in the press release.

So no apparently slow down here for you guys?

I mean, you guys seem to be somewhat conservative when it comes to production.

So anything you can kind of add to that?

Yes, no -- we're not -- we are not seeing any slow down at all.

And I think it's because of the markets that we serve.

I mean, certainly the mining sector that we supply product to is driven by the value of those basic commodities which is now very high and so the demand for products from Caterpillar and other guys that make that equipment is as good as it's ever been.

The oil and gas, I think everybody knows what's happening in the oil and gas world these days and they're just finding oil and gas all over the united states and everywhere there -- they're poking holes everywhere the environmentalists let them poke holes to get at it, and so there's a lot of equipment being used and built and redesigned and improved to supply that sector and we're certainly part of that.

And I think the interesting thing through is that the broad and general industrial sector that consumes the MRO requirements to support bottling and packaging and beer canning and all of those kinds of industries throughout the country is still very well.

Is doing very well in its demand profile is good for us.

So, I can't say that we're seeing what others are reporting.

As promised, you didn't break out the large bearing facility in the quarter, the start up costs associated with that.

What was the impact for the gross margin on that particular facility?

Yes, in this quarter Ed, it was about $770,000.

Compared to last year about $872,000 and compared to the fourth quarter about $741,000.

As we said, we're not breaking it out because we think everybody understands that story.

And as we discussed the last conference call, the goal this year is to get that to a cash flow breakeven through fiscal year 2012.

And of that $770,000, about 50% of it -- a little less than 50% is non cash.

So, depreciation.

So, if I do the math quickly, it looks like its closer to 35% from a gross margin perspective, if we ex that out.

Is that about right?

Yes, on a comparable adjusted basis to the fourth quarter, yes, they both came in at 34.9% from that standpoint.

And about $0.02 hit to the bottom line?

Yes.

And then, you made some comments, Mike, about oil and gas.

I think before you've said it's about 5% of revenue.

Where do you see that going?

I mean, you talk about market share gains there.

Let's see.

Let me just run some numbers here.

Yes, we'd like to - we'd like to see it holding to last year's revenue constant, we'd like to see that double to 10% of last year's number.

Double.

By when, do you think?

Tomorrow?

Our plan is to do that over a 30 month -- 36 month period, but we seem to be a little bit ahead of plan.

Interesting.

And then you talked about record content coming in with the Boeing -- new Boeing plans -- or planes.

What is your content now and where will that go?

Well, I talked about the record content on the A350, and we talk about our historical content on a 737 being in the $80,000 to $90,000 per plane range.

And it looks like the 350 could be in the 120 to 140 range.

And the 787 is certainly in the 120 to 140 range.

So, theoretically with these new plane roll outs, you should see -- and just by the sheer size of the plane itself, you should see your content per aircraft delivered should go up.

Yes, well it's based on size and the fact that a lot of what we produce are staples to the manufacturer of the plane.

But at the same time we've -- there's a lot of design effort here going into new components that we would manufacture for these planes, which are not historical statements for us.

And lastly, I guess, by the condition of your balance sheet.

Where the debts gone where the cash balance has gone, I imagine that your thirst for acquisition continues, multiples we know have gotten heightened and you're probably waiting -- selectively waiting for them to come in.

But in the meantime I mean you've got what's now becoming an abundance of cash from historical standards, high class problem, I understand, but what are the other thoughts that potentially have crossed your mind as far as the uses of those cash dollars?

Well it's certainly -- the primary use is directed towards our acquisition strategy and a productive and sizeable acquisition would certainly consume most of that cash.

So I think -- I think it's not a lot of cash in terms of where we're trying to bring this business.

our problem has been that the private equity boys these days seem to be able -- seem to be willing to play in excess of 10 times EBIDA or anything that's associated with the aerospace business, whether it's a commodity product that has no intellectual property protection or not.

And so until that era ends, I just don't think we're going to be chasing companies to that level of valuation.

Okay.

Next quarter when you report an equally good quarter, try not to do it -- try not to pick a day when the markets down 2.5%.

Thanks, guys, good quarter.

Thank you, Ed.

(Operator Instructions)

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

Fred, please proceed.

Yes, good morning.

Morning, Fred.

Morning, Fred.

Can you talk about -- you indicated that your Q2 should look similar or slightly better than your Q1 with the seasonal pattern mitigated somewhat.

Looking at the Q3, to the extent you have improving visibility with these strong orders, would you expect that to be the case as well -- where I mean you're just seeing such strong demand on both sides of your business that you'd see a complete offsetting of your normal seasonal pattern through this year?

You know, Fred, it could happen.

I think the problem we wrestle with in the third quarter that we've been able to solve in the second quarter, usually the second quarter is tainted by vacations and the third quarter is tainted by holidays.

We kind of worked our way through the vacation issue in many of our plants.

I don't know how we're going to work through the holiday issue.

That remains to be seen --

That might be a morale problem.

Right.

The demand is certainly there, but whether or not we're going to be able to -- after we've bought so many vacations out, people may want to take a few days off.

So it's -- the demand is there, Fred.

If it's not not a great -- as good a third quarter as it is a second quarter,, then all that demand will roll into the fourth quarter as it normally does.

Got you.

And just kind of probing into Ed's question about use of cash and acquisitions.

Can you provide us with any more specificity about -- it sounds like you're really targeting aerospace, can you just give us any more details?

Last quarter you spoke in more detail than I'd heard you in a while about acquisitions, which leads me to believe that you've been getting close on some, do you have any further comments about where you are in that process?

We're looking both at aerospace and industrial and its -- I think what's important to us in terms of an acquisition is the -- we'd like to acquire a company that fits into our marketing strategies and helps us in certain of our markets or has some unique production skills that we don't have that would enhance our ability to service our existing customer base.

And we see candidates like that and we're actively discussing purchases of these businesses with a number of different candidates, but it takes a long time.

And in some cases you're talking to private owners that are a little resistant at actually -- taking a check and walking away from their baby.

And in other cases, you're talking to investment bankers who are crating auctions that w just never seem to do very well in because the prices get out of control.

So, we're active.

So far its -- it's the end of the fifth inning and we don't have a man on base yet.

But the game isn't over.

Okay, that helpful.

Do you think -- I mean, I guess it's kind of obvious, but is the capacity constraint high class problem that you're running up against factoring into your acquisition strategy?

Yes, it absolutely is.

To the extent that there're candidates that fit that bill, we sort of move those candidates ahead a little bit.

But there aren't many bearing makers out there that do what we do.

And so, I think that game is pretty much over.

So it's going to be -- there are process people there that can help with our structure that's -- that would be interesting to us and there are a few and right now they're a little small but they're probably - they're probably convertible.

Okay and then maybe just to pick on the one sort of lukewarmish aspect of the quarter.

The defense business sounds like it's just flattish and I guess the reasons are fairly obvious -- but it's there anything there -- any opportunities there or any opportunity to shift your strategy in defense, maybe related to foreign military opportunities or anything like that that would give you reason to see potential improvement on that side of the business?

The defense is flat, but stable.

And I think one of the strategies here is to work more on the MRO side of supplying the ships that are out there and have to be maintained so we're -- we have active programs on that and they've been effective and have generated good revenues for us.

It's -- in terms of which program in the future of - to choose, certainly the Joint Strike Fighter has gotten -- has our attention and we think the funding for that is safe.

There are several other programs in that category which we rate as being safe and sort of beyond the budget axe of Washington.

So I mean that's what we're focused on right now.

And I just don't think -- I think that'll be a stable sector, but it's certainly not going to be a growth sector during this presidential administration.

Okay.

And then, finally, just on the large bearing facility, you quantified the impact on gross margin.

Can you talk a little bit I guess qualitatively about what's going on there and are you starting to ship some product there?

I know you've been looking at alternative paths other than wind there.

Can you talk about that at all?

Thank you.

Yes the -- well I -- we are looking at other industrial uses for that business and we are finding them.

We're developing them.

The cycle time is for these developments to convert it from a design need to a invoiceable product is a few years, and so we have several programs ongoing right now that look convertible.

I think relative to the wind, I think there's certainly going to be no energy policy created between now and 2012 -- created indorsed and funded between now and 2012.

That's just not going to happen.

And unless there's a change in administration that's liable to go on to 2016.

So I think if that's the case, I think the wind business in the United States is in trouble, and we'll just have to see which way the political winds blow.

Okay.

Thank you, very much.

Your next question comes from the line of Walt Liptak.

Walt, please proceed.

Hi, thanks.

Good morning, guys.

Morning, Walt.

Most of my questions have been asked, but I wondered if we could just get a couple things like the expectation for tax rate this year?

Yes, I think, Walt, around 35 to 35 and a half.

Okay.

And you mentioned capacity constraints, I wonder if you could talk a little bit bout CapEx plans.

Yes, well I think, surprisingly I think our CapEx requirements this year and next will be modest and probably just normal.

You won't see any bulges in our consumption of capital equipment.

That's just not part --

Okay.

It's not part of our strategy.

Okay, so you did about -- spent about $2 million in the quarters that are the run rate for the full year?

Yes, I think I'm -- when I went through my part of the introduction, Walt, we're forecasting $11 million to $14 million.

In that range.

Okay, great.

For the year.

Okay.

And the working capital, I guess looked nice during the quarter and free cash flow.

Is there -- as you're production ramps, especially in aerospace, are you going to be a cash user this year?

Or, do you expect for the full year to generate operating cash - or, I guess like a free cash flow number?

No, I think we'll definitely generate some nice free cash flow.

We did invest a little in AR this quarter, obviously with the sales number compared to where it's been.

And we put a little more into inventory to bring in some additional raw material, and just to start building for the ramp that we're going through.

But I still think we're going to be looking at that $40 million to $50 million of cash flow from operations, and maybe $11 million to $12 million of CapEx in that.

Okay.

And maybe the way to ask it, though, is on the working capital items.

Are working capital accounts cash user this year because of the production?

Well, assuming -- assuming a $90 million per quarter run rate for each quarter going out which says that the receivables shouldn't have to be funded any further.

There may be inventory builds because of the way our order book is filled out quarter to quarter.

In other words, if you have $10 million worth of capacity and you have $8 million worth of orders in one quarter and $12 million in the next, you might want to run your quarter's plant wise at $10 million and $10 million, and take the lumpiness out of the operation.

So, we do have some of that going on.

But I don't think there's going to be a material build in inventory through the balance of this year.

Maybe $4 million or $5 million is probably the number.

And in the first quarter, Walt, we invested about $2 million into working capital.

So, when you get the cash flow statement you'll be able to see that.

Okay, great.

-- [follow] the 10-Q.

Okay, great.

Thanks, very much.

Your next question comes from the line of Ed Marshall from Sidoti and Company.

Please proceed.

To follow up on Walt's question.

If you're not building facilities to meet capacity, I'm assuming its people.

Is it extra shifts or is it overtime or training?

And what cost comes -- I mean, or new people.

And what kind of cost associated with all of those should we expect as we bring them on?

Well, those costs will be reflected in the gross margin when it gets all rolled up.

And so, we're not expecting any determination in gross margin.

But when you talk about contribution margin on additional sales, and you wonder why you're not getting $0.50 on the dollar or whatever your goal is, those are some of the reasons.

Okay.

And when I go back to your guidance of 100 basis points to 125 basis points this year and 100 basis points next year of gross margin, I just wanted to be clear on something, the large bearing facility, I know it wasn't broken out in the quarter but we talked about it.

Does that include that?

So, you're looking at those margin assumptions from a GAAP perspective?

From a GAAP perspective.

Okay.

That's our internal target so --

Okay

-- hopefully like every year we can exceed our internal target.

Right.

Okay, great.

Thanks, guys.

Yes.

There are no further questions at this time, I'd like to turn the call over to Dr.

Michael Hartnett for closing remarks.

Okay, well thank you.

So in closing, I'd like to thank everyone for their continued interest and support of RBC Bearings, for participating in today's discussions, and for making RBC Bearings part of your investment strategy.

We'll all talk again at the end of our second quarter.

Good day.

Ladies and gentlemen, that concludes today's conference you may now disconnect, and have a great day