RBC Bearings Inc (RBC) 2012 Q2 法說會逐字稿

Good day and welcome to the second quarter 2012 RBC Bearings earnings teleconference.

My name is Candace, and I'll be your coordinator for today.

(Operator Instructions) I will now turn the presentation over to your host, Mr.

Adam Sigel.

Good morning and thank you for joining us today for RBC Bearings fiscal 2012 second 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 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 would like to turn the call over to Dr.

Hartnett.

Thank you, Adam.

Good morning.

I'm pleased to report today that the second quarter of fiscal 2012 was the company's strongest quarter lead performance since our IPO in August of 2005.

The first 6 months of fiscal 2012 are off to a good start, with strong organic growth in both our diversified industrial and aerospace markets.

We continue to see solid order volumes across our key markets.

We continue to see solid order volumes across our key markets.

We expect to see the same strength in our results for the next 6 months with the exception of some seasonality in Q3, which is normally the case at this time of year.

This is the result of the limited number of business days in the accounting period.

The excess days in the fourth quarter will normalize this measure.

During the second quarter, our sales were $97.8 million, an increase of 17.6% over the same period last year.

The strength of our industrial markets continued through the second quarter, with sales of our industrial products up 17.8% on a year-over-year basis.

This increase was driven by strong demand from both distribution and OEMs, with year-over-year growth rate of 12.7% and 19.7%, respectively.

If we exclude military vehicles, the industrial markets grew 21.2% year-over-year and the industrial OEM, an impressive 24.7% compared to the same period last year.

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

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

Last call we discussed the strengths and breadth of demand for our served industrial markets.

I'm pleased to report that the demand picture today remains as strong now as it was then.

The market demand leaders in this sector continue to be mining, oil and gas, and general industrial distribution.

These markets are responding favorably to our introduction of proprietary new products used in everything from tracking equipment and drilling stands to fracture-resistant suspension components and self-adjusting zero clearance spherical plain bearings for high speed rails.

I'm amazed at the diverse number of new designs for innovative machinery under development in the United States and Europe today, where we are seeing our products being incorporated.

There's a renaissance taking place in the world today that involves the design of a new generation of equipment to support new technologies and improve the efficiencies of old ones.

We are seeing this equipment being developed to service oil and gas production.

We see machinery under development to supply substantial amounts of nuclear energy for China and India.

We see more efficient equipment being designed to burn natural gas as a fuel for power generation and gas turbines.

There are numerous designs being created worldwide by companies for construction of sophisticated ground defense transport equipment, and we see substantial infrastructure improvement projects underway to repair or build new dams and bridges, as well as support a worldwide use of high speed rails.

To me, these are very encouraging signs for the future of our industrial product franchise, where this strong organic growth dynamic being demonstrated has been the result of years of continuous product development and innovation, for and with the right customers in well chosen markets.

We are active in every one of these markets and continue to expand our new product introductions measurably in these sectors.

Relative to our aerospace business, these markets grew 17.4% in the second quarter compared to the same period last year.

The positive developments in aircraft markets that we spoke about last call continue here also.

On a year-over-year -- on a year-to-date basis, the book-to-bill ratio at Boeing is above 150%, and at Airbus, as a result of outstanding showing at the Paris air show, now has a year-to-date ratio above 300%.

As a result, Boeing plans to build 20% more plans in calendar 2012 than calendar 2011.

Airbus plan increases about 15%, but they're increasing their mix of larger planes.

As you can see from our second quarter results, this industry performed well for us.

Today we are noticeably busier than we were even 3 months ago, working on projects, proposals, contracts, and new products for the numerous industry constituents.

The announced increase in production build rates for aircraft, as well as the delivery of the 787 aircraft, has quickened the industry's pace further.

Manufacturing capacity worldwide is being measured, rationed, and taxed to support these demands.

Relative to RBC, we are carefully reviewing our order book relative to client base, given our current and projected capacities to ensure our best clients see no disruption in service levels, and our manufacturing efficiencies are not compromised as a result of loss of economies of scale due to poor industry planning or capacity constraints by our competitors.

We ended the second fiscal quarter of 2012 with $216.2 million of backlog, compared to $175.3 million for the same period last year.

Gross margin performance for the second quarter was 34.8% compared to 32.8% for the same period last year.

This is an improvement of 2 percentage points better than last year's second quarter.

As we discussed on the last 2 calls, our internal target is to add 1% to 1.25% of gross margin points in fiscal 2012 over '11 and an additional 1% in fiscal 2013.

For the first 6 months of fiscal 2012, we are 1.7% gross margin points better.

And this exceeds our internal target for the year.

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

Looking ahead, we expect the third quarter of fiscal 2012 to look very much like the performance we saw in our first quarter.

The third quarter is normally seasonally weaker as discussed, but with that said, we should still see double-digit growth rates in the third quarter of fiscal 2012 over the same period last year.

I'll now turn the call over to Dan who can give you more color on the quarter.

Thanks, Mike.

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

SG&A for the second quarter fiscal 2012 increased $2.2 million to $15.2 million compared to $13 million for the same period last year.

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

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

Other net for the second quarter of fiscal 2012, was expense of $0.4 million compared to expense of $0.4 million for the same period last year.

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

The same period last year, other net consisted of $0.3 million of amortization of intangibles and $0.1 million of other expense.

Operating income was $18.4 million for the second quarter of fiscal 2012, an increase of 30.3% compared to operating income of $13.9 million for the same period in fiscal 2011.

As a percentage of net sales, operating income was 18.8% for the second quarter of fiscal 2012, compared to 16.7% for the same period last year.

Income tax expense for the second quarter fiscal 2012 was $6.2 million compared to $4.5 million for the same period last year.

Our effective income tax rate for the second quarter of fiscal 2012 was 35% compared to 34.4% for the same period last year.

For the second quarter fiscal 2012, the Company reported net income of $11.6 million compared to net income of $8.6 million for the same period last year.

Our diluted earnings per share was $0.52 per share for the second quarter fiscal 2012 compared to $0.39 per share for the same period last year.

Turning to cash flow, the company generated $5.2 million in cash from operating activities in the second quarter of fiscal 2012, compared to $9.7 million for the same period last year.

Capital expenditures were $5.5 million in the second quarter of fiscal 2012 compared to $2.5 million for the same period last year.

We expect our capital expenditures to be approximately $12 million to $14 million in fiscal 2012.

The company ended the second quarter fiscal 2012 with $49.5 million in cash and $1.2 million of debt on the balance sheet.

I'll now turn the call back to the operator to start the Q and A session.

Thank you, sir.

(Operator Instructions)

Edward Marshall, Sidoti & Company.

Hey, guys.

Good morning, Ed.

So, I guess I'll start with, maybe if I could just ask for the gross margin, which was pretty good in the quarter.

But, I understand you're still having a drag from the Houston facility.

And, I know you're not breaking it out any longer, but I'm curious as to what that number might be.

Yes, for the 3 months ended this quarter, $797,000 compared to last year of $638,000.

Okay.

And then, with the industrial business being so strong and considering what the ISM is doing, it looks like you guys are bucking the trend a little bit, especially with the military vehicle drag.

And I'm curious if there's something new, other than maybe the gas and oil in that business.

Is it pricing?

Is it heavy truck?

Help us understand why that business consistently grows in the teen range or above.

I think the growth element as a result of our industrial businesses are probably coming from a number of different sources.

I think number one, oil and gas is one of the sources, as you mentioned.

And there, it's pretty much the introduction of new products in the product lines are being well accepted, and so, actually, we're taxed right now capacity-wise in terms of being able to produce enough for that sector given the interest in the product offering.

So oil and gas has a strong component to it.

We see the -- RBC's base business, the general industrial component, is -- we've opened warehouses in -- new warehouses in Chicago.

We're in the process of opening a new warehouse in Dallas to support locally the product requirements of our customers in those -- and that part of the system is working extremely well.

And so we're picking up business as a result of having local service levels.

We're seeing some pre -- as you can tell, the heavy truck side of the business, which is a smaller part of our business, but it's still the demand side of that business, ripples through a lot of the, what we call, other aspects of our industrial product lines.

And that's been strong and steady and up.

And so, I'd say it's the base franchise that was there 10 years ago, is doing well.

And, on top of that, we're adding new products in important sectors.

The oil and gas business, I think you mentioned at one point it would be a $10 million run rate.

And you're running at capacity now.

Yes, we're running more like $15 million, and we're hoping to -- we have an objective of getting that to $30 million.

To $30 million.

So it's running well above plan.

Yes.

Excellent.

Good backlog.

I don't think aerospace is maxing out now, and you just hit a record sales quarter in a seasonally weaker quarter here.

Is this a new level of run rate?

And, more importantly, what kind of capital do you need to build out your capacity here?

I know you talked about $12 million to $14 million for fiscal '12.

But, looking forward, you're probably taxing your capacity pretty much across the board.

Well, as it turns out, the capital that we need seems to be adequate for the service the demand.

Our capacity is more limited by the human side of the equation, than it is by the capital side of the equation.

I think we have plenty of capital of equipment.

And we add as required appropriately.

But having enough trained people and enough management, engineering support of those people, and to have that on other shifts, is a big project.

And so, that's where the work is probably the most intense right now.

I think in terms of our current human machine steady-state capacity in the aerospace business, we currently have more capacity than we have current sales for.

So we're good on that measure in terms of where we are today.

But I think everyone is genuinely worried, who is in this industry, given the build rate and given the future outlook for demand, that -- does the industry truly have the capacity it needs in all these different component areas to support Boeing and Airbus' objectives and Embraer's and Bombardier's and Gulfstream's and Cessna's.

And so, we're using that excess capacity today, where appropriate, to build excess inventory for customers that we have long-term supply agreements with, where that supply agreement is exclusive.

Are you shipping that product?

We are not.

You're not.

Okay.

And then, I guess, listening to what you're saying and talking about the fact that you're over capacity in the aero side, is there a headcount drag on the gross margin so that your margin would be above that 34.8%, talking about temporary and full-time employees, that are probably coming on and having some training costs associated with it?

Yes.

There's always that.

We definitely need to be adding more people, even though we have adequate capacity today, to meet next year's plan.

Next year's plan, we're going through that now through our planning cycle in terms of revenue for these business sectors.

And doing the best work we can to identify what the demand drivers are going to be for these various aircraft businesses, and it's clear that we need to add staff.

But, while we have capacity, we should build out the product that we were obligated to deliver to these key customers, because it's not always going to be the case that we're going to have that excess capacity.

So, the 100 basis points of improvement and the gross margin that you intend, take all that into account, and through your guidance on those two lines.

Right.

Perfect.

Thanks, guys.

Walt Liptak, Barrington Research.

Hi, thanks, guys.

Good quarter.

And I wanted to ask about some of the Boeing and Airbus orders and wondered if you could talk a little bit about your content per plane on Airbus, especially since the orders have been very strong, especially for their A-320 series of planes.

Walt, I would have to give you that number separately.

I don't have it broken out right now.

We look at Airbus and how many planes they build and what our content is for all of Airbus.

But we don't break it out for any specific plane, with the exception of the 380 because we have so much content on the 380.

But, that number I don't have fresh in my mind.

Okay.

But, if I recall, your content per plane was higher on Boeing planes versus Airbus.

I wonder if you could get us up to date with where you are on content per plane.

Yes, I think for the Boeing planes, if we look at last year, we're somewhere between $85,000 and $90,000 per plane.

I think the 787 is probably going to be 70% more per plane than that number, so we might be in the $120,000 to $140,000 range.

And the A-350 will be -- we'll have substantial content on the A-350.

It should be a content that's in the $70,000, $80,000 per plane range.

Okay.

And, Dan, you mentioned inventory build.

I wonder if we can get some of those balance sheet accounts, inventory, accounts receivable, accounts payable.

Inventory is $67.2 million, we'll file the Q tomorrow, but $67.2 million -- AR, I mean, sorry.

And inventory $155.2 million.

So, from the year end, AR is up about $7 million.

Inventory is up about $10 million.

And it's offset by the increase in payables and accrued liabilities.

Okay.

And if I could ask one about the gross margin.

You talked about gross margin targets for this year.

And the kind of improvement in basis points you expected to get.

And it appears that gross margin is running a little bit ahead of what I was expecting.

Could you bring us up to date on what you thinking is now on gross margin/

Well, you know, our original target for the year was about 1.25 points on top of where we ended last year.

Last year we ended at 32.7%.

So, we thought we'd end this year around that 34% range.

And, my guess, we'll be a little north of that 34% range.

Okay

And then, still with the ability in fiscal year 2013 to add another percentage point.

Okay.

Great.

Thanks.

(Operator Instructions)

Anna Kaminskaya, Bank of America Merrill Lynch.

Good morning guys.

I just wanted to follow up quickly on the Texas facility.

Maybe you could provide us an update on the outlook for the next year.

Are we still on track to be break even?

And, where are we in the process of converting capacity to industrial products?

Sure.

I think our plan is to be pretty much break even with that facility next year, either coming through the first quarter or after the first quarter.

And that would be the result of moving some of the -- converting some of the proposals that we have for the Houston plant into orders.

And moving other manufacturing demands that we have on other RBC plants into Houston.

So, there's a two-step process, and we're planning our way through that right now.

Okay.

And, maybe you could give us more clarity on what drove the step-up in CapEx in the second quarter?

Is it retooling of the Houston plant?

Or is it something else?

Just because of one --

Our normal CapEx is running at that normal 3.5%.

But, we acquired one of our buildings, our manufacturing facilities and land, that was under lease.

And so it came on the market at a very good value.

So we took advantage of that situation.

That accounted for about half the CapEx expenditure in Q2.

Okay.

So, somewhat unusual.

Okay, And also maybe you can update us once again on your acquisition pipeline.

I know you talked about some potential opportunities in Eastern Europe, maybe smaller ball tons in the US.

Where are we in the process?

And, maybe, has the recent market volatility translated into more attractive multiples?

Thank you.

I'll let Dan take that one.

I think the situation is still the same.

There's a bunch of little ones that we're looking at.

And we hope we can get converted.

Some of them are here in the United States.

Some of them are in Europe.

And some of them are in Eastern Europe.

And so there's really not much more to report on that.

From a pricing standpoint, there hasn't been too much a change from what we've been seeing over the last 4 to 5 months on these type of deals.

And, the deals that are going to investment bankers and auctions, the pricing still seems to be on the high side.

Thank you very much.

Good quarter, guys.

Thank you.

Steve Barger, KeyBanc Capital Markets.

Good morning.

I had to hop off for a second, did you give any color around price versus volume relative to the top-line increase?

And, even better, can you break that out by segment?

We just don't do it that way, Steve.

We just don't keep the books that way.

Did you take price actions in the quarter?

Or is the mark -- you're talking about being capacity-constrained on the industrial side.

Are you trying to push through price a little bit to maybe fund future growth initiatives?

Or how are you thinking about price?

Well, yes, I think on the industrial side, there's maybe 2 different strategies going on there.

On the industrial side, particularly in the industrial distribution sector, there's normally a price increase annually that's in the -- historically been 4% to 5% or 6%.

And we would expect to see something like that announced early in our first quarter of next fiscal year.

Right.

So that's -- and then on a customer-by-customer basis where we see contracts either rolling over, we might look at that mix and decide which part of that mix needs to be improved or pruned as a result of pricing.

And then, what we need -- where we need to be, to be competitive on some of these programs one way or the other.

So, I would say there's been a bias to move pricing up given the volumes and demands.

And certainly the best way to move pricing up is to have extraordinarily good service levels.

And a proprietary product.

Right.

And so we really work hard on the service level point of view because that's extremely important to pricing.

And having a proprietary product that solves a customer's problem uniquely is another very good way.

So that's really how we focus the industrial strategy.

The aircraft strategy isn't too much different other than more of the business is typically done on a contractual basis.

And a lot of the contracts -- I mean there's -- a lot of the contract periods now are rolling over.

And some of these contracts were placed, sometimes 3 to 5, even 6 years ago.

And so I would say that going forward some of these contracts, there'll be substantial changes in pricing.

Got it.

I guess to that point, you're bumping up against $100 million in revenue per quarter, nice milestone.

And then markets hold up as they seem to be, you'll surely be there regularly in FY '13.

And I know mix matters, but what do you think your dollar capacity is?

Can you ship $110 million?

Where do you think about limiting out on a capacity standpoint across the organization?

The capacity of the existing organization?

Yes.

Quite large.

Pardon?

We have a big production base.

And we have service plants in Mexico.

And we have a lot of subcontractors who support the business.

So, I would say our production base is quite large.

It's probably in the order of 25% or 30% bigger than where we are today.

That's great.

Any more color you can give on the aerospace aftermarket given some of the pressure there?

Or just how are you thinking about capacity cuts with the carriers and what that might mean?

You know, the aftermarket has been -- we see most of the aftermarket players spending most of their time trying to service smaller OEMs.

And so, even when we talk about our aftermarket sales, most of those sales are still going to smaller OEMs who are supporting the aircraft builds.

So I think the big flywheel driver in the aerospace business today is the OEM business.

Okay.

I mean if the aftermarket contracted by 10% -- and that's defined as the users of spare parts or old parts or MRO parts, to support those planes -- I don't think anybody would even notice it.

Got it.

And, one last question and I'll get back in line, on the aerospace side, what are you seeing on the defense business right now?

And can you remind me what defense platforms you're most levered to?

We're seeing a very steady defense demand for the aircraft side and even the ground defense side has been steady-eddy quarter to quarter.

We're not seeing growth.

We're not seeing shrinkage.

We're seeing sort of steady results.

The programs that we're tied to, it's a little bit confidential.

But the Boeing helicopters are important to us.

The Bell helicopters are important to us.

Some of the engines that go into these helicopters are important to us.

The missile systems and weapon systems out of Lockheed and Raytheon are important to us.

And the United Technology people are important to us.

So both engines and helicopters.

So we're sort of spread across that client base.

But, more on rotary wing versus fixed wing.

Yes, yes.

That's right.

All right.

Thanks.

I will get back in line.

Gregory Macosko, Lord Abbett.

Yes, thank you.

With respect, if I may, relative to your product lines, the plain ball and roller, et cetera.

Roller was down and the others were up.

Just, help me understand the dynamics there and what the outlook is on the ball side.

I realize it's small, but still --

What happens is these segments cut across the 2 main industries, right?

So, on the roller side, it could be flat due to heavy truck and things on that side of the business.

And, on the ball side, it could be related to defense and also industrial.

So, it's hard to look at it from that segment side and say, okay, well if aerospace has grown at 20% how is the ball bearing segment going to do?

Okay.

I see.

And then, with regard to the incentive stock comp expense, that went down modestly.

Is that a number that just varies?

What does that vary relative to?

Why was it down?

You had a nice quarter.

Our options that we issue under our incentive stock compensation plan vest over a 5-year period.

So, this is probably the end of the cliff of the first few years of vesting on those options that were issued in 2006 and 2007.

So that's part of it.

It's not off that much.

For the quarter, it was $854,000 compared to last year of $1,000,013.

So, on average, we run about $1 million a quarter.

And that's where we going to end up.

It will probably be a little lighter this year.

Yes, and then to follow up a little bit, perhaps, on Steve's question relative to pricing and what's out there.

I know that, in the past, you've talked about changes relative to those customers that don't buy a lot, or buy very infrequently, and you're shifting the way you handle them.

Certainly, you serve them.

But you might require bigger initial orders or might vary the price.

How is that strategy working?

Is that continuing on as you have been planning?

Yes, the strategy is working perfectly.

Basically, having gone through a number of these cycles in the past, one of the things that happens with component companies like this is that -- we're a reasonably small company relative to the size of the aircraft industry.

So, when the aircraft industry surges, it can easily overwhelm our capacity with demand.

And so, you have to put governors in place to protect that from happening or your service levels with your key customers will be severely impacted.

So, those governors that you typically want to put in place are long-term contractual obligations by the customer to you, and you to the customer, to supply that product over such and such a period of time with such and such a pricing structure.

And that's kind of what we put in place.

And so, the people that aren't into that level of commitment with us are going to see and have seen substantial increases in prices.

And that's just the way we have to run our business.

And those increases could be as much as 40%.

Now, but with regard to that, quote, smaller or longer order time or whatever, is that primarily in the industrial side of your business?

And, in terms of implementing that across the different pieces, have you pretty much put that in place so that all the customers know where they stand relative to those issues and all?

It really applies more to the aircraft side of the business.

Oh.

Than the industrial.

And, yes, we have put it in place.

And our customers know where they stand.

Okay.

So there's not much more of that coming.

There shouldn't be.

I mean, that's just a policy that we're running the business on right now.

Okay.

All right.

Well, thanks very much.

Steve Barger, KeyBanc.

Mike, I think you just said that you could have some contracts roll over where the increase could be as much as 40%.

Could you give me some idea of how much of your revenue base might be exposed to increases, just say of 20% or more?

Steve, what I said was that if -- for the plants that we're very concerned about having the capacity needed to supply our client customers, that have long-term obligations with us, to protect those plants, that if those customers have long-term contracts with us, we're going to protect them.

And, for those people that aren't willing to make those kinds of commitments to us, then it's that group that will probably see substantial increases in the order of 40%.

Right.

Is that 5% or 10% of your revenue base?

Obviously, some of them will try and de-source you based on a 40% price increase, presumably.

But if they can't, I'm just trying to get a sense for how much of the revenue base that we're talking about here.

Our goal has been to use the Pareto, and to move 80% of our revenues into the contracted category.

I see what your saying.

Okay.

Thanks.

This concludes the question-and-answer portion of today's conference.

I will turn the call back to management for closing remarks.

Well, I guess that's me.

In closing, I'd like to thank everyone for the continued interest in RBC Bearings and your support and for participating in today's conference.

And for making RBC Bearings part of your investment strategy.

Thank you, and we'll speak again in February.

Thank you, sir.

And thank you for your participation in today's conference.

You may now disconnect.

Have a great day.