RBC Bearings Inc (RBC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 RBC Bearings earnings conference call.

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

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

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

I would now like to turn the conference over to your host for today, Mr. Adam Sigel, Vice President, and you have the floor, Sir.

Good morning and thank you for joining us today for RBC Bearings's fourth-quarter and fiscal year 2012 earnings conference call.

On the call today will be Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer, and Daniel 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's recent filings with the SEC for more detailed discussions 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.

Good morning and welcome.

Fiscal 2012 exceeded our expectations and ended on a high note with organic growth of 18% in both our diversified industrial and aerospace markets and the total net sales hitting historical levels of approximately $400 million.

We continued to experience solid order volumes across our key markets and our manufacturing facilities are executing to maintain high service levels to our customers.

During the fourth quarter, our sales were $111 million, an increase of 25% over the same period last year.

The strength of our industrial park and continued through the fourth quarter with sales up 25% on a year-over-year basis.

This increase was driven by strong demand from both distribution and OEMs with year-over-year growth rates of 17% and 28%, respectively.

Our major markets continued to respond well to our product offering support and outstanding service levels.

Sales of industrial products in the period represented 52% of our total revenues with aerospace and defense sales coming in at 48%.

Demand for our products from our industrial markets remain strong.

The market support continues at a good pace from the sectors of industrial distribution, mining, ground defense, and oil and gas.

We are also seeing demand from commercial nuclear industry for our products and expect this market component to play a larger role in our business this year than it has in the past.

With regard to the oil and gas market, as you know, this sector remains strong with deep backlogs reported among the major OEM producers.

We expect another good year in these products with some shift in equipment from natural gas to oil.

We don't see a major impact on our business as this shift transpires.

Construction of large equipment for mining sector continues to impress us.

The climate remains very favorable for large equipment producers.

Reports from the majors are encouraging with continued demand coming from ore mining and tar sands oil production.

Driving this expansion in demand are declining oil grades and more mining in remote parts of the world.

As a result of this tremendous growth in units of mining trucks produced in the past five years, there are now approximately 35,000 mine trucks over 90 tons operating worldwide.

The great majority of these were produced by the majors.

The average life of a truck is five to seven years and repair cycles come at the three- to five-year mark.

It has been estimated that 65% of the current OEM production goes to support spare parts demand.

For us, this is a very encouraging metric.

In Europe, demand for our products remains good.

Many of our machine tool producers -- many of our machine tool products are consumed by machine tool producers to export to countries such as Russia, China, and the United States as well as to the European market.

So there is some insulation from the European financial troubles.

Consumption of our products into European and aircraft OEMs is strong as you would expect.

And sales of our products for transportation applications remain steady.

Finally we are experiencing good volume increases in our industrial distributors, up 18% year over year.

This is a result of stronger demand from an increasingly healthier industrial economy.

It has been reported that the industrial production index expanded 4% in the first calendar quarter of calendar 2012, and it is projected to expand at that rate for the balance of the year.

Let's hope that statistician is right.

We have also internal initiatives to site products closer to their point of consumption and this combined with increased sales productivity has pushed our year-to-year growth rate.

Relative to our aerospace and defense businesses, these markets grew at 25% in the fourth quarter compared to the same period last year.

Demand for aircraft worldwide remains elevated.

Land capacity, readiness surveys are today's norm.

Build rates are up, contracts are being renewed, volumes are increasing and new products are being integrated into the mix.

We are expecting very strong performance from our plants in this sector over the following year.

The majors reported a book to bill ratio of 200% over 200% in the first quarter.

We are busy planning expansions to our capacity in line with these needs.

As I said in previous sessions, these are interesting times in this industry.

So in summary, we ended the fourth quarter of fiscal 2012 with $215 million in backlog compared to $196 million for the same period last year.

Gross margin performance for the fourth quarter was 37% compared to the 34% for the same period last year.

As we discussed in the last few calls, our internal target this year was to add 1 to 1.25% of gross margin points in fiscal 2012 over fiscal 2011 and to add an additional 1% in fiscal 2013.

Well, for fiscal 2012, we ended up adding an additional 2.7 percentage points over 2011.

So this was double our internal target.

We are very pleased about that.

These margin improvements are the result of improved pricing on new contracts as well as process improvements and cost reductions, and better execution of product manufacturing and, of course, greater production volumes.

Looking ahead, we expect first quarter of fiscal 2013 net sales will be north of $100 million but lower than what we achieved in the fourth quarter this year due to the seasonality of our business.

I'll now turn the call over to Dan who can provide more color on the quarter and the full year.

Thanks, Mike.

Since Mike already covered sales and gross margin, I will jump down to SG&A.

SG&A for the fourth quarter fiscal 2012 increased by $2.6 million; [the] $16.5 million compared to $13.9 million for the same period last year.

As a percentage of net sales, SG&A was 14.3% for the fourth 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 increase of personnel-related costs.

Other net for the fourth quarter fiscal 2012 was expense at $0.6 million compared to expense at $0.4 million for the same period last year.

For the fourth quarter fiscal 2012, other net consisted of $0.4 million of amortization of intangibles, $0.1 million of bad debt expense and $0.1 million of other miscellaneous expenses.

For the same period last year, other net consisted mainly of $0.4 million of amortization of intangibles.

Operating income was $24.1 million for the fourth quarter fiscal 2012, an increase of 49.9% compared to operating income of $16.1 million for the same period in fiscal 2011.

As a percentage of net sales, operating income was 21.6% for the fourth quarter compared to 18.1% for the same period last year.

Income tax expense for the fourth quarter fiscal 2012 was $8.4 million compared to $5.3 million for the same period last year or effective income tax rate for the fourth quarter was 35% compared to 35% for the same period last year.

For the fourth quarter fiscal 2012, the Company reported net income of $15.5 million compared to net income of $9.9 million for the same period last year.

Diluted earnings per share was $0.69 per share for the fourth quarter fiscal 2012 compared to $0.44 per share for the same period last year.

Turning to cash flow, the Company generated $13.1 million in cash from operating activities in the fourth quarter compared to $9.6 million for the same period last year.

Capital expenditures were $6.5 million in the fourth quarter fiscal 2012 compared to $3.2 million for the same period last year.

We expect our capital expenditures to be approximately $12 million to $15 million in fiscal 2013.

The Company ended the fourth quarter fiscal 2012 with $68.6 million in cash and $1 million of debt on the balance sheet.

I would now like to turn the call back to the operator for our Q&A session.

Thank you very much.

(Operator Instructions).

Edward Marshall, Sidoti & Company.

Good morning.

The industrial business which grew, I guess, what -- 25% in the quarter but I was particularly interested in the OEM of 28%.

First of all, what is the split of the OEM to aftermarket at first?

Then I guess if you can comment is it share gains that is driving that 28%?

Because it seems unusually high.

Yes, the split of OEM to aftermarket, well, we kind of break out the industrial distribution OEM in the call there.

So it's 25% is what we call OEM.

That probably 60% of that OEM business is going to that OEMs aftermarket.

We really don't measure that.

We don't know about it, which market is consuming it.

I would -- I think the growth is, number one, the markets that we are servicing there on the OEM side are growing.

Certainly mining, oil and gas are the big growers in that region.

I think ground defense probably didn't grow as much as the other 2. The -- so a lot of it is just keeping up to the pace of expansion in those industrial markets and also the introduction of several new products that we have developed for those markets over the past three or four years.

So, by several new products I mean, I can infer then that you are seeing significant -- I mean, I guess I can infer it also by the rate of growth versus the market growth.

I mean you are outpacing that there's certainly market share gain there, and we have talked about oil and gas before.

But are there other markets that you think that you are seeing some share gain in?

Well, certainly in the mining and construction area.

We are probably picking up share gain just because of the expansion in that market has been difficult for its current suppliers to keep up with.

Some of those suppliers are in Japan and the tsunami put some of them out of business or made it difficult for them to continue supplying.

So I would say I don't know if that is share gain or the -- is expansion for everyone.

I mean, so, in other words it is somewhat sustainable at the new share levels because it is not like there is a reloading of the [wip] or something along those lines where -- and these are structural changes to your business that this is a business that could (technical difficulties) base to work off of.

Yes, I mean, I don't think it is a one-time event.

There is no one-time events that we can put our finger on that sort of push the sales.

I mean, it's just an expansion of what is going on in those markets and an acceptance of several of the new products that we built.

And then CapEx was I guess unusually high for the fourth quarter.

I would say double or even triple some of the numbers you put up the last eight quarters or so.

What -- was there anything in particular that was in that?

I know that you had talked about, last call, about some additional aerospace kind of capacity.

Is that where the money was spent?

Or any highlight you could provide?

Yes, there was one building that we acquired and that accounted for about $1.3 million of it, and that's to service mainly aerospace.

I mean it's really just moving out of one building into a bigger space.

And then the rest are just spread across our 24 manufacturing facilities, the normal CapEx that we normally run at at around 3.5% to 4% of sales.

And then finally, the inventory number in the quarter.

Looks like maybe working capital was a bit of a drag.

Yes, the inventory for the quarter was $158.8 million so it was down $3.5 million from December.

So, the investment in working capital was in AR.

So we should see that all coming out, a lot of nice chunks of that in the first quarter, which will drive the cash number.

Right, so the fourth quarter was just more of a timing thing with the cash's and nothing else?

Yes.

Okay, perfect.

Thanks.

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

I guess first question if you could maybe talk about productivity and any sort of metrics that are willing to disclose this year and then what the potential for productivity improvement might be in the coming fiscal year.

In productivity you mean output per man hour kind of a productivity number?

That's right.

That's how I think of it too, Peter.

Well, I mean it is a number that we focus on.

It is a number that we talk about at many of our operations meetings.

It is the number that year-to-year basis we try to budget an improvement in that ratio.

We measure it total labor not just direct labor, value-added labor, but total labor divided into total sales.

And that is kind of the focus that we keep, we keep track of.

And so a price increase would be on that metric would be the same as more production per man hour.

But frankly, we don't care how we get it.

Price increases is fine if we are going to improve our productivity that way.

So we normally manage and expect something around 3% to 6% per year, depending upon the state of the business.

If the business has been doing well and is -- some of those ratios can be as high as 20.

We probably [are] going to plateau a little bit but if the business is doing, is one of our earlier businesses in terms of business development and maybe we acquired it in the last 36 months and it isn't quite on the production level that some of the others are we will probably budget a stronger expansion there.

Okay.

All right.

That is perfect.

And then if you take that productivity improvement and then translate that into some of the gross margin commentary that you had talked about previously, the 100 basis points of improvement for fiscal 2013 is sort of the plan, I guess.

A, can you maybe give us an update on whether or not that is still the plan for this coming fiscal year?

And then, B, it sounds like if you do get anywhere from that 3% to 6% that maybe that 100 basis point of guidance would again seem to be conservative.

Well, I know Dan has been working hard on those kind of -- sorts of of metrics.

So I will defer to him.

Well, as you know we really exceeded the expectation in 2012.

But I think internally internal target is to get to that 36% and like always.

if we are able to beat that internal target, we will be happy about that.

All right.

And then with the business running full steam both in aero and industrial just wondering if you are seeing any sort of bottlenecks or extended lead times in product delivery to your customers.

Any issues on that front?

No.

I don't, not in any major way.

I think we are very cautious about that and I think if you look at our backlog one of the things we have been able to do is bringing up our throughput to maintain our backlog to be reasonably steady.

And because we try to maintain competitive lead times on the lot of the products that we don't have under contract and the products that we do have under contract, we manage in a different way.

Okay.

All right.

And then what is your guess -- you can plead the Fifth if you want on this one.

But what is your guess as to whether or not your customer -- or your competitors can make that same claim?

In other words, are they -- are there delivery times being extended or are they at a competitive disadvantage at this point in your opinion?

Well, I think it is -- we have lots of competitors but no major competitor in any direct lineup with RBC's business.

So depending upon which product line we were talking about, we will have a different competitor for that product line.

But it may be only a $10 million or a $20 million product line for RBC.

So we have -- so we end up with a lot of different competitors.

Now we have heard that lead times for in some of the markets which are brisk right now particularly in aircraft are moving out toward 50 weeks.

And so, I would say that those guys are probably -- either have a really great business franchise or they are not keeping up.

Ours are not 50 weeks.

Okay.

All right.

That is very helpful.

Thank you for your time and help.

(Operator Instructions).

Ladies and gentlemen, since there are no further questions that includes the Q&A portion of the call.

I would now like to turn the presentation over to Dr. Mike Hartnett for closing remarks.

Okay, well in closing, I want to thank everyone for their continued interest and support of RBC Bearings and for continuing -- for participating in today's discussions.

And we look forward to speaking to you again soon probably end of July.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.