RBC Bearings Inc (RBC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 RBC Bearings earnings conference call.

My name is Stephanie and I will be your coordinator today.

(Operator Instructions).

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

I would now like to turn the presentation over to the host for today, Mr. Adam Sigel, Vice President.

Please proceed.

Good morning, and thank you for joining us today for RBC Bearings's fiscal 2013 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, the VP 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 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.

Net sales for the first quarter of fiscal 2013 were $103.3 million, an increase of 10.7% over the same period last year.

Our industrial markets contributed 6.7% growth in sales on a year-over-year basis.

The increase was driven principally by solid demand from both distribution and OEMs with the year-to-year growth rate of 11.1% and 5.0%, respectively.

Sales of industrial products in the period represented 52% of our total revenues, and aerospace and defense represented 48%.

Demand for our products from the industrial markets remains steady.

The sectors of industrial distribution, mining, ground defense, and oil and gas performed well during the period.

Although we are not seeing the double-digit expansion in revenues we saw last year, as much of that expansion was a result of new products introduced in years past, we are seeing solid demand from customers in this sector and expect the full year to show revenue expansion for industrial products to be in the mid to high single-digit range.

As a footnote, during the quarter we did see some reduction in demand from two of our mining customers.

This was the result of their planning errors last year, and as a result we were a few million dollars off per quarter from our sales plan.

We expect the same situation in second quarter, and this condition will be resolved by the end of September.

We do expect to see further expansion of our industrial sales volumes in future years as a result of new products being introduced this year and next.

Turning to the oil and gas market, as you know this market remains strong.

Backlog reports from major OEMs are extraordinary.

We expect another solid year of product sales in these markets and will be introducing several new designs this year that should accrue nicely to next year's plan.

OEM construction of large equipment for the mining sector is strong.

Build rates reported by the major producers have stepped up again.

Of course, this is all predicated on the outlook for continued order demand from the world economy, but who can challenge Caterpillar's recent bullish position on this matter?

Not us.

We're busy filling orders for the OEMs and expect this sector to continue to be a solid performer throughout the year.

In Europe, demand for our products remains good as well.

Of course, much of our business is in the aerospace sector, and continued expansion by the OEMs and subcontractors have had continued positive impact on our volumes.

Demand for our machine tool products is about the same as last year.

These products are consumed by machine tool producers who export to countries such as Russia, China, United States, as well as the European market.

Relative to our aerospace and defense business, these markets grew 15.3% in the first quarter of fiscal 2013, compared to the same period last year.

As you all know, demand for the aircraft worldwide remains at an all-time high.

As a result of the Farnborough Air Show, Boeing has now pulled ahead of Airbus in the number of planes ordered this year, and aircraft manufacturing is certainly a bright spot in our revenue line-up.

We are booking well in this sector and continue to work the contract development side of our business to help us define customer priorities, rationalize production strategies, plan capacity expansions.

We feel we're in the best position ever to execute our business strategy there today and expect to see continued revenue growth as increased requirements are released for step up in build rates on the 737 and the 787 planes, as well as the result of new products that are introduced -- they are introducing into the mix.

In summary, we've entered the first quarter of fiscal 2013 with $211.5 million of backlog, compared to $206.4 million for the same period last year.

Gross margin performance for the first quarter was 37.2%, compared to 31.4% for the same period a year ago.

Our internal target this year was to add 1% to 1.25% of gross margin points in fiscal 2013 over 2012, where we ended the year at 35.4%.

To achieve this internal target, we'll continue to focus on process improvements and cost reduction, which has benefited us well in the past.

Looking ahead, we expect the second quarter of fiscal 2013 net sales to be north of the $100 million, but lower than what we have achieved in the first quarter, mostly as a result of the vacation periods over the summer.

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

Thanks, Mike.

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

SG&A for the first quarter of fiscal 2013 increased $1.6 million to $16.1 million, compared to $14.5 million for the same period last year.

As a percentage of net sales, SG&A was 15.6% for the first quarter of fiscal 2013 and 15.6% for the same period last year.

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

Other net for the first quarter of fiscal 2013 was expense of $0.4 million, compared to expense of $0.3 million for the same period last year.

For the first-quarter fiscal 2013, other net consisted of $0.4 million of amortization of intangibles.

We ended the quarter with operating income of $22 million for the first quarter, an increase of 29.3% compared to operating income of $17 million for the same period last year in fiscal 2012.

As a percentage of net sales, operating income was 21.3% for the first quarter of fiscal 2013, compared to 18.2% for the same period last year.

Other non-operating income was $3.3 million for the first quarter of fiscal 2013, compared to $0.2 million of expense for the same period last year.

This was mainly due to a receipt of $3.6 million in CDSOA payments in the first quarter of fiscal 2013, offset by $0.3 million of foreign exchange losses.

Income tax expense for the first quarter of fiscal 2013 was $7.9 million, compared to $5.6 million for the same period last year.

Our effective income tax rate for the first quarter of fiscal 2013 was 31.6%, compared to 34.5% for the same period last year.

The effective income tax rate for the first quarter of fiscal 2013 includes $0.9 million benefit due to the reversal of unrecognized tax benefits associated with the conclusion of state income tax audits.

The effective income tax rate without these discrete benefit items would've been 35% for first quarter of fiscal 2013.

For the first quarter of fiscal 2013, the Company reported net income of $17.2 million, compared to net income of $10.7 million for the same period last year.

Excluding the after-tax impact of the CDSOA payment and the discrete tax benefit, net income would have been $13.9 million for the first quarter of fiscal 2013, an increase of 30.1% compared to $10.7 million for the same period last year.

Diluted earnings per share was $0.76 per share for the first quarter of fiscal 2013, compared to $0.48 per share for the same period last year.

Excluding the after-tax impact of the CDSOA payment and the discrete tax benefit, diluted earnings per share for the first-quarter fiscal 2013 would have been $0.62 per share, compared to $0.48 per share for the same period last year.

This is an increase of 29.2%.

Turning to cash flow, the Company generated $26.5 million in cash from operating activities in the first-quarter fiscal 2013, compared to $12 million for the same period last year.

Capital expenditures were $6.1 million for the first quarter of fiscal 2013, compared to $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 first quarter of fiscal 2013 with $90.9 million of cash and $1 million of debt on the balance sheet.

I would like to now turn the call back to the Operator to begin the Q&A session.

(Operator Instructions).

Ed Marshall, Sidoti & Company.

So looking at the business and the guidance you provided for the industrial business and seeing what you've put up in the first quarter and then your discussions surrounding the second quarter, it looks like you expect your industrial business to be much stronger in the back half of the year than it's displaying in the first half.

Is that the right characterization?

No, I think the industrial business throughout the year is going to be pretty much the same.

I mean, there'll be perhaps a little bit of growth there, but I think it's too early to tell.

The world is still an uncertain place right now.

Did you say mid to single digits for the industrial or mid to single digits for the entire business?

Mid industrial.

Industrial.

Right.

I mean, with all due respect -- I mean, then I look at the second quarter, do you expect the growth rate off the aerospace to come down a little bit?

No, we expect what we're going to see is sort of a shift in revenue leadership there from industrial to aerospace as the year goes on.

Okay.

Oil and gas business, if I could touch on that for a second.

I know it's new business for you, so it's probably less of an impact.

We've heard other companies discuss -- as we shift from gas rigs to oil rigs, we've heard two things.

One, restocking from the conversion and the parts used for the rigs and how they differ, and then, secondly, we've also heard a temporary [lapse] as some of the cannibalization of some parts are used from, say, oil rigs -- I mean, gas rigs going to oil rigs.

Have you seen any of those two dynamics, where there was a restocking or more of a cannibalization of the material?

Well, I think for the most part we haven't seen it, Ed.

It's not that we would see it.

Most of our oil and gas business is direct to the OEM, and we're not in that aftermarket sector.

So I think the people that are servicing that aftermarket sector would feel that more than us.

We sort of are tied to these OEMs and look at their build rates and try to support their build rates.

That's what our business is all about right now.

How has the traction been in that business?

Are you gaining -- is it still improving at the same rate that it was?

I think it's a matter of mix, and for us, we've had a small product offering relative to that marketplace, and so we're sort of fully consumed there in terms of what we do offer the marketplace.

We're bringing through new products through the balance of this year, which would expand our offering and make us more relevant to the aftermarket as well.

So I think as we expand the number of sizes that we offer to the marketplace, our revenues will be as a result of that, and so we're having some very positive discussions with our OEM customers relative to those issues right now.

Okay.

And Dan, what do you expect for the tax rate to be in the quarter?

It was a little higher than I anticipated.

35%, we should be looking at for the year.

For the balance of the year?

Yes, but just keep in mind, we mentioned in the 10-K and the 10-Q, we -- I'm sure there's a chance this year we'll have additional tax benefits that will be coming back to the P&L due to closing up certain statutory audits.

And if there's an adjustment on the R&D tax credit, will you pick that up as well?

We would, so that kind of pushed our number up a little higher this first quarter because that R&D credit doesn't exist right now.

Right, right, okay.

Thanks, guys.

Walt Liptak, Barrington Research.

Nice work on the gross margin this quarter.

I wonder if you can talk about -- and I apologize.

I got onto the call a little bit late -- the mix, and what's helping with that gross margin?

I think, you know, one of the things that's helping is that the mix that we have is under long-term contract so that we can justify capitalizing it correctly and we can justify putting engineering talent into working the process improvement side of the business, so that the product is made more and more efficiently than it was four or five years ago.

That efficiency is sort of accruing to our profitability, and we expect to see that efficiency accrue to profitability throughout the year.

You know, it's -- once you have this business secured and under contract, you can easily justify improving your methods, and that's what we're doing.

Okay.

Is this level of gross margin, then, sustainable throughout the year?

I think it's going to improve.

Okay, because you're running ahead, I think, of what you talked about last quarter with -- I think it was 100 -- 50 or 100 basis points of improvement.

Well, you know, it's a little hard to predict how much margin improvement you're going to see.

I mean, you work like hell, and then you get a pleasant surprise once the numbers on the plant get closed out and you see the results of your efforts.

So the improvement in gross margin is a little bit of a more pleasant surprise to us, too.

Okay, but you think it's sustainable?

Yes.

Okay.

I wondered how we could -- when we look at your backlog, it looks sequentially flat for the last couple quarters, and you know, I look at growth rate and backlog, which has been decelerating a little bit.

You know, I wonder how -- if you can help -- if you could talk a little bit about the backlog and how much of that backlog ships in, say, the next quarter, and how we should think about revenue growth compared to that backlog?

Be happy to.

First of all, I think the first quarter, you know, right -- currently in the -- particularly in the aerospace world for us and probably for most people because of the timing of contracts, there's a lot of contracts that are being renewed, renegotiated, redirected, and so on during, I'd say, the first six months of our year here.

It's very consuming.

As a result of that, once a contract is under negotiation and you have three or four or five or six months left on the contract, normally the PO period stops and so no new POs are issued and acknowledged until the new contract is finalized.

And so, there is some timing with contracts going on that are affecting the backlog in the first quarter, and I think that should be resolved and there should be a pleasant surprise in the second quarter.

Okay, great.

All right, thanks, guys.

Peter Lisnic, Robert W. Baird.

I guess if I could start with the second-quarter commentary you gave.

I mean, if I do the math, it looks like 2% to 5% topline growth for the second quarter, year over year, and I guess that suggests something is slowing or perhaps negative.

Can you give us a little feel for kind where that -- or which comparison is actually slowing and to what degree?

Yes, I don't know if it's slowing as much as it's steady.

It's not growing at the rate that it was growing.

And so, I think in the commentary I said that there's a couple of customers who overbought product last year because they sort of missed the forecast, their MRO demand, and so they ended up with more product than they need.

And so, that product is bleeding off in their system for our first two quarters, so I'd say that much of what you're looking at is being affected by that situation.

Okay.

So is it it's safe to assume -- well, maybe it's not, but should we think about industrial as being flat or down in the second quarter?

No, it won't be down.

It will be more flat.

Okay, so around flattish.

All right, that helps.

And then, on the gross margin expansion, the comments were 100 to 125 bips of expansion for the year.

Clearly the first quarter was well ahead of that and it sounds like it's sustainable, so why the conservativism on the target for this year?

Just a function of global macroeconomic uncertainty, or is there something in the gross margin mix that maybe you're uncertain of and not willing to kind of raise the bar, if you will, on that target?

Well, you know, Pete, that's our internal target, and I think for the last three years we've shared that internal target with you guys on the conference call and have been able to exceed that internal target each year.

So that's what we're targeting toward this year, 1% to 1.5% on 35.4% last year, so I think we're on track to do that.

Q4 and Q1 are always our strongest quarters from a performance standpoint and topline standpoint, and Q2 and Q3 are always our slower quarters because of the amount of production days, holiday season, and things of that nature.

So we're comfortable with that forecast, and as Mike said, we hope to exceed it.

Okay, got it.

And then, last question, just on the defense business, I know the uncertainty with sequestration out there, sort of a primary topic.

Do you have any feel for what that might mean, if indeed it comes through the way it presumably could come through, what that might mean for the business in maybe the back half of this year or into fiscal 2014?

Yes, I think certainly Congress took their summer leave and left that situation unresolved and put the ball back in Obama's court, and it probably won't get resolved -- sequestration won't get resolved until after the election.

We've looked at our programs, and first of all, I doubt the DOD will be able to defer maintenance of their core systems much longer.

They've already deferred the maintenance.

The systems are critically undermaintained, and so looking at our backlog and the kind of product that we produce and where those products are consumed, these are core -- really the core military programs that allow the defense system to even operate.

So I think for the balance of our year, our fiscal year, there won't be much of an effect.

Defense is now less than 10% of our revenues.

So I think the growth in the aircraft, aerospace, commercial sector, given to step up in production rates that people are talking about, will certainly offset some of that or most of that this year, if there is any.

I think the issue will really show up next year if the Democrats win the election and gut the defense budget, and I think that's what we're waiting to see.

Okay.

All right.

And have you -- you broke up a little bit there on me, maybe it was my phone or yours, but just to kind of close the loop, have you seen any trends in defense backlog that give you a feel for kind of what the impact might be?

It sounds like you're not seeing anything yet.

It sounds like things might actually be better because there's underspending of critical systems, as you put it, versus not getting orders.

No, we're seeing the opposite, Pete.

We're seeing a lot of defense contracts being negotiated right now that actually are a little unusual in terms of their size and the level of activity that we're seeing.

So we're kind of scratching our heads and saying, what is this all about?

And so, I'd say it's business as usual with the defense agencies, but the contracts that we are seeing are for these core systems.

They're not for the man in the moon shot.

It's really, how do you get soldiers from A to B?

Okay, all right, got it.

That is very helpful.

Thanks for your time and nice job in the quarter.

Thank you.

(Operator Instructions).

Samuel Eisner, William Blair.

I had a couple questions, again on the margin.

Maybe can you talk a little bit about pricing and price risk cost in the quarter, and how you anticipate that playing out throughout the remainder of fiscal 2013?

Yes.

Pricing?

Yes.

Favorable.

How favorable?

You analysts always want a metric on this stuff.

It's a good environment right now.

That's all -- I'd like to leave it at that.

Fair enough.

And the commentary regarding orders in the quarter, obviously it seems as though you had an actual decline in orders year on year.

Is there a way to kind of quantify how much of the orders were pushed out into the second quarter or through that process?

There really isn't.

I mean, we're talking about a $10 million kind of swing one way or the other, right?

It's a number like that.

All right.

And then, with your almost $90 million in net cash, obviously the question comes up, what are you guys doing with that?

So maybe if you can put some kind of qualifiers in, where you guys are looking to do, kind of cash priorities, and everything of that effect?

Well, we're trying to -- we're very active at looking at acquisitions as one of the uses of our cash.

And we'd like those acquisitions to enhance our market position and we'd like those acquisitions to come at a price that is affordable and justifiable.

And so, there are many in the first category and few in the second, and so I would expect that we're probably going to spend some of that, half of that, this year, given the programs that we're working on, but I can't guarantee we will.

All right, that's great.

And then, just lastly, just the commentary regarding -- in the mining industry, can you just -- I missed some of those comments.

You said there were two customers that changed their production schedules, or maybe if you could just give a little bit more color, that would be great.

The difficulty that these OEMs have is that -- and if you look at the build cycles for all of these OEMs, they all intend to build one heckuva lot more equipment this year than they built last year, and whether that's -- they all think that's the right thing to do.

So who am I to criticize?

But on top of the OEM build is MRO demand, right, and the MRO demand is significant.

And as the population of this equipment increases year to year, it's hard to predict the MRO demand year to year.

So we had two customers who overpredicted their MRO requirements last year to the point where they ordered too many bearings, we delivered too many bearings, and now they're sitting on a pile of bearings that are being more slowly absorbed into their system.

So we're looking at the absorption rate of those products and talking to these customers to understand when things will be back to normal, and that will affect, to the extent on the industrial business, a few million dollars of our revenues for the first two quarters -- in each quarter for the first two quarters of the year.

That's great.

And then, just one last one on this same point.

Do you think that this issue is specific to those two customers or is this more of an industrywide issue?

Well, industrywide, I think all of these people have difficulty planning their MRO requirements.

Either they order too much, too soon, which is unusual.

They usually don't order enough, and quickly in need -- have emergency situations needing bearings.

Again, that's a more normal course.

Great.

Thanks so much.

Steve Barger, KeyBanc Capital Markets.

I'm going to try another price question.

If you're looking for mid to high single-digit on the industrial side, can you break out what you're thinking about in terms of volume versus price?

I don't do it that way and I actually don't know how to do it that way.

Well, okay.

Do you expect -- as you moderate from double digit to single digit on the industrial side, do you expect that the price increases that you realized last year will be different or the same that you realized this year and it's more on the volume side, or are you seeing industrial come down in both metrics?

I think the pricing will hold on the industrial side.

There may be some expansion of pricing in some markets and some customers, but it's certainly not universal.

I think the more -- the other side of that is that the cost of the commodities to produce the products is going to be lower this year than it was last year, and so that ought to create some benefit by itself.

And you don't expect to really give much back, right?

Well, I -- we give as much back as we can, but not as much back as we are asked to.

We've heard some other companies talk about, you know, as they're seeing moderation in some industrial product demand, they've slowed production a little bit to avoid an inventory build.

Other than those mining customers that you mentioned, are you seeing any product lines where you feel like that is appropriate or is that not really applicable to you?

You know, we're not slowing any production.

I think we're not stepping production up to the extent that we had to in the last few years, so we're kind of keeping production levels steady and looking at inventory positions and adjusting accordingly.

Got it.

And one other, sorry if I missed this earlier, but you talked about new products on the industrial side.

Are they targeted to getting more content on existing applications where you have content or are you trying to get into areas where you currently don't have content at all?

It's both.

Okay.

It's product improvement with existing customers to solve the problems that existing customers have with bearing applications and it's new accounts with completely new products.

Typically are you seeing -- is the sales force going out to find those new accounts or are you having inquiries, or does it happen both ways?

Well, we look at the sectors.

You know, the nice thing about making bearings is every industrial sector needs them.

And so, we look at the sectors that we feel offer growth for us, and we might have some ideas and some offerings for them.

And then, based on that, we'll do a down-sort on who the most successful OEMs are in those sectors.

And then with what we know about those particular OEMs, we'll create a strategy of how do we approach those particular OEMs with -- and with which products is the most applicable for them.

So we'll do that often, and we're doing it now more than we used to and we're doing it very effectively in some cases.

That's great detail.

I appreciate the time.

Ed Marshall, Sidoti & Company.

A quick follow-up with all the cash, and I know you say acquisitions.

We've been hearing it for a while.

You're generating a lot of cash, too, looks like.

Any chance that you guys have kicked the idea around, and you'll probably laugh at me -- kicked the idea of initiating a dividend of any sort, even if it's a modest dividend?

We've discussed it, Ed.

Let's leave it at that.

Okay, fair enough.

Thanks, guys.

With no further questions in queue, I would now like to turn the conference call over to Dr. Michael Hartnett for any closing remarks.

Please proceed.

Okay, in closing I'd like to thank everyone for their interest on today's call and their interest in RBC Bearings and for participating in this session, and I look forward to another session in October.

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

This concludes the presentation.

You may now disconnect.

Have a great day.