RBC Bearings Inc (RBC) 2013 Q4 法說會逐字稿

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

My name is Gwen, and I'll be your operator for today.

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

At the end of the speakers' remarks, we will have a question and answer session.

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. Rory MacLellan, Investor Relations.

Please proceed.

Good morning and thank you for joining us today for RBC Bearings' fiscal 2013 fourth quarter earnings conference call.

On the call today will be Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; and Daniel A. Bergeron, Vice President and Chief Financial Officer.

Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those projected or implied due to a variety of factors.

We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition.

These factors are also described in greater detail in the Press Release and on the Company's website.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's website.

Now, I'd like to turn the call over to Dr. Hartnett.

Thank you, Rory, and good morning and welcome.

Net sales for the fourth quarter of fiscal 2013 were $103 million versus $111.3 million for the same period last year.

Our industrial markets were down 18.9% on a year-over-year basis.

Sales of aircraft and defense products were up 4.9% over the corresponding quarter last year.

For the full year, net sales were $403.1 million, an increase of 1.4% over last year.

Our industrial markets were down 8.2%, and our aerospace and defense products were up 12.1% over last year.

For the 12 month period, sales of the industrial products represented 48% of our net sales, and aerospace and defense products were 52%.

Gross margins for the period came in at 39.5% versus 37% in fiscal '12.

Adjusted operating margins were 22% for the quarter and 21.1% for the full year.

Demand for our products in the industrial markets were normal this quarter.

The construction machine producers lightened their OEM build schedules but steady demand from their after market filled in our requirements.

With regard to mining equipment, as we mentioned last call, this segment had a strong run over the past few years and is now operating at a more level pace.

We are now expecting this rate, steady but not overheated, to continue all year and beyond.

Revenues from our ground defense business were minimal during the period as a result of the completion of some of the programs associated with upgrading mine-resistant vehicles for the military, and we discussed that last call.

We expect to see more activity in this sector late in fiscal '14 and into '15 and beyond as the demand for foreign military customers comes online.

Several countries are now retooling their ground armament as a result of lessons learned in Iraq and Afghanistan.

Overall, our industrial distribution sales were about even with last year, with the softness in semiconductor customer base being offset by strength from general industrial accounts.

Sales to European distributors were equal to last year but up sequentially about 8%.

We are seeing a continued increase in business activity overseas as a result of some of the market initiatives taken over the past 12 to 24 months.

The news remains the same as last quarter.

The principal reasons for the year-to-year contraction in industrial OEM volume can be directly attributed to moderation in demand from our OEM mining equipment customers and completion of some ground defense programs.

Dan will have a little bit to say about that later in the call.

Relative to our aerospace and defense business, these markets grew 12.1% in the year and showed quarter-to-quarter growth of 4.9%.

We continue to see strong interest in our core products and continued encouragement from our customers, demonstrated by contract awards for new products developed for both the airframe and engine sectors of our business.

In calendar '12, the Big Four aircraft producers, Boeing, Airbus, Embraer and Bombardier sold 1,345 planes and booked 2,433 aircraft.

In the first quarter of this year, the Big Four booked 660 large transport and freighter aircraft in total and sold 298 planes.

Clearly this is a healthy indicator for future RBC Bearings business.

Our bookings continue to be solid, and our new program initiatives are too numerous to elaborate here, but they continue to grow.

We expect several years of expansion ahead as significant new airframe and engine programs come on line and core products are sold in higher volumes.

As we stated last time, we are in an excellent position to execute our business strategies today, and this continues to be demonstrated by gross margin improvements.

On defense, our activity has remained steady and is up slightly over last year.

A word on the year-over-year changes demonstrated in gross margins, I am pleased with the progress made to date, which is the result of completing very long cycle projects associated with the execution of several manufacturing strategies.

All plants have their target list of strategies needed to elevate their performance, and each has made real progress against these goals.

The manufacturing methods of core product lines that have formed the basis of our revenues for many years have been largely redesigned to improve the efficiency of execution.

Lessons learned from these projects are now quickly implemented into learning curve improvements for new products.

The result is a significant consolidated margin improvement as demonstrated over this year.

Of course we expect these overall improvements to continue, but remember that they will be influenced to some extent quarter to quarter by mix and absorption differences driven by the accounting calendar.

So in summary, we ended fiscal 2013 at $216.5 million of backlog compared to $215.8 million over the same period last year, and looking ahead, we expect the first quarter of 2014 net sales to be in the neighborhood, a very similar quarter to the one we just demonstrated, perhaps just a little bit better on the revenue side.

I'll now turn the call over to Dan, who will provide more details on the financial performance.

Thanks, Mike.

SG&A for the fourth quarter fiscal 2013 increased $0.8 million to $17.3 million compared to $16.5 million for the same period last year.

As a percentage of net sales, SG&A was 16.8% for the fourth quarter of fiscal 2013 compared to 14.8% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $0.6 million in incentive stock compensation, $0.4 million in professional fees offset by lower miscellaneous expenses of $0.2 million.

Other operating expense net for the fourth quarter fiscal 2013 was an expense of $7.6 million compared to an expense of $0.6 million for the same period list year.

For the fourth quarter fiscal 2013, other expense net consisted of $6.7 million related to large bearing consolidation and restructuring which we had previously announced, $0.4 million of amortization of intangibles and $0.5 million in costs associated with other asset disposals and other items.

Operating income was $15.8 million for the fourth quarter of fiscal 2013 compared to operating income of $24.1 million for the same period in fiscal 2012.

Operating income excluding costs associated with the consolidation restructuring of large bearing facilities and disposal of other fixed assets would have been $22.7 million compared to an operating income of $24.1 million for the same period last year.

As a percentage of net sales, operating income excluding these charges would have been 22% compared to 21.6% for the same period last year.

For the fourth quarter fiscal 2013, the Company reported net income of $10.6 million compared to net income of $15.5 million for the same period last year.

Excluding the after-tax impact of the large bearing consolidation and restructuring, loss on disposal of other fixed assets and a small discrete tax benefit, net income would have been $15.9 million for the fourth quarter of fiscal 2013, an increase of 2.6% compared to $15.5 million for the same period last year.

Diluted earnings per share was $0.46 per share for the fourth quarter of fiscal 2013 compared to $0.69 per share for the same period last year.

Excluding the after-tax impact of the large bearing consolidation restructuring, loss on disposal of other fixed assets and the discrete tax benefit, diluted earnings per share for the fourth quarter fiscal 2013 would have been $0.69 per share compared to $0.69 per share for the same period last year.

Turning to cash flow, the Company generated $17 million in cash from operating activities in the fourth quarter of fiscal 2013 compared to $13.1 million for the same period last year.

On a year-to-date basis, the Company generated $66.3 million in cash from operating activities compared to $45 million for the same 12 month period last year.

On a year-to-date basis, capital expenditures were $42 million compared to $17.8 million for the same 12 month period last year.

We expect our capital expenditures to be approximately $25 million to $30 million in fiscal 2014.

A large part of the fiscal 2013 capital number of $42 million was associated with the acquisition of land and building that our Swiss Company was leasing we acquired for approximately $15 million and $9 million for the purchase and renovations of new or existing properties in California, Connecticut, Georgia, Mexico and South Carolina.

All these expand our aerospace capacity.

Excluding these projects, our capital expenditures would have been $18 million right in line with our normal capital expenditure rate of 3.5% to 4.5% of sales.

The Company ended the fourth quarter fiscal 2013 with $115.8 million in cash and short-term investments and $10.3 million of debt on the balance sheet.

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

(Operator Instructions)

Edward Marshall, Sidoti.

Good morning.

The first question was on the industrial business, which the performance on the sequential basis looks a lot different than the year over year change.

And I was curious if we can maybe look at it or cut the data a little bit and look at it maybe from a daily sales run or some other kind of performance metrics that we can measure a little bit easier.

Has it bottomed?

Are we recovering slowly from the bottom, or is the seasonality in December skewing the data a little bit?

We're trying to take in what you just asked us, Ed.

Well Ed, in the fourth quarter, I mean in the third quarter fiscal 2013, industrial was $43.3 million, and in the fourth quarter is $46.9 million, so we have some sequential growth there, and I think we're seeing those types of levels carrying into our first quarter on the industrial side.

Arguably, I guess there's a year over year comp was pretty tough last year.

Yes, if you think about it last year, in our fourth quarter last year, if you compare fiscal year 2012 to fiscal year 2011, our industrial business grew at 25.4%, and our aerospace business grew at 25%.

So tough quarter to comp against, and obviously the growth rates will get a little stronger during the year as these comps get a little easier as we go through Q2/Q3 of next year.

Okay, so I mean -- so the big drops are passed I guess is what I'm trying to get at?

Seems as though there's some sequential improvement even though looking at the seasonality in the fourth quarter and trying to normalize that, it looks like we've kind of bottomed and started to trek back out of the trough here?

Yes, I'd say that's true.

That's how we see it.

We have other projects coming for other markets, and they just haven't phased in to the current quarter, and probably won't phase in until the end of our fiscal '14.

But certainly the core industrial business has bottomed, and it looks like it's growing back with parts of the sector healthy and parts of the sector just sort of normal.

So there's no need to further increase your restructuring that you've already announced, so you aren't going to bring in any further than what you've already done, correct?

Correct.

I think in the release that we put out this morning, you see we spent $6.7 million.

We'll have a little bit of period costs that go through 2014, and it's about $1.2 million.

Some of it's depreciation on the building until we get to a conclusion either lease or sale of the building, and some of it's for continued moving costs to complete the restructuring and consolidation, but there's no new projects or consolidation projects on the radar at this point.

Okay, and then the cadence is where I guess two thirds almost of the way through the quarter albeit a few days, I think you mentioned that the performance so far on the industrial side has been relatively the same to your fourth quarter.

Aerospace as well, or is that the same kind of ballpark, or any comments you can make of the cadence through April and May so far this year?

The question is first quarter to fourth quarter?

Yes.

Yes, I'd say we're expecting it to be about the same.

We are seeing some accelerations in the aerospace market with people looking for products earlier than we anticipated, producing them and delivering them, which is always a pleasant surprise, but we expect sort of a normal quarter to quarter rate on aircraft also.

Okay, thanks guys, good quarter.

Peter Lisnic, Robert W. Baird.

Hi, good morning.

This is Josh [Hansell] in for Pete.

So we talked a little bit about industrial in the first quarter.

Just curious about your thoughts on industrial as you kind of progressed through the entire year of fiscal '14, how you think that would trend, are you a subscriber to the notion of second half calendar '13 industrial recovery if you would?

Well, I think the second half '13 industrial recovery is all based on the theory that mining gets better, and I'm not a big subscriber to that theory.

I don't expect it to get better.

I hope I'm wrong.

I think it's going to stay kind of where its been for the last two quarters.

That's how we've created our planning.

I think there's other industrial sectors we see strengthening, and the general industrial marketplace is good.

We think oil and gas will get better, and there's some other smaller markets in Semicon and other places where there seems to be upside in the fiscal year, so we're thinking industrial is okay.

I mean it's not a barnburner in aerospace, which has continued to get quarter to quarter stronger as new projects and new products come on line.

Great, thanks for the color there, and a little bit of a follow-up on the Aero side.

The fourth quarter growth was a little bit less because of the tough comp, but do you think that you can resume sort of the more double digit type growth in the next year, or do you think that comps have been difficult enough that might not be possible?

Well, I think that it's a little lumpy.

To some extent, the delay in the 787 program has kind of slowed things down a little bit, and they're back on the gas with that, so we're seeing pull-ins.

As the 350 comes online, that will generate additional volume.

We have a substantial amount of new projects and products going into these aircraft and these engines, so as the new engines and new airframe are released, we are absolutely going to see additional volumes, and Boeing is now looking at stepping up the production rate on the 737 again, so that will create more volume in the system.

So I would think the double digit rate is within reach.

Okay, great, and then last question for me is, is there a way to quantify the annual cost savings from the consolidation of the Houston facility, and then also what portion of that savings would be cash?

Well that was running us about $800,000 a quarter of gross margin, of which 50% of that was cash and the other 50% was depreciation, so it's going to --we'll obviously see a positive impact to gross margins from the consolidation throughout the year.

I think it will be slower in the first half of the year because we're still in the middle of moving things around, setting things up and getting back to efficiency levels that make sense.

So I think from a gross margin standpoint, we're looking at for the year, we should be around that 38% range, and once we get further down the road on the consolidation, maybe on the Second quarter, we'll disclose what our new internal target is for gross margin for fiscal year 2014.

Okay, great.

Thank you for both of your time.

(Operator Instructions)

Kristine Liwag, Bank of America.

So my question first is with your Texas facility, I was wondering if the closure of that changes your strategy at all regarding the oil and gas market.

No.

They have very little to do with each other.

That was principally wind.

Sure, and then in terms of gross margins, how should we think about that in fiscal year '14, and are there further opportunities for gross margin expansion there?

Yes, like I just said on the last comment, I think for this year, we're targeting 38%, and once we get a little further down the road with the consolidation and getting those plants all working again, we'll come out and give everybody what our internal target is on gross margin for fiscal year 2014.

Sure, and then for your defense business, what are you hearing from your customers regarding sequestration, and how much of the headwind are you factoring in or are you thinking about defense in fiscal year '14?

Well, we're not seeing defense as a big growth leg for us in 2014, but there's still a lot of active programs, and they're all associated with either maintenance or airframes that have been -- or systems that have been committed and funded, so we're still seeing good demand, and we're really not feeling much effect from sequestration from our major customers.

Sure, and then for commercial Aero, I was wondering for where you are in terms of compared to line rates announced by OEMs, are you guys currently delivering to customers the same kind of announced rates that Boeing and Airbus have scheduled, or are you shipping below or above that?

Well, usually in order for it to work right, we have such strong planning for both of those customers and such strong logistics supporting the flow of product to both of those customers that if they are announcing a step up in build rate that's effective January 1, we're probably shipping bearings at that rate somewhere in July or August of the preceding year, so we're right in step with them.

Great, thank you.

Joe [Moreover], [Loma Sales].

Hello.

My question is on gross margins, and I realize Q4 is generally seasonally strong from a revenue standpoint, but 39.5% was a very strong number.

Normally you can look at incremental margins which in this case is a negative number divided by another negative number, so I'm wondering if management could help me out and give me some idea of gross margins.

What would they have been if revenues were flat?

So on an incremental $8.5 million in revenue, would we be looking at gross margins of 40.5% or maybe 41%?

Thank you.

Yes, Joe, probably we would have seen a little bit better gross margin, but we definitely would have seen a little bit better operating income because pretty much our sales and administrative costs are pretty much fixed costs with that small differential in volume, so you would have seen a better EBIT line and a little bit better gross margin line.

There's no question about it.

Okay, thanks.

There are no other questions at this time.

Very good.

Well, I'd like to thank everybody for participating in the call today, and the continued interest and support of RBC Bearings as part of your investment strategy, and we will be talking to you I think very shortly here in the next 45 days as we report the results of our first quarter.

Thank you very much.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation in today's call.

You may now disconnect.

Have a wonderful day.