RBC Bearings Inc (RBC) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the first quarter fiscal 2014 RBC Bearings earnings conference call.

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

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

At the end of 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 Mr. Rory McClellan, Investor Relations.

Please proceed.

Good morning.

Thank you for joining us today for RBC Bearings' fiscal 2014 first quarter's earnings conference call.

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

Before we begin today's call, let me remind you that some of the statements made today will be forward-looking, and made are 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 files with the SEC for a more detailed discussion of the risks that could impact the 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 press release and is available on the company's website.

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

Thank you, Rory.

Good morning.

Net sales for the first quarter of 2014 were $102.7 million versus $103.3 million for the same period last year.

Our industrial markets were down 22% on a year-over-year basis in our aircraft, and defense products were up 22.2% over the corresponding quarter last year.

For the first quarter of fiscal 2014, sales of our industrial products represented 41% of our net sales with aerospace and defense at 59%.

Gross margins for the period came in at 39.4% versus 37.2% in fiscal 2013.

Adjusted operating margins were a record 22.3% for the quarter versus 21.3% for the same period last year.

Our first quarter of fiscal 2014 showed the industrial OEM business down 29%, net of ground defense, the industrial OEMs were off 24% from last year.

Relative to industrial distribution in total we were off 3.4%.

Most of the shortfall was in Europe as our US industrial distribution business was up 6%.

Demand for our products from the industrial markets this quarter was off as some of the construction machinery, oil and gas producers, lightened their OEM build schedules, and the build-up of military ground vehicles in the US is currently for the most part on pause.

Although our major US-based military programs have cycled down, the ramp-up that is ahead of us for other parts of the world is now at its early innings.

In the first quarter demand for the construction aftermarket helped fill some of the new build shortfall, and formed a solid base for these products.

The good news is we are starting to see the bottom of the industrial side, with some positive order momentum building, which should result in some nice, sequential growth from our first quarter into our second quarter.

We are expecting a small but meaningful balance from our industrial business in our second quarter.

Relative to our aerospace and defense business, the markets grew at 22.2% in the first quarter of 2014, and showed sequential growth of 8.8%.

We continue to see strong interest in our core products and continued encouragement from our customers to accept and approved our new designs.

Interest in our extensive offering expressed at the Paris Air Show this year was overwhelming at times.

These products were developed for aircraft, airframe and engine applications, as well as the helicopter markets.

Our defense business continues to perform as we expect to see some growth in this sector in fiscal 2014.

Not including the ground defense initiative that we spoke about earlier.

We did end the first fiscal quarter of 2014 with $128.2 million in cash and short-term investments.

The current quarter, our second quarter, we are completing the consolidation of our large bearing manufacturing operations into South Carolina, adding new capacity predominantly to our aerospace operations in North America and Europe, as we prepare for further expansion in these markets and new designs.

Finally, our activity on the acquisition front has been brisk, and I trust we will have some good news to report over the next few quarters in this regard.

In summary, we ended the first quarter of fiscal 2014 with $218.9 million in backlog compared to $211.5 million for the same period last year.

And $216.5 million for the fourth quarter of 2013.

Looking ahead, we expect the second quarter of fiscal 2014 net sales to be in the same neighborhood as the first quarter in the $103 million range.

Our second quarter is normally a weak one because of summer holiday schedules and shutdowns, but this year that is clearly not the case.

I will now turn the call over to Dan and he will provide more details on our financial performance.

Thanks, Mike.

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

SG&A for the first quarter fiscal 2014 increased by $0.9 million to $17 million compared to $16.1 million for the same period last year.

As a percentage of net sales, SG&A was 16.5% for the first quarter, fiscal 2014 compared to 15.6% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $0.4 million in personnel-related expenses, $0.1 million in incentive stock compensation, $0.2 million in professional fees, and $0.2 million in miscellaneous expenses.

Other net for the first quarter fiscal 2014 was an expense $1.2 million compared to $0.4 million for the same period last year.

For the first quarter fiscal 2014 other net consists of $0.6 million, associated with the Large Bearing consolidation restructuring, $0.4 million of amortization of intangibles, and $0.2 million in costs associated with other expenses.

Operating income was $22.3 million for the first quarter of 2014 compared to operating income of $22 million for the same period of fiscal 2013.

As a percentage of net sales, operating income was 21.7% for the first quarter of fiscal 2014, compared to 21.3% for the same period last year.

Included in operating income was $0.6 million of expense associated with the consolidation and restructuring of our Large Bearing Facilities, excluding these expenses operating income would have been $22.9 million compared to $22 million for the same period last year, or 22.3% of net sales compared to 21.3% for the comparable period last year.

Income tax expense for the first quarter fiscal 2014 was $7.1 million compared to $7.9 million for the same period last year.

Our effective income tax rate for the first quarter fiscal 2014 was 32.1% compared to 31.6% for the same period last year.

The effective income tax rate for the first quarters of fiscal 2014 and 2013 included $0.4 million and $0.9 million of tax benefits due to the reversal of unrecognized tax benefits associated with the conclusion of federal and state income tax audits.

The effective income tax rate without these discreet benefits would have been 33.8% for the first quarter fiscal 2014 compared to 35% for the same period last year.

For the first quarter fiscal 2014, the Company reported net income of $15.1 million compared to net income of $17.2 million for the same period last year.

Excluding the after tax impact of the restructuring expenses, the CDSOA payment last year and the discrete tax benefits in both tax years, net income would have been $15.2 million for the first quarter of fiscal 2014, an increase of 8.7% compared to $13.9 million for the same period last year.

Diluted earnings per share was $0.65 per share for the first quarter fiscal 2014 compared to $.76 per share for the same period last year.

Excluding the restructuring expenses, the CDSOA payment last year, and the discreet tax benefits, diluted EPS for the first quarter fiscal 2014 would have been $0.66 per share, compared to $0.62 per share for the same period last year, an increase of 6.5%.

Turning to cash flow, the Company generated $17.4 million in cash from operating activities in the first quarter fiscal 2014 compared to $26.5 million for the same period last year.

Capital expenditures were $5.8 million in the first quarter fiscal 2014 compared to $6.1 million for the same period last year, and the Company ended the first quarter fiscal 2014 with $128.1 million of cash and short-term investments, and $10.2 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.

(Operator Instructions).

Please stand by for your first question.

Your first question comes from the line of Edward Marshall from Sidoti & Co.

Please proceed.

Hey guys.

Good morning, Ed.

Good quarter.

Questions first, I kind of want to touch on the aerospace business and maybe it is forward-looking, but I have heard with some of the material companies that I cover, that they talk about some of the rate readiness that they prepped for last year, starting to push back on some inventories that are stocking in the chain.

I just kind of want to discuss whether or not, and I haven't heard it from any of the other suppliers yet, but whether or not you are seeing any destocking in that business, or whether it is full go at this point?

Destocking on a lot of the nickel, as well as the aluminum products are seeing a little bit of destocking.

I know that is not necessarily what you consume, but it looks like Boeing and Airbus through the rate readiness program really made a lot of raw material get pushed up into the system.

I just want to make sure it is not flowing back to some of the supplier base.

Based on the revenue growth that you had in this quarter, it doesn't look like there is destocking, but I just wanted to get your point of view?

We have no issues or difficulty getting the materials that we need.

As a matter of fact, we are probably, if anything, long on those materials internally.

As we secured a position for performance on long term contracts to our customers.

So, we are, I think from the material side, we are in very good shape.

Maybe I should have been more clear.

I am referring to maybe your customer's inventory levels of your product?

Oh, yes.

No, we didn't see it in the first quarter and we are not seeing much of that in the second quarter.

Actually, our first quarter, our aircraft aftermarket and distribution business was very strong.

So no, we are not seeing it.

Okay.

And then switching gears a little bit.

You did a great job again on the margin and I am kind of curious as to how maybe the profile looks as maybe the industrial volumes start to come back?

I know you said you expect kind of modest sequential growth as we progress through the year.

But I understand the product mix is a little bit richer on aerospace than maybe it is on industrial from a margin perspective.

How does the margin profile look as some of the industrial volume comes back and soaks up some of the fixed costs?

Taking note that you have done some restructuring, and you have lowered your fixed cost base a bit?

Yes, well, that is a good question.

I think -- we don't see any major diluting effect by those increased industrial volumes.

So I don't think we are going to see any margin dilution if that is the nature of your question, Ed.

I think that's the root of it.

Yes.

Because actually the industrial OEM business is probably not as profitable as the aircraft OEM business, but the industrial aftermarket is probably more profitable than the aircraft aftermarket.

So it kind of balances out.

I see.

And you said you saw sequential improvement and maybe the order book filling up a bit.

Can you kind of talk maybe about which end markets, because you have highlighted the mining and oil and gas as being a big decline in the quarter.

Or responsible for the decline but what is responsible for the order book as it starts to fill?

The same markets or other markets starting to improve a little bit stronger than you would have anticipated?

I think the mining and the oil and gas, we don't see major sequential improvement in those markets, but just in the other general industrial markets, we do see a pickup in volume, and we see an improvement in Europe.

Is that to say that mining, oil and gas, have they bottomed?

Yes.

I think they have pretty much bottomed.

They were down substantially in our first quarter, and we are not expecting them to be up in any material way in the second quarter.

Great.

Thanks for your responses.

Thank you.

Our next question comes from the line of Walt Liptak, Global Hunter.

Please proceed.

Hi, thanks, good morning.

Good quarter.

Thank you.

My question is on the gross margin, too.

And maybe just to follow on to the last one, with some of these markets down, oil and gas and mining, have you been able to maintain price?

Yes.

Yes, we have.

Okay.

Then maybe just ask directly, as you look into the rest of 2014, last year, your first quarter gross margin was low for the year.

Is it kind of what you are thinking of that we are at a new level for gross margin for 2014?

Our internal targets, Walt, remember on the last call, I told everybody would tell you what our internal target is on this call.

We are looking at least a 1% improvement over last year.

We ended last year at 37.94%.

So I think it will be a little lumpy in the middle two quarters.

Like it always is because we have shorter production days.

But we should be able to achieve a 1% improvement over fiscal 2013.

Okay.

I thought that was the guidance last quarter was 100 to 150 basis points margin improvement.

Am I remembering that wrong?

Yes, I think that was two quarters ago.

Okay.

Okay.

I wanted to ask, too, about the aerospace.

It appears that sequentially, it is improving.

I wonder if you could talk about the sequential trends that you are seeing leading up to the Paris Air Show, and maybe talk about some of the products that you alluded to in your opening remarks?

Sequential trends we are seeing what everybody else is seeing in terms of increased production rates for particularly Boeing.

Airbus has pretty much stayed with their current rates, but Boeing has an objective.

They told us two weeks ago to get to 60 737s by some date, such an incredible number for me, I didn't even write down the date.

But clearly Boeing is going to make the jump from 38 to 42 next year.

And 777 business is good.

The 787 business now is through its problems, and that volume is increasing.

So the Boeing people are running through all of the subcontractors doing rate readiness studies, to make sure that they understand that there is capacity in the industry to support their build-up.

And they certainly have been here.

And we have gone through it with them.

So clearly, there is just a volume increase because of OEM demand on the Boeing side of the picture.

Now in addition to that, there are all sorts of new products that we have that are going into the 777 and the 787, which historically we haven't been the supplier of in the past.

So we have additional content on those planes, both in the airframe and on the engines.

So we are going to be tested with regard to our ability to produce all of this hardware, certainly the test will be an incremental one.

It will be a ramp.

Certainly next year at this time, we will be in graduate school taking tests on production volumes.

Okay, good.

Sounds good.

And maybe a last question is just on the backlog is up a little bit sequentially from the March quarter.

And it sounds like it is coming through a little bit better on the industrial side.

I wonder if you could talk a little bit about the mix of what you have got in backlog?

Yes, I think most of the backlog you're looking at is because of the nature of the products is probably heavily distorted toward the aircraft business, because so much of that aircraft business is under contract, and so as a result of being under contract, it rolls right into that backlog calculation for us.

And the industrial business is typically not so contract-driven, and so its representation in the backlog is much smaller.

So what you are really seeing there is an increase in demand for our aircraft business.

Okay, good.

Okay maybe this will be the final one.

On the industrial side, some of the machinery makers like Caterpillar and others are pretty weak right now.

And I wondered if you can comment on what you are seeing from the big machinery OEs, and if your comments about industrial, are they related to aftermarket and industrial distribution moreso than the OE side?

Well, the OE demand is mixed.

And yes, I think Caterpillar's demand on the OEM side is definitely down, and down substantially with us.

But on the aftermarket side of Caterpillar, it is steady.

You can kind of tell based upon where your shipments are heading, which markets those are being consumed in.

The other construction and mining guys are stronger than Caterpillar, and so they are certainly not down as much and have formed for us a pretty good base, and I suspect a lot of that base is supporting aftermarket equipment.

And we look at, we look pretty closely year to year at the tonnage of copper that is mined,to determine just how much as a proxy, how much of this equipment is being utilized.

And copper is a good proxy for the other minerals.

And that is holding up.

So the equipment is being used.

Bearings are wearing out.

The aftermarket business is strong.

There is more population in the construction fleet to consume these bearings, and so we are feeling reasonably good about where we are in that market right now.

Okay, good.

Alright.

I will give someone else a chance.

Thanks.

Thank you.

The next question comes from the line of Samuel Eisner, Goldman Sachs.

Please proceed.

Good morning everyone.

Good morning, Sam.

Back on the gross margin, the 220 basis points of expansion, is there any way to parse out what the different buckets are there between price and cost savings and absorption, how do you guys think about that, as far as the expansion is concerned?

Well, we try to save it wherever we can, Sam.

The way our business operates, and there are so many discreet business units, it is really a matter of considerable calculus to figure out, are you getting it with price?

I would say subjectively, there is a price component to it.

How much that component is contributing to gross margin is probably small, but there is a price component to it.

I would say the bigger component is execution, because basically for any product that you make, there are so many burdened hours in that product.

And if you can figure out, and most of your production cost is labor.

Burdened labor.

And it is mainly burdened with fringe benefits and all of the rest of that stuff, and some minor overhead accounts.

So if you can figure out how to make the time to produce a product, reduce the time to produce a product, you expand your margins substantially.

So each one of our operations has a list of, on a prorata basis of those products that generate the greatest revenues, to those products that generate the least revenue, and against that list we determine where we feel the margins can be moved the most with the least amount of work.

And so we do the easy things first.

And then the harder things next.

And when you keep working that list and you revisit the list every month, and have a meeting with the folks talking about progress and objectives, you can make good progress.

And I would say that is probably a large part of the difference.

Of I would say the third part of the difference is over the period, we have had a lot of vendors supplying various outside operations that we weren't internally tooled for,at substantial cost premiums.

And over the years, as we have gone through that list of how to improve the margins in our product, we have moved a considerable amount into some of our own plants and tools accordingly.

So I would say those are the three big components.

Great.

That is excellent color.

Then just on the industrial business, I assume there is a level of kind of absorption that is also benefiting.

Can you talk maybe about the differences in utilization rates on your aerospace and defense business versus your industrial, I assume as you are adding capacity in aerospace, you are running pretty high there.

I am curious how the industrial business is looking, maybe the cadence throughout the quarter?

Well, it is mix dependent.

Certainly the business has more capacity than we are utilizing right now.

That is because of the cycles in our core markets.

And so as those markets cycle back in, we will use the machine tool capacity that is available to us.

Now the machine tool capacity is just one sort of static element of capacity.

The more dynamic element is how many hours you put into the plant per month to produce its product.

So you can manage with a budget how many hours have to go into each plant in order to generate the targeted margins out of that plant, and those hours are the big cost elements for the plant.

A lot of the machinery is fully depreciated or has a depreciation curve that is very minor in the overall overhead component.

But the hours are major.

So we vary the hours plant by plant based upon what production rates we want out of a given plant in a quarter, which is based upon order book and market outlook, and then basically the margin falls out at the bottom as a result of that.

Great.

And just on the industrial business, you mentioned that distribution was up 6% year-on-year.

I think I heard that correctlyin the US.

How did that play out throw throughout the course of the quarter.

Were you stronger as you exited?

Did it ramp throughout the quarter?

Just trying to understand the progress there?

It ramped through the quarter.

Part of that is fiscal year driven and we always start April, April is always a little soft in our world because it is our first fiscal month.

And I swear everybody is just trying to catch their breath from finishing up the previous fiscal quarter.

Most people say that is not true, but I still adhere to that theory.

But as that quarter builds people, for us, the industrial distribution business built with it.

Great.

Thanks so much for the commentary.

Yes.

Thank you.

Our next question comes from the line of Peter Lisnic, Robert W. Baird.

Please proceed.

Good morning, this is Josh Chan filling in for Pete.

My first question is on the impressive growth at aerospace.

Mike talked about the OEM growth, but could you talk about sort of the aftermarket growth as well, how do you think of yourself there competitively?

Do you believe you are gaining share in the aftermarket, or is it a timing thing?

Maybe a little more color on the growth there?

Yes.

Well, are you interested mostly in the aerospace aftermarket growth?

Correct, yes.

Okay.

For our aerospace aftermarket, as we measure it, and define it, it is basically a number of distributors who service not only the aftermarket, but they really service small OEMs that are building out, supplying the larger subcontractors to the airplane builders.

So these OEMs are so small that they would be as a customer, too small for us to handle, so they go through this other channel.

So when we see volume pick up in that group, it is a little difficult for us to tell without an interview process, whether or not that volume was OEM-driven or aftermarket driven.

I suspect, given the profitability that the airlines are showing right now, they are actually starting to maintain the planes again.

So I suspect if we went out and surveyed our distributors to find out what the break was between OEM and aftermarket, we would probably see a bump in the aftermarket consumption because there has been a lot of deferred maintenance in the industry for years.

We haven't done that.

So it is only my theory right now.

Okay, great.

Thanks for the color there.

And then on the aerospace outlook, I think usually your sales steps up a little bit from Q1 to Q2 just seasonally, but it sounds like your guidance suggested that might not be the case this year.

So is there something unusual about the growth in aerospace this quarter that makes that seasonality trend not true this year, perhaps?

Well, normally, the first, our strongest quarters are fourth quarter and our first quarter.

And then the second and third quarters are typically weaker because they are shorter in terms of the number of production days in our accounting calendars, and there are a lot of holidays and vacations and plant shutdowns and all of that sort of nonsense that has to clear, in order to make the year come out.

So our second quarter typically would be smaller in revenues than our first quarter as a result of that.

Now this year we are not seeing that because we are seeing considerable strength from the aircraft people, and we are seeing somewhat of a bounce from the industrial guys.

So it is a little bit of an unusual year for us.

Okay.

And then last question is on potential acquisitions.

Given that your cash balance has increased steadily, are there any changes in terms of how you think about what is the sweet spot in terms of the target size or scope of business, relative to the past by any chance?

Well, the sweet spot for us is our businesses that accrue to our customer base that would make us, that would give us more volume with certain targeted customers.

And have good management teams so they weren't a burden on the rest of the Company's management, so that we could keep focused on our growth objectives and our margin expansion objectives inside of RBC.

So it doesn't matter, that business can be anywhere from $10 million to $50 million in revenue.

If it fit that profile, we would be interested in it.

Great.

Thanks for the color, and congratulations on the quarter.

Thank you.

Thank you.

(Operator Instructions).

Your next question comes from the line of Steve Barger, KeyBanc Capital Markets.

Please proceed.

Good morning guys, this is actually Tejas filling in for Steve.

I wanted to quickly follow up on the last question.

Can you just talk about what the pipeline looks like there?

Just on the targets that you are possibly viewing?

Well, do you want names?

(laughter) The pipeline is healthy, the pipeline is healthy and productive.

Okay.

Thank you.

And then just another one on margin.

Just trying to think about it in terms of incrementals and decrementals, how should we think about that by segment, I would imagine on the industrial side, given the weaker volumes, when that does come back, it would be stronger than on the aero side, would that be fair?

And then just numerically, how do you think about that internally?

How do we think about improving industrial margins internally relative to our consolidated overall margin, is that your question?

No.

Just kind of thinking about it in terms of incrementals and decrementals.

As volume comes back, you will have the fixed costs spread over a larger unit, if you will.

So I guess I am just thinking about it.

What is that?

Do you think of it that way internally, and if so, what is that numerically?

The way I think of it is this way.

Is that the real cost of running a plant is once you get by the material aspect is the hours, the direct hours invested in making the product.

The rest of the costs on the plant are not substantial to that.

That is where all of your, on an 80/20 or 70/30 basis, whatever plant you are looking at, that is where your costs are, so your fixed cost absorption is really in your SG&A line.

So as you generate more volume for a given gross margin, you certainly get better absorption to your sales and administrative expense.

So your operating income is the benefit of that.

Your gross margin sees much less benefit with increased volume.

Now other people think about that differently.

If you are running a plant in Germany or in Europe, where your labor expense is a fixed cost expense, then the whole equation is upside down.

But in the US and in other parts of the world, that is not the case.

Okay, no, thank you.

That makes a lot of sense.

And then just one more, if I could on the trends in the quarter.

If you could, excluding aero, just talk about how the trend was geographically as well as end markets?

I know you already addressed the construction and mining, but just kind of looking at what your order book looks like, what do you think two half 2014 can look like for you, especially given the easier comps that you will run into?

Some of the business that we have and we didn't talk about, last year in our first quarter, we had a big, lumpy sales going to some of our nuclear customers in Asia.

And that big lumpy sale doesn't come out until later this year.

So I would say that is almost a big reason why year to year comparison was down a little bit.

So some of our sales are very lumpy based upon the programs that we are working on.

Yes, sure.

And come out different quarters this year than they did last year, and I am sure next year we will be talking about that again.

Yes.

Just lastly, you may have already addressed this.

I am sorry if I missed this.

What do you expect the full year tax rate to be?

34.5% excluding the discrete tax benefits.

Great.

Thank you, guys.

Thank you.

Our next question comes from the line of Chip Rewey from Cramer Rosenthal McGlynn.

Please proceed.

Hi, thank you.

Do you mind circling back to your comments from your prepared remarks on defense and just industrial, because I think you said that net of defense your industrial markets were up, and I wanted to see how that would square with your comments on mining and things like that on the OE side, or if that was indeed what you said?

And then following up with the commentary that you thought that the quarter could have had a bottom on the non defense industrial orders at least, and what kind of strength, and why did you think that the quarter could have been a bottom?

Chip, I will answer the first part of that for you.

For our industrial business, it was down 22% and in there, we do have the military vehicle volume, so if you pulled that out, our industrial business was down 17.5%.

What Mike said was up was our industrial distribution.

If you pull out the European piece, our industrial distribution domestically was up.

Okay.

That makes more sense.

Okay.

And then on the order side?

Like what were you referring to when you thought it may have been a bottom?

Oh.

We would expect larger industrial product sales in the second quarter than the first.

On the OE, is that for just OE, or OE and aftermarket?

That is everything.

That is everything.

Driven by better aftermarket activities still, and are you seeing any OE order pickup, or is that still kind of bouncing along at the bottom?

Well, for mining and oil and gas, it is still bouncing along the bottom.

For other markets, it is better than that.

Alright.

Thanks a lot.

Thank you.

You have no other questions at this time.

Okay.

Well, then in closing, I want to thank everyone for their continued interest and support of RBC Bearings.

For participating in today's discussion.

And for making RBC Bearings a part of your investment strategy.

Thanks, and we will speak to you again after our second quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.