RBC Bearings Inc (RBC) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen.

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

(Operator Instructions)

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

As a reminder this covered his been recorded for replay purposes.

I would now like to turn the presentation over to Mr. Rory MacLellan, investor relations.

Please proceed.

Good morning and thank you for joining us today are RBC Bearings fiscal 2014 third-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 Security Litigation Reform Act of 1995.

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

We refer you to RBC Bearings' recent filings with the SEC for more detail 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 press release and is available on the companies website.

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

Thank you Rory, and good morning.

Welcome to our third-quarter fiscal 2014 conference call.

The net sales for the third quarter 2014 were $100.5 million versus $96.3 million last year over the same period.

An increase of 4.4%.

Our industrial markets were down 0.8% on a year-over-year basis.

Our aircraft and defense products were up 8.6% over the corresponding quarter last year.

For the third quarter FY14, sales of industrial products represented 43% of our total sales.

Sales of aircraft and defense products represented that 57%.

Gross margins for the period came in at 38.3% versus 37.7% in fiscal 2013.

On a year over -- year-to-date basis gross margins were 39.2% versus 37.4% in FY13, right on our internal target of 1% to 1.25% improvement year-over-year.

Our third-quarter of FY14 showed the industrial business up 3.8% net of the large Ground Defense program that we had of last year.

Sequential quarter to quarter comparisons are difficult to make because of the large differences in our production calendar which governs the days we operate the business.

Our third-quarter, on average, had a total of 58 operating days.

The standard quarter for us is 62 days.

The differences is worth $7.5 million in revenue to us.

Our fourth-quarter is configured with 63 days and will produce a rate of slightly more than $1.75 million a day.

Hence the fourth quarter so is always our largest, and that will hold true again this year.

As reference, we produced and sold at a rate of $1.65 million per day in the second quarter.

As you know, we formally budget the company each quarter.

Our plan for Q3 was finalized in mid-September.

We performed precisely to that plan.

Given the rates discussed, we will do the same for this fourth quarter.

The components of our industrial business are distribution and OEM.

On a year-over-year basis were up 23.1% in distribution and down 5.2% in OEM sales net of the Ground Defense program.

Relative to our industrial markets, we definitely saw positive change in demand mid-quarter in both the sectors we classify as construction and mining as well as oil and gas.

We are planning a step up in run rate accordingly expect the results of this demand, if sustained, will be reflected in our first quarter of the fiscal 2015 performance.

Relative to our aircraft products, we felt the impact of increased run aircraft build rates the industry has published during this period with us strengthening in orders.

Given the lead time, this is a positive sign beginning the first quarter of next year.

As a footnote, we saw that increase in demand in the quarter coming late in the quarter.

And we really expected it in the final innings of our second quarter.

As far as the fourth quarter goes, we expect net sales to be close to on hundred $10 million, right on the 1.75% rate, a nice improvement over the fourth quarter of last year.

I will now turn the call over to Dan.

Thanks, Mike.

SG&A for the third quarter FY14 increased by $1.7 million to $18.3 million, compared to $16.6 million for the same period last year.

As for percentage net sales, SG&A was 18.2% for the third quarter of FY13, compared 17.2% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $0.9 million associated with the addition of two acquisitions since August of 2013.

$0.6 million in personnel related expenses and $0.2 million in other expenses.

Other net for the third quarter FY14was expensed at $0.6 million compared to an expensive $0.6 million for the same period last year.

For the third-quarter FY14 other net consisted of $0.5 million of amortization of intangibles and $0.1 million of costs associated with the acquisition of TCI in October 2013.

Operating income with $19.7 million for the third quarter FY14, compared to operating income of $19.2 million for the same period in FY13.

As a percentage of net sales operating income was 19.6% for the third quarter of FY14 compared to 19.9% of the same period last year.

Income tax expense for the third quarter FY14 was $6.6 million compared to $6.5 million for the same period last year.

Our effective income tax rate for the third quarter FY14 was 34%, compared to 35.1% for the same period last year.

For the third quarter of FY14, the Company reported net income of $12.8 million compared to net income of $12.1 million for the same period last year.

Excluding discrete tax benefit in the third quarter last year, net income would have been $12.8 million for the third quarter FY14, an increase of 6.3% compared to adjusted $12 million for the same period last year.

Diluted earns per share was $0.55 per share for the third quarter FY14, compared to $0.53 per share the same period last year, an increase of 3.8%.

Turning to cash flow, the Company generated $14.4 million in cash from operating activities in the third quarter FY14, compared to $19.5 million for the same period last year.

Capital expenditures were $8 million in the third quarter FY14, compared to $19.2 million for the same period last year.

The company ended the third quarter FY14 with $118.3 million of cash and short-term investments, and $10.7 million debt on the balance sheet.

I would now like to turn it back to the operator to begin the question-and-answer session.

Thank you.

(Operator Instructions)

Edward Marshall, Sidoti

I just want to check my math, if I could.

When I look at the organic sales in the business and trying to X-out the three acquisitions, I guess it looks like it's down about 1%?

Is that math right?

I guess I should also be thinking about ground vehicle and X-ing that out of the numbers, which suggest the number is slightly up.

Is that math about right?

Yes.

For the total company, our growth rate was 4.4%.

If you pull out the acquisitions, organic growth was down 1.5%.

If you pull out Axle Tech, we would have been up 6.5%.

But organic minus our military vehicle would have been growth of 0.5%.

Okay.

And then, if I look at the aerospace and I back out some of -- I know it's difficult because we don't have complete data there -- but if I try to back out some of the acquired sales it looks like it was up maybe 2% in the quarter.

I'm just curious -- if I was to ship a plane today -- when did you ship the product that would be on that aircraft?

I will answer the first part for you and then Mike can answer the second.

The organic growth for aerospace was 4.8% in the quarter.

I will let Mike answer the lead time question.

We've always offset the increase in plane build rate by 6 months with regard to when we think we have to ship the bearings to the manufacturer or to the sub.

Clearly that rule was breached a little bit in the fourth calendar quarter, because we saw tepid demand early in the quarter and we were wondering how are these guys going to build airplanes when they are not ordering bearings at the right weight?

We were kind of scratching our heads.

And then late in the quarter all of that reversed and new orders started rolling in.

I think part of the problem is we deliver these products -- we never have delivery issues; we deliver all of these products on time all of the time.

The good news is, we are gold-rated for most of these customers.

The bad news is, they're taking us for granted.

As I look at Boeing's guidance for plane deliveries next year, the midpoint suggests roughly 11%.

They're one of your larger customers and I think it's weighted the programs that you have larger content on.

Is it right to look at that 11% growth rate and think that you can grow a little bit faster than that, given that you're waiting?

Or how do I think about how defense fits into that equation as well?

Defense has been pretty steady.

It hasn't seen any -- taking the Axle Tech ground thing out of it -- hasn't seen a big ups and downs.

It has been steady and predictable.

You should see -- Boeing's increase in build reach should be directly reflected here, because of contractual relationships we have with Boeing and the subcontractors for all of these products.

You have Embraer, Bombardier, Gulfstream -- other guys that are either maybe diluting that a little bit, given what is happening in their industries, in their businesses.

Or maybe they're accreting to it.

I think Boeing is a good standard to set your helm to.

There's no issues with inventory or anything like that?

You didn't produce ahead of any kind of rate increases or anything to that matter that we should be thinking about?

It sounded like -- given the comments about the early part of the quarter, that inventory really isn't an issue, and that you should be growing along with the growth --

It's business as usual.

Finally, I just want to ask, we [haven't] talked about ground vehicles for sometime -- I think that we're close -- I don't think we're there yet -- but I think we're close to the last comparable quarter for Military Ground Vehicle.

I'm sure you're going to be happy when that's out of the numbers, but can you give me the cadence for FY13, last year, quarter by quarter, so we can get an idea of how that ground vehicle looks?

Sure.

For FY13, we did $11.462 million on military vehicle.

In Q1 we did $3.681 million; in Q2 we did $4.214 million; in Q3 we did $1.919 million; and in Q4 we did $1.648 million

This year, just so you know, in Q1 we did $633,000, Q2 $61,000, Q3 $2,000, and my guess is Q4 will be zero.

Thanks a lot.

Peter Lisnic, Robert W Baird

(technical difficulty) X acquisitions growth minus 1.5% in the quarter?

Correct?

Organic growth was minus1.5%.

Okay.

Perfect.

And then I heard -- at least I thought I heard -- on the construction and mining and oil and gas side, maybe mid-ish quarter saw demand trends turn a little bit more positive.

Can you give us a little bit of color?

Does that mean inventory pretty cleaned out of the channel, starting to see orders come in?

Is there maybe a book-to-bill or some sort of indicator that you can help us understand the order of magnitude of positive change in those particular verticals?

I think, Peter, in the construction and mining side, taking these one at a time, in the construction and mining side, certainly coming down the slope that the large OEMs came down, they were burning off inventory.

They never do that well for us.

It's just, they just put both feet on the brake and stop ordering those products.

Inevitably, they overshoot.

We had indications in mid-quarter, they overshot, and they are out of stock on important items for their after-market.

Okay.

So now this whole thing kind of reverses itself.

It's just a typical industry cycle.

And now we are on the other side of that cycle, coming up the curve.

That is definitely going on in construction and mining.

We have conversations every day with customers in that regard.

Oil and gas -- we are seeing more activity in the oil and gas field.

It is very positive.

We are expecting to have a very good year in the oil and gas business.

We are having meaningful discussions with large customers on volume purchases.

That hadn't been reflected in any order book in the fourth quarter, but these discussions are not pie in the sky; they are a long way down the pike.

And again, the oil and gas industry a little bit like the construction and mining, in some areas, have depleted inventory beyond where they need to be in terms of safety stock and have a little bit of a crisis on their hands.

We should be coming up the curve on the other side of that too.

Now that probably won't get reflected very much in our fourth quarter, because of the lead times associated with producing these products.

Fourth quarter is going to be on that $1.75 million a day rate.

Maybe a little bit north of that, depending upon how things change.

But it should be right on that rate.

In the first quarter next year we should start seeing some perkier behavior.

Okay.

So when I wrap all that up -- and thanks, Dan, for giving us the military numbers -- the OEM piece was an industrial -- I guess if I summarize all of that, maybe a slightly down fourth quarter year over year and then things turning more positive in fiscal 2015?

Is that right way to think about the comp trend in that OEM piece of industrial?

Yes.

And then just one question on margins or cost structure.

The SG&A number at 18.2% looked like a more elevated number than what we have seen over the past several quarters, maybe the past couple of years.

Is there anything in there -- not necessarily non-recurring, but -- I know you're spending a bit on growth -- is there a way of parsing out what that might be?

And maybe the way of asking the question more directly is, should we expect that level of SG&A burden to come down to more of a 15% or 16% level as we progress through fiscal 2015 and beyond?

Peter, that SG&A spending in gross dollars looks a lot better with a $110 million top line.

Because remember, those are period costs.

Right.

You'll have the same period costs in our fourth quarter with a different top line.

That is just the way it works for us.

You have to keep in mind that there is $1 million of additional SG&A associated with the three acquisitions that we did over the last 9 months.

It will take us a few quarters to integrate these transactions and get the leverage out of the SG&A that we had planned for when we acquired these businesses.

That is very helpful.

Thank you both for your time.

Walter Liptak, Global Hunter

Good morning, guys.

One of the comments I think I heard you say, Mike, at the beginning of your comments was, you -- I thought you gave guidance for the fourth quarter revenue.

Is that right?

Yes.

$110 million target.

As I look at the number, though, in the fourth quarter you'd had a similar amount of acquired revenue.

Right?

Yes.

About $1.8 million -- I'm sorry, about $5.2 million.

Okay.

So in the fourth quarter, again, the organic growth is still pretty modest.

I know you went through a few of those sectors and how it is trending.

But I guess I would have thought that with industrial starting to do a little bit better and aerospace, fourth quarter would see a little bit better revenue number.

I wonder if there's something going on, like with drawdowns from your customers?

Or just the way that you are approaching your calendar year in terms of production levels?

I wonder if you could just provide some color on that?

The question is -- I think the organic growth in the fourth quarter is really still diluted back by the industrial performance.

That's a flat year-to-year on oil and gas and down on construction and mining.

Again, the orders for that hardware won't be completed and delivered in the quarter.

That will be the issue.

Although we will see good demand, we will not be able to satisfy that demand with only 90 days left to produce it.

Industrial is deluding us back, and the organic growth in the quarter should be about 3% in total.

Most of that is driven, obviously, by aerospace and defense offsetting the decline in industrial.

If I can ask one on gross margin.

I got your comment about how on a 9-month basis, it looks like you are up 120 or so basis points.

The expectation, I guess, is that you would still be in that 100 to 150 basis point year-over-year improvement for the full year.

Was there anything in the gross margin, maybe related to the acquisitions, that weren't called out in the press release or your comments?

Yes.

Like I said in the conference call last quarter, there have definitely have headwinds on gross margin and SG&A from the acquisitions.

So it probably cost us a little over a half a point on gross margin, which will filter itself out by the third quarter of next year.

Our target this year -- remember, at the beginning of the year we told everybody 100 bps to 125 bps?

Right now, year to date, we're at 130.

I think we will have no problem maintaining that 130 for the full year even with the headwinds that we have from the acquisitions.

I think there's two other issues besides the purchase accounting treatment of gross margin for those acquisitions.

One is, we had an unusual issue with one of our vendors and it cost us about half a percent on consolidated gross margin.

That's not going to repeat, but it did create a fire drill for us.

The other issue is just mix.

During the quarter, some of the large, highly profitable products were in production but didn't ship.

Great.

I think we've become a little bit spoiled seeing your gross margin going up year over year and sequentially for so long that it came as a little bit of a surprise with this quarter.

But thank you for the bigger points.

Samuel Eisner, Goldman Sachs

If I could just go back to gross margins here.

Just curious how you guys are thinking about pricing and the impact of that on this quarter?

And potentially going forward, as well as with some potentially new facilities coming online, was there any under-absorption occurred this quarter?

Good point.

Pricing -- not much going on positive or negative.

The industry is putting through price increases at certain levels and we are following in the industry.

We probably won't see much of that until late in our first quarter, maybe into our second quarter.

We have, obviously, we're starting up the plant in Poland and it's completely under-absorbed.

It has a minor effect -- and I don't think we have even calculated this in, but we probably should -- on what impact of it's having today on our margins.

When did that facility come online?

And what is expectation for that to be running at a normal 70% or 80% utilization rate?

Yes.

I don't know.

I don't know the answers to your questions.

It will come online in our first calendar quarter.

We've had people from Poland in our plants training on skills and production practices, [engaging] techniques, et cetera, ramping up all year this past year.

It's probably something like between 8 and 12 people and their travel and the relocation expenses, et cetera.

I suspect that, that plant will be probably, at best, running at neutral by the end of next year.

And will be a small gross margin drag on us through the year.

But it's an important strategy for us to service the aircraft and machine tool business in Europe with the engineering and manufacturing process design being done in Switzerland.

On the distribution growth that you called out this quarter.

I believe it was up around 23%.

So just curious if that's just a function of using comps?

Or you've actually seen sequential improvement within the distribution channel?

A big piece of it, Sam, was related to acquisitions.

Industrial distribution on an organic basis was close to 1% growth over last year.

Lastly, obviously, cash balance continues to remain high, but you have about $4.60 a share in net cash.

Maybe some commentary on how you're thinking about capital allocation in the fourth quarter?

And also in FY15?

That 1% in organic growth in industrial distribution was diluted back pretty good in Europe.

The North American distribution growth was probably closer to between 3% and 4%.

Just to clarify that point

Your question on capital allocation?

Yes, just curious.

Obviously, cash continues to build here.

We're at about $4.60 a share in net cash.

So just curious how you guys are thinking about capital allocation entering FY15?

How's the M&A pipeline?

All of those things [tend to be] involved in capital allocation?

The M&A pipeline is healthy.

We expect to be doing our normal $1 million to $1.5 million acquisitions next year.

Maybe sooner rather than later, depending on how things flow here.

Relative to a dividend or any considerations like that, there is active and productive discussions going on with the Board.

Nothing's been concluded, but we expect to reach conclusion sometimes before the end of our year.

Thanks so much.

Kristine Liwag, Bank of America

My question is more for commercial aerospace.

It sounded like the weakness in the quarter is attributed more to timing of orders from customers and not necessarily from inventory restocking.

If your organic growth in commercial aero is up 4.8% and OEM production rates are closer to low double digits, do you expect the catch-up to occur mostly in 4Q?

Or will it stretch beyond that?

Do we expect to catch up in production rates?

No.

In your shipping rates.

Your sales growth is lower than what Boeing is producing.

So if there's no inventory restocking, then there's presumably some sort of catch-up for you to meet the lead times -- the production rates for them.

Is that catch up on the next quarter?

Or what's the timing on the catch-up for you?

The overall run rate that we had in the quarter, on the second quarter, was $1.65 million a day and the fourth quarter is $1.75 million.

We're not going to be much off that number.

That's just the way things work.

On a year-to-date basis for aircraft, we are up 12% and we expect, again, we will probably be a little closer to that 12% in the fourth quarter.

Baked into that $1.75 million a day rate to service the buildup in the aircraft business.

We expect to stay right with it.

It may phase in and out quarter to quarter, based on timing, but there should be no surprises if there's no inventory thing going on anywhere that we can measure or we know about.

It's all -- I think a lot of this subcontractors to Boeing and Airbus wait now for the very last minute for them to order our hardware, probably triggered by orders from Boeing.

This hand-band thing has taken -- that's just the way the industry is working right now.

It makes it challenging for us, because the normal production cycles for bearings, given the amount of process steps taken to make a bearing and get the specialty steels required to produce a bearing, are normally 20 to 25 weeks.

You really have to be ahead of your game, mix-wise, in order to be way inside of that and support the subcontractors.

Just to get the understanding, it seems commercial aerospace supply chain is operating at a tighter just-in-time schedule.

Is that a better way to understand that?

I think that's right.

Sure.

And then switching gears to defense.

Can you talk about the biggest movers and shakers on an organic basis, and also on a program basis, for that piece?

Well, it's a little confidential, Kristine.

We like missiles and helicopters and we do well in missiles and helicopters.

And we have long-term contractual relationships with the major builders there.

Those orders -- contracts are booked and orders are part of our backlog.

That's why we can say it's pretty steady, because we can look at our backlog and understand usage rates of these things and feel secure about where we are going to be, quarter to quarter.

Steve Barger, KeyBanc Capital Markets

I want to understand the revenue contribution from CMP specifically, since it's bigger than the other two acquisitions combined.

Is there seasonality in that one beyond what you discussed for this quarter in general?

Or can you tell me what that specifically added in the quarter?

CMP was $3.6 million.

And any seasonality beyond what the days issue that you talked about that impacted the quarter itself?

No.

Not that we can see after only owning them since August.

But they seem to operate in the same cycle that our normal industrial businesses operate.

Okay.

As you mentioned, you're 6 months in, but is it on track with expectations?

And how are you thinking the best way is to leverage that deal into improving results?

Is it new market opportunities?

Or driving inefficiencies out of that specific location?

Can you just talk through where you see the best opportunities?

I think it's both.

We're looking at trying to find better ways to make the product (technical difficulty) and we are working now to bring their product line offer and across our direct sales force and to start picking up the market share.

Mike, to go back your comment about the industrial cycle, starting to come up to curve.

Are you more focused now on finding new organic growth opportunities in that half of the business?

Or is there really managing capacity from what's been a low level?

Are you looking for acquisitions on that side, specifically to get in front of improving demand?

I know it's all important, but where can you make the most impact on the business if the cycle is turning positive?

We are always looking for a way to improve our product offering organically.

We have spent a lot of time, effort, money, capital, positioning our plants to do that.

We're early in the game on the oil and gas industry.

We are making a big bet that the oil and gas industry is going to be successful independent of any political administration that tries to make it unsuccessful.

We see nice upside there.

We are expanding our product lines there.

We are making bearings now that are up to 40 inches-50 inches, even more in diameter, to support the OEMs in that sector and it is being received very well.

Our major thrust right now -- that is one of them -- on the construction and mining we continue to work with large OEM people, trying to innovate and redesign their construction machinery so it's more durable and requires less maintenance interval.

We have a lot of new products in the breech that are being tested.

That could change the way some of this equipment is designed.

We're working also with large engine makers in that field to anti-frictionize some of the larger engines that are used in the big earth movers to make them more durable and able to achieve the EPA requirements that are being forced on the industry next year.

Really, those are our three major thrusts in the industrial OEM area.

We have even more vigorous thrusts in the aircraft, airframe and engine business that we can talk about sometime.

Just to stay on the industrial side for a second -- I know it's impossible to predict any specific program, but when you think about getting involved in the design process with a customer to re-engineer a part, is that something where you can see product in the field?

Is that a 1-year thing?

Or does that take 3 years?

Is there any way to frame up that process?

In oil and gas it will be next year.

It will affect next year's results.

In the construction and mining, it's probably out a year or two because of the test sequences that this machinery goes through.

It goes through lab tests, bench tests, field tests, tests with users-- that's kind of a long cycle.

It is both.

Some of it will affect next year.

And last one from me.

Any more color on the unusual vendor issue?

You said it will not be recurring.

But was it something related to shipments from them?

Or anything you can discuss?

It was related to a change in the product that they were shipping us.

It required us to cease manufacturing of that product and do some extraordinary testing and recertification before we could commence production again.

It was a fire drill.

(Operator Instructions)

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

I would like to thank everyone today for participating in the call.

It was certainly vigorous and we expected it to be.

We expect to have another interesting session after our fourth quarter, and hopefully that should be a good-news session.

Thank you and good day.

Thank you for joining today's conference.

That concludes the presentation.

You may now disconnect and have a great day.