RBC Bearings Inc (RBC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth-quarter FY14 RBC Bearings earnings conference call.

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

(Operator Instructions)

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

I would like to turn the presentation over to Rory MacLellan, Investor Relations.

Please proceed.

Good morning and thank you for joining us today for RBC Bearings' FY14 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 conditions.

These factors are also described in greater detail in the press release and 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, Rory, and good morning, and welcome.

Net sales for the fourth quarter of 2014 were $113.7 million versus $103 million last year, a 10.4% year-over-year improvement.

Our industrial markets were up 7.3% on a year-over-year basis, and our aircraft and defense products were up 12.9% over the corresponding quarter last year.

For the fourth quarter of FY14, sales of the industrial products represented 44% of our total sales; sales of aircraft products represented 56% of our total sales.

Gross margins for the period came in at a record 39.8% versus 39.5% last year.

Operating income was 22.1% of sales, which is about the same as it was last year and you would have to look at last year on an adjusted basis to give that comparison.

Our fourth quarter of FY14 showed the industrial OEM business up 5% overall on a quarterly comparison.

This is a net of a large ground defense program that ended last year.

Sequential quarters tell a different story.

Net of the same ground defense program, we saw an OEM expansion of 19.2% during the period, so there's both volume and a different number of production days that complicate that measure.

Relative to industrial distribution on a full-year basis, we were up 14.9% on a quarterly comparison; year-over-year, we were up 23.9%.

As we reported in previous sessions, we have seen the bottom of the industrial demand and are now seeing momentum turning favorably for our products in several markets, including mining, oil and gas, and industrial distribution.

Relative to our aircraft and defense business, we definitely saw continued demand as sales were up 12.9% for the quarter and 14.6% for the full year.

Obviously, we are very pleased with the performance this quarter and in the market recovery being demonstrated in most of our industrial markets.

Continued demand of our aircraft products, coupled with recent acceptance of several large product programs now in their infancy gives us a great deal of confidence for this year and beyond.

At this point, I'll turn it over to Dan, who will give you a little bit more color on the quarter.

Thanks, Mike.

SG&A for the fourth quarter of FY14 increased by $2.3 million to $19.6 million compared to $17.3 million for the same period last year.

As a percentage of net sales, SG&A was 17.2% for the fourth quarter of FY14 compared to 16.8% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $1 million associated with the addition of three acquisitions, $0.6 million in personnel-related expenses, $0.3 million in incentive compensation expense, and $0.4 million in other expenses.

Other net for the fourth quarter of FY14 was expense of $0.5 million compared to expense of $7.6 million for the same period last year.

For the fourth quarter FY14, other net consisted mainly of $0.5 million of amortization of intangibles.

For the same period last year, other operating expense consisted of $6.7 million related to the consolidation and restructuring of larger bearing facilities, amortization of intangibles of $0.4 million, and $0.5 million in costs associated with asset disposals and other items.

Operating income was $25.2 million for the fourth quarter FY14 compared to operating income of $15.8 million for the same period in FY13.

As a percentage of net sales, operating income was 22.1% for the fourth quarter FY14 compared to 15.3% for the same period last year.

On an adjusted basis, operating income for the fourth quarter of FY14 was $25.2 million compared to an adjusted operating income of $22.7 million for the same period last year.

As a percentage of net sales, operating income was 22.1% compared to an adjusted 22% for the same period last year.

Income tax expense for the fourth quarter FY14 was $6.7 million compared to $5 million for the same period last year.

Our effective income tax rate for the fourth quarter FY14 was 26.7% compared to 32% for the same period last year.

Excluding discrete tax benefits in the fourth quarter FY14 and FY13 of $1.1 million and $0.2 million respectively, our effective income tax rate for the fourth quarter of FY14 would have been 31.1% compared to 29.1% for the fourth quarter of FY13.

For the fourth quarter FY14, the Company reported net income of $18.2 million compared to net income of $10.6 million for the same period last year.

On an adjusted basis, net income would have been $17.1 million for the fourth quarter FY14, an increase of 7.6% compared to an adjusted $15.9 million for the same period last year.

Diluted earnings per share was $0.78 per share for the fourth quarter FY14 compared to $0.46 per share for the same period last year.

On an adjusted basis, diluted earnings per share would have been $0.73 per share compared to $0.69 per share for the same period last year.

Turning to cash flow, the Company generated $12 million in cash from operating activities in the fourth quarter FY14 compared to $17 million for the same period last year.

Capital expenditures were $6.3 million in the fourth quarter FY14 compared to $11.2 million for the same period last year.

The Company ended the fourth quarter FY14 with $123.6 million of cash and short-term investments and $10.5 million of debt on the balance sheet.

I would like now to turn the call back to the operator for a questions-and-answers session.

(Operator Instructions)

The first question comes from the line of Edward Marshall from Sidoti & Company.

Please proceed.

Good morning, guys.

Good morning, Ed.

My first question is looking at the industrial business and seeing the good improvements you had in the quarter here on a year-over-year basis, the first in some time.

I'm curious about the sustainability, because when I -- maybe we can look at backlog and you can parse out backlog and maybe what's happened there on the industrial side.

But I seem to remember your industrial business is short order business.

What visibility do you see there that we can see maybe this double-digit growth continue as we go forward?

Well the industrial business, most of the backlog is aircraft just because of the way the industrial business books.

But we are expecting to see continued strength in the markets of oil and gas.

One of the stronger market performances for us recently has been mining and that turned up in the middle of the third quarter last year and is definitely sustaining its demand.

And overall, it's hard to predict, but Europe has been very good for us, and particularly in the areas of trains and trams, and that business continues to be strong.

So I think we're going to have a good industrial year this year.

From my seat, it's tough to look at -- I understand the industrial markets are improving, but you've got some easy comps, the seasonality in the fourth quarter.

It's really -- it's difficult for me to see what the real number is here.

I know the year-over-year improvement, but there are some easy comps in the fourth quarter last year and then, of course, the seasonality, so the sequential improvement is tough to look at as well.

So how do I parse this business out, just think about on a run rate basis on the industrial side?

Any help you could provide there?

Yes, year-to-year, we should be up in the low single-digits, percentage-wise.

Okay.

And then when we look at the margins, you had a good year of gross margins.

You've done over the last several.

I'm just curious about, as we look out into FY15, what you anticipate from a margin improvement year-over-year, any help there?

Yes, let me -- I said low single-digits, I meant high single-digits.

I was going to say low teens, but I wasn't that brave.

High single on industrial growth year-over-year?

Yes, yes.

Absolutely.

Okay.

Mid to high.

Mid to high, okay.

I can hear Dan in the background.

I didn't say anything (laughter).

On gross margins, our -- we finished the year at 39.3% and our target this year internally is to try to get up to 39.8% to 40%.

It's going to be lumpy quarter-to-quarter, but we're feeling good that we'll be in that range by the end of the year.

And the bookend quarters higher, the two in the middle lower and it evens out?

Right.

Remember, Q3 is always the shortest amount of production days, so that's always a bigger challenge than the other quarters.

Yes.

And if I look -- I turn to cash and the balance sheet real quick, and I understand you paid the special dividend.

Just want to just quickly touch on maybe your thoughts on cash, maybe thoughts on acquisitions, it's been earmarked for acquisitions for some time.

I'm assuming that larger acquisitions are probably -- I won't say remote, but less of a target right now, as you're putting cash back to shareholders.

Is that a fair assumption?

I don't think it is.

The Company generates a lot of cash, and it has its cash cycle that's a little bit longer than 12 months, it appears, just because of the things that go on with taxes and the rest of it.

So it didn't appear to us that paying that dividend would be difficult from a cash replacement standpoint and we would probably be right back into that previous cash level in a couple of quarters.

So in terms of acquisition size, we look for a certain characteristic in the acquisitions that we make and the characteristic is one where we like to see acquisitions that help us in our core markets or move us into targeted markets.

We see, and we've done, as you know, many small ones.

If we were to do something that cost us $100 million and had $15 million of EBITDA and $70 million of revenue, we would have absolutely no problem financing that off of our balance sheet with either our cash or a blend between cash and debt.

So -- and that size of an acquisition would be out of the ordinary for us.

So there's just no inhibitions as a result of paying that dividend that we would incur based upon historically where we've been and currently what we're looking at in terms of candidates.

Okay.

Fair enough.

Thanks.

And Ed, just to add a little to that, post-dividend, based on today's cash, we're going to have a net cash balance still of $100 million.

We started the beginning of FY14 with $110 million and that's surely -- and completed during that period in 2014, two acquisitions.

So it's surely not changing our model at all from what we've done in the past and what we expect to do in the future.

Now, you said $100 million.

You are talking as of the end of May or the end of April or--?

Well, as of May.

Based on my cash position today, if I back out approximately $46 million for dividend payment on June 13.

Pretty good.

I'm going to be sitting here with $100 million in cash.

So for the first, say, 45 days of Q1, you've had a pretty good cash year so far?

Yes.

Yes.

Okay.

Thanks, guys.

Appreciate it.

Your next question comes from the line of Walter Liptak from Global Hunter.

Please proceed.

Hi.

Thanks.

Good morning, everybody.

Nice quarter, guys.

Thank you, Walt.

Wanted to ask about the organic revenue growth and see if we could talk about, sequentially, the improvement that you might have seen in the different parts of the business last quarter versus this quarter?

What we've seen in different parts of the business?

Yes, industrial versus aerospace?

Okay.

Well, just big picture point of view, from the industrial point -- starting there, we've seen the mining sector come back very strong.

It was clear to us that the -- most of the OEMs had liquidated their inventories over 12 months prior to our third quarter last year and some of them are in crisis mode to recover those inventories.

So, we're going to be feeling those kinds of pressures through much of this year and what happens to the OEM side of the mining business in our FY16 remains to be seen.

Oil and gas is very strong.

We have significant volume we see coming online for us for the balance of this year, so we're pretty well going to book out much of our capacity in that sector this year.

In previous years, that sector has been dilutive to our margins because we were in start-up and we were early in the program on a lot of sizes.

We are much more mature than that today and things are better.

So we've seen margin improvement, volume expansion, and improvement in demand from the entire cross section of that sector, so we're real happy about what we see there.

If I look at -- Europe has been very strong for us.

Part of the strength from Europe comes from their industrial aftermarket, which to a certain extent supplies the machine tool base in Europe and the United States that are making automobiles, so that's behind some of it.

To another extent, the precision watch-making industry in Europe, and particularly in Switzerland, is extremely strong and provides a nice, strong demand for our products.

And thirdly, we've initiated some marketing initiatives in Asia to follow some of the Swiss machine tool companies that moved to Asia and market their products there and that has been successful for us.

And we have some new products that are being well-received that are being absorbed by the overall world marketplace at a rate that's very encouraging to us.

¶ So we're seeing some really good things out of Europe that some of them are being generated because of economic improvements in the world and others are being generated internally because of programs through our development cycle.

The aircraft side is very steady and strong for us.

Everybody knows what the aircraft makers are reporting in terms of assembly builds and stepping up production rates.

We're definitely part of that.

Our base business is seeing volume -- quarter-to-quarter volume enhancements as a result of those stepped-up rates.

It's a little lumpy because there's so many subcontractors in the system and some of them are small and they don't plan well and become -- go from crisis to crisis in terms of what they want from us, in terms of their planning.

So that's the source of some of that lumpiness.

Superimposed on top of that is, we have some several large new programs, both in the US for the plane makers, the engine makers, and in Europe in the plane makers and engine makers that are substantially going to improve our offering, expand our offering, and significantly increase our revenues as some of these new designs mature.

So we're very busy, both in the development cycle and in the production side, in this entire air frame and engine business.

And that's the major part of it.

Okay.

That sounds good.

So sequentially, you'd say that things, with the commentary in oil and gas, mining, et cetera, that the organic growth rates are improving from last quarter?

Yes, in all cases.

Okay.

Okay, good.

When do those -- you mentioned the new large programs on the aircraft side -- when do those start generating revenues?

Is that this year, in the next 12 months?

It depends upon the program.

If you look at when does the 787 hit its full 10 planes per month production cycle, when does the A350 come online, and what engines are central to those plane systems.

So if you start to look at that, you see that by calendar 2017, you're starting to see -- you see a little bit of volume in 2016, but it's not material.

In 2017, 2018, 2019, it becomes very significant for us.

Okay, got it.

Thanks for that.

And Dan, this one you could probably address, is on the gross margin comments that you made, the 39.8% to 40%.

Can you talk about the components of that pricing?

You touched on volume, mix, and especially given the acquisitions that were done, how does -- any mix change from the acquisitions change the gross margin?

For us, it's based on volume improvement and cost efficiencies that we're working on in each of our 24 manufacturing facilities.

That's how we came up with our internal goal.

Okay.

So no gross margin dilution from the acquisitions?

Well, we still have a little going into the first quarter, but it all cleans itself out by the second quarter and on a [total] basis, it's just not that big.

Okay, great.

Okay, thanks.

I'll get back in queue.

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

Please proceed.

Thanks.

Good morning, everyone.

Good morning, Sam.

Just to start off with, you gave some guide posts on the industrial business, as well as gross margin.

I was wondering if you can maybe talk a bit about the aerospace business and your expectations again from a guide post standpoint for this upcoming year?

We certainly expect the aerospace business to be up probably the same percentage as it was in our FY14.

We don't see much of a change to that.

A certain amount of that growth will come from -- most of that growth will come from mature products that we've been supplying for some period of time, and the good part of that is the more time that you have to make these products, the more ideas you have on how to make your production processes more efficient and the better your margins as a result.

So we expect to see that performance out of aerospace this year.

Then as our new products start to phase in -- a little bit in 2016, 2017, we'll see -- we should see that growth accelerating.

Understood.

And if -- going back to industrial the -- you said almost 24% year-on-year growth in distribution.

Last year you were about flat in distribution, so a fine comp.

But just curious how much of that growth was organic and how much of that was potentially the acquisition aiding in the distribution growth year-on-year?

Yes, the organic part of that was about 2.4%.

That's helpful.

And then, in terms of the new facility that you guys have coming online in Poland, I believe last quarter you mentioned that you were nearly there, but it was under-absorbed.

Perhaps just getting an update there on what the expectations are for volume coming through that facility -- is it being -- are you paying all the D&A on it now?

Just an update on that facility?

Well, that facility is producing.

It's still under-absorbed.

That facility pretty much will be targeted for some of these new products that we talked about for the aircraft side of our business coming online in 2016 and 2017.

So as those products come online, Poland will play a bigger and bigger role and the absorption will -- the under-absorption will actually turn to gross margin, and so this year, if we come out of the fourth quarter fully absorbed, it would be a nice achievement.

Great.

And then just lastly, in terms of the new product introductions, I don't know if you have given a statistics like this in the past, but have you ever looked at new product, or product vitality index, new products as a percentage, introduced over the last few years, a percentage of total revenue?

Any numbers that you can maybe put behind to give us a goal post here of what you're trying to get to in terms of new product introduction?

I don't have a metric on that, Sam, that's easy to grab, that would be meaningful to anybody.

I would say this.

Most of our oil and gas business on the industrial side is new product.

A fair amount of programs right now on the aircraft side are new products, but they are very early in their revenue cycle so they are not meaningful to our top line.

As you know, on the aircraft cycle, it takes forever to get your products approved, tested, endorsed, certified, and specified on the drawings.

So we've been working through that for the last number of years on several programs.

And is it right--?

I don't have an easy answer -- easy percentage to give you in terms of content.

Understood.

Just one last one here.

Is it right to assume that new products carry higher prices and also higher margins as well?

No, it's not -- it depends upon the nature of the new product.

If it's a totally new, innovative design that you have originated and have a patent around it, then yes.

If it's a component that you've worked with the OEM on and the design is co-owned between you and the OEM, then you're probably going to be challenged on the manufacturing side to achieve your margins.

I would say we'd have a mix of both of those.

So inevitably, when you start up a large program on the OEM side, your margin is tight, because you are early in the maturity cycle, and as you work through your processing and performance issues, you're able to achieve your targeted margins.

So fortunately these programs start small, so the margin bites of the consolidated numbers is a small nibble, and if you have the program well enough defined and engineered, you should, over your plan cycle, be able to achieve your targeted margins.

That's the basis for a lot of our programs.

Great.

Thanks so much.

I'll hop back in queue.

(Operator Instructions)

Your next question comes from the line of Kristine Liwag of Bank of America Merrill Lynch.

Please proceed.

Hi, good morning.

Good morning, Kris.

You've talked about margin improvement a little bit earlier, you had said that 39.8% to 40% for the year.

When I look at my model, it's a little bit shy of the historical 1% target improvement that you guys had, had before.

So if we are seeing the bottom in the industrial cycle and volume really recovers and you get to that mid- to high single-digit growth in industrial, and aerospace continues to be stronger, what is preventing you from getting to that historical 1% target?

Is this conservatism built in, or is there some pricing headwinds that we should be aware of?

Kris, the conservatism is our CFO because I wanted to go with a 1% improvement and he doesn't want to do that.

He wants to use a smaller number than I wanted to use, so we went with his number for this call.

But I'm pretty confident that we're going to see pretty good margin expansion this year.

Great.

And then--

I'm a lot more confident than my CFO.

Let's put it this way (laughter).

So really I'll put down 1%.

In legacy aerospace programs, you had talked about the proprietary content versus the build-to-print for the OEMs.

How is the new aircraft development program's shift between your proprietary versus build-to-print differ from the legacy programs?

Do you have more proprietary content or less, and how should we think about the ramp-up in margins there as these programs ramp up?

Okay.

Let's take it one at a time.

The first part of your question, could you ask that again?

The mix between proprietary content versus build-to-print?

Okay.

There's a lot of -- I would say that our content is, when I think over the field here, there's content in both build-to-print and proprietary content.

So the proprietary content, obviously we prefer because it's easier on the pricing side.

The build-to-print, in order to achieve your margins on the build-to-print, you -- the proprietary nature of your business becomes that of your manufacturing processes.

Typically we'll look at a build-to-print opportunity, determine who our competitors are, what our advantage might be against those competitors, what the customer is trying to achieve, how committed the customer will be to our business over a multiple of years, and that will tell us how much engineering effort we should put into process development to secure the margins that we expect RBC Bearings to generate over that period of time.

If we feel that we can participate in an OEM build-to-print and come up with some innovative processes in order to achieve our margin objectives with a customer who is going to be committed to us over multiple years, then a green flag will come up and we'll begin the program.

So we weigh these programs very carefully and if they don't weigh out appropriately, we won't invest the time, effort, or talent in order to achieve the goal.

So we've been able to identify several really important programs for us that we could participate in that are of a build-to-print nature where the proprietary aspect of the build-to-print nature is our processing technology and our net performance out of those opportunities on a pro forma basis, appears to be very acceptable to us.

Great.

And the second part of my question is really what is the shift between proprietary versus build-to-print and legacy versus the development programs and if the development programs have more proprietary content or more build-to-print content?

I would say the development programs are split.

If I had to guess, and this is truly a guess, it's probably 50%/50%, thinking of all the meetings I sit in, in terms of development meetings and the products that we talk about, the nature of those are on both sides of that street.

Our legacy products, are we talking simply the aircraft side of the business?

Yes.

Yes, our legacy products are very -- a lot of them are standards, but we're the standard bearer and so it's a place that you really want to be.

Great.

Thank you.

Your next question comes from the line of Walter Liptak from Global Hunter.

Please proceed.

Hi, guys.

Thanks.

Wanted to ask about some of the income statement and cash flow numbers for 2015.

What are you thinking about for SG&A expenses?

Are you managing it now to percentage of sales, or how should we look at that?

We ended FY14 at 17.2%.

The first one-half this year, we're going to be closer to that range, but hoping by the end of the year for FY15 that we're closer to 16.5% range as a percentage.

Okay, great.

And how about tax rate for 2015?

34%.

Okay.

And any meaningful changes?

CapEx should be a little bit lower for 2015, right?

Yes, all of our major capital build-outs of brick and mortar have been done, so we should get back to our normal 3.5% of sales type number and that's basically what our depreciation is running at.

Okay, got it.

And then cash flow has been very good and, obviously, it's nice to see the special dividend.

Is there any change that we might see, continued dividend payments or share repurchase?

Any other uses of cash that benefits shareholders?

There's no immediate plans.

It's on a -- from time to time, the Board will evaluate where we are and what we have on the docket in terms of acquisition opportunities and what our cash position is.

We're trying to demonstrate that we're shareholder-friendly and I think we demonstrated that.

Yes.

Thank you.

Okay.

Thanks, guys.

Ladies and gentlemen, that concludes our question-and-answer session.

I will now turn the call back to Dr. Hartnett.

Thank you.

Just before we leave, because of the timing of this call, we're obviously very deep into the first quarter of our FY15 and so we basically have a few more weeks to wrap up the quarter.

To the largest extent possible, we see the first quarter of our 2015 to be almost identical to the fourth quarter of our 2014, with I'm sure some minor changes here and there that can't be targeted right now.

But the business is strong and healthy, performing well, and we're very pleased about today's position and where we're going.

And we thank everyone for participating in the call and look forward to our next one.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.