RBC Bearings Inc (RBC) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-one 2015 RBC Bearings earnings conference call.

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

(Operator Instructions).

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

And now I would like to turn the call over to Mr. Matt Steinberg of FTI Consulting.

Please proceed, sir.

Good morning, and thank you for joining us today for RBC Bearings' fiscal 2015 first-quarter earnings conference call.

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

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

Thank you, Matt, and good morning, everyone.

Net sales for the first quarter of fiscal 2015 were $113 million versus $102.7 million for the same period last year.

Our industrial markets increased 19.3% on a year-over-year basis, and our aircraft and defense products were up 3.8% over the corresponding quarter.

For the first quarter of fiscal 2015, sales of industrial products represented 44% of our net sales, with aerospace and defense products at 56%.

Gross margins for the period came in at 38.8% versus 39.4% in fiscal 2014.

Operating margins were 21.4% for the quarter versus 21.7% for the same period last year.

Our first quarter of fiscal 2015 showed the industrial OEM business up about 16.3%; and, net of acquisitions, increased 13.3% over the same period last year.

Relative to industrial distribution, in total we saw an increase of 24.7%, with an organic growth of 4%.

The 4% increase was attributable to steady growth across all of our general industrial markets.

The industrial distribution growth in the United States was close to 7.7%.

Demand for our products for the industrial OEM markets this quarter was driven by oil and gas producers, mining and construction, and a steady demand of general industrial markets in the US and Europe.

We were encouraged to see our European industrial OEM business up 33%, and our aircraft business there up a solid 11%.

The good news -- the basis formed in the mining market, primarily driven by the industry's MRO needs, while demand from the general construction sector remains steady.

On the industrial side, we are experiencing positive order momentum building across the broad base of industries, which are showing solid growth going into the second quarter.

We are expecting to see continued demand from the OEMs producing equipment for the development and completion of oil and gas fields, heavy trucks, construction, semiconductor equipment, trains, European ground defense vehicles, and machine tools.

Relative to our aerospace and defense business, these markets grew 3.8% in the first quarter of 2015, with a 9% growth in sales to the aircraft OEMs, offset by timing and distribution and steady demand in defense.

We continue to see strong demand from our core products, and continued encouragement from our customers to accept and approve new designs, some of which will have a major impact on fiscal years, starting 2016.

These products were developed for both airframe and engine applications.

Gross margins for the first quarter of 2015 was $43.8 million or 38.8%, compared to $40.5 million and 39.4% for the same period last year.

Our overall gross margin was impacted by new process startup in industrial products, along with a little drag from acquisition accounting.

We are happy where the margin story is going, and the continued new process introductions moving through our manufacturing methods programs.

We expect to reach our internal goal of adding 70 to 100 basis points by the end of the year.

But as Dan said in the last call, it will be lumpy quarter-to-quarter, and back-ended for the year.

We did end the first quarter of fiscal 2015 with $104.5 million in cash and short-term investments, after paying a $2 per share dividend in June of approximately $46 million.

In summary, we ended the first quarter of fiscal 2015 with $220 million in backlog compared to $219 million for the same period last year, and $218 million for the fourth quarter of fiscal 2014.

Looking ahead, we expect to see the second quarter of fiscal 2015 net sales to be in the neighborhood of $112 million, even with the shortened production days and the summer holiday schedules and shutdowns.

This would be a year-over-year growth of about 10%.

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

All right, thanks, Mike.

SG&A for the first quarter of fiscal 2015 increased by $2 million to $19 million compared to $17 million for the same period last year.

As a percentage of net sales, SG&A was 16.8% for the first quarter of fiscal 2015 compared to 16.5% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $0.8 million associated with the addition of two acquisitions; $0.4 million in personnel-related expenses; $0.5 million incentive compensation expense; and $0.3 million in other expenses.

Other, net, for the first quarter fiscal 2015 was an expense of $0.6 million compared to an expense of $1.2 million for the same period last year.

For the first quarter of fiscal 2015 other, net, consisted mainly of $0.5 million of amortization of intangibles and $0.1 million of other expenses.

Operating income was $24.2 million for the first quarter of fiscal 2015 compared to operating income of $22.3 million for the same period in fiscal 2014.

As a percentage of net sales, operating income was 21.4% for the first quarter of fiscal 2015 compared to 21.7% for the same period last year.

Income tax expense for the first quarter of fiscal 2015 was $8.2 million compared to $7.1 million for the same period last year.

Our effective income tax rate for the first quarter of fiscal 2015 was 34% compared to 32.1% for the same period last year.

For the first quarter of fiscal 2015 the Company reported net income of $16 million compared to net income of $15.1 million for the same period last year.

Our diluted earnings per share was $0.69 per share for the first quarter of fiscal 2015 compared to $0.65 per share for the same period last year.

Turning to cash flow, the Company generated $26.9 million of cash from operating activities in the first quarter of fiscal 2015 compared to $17.4 million for the same period last year.

Capital expenditures were $3.5 million in the first quarter of fiscal 2015 compared to $5.8 million for the same period last year.

At the Company, we're expecting that CapEx range to be in between $14 million to $17 million for this fiscal year.

The Company ended the first quarter of fiscal 2015 with $104.5 million of cash and short-term investments, after paying a $2 per share dividend or approximately $46 million on June 13, 2014.

As of the end of the first quarter of fiscal 2015, the Company had $10.3 million of debt on the balance sheet.

I will now turn the call over to the operator for Q&A.

(Operator Instructions).

Edward Marshall, Sidoti & Company.

So, you're not the first aerospace -- within your aerospace segment -- you're not the first company we've seen this quarter saw weaker demand on the aftermarket side, and down about 15% or something.

I'm just curious about your opinion.

Is there any changes in the distribution channel that is rippling through that -- especially when it comes to components, whether it's fasteners or bearings, as you guys ship -- is there anything that has changed structurally in the channel?

New customers, new way of dealing that you are aware of that might be the cause of this?

Because it seems to buck the trend of what you would think would happen at this portion of the cycle.

Well, I think last year we had a very large quarter for that aftermarket business, and so you are comparing it against a difficult comp.

When we look at the run rate over 12 months, it's pretty normal.

And we see that demand building again this quarter, so it's probably just timing.

But in terms of structural changes, a lot of these companies now were bought out by PE firms.

And they have to service a lot of debt, so they are probably squeezing their working capital more than normal.

Okay.

Which is -- you can only do that for so long, right?

Right, before you've got to rebuild that WIP.

Right.

It just seems to buck the trend, with the way traffic demand has been across the channel, you would think that the aftermarket would continue to be strong.

When I think about -- I'm sorry?

No, I think Mike's point was, it is strong still.

If you compared the distribution of $12 million in Q1, it was basically in line at the $12 million in Q4, even with less production days.

So we still see the strength there, but the comp, first quarter last year was about 14 -- a little over $14 million, so it was just an unusual quarter.

Okay.

So, is it roughly 19%, 20% of revenues on the aerospace is distribution?

Is that would you just said?

I think that's about right.

I'll just check your math there.

Yes, it's $12 million on --

65?

64?

-- $63.5 million.

Okay, okay.

And then when I think about your gross margin -- and I know there's a lot of different noise coming through, especially with the acquisitions and so forth that you made in the prior year -- but as I think about your industrial business building in fiscal 2015, what happens to the margin?

Because I know there's an awful lot of businesses in there that run in the low 20s, versus I think mid- to high-30s on the aerospace.

So I just kind of think about the mix there that would run through on your gross margin that might occur.

And I assume there will be some more absorption, but just walk me through on how that might work.

Well, on the industrial side, there's -- yes, I think the major issue for us on the industrial side is that we see some volume building in products that we -- where our capitalization to produce those products was out of step with demand, or becoming out of step with demand.

So a lot of those products were -- processes were outsourced.

So for the last 12 to 24 months, we have insourced a lot of those processes.

And now we're in a startup mode on those new processes in some of our plants.

And so as we mature down the learning curve, the margins there will get better.

And we see a lot of demand coming for those products in the next 6 to 12 months, so we're really working pretty hard to get all that squared away.

And based I guess, Dan, on the CapEx comments, it doesn't sound like with the insourcing and the additional demand that you see, that there's any reason to really put more capital into the ground, over and beyond, on the industrial side at least.

No, it's normalized now.

The capital spend has been put in place.

And now it's a matter of start-up, tooling, training, execution, returning to identifying where the -- what the Pareto looks like in the problem areas of process, and working the Pareto.

So that's right where we are today.

Last question.

I know there's a lot of different lines in your business on both sides of the business.

Is there a way to -- and I don't think we normally talk about this, but is there a way to think about utilization rates?

Maybe if you can compile them into aerospace and industrial, and where we are on those two businesses as a whole.

Is that possible?

Utilization rate?

We use everything.

I think we have right now, in the aerospace and the industrial side, we have plenty of capacity for the existing products that we produce to produce 25% to 30% more product without having to put a lot more capital in place.

I guess human capital would be the variable there.

It is.

It always is.

And on the industrial side?

Same.

That applies across the Company.

Across the Company, okay.

Thanks, guys.

Walter Liptak, Global Hunter Securities.

Wanted to ask a follow-on to the previous question in aerospace distribution.

And it sounds like this is a little bit one-timey in the decline.

Can you help to give some color on how things trended on a monthly basis through the quarter, and any thought on July, August?

Well, August is still pretty young, and July showed some pretty good strength in incoming order rate in total.

I can't tell you that I've boiled it down to what came in from aerospace distribution and aerospace OEM, US and Europe, yet.

But it looks more normal.

I can tell by the way the plants are booking, because certain of these distribution demand hit some plants harder than others, and the plants that saw a weak first quarter are now seeing a stronger second quarter.

So, that's probably a good sign that the distribution business is picking up.

Okay, great.

When do you negotiate pricing with that distribution channel?

We have multi-year contracts with most of our distributors on most of our products.

And I don't remember what the termination date for those contracts are, but I would guess those are out a couple years.

Okay, okay.

And then unrelated, you talked about the revenue growth for the next quarter being pretty good.

I wonder if you can delineate that for us a little bit, by end market or by line of business.

Well, certainly if you start off with the construction and mining side of the business, that's very strong.

Certainly our bookings -- our sales in the construction -- or to the mining OEMs that are supporting their aftermarket -- and we can kind of tell, based upon where we get the orders from, what part of the OEM demand is going to newbuilds, and what part of the OEM demand is going to the aftermarket -- that the situation is very strong for the mining aftermarket; stronger than we had capacity in the first quarter to satisfy.

So given the leadtimes and so on, now our back orders for the mining market are increasing.

So that's looking very favorable.

The industrial distribution business in total continues to look very favorable and strong for us.

The aircraft OEM, which was up 9% the first quarter, we don't expect that to change its rate at all, whatsoever.

And so I think the whole gain will be that aerospace distribution fill rate.

Okay.

All right, good.

And along those lines, typically your first quarter is a little bit lower gross margin anyways.

What are you thinking about for gross margins as you go into the second quarter?

I think Dan has the most recent information on that.

Yes, I think we'll be a little better, Walt, than Q1.

And like Mike said on his opening comments, it's probably going to be a little more back-ended for us to get to our internal goal of 70 to 100 bps.

We ended last year at 39.3%, so we're a little behind right now.

But we're still feeling confident that we can achieve that internal goal.

Okay, good.

Okay, sounds good.

Thank you.

(Operator Instructions).

Steve Barger, KeyBanc Capital Markets.

You talked about the uptick in the mining market.

Does it seem like your customers got surprised by this uptick, or were you surprised?

It's been low for so long.

Was this expected, or is it coming back quicker than people thought?

Well, I think it's been low because the industry OEMs were Cadillac-ing along with a great build rate.

So they had all these materials inbound, and all of a sudden their business dried up, and they still had all those materials inbound.

So I think the aftermarket has now absorbed those materials, and what we're seeing is the true steady-state aftermarket demand for MRO replacement.

And I think it has always been there.

We look at how these mine operators -- how many tons of material they mine each month, each quarter, each year.

That hasn't really been affected in a major way.

And so the operators are operating the mine; they are operating the equipment.

There's a lot more equipment out there than there was in 2008, so that aftermarket MRO business has been strong all along.

I think that inventories have been normalized, and what we're seeing is true demand rate right now.

Got you.

So, some of that OEM product just shifted to the aftermarket, which caused the inventory channel to lean out.

And now you are back to a good supply/demand imbalance for those aftermarket parts.

Exactly.

Okay.

Are you seeing it more, if you can tell, for underground or surface, or both sides of that equation?

Based upon where this is going, it's surface.

Okay.

And do you sell to -- well, I guess if you sell to companies that sell internationally, it can go anywhere.

But can you tell if it's more North American-based or more international?

Well, for us, it's more North American-based just because of our channels are North American strong.

Right.

But if it's international, then it's going directly through the OEM channel.

And we're seeing both channels strong.

Got you.

Has your view on industrial growth being mid-single-digit for the year -- I'm sorry, high-single-digit for the year -- has that changed any since you are now one quarter in?

Looks like it's going to be stronger than we thought.

That's the bottom line on that.

We didn't expect so much industrial strength this quarter.

Well, and I guess similar question on the construction side, are you seeing that across the board for -- if you can tell, is it dirt moving, is it aerial equipment, the cranes?

Where's the real strength?

Yes, I think on the construction side, we're seeing the dirt-moving part of construction steady.

We're not seeing any big change in demand there.

We're seeing the aerial lift side of the construction business as strong.

Right, okay.

Switching gears to the new products for airframe and engine applications, what does that do to your content per aircraft if you got adoption across the board for these products?

It really substantially increases it.

I can't give you -- I don't have the exact number by engine, and which engines go on the 737neo or anything like that, or MAX.

But we have those numbers, and it is substantial.

Got you.

Substantial being more than 10%, more than 20%, in terms of content per airframe?

More than 20%.

Got you, great.

Operating cash flow, Dan, very nice in the quarter.

Was that really a function of working cap, or what drove that increase?

Well, a little bit of it was working cap, top line.

And that's basically it.

It was just a strong quarter; it always is, because we always have a strong fourth quarter, so all that cash is coming in.

We didn't have a big investment in inventory.

And didn't have a lot of CapEx.

And we didn't have a lot of CapEx, from a free cash flow standpoint, so --.

Right.

All right, that's great.

I'll get back in line.

Thanks.

Kristine Liwag, Bank of America Merrill Lynch.

In aerospace, we are hearing that one of the major distributors is trying to grow its market share by increasing the number of SKUs they offer to customers, but are offering discounts to get those contracts closed.

And, in turn, they've been saying that they expect to preserve their margins by getting lower product cost from the suppliers.

So my question is whether or not you are seeing some of this pricing pressure from them.

And I know you mentioned that contracts are generally expected to end in the next couple of years, but is there pressure to renegotiate?

And are there other items that may be pressuring those margins?

Well, I -- gee, I wonder who you are talking about, Kris?

(laughter) I think they have very big margins over there, mainly in their fastener business.

I don't suspect that they -- I think the bearing business is a small part of their total business; a very small part of their total business.

So, our contracts extend for several years.

I'd have to pull out that one to know exactly what the term date is.

But we're not -- as of today, we're not feeling the kind of pressures that you just explained.

Great, thank you.

Samuel Eisner, Goldman Sachs.

Just regarding the gross margin pressure this quarter, I was wondering if you could actually parse out how much of the new product spend was embedded into that gross margin.

$0.01 to $0.02 a share.

That's very helpful.

And then these new products, what is the expected time that they are going to be rolled out?

Is this primarily products that you are introducing over on the industrial side?

Can you maybe talk about the end market applications for them?

Yes, they are both on the industrial side, and they are on the aircraft side.

The industrial side, they are not new products.

They are more new processes for products that are reasonably young lifecycles with us, and we expect to see substantial volume increases for those products in the next -- beginning almost immediately.

That's -- yes.

So, on the aircraft side, those products are -- let's see, how can I explain that?

Those products are associated with new engine introductions by the major engine builders for the more efficient airframes for the MAX and the neo.

And as the MAX and the neo generate their volumes, then they will absorb our products, which are really key components to those engines.

And those volumes build a little bit in 2016; more in 2017; substantially more in 2018; mature levels in 2019, 2020, 2021, 2022.

And that's where the really big dollars are.

That's very helpful.

Are you seeing any impact from Partnering for Success at this point?

We've been working on it continuously.

We have -- I think we have reached a successful conclusion with that with Boeing, and that's where we are today.

All right.

And just going back to the question on cash generation; obviously the last three years, free cash has been less than net income because of the -- basically the expansion in CapEx.

Are we nearing the point where free cash could begin to equal net income?

How do you think about that for the remainder of this year, and potentially even into next year?

Yes, I think so.

I think we're back to our normal run rate of CapEx being around 3% to 3.5% of sales.

And I think from a working capital standpoint, we're not going to see any major investments in working capital over the next 12 to 16 months.

And then just lastly on the gross margin expansion guidepost here of 70 to 100 bps, is that primarily -- I guess where does the confidence or conviction come from?

Is that primarily that new product drag goes away, and you should leverage that in the back half of the year?

Just wanted to understand that a little bit better.

Well, yes, I think the process drag that we're going through right now gets better each quarter.

That's a given.

So that $0.01 to $0.02 comes back to us, probably by the end of the year, gradually.

And the acquisition accounting blends back-out, and those three acquisitions, their margins every quarter get a little bit better as we transition into RBC's methods.

And then thirdly, we're getting further and further online with our new Polish facility, which will not be a drag; and, actually, will add value by the end of the year to gross margin.

So there's kind of three items that are impacting the number.

That's helpful, thanks.

Walter Liptak, Global Hunter Securities.

I just had a quick one on the revenue growth.

If OE is doing well for aerospace, and industrial stays strong, it seems to me that the swing factor, like you mentioned, is aerospace and defense.

And if that's coming back in July a little bit, why wouldn't you have greater than 10%?

Or is it just the uncertainty about the aerospace after that distribution?

Well, it's -- no, it's more associated with leadtimes now.

We're booking into January-February-March now.

So basically our second and third quarter is spoken for, in terms of rates and programs and promises and demand requirements, and all that sort of thing.

So it's really a leadtime issue.

Okay.

Yes, I get it.

Your next-quarter production is already baked.

Yes.

Okay.

Okay, perfect.

Thank you.

Thank you for your questions, ladies and gentlemen.

I would now like to turn the call over to management for their closing remarks.

Okay.

Well, I appreciate everybody's participation in today's call.

Some really good questions.

I think we explained our case pretty well, with regard to what went on in the quarter.

Any additional questions you might have, you can refer to Dan, and we'll be happy to try to answer them for you.

So thank you again, and we'll speak once more in October, I'm sure.

Thank you for joining in today's conference, ladies and gentlemen.

This concludes the presentation.

You may now disconnect.

Good day.