RBC Bearings Inc (RBC) 2015 Q3 法說會逐字稿

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

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

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

We will have a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Mike Cummings, of the [IR Group].

Please proceed.

Thank you.

Good morning and thank you for joining us today for the RBC Bearings fiscal 2015 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 Securities Litigation Reform Act of 1995.

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

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

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

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

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

Thank you, Mike, and good morning and welcome to everyone.

Today we will follow the same format as we normally do.

I will provide some highlights for the quarter and Dan Bergeron will provide the color.

Net sales for the third quarter of fiscal 2015 were $106.3 million versus $100.5 million for the same period last year, a 5.7% increase.

Our industrial markets increased 13.9% on a year-over-year basis and our aircraft and defense products were basically flat with the corresponding quarter last year.

For the third quarter fiscal 2015, sales industrial products represented 46% of our net sales with aerospace and defense at 54%.

Adjusted gross margins for the period came in at 39.2% versus 38.3% in fiscal 2014.

Adjusted operating margins were 20.9% for the quarter versus 19.6% for the same period last year.

Our third quarter of fiscal 2015 showed the industrial OEM business up 13.9% from the same period last year.

Relative to the industrial distribution we demonstrated organic growth of 10.6% across a broad number of product.

Again, Europe was the standout in growth for us in this segment, up 37% year-over-year.

Demand for our products from industrial OEM customers was up a strong 15.9% from last year.

This was driven by the markups of oil and gas, mining construction as well as demand over a wide range of industrial markets in the United States.

We, like everyone else, are waiting to see how the current price of oil affects the customers in the E&P sector.

We are closely watching the capital plans of the majors to determine the extent of the downturn, and we are seeing reports of 30% to 40% reduction in capital budgets of the majors, but we think it's still early in the game.

We won't expect to see an impact on our revenues until the second quarter of fiscal 2016 at the earliest.

The sector remains about -- represents about 5% of our revenues, many of the products we supply are consumed on a daily basis in the recovery of oil and won't be affected.

Others are used in the development of the well site and will be impacted.

In any event, we estimate less than a $5 million to $10 million per year impact on consolidated revenues through fiscal 2016 after which our plan is to see growth through new product introductions.

In mining, the revenue base we saw forming in the second quarter demonstrated itself in the third quarter with steady demand, and the driver was principally aftermarket.

Relative to our aerospace and defense business, these markets were flat, relative to last year.

Aero distribution showed a contraction of 4.3%, and the OEM side expanded approximately 0.5%.

The largest reasons for the contraction in distribution is the business moving from this channel to the OEM channel.

Sales to defense customers contracted as a result of lumpy demand in defense helicopter and completion of some programs in ground defense.

We are expecting a renewal in the ground defense programs mid to late last next year.

Our sales to aircraft OEMs were up 8%.

Today we are busy preparing for further growth as the 787 program increases its volume and the 350 airframe comes online, and RBC has significant content in both of these programs.

Adjusted gross margin for the third-quarter fiscal 2015 was $41.6 million or 39.2% compared to $35.8 million or 38.3% for the same period last year.

The margin expansion is the result of favorable mix and improve -- improvement in manufacturing methods.

We did end the third quarter of fiscal 2015 with $119.2 million in cash and short-term investments.

We ended the third quarter of fiscal 2015 with $217 million in backlog compared to $218.4 million for the fourth quarter of fiscal 2014.

With a greater component of our sales coming from the industrial businesses than in previous quarters, this is expected and that business has shorter lead times, or like industrial distribution, the nature of which the sales are satisfied immediately from inventory and those numbers never reach backlog.

Also, under a considerable number of supply agreements on the aircraft side of the house, they are now passing through our contract cycle, and we expect those will be hitting the backlog in future quarters.

We are expecting to see sales in the fourth quarter of fiscal 2015 in the neighborhood of $115 million, with historically similar margins relative to previous year-end quarters.

We don't expect to see much of an impact on revenues or margins due to currency valuation changes.

These are both small headwinds and tailwinds in this regard.

There are small headwinds and tailwinds in this regard but the net effect on consolidated revenues and margins is minimal.

Most of our sales and purchases are in dollars, those contracts in other currencies either have currency collars or have a limited impact on consolidated results.

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

Thanks, Mike.

Since Mike has already discussed sales and gross margin I'll jump down to SG&A.

SG&A for the third quarter of fiscal 2015 increased $1 million to $19.3 million compared to $18.3 million for the same period last year.

As a percentage of net sales, SG&A was 18.1% the third quarter of fiscal 2015 compared to 18.2% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $0.6 million associated with incentive stock compensation expense and $0.4 million in other items.

Other operating expenses for the third quarter of fiscal 2015 was expense of $1.8 million compared to expense of $0.6 million for the same period last year.

For the third-quarter fiscal 2015 other operating expenses consisted mainly of $1.5 million associated with acquisition activity, $0.1 million in costs associated with the consolidation and restructuring of our UK facility which is completed, and $0.4 million of amortization of intangibles offset by $0.2 million of other income.

Further explanation of the $1.5 million acquisition activity in the third quarter of fiscal 2015, the Company incurred $1.5 million in legal fees, accounting, tax, environmental due diligence expenses on investigation of a large acquisition target.

The Company was not successful in the final bid in the auction process.

When we get to the Q&A session just keep in mind we are under a nondisclosure agreement there so we cannot discuss who the target was.

Operating income of $20.6 million for the third-quarter fiscal 2015 compared to operating income of $19.7 million for the same period in fiscal 2014.

Excluding the cost associated with the consolidation restructuring and acquisition activity, operating income would've been $22.2 million for third-quarter fiscal 2015 compared to an adjusted $19.7 million for the same period last year.

Excluding these adjustments, operating income as a percentage of net sales was 20.9% for the third quarter of fiscal 2015 compared to 19.6% for the same period last year.

Income tax expense for the third-quarter fiscal 2015 was $6.1 million compared to $6.6 million for the same period last year.

Our effective income tax rate for the third-quarter fiscal 2015 was 30.3% compared to 34% for the same period last year.

The effective income tax rate for the third quarter of fiscal 2015 includes discrete tax benefits of $0.7 million.

Effective income tax rate without these discrete tax benefits would've been 33.7% compared to 34% for the same period last year.

For the third-quarter fiscal 2015, the Company reported net income of $14.1 million compared to net income of $12.8 million for the same period last year excluding the after-tax impact of costs associated with consolidation and restructuring and acquisition activities, and the discrete tax benefits.

Net income would've been $14.4 million for the third-quarter fiscal 2015 compared to net income of $12.8 million for the same period last year.

Diluted earnings per share were $0.60 per share for the third-quarter fiscal 2015 compared to $0.55 per share for the same period last year.

Excluding the after-tax impact of costs associated with consolidation and restructuring, acquisition activity and the discrete tax benefits, diluted earnings per share for the third-quarter fiscal 2015 would've been $0.62 per share compared to an adjusted EPS of $0.55 per share for the same period last year, an increase of 12.7%.

Turning to cash flow the Company generated $17.7 million in cash from operating activities in the third-quarter fiscal 2015 compared to $14.4 million for the same period last year.

On a nine-month basis for fiscal 2015 the Company's generate $62.4 million in cash from operating activities compared to $36 million for the same period last year.

Capital expenditures were $4.4 million in the third-quarter fiscal 2015 compared to $8 million for the same period last year.

And on a nine-month basis for fiscal 2015, capital expenditures were $15.9 million compared to $22.6 million for the same period last year.

In the fourth quarter the Company expects capital expenditures to be in the range of $3 million-$6 million.

On a nine-month basis the Company paid a cash dividend of $46 million, repurchase common stock of $7.1 million.

[Then come] the end of the third quarter fiscal 2015 with $19.2 million in cash and $9.1 million in debt on the balance sheet.

I'd like now to turn the call over to the operator to begin the Q&A session.

(Operator Instructions).

Edward Marshall, Sidoti.

Hey, guys.

Good morning.

So I wanted to maybe look into the guidance you provided for the fourth quarter or the range for sales.

And I guess looking at maybe both components, industrial and aerospace, do you anticipate that aerospace first will continue a decline into the fourth quarter, or is that just something that was timing around the helicopter orders that you mentioned?

Just trying to think of the component buildup.

No, I think aerospace will be up a little bit in the fourth quarter.

I don't have that broken out.

So it looks like -- if that's the case, it looks like industrials have come off that midteens growth rate that you've seen for the first three quarters of this year, and probably fall into a single-digit rate based on kind of the year-over-year comps?

Yes.

I think that's basically true.

I think on the aircraft side, we've certainly -- given the fact that Boeing's plane build rate was up 14%, 15% year-over-year and Airbus was virtually flat, we are expecting to see next year Airbus move their numbers up.

And we are expecting to see some additional platforms and engine models that we have developed new products for come on.

So I think we are plateaued for a couple of quarters here, and then we're back up to growth on the aircraft side.

I see.

Just a point of clarification, I think when you were talking about the aerospace division you were talking about ground defense in that segment.

I thought that ran through industrials.

Is that right, or were you just -- is it actually in the aerospace division?

It's a different vehicle.

It's called the Bradley that actually runs through the aerospace side.

The one that runs through the industrial side is the M wrap, this is business we do in Axle Tech.

Okay.

And then finally, I guess the energy component, you gave a lot of color there.

Have you seen any declines in the business as of yet or the order book?

I know it's kind of newer for you so you probably don't have quite the feel for it, but maybe you can kind of talk about, maybe elaborate on what you provided already in your prepared remarks as to what you anticipate to timing, etc.

We've seen a decline from some customers, and we've seen an increase from other customers.

And the decline is from customers who were in the well development area and the increases in the customers who were in the recovery side.

So, so far so good on that.

We are anticipating, just given what we see for the capital plans, that that business is going to be off until oil gets back to a better price per barrel.

So how long that's going to be, we are thinking 12 to 18 months.

But frankly, no one knows, and we don't know any better than anybody else.

I see.

Okay, thanks.

Walter Liptak, Global Hunter.

Thanks.

Good morning, guys.

I wanted to ask about -- see if we can get a little more detail on the aerospace and your comments on Boeing.

What are you thinking about now with the supply chain and production rates for some of the aerospace?

It's been a little bit volatile.

Are we expecting it to improve into March or is it going to be beyond that before we start getting better growth in that market?

I think Boeing's production numbers year-to-year, year-over-year for calendar 2014 to calendar 2013 were up 14%, 15%.

And we are expecting, and they're publishing, that they're finding it to be pretty flat for the next year.

And then move up particularly in the 787 and 737 build rates for the year after that.

So it looks to me like they are trying to get their vendors to sort of consolidate and get into a production cadence before they take that next step.

So we don't see -- we think we are going to be sort of even with Boeing for the next year.

And then up from there, and Airbus -- they are expecting to grow somewhere around 10% year-over-year.

I don't remember the exact number, but it's in that 60 plane range.

So we have more content on Airbus then we had in the past.

So we expect to see some growth, particularly coming from the European side.

Okay.

Sounds good.

And if I could switch gears to the -- and ask about the transformational acquisition.

I guess maybe to not get into the NDA portion of it, but what sector of the industrial economy was it,?

Was it industrial, to have industrial and aerospace?

What kind of size do you think of as transformational, and are there other such deals that you are seeing out there?

There are other such deals.

That we are seeing out there.

Transformational size would be about the size that we are today.

And we like the industrial and aerospace space, depending upon the nature of the customer base.

Okay, very good.

Thank you.

Steve Barger, KeyBanc.

Good morning, it's [Ken Newman] on for Steve.

I was just curious if you could dig into, if you could, the gross margins by sector.

Industrial versus aero.

Did you see margins in either of those segments move materially in this past quarter, and trying to get a sense of where you expect margins for aerospace to go going forward.

I'm just trying to think of business by business where we saw the margins move the most.

I think we probably saw the margins move the most in some of our -- it was actually both defense and industrial is where we made some real margin progress.

And I think in both cases that was related to methods improvements in the way we produce these products.

So -- we work on that every week with the divisions.

And the divisions have objectives of margin expansion.

And they have -- in order to expand margins in an industry like this, it requires a considerable amount of skill in terms of manufacturing technique and know-how and design technique and know-how.

And most of our major divisions have those skill sets.

And so, they have the targets that they need in order to keep the margin expansion goals that we set for them.

And they do a pretty good job getting us there.

So that's just the way that -- that's just the way we make our bread here.

And it's been the culture of the Company since -- for the last 20 years, and I would say that now a lot of our major divisions are better at it than they have ever been.

They've played the game so many times that they are getting very expert at execution.

So I think our margins are safe, and I would hope that there's a few points of upside there.

Got you.

And then, I think a few quarters ago, you had mentioned some large volume expectations associated with a few narrowbody airframe starting in 2016 really ramping up in 2018.

I think those were the NEO and Max, specifically.

We've been hearing some murmurs about those orders for airframes weakening or being delayed with the new oil environment making operating these older models more cost-efficient.

Just curious, have you seen any evidence of this, and if you have what kind of impact does it have on your for-delivery expectations?

We see no evidence of it at all.

And I think both Boeing and Airbus's order book is so deep, I don't imagine that that's much of an -- a factor for them either.

Got you.

I'll get back in line.

Thanks.

(Operator Instructions).

Walter Liptak, Global Hunter.

I wanted to ask about Europe and the re-lo that you've done out there.

where are we in terms of starting to see some benefits from that labor arbitrage?

We are in a good spot.

You're talking about our Poland operation?

That's correct.

We are in a good spot.

The Poland operation is up, it's productive, is performing, it's beyond its breakeven.

It's an overall contributor to the good right now, and when you look at how the Swiss franc has strengthened, and how the Poland zloty tracks with the euro, we kind of look like geniuses.

So we have big plans for that plant going forward and we are accelerating that.

How much production is running through there?

Like if you're going to -- how -- where are you in the re-lo, what percent do you still have to run to move over to that plant?

We are probably using about 20% of the plant right now.

So at the very early stages of utilization, we've gone through the difficult period of hiring people, training them, relocating them to Switzerland for additional training, putting them back in Poland for production activities, and getting schedule in place, getting tooling in place, getting machines in place and getting that all to work in an environment that's beyond breakeven.

So, there's a lot of work behind us, and I think right now we definitely have the wind at our back on that plant.

We have a good operation, we have a first-class facility, we have a small but highly trained workforce, and now we can start scaling it up.

Okay.

With the way that the franc and the zloty have moved, is the gross margin impact larger than what you first thought?

Yes.

From that perspective, it should be.

We don't like the way the franc has moved relative to the euro from a competitive point of view on some of the other product lines.

So that's some of the things we're dealing with.

Okay, thanks, guys.

Steve Barger, KeyBanc.

Thanks for circling back.

Last quarter, you mentioned some strength in the mining MRO sector, Cat earlier lowered its sales guidance for mining because of low commodity prices and increasing efficiency from customers.

Your comments were a little more optimistic on mining.

Could you characterize activity levels and how it's changed over the past few months?

I think, if anything, it's just stabilized.

We saw that mining MRO side came back, come back, I think Cat's problem is they can't live on their MRO.

They are an OEM manufacturer.

These guys sold new machinery that covered their overheads and all that.

So that's a little bit different situation.

But we've seen stable demand, and it's stabilized now for the second quarter in a row.

So, we are feeling good about that.

And we don't see anything happening in the near term that's going to change that.

Got it.

And then, you mentioned some solid strength in the European markets this quarter, and I was curious if you could just talk about what's been the main driver of growth in that market, and has the strategy changed at all in that region for you guys going forward?

I think there's a couple of aspects for growth that are favorable to us.

First of all, when the US is making a lot of cars, and they are making a lot of cars now, they use a lot of machinery.

Machine tools.

And all their sub- suppliers use -- also have a population of machine tools.

A lot of those machine tools are made in Switzerland.

And so, machine tools that are made in Switzerland -- some of the designs have our tooling specified.

And so as the US volume of automobile production goes up, the consumable tooling that we supply goes up with it.

So although we might be selling those tools to OEMs that produce the machines in Switzerland, those machines are consumed in the United States.

So we are seeing some increased demand from that standpoint, which has been favorable.

And I think, secondly, we have some new products that go into the high-speed train, high-speed rail, and the Chinese have become very big fans of these products.

And so, we see our industrial business growing in China as a result of that.

And so, I think those are the two of the main drivers of that business that immediately come to mine.

Got it.

And then just one more if I could.

ROLL is typically pretty good at keeping price on industrial products.

Are you seeing any areas where the customers are pushing for price concessions or are the distributors telling you the price is too high?

Yes.

We've had customers telling us that for at least the last 30 years.

And they haven't let up.

I think it's part of the DNA when they hire new purchasing people or purchasing people go to seminars, and that's -- they are always trained to say, you're 10% high.

If you came off that 10%, we could probably do business with you.

So, it's part of the culture.

Some periods it's more intense than others, some markets it's more intense than others.

We have some intensity in some markets and some lack of intensity in other markets today.

And we have to learn how to deal with it.

And that's -- we work hard at trying to understand that, trying to train our people on methods and techniques of negotiation so that we can get a fair price for a good product.

So I guess, in general, you're not too worried about having to give up on price going forward.

You are always worried about that, I don't think it's material.

But we never -- I particularly don't like to do it.

I think everybody here knows that.

Thanks.

Edward Marshall, Sidoti.

Guys, I just wanted to clarify.

You mentioned size of an acquisition and you gave kind of a range of something similar to the size of you.

I wanted to clarify, are you talking about your enterprise value, your sales, both?

Sales.

Sales.

And when you broke out the costs associated with the acquisition-related expenses, generally you do most of the due diligence internally, I guess, partially because of the size.

Are you seeking outside assistance as well going through this?

Or I'm just curious --

On a typical small deal we do all the work internally.

But when you look at it a deal of that size and magnitude, then you need to bring in assistance to help you.

Okay, great.

Thanks, guys.

(Operator Instructions).

There are no questions in queue at this time.

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

Thank you, and I'd like to thank everybody for participating in the call today.

I hope it was good for you.

And we are happy with the performance in the quarter and we are going to go back to work and see if we can't do even better.

Thanks for your day.

Ladies and gentlemen, thank you for your participation in today's conference.

That concludes the presentation, you may now disconnect.

Have a great day.