RBC Bearings Inc (RBC) 2015 Q4 法說會逐字稿

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

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

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

Later, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Mike Cummings, Alpha IR Group.

Please proceed.

Good morning, and thank you for joining us today for RBC Bearings FY15 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 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.

Net sales for the fourth quarter 2015 were $113.4 million versus $113.7 million last year.

Operating income was 22.3%, or $25.3 million, resulting in an adjusted EPS of $0.73 per share versus $0.73 per share last year.

I'm very pleased with our execution this quarter.

On a full-year basis, sales were $445 million versus $415 million last year, up 6.3%.

For the full year, adjusted EPS was $2.74 versus $2.58 last year, up 6.2%.

Adjusted EBITDA of $30.7 million was generated during the quarter, and $120 million for the full year.

Gross margins for the period came in at 39.6% versus 39.8% last year.

Aerospace and defense sales were up 2.2% for the full year and basically flat with last year on quarter comparisons.

For the quarter, there was a lot of noise in the aerospace and defense revenue line.

Some of it is a result of timing, where shipments were made early in the year in support of government programs.

Some of it is a result of weak aftermarket demand at the beginning of the year and government program run-out from earlier periods.

During this quarter, revenues for the aircraft aftermarket expanded 11%, and some of it is a result of the Swiss currency strengthening.

It is better to look at the full year, look at this as a full-year episode and that will normalize some of these issues.

The base OEM business in support of air frame and engine makers continues to expand at the low double-digit pace, and we continue to bring on new products in support of new designs for future production of aircraft and engines, which today are at the early stage.

For the fourth quarter of 2015, sales of the industrial products represented 44% of our total sales.

Sales of aircraft products represented 56%.

Our industrial markets were up 0.1% on a quarter-over-quarter basis.

Net of the Schaublin product sales, which were impacted by the currency shift, our North American market expanded between 3.5% and 4% for industrial products.

Dan will talk more about this subject in a minute.

For the full year, industrial sales were up 11.9% over last year.

Obviously, our recent acquisition of Sargent Aerospace & Defense will impact these results in a favorable manner going forward.

And we expect to see sales ending our first quarter in the $140-million range, as we have less than two months of operating performance to include here and also many issues to resolve on the accounting side to integrate the performance of Sargent with RBC's calendar.

Now I'll turn the call over to Dan.

Thank you, Mike.

SG&A for the fourth quarter of FY15 decreased by $0.5 million to $19.1 million, compared to $19.6 million for the same period last year.

As a percentage of net sales, SG&A was 16.9% for the fourth quarter of FY15 compared to 17.2% for the same period last year.

The decrease in SG&A year over year was mainly due to a decrease of $1.2 million associated with professional fees, personnel-related expenses, and other expenses, offset by an increase of $0.7 million in incentive stock compensation expense.

Other operating expenses for the fourth quarter of FY15 was expense of $0.5 million compared to expense of $0.5 million for the same period last year.

For both periods in FY15 and FY14, other operating expense consisted mainly of amortization of intangibles.

Operating income was $25.3 million for the fourth quarter of FY15, compared to operating income of $25.2 million for the same period in FY14.

We had a small amount of acquisition expense in the quarter, $60,000.

Excluding this cost, operating income would have been $25.4 million in the fourth quarter of FY15, compared to $25.2 million for the same period last year.

Excluding this adjustment, operating income as a percentage of net sales was 22.4% for the fourth quarter of FY15, compared to 22.1% for the same period last year.

Other nonoperating expense for the fourth-quarter FY15 was $3.2 million.

This is mainly comprised of $3.1 million associated with the translation and remeasurement on nonfunctional euro currency on our Swiss balance sheet.

Income tax expense for the fourth-quarter FY15 was $7 million compared to $6.7 million for the same period last year.

Our effective income tax rate for the fourth-quarter FY15 was 31.9%, compared to 26.9% for the same period last year.

The effective income tax rate for the fourth quarter of FY15 includes discrete tax benefits of $0.4 million compared to $1.1 million for the same period last year.

Excluding these discrete tax benefits, the effective income tax rate would have been 34.6% compared to 31.1% for last year.

For the fourth quarter FY15, the Company reported net income of $14.9 million compared to net income of $18.2 million for the same period last year.

Excluding the after-tax impact, the costs associated with acquisition activity, foreign exchange translation losses, and the discrete tax benefit, net income would have been $17.1 million for the fourth quarter of FY15 compared to an adjusted net income of $17.1 million for the same period last year.

Diluted earnings per share were $0.64 per share for the fourth-quarter FY15, compared to $0.78 per share for the same period last year.

Excluding the after-tax impact of costs associated with acquisition activity, foreign exchange translation losses and the discrete tax benefits, diluted EPS for the fourth quarter of FY15 would have been $0.73 per share, comparing to an adjusted diluted EPS of $0.73 per share for the same period last year.

Turning to cash flow, the Company generated $9.4 million in cash from operations in the fourth-quarter FY15, compared to $12 million for the same period last year.

For the full FY15, the Company generated $71.8 million in cash from operating activities, compared to $48 million for the same period last year.

Capital expenditures were $5 million in the fourth-quarter FY15, compared to $6.3 million for the same period last year.

For the full-year 2015, capital expenditures were $20.9 million, compared to $28.9 million for the same period last year.

In FY15, the Company paid a cash dividend of $46 million and repurchased common stock of $7.1 million.

The Company ended the fourth quarter of FY15 with $125.5 million of cash and $9.2 million in debt on the balance sheet.

I would like to turn the call back to the operator to begin the Q&A session.

(Operator Instructions)

The first question comes from the line of Walter Liptak with Global Hunter.

Please proceed.

Good morning, guys.

Good quarter.

Good morning.

Hi.

Wanted to ask firstly about the aerospace business and your comments about better to look at the annual rate.

I wonder, as you look out over -- if you grew a couple of percent this year, if you look out over the next 12 months, is that the growth rate that you're expecting, excluding the Sargent deal?

Good question.

Let's see.

The -- looking out over the next 12 months, we don't expect a currency shift to hit us again, so that ought to be good news.

I think last year we had a weak demand from the aerospace distributors and the aftermarket, and that seems to be normalized and strong now.

So I think the defense programs are tepid.

So I would expect that the overall, we're going to be in the high single digits in terms of expansion rate, driven principally by the major OEMs for air frame and engine and offsetting some of the defense weakness and no more currency impact.

Okay, that sounds great.

Are you expecting the Sargent business to see revenue growth over the next 12 months?

From their last 12 months?

Yes, I think they were at about 195, was the number that you guys press released.

I would expect them to be overall flat with the last 12 months.

Okay, and then Dan, maybe just to help with modeling, some of the overhead expenses, can you give us a number on what you think overall SG&A is going to be including Sargent in 2016?

Yes, I think it would be closer to around 15.5% to 16%.

Okay.

But our assumptions haven't changed since what we presented to you about a month ago when we announced the deal.

As you know, we're just in the process of preparing our beginning balance sheet valuations with our experts to make sure that our assumptions that we did give everybody are correct.

So I think when we report our first-quarter earnings the first week of August, everybody will get a good view of what we have on the books.

We have amortization and interest and debt-deferred amortization costs.

Okay.

So it sounds like the accretion numbers that you talked about previously are still -- those are still good numbers?

Yes, it's only been four weeks.

Good.

Congratulations.

All right.

Okay.

Thanks, guys.

The next question comes from the line of Kristine Liwag with Bank of America.

Please proceed.

Hi.

Good morning, guys.

Great quarter.

Thank you.

Not to rush or anything, because I know you're in the initial stages of integrating Sargent, but post-deal, I think you have about $130 million left in your revolver, and your net debt to EBITDA is about 2.6 times.

Could you maybe provide some color on your appetite for doing other deals and what you think about your priorities for capital deployment this year and maybe next year?

Well, let's start with the -- start at the top there, Kristine.

I think we won't probably do a deal this size this year.

I think we're going to be in the process of integrating the Sargent activities with the RBC activities and getting the accounting homogenized with RBC's accounting and getting our sales and marketing people lined up and working on improving their execution and margin expansion.

So I think we're going to be pretty busy with Sargent for this year.

I would think by the end of this year, we would be in a much better position to answer a question like that.

Great.

And then for your gross margins, historically, you guys have guided to about a 1% gross margin improvement on an annual basis.

When we think about the business, maybe without Sargent on a go-forward basis, is that 1% still what we should be looking at?

And then now with Sargent, what should that 1% look like?

Well, I think the 1% is still good for the base business and we have some good programs that are maturing now and starting to show their strength.

I think I would defer the gross margin expansion with Sargent included until our August conference call so that we have more time to spend with the Sargent people understanding where their opportunities are.

Great.

Thank you so much.

(Operator Instructions)

The next question comes from the line of Larry Pfeffer with Avondale.

Please proceed.

Good morning, gentlemen.

Congratulations on the quarter.

Thank you.

So just trying to dive into the industrial side of the business, what are you guys thinking about for a growth rate there?

Do you think the 3.5% to 4% you saw in the underlying North American business this quarter is a decent run rate for FY15 or FY16?

Yes, let's see.

I think the industrial business, it's got some strong spots and some not so strong spots.

So I think we look at the general industrial business that we service and it's strong and it's good and it's growing, and it's got some exciting new programs with substantial scale, which will be phasing in slowly this year and with more mass next year and the year following.

So I think general industrial is good.

I think the mining business, we expect that to start off weak in our first two quarters and strengthen in our last two quarters.

So mining is touch and go right now.

And on the oil and gas side of our business, I think everybody has a view of what's happening there.

That market isn't wonderful.

We're in a sweet spot in that market where our volumes have some protection around them for some of the OEMs that we service.

And so, I think we don't see any growth occurring in that market next year, and we're going to be happy to maintain a flat revenue number.

So I think the heavy lifting on our industrial business next year is going to have to be done in the general industrial markets.

Okay, and then do you have a feel for the split between the OEM and aftermarket side of it?

That's a 50/50 deal really.

It may be -- I'm -- Dan is searching for the right numbers, but I'm guessing it's -- what is it?

70/30?

This is Dan.

This year for the full year we did $72 million and $126 million to the OEM.

Okay.

That's all I had.

Thank you very much, guys.

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

Please proceed.

Hey, guys.

Thanks for taking my questions.

This is Nick Stuart on for Sam.

Hi, Nick.

Hello, Nick.

I just had one quick one piggybacking off of that prior question.

Can you talk about what you're seeing in mining that is giving you confidence in a back-half recovery?

What we see in mining right now is the aftermarket is pretty much propping up the whole mining world.

And so we look at the tonnage of copper and steel produced each quarter and see how well their mines are running and they are pretty -- they have been pretty consistent.

Any OEM growth that you see out of some of the big producers would benefit those volumes.

On the smaller side of the mining business, which we might classify as mining, but is really residential construction and street and highway construction and we just categorize it broadly as mining.

That business really responds well to how things starts and GDP growth, so a little pickup in that GDP area.

And a little pickup in housing starts is going to help that business year end, and we're subscribing to an increasing GDP growth rate as the year ages.

Got it.

That's helpful.

That's all I had.

Thank you.

The next question comes from the line of Edward Marshall with Sidoti.

Please proceed.

Good morning.

Good morning, Ed.

When you gave the split out of the industrial and the aerospace growth in the press release, you talked about a $1 million -- you excluded $1 million in foreign currency.

Is that all on the industrial side of the business, I assume?

No, it hit both sides.

Could you give the growth rates ex that currency?

Yes, yes.

So the growth rate for industrial for the quarter was 0.1%, and for aerospace and defense, it was minus 0.5%.

Okay.

And in the prepared remarks, we talked about maybe timing being -- and to look on a 12-month basis.

Over the full year, it looked like it was up about 2%, 2.5% for aerospace.

Do you have the mix between what the impact in commercial and what defense was for either the full year or the fourth quarter?

That would be helpful.

No, we don't have that broken down, Ed.

Okay.

And in the backlog, when I look at it down 4%, what's responsible for the decline?

Is it aerospace or is it industrial?

Well, first, about $4 million is just remeasurement due to the drop in the exchange rate.

Okay.

And then the other side of it is aerospace, mainly defense.

Okay.

And on that, it's mainly timing.

It's mainly timing.

We had a delayed contract that should have come in in our fourth quarter and actually came in in our first quarter, which amounted to about $2 million on that -- to that change.

Okay.

And this year, we have a substantial number of three- to five-year contracts rolling over in the aircraft business.

And since they are rolling over this year, you don't have as many years with a backlog as you normally do to roll into your backlog numbers.

So we're very busy negotiating and expanding, extending contracts through the next cycle.

And that is having a substantial impact on that number, too.

When we exclude maybe Sargent from the content discussion, and generally if -- my experience suggests that when these 3- to 5-year contracts come up, it's pricing and content awards that you win.

What -- if the index is 1 today or 100 today, a year from now, what do you anticipate your content will be on the commercial programs, excluding Sargent?

The index representing our base business?

Yes.

We don't expect to lose any.

We haven't heard of any of that.

We have actually have picked up some new accounts that are meaningful that we didn't have previously.

So then you have the A350, the joint strike fighter, and the 787 building in volumes and an increase in the 737 rates.

So we're going to pick up share and we're going to pick up mass.

So is it a content discussion about these contracts or is it a pricing discussion?

It's both.

It's both.

Certainly the new air frames, there's a lot of new content in the new air frames and a lot of new designs in the new air frames.

So that's -- there's substantial content discussion going on around that, and the rest of it is about pricing and terms.

Terms are a big deal and terms are hard to negotiate.

It seems like everybody's been schooled on that to an art form.

These contracts are taking time to put in place.

So I assume some of these new larger aircraft, like the 787, I assume they are not coming up for the 3- to 5-year awards, or are they?

Oh, they are.

They are, okay.

And you're not seeing any impact from partnership for success?

We are.

Okay.

And then, Dan, you talked about the accounting of Sargent and you talked about the SG&A in 2016 being 15.5% to 16% of revenue.

Historically when you make acquisitions, the SG&A ticks up; I think the last one was up about 100 basis points.

Is it because of the size of this deal that it's not?

Or is it because of the mix, it's aerospace, and therefore you're actually seeing a decline?

2000 -- it's been running around 17%.

So you expect it to fall?

Their SG&A as a percentage of sales runs a little lower than ours.

Until we finalize beginning balance sheet, find out where the amortizations fall and the depreciation, we're not going to have a good number to give you until we talk again in August.

Okay, the number you provided though, that was for Sargent, or that was for the entire business?

Entire business.

I see.

Okay.

Thank you, guys.

We have a follow-up question from Kristine Liwag with Bank of America.

Please proceed.

Hi.

I wanted to follow-up on that question prior on Boeing partnering for success.

I was wondering if you guys could provide a bit more color on what that means for you.

Does that mean you could get more share but at a lower price?

Or any color would be helpful.

Well, that means if you can reach an accommodation with Boeing on that program, that your current Boeing business is protected for three to five years.

I think it's three.

I'm sure it's three.

You'll have no competition on your current business direct to Boeing, which is not a lot of our business direct to Boeing.

Most of our business is to Boeing subcontractors.

And so does that mean in three years' time, there's room for negotiation for pricing step down, or is that contract up for renegotiation or recompetition?

I think it's very dependent upon how long they hang on to McNerney.

This is the same drill he did at GE Evendale in 1994, almost exactly the same playbook, probably gathered a little dust and gained a few pages, but this is McNerney's playbook.

I think in three years he's gone and it's a new era for Boeing.

Sure.

Is Boeing trying to move -- I understand a lot of your commercial aerospace sales is to the suppliers.

Is there a desire for them to move to some Boeing master contract where then your renegotiated price with Boeing is what the supply chain would buy?

There is an attempt to do that.

They have done that with fasteners with some success, and there's an attempt to do that for other commodities, which are more highly engineered products that they buy for their claims.

Whether they can actually do that or not is anybody's -- effectively is anybody's guess.

Great.

Thank you so much.

All right, Kristine.

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

Well, we thank everybody for participating in the call today and the interest that you have in RBC Bearings.

And we would be -- we'll certainly have a more definitive and tuned-up discussion in August after we have solidified the accounting figures on Sargent and have a good pro forma on its impact to RBC.

But it's -- we're very pleased with the acquisition.

We're very happy with the strength of the management team.

I think Sargent's going to be -- it's going to be easy to integrate it with the RBC resources.

And I think the RBC resources will help Sargent accelerate their programs in many ways.

So that's what we're working on, and we'll report back in August.

Thank you for your time.

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

That concludes the presentation.

You may now disconnect.

Have a great day.