RBC Bearings Inc (RBC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RBC Bearings fiscal 2016 fourth-quarter earnings conference call.

(Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Mike Cummings, Alpha IR Group.

You may begin.

Good morning.

Thank you for joining us for RBC Bearings' fiscal 2016 fourth-quarter conference call.

With me on the call today are 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 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 will turn the call over to Dr. Hartnett.

Thank you, Mike.

And good morning and welcome.

Net sales for the fourth quarter of fiscal 2016 were $162.3 million versus $113.4 million for the same period last year, a 43.1% increase.

Our aerospace markets increased 70% on a year-over-year basis and our industrial markets increased 9.4%.

For fourth-quarter fiscal 2016, sales of industrial products represented 34% of our net sales with aerospace products at 66%.

Gross margin for the fourth quarter was $60.4 million or 37.2% of net sales compared to $44.9 million or 39.6% for the same period last year.

On a year-to-date basis, adjusted gross margin as a percentage of net sales was 37.8% compared to 39% for the same period last year.

The reduction is principally the result of adding the Sargent businesses to the consolidation.

Adjusted EBITDA for the year was $154.9 million versus $119.8 million last year, a 29% improvement.

Adjusted EPS for the quarter was $0.86 per share and for the full year $3.14, a 14.6% improvement.

We continue to implement RBC's manufacturing philosophy and methods into the Sargent facilities and are seeing improvement in margin performance that will continue indefinitely.

As I discussed in our last call, the four sources of improvement are, number one, in sourcing, and that means converting some of Sargent's direct material purchases to RBC plants as the sources, as well as we are well along in this project now and expect to see quantifiable impact in fiscal 2017.

Improvement of planning and manufacturing methods at the Sargent plants was point number two.

Mix management through pricing as well as focusing our technical resources on what we can do or should do well that is accorded with considerable market scale and, of course, continued improvement of RBC core gross margins resulting from maturing and/or new cost reduction projects.

Our markets for industrial products saw an expansion of 9.4% for the fourth quarter and continue to be mixed.

Strong for marine products, which added 15.7%, steady and up slightly for general industrial products.

The weak industrial markets continue to be mining, which seem to have formed a base, and oil and gas and semiconductor manufacturer.

We saw strength in ground military, train, Europe, US and Asia, machine tool, home construction and industrial gas turbines.

Semiconductor machinery showed considerable strengthening late in the quarter and we expect a lift from this section this year.

Relative to our aerospace business, sales were up 70% on a year-over-year basis for the fourth quarter.

Aerospace OEM was up [88].1% and aerospace distribution in aftermarket increased 3.7%.

We remain tremendously busy in the quoting, proposal and contract negotiations basis today as the major worldwide aircraft producers redefine their supply base for the next five years.

Of course, we're doing all we can to play a larger role in that supply network and are very optimistic about our future content in this regard.

The Sargent acquisition has opened some important new aero industry doors in terms of new products for old customers that are complementary to the classic RBC offering.

And just to speak a little bit about our first quarter of fiscal 2017, we are expecting to see sales in the first quarter of fiscal 2017 in the neighborhood of $151 million to $153 million compared to $142.3 million last year.

I will now turn the call over to Dan, who will provide more details.

Thanks, Mike.

SG&A for the fourth quarter of fiscal 2016 was $26.2 million compared to $19.1 million for the same period last year.

As a percentage of net sales SG&A was 16.1% for the fourth quarter of fiscal 2016 compared to 16.9% for the same period last year.

Excluding the impact of the Sargent acquisition of $5.1 million, SG&A year-over-year increased $2 million, which was mainly due to $0.9 million stock compensation expense, $0.9 million of personnel-related fees and $0.2 million in other expenses.

Other operating expenses for the fourth quarter of fiscal 2016 was expense of $3.3 million compared to expense of $0.5 million for the same period last year.

For the fourth quarter of fiscal 2016, other operating expenses were comprised of $2.4 million in amortization of intangibles, $1.7 million in the litigation reserve, offset by $0.8 million of other income.

Operating income was $30.8 million for the fourth quarter of fiscal 2016 compared to operating income of $25.3 million for the same period in fiscal 2015.

On an adjusted basis, operating income would have been $32.5 million for the fourth quarter of fiscal 2016 compared to $25.4 million for the same period last year.

Adjusted operating income as a percentage of net sales would have been 20% for the fourth quarter of fiscal 2016 compared to 22.4% for the same period last year.

For the fourth quarter fiscal 2016 the Company reported net income of $18.9 million compared to net income of $14.9 million for the same period last year.

On an adjusted basis net income would have been $20.9 million for the fourth quarter of fiscal 2016 compared to net income of $17.1 million for the same period last year, a growth rate of 18.7%.

Diluted earnings per share was $0.81 per share for the fourth quarter of fiscal 2016 compared to $0.64 per share for the same period last year.

On an adjusted basis, diluted earnings per share for the fourth quarter of fiscal 2016 would have been $0.86 per share compared to a diluted adjusted EPS of $0.73 per share for the same period last year, a growth rate of 17.8%.

Turning to cash flow, the Company generated $21.6 million in cash from operating activities in the fourth quarter of fiscal 2016 compared to $9.4 million for the same period last year.

Capital expenditures were $6.2 million in the fourth quarter of fiscal 2016 compared to $5 million for the same period last year.

In the fourth quarter of fiscal 2016, the Company paid down $21.9 million of debt.

For fiscal year 2016 the Company paid down $65 million of debt and repurchased $10.5 million of Company stock.

The Company ended the fourth quarter of fiscal 2016 with $39.2 million in cash on the balance sheet.

We would now like to turn the call back over to the operator to begin the Q&A session.

(Operator Instructions) Steve Barger, KeyBanc Capital Markets.

It's Ken Newman on for Steve.

You may have already said this in your opening comments but I may have missed it.

But can you split out how much margin contributed to sales for both industrial and aerospace in the quarter?

For the quarter, Sargent was -- total aerospace was [49 175 6] and industrial was $7,946,000.

That's helpful, thank you.

You gave a little bit of color on strength in industrial sales that you saw.

You mentioned marine products as well as mixed demand there.

As we look into fiscal 2017, do you have any color or any kind of opinion as to where you see the most strength for industrial and markets going forward?

Well, I can look at the past.

And I think that's a pretty good proxy for what's going to happen for the next 12 months.

Certainly, on the mining side of our business I think we formed a good base there.

And I think we are probably going to run at the levels that we ran in the fourth quarter all next year.

That sector is supplying their aftermarket.

Our industrial business, ex-mining and oil and gas, was actually up worldwide.

And we expect that industrial business to be a good performer next year.

Europe led the way, as a matter of fact, with about an 18% year-over-year improvement in revenue.

So we see some pretty good things happening in some sectors in the industrial businesses.

And so, I think it forms a very nice space for us.

Great.

And then can you give us -- switching over to aero, can you give us an update on aero visibility you have?

You mentioned some platform wins or any contracts that are in the pipeline currently.

And as a follow-up to that, your take on inventory levels at the OEs you serve and how do you see that changing over the next year?

How much time have you got?

(Laughs).

So long answer, yes, we know what platforms we are on.

We know our content by platform.

It's very conservative for some of these platforms, for both aerospace and defense.

We are very secure with where we are contract-wise and offering-wise and happy about the outlook for the next five-plus years.

So if the industry continues to build, according to their projections, it's a great story.

On the defense side, there's considerable things going on in the defense area that are favorable to us.

Number one, it has been -- the spares on the defense side have been depressed a little bit over the past few years.

We are seeing a nice pickup in some sectors for that.

We see the Joint Strike Fighter coming on board in significant numbers over the next three or four years, where we have considerable content on that ship.

And in Europe, we see a lot of ground military activity taking place with new builds of equipment as a result of Ukraine and Paris and Brussels, and it appears that people there are taking their defense budgets more seriously and are starting to fund some considerable builds of equipment.

So I don't know if I answered your question completely.

But that's a very long and complex answer, the short (multiple speakers) --

Yes.

No, it was very, very helpful.

I do have one more question and I'll jump back in line here.

In terms of the margins you did say that insourcing initiatives should convert or you should see -- expect to see some quantifiable results this upcoming year.

Can you give us any kind of color on margin expansion here in the first quarter of 2017?

Or, put another way, how high could incremental margins go in 2017?

Do you think you could match 2016 levels or do better?

Well, you know, the timing is a big issue on how quickly we can absorb some of this work, and how quickly we can absorb it, given the demands of some of the other pieces of our business.

But I think our overall goal for the year is to expand that consolidated margin another percentage point.

And that's not going to be linear order to quarter because, as these programs phase in, that have a compounding effect.

But I think, over the course of the year, our goal is to increase it by a percent.

And over a longer cycle we are trying to bring the whole Company into the 40s.

And Ken, just keep in mind Q1 last year only had two months of Sargent in it and this year we will have three months.

It does have a little impact on gross margin percent.

Understood.

Thanks for the time today.

Kristine Liwag, Bank of America Merrill Lynch.

Mike and Dan, just putting together some of the comments you made, if mining and oil and gas is bottoming or it bottomed this quarter and you are seeing some pickup in other end markets like marine, semiconductors and ground military vehicles, just to name a few, should we think about overall industrial sales for fiscal 2017 to be up mid- to high single digit?

And if not, are there other headwinds we should factor in?

I think -- just to reiterate, I think the mining business form of base, in that basis aftermarket.

There's nothing new being built.

So I think we are steady-state feeding parts into the aftermarket.

And so we have strategy to grow our business in the aftermarket which seems to have some legs right now.

I think oil and gas really -- it can't really affect our revenues any further.

That business is about as low as it can go in this period, in this current quarter.

So the rest of the industrial business seems to be doing quite well.

And I would say, if you wanted to put a growth number on there, our objective has always been two times GDP to grow that industrial business.

And I think that's still a realistic number this year.

Great.

And then you mentioned specifically in the aerospace contract negotiation -- I was wondering, are these negotiations business as usual as contracts expire?

Or was there a specific event driver that was out of the ordinary that would make you highlight those five-year negotiations?

Well, I can't say that business with the aircraft builders is business as usual anymore, given Boeing with their basing strategy, and Airbus trying to come up with something as egregious.

So these are challenging events, normally, to negotiate.

But where there's risk there's also opportunities.

So we have an opportunity to substantially increase our offering in our mix as a result of what's going on here.

And we are taking advantage of that opportunity everywhere we can.

Thanks.

And if I could do one last one, on Sargent I think in the past you've mentioned that there are a couple businesses that were underperforming and there were a few that I think there's one -- near-zero gross margin businesses in Miami, Canada.

And there's also the undermanaged facility in Torrance.

I was wondering if you can provide an update about these business lines and if they are doing better.

And are they tracking towards more of the RBC Bearings corporate run rate for margins?

Yes.

Well, Torrance, because it was [scale], obviously was high on the priority list in terms of understanding what to do and how to do it and creating an executable strategy that could be achieved in a short time cycle.

And we are a long way down the road with Torrance both in improving their planning, improving their plant execution, improving the technical quality of their staff, improving access to world-class purchased materials and also improving their sourcing alternatives into some of the RBC businesses.

So Torrance is going to do very well.

And it was our first early initiative.

Miami is doing extraordinarily well.

We are very pleased at the progress we are seeing out of Miami, both on the revenue side and the gross margin side.

And it's improving on a scale much quicker than we thought it would be.

So that's certainly upside to our plan.

And Canada is running third.

The resources have been consumed by some of the other plants, and Canada is now, this year, is one of our focal points for improvement.

Thank you very much.

That was great color.

(Operator Instructions) Walter Liptak, Seaport Global.

I wanted to ask a follow-on in the industrial part of the business.

I wondered about the comps in the fourth quarter and if they are getting easier now in April and May.

So I guess I'm asking about your comments with regard to oil and gas.

It looks like, if you back out Sargent, you had double-digit industrial declines.

Are you seeing those declines now more stable and growing in April and May as we are getting into easier comps?

Is there something else going on, like you are getting industrial distribution to recover?

Well, Walter, as usual, you are deep into the numbers.

Let me explain to you how we see it.

Overall, the classic industrial business net of FX effect was down 5.6%.

So it's down roughly $3 million on [50].

The oil and gas and mining part of that business is down $5 million on 50.

And so the rest of it is up $2 million on 50, 4%.

Europe in that equation is, as I said, is leading the way; they are up 18%.

And that's principally driven by train and tram and renewed interest in ground defense.

Okay, that sounds great.

Thanks for that color.

Thinking about the industrial distribution, how are trends in North America?

You are up to, I guess, through March.

Are you seeing any improvement as you get further into your 2017?

2017 is very early.

We are just into May right now; it's only a month and a half.

But I think we are all hoping for some recovery in industrial.

And I think industrial distribution is where you would see that first.

Yes; I would say that if you look at calendar 2017, it's net of the oil and gas and mining, in fact, it's kind of flat to up a few percent.

It's not burning the barn down.

And it's very stable; it's a very stable source of revenue.

Okay, sounds good.

Yes, thanks for the comments on the 100 basis points of gross margin improvement in 2017; that sounds really excellent.

I wonder if you could comment; is that coming equally from classic RBC?

Or are you expecting more benefit from implementing your process at Sargent?

Well, it's both.

1% is our goal.

Obviously, internally we are pushing all the buttons we can push, both in the classic RBC and at the Sargent.

I'd say in the Sargent business there may be a little bit more room for upside.

And for every $1 million of outsourced work that we can insource, the contribution margin is probably 40%-50%.

So it's an enormous impact.

Okay, great.

And if I could ask one for Dan, on the cash flow.

I wonder what you are thinking about for 2017 free cash flow and debt paydown.

Yes, we will be on the same kind of trajectory we are now.

But, you know, we don't give guidance for that.

But I think from where we thought we would have been at the [end] of this year, if you had back the one-time charges of cash that went out the door for the bank facility and for the acquisition, we will be right on that $100 million mark that we had for the 12-month period going into the first quarter.

So I think we are happy with the cash generation.

We make some strategic investments in the Sargent and working capital.

Our CapEx is under control and was very good levels in 2016, and we don't expect major impacts in 2017 from that.

So I think we will have some nice upside to what we are able to achieve this year.

s

Okay, great.

At what point do you feel that you've got the bandwidth to do acquisitions again, or are you actually looking for M&A at this one?

No; we are -- we continue to look.

Right now, obviously, we've got a lot of housekeeping to do with the businesses that we have.

We continue to work that.

But we continue to read the books that are sent to us by nice folks like yourselves, and we continue to bid on businesses that are strategic and synergistic with us that are -- I would say they are more in the bolt-on category right now is what we are seeing.

But we need some technical augmentation of our existing skill set to do some things in the markets that we think are going to be very valuable to the Company.

So we are looking at certain companies that are in the $15 million to $30 million range that have those technical skill sets that can be applied to some of RBC's markets.

So that's where our focal point is right now.

If we saw an acquisition that has the characteristics of Sargent, and those characteristics would be something like synergistic to our markets, products that we know how to make, manufacturing processes that we are very comfortable with, undermanaged businesses that can show considerable margin improvement and well-regarded product lines, we probably would be tempted.

But at this point we haven't been tempted.

Okay.

All right, that sounds great.

You did a great job with Sargent and I think we all look forward to the next one.

[Joseph Ciarleglio], Bradley Foster.

Just a quick question -- so our recurring theme at -- from a lot of the presentations at last week's Electrical Products Group Conference was that there's little to no economic growth globally and we are operating in an onerous regulatory environment, bad political climate, etc., customers are scared to invest.

I just want to ask for your thoughts on the overall operating environment and how you guys see things.

I think you start with aerospace.

Right now it's a great aerospace build rate race.

And so there's lots of investment going into that sector, no question about it, nationwide, worldwide.

And we are optimistic and participate in it.

Some of the industrial sectors are soft.

We are not big into ag, but we see what's happening there.

It doesn't seem to be much of an opportunity to participate in any upside in the ag business.

But housing, very strong; auto, reasonably strong to record strong, depending upon region of the world.

And aerospace is still very, very good.

So I think you have to -- and semicon now is starting to ramp back up.

Look at Applied Materials' stock and read their analyst coverage and you can see what's driving that.

And so there's places in the world that are doing extremely well.

Fortunately, in the bearing business everything that moves needs a bearing.

That's how it moves; it moves through a joint with a bearing.

It might be a simple little thing, might be the most complex thing in the whole world.

But it needs a bearing in that joint.

And so fortunately, in the bearing business you can decide what industries you want to participate in, based upon the future of those industries, and develop a game plan and the strategy to enter.

We try to stay close to our existing markets to the greatest extent because we have people that understand that customer base and those markets and how those machines move and what they need for bearings.

But if we saw an interesting market developing that had the financial characteristics that were attractive to us, we would definitely retool our infrastructure and our engineering and marketing staffs to get into that business.

And we do that all the time.

And right now, we are doing it with train.

Great, appreciate the color.

Thank you.

And I am showing no further questions at this time.

I'd like to hand the call back over to Dr. Hartnett for any closing remarks.

Okay.

Well, I thank everyone for participating in today's call and asking the good questions that you asked.

And we will be issuing the proxy pretty soon, so we would like to have you all vote in favor of management's recommendations.

Thank you, and we will talk again in August.

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

That does conclude today's program.

You may all disconnect.

Have a great day, everyone.