RBC Bearings Inc (RBC) 2017 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to your RBC Bearings Q1 2017 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Michael Cummings with the Alpha IR Group. Sir, you may begin.

Good morning and thank you for joining us for RBC Bearings' fiscal 2017 first-quarter earnings 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 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'll turn the call over to Dr. Hartnett.

Thank you, Mike and good morning to all.

Net sales for the first quarter of fiscal 2017 were $154.6 million versus $142.3 million for the same period last year, an 8.6% increase. Our aerospace markets increased 11.8% on a year-over-year basis and our industrial markets increased 3.1%.

For the first quarter of fiscal 2017, sales of industrial products represented 35% of our net sales with aerospace products at 65%. Adjusted gross margin for the first quarter of fiscal 2017 was $57.6 million, or 37.3% of net sales, compared to $55.1 million, or 38.7%, for the same period last year. This difference is mainly attributed to mix. Last year, only two months of Sargent were represented.

Adjusted EBITDA for the period was $39.1 million versus $37.3 million last year, a 4.8% improvement. Adjusted EPS for the quarter was $0.77.

In this quarter, we saw a larger component of our sales from the Sargent businesses than the same quarter last year. These sales are normally at lower margins than the classic RBC products, and we are working to improve that. We'll talk about that a little later.

In addition to our few higher-margin aftermarket sales as a result of order, there were fewer higher-margin aftermarket sales as a result of order timing. This will be reversing later in the year. This market is lumpy and we can distort the -- and can distort the normal cadence of profitability from one quarter to the next but it should even out for the year.

Looking at components of our aerospace and defense business this period, we saw aerospace OEM up a strong 23% offset by defense OEM, which was off 19.8%, yielding a positive 17.3% for this sector of our business. The defense component weakness is all attributed to delayed shipment of a complex electromechanical assembly from a Sargent plant in support of added testing by one of our customers. This should catch up with itself in the second quarter.

We are seeing exciting customer acceptance of the RBC/Sargent companies in the market leading to a substantial number of large opportunities for the business. These opportunities fit well into our wheelhouse and provide an excellent path for OEM aerospace growth in future years as the magnitude of new aircraft systems reach substantial build rates. On a consolidated basis, the above market components yielded the aforementioned 11.8% expansion for the aerospace and defense segment in the first quarter.

Let's now turn to our industrial businesses. Overall, they were up 3.1% for the quarter. There are a lot of moving parts in the industrial franchise and I'll explain what we are seeing. We see strength in market demand from marine producers of semiconductor equipment, ground defense, auto and industrial gas turbines and train. We are also seeing a floor on demand for mining products with steady demands for those products having been demonstrated over several quarters.

Weakness in demand was experienced in the markets of heavy truck and oil and gas. The stronger markets are offsetting the weaker ones to show the growth that we mentioned earlier. By far, the weakest demand is from the oil and gas sector. I expect little improvement here this year.

On margin improvement initiatives underway at the Sargent Company, we are on track. As I discussed in our last call, the four sources of improvement are insourcing involving Sargent purchases to RBC plants, improvement of planning and manufacturing methods at Sargent plants, mix management, and of course continued improvements of RBC core gross margins resulting from maturing and new cost reduction projects.

I'll talk a little bit about fiscal 2017. Today, we are seeing an increase in demand on the second half of our year. This is driven mainly by the aerospace and defense sector and is also in part governed by leadtime considerations, aircraft build rate increases, and in response to customer demand -- customer required dates of shipment.

Regarding our second quarter, we are expecting to see sales in the second quarter of fiscal 2017 in the neighborhood of $152 million to $154 million compared to $147.8 million last year.

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

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

So, SG&A for the first quarter of fiscal 2017 was $25.8 million compared to $23.7 million for the same period last year. As a percentage of net sales, SG&A was 16.7% for the first quarter of fiscal 2017 compared to 16.7% for the same period last year. Excluding the one-month impact of the Sargent acquisition of $1.2 million, SG&A year-over-year increased $0.9 million, which was mainly due to $0.6 million in stock compensation expense and $0.3 million in other miscellaneous items.

Other operating expenses for the first quarter of fiscal 2017 was expense of $2.2 million compared to expense of $6.7 million for the same period last year. For the first quarter of fiscal 2017, other operating expenses were comprised of mainly $2.2 million in amortization of intangible assets.

Operating income was $29.2 million for the first quarter of fiscal 2017 compared to operating income of $22.4 million for the same period in fiscal 2016. On an adjusted basis, operating income would have been $29.6 million for the first quarter of fiscal 2017 compared to $29.5 million for the same period last year. Adjusted operating income as a percentage of net sales would have been 19.2% for the first quarter of fiscal 2017 compared to 20.7% for the same period last year.

For the first quarter of fiscal 2017, the Company reported net income of $18 million compared to net income of $13.4 million for the same period last year. On an adjusted basis, net income would have been $18.1 million for the first quarter of fiscal 2017 compared to net income of $18.5 million for the same period last year.

Diluted earnings per share was $0.76 per share for the first quarter of fiscal 2017 compared to $0.57 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2017 would have been $0.77 per share compared to a diluted EPS adjusted of $0.78 per share for the same period last year.

Turning to cash flow, the Company generated $19.2 million in cash from operating activities in the first quarter of fiscal 2017 compared to $22.2 million for the same period last year. Capital expenditures were $5.2 million in the first quarter of fiscal 2017 compared to $5.3 million for the same period last year.

In the first quarter of fiscal 2017, the Company paid down $20.1 million of debt and repurchased $3.4 million worth of Company stock. The Company ended the first quarter of fiscal 2017 with $37.3 million of cash on the balance sheet.

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

(Operator Instructions). Kristine Liwag, Bank of America.

Hey guys. Good morning. A couple of quick questions. First, I was looking at your SG&A in the quarter and I was wondering whether or not this is kind of the new run rate of SG&A we should expect going forward, or do we go back to the 16% range that you had before Sargent?

I think, last year, we finished the year at 16.5% and so, for the first quarter, we are at 16.7% and our goal is to continue to work and get a little more leverage out of that number and get it back closer to that 16% range over the next 12 to 18 months.

Great. And then the defense weakness that you highlighted in the quarter, can you provide a little bit more qualitative information on what drove that?

Could you say that's again Kristine? You broke up a little bit.

Is this better? For the defense weakness that you highlighted in your press release, can you talk a little bit more about what drove that and maybe give us a little bit more qualitative details?

Yes, it has two components. There's the defense OEM and then there's the defense aftermarket. And the defense aftermarket, they only buy products when they need them and it's hard to predict in any given quarter when they are going to buy those. We took in a fairly nice amount of orders in the first quarter for those products which we can't deliver. There's a leadtime associated with those orders, so those products will come out later in the year. Those are for sort of traditional systems that we've been sourced on for more than a generation that form the basis of their current defense aircraft business.

The OEM component is a lot of the new OEM systems that are coming out, defense OEM systems, are early in their cycle. They are extremely complex products, electromechanical hydraulic assemblies, that are very sophisticated. And so there's a great deal of care required and oversight required in order to make sure that that system, once it's shipped, performs exactly as it was designed. And so it's really a learning curve maturity thing, and we're right at the beginning of that learning curve. And we see the -- you can see that the JSF numbers, Joint Strike Fighter numbers, really start kicking up in terms of production rates in the next few years and we have a substantial part of that business and so that's what we're working on.

Great. And maybe lastly for me, can you discuss your gross margin progress in the three facilities that you had previously mentioned from Sargent that were kind of below overall Company margins in Miami, Canada, and Torrance? Is there an update for those facilities and are they close now to Company level gross margins?

Yes, I think, on those three facilities, Miami has made great progress and we are very optimistic about what they are doing down there and the progress that they are making. And it's a little beyond -- it's definitely beyond what our expectations were for that business at this stage. So we are very encouraged by what we see in Miami.

Canada, really we've just begun working on the Canada project in a serious mode here in the last quarter and so we don't have -- we haven't changed the results of Canada yet at all. And Torrance is on the bubble right now, and so we're trying to study how to bring Torrance -- how to improve Torrance's margin another 5% over the next 12 months, and I think we have a pretty good line of sight on how to do that. And so that's currently in the works. Torrance's margin I believe has increased since the acquisition somewhere around 6% or 7%, and I think there's probably another 5% to 10% in there, so we've targeted the next 5%.

Great. Thank you very much.

(Operator Instructions). Steve Barger, KeyBanc Capital Markets.

Good morning, guys. We're hearing from some other companies through the reporting season that the aero aftermarket supply chain is still having some disruption. Could you tell us what the most recent activities are there, and any changes that you are seeing in order or payment patterns?

I would have to do a little research there. That supply chain for us in terms of shipments in the quarter was definitely down, but it's in no way alarming because it's an up again/down again kind of business profile for them and it has been for years. There's been a lot of management changes in that sector over the past 24 months, and I think the new management is really just getting into the saddle and learning the business, so I suspect that some of that up and down has been a result of order patterns that were delayed and shouldn't have been. So that's kind of what we're seeing.

So you don't think there's anything structural going on? You think this will work itself out?

Well, I think, structurally, what's going on is that the Boeing PFS is having an impact on that sector. People can't afford to be buying from some of the distributors and are trying to go to the OEM direct and buy around what used to historically be the distributor channel. So I think they are facing some headwinds. And I can't tell you that I understand the amount of headwinds that they are facing. We are seeing a pickup in our OEM business that here and there would normally come through the distribution channel. So, there is definitely some shifting going around.

Right. But the net effect isn't too negative for you?

No. What we don't pick up on the distributor channel we pick up from the OEMs, so there's no negative impact.

So no effect really on working cap in terms of either inventory or payables as you work through that?

None that we are aware of.

Okay. Most industrial companies are coming in light on revenue across most end markets. Any particular bright spots or areas of weakness that you want to highlight?

Well, you know, I think I'll just kind of go over what I said earlier. I think that kind of summarizes it. The bright spots are definitely, as we classify it, marine and semiconductor. Industrial gas turbines is certainly a bright spot. A floor for mining products -- mining is an important part of what we do and seeing a nice solid floor there is good for us. And ground defense has been fairly steady. So those are the strong parts.

The weak parts are heavy truck, which is sort of backing off of little bit. I think everybody kind of knows the profile of what's going on in the heavy truck business. New orders are down 30%, build rates are down 30%, so that's not completely unexpected.

And oil and gas -- today no one is making a profit pumping energy from the ground in the United States. There's a tremendous supply-demand imbalance and a big inventory overhang and fracking has completely changed the game. And there is -- an overcorrection is inevitable. There's too much capacity that has been liquidated in the entire oil service industry to support a normal steady-state run rate in the oil services -- in the oil business. So you are going to see oil in the $80 to $100 a barrel range spiking as soon as this imbalance is created. It's not going to stay there, but there's going to be a big supply imbalance. And of course everybody will be rushing to the bar for a free drink on that one.

But the future is really going to revolve around fracking and the economics of fracking and can offshore oil compete with the economics of fracking. I don't know if I would want to be in Transocean's business. And can the tar sands compete with fracking economics? I don't think I would want to be in Suncor's business. So, there's going to be some big changes afoot. And right now we're trying to study exactly how to position our product lines for the other side of this when supply and demand become balanced and fracking is generated as the flywheel of the economics behind oil. So that's how we see oil and gas, and right now, on the oil service equipment side, nothing is going on.

Right. No, I think that's a good point in terms of thinking about how to position. I guess, from a broader sense, can you talk about new quoting activity that you have out there and how quote conversion is running for new product lines that you may be trying to get into?

For the industrial, aerospace, or both?

Yes, both.

Both? For the aerospace side, we are seeing really substantial demand for products that will be shipping in 2018 and beyond. And actually, it's requiring us to do a capacity demand analysis by plant. And we call that kind of a layer cake analysis here. We are going to definitely need to have capacity expanded in several of our plants.

We are trying to determine, given to build rates, what we've acquired in terms of contracts, where we are highly likely -- have been told we are highly likely to receive major new contracts, exactly what capacity additions we are going to need in which plants in order to service this business in 2018 and beyond. So, build rate increases, an increase in mix and some shuffling going on in the aircraft supply chain on who is going to make which product for Boeing and Airbus is -- we seem to be a big beneficiary of that right now.

I think, on the industrial side, I think, for the short-term, it's probably going to be more of the same. And I think, for the longer-term, we have some really big projects that will come into commercialization in the late 2017, 2018, 2019 time frame, which by that could add revenues in the low eight figures for us. So

Low eight figures?

Yes, we've had some really nice project's that we've been either awarded or we're primary on that we have a high confidence we will be awarded. So the industrial has got long-term good, and short-term, it's more of the same.

So just to follow-up on a couple of points there, one, where you are a beneficiary of the mix and build rate exposure, can you tell us what -- are those different bearing product lines that you are taking from another OEM? Are they related products that are coming through the Sargent acquisition? Just where are you seeing that increased content?

Both. They're bearing products that we've been supplying for a long time for these systems and build rate increases. That's an Excel spreadsheet project, right? You've got so much content per plane per bearing size and how many planes and what does that mean for -- what the plant produced last year? What can it produce in 2018? What does the delta look like and do we have enough horsepower to get our leg over the wall on that delta or do we need to do something about it? So that's the layer cake analysis that we are going through. It's a five-year analysis by plant.

So, we are seeing more volume as a result of the build rate increases on bearings. We are seeing more volume as a result of new bearing product lines that we've introduced over the last five years that are part of the contracts that weren't part of previous contracts. And we are seeing more demand from some of the Sargent areas because of the relationship between RBC and the aircraft majors is really beneficial to Sargent and so a lot of that Sargent product is being endorsed and absorbed by the big aircraft builders. We have a lot of pots boiling right now.

That sounds good. The new bearings, are they truly new products to you that are engineered into brand new applications, or are they new product lines to you and you are becoming an alternative supplier?

They are both. They're both. They are new products for the aircraft that are introduced to solve certain technical problems that the existing product lines by the existing suppliers were unable to satisfy, and they are new products to us that are existing products to others that we've achieved approvals on and have secured contracts on.

Got it. And my last question, on the industrial side, when you're talking about adding revenue in the low eight-figure range, is that for traditional more scenery, whether it's Construction Equipment or mining equipment? Or where are the end markets that you will be serving?

That's probably going to be in the auto and heavy truck area.

Okay.

There may be some construction business there that's substantial too. And it's too early to tell. We have a new product line that is very well tested and endorsed by some of those people, but we really haven't put any numbers around or contracts around it yet.

All right. That's great detail. Thanks so much.

Larry Pfeffer, Avondale Partners.

Good afternoon, guys. So, on the gross margin side, I know last quarter you talked about 100 basis points of improvement for the full year. I know it's been a long held annual goal. How do you look at that playing out over the course of the year? Obviously, some of these are lumpy margin improvement programs. But I guess, just from a modeling standpoint, how would you anticipate gross margins moving over fiscal 2017?

Well, we ended last year at 37.8%, so our internal target this year is to hit 38.8%, and it's definitely going to be more heavily weighted toward the second half of the year.

Okay. And then looking at the aero ramp in the second half of the year, how do you think about that in terms of airframe versus engine?

Well, it's coming from both areas. Do you want a percentage of how much is airframe, how much is engine?

Yes, I guess I'm just trying to get a feel for the magnitude of the increase on both of them in the second half.

I can't say that I know that number. I would say it's biased heavily toward airframe, though.

Okay. And then, Dan, just kind of a housekeeping question. What would the organic revenue growth have been just on the core RBC in the first quarter?

For total sales organic would have been around 2.6% to about 3%, but it's getting to that point where, when you are emerging product lines together in these two divisions, it's hard to get to a good number.

Right.

You are talking one month here between the two years.

Yes. Okay. Well, thanks for the questions, guys.

Sam Eisner, Goldman Sachs.

Hi, guys. This is Nick Stuart on for Sam. Thanks for taking my questions. Just piggybacking on that last question, can you break out what organic was in the aero and industrial markets for core RBC ex the Sargent acquisition?

Yes. For total industrial, the growth for the quarter was 3.1%, and classic RBC, which is going to be a little off but this is the number we are using because we merged some product lines here, is down 5.4% and Sargent is up 105%.

Got it. And then on the aerospace side?

On total aerospace, it's up 11.8% and organic is 2.9%, classic RBC around 5.6%, and Sargent 24.3%.

Great. Super helpful.

But once again, there's a lot of movement now between plants so --

I understand.

-- it's probably not as good a number as we would've given you last year when we were looking at it on a quarterly basis.

Got it. And then I just wanted to dig into the mining comments you made earlier about finding a floor there. Is that primarily mining OE, or mining aftermarket, or what's driving the resilience there?

It's mining aftermarket. There's not very much happening on the OE side.

Okay. And then my last question on the oil and gas comments you made, obviously still a lot of weakness in that end market. But have you seen any early indications just given that rig counts have sort of bottomed or are potentially increasing sequentially? Have you seen any improvement in that end market at all?

No.

Got it. That's helpful. That's it for me. Thank you.

David Goldsmith, Buckingham Capital.

Hi, guys. You called out costs associated with acquisition activity in the quarter. Can you just frame the pipeline of acquisition opportunities, what you're seeing out there? Thanks.

Well, we see a continuous flow of acquisition candidates coming from the banking houses that are trying to make their way in the world. And we have a little bit of a flow from internal sources that we use. We don't have anything that's going to close in the next 90 days, but we do have businesses that we are active on, we are visiting, we are bidding, and we're in basically some early stages of that now with things that are in the $25 million to $50 million revenue ranges. Whether we succeed in the bid and whether we succeed in the diligence, there's a lot of slips between the cup and the lip, right?

Thanks.

Thank you. And I'm showing no further questions in the queue at this time. I would like to turn to call back to management for closing remarks.

Okay. Well, I want to thank everyone for their interest today in RBC Bearings and for participating in today's discussion and the excellent questions that you had, and we will speak again I'm sure in early November. Good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.