RBC Bearings Inc (RBC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RBC Bearings Q2 Fiscal 2017 Earnings Conference Call.

(Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Michael Cummings from Alpha IR Group. You may begin.

Good morning, and thank you for joining us for RBC Bearings Fiscal 2017 Second 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 second quarter of fiscal 2017 were $153.9 million versus $148.7 million for the same period last year, a 3.5% increase.

Our aerospace markets increased 3.2% on a year-over-year basis and our industrial markets increased 4.2%.

For the second quarter of fiscal 2017, sales of industrial products represented 33% of our net sales, with aerospace products being at 67%.

Adjusted gross margin for the second quarter fiscal 2017 was $56.7 million or 36.9% of net sales, compared to $56.4 million or 37.9% for the same period last year.

This rate difference is principally related to mix, which is a timing issue, and start-up costs on new programs and some under-absorption of the costs in our oil and gas business. And the mix timing plays the most dominant role of the three, by far.

We see margins more reflective of our (inaudible) levels in the second half of the year, but we may see some modest headwinds due to new program start-ups, both in North America and in Europe.

Adjusted EBITA for the period was $39.9 million versus $38.5 million last year, a 3.6% improvement.

Adjusted EPS for the quarter was $0.78.

In this quarter, we saw a consistent contribution to our sales from the Sargent businesses and are seeing year-over-year improvement in operating results in most of the Sargent businesses. We're very much on track here.

Looking at the components of our aerospace and defense business this period, we saw aerospace OEM up 7.5%, off by defense OEM, which was down 1.9%, yielding a positive 6.3% for the OEM component of the sector. Overall, the consolidated sector growth was 3.2% net with the diluting elements being after markets of defense and aircraft.

As mentioned on previous calls, (inaudible) is lumpy quarter to quarter, and it's mainly driven by Boeing contract placements with their subs, but we are seeing strengthening in the order patterns and distribution market, which is a good sign for the balance of the year.

We are very pleased with the results of our five-year demand capacity review we reported last call and completed in October.

The aircraft sector of our business has a very strong outlook for the next three-to-five-year period showing solid growth in our core business resulting from new ship build increases or expanded content on ships, including the 737, 787, A350 and the Joint Strike Fighter, as well as new airframe and engine introductions, including (inaudible) the A320neo, the A330neo and the 777X.

This core business, when augmented by business added through new products recently introduced and now under contract, yields strong account volume for both airframe and engines for the years ahead.

It is clear we will need to make some modest capacity additions at some of our locations to support growth in several of the products that we are contracted to supply.

Our projections are now showing a double-digit rate of expansion for RBC products -- aircraft products over the next three-year window as a result of the two growth components.

Now, let's turn to the industrial businesses. Overall, they were up 4.2% for the quarter. We saw strength in market demand for marine products, producers of semiconductor equipment, ground defense, auto and industrial-gas turbines and train.

We continue to see a steady demand from the aftermarket for mining products and machine-tool components worldwide. We expect to see acceleration in demand from the semiconductor, auto and marine products for the years ahead as new program volumes expand and momentum here is very good.

Weak markets were experienced for heavy truck, industrial distribution and oil and gas, and the mining OEMs. The stronger markets are offsetting the weaker ones to show the growth we mentioned.

Relative to overall order rates, much of our business is conducted under long-term contracts, and, of course, there is a normal depletion of the order book as the company works its way through some of these contracts.

We are in good position to renew and expand agreements, and I'm 99% certain we will have good news to discuss in this regard at our next call. No worries here. We are in a very healthy spot.

Regarding our third quarter, this is our seasonally-shortest quarter, and our fourth quarter is our seasonally-longest period. So please remember that taken together one normalizes the other.

We are expecting to see sales in the third quarter of fiscal 2017 in the neighborhood of $146 million to $148 million, compared to $144.2 million last year.

As you know, this quarter is our shortest, as I mentioned, as a result of holidays and planned shutdowns this year. It is also affected by some industry noise that is centered around delivery delays associated with the geared turbofan engine. This has a minor impact on both our engine and airplane volumes, and we expect much of this to clear in the fourth quarter, which is not encumbered by the holiday schedules, and, as I said, is seasonally our strongest.

I'll now turn the call over to Dan who'll give you more information on the financial performance.

Thanks, Mike.

SG&A for the second quarter of fiscal 2017 was $25.2 million, compared to $24.9 million for the same period last year. As percentage of net sales, SG&A was 16.4% for the second quarter of fiscal 2017, compared to 16.8% for the same period last year.

Other operating expenses for the second quarter of fiscal 2017 was expensed $2 million, compared to expense at $3.6 million for the same period last year. For the second quarter of fiscal 2017, other operating expenses were comprised mainly of $2.4 million in amortization of intangible assets, offset by income of $0.4 million and other operating expense for the same period last year, mainly consisted of $2.4 million in amortization of intangibles, $1.3 million in acquisition restructuring costs, offset by $0.1 million in other income.

Operating income was $29.6 million for the second quarter of fiscal 2017, compared to operating income of $23.6 million for the same period in fiscal 2016.

On an adjusted basis, operating income would have been $29.8 million for the second quarter of fiscal 2017, compared to $29.2 million for the same period last year.

Adjusted operating income as a percentage of net sales would have been 19.3% for the second quarter of fiscal 2017, compared to 19.6% the same period last year.

For the second quarter of fiscal 2017, the company reported net income of $18.2 million compared to net income of $14.5 million for the same period last year. On an adjusted basis, net income would have been $18.4 million for the second quarter of fiscal 2017 compared to adjusted net income of $17.8 million for the same period last year.

Diluted earnings per share was $0.77 per share for the second quarter of fiscal 2017 compared to $0.62 per share for the same period last year. On an adjusted basis, diluted earnings per share for the second quarter of fiscal 2017 would have been $0.78 per share compared to adjusted diluted earnings per share of $0.76 for the same period last year.

Turning to cash flow, (inaudible) at $19.3 million in cash from operating activities in the second quarter of fiscal 2017, compared to $18.1 million for the same period last year.

Capital expenditures were $4.5 million in the second quarter fiscal 2017 compared to $4.5 million for the same period last year.

In the second quarter of fiscal 2017, the company paid down $14.1 million of debt and we purchased $0.1 million worth of company stock. And on a six-month basis, the company paid down $34.2 million of debt, and we purchased $3-1/2 million worth of company stock.

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

(Operator Instructions)

And our first question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open.

Good morning, guys. It's Ken (inaudible) for Steve.

So I have a quick question regarding the product opportunities you mentioned for OE aerospace, could you talk a little bit about whether that could be a potential fiscal '18 revenue event or is that something that is going to be pushed out a little further?

It'll be fiscal '18. It builds beginning in fiscal '18 and continues to build all the way through '20.

Got it. And, then, in terms of the significant -- or I guess in the capex, you need to ramp up for these new programs. Any color on sizing up how large that ramp could be?

For the capex expenditure? Yes, you know, I think -- You know, we did the bricks and mortar work a few years ago. So we don't have to do -- We have plenty of floor space. So it looks like the capex will be sort of dedicated and within our normal capex rate, might be a little bit on the high side of the rate. And, obviously, the industrial business is not demanding a lot of capex right now. So it's shunted over to these aircraft programs.

Got it.

And, then, can we just talk about the margin-improvement efforts for Sargent? I know mix was a little bit of an issue, and I understand that those orders can be lumpy. Are you pretty confident or what is the confidence level in order to achieve the 100 basis points in gross-margin expansion for the year?

Company wide?

Yes.

Well, the -- That's still our target. You know, it looks like the mix in the second half of the year improves significantly. The margin work is sort of improving and ongoing, and we've got a little bit of headwinds there as a result of some of the startup on these programs. So we may have, you know, net of that headwind, we may not get to that, quite to that 1%, but we'll be in good shape.

Got it.

And, then, I'll just ask one more before getting in line. You know, just looking at the quarter earnings releases from some of the other industrial (inaudible) that we've listened to this quarter, it seems like a recurring theme seems to be accessing (inaudible) capacity in some idle equipment. Obviously, your industrial sales growth has been pretty decent and pretty strong this quarter relative to others.

As you look at the quoting activity for your customers, do you agree with that generalization in the market? And, if so, you know, any thoughts you have on being able to deal with a supply overhang and how long you think it takes to rebalance to that demand.

Well, I think a lot of it depends upon which market you're trying to service and what mix you're servicing it with and what's the proprietary nature of that mix.

And so the markets, they're strong for us. You know, we have three green flags with regard to that. We have, you know, good market demand. We have a proprietary mix, and so we're in good shape on the markets that have momentum. And, thank goodness, the markets with momentum are outrunning the markets that don't have the momentum. So in that, we're ahead of the game.

(Operator Instructions)

And I'm showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Okay. Well, I -- I'm surprised that the call was so short, but I'm also pleased. So, in closing, I'd like to thank everybody for their continued interest and support of RBC, and I think we're going to have a very good call in -- later in the year. Thank you.

I do apologize, sir. We do have a follow-up from Steve Barger from KeyBanc Capital Markets. (Inaudible) are open.

Hi, guys. We were having such a good time, I thought we'd just keep this going.

Just a few clean-up items for me. I mean, can you talk about -- Now, that we've anniversary the revenue contribution from Sargent, how should we think about the organic growth in the back half of the year, you know, split between industrial and aerospace?

You know, we don't give guidance for the full year. We always just talk about what our expectation is for the next quarter, so I don't think, at this time, we're prepared to give guidance for Q4.

Understood. So I guess maybe another way to ask it, if we look at just third quarter versus last quarter, is most of that demand really coming just from the aerospace side versus the industrial side?

No, I'd say it's about the same ratio. You know, we haven't run through the calculus on that, but my guess is, when you do, it's going to be the same ratio. The industrial might be a tad stronger. We're seeing some strength there, in the industrial side, that we didn't see in the second quarter. So the industrial might be a little bit better.

But it's -- You know, you know, the organic growth really starts to -- It's going to be the best for aircraft going forward, not this year, but, you know, in subsequent years, and it really starts to show itself in '18.

Got it.

And then in terms of -- I mean, you mentioned a few of the end markets on industrial that were offsetting some of the weaker ones. I mean, do you have -- Can you give us a little bit of an opinion of where you have the most confidence for the biggest upside for industrial growth as we look into fiscal '18 or if you look in your backlog?

Yes, let me just check my notes. What did I say?

Let's see. So, you know, what we said was marine products, semi-conductor, capital equipment, ground defense, auto and industrial gas turbines and train.

Now, what was your question? Why are those strong? Is that it?

Well, I guess, I mean, if you have a confidence level that there's probably some more upsides to any one of those markets versus, you know, versus some of the ones that are not performing as well.

Yes. Well, you know, I think marine products is going to do very well for us next year. It's really hitting its stride. And that's been -- That's going to start, historical offerings. It's been -- Operationally, it's just every quarter it improves.

Producers of semiconductor capital, you know, we just -- The semiconductor sector, as you probably know, is doing real well, if you're with the right partners in that sector. We're definitely with the right partners. There's a lot of good things happening, a lot of expansions going on, and we just have the right product for the right markets.

You know, ground defense is -- it's interesting. You know, the Department of Defense needs to remanufacture a lot of equipment that's in poor shape today, and so we'll be looking at the defense budgets, and you can pretty much see who's getting the contracts, and we're part of a lot of that. So we're expecting to see some upside for ground defense going forward.

Auto is another area that -- It's an area that if you have the right product, the right designs, the right (inaudible0, you can reasonably well in that business, you know, provided that you stay away from the commodity side of the street, which we don't like the guys on that side of the street, so we kind of -- we stay off of that area, but we do have some proprietary products that are well accepted in that industry, and that's an area that we're in -- we're in the expansion mode right now. So we'll probably do very well on that score between now and 2020.

And train, there's just a lot of things going on in the train world in Europe and in China, and we have a very good positon in that regard. The Europeans are developing intercity trains, sort of high-tech intercity trains. A lot of these trains have various suspension requirements and various connecting requirements and articulated joints relative to being able to connect them to the electrical grid, and so we have public offerings in all of that area that are being well accepted.

The Chinese are developing high-speed rail by the -- You know, I don't even remember the number of kilometers per year that's their goal for installation, but it's a substantial number. I'm sure one quick Google search could get you those numbers.

And so there's a lot of hardware being built in China. A lot of that hardware incorporates our products, and so we're busy trying to figure out how to get products to China and how to make more products and exactly how to do business with them in a larger scale than we do today.

So that's kind of what's happening on our industrial side.

That's really good color.

You mentioned some start-up costs and some new programs this quarter. Are those mostly behind you now or is there still some -- is it kind of the same rate of start-up costs expected in the second half?

No. I think those start-up costs are going to be building, modestly, but building quarter to quarter going forward for probably the next three quarters. We have a lot of programs to start up.

Okay. And, then, you talked about some under-absorption in the O&G business. Can you provide just a little bit of color with what happened this quarter as well as, you know, what steps you're taking with the strategy for that business?

Sure. Well, the, you know, the oil and gas business, you know, everybody knows what it's like, right? I mean, there's no secrets there. It's very soft. The hardware is -- The demand for hardware from everybody that's supporting that industry is low. And so, you know, we've kind of backed down our production rates in accordance with that, which sort of leaves an underutilized plant, which is a subset of another plant, but it's still underutilized.

So the question is what is the future of the oil and gas business in the United States? And what is the ultimate cost, capital cost and operating cost of a fracked well? Because, certainly, the convergence of the economics of the oil business are going to be dictated by the economics of operating and capitalizing a fracked well.

And what does that mean in terms of a per-gallon, per-barrel rate for the cost of a barrel of oil? And who, you know -- Who is -- Who -- Where is that cost level going to settle? Today, it's artificially low. Where will it be in the future? And who is going to be a survivor in that industry? Can the oil (inaudible) survive? Can the offshore people survive or it's all going to be fracked wells, land wells?

So, you know, a lot of decisions have to be made with regard to how to position the company going forward to have the right hardware at the right price for the right market, and I can't say that I have all the answers today, but I can say that we're intensely studying our position.

That's fair.

Just a couple more from me. You talked about expansion of double-digit growth in the aircraft products over -- I want to say it was -- three to five years. Is it fair to say that that's going to be a bit of a modest piece of growth starting next year, and then it starts to compound afterwards or is that something that you see heavier growth towards the beginning of that program?

Yes, I think it builds up through fiscal '18. I don't know how much we can get into fiscal '17. I mean, fiscal '17 lead-time-wise is just about over. You have what you have, and that's all you can do today, but, you know, we have a lot of those programs targeted into -- in fiscal '18, and so that should build out well through that year.

Got it.

And then lastly from me, you know, could you just give a little bit of color as to what you're seeing in the distribution channel? I know it still tends to be lumpy and a little difficult for some of the other suppliers as well. Any color as to how you look at the visibility in that channel and what you're doing to overcome this lumpiness?

Is it aircraft or industrial?

In aircraft particular.

Aircraft in particular.

You know, the aircraft distribution business, as we participate in it, is really not an after-market business. It's really -- It's an OEM business, and it's driven by a lot of these people that are supplying parts to Boeing subcontractors.

And so, you know, currently, you know, Boeing is very busy trying to get the 777x program launched. So they have a lot of focus on that and less focus on renewing their contracts with a lot of these up-contractors for their existing business.

So I think Boeing is running a little behind on contract placement, and I think that's delaying -- that's creating some of the angst in the -- that distribution marketplace. I think that should clear itself. I mean, sooner or later, they're going to need the hardwood (inaudible). They're going to have to, you know, put the contracts out. But I think, right now, they're a little bottled up.

Is that something that could be flushed out before fiscal '18 or is that something that probably takes a little bit longer?

I don't know how they can wait much longer. You know, I don't know where the (inaudible) people are and all that sort of thing. Everybody seems to have a little bit different schedule, but there is some -- quite a bit of industry delay right now.

Perfect. Thanks for the time, guys.

(Operator Instructions)

And I'm showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Okay. Well, in closing again, I'd like to thank everyone for their continued interest and support, and we will talk to you again in February.

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

Everyone have a great day.