RBC Bearings Inc (RBC) 2017 Q4 法說會逐字稿

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

(Operator Instructions)

I would now like to introduce your host for this conference call, Mr. Mike Cummings with Alpha IR.

You may begin, sir.

Good morning, and thank you for joining us for RBC Bearings Fiscal 2017 Fourth 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, and thank you for your participation.

Net sales for the fourth quarter of fiscal 2017 were $160.2 million versus $162.3 million for the same period last year.

There were 53 weeks in last year's operating agenda that did not occur this year.

Consequently, our fourth quarter was 1 week short.

For the quarter, sales of industrial products represented 35.3% of our net sales with aerospace products at 64.7%.

Adjusted gross margin for the period was $63.2 million or 39.5% of net sales compared to $60.4 million or 37.2% last year.

Again, mix and timing play a role here as well as at the cumulative impact of plant efficiency initiatives taken over the past several years.

The gross margins demonstrated by the Sargent division have now converged to equal loads of RBC's classic products.

This is approximately a 5% improvement for Sargent over the first 24 months of ownership.

Adjusted EBITDA for the period was $44.5 million versus $42.2 million last year or 27.8% of sales versus 26%, respectively.

Adjusted EPS for the quarter was $0.90 per share.

Industrial products showed a 2.6% year-to-year growth.

We saw a very good sequential demand, which continues today.

Our key markets of mining, oil and gas, industrial distribution, marine and semiconductor manufacturing machinery continue to demonstrate encouraging sequential strength, offset minimally by the demand for heavy truck parts.

Marine products remain a steady contributor to our revenues here, and looking ahead, budget expansions planned by the DoD for the Virginia and Colombia-class of Navy submarines, coupled with almost doubling of the repair budget for these ships are extremely favorable to the outlook.

We have now focused our planning to add staff and expand our supplier base to eliminate constraints and weakness and readiness for the budgeted step up in future demand.

Continuing need for products for the mining aftermarket has formed the backbone of our revenues for these products.

We continue to add new products targeted for this market as well as new resources to expand our international reach.

The upgrade of semiconductor technology from LED to OLED devices has created exciting new prospects for the semiconductor machine builders and also the users of this new technology.

These new chips are heavily favored for screens from -- for flat screens from phones to TVs.

Domestic and international demand for our products to support machine platforms for this market has been building throughout the year, and the outlook is favorable for this line.

In summary, on a full year basis, our industrial products were up 3.1%, with distribution being up 1.6% and OEM weighing in at a plus 3.8%.

Most of the expansion came in the last quarter.

On aerospace and defense.

For the quarter, this sector was off 3.2%.

Remember, the quarter was a week short of last year's period, which more than explains this differential.

For the year, this sector was up 2.9%, and a gain of it, for aerospace OEM of 4.5%.

We continue to see good demand for our aerospace and defense products, but we all realize how lumpy defense revenues can be.

From what we are seeing today on inquiries for developed products coupled with new federal budget initiatives in higher military engagement strategies, we expect this year's lump to be in our favor, and we are already experiencing some of that now.

The step-up in narrow-body production rates is beginning to show in the form of contracts for our core products.

Contracts for some of our new products in support of both narrow and wide-body production have exceeded our expectations.

We see a meaningful pickup in shipments of these products throughout the year, beginning in our second quarter.

Our year will definitely be back-end loaded as a result of these developments.

There may be some headwinds on margins as a continuing result of start-up expenses, but that should be and remain small.

As reported in our last call, the result of our 5-year demand capacity review on aircraft products show a strong outlook for the next 3- to 5-year period, where solid growth in our core business resulting from build rate increases or expanded content on platforms, including 737, 787, A350, A330, Joint Strike Fighter as well as new airframe and engine introductions, including the LEAP and the A320neo.

We see expanded participation in the content for many of these programs in the years ahead augmented by the addition of several new bearing and structural products recently introduced.

As a result, our projections continue to favor a double-digit rate of expansion for RBC products over the next 3-year window for commercial aircraft.

And in this regard, our content on the 787 ship has moved from about $0.25 million to ship -- per ship to over $350,000 per ship.

Regarding our first quarter, we are experiencing -- or we're expecting sales for the period to be between $159 million and $161 million compared to $154.2.

Now I'll turn the call over to Dan for more detail on the financial performance.

Thanks, Mike.

SG&A for the fourth quarter of fiscal 2017 was $26.2 million compared to $26.2 million for the same period last year.

As a percentage of net sales, SG&A was 6.4% for the fourth quarter of fiscal 2017 compared to 16.1% for this same period last year.

Other operating expense for the fourth quarter of fiscal 2017 was expense of $2.6 million compared to expense of $3.3 million for the same period last year.

For the fourth quarter fiscal 2017, other operating expenses were comprised mainly of $2.4 million in amortization of intangible assets and $0.2 million of other items.

Other operating expense for the same period last year consisted mainly of $2.4 million in amortization of intangible assets, a $1.7 million litigation reserve offset by $0.8 million of other income.

Operating income was $34.4 million for the fourth quarter of fiscal 2017 compared to operating income of $30.8 million for the same period in fiscal 2016.

On an adjusted basis, operating income would have been $34.4 million for the fourth quarter fiscal 2017 compared to $32.5 million for the same period last year.

Adjusted operating income as a percentage of net sales would have been 21.5% for the fourth quarter of fiscal 2017 compared to 20% for the same period last year.

For the fourth quarter of fiscal 2017, the company reported net income of $21.6 million compared to net income of $18.9 million for the same period last year.

On an adjusted basis, net income would have been $21.6 million for the fourth quarter of fiscal 2017 compared to net income of $20.2 million for the same period last year.

Diluted earnings per share was $0.90 per share for the fourth quarter fiscal 2017 compared to $0.81 per share for the same period last year.

On an adjusted basis, diluted earnings per share for the fourth quarter of fiscal 2017 was $0.90 per share compared to an adjusted EPS of $0.86 per share for the same period last year.

Turning to cash flow.

The company generated $26.7 million in cash from operating activities in the fourth quarter fiscal 2017 compared to $21.6 million for the same period last year.

Our capital expenditures were $6.5 million in the fourth quarter fiscal 2017 compared to $6.2 million for the same period last year.

In the fourth quarter of fiscal 2017, the company paid down $25.6 million of debt.

On a 12-month basis, the company generated $101.2 million of cash from operating activities compared to $83.4 million for the same period last year.

For the full year, capital expenditures for fiscal 2017 were $20.9 million versus $20.9 million for the same period last year.

For the full year, the company paid down $95 million of debt and repurchased 4.8 million of company's stock.

I would now like to turn the call back to the operator to begin the question-and-answer session.

(Operator Instructions) Our first question comes from Kristine Liwag with Bank of America Merrill Lynch.

For fiscal year '18, can you provide your growth outlook particularly in industrial?

It seems like there could be tailwind there, particularly as companies like Caterpillar are more optimistic about orders.

Well, Kristine, we've been taking it one quarter at a time.

And if Caterpillar is optimistic, that's good for us.

We're seeing really good demand across the spectrum, not only in the Caterpillar products but also in the oil and gas products and the general industrial distribution products and in some of our new products for robotics and semiconductor manufacture.

So we really like what we see every time we lay in a forecast for the quarter.

The industrial guys call up and tell us that they're going to beat the forecast by not a small amount and we're happy to see that.

So we're kind of bullish.

We hope the industrial expansion stays strong all through the year.

And if it does, we'll do extremely well.

Great.

That's helpful.

And for the Boeing 787 market share, when they [are] highlighted in your prepared remarks, it seems like with the program now at full production rate, it's usually pretty rare to see such a big market share shift.

Can you provide a little bit more details on what's driving that?

Well, yes.

I -- we provide Boeing with an exceptional level of service, and we've been sort of singled out year-after-year for special awards and commendations as a result of our service levels.

So when other suppliers that we either compete with or we may not even compete with them, but we have the ability to make products that they supply and disappoint Boeing in a substantial way.

They come to us as the -- we're sort of the go-to person to rectify the logistics and that's happened recently in a big way for us.

So this -- are you taking share from somebody else?

Yes.

And then are these at a similar pricing?

Are these pricing -- are the pricing you're getting for these contracts favorable to your existing pricing?

Or are these dilutive to margin?

Well, they'll be -- they're in the start-up period.

I suspect they'll be dilutive to a small extent because there's a maturity curve associated with manufacturing these, that to get to the profitability level that you expect to demonstrate.

But these are fairly simple products for us to make so that maturity curve should be readily achieved.

And in terms of executional difficulty, these are pretty vanilla.

So -- and the margins are right dead center to where RBC typically performs.

(Operator Instructions) Our next question comes from Walter Liptak with Seaport Global.

I wanted to ask -- congratulations on a nice end to the year, the cash flow and other things.

But yes, you made a comment that Sargent's gross profits, I think, are up 500 basis points over 2 years, which is obviously very impressive.

I wonder if, as you look at the business now, is there still more improvement that you can do to the gross profits?

And what do you think about, for the next 12 months, the kind of gross margin improvement you'll get?

That's a good question.

I think the improvement that we'll see in gross margin in the next 12 months won't be half of what we saw in the last 24 months, let's put it that way.

I think we're reaching a point of -- we're converging on a point where Sargent's margins will be sort of steady and predictable, and maybe it'll probably be a premium level to where the RBC classic business performs.

And the reason that I say that is that every one of our plants has what is called a dirty dozen program.

And so we review monthly the dirty dozen for every one of our businesses.

And the dirty dozen is those products that have the largest revenue and the lowest margins.

And what can we do about that in terms of manufacturing execution or other in order to improve the performance?

And so there's always a checklist of items, issues that can be touched with regard to, is the material right?

Is the product designed for manufacturability?

Are we running the right lot sizes?

Are we running it in plants with the appropriate overheads?

How much touch labor do we have?

How do we have the touch labor content by maybe reorganizing the manufacturing floor or incorporating some robotics?

On and on and on.

So we've spent countless hours on this every month.

I mean, literally, countless hours.

And it accrues, it compounds, and you can see the results of it.

So I think we had sort of exceptional out-of-the-gate performance at the Sargent business because we've redirected a lot of our aces on this program, into Sargent, to help accelerate them through the program.

So now they're sort of on their own.

They're pretty bright people.

They're well trained.

And so they're executing the program with the normal speed of (inaudible).

So I'd expect that their margins to expand -- continue to expand, and we haven't backed off RBC classic business at all.

So we'll still keep working the dirty dozen program [there].

Okay.

So it sounds like the dirty dozen that you see each quarter, each month are less sturdy than they were a couple of years ago.

So maybe is it fair to say some of the low-hanging fruit that you had over the last couple of years, maybe it becomes a little bit heavier lifting, putting in automation like robotics are going forward to get the margin expansion?

Yes.

Well, I mean, in some cases, the margin expansion is we might be -- we might have a product that we sell $1 million of -- at $100 a unit and the manufacturing cost is $110 a unit, right?

So where -- with the proper of this and the proper of that, we can get the manufacturing cost to $40 a unit.

So we got all over that kind of thing.

And then that program gets fixed, that line item get fixed, and inevitably something else takes its place.

When is the job done?

When we all get tired and go home, it never gets done.

Okay.

Fair enough.

So is it fair to say that you're expecting 2018 gross margin improvement from Sargent plus classic RBC?

Yes.

I think that's the case, it's at this point out there each year and try to achieve (inaudible) and actually I think (inaudible).

Mike, I'm very sorry to interrupt but the sound is not coming through on the line.

I can't hear you.

I'm sorry.

So where did I leave off?

Okay.

That's okay.

I'll try and go to another question.

The cash flow was good this year, and you guys are at the $100 million kind of debt repayment level, I think, now.

Is that the levels we should think about for 2018?

Or do you have more cash flow for us for this year?

Walt, I think that you can assume that same level.

Okay.

And then the acquisition pipeline.

How is that looking?

Are you still trying to pursue deals?

I wonder if you can give us some color on that.

Yes, Walt, we are definitely out there looking for opportunities.

We are looking at a few nice tuck-in opportunities, and we hope that we can be successful.

But they're very unpredictable, and on getting them done, and we're also looking for deals that are a little bigger in size.

So there's a lot of activity going on there.

We just haven't found what really fits our needs as of yet.

So -- but I'm sure we will.

We just got to keep pushing hard at it.

Okay.

Does bigger in size mean bigger than the Sargent deal or is it one of those...

No, no.

Bigger than our normal tuck-in deal.

So things in the range of maybe $50 million to $150 million in revenue.

Okay.

Got it.

And maybe just a couple of other quick ones.

Pricing.

Did you guys put a price increase through for this year?

Are you able to pass along material costs?

Yes.

On material costs, a lot of our business, specially on the aerospace side is covered with long-term agreements and there we do have the ability.

We normally have some type of material collar in there or method to pass through material increases.

On distribution, we would normally just handle it with price increases on the general industrial side of the business.

I mean, I think, we -- as you probably remember from 2004 to 2006 when material was jumping at 10% a quarter, we were able to manage that situation pretty well.

Okay.

And maybe a last one for me.

As you've got a small oil and gas business or oil and gas exposure, are you seeing any improvement there with, I guess, more stable oil prices around $50?

Yes.

We are definitely seeing demand there, and we're being very selective with regard to how we approach that market.

And so far the demand by the market has pretty much equaled our capacity.

And so our next decision point is do we add more capacity and where?

And I'm not showing any further questions at this time.

Okay.

Well, I'll just wrap up by saying I appreciate the interest in RBC, I appreciate your questions, and we look forward to talking to you again in probably late July, maybe early August.

Thank you.

Well, ladies and gentlemen, this does concludes today's presentation.

You may now disconnect, and have a wonderful day.