RBC Bearings Inc (RBC) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RBC Bearings First Quarter 2018 Earnings Conference Call.

(Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Chris Donovan of Alpha IR.

Sir, you may begin.

Good morning, and thank you for joining us for RBC Bearings Fiscal 2018 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, Chief Financial Officer and Chief Operating Officer.

Before beginning today's call, let me remind you that some of today's statements 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 press release and is available on the company's website.

Now I'll turn the call over to Dr. Hartnett.

Thank you, Chris.

Good morning, and welcome.

Net sales for the first quarter of fiscal 2018 were $163.9 million versus $154.6 million for the same period last year.

For the first fiscal quarter of 2018, sales of industrial products represented 37% of net sales and aerospace products were 63% of net sales.

Gross margin for the first quarter was $61.9 million or 37.8% of net sales compared to $57.3 million or 37% for the same period last year.

We continue experience gross margin improvement across the company due to cost initiatives, manufacturing process improvements and consolidation programs that have been put into motion over the last 3 years.

We are also experiencing startup and low production run cost in several facilities, primarily associated with new programs that, when mature, will accrue further benefit to consolidated margins.

We expect to see further benefit here beginning in our second quarter.

Adjusted diluted EPS for the quarter was $0.91 per share.

Free cash flow for the quarter was a strong $34.1 million and corresponding debt was reduced by another $32.6 million during the period.

EBITDA came in at $42.1 million at 20 -- 25.7% of revenues.

Industrial products showed a 12.1% year-over-year growth rate, and we continue to see good sequential demand for these products.

Industrial OEM was up 12%, and distribution and aftermarket was up 12.3% on a year-over-year basis.

European demand was particularly strong with a 14% year-on-year showing.

Strength was demonstrated in most of our key markets, including mining, oil and gas, marine, semiconductor machinery, machine tool, rail and general industrial distribution.

On aerospace and defense products, for the quarter, this sector was up 2.8%.

Several plants produced both aerospace and industrial products, and as a result, classification of markets can at times be a little bit murky.

The shortened lead time cycle in some industrial markets, semiconductor machinery as an extreme example, can create demand spikes that, despite the best planning efforts that can cause immediate short-term customer needs.

In these circumstances, it is often the case that aerospace capacity can be allocated to commercial products.

This occurred during the first quarter, and cost the aerospace growth component about 1% or so on a year-over-year comparison basis.

We also deemphasized sales of certain products by extending lead times, while a change on the side of manufacturing was implemented.

This cost another 1-plus percent on a year-over-year comps for aerospace bearing revenues.

We expect to recover these sales volumes at better margins later in the year.

Overall, we expect to see the OEM component of the aerospace revenues increase as the year rolls out.

The outlook for this sector this year is in the mid- to high single-digit growth.

Regarding our second quarter, we're expecting sales over the period of between $164 million and $165 million compared to $153.9 million last year, an increase of between 6.6% to 7.2%.

The total year is looking very solid to us today.

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

Thanks, Mike.

SG&A for the first quarter of fiscal 2018 was $27.8 million compared to $25.8 million for the same period last year.

The increase was mainly due to higher personnel cost of $1.3 million, $0.5 million of additional incentive stock compensation and $0.2 million of other items.

As a percentage of net sales, SG&A was 16.9% for the first quarter of fiscal 2018 compared to 16.7% for the same period last year.

Other operating expense for the first quarter of fiscal 2018 was expense of $2.3 million compared to expense of $2.2 million for the same period last year.

For the first quarter of fiscal 2018, other operating expenses were comprised mainly of $2.4 million in amortization of intangible assets, offset by $0.1 million of operating income.

Other operating expense for the same period last year consisted mainly of $2.2 million in amortization of intangible assets.

Operating income was $31.8 million for the first quarter of fiscal 2018 compared to operating income of $29.2 million for the same period in fiscal 2017.

On an adjusted basis, operating income would have been $31.8 million for fiscal year 2018 compared to $29.6 million for the same period last year.

Adjusted operating income as a percentage of net sales would have been 19.4% for the first quarter of fiscal 2018 compared to 19.2% for the same period last year.

For the first quarter of fiscal 2018, the company reported net income of $21.8 million compared to net income of $18 million for the same period last year.

On an adjusted basis, net income would have been $22 million for the first quarter of fiscal 2018 compared to net income of $18.1 million for the same period last year.

Diluted earnings per share was $0.90 per share for the first quarter of fiscal 2018 compared to $0.76 per share for the same period last year.

On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2018 was $0.91 per share compared to adjusted diluted EPS of $0.77 per share for the same period last year.

The adoption of ASU #206 -- in 2016-09 added approximately $0.09 to diluted and adjusted diluted earnings per share in the first quarter of fiscal 2018.

Turning to cash flow.

The company generated $39.8 million in cash from operating activities in the first quarter of fiscal 2018 compared to $19.2 million for the same period last year.

Capital expenditures were $5.7 million in the first quarter of fiscal 2018 compared to $5.2 million for the same period last year.

In the first quarter of fiscal 2018, the company paid down $32.6 million in debt and ended the quarter with $45.5 million of cash.

And now I'd like to turn the call back to the operator to begin the Q&A session.

(Operator Instructions) Our first question comes from Walter Liptak of Seaport Global.

Wanted to ask you about -- in your prepared remarks, you talked about gross margin and some startup cost for new programs.

Can you guys give a little bit more detail on that?

Was that in industrial or aerospace products?

And it also -- you kind of alluded to benefits in the second quarter.

Were you talking about revenue benefits or just less startup cost rolling through the gross margin?

Yes, to answer your question, sort of the last part of your question, Walter, there's revenue benefits and some margin benefits that's begun in the second quarter.

So most of the startup costs are being experienced in the aerospace side of the business right now.

And we have a number of new product lines that are coming on stream for the 787, the 350, the 320 and the 330.

So all of those -- and they're spread across a number of different plants.

So all of those are really at just initial production rates right now.

And we're talking about probably 5 different plants being involved.

Okay.

Okay, great.

And switching over to industrial, very nice double-digit growth there.

Wonder if it's possible to talk about it as kind of sell-through that your customers had versus inventory refresh that could be going on.

And I guess, when you think about next quarter and a little bit further out into the year, could you get vision, double-digit growth in industrial continuing?

Well, that's the hard part for me is to kind of project out what industrial is doing.

I mean, with aircraft, you have how many planes and what your content per plane and what your new product adds are, and you can kind of do the math.

And industrial has a broader market with many more customers and is very GDP-dependent.

So it's a little more difficult for us to answer that question directly.

But there are some micro things going on in the world that are driving some of that demand.

And I think some of that is -- when you look at what's going on in the semiconductor industry and the retooling of the semiconductor plants for the new technology associated with light emitting diodes and -- I mean, there's a whole treasure chest of literature about what's happening there.

That's certainly driving a fair amount of our semicon demand.

I think when we're looking at materials, right now, we see the major demand coming from slide to the after-market.

And inevitably, on the materials and mining side, the major producers, typically cycle-to-cycle, deplete their working capital to a very extreme extent as they come down the cycle.

And then after, rebuild it as the cycle normalizes.

And I think we're in a normalized cycle now, where that demand should continue at least at the current rates.

That's -- and that's what we're seeing in terms of input right now.

And certainly, I think everybody knows what's happening in the oil and gas business and with oil around $50 a barrel.

And everybody figured out how to make money in the Permian Basin, there's a whole land rush going on down there with the frackers and the machinery people.

So there's just good demand coming out of that sector.

So will it continue with double digits?

Walter, you're the analyst.

I listen to you on that.

All right.

Good one.

And then you mentioned the oil and gas market.

So wondered if you could refresh what was -- what you had, like what the mix of revenue is for oil and gas.

And then if I recall correctly, I thought a lot of it was offshore that's going to be down and out for a while.

So what products are there that go into land-based oil and gas?

And how big is that business?

Well, it's -- the basic -- they're bearing products for the most part.

And they're the products that go into fracking and fracking machinery.

They're the products that go into -- down well injector systems, which are used to introduce piping into the wells to clear out the well flow.

It's like a stent in a heart operation, I guess.

And so there's a lot of bearings that are consumed in those kinds of markets.

The -- just the ground-based downhole drilling is -- consumes a fair amount of product just in the consumption rate.

So for us, I mean, it's a market that's -- that was pretty soft during the 2015 to 2016 period, and it's certainly coming back at a good rate.

And so we're optimistic that oil holds around $50 a barrel.

And the frackers and the Chevrons and the people that are active in that space continue to be bullish about investing in it.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

This is Ken Newman on for Steve.

So I just wanted to get your thoughts on how you're thinking about free cash flow for the year.

Are you expecting that it will increase versus last year?

Or do you think working cap -- or increases in working cap will bring that down?

No.

I think it will increase a little this year.

I don't think we'll be investing as much in working capital as we have in the past 2 years.

As you'd see -- when you see the Q this afternoon, you'll see that, that was definitely the case.

And we'll continue to pay down debt.

And as always, we're out looking hard to find acquisitions.

Got it.

I guess, as a follow-on to that, in terms of the acquisition pipeline, can you talk a little bit about how active it is and where you're looking for deals in terms of industry or in size?

Well, we like both industrial and aerospace assets.

And so we've been looking everywhere.

There's a lot of books crossing our table.

And there's a lot of activity going on.

But it's always hard to find that right one that fits what we're looking for and fits the profile that we're looking for.

Got it.

For my second question, going back to gross margin, I think last year, you had mentioned 100 basis gross margin expansion target.

Is that reasonable for fiscal '18 and based on how you're seeing the end markets come together?

Yes.

I think that's our internal goal for the year.

I think it's going to be more second-half related, as based on the comments that Mike made a little earlier on this call and last call about some of these startup costs and low production run costs that we have on some new products entering the market.

But I think for the year, yes, we're still trying to get to that 39%.

Okay.

And then lastly, you mentioned some headwinds to margin from lead times and just the allocation of aerospace capacity allocated to commercial.

How -- I guess, how are you expecting or looking at the timing of those issues to be resolved?

Is that something that's already being fixed?

Or is that something that really comes out in the third or fourth quarter?

If you are referring to Mike's comment, he was referring more to top line sales that we reallocated some capacity internally from aerospace capacity to industrial capacity, and that will neutralize itself over the next 3 quarters.

And on the gross margin, on the cost, that will also -- by the third, fourth quarter, we should definitely see the improvements coming through.

(Operator Instructions) Our next question comes from Kristine Liwag of Bank of America.

Mike and Dan, when we look at your largest program, production rate of the 737 is ramping up.

And I think from the announced rates today, it will go up about 12% in volume next year.

And -- plus you've got incremental content on the MAX versus NG.

And additionally, on the F-35, we've seen higher procurement rates from Lockheed, too.

I know it's a little early, but it seems to me that if you start looking at fiscal year '19, you'd have a sizable acceleration in your aerospace business.

I was wondering if you could walk us through maybe puts and takes of why and why wouldn't your fiscal year '19 aerospace business grow double digit next year.

Next year is calendar '18, right?

So -- yes, I guess, because we're in '18 now for fiscal.

Yes, we -- what we see here is if you look at our major programs where -- which are coming on, and we have some major programs that are sort of backing off and then there's sort of a netting, so the calculus gets a little complicated and -- so the major programs that are coming on with new products concern the 787, the 350, the 330neo and the 320, both the old 320 and the 320neo.

So those are sort of new products that are coming through on those programs, both for the airframe and the engine, both the LEAP and the geared turbofan engine.

So then we see the volume increases on the 737 build rates and we see the volume increases on the 330neo.

But a big program for us has been the 777.

And the 777 backs down for a year or 2 as they convert it from the 777 to the 777X.

So when it goes to X version, our content on the X increases by 50% over the content on the basic 777 version.

So that's what's going to sort of hold our growth in the single digits -- high single digits this year because of the backing down of that particular program.

Great.

And just to confirm, did you mean for calendar year '17 or do you expect that balance to also hold in calendar year '18 as the rates come down?

No.

Yes, I think fiscal years -- I think in fiscal years because I have to.

So I think for our fiscal year, that's kind of where we're going to be.

When I look at that program for next year, for calendar '18, yes, calendar '18, it's a little soft, too.

And then calendar '19, it comes back pretty strong.

Great.

That's helpful.

And maybe a bigger picture question.

Lately, we've seen a lot of news coming from Boeing and it seems like Boeing's relationship with the supply chain is becoming more contentious.

As we look at Partnering for Success 2.0, how do you expect that to affect you?

And would you be able to offset maybe what the pricing concessions that Boeing wants with better operational efficiency or anything like that?

Well, I don't see PFS 2.0 impacting us today.

The -- pretty much, our Boeing contracts are in place through, I don't remember the exact date, 2021 to 2025 depending upon the contract.

So we've kind of reached an agreement with Boeing on various things.

And so there hasn't been much discussion on PFS 2.0.

It'll be interesting to hear what you've heard from other people on -- in that regard, but that's kind of where we are.

We're always looking for a way to improve the manufacturing efficiencies through either methods improvement or through better capitalization or through moving to places where the overhead rate is lower and the labor content is high.

So we're always looking for that balance, and we continue to do that.

And we continue to make decisions quarterly on what's the best approach to achieve and improve execution.

And to some extent, when I -- in my prepared remarks, we talked a little bit about moving one of the product lines from one plant to another that's better tooled and more efficient.

And in order to do that, we had to move out lead times and sort of relieve the pressure on the home plant to give the away plant time to spool up and probably cost us 1% of our sales growth for the first quarter.

So that's just an example of kind of what we talk about and think about every month.

(Operator Instructions) I'm not showing any further questions in queue.

I would like to turn the call back over to Dr. Hartnett for closing remarks.

Okay.

Thank you, Chris.

I want to thank everybody for their participation today and for your continued interest in RBC Bearings.

And we will be speaking to you again, I think, in October.

Good day.

Ladies and gentlemen, that does conclude today's conference.

Thank you very much for your participation.

You may all disconnect.

Have a wonderful day.