RBC Bearings Inc (RBC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 RBC Bearings Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Chris Donovan with the Alpha IR Group.

You may begin.

Good morning, and thank you for joining us for RBC Bearings' Fiscal 2018 Fourth Quarter Earnings Conference call.

With me on the call are 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 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, and good morning.

Net sales for the fourth quarter of fiscal 2018 were $179.9 million versus $160.2 million for the same period last year, a 12.3% increase.

Excluding the surge in Canada sales from last year, organic growth for the quarter was 13.5% and 10% for the full fiscal year 2018.

For the fourth fiscal quarter of 2018, sales of industrial products represented 40% of our net sales, with aerospace products at 60%.

Gross margin for the fourth quarter fiscal 2018 was $69.7 million or 38.8% of net sales.

This compares to $63.2 million or 39.5% for the same period last year, a 10.3% increase.

On a full year basis, gross margin, as a percentage of net sales in fiscal 2018 was 38.2% compared to an adjusted 37.9% for the same period last year.

Adjusted operating income was $38.3 million versus $34.4 million last year, an 11.5% increase.

On a full year basis, fiscal 2018 ended at $136.1 million adjusted or 20.2% of net sales, compared to $121.4 million or 19.7% of net sales operating income.

Clearly, this was a nice quarter for the company and an excellent year all around.

Industrial products showed a 26.4% year-over-year growth rate, and we continue to see strong overall demand for these products.

Industrial OEM was up 29.9% and distribution and aftermarket was up 19% on a year-over-year basis.

Mining, oil and gas, semiconductor machinery, machine tool and general industrial equipment continue to demonstrate exceptional strength during the period.

On the aerospace and defense side, the fourth quarter net sales were up 6.7%, normalized for revenues generated by Canada last year.

This was mainly driven by OEM.

Aero and defense OEM was up 9.1% on an organic basis.

We see our aerospace volumes building through subsequent quarters as we add additional capacity, floor space, equipment and staff.

This is in order to support expansion in volumes driven by new contracts as well as the additional airframe and engine builds scheduled for the coming years.

There's no question that our aerospace margins were impacted this quarter by start-up expenses related to new programs being introduced at several facilities in both the airframe and engine product segment.

The impact here was approximately 0.5-plus percent, probably larger, and will likely continue for the next few quarters as these programs are assimilated, tooled and brought to maturity.

Another 0.5 point-plus was mix related as aftermarket spares volumes was lower than normal.

This aftermarket demand can ebb and flow quarter-to-quarter, but is expected to strengthen as a result of the new defense bill with increased spending budgeted for repairs and readiness.

Regarding our first quarter, we're expecting sales over the period to be between $171 million and $174 million compared to $160.8 million last year net of Canada, an increase of 6.7 -- 6.8% to 8.7%.

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

Thanks, Mike.

SG&A for the fourth quarter of fiscal 2018 was $29.6 million compared to $26.2 million same period last year.

The increase was mainly due to higher personnel costs of $2.2 million, $0.3 million of additional incentive stock compensation and $0.9 million of other items.

As a percentage of net sales, SG&A was 16.4% for the fourth quarter of fiscal 2018 compared to 16.4% for the same period last year.

Other operating expense for the fourth quarter of fiscal 2018 was expense of $2.2 million compared to expense of $2.6 million for the same period last year.

For the fourth quarter of fiscal 2018, other operating expenses were comprised mainly of $2.3 million in amortization of intangible assets, offset by $0.1 million of other items.

Other operating expense for the same period last year consisted mainly of $2.4 million in the amortization of intangible assets and $0.2 million of other items.

Operating income was $37.9 million for the fourth quarter of fiscal year 2018 compared to operating income of $34.4 million for the same period in fiscal 2017.

On an adjusted basis, operating income would have been $38.3 million for the fourth quarter of fiscal 2018.

Adjusted operating income as a percentage of net sales would have been 21.3% for the fourth quarter of fiscal 2018 compared to 21.5% for the same period last year.

For the full year fiscal 2018, adjusted operating income was 20.2% of net sales compared to 19.7% for the same period last year.

For the fourth quarter of fiscal 2018, the company reported net income of $26.7 million compared to net income of $21.6 million for the same period last year.

On an adjusted basis, net income would have been $26.4 million for the fourth quarter of fiscal 2018 compared to net income of $21.6 million for the same period last year.

Diluted earnings per share was $1.09 per share for the fourth quarter of fiscal 2018 compared to $0.90 per share for the same period last year.

On an adjusted basis, diluted EPS for the fourth quarter fiscal 2018 was $1.08 per share compared to adjusted diluted EPS of $0.90 per share for the same period last year, a 20% growth rate.

Turning to cash flow.

The company generated $37.8 million in cash from operating activities and spent $7.4 million in capital expenditures in the fourth quarter of fiscal 2018 compared to $26.7 million for the same period last year.

For the full year fiscal 2018, the company generated $130.3 million in cash from operating activities and spent $30 million on capital expenditures.

In the fourth quarter, of fiscal 2018, the company paid down $25.1 million of debt.

And for the full year fiscal 2018, the company paid down $98.2 million of debt and ended the year with $54.2 million of cash on hand compared to $38.9 million of cash on hand for the same period last year.

I'll now turn the call over to the operator to begin the Q&A session.

(Operator Instructions) And our first question comes from the line of Kristine Liwag from Bank of America.

Mike, you mentioned a few headwinds in the quarter in commercial aerospace, but I thought that with your significantly higher content on the MAX and NEO, that revenues would have been higher in the quarter than they were.

With the announced production rates from Boeing and Airbus, are you at the volume that you expected to be?

Or is there something going on in the supply chain, either with inventory in the pipeline that's preventing you from being at the volume that you expected to be?

Well, the MAX is really in its early production phases, Kristine, right now.

So we're not really seeing the mature numbers.

I mean, that's ahead of us, and our content on the MAXes is really good.

But there was -- at RBC, there was just a lot going on this quarter in our aircraft business, and -- both in the new engines and newer airframe categories.

And we're moving from an initial lot production phase in some of our plants to a mature production phase once these airframes and the engines start to get into significant numbers.

And the other thing is there's a number of contracts that are rolling over in the next couple of years, and we expect to benefit substantially from that.

So during this quarter, one of our plants was asked to develop and deliver -- design and deliver over 50 new products for the 777X.

So -- and there's just a big acceleration at Boeing on that ship.

And so of course, we had to put everybody on it and turn the plant upside down and move heaven and earth.

And needless to say, this doesn't -- does not have a positive impact on production efficiency when your plant is focused on making 50-plus samples.

So I think we delivered 45 of the 50 plus during the quarter, and we have a few left this quarter to finish, and we'll be through that phase.

But the plant was -- we had 1 plant that was really distracted as a result of that, and I think we chose the right priority to get on that ship and take care of that customer, and so we did.

We -- so that was one example of some of the start-up expenses that we had, and we have similar examples in 2 other plants where we're starting up other plant -- other programs, which I can talk about.

I see.

And so as these samples tail off and as initial lots transition to mature production, how should we think about gross margins into fiscal year '19?

Does this mean that fiscal year '19 should see gross margin expansion of greater than 1 percentage point?

Well, if we were through the production start-up on some of these projects, that would certainly be the case.

But we're not going to be through the production start-up.

I mean, we're -- we have another -- we're expanding 2 other plants to accommodate some of the business that we've been contracted on structural components.

And so I think the start-up will be -- that those plants are both in the United States and into Mexico.

So I think the start-up of those programs is going to also have some impact on us through the quarter as through the year -- through the fiscal year.

I'm thinking, probably, it's going to be -- the bite, it's probably going to be at least 0.5 point during the fiscal year as we ramp up these volumes.

But the volumes are significant.

We're going to basically triple revenues from between now and 2022, and we expect these revenues to be in the low 8 figures.

And so we're applying manpower and capital and talent to put in these production systems.

So I think the bite will be about 0.5% going forward, next year.

And is that 0.5% incremental to the fiscal year '18 numbers?

Or is that already included in the fiscal year '18 numbers?

That's included in the fiscal '18 numbers.

So I think you can use fiscal '18 as a baseline, all right.

Where we normally try to expand our margin 1 percentage point a year, I think now, we're probably going to say, okay, we're going to expand it 1 percentage point a year, but back it off to 0.5 percentage point because we have start-ups on these various programs.

I see.

That makes sense.

And then if I could squeeze in one more question.

Can you discuss the effects of higher steel prices in your business?

Is that relevant, or not relevant?

Is that a pass-through cost, or can you increase pricing to adjust?

Yes, it's kind of mix and match.

In some cases, we have contracts where we've negotiated a collar.

And so if the material moves plus or minus 5% from some baseline, we can debit or credit accordingly.

In some cases where we don't have that collar, the material component of the cost is very low, so it's just not administratively worthwhile to worry about the collar.

And then in some cases, we've made extensive material buys and brought in material early before these tariffs, and so we have sort of a cache of material that will at least last us through next year.

And our next question comes from the line of Pete Skibitski from Drexel Hamilton.

Dan, would you be able to give us the full year EBIT by segment for fiscal '18?

Yes, Pete, I just don't have it in front of me, but we'll be filing the 10-K in about 3 hours.

So you'll have it.

Okay, great.

Great.

You guys win an award for speedy 10-K filing there.

Mike, when you were talking about the tripling of revenue to 2022 to the low 8 figure, was that specifically sort of moving from 777 to 777X?

I wasn't quite sure what you're referencing.

No.

That has more to do with structural components for all the ships.

Specific for structural components as opposed to bearings?

Well, structural components with bearings.

We like to make sure that they have bearings with them.

So all these structural components have bearings.

Okay.

Okay.

Got you.

And then just was wondering if we could do some housekeeping.

Maybe your expectations in fiscal '19 for CapEx and D&A, and wasn't sure if you could give tax rate or not either.

Yes.

On CapEx, we'll still be in that 3% to 4% range, and we'll probably spend a little more money in fiscal '19 than we did in '18, because we're building out a few more plants to handle the capacity that's coming toward us.

On the depreciation, we'll be running around $7.7 million a quarter.

That's depreciation and amortization.

Okay, great.

Great.

And the tax act -- excuse me, the tax rates?

22%.

22%.

Okay, great.

Great.

Okay.

And then, Mike, just to close it out, on A&D overall, you've grown kind of low single digit the last couple of years, but it sounds like you're implying that the best of the narrow body ramp for sure is ahead of you, and we have got this fiscal '18 defense bill signed as well.

So does it make sense to think that on the AV side you'll be accelerating in terms of growth the next couple of years?

Yes.

I would expect so.

I mean, we have some really, really good programs that are lined up and are inbound, which is one of the reasons -- right now, we're going through expansions in 4 plants.

We probably should be working on 6, but how much can you work on at once, right?

So yes, I think we -- there's these new engines are very important to us, and of course, the build numbers on the LEAP and the gear turbo fan are basically low.

I mean, they really haven't hit their mature numbers.

They start to hit those mature numbers in this year and '19 and '20 they become very perky.

So those are important engines to us, and we have good content in those places.

So -- and also, we've been advised that a major European engine builder has selected us to be a supplier of some major components beginning in 2020.

So I think we'll probably be expanding our plant in Poland a little bit once we take care of the U.S. and Mexico to accommodate some contracts over there.

So our content on this -- on these engines and on these airframes is going up.

That's great.

That's great.

And I mean, probably you're thinking about the industrial side as well because you had explosive growth here in fiscal '18.

But the PMIs that you talked about a lot are still fairly high.

With the more difficult comp, did the growth slow down?

Or are things just still so good out there that you can maybe still do double-digit type of growth in industrial?

How are you thinking about that?

Industrial is, because of the way industrial works, through so many different sectors that we're servicing, it's -- you have to be a Bernanke-level economist to figure out what the future's going to hold.

So we try to make sure that we have the capacity that our customers require.

And right now, we're taxing -- we're definitely taxing our capacity.

So if it slowed down to the low double digits, it might be a good thing.

(Operator Instructions) Our next question comes from the line of George Godfrey from CL King.

I just wanted to drill down on that industrials.

The aerospace is very clear with the build rates at Airbus and Boeing, and you highlighted that.

On that industrial segment, if we go into the mining, oil and gas or machinery, or segments that are -- do you see trends that are specifically benefiting now that perhaps won't continue in the future?

Are there projects, larger-scale projects?

I just would like to get a little more granularity on the 26%, I would not think that, that is sustainable at such as strong growth number.

So I'm just wondering, if there are moving pieces that you can see that are visible today before the Bernanke PhD?

Well, I'll let Dan answer that one.

So George, in that segment, we have, as Mike talked about, oil and gas, construction, mining, general industrial.

And on general industrial, it just goes all over the industrial complex in the U.S. and in Europe, and then we have our collab business in Europe.

So all of them are behaving very nicely.

I think as Mike said, 6 months into the year, the comp's going to get more difficult, right, because we had a really good year this year in the industrial side.

But other items that are in our Industrial segment would be submarine, and so we're going to see some nice growth on the Virginia and the Colombia subs coming in, in 2 to 3 years from now.

So that's a nice growth story that we'll continue to see.

And the military vehicles, where we're just starting to see some good activity from the Department of Defense on new builds and repair work on the military vehicles.

So I think on the industrial side, right now, oil and gas has been really strong, and we think that's going to continue, and I think for us on mining, we're always talking about large hauling trucks for Caterpillar, Komatsu and Liebherr, folks like that, and I think that's continuing to go in the right direction.

Yes.

We have one other sector that we can talk about, and that is there's just an awful lot going on in China, building out the rail complex for high-speed trains and for city trams.

And so our products for that -- for those systems are very well accepted and to the extent that we've had to build out an office in Shanghai with engineering and customer service people this year in order to support that network of demand.

And also mapping across that is our machine tool business.

And now, our largest consumers of machine tool products is China, and the growth there seems to be -- and the acceptance of our products seems to be extremely good.

And so the mechanism for -- that's driving the economy over there, if anybody has a good idea of where the Chinese economy is going, it's -- we're going with it.

I'm showing no further questions at this time.

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

Okay.

Well, thanks, everyone, for participating in the call today, and we look forward to speaking to you again in the midsummer.

Have a 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 great day.