Q2 2020 Earnings Call
Get the ladies and gentlemen, and welcome to the RBC bearings fiscal 2022nd quarter earnings Conference call.
At this time, all participants are any listen only mode.
Later, we will conduct they question and answer session.
Instructions will follow at that time.
If anyone should require assistance or in a conference.
<unk> on your touch tone telephone.
As a reminder, this conference call is being recorded.
I will now like to turn the conference over to your House Mister Chris Donovan without the I.R. sorry. Please go ahead.
Good morning, and thank you for joining us for RBC bearing physical 2022nd quarter earnings conference call with.
With me on the call today are Dr. Michael J., Hartnett, Chairman, President and Chief Executive Officer, If Daniel <unk>, Vice President Chief Financial Officer, and Chief Operating Officer before beginning today's car. Let me remind you that some of the statements made today will be forward looking at are made under the private Securities Litigation Act Reform Act of 1995.
Actual results may differ materially from those projected works fine to do a variety of factors. We are for each RBC bearings recent findings with the S.P.C. for more detailed discussion of the rest I could impact the company's feature operating results in financial conditions.
These factors are also described in greater detail in the press release in on the company's website. In addition reconciliation between gap in financial information.
As part of the release and it's available on the company's website now I'll turn the call over to Doctor hardness.
Thank you and good morning.
Net sales for the second quarter of fiscal 2020 were 181.9 million.
There's 172.9 million for the same period last year.
5.2% increase.
Organic growth for the quarter was 6.8%.
For the second fiscal quarter of 2020.
Sales of industrial products represented 30, 525% of her net sales with aerospace products at 64.5%.
Gross margin per quarter was 71.1 million or 39.1% of net sales.
This compares to 67.8 million or 39.2% for the same period last year.
Before 0.9 per cent increase.
Operating income was 37.3 million versus 35.9 million last year, a 4% increase.
<unk> was five point 51.2 million versus set a 7.7 per cent increase over last year.
We are pleased with the performance this quarter and continued be encouraged with the strong outlook.
Of our aircraft businesses in our seeing green shoots in the is really is a fourth quarter.
In some of our industrial markets.
Sales of industrial products over the period were down 5% last year the expansion was 7%.
So we were up against some difficult concepts.
Industrial or we M. was down 4% and distribution and after market was down and organic 7.2% a year over year basis.
Aerospace and defense markets paint the opposite pitcher.
The second quarter organic net sales were up 14.4%.
Aerospace and industrial markets today.
Our night and day.
Aerospace sales were driven by Oh, Yemen after market.
Heroin defend so we I'm, we're up 15.1% kind of organic basis.
Chain constraints internal and external continue to east as we bring new capacity in approvals online.
Some plants continue to the production constrained.
We will continue to add capacity.
In these areas.
The sector will likely can continue to perform pick a double digit growth level for the next several quarters.
As we introduce additional manufacturing capacity.
<unk> new contracts to revenues.
At this point in a year.
We enter a third quarter most of our aerospace businesses are well our book well into 2021.
When the 737 Max receives it's F.A.A. certifications.
We hope and calendar cute for.
Production is accelerated we expect our aircraft products growth rate just even further.
Today, we are beginning to see the impact of the mix.
Q3 outlook as we are beginning to feel the effects of the reduced production rate for that plane.
Implants were production is not constrained.
We continue to add both capacity and new processes in support of our customers requirements and should be well positioned in this regard for F.Y. 21 M. beyond.
With regard to our second quarter, we're expecting sales between 170 779 million.
Which results in it or organic growth rate of approximately 4% over last year.
Oh, No trust cute call over the D.N. for more details on the financial performance Everything's fine.
You know you for the second quarter of fiscal 2020 3.8 million.
29.3 million.
Same period last year, the increase just mainly due to 1 million of additional incentive stock compensation higher personnel cost of about 2.4 million and 0.1 million on right.
What percentage of net sales S.G. neighbor 16.9 per cent second quarter of fiscal 2020 compared to 17% same period last year.
They're operating expense for the second quarter. It 'cause for 2020 was expensive 3 million compared to expense at 2.6 million for the same year period last year per second quarter access what 2020.
Expenses were.
Mainly of 2.3 million in the amortization of intangible assets.
Your point 9 million Novak acquisition costs offset by other income 0.2 million.
Operating expense for the same period last year consisted mainly of 2.6 million any amortization tangible assets.
Operating income was 37.3 million second quarter because for 2020.
Two operating income at 35.9 million for the same period in fiscal 2019 on an adjusted basis operating income would have been 38.4 million for the second quarter of fiscal 2020 compared to adjust to operating income to 35.9 billion for the second quarter or fiscal 2019.
Per second quarter, physical 2020, accompanied reporting that income 31.3 million compared to net income a 30.1 million at the same period last year and adjusted basis that income would have been 32.3 million per second quarter. After school 2020 compared to adjust to net income with 30 point too many.
And for the same period last year.
Diluted earnings per share, what's $1.26 per share for the second quarter 'cause for 2020 compared to $1.22 per share. The same period last year on adjusted basis diluted orange per share for the second quarter, a fiscal 2020 $1.30 per share.
Compared to adjust to dilute E.P.S. at $1.22 per share the same period last year.
Turn into cash flow to accompany generated 24.5 million in cash from operating activities and the second quarter.
2020, compared to 24 million for the same period last year and 64.6 million in cash from operating activities for the six month period.
2020, compared to 57.9 million for the six month period last year.
Expenditures were 8.2 million in a second quarter for spend 2019 compared to 10.8 million for some period last year and a six month basis, tap X., which 20.2 million compared to 17.7 million for the same period.
<unk> and the second quarter.
Fiscal 2020, the company pay down 13.1 million at that.
Six month period, we pay down 30.2 million at that total debt.
Can be 28 2019.
37.8 million and cash on hand was 36.4 million.
Well now turn a call back over to the operated to begin to <unk> session.
[noise], ladies and gentlemen, if you have the question at this time. Please press start tend to number one and you touch tone telephone.
Question Huh.
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[noise].
And your first question comes from the wine estates Kubinski Alembic global.
Hi, good morning, guys.
Hey, guys just wanted to get a sense of how you're seeing margins operating margins in the second half of the year looks.
Like the first half failure up year over year in the first half.
Second half I think a little tougher comp wise on the margin side, but it looks like you're feeling good about volumes. So should we expect margins to be up period over period in the second half and kind of how much are they tied to whether or not we get a max returned to service.
At the beginning of year, we gave guidance of 50 Bips on gross margin so but for six funds. This year were 38.9% compared to 38.9% last year. So little short on the target for gross margin or we were able to keep the cost in line. So on an adjusted operating income year to date were 21.
My one per cent compared to last year, 20.6%. So we're a 50 dip improvement. So I think that's going to stay steady to the year I think we'll see the margins improving going into Q3 in Q4, and we'll try to keep the cost under control so, but I think we're comfortable with that 50 get.
Improvement phone downtime operating income.
Okay sounds great and that.
Maybe Mike can you maybe expand on your comments about the green shoots in industrial maybe starting to emerge in the fourth quarter or are those you know maybe certain sub sectors within industrial are already showing signs there.
Well.
There's a couple of things that normally go on in the industrial section right now.
What you have in the third quarter or our third quarter the calendar year fourth quarter.
Is a everybody.
In is in the in the Kingdom.
Is trying.
And manage their inventories to some turn objective that they had set for their bonuses.
And inevitably businesses can't run.
With that.
With that artificial level of working capital. So every year, what you see.
He is in the in our fourth quarter the calendar first quarter.
The all these companies hit the gas in terms of replenishing inventory. So they can run their businesses properly. So I mean, that's just.
Sort of standard operating procedure in the industrial world for Us.
But in addition to.
That you know we have some new contracts coming in on existing accounts, which are which are very promising which are going to get bring us some industrial volumes.
Increased industrial volumes next year.
We have some new contracts, a new accounts, which are equally promising and we see.
We're seeing a pickup in mind.
It sounds great and is that all incremental too I think you Ben expecting to some marine business to get better next year. So so as the commentary you just gave kind of in addition to the submarine kind of optimism yeah. I know that has nothing to do with the submarine business. That's okay. Yeah.
Great great Okay.
Okay gentlemen, last question for me, Mike just want to you could you talk about inventory it looks like maybe this is more for Dan, but it looks like you guys. You know just looking at the cash from ops number that you built a lot of inventory yourselves this quarter and through the first half a year should we think.
That's not to reverse maybe if not the.
Quarter by the fourth quarter.
Yeah, it's been slowing down going in decelerating going into this year you know at September we're gonna filed acute this afternoon, but we ended September at a 300.
53.9 million in inventory.
Compared to year end of 235.
So now some of its backing off on the industrial side and some of it being offset by builds on on aerospace side.
Okay, Okay, great. Thanks, guys.
Your next question comes from the line of Kristine Liwag with Bank of America.
Hi, good morning, guys.
When corn interesting.
Mike like last quarter, you mentioned for the 77 that you are producing generally at 42 per month with sound like 52 intimate 32 with your commentary today it sounds like there's a change.
With that production rate can you give more color of where you are today.
And then also how is your supply chain coping with lower 737 volumes than previously anticipated.
Okay.
Well we are we are.
Relative to the supply chain, we are the supply chain. So.
Yeah, we're coke coping just fine.
Yeah I think.
What we see is depending upon which which products are being produced in each each with each of these products are you know come from a different plant.
But what we're seeing is you know some some sectors of the aircraft business are running it.
52 summary, running it a little bit more than.
50 to December running is in the high Thirtys.
So you just see this.
Widespread of demand for these planes.
And you know kind of is what it is.
In one of our one of our plants, which which.
Which.
As capacity.
Is being throttled.
By the mix demand.
So that's probably a few million dollars and our quarter, which.
You know we we we are believers that the Max will be will come back into production someday.
And.
So.
This all gets corrected so.
But into plants where were production constrained.
We're.
We're using this interim period to catch up.
Did that did I answer your question are we get off track.
Well I guess, it's more with the production I guess the nature of my question is just understanding where you are today and then.
How this lower volumes and general could affect your margin outlook for the year and then I'll see if you're seeing.
So maybe a supplier to you how their coping and that are we going to see bottleneck for the <unk>.
Once the airplay goes into service you will eventually see some sort of rate ramp that billings planning to see how you guys and some of your peers your suppliers to cope with that eventually.
All right great.
Yeah well.
So there's bottlenecks now Christine they're serious bottlenecks now and our and our sector.
And that's that's the reason that we built new plant and that's the reason we installed a lot of these special processes in the plant.
And we're going through the approval cycle now.
One by one will be able to turn these processes on in use them for internal production.
Sort of bypass the.
Constraints that.
But a lot of the industry's feeling right now that uses a lot of these subcontractors.
So if the.
737, and wind at 737 comes back into production.
The timing that's going to be just perfect for us in terms of internal production for.
For these products.
No if.
At the 37 is delayed through.
Our fourth quarter, which is calendar.
First quarter.
If you know.
Probably have a couple of million dollars more impact on our and our revenues.
Yeah, if it.
If it's not delayed then.
You know the plants that aren't constrained.
We will.
Sort of have a great day in the plants that are constrained.
I think we're gonna be coming out of that constraint problem soon so.
I think we're going to be really well position to service that that that business certainly by the end of our fourth.
Quarter.
That's really helpful color.
And in your general industrial business can you talk about.
The end markets and what you're seeing in terms of growth.
And also our order activity.
Yes, so christine on the industrial site for the quarter.
We were down about 2.8% and organically about 5%. So if you take out to switch to acquisition, we just did.
The major drivers there for us a big one is oil and gas was down 54% in the quarter and that's equivalent to about $1.8 million to sales in the quarter.
So if we took that out of the equation, we basically would've been flat year over year on our industrial sales.
So I think just slow points worse in Q2 oil and gas mining and general industrial distribution, where my last night was talking about a little earlier, they're tracking their inventories where we had.
Some positive signs on the industrial side was back in semiconductor equipment and on our marine side of the business.
So that's.
Hi, there on them on the industrials.
Thank you very much.
Your next question comes from <unk>.
A line of Jug, George Godfrey would see okay.
Good morning, George.
Good morning, Thank you for taking the question.
I heard all the comments about.
The production of the Boeing 737, Max coming back in.
Just wanted to take a or get some thoughts on a more.
More pessimistic I'll walk in is that something that.
You have thought about what what if production would go down to like 10, or 15 plans or the coming back into service gets pushed out to next summer.
Have you thought about what that means for your business and supply chain or taking a more the or.
What is a more dire scenario that you're thinking about thanks.
Well I mean, our business you know the the dimensions of our business are far beyond the 737, Max Although the 737 Max is an important contributor to for what we do I think.
I think I.
I think it's no secret we have more than $100000 per plane.
So you know it.
A delay in the production.
Wouldn't it wouldn't be great news, but we'd get through it.
On the other hand, there's a there's other programs.
Ramps that are.
That are alive and.
Coming through and.
One windoor closes the other door opens.
And this is that something you could ramp up if if all orders from the Mac started winding down well production had to go down in the Athree 20 meal had to ramp up is that something you would be prepared.
To address or me.
Yeah, well I mean, it's the neo and the Max.
To a large extent.
Use this same kind of product that we produce.
It's it's a sort of a generic varying set that.
We produce for both ships and.
They have different part numbers, but basically the same bearing in many cases so.
A lot of that mix is saying the same some of that mix is different so.
It isn't a.
It is an oil.
I'll.
Generic mix.
Got it and then my last question in the press release, you call out before or five fewer production days in the next quarter or the current quarter that were no but relative to last year do there would be no difference in the days correct. That's correct as is the same last year.
Okay. Thank you very much.
[noise].
Your next question comes from the line of Josh Sullivan with Seaport Global.
Good morning.
Good morning.
Just can you talk about the 77 program.
Got a large program for you I don't know you ever given shipset values on that and then did you see that already working its way through this.
Supply chain on the cut just where do you think what do you think you are in the 77 at this point.
Well, it's 77 is.
Equally important plane to us and.
You know I think.
You know with what do they backing off one ship per per month.
I heard.
I think that's the right to get them too I think it's too too.
Yeah, I mean, it's.
Yeah. It doesn't have much of it effect on us.
No I think it's probably.
Particularly if the mix you know replaces it.
In the Triple Sevenx, you know comes onboard and if the Triple Sevenx comes on board and a reasonable timeframe whatever we'll have our hands full.
The next second.
Most important platform for us would be to seven seven.
Sevenx.
And have you seen any changes in the pull on that program right now just given some of voting sky and guidance on entry into service.
Yeah, we've seen we've seen some delay you know.
But at the same time to bringing up this the triple seven to sort of.
You know.
Accommodate their market demand so.
You know our content on a triple seven is very good our content on the triple seven axis.
Know probably 50% better.
<unk> and then just switching over to the submarine business I think earlier. There is this year there were some timing delays just on the block five changeover, if I remember correctly do you see any changes to that progression going forward on the negotiations on the block five is that it has it gotten better as it accelerated as the CR, having any impact on that.
I think it's right on time, where we thought it was going to be where are we going to final terms and condition negotiations.
So we should be and im pretty good shape.
Got it.
Thanks for the time.
Your next question comes from the line of Michaels.
Similarly with Sanchez.
Hey, good morning, guys. Thanks for taking the question just on I mean it.
We've been talking about aerospace here I mean, the eight seven is going down you know 24 units per year that the triple seven axis is getting delayed.
If the 737.
Never goes to 57, a month I mean, how are you guys looking at you've had a lot of capacity you have in sourced a lot. I mean, you kind of suggested that some of your facilities or or feeling lighter volume already I mean could you be looking at a situation where you've got you know you've got too much capacity and you're going to have some overhead absorption.
Sure.
I don't see that's scenario developing for US we have we have only one facility that is being affected by the.
737 mix slowdown.
The other facilities are very much yeah.
As as I said production constraints so.
Yeah, I mean, if the Max doesn't come back into service I think I.
I think is a disaster for the industry, but I think a likelihood of that is zero.
I think you'll get through it it's a matter of timing and.
Maybe a new CEO or two but they'll get through it.
What about what did you say you know if the Max is delayed more I mean, if we get a return to service you know later, but December we get a February .
You know start flying but you know they opted to not take that weight to 57, if they hold this rate at 42 that does that you know keep this.
He did headwind on you guys.
No yeah I don't.
First of all I don't think that supply chain is capable of making 57.
Notwithstanding.
Their optimism about as its robustness.
I don't think that I don't think it's there.
I.
I think the supply chain would have a very.
Great amount of difficulty maintaining 52.
Our models for next year are based around 52.
And if it's you know if it's more it's better if it's less we'll deal with it.
So.
Yes, that's kind.
Of where we are right now and I think the whole.
I think everybody is.
Waiting for the next shoot shoe to drop on the program.
Got it.
And then maybe a just a just one more on that topic I mean, I know you guys talked about that you were picking up some share you know is that it's.
That's still the case is that you know softening.
You know maybe the blow of being at a lower rate. You know can you just I think you hinted at data a quarter or two ago that you were in fact, taking share from some challenge that suppliers out there.
Yeah, that's definitely mitigating the volumes that's one of the reasons why we're so.
So production constrain some of our plants.
Is is our competition is.
His I'm, having a great deal of difficulty getting these products to their plants.
Okay, Alright, thanks, guys I'll jump back thank you.
Your next question comes from the line of Steve Barger with Keybanc capital markets.
Hey, good morning, Wednesday morning, Steve.
Mike I just wanted to go back to the industrial inventory commentary in the thought about replenishment can you remind us of your exposure to things like off highway construction equipment, because we're seeing some pretty sizeable.
A year over year order contraction, which is going to lead a lower production next year and in some of those end markets and that should flow through to general industrial distribution at some level. So just any any color on that.
On our our exposure to the.
Hi way construction equipment.
Cranes that sort of thing yeah.
We we don't have the kind of exposure that timken seems to have it's it's a it's a smaller sector for us, but its you know it's a meaningful sector I.
I think Dan it's probably more current on the numbers in that sector that I am but.
I'll, let him speak.
Yeah, but for us in that sector, it's the big hauling trucks, where we have a lot of our content.
And so it's mainly driven by the mind activity and commodity activity and the mines.
Okay, so not much exposure to that kind of traditional construction equipment at all.
Well we have exposure.
It was your too, but it's not it's not a sizable market like we would see in and heavy haul and mine trucks right. So more of the size of like oil and gas as you described earlier somebody like that.
Yeah, hi than even yeah around there maybe five to 10 million dollar type market.
Gotcha, Okay and switching gears.
Can you just talked about the strategic rationale for buying Swiss tools.
Yeah, what would you like to know.
Well and niche supplier of tools, returning and boring right. So how does that fit with your portfolio.
Well it.
We.
We make tools for turning in boring and grinding and machining and.
The like in a in Switzerland, we like the market.
It's a it's a market that.
It's it's definitely a razor blade market.
And we like we'd like those.
It's like bearing markets, where you sell the product once there has to be replaced a.
Five or 10 times in its lifecycle before before a new product a replaces it. So that's that's the nature of that product level and.
And we like that sector a lot.
And Oh, we intend to do more work in it.
So this is really a market consolidation and scale play.
Yes, well it it isn't in in a market that.
Where we feel.
We know how it operates and do we know the players and we know the.
Manufacturing technologies needed to support it.
And and we look for companies that have.
I'm good strong defensible franchises in those markets.
And that's great and I know, it's small but it can you talk about the margin profile.
Big.
[laughter] is it accretive to corporate.
Yes, yes substantially.
Got it thanks, yeah.
Again, if he would like to ask your question. Please press star one on your telephone keypad.
And at this time, we have no questions I would now like to turn the conference back to Dr. Huh.
Okay well.
Thanks, once again for participating in our in our conference call and that this completes the a call for the second quarter and leave we look forward to talking to again in January .
Good day.
Ladies and gentlemen. This concludes today's conference. Thank you forget participation and have a wonderful day. He may all disconnect.