Q3 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2020, RBC bearings earnings Conference call.

This time, all participant lines are not listen only mode. After the speakers presentation. There will be a question and answer session to ask the question. During the session you would need to press Star then one of your telephone.

Please be advised to today's conference is being recorded if you acquire any further assistance. Please press Star then zero.

I would now like to handle conference or what's your speaker today.

Hamilton with Alpha IR. Please go ahead.

Good morning, Thank you for joining us for RBC bearings fiscal 2023rd quarter earnings Conference call.

With me on the call today are Dr., Michael J., Hartnett, Chairman, President and Chief Executive Officer, and Daniel <unk>, Vice President Chief Financial Officer in Chief Operating Officer.

Before beginning today's call I remind you that some of the statements made today well be forward looking are made under the private Securities Litigation Reform Act Nice 90 Bucks.

Actual results may differ materially from those projected or implied due to a variety of factors.

Thank you to RBC bearings recent filings with the FCC for more detailed discussion of risks that could impact the company's future operating results 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 that really is available in the company's website.

Now I'll turn the call emerge Dr. hard.

Thank you Bruce and good morning.

Net sales for the third quarter fiscal 2020 were 177 million.

Versus 171.5 million for the same period last year.

3.2% increase.

Organic growth for the quarter was 3.6%.

For the third fiscal quarter of 2020 sales of industrial products represented 34% averse net sales.

Based products at 66%.

Adjusted gross margin for the quarter was 70.9 billion or 40.1% of net sales.

This compares to 68.1 million worth 39.7% for the same period last year.

4.1% increase.

Adjusted operating income was 37.8 million.

21.4% that sales.

EBITDA was 50.9 million, 86.3% increase over last year.

The quarter, certainly had its challenges and noises accommodations made to support Boeings schedule changes.

Driven by Max Rescheduling began to challenge, our logistics and suppliers.

Closing other products to be accelerated in the schedule to replace the delayed Max products.

As you can see we're able to accommodate many of these changes in came in at the bottom end of our revenue guidance for the period.

We didn't miss some sales on products as a result over the last minute technical delays.

Which is typical in a quarter short on production days along that holidays.

Sales of industrial products were down 7.5% from last year.

The prime variance here show in our.

Next area, where the completion of very complex assemblies missed schedule.

Without this delay sales of industrial products would have been flat.

Last year.

Sales to the industrial aftermarket expanded by 13.2%.

The organic sales component of this was <unk>, 0.9%.

The weak markets in our classic industrial OEM lineup continue to be mining and oil and gas.

The strong markets were general distribution.

Semiconductor capital goods.

Ground defense and international trade.

Aerospace and defense markets continue to perform well.

The third quarter organic Nicks net sales were up 13%.

Aerospace sales were driven by both OEM in defense.

Aero and defense OEM were up 14.7% on an organic basis.

Important contributing markets here were airframe Aero engine space.

And missiles.

We also see some benefit as a few of these products previously.

She was these products previously made in Turkey.

Now being made by the by RBC bearings.

[laughter] fogged around todays 737, Max outlet creates a certain amount of challenge and setting production rates and sales outlook for the fourth quarter and beyond.

It's you know are trailing content per ship has been approximately $120000.

This will climb towards $160000 per ship over the next year, plus it's new contracts mature.

This matter.

Its impact on sales and production rates has our greatest attention.

As we move into our new fiscal year in April.

We have received broad monthly guidance from Boeing.

On a monthly Max rate and our standing by for slowdown of specific production schedules from our customers.

Regarding our fourth quarter, we expecting sales to be 187 to 191 million.

Which results in our organic growth rate of approximately 1.92 or 3.5% over last year.

We have baked into this projection $4 million revenues, we expect a shift.

Into next year as a result to the Max production risk controls.

You think this is a fair estimate.

The impact on Q4.

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

Hey, Thanks, Mike.

That's true in April 3rd quarter fiscal 2020 was 30.7 million compared to 29.1 million for the same period last year. The increase is mainly due to higher personnel cost him 0.4 million and 1.2 million of additional incentive stock compensation.

As a percent unit sales SGN name was 17.4% third quarter fiscal 2020 compared to 17% pretty same period last year.

Other operating expense could occur quarter, Osisko 2020, what's expense or 2.5 million compared to expense of 19.1 million square same period last year third quarter fiscal 2020 or other operating expenses were comprised mainly of two and a half million in the amortization of intangible assets other operating expense for the sake.

Period last year consisted mainly of 16.8 million or cost associated with silicon Miami provision and 2.4 million any immunization of intangible assets offset by other income or 0.1 million.

Operating income was 37.5 million for third quarter fiscal 2020 compared to operating income was 19.8 million for the same period in fiscal 2019.

On an adjusted basis operating income would've been 37.8 million third quarter fiscal 2020 compared to adjusted operating income of 36.6 million in the third quarter fiscal 2019.

On your day basis operating income was 113.3 million could first nine months in fiscal 2020.

Current operating income of 91.7 million the same period in fiscal 2019.

The adjusted basis operating income would have been 114.7 million were 21.2% to net sales for the first nine months for fiscal 2020 compared to adjusted operating income of 108.5 million or 20.9% net sales for the first nine months fiscal 2019 that's.

<unk> Internet sales, just a year over year improvement 30 Bips.

<unk> third quarter fiscal 2020, the company reported net income of 30.5 million compared to net income of 16.2 million for the same period last year on an adjusted basis net income would have been 30.4 million pretty third quarter fiscal 2020 compared to adjusted net income of 28.5 million <unk>.

Period last year diluted earnings per share was $1.22 per share for the third quarter fiscal 2020 compared to 65 cents per share for the same period last year on an adjusted basis diluted earnings per share for third quarter fiscal 2020, <unk> dollar 22 per share compared to adjusted diluted EPS.

Yes, I have $1.15 per share could same period last year.

Turning to cash flow the company generated 46.6 million in cash from operating activities in the third quarter fiscal 2020 compared to 21.1 million for the same period last year and 111.2 million in cash from operating activities for the nine month period fiscal 2020 compared to 79 million per se.

Nine month period last year.

Capital expenditures were 7.3 million in the third quarter fiscal 2020 compared to 11.5 million for the same period last year.

Nine month basis, Capex, which 27.6 million compared to 29.2 million for the same nine month period last year.

The company repurchased 1.7 million a common shares in the third quarter fiscal 2020 compared to 1.2 million for the same period last year.

On a nine month basis common share repurchases were 11.5 million compared to 4.7 million or the same nine month period last year in the third quarter fiscal 2020, the company paid down 15.5 million a debt and putting a nine month period pay down 45.8 million a dead told pet as of December.

28, 2019 was 22.8 million and cash on hand was 60.3 million.

I'd like now the turned to call back over to the operated the begin to Q and a session.

Thank you my first question in the queue comes from Kristine Liwag with Bank of America.

Honest now been.

Hi, Good morning, guys. Good morning, where do you think.

Can you provide more details about the Boeing 737 pods, how much it affects you I know in your press release, you gave out shipset content, but what kind of rate will you be producing during this time and then also how do you expect the change in volume to affect margins.

You always ask us the easiest questions Christine.

I I expect that one.

So the the impact on.

Fiscal 21 sales is about $40 million.

As a gross number.

Let me work it down to a net number.

Because that's offset by the increase in this seven triple seven dash Triple Sevenx production rate.

And that production rate is about equivalent to.

Five mix ships that increase in production rate is equivalent to about five Mac ships.

For a per month.

So.

We you know we have a.

A rough idea of from Boeing on what their monthly production rate is gonna be next year.

And I'm sure that's subject to change.

And we looked at a with the production rate was last year.

And as near as we can tell between this seven triple seven.

Our next 737, Max and the 737 and Gi.

There were 534 ships produced.

And that's equivalent to about 44.5 ships per month.

We're is we're we're under guidance at the Boeing reschedule is going to be averaging about 25 ships per month.

Over the over the next 12 month period.

So if I take those 25 ships per month against the.

44.5 ships per month produced last year.

And I had five ship equivalents for the increase in.

And the Triple seven.

Triple Seven X program.

I come to about 30 ships per month.

And $120000 per ship, that's about a 17.4 million dollar.

Decrease from last year's rate.

And I, that's going to be offset by what we're seeing is an increase in spears or the older 737, Sip and put into production.

We're seeing a bump in demand there.

And that's probably going.

You know upset that 17.4 by about 5 million.

So the net comes to 12.5 million over the 12 month period.

So that's something like $3 million to $4 million per quarter headwind.

As a result of the.

Of the Max delay.

And the extra time.

Required.

To bring them Exxon line.

Actually has.

As a positive side to it also it allows us to.

Bring more vertical integration and process approvals into play.

So that so that we're producing these parts more efficiently when the volume turns out.

So that's a that's how we're viewing the situation right now.

That's really helpful. Thank you very much.

Okay.

Thank you as a reminder to ask a question you would need to press Star then one on your telephone.

Our next question comes on the mine.

Pete Dubinsky with Olympic Global Your line is now open.

Hi, good morning, guys.

Mike just a follow up on that so I I mean, assuming Boeing kinda starts just slowly restart production in the summertime should we think you know your headwinds on the Max will be you know more first half weighted and they start to kind of re accelerate and the second half of calendar Twentys is that maybe the way will work.

Yeah. That's that's that's how we see it exactly.

Okay. So so we should think about aerospace overall, maybe having you know maybe being down.

In the first half of fiscal 21 or close to that and that accelerating pretty heavily in the back half.

Yeah, I think that's that's how we're seeing it I mean, there's some.

Some additional aerospace volumes being.

Her flowing in from the defense side that will offset that similar so we make we may see a flat aerospace for the first quarter, maybe maybe spreading into the first and second quarter, but.

<unk>, maybe a little bit better than that.

Okay. Okay, Yeah, I guess, a follow up on that Lockheed's, you know, but bring obviously you've touched on bringing the F. 35 work out of Sircy. It sounds like that benefited benefited you can you quantify that at all or maybe talk about your content on the F 35.

Yeah, I I think the.

There were a lot.

The biggest spend if it were seeing is there were there were other nine F 35 programs that were being.

Ah produced in Turkey, which are.

But it could benefit fitting us in a significant way and it has more to do with.

Missiles.

I see actually okay. So this was related to the F 35 decision, but just a different program.

The different program.

Okay.

Not a small it's not a small addition for us it's it's a it's a meaningful impact to two one of our divisions. Okay. Okay. Great. Maybe last one for me I'm just curious on the industrial side, Yeah. We saw the eyes. Some PM I pick up in January for the first time in several months. So just wondering you know kind of <unk>.

Early days in the fourth quarter for you or you kind of sitting at a read any recovery there based on this.

Got it indicator for the for the Piedmont.

And on the feet on the industrial distribution side in the quarter Q3. It was up 13% now some of that was due to switch tool a big chunk of it. So if I pull switched to out are there to company, we just acquired.

Two quarters ago, our growth on industrial distribution.

Was about a 0.9% I'm. So we've seen that stop and we're starting to see that move into right direction going in into the fourth quarter as Mike said on our classic RBC type markets like mining and oil and gas mean fracking that will continue to be down and going into our fourth.

Quarter, but it's being offset by some other traditional markets that we.

Operating like semiconductor.

Military vehicles, and then just general industrial.

Activity.

And then in the third quarter or Marine business was down significantly mainly just a timing and so that will be up nicely into Q4 again offsetting some of this headwinds that wouldn't getting on from our classic.

RBC markets [noise].

Okay. Okay. So maybe the worsening industrial headwinds or are kinda behind us is that when you factor.

Yeah, you know I think in certain markets there.

They're not and others that are already improvement and doing better [laughter].

On gas I still we have a ways to go I think in oil and gas on tracking, but one cents bottomed out in the fourth quarter.

Comps will get a lot easier starting Q1, [laughter] right. Okay, and you saw the Columbia kind of production ramp I had to be right. I know that's supposed to be nice program for your right. Yeah, well were trailing off now the block for Virginia.

Program and that's used last complicated parts that were getting through in this fiscal year and then going into next year. So we're kind of up to a single both building now right because block fives or single boat and nine boat program. So we're starting to go into this program in a single boat in the second half the year.

To probably two ships running average or a month and so we should see some nice growth next year and London Marine side of the business and of course, we're continuing to do a engineering and design work on the Columbia, but that's really doesn't go into production I think into 2020 to 2023.

Okay. Thanks for the color I appreciate it.

Thank you. Our next question comes from the line of Steve Barger with Keybanc capital markets. Your line is now open.

Hi, good morning, guys.

Right.

When you think through the revenue headwind didn't whatever happens to margins and how you'll manage inventory through this process on the aerospace side, what do you expect the free cash flow impact is next quarter and into next year.

Yeah, Steve I don't think I don't think it's anything major I think going into next year on total company, we're not going to be at a negative broke rate. So it all depends where a top lines coming out and we'll give more guidance on that or will expire.

Second 2021 to look.

When we get on our fourth quarter conference call at the end of May.

But I I think right now, we'll probably close to the top of our inventory build program and most of our divisions and so we should see a pretty good your next year for cash flow generation from from operations.

Okay.

And going back to the last question on the industrial side, the comps get a lot easier into next quarter, you talked about marine timing given the puts and takes do you think industrial organic is down next quarter or can you be flat or up.

I think for Q4, we should be pretty much flat I mean, our classic industrial we down a little but it will be offset by or marine.

Okay, Okay, and just given the weakness that you're seeing and some of the classic markets to use. Your term are you seeing competitors come in more aggressively on price that are causing share shifts or is this really a volume function. It's purely a volume function. If anything we were picking up market share in the marketplace and then my.

You talked a little bit about that on Q2, we Tom referenced green shoots that we are working on on the industrial side that we feel will definitely impact Q1 in Q2 in fiscal 20 or 21.

So just so I understand your do you think you're taking share on in mining and and oil and gas or on the other kinds of industrial another other markets. Okay. Yeah.

Got it thanks.

Yeah.

Thank you. This concludes today's question and answer session I would now like to send the call back to Dr., Michael hardness for closing remarks.

Okay well.

We appreciate your interest in RBC and look forward to.

Speaking to you to again after our fourth quarter and.

Thank you for your interest.

<unk>.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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