Q2 2021 RBC Bearings Inc Earnings Call

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Good morning, ladies and gentlemen, and welcome to the RBC bearings fiscal 2021 second quarter earnings Conference call. At this time all the participant lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I wouldn't like to turn the conference over to your host Michael Cummings with Alpha IR. Please go ahead.

Good morning, Thank you for joining us for RBC bearings fiscal 2021 second quarter earnings Conference call.

With me on the call today are Dr., Michael J., Hartnett, Chairman, President and Chief Executive Officer, Daniel E., Bershawn Director, Vice President and Chief Operating Officer, and Robert Sullivan, 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 FCC 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. hardness.

Good morning, and welcome to the RBC Conference call.

Net sales for the second quarter of fiscal 2021 were 146.3 million versus 181.9 million for the same period last year.

A decrease of 19.6%.

For the second fiscal quarter of 2021.

Sales of industrial products represented 40% of our net sales aerospace products represented 60%.

Adjusted gross margins for the quarter were 58.6% or 40% of net sales.

The parents to 71.2 million or 39.1% for the same period last year.

Adjusted operating income was 29.9 million, 20.4% of net sales compared to last year of 38.4 million and 21%.

Net sales.

Again, we penetrated the 40% gross margin level on a consolidated basis and were.

Very happy about that.

Adjusted EBITDA was 43.5 million.

29.8% of net sales compared to 51.2 million and 28.2% of net sales for the same period last year.

We ended the quarter with 166.4 million in cash and 20.4 million of debt.

We entered the second quarter with better visibility on demand.

But continued uncertainty due to the impact of the pandemic on our overall business.

The extraordinary measures, we used to protect the health and well being of our employees and vendors remained in place.

And were enhanced where needed.

We continue to operate our plants with minimal impact on health and safety of our employees.

Sales of industrial products were down 8.3% from last year. The prime periods from last years continues to fall in the natural resources markets, both mining and oil.

Sales to the industrial aftermarket.

Two industrial distributors were down 4.8%.

In both the United States and Europe.

We see continuing strength in demand from fruit producers of equipment for wind energy.

Semiconductor fabrication military vehicles high speed trains and space.

Industrial sales were up sequentially, 22.9% over over the period.

Distribution.

In that measure was up 10.2%.

Good news there as the economy recovers.

Aerospace commercial and defense second quarter fiscal 2021, net sales contracted 25.8%.

Aerospace defense, OEM and aftermarket increased 28.3% offset.

Offset by a decrease of 24.4% in commercial aircraft OEM and aftermarket.

Important drivers for aerospace defense continues to be for helicopters engines missiles and space.

The outlook for commercial aircraft travel is still not clear pressure on commercial aircraft builders and supply chain remains we continue.

Reworking and fine tuning our productions schedules and capacity.

To align our supply of products to the new demand levels.

We are using all the time and our resources wisely.

Well the aircraft.

Yeah.

Business is.

Remains in the doldrums.

Where we're developing products for future portfolios and and making a good progress doing that we expect to supply more of the commercial airplane content in the future.

Oh up our offering further for space and high priority defense systems.

And work through plant consolidation projects.

<unk>, which is our current agenda topics.

But these are projects, we couldn't fully address what our primary priorities to expand our production capacity where paramount.

With regard to our third quarter, we're expecting sales to be between 140 million and $145 million.

I'll now turn the call over to Dan for more detail on the financial performance. Thanks, Mike SG named for the second quarter of fiscal 2021 was 26 million compared to 30.8 million for the same period last year. The decrease mainly was due to lower personnel cost of 4.9 million offset by 0.1 million of other items.

As a percentage of net sales estimate was 17.8% for the second quarter of fiscal 2021 compared to 16.9%.

For the same period last year.

Our operating expense for the second quarter of fiscal 2021 was expense of 4.2 million compared to expense of 3 million for the same period last year, but.

For the second quarter of fiscal 2021. Other operating expenses were comprised mainly of 1.5 million of restructuring costs, we lead and related items 2.6 million and the amortization of intangible assets and 0.1 million of other items.

Other operating expense for the same period last year consisted mainly of $2.3 million in amortization of intangible assets and zero point $9 million of acquisition related costs offset by other income of 2.2 million.

Operating income was 26.4 million for the second quarter of fiscal 2021 compared to operating income of 37.3 million for the same period in fiscal 2020.

On an adjusted basis operating income would have been 29.9 million for the second quarter fiscal 2021 compared to adjusted operating income of 38.4 million for the second quarter of fiscal 2020.

Other non operating expenses were 2.2 million for the second quarter of fiscal 2021 compared to 0.2 million for the same period last year.

Second quarter of fiscal 2021, the company reported net income of $20.4 million compared to net income of 31.3 million for the same period last year on an adjusted basis net income would have been 23.2 million for the second quarter fiscal 2021 compared to adjusted net income.

32.3 million for the same period last year.

Looted earnings per share was 82 cents per share for the second quarter fiscal 2021 compared to $1.26 per share for the same period last year on an adjusted basis diluted earnings per share for the second quarter of fiscal 2021 was 93 cents per share compared to an adjusted diluted EPS of $1.30 per share.

For the same period last year.

Turning to cash flow the company generated 26.1 million in cash from operating activities in the second quarter fiscal 2021 compared to 24.5 million for the same period last year.

Capital expenditures were $2.1 million in the second quarter of fiscal 2021 compared to 8.2 million for the same period last year totaled.

Total debt as of September 26, 2020 was $20.4 million and current cash on hand was 166.4 million I would now like to turn the call back to the operator to begin the Q and a session.

Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question is from the line of Steve Barger with Keybanc capital markets.

Hey, good morning, guys.

Once these learnings warning.

Oh your guidance suggests another 20% decline in revenue year over year, plus or minus and your aerospace revenue comp in Threeq. You 20 is very similar to what you had in Q 20. So do you expect another mid 20% decline for Arrow in Threeq you.

Yes.

All right that's about right.

Okay, Great and what do you expect your gross margin will be before restructuring or anything like that can you still be near 40%, even with the lower revenue level and the lower mix of aerospace.

Yeah, Steve on that on our Q3, it's our shortest quarter, so it'll be a little a little softer in Q3 and it was in Q2.

But a little stronger in Q4 than it was in Q2.

Okay.

Yeah, that's really great with that with the mix moving against you I guess what are the offsets is it the restructuring actions that you've taken recently and that's allowing you to maintain that that's called gross margin.

Well a couple of things there Steve.

First of all.

Just to talk about Q3 overall.

It's it's a very short quarter for us.

And in many of the products, we produce have long lead times.

Because of the specialized nature of the processes and the approval gates required.

Yeah.

Our question always becomes one of.

Well, the OEM or the government.

Inspectors, who have to.

Gate these products at our plants.

Well they work through December.

He will we don't know if they will.

So we're doing a little hedging here, okay yep, so the short quarter kind of puts us at a disadvantage in that regard.

It's it's just the nature of some of our more complex designs. It is what it is.

And it's normally the case, but you know it doesn't get shipped in the third quarter gets shipped in the fourth quarter and it all gets all gets corrected the fourth quarter's disproportionately long this year so it.

It is you know it's just you know like I can't fight the calendar and I can't fight the government I'm just I'm just as I'm. Just you know just trying to do what I can do.

In terms of our improved margins for the <unk>.

There's actually a number of things going on.

First of all the you know.

We've we've.

Invested quite a bit of time and effort.

And some capital over the years.

With the factory automation.

Automation.

And those projects are maturing and they're contributing so that's that.

It's one element I can't tell you exactly.

Which you know which element contributes what to the margin.

The accrual to margin I know you're going to ask me that next so I don't know that number.

Secondly.

Secondly, the no we we continue to in source.

Processes that we had outsourced in the past to our to our plants as our plants gain approvals for these for these news new processes.

And the impact of those approvals.

For these often these are specialized processes that are sort of you know.

Unique to a few suppliers in the industry.

So it's it's not only saves us.

The cost of having a third parties do the work, but often we have to the cost of transportation to the third party, whose you know sometimes two dozen states away.

Yeah. It is that we save those costs and we save the amount of timeframe it takes to.

To.

Two.

Services and.

And I think finally.

There's there's been improvements in mix.

And there is just just plain better factory execution.

Understood.

So since you don't know that number Alaska something different can you build out the comment on maintaining a healthy balance sheet. While also addressing the urgent needs in space and defense that was in the press release should we think that you're preserving the balance sheet because of current conditions and you're looking for organic opportunities in space and defense or.

We're looking at acquisition opportunities to get in front of trends in space and defense.

Well.

You know, we're we're working hard to.

Maintaining the balance sheet.

You know we we we.

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Achieve certain inventory levels over the over the past.

Several years that was consistent with the.

Manned of our customer base to service that customer base, they're now going to run into but at a lower requirement.

So it's it's obvious that we you know we need to liquidate some of our inventories and we'll be doing that you know.

Over over time. So that's just that's just part of the part of the process here.

You know it in the meantime, we are we are organically developing.

Our space and and sort of I'd call It advanced defense business.

As a priority and you know we look at the space is the new aerospace.

All those guys that are making the headlines every day you are the people that were working with.

And and we're making we're making great progress and.

You know its just.

Their their concepts are the future or just exciting and we want to be part of that so.

That's that's what's going on there and I think finally the.

On the acquisition side.

Yeah, I mean, we.

We're always looking.

Your next question is going to ask me, what we're going to do all the cash.

I'm, just I'm sure and ER and so short term, we're going to invest the cash and liquid securities.

That generate something more than cash.

And in the long term you know, we're going to find the right acquisitions in our space.

And we like the business is where there's strong synergies and they're out there.

And there is common in markets that we service today.

That we can service tomorrow and with greater scale.

And and when we look for companies with strong brands.

And.

It's not a disappointing sales right now so.

You know time will tell.

Hey, good thank you.

Yeah.

Again to ask a question. Please press Star then the number one on your telephone keypad.

Your next question is from the line of Mike Ciarmoli with the true Securities.

Hi, Good morning, this is Pete Osterlund on for Mike.

A couple of questions on the aerospace end market first what is your view on current inventory levels in the channel at your customers.

Seems like we're hearing about de stocking could last through the first half of next year is that consistent with your view and how do you expect to be aligning production near term.

Well, that's that's completely consistent with our view I mean, I think Boeing now has 500 737 maxus I mean they.

They had 450, but they kept building so there's there's more max's now and.

I guess the expectation is that they will liquidate half of those Max's next year.

And you know of course, we'd like we'd like to see them do that.

So yes, we've we've adjusted our our production rates.

In accordance with what we expect.

Overall build rates and inventory positioning of our of the subcontractors is today and we've done that after.

You know considerable work to study.

You know subcontractor by subcontractor plane by plane with the content is and.

And what's in the middle.

Thanks, and then specifically on the aftermarket has demand or order flow stabilize and do you have a view as to how distributors are solved.

Yeah well.

I'd say the the demand from the aftermarket is.

I guess are you talking industrial or aerospace.

Aerospace.

Yeah, the demand from the aftermarket is better than we expected and I and where were we.

We think that that's going to be that's going to lead the.

That's going to lead the <unk> the recover the Earth aircraft business.

It's just.

You know it's.

[noise] planes or.

Our older they need to be maintained.

Boeing isn't going to have the production rate to.

You know in the future as we see it to them.

To satisfy everybody's demand. So those old planes are going to have to come into service and I think I think.

As 2021 ages people will begin to travel is they feel more secure about their health.

Thank you very much.

I am showing no further questions at this time I would now like to turn the conference back to Mr. Hartnett.

Okay well.

Well that was I.

I think that was our shortest conference call I hope that that's a good sign and thank you for your interest in RBC and we will be speaking.

Speaking to you again in a in late January today.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may all disconnect.