Q3 2021 RBC Bearings Inc Earnings Call
[music].
Good morning, and ladies and gentlemen, and welcome to the RBC bearings fiscal 2021 third quarter earnings Conference call. At this time all the participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
And then once you require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to hand, the conference over to your host Michael Cummings with the Alpha IR.
Okay.
Good morning, and thank you for joining us for RBC bearings fiscal 2021 third quarter earnings conference call with.
With me and the call today are Dr. Michael J, Hartnett, Chairman, President and Chief Executive Officer, Daniel Zhang Director, Vice President and Chief Operating Officer, and Robert Sullivan, Vice President and Chief Financial Officer.
Before beginning todays 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 for the 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 and 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 will turn the call over to Dr. Hartnett.
Thank you Mike.
And good morning.
Net sales for the third quarter of fiscal 'twenty 'twenty, one for $145 9 million versus 177.0 million for the same period last year, the decrease of $17 six per cent.
For the third quarter of 2021 sales of industrial products represented 44 per cent of our net sales and aerospace products 56 per cent.
Gross margin for the quarter was $55 6 million or $38 one per cent of net sales.
This compares to $70.7 million.
And for a 39.9% for the same period last year.
Adjusted operating income was the was $27 9 million or $19 one per cent of net sales compared to last year of $37 8 million and 21 point for per Se.
The adjusted EBITDA was 41 million.
$28 one per cent of net sales compared to $50 9 million 28, 7% of net sales.
For the same period last year.
We ended the quarter with over 200 million and cash and marketable securities.
And roughly $20 million of debt.
And year to day free cash flow was a record $102 million.
We entered the second quarter with better visibility to customer requirements and past periods.
And so and encouraging increase for products from industrial Oems.
And as well as stabilization of demand from the aircraft sector.
We continue to work through and environment complicated by enhanced safety procedures procedures to manage the COVID-19 the Venice and.
And this environment has almost become a normal practice for us today.
Sales of industrial products were five for up 5.5 per cent from last year and sequentially up eight five per cent.
Prime drivers and the industrial sector.
For the following markets Windpower.
Where are the green Red the revolution and is generating a need for ever larger wind machines.
And as large as 220 meters in diameter.
For advanced blade designs and machine mechanics, leading to higher efficiencies.
And number two is marine and the build out of the Virginia submarine fleet with extended weaponry and the funding of the Columbia ballistic missile submarine and.
And is driving substantial need for hydraulic hardware and the engineering support.
Mm three and semiconductor.
Greater use of the computer chips and automobiles phones games self driving cars and five G technology.
And it's created shortage and this industry and.
And producers of expanding capital budgets like never before.
Jack to protect their market positions.
And finally train mass movement of people in Asia as a priority as China continues to and and extremely ambitious goal of connecting her cities with high speed rail.
We are working and all of these markets today with proven products and solutions as well as new design proposals.
For the for problem solving.
And acquiring new customers.
Turning now to aerospace and defense.
The third quarter of fiscal 2021 sales were down 29, 7%.
The abrupt suspension of the seven and 37 Max production in March.
Resulted and excess inventory of aircraft hardware throughout the system.
This is reflected in the suggest exaggerated decline.
And it will likely be with us for another quarter.
We worked with customers during the second and into the third quarter to re schedule product deliveries.
Most of that is now if not all of us behind us today.
We are encouraged by the release of the Max for commercial use and our plants are now to support the Boeing build rate of between 150, and 160 mix shifts and calendar 'twenty 'twenty one.
Moving to over 300 and calendar 'twenty and 'twenty two.
Yeah.
And we are very heartened to see of 10% expansion announced by Airbus and.
'twenty 'twenty one.
Followed by a 20% expansion in 2022 for the <unk> hundred 20 ship.
And the plan to build almost 800 total shifts in 'twenty and 'twenty two.
Is inspiring to all of us.
During the period, we consolidated plan operations and two locations to streamline our cost structure and drive the efficiencies of execution.
We expect a little bit of more of this and the future.
Regarding our fourth quarter, we're expecting sales to be between 155 and $160 million.
I'll now turn the call over to Rob for more detail on our financial performance.
And Mike since Mike has already covered net sales and gross margin I'll jump down to SG&A.
SG&A for the third quarter of fiscal 'twenty 'twenty, one was $25 7 million compared to $30 7 million for the same period last year.
The decrease was mainly due to lower personnel costs of $4 4 million and point 6 million of other items as the percentage of net sales SG&A was $17 six per cent for the third quarter of fiscal 2021 compared to $17 four per cent for the same period last year.
Other operating expense for the third quarter of fiscal 2021 was expense of $3 3 million compared to expense of $2 5 million for the same period last year for the third quarter of fiscal 'twenty and 'twenty. One other operating expenses were comprised mainly of $2 6 million and amortization of intangible assets and <unk> 5 million of restructuring costs and related items.
And point of $2 million of other items other operating expense for the same period last year consisted mainly of $2 5 million and amortization of intangible assets operating.
Operating income for <unk> was $26 5 million for the third quarter of fiscal 'twenty and 'twenty, one compared to operating income of $37 5 million for the same period in fiscal 2020 on an adjusted basis operating income would have been 27 9 million for sure.
Order of fiscal 'twenty 'twenty, one and.
The adjusted operating income of $37 8 million for the third quarter of fiscal 'twenty and 'twenty.
For the third quarter of fiscal 'twenty and 'twenty one the company reported net income of $21 6 million compared to net income of $30 5 million for the same period last year.
On an adjusted basis net income would have been $22 7 million for the third quarter of fiscal 2021 compared to adjusted net income of $30 4 million for the same period last year.
Diluted earnings per share was <unk> 86 cents for per share for the third quarter of fiscal 'twenty 'twenty, one compared to the $1 22 per share.
For the same period last year.
And an adjusted basis diluted EPS for the third quarter of fiscal 'twenty and 'twenty. One was <unk> 90 per share compared to adjusted diluted EPS of $1 22 per share for the same period last year.
Turning to cash flow the company generated $36 1 million and cash from operating activities and the third quarter of fiscal 2021 compared to $46 6 million for the same period last year, and $110 6 million and cash from operating activities for the nine months period.
During fiscal 'twenty and 'twenty, one compared to $111 2 million for the same nine months period last year.
Capital expenditures were $2 8 million and the third quarter of fiscal 'twenty and 'twenty, one compared to $7 3 million for the same period last year.
And the nine months basis capital expenditures were $8 8 million compared to $27 6 million for the same nine month period last year.
Total debt as of December 'twenty, six 'twenty, and 'twenty was $20 5 million and cash and marketable marketable securities on hand for $201 7 million.
I would now like to turn the call back to the operator for the question and answer session.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number of one key on your Touchtone telephone.
For 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 Pizza Kubicki lots of Alembic global.
Hey, good morning, guys nice quarter.
Pete.
Hey, Mike in terms of fourth quarter margin.
If you do get some volume and it looks like you're signaling that the fourth quarter would probably be your highest revenue quarter of the fiscal year. So are you thinking of it will also be your highest adjusted operating margin rate quarter as well or.
Might you have some mix headwinds.
No I think.
I think the you your.
The former conclusion, there was right and it'll be our highest margin highest operating income quarter.
Okay, Okay gotcha.
And then my other question was just on your comments on the Boeing numbers I think the $1 50 to 160 of that must be new builds as opposed to delivering from a Boeing inventory.
Just on the timing are you expecting to ship the majority of your deliveries on the Max.
And the first half of the year on the in terms of their 150 to 160 and then the second half of your year you start to deliver to them. What they are we'll deliver in 2022 until we have this building of factors in that.
You have that right. So so I think the first half of the year, we're going to be working on that.
You know, we're working through that 155, 160 rate kind of kind of thing for cash.
Calendar 2021, right, but that'll that'll pretty pretty much by July we'll be building into the.
The 300 plus range for 2022.
Yes, Okay, Okay and last last question for me and just on.
On the aftermarket side does it feel like you have more visibility kind of forward six to 12 months on the OE side versus the aftermarket side, just because we're kind of still and the doldrums traffic wise or kind of how are you guys thinking about the predictability of your aftermarket revenue and the midterm.
Well you know the the aftermarket.
Revenue is really short cycle business and.
And Theres never much backlog, there and you know it.
It's it's in and out with and as a matter of fact as you know the big measure there is turnaround time from the time and get the order to the time you get the hardware to the time you ship the hardware. It back is a pretty important for that.
For that industry, so yeah, theres not much backlog going with with aftermarket, but we do see strength and the aftermarket.
Hey, guys.
The strength, returning and the aftermarket let me put it out.
Okay. That's what I think of lot of people are wondering.
And so many retirements of older aircraft people are wondering if they'll be up.
Sustaining the aftermarket bathtub, if you will but it sounds like you don't subscribe to that view per se.
Well I think of lot of these you know the lot of the carriers and a downsize their maintenance departments and now are looking for the third party.
Support and order to.
The service their planes and so that's that's a a.
The mechanism that's working for us.
Okay. Okay, okay, great. Thanks for the color guys.
Your next question is from the line of Steve Barger with Keybanc capital.
Thanks, Good morning.
A really nice to see of returned to growth for the industrial business are you expecting another mid single digit increase and for Q.
Yes.
We are.
Yeah, you got it.
And it or for Q is doing very well.
On the industrial so that's.
So as I think about that and the context of your guidance that suggests another maybe mid 20% decline for arrow.
And and just as I think about how that flows into the next fiscal year just looking at the comps would you expect that <unk> is still down on the Aero and then you get back to growth and to Q3 Q for Q.
That's kind of what we're thinking yeah.
It's.
Yeah, that's that's pretty much how we're we're beginning to see the the theres. Some theres some strange things happening too on top of that and that.
You know of Boeing Boeing goes through a contract cycles with all of their subcontractors.
And the there you know going through contract cycles, some of it right now and changing subcontractors and of.
Of course, we supply the subcontractors and product.
So and we supply of under certain contractual terms.
And our negotiated and and the and so sort of the new guys.
Theyre getting contract awards going forward beginning.
Beginning in 2022 are just taking their seats right now and.
And not quite understanding what their needs are for our kinds of products. So theres, a little bit of a delay between when they.
Get their contract and when they actually.
Place orders with us and the.
And so that's that's creating a little bit of fuzz and ultimately what's going to happen is they're going to need product.
Oh.
And the initial and a.
Cycle, that's much shorter than the lead time for our for our for our bearings.
For other structural mechanisms and.
And.
Small crises day to day crises will be created.
And what we're trying to figure out how to manage through that with all of our divisions that support that that sector to make sure that we're on top of.
You know our mix and our content per ship and.
And the ship build rates.
And who the new contract holders are going to be and what their needs are going to be so that we don't get caught short and so it's just the typical.
It's typical five year event.
And you're supplying a big OEM like Boeing.
So should my takeaway be that your fiscal <unk> 'twenty, two doesn't necessarily have to be negative it actually could be positive if they pulled out for it or that actually <unk> could be negative like <unk>.
While the kind of work it out.
I don't see Q2 be of negatives because.
No.
Uh huh.
You know they weren't the lead times won't support the requirement of boeing's requirements and so.
Gonna be that's going to be a problem for everybody. So.
No it won't.
It'll all get sorted out right now it's a it's a.
It's gonna be a scramble.
You know, whether <unk> was down as much as for Q.
I don't I don't really see that happening given given the the build rate in 2000 and.
2022 that we have to support.
Right, because youll be shipping those six or nine months early write those part and for the <unk>.
Yes got it exactly.
Okay. So <unk> down, but then growth resuming after that and presumably you have the expectation that you are looking at positive growth for the entire year fiscal year for 'twenty two on the industrial side, just given how those trends are going.
Correct.
Okay.
And so as I think about the volume coming back on both sides.
FY 'twenty, one will be down maybe 150 basis points on operating margin versus FY.
FY 'twenty.
As you think about growth coming back and managing SG&A, how much of that 150 basis points that you lost do you think you can recover and FY 'twenty two.
Well.
Let's hope we can recover it all right and.
And.
For the let's create a process thats better than hoped.
[laughter].
[laughter].
Yeah, sorry head on.
Sure.
And so I'd.
I think the right right now the the margins or are down.
The amount that you referenced there at large and largely because we.
We see the industry coming back and the demands coming back on us.
And so we're you know what.
Retaining as much human capacity as we could possibly retain to be able to support the market and the other side of this and and so.
So that's that's our ex that.
Really our strategy.
So we should be and if we.
And we shouldn't be able to come back into those new revenues.
And and recover of the margins there and that's the theory.
Okay, and then him and ask one more and then I'll get back in line when we when we talk about the M&A pipeline every quarter of your balance sheet is obviously in great shape, you've got a ton of cash.
Is can you can you frame up for us and where you are and the process of talking to some of these private companies and and just as a and add on are there any smaller public companies out there that you would ever consider taking out.
Yes, yes, and yes.
I mean, we were pretty active on the on the acquisition side.
In terms of our candidates.
And and we've been active in terms of.
Of proposals, but we haven't been.
Achieving is a successful closings.
And so it's a very competitive world out there for some of these assets and and.
And so we're in the mix.
But we you know and where we.
We're bidding generously.
But we haven't we haven't won some of these bids.
Just because theres other money out there that is that it's more aggressive are generous and you just.
Is it that something bad.
And yeah, exactly well exactly and.
I'd say, we're pretty pretty dang generous.
Okay.
Understood. Thanks, I have some more but I'll get back in line.
Okay.
And again to ask a question press star one.
And your next question is from the line of Michael the term only with the true with security.
Okay.
One of Michael you there.
Hello, Michael your line of it.
Sorry, guys I was on mute.
Hey, good morning, guys. Thanks for taking the questions.
Mike just to stay on what Steve was just hitting that on M&A.
Sounds like you know that there's a lot of I guess aggressive valuations being applied out there, but you know maybe and the absence of any deal flow. Here. You know you certainly have a lot of dry powder or are you thinking about anything else and the way of of capital deployment, whether it's you know buyback the.
EBITDA and doors.
Are you guys just razor focused on on M&A.
Yeah, we're pretty we're pretty razor focused on M&A. This is this is a there's some for some really attractive candidates out there.
That would that would.
Substantially.
Add to our.
Two of our market positions and so we're really focused on of those candidates.
Is it the function of size I mean are you seeing maybe just.
The tightness or increased competition, you know across all sizes of deals or is it you know youre going for something a little bit more needle moving.
Yeah, I mean, we haven't we haven't really gone after the smaller size.
Deals.
And the larger the larger ones attract a lot of attention.
Got it got it.
Okay, and then just going back to the maybe the the margin side, if we think about coming through the exiting fiscal 'twenty. Two I mean do you guys think you can get.
Operating margin and gross margins back to those levels that you were at you know and.
The fiscal 'twenty I mean, obviously you put in a lot more capacity to support certainly on the aerospace side production rates that the.
It won't happen by by fiscal 'twenty two.
And there is any constraints on.
And your profitability from excess overhead or or any kind of stranded cost just because we might be both.
And Airbus might be running production below where you guys are sized for.
No no we don't.
We don't have we don't have that Scranton and cost problem and it's some of the.
We're not a steel company and we don't have to keep our furnaces.
Temperature 'twenty 'twenty for seven or anything we just don't have those kinds of problems I mean, we're very we're very variable cost.
Hum defined and and so.
I think the you know the the only reason of our margins.
Today or where they are is that we're leaving a lot of resources in place to support us on the for the upside I mean.
And you know why why.
Y D tune the company.
That you've taken a generation to build because you have one year of pandemic.
Yeah, No that's fair.
And just last one I had I mean, you guys sound a lot more confident on production rates for.
For the Max I mean Boeing.
What's kind of hesitant to say, where they were even producing yeah certainly they've got this aspiration to get the 31.
Airbus kind of just dialed back their plan to get the 47, whats really giving you. This clear line of sight to $1 $55 60, and you know kind of 300, plus you know next year.
Well.
We have a lot of <unk>.
People.
Working on these numbers because these numbers are very important to us so.
And then you know Boeing publishes their skylight chart, and we interpret that Skyline Skyline chart.
And it's out of 24 months.
So I mean, we need that in order to determine how to load and capitalize and staff of our plants. So I mean, that's you know we've got to have that guidance. The whole industry has to have that guidance or for.
I don't know, how and how Boeing would have any and any way of getting the support they need to make and airplanes.
Okay.
If any of them over off of information that it's flown down slowed down to us.
And and even as we're talking about the arrow trajectory here obviously your your content on the wide bodies is significantly higher you know couple of quarters ago mentioning that triple Triple seven ex which just got pushed out even further.
It would certainly seem there's a lot more uncertainty eurobond of recovery for wide bodies. I mean is that skyline for wide bodies, giving you.
And telling you anything or given you any sense of confidence that the at the rates of the right now and you expect kind of your ship set volume there to hold steady on these rates or are you modeling for for any kind of pick up on the wide body platforms, you've got exposure to.
Well I think the the one.
The wide body comes comes back after the <unk>.
After the pandemic is behind US right. So that's that's kind of probably got it.
A couple of years lead time on it so you know.
This is really of Mac story I mean the.
The the growth and the mix volume.
What's kind of.
Primarily generate the bulk of our you know the bulk of our revenues for the aircraft side.
The.
87 is going to back off some and the ex.
And the Triple seven ex.
Going to be pushed out of a couple of years. So you know.
It's important for those for that Max volume too.
To achieve the of the Boeing numbers and the Airbus being up 10%.
And in building into 800 planes doesn't hurt us either so.
Yeah, It looks like Airbus is going to.
And just recover fully.
By 2023 and <unk>.
And and Boeing is probably 2000 and twenty-five story before they get back from the numbers that they were in 2019.
Got it okay.
Alright, perfect. Thanks, guys I'll jump back in the queue here.
Your next question is from the line of Joseph Charlie with the Bradley Foster of Sargent.
Good morning, guys. Thanks for taking my question.
Good morning, I'm, just curious of how the how the shift of a portion of RBC is back office engineering and R&D functions, the Poland, how that's progressing and how you're sizing up the potential cost savings from these efforts so in other words.
Should this accretive margins beginning in fiscal fiscal year 2022 or is it more of the fiscal year 2023 story. Thank you.
Yeah, well, it's not of fiscal 'twenty and 'twenty two story that's for sure I mean, it's you just you just can't get the Poland and the travel.
Travel is and difficult to some of those countries.
And so our ability to go over there and interview people and get them on board has been.
It's Ben.
It hasn't it hasn't ceased that it's been delayed and so the the number of people that we wanted to hire.
And you know, we probably hiring 10 per cent of it the people that we wanted to hire.
This year and you know where.
In the meantime, we're moving forward on the whole program.
So it's.
As of 2023 kind of story.
Great. Thank you.
Yep.
Yeah.
Okay, I am showing no further questions at this time I would now like to turn the conference back to Dr. Hartnett.
Okay, well, thank you and and thank you for participating in the and the call today Hope it was helpful for everyone.
And the we'll.
We're in the process of.
Executing a pretty nice fourth quarter here and we.
We will get back to it and then talk to you and me. Thanks again.
Okay, Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.