RBC Bearings Incorporated (NASDAQ:ROLL) Q2 2021 Results Earnings Conference Call October 30, 2020 10:40 AM ET
Michael Cummings – IR, Alpha IR Group
Michael Hartnett – Chairman, President and CEO
Daniel Bergeron – VP and COO
Robert Sullivan – VP, CFO
Conference Call Participants
Steve Barger – KeyBanc Capital Markets
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[00:00:02] Good morning, ladies and gentlemen, and welcome to the RBC Bearings fiscal two thousand twenty one second quarter earnings conference call. At this time, all the participants 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 Zober on your touchtone telephone. As a reminder, this conference call is being recorded. I want to like to turn the conference over to your host, Michael Cummings. with Alpha IR? Please go ahead.
[00:00:36] Good morning. Thank you for joining us for RBC Bering’s fiscal 2020 one second quarter earnings conference call. With me in the call today are Dr. Michael J. Hartnett, chairman, president and chief executive officer, Daniel Bertran, 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 Barron’s recent filings with SBC for a more detailed discussion of the risks that could impact a company’s future operating results in financial condition. These factors are also described in greater detail in the press release and on the company’s website. In addition, reconciliation between cat and non cat 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.
[00:01:43] Thank you, Mike, and good morning and welcome to the EPS conference call, net sales for the second quarter of fiscal 2020 one with one hundred and forty six point three million versus one hundred and eighty one point nine million for the same period last year and a decrease of nineteen point six percent for the second fiscal quarter of 2020 one. Sales of industrial products represented 40 percent of our net sales. Aerospace products represented 60 percent. Adjusted gross margins for the quarter were fifty eight point six percent, or 40 percent of net sales. That compares to seventy one point two million, or thirty nine point one percent for the same period last year, adjusted operating income was twenty nine point nine million twenty point four percent of net sales compared to last year of thirty eight point four million and twenty one percent net sales.
[00:02:43] Again, we penetrated the 40 percent gross margin level on a consolidated basis, and we’re very happy about that, just to EBITDA was forty three point five million, twenty nine point eight percent net sales compared to fifty one point two million and twenty eight point two percent of net sales for the same period last year. We ended the quarter with one hundred and sixty six point four million in cash and twenty point four million of debt.
[00:03:14] 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 use 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 eight point three percent from last year. The prime variance from last year continues to fall in the natural resources markets of mining and oil sales to the industrial aftermarket to industrial distributors were down four point eight percent in both the United States and Europe.
[00:04:04] We see continuing strength and demand from fruit producers of equipment for wind energy, semiconductor fabrication, military vehicles, high speed trains and space industrial sales were up sequentially twenty two point nine percent over the period.
[00:04:25] Distribution in that in that measure was up ten point two percent.
[00:04:32] Good news there as the economy recovers, aerospace, commercial and defense. Second quarter fiscal 2020 one net sales contracted twenty five point eight percent. Aerospace defense OEM and aftermarket increased twenty eight point three percent, offset by a decrease of twenty four point four percent in commercial aircraft. OEM and aftermarket important drivers for aerospace defense continues to be four helicopters, engines, missiles and space.
[00:05:06] The outlook for commercial aircraft travel is still not clear. Pressure on commercial aircraft builders and supply chain remains. And we continue reworking and fine tuning our production schedules and capacity to align our supply of products to the new demand levels. We are using the time and our resources wisely while the aircraft. Business remains in the doldrums where we are developing products for future portfolios and making good progress doing that, we expect to supply more of the commercial airplane content in the future, develop our offering further for space and high priority defense systems, and work through plant consolidation projects, which is our current agenda topics. But these are projects we couldn’t fully address when our priority priorities to expand our production capacity were paramount. With regard to our third quarter, we are expecting sales to be between one hundred and forty million and one hundred and forty five million dollars. And now turn the call over to Dan for more detail on the financial performance.
[00:06:23] Thanks, Mike. As for the second quarter of fiscal, 2020 one was twenty six million compared to thirty point eight million for the same period last year. The decrease mainly was due to lower personnel cost of four point nine million, offset by zero point one million of other items as a percentage of net sales, as Chainey was seventeen point eight percent for the second quarter of fiscal 2020 one, compared to sixteen point nine percent for the same period last year. Other operating expense for the second quarter of fiscal 2020 one was expensive four point two million compared to expense of three million for the same period last year for the second quarter of fiscal. 2020 one other operating expenses were comprised mainly of one point five million of restructuring costs, related and related items, two point six million and amortization of intangible assets and zero point one million of other items. Other operating expense for the same period last year consisted mainly of two point three million in amortization of intangible assets and zero point nine million of acquisition related costs offset by other income of zero point two million. Operating income was twenty six point four million for the second quarter of fiscal 2020 one, compared to operating income of thirty seven point three million for the same period in fiscal 2020. On an adjusted basis, operating income would have been twenty nine point nine million for the second quarter of fiscal 2020 one, compared to adjusted operating income with thirty eight point four million for the second quarter of fiscal 2020 other non operating expenses with zero point two million for the second quarter of fiscal 2020 one, compared to zero point two million for the same period last year.
[00:08:11] Second quarter of fiscal 2020 one, the company reported net income of twenty point four million compared to net income of thirty one point three million for the same period last year. On an adjusted basis, net income would have been twenty three point two million for the second quarter of fiscal 2020 one, compared to adjusted net income of thirty two point three million for the same period last year. I, at earnings per share was eighty two cents per share for the second quarter of fiscal 2020 one, compared to a dollar twenty six per share for the same period last year on an adjusted basis. Diluted earnings per share for the second quarter of fiscal 2020 one was ninety three cents per share, compared to an adjusted diluted EPS of a dollar thirty per share for the same period last year turned into cash flow, the company generated twenty six point one million in cash from operating activities in the second quarter of fiscal 2020 one, compared to twenty four point five million for the same period last year. Capital expenditures were two point one million in the second quarter of fiscal 2020 one, compared to eight point two million for the same period last year. Total debt as of twenty six 2020 was twenty point four million and cash on hand was one hundred and sixty six point four million. I would now like to turn the call back to the operator to begin the Q&A session.
[00:09:35] 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 what the line of Steve Barger with KeyBanc Capital Markets.
[00:09:58] Hey, good morning, guys. your guidance suggests another 20 percent decline in revenue year over year, plus or minus, and your aerospace revenue comp in 3Q 20 is very similar to what you had in juku 20. So do you expect another mid 20 percent decline for Arrow in 3Q?
[00:10:23] Yes. that’s about right.
[00:10:27] OK, great. And what do you expect your gross margin will be before restructuring or anything like that? Can you still be near 40 percent even with the lower revenue level and the lower mix of aerospace?
[00:10:42] Yeah, Steve, know that on our Q3, it’s our shortest quarter, so I think will be a little a little softer in Q3 than it was in Q2, but a little stronger in Q4 than it was in Q2.
[00:10:56] Ok, yeah, that’s really great. With the mix moving against you, I guess, what are the offsets? Is that the restructuring actions that you’ve taken recently and that’s allowing you to maintain that gross margin?
[00:11:11] Well, a couple of things there, Steve. First of all, just to talk about Q3 overall, 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 will the OEM or the government inspectors who have to get these products at our plants, will they work through December? We will. We don’t know if they will. So we’re doing a little hedging here. OK, so the short quarter kind of puts us at a disadvantage in that regard. It’s just the nature of some of our more complex designs. It is what it is. And it’s normally the case. It doesn’t get shipped in the third quarter, get shipped in the fourth quarter, and it all gets it all gets corrected. The fourth quarter is disproportionately long this year. So it is just, you know, like I can’t fight the calendar and I can’t fight the government. I’m just I’m just I’m just, you know, just trying to do what I can do in terms of our improved margins for the year, there’s actually a number of things going on.
[00:12:41] First of all, the you know, we’ve invested quite a bit of time and effort and some capital over the years with factory automation. And those projects are maturing and they’re contributing. So that’s one element. I can’t tell you exactly which element contributes what to the margin, the accrual, the margin. I know you’re going to ask me that next. So I don’t know that number. Secondly, secondly, the we continue to insource processes that we had outsourced in the past to our to our plants as our plants gain approvals for these for these new processes and the impact of those approvals for these plants. And these are specialized processes that are sort of unique to a few suppliers in the industry. So 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, who’s sometimes two dozen states away. Yeah, is that we save those costs and we save the amount of time frame it takes to service it. And I think finally there’s been improvements in mix and there’s just plain better factory execution.
[00:14:24] Understood. So since you don’t know that number, I’ll ask 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 that was in a 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 you’re looking at acquisition opportunities to get in front of trends in space and defense?
[00:14:56] Well. you know, we’re working hard to, you know, maintain the balance sheet, you know, we achieve certain inventory levels over. Over the past several years that was consistent with the mind of our customer base to service that customer base. They’re now going to run it at a lower requirement. So it’s obvious that we, you know, we need to liquidate some of our inventories and we’ll be doing that, you know, over time. So that’s just that’s just part of the part of the process here. You know, in the meantime, we are we are organically developing our space and sort of I call it advanced defense. Business is a priority. And, you know, we look at the space as the new aerospace. All those guys that are making headlines every day are the people that we’re working with. And we’re making we’re making great progress. And, you know, it’s just, you know, their concepts of the future are just exciting and we want to be part of that. So that’s what’s going on there. And I think finally the on the acquisition side. Yeah. I mean, we we’re always looking for your next question is going to ask me what we’re going to do with all the cash. I’m sure. And so short term, we’re going to invest the cash in liquid securities that generate something more than cash.
[00:16:46] And in long term, we’re going to find the right acquisitions in our space. And we like the businesses where there’s strong synergies and they’re out there and there’s common markets that we service today that we can service tomorrow and with greater scale. And we look for companies with strong brands. And it’s not a disappointing field right now. So, you know, time will tell it.
[00:17:17] Good. Thank you. Know.
[00:17:21] Again, to ask a question, please, press star, then be number one on your telephone keypad. Your next question is from the line of Mike Ciarmoli with the Truist securities.
[00:17:37] Good morning, this is Pete Australind on from Mike, a couple of questions on the aerospace and market. First, what is your view on current inventory levels in the channel that your customers. It seems like we’re hearing about destocking 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?
[00:18:00] Well, that’s completely consistent with our view. I mean, I think Boeing now has 500 737, Max. I mean, they had 450, but they kept building. So there’s more maxes now. And I guess the expectation is that they’ll liquidate half of those taxes next year. And, of course, we’d like to we’d like to see them do that. So, yes, we’ve adjusted our production rates in accordance with what we expect overall build rates and inventory positioning of our of the subcontractor’s 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 what’s in the middle.
[00:18:57] So then specifically, aftermarket has a demand or order flow stabilized, and do you have a view as to how distributors are currently stocked?
[00:19:08] Yeah, well, I’d say the demand from the aftermarket is. I guess are you talking industrial or aerospace, aerospace, aerospace? Yeah, the demand from the aftermarket is better than we expected. And I mean, we’re we think that that’s going to be that’s going to lead the way. That’s going to lead to the recovery of the aircraft business. It’s just, you know, it’s planes are 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 satisfy everybody’s demand. So those old planes are going to have to come into service. And I think I think as two thousand twenty one ages, people will begin to travel as they feel more secure about their health.
[00:20:12] Thank you very much.
[00:20:17] I am showing no further questions at this time, I would not like to turn the conference back to Mr. Hartnett.
[00:20:24] Ok, well, well, that was I think that was our shortest conference call. OK, that’s a good sign. And thank you for your interest in RBC. And we will be speaking to you again in in late January.
[00:20:44] This concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.