RBC Bearings Inc (RBC) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RBC Bearings Fiscal 2020 Second Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Chris Donovan with Alpha IR.

Sir, please go ahead.

Good morning, and thank you for joining us for RBC Bearings Fiscal 2020 Second Quarter Earnings Conference Call.

With me on the call today are Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; and Daniel A. Bergeron, Vice President, Chief Financial Officer and Chief Operating 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 Act -- 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 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 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. Hartnett.

Thank you, and good morning.

Net sales for the second quarter of fiscal 2020 were $181.9 million versus $172.9 million for the same period last year, a 5.2% increase.

Organic growth for the quarter was 6.8%.

For the second fiscal quarter of 2020, sales of industrial products represented 35.5% of our net sales with aerospace products at 64.5%.

Gross margin for the 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, a 4.9% increase.

Operating income was $37.3 million versus $35.9 million last year, a 4% increase.

EBITDA was $51.2 million versus -- a 7.7% increase over last year.

We're pleased with the performance this quarter and continue to be encouraged with the strong outlook of our aircraft businesses and are seeing green shoots in the -- as early as the 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're up against some difficult comps.

Industrial OEM was down 4% and distribution and aftermarket was down an organic 7.2% on a year-over-year basis.

Aerospace and defense markets paint the opposite picture.

The second quarter organic net sales were up 14.4%.

Aerospace and industrial markets today are night and day.

Aerospace sales were driven by OEM and aftermarket.

Aero and defense OEM were up 15.1% on an organic basis.

Supply chain constraints, internal and external, continue to ease as we bring new capacity and approvals online.

Some plants continue to be production-constrained, and we'll continue to add capacity in these areas.

This sector will likely continue to perform at the double-digit growth level for the next several quarters as we introduce additional manufacturing capacity and convert new contracts to revenues.

At this point in our year, as we enter our third quarter, most of our aerospace businesses are well -- are booked well into 2021.

When the 737 MAX receives its FAA certifications, we hope in calendar Q4, and production has accelerated, we expect our aircraft products growth rate to steepen further.

Today, we are beginning to see the impact of the mix in the Q3 outlook as we are beginning to feel the effects of the reduced production rate for that plane in plants where 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 FY '21 and beyond.

With regard to our second quarter, we're expecting sales between $177 million and $179 million, which results in an organic growth rate of approximately 4% over last year.

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

Okay.

Thanks, Mike.

SG&A for the second quarter of fiscal 2020 was $30.8 million compared to $29.3 million for the same period last year.

The increase is mainly due to $1 million of additional incentive stock compensation, higher personnel costs of about $0.4 million and $0.1 million of other items.

As a percentage of net sales, SG&A was 16.9% for the second quarter of fiscal 2020 compared to 17% for the same period last year.

Other operating expense for the second quarter of fiscal 2020 was expense of $3 million compared to expense of $2.6 million for the same period last year.

For the second quarter of fiscal 2020, other operating expenses were comprised mainly of $2.3 million in the amortization of intangible assets and $0.9 million of acquisition costs offset by other income of $0.2 million.

Other operating expense for the same period last year consisted mainly of $2.6 million in the amortization of intangible assets.

Operating income was $37.3 million for the second quarter of fiscal 2020 compared to operating income of $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 adjusted operating income of $35.9 million for the second quarter of fiscal 2019.

For the second quarter of fiscal 2020, the company reported net income of $31.3 million compared to net income of $30.1 million for the same period last year.

On an adjusted basis, net income would have been $32.3 million for the second quarter of fiscal 2020 compared to adjusted net income of $30.2 million for the same period last year.

Diluted earnings per share was $1.26 per share for the second quarter of fiscal 2020 compared to $1.22 per share for the same period last year.

On an adjusted basis, diluted earnings per share for the second quarter of fiscal 2020 was $1.30 per share compared to an adjusted diluted EPS of $1.22 per share for the same period last year.

Turning to cash flow.

The company generated $24.5 million in cash from operating activities in the second quarter of fiscal 2020 compared to $24 million for the same period last year and $64.6 million in cash from operating activities for the 6-month period fiscal 2020 compared to $57.9 million for the 6-month period last year.

Capital expenditures were $8.2 million in the second quarter of fiscal 2019 compared to $10.8 million for the same period last year.

On a 6-month basis, CapEx was $20.2 million compared to $17.7 million for the same period last year.

In the second quarter fiscal 2020, the company paid down $13.1 million of debt, and for the 6-month period, we paid down $30.2 million of debt.

Total debt as of September 28, 2019, was $37.8 million and cash on hand was $36.4 million.

I'll now turn the call back over to the operator to begin the Q&A session.

(Operator Instructions) And your first question comes from the line of Pete Skibitski with Alembic Global.

Guys, just wanted to get a sense of how you're seeing margins -- operating margins in the second half of the year.

It looks like the first half -- you're up year-over-year in the first half.

Second half, I think, is a little tougher comp-wise on the margin side, but it looks like you're feeling good about volume.

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?

Yes.

Well, at the beginning of the year, we gave guidance of 50 bps on gross margin.

So for the first 6 months, this year, we're at 38.9% compared to 38.9% last year.

So a little short on the target for gross margin, but we're able to keep the cost in line.

So on adjusted operating income year-to-date, we're at 21.1% compared to last year, 20.6%.

So we're a 50 bp improvement.

So I think that's going to stay steady through the year.

I think we'll see the margins improve going into Q3 and Q4, and we'll try to keep the cost under control also, but I think we're comfortable with the 50 bp improvement falling down to operating income.

Okay, sounds great.

And then Mike, can you maybe expand on your comments about green shoots in industrial maybe starting to emerge in the fourth quarter.

Are those maybe certain subsectors within industrial that 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 everybody in the kingdom is trying to manage their inventories to some turn objective that they had set for their bonuses.

And inevitably, the businesses can't run with that artificial level of working capital.

So every year, what you see is 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, we have some new contracts coming in on existing accounts, which are very promising, which are going to bring us some industrial volumes, increased industrial volumes next year.

And we have some new contracts and new accounts, which are equally promising, and we see -- we're seeing a pickup in mind.

That sounds great.

And is that all incremental to -- I think you've been expecting the submarine business to get better next year.

So the commentary you just gave kind of in addition to the submarine kind of optimism?

Yes.

No.

That has nothing to do with the submarine business.

That's just...

Okay.

Great.

Great.

Okay.

Okay, gentlemen, last question for me.

Mike, just wondering, you talked about inventory.

It looks like -- and maybe this is more for Dan, but it looks like you guys -- just looking at the cash from ops number that you've built a lot of inventory yourselves this quarter and through the first half of the year.

So we think that starts to reverse maybe if not the third quarter, by the fourth quarter?

Yes.

It's been slowing down going -- and decelerating going into this year.

At September, we're going to file the Q this afternoon, but we ended September at $353.9 million in inventory compared to year-end of $335 million.

So now some of it's backing off on the industrial side and some of it's been offset by builds on the aerospace side.

Your next question comes from the line of Kristine Liwag with Bank of America.

Mike, last quarter, you mentioned for the 737 that you're producing generally at 42 per month with some at 52 and some at 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?

Well, we are -- relative to the supply chain, we are the supply chain.

So we're coping just fine.

Yes.

I think what we see is depending upon which products are being produced -- and each of these products come from a different plant, but what we're seeing is some sectors of the aircraft business are running at 52.

Some are running at a little more than 52.

Then some are running as -- in the high 30s.

So you just see this widespread of demand for these planes, and it kind of is what it is, in one of our plants which has capacity is being throttled by the MAX demand.

So that's probably a few million dollars in our quarter, which we are believers that the MAX will be -- will come back into production someday and this all gets corrected.

So -- but in the plants where we're production-constrained, we're using this interim period to catch up.

Did I answer your question?

Or did 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 in general could affect your margin outlook for the year.

And then also if you're seeing some -- maybe a supplier to you, how they're coping in that are we going to see bottlenecks for the -- once the airplane goes into service, you will eventually see some sort of rate ramp that Boeing's planning to see how you guys and some of your peers or your suppliers could cope with that eventual rate increase.

Yes.

Well, there's bottlenecks now, Kristine.

There are serious bottlenecks now in our sector, and that's the reason that we built a 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, and one by one, we'll be able to turn these processes on and use them for internal production and sort of bypass the constraints that a lot of the industry is feeling right now that uses a lot of these subcontractors.

So if the 737 -- and when the 737 comes back into production, the timing is going to be just perfect for us in terms of internal production for these products.

Now if the 37 is delayed through our fourth quarter, which is calendar first quarter, it'll probably have a couple of million dollars more impact on our revenues.

If it's not delayed, then the plants that aren't constrained will sort of have a great day, and the plants that are constrained, I think we're going to be coming out of that constraint problem soon.

So I think we're going to be really well positioned to service 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 order activity?

Yes.

So Kristine, on the industrial side for the quarter, we were down about 2.8% and organically about 5% so if you take out the Swiss Tool acquisition we just did.

And the major drivers there, for us, the big one is oil and gas, was down 54% in the quarter, and that's equivalent to about $1.8 million of sales in the quarter.

So if we took that out of the equation, we basically would have been flat year-over-year on our industrial sales.

So I think the slow points for us in Q2 were oil and gas, mining and general industrial distribution, where Mike -- as Mike was talking about a little earlier, they're correcting 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 kind of it there on the industrials.

Your next question comes from the line of George Godfrey with CLK.

I heard all the comments about the production of the Boeing 737 MAX coming back in.

I just wanted to take or get some thoughts on a more pessimistic outlook.

And is that something that you have thought about?

What if production were to go down to like 10 or 15 planes 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 -- or what is a more dire scenario that you're thinking about?

Well, I mean, our -- the dimensions of our business are far beyond the 737 MAX, although the 737 MAX is an important contributor to what we do.

I think it's no secret we have more than $100,000 per plane.

So it -- a delay in the production wouldn't be great news, but we'd get through it.

On the other hand, there's other programs that are alive and coming through.

And when one door closes, the other door opens.

And is that something you could ramp up if orders from the MAX started winding down; or production had to go down, and the A320neo had to ramp up?

Is that something you would be prepared to address or meet?

Yes.

Well, I mean, the NEO and the MAX, to a large extent, used the same kind of product that we produce.

It's sort of a generic bearing 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 the same.

Some of that mix is different.

So it isn't all generic mix.

Got it.

And then my last question, in the press release, you called out the 4 or 5 fewer production days in the next quarter or the current quarter that we're in now.

But relative to last year, there would be no difference in the days, correct?

That's correct.

It was the same last year.

Your next question comes from the line of Josh Sullivan with Seaport Global.

Just can you talk about the 787 program?

Is that a large program for you?

I don't know if you've ever given ships that values on that.

And then did you see that already working its way through the supply chain on the cut?

Just where do you think you are in the 787 at this point?

Well, 787 is an equally important plane to us.

And I think -- what are they, backing off one ship per month?

Is that what I heard?

I think that's the right number.

I think it's 2. I think it's 2.

It's 2. Yes.

I mean, it's -- it doesn't have much of an effect on us.

And I think it's probably -- particularly if the MAX replaces it and the 777X comes on board.

If the 777X comes on board in a reasonable time frame, we'll have our hands full.

And the next second most important platform for us would be the 777X.

And have you seen any changes in the pull on that program right now, just given some of Boeing's guidance on entry into service?

Yes, we've seen some delay.

But at the same time, they're bringing up the 777 to sort of accommodate their market demand.

So our content on the 777 is very good.

Our content on the 777X is probably 50% better.

Got it.

And then just switching over to the submarine business.

I think earlier this year, there were some timing delays just on the block 5 changeover, if I remember correctly.

Do you see any changes to that progression going forward on the negotiations on the block 5?

Has it gotten better?

Has it accelerated?

Is the CR having any impact on that?

I think it's right on time where we thought it was going to be where we're going through final terms and condition negotiations.

And so we should be in pretty good shape.

Your next question comes from the line of Michael Ciarmoli with SunTrust.

Just on -- I mean, we've been talking about aerospace here.

I mean, the 87 is going down 24 units per year.

The 777X 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 and you've in-sourced a lot.

I mean you kind of suggested that some of your facilities are feeling lighter volume already.

I mean could you be looking at a situation where you've got too much capacity and you're going to have some overhead absorption issues?

We don't see that scenario developing for us.

We have only one facility that is being affected by the 737 MAX slowdown.

The other facilities are very much, as I said, production constrained.

So yes, I mean, if the MAX doesn't come back into service, I think it's a disaster for the industry, but I think the likelihood of that is 0. I think they'll get through it.

It's a matter of timing and maybe a new CEO or 2, but they'll get through it.

What about -- when you say if the MAX is delayed more, I mean if we get a return to service later, if it's December, we get to February, it starts flying, but they opt to not take that rate to 57, if they hold this rate at 42, does that keep the headwind on you guys?

No.

I don't -- first of all, I don't think that the supply chain is capable of making 57, notwithstanding their optimism about its robustness.

I don't think it's there.

I think the supply chain would have a very -- a great amount of difficulty maintaining 52.

Our models for next year are based around 52.

And if it's more, it's better.

If it's less, we'll deal with it.

So that's kind of where we are right now.

And I think the whole -- I think everybody is waiting for the next shoe to drop on the program.

Got it.

And then maybe just one more on that topic.

I mean, I know you guys talked about that you were picking up some share.

Is that still the case?

Is that softening maybe the blow of being at a lower rate?

Can you just -- I think you hinted at that a quarter or 2 ago that you were, in fact, taking share from some challenged suppliers out there?

Yes.

That's definitely mitigating the volumes.

That's one of the reasons why we're so production-constrained in some of our plants is our competition is having a great deal of difficulty getting these products to their plants.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Mike, I just wanted to go back to the industrial inventory commentary and the thought about replenishment.

Can you remind us of your exposure to things like off-highway and construction equipment?

Because we're seeing some pretty sizable year-over-year order contraction, which is going to lead to lower production next year and in some of those end markets.

And that should flow through to general industrial and distribution at some level.

So just any color on that?

On our exposure to the...

Off-highway, construction equipment, cranes, that sort of thing?

Yes.

We don't have the kind of exposure that Timken seems to have.

It's a smaller sector for us, but it's a meaningful sector.

I think Dan's probably more current on the numbers in that sector than I am.

But I'll let him speak to it.

Yes.

For us, in that sector, it's the big hauling trucks where we have a lot of our content on.

And so it's mainly driven by the mined activity and commodity activity in the mines.

Okay.

So not much exposure to that kind of traditional construction equipment at all?

Well, we have exposure to it, but it's not a sizable market like we would see in heavy haul and mine trucks.

Right.

So more of the size of like oil and gas, as you described earlier, something like that?

Yes, probably even -- around there, maybe about $5 million to $10 million type market.

Got you.

Okay.

And switching gears, can you just talk about the strategic rationale for buying Swiss Tools.

Yes.

What would you like to know?

It was a niche supplier of tools for turning and boring, right?

So how does that fit with your portfolio?

Well, it -- we make tools for turning and boring and grinding and machining and the like in Switzerland.

We like the market.

It's a market that -- it's definitely a razor blade market, and we like those markets like bearing markets where you sell the product once and it has to be replaced 5 or 10x in its life cycle before a new product replaces it.

So that's the nature of that product level.

And we like that sector a lot and we intend to do more work in it.

So this is really a market consolidation and scale play?

Yes.

Well, it is in a market that -- where we feel we know how it operates and we know the players and we know the manufacturing technologies needed to support it.

And we look for companies that have good, strong, defensible franchises in those markets.

That's great.

And I know it's small, but can you talk about the margin profile?

Big.

Is it accretive to corporate?

Yes.

Yes.

Substantially.

(Operator Instructions) And at this time, we have no questions.

I would now like to turn the conference back to Dr. Hartnett.

Okay.

Well, thanks once again for participating in our conference call, and that this completes the call for the second quarter, and we look forward to talking to you again in January.

Good day.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation, and have a wonderful day.

You may all disconnect.