RBC Bearings Inc (RBC) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the RBC Bearings First Quarter Fiscal 2021 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Brooks Hamilton, Investor Relations.

Thank you.

Please go ahead, sir.

Good morning, and thank you for joining us for RBC Bearings' Fiscal 2021 First 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 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, Brooks, and good morning, and welcome to RBC's First Quarter Fiscal '21 Conference Call.

Net sales for the first quarter of fiscal 2021 were $156.5 million versus $182.7 million for the same period last year, a decrease of 14.3%.

For the first quarter of 2021, sales of industrial products represented 37% of net sales with aerospace products at 63%.

Gross margin for the quarter was $59.5 million or 38% of net sales.

This compares to $70.7 million or 38.7% for the same period last year.

Adjusted operating income was $29.9 million, 19.1% of net sales, compared to last year's number of $38.5 million or 21.1% of sales.

Adjusted EBITDA was $43.8 million and 28% of net sales compared to $50.8 million and 27.8% of net sales in the same period last year.

And we ended up the quarter with $143.6 million of cash and $23.1 million of debt.

We entered this quarter with limited visibility and uncertainty due to the impact of the pandemic on the economy and travel.

We continued our extraordinary measures to protect the health and well-being of our employees, customers and vendors with our strict procedures for environmental management as guided by the CDC.

We continue to operate all of our plants in a safe manner and experienced a few foreign plant mandatory shutdowns that lasted a few weeks at most.

Sales of industrial products were down 13.3% from last year.

The prime variance from last year fell in the natural resources markets, mining and oil and in general, industrial activity.

Sales to the industrial aftermarket were down 12.3%, driven by the main industrial distributors in both the United States and Europe.

A few quarters back, we discussed a few green shoots, which we started to see the benefit in Q1 this year, mainly in wind, semicon, military vehicles and high-speed trains.

Aerospace, commercial and defense first quarter 2021 net sales were down 14.9%.

Aerospace, defense OEM and aftermarket increased 11.9%, offset by a decrease of 21.4% in commercial aircraft, OEM and aftermarket.

Important contributors for aerospace defense were helicopters, engines, missiles and airframe for jets.

The uncertainty around commercial aircraft travel due to the pandemic continues to put pressure on the commercial aircraft builders and their supply chain.

The major airframe producers appear to have a clearer view on the build rates over the next 12-plus months.

That in turn is setting our requirements to meet their expectations.

We continue reworking and fine-tuning our production schedules and capacity to align our -- supply of our products to the new demand levels.

Regarding our second quarter, we are expecting sales to be between $148 million and $152 million.

And that is, of course, a difficult number to project.

First of all, it's challenging to guess what the GDP is going to be in the -- in our second fiscal quarter, the third calendar quarter.

I've seen industrial expansion numbers as high as 20% for this period.

Much of our business is in and out the same day, and never hits backlog.

It's -- basically, we really never have been in a forecasting situation like this.

So trying -- we're trying to play the ball in the middle of the fairway as best we can.

And hence, we came up with that guidance.

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

Thanks, Mike.

SG&A for the first quarter of fiscal 2021 was $26.8 million compared to $30.1 million for the same period last year.

The decrease was mainly due to $4.1 million of lower personnel-related costs, offset by $0.8 million of other costs.

As a percentage of net sales, SG&A was 17.1% for the first quarter fiscal 2021 compared to 16.5% for the same period last year.

Other operating expense for the first quarter of fiscal 2021 was expense of $3.8 million compared to expense of $2.1 million for the same period last year.

For the first quarter of fiscal 2021, other operating expenses were comprised mainly of $2.5 million in amortization of intangible assets, and $1.1 million of restructuring costs and related items and $0.2 million of other items.

Other operating expense for the same period last year consisted mainly of $2.3 million in the amortization of intangible assets, offset by $0.2 million of other income.

Operating income was $28.8 million for the first quarter of fiscal 2021 compared to operating income of $38.5 million for the same period in fiscal 2020.

And on an adjusted basis, operating income would have been $29.9 million for the first quarter of fiscal 2021 compared to adjusted operating income of $38.5 million for the first quarter of fiscal 2020.

Other nonoperating expenses were 0 for the first quarter of fiscal 2021 compared to $0.2 million for the same period last year.

For the first quarter of fiscal 2021, other -- sorry, was 0.01.

Other nonoperating expense comprised $0.1 million of foreign exchange, offset by $0.1 million of other items.

Other nonoperating expenses for the first quarter of fiscal 2020 consisted primary of $0.4 million of foreign exchange loss offset by $0.2 million of other items.

For the first quarter of fiscal 2021, the company reported net income of $22.7 million compared to net income of $30.5 million for the same period last year.

On an adjusted basis, net income would have been $23.6 million for the first quarter of fiscal 2021 compared to $30.5 million for the same period last year.

Diluted earnings per share was $0.91 and per share for the first quarter of fiscal 2021 compared to $1.23 per share for the same period last year.

And on an adjusted basis, diluted earnings per share for the first quarter of fiscal 2021 would have been $0.95 per share compared to adjusted diluted EPS of $1.23 per share for the same period last year.

Turning to cash flow, the company generated $48.4 million in cash from operating activities in the first quarter of fiscal 2021 compared to $40.1 million for the same period last year.

Capital expenditures were $3.9 million in the first quarter of fiscal 2021 compared to $12 million for the same period last year.

And as Mike has already said, total debt as of the end of June was $23.1 million, and we had $143.6 million of cash on the balance sheet.

So now I'd like to turn the call over to the operator for Q&A.

(Operator Instructions) Our first question comes from Pete Skibitski with Alembic Global.

Nice quarter in light of the environment we're all in here.

Yes.

So look, you touched on, Mike, you guys have kind of the updated production forecast from Boeing and Airbus.

And I'm just trying to get a better feel of, did your first quarter, did you see kind of the maximum commercial aero headwinds that you think you will, especially on the OE side?

And you just kind of -- you had those same headwinds, the balance of this year and then the comps get easy pretty early in fiscal '22?

Or had you not slowed down your production quite the same way as we might see in the back half of '21, if that -- if I'm being clear?

Yes.

Well, I think for the first quarter, this all happened in March, right?

I mean this whole pandemic thing.

And so by March, I mean, you're literally moving into your first quarter production rate, and you can't be moving into your first quarter production rate if you don't have your -- all of your materials inbound, so basically had all our materials inbound.

And so then it's almost -- it's impossible to change the -- to reflect the change in demand in your production schedules in that shorter time period.

So we ran the normal production schedules and started planning how to run the balance of the year as best possible given a tremendous amount of calculus that we went through business by business on where the baseline is and where our production rates should be set.

And that kind of determines what our cost needs to be in order to maintain the margin performance that we'd like to maintain.

So all of that churn happened in the first quarter.

I don't know if I answered your question.

Well, so if we think about the second quarter -- sequentially into the second quarter, you're not guiding down very much.

It's almost close to flat in the second quarter.

So are you saying commercial aero might be down more year-over-year in the second quarter, but maybe it offsets a bit from industrial getting stronger?

Yes.

I think industrial gets a little stronger, commercial aero kind of backs down a notch or 2. And just our view on that.

I mean, it's really -- it's clear to everybody.

The carriers are going through a really rough patch of road right now, right?

And everybody sees it.

And I think it's just as clear that the people are sick of being confined and they congregate and party whenever they get a chance.

So I think what that's telling us is with the release of the vaccine by Pfizer or Moderna or whoever else of the other 100 people that are working on it, later in the quarter, later in the year, which I expect -- it looks like it's going to be sort of an October kind of timing at the earliest, things will get better fast.

Unfortunately, many of the carriers have failed, the smaller ones.

And -- but the demand for aircraft capacity we expect to see exceed supply.

So just because there's not as many carriers, and there's -- and the people that are running the carrier lines are stressed financially.

So ticket prices will go up.

That will draw new money into the industry.

And I think this is going to happen fast.

Certainly within the next 6 to 9 months, we expect a huge turnaround.

And then I think when you get to the builders, Boeing and Airbus, they're going to have the opposite problem because the supply chain has been damaged.

And they're in triage mode right now trying to figure out which of their suppliers financially are going to survive.

And how to reallocate work -- statements of work to the -- what they consider the survivors.

And we know for sure from the discussions that we've had with some of these big builders that we're in the winners' column.

And so we expect a considerable expansion of our statement of work.

So in between now and then, we're going to restructure our cost base to run at this new level to maintain some pretty decent margins.

And we expect towards the other end of this year to see things improving on an accelerated basis.

That's great.

That's great.

A couple of questions out of that, and then I'll get back in queue.

But -- I mean, can you retain gross margins at 38% or above the balance of this year, do you anticipate?

We're going to try to do that.

There's nothing flashing at us that tells us that we can't.

We have some very healthy businesses in about 45% of the company that they're doing extraordinarily well, expanding margins and growing.

So that's a helpful base in our -- independent of any of this nonsense.

Yes.

Okay.

And then just on like sort of gaining share, will it come strictly from gaining statements of work?

Or do you anticipate buying distressed assets, either kind of on your own or maybe the OEMs kind of ask you to pick up some distressed players out there?

How are you guys thinking about that?

We aren't seeing distressed assets that are attractive to us.

We are seeing distressed assets, but they're not attractive to us.

So whether that comes full circle is to be seen.

We'll know at another time, but we're not expecting that.

We are expecting to pick up statements of work.

(Operator Instructions) Our next question comes from Michael Ciarmoli with Truist Securities.

Nice quarter here in light of everything.

Mike, I guess I just got to try and figure out a little bit more on commercial aerospace.

I mean, even what you just said, a 6- to 9-month downturn, we're hearing multiyear downturns.

It seems like most of your customers are reporting that their OEM build revenues are down far greater than their expectations in the 60% range.

We're seeing inventory destocking.

I know just as early as last quarter call, which was May, you guys were talking a little bit more optimistic about Boeing and build rates.

And I'm just struggling to see or figure out where you guys are getting this confidence from.

I mean, are you -- it sounded like you were producing on normal schedules, but we've seen rates come down.

So can you give us a sense of what you're producing at across some of your biggest programs like the 87, the MAX?

And I know you said aero would be down but it just seems like some of these OEM headwinds are going to be pretty persistent for some time here.

Yes.

Well, we're producing at a rate -- we're attempting to produce at a rate that's slightly lower than the build rate that the builders have advised us.

So just to -- because I know that there's some inventory in the system, I would like to get that inventory released out of the system.

I just don't want to push more in there.

So we've basically restructured our costs plant by plant to operate efficiently at those levels.

What are you -- what are the conversations like with your customers, whether it's a Honeywell or Pratt or GE?

I mean, are you -- are they revisiting their purchase orders with you?

Or -- because we've been seeing that some of these larger suppliers are slowing down their inventory and their materials by pretty substantial numbers.

So what are the conversations like with the customers right now?

Well, they're all different.

I mean, if you take Honeywell or Pratt or GE or some of the large ones, you end up with a supply contract with that.

And there's a certain statement of work, certain parts and certain prices supply those parts.

And periodically during the week, they send you a bar code of what to send them.

So you don't really have any backlog on that stuff.

You just -- electronically, you get authorizations for ship.

Right?

So part of the industry, the big guys work that way.

Boeing doesn't work that way, particularly, but a lot of the big subs do.

And then there's other subs that are smaller and they work contract to contract, where they have a -- we give them a price and delivery, and they give us a purchase order to deliver at that price at a certain time.

Now, those people that -- in that second category, we actually -- for the most part, it's a very confused lot of people who don't know what to order or when to order it or whether they should be -- what math they should be applying based upon Boeing's guidance.

So we try to advise them what they should be ordering, when it should be delivered.

And if they have orders that are in excess of what we see as their true requirements, we move those orders out later into this year and sometimes into next year.

Okay.

Okay.

And then what about just on the -- a couple of quarters ago, you kind of gave your view on how the MAX rates would kind of dovetail with the ramp of the 777X, and we've obviously got the 777X being delayed.

And can you give us a sense of just those 2 programs alone, where you are in the MAX?

I think at one point, certainly the direction from Boeing looks a little muddy, clearly, but maybe they produce 200 next year, but where are you guys on the MAX?

It sounded like you were more optimistic last quarter that you were going to get to that 31 a month rate and certainly, that's been pushed to '22.

So what's the thoughts with that platform?

Yes.

I think the last time we talked about that with some mathematical specificity was in February.

And then it was pre-pandemic.

This is where they expected the MAX to run, and this is where they expected the 777 and the 777X to run.

This was our content, and therefore, this was the net result.

So all of that's changed.

I mean, so right now, it's -- we're just teeing up to what Boeing has projected for MAX build rates and 777X build rates and redid our manufacturing and sales plan in accordance with those rates, ex what we believe was too much inventory in the system.

Okay.

Okay.

But it sounds like -- I mean, even on the last, I mean, when we spoke in May, it sounded like -- I mean, they -- were certification by August 31.

So it just sounds like then it's lower volumes and trying to plan accordingly here.

(multiple speakers)

Yes.

I think it's a big picture thing.

I mean, if people start traveling and the air carriers get refinanced or healthier or whatever happens there, I mean, this whole thing turns around.

And if that doesn't happen, then this thing doesn't turn around.

And I'm believing it turns around and it turns around in a big way.

Our next question comes from Pete Skibitski with Alembic Global.

Okay.

Short list today.

So Mike, I was going to ask you what drove the strong growth in defense sales in the first quarter, but it almost sounds like it was across the board.

And except for submarines, my thought is that maybe submarines really ramp in the second half for you.

Is -- would you agree with that?

And any color you would add?

Yes.

This is Dan, Pete.

The submarines are in industrial, right?

And for the quarter, they were up around 1.3%.

But yes, we'll see the ramp on marine in the second half of our year because the Block IX, I mean, the Block VIX ship.

It's all done and in house.

So we'll start working on those ships over the next 9 months.

And that definitely will have a double-digit growth on that portion of the business for us.

Okay.

That's great.

That's great.

And then I want to ask one question about the segment since you guys put the Q out, which was great.

The ball bearing segment, you had 29% growth in aerospace and defense in the quarter, even with kind of a tough comp and I was just wondering what kind of, in particular, drove that type of growth in that segment.

Yes, it's mainly our thin section bearing and on the industrial side of it, it's driven by semiconductor.

And on the aerospace side, it's driven by space.

By space.

Okay.

Okay.

And then just last 1 for me on the industrial side.

You guys have touched on it.

But even coming into the first quarter, you thought you'd see kind of easier comps in the back half of the year in industrial and a return to growth there.

And we saw a better PMI in June, but has anything led you guys to change that view?

No.

I think we finally started to see the first 3 weeks of July, the incoming orders starting to pick up, which is a good sign.

As Dr. Hartnett said a little earlier, on our industrial side of the business, 2/3 of it's in and out in the quarter, so it's a little hard to forecast that side of the business.

But we're starting to see it come back.

And that's being driven by semiconductor, it's being driven by high-speed trains in our European entity that are going into China.

It's being driven by our wind projects that we're working on.

And it's being driven by military vehicles, which are in the industrial segment, which are helping push the volumes for us.

That's great.

That's great.

Actually, just one last one for me.

On the backlog, backlog did decline and even kind of the book-to-bill was 0.7, which is low for you guys.

And I know we've talked about in and out type of business.

Anything unusual there in that decline in terms of more risk heading into the second quarter or third quarter?

Or do you feel like everything that we -- the decline in backlog is kind of in consonance with everything we've talked about thus far on the call?

Yes.

No, I think...

Go ahead, Mike.

Go ahead.

I think it's in line with everything we've said in the call.

I think it's certain portions of the longer lead time items on aerospace, as Mike has talked about, were pushed around or canceled, but that was offset by increased volumes we picked up on defense.

And it's never -- industrials are never a big component of our backlog.

Okay.

Okay.

So if we do start to see better revenue in industrial in second quarter or third quarter, that might not necessarily show up in backlog ahead of time?

Right.

Unless it all popped in the last month of the quarter.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

Mike, to your comment about the 45% of the business that's doing well right now, how is your visibility into the back half?

Does it feel like those are pretty firm lines of business for the next 2, 3 quarters?

You're talking about the industrial side of the business?

Yes.

You had made the earlier comment about the 45% of the business that's doing well.

I think it was in response to a gross margin loss (multiple speakers)

Yes, I see.

Interesting.

Oh, yes, that's rock solid.

Is that primarily the defense stuff that you've already mentioned?

Or what are some of the product lines that are looking good from a visibility standpoint?

Well, it's certainly marine.

It's certainly helicopter defense.

Let's see, what the heck else in there?

Yes, we have wind in there.

We have semiconductor.

Yes.

Space and missiles.

Are you seeing distressed competitors on the industrial side?

And any comments around specific opportunities to bid on new business?

Well, we've seen distressed competitors on the aerospace side for some time, and that continues to give us opportunity to bid on business.

On the industrial side, the people that we compete with, by and large, are all big balance sheet players.

And they seem to be able to get through periods like this with little pain.

Okay.

And you guys have a long track record of improving your operations over time.

Just given the slowdown we're in, do you see opportunities internally to make structural or procedural changes to the operating model that you couldn't do in normal times?

Yes, absolutely.

We're going to combine some of our plant operations, which we wouldn't do when they're too busy, and we've completed one and we're working on a second one this quarter.

So yes, I mean, we're trying to reduce the rooftops.

Right.

So you would expect that to flow through the income statement this year then?

Yes.

Will it be material?

No.

Okay.

And what about -- I think in the past couple of quarters, you've talked about wanting to in-house some certifications from third-party suppliers.

Is that still underway?

Yes.

Yes, it's underway.

It's -- we're just delayed a little bit and we're waiting for the auditors from the various agencies, including our OEMs, to come and sign off our processes, but our -- our processes are in place.

They're ready to be audited.

They're ready to be commissioned, and they will impact our WIP levels and our margin improvement immediately.

Okay.

And then just last one for me.

Free cash flow obviously strong right now with lower CapEx and working capital management.

Revenue -- I mean, sorry, inventory hasn't come down that much.

So if revenue continues to decline mid-teens, do you have an inventory target?

Or an idea of how much you could unlock from working cap?

Yes.

I mean, we -- in our current operating rates, basically, the discussion that we had about the first quarter, the materials were inbound and there's not much you can do to turn that around in the short term.

So we ended up with excess materials, excess WIP, as we brought the plant operating expenses and throughput rates down.

So we'll liquidate out those materials as time goes on and turn them into the finished product.

But in terms of finished goods, yes, we need to pare down our finished goods level, and there may be $10 million or $20 million worth of liberation overall in that package.

I'm not showing any further questions at this time.

I would now like to turn the call back over to Dr. Hartnett for any closing remarks.

Okay.

Well, that kind of sums up where we are right now.

And I appreciate everybody's attention and interest in the call today and look forward to speaking to you again later in the year.

Good day.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.