Good day ladies and gentlemen and welcome to the RBC Bearings Fiscal 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [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 applied 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 Web site.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the company's Web site. 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 were pleased with the performance this quarter and continue to be encouraged with a strong outlook of our aircraft businesses and are seeing green shoots in 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 were up against some difficult comps. Industrial OEM was down 4% and distribution in after market was down and 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 continued to ease as we bring new capacity and approvals online.

Some plants continue to be production constraint and we will continue to add capacity in these areas. The sector will likely can 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 receive its FAA certifications, we hope in calendar Q4 and production is accelerated. We expect our aircraft products growth rate to steepened further.

Today, we are beginning to see the impact of the Max in the Q3 outlook as we are beginning to feel the effects of the reduced production rate for that plane implants where production is not constrained.

We continue to add both capacity and new processes and support of our customers' requirements and should be well positioned in this regard for FY '21 and beyond. With regards to our second quarter, we are expecting sales between $177 million and $179 million which results in an organic growth rate of approximately 4% over last year.

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

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 was mainly due to a $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% the second quarter of fiscal 2020 compared to 17% at 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 and 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 of 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, 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 of 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 alluded 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 six month period fiscal 2020 compared to $57.9 million for the six 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 six 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 pay down $13.1 million of debt and for the six 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 operators to begin the Q&A session..

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

Good morning guys. Hey guys, just want 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 it's a little tougher comp wise on the margin side, but it looks like you're feeling good about volumes.

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 can have Max return to service?.

Yes. Well, at the beginning of the year we gave guidance 50 bps on gross margins. So, for the first six 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 were able to keep the cost in mind. 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 and industrial, maybe starting to do more in the fourth quarter or are those, maybe certain subsectors within industrial are already showing signs there?.

Well, there's a couple of things that normally go on, on 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, 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 on new accounts which are equally promising. And we see -- we're seeing a pickup in [indiscernible]..

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?.

That has nothing to do with the submarine business. That just, yes….

Great. Okay. Gentlemen, last question for me. Mike, you're talking 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.

Should we think that's not reverse maybe it's not the third quarter by the fourth quarter?.

Yes. It's been slowing down, going in decelerating going into this year. At September we're going to file the Q this afternoon, but we ended September at the 353.9 million in inventory compared to the year end of 335. So now, some of it's backing off on the industrial side and some of it's being offset by builds on the aerospace side..

Okay, great. Thanks guys..

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

Hi, good morning guys. 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. I think what we see is depending upon which products are being produced in each of these products have come from a different plan. 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.

The summer running is in the high thirties. 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 come back into production someday and this all gets corrected. So, but in the plants where we're production constraint 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'll eventually see some sort of rate ramp that Boeing's planning to see how you guys and some of your peers, your suppliers could cope with that eventual rate increase..

Well, this bottlenecks now, Kristine, there's serious bottlenecks now in 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 in and use them for internal production and sort of bypass the constraints that a lot of the industry's 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 took. And the major drivers there, first, the big one is the 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've been flat year-over-year on our industrial sales.

So, I think the slow points we're seeing Q2, oil and gas, mining and general industrial distribution where 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 on the industrials..

Thank you very much..

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

Good morning. Thank you for taking the question. I heard all the comments about the production of the Boeing 737 Max coming back in, just want to take or get some thoughts on a more pessimistic outlook.

And is that something that you have thought about? What if, what if production were to go down to like 10 or 15 plants 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 more or what is a more dire scenario that you're thinking about? Thanks..

Well, I mean, our business, the dimensions of our business are far beyond the 737 Max. Although the 737 max is an important contributor to for what we do. I think it's no secret we have more than a $100,000 per plane. So, it's a delay in the production wouldn't be a 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 owners from the Max started winding down or production had to go down in the A320 Neo to ramp up? Is that something you'd be prepared to address or meet?.

Yes. Well, I mean it's the Neo and the Max to a large extent use this same kind of product that we produce. It's a 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 call out the four or five 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. This was the same last year..

Okay. Thank you very much..

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

Good morning. 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 on the 787 at this point?.

Well, 787 is 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 thing. .

I think, it's two..

Yes. I mean it's -- it doesn't have much of an effect on us, I think it's probably, particularly if the Max replaces it and the 777x, comes onboard and if the 777x comes on board in a reasonable timeframe whatever, we'll have our hands full..

And the most important platform for us would be the 777x..

Have you seen any changes in the poll on that program right now? Just given some of [boarding Sky] [ph] and guidance on entering the 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..

And then, just switching over to the submarine business, I think earlier this year there were some timing delays just on the block five changeover, if I remember correctly.

Do you see any changes to that progression going forward on the negotiations in the block five? 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 be, we are going through final terms and conditions, negotiations and so we should be in pretty good shape..

All right. Thanks for the time..

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

Hey, good morning guys. Thanks for taking the question. Just on, I mean, we've been talking about aerospace here. I mean the 87 is going down, 24 units per year that 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, you've insourced 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 slow down. The other facilities are very much as I said, production constraints. So, yes, I mean if the Max doesn't come back into service, I think this is a disaster for the industry, but I think a likelihood of that is zero.

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

When you say, if the Max is delayed more, I mean, if we get a return to service, later -- December we get a February, starts flying, but they opted to not take that rate to 57.

If they hold this rate at 42 does that, keep this headwind on you guys?.

No. I don't, first of all, I don't think that supply chain is capable of making 57 notwithstanding their optimism about its robustness. I don't think that, I don't think it's there. I think the supply chain would have a very 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 -- and 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 knew 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 two ago, that you were in fact taking share -- challenged to suppliers out there?.

Yes, that's definitely mitigating the volumes. That's one of the reasons why we're so production constraint in some of our plans, as our competition is having a great deal of difficulty getting these products to their plants..

Okay. All right. Thanks guys. I'll jump back in the queue..

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

Hey, good morning. 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 levels.

So just any color on that?.

On our, our exposure to the….

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 mind 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 $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?.

Probably it looks like a niche supplier of tools for turning and boring, right? So how does that fit with your portfolio?.

Well, we make tools for turning and boring and grinding and machining and the like in Switzerland, we liked the market. It's a market that -- yes, 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 5x or 10x in its life cycle before a new product replaces it.

So that's the nature of that product level and we liked that sector a lot and we intend to do more work in it..

So this is really a market consolidation and scale play?.

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..

And that's great.

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

Big..

Is it accretive to corporate?.

Yes, substantially..

Got it. Thanks..

[Operator Instructions] And at this time we have no questions. I will now like to turn the conference back to Dr. Hartnett..

Okay. Well, thanks once again for participating in our conference call and that 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..