Good morning, ladies and gentlemen and welcome to the Q1 2022 RBC Bearings Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Will Stack with Investor Relations..

Good morning and thank you for joining us for RBC Bearings fiscal 2022 first quarter earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; Daniel A. Bergeron, 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 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 conditions. These factors are also described in greater detail on 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, Will and good morning and welcome to all. It seems like we are having these calls weekly now. It’s just a pleasure to speak to everyone every week. Net sales for the first quarter of fiscal ‘22 were $156.2 million versus $156.5 million for the same period last year, a decrease of 0.2%.

We had some delays in shipments in one of our divisions as a result of source inspection, which is beyond our control. So that’s where we are. For fiscal quarter – for the first fiscal quarter of ‘22, sales of industrial products represented 48% of net sales, with aerospace products at 52%.

Gross margin for the quarter was $63.8 million or 40.8% of net sales. This compares to $59.5 million or 38% for the same period last year. Adjusted operating income was $31.3 million, 20% of net sales compared to last year’s 19.1%.

Adjusted EBITDA was $45.3 million, 29% of net sales compared to $43.8 million and 28% of net sales for the same period last year. We ended the quarter with $296 million in cash and securities and $10.8 million of debt. Quarter was one where the industrial markets continued to show increasing strength.

Our industrial OEM businesses, non-marine, demonstrated a quarter-to-quarter balance of 42% over last year. Demand was strong in virtually all components of the market, except oil and gas, but the latter appears to be making a comeback now in the July quarter.

Performance in the industrial aftermarket was almost as impressive with a 32.6% expansion over last year.

We saw demand ranging from excellent to extraordinary and most markets served, and we are looking forward to a strong second quarter from the industrial businesses and expect a continuing, but some moderation in demand through the balance of the year.

Our strong industrial markets were construction and mining, industrial distribution, semiconductor machinery, machine tool, wind and train. Turning to aerospace and defense, this sector was off 18.3% for the quarter. Sequentially, when normalized for production days, it was about flat with the preceding period. Aircraft OEM was down almost 22.5%.

This can be almost entirely attributed to the slow ramp of the 737 MAX programs through ‘21 and into calendar year ‘22, a problem that should resolve itself in the quarters ahead as Boeing steps through their monthly production rates from today’s 17 per month to January of 2023 of 42 per month, but we are now seeing increases in orders shippable later in the year across all of our plants that service and supply both Boeing and Airbus.

Today, we are coming through over 200 – 2,000 line items, excuse me, bearings and assemblies we supply to the industry to ensure we have materials, logistics and staff in place to seamlessly support the next 2 years of build rate increases. Regarding our second quarter, we are expecting sales to be between $158 million and $162 million.

And then I will now turn the call over to Dan and Rob for more detail on the financial performance..

Thank you, Mike. Since Mike has already covered net sales and gross margin, I will jump down to SG&A. SG&A for the first quarter of fiscal 2022 was $29.8 million compared to $26.8 million for the same period last year. The increase is mainly due to higher personnel costs of $2.4 million and $0.6 million of other items.

As a percentage of net sales, SG&A was 19.1% for the first quarter of fiscal 2022 compared to 17.1% for the same period last year. Other operating expense for the first quarter of fiscal 2022 was $3.2 million compared to expense of $3.8 million for the same period last year.

For the first quarter of fiscal 2022, other operating expenses were comprised mainly of $2.6 million of the amortization of intangible assets and $0.6 million of restructuring costs and other items.

Other operating expense for the same period last year consisted mainly of $2.5 million in amortization of intangible assets, $1.1 million of restructuring costs and $0.2 million of other items. Operating income was $30.7 million for the first quarter of fiscal 2022 compared to operating income of $28.8 million for the same period in fiscal 2021.

On an adjusted basis, operating income would have been $31.3 million for the first quarter of fiscal 2022 compared to adjusted operating income of $29.9 million for the first quarter of 2020 – sorry, 2021.

For the first quarter of 2022, the company reported net income of $26 million compared to net income of $22.7 million for the same period last year. On an adjusted basis, net income would have been $26.3 million for the first quarter of fiscal 2022 compared to adjusted net income of $23.6 million for the same period last year.

Diluted earnings per share, was $1.03 per share for the first quarter of fiscal ‘22 compared to $0.91 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal ‘22 was $1.04 compared to $0.95 per share for the same period last year.

Turning to cash flow, one of our strongest quarters-to-date, the company generated $53.3 million in cash from operating activities in the first quarter of fiscal 2022 compared to $48.4 million for the same period last year.

Capital expenditures were $3.4 million in the first quarter of fiscal 2022 compared to $3.9 million for the same period last year. Total debt as of July 3, 2021, was $10.8 million, and cash and marketable securities on hand was $296.1 million. I would now like to turn the call back to the operator for the question-and-answer session..

And your first question comes from Pete Skibitski with Alembic Global..

Hi, good morning guys. Long time I have talked. I want to start out, Mike, I think you talked about delays in shipments from, I think, one unit because of source inspections.

Can you guys maybe quantify how much revenue was impacted by that event? And maybe was it aerospace sales or industrial sales?.

Yes. It was industrial sales, and it’s about $2 million..

Okay, got it. And then on the aerospace – I thought aerospace was interesting because it wasn’t – you had had four quarters of down aerospace sales. So, this should have been an easier comp quarter. I thought, maybe, Mike, you mentioned something about the fewer days in the quarter or something.

Did I hear that right or am I completely wrong on that?.

Yes. Well, there is more days in our fourth quarter than there is in our first quarter. So, when you normalize the two, it’s about even..

Okay.

In the first quarter, was the same number of days in the first quarter of fiscal ‘21 or no?.

Yes. No, it’s about the same, yes..

It’s about the same. Okay.

So, are you seeing kind of some recovery in some of the – in demand for some of the other platforms? It’s just mainly the MAX that was the headwind this quarter?.

Yes. It’s mainly the MAX. I mean the other platforms are almost incidental to what’s going on here. The MAX is really kind of a big deal because when we look at – when we look – I have to quote industry analysts numbers because I am kind of an insider on the aircraft stuff, and I can’t quote the exact numbers.

But the – when I look at what the industry expects Boeing to build this year, it’s somewhere between 150 and 160 MAXs, right, through the calendar year. And I think that number is a good number. And next year, it’s 300 to 340, sort of that that’s the range. And the year after, it’s 500.

And so the – there has been a sort of a liquidation of Boeing’s inventory because if you look at our last – our first quarter last year, we still had full order books, and we still had full plants, and we were shipping orders to subcontractors and to Boeing that we had on the books.

And so that inventory now is clearing the system as well as everybody else’s inventory, including Boeing’s. So, we are seeing this pickup in demand to support the builds next year of sort of in our fourth quarter, some in our third quarter. Frankly, I think we should be – if life worked perfectly, and it never does.

We should be starting our products a year ahead of their build rate, simply because it takes six months, to make it simple, to make the bearing. And of the six months, probably right now, it’s 20 weeks to get this deal. So, we don’t have a lot of time to make the bearing.

And sometimes the bearing has to get a frequent flyer to get all the outside processings that has to be done. And that’s the exception to the rule, but still, it’s the rule. So yes, I mean, we should – I think the industry is a little bit delayed right now in turning on the volumes that they need to produce the planes that are expected to be produced.

So, that calculus falls on us to make sure that we understand what we are obligated to supply and when we are likely to supply it. And so we are going through those planning routines now to make sure that we have the product that the aircraft builders need when they need it.

And if you look at the step-up, I mean, those 30 planes to us or 300 planes next year, 300 to 340 next year, that’s probably worth $45 million to us in over the course of 12 months in revenue. So, it’s a big number for our plants to absorb.

And so we are a little – we want to get way ahead of the game in terms of getting everybody into position to be able to support that. And then you look further at the skyline chart, and there is another 200 plane step-up to ‘23. And so there is going to be a lot of demand headed our way.

And the last thing we want is not to be able to execute it deficiently and service the customer on time..

I appreciate all the color. I guess last one for me. Just looking at your defense revenue the last three quarters, defense ex-marine and I know you have a lot of – you are on the F-35 and stuff. But we have seen defense down for a few quarters.

And I know a lot of other suppliers have had some F-35 inventory that have had to kind of flush out as Lockheed has kind of slowed things a bit there on an interim basis.

So, is that what’s going on for you guys, maybe just some interim F-35 headwinds or do you think you and maybe expect it’s better to step back up later this year or next year or do you just sense that defense is kind of getting some headwinds there just because of the overall budget flattening?.

Well, I see – Dan is looking at the tables. So, I will….

Well, I think on aerospace OEM defense, I mean, it’s Q1 to Q1 last year, we are only down 3.6%, right. But it’s just not big numbers on total sales. It’s $20.6 million compared to $21.4 million on the aerospace, OEM, defense. So, it’s a little lumpy with the F-35 and the new lot sizes, a lot come through.

And some of the work that we are doing on the military helicopters, but some of that’s being offset by the strain on our missile programs, and that we are working on with Lockheed and others..

Okay. Thank you very much guys..

Your next question comes from Michael Ciarmoli with Truist Securities..

Hi, good morning guys. Thanks for taking the questions here, nice results. Maybe just sticking on aero, what Pete was asking, was there any – I mean, the step-down, I guess, on a sequential basis for the aero OEM was pretty significant. It seems like a 14% step down.

Maybe – you mentioned the working days, any other changes on some of the wide-body platforms? I mean, I know you have got a lot of content on the 787 or any way to parse that out? Was it more engine? Was it more airframe content? And I – yes, because it seems like that definitely snuck up on you if there was supposed to be kind of sequential improvements in growth.

I mean, it just seems like a big move down..

Yes. No, it’s all about order rates by Boeing and its subs. And I think right now, they are trying to sell the planes they built and liquidate. It’s in the middle.

But if – I would say that their priority to do that maybe is more extreme than it should be, and it could affect their ability to build planes in the future if they don’t turn on the supply chain..

Okay. No, that’s helpful. What about – anything on the aftermarket side? I know it’s kind of a tale of domestic narrow bodies. You guys were, again, I think, sequentially flat there.

I mean, are you seeing any noticeable changes on the aftermarket, distribution outside of aero?.

Well, just the aftermarket distribution side of business has been – usually, at this stage in the cycle, the distributors would be of loading up their inventories knowing that build rate increases were going to be substantial, and the market would be – the buyers would be best with service levels. And that would be normal at this stage in the cycle.

What’s not normal now is so many of the aftermarket distributors are owned by a new owner and new management teams. And they don’t have experience – they don’t have the experience to do cycle. So, what they should be doing with their capital right now, they don’t appear to be doing it.

So, that the aftermarket in terms of distribution is on – what does it look like? Dan has got the charts..

Yes. For Q1 FY ‘22 was around $12.2 million. But compared to Q4 is a longer quarter was $12.3 million. Yes. So, it’s kind of just probably ended up doing a little better than Q4 because there is more production days in Q4..

Okay.

What about last one?.

Yes. But the repair side of the aftermarket is – has been a pleasant surprise for us. That’s been strong and it’s producing well..

Got it. Last one, you kind of brought up inventories there, but just to shift it maybe to industrial. I think last quarter, you noted that there was so much demand. You had kind of depleted inventory, rushing to replenish it.

Did you – you called out the $2 million headwind, but did you kind of see that same pace of demand persists? I mean, obviously, you had – if I add back the $2 million too, you had a sequential uptick there in industrial, but were you able to catch up on inventory to meet demand or did you lose out on some revenue this quarter?.

No. We are making it as fast as we can deliver it. And we do have some supply chain challenges getting raw material which we are working..

Okay. Thanks guys. I will get back in the queue..

And your next question comes from Ken Newman with KeyBanc..

Hi, good morning guys..

Good morning..

I wanted to step back to the aero side a little bit. It was good color in terms of the forward outlook for aero.

Obviously, with the build rates kind of coming up into the second half, I am curious, how do you weigh that against some of the slower ramps in the larger wide-body platforms as we think about the step-up in the second half for aero revenue versus the first half? Is that – I guess, to simplify it, could that revenue for aero be up double digits, it’s like 10% or is it – is the ramp via the build rate going to slow that a little bit?.

No. It can be up double digits in the second half. And it needs to be up double digits in the second half to support the Boeing build rate. So, that – that’s how we see it. Let’s hope the cards get played that way..

Right. So, I guess with that in mind, obviously, you put up really strong gross margins in the quarter.

I am curious how sustainable a 40% plus gross margin could be for the remainder of the year as I kind of think about potential inventory builds and just the expected step-up in aero growth for the second half?.

I think it would be lumpy during the quarters, but I think by the end of the year, we should be close to or a little north of about 41%..

And is a lot of that just absorption on higher volumes? Any way to kind of parse out how much of that is better pricing or any color on price cost, either for the quarter or just your forward outlook?.

Yes. Well, each division that we have has a – keeps a ledger on what price increases we have seen from on materials and suppliers and what price increases we have instituted into the market to offset the price increases from materials and suppliers. And we always like to be a little bit ahead..

And also, we put significant investment in bringing all these out sized services inside for the aerospace business in 2021. And we still haven’t seen the full benefit of that investment because of COVID, right, because the build rates dropped off.

So, we should see when the aerospace business picks up and the volume picks up, we should see some nice improvement driven by this investment that we made over that 24-month period..

Right. So, this would be my last one here. Just trying to put a finer point on price cost here, I guess, obviously, the industrial aftermarket sales were up, as you were mentioning to Mike earlier. Any – I am guessing the pricing increases for those products within that channel are pretty instantaneous.

Can you help us kind of put a finer point on just how much price was a contributor to the sales growth in aftermarket for industrial versus just materially volumes?.

Yes. I would say on the industrial side, especially industrial distribution in our first quarter, it was in price. And on industrial OEM, on – in some cases, it is. Other cases, it’s the ability to pass-through all material inflation that comes through in the way of surcharges.

So, every segment is a little different, every customer is a little different, and every channel is a little different. And there is just a lot of good efficiency happening in the industrial side of our business. When your business is up 30% to 40%, you are really absorbing your assets nicely..

Understood. Thank you..

At this time, there are no further questions. I will now hand the call back to Dr. Hartnett for closing remarks..

Okay. Well, thanks for participating in the call today. And we will be certainly talking to you again by early November and discussing our third quarter or our second quarter, which we are anticipating another strong quarter. I think, as I have said, we are expecting sales to be between $158 million and $162 million. And that’s looking very positive..

That concludes today’s conference. Thank you for your participation. You may now disconnect..