Good morning, ladies and gentlemen, and welcome to the RBC Bearings Fiscal 2021 Third 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. As a reminder, this conference call is being recorded. I would now like to hand the conference over to your host Michael Cummings with Alpha IR. Please go ahead.

Good morning. Thank you for joining us for RBC Bearings fiscal 2021 third 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.

Thank you, Mike and good morning. Net sales for the third quarter of fiscal 2021 were $145.9 million versus $177.0 million for the same period last year, a decrease of 17.6%. For the third quarter of 2021, sales of industrial products represented 44% of our net sales and aerospace products, 56%. Gross margin for the quarter was $55.6 million or 38.1% of net sales. This compares to $70.7 million or 39.9% for the same period last year. Adjusted operating income was $27.9 million or 19.1% of net sales compared to last year $37.8 million and 21.4%. Adjusted EBITDA was $41 million, 28.1% of net sales compared to $50.9, 28.7% of net sales for the same period last year. We ended the quarter with over $200 million in cash and marketable securities and roughly $20 million in debt. And year-to-date free cash flow was a record $102 million. We entered the second quarter with better visibility to customer requirements than past periods and saw encouraging increase for product from industrial OEMs as well as stabilization of demand from the aircraft sector. We continue to work through an environment complicated by enhanced safety procedures to manage the COVID menace and this environment has almost become normal practice for us today. Sales of industrial products were up 5.5% from last year and sequentially up 8.5%. Prime drivers in the industrial sector are the following markets; wind power, where the green revolution is generating a need for ever larger wind machines, some as large as 220 meters in diameter, require advanced blade designs and machine mechanics leading to higher efficiencies. Number two is marine; the build out of the Virginia submarine fleet with extended weaponry and the funding of the Columbia ballistic missile submarine is driving substantial need for hydraulic hardware and engineering support.

Thank you, Mike. Since Mike has already covered net sales and gross margin, I'll jump down to SG&A. SG&A for the third quarter of fiscal 2021 was $25.7 million compared to $30.7 million for the same period last year. The decrease is mainly due to lower personnel costs of $4.4 million and $0.6 million of other items. As a percentage of net sales, SG&A was 17.6% for the third quarter of fiscal 2021 compared to 17.4% for the same period last year. Other operating expense for the third quarter of fiscal 2021 was expense of $3.3 million compared to expense of $2.5 million for the same period last year. For the third quarter of fiscal 2021, other operating expenses were comprised mainly of $2.6 million and amortization of intangible assets, $0.5 million of restructuring costs and related items, and $0.2 million of other items.

Your first question is from the line of Pete Skibitski with Alembic Global.

Hey good morning guys. Nice quarter. Hey, Mike, in terms of fourth quarter margin, if you do get some volume -- it looks like you're signaling that the fourth quarter would probably be your highest revenue quarter of the fiscal year. So, are you thinking that it will also be your highest adjusted operating margin rate quarter as well? Or might you have some mix headwinds?

No, I think the -- your former conclusion there was right. It'll be our highest margin -- highest operating income quarter.

Okay. Okay. Got you. And then my other question was just your comments on the Boeing numbers, I think the 150 to 160, that must be newbuilds, as opposed to delivering from Boeing inventory. So, just on the timing, are you expecting to ship the majority of your deliveries on the MAX in the first half of the year on -- in terms of that 150 to 160. And then the second half of your year, you start to deliver to that what they will deliver in 2022 until we have this building effect?

You have that right. So, I think the first half of the year, we're going to be working on that. We're working through that 155, 160 rate kind of thing for calendar 2021, right. But that'll pretty much by July we'll be building into the 300 plus rate for 2022.

Yeah, okay. Okay. Last question for me is just on the aftermarket side. Does it feel like you have more visibility kind of forward six to 12 months on the OE side versus the aftermarket side? Just because we're kind of still in the doldrums traffic-wise? How are you guys thinking about the predictability of your aftermarket revenue in the in the mid-term?

Well, the aftermarket revenue is really short cycle business. And there's never much backlog there. It's in and out within -- as a matter of fact, the big measure there is turnaround time from the time you get the order to the time you get the hardware to the time you ship the hardware back is pretty important to that industry. So, yes, there's not much backlog going with aftermarket, but we do see strength in the aftermarket. We see strength returning in the aftermarket, let me put it that way.

Okay. That's why I think a lot of people are wondering, we know we've seen so many retirements of older aircraft, people are wondering if they'll be sustained aftermarket bathtub, if you will, but it sounds like you don't subscribe to that view, per se.

Well, I think a lot of these -- a lot of the carriers, you know, downsize their maintenance departments and now are looking for third-party support in order to service their planes. So, that's a mechanism that's working for us.

Okay, okay. Okay, great. Thanks for the color guys.

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

Thanks. Good morning. Really nice to see a return to growth for the industrial business, are you expecting another mid-single-digit increase in 4Q?

Yes, we are. 4Q is doing very well on the industrial side.

So, as I think about that, in the context of your guidance that suggests another maybe mid-20% decline for aero. And just as I think about how that flows into the next fiscal year, just looking at the comps, would you expect that 1Q is still down on aero and then you get back to growth in 2Q, 3Q, 4Q?

That's kind of what we're thinking, yes. It's -- that's pretty much how we're beginning to see it. There's some strange things happening to on top of that in that -- Boeing, Boeing goes through contract cycles with all their subcontractors. And they're going through contracts cycles right now and changing subcontractors. And of course, we supply the subcontractors product. So, -- and we supply it under a certain contractual term that are negotiated. And so the new guys that are getting contract awards going forward, beginning in 2022, are just taking their seats right now and not quite understanding what their needs are for our kinds of products. So, there's a little bit of delay between when they get their contract and when they actually place orders with us. And so that's, that's creating a little bit of fuzz and ultimately, what's going to happen is they're going to need product in a cycle that's much shorter than the lead-time for our bearings or other structural mechanisms and small crises -- day-to-day crises will be created. So, we're trying to figure out how to manage through that with all of our divisions that support that sector to make sure that we're on top of our mix, and our content per ship, and the ship build rates, and who the new contract holders are going to be and what their needs are going to be so that we don't get caught short. And so it's just a typical five-year event when you're supplying a big OEM like Boeing.

So, should my takeaway be that your fiscal 1Q 2022 doesn't necessarily have to be negative, it actually could be positive, if they pull that forward, or that actually 2Q could be negative like 1Q, while they kind of work it out?

Well, I don't see Q2 being negative because they just -- they won't -- the lead-times won't support the Boeing's requirements. And so that's going to be a problem for everybody. So, it'll all get sorted out. Right now it's going to be a scramble. Whether 1Q is down as much as 4Q, I don't really see that happening given the build rate in 2022 that we have to support.

Right. Because you'll be shipping those six or nine months early, right? Those parts for the 2020 -- yeah, got it.

Exactly.

Okay, so 1Q down, but then growth resuming after that, and presumably you have the expectation that you're looking at positive growth for the entire year, fiscal year for 2022 on the industrial side, just given how those trends are going.

Correct.

Okay. And so as I think about that volume coming back on both sides, FY 2021 will be down maybe 150 basis points on operating margin versus FY 2020. As you think about growth, coming back and managing SG&A, how much of that 150 basis points that you lost do you think you can recover in FY 2022?

Well, let's hope we can recover it all, right. And let's create a process that's better than hope.

Right on.

So, I think right now the margins are down the amount that you reference there, largely because we see the industry coming back and the demands coming back on us. And so we're retaining as much human capacity as we can possibly retain to be able to support the market on the other side of this. And so that's really our strategy. So, we should be able to back into those new revenues and recover the margins. That's the theory.

Okay. And then I'm going to ask one more and then I'll get back in line. When we -- we talked about the M&A pipeline every quarter your balance sheets, obviously, in great shape, you got a tonne of cash? Is -- can you frame up for us where you are in the process of talking to some of these private companies and just as an add on, are there any smaller public companies out there that you would ever consider taking out?

Yes and yes. So, -- I mean, we're pretty active on the on the acquisition side in terms of candidates. And we've been active in terms of proposals, but we haven't been achieving successful closings. And so it's a very competitive world out there for some of these assets. And so we're in the mix, but we -- and we're bidding generously, but we haven't won some of these bids.

Just because there's other money out there that is more aggressive or generous than you, it's just -- is it that--

Yeah. Well, exactly and I'd say we're pretty dang generous.

Understood. Thanks. I have some more. But I will get back in line.

And your next question is from the line of Michael Ciarmoli with Truist Securities.

Michael, are you there? Hello.

Michael, your line is live.

Sorry, guys. I was on mute. Morning guys. Thanks for taking the questions. Mike just to stay on what Steve was just hitting out on M&A, sounds like that there's a lot of, I guess, aggressive valuations being applied out there. But maybe in the absence of any deal flow here, you certainly have a lot of dry powder. Are you thinking about anything else in the way of capital deployment, whether it's buyback, dividend, or are you guys just laser focused on M&A?

Yes, we're pretty laser-focused on M&A. This is -- there's some really attractive candidates out there that would substantially add to our market positions. And so we're really focused on those candidates.

Is it a -- is it a function of size? I mean are you seeing maybe just tightness or increased competition across all sizes of deals? Or is it -- you're going for something a little bit more needle moving?

Yes, I mean, we haven't really gone after the smaller size deals. The larger ones attract a lot of attention.

Got it. Got it. Okay. And then just going back to maybe the margin side, if we think about coming through this exiting fiscal 2022, I mean, do you guys think you can get operating margins and gross margins back to those levels that you were at in fiscal 2020? I mean, obviously, put in a lot more capacity to support certainly on the aerospace side production rates that probably won't happen by fiscal 2022. But do you think there's any constraints on your profitability from excess overhead or any kind of stranded costs just because we might be -- Boeing and Airbus might be running production below where you guys are sized for?

No, no, we don't we that stranded cost problem that some of the -- we're not a steel company, we don't have to keep our furnaces at temperature 24/7 or anything, we just don't have those kinds of problems. I mean we're very variable cost defined. And so I think the only reason our margins today are where they are, is that we're leaving a lot of resources in place to support us on the -- for the upside. I mean why detune the company that you've taken a generation to build, because you have one year of pandemic.

Yes. No, that's fair. Just last one I had. I mean you guys sound a lot more confident on production rates for the MAX, I mean, Boeing was kind of hesitant to say where they're even producing certainly they've got this aspiration to get to 31. Airbus kind of just dialed back their plan to get to 47. What's really given you this, this clear line of sight to 155 160 and kind of 300 plus next year?

Well, we have a lot of people working on these numbers because these numbers are very important to us. So, -- and then Boeing publishes their skyline chart and we interpret that skyline chart and it's out 24 months. So, I mean, we need that in order to determine how to load and capitalize and staff our plants. So, I mean, that's we've got to have that guidance -- the whole industry has to have that guidance, or I don't know how Boeing would have any way of getting the support they need to make an airplane.

Okay.

We're just benefitting over off of information that it's slowed down to us.

And even as we're talking about the aero trajectory here, obviously, your content on the wide-bodies is significantly higher couple quarters ago mentioning that 777X, which just got pushed out even further, it would certainly seem there's a lot more uncertainty here about a recovery for wide-bodies. I mean it's that skyline for wide-bodies giving you -- telling you anything or giving you any sense of confidence that the rates the right now, and do you expect kind of your ships at volume there to hold steady on these rates, or are you modeling for any kind of pickup on the wide-body platforms you've got exposure to?

Well, I think the wide-body comes back after the pandemic is behind us, right? So, that's got -- probably got a couple year lead-time on it. So, this is really a MAX story. I mean the growth in the MAX volume is what's going to primarily generate the bulk of our revenues to the aircraft side, that 87 is going to back off some and the X -- the 777X is going to be pushed out a couple years. So, it's important for those -- for that MAX volume to achieve the Boeing numbers and the Airbus being up 10% and building into 800 planes doesn't hurt us either. So, looks like Airbus is going to just recover fully by 2023. And Boeing, it's probably 2025 story before they get back to the numbers that they were in 2019.

Got it. Okay. All right, perfect. Thanks guys. I'll jump back in the queue here.

Your next question is from the line of Joseph Ciarleglio with Bradley, Foster & Sargent.

Good morning guys. Thanks for taking my question.

Good morning.

I'm just wondering as to how the shift of a portion of RBC back office engineering and R&D functions to Poland, how that's progressing? And how you're sizing up the potential cost savings from these efforts? So, in other words, should this accretive margins beginning in fiscal year 2022 or is it more of a fiscal year 2023 story? Thank you.

Yes, well, it's not a fiscal 2022 story, that's for sure. I mean, it's -- you just can't get to Poland. And travel is difficult to some of those countries. And so our ability to go over there and interview people and get them on board has been -- it's been -- it hasn't ceased that it's been delayed. And so the number of people that we wanted to hire -- we're probably hiring 10% of the people that we wanted to hire this year. And we're -- in the meantime, we're moving forward on the whole program. So, it's a 2023 kind of story.

Great. Thank you.

Okay. I am showing no further questions at this time. I will now like to turn the conference back to Dr. Hartnett.

Okay, well thank you. And thank you for participating in the call today. Hope it was helpful to everyone. And we'll -- we're in the process of executing a pretty nice fourth quarter here and we'll get back to it and talk to you in May. Thanks again.

Okay, ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.