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spk00: Good morning, ladies and gentlemen, and welcome to the RBC Barings 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. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. 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.
spk02: Good morning, and thank you for joining us for RBC Barron's 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. 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 Barron's 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.
spk07: 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 percent. For the third quarter of 2021, sales of industrial products represented 44 percent of our net sales and aerospace products 56 percent. Gross margin for the quarter was 55.6 million or 38.1 percent of net sales. This compares to 70.7 million or 39.9 percent 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 million, 28.7% of net sales for the same period last year. We ended the quarter with over $200 million in cash in 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 an 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, requiring 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 in the funding of the Columbia ballistic missile submarine. is driving substantial need for hydraulic hardware and engineering support. Three is semiconductor. A greater use of computer chips in automobiles, phones, games, self-driving cars, and 5G technology has created shortage in this industry. And producers are expanding capital budgets like never before to protect their market positions. And finally train mass movement of people in Asia is a priority as China continues to an, an extremely ambitious goal of connecting her cities with high speed rail. We are working in all these markets today with proven products and solutions, as well as new design proposals for pro or problem solving in acquiring new customers. Turning now to aerospace and defense, the third quarter of fiscal 2021, Sales were down 29.7%. The abrupt suspension of the 737 MAX production in March resulted in excess inventory of aircraft hardware throughout the system. This is reflected in this exaggerated decline and will likely be with us for another quarter. We work with customers during the second and into the third quarter to reschedule product deliveries. Most of that, if not all, is behind us today. We are encouraged by the release of the MAX for commercial use, and our plans are now to support the Boeing build rate of between 150 and 160 MAX ships in calendar 2021, moving to over 300 in calendar 2022. And we are very heartened to see a 10% expansion announced by Airbus in 2021. followed by a 20% expansion in 2022 for the A320 ship. Their plan to build almost 800 total ships in 2022 is inspiring to all of us. During the period, we consolidated plan operations in two locations to streamline our cost structure and drive efficiencies of execution. We expect a little bit more of this in the future. Regarding our fourth quarter, We are expecting sales to be between $155 and $160 million. I'll now turn the call over to Rob for more detail on our financial performance.
spk06: 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 in amortization of intangible assets 0.5 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 2.5 million in amortization of intangible assets. Operating income was 26.5 million for the third quarter of fiscal 2021, compared to operating income of 37.5 million for the same period in fiscal 2020. On an adjusted basis, operating income would have been 27.9 million for the third quarter of fiscal 2021, compared to adjusted operating income of $37.8 million for the third quarter of fiscal 2020. For the third quarter of fiscal 2021, the company reported net income of $21.6 million compared to net income of $30.5 million for the same period last year. On an adjusted basis, net income would have been $22.7 million for the third quarter of fiscal 2021 compared to adjusted net income of $30.4 million for the same period last year. Diluted earnings per share was 86 cents per share for the third quarter of fiscal 2021, compared to $1.22 per share for the same period last year. On an adjusted basis, diluted EPS for the third quarter of fiscal 2021 was 90 cents per share, compared to adjusted diluted EPS of $1.22 per share for the same period last year. Turning to cash flow, the company generated $36.1 million in cash from operating activities in the third quarter of fiscal 2021, compared to $46.6 million for the same period last year and $110.6 million in cash from operating activities for the nine-month period during fiscal 2021 compared to $111.2 million for the same nine-month period last year. Capital expenditures were $2.8 million in the third quarter of fiscal 2021 compared to $7.3 million for the same period last year. On a nine-month basis, capital expenditures were $8.8 million compared to $27.6 million for the same nine-month period last year. Total debt as of December 26, 2020 was $20.5 million, and cash and marketable securities on hand were $201.7 million. I would now like to turn the call back to the operator for the question and answer session.
spk00: Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question is from the line of Pete Skibitsky with Alembic Global.
spk04: Hey, good morning, guys. Nice quarter. Hey, Mike, in terms of fourth quarter margin here, you know, if you do get some value, 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, you know, might you have some mixed headwinds?
spk07: No, I think your former conclusion there was right. It'll be a our highest margin, highest operating income quarter.
spk04: Okay, okay, gotcha. And then my other question was just your comments on the Boeing numbers. I think the 150 to 160, that must be new bills as opposed to delivering from a Boeing inventory. So just on the timing, are you expecting to, you know, ship the majority of your deliveries on the MAXs? in the first half of the year in terms of their 150 to 160, and then the second half of your year, you start to deliver to them what they will deliver in 2022? So we have this building effect?
spk07: Yeah, you have that right. So I think the first half of the year we're going to be working on that, you know, 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.
spk04: 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 midterm?
spk07: Well, you know, the aftermarket revenue is really short-cycle business, and that's 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, yeah, there's not much backlog going with aftermarket, but we do see strength in the aftermarket.
spk04: Okay.
spk07: That's a good one. Strength returning in the aftermarket. Let me put it that way.
spk04: Okay. That's why I think a lot of people are wondering. We've seen so many retirements of older aircraft. People are wondering if there will be a sustained aftermarket bathtub, if you will. But it sounds like you don't subscribe to that view per se.
spk07: Well, I think a lot of the carriers downsized their maintenance departments and now are looking for third-party carriers. you know, support in order to service their planes. So that's a mechanism that's working for us.
spk04: Okay. Okay. Okay, great. Thanks for the call, guys.
spk00: Your next question is from the line of Steve Barger with KeyBank Capital.
spk01: 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?
spk07: Yes. Yeah, we are. 4Q is doing very well on the industrial side.
spk01: So as I think about that in the context of your guidance, that suggests another maybe mid-20% decline for Arrow. 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 Arrow and then you get back to growth in 2Q, 3Q, 4Q? No.
spk07: That's kind of what we're thinking, yeah. That's pretty much how we're beginning to see it. There's some strange things happening, too, on top of that, in that Boeing goes through contract cycles with all their subcontractors, and they're going through contract cycles right now and changing subcontractors. And, of course, we supply the subcontractor's product, and we supply it under certain contractual terms 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 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. So it's just a typical five-year event when you're supplying a big OEM like Boeing.
spk01: So should my takeaway be that your fiscal 1Q22 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?
spk07: Well, I don't see Q2 being negative because the lead times won't support 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 one queue is down as much as four queue, I don't really see that happening given the build rate in 2022 that we have to support.
spk01: Right. Because you'll be shipping those six or nine months early, right? Those parts for the 20 – yeah, got it. Exactly. Okay. So one Q 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 22 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, FY21 will be down maybe 150 basis points on operating margin versus FY20. 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 FY22? Well,
spk07: let's hope we can recover it all, right? And let's create a process that's better than hope.
spk01: Right on.
spk07: So, you know, I think that right now the margins are down the amount that you referenced there, largely because we're we see the industry coming back and the demands coming back on us. And so we're retaining as much human capacity as we could 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.
spk01: Okay. And then I'm going to ask one more, and then I'll get back in line. When we talk about the M&A pipeline every quarter, your balance sheet's obviously in great shape. You've got a ton of cash. 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?
spk07: Yes, yes and yes. So I mean, we're pretty active on the acquisition side in terms of candidates. And we've been active in terms of proposals. What we haven't been achieving is 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, you know, and we're bidding generously, but we haven't won some of these bids.
spk01: Just because there's other money out there that is more aggressive or generous than you? It's just, is it that simple?
spk07: Yeah, well, exactly. And I'd say we're pretty dang generous. Yeah.
spk01: Understood. Thanks. I have some more, but I'll get back in line.
spk00: Again, to ask a question, press star 1. And your next question is from the line of Michael Termoli with Truist Security.
spk07: Hi, Michael. You there?
spk00: Michael, your line is live.
spk03: Sorry, guys. I was on mute. Good morning, guys. Thanks for taking the questions. Mike, just to stay on what Steve was just hitting at on M&A, it sounds like 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 razor-focused on M&A?
spk07: Yeah, we're pretty razor-focused on M&A. 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.
spk03: Is it a function of size? I mean, are you seeing maybe just you know, tightness or increased competition, you know, across all sizes of deals? Or is it, you know, you're going for something a little bit more needle moving?
spk07: Yeah, I mean, we haven't really gone after the smaller size deals. And the larger ones, you know, attract a lot of attention.
spk03: Got it. Got it. Okay. Okay. And then just going back to maybe the margin side, if we think about coming through this, exiting fiscal 22, do you guys think you can get operating margins and gross margins back to those levels that you were at in fiscal 20? I mean, obviously, you've put in a lot more capacity to support, certainly on the aerospace side, production rates that probably won't happen by fiscal 22. 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, you know, Boeing and Airbus might be running production below where you guys are sized for?
spk07: No, no. You know, we don't have... We don't have that stranded cost problem. 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. We're very variable cost defined. 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 for the upside. I mean, you know, why detune the company that you've taken, you know, a generation to build because you have one year of pandemic?
spk03: Yep. No, that's fair. Just the last one I had, I mean, you guys sound a lot more confident on production rates for the MAX. I mean, Boeing, you know, was kind of hesitant to say where they're even producing. You know, certainly they've got this aspiration to get to 31. You know, Airbus, you know, kind of just dialed back their plan to get to 47. You know, what's really giving you this clear line of sight to, you know, 155, 160, and, you know, kind of 300 plus, you know, next year?
spk07: Well, we have a lot of people working on these numbers, because these numbers are very important to us. And then Boeing publishes their skyline chart, and we interpret that skyline chart, and it's out 24 months. So we need that in order to determine how to load and capitalize and staff our plants. So we've got to have that guidance. The whole industry has to have that guidance. I don't know how Boeing would have any way of getting the support they need to make an airplane.
spk03: Okay.
spk07: So we're just pivoting over off of information that's flowed down to us.
spk03: And even, you know, as we're talking about the arrow trajectory here, obviously your content on the wide bodies is significantly higher. You know, a couple quarters ago, you know, mentioning that 777X, which just got, you know, pushed out even further. it would certainly seem there's a lot more uncertainty here about a recovery for wide bodies. I mean, is that skyline for wide bodies giving you, you know, telling you anything or giving you any sense of confidence at the rates they're at now? Do you expect kind of your ship set 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?
spk07: Well, I think, you know, the wide body comes back after the after the pandemic is is behind us right so that's that's got it probably got a couple year lead time on it so um you know this is really a max story i mean the the the growth in the max volume um is is what what's going to primarily generate the bulk of our you know the bulk of our revenues to the aircraft side you know that the 87 is going to back off some and in the x And the 777X is going to be pushed out a couple of years. So it's important 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 yeah, it looks like Airbus is going to just recover fully. Um, by 2023 and, uh, and, and Boeing is probably 2025 story before they get back to the numbers that they were in 2019. Got it. Okay.
spk03: Um, all right. Perfect. Thanks guys. I'll jump back in the queue here.
spk07: Yep.
spk00: Your next question is from the line of Joseph Charleo with Bradley Foster Sergeant.
spk05: Good morning guys. Thanks for taking my question. I'm just curious how the shift of a portion of RBC's 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 accrue to margins beginning in fiscal year 2022, or is it more of a fiscal year 2023 story? Thank you.
spk07: Yeah, well, it's not a fiscal 2022 story, that's for sure. I mean, you just can't get to Poland, and... You know, travel is difficult to some of those countries and, you know, so our ability to go over there and interview people and get them on board has been, it hasn't ceased but it's been delayed. And so the number of people that we wanted to hire, you know, we're probably hiring 10% of the people that we wanted to hire. this year. And, you know, we're in the meantime, we're moving forward on the whole program. So it's a it's, it's, it's a 2023 kind of story.
spk05: Great, thank you.
spk07: Yep.
spk00: Okay, I am showing no further questions at this time. I would now like to turn the conference back to Dr. Hartnett.
spk07: Okay, well, thank you, and thank you for participating in the call today. I hope it was helpful to everyone, and 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.
spk00: Okay, ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.
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