Good day and thank you for standing by. Welcome to the RBC Bearings Fiscal 2021 Fourth Quarter Earnings Call. I would now like to hand the conference over to your host today, Mr. Will Stack with Alpha IR. Please go ahead.

Good morning and thank you for joining us for RBC Bearings fiscal 2021 fourth 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 Holden, Vice President and Chief Financial Officer.

Thank you, Will. Good morning and welcome. Net sales for the fourth quarter of fiscal 2021 were $160.3 million versus $185.8 million for the same period last year, a decrease of 13.7%. For the fourth quarter of 2021, sales of industrial products represented 47% of our net sales, with aerospace products at 53%. Gross margin for the quarter was $62.5 million or 39% of net sales. This compares to the $76.6 million or 41.2% for the same period last year. Operating income was $29.7 million, 18.6% of net sales compared to last year’s $43.5 million or 23.4% respectively. Adjusted EBITDA was $45.9 million, 28.6% of net sales compared to $56.3 million and 30.3% of net sales for the same period last year. We ended the quarter with $241.3 million of cash and securities and $16.1 million of debt. Year-to-date free cash flow was a record $140.7 million. We entered the fourth quarter and saw a substantial strengthening of our industrial sector. All markets participated: industrial distribution, mining, machine tool, rail, semiconductor, machinery, marine and wind. We also saw substantial increase quoting and contract activity from the aerospace sector. Sales of industrial products were up 12.9% from last year, led by OEM, which was up 15.1%. Sequential quarter comparisons show industrials were up by 16.8%, led by distribution at 21.3%. Industrial distribution gave a very strong showing during the period across all product lines and geographies. In fact, we could have sold more if we had stock in many of the key items. We are busy today on inventory replenishment and increasing many key stocking positions. Marine, the build-out of the Virginia and Columbia submarine fleets continue. We have completed Block 4 build-out of the Virginia class and are starting the next 10 build contract this month. We are also preparing for the Columbia to begin production cycle in calendar year ‘22. On semiconductor, the race to expand semiconductor manufacturing is driving requirements for machinery and components at levels we haven’t experienced before. As you know, this is driven by demand for computers and automobiles, phones, games, self-driving cars, 5G technology, etc. Over the past 20 years, we have diligently built out very strong positions with the machine builders and achieved considerable design excellence, manufacturing scale and reputation in these markets. We are now realizing the benefits of all these efforts.

Thank you, Mike. Since Mike has already covered net sales and gross margin, I will jump down to SG&A. SG&A for the fourth quarter of fiscal 2021 was $27.4 million compared to $31.0 million for the same period last year. The decrease was mainly due to lower personnel costs of $3.4 million and $0.5 million of other items offset by $0.3 million of higher share-based compensation costs. As a percentage of net sales, SG&A was 17.1% for the fourth quarter of fiscal 2021 compared to 16.7% for the same period last year. Other operating expense for the fourth quarter of fiscal 2021 was an expense of $5.3 million compared to an expense of $2.1 million for the same period last year.

Our first question comes from Pete Skibitski with Alembic Global Advisors.

Hey, good morning, Mike and Dan and Rob. Nice quarter.

Good morning.

Good morning.

Hey, guys. Can you talk about – the press release talked about a charge related to a cyber incident, you quantified it in the release. Can we talk about what happened and if it’s fully resolved now?

Yes, yes. So in the last week of February, the company experienced a cyber event. The event had no material impact on our business; no employee, customer, vendor, or company files were extracted from our systems and our main ERP systems were not impacted. We hired two independent forensic specialists to review the cyber event and assist in the remediation. We incurred about $1.5 million in costs associated with the remediation. And when our 10-K comes out today, you can read more about the certain risks and uncertainties as a result of any security incident as described in the 10-K under the section entitled Risk Factors.

Okay. I appreciate the color there. It’s a problem that’s going around. Can we talk more about semiconductors? You guys seem to be, like you alluded to, kind of into a real trend here globally. Can you maybe outline for us how big was it for you as a sub-niche in fiscal ‘21 and maybe the level of growth that you think is reasonable in fiscal ‘22?

Yes. Well, let us just say we don’t have the numbers on the top of my head here, Pete, but let us research that a little bit.

Okay. Okay. I’ll move on to something else. Mike, maybe you can talk about M&A. I think the consensus that I hear in commercial aerospace is that even though we’ve gone through this or maybe because we’ve gone through this horrible downturn, no one is really wanting to sell for the most part, because of the expectation you have to sell at such a steep discount. Is that kind of what you guys are seeing in the M&A marketplace? And maybe any other color you could add just given the strength of your balance sheet, and I know your proclivity towards M&A.

Yes. Well, I’d say on the Aerospace side, we’re not seeing too many attractive candidates for M&A. I mean the companies that couldn’t make it didn’t make it. There are some bankruptcies there that we don’t find interesting. So, we don’t really do much with them. And I think that whole sector is on pause a little bit until things correct. On the other hand, there are some small assets out there that are attractive. And we may have some news on that in the not too distant future.

Okay, fair enough. I appreciate the color. I will get to the end of the queue. Let someone else talk. Thanks.

Okay.

Our next question comes from Michael Ciarmoli with Truist Securities.

Hey, good morning, gentlemen. Nice results. I guess, I don’t know, who wants to field this one. But I guess, looking at the guidance for the next quarter. I know you’ve historically got some seasonality with maybe a 1Q being a bit weaker. But what drives that sequential step down? I mean it sounds like there is optimism and quoting strength, booking strength across all markets. So is there anything driving that sequential weakness between quarters here as we move into the first quarter?

Yes. Well, first of all, in our lineup, there is kind of a shift in leadership in terms of what’s growing and what’s not growing. What’s growing is the industrial sector, right? But there is a lot to consider here. The industrial demand is a lot of it is short-term in nature, and it will be up. And our challenge is to try to determine how much it will be up, right? So we try to reflect some of that in the outlook, but frankly, we’re not sure if we reflected enough. I mean, we haven’t normally, when the purchasing managers index is north of 55, we can’t make it fast enough, and we can’t keep it in stock. Okay? When it’s over 60 now, it’s in a world that we’ve never lived in before. So it’s sort of off the edge of the map. And so it’s hard for us to predict exactly what the upside of our sales is going to be on the industrial side. And the problem with that is we had so much demand in the fourth quarter that a lot of our key inventories for key mix items were depleted. So we are rushing to replenish those stocks, but there is a lead time there. And so we have to add materials and labor. Right now, materials are a bit constrained. We are having trouble getting steel. We are having trouble getting some of the product that we import through the ports. And we’re competing with our own government on labor. So, anyway, we’re working through that. And we’re keeping UPS and FedEx busy, because we’re air shipping parts at our customers’ expense from Asia that we use for some of our components. So it’s an interesting time. I think on the aerospace side, the primary factor here is the Boeing ramp. With the abrupt cease in 737 MAX production in March of ‘20, there was just a lot of componentry that was left in the system. So they are working through that overhang now. I expect quarter-to-quarter, it will be better. I expect by the end of the calendar year, we will probably be through it. I think next year at this time, our capacity is going to be taxed with demand. Right now, we’re trying to think through how we position ourselves mix-wise so that our capacity and the demand curve intersect in the right place at the right time. And so that’s really the calculus. There are lots of lumps in the pudding right now on the logistics side. And it’s not just for us. I think it’s just for the whole U.S., as we try to walk through these issues. I expect this is just the normal exit of a pandemic. I hope to never experience it again.

I think we could all agree on that. So it sounds like, I mean, Aerospace, though, you think, I mean, and based on what you’re building towards, I mean we will probably see these continued gradual sequential improvements. And then like you said, Industrial is going to be the big swing factor. What about on the pricing side? I mean are you – you talked about some expedited shipping. Are you able to pass off and pass-through a lot of these price increases? And how is that impacting sort of your current contracts? Are there any markets that might be more exposed or less exposed to pass-through? I know Arrow is usually a full pass through. But anything on the pricing side that’s kind of raising the yellow flag that you’re seeing?

Well, the devil's in the details here. I mean you can incur these expenses on expedited freight and expedited materials and all that sort of thing, and just pass it through the night and surprise you. So we help filter up to make sure that we have early warning indications of any excursions that we need to deal with right away. And so we deal with them right away. Either we have in our contracts, a pass-through on material costs or we explain to our customers that there are extraordinary expenses to service their account and we sometimes share those expenses. We sometimes pass them along 100%, and sometimes we don’t. It’s very situationally dependent, but we’re confident we can manage through it.

Got it. Got it. Thanks for that color, guys. I will jump back in the queue.

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

Hi, good morning, guys.

Good morning.

Mike, you talked about how strong Industrial is. Just thinking about aero, it’s got a negative 15% comp from last year’s 1Q. Do you expect positive year-over-year growth this quarter in Aero?

Good question. I think it’s probably going to be flat. It might be up slightly, but it’s definitely not going to be a barn burner.

Right. Yes. And last quarter, you had said there were some limited visibility around Aero order trends. Has that cleared up or just what are you seeing from your order rates?

It’s definitely improved. It’s substantially improved.

And I guess, shifting back to Industrial. I know it’s hard to call the year, but would you guess the Industrial business has double-digit growth in FY ‘22, just given how strongly the year is starting and the trends that you’re seeing?

Yes, absolutely. No question about it.

Yes. And I understand you don’t have semiconductor mix handy. But what is the message you’re getting from the equipment manufacturers in terms of demand trends? Or just how are you looking at it in terms of visibility?

Well, right now, the message that we’re getting is that for our key customers, we can ship everything we can make as quickly as we can make it. These are pretty sophisticated products, and there are a lot of process steps and special features. There is a speed limit on how quickly you can produce these, but the situation is very good.

Alright, thanks.

Our next question comes from Pete Skibitski with Alembic Global Advisors.

Yes. Let me just follow-on to the kind of CapEx type of issues. Your CapEx came down quite a bit this year. I want to ask, how much do you expect to spend in fiscal ‘22? And is there a case to be made that you need to build out your semiconductor facilities? Or is that too early to know, too risky? I was just interested in your thoughts on that.

I think it looks to me like the CapEx this year is going to be a little bit on the light side. Simply because the year before the pandemic, it was a little on the heavy side as we were building out capacity to support various programs. That capacity is built out now. It needs to be put to work. And it’s mostly in the Aerospace side. As conditions improve, that capacity will get utilized. So I don’t expect this year and last year to be materially different.

Okay. Okay. So it will stay in that $10 million to $15 million type of a range. Okay. And then Mike, thinking about margins that you sustained at a pretty nice level, they only came in 2 points in this crazy year of fiscal ‘21. How fast are you guys thinking they come back? As I think you’ve talked about maybe 0.5 point adjusted operating margin improvement each year? Or would the sharp increase in volumes? Are you thinking maybe a full point or more in fiscal ‘22? What’s the right way to think about that?

Well, it’s going to be hard to… again, there are a lot of moving parts here. We should do very well. I mean we’re going to have increased volume over a reduced cost structure. That alone is going to be very helpful. And we have to keep an eye on the inflationary pressures, because those are going to be real. We have to make adjustments in pricing or surcharges or however we want to manage those accordingly. That’s all in our wheelhouse to manage. Overall, I expect that the gross margin level to be – the margins to do very well. Now at the operating income level, I think we’re going to have to front-load some SG&A expense to satisfy the requirements of a larger business each quarter as the year progresses. That’s just the way that works. We expect to probably lose a couple of margin points on the EBIT line as we get ahead of the requirements for engineers, salespeople, business management people, and customer service people, as we bring all that back again.

Okay. So you’re saying first half of the year, maybe lose some margin points, but you expect to do better in the second half of the year or are you talking about the full year?

Yes. I think, Rob probably knows those numbers better than me. But I think for the full year, we may be down what maybe up what a percentage point on SG&A, that kind of thing.

Yes. I think we are going to see some pick-up in SG&A in the back half of the year as the comparisons from sales take off. We will just see that front-loaded cost structure as we bring the folks on. So in the second half of the year, you should see some overall operating margin improvement.

Okay. We will watch that. And then just last 2 for me on the defense side. On submarines, it sounds like maybe right now on Columbia, there is not a ton of activity in the Columbia right now. Because you mentioned I think the year after, maybe calendar ‘22 is when the production starts for you guys. So are you thinking maybe fiscal ‘22, you will have maybe a little bit of a kind of a bathtub on submarine revenue or is overall activity within the subs just so strong, that it’s kind of continued up and to the right?

Yes. Pete, this is Dan. This year, we finished at up in the quarter, up 40% on marine. And I think going into next year, we will be starting to ship some or at least working on hardware for the Columbia in this fiscal year. So we are expecting another 10% growth rate for us on the marine side. Yes, we ended this year around $40 million, so…

Okay. And is there any – I know you guys have a lot of content on the F-35 and I think as we go out 2 years or 3 years, I think that production profile starts to flatten a bit. So, I just want to get a sense, because I know you are confident overall on the defense side. Are you seeing any aftermarket stream from the F-35 at all? I am just wondering maybe how you could potentially offset that in the mid-term when production volumes start to flatten?

Yes. No, we’re not seeing it yet, Pete.

Okay. Fair enough. Okay. So just overall, Mike, your confidence on the defense side is just kind of new business wins, that sort of thing?

Yes. There is a lot going on in the defense side, there are platforms beyond the F-35 that we can talk about. And frankly, there are some that we shouldn’t talk about. But we are happy with the suite of our positions and where this whole thing is going. We are well integrated with the right need contractors in all of these programs. We have important positions and expanding positions on all these programs.

Okay, that’s great. Thanks very much, guys.

Our next question comes from Michael Ciarmoli with Truist Securities.

Hi guys. Thanks for taking this follow-up. Maybe just on aerospace, specifically in the aftermarket and distribution, what are you guys seeing there? We continue to hear optimism from suppliers that as we see more cycles, we are going to start to see that airline spending kick in. But are you seeing any sort of restocking yet? Maybe any color that you could provide from product at the distributor channel? And are you seeing more pull-through there? Because I would think that, that’s going to recover and snap back much quicker than the OE production side. But any color on that?

Yes. Well, we – the aerospace distribution channel has been, let’s say, interesting. There have been a lot of changes in management and net changes in ownership. I think that’s sort of interrupted their momentum in previous years. But that is all coalescing again. We are seeing a year ahead that looks like it will be up substantially double-digits in aerospace distribution.

Okay. Is it anything – is it more tied to engine shop visits? Is it some of the component accessory repair that we should be looking out for? I mean where are the bulk of your products going into? Is it more on the airframe side, I guess, engine side?

Well, it’s all of the above. I think now that the panic is over and the crisis is over, relative to air travel and all that sort of thing, those distributors have been really unfrozen in terms of order rates and trying to maintain their cash flows and so on and so forth. Well, there is renewed confidence in air travel and the distributor can only be the distributor if they have items to distribute. They are building back their inventories as we speak. We are seeing that as a pickup in our business, and that will be probably stronger each quarter this year.

Got it. Last one for me, I think you mentioned some positive comments about wide-bodies and maybe seeing, I guess, better demand pull and build rates by the end of the summer. It seems like there is still a lot of uncertainty there. But – and I think you called out the 777, but broadly, are you seeing any leading indicators on the wide-bodies, the A70, the A350, your other significant platforms?

No, we are not seeing any news or any direct indication that things are better there. The fact that Europe is opening up and desperately needs Americans to travel there and spend their dollars is an important aspect of that. And the fact that Americans want to go to Europe and spend their dollars is an important aspect of that. So, I think that air travel for those ships is going to be to rebound more quickly than anybody expected.

Okay, got it. Alright. Thanks, guys.

Our next question comes from Joseph P. Ciarleglio with BFS.

Good morning, guys. How are you?

Good morning.

You had mentioned inflationary pressures across the business. Obviously, specifically, higher steel costs, but also some labor cost pressures. I am just curious about how far RBC is along in terms of automating its factories in terms of robotics, etc. in order to offset some of those labor pressures?

Well, I mean we are pretty advanced in terms of factory automation. A lot of our products, because of the nature of who we service, have small lot sizes. This requires a different automation concept. It has taken us years to determine the right strategies and improve manufacturing technology for robots and machine tools, and the integration between robots and machine tools has gotten so much better. The courses in mechanical engineering at the universities that have focused on improving the credentials for engineers in control engineering have been valuable to us. Over the past half a dozen years, we have been able to take all of that and make large improvements and gains in our plants.

Great. Thank you. And then just my second question was just on the restructuring and consolidation cost in the quarter. I think you had a gain on sale of a surplus building. Just any commentary around further opportunities to consolidate the manufacturing base or maybe factory count at quarter end and how that’s trended versus pre-pandemic? Thanks.

Yes. The gain was from last year. That’s a building we sold down in Texas last year for comparison purposes. Some of the negative restructuring we had in the fourth quarter was just finalizing the moves that we are making on the West Coast with some of our small plants. We combined 2 plants together, and combined one plant from a two-building scenario to a one-building scenario. There are no major consolidations planned at this time, but we will always look at ways to become more efficient with our real estate and our manufacturing facilities.

Thanks. I appreciate it.

We have a follow-up question from the line of Michael Ciarmoli with Truist Securities.

Hi. Thanks guys. Sorry, just 1 more. Looking at the balance sheet cap structure, I know you guys have been talking about M&A for a while. We have been asking about M&A for a while. But clearly, the strong balance sheet may be a little bit of a lazy balance sheet in terms of generating returns. I mean outside of M&A, and I know you said maybe something to be seen soon here. But what else are you guys thinking in terms of the cap structure, leverage? Is it dividend? Is it a special dividend? Anything else you guys are kicking around to maybe think about overall returns?

Mike, we still consider ourselves a growth company. We want to be able to grow the top line to 10% compounded. We are looking hard for acquisitions. We want to redeploy that money back into growth, into organic growth, into acquisition growth. That’s where our focus and target are.

Got it. Alright. Okay. Thanks guys.

I am showing no further questions in queue at this time. I would like to turn the call back to Dr. Hartnett for closing remarks.

Okay. Well, that concludes our conference call on fiscal year ‘21. As we move into fiscal year ‘22, we are very optimistic. I think the situation has changed; now it’s how much can you make and how quickly can you make it and deliver it to us, which is exactly the kind of problem that we want to be dealing with. We will be looking forward to reporting on that more in July. Thanks. Thanks for participating.

This concludes today’s conference call. Thank you for participating. You may now disconnect.