RBC Bearings Q1 2025 Earnings Call Transcript

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Provided by Quartr
August 2, 2024

There are 12 speakers on the call.

Operator

As a reminder, this conference is being recorded.

Operator

I would now like to turn the conference over to your host, Rob Moffett, the Director of Investor Relations. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for RBC Bearings' fiscal Q1 2025 earnings call. I'm Rob Moffett, Director of Investor Relations.

Speaker 2

With me

Speaker 1

on the call today are Doctor. Michael Hartnett, Chairman, President and Chief Executive Officer Daniel Bergeron, Director, Vice President and Chief Operating Officer and Rob 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 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 condition.

Speaker 1

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. With that, I'll now turn the call over to Doctor. Hartnett.

Speaker 3

Thank you, Rob, and good morning to everyone and thanks for joining us. I'm going to start today's call with a quick review of our quarter and fiscal year and hand it over to Rob for some detailed color on the numbers. And then I'll finish with some high level thoughts on the industry, RBC's positioning and some in our fiscal 2025 outlook. 1st quarter sales came in at $406,300,000 a 5% increase over last year. Strong performance from our Aerospace and Defense sector showed a 23.7% expansion, where our industrial business contracted slightly at 3.5%.

Speaker 3

In Aerospace and Defense, sales expanded approximately $30,000,000 quarter to quarter year over year with $149,100,000 dollars the quarterly result. The defense sector led with a 38.1% expansion rate. Unquestionably, we can expect continued strong showings from our A and D sector through the balance of the year. On the industrial side, we held our own against our peers, showing a small contraction of 3.5% in sales. Sales were $257,200,000 Weakened sector performance was seen in oil and gas, semiconductor machinery and some general industrial markets.

Speaker 3

We currently expect and plan for these markets to strengthen in the second half of the year. Adjusted gross margin for the quarter came in at $184,000,000 45.3 percent of sales and almost 2 full percentage points above last year. Clearly, our manufacturing points are manufacturing plants are executing extremely well. We are operating well within our sweet spot in this regard and many completed synergies and improvement projects contributed to this performance. Still, many more productive concepts and plans are in the breach and or active today.

Speaker 3

And these are very productive and promising areas for us to prospect. I'd like to acknowledge and thank our teams for this quarter's performance. Clearly, it is they who are the reason for RBC's continued successes. As a result, adjusted net income was $2.54 a share and adjusted EBITDA was 33 percent of revenues. Obviously, we're very pleased with this performance and we really can't think of a better way to start our fiscal year.

Speaker 3

Net cash provided by the operating activities was $97,400,000 versus $61,700,000 last year, a 57.9% increase. This allowed us to reduce debt another $60,000,000 during the period, bringing the EBITDA to net debt ratio to approximately 2.1 times, another sweet spot. Overall, we expect more of the same performance from the Aerospace and Defense Group through the year end, some ups and downs in this regard as a result of normal seasonal impacts of holidays, vacations and supply chain. On the industrial side, we are planning to see strengthening in the second half of the year and are setting our plans today accordingly. RBC is well positioned to support additional demand from both industrial and aerospace defense customers as well as space customers.

Speaker 3

We have the production capacity, the trained and skilled workforce forces in place and are in the process of augmenting plant capacities to accommodate additional business awards. I'll now turn the call over to Rob for more details on our financial performance.

Speaker 4

Thank you, Mike. As Doctor. Hirdin indicated, this is another strong quarter for RBC. Total sales growth of 5% in the quarter was surpassed by adjusted EBITDA growth of 11.3% and adjusted EPS growth of 19.2%. Along with that, we had free cash flow growth of 61% year over year.

Speaker 4

This was driven in large part by strong gross margin expansion with 1st quarter gross margin as a percentage of sales coming in at 45.3%, an expansion of roughly 190 basis points year over year. The 2 biggest drivers here continue to be the ongoing tailwinds from Dodge synergies and increased utilization of our aerospace manufacturing assets. We also saw tailwinds from strong plant efficiency, expedites and a favorable mix. On the SG and A line, we continue to make investments in our future growth. This includes sales force additions to support the international expansion that we have highlighted as part of our Dodge strategy and the resources needed to support that growth, including IT infrastructure and back office support.

Speaker 4

With that said, the rate of growth on the SG and A line moderated versus the year ago period and we were able to extract a modest amount of leverage this quarter. Going forward, we expect SG and A as a percentage of sales to increase in Q2 and Q3 before normalizing in Q4. This led to adjusted EBITDA of $134,000,000 this quarter, up 11.3% year over year and adjusted EBITDA margin of 33%, which is up almost 190 basis points versus last year's 31.1%. The EBITDA margin is a new record for RBC, eclipsing our recent peak of 31.7% in the Q2 of fiscal 'twenty four. The achievement of this milestone was a multifaceted effort with credit being deserved across multiple layers of the company, including the Dodge team for their efforts in extracting synergies and to our operations and plant management teams for running at very high levels of plant efficiency during the quarter.

Speaker 4

Interest expense in the quarter was $17,200,000 This was down 16% year over year reflecting the ongoing repayment of our term loan. The tax rate in our adjusted EPS calculation was 22.4%, a moderate year over year headwind versus last year's 22%. Altogether, this led to adjusted diluted EPS of $2.54 representing 19.2% of year over year growth, an impressive result on revenue growth of 5%. In terms of cash, free cash flow of $88,400,000 ran at 144% conversion rate and grew 61% on a year over year basis. This is fueled by strong net income growth and improved working capital performance.

Speaker 4

As usual, we used a meaningful portion of the cash generated to continue to pay down our term loan. We repaid $60,000,000 of the loan this quarter and continue to expect to repay $75,000,000 to $300,000,000 total for the year. The balance on the term loan at the end of the quarter was $615,000,000 leaving net debt at $1,050,000,000 and trailing net leverage of 2.1 times. We continue to expect trailing net leverage to be well below the 2 times mark exiting the fiscal year, leaving ample room for a return to M and A should the right deal come across our path. As a reminder, our Series A mandatory convertible preferred stock is expected to automatically convert on October 15, 2024.

Speaker 4

Using Q1 results as an approximation, the net impact of this conversion is expected to be slightly accretive to earnings per share, assuming conversion at the current share price. It will be more meaningfully accretive, however, to free cash flow as the conversion will remove the cash dividend payment, reducing our future total cash outlays by approximately $23,000,000 on an annualized basis. This is roughly 9.5% of fiscal 2024's total free cash flow. In closing, this was another strong quarter for RBC. We remain focused on leveraging our core strengths in engineering, manufacturing and product development to drive organic and inorganic growth, continued margin excellence and high levels of free cash flow conversion.

Speaker 4

With that, operator, please open the call for Q and A.

Operator

Thank you. Thank you. And our first question is from the line of Christine Liwag with Morgan Stanley. Please proceed with your question.

Speaker 5

Hey, good morning, everyone.

Speaker 3

Good morning, Christine.

Speaker 5

With industrial end market kind of starting to decline here, can you provide more content and detail about what you're seeing in the different end markets and exactly how far away we are from a trough and what we've had to see to see improvement? Because it seems like the issue in the quarter is just a little bit of weakness in the top line. But that said, I mean, with a 45% gross margin for the business, that's still pretty incredible performance.

Speaker 3

Yes. Well, when we're looking at the industrial markets, Christine, there's a few things that where we saw a substantial amount of softness and we've seen that continued for almost 12 months now. And that's in semicon in oil and gas. And on the semicon,

Speaker 5

Hello, I think the line dropped.

Operator

Hi, gentlemen. This ladies and gentlemen, this is the operator. Please stand by. We're experiencing technical difficulties. We'll resume momentarily.

Speaker 6

Ladies and gentlemen, please continue to stand by. The event will resume momentarily.

Operator

Ladies and gentlemen, thank you for standing by. Gentlemen, you may continue. Christine, please continue with your questions.

Speaker 3

Where did I lose you, Christine?

Speaker 5

Great. Mike, you were talking about semiconductors is where you've seen the weakness in oil and gas and that's where the line dropped off.

Speaker 3

Yes. Okay. So those are the 2 majors. The oil and gas is sort of a we have a major customer who had a planning problem and bought too much a year ago and now is sort of liquidating that position. We expect him to get better over as the year progresses.

Speaker 3

And the rest of the business, there's a slight downward bias on the rest of the market. Some positive, some negative, but overall bias down.

Speaker 5

Great. And just to follow-up in terms of where we're seeing the weakness, are these mostly on new builds or was the slowdown in buying also in the aftermarket if there was a little bit of an overage in buying before?

Speaker 3

Yes, I think it's by and large a slowdown in the aftermarket in the various industrial sectors that support the aftermarket.

Speaker 5

I see. And then as you look at the recovery for each of these end markets, which quarter do you think industrial revenue could potentially trough? And do you have any visibility into that?

Speaker 3

If I had the visibility, I would probably know what stocks to buy and which stocks to sell, right? I don't have that kind of visibility. What we do have is economic models that sort of give us general overall direction and those economic models are saying have been telling us that it's flat through our Q3 and very strong in our last quarter. And that's sort of how we're piloting the SIP today.

Speaker 5

Well, great. Thank you for the color. I'll get back in queue. Thanks.

Operator

Thank you. Our next question is from the line of Michael Ciarmoli with Chua Securities. Please proceed with your question.

Speaker 2

Hey, good morning guys. Thanks for taking the questions. Maybe just to stay on Industrial. I guess the quarterly results on revenue came up short of your guidance. Was the industrial weakness the biggest driver of that delta or did anything else kind of materialize?

Speaker 3

No, that was the biggest driver. It's just it's all about consumption rates and industrial consumption rates. Our estimates of those rates at the beginning of the quarter and the actual consumption that we see during the quarter creates a variance.

Speaker 2

Got it. Got it. Do you have that I guess ever since the acquisition of Dodge and the amount of industrial revenues that go through aftermarket distribution now is pretty sizable at the company level. I mean, do you have the level of visibility into the distributors to know if there's really going to be a more pronounced destock in any of these industrial sectors? Or do you even have sort of minmax thresholds where you have a certain base level of demand that you're shipping to in the industrial channels?

Speaker 3

Well, we have probably the same information that you have. I mean, some of these are public companies and they public quite detailed information on what their situation is. And basically, I didn't I don't think there's much destocking going on. I think part of the year to year comp delta there was that a year ago we were still benefiting from a recovering supply thing and cleaning up backlog. Those are products that have been on the order book for an extended period of time.

Speaker 3

But as a result of supply chain difficulties, we couldn't complete those orders. And so, last year we probably benefited from some number that it might be as high as $10,000,000 of that backlog reduction. And this year we supply chain is normal. And so we're just living on the economic consumption rate. Got it.

Speaker 3

As is our distributors. I mean, I don't think there's any serious destocking going on anywhere.

Speaker 2

Okay. Okay. Do you think as you look out for the remainder of 'twenty five, I mean, you had a tough comp year over year in the Q1 for industrial, but they certainly get easier. Do you think industrial grows for fiscal 2025? Or do you think it's going to be sort of low single digit kind of pressure all year?

Speaker 3

Our plan today has it growing. And that's we're expecting, as I said, a recovery in some recovery in semicon, We're expecting a milder recovery in oil and gas. And then the rest of it is about the industrial economic consumption rate.

Speaker 2

Okay, okay. Got it. And then just real quickly and then I'll jump off here. Any more detail on the year over year growth rates by channel in aerospace, aero OEM, aftermarket distribution? I think you called out defense already.

Speaker 3

Yes, I think Rob can give you those. He's looking at it now. So I'll turn the call over to Rob.

Speaker 4

Yes, they were very consistent

Speaker 3

like they were both right around that 23.7 for OEM, 23.9 for distribution. So very consistent.

Operator

Okay. Okay, perfect.

Speaker 2

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

Operator

Our next question is from the line of Pete Skibitski with Lebitt Global. Please proceed with your question.

Speaker 7

Hey, good morning guys. Nice performance. Hey, Mike, just on the Torrid growth in defense, I think you said 38%. Was there a few programs that are helping to drive that or because you're just growing just so much above the market, above all the OEMs. So I'm just wondering if you could give us more color on what's driving that.

Speaker 7

It's like the 4th quarter in a row of that type of really strong growth. And I don't know if you can talk about pricing at all in terms of pricing maybe finally catching up with past inflation, because I know you're on a lot of LTAs as well. So just if you could comment there?

Speaker 3

Yes. Just to get the pricing thing out of the way, you know what I think, I don't think we're seeing any benefit from that right now. A lot of our contracts roll over in 2025 and 2026. So we're really still living with prices that were probably set in 2021, maybe 2020, maybe 2019. So that's basically that's headwind for us.

Speaker 3

But there are several major programs that we're involved with right now that are going to continue to drive that kind of expansion. And it's a I think the year to year comps will become more difficult because this started about a year ago. But when you talk about the need to build submarine, that's not going away for 5 or 10 years, probably 10 years. That's going to be very demanding on us. Missile demanding, Joint Strike Fighter demanding, Long Range Bomber demanding.

Speaker 3

So there's just a lot of really big programs that we're working on. And also the cancellation of the, BARRA program for the Scout helicopter that impacted the course and Lockheed as a result benefited the other ships that were on tremendously because the other ships were sort of in some extent hiatus like the PH-forty seven, the Apache, the Blackhawk, those are major important platforms for us. And the rest of the world didn't know whether they could buy those platforms or not based upon where the DoD money was heading. And that seems that environment has cleared and there's a lot of interest for an interest in those platforms. So we're just it's kind of a perfect storm for us on the defense side.

Speaker 7

Yes. Okay. That makes sense. Just one follow-up for me, maybe on the commercial side. It sounds like Boeing is at about on the MAX they're at about 25 per month now in June July.

Speaker 7

Can you guys just remind us where you were over the past couple of quarters? I think they've been maintaining you like in the 30s or so. Does that sound about right?

Speaker 3

Yes, that sounds about right. I think our planning now is probably at a 33% range. Although they've indicated they'll be at 38 by the end of the year, and the new CEO has agreed with that. I hope when he goes up at his office he agrees with it even further. But you know, so yes, I think we think we have a very modest expectation built into our planning with regard to Boeing demand and that seems to be a little way of playing now.

Speaker 7

Yes. And if they make that 38% a rate by the end of the year, I imagine you're potentially you could accelerate, I guess, in the fiscal 'twenty six, it sounds like?

Speaker 3

Yes. Well, I think they've got to get the FAA to approve a step up beyond 38, assuming they can get to 38. And so obviously our parts for the most part have to be available 6 months ahead of that's our planning cycle ahead of the aircraft assembly rates. So that's kind of moved that moved April into October on the 38 rate. So we should be really, really conservative using a 30 3 planning rate.

Speaker 3

Rate.

Speaker 7

Right, right. Okay. Appreciate it. Thank you.

Operator

Our next question is from the line of Jordan Liannis with Bank of America. Please proceed with your question.

Speaker 8

Hey, good morning. On M and A, could you guys give any color on deals in the pipe, what you're seeing, any changes in size or scope? And 2, if you're looking at anything to get more capacity if the A and D side keeps growing at this rate?

Speaker 3

Well, I think we're seeing A and D like companies coming to market. And we're investigating the fit with RBC. We have really nothing to report at this point. Obviously, if one of our companies does come to market, they'll likely come to market with their own capacity. So, they probably won't tax ours.

Speaker 3

But, is just a lot going on in the A and D world and we can either we are very pleased with our growth in that sector and the outlook in that sector for the next several years. So we're being cautious and conservative about what we take on.

Speaker 8

Got it. Thank you.

Operator

Our next question is from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Speaker 9

Thanks. Hey, Mike, seeing gross margin above 45% with industrial down 3.5% is great performance.

Speaker 3

Thank you.

Speaker 9

Was that all mix in aerospace? Or was there something unusual in there?

Speaker 3

No, aerospace contributed. Its margin is improving. I think it's as I said, we have a lot of contracts that we're working our way through that were inked in 2019, 2020 2021 that are a little bit of a headwind. We're becoming more efficient in the execution of those contracts just because there's more volume and there's more absorption as a result of that. We have also better methods and a little better capitalization here and there to execute some of those designs.

Speaker 3

So, I would say it was very solid performance on the industrial side that really, really carried the day.

Speaker 9

So, Industrial margins were up even against negative 3.5 percent organic?

Speaker 3

Yes, that's right.

Speaker 9

And what in industrial drove that, because that's a pretty big absorption headwind to over come, isn't it? Like what was in mix that made that so rich?

Speaker 3

Well, we've been talking about synergies for a long time and we're starting to see it. They did have a favorable mix this quarter. I can't say that we're going to see margins like that forever, but we saw it in the Q1. I think the neighborhood that we'll probably end up living in is more like 44% when the year is all done, but we'll see. That's hard to predict.

Speaker 3

So there's a lot of synergies that went on. Mix was favorable. Plant efficiencies were absolutely better. There's no question about that. I mean, they're operating in their sweet spot.

Speaker 3

And we've had methods improvements. And we've had improvements in supply chain cost structure. So everybody sort of has a role when they come to work in the morning and a little piece of each one of these issues and you know they cumulative it makes a difference.

Speaker 9

So I guess you're guiding fiscal 2Q gross margin down 1 or 200 points against what is obviously a tough comp. But is there any specific thing causing that sequential decrease?

Operator

I mean,

Speaker 4

I think we have fewer production days in Q2 and Q3. That's been pretty consistent over time. So you have a little bit of a headwind there. And then you couple that with the favorable mix we had in the Q1, it just adds up to this is where we're seeing things in the Q2.

Speaker 3

And the right way to look at it

Speaker 1

is probably more on a year over year basis, right? And you'll notice that the range capsulate some expansion on a year.

Speaker 9

Understood. And then on the revenue side, Aerospace is up 24%, I guess, the 21% comp. You talked about all the things that are going right there. Do you expect 20% plus growth again in 2Q?

Speaker 3

We're not planning for it, but I can't say that it won't happen.

Speaker 9

Well, I guess the question then is, you expect industrial to recover in the back half. Do you think that's up sequentially a revenue standpoint or is that more likely down given some of the softness that you're seeing right now?

Speaker 3

Yes, that's more likely down.

Speaker 9

Understood. All right. Thanks very much.

Speaker 3

Yes.

Operator

Our next question is from the line of Joe Ritchie with Goldman Sachs.

Speaker 10

This is Vivek Shrivastava on for Joe. I just want to start with a more long term question. Your EBITDA margin this quarter, 32.9%, the highest we've seen. You've previously talked about mid-30s long term EBITDA margin, which is not far away from where you are today. So just wondering what kind of updated long term margins you have your eyes set on and just how to think about the margin improvement path from here once the industrial businesses do start inflecting positively?

Speaker 3

We're thrilled with the 33%

Speaker 4

that we achieved this year. We are far ahead coming out of the gate of what we talked about in Q1. We talked about where we're seeing gross margins into Q2. Our mission is to continue to squeeze the lemon to expand margin every quarter as best for our ability. So we're not looking to put out long term guidance, but we are telling you that we're continuing to drive eke out that EBITDA margin and I think we have opportunities

Speaker 3

in different pockets to do so.

Speaker 10

That's helpful. And maybe just a follow-up on that. As your margin continues to improve, industrial growth, your long term target probably close to 2x GDP. Is reinvesting within the industrial business something that could potentially accelerate a bit more from here to return to that 2x GDP growth target?

Speaker 4

Can you clarify? I'm sorry.

Speaker 10

Yes. Just given you're getting such strong margins right now, will reinvesting back in the business for growth be something that could potentially accelerate from here on?

Speaker 3

Well, I think those are 2 different things. We're reinvesting in the industrial business for cost In other words, we're trying to reduce our cost of sales by putting in capital equipment that will make our plants more efficient and incorporate manufacturing processes that we don't have in house today and are very expensive to buy in the outhouse. So, that's ongoing and we're making not insubstantial investments in that those kinds of machinery. And so that's that's why we're reasonably confident that that'll accrue to gross margin over time. In terms of growth, the industrial business on an annual rate now is probably running over $1,000,000,000 So in order to really, you know, impact that kind of number to get the internal growth mechanism performing at a measurable level requires some pretty big projects.

Speaker 3

And ultimately and so we have our eye on some pretty big projects, but ultimately those bigger projects take time to implement. And so we've just got to work through that. And that's sort of ongoing right now.

Speaker 10

That's very helpful color. Thanks for that. Maybe one last question from me. Just on the backlog, noticed that in the press release, you provided backlog beyond 12 months, but we didn't see backlog due within 12 months. Just wanted to understand the rationale behind that and just any color on the backlog due within 12 months?

Speaker 4

Yes. We made a strategic decision and communicated last quarter that from here on out, we were just going to be presenting the full on backlog because that's such a significant part of our business, especially on the defense side at this point. We think that's the more appropriate way to look at our overall backlog position.

Speaker 10

Very helpful. I'll pass it on. Thanks.

Operator

Thank you. Our next question is from the line of Tim Thein with Raymond James. Please proceed with your question.

Speaker 11

Yes, thanks. Good morning. Just I guess one for me is on the gross margins and a lot obviously discussed here in terms of the outlook for the Q2. But thinking in terms of I believe the expectation coming into the year was that you may see more of a lift in the back half of the year as you better absorb some of that aerospace fixed capacity and the Dodge synergies kick in even more. But A, the industrial economy obviously being weaker, does that change the outlook in terms of on the Dodge side?

Speaker 11

And then, I guess, related to that, was there some maybe pull ahead that maybe some of those benefits that would you're expecting more in the later part of the year, maybe they came earlier as a contributor in the Q1. So I guess simply stated, do you still is the expectation still that there's room for more even more kind of a second half lift from some of these drivers?

Speaker 3

Right now, we continue to expect the second half lift. One of the things that attracted us to Dodge when we bought Dodge is when you look at the revenue performance at Dodge over a series a year through various economic cycles. It's a very low beta company. It's so integrated into the U. S.

Speaker 3

Infrastructure that when you're pouring your cereal in the morning, we actually had something to do with that. When you're driving your car over a street or a bridge to get to work, we actually had something to do with that road. So, we're and whatever we supplied only lasted a few years before nature had its way with it and we had to replace it. So, Dodge has a very strong recurring revenue driven by human consumption in North America. And so whether the economy is expanding or it's contracting slightly, Dodge's business is probably going to perform well through those cycles.

Speaker 3

In terms of what we expect for the rest of the year, we expect the semicon to pick up and we expect oil and gas to recover. And if there's more tension in the Middle East that interferes with the production of oil. It will we will definitely feel the acceleration in our business. So that's sort of where the things fit right now.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the call over to Doctor. Hartnett for any closing remarks.

Speaker 3

Okay. Well, I'd like to thank everyone for participating today. And we look forward to speaking again to you in the fall. Have a good day.

Operator

This will conclude today's conference.

Speaker 1

Thank you for your participation.

Operator

You may now disconnect your lines at this time.

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