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spk13: Greetings. Welcome to RBC Bearing's Fiscal 2025 First Quarter Earnings Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Moffitt, the Director of Investor Relations. Please go ahead.
spk12: Good morning. And thank you for joining us for RBC Bearing's Fiscal First Quarter 2025 Earnings Call. I'm Rob Moffitt, Director of Investor Relations. And with me on the call today are Dr. Michael Hartnett, Chairman, President, and Chief Executive Officer, Samuel 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 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 Bearing'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. With that, I'll now turn the call over to Dr. Hartnett.
spk10: 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. Then I'll finish with some high-level thoughts on the industry, RBC's positioning, and some in our fiscal 25 outlook. First quarter sales came in at $406.3 million, 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%. In aerospace and defense, sales expanded approximately $30 million quarter to quarter, year over year, with $149.1 million the quarterly result. The defense sector led with a 38.1% expansion rate. Unquestionably, we can expect continued strong showings from our A&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 257.2 million. Weakened sector performance was seen in oil and gas, semiconductor machinery, and some general industrial markets. 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 million, 45.3% of sales, and almost two full percentage points above last year. Clearly, our 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. 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% 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. Net cash provided by the operating activities was $97.4 million versus $61.7 million last year, a 57.9% increase. This allowed us to reduce debt another $60 million 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. 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.
spk09: Thank you, Mike. As Dr. Hartman indicated, this is another strong quarter for RBC. Total sales growth 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. This was driven in large part by strong gross margin expansion, with first quarter gross margin as a percentage of sales coming in at 45.3%, an expansion of roughly 190 basis points year over year. The two 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 in a favorable mix. On the SG&A line, we continue to make investments in our future growth. This includes Salesforce 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. With that said, the rate of growth on the SG&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&A as a percentage of sales to increase in Q2 and Q3 before normalizing in Q4. This led to adjusted EBITDA of $134 million 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 second quarter of fiscal 24th. 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. Interest expense in the quarter was $17.2 million. 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 $88.4 million ran at 144% conversion rate and grew 61% on a year-over-year basis. This was fueled by strong net income growth and improved working capital performance. As usual, we used a meaningful portion of the cash generated to continue to pay down our term loan. We repaid $60 million of the loan this quarter and continue to expect to repay $275 to $300 million total for the year. The balance on the term loan at the end of the quarter was $615 million, leaving net debt at $1.05 billion and trailing net leverage of 2.1 times. We continue to expect trailing net leverage to be well below the two times mark exiting the fiscal year, leaving ample room for a return M&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. Using Q1 results as an approximation, the net impact of this conversion is expected to be slightly accreted 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 million on an annualized basis. This is roughly 9.5% of fiscal 24'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. With that, operator, please open the call for Q&A.
spk13: Thank you. Ladies and gentlemen, we'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad and a confirmation tone to indicate your line is in the queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, where we poll for questions. Thank you. And our first question is from the line of Christine Lewak with Morgan Stanley. Pleased to see with your questions.
spk01: Hey, good morning, everyone.
spk13: Morning, Christine.
spk01: You know, with industrial and 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 how far away we are from a trough and what we'd have to see to see improvement. Because it seems like, you know, the issue in the quarter is just a little bit of weakness in the top line. But that said, I mean, you know, with a 45% gross margin for the business, that's still pretty incredible performance.
spk10: Yeah, well, you know, 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,
spk01: Hello, I think the line dropped.
spk13: Hi, gentlemen. Ladies and gentlemen, this is the operator. Please stand by. We're experiencing technical difficulties. We'll resume momentarily. Please remain on the line, ladies and gentlemen. Our call will resume momentarily. Our conference will resume momentarily.
spk00: Ladies and gentlemen, please continue to standby. The event will resume momentarily. Again, please continue to standby. The event will resume momentarily. Once again, ladies and gentlemen, we thank you for your patience. Please continue to stand by. The event will resume momentarily. Thank you.
spk13: Ladies and gentlemen, thank you for standing by. Gentlemen, you may continue. Christine, please continue with your questions.
spk10: Where did I lose you, Christine?
spk01: 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.
spk10: Yeah, okay. So those are the two majors. The oil and gas is sort of a – we have a major customer. We 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 as the year progresses. And the rest of the business, you know, there's a slight downward bias on the rest of the market. Some positive, some negative, but overall a bias down.
spk01: Great. And just to follow up in terms of, you know, 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?
spk10: Yeah, I think it's, by and large, just slow down in the aftermarket, in the various industrial sectors that support the aftermarket.
spk01: 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?
spk10: If I had the visibility, I would probably know, you 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, you know, it's flat through our third quarter and very strong in our last quarter. And that's sort of how we're piloting the ship today.
spk01: Well, great. Thank you for the caller. I'll get back in queue. Thanks.
spk13: Thank you. Our next question is from the line of Michael Cimaroli with Truist Securities. Please proceed with your question.
spk06: Hey, good morning, guys. Thanks for taking the questions. Maybe just to stay on industrial, I did – the quarterly results on revenue came up short of your guidance. Was that, was the industrial weakness the biggest driver of that delta or did anything else kind of materialize?
spk10: No, that was the biggest driver. It's just, you know, it's all about, you know, 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 the variance.
spk06: Got it. Got it. Do you have, you know, that I guess ever since the acquisition of Dodge and, you know, the amount of industrial revenues that go through aftermarket distribution now is pretty, pretty sizable at the, at the company level. I mean, do you have the level of visibility into the descriptors to know if there's, really going to be a more pronounced D-stock in any of these industrial sectors? Or, you know, do you even have some sort of min-max thresholds where you have, you know, a certain base level of demand that you're shipping to in the industrial channels?
spk10: Well, we have, you know, we have probably the same information that you have. I mean, you know, some of these are public companies and they publish quite detailed information on what their situation is. And basically, 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 chain and cleaning up backlogs. Those are products that have been on the order book for an extended period of time, 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 million of that backlog reduction. And this year, supply chain is normal, and so we're just, you know,
spk06: living on the you know economic consumption rate um got it as is our distributors i i mean i don't think there's any serious feedback going on anywhere okay okay do you think as you look out for the remainder of 25 i mean you had a tough comp uh year over year in the first quarter for industrial but they certainly get easier do you think industrial grows for fiscal 25 or do you think it's going to be, you know, sort of a single-digit kind of pressure all year?
spk10: You know, our plan today has it growing. Okay. And, you know, that's – we're expecting, as I said, a recovery and some recovery in the Semicon. We're expecting a milder recovery in oil and gas. And then the rest of it is about the industrial economic consumption rate.
spk06: 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 and Aerospace, Aero OEM, aftermarket distribution? I think you called out defense already.
spk10: Yeah, I think Rob can give you those. He's looking at it now. So I'll turn the call over to Rob.
spk09: Yeah, they were very consistent. Like they were both, you know, right around that 23.7 for OEM, 23.9 for distribution. So very consistent. Okay. Okay.
spk06: Perfect. All right, guys. I'll jump back in the queue. Thanks.
spk13: Our next question is from the line of Pete Skibiski with Olympic Global. Please proceed with your questions.
spk08: Hey, good morning, guys. Nice performance. Hey, Mike, just on, you know, the torrid growth in defense, I think you said 38%. Was there, you know, a few programs that are helping to drive that or – you know, cause you're just growing just so much above the market, above all the OEM. So I'm just wondering if you could give us more color and what's driving that. It's like the fourth 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, you know, pricing, maybe finally catching up with past inflation. Cause I, I know you're on a lot of LTAs as well. So just if you could comment there.
spk10: Yeah. Just to get the pricing thing out of the way, um, You know, we're not seeing, I don't think we're seeing any benefit from that right now. You know, a lot of our contracts roll over in 25 and 26. So, you know, we're really still living with prices that were probably set in 21, maybe 20, maybe 19. So that's basically, that's headwind for us. But there are several major programs that... that we're involved with right now that are going to continue to drive that kind of expansion. 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 submarines, that's not going away for you know, five or 10 years, probably 10 years, um, that's going to be very demanding on, on us. Um, uh, missile, uh, demanding joint strike fighter, demanding long range bomber demanding. So there's just a lot of really big programs that we're working on. And also the, the cancellation of the, um, FARA program, uh, for the scout helicopter that, um, that impacted Sikorsky and Lockheed as a result benefited the other ships that were on tremendously because, you know, the other ships were sort of in to some extent a hiatus, like the CH-47, the Apache, the Black Hawk. Those are, you know, major important platforms for us. And the rest of the world didn't know whether to buy those platforms or not based upon where the DOD money was heading. And that environment has cleared, and there's a lot of interest, foreign interest in those platforms. So, you know, it's kind of a perfect zone for us on the defense side.
spk08: Yeah, okay. It makes sense. Just one follow-up for me, maybe on the commercial side. It sounds like Boeing is at about on the, on the max, they're at about 25 per month now in June and July. 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 thirties or so. Does that sound about right?
spk10: Yeah, that sounds, that sounds about right. I think there, I think our planning now is probably at a, at a 33 grade. Um, 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 yeah, I think we have a very modest expectation. built into our planning with regard to Boeing demand, and that seems to be the way it's playing out.
spk08: Yeah, and if they make that 38 a rate by the end of the year, I imagine potentially you could accelerate, I guess, into fiscal 26, it sounds like.
spk10: Yeah, well, you know, I think they've got to get, you know, the FAA to approve, you know, a step up beyond 38, assuming they can get to 38. And so, you know, obviously our parts, for the most part, have to be available six months ahead of, that's our planning cycle, ahead of the aircraft assembly rates. So, you know, that's kind of moved. That moves April into October on the 38 rate. So we should be really, really conservative using a 33 planning rate.
spk08: Right, right. Okay. Appreciate it. Thank you.
spk13: Our next question is from the line of Jordan Leonese with Bank of America. Please proceed with your questions.
spk02: Hey, good morning. On M&A, could you guys give any color on deals in the pipe, what you're seeing, any changes in size or scope, and two, if you're looking at anything to get more capacity if the A&D side keeps growing at this rate?
spk10: Well, I think we're seeing A&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 those companies does come to market, they'll likely come to market with their own capacity, so they probably won't tax ours. There's just a lot going on in the A&D world, and we're 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.
spk02: Got it. Thank you.
spk13: Our next question is from the line of Steve Barger with KeyBank Capital Markets. Pleased to see you with your questions.
spk07: Thanks. Hey, Mike, seeing gross margin above 45% with industrial down 3.5% is great performance.
spk04: Thank you.
spk07: Was that all mixed in aerospace? Sure, you earned it. Was that all mixed in aerospace, or was there something unusual in there?
spk10: No, you know, aerospace contributed. You know, 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 19, 20, and 21 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. I would say it was very solid performance on the industrial side that really, really carried the day.
spk07: So industrial margins were up even against negative 3.5% organic?
spk10: Yes, that's right.
spk07: And what in industrial drove that? Because that's a pretty big absorption headwind to overcome, isn't it? Like what was in mix that made that so rich?
spk10: Well, You know, we've been talking about synergies for a long time and we're starting to see it. Um, it, you know, they did have a favorable mix this quarter. I can't say that we're going to see margins like that forever, but, um, we, we saw it in, in, in the first quarter. You know, I think the neighborhood that we'll probably end up living in is more like 44% when the year's all done, but, but we'll see that that's hard to predict. Um, So, you know, there's a lot of synergies that went on. Mixed was favorable. Plant efficiencies were absolutely better. There's no question about that. I mean, they're operating in their sweet spot. And we've had methods improvements. And we've had improvements in supply chain cost structure. So, you know, everybody sort of has a – a role when they come to work in the morning and a little piece of each one of these issues. And, you know, it makes a difference.
spk07: So I guess you're guiding fiscal 2Q gross margin down one or 200 basis points against what is obviously a tough comp, but is there any specific thing causing that sequential decrease?
spk09: I mean, I think we have fewer production days in Q2 and Q3. You know, 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 first quarter. It just adds up to, you know, this is where we're seeing things in Q2.
spk12: And the right way to look at it is probably more on a year-over-year basis, right? And you'll notice that the range changes.
spk07: Understood. And on the revenue side, you know, aerospace is up 24% against the 21% comp. You talked about all the things that are going right there. Do you expect 20% plus growth again in 2Q?
spk10: You know, we're not planning for it, but I can't say that it won't happen.
spk07: Well, I guess the question then is, You know, you expect industrial to recover in the back half. Do you think that's up sequentially from a revenue standpoint, or is that more likely down given some of the softness that you're seeing right now?
spk10: Yeah, that's more likely down.
spk07: Understood. All right. Thanks very much.
spk10: Yep.
spk13: Our next question is from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
spk05: Thanks. This is Vivek Srivastava 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?
spk09: You know, we're thrilled with the 33% that we achieved this year. You know, we're far ahead, you know, coming out of the gate of what we talked about in Q1. We talked about, you know, where we're seeing gross margins into Q2. You know, our mission is to continue to squeeze the lemon to expand margins every quarter is best for our ability. So we're not, you know, we're not looking to put out long-term guidance, but we are telling you that we're continuing to strive to geek out that EBITDA margin. And I think, you know, we have opportunities in different pockets.
spk05: That's helpful. And maybe just to follow up on that, as your margin continues to improve, Industrial growth, your long-term target, probably close to two times GDP. Is reinvesting within the industrial business something that could potentially accelerate a bit more from here to return to that two times GDP growth target?
spk09: Can you clarify? I'm sorry.
spk05: Yeah, 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?
spk10: Well, I think those are two different things. We're reinvesting in the industrial business for cost reasons. 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 those kinds of machinery. And so that's That's why we're reasonably confident that that will accrue to gross margin over time. In terms of growth, the industrial business on an annual rate now is probably running over a billion dollars. So in order to really impact that kind of number, to get the internal growth mechanism performing at a measurable level, requires some pretty big projects and ultimately and so we have our eye on some pretty big projects but ultimately those those bigger projects take time to implement and so we've just got to work through that and and that's that's sort of ongoing right now that's that's very helpful thanks for that
spk05: Maybe one last question from me. Just on the backlog, notice 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.
spk09: Yeah, 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.
spk05: Very helpful. I'll pass it on. Thanks.
spk13: Thank you. Our next question is from the line of Tim Thain with Raymond James. Please proceed with your question.
spk11: Yeah, thanks. Good morning. Just one for me. On the gross margins, and a lot obviously discussed here in terms of the outlook for the second quarter, 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. A, the industrial economy obviously being weaker, does that change the outlook in terms of on the Dodge side? And then I guess related to that, was there some maybe pull ahead that maybe some of those benefits that you're expecting more in the later part of the year, maybe they came earlier contributor in the first quarter. So I guess simply stated, is the expectation still that there's room for even more kind of a second-half lift from some of these drivers?
spk10: Right now, we continue to expect a 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 of years through various economic cycles. It's a very low beta company. It's so integrated into the US 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. 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. 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. If there's more tension in the Middle East that interferes with the production of oil, we will definitely feel the acceleration in our business. That's That's sort of where the thing sits right now. Got it.
spk09: Okay.
spk10: All right. Thanks a lot.
spk13: Appreciate it. Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the call over to Dr. Hartnett for any closing remarks.
spk10: Okay. Well, I'd like to thank everyone for participating today, and we look forward to speaking again to you in the fall. So good day.
spk13: This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.
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