RBC Bearings Incorporated

Good morning, and thank you for joining us for RBC Bearing's Fiscal Third Quarter 2025 Earnings Call. I'm Rob Moffitt, Director of Corporate Development and Investor Relations, and with me on today's call are Dr. Michael Hartnett, Chairman, President, and Chief Executive Officer, Dan Bergeron, Director, Vice President, and Chief Operating Officer, and Rob Sullivan, Vice President and Chief Financial Officer. As a reminder, some of the statements made today may 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 listed in the press release along with the reconciliation between GAAP and non-GAAP financial information. With that, I'll now turn the call over to Dr. Hartnett.

Thank you, Rob, and good morning. I'm going to start today's call with a quick review of our financial results, and I'll finish with some high-level thoughts on the industry and the outlook for the remainder of fiscal 25. And I'll hand it over to Rob Sullivan for some more detail on the numbers. Third quarter net sales came in at 394 million, a 5.5% increase over last year. driven by continued strong performance in our aerospace and defense segment. Total aerospace and defense sales were up 10.7% year over year, with a 14.6% growth on the commercial aerospace side and a 3% growth in defense. On the industrial side, the segment grew 2.7% year over year, with distribution and aftermarket up 8% and OEM down 8%. Altogether, it was a solid quarter, so I'm going to talk about some underlying trends. In aerospace and defense, we did a good job mitigating the impact from the strikes of Boeing and Textron during the quarter. Quarter-by-quarter cadence across commercial aerospace has been lumpy through our fiscal 2025. And I'm sure that's no surprise to anyone on this call. I would encourage you to focus on the total segment trend, which is 10.7% growth for the quarter and a 15.5% growth year to date. And these are solid performance numbers. Growth in the case of defense was limited by capacity and not demand. In fact, demand is extraordinary. We are adding capacity as we speak. And adding capacity means hiring and training staff, expanding supply chain, and we are currently building plants. I want to take a second to commend the teams managing our customers, plants, people, and production schedules. There's a lot of work put into rebalancing our production cadence. in order to smooth some of the customer volatility over the past two quarters. Maintaining level operating loads in our plant, that is balancing load against cost, is a critical part of RBC's performance and continues to be a key contributor to our long-term gross margin expansion. On the industrial side, we were excited to see this segment return to growth. While our OEM business was down for the period, the bulk of the contraction came from the oil and gas category. Additionally, headwinds were also seen, but to a lesser extent, in the construction and semiconductor machinery manufacturing. We saw encouraging signs in the aftermarket of aggregate and cement, mining and metals, food and beverage, and grain. Several markets grew up well into the double digits, yielding a net gain of 8% over the period, evidence of how even a modest USA GDP expansion can be very impactful to this sector. Excluding the oil and gas influence, our industrial sector expanded at a 4.4% rate. Overall, the continued tailwinds of industry-leading service levels, organic growth, synergies and favorable end market mix came together and put us well into the green on revenues, margins, cash flow for the quarter, which was a quarter that's the most challenging of the four to navigate. Gross margin for the quarter came in at $175 million, or 44.3% of sales, a 205 basis point increase year over year. The biggest drivers of our margin expansion continue to be increased absorption of our aerospace and defense capacity, ongoing synergies with Dodge, and a wide range of smaller continuous improvement projects plant by plant basis we continue to identify through our RBC ops management process. Adjusted net income of $73 million was up 34.7% year over year, and that translated to an adjusted EPS of 2.34 per share compared to last year's 185 for a growth of 26.5%. Cash from operations came in at $84 million and compares to $80 million last year, and pre-cash flow of $74 million was up nicely versus the $71 million last year. We used our cash to continue to deleverage the balance sheet with an impressive $100 million of net reduction in the quarter, taking our trailing net leverage to 1.8 turns. As many of you know, RBC is a cash flow rich business. Since we acquired Dodge, we committed nearly all of our cash generation to deleveraging the balance sheet. The 2.0 mark that divided by EBITDA was an important milestone, and I'm excited we were able to achieve it in just three years. Also, with our preferred dividend now gone, we are excited to recapture $23 million in annual expense back into our cash flow and further accelerate additional debt repayment going forward. In terms of our outlook, Our A&D business remains on a path towards mid-teens growth for the full year. The industrial business should finish the year roughly flat with a healthy second half exit to the year. With the new calendar year, the election behind us, many of you asked for my thoughts on the new administration and what it might mean for RBC. I've done a little bit of thinking on the topic. And this is where I come out. In terms of our end markets, I don't think it changes much for commercial aerospace. The drivers here have been supply chain challenges and the broader issues at Boeing. But from what I can see, there appears to be a nice progress in addressing some of these issues, and I'm optimistic that it continues. If that happens, we should stand to benefit from some wonderful counts in the commercial aerospace business as we progress through calendar 2025, our fiscal 2026. We continue to expect strong secular growth beyond 25, fueled by record bookings, backlogs at Boeing and Airbus, who together have 12 years of demand sitting on their order books and build rates that need to move higher. On the defense side, with the current geopolitical backdrop, and with the Republicans in charge of the House, Senate, and executive branch, it seems likely that the U.S. defense spending will accelerate over the next four years. And in terms of international defense spending, EU members are increasingly investing 2% of GDP level and are now debating if it needs to be 3%, with Trump arguing that it should be 5%. I can't tell you exactly where things are going to shake out, but I suspect there's a good odds that it will eventually be higher than it's been at any time in post-Cold War history. In the industrial business, we continue to hear from customers and distributor partners the following. Since the election, there has been a risk step-up in quoting for new projects. Clearly, there's no mistake we are moving into a drill baby drill period where renewable energy sources are out of favor worldwide. Hooray for common sense. Where has it been? Confidence seems to have returned and a future lowering of interest rates appears to be inevitable. Our third quarter is a good indicator of the impact of GDP growth on our industrial aftermath. Tariffs certainly add both spice and fuel to our business outlook, all of which are strongly a net good for RBC. The last area worth touching on is M&A. With our net leverage down to 1.8 times, we are well prepared for the next opportunity and remain busy assessing candidates. With just one more quarter left in our fiscal 2025, our attention is beginning to focus on next year. If the current trend holds, it's likely that fiscal 2026 could offer an environment where all three of our end markets are growing in unison. It's too early to provide a concrete outlook, but that is the backdrop by which we are putting budgets together for fiscal 2026. With that, I'll now turn the call over to Rob Sullivan for more details on the financial performance.

Thank you, Mike. As Dr. Hartnett indicated, this was another strong quarter for RBC. Net sales growth of 5.5% drove gross margin growth of 10.6%, with more than 200 basis points of percentage expansion. The quarter benefited from some favorable product mix and strong manufacturing performance on the industrial side. Those factors were in addition to the more structural drivers of our gross margin performance, including ongoing synergies and increased utilization of our aerospace and defense manufacturing assets. On the SG&A line, we continued our investments in future growth. This includes a combination of investing in personnel costs and back office support, including IT licenses and This resulted in adjusted EBITDA of 122.6 million, up 12% year-over-year, and an adjusted EBITDA margin of 31.1%, which was up 180 basis points year-over-year. Interest expense in the quarter was 14.2 million. This was down 26.4% year-over-year, reflecting the ongoing repayment of our term loan, as well as a lower rate on the loan as the SOFR base rate has moved lower. The tax rate in our adjusted EPS calculation 22.2%, reasonably consistent versus last year's 21.3%. Altogether, this led to an adjusted diluted EPS of $2.34, representing growth of 26.5% year over year, an impressive result given some of the choppiness in commercial aerospace customer production schedules and the macroeconomic softness in the industrial economy. Pre-cash flow in the quarter came in at $73.6 million, with conversion of 127% and compares to $70.9 million and 152% last year. As usual, we used a meaningful portion of the cash generated to continue to leverage the balance sheet. We repaid $100 million of debt during the quarter, taking our total year-to-date debt reduction on the facilities to $195.4 million. And in terms of our free cash flow generation going forward, the October 15th automatic conversion of our mandatory convertible preferred stock removed 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. With our trailing net leverage now at 1.8 turns and heading even lower going forward, our balance sheet is in an increasingly attractive position to pursue additional accretive M&A, and our team remains busy growing our funnel of potential deal flow. Looking into the fourth quarter, we are guiding to revenues of $434 to $444 million, representing year-over-year growth of 4.9% to 7.3%. That guidance embeds an operating environment that's fairly similar to the fiscal third quarter. On the gross margin side, we were projecting gross margins of 44% to 44.5%, which would be an increase of roughly 115 basis points year-over-year at the midpoint. And for SG&A, we expect SG&A as a percentage of sales to be between 16% and 16.5% range during the fourth quarter. 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 both 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.