RBC Bearings Incorporated

Good morning, and thank you for joining us for RBC Behring's Fiscal Fourth 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, Daniel 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 Behring'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 turn the call over to Dr. Hartnett.

Thank you, Rob, and good morning. And thank you for joining us. 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, our outlook for fiscal 2026, and then hand it over to Rob Sullivan for more detailed color on the numbers. Fourth quarter sales came in at $438 million, a 5.8% increase over last year, driven by continued strong performance in our A&D segment and other very strong performance in the industrial businesses, particularly when viewed against the broader industrial trends. Consolidated gross margin for the quarter was 44.2% versus 43.1% for the same period last year. And adjusted diluted EPS was $2.83 a share versus $2.47 a share, up 14.6%. Clearly, we're thrilled to see the results. And this reflects the energy and commitment everyone invested to make this year successful. So a big thank you to Team RBC. Total A&D sales were up 10.6% year over year, with 11.6% growth on the commercial aerospace and 8.2% on defense. On the industrial side, the segment grew 3.3% year over year with distribution and aftermarket up 2.5% and OEM up an impressive 5.1%. In A&D, we saw broad strengths across the portfolio. Our leading sources of growth came from engine OEMs, commercial spare parts, commercial fixed wing aircraft, missiles and guided munitions, and of course, space. For the full year, A&D sales grew at 14%, with commercial aero up 13.3% and defense up 15.9%. Although the FAA constrained production and a prolonged strike at our largest customer coupled with other challenges that the industry faced this past year, We still grew the business at 14% and expanded margins as planned. We clearly benefited from the breadth and diversity of RBC's portfolio, giving us exposure to many different customers and many different parts of the supply chain. This includes a healthy balance between aftermarket and OEM, fixed wing and rotary craft, and commercial and defense. We also benefited from highly targeted organic growth initiatives focused on specific customers and programs that not only contributed to fiscal 2025, but should continue to benefit us in 2026 and well beyond. Moving over to industrial segment, we delivered a 3.3 percent growth this quarter. We were able to grow the business on a full year basis, even in an environment where the industrial economy has seen two consecutive years of contraction as measured by the manufacturing PMI. High service levels, lots of internal can-do, and incremental progress on new product introductions were the reasons. Our outgrowth relative to peers and the broader industrial economy has been notable, and I want to commend our teams for measuring up to the high bar they reached. Results like this don't happen by chance. They are the result of our relentless focus on our organic growth during our ops meetings and the ambitious goals of our managers that are willing and those goals that they're willing to take on. Coming into the year, we talked about how our focus at Dodge is in the early innings of evolving from delivering cost synergies to driving revenue synergies. and that accelerating growth was the major priority for fiscal 2025. I'm proud to say that these early efforts appeared to be paying off. Year-over-year OEM sales growth in the Dodge business has been in the double digits for the past three quarters, and the very strong finish in the fourth quarter enabled them to finish with a double-digit OEM sales growth for the full year. Keep in mind OEM wins today pay in the aftermarket and MRO dividends for years to come. With fiscal 2025 behind us, let's spend a little time talking about 2026. In terms of end markets, we believe commercial arrow is poised for growth of at least 15% driven primarily by the expected year-over-year production growth at Boeing and Airbus. Last year had its challenges for Boeing, but the company appears to be making substantial progress under its new CEO, and recent trends are very encouraging to the industry. On the defense side, we are comping against substantial growth of nearly 22% in fiscal 2024 and 16% in 2025. Even against this high bar, we believe we can grow the business at least in the mid to high single digits and likely more. We are adding additional capacity at several plants to accommodate very strong demand from a wide array of defense OEMs. Certainly this led by growth in submarines coupled with broader strength across RBC's portfolio. in support of the government's proposed trillion-dollar defense budget. For the industrial businesses, end markets are a little tougher to predict due to the short-term impact of interest rates, tariffs, consumer spending, and general GDP expansion or not. In any event, we feel the MRO side of the world that supports the staples of human life such as food and beverage, grain, aggregate mining, forest products, sewage treatment, provide a steady demand for our North American product offering, and are essential to keep the wheels of American industry turning and America's population fed. The last topic I want to touch on before handing the call over to Rob is the balance sheet. Last quarter we crossed the two-turn mark from a net leverage perspective. and this quarter we pushed it even lower. In total, we allocated $275 million to debt repayment in fiscal 2025, taking our trailing net leverage to 1.7 turns exiting the year. We remain well poised to pursue additional accretive M&A, and the team has been very active in keeping the pipeline full of ideas. Looking ahead, fiscal 2026 is poised to be another strong year for RBC. The backdrop for growth across all of our channels is substantial, and our team is laser focused on executing at the highest level. With that, I'd like to turn over the call to Rob Sullivan for more details.

Thank you, Mike. As Dr. Hartnett indicated, this is another strong quarter for RBC. Net sales growth of 5.8% drove gross profit growth of 8.5%, with more than 110 basis points of expansion. The quarter benefited from strong manufacturing performance, coupled with the structural drivers of our gross margin performance, including dodged synergies, increased utilization of our aerospace and defense manufacturing assets, and the continuous improvement focus on the RBC ops management process. Industrial gross margins during the quarter were 45.7%, and aerospace and defense margins were 41.5%. On the SG&A line, we continued our investments in future growth. This included a combination of investments in personnel costs and back office support, including ID. This resulted in adjusted EBITDA of $139.8 million, up 7.4% year over year, and an adjusted EBITDA margin of 31.9%, which was up 50 basis points year over year. Interest expense in the quarter was $12.8 million. This was down 31.8% 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 was 21.7%, reasonably consistent versus last year's 21.2%. Altogether, this led to adjusted diluted EPS of $2.83, representing growth of 14.6% year over year. an impressive result given the choppiness in commercial aerospace customer production schedules and the macroeconomic softness in the industrial economy. Free cash flow in the quarter came in at $55 million with conversion of 76% and compares to $70 million and 113% last year. The lower conversion rate this quarter was primarily the result of timing around accounts receivable driven by year-over-year increased sales. As usual, we used the cash generated to continue to deleverage the balance sheet. We repaid 82 million of the debt during the quarter, taking our total year-to-date debt reduction to 275 million. All in, this is another strong year for free cash flow generation, and all of that cash flow is applied to debt reduction. This takes our trailing net leverage to 1.7 turns, leaving our balance sheet in an increasingly attractive position to pursue additional accretive M&A. Looking into the first quarter, we are guiding to revenues of 424 to 434 million, representing year-over-year growth of 4.4 to 6.8 percent. That guidance embeds an operating environment that's fairly similar to the fiscal fourth quarter. On the margin side, we were projecting gross margins of 44.25 to 44.75 for the quarter, which at the midpoint would be up against the full-year fiscal 2025 performance. Our focus on continuous improvement on the margin line marches on and can be seen in our outlook for full-year gross margin expansion of 50 to 100 basis points, which will likely be back half weighted. This is inclusive of all tariffs at the current levels. We currently expect tariff pressure to be minimal and believe we can mitigate the expected headwinds and still deliver margin expansion on a full year basis. Similar to prior years, we expect to reinvest some of this margin expansion into fueling future growth through investments in the SG&A line. We expect other factors to be normal as well. including free cash flow conversion of 100%, adjusted taxes in the 22% to 23% range in CapEx, and the range of 3% to 3.5% of sales. In closing, this was another strong quarter for RBC, and we are poised for another strong year. We remain focused on leveraging our core strengths in engineering, manufacturing, and product development to drive both organic and inorganic growth, continuous improvement in operating efficiency, and high levels of free cash flow conversions. With that, operator, please open the call for Q&A.