RBC Bearings Incorporated (NYSE:RBC) Q1 2024 Earnings Call Transcript

RBC Bearings Incorporated (NYSE:RBC) Q1 2024 Earnings Call Transcript August 4, 2023

RBC Bearings Incorporated beats earnings expectations. Reported EPS is $2.13, expectations were $1.97.

Operator: Greetings, and welcome to RBC Bearings’ Fiscal 2024 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your Josh Carroll with Investor Relations. Please go ahead.

Josh Carroll: Good morning and thank you for joining us for RBC Bearings fiscal 2024 first quarter earnings conference call. With me on the call today are Dr. Michael Hartnett, Chairman, President, and Chief Executive Officer; Daniel Bergeron, Director, Vice President and Chief Operating Officer; and Robert 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 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.

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 will now turn the call over to Dr. Hartnett.

Michael Hartnett: Thank you, Josh, and good morning to all, and welcome to the RBC conference call. While I’m pleased to report that our net sales for the first quarter of 2024 were $387 million. This represents an increase of 9.3% from last year. For the first quarter of 2024 sales of industrial products represented 69% of our net sales with aerospace products at 31%. As footnote, over the past 10-years, revenue growth at RBC has been made at the compounded rate of 14.7%. Gross margin for the quarter is 167.9 million or 43.4% of net sales. This compares to 141.2 million or 39.9% for the same period last year, a 350 basis point improvement from last year. Clearly, we are tremendously pleased with the gross margin expansion.

Overall that is a clear result of increased volumes in our aerospace product plans, coupled with the impact of many components of Synergy Achievement from the Dodge acquisition. Given this trajectory, we can report that we plan now to finish the year with gross margins in the low to mid-40% range. I want to take a moment here and thank the RBC teams for their excellence and execution, both in the plants and the offices, as well as the top grades received for customer satisfaction. It is you and your title is intention to detail, to make the difference and create a strong preference for the RBC and Dodge branded products in the aircraft and industrial markets. So thank you all for a job well done. Adjusted operating income for the period was 85.3 million or 22% of net sales compared to last year of 68.3 million and 19.3% respectively, a 25% improvement.

Free cash flow was a strong $55 million. This has allowed us to reduce debt by over $450 million since the acquisition of Dodge in November of 2021. We now have achieved a net debt to EBITDA ratio of 2.84 over trailing 12-months down from 5.65 from fiscal 2022. So, RBC has grown EBITDA at a compounded rate of 15.2% per year over the last 10-years. Adjusted EPS was $2.13 a share and 19% improvement from last year. Adjusted EBITDA was 120.4 million, 31% of net sales compared to a 100.7 million and 28.4% of net sales for the same period a 20% increase. Overall we are encouraged by the cultural fit now that exists between Dodge and the RBC and the environment of teamwork and camaraderie that has developed over the first 18-months since the acquisition, and more importantly, the future that this coupling has created.

We look forward to finishing the year at about $1.6 billion in revenue. On the industrial business, during the period, the industrial sector growth was 4.7% against some strong comps last year. Last year, improved supply chain performance allowed shipments of late orders to customers creating a Q1, Q2 and 2023 sales bolt, that is behind us now. Dodge was a revenue leader in the industrial sector with a 9.4% expansion on a combined OEM and distribution sales. Importantly, several of our target market sectors expanded at a double digit rate over the period. These include oil and gas, food and beverage, and forest products. We expect this to continue for the balance of the year, driven by world events. On aerospace and defense overall, we saw an expansion rate of 21.2% with commercial aero OEM up 26.5% and commercial distribution up 35.9%.

Defense was up 7.9%. OEM defense was up 11%. Jets, missiles, helicopters, and Marine were the drivers. Aftermarket was down 3.3% mainly fighter jets. We have finally shaken off the bad dreams of the pandemic and the continuing endemic problems of the major builders. The demand drivers here as explained in past calls now are the large plane builders and their supply chain in support of production of Boeing and Airbus 787, 737 and A330 planes. And also the private aircraft builders and of course the many subcontractors who support to industry. Currently, we are building 737 materials at a rate of 38 per month, and new orders inbound at a rate of 42. On the 787, our current build rate numbers are three per month, we are building now and seven per month.

We expect that order rate very soon. It is probably a little past due. As this typical of these products today, RBC generates 70% of its sales from sole source or single source positions. In summary, let’s go over the highlight reel. Q1 sales were up 9.3% for the period, EBITDA 120.4 up 19.5%, adjusted net income of 2.13 up 19%, full-year guidance revenues $1.6 billion, gross margins expected to be in the low of mid forties. Debt pay down since November 2021, $450 million, trailing EBITDA to net debt today is 2.84 from 5.65 in fiscal 2022, 70% of our revenues under replaced products consumed in use. And we are normally number one market share supplier of our products. And 70% of our business is either sole source or we are primary source for the product.

Another point to mention is our backlog numbers. They are not particularly relevant. Probably 75% of our revenues never pass through our backlog. The aircraft business is done on a, where orders are received from a computer screen and shipped as received. And Dodge is working normally when they have a very small backlog, if any and shipments are made subject to orders received. And for the most part, it is a day or two within the receipt of that order. So regarding our second quarter of 2024, we are expecting sales to be somewhere between $380 million and $390 million range. And I will now turn the call over to Rob for more detail on the financial performance.

Robert Sullivan: Thank you, Mike. SG&A for the first quarter of fiscal 2024 was 64.7 million compared to 55.8 million for the same period last year as a percentage of net sales SG&A was 16.7% for the first quarter of fiscal 2024 compared to 15.8% for the same period last year. Other operating expenses for the first quarter of fiscal 2024 totaled 18.2 million compared to 20.9 million for the same period last year. For the first quarter of fiscal 2024, other operating expenses included 17.5 million of amortization of intangible assets, 0.3 million of restructuring costs associated with our California operations and 0.4 million of other items. For the first quarter of fiscal 2023, other operating expenses consisted primarily of 17.3 million of amortization of intangible assets, and 3.8 million of costs associated with the Dodge acquisition, partially offset by 0.2 million of other income.

Operating income was 85 million for the first quarter of fiscal 2024 compared to operating income of 64.5 million for the same period last year. Excluding approximately 0.3 million of restructuring costs, adjusted operating income was 85.3 million or 22% of sales for first quarter of fiscal 2024 excluding approximately 3.8 million of acquisition costs. Adjusted operating income for the first quarter of fiscal 2023 was 68.3 million or 19.3% of sales. Interest expense for the first quarter of fiscal 2024 was 20.5 million compared to 15.8 million for the same period last year. For the first quarter of fiscal 2024, the company reported net income of 50 million compared to 37.4 million for the same period last year. On an adjusted basis, net income was 67.7 million for the first quarter of fiscal 2024, compared to 57.5 million for the same period last year.

Net income attributable to common stock holders for the first quarter of fiscal 2024 website 44.3 million compared to 31.7 million for the same period last year. On an adjusted basis, net income attributable to common stockholders for the first quarter of fiscal 2024 was 61.9 million compared to 51.8 million for the same period last year. Diluted earnings per share attributable to common stockholders was $1.52 per share for the first quarter of fiscal 2024 compared to a $1.09 per share for the same period last year. On an adjusted basis, diluted EPS attributable to common stockholders for the first quarter of fiscal 2024 was $2.13 per share compared to $1.79 per share for the same period last year. Turning to cash flow. Company generated 61.7 million in cash from operating activities in the first quarter of fiscal 2024, compared to 59 million for the same period last year.

Capital expenditures were 6.7 million in the first quarter of fiscal 2024 compared to 7.9 million of capital expenditures for the same period last year. We paid down 50 million on the term loan during the period, leaving total debt of 1.34 billion as of July 1st, 2023 and cash on hand was 56.7 million. Our net debt to adjusted EBITDA for the trailing 12-months is 2.84 compared to 3.06 at the end of fiscal 2023 and 5.65 at the end of fiscal 2022. I would now like to turn the call back to the operator for the question-and-answer session.

Operator: Thank you. [Operator Instructions] Our first questions come from the line of Kristine Liwag with Morgan Stanley. Please proceed with your questions.

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Q&A Session

Kristine Liwag: Good morning, guys. On the margin that you guys printed this quarter, I mean, is just I mean, I’m sorry, but it is just a monster margin. So my first question is, in hindsight, like, being able to generate margins, at 43.4% gross margin within about almost two years ownership of Dodge. In hindsight, like where were you surprised. Like one, were you really surprised that you can, you got this much margin expansion in short period of time? And then number two, can you give some color in terms of where that surprise could have potentially come from? I mean, this is a pretty meaningful change in profitability in such a shortage of time for a company that is becoming larger like yours?

Michael Hartnett: Sure. Well let’s put it this way. Kristine, we are pleased that the margin expansion that we have been able to achieve with the Dodge RBC combination since November of 2021. And are we a little ahead of our plan? I would say we are. Is there any one thing that we did to achieve that kind of performance? There is really never ever one thing that you can do. I mean, there is a whole series of things that has to be done in terms of, how to sort of tune up the performance of a business. And certainly looking at the price cost of your 80/20 items is really important thing to do first, right out of the base. And trying to understand, if you have a large revenue producer that has a smaller margin than it should have or that is acceptable, what to do about it.

And so you have a lot of smart people in the system that have a lot of good ideas on how to correct things like that. And so you have lots of meetings with many people on issues such as that product line by product line to discuss what can be done in terms of operational per performance, what costs should be passed along to the marketplace, because you have experienced some pretty steep material charges from suppliers over the years and they weren’t passed along. And whether or not that particular product offered for sale is something you should even offer for sale. I mean, some products linger when they should die. And so it is, there is a certain coloring effect and that imbalance improves the mix. And I think the other thing is you look at all the entire customer base has various discounts associated with how they buy the product.

And often those discounts haven’t been revisited in a decade. And so the revisitation of those discounts is another important part of the process. And finally having additional volumes going through our aircraft plants that have been sort of on standby since 2019 is extraordinarily helpful. So there is several components that are working together for us right now that are very positive. And we are on a very good path.

Kristine Liwag: And then you mentioned that backlog isn’t a great read through for the business now, especially with the book to ship aspect of the portfolio. So first, what have you had to do differently, if any, to be able to forecast demand and get your demand signals to your planning in your factory? And then second, how accurate has your methodology been in hindsight?

Michael Hartnett: Well, there is kind of two answers to that. I mean for the bulk of our business that is aircraft, it is pretty easy to understand what you should be building and have available for immediate delivery based upon your contracts and Boeing or Airbuss or Cessna’s build rate. And so you stay pretty close to the build rate. You understand what your bill of materials is for that particular airframe and you understand what your obligated to in terms of a statement of work. And if you revisit that monthly and you make sure that you have materials inbound and that you have the right load against your plants so that that product’s available when it needs to be available. And that is really the way that we got supplier of the year at Boeing is that is our process.