RBC Bearings Incorporated (NYSE:RBC) Q2 2024 Earnings Call Transcript

RBC Bearings Incorporated (NYSE:RBC) Q2 2024 Earnings Call Transcript November 11, 2023

Operator: Greetings, and welcome to the RBC Bearings Fiscal 2024 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. The 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 host, Josh Carroll with Investor Relations. Please go ahead.

Josh Carroll: Good morning, and thank you for joining us for RBC Bearings fiscal 2024 second 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 would now like to turn the call over to Dr. Hartnett.

Michael Hartnett: Thank you, Josh, and good morning, and welcome to everyone. I’m pleased to report that our net sales for the second quarter of fiscal 2024 were $385.6 million and this represents a 4.4% increase from last year. For the second quarter of 2024, our industrial products represented 67% of our sales and aerospace products 33%. As a footnote, over the past five years, revenue growth at RBC has been compounded at a rate of 16.8%. Gross margin for the quarter was $166.3 million or 43.1% of net sales. This compares to $151.1 million or 40.9% for the same period last year, a 220 basis point improvement from last year. Clearly, we are tremendously pleased with this performance. The gross margin expansion is derived from increased volumes in our aerospace products plants, thereby improving our absorption rates, coupled with synergy achievements from the Dodge acquisition and price improvement overall on most lines.

Our profitability, we are ahead of plan and making good progress and expect to finish the year with gross margins in the low to mid 40% range. Again, many thanks to the RBC teams for this performance. We all understand well that excellence in customer care is the cornerstone of our success. Adjusted operating income for the period was $88.4 million, 22.9% of net sales compared to last year’s $76 million and 20.6%, respectively, a 16.3% improvement. Free cash flow was $45.6 million, debt reduction continues to be a priority. We have achieved a $490 million decrease in debt since the acquisition of Dodge in November of 2021, 24 months ago. We’ve now have achieved a net debt to EBITDA ratio of 2.71 over the trailing 12 months, down from 5.65 from fiscal 2022.

RBC’s record of EBITDA growth over the last five years now stands at 19.9%. Adjusted EPS was $2.17 a share, adjusted EBITDA was $122.1 million, 31.7% of net sales compared to $108.8 million, 29.5% of net sales last year, a 12.2% increase. Overall, we are proud of the continual improvements made in the execution of our business and are excited to see the robust acceleration in demand for our products from industry leaders in the aircraft, marine and space industries. We look forward to a March year-end with revenues finishing between $1.55 billion and $1.6 billion range. On the industrial businesses, during the quarter the industrial growth was a negative 2.8% overall against some pretty strong comps last year. At that time, improved supply chain performance allowed us to ship orders, which were late to customers, creating a bulge in revenues.

Dodge revenues were down 4.4% year-to-date, and we expect to be up in Q3 a few percentage points in this — on this measure. RBC classic industrial sales were up 1.7% during the same period. We had very little supply chain impact in the — on the classic side of our industrial business. On aerospace and defense, commercial aerospace was up 24.9%. The aerospace and defense sector was up 22.9% overall. OEM defense includes components and assemblies for jets, missiles, helicopters, marine valves, satellites and rockets. Aftermarket was up 26.1%. The main drivers here, jets, helicopters and jet engines. The aerospace market is now strongly accelerating with volumes increasing quarterly. The demand drivers here are, of course, the large plane builders and their supply chain, all in support of production for Boeing and Airbus ships.

Also the private aircraft builders and, of course, the many subcontractors who support the industry. Currently, the OEM is building 737 ships at a 38 per month rate. New orders to RBC are inbound at about a 42 ship per month rate and moving to a $47 per month rate soon. On the 787, our current build rate numbers are approximately four per month and moving to seven per month order rate by April. This has a substantial impact to us. Airbus is pursuing the build rate of — on the 320 ships at about 70 ships per month as they exit 2024. As is typical of these products today, RBC generates approximately 70% of its sales from sole sourced or primary sourced positions. Our customers trust us. In summary, let’s go over the highlight reel. For Q2, sales were up 4.4% for the period.

EBITDA $122.1 million, up 12.2%, adjusted net income, $68.9 million, up 11.3%. Full year guidance, revenue is $1.55 billion to $1.6 billion. Gross margin is expected to be in the low to mid-40s. Debt paydown since November 2021 is $490 million, trailing EBITDA to net debt today is 2.71, and over half of our revenues are to replace products that are consumed in use. Regarding our third quarter for 2024, we are expecting sales to be somewhere between $370 million and $380 million range. I’ll now turn the meeting over to Rob Sullivan, our CFO, for some details on the financials.

Robert Sullivan: Thank you, Mike. SG&A for the second quarter of fiscal 2024 was $60.5 million compared to $57.5 million for the same period last year. As a percentage of net sales, SG&A was 15.7% for the second quarter of fiscal 2024 compared to 15.6% for the same period last year. Other operating expenses for the second quarter of fiscal 2024 totaled $18 million compared to $21.6 million for the same period last year. For the second quarter of fiscal 2024, other operating expenses included $17.6 million of amortization of intangible assets, $0.3 million of restructuring costs, and $0.1 million of other items. For the second quarter of fiscal 2023, other operating expenses consisted primarily of $16.8 million of amortization of intangible assets, $4.0 million of costs associated with the Dodge acquisition, and $0.8 million of other items.

Operating income was $87.8 million for the second quarter of fiscal 2024 compared to operating income of $72 million for the same period in fiscal 2023. Excluding approximately $0.6 million of restructuring costs, adjusted operating income was $88.4 million or 22.9% of sales for the second quarter of fiscal 2024. Excluding approximately $4 million of acquisition costs, adjusted operating income for the second quarter of fiscal 2023 was $76 million or 20.6% of sales. Interest expense for the second quarter of fiscal 2024 was $20.1 million compared to $18.3 million for the same period last year. For the second quarter of fiscal 2024, the company reported net income of $51.7 million compared to $43.8 million for the same period last year. On an adjusted basis, net income was $68.9 million for the second quarter of fiscal 2024 compared to $61.9 million for the same period last year.

Net income attributable to common stockholders for the second quarter of fiscal 2024 was $45.9 million compared to $38.1 million for the same period last year. On an adjusted basis, net income attributable to common stockholders for the second quarter of fiscal 2024 was $63.2 million compared to $56.2 million for the same period last year. Diluted earnings per share attributable to common stockholders was $1.58 per share for the second quarter of fiscal 2024 compared to $1.31 per share for the same period last year. On an adjusted basis, diluted earnings per share attributable to common stockholders for the second quarter of fiscal 2024 was $2.17 per share compared to $1.93 for the same period last year. Turning to cash flow. The company generated $53.1 million in cash from operating activities in the second quarter of fiscal 2024 compared to $29.4 million for the same period last year.

Capital expenditures were $7.5 million in the second quarter of fiscal 2024 compared to $15.2 million for the same period last year. We paid down $40 million on the term loan during the period, which was partially offset by drawing $18 million on the revolver for the acquisition of Specline, leaving total debt of $1.32 billion as of September 30th and cash on hand was $56.6 million. I would now like to turn the call back to the operator for the question-and-answer session.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Kristine Liwag with Morgan Stanley. Please proceed with your question.

Kristine Liwag: Hey, good morning, guys. How are you?

Michael Hartnett: Good morning, Kristine.

Kristine Liwag: Maybe focusing on the industrial end market, we saw a year-over-year decline in revenue and a sequential decline as well. Can you give more color regarding what you’re seeing regarding demand signals from your customers by the different end markets you’re serving and how you expect the rest of the year to shape up?

Michael Hartnett: Well, we’ll try. Let’s see. So when we look at it…

Kristine Liwag: [Multiple Speaker]

Michael Hartnett: Yeah. Well, when we look at our industrial end markets, overall they’re steady. When I look at Dodge’s second — year-to-date on Dodge, they’re up 2.2%. So when I look at Dodge’s second quarter, I mean, there’s basically — it’s a 50/50 split between some — between international and supply chain. The supply chain catch up that happened last year that affects the comps in a negative way. And when I look at the international piece, most of that is timing based upon big orders that were received, but product wasn’t completed in the quarter. So I think that should normalize itself. And the supply chain is pretty much — has pretty much normalized. And now those industrial end markets, some are up and some are down.

But overall, they’re pretty steady. And the ones that are up are oil and gas, aggregate, food and beverage to give you three. And the ones that are down are semicon, warehousing and construction and mining equipment makers. So one is offsetting the other and the whole thing seems to be steady. We expect the industrial business to be up a few percentage points in the third quarter on a quarter-to-quarter comp basis and to be pretty much steady in the fourth quarter with last year, maybe up a few percent. It’s just — it’s hard to project that given what the Fed is doing and what you hear for GDP growth and what you see for employment figures and then all that has to be sort of put into the stew and stirred around and comes up with some sort of an industrial projection on what your business is going to do.

And I don’t think anybody really does that well.

Kristine Liwag: Great. It’s really helpful context. And looking at the margins, is there a margin differential between oil and gas, aggregate and food beverage, they’re doing well versus the ones under some pressure like semiconductors, warehousing, construction and mining equipment? Like is there one that’s more profitable than the others in terms of an overall bucket perspective?

Michael Hartnett: Yeah. Well, the ones that are down, semicon is fine and construction and mining is okay. It’s not a barn burner. But warehousing is pretty weak profitability wise. So the ones that are up are stronger than the ones that are — that some of the markets that are off a little bit. To some extent, we’re rationalizing our offering in some of those markets where the margins are compressed. And so, over a longer period that will affect our revenue line too. It will be a second order effect, but it will be an effect.

Kristine Liwag: Great. Thank you for the color. And if I could sneak a third one in. If we look at gross margin, I mean, gross margin at 43.1% in the quarter, 43.2% adjusted, is a pretty high bar for you guys. That’s great performance. Can you talk about the drivers of this regarding the synergies you’re able to extract from Dodge? And I know the first two years of the transaction is generally more plant focused. But are you starting to do more of the shifting to low cost manufacturing and trying to get more of the next step of the synergy plan from the deals?

Daniel Bergeron: Yeah. Kristine, this is Dan. For the six-month period, we’re up about 1,100 basis points on EBITDA margin for Dodge driven by — a lot by the synergies. That puts us at about $70 million to $80 million of synergy based on a run rate of $700 million in sales [technical difficulty] done pretty quickly and get in place. I think the ones that we’re working on that are longer poles in the tent that are going to contribute over the next two to three years is cross-selling with our sales teams, which is starting to really pick up nicely on the industrial side. We’re starting to see a lot of good activity there. So we should start seeing that come in the next 24 to 36 months and have an impact on our growth on the top line.

We continue to work on in-sourcing product into our US plants and into our Mexican facilities. And that’s more of a long-term goal for us. So that’s going — to get the benefit from those activities, it’s going to take two to three years. So we’ll see a lot more of that impact in year four and year five for us on our projections here. So I think we’re a lot further ahead in the process than we thought we would be. And I still think we have some really good activity to come along, and we’re just starting now to try to take advantage of the size of our company and our buying opportunities and leverage in the SG&A section of the P&L. So, we’re going to start seeing some nice activity there over the next 12 to 24 months from everything from insurance to different services that we have to acquire, which — the bigger company now, and we have a little more leverage in negotiating contracts.

So, we’re pretty happy where we are in the process right now.

Michael Hartnett: Yeah. I might add one other thing, Kristine, is that the Dodge plants in the US are pretty full with production, which makes it a little bit difficult for us to expand production for new products and to expand our lines. And so, in February, our new plant for Dodge will be completed in Tecate, where we’re adding 100,000 square feet and moving some of the Dodge operations into Tecate to open up floor space in the United States for new product lines. And so, we’re pretty excited about that. It has — it not only opens up floor spacing in the United States for new product growth, which has been constrained by supply chain support. But it also allows us to achieve economic benefits in labor cost and on products that have been under stress. So, yeah, I think there’s — we have big hopes for that new plant.

Kristine Liwag: Great. Thank you for the color, guys.

Michael Hartnett: Yeah. Thank you.

Operator: Our next question is from Pete Skibitski with Alembic Global. Please proceed with your question.

Peter Skibitski: Hey, good morning, guys. Nice performance.

Michael Hartnett: Thank you, Pete.