RBC Bearings Incorporated (NYSE:RBC) Q3 2024 Earnings Call Transcript

RBC Bearings Incorporated (NYSE:RBC) Q3 2024 Earnings Call Transcript February 8, 2024

RBC Bearings Incorporated misses on earnings expectations. Reported EPS is $1.85 EPS, expectations were $1.91. RBC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the RBC Bearings Fiscal 2024 Third 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 host, Josh Carroll with Investor Relations. Please go ahead.

Josh Carroll: Good morning, and thank you for joining us for RBC Bearings fiscal 2024 third 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; 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. Net sales for the third quarter of fiscal 2024 were $373.9 million. This represents an increase of 6.3% from last year. And I’m happy to report this is within our guidance range on revenues. The third quarter of 2024 sales of industrial products represented 65% of net sales with aerospace products at 35%. As a footnote over the past five years revenue growth at RBC has been a compounded rate of 16.8%. Gross margin for the quarter was $158 million or 42.3% of net sales, again within our range. This compares to $146 million or 41.5% for the same period last year, an 80 basis point improvement. We continue to see year-on-year improvement in gross margin, as we continue to strengthen operational performance and improve both absorption and methods in our plants.

This quarter because of fewer production days, leading to lower overhead absorption, margin is normally the lowest of the year. It’s historically bounced back in Q4 and there’s no surprises here. We see this effect every year. Overall, profitability continues ahead of plan, year-to-date and to reconfirm, we expect to finish the year in the low to mid-40% range on gross margins. Again our hats are off to the RBC team for this performance. We all understand that we are in business to service our customers to the full extent of our abilities with high quality and service levels is always our first priority. More than 70% of our revenue are from products where we are – sole or primary source. Our customers have learned over the years they can trust us.

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Q&A Session

When they come to us at the last minute in crisis, we perform for them. Adjusted operating income for the period was $75.5 million, 20.2% of net sales compared to last year $71.6 million and 20.4% respectively, a 5.3% improvement. Free cash flow was a strong $70.9 million. Debt reduction continues to be a priority and is progressing as planned. We achieved $550 million decrease in debt, since the acquisition of Dodge in November of 2021, 27 months ago. And net debt-to-EBITDA ratio of 2.5, over trailing 12 months down from 5.65 in fiscal 2022. RBC’s record of EBITDA growth over the last five years now stands at 19.4%. Adjusted EPS diluted was $1.85 a share. Adjusted EBITDA was $109.5 million or 29.3% of net sales, compared to $103.3 million or 29.4% of net sales for the same period last year, a 6.1% increase.

We continue to make continual improvements in the execution of our business and are excited to see a robust acceleration in demand, for our products from industry leaders in the Aircraft, Marine and Space industries. We look forward to March, year-end with revenues finishing in the $1.5 billion range. On the Industrial business, during the quarter the industrial growth was minus 0.6%, overall against some strong comps last year. Last year improved supply chain performance, allowed us to ship orders, which were late to customers, creating a bulge in sales and distorting year-on-year comps by a few percentage points. We now have well-performing supply chain on the industrial side, so the environment has changed and orders late to customers’ requests are back to normal.

Dodge revenues are up 1.4% year-to-date, down in Q3 minus 0.3%. And we expect to be up again in Q4, a few percentage points. RBC Classic Industrial sales were down 1.4% during the last period, driven solely by softness in semiconductor machine makers. Normalizing for semiconductor sales, RBC Classic Industrial revenues would have been up 3.6%. In a word our Industrial business is performing well, and is the — is in the steady ESG goals mode. On Aerospace and Defense, Commercial Aerospace was up 16.5%. The Aerospace and Defense sector was up 22.5% overall. The constraint here is not demand, its production. We are working to expand manufacturing assets as well as increased in Biomaterials to fuel the continued 20-plus percent per year-on-year expansion across many facilities that service these markets.

As explained in prior calls, OEM defense includes components and assemblies for Jets, Missiles, Helicopters, Marine Valves, Satellites, Rockets. And it’s up 32.7% year-over-year. Bookings overall in this sector have been very strong. We now have over 60 contracts negotiated and signed with a value of approximately $1 billion. Additionally, we are in a position to grow this metric substantially again, by midyear. Finally the aftermarket was up 26.1%, main drivers, jets, helicopters, engines and marine. As you can see the aerospace market is strongly accelerating with increased volumes quarterly. Demand drivers here are defense and of course large plane builders, the submarine and weapons OEMs and their supply chains. Despite the news otherwise, we are building 737 materials at the 42 per month rate and new orders to RBC are inbound at about the 47 per month rate.

We don’t expect this change to — this situation to change materially at this time. On the 787, our current build rates are approximately five per month now and seven per month by April that’s an important ship to us. As, you know, airbus is pushing the 320 ship build to exceed the monthly rate of 70 in 2024. So in summary just to go over the highlight reel, Q4 sales were up 6.3% for the period. EBITDA $109.5 million, up 6.1% from last year. EBITDA 29.3% of sales, up from 26.7% in Q3 of 2022, adjusted net income of $60 million, up 12.4%; debt pay down since November of 2021 $550 million, trailing EBITDA to net debt 2.5 versus 5.65 in fiscal 2022, and well over half of our revenues are to replace products consumed in use. Full year guidance, revenue range FY 2024 in the $1.55 million range and gross margins will be in the low to mid-40s.

Regarding the fourth quarter of 2024, we are expecting sales to be somewhere between $405 million and $415 million range. And I’ll now turn the call over to Rob, our Chief Financial Officer for more financial details.

Robert Sullivan: Thank you, Mike. SG&A for the third quarter of fiscal 2024 was $63.9 million compared to $56.8 million for the same period last year. As a percentage of net sales SG&A was 17.1% for the third quarter of fiscal 2024 compared to 16.1% for the same period last year. Other operating expenses for the third quarter of fiscal 2024 totaled $18.9 million compared to $18.8 million in [indiscernible]. For the third quarter, other operating expenses included $17.7 million of amortization of intangible assets, $0.1 million of restructuring costs and $1.1 million of other items. For the same period last year, other operating expenses consisted primarily of $17.4 million of amortization of intangible assets, $1.2 million of Dodge TSA costs and other costs associated with that acquisition, and $0.2 million of other items.

Operating income was $75.2 million for the third quarter of fiscal 2024 compared to operating income of $70.4 million for the same period last year. Excluding approximately $0.2 million of restructuring costs and $0.1 million of transaction-related costs, adjusted operating income was $75.5 million for 20.2% of sales for the same — for the third quarter of fiscal 2024. Excluding approximately $1.2 million of acquisition costs, adjusted operating income for the third quarter of fiscal 2023 was $71.6 million or 20.4% of sales. Interest expense for the third quarter was $19.3 million compared to $20.9 million for the same period last year. For the third quarter of fiscal 2024, the company reported net income of $46.6 million compared to $36.3 million for the same period last year.

On an adjusted basis, net income was $60 million for the third quarter compared to $53.3 million for the same period last year. Net income attributable to common stockholders for the third quarter was $40.8 million compared to $30.6 million for the same period last year. On an adjusted basis, net income to common stockholders attributable to common stockholders for the third quarter was $54.2 million compared to $47.7 million for the same period last year. Diluted earnings per share attributable to common stockholders, was $1.39 per share for the third quarter compared to $1.05 for the same period last year. On an adjusted basis, diluted EPS attributable to common stockholders for the third quarter was $1.85 per share compared to $1.64 per share for the same period last year.