Q2 2023 RBC Bearings Inc Earnings Call
Okay.
[music].
Greetings and welcome to the RBC bearings second quarter fiscal year 2023 earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Josh Kara Investor Relations. Thank you you may begin.
Good morning, and thank you for joining us for RBC bearings fiscal 2023 second quarter earnings Conference call.
With me on the call today are Doctor, Michael J, Hartnett, Chairman, President and Chief Executive Officer.
Daniel <unk> Director, Vice President and Chief operating Officer, and Robert <unk>, Vice President and Chief Financial Officer.
Before beginning todays 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 995.
Actual results may differ materially from those projected or implied due to a variety of factors.
Were 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 is available on the company's website.
With that I'll now turn the call over to Dr. Hart.
Okay. Thank you Josh.
Good morning, everyone and welcome.
Yeah.
I'll go through the introduction here and then turn it over to Rob.
Net sales for the second quarter of 2023 were $369 2 million.
Versus $160 9 million for the same period last year.
An increase of 129, 4%.
The second quarter of 2023, our sales of our industrial products represented 72% of.
Net sales in Aero space products, 28%.
Gross margin for the quarter was 151.1 million or 49% of net sales.
This compares with $62 5 million or 38, 8% for the same period last year.
Adjusted operating income was 76 million, 26% of net sales compared to last year of $20 million and 12, 4% respectively.
GAAP EPS was $1 31, adjusted EPS came in at $1 93 per share.
Adjusted EBITDA was $108 8 million 29, 5% of net sales compared to $45 4 million and 28, 2% of net sales for the same period last year.
During the period, we paid down debt of another $45 million on the term loan and had free cash flow of $14 1 million.
We entered the second quarter with continued strength in the industrial sector.
And a good outlook for the balance of our fiscal year.
Sales of industrial products were up 270 point, 297% from last year.
Rpc's organic growth for the industrial products was seven 9%.
<unk> expanded 16, 2% rate.
So that that average rate for industrial growth was somewhere around 14%.
Weakness from Europe reduce the classic growth rate from.
Double digit expansion on the RPC side of the side of the coin.
Major markets.
Mining aggregate oil and gas food and beverage grain semiconductor machinery.
In general industrial distribution continue to perform well.
Turning now to aerospace and defense overall, the second quarter.
2023, net sales were up 11, 4%.
<unk> aerospace expanded at a rate of 31, 3%.
Expansion of production levels at Boeing and Airbus were the obvious prime drivers here.
You know we are at a very early innings of a multiyear expansion with these majors.
Yeah.
We remained busy adding capacity in the forms of capital and staff to our manufacturing sites in order to support future quarter to quarter demand requirements.
Putting this all back together again after the pandemic ends and boeing's problems.
A word on our defense business.
Business contract is 15, 3%.
The delay.
And shipping products within the quarter as a result of normal production delays and a short fall in order rate from historical norms for government spares on military aircraft.
Platforms explains most of that variance.
Yeah.
It's disturbing to see that deferred maintenance or of our important defense aircraft continues with low grades of fleet readiness are reported by the Air Force times.
Sophisticated materials needed to produce replacement parts have at least a 52 week lead time. So this problem will be with us for some time.
Obviously fleet readiness should be announced national defense priorities, So ray your Congressman.
Yeah.
Recently, we have had an unusual amount of inquiries for products associated with munitions used in Ukraine.
As well as other sophisticated weaponry.
Some of which recently converted to orders.
Yeah.
Regarding the third quarter, we are expecting sales to be between 348 and $360 million.
I'll now turn the call over to Rob for a more detail on the financial performance.
Thank you Mike SG&A for the second quarter of fiscal 2023 was $57 5 million compared to $40 2 million for the same period last year as a percentage of net sales SG&A was 15, 6% for the second quarter compared to 25% for the same period last year.
Looking forward with fewer production days in the third quarter SG&A as a percentage of sales is expected to be closer to 16% to 16, 5% of sales.
Other operating expenses for the second quarter of fiscal 2023 totaled $21 6 million compared to $5 7 million for the same period last year for.
For the second quarter of fiscal 2023, other operating expenses included $16 8 million of amortization of intangible assets $4 million of costs associated with the Dodge acquisition.
Zero point $8 million of other expense for.
For the second quarter of fiscal 2022. Other operating expenses consisted primarily of $2 8 million of amortization of intangible assets $1 4 million of acquisition costs, $1 1 million of restructuring costs and related items and zero point $4 million of other items.
Operating income was $72 million for the second quarter of fiscal 2023 compared to operating income of $16 6 million for the same period in fiscal 2022 under.
On an adjusted basis operating income would have been $76 million for the second quarter of fiscal 2023 compared to adjusted operating income of $20 million for the second quarter of fiscal 2022.
Interest expense for the second quarter of fiscal 2023 was $18 3 million compared to $15 8 million for the same period last year.
For the second quarter of fiscal 2023, the company reported net income of $43 8 million compared to a net loss of $1 4 million for the same period last year.
On adjusted basis, net income was $61 9 million for the second quarter of fiscal 2023 compared to $30 5 million for the same period last year.
Net income available to common stockholders for the second quarter of fiscal 2023 was $38 1 million compared to a net loss of $1 9 million for the same period last year.
On an adjusted basis net income available to common stockholders for the second quarter of fiscal 2023 was $56 2 million compared to $29 9 million for the same period last year.
Diluted earnings per share was $1 31 per share for the second quarter of fiscal 2023 compared to a loss of <unk> <unk> per share for the same period last year.
On an adjusted basis diluted earnings per share for the second quarter of fiscal 2023.
<unk> 93 per share compared to adjusted diluted earnings per share of $1 16 per share for the same period last year.
Turning to cash flow the company generated $29 3 million in cash from operating activities in the second quarter of fiscal 2023 compared to $40 2 million for the same period last year.
Our cash from operations in the current quarter was impacted by continued strategic investments in our inventory and the timing of certain tax payments.
Expenditures were $15 2 million in the second quarter of fiscal 2023, which in addition to our traditional capital spend reflects certain costs to transition of our it systems hardware and applications from AVB RBC as we rolled off the TSA.
This compared to $3 5 million of capital expenditures for the same period last year.
We paid down $45 million on the term loan during the period, leaving total debt of $1 five 2 billion as of October one 2022.
And cash on hand was $88 5 million.
I would now like to turn the call back to the operator for the question and answer session.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up the handset before pressing the star.
Our first question is from Joe Ritchie with Goldman Sachs. Please proceed.
Hi, Thank you good morning, everybody.
Good morning.
Hey, guys last quarter, we talked a little bit about supply chain issues.
And I was just curious.
Obviously, you put up a pretty healthy growth in the industrial sector and then also in A&D, but I just wanted to see like what update can you kind of give us on how supply chain is evolving for you.
Yes sure Joe.
Well supply chain is continues to be a problem.
Uh huh.
And.
<unk>.
There is.
Something that we have to.
We actually have to work on every day.
It continues to bite us.
<unk>.
Sensitive places.
And so we.
We continue to.
Develop countermeasures to.
Two.
Reverse its impact.
So.
The deep <unk>.
The difficult thing is our materials for the most part.
They're not simple materials, they're sophisticated steels.
Titanium and aluminum.
Sometimes the specifications can be extreme.
The lead time on a lot of these materials has moved out.
Fast 50 50 weeks.
So that means to your planning horizon.
<unk> is another six months into your planning horizon.
You're.
Trying to plan your plants, so you have to make adjustments for that.
There is a prohibition on.
The supply from China, now certain defense products that.
We are.
Yeah.
Approved in the past so that makes it more difficult, particularly when theres not any U S suppliers producers of some of these components.
And so far it's manageable, but it's difficult and.
Okay.
In the materials in many cases.
The price of these materials as has doubled.
And so what do you have to.
No.
Work on.
Our contracts.
Making sure that we're passing through them.
Owner economics.
The economics, that's required in order to.
Normalized margins. So it's a it's definitely it definitely keeps everybody busy.
Uh huh.
Okay.
Certainly a reason to get up early and get to work.
That's helpful context, and good segue into my next question.
Which is really just around the pricing that you're putting through.
I know that.
Yes, the vast majority of the revenues that came in from Dodge.
Go through distribution.
And so I'm curious like if theres any other specific color you can tell us about how much pricing is coming through today, what's your expectation on the industrial side of your business for pricing.
As we head into calendar year 2023.
Well I think I think.
Everybody knows what inflation is doing.
And that certainly gets into the manufacturing cost of our products.
And we have to.
We have to have the right.
Metrics to measure it and make sure that we reflected in price changes to to the marketplace. I mean, it's not that we're unique in this I mean the hope.
The baseline for.
For all the suppliers is it changes monthly so.
You know, it's it's definitely an area we haven't had to.
And to consider so carefully in past years, but it's.
It's.
One thing about manufacturing products.
There's always there's always a different problem yourself.
I mean, Mike maybe just a quick follow on on that one do you do you anticipate just how your contracts are set up that youre going to have to give back any pricing.
Next year, if we actually start to see deflation, obviously, the market's acting well today on the.
Yes, hopefully getting closer to like a peak inflation number.
Just any thoughts around that would be helpful.
You mean.
If you get inflation number goes negative and we have.
Well, if I only had a couple of things.
Yeah. No. This is more of a comment around like your costs right because you've had.
Pretty pretty significant material deflation already in the last couple of quarters I'm. Just curious like do you have like two way price material formulas with your.
With your distributors or with your Oems or you'd have to give back some of that pricing.
Well.
If you.
If the baseline changes from a from a dollar to $1 50.
And if inflation goes from whatever whatever it was last quarter, 8% to 2%.
We're going to see a 2% adjustment on a $1 50.
And that adjustment will be up if it goes negative then we will.
Well adjust it down, but we're not anticipating any negativity.
Inflation for.
A long time to come.
Okay understood. Thank you.
Our next question is from Steve Barger with Keybanc capital markets. Please proceed.
Hey, Thanks, good morning.
Good morning, good morning.
Mike I'd like to get your take on the industrial cycle. The September and October PMI readings were around 50, but September industrial production was still five 3%.
So they are both still showing growth, but obviously IP is a lot stronger how are you incorporating that kind of backdrop into your production planning or do you even look at that or just listen to your customers. Just how are you thinking about the cycle.
Well.
Yeah.
It's a simple.
Question with a complex answer Steve.
Just because of the number of different markets that we're in.
All of these markets.
Have their own little.
Economic strength or weakness.
And so.
And a lot of cases.
We will have.
Long term agreements with with these customers that.
That you know.
<unk>.
Protects the supply side for us.
And.
Yes.
We look at what they are.
Demand outlook is for example.
How many how many shifts is boeing going to produce in a given month.
Our mix.
What rate should we be running that sort of thing.
Yeah.
So.
Then we roll it all up into a into a business plan.
In many cases, particularly on the Dod side of the business.
That's really driven a lot by the.
Hum.
PMI index and.
And other economic indexes.
Because basically Dodge is in and out business where.
We're RBC historically is a business that has contracts and in the long term agreements.
Backlog.
So you have to be just a little bit closer to you a little bit closer to the.
Does the economy, the Dodge side than you are on the right.
RBC side.
So with Dodge, Yes, we have we have models and we have economic inputs.
Basically give us a forecast of demand going forward for each product line.
And from that forecasted demand, we decide whether or not.
The forecaster is crazy or we should believe him.
And decide at what rate, we should we should load load the plants.
To produce these products for the most part on the Dod side.
Yes.
Mutually.
Dependent upon.
U S consumption.
Yeah.
How much grain how much aggregate how much how many materials that sort of thing.
Hum food and beverage how much how much consumption is going on and.
And that's that's a big economic driver for dogs. So that's how we do it.
So what are your thoughts as you go into the next few quarters.
On the Dod side, knowing that it is closer to the real economy or are you expecting that that's going to moderate in terms of growth rates or does it still seem pretty robust as far as you can see.
Yes, I think for the balance of our fiscal year, I mean, I don't like to get out too.
Too far because.
I don't like to go beyond that.
The fiscal year, but.
I think for the balance of our fiscal year, we expect the industrial.
Businesses to perform in the low double digits.
Organically low double digits, okay, yes.
Got it and and I know the pace of commercial aerospace has been hard to predict over the past couple of years, but if we do track to the multiyear expansion you're expecting how are you thinking about normalized commercial aero growth rates.
And I know you don't like to get too far out, but you do have contracts on that business. Just how are you thinking about the back half of 'twenty, three and into 'twenty for fiscal for Ya.
Well I think.
I think the.
Commercial growth rates are.
Demonstrated in the second quarter.
At the OEM level was.
30% kind of number yes.
Yes.
We're going to I think we're gonna be living there for a while.
Got it well and so and presumably you expect the defense side to improve from I think you said it was down 15 this quarter because of those some of those shipping delays.
Yeah.
On the defense side, we make very complicated.
<unk> sophisticated.
<unk> that require all sorts of outside processing and <unk>.
And government buy offs and.
So it's.
It just it all doesn't happen in a quarter.
Right.
Okay, one more.
More and ill jump back in line first half free cash flow was $65 million I know that included some of the cash transition and integration costs can you tell us what you expect in the back half for operating cash flow and Capex or just free cash flow if it's easier.
Let me put it this way for Steve I mean, the first this quarter alone.
We continue that strategic inventory build at $17 million.
Dodge cost to stand up their systems kind of didn't pay the TSA fits close to $10 million and then we had timing of two Pat tax payments coming through so we had $34 million of tax payments. This quarter will have one tax payment in Q3, one in Q4. So it starts to spread out. So I think we'll start to see that operating cash escalate.
Get to the back half of the year.
So I mean, essentially all of those things that you just mentioned.
Well I guess, you said some of the tax falls in the back half or that was in <unk>.
In Q2, we had two payments in Q3 will have while Q4 will have one so it was just the timing and got it to we got hit hard the Dodge I understood costs should start to fall off obviously, the TSA goes away in.
In November .
And would you expect the inventory build to moderate in the back half or just given the growth rates, Mike just talked about you're still going to be running ahead on working cap.
Yes.
Working hard to liquidate.
Liquidate some of that some of that inventory build as a result of supply chain.
This mismatch.
Youre, making in assembly and you get all your you get all your castings, which you didn't get the seal for the bearing you can't ship the assembly so.
Some simple things can tie up a lot of working capital.
Understood. Thanks.
Our next question is from Seth Weber with Wells Fargo. Please proceed.
Hi, guys. How are you it's actually Larry Davis on for Seth today, Thanks for taking my questions.
Larry.
First wanted to ask about gross margins or margins that were better than we expected up about 100 basis points sequentially.
Where do you see the trajectory of gross margins going for the balance of the year given your price cost expectations.
I think we will continue to see some strength in the gross margin space. I think Q2 was a obviously a exceptionally strong quarter third quarter with fewer production days 10 things tend to moderate a bit in the fourth quarter tends to be a stronger quarter for us as well.
Okay.
But are you thinking.
I mean, you have been at or above 40, or so for the last couple of quarters does that kind of.
Yes.
I think that's about where we're living these days.
Yes neighborhood.
Yeah for sure for sure. Okay. Thanks, and then I just wanted to follow up on China. I know you had some manufacturing issues. There last quarter you guys got kind of.
Little bit jammed up.
I guess can you talk about the production dynamics that youre seeing there with Colgate and the.
The regional dynamics there.
Yeah right now.
Q2 was back to normal.
I think we missed about a month month and a half as shipments.
In Q1, sorry.
Q2, we're back to normal in Q3 were projected to be back to normal but.
As a total.
Total sales, it's just not a big number.
Alright, Okay, you know it was about $6 million this quarter.
$6 million.
Yeah Okay.
Okay.
Huge contributor to the top line.
Alright, Okay gotcha, Okay. Thanks, I'll pass it on you guys I appreciate it.
Our next question is from Elizabeth Grenfell with Bank of America. Please proceed.
Hi, good morning, good morning.
How should we think about capex.
For the rest of this year, and then going into next year and out from there.
Sure. So this quarter reflected some of those Dodge system implementation costs that we had as we rolled off of the TSA.
So you know when you back that out you kind of get back to our normal cadence between two and 3% I think that's the neighborhood, we're going to live and as we continue into the future.
Are there opportunities for additional capex related to Dodge that maybe weren't anticipated a.
A year ago.
Yeah.
We're not we're not.
Far enough along to answer that question well.
I'll tell you why.
They are normalized.
Capex usage is pretty much a 3% or.
The sales.
That sort of neighborhood.
On the other hand when we.
When we got involved.
In golf with Dodge and sort of.
Sort of went down the rabbit hole.
In terms of what they were developing in research and development. We found some very promising new products.
That.
We need to bring forward and.
We're not far enough along to know how much capital that's going to require too.
To support them.
But overall it should.
Live within I think that 3%.
Mm 3% of sales.
Ratio.
Might go to four or something like that but it's.
We don't see we don't see big changes.
Okay and then one other question.
Adjusted EBITDA margin target over the long term I think is in the mid Thirty's can you talk.
Talk to us about sort of the drivers behind that.
When do you expect Youll get there.
No.
Who put the mid Thirty's I think that's the guidance should be speaking to it.
Yeah.
Yeah I think this is Dan I think.
Not sure where the mid thirties came from but I think with all the work we're doing on our integration and our synergy impact will continue to work toward towards that number and you can see our gross margins and our EBITDA margins now.
Over this last 12 months have I appreciate it.
Pretty well to where we thought we'd be for the for the first year and so all of the things that we talked about on the synergy side all of those programs have been started and over the next three to four years, we should start seeing the benefit of that down to gross margin operating income and EBITDA.
Okay. So so mid <unk>.
Not an option or.
Well.
That's not the floor, that's probably more like the ceiling.
And we'll leave somewhere.
Between those two.
Got it alright. Thank you. Thank you very much.
Our next question is from Pete Kubicki with.
Alembic Global please proceed.
Hey, good morning, guys nice quarter good morning, good morning.
Hey, just wanted to be clear, how many fewer days does the third quarter half versus the second quarter and.
I think both of the segments to be to be lower sequentially in revenue.
Yes. The factory is not open and we're not shipping right. So the fourth quarter, we normally havent no vacations into longer quarter on a 445. So we pick up on average around seven days every facility is different Dodge is a little different there is a little less.
Than we do in the third quarter, we have Thanksgiving for the RBC classic divisions, most of them will close down between Christmas and new year's Dodge shuts down part part way over that holiday so all of that impacts the <unk>.
Production days, and our shipments and one.
One other thing impacting our shipments in Q3 as we went live on new.
S&P system that we had the standup from ABB.
And we probably lost a few production days.
Which we're trying to catch up we went live in October .
And.
Be quiet last two to four days.
Just normalized production over that period of time. So that's why our sales range for Q3 is so wide. This time around so we'll see where we ended up coming out by the end of December and.
But yes, I mean, if you look at <unk>.
Q3 on average divided by 60 days and multiply it by 67 days that kind of gives you. The idea of what are our six month quarter, you could say it looks like.
You add them both together.
Okay, Okay, and then I just wanted to ask on <unk>.
On defense.
With a soft this quarter and we're in a continuing resolution now right for the federal government for our for your fiscal third quarter.
Has visibility improve there at all in terms of you know.
Are you expecting another even if you adjusted for fewer working days in your third quarter Wood.
Defense sales still be down in this third quarter is it going to be a situation, where maybe you have to wait until next calendar year before defense revenue improves.
Well.
I think the.
No.
My editorial comment.
It was really about about.
Aircraft platform readiness was.
That's probably 20% of the of the issue.
The bigger issue is just.
The fact that you know.
The normal production delays.
Making very sophisticated products doesn't.
It doesn't work well with the quarter quarterly metrics.
And just to touch on top of that Peter our submarine business.
Didn't perform to the level that we wanted to in Q2.
And so they have shipments moving to the right. So were hoping to recover some of that in Q3.
But for the whole quarter.
Aerospace space and defense was $32 6 million so it's.
I don't think it's $100 million segment.
Yep Yep understood understood. Okay, and then just last one for me what is your all in interest rate.
Today, I have been trending a little lower.
So I just wanted to.
Make sure I had that pegged right sure. So at the current moment on the term loan B. The rate is the one month LIBOR plus a one 5% spread.
So take it for what it is and then on the bond, it's a fixed for 375% and on the dividend it's Matt.
Mandatory convertible pays a dividend of 5%.
Yeah, Okay. Okay.
Okay. Thank you guys.
If you add those three pieces up along with our interest rate swap you can see we're close to 75% fixed.
Fixed.
The financing of the Dodge transaction.
Great. Thank you.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Michael Sabella with Chili's Securities. Please proceed.
Hey, Good morning, this is Pete Austria.
Mike Thanks for taking my question.
First I just wanted to ask given some of the supply chain and working capital dynamics discussed and now what you are expecting around free cash flow generation.
Could you provide an update on the level of debt pay down that you are targeting by the end of the fiscal year.
Sure. So if you recall, we had said cumulatively starting from last November we were.
Targeting $400 million by the end of this fiscal year, we paid $2 70 through this quarter. So we're right on track there and as the working capital loosens up in the back half of the year, that's still we're working towards.
Okay very helpful. Thanks, and then.
Also just you mentioned labor in your prepared remarks, I'm, just kind of wanted to dig in there.
Just to get a sense of how many net hires you need to add still where are those concentrated.
And then any.
Difficulties, finding qualified workers or any elevated attrition.
Yes.
Certainly, we probably have to hire over 100 people.
I'm just you know.
Taking a a rough inventory across the half a dozen plants I don't I don't have a.
Have a hard number, but it's probably more like 100.
On the labor and the labor level.
Yes. It is.
It's difficult to find the talent.
And in <unk>.
Some areas there's.
The employment rate is.
Unemployment rate is very low and so we're scratching pretty hard and doing innovative things in order to fill the plants, but but we're making we're making progress and.
What was the last part of your question.
Just if youre seeing any.
I made a decision.
Got it.
No not really.
We're not we're not seeing that.
Okay very helpful. Thanks.
There are no further questions at this time I would like to turn the conference back over to Dr. Hartnett for closing comments.
Well I think that's.
That's the.
The status of RBC bearings.
Today and.
Enjoyed enjoyed the call enjoyed the questions and look forward to meeting with you again in February .
Okay.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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