RBC Bearings Incorporated (RBC) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for RBC Bearings Fiscal First Quarter 2027 Earnings Call. I'm Josh Carroll with the Investor Relations team. With me on today's call are Dr. 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 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 listed in the press release, along with the reconciliation between GAAP and non-GAAP financial information. With all that said, I'll now turn the call over to Dr. Hartnett.

Thank you, Josh. Good morning, and thank you for joining us. I'll begin today's call with a brief review of our first quarter results and discuss the trends we are seeing across the end markets. Before turning the call over to Rob, who will provide additional details on our financial performance. We delivered a strong start to fiscal 2027 with first quarter net sales increasing 19.2% year-over-year to $519.5 million. This was driven by exceptional demand in our aerospace and defense business, followed by strong growth across our Industrial segment. Consolidated and adjusted gross margins for the quarter were 47.7%. Adjusted EPS increased 36.6% year-over-year to $3.88 compared to $2.84 in the prior year's period. Adjusted EBITDA rose 28.1% to $181.2 million, up from $141.5 million last year. Free cash flow remained a strong $146.9 million, and we eliminated $77 million of debt during the first quarter. Turning now to our 2 business segments. Approximately 57% of our revenue during the quarter came from the industrial segment, the remaining 43% came from our A&D business. A&D has continued to perform exceptionally well, with segment revenue increasing 36.9% compared to the prior year period, 16.6% of which was organic. I'll dive now a little bit into our 2 business segments, starting with aerospace and defense. Commercial Aerospace growth was 21.8%, 20.3% on an organic basis. Defense was up 64.6% and 10% organically. Across the A&D business, we are observing healthy order activity, increasing RFQ volumes contract inking and daily customer requests for additional capacity. We continue to expand production rates for commercial aircraft and engines at several production sites in North America and Europe. As you know, our products are deeply embedded across the A&D markets, and we see a very healthy demand outlook. On our space sector, we see an impressive and building momentum. As you may recall from our last earnings call, our space business generated approximately $70 million of revenue during fiscal 2026. In the first quarter alone, our Space business contributed $25 million to revenue, putting it on a strong run rate for fiscal 2027, and we now serve more than a dozen space customers. robust investments by our major customers across both commercial and government space markets around. We believe this business is still in the early stages of becoming a significant and long-term growth opportunity for RBC. Shifting gears now to Marine. Our marine business demands, production growth and a lot of it. Our backlog now stands at $2.3 billion, much of which is marine. Given the complexity of these designs, production can be challenging at times with nuts in the supply chain that can appear. We have untied most of those knots and expand and expect and are planning to expand shipments from this sector significantly in the second half of our year. And we think most of those problems are now behind us. Turning now to our Industrial business. Performance remained strong during the period with OEM revenue increasing 21.5% and distribution revenue growing 3.1%. During the quarter, we saw growth across sectors of aggregate and cement, food and beverage, warehousing, semiconductors and grain industries. Only a small number of our end markets in industrial show up. So saw a very modest decline during the period. reinforcing our view that industrial environment remains healthy and poised for continued growth. Overall, we are excited and energized by the strength and outlook of our core business sectors. Our priorities remain focused execute efficiently, support our customers and investing in the capacity and capabilities needed to meet the growing multi industry demands for RBC products. We believe our differentiators make the difference. These are outstanding service levels strong brands, leading market positions technical expertise. And most of all our employees. People who work every day to make RBC the very best we can be and provide the foundation needed to serve well all stakeholder holders. With that, I'll turn the call over to Rob.

Thank you, Mike. We started off fiscal 2027 with a strong first quarter that exceeded our expectations with net sales growing 19.2%, which led to a 26.9% increase in our reported gross margin. Gross margins were 47.7% for the quarter compared to 45.4% on an adjusted basis for the same period last year. The gross margins this quarter reflect the benefits of increased volumes running from our production facilities driving operating efficiencies, favorable mix and the benefit of contract resolutions realized during the quarter. Further, the timing of tariff refunds, which temporarily alleviated the impact of ongoing global tariff costs provided almost 100 basis points of benefit to gross margins this quarter. First quarter A&D sales increased 36.9% year-over-year. With the VACCO acquisition excluded, our A&D business saw an increase in sales of 16.6%, which highlights the continued strong growth of both our legacy commercial and defense markets. Net sales from our industrial business increased 8.4% during the period. A&D gross margins during the quarter were 44.5% and Industrial margins were 50.2%. We are pleased with the expanded gross margin in both segments, with A&D margins expanding more than 180 basis points year-over-year industrial adjusted gross margins expanding more than 300 basis points year-over-year. On the SG&A line, we had total costs of $85.8 million or 16.5% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $181.2 million or 34.9% of sales for the quarter. That represents an approximate 28% increase in adjusted EBITDA dollars during the quarter. compared to the same period last year. Interest expense for the quarter was $10.1 million. This was down 17.2% year-over-year, reflecting the improved leverage position achieved over the last 12 months coupled with lower interest rates compared to this time last year. We paid off $77 million of debt during the quarter and another $50 million on the term loan since the end of the quarter. The tax rate in our adjusted EPS calculation was 22% compared to last year's 22.5%. This led to an adjusted diluted earnings per share of $3.88 and representing growth of 36.6% year-over-year. Free cash flow in the quarter came in at $146.9 million, with conversion of 144.7% of net income compared to $104.3 million and 152.3% last year. Our capital allocation strategy continues to remain focused on deleveraging by using the cash that we generate to pay off our outstanding debt and we continue to remain on track to pay off the remainder of the term loan by November of 2026. Looking into the second quarter of fiscal 2027, we are guiding revenues of $505 million to $515 million representing year-over-year growth of 10.9% to 13.1%. And on a 6-month basis, that would mean sales are expected to be $1.024 billion to $1.035 billion, representing growth of 14.9% to 16.1% year-over-year. Adjusted gross margins in the next quarter are expected to be in the range of 45.5% to 45.75% and SG&A as a percentage of net sales is expected to be in the range of 16.5% to 16.75%. With that, operator, please open the call for Q&A.

[Operator Instructions] Our first question is from Kristine Liwag with Morgan Stanley .

Mike, you've historically said that gross margin is just mass and you're really good at math. So you are never surprised by gross margins in any given quarter. I just want to check a little bit. So 1Q '20 -- fiscal year '27 was robust, 47.7% out of the gate. But when we look at your 2Q outlook, you're at 45.5% to $45.75% for the quarter. I was wondering, were there any onetime items in 1Q that had the higher margin? Is there mix or any onetime items? And then when we look at 2Q, how conservative is that outlook? And how do we think about this through the rest of the year?

Okay. I'm just making some notes on your questions. I think in terms of the gross margin onetime items, I think Rob is probably the best prepared to talk about that. .

Yes. Kristine, there was really just a couple of things. There is the tariff relief the refunds, which are really onetime in nature, which offered about 100 basis points of expansion. So that would take the gross margins from 47.7% down to the upper 46s. And then we did have some specific contract resolutions during the quarter, which offered some incremental margin benefit this quarter, which also probably added or 60 basis points. And then from there, it's just important to remember that Q4 and Q1 tend to be our strongest margin quarters historically. So with the seasonality of the fewer production days, there's just another decrement that we were looking at where we're building out our forecast for the second quarter.

Great. Super helpful. Maybe pivoting to more of the margin profile. I guess it's been several quarters now. I mean almost 2 years where industrial has margins have been higher than aerospace and defense. I was wondering, as I think this year, you've got a lot of initial long-term contracts that expired -- that were signed post-COVID world, and you're getting some pricing in aerospace. As we look out to the next few years, how do we think about the dynamic between margins in industrial versus aerospace defense? Will aerospaces catch up? Do you anticipate other things that could potentially get industrial margins to come down? Like any dynamics between the two? Or should we think about this in the long run where both end markets could see margins [ less ] than 50%?

Well, there's a lot of questions in there, Kristine.

I hope you'll anwser some of them.

Well, I think overall, yes, margins will continue to expand in the A&D sector. And -- and whether they completely converge on the industrial margins, it remains to be seen, but they are definitely catching up. The sort of the things that are driving the margin expansion is obviously new contracts that reflect the adjustments made for inflation that occurred in the last 5 years that sort of depressed the value of the old contracts. So those adjustments have been made, but there's other contracts that are flowing after the turn of the year that can sort of continue that momentum. The -- I think the other thing is the over the past several years, we've done a number of in-sourcing operations for bottleneck processes that create created difficulty for us to finish our product. And so a lot of those bottleneck processes have been in-sourced. And so we're seeing greater absorption through our plants and obviously, a material savings also as we in source those processes. So that also accrues to the margins. And so I think the -- from where we finished FY '26 to where we finish -- will finish FY '27. There's a good consolidated 1, 1.5 there.

Great. Super helpful. And on your prepared remarks, Mike, you called out a space, and it seems like you've got a strong run rate for revenue in space. And you're now with 12 different customers. Can you provide more color about your exposure? Are you more exposed to the traditional space guys, the government space exquisite capabilities? Are you more present now with more of the commercial space companies? And would you call anything out about either the growth trajectory or where you live in that ecosystem?

Yes. Well, there's really a lot going on in space right now. I mean as -- certainly, we have a good customer in SpaceX as their volumes increase, our volumes increase. So that's almost dialed in. We have long-term agreements with those companies as Blue Origin solve their problems and it starts to move into the commercial world in a planned way. We're very involved with the Blue Origin side of the business. The -- and we see a lot of benefit in working with Amazon right now on various projects. So those sort of top of the list for us. But on the other hand, on the government side, there's just -- there's just a lot going through in terms of new space programs for the government at that are keeping us busy in terms of proposals and bids and planning to support those programs, which are large programs. And so we don't don't see any deficiency in demand coming from that whole space sector. As a matter of fact, I think I think it's going to be capacity demanding on us to support it.

Our next question is from Steve Barger with KeyBanc Capital Markets.

Backlog was flat sequentially for the first time in a while, which was kind of surprising to me. I would think some missile reeveronment programs will be coming in. We know that the marine programs are really strong. You just talked about space. Can you just talk a little bit about what's going on with backlog?

Yes. I mean it's I think a lot of our long-term contracts, particularly on the airframe and engine side of the business are not reflected in our backlog. And I mean, it's -- it just isn't. So you would see small increases in the back [indiscernible] as 12 months of demand rolls in and rolls out. And so that's -- that would be the only adjustment there. There's some really large programs that are inbound we're 100% certain that we're -- we will be the supplier because we're sole sourced on these programs, which will probably create a material change to that backlog. Also, I think the release of the seventh lot of Virginia's and will be a significant event for us, but I don't think that's going to happen for another 12 to 18 months.

Got it. So your visibility exceeds the book -- the backlog you report in a big way? .

In a big way, yes.

Got it. That's great to hear. The PR said, the vast majority of your end markets are growing. You said a couple were running down year-over-year. What isn't growing? And just more broadly, is the industrial cycle continuing to broaden out into something that feels more durable for the next year or 2?

Yes. I mean the only sector that wasn't growing for us was metals, and that was flat. You can't -- we couldn't call it growing. So it is flat. So it was flat over the period year-to-year. But every virtually every industrial sector other than that is up for us. And some of them, the ones that I mentioned were up double digits.

And that has continued in July and you feel like this has some legs to it from an industrial side...

It's continued right through July. Yes, absolutely.

Our next question is from Scott Deuschle with Deutsche Bank.

Rob, can you share how the tariff refund benefit split between industrial and A&D, was it primarily A&D?

No. Actually, it was primarily industrial, the majority of it went through industrial.

Okay. Got it. And then Dr. Hartnett, is there any impact to the space growth outlook from the LaunchPad explosion that Blue Origin had recently? Or is there a demand signal to you relatively unchanged?

No, it's unchanged. It's unchanged.

Okay. And then are your commercial aerospace competitors getting any better at meeting demand? Or is there performance still creating big opportunities for RBC to gain share?

Well, I hate to disparage my competition. But we see a lot of customers that are having difficulty getting product in the market today, but we don't normally see. Let's leave it there.