Q1 2027 RBC Bearings Earnings Conference Call

Good morning, and thank you for joining us for RBC Barings' 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's 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 percent. 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 two 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 two business segments, starting with aerospace and defense. commercial aerospace growth was 21.8 percent 20.3 percent on an organic basis defense was up 64.6 percent and 10 percent organically across the a and d business we are observing healthy order activity increasing rfq volumes contract inking inkings 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 abound. 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 knots 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 percent, and distribution revenue growing 3.1 percent. 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 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 invest in the testing 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 to all stakeholders. 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 through our production facilities driving operating efficiencies, favorable mix, and the benefit of contract resolutions realized during the quarter. Further, the timing of tariff-free funds, which temporarily alleviated the impact of ongoing global tariff costs, provided almost 100 basis points of benefit to gross margins this quarter. First quarter AMD sales increased 36.9 percent year over year. With the VATCO acquisition excluded, our AMD business saw an increase in sales of 16.6 percent, which highlights the continued strong growth of both our legacy commercial and defense markets. Net sales from our industrial business increased 8.4 percent during the period. A&D gross margins during the quarter were 44.5 percent, and industrial margins were 50.2 percent. We are pleased with the expanded gross margin in both segments, with A&D margins expanding more than 180 basis points year-over-year and 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 for 16.5% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $181.2 million for 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, 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 that 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 six-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.

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, too, if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull up our questions. Thank you. Our first question is from Christine Lohag with Morgan Stanley.

Good morning, everyone.

Good morning, Christine.

You know, Mike, you've historically said that gross margin is just math and you're really good at math. So you're never surprised by gross margins in any given quarter. So I just want to check a little bit. So 1Q20, 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 one-time items in 1Q that had the higher margin? Is there mixed or any one-time items? And then when we look at QQ, 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 one-time items, I think Rob is probably the best prepared to talk about that.

Christine, you know, there was really just a couple things. There was the tariff relief, you know, the refunds, which are really one time in nature, which offered about 100 basis points of expansion. So, that would take the gross margins from 47.7 down to, you know, 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 50 or 60 basis points. And then from there, you know, it's just important to remember that Q4 and Q1 tend to be our strongest margin quarters historically. So, you know, with the seasonality and the fewer production days, there's just that other decrement that we were looking at when we were building out our forecast for the second quarter.

Great. Super helpful. Maybe pivoting to, you know, more of the margin profile, I guess, you know, it's been several quarters now. I mean, almost two years where industrial margins have been higher than aerospace and defense. I was wondering, you know, as, you know, I think this year you've got a lot of initial long-term contracts that expired, you know, that were signed, you know, post-COVID world, and you're getting some pricing in aerospace. As we look at the next few years, how do we think about the dynamic between margins and industrial versus aerospace defense? Will aerospace defense 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 can see margins north of 50%?

Well, there's a lot of question in there, Christine.

I hope you'll answer some of them.

Well, you know, I think overall, yes, margins will continue to expand in the A&D sector. and whether they completely converge on the industrial margins remains to be seen, but they are definitely catching up. 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 five 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 in after the turn of the year that can sort of continue that momentum. Um, the, I think the, the other thing is the, um, uh, over, over the past several years, we've done a number of, um, insourcing operations for bottleneck, um, processes that, um, created, uh, created difficulty for us to, um, to finish our product. And, um, so a lot of those, um, bottleneck processes have been insourced. And so we're seeing, you know, greater absorption through our plants and obviously material savings also as we insource those processes. So that also accrues to the margin. And so I think, you know, I think the – from where we finished FY26 to where we will finish FY27, there's a good consolidated point, point and a half there.

Great. Super helpful. And on your preparator marks, Mike, you called out 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 their growth trajectory or where you live in that ecosystem?

Yeah, 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 solves their problems and starts to move into the commercial world in a planned way, um we're very involved with the blue origin um side of the business the um you know and we see we see a lot of um a lot of benefit in working with amazon right now on on various projects so so those those sort of um are top of the list for us but on on the other hand on the government side There's just a lot going through in terms of new space programs for the government 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 see any deficiency in demand coming from that whole space sector. As a matter of fact, I think it's going to be capacity demanding on us to support it.

Great. Thank you, Mike. Thanks, Rob.

Sure. Our next question is from Steve Barger with KeyBank Capital Markets.

Hey, good morning, guys. Hey, Dave. Good morning, Steve. Mike, backlog was flat sequentially for the first time in a while, which was kind of surprising to me. I think some missile rearmament programs would 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?

Yeah. 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, you know, small increases in the background fog as 12 months of demand rolls in and rolls out. And so that would be the only adjustment there. There's some really large programs that are inbound where we're 100% certain that we will be the supplier because we're sole source 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 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 two?

Yeah, I mean, the only sector that wasn't growing for us was metals, and that was flat. We couldn't call it growing, so it was flat. So it was flat over the period, year to year. But virtually every industrial sector other than that was 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 sector?

Yeah, it's continued right through July. Yeah, absolutely.

Our next question is from Scott Ducharal with Deutsche Bank.

Hi, good morning. Rob, can you share how the tariff refund benefits 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 launch pad explosion that Blue Origin had recently, or is their 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 their 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 that we don't normally see. Let's leave it there.

Okay. Yeah. I mean, just on that, I spoke with one of your customers recently, and they said RBC is great, but they're not aggressive enough about taking market share from some of these suppliers that can't perform. I know you guys have this policy to not bail out your competitors, but I guess is there any maybe change in heart there to become a little bit more aggressive?

Yeah. I mean, right now, it's very easy for us to overhook our plants. which will create a problem for the plants because we're booking more capacity than we have. And if we do that, then we're going to have the same kind of service levels that the rest of the industry has. So, you know, we have very good customers that are long-term contractual, give us long-term contractual obligations. um three years five years sometimes some of them ask for 10 years um and and uh and so those are our priority is to take care of them first um if we see somebody else that comes in that um we haven't seen for a long time and has a has a an immediate need but is unwilling to make a long-term commitment um then uh if we can supply him without hurting somebody else, we probably will. But if we can't supply him without hurting somebody else, we're not going to hurt our long-term, the customers that support our business in the long term. So that's probably what they're seeing. I would say that everybody today that's working on the RBC side are seeing significant more demand than they have capacity. And so that's an environment that few have experience in, and it's easy to make mistakes.

Very helpful. Thank you.

Our next question is from Pete Scubizzi with Alembic Global.

Good morning, guys. Hey, Rob, maybe just to clarify one thing on the gross margin benefit that you spoke to from the contract resolution and the tariffs, did those two items impact revenue at all or just gross margin?

The tariff would be just in the margins, so it would just be a cost offset. The contract resolution would have led to additional revenues.

Okay. And which segment was that in?

That was in A&D.

Okay. Okay. So, yeah, just maybe to follow up. I forgot who asked it, but just on the industrial tailwinds, it was a really nice quarter, this revenue quarter in industrial. You know, it wasn't a particularly easy comp, I didn't think. I think you've got easier comps in the third quarter and fourth quarter, but, you know, I know there's seasonality there. So, you know, just kind of trying to back into the industrial outlook from your guide. Are you expecting continued kind of upper single-digit type growth at industrial the next couple of quarters on the easier comps, or will seasonality kind of weigh on that?

Yeah, I think that's, you know, certainly baked into the range that we put out there for the next quarter.

Okay, okay. Okay, maybe just one last one for me, for whoever. Guys, VACO seems like it's coming in maybe better than expected, just in terms of the growth. I think this is the highest revenue quarter you've had with VACO. So maybe you could tell us how far along you are with just net assessment there on VACO and maybe which side of the shop is growing faster, the marine side or the space side for VACO. Thanks.

Yeah, sure. Well, yeah, I think VACO had a good quarter, and there's strong demand on both sides of that street for VACO, and that's great news. And I think in terms of balance, longer term, I think they're going to be about equal in terms of revenue production, and probably margin production will see more benefit from the space side. That's just the way it seems to be shaping up. um and um you know we're the the space side of the business is a is definitely a um unexpected benefit of the acquisition that's great thanks guys thanks as a reminder if you'd like to ask a question please press star one on your telephone keypad our next question is from ronald epstein with bank of america yeah hey hey good morning guys good morning

so with with the you know the demand you're seeing across the business retaining labor attracting new labor how's that going and you know how's the enrollment in you know your internal training programs and and so on and so forth yeah well um that's a big question too ron Well, certainly on the labor side, depending upon where you are in the country, it can be challenging or it can be easy.

I think the benefit that we have is that we have over 1,000 people in our Mexican facilities, and we don't have a labor shortage in Mexico. And so that's certainly a big aid to the U.S. plants in terms of capacity ramp whenever we have to ramp into any of these sectors. And we are ramping now. In the U.S., on the labor side, it's more difficult in the Northeast. and depending upon where you are in Los Angeles, it could be difficult or it could be not so difficult. If you're in Los Angeles County, it's easier. If you're in Orange County, it's more difficult. In terms of our training program, at any given time of the year, We probably have, in training, probably close to 100 people with engineering or general business degrees, either training on manufacturing and engineering or design engineering or applications engineering or business management practices or sales practices. So, yeah, I'd say at any given time, it's pretty easy to find 100 people going through that process.

Gotcha, gotcha, gotcha. But on balance across the business, you're able to find enough talent to get done what you need to get done?

Yeah, thankfully, we've had this training program going now for, I don't know, maybe 15, 20 years. It hasn't been the scale that it is today, but it ramped up to that scale sort of linearly over the last time period. Maybe 20 years ago, we had 50 people going through the system. Now we have 100 people going through. So we have a really deep base of talent in many places, and, you know, they're the core to our ability to execute.

Gotcha, gotcha. And in your remarks, you talked a little bit about some knots. You had a knot in the supply chain.

Are there any knots left out there that you worry about, or are there any knots that were kind of double knots or trickier to unknock? yeah there is some double knot we had we definitely had some double knot and um particularly uh you know the supply chain is um well it's fragile and when when the parts are complex and um one of your suppliers um goes out of business because they go they got old and didn't want to do it anymore and had a certain amount of expertise in those particular processes, recovering it can be difficult, particularly when it's a metallurgical puzzle, as some of these are. And so, yeah, I think to the best of our ability, I think we've identified most of the double knots. I'm sure there's still a few knots out there, but we can't see where they are right now. I'm sure we'll find them, and we'll deal with them, but that's just part of the supply chain. And I think in Los Angeles, of course, the suppliers are all really busy because it's all A and D in space, and there's plenty of business around. And so it's a challenging world, but, you know, we survived.

And then maybe just one last one, and this is a much broader question.

Kind of in your history out in L.A., I mean, have you seen like a real rebirth in Southern California with regard to A&D, particularly because of all the space stuff that's going on um there must have been i mean there's just there's just a lot of shops around that have you know really unique capabilities and i think one of the big advantages in in working in la is is that the there's so many engineering schools that that that generate so many talented individuals that should really come into our plants in a shorter period of time are really productive for us. And so the University of California school system is spectacular. And, of course, with VACO nuzzling up to JPL, that neighborhood's not too bad either.

Yeah, yeah. Perfect. Well, thank you very much, guys.

Our next question is from Alexandra Mandary with Druid Securities.

Hey, nice results and thanks for taking my question. I just had a quick one here. Are you seeing any headwinds as a result of the Middle East and higher jet fuel environment?

We are not. We are not seeing any headwinds. We're hearing from some of our customers that there may be headwinds in the aftermarket, but we're not seeing it and we're not feeling it.

Great. And then I guess just to add another one, I guess what is your appetite for expanding your business through M&A to take advantage of recent growth and, you know, products such as, you know, missiles and then the space industry?

Well, I mean, we're not adverse to M&A, as you can see from our history, and we like to do things that complement what we do already and help us service our customer base that depends on us to supply certain things that nobody else can supply. And so when acquisitions come up that sort of fit that category, we can become aggressive. And right now in the acquisition world, you have to be aggressive.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Dr. Hartnett for any closing remarks.

Okay. Well, I thank everybody for their interest in RBC today and participating in the call. and we'll speak again in October.

This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.