Earnings Call Transcript - RBC Q2 2024

Operator, 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. 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, Investor Relations

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, CEO

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 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 on this measure. RBC classic industrial sales were up 1.7% during the same period. We had very little supply chain impact 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 are 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 on us. Airbus is pursuing the build rate of 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, CFO

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.

Operator, Operator

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

Kristine Liwag, Analyst

Hey, good morning, guys. How are you?

Michael Hartnett, CEO

Good morning, Kristine.

Kristine Liwag, Analyst

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, CEO

When we assess our industrial end markets, they're generally steady. Year-to-date, Dodge is up 2.2%. In the second quarter, there's a balance between international factors and supply chain issues, influenced by last year's supply chain recovery, which has negatively impacted comparisons. The international aspect is mostly due to timing related to substantial orders that weren't fulfilled in the quarter. I believe this will stabilize. The supply chain has largely normalized, and although some industrial markets are rising and others are falling, the overall situation remains steady. The markets that are performing well include oil and gas, aggregate, and food and beverage, while areas like semiconductors, warehousing, and construction and mining equipment are seeing declines. The gains in some sectors offset the losses in others, resulting in a steady overall picture. We expect the industrial business to increase a few percentage points in the third quarter compared to the previous quarter and to remain relatively stable in the fourth quarter, possibly with a slight uptick. However, predicting this is challenging due to the Fed's actions, GDP growth forecasts, and employment figures, all of which need to be considered for a reliable industrial business projection, and it's tough for anyone to do this accurately.

Kristine Liwag, Analyst

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, CEO

The segments that are experiencing declines, such as semiconductors, are stable, and construction and mining are manageable, though not exceptional. However, warehousing is significantly weaker in terms of profitability. The stronger segments are performing better than those facing minor challenges. We are also streamlining our offerings in some of these pressured markets where profit margins have tightened. Over a longer time frame, this will impact our revenue, although it will be a secondary effect.

Kristine Liwag, Analyst

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, COO

For the six-month period, we're up about 1,100 basis points on EBITDA margin for Dodge, largely due to synergies. This equates to around $70 million to $80 million in synergy based on a sales run rate of $700 million, achieved quite swiftly. The initiatives that will take longer to materialize, such as cross-selling between our sales teams, are gaining momentum on the industrial side, and we're witnessing a lot of positive developments there. We expect to see contributions from this over the next two to three years, impacting our top-line growth. Additionally, we're focusing on in-sourcing products into our US and Mexican facilities, which is more of a long-term objective. The benefits from these efforts will take two to three years to fully realize, with significant impacts expected in the fourth and fifth years of our projections. We are ahead of schedule in this process and anticipate continued strong activity as we leverage our company's size and purchasing power within the SG&A areas. Over the next 12 to 24 months, we expect to see positive developments in areas like insurance and various services we need to procure, benefiting from our increased leverage in contract negotiations. Overall, we're pleased with our current position in this process.

Michael Hartnett, CEO

I would like to add that the Dodge plants in the US are currently at full capacity, which makes it a bit challenging for us to increase production for new products and expand our lines. In February, we will complete our new plant for Dodge in Tecate, where we are adding 100,000 square feet and relocating some Dodge operations there to create more space in the US for new product lines. We are very excited about this development. It not only creates additional space in the US for product growth, which has been limited by supply chain constraints, but it also enables us to achieve cost efficiencies in labor and on products that have faced challenges. We have high expectations for this new plant.

Kristine Liwag, Analyst

Great. Thank you for the color, guys.

Michael Hartnett, CEO

Thank you.

Peter Skibitski, Analyst

Hey, good morning, guys. Nice performance.

Michael Hartnett, CEO

Thank you, Pete.

Peter Skibitski, Analyst

Hey, Mike, I wanted to ask you a broader question since you cover many end markets. We've noticed that ISMs have been below 50 in the US for almost a year, and many believe Europe is already in a recession. It seems that industrial activity has slowed down a bit organically, but your factories are still operating at full capacity. What’s your perspective on this? Do you feel like we are in the later stages of the cycle, or do you think federal spending is helping to offset the situation for your business? What is your overall impression? Do you think we are in the depths of a recession? Given the various markets you engage with and the insights you have, I would appreciate your thoughts.

Michael Hartnett, CEO

Right now, we are somewhat influenced by the current economic demand in the industrial sector. We’re neither making significant gains nor experiencing losses; we're maintaining a steady position. Growth in the industrial sector is possible if we increase our market share and introduce appealing new products. Therefore, it's important to take initiative. We are actively working on new strategies to foster growth. That's our perspective on the situation.

Peter Skibitski, Analyst

That sounds reasonable. It seems clear to me. I suppose you might be adjusting prices in certain areas due to the current disinflationary environment. Additionally, if you have new product introductions, I'm not sure how widespread they are, but that could provide an opportunity for pricing adjustments. Is that the correct way to understand it?

Michael Hartnett, CEO

When we acquired Dodge two years ago, our first priority was to understand the business thoroughly and identify areas for improvement and synergy with RBC. This process involved numerous meetings, which meant that product development wasn’t our main focus initially. After the first year, we began examining their new products developed over the past five years that were ready for launch, and we discovered several promising options. We also realized that some of their product sales were limited by the supply chain's unwillingness to boost production, as they were content with their current output. Recognizing that these products were well-received in the market, we decided to increase production. To do this, we needed to create additional space for production equipment, which led to the construction of a new plant in Tecate. While it took time to integrate Dodge into our operations initially, we are now moving into a growth phase.

Peter Skibitski, Analyst

That's great. And I appreciate the color. I'll get back in queue.

Steve Barger, Analyst

Morning, guys. Your Industrial segment outperformed some of the other public bearing companies on the top line this quarter. Do you think that's all end market exposure? Or are there some other structural differences between Dodge and the public competitors that make your platform more resilient?

Michael Hartnett, CEO

We excel compared to others in our industry, serving the same end markets with significant overlap in some areas. At Dodge, we provide excellent customer service and support, which is widely recognized. We do not take customer loyalty for granted, especially during challenging times when trust in a company is crucial. This strong reputation is benefiting us.

Steve Barger, Analyst

Yeah. And it certainly seems to be accruing to the margins. Incremental margin in 1Q was 52%. Industrial margin was up 570 basis points to almost 27%. As I look at this quarter, consolidated incremental was 75%, which is pretty amazing. Did you see a similar result in the Industrial segment in 2Q margin wise?

Robert Sullivan, CFO

Yeah. The Q2 margins in Industrial look very similar to what you saw in Q1, sustained strength there.

Steve Barger, Analyst

And we're saying all this is primarily Dodge synergy?

Robert Sullivan, CFO

I think the Dodge Synergy is absolutely driving their growth at 1,100 basis points that Dan talked about earlier, 1100%. But the RBC industrial products margins have done well as well. So, it's really been across the entire segment that we've seen a lot of strength in industrial.

Steve Barger, Analyst

Got it. And just with the industrial environment becoming increasingly dynamic and Mike, you referenced that we're kind of drifting along. Is there any chance that you'll give us segment margins in the release, so we can have more informed conversations on the earnings calls?

Michael Hartnett, CEO

Yeah. We can certainly look at that. It's obviously in the Q every quarter, but we can look at breaking it out in future releases for you.

Steve Barger, Analyst

Yeah.

Michael Hartnett, CEO

Yeah. The story is the Industrial margins are still around the 45% mark. Aerospace margins ticked up this quarter, less than a point, but they're definitely up, which is the trend that we were looking for as the plants continue to pick up the capacity with the increased build rates. And I suspect we'll continue to see that as well. We should see the Aerospace gross margins this quarter on an adjusted basis, we were at 40%. And I think we'll continue to see that grow from there in the future periods.

Steve Barger, Analyst

Got it. Yeah. It would be great to get that data in real time with the rest of your release just so we can update our models before the call. Thanks.

Unidentified Analyst, Analyst

Good morning, everyone. This is Larry standing in for Seth today. I wanted to ask about the Specline acquisition and if you could provide more details on that as well as your expectations for Specline moving forward.

Michael Hartnett, CEO

Sure. Well, just to kind of reframe this Specline. Specline produces lines, spherical plane bearings and rod ends for aerospace customers. That's their business. They basically have the same customer base as RBC, very similar products, in some cases, identical. So, we're comfortable with their markets, their manufacturing methods. We're very aligned here with Specline and how they ran the business. So, the acquisition gave us more plant capacity in a very high demand environment. And it gave us a trained workforce and made our lines more important to our largest customers. So, this really hit all of the must haves for an acquisition for us. That's our acquisition checklist right there. And so, the owners decided to retire, and were looking for a home for their business. We learned about it. And so, that's sort of the background story behind the acquisition.

Unidentified Analyst, Analyst

I appreciate the information. You mentioned that your net debt is down to about 2.7 times. I know you had a focus on aerospace and defense and were looking to strengthen that sector. Are you still pursuing opportunities in that area? What does your acquisition pipeline look like?

Michael Hartnett, CEO

We are definitely still exploring options. However, we don't have anything specific in our sights at the moment. We have various concepts, ideas, and theories that we are analyzing, but there's nothing that we can act on right now.

Unidentified Analyst, Analyst

Okay. Got you. And then just turning to aerospace and defense. The first quarter growth rates were above 22%. You mentioned the increased build rates. Are you expecting growth to accelerate in the second half of the year? Or should we be cautious and not get too overzealous?

Michael Hartnett, CEO

We are currently evaluating all our companies, with a specific focus on the aerospace and defense sectors in relation to a five-year plan. We are assessing the content per ship, the number of ships, and whether we have sufficient floor space. If we anticipate a 25% increase in aerospace business next year, we need to have the necessary infrastructure in place ahead of time. Currently, we have surpassed our performance levels from 2019, prior to the pandemic, and we are confident about our existing demand. However, I must note that we are operating at full capacity with our current resources to meet the anticipated orders. Looking ahead, next year seems promising for our aerospace and defense segment, barring any unforeseen global events that could disrupt the industry. Overall, we expect to see significant strength in these markets next year.

Unidentified Analyst, Analyst

Okay, great. Really appreciate the call there, guys. Thanks.

Operator, Operator

Thank you. Our next question is from Joe Ritchie from Goldman Sachs. Please proceed with your question.

Vivek Srivastava, Analyst

Hi. Thank you. This is Vivek Srivastava on for Joe. My first question is on your SG&A as a percentage of sales. It definitely came in much better than the previous guidance. Just curious what caused the upside surprise? And how much of it was driven by synergy specifically? And then just very quickly, the stock comp also stepped down. So, going forward, any indication on what should be a more reasonable stock comp expectation?

Robert Sullivan, CFO

There was some favorability we experienced in certain fringe costs and the timing of various items that occurred in Q1 but did not repeat in Q2. This led to an improvement in SG&A as a percentage of sales. Additionally, there was a temporary reduction in stock compensation expense. I anticipate that stock compensation in Q3 will be $4.3 million, compared to the $3.7 million we saw this quarter. We also had favorable variable costs, which contributed to a strong quarter. However, as we mentioned in the release, we expect SG&A as a percentage of sales next quarter to be between 17% and 17.5%.

Vivek Srivastava, Analyst

That's helpful. And maybe just on the new plant, great to hear that you are freeing up more floor space. But just maybe in the medium term, as this new plant comes through, how should we think about maybe some productivity headwinds, or any elevated costs you would point out because of the plant coming up?

Daniel Bergeron, COO

Yeah. For the Tecate plant that Dr. Hartnett was talking about, we don't expect to see a real disruption there and our big cost impact to capitalize that plant and its floor space over the next 12 to 24 months. So, it should fall in our normal CapEx.

Vivek Srivastava, Analyst

Great. That's helpful. And maybe just a bit more medium to long-term question. Just mega projects, we are seeing a lot of activity in the projects which are breaking ground right now. Just any color you can provide on what is your content as a percentage of total plant cost? When do you see some of the benefits start to flow in your orders, especially on the industrial side would be helpful?

Michael Hartnett, CEO

I'm sorry, can you clarify the question?

Vivek Srivastava, Analyst

We currently have approximately $900 billion in large projects that are over $1 billion being announced, focusing mainly on semiconductor production and EV battery LNG plants. I'm interested in knowing when we can expect to see orders from these projects begin to impact your profit and loss statements.

Michael Hartnett, CEO

The industry is still anticipating orders from the infrastructure bill, which is crucial for our business. This bill has been approved for some time, yet its impact on the economic landscape has been quite limited so far. We believe that once spending from this bill enters the market, it will make a difference. Looking at the overall market, we notice that most of the US is currently operating at full capacity. Therefore, new plants will need to be established to produce cement, asphalt, and aggregates to manage the capital and create the necessary elements for enhancing roads, dams, and overall infrastructure related to this spending. We are essentially at the start of this entire process, reminiscent of the sentiment in 1958 when Eisenhower introduced the interstate highway system.

Vivek Srivastava, Analyst

Thank you.

Michael Hartnett, CEO

I'm sure everybody was waiting for that money to be spent.

Operator, Operator

Thank you. Our next question is from Ron Epstein with Bank of America. Please proceed with your question.

Unidentified Analyst, Analyst

This is on for Ron. Could you guys give more detail on what you're seeing for labor talent acquisition, attrition rate is still high and where that's at?

Michael Hartnett, CEO

We're noticing differences based on geographic location. We have a strong presence on the East Coast, a lighter footprint in the Midwest, and significant operations on the West Coast and in the Southeast. There are no unusual issues with labor in general, though California is facing some challenging legislation. Overall, we're effectively recruiting new engineers, typically hiring close to 100 recent college graduates annually and training them in various roles such as bearing makers, assembly makers, and valve makers, with no difficulties in our recruitment efforts at this time.

Unidentified Analyst, Analyst

Great. Thank you. And then just one other one. Could you give an update on what you're seeing so far for the marine exposure, how that's going? Are you guys expecting to see any of the benefits from the supplemental AUKUS funding?

Daniel Bergeron, COO

Yeah. Right now, we are very busy working with Newport News and Electric Boat on quoting new boats and new Virginias and new Columbias. There's a lot of activity. That business has grown at double-digit for us, and we expect it to for the next 12 months.

Unidentified Analyst, Analyst

Great. Thank you so much.

Operator, Operator

Thank you. Our next question is from Steve Barger of KeyBanc Capital Markets. Please proceed with your question.

Steve Barger, Analyst

Hey, thanks for taking the follow up. Rob, I just want to make sure I understand your commentary on margin sustainability relative to the 3Q guide. At the midpoint, I'm getting consolidated op margin in kind of the mid 20% range like at historical levels versus the 22% plus in the first half. Is the guide conservative? Or is one of the segments going to have a seasonal step down or some headwind in the quarter?

Robert Sullivan, CFO

The third quarter is always challenging due to the loss of production days, which typically creates some headwinds. As I mentioned last year, a gross margin target of 43% seemed reasonable, and I still stand by that. This quarter's holiday season will impact our margin profile, but we expect Q4 to be strong in that regard. That's how we are planning for the year.

Steve Barger, Analyst

Yeah. Is one segment or the other taking outsized hit from fewer days in 3Q?

Robert Sullivan, CFO

I mean, it depends on the location. So no, not really. It's pretty much across the organization.

Daniel Bergeron, COO

Yeah. Steve, this is Dan. I think it would be more impact on classic RBC, because we actually closed down a lot around the holidays. And so, if you look at the six months, we'll be right on track to where we were prior in the first six months of the year.

Steve Barger, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question is from Tim Thein with Citi. Please proceed with your question.

Timothy Thein, Analyst

Thank you. Good morning. Could you provide more insight into your expectations for the aerospace sector in the latter half of the year and into 2024? There's been considerable talk regarding the ramp-up in OEM production, which is understood. However, could you also discuss the aftermarket and what trends you are observing there? Have supply chain issues posed any constraints for you? Additionally, what are your projections for the second half of the year and into 2024?

Michael Hartnett, CEO

In 2024, we expect the aerospace and defense sector to perform exceptionally well. We have between eight to ten plants dedicated to servicing this business with various products. Currently, we are reviewing our fiscal year 2025 budget and working on our revenue projections for each business unit. This process typically starts in October and gets refined in November and December, allowing us to finalize plant budgets by January. By February, we also determine our SG&A spending. We are currently evaluating revenue outlooks for each plant, focusing on content and standard business variations to set the 2025 baseline for aerospace and defense units. It appears that most are seeing a 20% increase, with some even exceeding that slightly. However, our overall performance will hinge on our production capabilities and labor availability, which varies across the country. There are many operational factors to consider in order to align everything, but it looks like a very strong year ahead. In some of our areas, if we could increase our capacity twofold, we would see double the sales, though scaling up that quickly is challenging.

Timothy Thein, Analyst

Okay. I understand. Regarding the full year net sales expectation, has there been any change from last quarter? The language was slightly different, and after acquiring Specline, you won't get any contributions for the remaining months of the year. Have your full year net sales expectations changed at all since last quarter?

Michael Hartnett, CEO

Well, I mean, we're 90 days deeper into the year. So, we have 90 days more information on how the economy is treating our industrial businesses. We pretty much know how it's treating the aerospace and defense businesses. So, we adjusted accordingly.

Timothy Thein, Analyst

Got it. So, maybe industrial is a bit softer, which is certainly not shocking, but maybe that's taken out a little bit of the guidance compared to 90 days ago. That's a fair and that's more than offset maybe a little stronger aero environment?

Michael Hartnett, CEO

Yeah. That's right.

Operator, Operator

Thank you. There are no further questions at this time. I would now like to turn the call over to Dr. Hartnett for any closing remarks.

Michael Hartnett, CEO

Okay. That concludes our conference call for the second quarter. I appreciate everyone participating and all the great questions. I look forward to speaking with you again, likely in early February. Have a good day.

Operator, Operator

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