Welcome to RBC Bearings second quarter fiscal year 2023 earnings call. At this time, all participants are in a listen-only mode. A 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 Carroll, 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 Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer, Daniel A. 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'll now turn the call over to Dr. Hartnett. Okay, thank you, Josh, and good morning, everyone, and welcome. 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 $169.9 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 and aerospace products, 28%. Gross margin for the quarter was $151.1 million or 40.9% of net sales. This compares with $62.5 million or 38.8% for the same period last year. Adjusted operating income was $76 million, 20.6% 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 290.7% from last year. RBC's organic growth for the industrial products was 7.9%. Dodge expanded at a 16.2% rate. That average rate for industrial growth was somewhere around 14%. Weakness from Europe reduced the Classic growth rate from double-digit expansion on the RBC side of the coin. Major markets of mining, aggregate, oil and gas, food and beverage, grain, semiconductor, machinery, and general industrial distribution continue to perform well. Turning now to aerospace and defense. Overall, the second quarter of 2023 net sales were up 11.4%. Commercial aerospace expanded at a rate of 31.3%. Expansion of production levels at Boeing and Airbus were the obvious prime drivers here. As you know, we are in a very early innings of a multi-year expansion with these majors. 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 and Boeing's problems. A word on our defense business. This business contracted 15.3%. The delay in 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. It's disturbing to see that the deferred maintenance of our important defense aircraft continues with low grades of fleet readiness are reported by the Air Force Times. The 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 a national defense priority, so write your congressman. 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 have recently converted to orders. Regarding the third quarter, we are expecting sales to be between $348 million and $360 million. I'll now turn the call over to Rob for 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%-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 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, and $0.8 million of other expense. 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 $0.4 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. 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 an 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 $0.07 per share for the same period last year. On an adjusted basis, diluted earnings per share for the second quarter of fiscal 2023 was $1.93 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. Capital 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 our IT systems, hardware, and applications from ABB to 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 $1.52 billion as of October 1, 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. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. Our first question is from Joe Ritchie with Goldman Sachs. Please proceed. Thank you. Good morning, everybody. Morning. Morning. Hey, guys. Last quarter, we talked a little bit about, you know, supply chain issues. I was just curious, just you know, obviously you put up pretty healthy growth in the industrial sector and also in A&D. I just wanna see, like, what update can you kind of give us on how supply chain is evolving for you? Yeah, sure, Joe. Supply chain continues to be a problem. You know, it's something that we actually have to work on every day. It continues to bite us in sensitive places. We, you know, continue to, you know, develop countermeasures to reverse its impact. You know, the difficult thing is our materials, for the most part, are not simple materials. They're sophisticated steels and titaniums and aluminum. Sometimes the specifications can be extreme. The lead time on a lot of these materials has moved out past 50 weeks. That means your planning horizon, just, you know, is another six months into your planning horizon when you're trying to plan your plants, so you have to make adjustments for that. There's prohibitions on Supply from China now on certain defense products that were, you know, approved in the past. That makes it more difficult, particularly when there's not many U.S. suppliers or producers of some of these components. So far it's manageable, but it's difficult. The materials, you know, in many cases, the price of these materials has doubled. We have to, you know, work on our contracts and making sure that we're passing through the amount of economics that's required in order to normalize the margins. It definitely keeps everybody busy. It 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, you know, vast majority of the revenues that came in from Dodge, you know, go through distribution. I'm curious, like, if there's 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, you know, as we head into calendar year 2023? Well, you know, I think everybody knows what inflation is doing. That certainly gets into the manufacturing costs of our products. We have to have the right, you know, metrics to measure it and make sure that we reflect it in price changes to the marketplace. I mean, it's not that we're unique in this. I mean, the whole baseline for all the suppliers, you know, changes monthly. You know, it's definitely an area we haven't had to consider so carefully in past years. But it's one thing about manufacturing products. There's always a different problem to solve. I mean, Mike, maybe just a quick follow on that one. Do you anticipate just how your contracts are set up, that you're gonna have to give back any pricing next year if we actually start to see deflation? You know, obviously, the market's acting well today on the you know, hopefully getting closer to like a peak inflation number. Just any thoughts around that would be helpful. You mean, if the inflation number goes negative and we have deflation? If... I don't anticipate that. A couple things. Yeah, no, this is more of a comment around like your costs, right? Because you've had pretty significant material deflation already in the last couple quarters. I'm just curious, like, do you have like two-way price material formulas with your distributors or with your OEMs where you'd have to give back some of that pricing? If the baseline changes from $1- $1.50, and if inflation goes from, you know, whatever it was last quarter, 8%-2%, you know, we're gonna see a 2% adjustment on $1.50, and that adjustment will be up. If it goes negative, we'll adjust it down. We're not anticipating any negativity in inflation for a long time to come. Okay, understood. Thank you. Sure. Our next question is from Steve Barger with KeyBanc Capital Markets. Please proceed. Hey, thanks. Good morning. Morning. 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 5.3%. They're 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, you know, the... It's a simple question with a complex answer, Steve. Just because of the number of different markets that we're in, and all of these markets, you know, have their own little, you know, economic strength or weakness. In a lot of cases, you know, we will have, you know, long-term agreements with these customers that, you know, protects the supply side for us. And we look at what their demand outlook is. For example, how many ships is Boeing gonna produce in a given month, and what's our mix and at what weight rate should we be running? That sort of thing. You know, then we roll it all up into a business plan. In many cases, particularly on the Dodge side of the business, you know, that's really driven a lot by the PMI index and other economic indexes, because basically Dodge is an in and out business where RBC historically is a business that has contracts and long-term agreements and backlog. You have to be just a little bit closer. You're a little bit closer to the economy on the Dodge side than you are on the RBC side. With Dodge, yeah, we have models, and we have, you know, economic inputs that basically give us a forecast of demand going forward for each product line. 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 load the plants to produce these products. For the most part, on the Dodge side, that's hugely dependent upon U.S. consumption and, you know, how much grain, how much aggregate, how much, how many materials, that sort of thing. Food and beverage, how much consumption is going on. That's a big economic driver for Dodge. That's how we do it. What are your thoughts as you go into the next few quarters on the Dodge side, knowing that it is closer to the real economy? 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? Yeah, I think for the balance of our fiscal year, I mean, I don't like to get out too far because, you know, I don't like to go beyond the fiscal year. 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. Yeah. Got it. 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 in, 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 2023 and into 2024 fiscal for you? Well, I think, you know, I think the commercial growth rates are demonstrated in the second quarter, at the OEM level was a 30% kind of number. Yep. I think we're gonna be living there for a while. Got it. Well, 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. You know, it's on the defense side. We make very complicated, sophisticated products that require all sorts of outside processing and government buy offs. It's just, it all doesn't happen in a quarter. Right. Okay. One more, and I'll 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? Well, let me put it this way for Steve. I mean, this quarter alone, you know, we continued that strategic inventory build of $17 million. We had Dodge costs to stand up their systems, kind of, and pay the TSA. That's close to $10 million. Then we had timing of two VAT tax payments coming through, so we had $34 million of tax payments this quarter. We'll have one tax payment in Q3, one in Q4, so it starts to spread out. I think we'll start to see that operating cash escalate as we get to the back half of the year. I mean, essentially all those things that you just mentioned. Well, I guess you said some of the tax falls in the back half, or that was in 2Q? In Q2, we had two payments. In Q3, we'll have one. Yep. In Q4, we'll have one. It was just the timing in Q2. Got it. We got hit hard. The Dodge one-time costs. Understood. should start to fall off. Obviously, the TSA goes away in November. 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 gonna be running ahead on working cap? Yeah. We're you know working hard to liquidate some of that. Some of that inventory build is a result of supply chain mismatch. You know, if you're making an assembly and you get all your castings, but you didn't get the seal for the bearing, you can't ship the assembly. 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 Lawrence Stavitski on for Seth today. Thanks for taking my questions. Larry. First wanted to ask about gross margins or margins. You know, they 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'll continue to see some strength in the gross margin space. I think Q2 was obviously an exceptionally strong quarter. Third quarter with those fewer production days, then things tend to moderate a bit, and in the fourth quarter tends to be a stronger quarter for us as well. Okay. Are you thinking, I mean, you know, you've been at or above 40 or so for the last couple of quarters. Is that kind of, you know? Yeah. Is that? I think that's about where we're living these days. Yeah. It's a nice neighborhood. Yeah. For sure. Okay, thanks. I just wanted to follow up on China. I know you had some manufacturing issues there last quarter. You guys got kind of, you know, a little bit jammed up. I guess, can you talk about the production dynamics that you're seeing there with, you know, COVID and, you know, the regional dynamics there? Yeah. Right now, Seth, Q2 was back to normal. Mm-hmm. Q3, I think we missed about a month and a half of shipments. Q1. In Q1, sorry. Yeah. Q2, we're back to normal, and Q3 we're projecting to be back to normal. But as a total of sales, it's just not a big number. Right. Okay. You know, it was about $6 million this quarter. $6 million? Yeah. Okay. It's not a huge contributor to the top line. Right. Okay. Gotcha. Okay, thanks. I'll pass it on, guys. Appreciate it. Yep. Yep. Our next question is from Elizabeth Davies with Bank of America. Please proceed. Hi. Good morning. 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. This quarter, you know, reflected some of those Dodge system implementations costs that we had as we rolled off of the TSA. You know, when you back that out, you kinda get back to our normal cadence between 2% and 3%. I think that's the neighborhood we're going to live in as we continue into the future. Okay. Are there opportunities for additional CapEx related to Dodge that maybe weren't anticipated, a year ago? We're not far enough along to answer that question well, and I'll tell you why. You know, it's their normalized CapEx usage is pretty much, you know, 3% of sales, that sort of neighborhood. On the other hand, you know, when we got involved with Dodge and 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, you know, we need to bring forward and we're not far enough along to know how much capital that's gonna require to support them. But overall, it should live within, I think, that 3% of sales ratio. We might go to four or something like that, but it's. You know, we don't see big changes. Okay. One other question. The adjusted EBITDA margin target over the long term, I think, is in the mid-30s%. Can you talk to us about sort of the drivers behind that and when you expect you'll get there? Daniel? Who put the mid-30s out? That's the guy that should be speaking to it. Yeah. This is Daniel A. Bergeron. I I think, you know, I'm not sure where the mid-30s came from, but I think with all the work we're doing on our integration and our synergy impact, we'll continue to work toward that number. You can see our gross margins and our EBITDA margins now over the last 12 months have appreciated pretty well to where we thought we'd be for the first year. All the things that we talked about on the synergy side, all 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. Mid-thirties is not an option or? Well, you know, that's not the floor. That's probably more like the ceiling. We'll live somewhere between those two. Got it. All right. Thank you. Thank you very much. Yep. Our next question is from Pete Skibitski with Alembic Global. Please proceed. Hey, good morning, guys. Nice quarter. Morning. Morning. Hey, just want to be clear, how many fewer days does the third quarter have versus the second quarter? And are you expecting both of the segments to be lower sequentially in revenue? Yeah, the factory's not open. We're not shipping, right? The fourth quarter where we normally have no vacations, it's a longer quarter on the 4-4-5. We pick up on average around seven days. Every facility is different. Dodge is a little different. There's a little less than we do in the third quarter, where we have Thanksgiving. For the RBC Classic divisions, most of them are closed down between Christmas and New Year's. Dodge shuts down partway over that holiday. All that impacts the production days and our shipments. One of the thing impacting our shipments in Q3 is we went live on a new ERP SAP system that we had to stand up from ABB. We probably lost a few production days, which we're trying to catch up. We went live in October and we probably lost 2-4 days of just normalized production over that period of time. That's why our sales range for Q3 is so wide this time around. We'll see where we end up coming out by the end of December. Yeah, I mean, if you look at Q3 on average, divided by 60 days and multiply it by 67 days, it kind of gives you the idea what our six-month quarter, you could say, looks like when you add them both together. Okay. I just wanna ask on defense with the softness this quarter, and we're in a continuing resolution now, right? For the federal government for your fiscal third quarter. Has visibility improved there at all in terms of, you know, even if you adjusted for fewer working days in your third quarter, would, you know, defense sales still be down in this third quarter? Is it gonna be a situation where maybe we have to wait till, you know, next calendar year before defense revenue improves? Well, you know, I think, you know. My editorial comment was really about, you know, about aircraft platform readiness. I mean, that's probably 20% of the issue. The bigger issue is just the fact that, you know, the normal production delays in making very sophisticated products doesn't work well with the quarterly metrics. Just to touch on top of that, Pete, our submarine business, you know, didn't perform to the level that we wanted to in Q2, and so they have shipments moving to the right, so we're hoping to recover some of that in Q3. But for the whole quarter, Aerospace, Space and Defense was $32.6 million. So it's not like it's a $100 million segment. Yeah. Understood. Okay. Just last one for me. What's your all in interest rate as of today? I've been trending a little lower, so I just wanna make sure I had that pegged right. Sure. At the current moment on the term loan, the rate is the one-month LIBOR plus a 1.5% spread. Take it for what it is. Then on the bond, it's a fixed 4.375%. On the dividend, it's. The mandatory convertible pays a dividend of 5%. Yeah. 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 on the financing of the Dodge transaction. Great. Thank you. As a reminder, it is star one on your telephone keypad if you would like to ask a question. Our next question is from Michael Ciarmoli with Truist Securities. Please proceed. Hey, good morning. This is Peter Osterland on for Mike. Thanks for taking our question. First, I just wanted to ask, given some of the supply chain and working capital dynamics you've discussed and what you're expecting around free cash flow generation, could you provide an update on the level of debt paydown that you're targeting by the end of the fiscal year? Sure. If you recall, we had said cumulatively, starting from last November, we were targeting $400 million by the end of this fiscal year. We've paid $270 million through this quarter, so we're right on track there. As the working capital loosens up in the back half of the year, that's still what we're working towards. Okay. Very helpful. Thanks. Also just, you mentioned labor in your prepared remarks, so I just kinda wanted to dig in there. You know, just get a sense of how many net hires do you need to add still? Where are those concentrated? Have there been any difficulties finding qualified workers or any elevated attrition? Yeah. Well, certainly, we probably have to hire over 100 people. I'm just, you know, taking a rough inventory across two to half a dozen plants. I don't have a hard number, but it's probably more like 100 on a labor level. Yes, it's difficult to find the talent. In some areas, the unemployment rate is very low, so we're scratching pretty hard and doing innovative things in order to fill the plants. We're making progress. What was the last part of your question? Just if you were seeing any elevated attrition as you're trying to... Not really. We're not seeing that. Okay, very helpful. Thanks. Yep. There are no further questions at this time. I would like to turn the conference back over to Dr. Hartnett for closing comments. Okay. Well, I think that's the status of RBC Bearings today. I've enjoyed the call, enjoyed the questions, and look forward to meeting with you again in February. Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.