RBC Bearings Q2 2024 Earnings Call Transcript

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November 9, 2023

Key Takeaways

  • In Q2, net sales rose 4.4% year-over-year to $385.6 million, driven by aerospace demand as Industrial Products declined 2.8% on strong prior-year comps.
  • Gross margin expanded by 220 bps to 43.1% thanks to higher aerospace volumes, Dodge acquisition synergies, and pricing actions, with full-year margins expected in the low-to-mid 40% range.
  • Aerospace & Defense revenues grew 22.9% year-over-year (Commercial Aerospace +24.9%, Aftermarket +26.1%) on accelerating Boeing and Airbus build rates, with OEM orders increasing ahead of production.
  • Industrial Products sales fell 2.8% in the quarter due to comp-related supply chain catch-up in Dodge and international order timing, though segment margins remained resilient and are expected to improve.
  • Debt reduction of $490 million since November 2021 cut net debt/EBITDA to 2.71x, while free cash flow of $45.6 million supports fiscal 2024 revenue guidance of $1.55–$1.60 billion.
AI Generated. May Contain Errors.
Earnings Conference Call
RBC Bearings Q2 2024
00:00 / 00:00

There are 11 speakers on the call.

Operator

Greetings, and welcome to the RBC Bearings Fiscal 20 24 Second Quarter Earnings Call. At this time, all participants are in a listen only mode. A 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.

Operator

Please go ahead.

Speaker 1

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 Doctor. 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 before looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied to a variety of factors.

Speaker 1

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 is available on the company's website. With that, I would now like to turn the call over to Doctor. Hardin.

Speaker 2

Thank you, Josh, and good morning, and welcome to everyone. I'm pleased to report that our net sales for the Q2 For fiscal 2024, we're $385,600,000 and this represents a 4.4% increase from last year. For the Q2 of 2024, our industrial products represented 67% of our sales and Aerospace Products, 33%. As a footnote, over the past 5 years, revenue growth at RBC Has been compounded at a rate of 16.8%. Gross margin for the quarter was 166,300,000 or 43.1 percent of net sales.

Speaker 2

This compares to $151,100,000 or 40.9 percent 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 in 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.

Speaker 2

We all understand well that excellence in customer care is the cornerstone of our success. Adjusted operating income for the period was $88,400,000 22.9 percent of net sales compared to last year's $76,000,000 20.6 percent respectively, a 16.3% improvement. Free cash flow was $45,600,000 Debt reduction continues to be a priority. We have achieved a $490,000,000 decrease in debt since the acquisition of Dodge in November of 2021, 24 months ago. We now have achieved a net debt to EBITDA ratio of 2.71 over the trailing 12 months, down from 5.65 from fiscal 'twenty 2.

Speaker 2

RBC's record of EBITDA growth over the last 5 years now stands at 19.9%. Adjusted EPS was $2.17 a share. Adjusted EBITDA was 122,100,000 31.7 percent of net sales compared to $108,800,000 29.5 percent of net sales last year, A 12.2% increase. Overall, we are proud of the continual improvements made and 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 $155,000,000,000 $1,600,000,000 range.

Speaker 2

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 We're 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. And we had very little supply chain impact on the classic side of our industrial business.

Speaker 2

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, jets, helicopters and jet engines.

Speaker 2

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.

Speaker 2

On the 787, Our current build rate numbers are approximately 4 per month and moving to 7 per month Order rate by April. This is has a substantial impact to us. Airbus Is pursuing the build rate of on the 3 20 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 source or primary sourced positions. Our customers trust us.

Speaker 2

In summary, let's go over the highlight reel. For Q2, sales were up 4.4% for the period EBITDA 122.1%, up 12.2 percent Adjusted net income, $68,900,000 up 11.3 percent full year guidance Revenue is $1,550,000,000 to $1,600,000,000 gross margins expected to be in the low to mid-40s Debt pay down since November 2021 is $490,000,000 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 Q3 for 2024, we are expecting sales to be somewhere between 370 and $380,000,000 range. I'll now turn the meeting over to Rob Sullivan, our CFO, For some details on the financials.

Speaker 3

Thank you, Mike. SG and A for the Q2 of fiscal 'twenty four was $60,500,000 compared to 57 point 24 compared to 15.6 percent for the same period last year. Other operating expenses for the Q2 of fiscal 2024 Total of $18,000,000 compared to $21,600,000 for the same period last year. For the Q2 of fiscal 2024, other operating expenses included $17,600,000 of amortization of intangible assets, dollars 300,000 of restructuring costs and $100,000 of other items. For the Q2 of fiscal 2023, other operating expenses consisted primarily of $16,800,000 of amortization of intangible assets, $4,000,000 of costs associated with the Dodge acquisition and $800,000 of other items.

Speaker 3

Operating income was 87,800,000 the Q2 of fiscal 2024 compared to operating income of $72,000,000 for the same period in fiscal 2023. Excluding approximately $600,000 of restructuring costs, adjusted operating income was $88,400,000 or 22.9 percent of sales for the 2nd Excluding approximately $4,000,000 of acquisition costs, adjusted operating income for the Q2 of fiscal 2023 was 76,000,000 for 20.6 percent of sales. Interest expense for the Q2 of fiscal 2024 was $20,100,000 compared to $18,300,000 for the same period For the Q2 of fiscal 2024, the company reported net income of $51,700,000 compared $43,800,000 for the same period last year. On an adjusted basis, net income was $68,900,000 for the Q2 of fiscal 2024 compared to $61,900,000 for the same period last year. Net income attributable to common stockholders for the Q2 of fiscal 2024 was $45,900,000 compared to $38,100,000 for the same period last year.

Speaker 3

On an adjusted basis, Net income attributable to common stockholders for the Q2 of fiscal 2024 was $63,200,000 compared to $56,200,000 for the same period last year. Diluted earnings per share attributable to common stockholders was $1.58 per share for the Q2 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 Q2 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 $53,100,000 in cash from operating activities in the Q2 of fiscal 2024 compared to $29,400,000 for the same period last year. Capital expenditures were $7,500,000 in the Q2 of fiscal 24 compared to $15,200,000 for the same period last year.

Speaker 3

We paid down $40,000,000 on the term loan during the period, which is partially offset by drawing $18,000,000 on the revolver for the acquisition of Specline, leaving total debt of $1,320,000,000 as of September 30, And cash on hand was $56,600,000 I would now like to turn the call back to the operator for the question and answer session.

Operator

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

Speaker 4

Hey, good morning, guys. How are you?

Speaker 2

Good morning, Christine.

Speaker 4

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?

Speaker 2

Well, we'll try. Let's see. So when we look at it Yes. Well, when we look at our industrial end markets, overall, they're steady. When I look at Dodge's 2nd quarter year to date on Dodge, they're up 2.2%.

Speaker 2

So when I look at Dodge's 2nd quarter, I mean, there's basically, it's a fifty-fifty split between Some between international and supply chain, the supply chain catch up that happened last year that affects the comps in a negative way. And when I look at the international piece, most of that is timing based upon big orders that were received, but product wasn't completed in the quarter. So I think that should normalize itself and the supply chain is pretty much normalized. And now those industrial end markets, some are up And some are down, but overall they're about they're pretty steady. And the ones that are up were oil and gas, Aggregate, food and beverage, to give you 3, and the ones that are down are semicon, Warehousing and Construction and Mining Equipment Makers.

Speaker 2

You know, one is offsetting the other and the whole thing seems to be steady. We expect the industrial business to be up A few percentage points in the 3rd quarter on a quarter to quarter comp basis And to be pretty much steady in the Q4 with last year, maybe up

Operator

a few

Speaker 2

percent. It's just it's hard to Project that given what the Fed is doing and what you hear for GDP growth and what you see for employment figures and then all that has to be Sort of put into the stool and stirred around and comes up with some sort of an industrial projection on what your business is going to do. And I don't think anybody really does that well.

Speaker 4

Great. It's really helpful context. And looking at the margins, Is there a margin differential between oil and gas aggregate and food beverage that are 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 overall bucket

Speaker 2

Active. Yes. Well, the ones that are down, semicon is fine and construction and mining is okay. It's not Senator Barnburner, but warehousing is pretty weak profitability wise. So the ones that are up are stronger than the ones that are Some of the markets that are off a little bit.

Speaker 2

To some extent, we're rationalizing our offering In some of those markets where the margins are compressed and so over a longer period That will affect our revenue line too. It will be a second order effect, but it will be in effect.

Speaker 4

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 It's 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 And I know the 1st few 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 deal?

Speaker 5

Yes. Christine, it's Dan. For the 6 month period, we're up about 1100 basis points on EBITDA margin for Dodge, driven by Allot by the synergies, that puts us at about $70,000,000 to $80,000,000 of synergy based on a run rate of $700,000,000 in sales. Pretty quickly and get in place. I think the ones that we're working on that are longer holes in the tent that are going to contribute over the next 2 to 3 years It is cross selling with our sales teams, which is starting to really pick up nicely on the industrial side.

Speaker 5

We're starting to see a lot of good activity there. So we should start seeing that come in the next 24 to 36 months and have an impact on our growth on the top line. We continue to work on in sourcing product into our U. S. Plants and into our Mexican facilities.

Speaker 5

And that's more of a long term goal for us. So that's going to get the benefit from those activities. It's going to take 2 to 3 years. So We'll see a lot more of that impact in year 4 year 5 for us on our projections here. So I think we're a lot further ahead in the process than we thought we would be.

Speaker 5

And I still think we have some really good activity To come along and we're just starting now to try to take advantage of the size Our company and our buying opportunities and leverage in the SG and A section of the P and L. So we're going to start seeing some nice Activity there over the next 12 to 24 months from everything from insurance to Different services that we have to acquire, which is the bigger company now and we have a little more leverage in negotiating contracts. So, we're pretty happy where we are

Speaker 2

in the process right now. Yes. I might add one other thing, Christine, is that The Dodge plants in the U. S. Are pretty full with production, which makes it a little bit difficult for us to expand production for new products and to expand our lines.

Speaker 2

And so In February, our new plant for Dodge will be completed in Tecate, where we're adding 100,000 square feet and moving some of the Dodge operations into Tecate to open up floor space in the United States for new product lines. And so we're pretty excited about that. It has it not only opens up source space in the United States For new product growth, which has been constrained by supply chain support, it also allows us to Achieve economic benefits in labor cost and On products that have been under stress. So, yes, I think there's We have big hopes for that new plant.

Speaker 4

Great. Thank you for the color, guys.

Speaker 3

Yes.

Operator

Thank you. Our next question is from Pete Skibitski with Alembic Global. Please proceed with your question.

Speaker 6

Hey, good morning, guys. Nice performance.

Speaker 2

Thank you, Pete.

Speaker 6

Hey, Mike, I was wondering if I could ask you a big picture question just because In industrial, you do touch so many end markets. Obviously, we've seen kind of ISMs But things have slowed a bit in industrial organically, it seems like, but not so your factories were full still. So Just wondering, what does it feel like to you? Does it feel like we're kind of in the late part of a cycle? Or do you think all the federal spending is kind of offsetting it for you guys?

Speaker 6

How does it feel like to you? Are we deep in a recession? I'm just wondering, given all the end markets that you touch and the visibility that you Just kind of your gut feel?

Speaker 2

Well, I think right now we're kind of drifting with the tide in terms of economic Demand in the industrial, I don't think we're gaining great In any great way and we're not losing. We're staying about even. I mean, you can grow industrial if you And grow your market share and if you have some interesting new products to introduce. So to some extent, you have to make your own wind. And so, we're building wind machines.

Speaker 2

And so that's how we see it. That's

Speaker 6

how we see it. That's fair. No, it makes sense to me. It makes sense to me. And I guess, To the extent you have new I imagine maybe you guys are lightening up on pricing in certain areas because it's a little bit of a Disinflationary environment, but I guess to the extent that you have new product introductions, I don't know how widespread they are, but maybe that gives you an opportunity on price.

Speaker 6

Is that the way to think about it?

Speaker 2

Yes. Well, we're when we bought Dodge 2 years ago, we I think the first order of business is to kind of get your fingernails into the business and Figure out how to improve it and how to synergize it with RBC and all that sort of thing. And I would say that took an endless amount of meetings. So your product development isn't On the forefront and so after the 1st year, we started Pulling out what new products they've been developing for the last 5 years that are ready for commercialization and found Some very, very promising ones. And we also found that in some of their product cases, their sales We're constrained by the ability of their supply chain to increase production.

Speaker 2

And the supply chain was unwilling to increase production Because they were happy with whatever they were getting for the production they were making. So based on that, we decided that, hey, listen, This is a well these are well accepted products in the marketplace. And if we produce more, there is A market for them. And so how do we produce more? And the answer to that cut came that we need to open up floor space For production equipment for these particular items and so hence a new plant in Tecate is Constructed and off we go.

Speaker 2

And so that's kind of, I mean, we'll get Dodge cooking, but it's It wasn't the first order priority and it usually never is with a new acquisition. It takes some time to Go through the motions and integrate and so we're beyond that now and We're into the growth mode.

Speaker 6

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

Operator

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

Speaker 7

Good morning, guys.

Speaker 2

Good morning, Steve.

Speaker 7

Your Industrial segment outperformed some of the other public bearing company is on the top line this quarter. Do you think that's all end market exposure or there are some other structural differences Between Dodge and the public competitors that make your platform more resilient?

Speaker 2

We're just better than everybody. We service the same end markets. It's In many cases, there's great overlap with some of our end markets and to some extent Some of our products, so I think we do an exceptional job at Dodge and in customer service and customer support. And It's really well recognized. And so we don't test anybody's loyalty.

Speaker 2

And in times like this where you're sort of drifting with the industrial tide, you definitely want to be A leader in a company that the customers can trust. And that's kind of where we are. And I think that's accruing to our benefit.

Speaker 7

Yes. Well, and it certainly seems to be accruing to the margins. Incremental margin in 1Q was 52%. Industrial margin was up 5 70 basis points to almost 27%. As I look at this quarter, consolidated incremental was 75

Speaker 3

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

Speaker 7

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

Speaker 3

I think the Dodge synergy is absolutely driving their growth at 1100 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 We've seen a lot of strength in industrial.

Speaker 7

Got it. And just with the industrial environment becoming 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?

Speaker 3

Yes, we can certainly look at that. It's obviously in the queue every quarter, but we can look at breaking it out And future releases for you. Yes. But the story is that 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.

Speaker 3

And I suspect we'll continue to see that as well. We should see the Aerospace gross margins. At this quarter on an adjusted basis, we were at 40. I think we'll continue to see that grow from there in the future periods.

Speaker 6

Got it. Yes, it would

Speaker 7

be great to get that Data in real time with the rest are released just so we can update our models before the call. Thanks.

Operator

Our next question is from Seth Weber with Wells Fargo. Please proceed with your question.

Speaker 8

Hey, good morning, guys. This is Larry on for Seth this morning. Just wanted to I was wondering about the spec line acquisition, if you could give A little bit more color on that and what your expectations are for spec line going forward?

Speaker 2

Sure. Well, just to kind of reframe the spec line. Spec line produces lines, spherical plane bearings and rod ends 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 are very aligned here with specline and how they ran the business.

Speaker 2

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 we're looking for a home for their business.

Speaker 2

We learned about it And so that's sort of the background story behind the acquisition.

Speaker 8

Got you. Appreciate that color. And you mentioned your net debt now down to about 2.7x. And I know you guys had a bend towards Aerospace and Defense Looking to bolster that business, are you guys still looking and what does the pipeline look like for you guys in terms of The acquisition pipeline?

Speaker 2

Well, we're certainly still looking. We don't have anything in the immediate Crosshairs, we have concepts and ideas and theories And we're studying the current candidates, But we there's nothing immediately actionable.

Speaker 8

Okay, got you. And then just turning to, Aerospace and Defense. You guys the Q1 growth rate is about above 22%. And you guys mentioned the increased build rates. Are you expecting growth to accelerate in the back half of the year?

Speaker 8

Or should we kind of think about Tapping the brakes here a little bit and not getting too overzealous.

Speaker 2

Well, I'll tell you, right now, We're going through a process with all of the companies, but we're particularly paying attention to the aerospace and defense companies On a 5 year plan, and what their content is per ship and how many ships and So on and so forth. And do we have enough floor space? Because you just if your business in aerospace is going to jump 25% next year. You can't put everything in place to support that kind of a jump And right now, we're exceeding where we are, where we were in 2019 before the pandemic. And so we know we're good to go in terms of what our current steady state demand is.

Speaker 2

But tell you the truth, we're standing on our Tippy toes in terms of the capacity that we have, the number of people that we have, so on and so forth to support what we see coming into our order book. So, Yes, I'd say that we're going to be next year looks like a very strong year for In the Aerospace Defense segment, there is unless some world event happens that Throws the whole thing into a tailspin. We're going to be substantially strong next year in those markets.

Speaker 8

Okay, great. Really appreciate the color guys. Thanks.

Operator

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

Speaker 9

Hi, thanks. This is Vivek Srivastava on for Joe. My first question is on your SG and 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 synergies specifically?

Speaker 9

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?

Speaker 3

Yes, absolutely. So there was some favorability that we experienced in certain fringe costs And timing of different items that had come in, in Q1 that weren't repeating in Q2. So that offered some improvement on the SG and A as a percentage of sales. There was the temporary reduction in stock comp expense. I expect Q3 stock comp to be $4,300,000 compared to the $3,700,000 we saw this quarter.

Speaker 3

So we had favorability in some of the variable costs that came in, which really drove the nice quarter. But as we discussed or as we put out there in the release, As a percentage of sales next quarter, we're thinking somewhere between 17% to 17.5%.

Speaker 9

That's helpful. And maybe just on the new plant, great to hear that you're 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 cost you would point out because of the plant coming up?

Speaker 5

Yes. For The Ducati plant that Doctor. Hartnell was talking about, we don't expect to see a real disruption there and our big cost impact To capitalize that plant and its and the floor space over the next 12 months to 24 months. So It should fall in our normal CapEx and so.

Speaker 9

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 Total plant cost, when do you see some of the benefits start to flow in your order, especially on the industrial side, would be helpful?

Speaker 3

Sorry, can you clarify the question?

Speaker 9

So the large projects like over 1,000,000,000 projects, we have about 900,000,000,000 of such projects being announced now, a lot of semiconductor production, a lot of EV battery LNG plants. Just curious if you can You have some color you can provide on when you should start seeing orders from these projects start hitting your P and L?

Speaker 2

Well, I think the industry is still waiting to see orders from the infrastructure bill, which would be Substantially important to our business and it's I think that's the oldest Of the bills that has been approved. And I would say it's The impact that that bill has had on the economic environment so far For everybody, it seems to be very minimal. So we do expect that once that spending does hit the markets And when we look around at, for example, the aggregate market, we see that For the most part, much of the U. S. Is running at full capacity today.

Speaker 2

So new plants will have to be built to Produce cement and asphalt and aggregate in order to absorb that capital And produce the end items that improve the roads, improve the dams and improve the infrastructure That spending is meant for. So we're really at the beginning of that entire phase. This is what it must have felt this is it must have felt this way in 1958 when Eisenhower I'm sure everybody was waiting for that money to be spent.

Operator

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

Speaker 1

Hi, good morning. This is George Linas on for Ron. Could you guys give more detail on what you're seeing

Speaker 2

We're not seeing it's dependent upon where you are in the country. I mean, We're in heavy on the East Coast, light in the Midwest, heavy on the West Coast, Heavy in the Southeast in terms of production facilities. We're not seeing any problem with That's unusual relative to labor. We're probably seeing more problems that are unusual in California With regard to ridiculous legislations, but we're not seeing the problem with labor. And typically, Year to year, we'll bring in close to 100 new engineers from college graduates and train them into bearing makers and assembly makers and valve makers and So on and so forth.

Speaker 2

And we're having no problem recruiting at that level today.

Speaker 1

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?

Speaker 1

Are you guys expecting to see any of the benefits from the supplemental AUKUS funding?

Speaker 5

Yes. Right now, we're very busy working with Newport News on Electric Boat on quoting new boats And New Virginia's and New Columbia's, there's a lot of activity that business is growing at double digit for us And we expect it to for the next 12 months.

Speaker 2

Great. Thank you so much.

Operator

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

Speaker 7

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-twenty percent 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?

Speaker 3

The Q3 is always a tricky one, right, because we lose a number of production days. It's not unusual to see A little bit of headwind on that front, but as I alluded to last year from a gross margin or last quarter, from a gross margin perspective, we felt 43% was A good target, and I still believe that. So it's been a challenging quarter with the holidays, Which just reduces our margin profile, but Q4 looks strong on that front. So that's kind of where we're looking to shape up for the year.

Speaker 7

Yes. Is one segment or the other taken outsized to hit from fewer days in 3Q? I

Speaker 3

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

Speaker 5

Yes, Steve, this is David. 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 6 months, it will be right on track to where we were prior in the 1st 6 months of the year.

Speaker 7

Got it. Thank you.

Operator

Thank you. Our next question is from Tim Thean with Citi.

Speaker 10

The first one is Just in terms of going back to the Aerospace discussion, can you just give us maybe a little bit more color in terms of Your expectations in the back half of the year and into 'twenty four, a lot of discussion just in terms of the OEM production ramp, which is clear. But maybe just Some discussion on aftermarket, what you're seeing there? Is the supply chain Issues been a constraint for you at all or just what are you seeing there? And then again, kind of your expectations into the back half of the year and into 'twenty four?

Speaker 2

Well, 24 on the Aerospace and Defense side This is going to be extremely strong for us. We have 8 to 10 plants that are servicing that business with different products. And when we look at right now, we're going through our FY 'twenty five Budget review and we're in the process of establishing what our revenue outlook Per unit, per business unit, and we usually start that process in October And then refine it in November December so that we can put plant budgets together by January and then we know how much we can spend on SG and A by February. So that's the sequence of events. And so we're in our second turn On revenue outlooks by plant based upon driven by content and driven by normal in and out business To establish what the 25 baseline is for the Aerospace and Defense Units and it looks to me like everybody is up 20%.

Speaker 2

And with rare exception, where they're up maybe a little bit more. So It's really going to depend on to some extent how much we're able to produce, can we get the labor, What do we in some places in the country that's not so difficult, in other places it's very difficult. There's a lot of operational ether to pass through In order to put it all together, but it's going to be a very strong year. And so in some of our Businesses right now, if we had double if we could double the capacity, we would double the sales. I mean, you just can't turn that up that fast.

Speaker 2

Yes,

Speaker 10

got it. Got it. Okay. And then this is probably Pricing is way too finally. But in terms of the just the full year net sales expectation, was there any change from The language changed a little bit from last quarter.

Speaker 10

Subsequent to that, you acquired spec line, which obviously doesn't give you a whole and for the remaining months of the year, but have your full year net sales expectations changed at all from last quarter?

Speaker 2

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 adjust it accordingly.

Speaker 10

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?

Speaker 2

Yes, that's right.

Speaker 10

Okay. All right. Thank you.

Speaker 3

Yes.

Operator

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

Speaker 2

Okay. Well, that concludes our conference call for the for our Q2 and I appreciate everybody participating. Appreciate all the good questions and look forward to speaking to you again in probably early February. Good

Speaker 6

day.

Operator

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

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