RBC Bearings (RBC) 2027 財年第二季財報電話會議：營收成長 15.2%，發布第三季財測指引

重點摘要

• 2027 財年第二季淨銷售額年增 15.2% 至 5.246 億美元，主要受惠於航太與國防成長 15.8% 以及工業業務成長 14.8%。
• 調整後稀釋每股盈餘 (EPS) 從 2.84 美元成長 29.9% 至 3.74 美元。調整後 EBITDA 成長 20.4% 至 1.750 億美元，佔總營收的 33.4%。
• 毛利率達 45.6%，反映出產量提升、合約續約以及有利的業務組合。
• 自由現金流為 8,570 萬美元。RBC Bearings 償還了 9,600 萬美元債務（包含剩餘的定期貸款餘額），利息費用則下降 30.6%。
• 管理層預測第 3 財季營收為 5.2 億至 5.25 億美元，相當於年成長 12.7%–13.7%，調整後毛利率為 45.5%–45.75%。
• 航太與國防需求仍受限於產能。管理層預期新設備、海洋業務轉為內部自製以及先前的資本投資將支持更強勁的產出，特別是在第 4 財季。

關鍵財務數據

業務與營運表現

航太與國防佔季度銷售額的 44%，成長 15.8%。商業航太成長 17.4%，國防成長 13.6%。部門毛利率從 38.7% 提升至 42.2%。

管理層回報航太與國防訂單活動創下新高，要求加速交貨的請求增加，且對長期承諾的興趣升溫。儘管新設備正陸續上線，產能仍是一大限制。

太空業務營收在 2027 財年上半年成長 78%，其中 VACCO 占據成長的很大一部分。公司在第 2 財季亦錄得太空業務的有機成長。

在海洋業務方面，RBC Bearings 正在努力將潛艇零件產量比基準提升至三倍，並表示擴充計畫已完成約 30%。供應鏈問題延誤了生產計畫，促使公司將部分技術複雜的製程轉為內部自製。管理層預期第 4 財季將有顯著追趕，2028 財年間進度將超過 70%，擴充計畫預計於 2029 財年完成。

工業部門貢獻了季度營收的 56%，成長 14.8%；若扣除來自 PSC 的 200 萬美元銷售額，成長率約為 14%。OEM 營收成長 24.2%，分銷營收成長 10.6%。工業部門毛利率維持在 48.2%。

成長遍及骨材（砂石）、金屬、食品飲料、倉儲、半導體、穀物和發電等廣泛領域。管理層也指出石油與天然氣活動有所復甦。高產品供應率與服務水準支撐了售後市場與分銷銷售。

管理層指引

RBC Bearings 預期 2027 財年第 3 季營收為 5.2 億至 5.25 億美元，相當於年成長 12.7%–13.7%。前九個月營收預計為 15.64 億至 15.69 億美元，年增 15.6%–16.0%。

預計調整後毛利率為 45.5%–45.75%，銷售及管理費用 (SG&A) 預估佔銷售額的 16.25%–16.5%。管理層將 SG&A 預期增加的部分原因歸咎於約 150 萬美元的額外股份酬勞費用。

就全年而言，管理層表示毛利率擴展 100 個基點的目標仍可實現。預期下半年的表現將受惠於額外的一週報表週、增加的產能，以及先前在機械、培訓與供應鏈物流方面的投資。

取決於海洋生產狀況的改善，管理層表示航太與國防的成長率可能超過 15%，並可能接近 20%。至於工業部門，公司預算編列為高個位數成長，因為需求仍取決於 GDP 狀況。

風險與觀察重點

受限於供應鏈瓶頸以及將專業製程內部自製化所需的時間，海洋業務產出落後於公司計畫。管理層預計這些調整將改善營收與利潤率，但具體效益時間點仍集中於第 4 財季。

第 3 財季包含較少的生產天數和較多的假期。部分航太與國防出貨需要客戶認證和行政放行，這創造了交貨可能延至第 4 財季的風險。

產能擴增需要較長的前置時間。管理層舉例：車削設備約需 6 個月，熱處理系統約需 12–18 個月，加工/精整設備約需 15 個月。原料可取得性也可能構成限制。

公司繼續關注通膨、運費與物流成本。管理層表示，截至目前為止，定價與營運調整已協助公司應對這些壓力。

分析師問答亮點

• 飛彈與彈藥：該業務目前每年創造約 5,000 萬美元營收。管理層預期包含戰斧 (Tomahawk) 與 GMLRS 在內的計畫生產需求將會提高。管理層表示戰斧飛彈的年產量正從約 200 套提升至 1,000 套，而 GMLRS 的增產幅度至少為 20%。
• 高超音速：管理層估計，在完成測試的前提下，一項大型高超音速計畫距離核准量產可能還有約 18 個月。
• 商業航太：RBC Bearings 表示其與波音相關的生產速率約為 42–45 套，且由於從退出供應鏈的供應商手中轉獲業務，部分廠區營運速率高於基礎飛機製造速率。
• 第二供應商機會：管理層表示，客戶越來越常尋求 RBC Bearings 作為備選供應商。對於已在量產的標準產品，交貨前置時間仍可能長達約 50 週。
• 資本配置：公司計畫在減少債務、有機投資與併購之間取得平衡。管理層表示槓桿比率低於 1，並對能夠增加產品或技術的國防、航太與工業資產持續保持興趣。
• 海洋業務獲利能力：管理層估計，當前海洋業務的挑戰使該業務在本季度的利潤率下降了約 5 到 6 個百分點。預計隨著產量提升，利潤率將會改善。

法說會完整逐字稿

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完整財報電話會議逐字稿

管理層陳述

Joshua Carroll

Good morning, and thank you for joining us for RBC Bearings Fiscal Second Quarter 2027 Earnings Call. I'm Josh Carroll with the Investor Relations team. With me on today's call are Dr. Hartnett, Chairman, President and Chief Executive Officer; Daniel Bergeron, Director, Vice President and Chief Operating Officer; and Rob Sullivan, Vice President and Chief Financial Officer.

As a reminder, some of the statements made today may be forward-looking under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. These factors are also listed in the press release along with a reconciliation between GAAP and non-GAAP financial information.

With all that said, I'll now turn the call over to Dr. Hartnett.

Mike Hartnett

Thank you, Josh, and good morning to everyone, and thank you for joining us. Again, as normal, I'll begin today's call with a brief review of our second quarter results then discuss some trends we are seeing across the end markets before turning the call over to Rob, who will provide additional details.

We delivered a strong second quarter with net sales increasing 15.2% year-over-year to $524.6 million. This was driven by continued demand in our Aerospace and Defense environment and a 14.8% growth from our Industrial business. Consolidated gross margin for the quarter was 45.6%. Adjusted EPS increased 29.9% year-over-year to $3.74 compared to $2.84 in the prior year. Adjusted EBITDA rose from 20.4% -- rose 20.4% to $175 million versus $145.3 million last year. That's 33.4% of revenues. Free cash flow remained strong at $85.2 million, and that was net of a $24 million acquisition, and we retired $96 million of debt during the period.

Turning now to our 2 business segments. Approximately 56% of our revenue during the quarter came from our Industrial segment. And Aerospace and Defense, which was 44% of sales, continues to expand. Segment revenue increased 15.8%. The components were commercial aerospace was up 17.4%, defense 13.6%. Both were constrained by production capacity, which is easing as new equipment comes online. Across the A&D business, including space, we are seeing record order activity, increasing inquiries, customer request for accelerated deliveries and long-term commitments.

On space, this sector continues to shine. In the first half, revenues expanded 78% showing a continuous demand for components from an even ever-expanding stream of new and old customers. Of course, this business is still early -- in the early stages of maturity. We recognize the long-term growth prospects and represents RBC and are planning future expansions accordingly. On marine, we continue to boost production of components for submarines and are working to triple our output on these products from our baseline. We are now about 30% complete, 70% to go to reach our goal. We are planning continued expansion through FY '28.

Turning now to our Industrial business. Performance remained strong during the period, with OEM revenues increasing 24.2% and distribution revenues increasing 10.6%. Overall, the sector was up 14.8%. During the quarter, we saw growth across aggregates, metals, food and beverage, warehousing, semiconductors, grain and power generation. No significant contraction we've seen in any of the core industrial markets. Overall, we remain invigorated by the strength, breadth and outlook of the total RBC business. To the RBC team listening today, thank you for always going the extra mile in support of our customers. We believe and continue to believe our differentiators that make the difference are outstanding service levels, strong brands, unique certified products, leading market positions, technical expertise, most of all our dedicated employees.

With that, I'll turn over the call to Rob, who will walk us through the financials.

Robert Sullivan

Thank you, Mike. We delivered another strong quarter ahead of our expectations with net sales growing 15.2%, which led to a 19.1% increase in our reported gross margin. Gross margins of 45.6% on both a reported and adjusted basis compared to 44.1% reported and 44.9% adjusted in the same period last year. The gross margins this quarter reflect the benefits of increased volumes running through our production facilities along with the impacts of contract renewals and favorable mix.

Second quarter A&D sales increased 15.8% year-over-year. Net sales from our industrial business increased 14.8% during the period or approximately 14% excluding $2 million of sales from PSC, which was acquired in August. A&D reported gross margins during the quarter were 42.2% and Industrial margins were 48.2% compared to 38.7% and 48.2% in the prior year period, respectively.

On the SG&A line, we had total costs of $83.4 million or 15.9% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $125 million or 33.4% of net sales for the quarter. That represents a 20.4% increase in adjusted EBITDA dollars during the quarter compared to the same period last year. Interest expense for the quarter was $9.3 million. This was down 30.6% year-over-year, reflecting the improved leverage position achieved over the last 12 months, coupled with lower interest rates. We paid off $96 million of debt during the quarter, which included repaying the remaining balance of our term loan ahead of the November 2026 target we set a year ago.

The tax rate in our adjusted EPS calculation was 22.2% compared to last year's 22.0%. This led to an adjusted diluted earnings per share of $3.74, representing growth of 29.9% year-over-year. Free cash flow in the quarter came in at $85.7 million with a conversion of 91.4% of net income compared to $71.7 million and 119.5% last year. Conversion through 6 months stands at approximately 119% of net income. Our strong balance sheet and improved financial flexibility provides us opportunities to pursue a balanced capital allocation strategy as we continue to deleverage.

Looking into the third quarter of fiscal 2027, we are guiding revenues of $520 million to $525 million, representing year-over-year growth of 12.7% to 13.7%. On a 9-month basis, that would mean sales of $1.564 billion to $1.569 billion, represent growth of 15.6% to 16% year-over-year. The outlook reflects the no seasonal impact of the holiday period on our third quarter. Adjusted gross margins in the next quarter expected to be in the range of 45.5% to 45.75% and SG&A as a percentage of net sales is expected to be in the range of 16.25% to 16.5%.

With that, operator, please open the call for Q&A.

Operator

[Operator Instructions] Our first question is coming from Jason Holcomb from Morgan Stanley.

分析師問答

Jason Holcomb

Maybe Mike, in the press release, you noted that you expect the second half of the fiscal year to be better than the first half. Can you maybe provide more detail on that comment and provide some context on what you're expecting for growth in the second half for Industrial and Aerospace and Defense? And also, it'd be great if you can maybe comment on any notable differences in expected growth dynamics between commercial aero and defense.

Mike Hartnett

I'm just making notes of your question. Sure. Well, first of all, it's easy to explain. The easiest component of the expansion in the second half is we get an extra week in there. So the way our accounting calendar works, it gives us an extra week. So that explains some of it.

I think what's more relevant here though, the efforts that we've put in over the past several years and the capital that we've put in over the past several years will now show in these quarters. It will show more in the fourth quarter than the third quarter for reasons which I'll explain. But that's definitely, we've added capacity. We have the machinery. We've trained the people. We've did the logistics behind the supply chain. And that effort is going to produce dividends for us in the next 6 months.

So behind that, we're behind our plan for the year on marine production. We're just not producing what we plan to produce. And we've had some difficulties in the supply chain. Those difficulties have regard us to in-source some processes that are somewhat complex, but manageable. And we expect to do some significant catch-up, particularly in the fourth quarter of our year on our marine plan. And so that's another element that's important to us.

And on the third quarter, third quarter is always a tricky quarter for us. Because it's a short quarter, everybody knows there's plenty of holidays. But I think what people don't feel is a lot of business goes to either the government or A&D customers that have market caps in excess of $100 billion. I won't name any names, but you know the names. They seem to use a lot of December in terms of holidays and vacation time.

A lot of our products that have to be shipped are shipped in accordance with a release that has to come from them with regard to certifications for quality and logistics. And so we're depending upon them in many cases for these certifications. In this particular year, there seems to be more of that than normal. So some of that might roll into the fourth quarter and some might not. It's really hard to tell. So that's the basis of our third quarter forecast right there.

Let's see. I think when we look at the Aerospace and Defense side, I suspect if we can get the marine up on its feet, then I think we're certainly going to be north of 15% on the A&D side of the business. Maybe hovering closer to 20%. On the Industrial side, very GDP-dependent. And so I think we're always sort of budgeting a high single-digit expansion on the industrial side of the business because not great forecasters of what the GDP is going to be out 6 months. And if you know somebody that is, please introduce us to him.

Jason Holcomb

Maybe just as a quick follow-up. I mean, I guess, in your comment on the sort of like the logistical sign-offs for kind of calendar 4Q, I guess, is that more directly related to the in-sourcing with some of the things you're doing in marine? Or is that for -- is that a separate comment that maybe is about maybe market share that you're winning on other programs? Maybe just a little extra on that would be helpful.

Mike Hartnett

No, it's -- actually, marine seems to be a little bit independent of that, but it's usually Aerospace, it's Aerospace, Defense, maybe a little bit space. I think space is in there, too. That's a little bit more administrative. There's more administrative releases on the defense side.

Jason Holcomb

Got you. And then maybe just one last quick one is just you mentioned on marine kind of tripling output from the baseline for that business. I guess, do you have a sense of how long you think it would take to achieve that?

Mike Hartnett

Well, I think once we put the in-sourcing project to bed, and I hope we have all the linen in the pillows and that's imminent. I think we'll probably be past 70% next year and be in FY '28, and we'll round that off in FY '29.

Operator

Next question is coming from Steve Barger from KeyBanc Capital Markets.

Steve Barger

First question is on defense, on missiles and munitions. How much of what you're seeing today is just for replenishment of depleted inventories versus a structural increase in production rates? And what's your visibility like there?

Mike Hartnett

Well, I mean, it's -- certainly, the programs that we've been on, our programs like the Tomahawk, the GMLRS, the standard missile and the hypersonic [ missile/sumwell ] program. We've been pretty much steady-state manufacturing product for those systems as is normal. Certainly, those systems -- to build rate for those systems has stepped up substantially. So we're going to see a substantial stepping up in that next year. So maybe some of that in the fourth quarter. It's hard to predict.

But if you look at the Tomahawk, I mean, it's no secret that we've -- Tomahawks have been built at 200 a year kind of rate. They now are going to 1,000 a year kind of rate. We produce several fuel system components for the Tomahawk missile, which are critical to the missile. So we're actually in the process now of laying out floor space to bring up those production rates in accordance with that kind of demand. And GMLRS is something that we're well tooled on. And there's a -- I think there's a 40% or a 20%, I don't remember the trailing numbers, but it's at least a 20% step up in volume and we're tooled and we won't have any trouble meeting that step up.

And the hypersonic [ some well ] program is a big one for us, and we're kind of in the middle of that. It's that -- hypersonic is going through its testing. And once testing is completed, will be released for manufacturing. So I think we're probably 18 months away from that release.

Steve Barger

And I know your submarine programs are the biggest part of defense. How big is missiles and munitions as a percentage of defense revenue for you?

Mike Hartnett

Good question. Rob, how is it?

Robert Sullivan

I mean, I think it's running in the range of $50 million a year right now. Yes.

Steve Barger

Got it. Okay. And then one follow-up on Industrial. In your prepared remarks, you noted a lot of positive end markets. We're hearing the same from other companies. Can you talk about what you're seeing from the more traditionally cyclical OEM markets to the extent that you have exposure? I'm just trying to get the sense of whether we'll see an equipment CapEx cycle beyond the pickup in aftermarket and distribution that's already taken place?

Mike Hartnett

Well, certainly, our most cyclical OEM end market in Industrial is oil and gas. And with what's going on in the world, there's a renewal there. We're seeing a pickup there.

Steve Barger

Got it. And you don't have much machinery, like traditional machinery exposure, right?

Mike Hartnett

We have it. It's not material.

Operator

Next question is coming from Michael Ciarmoli from Guggenheim Securities.

Michael Ciarmoli

Maybe Mike, at the -- maybe I know the answer to this, but I'll answer it anyway. Just given kind of the demand coming from marine, missiles, all things Aerospace and Defense. Are you seeing any risk to your businesses of being second sourced at all as the industry in general is broadly looking for more capacity?

Mike Hartnett

I think the answer -- the overall answer to that is no. We hear a lot of talk about bringing on second sources for certain positions. But that talk usually is directed at us to be the second source. So we do take a lot of pride in service levels. And so bearing is a very small part of an airframe. I guess if you look at 737 and if you look at the discounted selling price of a 737, it's probably $60 million, $70 million. And our content is $200,000. So we don't -- if you don't create the problem, if you're not the problem, you won't be -- they won't be looking for a solution because they have other problems to sell. So our whole theory in life here is don't be the problem.

Michael Ciarmoli

Right. That's always good advice. What about -- just on the capacity constraints you talked about in marine. Can you quantify that? In terms of revenue and even that area, I guess, maybe honing in specifically, was that more on the legacy RBC? Was it more on the VACCO side? Any additional color there?

Mike Hartnett

It's more legacy RBC. VACCO is got the same charge, is tripling their production. And there -- they seem to be more able to do that. There's -- because designs are different than Sargent designs completely. So yes, the problem is in Tucson and -- so we kind of work on that every day, trying to bring solutions to what they need. Fortunately, the requirements that they have, which are technically somewhat sophisticated from a metallurgical standpoint, we're equipped in other plants, RBC plants to manufacture those items.

So we're in the process of retooling some of those RBC plants today to bring their manufacturing rate of those products consistent with surgeons' needs. So that's why I'm recently -- it's a timing thing at this point. I'm reasonably sure that we're going to feel the effects of that in the fourth quarter.

Michael Ciarmoli

Okay. Okay. And then just last one for me. Rob, do you have the Aerospace OEM growth rate in the quarter? And maybe just kind of what you're seeing there in terms of kind of from Boeing, from Airbus from the engine OEMs? Are you kind of in line with their rates? Are you looking into next year to where they want to get to in rates across the narrow-bodies and wide-bodies?

Robert Sullivan

Yes. Let me give you the numbers. So total commercial OEM was $114.9 million this quarter. Distribution was 21.5. And so you have a Defense is 67.5 on the OEM side and 26.4 on the distribution side. So we're certainly seeing sequential growth in the OEM side consistently as we've been ramping up and certainly driving a lot of it.

Operator

Your next question is coming from Scott Deuschle from Deutsche Bank.

Scott Deuschle

Rob, was the sequential backlog increase related to marine? Or is that something else?

Robert Sullivan

It would be broad across the areas, it's mostly Aerospace, as you can imagine. Some of it was on VACCO, some of it out of Sargent Marine and then just some other Aerospace contracts flowing through.

Scott Deuschle

Okay. And then Mike or Rob, you mentioned 78% growth in the space business in the first half. Can you share a rough split of that between organic and inorganic for VACCO?

Robert Sullivan

So yes, I'd say that VACCO certainly makes up a large portion of that. When you look at it, but even if you look this quarter 2 versus quarter 2 last year, it's still up a few million bucks on an organic basis.

Scott Deuschle

Okay. And then Mike, if an Aerospace OEM were to add RBC as a second source of supply on an existing product that is currently sole-sourced to someone else. And you signed that contract, say, this quarter, how long would it take for that to begin to shift to that customer and then show up in your results? Is it a year or longer or shorter?

Mike Hartnett

Well, it depends upon what we -- if we sold them, if it's a standard product that we're already producing, we would probably give them a time kind of delivery. And just phase it in and the lead time would be depending on the product line, but at this point, it could be 50 weeks.

Scott Deuschle

Okay. And then last question for me. Just on the earlier point about capacity. What are the primary machine tools that you use to produce aerospace bearings? And then how long does it take to get those tools if you order them now?

Mike Hartnett

Well, the primary machine tools, if you can get the material. The material is also a problem, but you have to be way ahead of the game on the material side. Primary machine tools are turning and cutting machines. And those are made by [ Maury Sake ] and people like that. And then there's the next step in the process would be heat treating.

So there is -- usually, there's the turning machines lead time, 6 months. The heat treating equipment lead time depending upon the type of heat treating you want to do is a year to 18 months. And then there's finishing equipment. And the finishing equipment is we use 15 months planning to get it on our floor and get it operational. And sometimes, it's a little quicker than that, but not very much. And there's several different finishing operations that have that kind of lead time, so you might have a grinding operation.

And then you might have a publishing operation and Stoning operation. And so both of those machine sets have that kind of lead time. And that's sort of the major machine tools. At the same time, you need operators and folks that can deal with that level of complexity on the floor that can run these veins. So simultaneously, you have to be training those people. And as you train those people, you usually have a drop back in plant efficiency because you have a lot of people in training and not a lot of people are making. So you're -- your paid hour versus your earned hour is diluted. You earned dollars diluted. So that's sort of the manufacturing equation for bearings right there.

Scott Deuschle

Okay. And then I guess as you look forward, do you see the constraint on growth as being -- continuing to be focused on tooling capacity and your ability to bring that in? Or does it start to shift more towards labor as you get into next year?

Mike Hartnett

I think we're okay from a labor standpoint. I mean, there's -- we're not perfect. There's -- but it's not -- it's a fringe item at this point because of some of the approvals that we've recently gotten for our plants in Mexico. Where there's plenty of labor and plenty of labor availability, implant of machine tool capacity. So yes, I think the major component here is going to be continuing to cycle in advanced machine tool systems to upgrade those systems that are -- we have on the floor to improve throughput and efficiencies.

Operator

Your next question is coming from Pete Skibitski from Alembic Global.

Peter Skibitski

Nice quarter. Mike, can you update us on where you're at specifically at Boeing on production rates just because they've obviously had some trouble stabilizing here at 47 a month on the MAX and trying to get to 10 onto 787. I know it differs by plant, but maybe you can give us kind of an average of where you produce that this quarter?

Mike Hartnett

Yes. I think I'm trying to think of the last meeting I had on that 2 weeks ago. And I think they were clocking at about 42 to 45. It's a little disproportionate because some of our -- we're getting businesses -- business volume from previous suppliers of Boeing who have sort of exited the supply chain to say it nicely. And so that's a little bit disproportionate to their rates, which pushes a couple of our plants to a higher speed limit.

Peter Skibitski

Right, So organically, it's almost like you're in the low 40s organically, if you exclude market share gains?

Mike Hartnett

Right. I think that's fair.

Peter Skibitski

Okay. Okay. Okay. Sounds good. And then just one more, just one maybe for Rob. Rob, one of the better SG&A spend quarters you guys have had in probably 3 or 4 years, I guess. And yes, you're looking like a bit of an uptick here in the third quarter. But how -- was there any kind of unusual onetime lower spend levels this quarter? Or are we able to maybe see a pronounced downward trend over the next few years? Maybe just update us on kind of what you're seeing SG&A-wise.

Robert Sullivan

I think we're seeing more just the leverage of the increase in sales over time that's helped fall below the 16% mark. I think this was a strong execution quarter in terms of SG&A and controlling our cost profile. Obviously, as certain compensation items run through, you get a little bit of an uptick in dollars moving forward, but we're pretty comfortable right now, where we are, and we're pretty pleased to see the leverage on the increased sales compared to where we were a year ago, we were closer to 17%.

So it's just kind of continuation of the discipline that we've been trying to put in place. But just to add to that quickly, the uptick in the next quarter is largely centered around stock comp, which I think is going to be up $1.5 million next quarter. That's driving us closer to that forecasted rate.

Peter Skibitski

Okay. It's like a first quarter, third quarter thing, typically?

Mike Hartnett

It's just the timing. And so I think that Q2 was up from Q1 and stock comp, Q3 is a little bit up from Q2.

Operator

Next question is coming from Tim Thein from Raymond James.

Timothy Thein

First question is just on Industrial. And I was interested that I think you said the 11% growth on the distribution side in the quarter. If you look at the results of some of the public suppliers, they're not growing at nearly that rate. So I was just curious if maybe you could add some context there. And obviously, they're getting a bit of pricing.

So just curious if that's -- are you seeing any signs of -- or maybe inventory build from some of the customers or maybe gaining some share or a combination of that? Just a bit of context in terms of what you're seeing on that side of the industrial house and whether you think that's the sustainability, I guess, of that.

Mike Hartnett

Well, I think one of our advantages there, Tim, is that if we kind of use Dodge as the proxy on the industrial side of our business. Their product availability across their line items. And they have thousands of line items 97% of the time, 95% of the time, 96% of the time when a customer needs that product that's in stock. And so their service levels are extraordinarily high. And this is an aftermarket kind of thing that somebody needs to part because there's a part that failed in some of these machines in someplace that they need right away, and we have it in stock and so they buy it from us. I think our service rates are industry-leading. I think that brings a lot of revenue into Dodge. And RBC, the balance of RBC's Industrial business sort of runs the same plan.

Timothy Thein

Understood. Okay. And then maybe one for Rob. Just how to think about the -- some of the cost items here as we think about what that picture looks like today versus 90 days ago. Just how you're thinking about this, I guess, more at the gross margin level, the impact of inflationary the potential inflationary headwinds. How that change, if at all, in terms of how you're thinking about the back half of the year, just given changes in freight and logistics, et cetera? How impactful is that?

Robert Sullivan

Yes. It's a fair question. I think we've been running this inflation rate for a few years now. I'm trying to stay ahead of it, and I think we've done a pretty effective job across the board. I think last quarter, we increased our outlook for the year from 50 basis points to 100 basis points of margin expansion for the full year. I think we still feel good that 100 basis points is very, very achievable. So we certainly keep a very close eye on cost pressures as they come on, and we're constantly making sure we're making adjustments where we can do to stay in front of it.

Operator

Next question is coming from Ronald Epstein from Bank of America.

Unknown Analyst

This is [ Andrew Stein ] for Ron. I just wanted to ask about the capital allocation strategy here given the comments on the supply chain. And particularly in marine, are you guys looking at M&A opportunities where you could potentially vertically integrate areas of weakness in the supply chain? Any color there would be appreciated.

Daniel Bergeron

Yes, this is Dan. Of course, we're always taking a look to see if some of our supply chain if there's an opportunity in it. And -- but it's not the main focus of our M&A strategy. So I think we're out looking, Rob and I, like always. RBC, we've been doing this for over 23 years and have completed over 27 acquisitions. So we continue to do that. Rob's job is to get the balance sheet in shape and delever it. So we're in a good position to participate in any transactions that come by. And so him and his team have done a great job getting that leverage down under 1, and we'll continue to do that and continue to delever and we'll continue to look for deals to get done. So the 3 legs of a stool, right, to pay down that debt, invest in organic growth and continue to look for M&A.

Unknown Analyst

Just a quick follow-up. Are there any particular categories in the marketplace that appear attractive as like a bolt-on acquisition?

Daniel Bergeron

Well, we like deals that bring new products and technology that we can bring over our current customer base to better leverage our position in our market with our customers. So we like defense assets. We like Aerospace assets, and we like Industrial assets.

Operator

Next question is a follow-up from Scott Deuschle from Deutsche Bank.

Scott Deuschle

Yes. Sorry if I missed it, Rob, but were there any end markets in the Industrial business that batted well above their weight in terms of driving this growth, particularly on the OEM side? Or is that growth pretty balanced across the different end markets?

Robert Sullivan

You're saying OEM specifically?

Scott Deuschle

Yes. you brought it out as well.

Robert Sullivan

Yes. I mean, mining and metals did really well this quarter. And then semiconductor, while it's small, it was mighty and it was up significantly this quarter as well on the OEM side, but really broad-based expansion across so many end markets there.

Daniel Bergeron

And OEM business was up 24.6%.

Scott Deuschle

Right. Yes. And then is there much of a margin benefit that also hits for the Aerospace and Defense business when you hit this marine unlock at the end of the year? Or is it more of just a revenue tailwind?

Robert Sullivan

It's definitely a margin benefit. We've been feeling some pinch on the margins, I think, with some of the headwinds in the marine business. So I think that there's definitely opportunity there as we work through and ramp up.

Scott Deuschle

Can you quantify that pinch at all like a couple of million dollars a quarter or something like that?

Robert Sullivan

Well, for their business, I think it's -- this past quarter is 5 or 6 points on that business. So it's impactful. Largely on the Aerospace margins, that was 1 pinch. The other side of it again is that Q1 and Q4 just notably have most production days and tend to be our strongest operating quarters. Q2 has fewer production days. Do you feel a little bit of that seasonality pinch and the efficiency.

Operator

We reached our question-and-answer session. So I'd like to turn the floor back over for any further closing comments.

Mike Hartnett

Well, I think our closing comments are, we appreciate everybody's interest and questions this morning. I hope we gave you a good understanding of the positive outlook that we have and we feel about the business and look forward to talking to you probably in late January, early February.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.