Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Brian D. Koppy – Director of Investor Relations & Communications

Gregory F. Milzcik – President, Chief Executive Officer & Director

William C. Denninger – Chief Financial Officer, Senior Vice President Finance & Director

Analysts

Analyst for Peter Lisnic – Robert W. Baird

Christophe Glynn – Oppenheimer

Edward Marshall – Sidoti & Company

Matt J. Summerville – KeyBanc Capital Markets

[David Sacks – Hoffy Capital]

Barnes Group Inc. (B) Q1 2008 Earnings Call May 2, 2008 8:30 PM ET

Operator

Welcome to the first quarter 2008 Barnes Group earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today’s call Brian Koppy.

Brian D. Koppy

This is Brian Koppy, Director of Investor Relations and Communications for Barnes Group and with me this morning are Barnes Group President and CEO Greg Milzcik and Senior Vice President of Finance and Chief Financial Officer Bill Denninger.

I want to remind everyone that certain statements that we make on today’s call both during the opening remarks and during the question and answer session may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subjects to risk and uncertainties that may cause actual results to differ materially from those contained in the financial statements.

We encourage everyone to consider these risks and uncertainties that are described in our periodic filings with the Securities & Exchange Commission which are available through the investor relations section of our corporate website at www.BarnesGroupInc.com.

Our detailed press release was issued this morning and we hope you’ve had a chance to review it. As a result we will begin today’s call with only a brief opening statement by Greg Milzcik and then open the call up to answer your questions.

Now, let me turn the call over to Greg.

Gregory F. Milzcik

As you saw in the press release this morning Barnes Group has a record start for the year driven by strong performance across the businesses. Revenues were up 8% with strong organic growth at Barnes Aerospace. Earnings per diluted share were $0.60 and increase of 20% over last year and we raised our full year outlook to $2.30 to $2.39 a share, an increase of approximately 33% over 2007 results.

Importantly, sales and operating profit per employee were both up 18% and 10% respectively in the quarter. These key productivity measures are being driven by our enterprise wide operational improvements. As our business landscape becomes more competitive and the economic environment becomes more uncertain a fully integrated operating system which standardizes, aligns and enhances our operations will enable us to continue to meet and exceed our customer’s expectations for service, quality and delivery.

Our businesses are demonstrating continued improvement. Barnes Aerospace delivered 23% top line growth along with a 33% operating profit growth. Sales in the commercial aerospace manufacturing businesses are expected to continue to grow based on the strong commercial engine order backlog.

Increased outsourcing trends, capability expansion and strategic platform positioning are expected to add to Barnes Aerospace growth potential. In addition, our current backlog does not reflect the nearly 1,000 Boeing 787 aircraft scheduled for delivery over the next eight years. Capacity expansion, new product introduction and enterprise wide investments along with a dynamic industrial setting including globalization and dollarization efforts should enable Barnes Aerospace to continue to deliver solid results throughout the rest of the year and beyond.

Turning now to Barnes Distribution, during the first quarter we realized a number of benefits from the organizational and operational initiatives undertaken in 2007 which reaffirm our expectations for continued momentum throughout the rest of the year. We believe we have made substantial progress within Barnes Distribution North America.

We are focused on targeted market segment initiatives and a change in sales force compensation which focuses on market pricing, customer retention and penetration and adding new customers to our core markets. However, Barnes Distribution Europe and specifically the United Kingdom had results which underperformed our expectations during the first quarter.

We have taken aggressive actions to solidify and stabilize the business including a new management team, added focus on operational efficiencies through deployment of lean experts and we have expanded our successful global sourcing efforts to include our European businesses. As we move throughout the year improved performance in Europe is expected as a result of these actions and the strengthening of our fulfillment operations and the recruitment of sales representatives in certain territories.

Barnes Industrial continues to benefit from its globally diverse businesses. Strong growth from Barnes Industrial’s businesses in Asia and Europe are providing balance within the group as North American businesses have seen pressure in the transportation and consumer home products end markets.

As of the end of the first quarter approximately 59% of Barnes Industrial sales were from outside North America. Barnes Industrial will continue to implement operational improvements to enhance its market competitiveness, grow profitably and expand its global presence and customer base.

In summary, we expect the momentum to continue throughout 2008 as we realize the benefits of our global diversification strategy and drive process improvements and cost reduction activities. Barnes Group ongoing operational improvements including lean enterprise and systematic goal deployment, key elements within an integrated operating system will continue to help drive the company’s business activities to new levels of efficiency and effectiveness to meet the customers’ needs and improve their performance.

We are looking forward to a successful 2008 with increased stock holder value and remain committed to positioning all of our businesses for consistent sustainable and predictable profitable growth over the long term.

Now, I will turn it over to Brian.

Brian D. Koppy

We will now open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Peter Lisnic – Robert W. Baird.

Analyst for Peter Lisnic – Robert W. Baird

As I look through the aerospace backlog number the implied order rate is about 2% or so year-on-year and I’m just curious is there some cancellation or push back of orders from the 787? Or, if you could just give a little more color behind the implied order rate there?

Gregory F. Milzcik

First of all, remember that there are a couple of different aspects to the backlog. First of all it reflect primarily on the original equipment manufacturing side of the businesses since the higher margin aftermarket businesses is a shorter cycle. So, on the OE side the backlog was affected by the 787 push outs as well as some horizon changes due to the ability to obtain titanium sheet more readily, etc. But, it was relatively good order for the quarter. I think we had somewhere around $10 million of push outs for 787 in the quarter.

Analyst for Peter Lisnic – Robert W. Baird

Looking at what you did in the first quarter and clearly results were above our expectation, I’m assuming they were above what you were planning also. It seems like the EPS increase was really the magnitude of what you did in the first quarter and is that just conservatism regarding Europe right now? Or, what’s behind the relatively small increase in guidance relative to what you just did in the first quarter?

William C. Denninger

In the first quarter we did benefit from lower diluted share count for the tune of around $0.03 against our internal estimates. I would say the full year increase is a combination of lower diluted share count related to the share price and an improvement in operations.

Gregory F. Milzcik

I would also point out too that we are going to continue to make investments to ensure 2009 is going to be successful so we are going to continue to make investments in Q2 and Q3 for 09.

Analyst for Peter Lisnic – Robert W. Baird

Bill, just with that convert, it looks like the imputed share price that you’re using for the full year for purchases is about $33?

William C. Denninger

That’s in the ballpark, yes.

Analyst for Peter Lisnic – Robert W. Baird

Where your stock is right now, is there any thought for share repurchases or anything like that?

William C. Denninger

We’ve got an open authorization, we’re always looking at it and have bought the shares when we think they are cheap so that’s certainly something we consider.

Operator

Your next question comes from Christophe Glynn – Oppenheimer.

Christophe Glynn – Oppenheimer

On the industrial margins, just curious it was down a little year-over-year, I know it was a really tough comp but it’s usually your strongest quarter seasonally for margin, I believe, and it seems like you had some pretty good mix in the overseas higher margin stuff versus the domestic.

William C. Denninger

Chris I think it really is a mix issue. Our offshore business was [inaudible] versus North America. We did see an impact in North America and our associated spring piece of the business really the light vehicles and heavy trucks, that’s a high fixed comps business so we did take a bit of a hit there but luckily were able to offset it with the strength in the offshore operation.

Christophe Glynn – Oppenheimer

Could you talk a little bit about the RSP pipeline and how the execution is going on just the last couple month’s recent wins?

Gregory F. Milzcik

I think the RSPs are progressing very nicely. For example, we’ve been transitioning the work load to our Singapore operation and that has been fairly well managed. We’ve had no pipeline issues with the product or the customer, the quality is exceptional and those are the key driving forces behind ensuring the RSPs for long term. Other than that they’re performing to our model and expectation.

Christophe Glynn – Oppenheimer

I guess by pipeline meant prospects.

Gregory F. Milzcik

We continue to evaluate RSPs but it is a very difficult negotiating process simply because it’s complex as well as demanding financially. So, we do not anticipate or forecast or disclose any of the negotiations that are ongoing.

Christophe Glynn – Oppenheimer

On the distribution side, I think of the components within project catalyst, the sales impact was a little further out than say procurement and sourcing benefits but should we think about the sales and vertical marketing target component as a meaningful offset to the economy maybe more in the second half?

Gregory F. Milzcik

I think there are a couple of different things, first of all I’d like to reiterate that Barnes Distribution North America where the majority of our project catalyst initiatives were in 2007 had the best margin performance quarter since 1998 and I think that bodes well for the various levers that we’ve been using to drive the margin improvement. Certainly price as well as the lowering of costs through global procurement is a key component of that but I think when I think about market segmentation a lot of that will benefit 2009.

William C. Denninger

There’s quite an extensive training program that we are putting our sales reps through relative to market segmentation and we’re really trying to make them experts as they move in to the vertical markets.

Christophe Glynn – Oppenheimer

Just lastly, comments on the acquisition pipeline?

Gregory F. Milzcik

Actually, I think it’s improving. I think generically you could say that multiples are coming down. I think there’s more strategic buyers in the marketplace rather than financial buyers and we’re continuing to evaluate opportunities.

Operator

Your next question comes from Edward Marshall – Sidoti & Company.

Edward Marshall – Sidoti & Company

I wanted to back up to that acquisition question that was just mentioned. Is there a particular segment, I know we took a hiatus from acquisitions on the distribution segment but would we consider something maybe in the industrial or aerospace? And, which one would you pursue?

Gregory F. Milzcik

I think that generally multiples in aerospace have moderated somewhat. We will not do an acquisition for acquisitions sake, it has to make strategic sense and it has to make financial sense for our shareholders. But, I think there are opportunities in aerospace that make sense for us, also in industrial and later in the year if we continue to see progress in distribution we’ll revisit the moratorium on distribution acquisitions.

Edward Marshall – Sidoti & Company

And would it be more of a bolt on for the aerospace or is it something that would be a third leg to the company?

Gregory F. Milzcik

Primarily we’re looking at bolt on but that’s not to say we’re excluding evaluating other marketplaces. But, we’ve done a fairly good job of establishing an organization that has economies of scale that brings value to the customer as well as to the shareholder.

Edward Marshall – Sidoti & Company

Now, in North America project catalyst obviously had a pretty good impact on the margins in the distribution segment.

Gregory F. Milzcik

Absolutely.

Edward Marshall – Sidoti & Company

But, more importantly, I think the long term goal of the upwards of 9% to 10% in 2009, at this preliminary stage how does that goal look at this point?

Gregory F. Milzcik

Well, first of all we never committed to double digit in 2009. I think people have been trying to get us to commit to what date we believe it’s double digit. I’m more convinced now than ever that this is a very healthy business, it’s one that we want to continue to reinvest in, it’s one that I think everyone can prosper in but we’re going to drive towards that 10% or double digit growth rate and we’re not committed to a particular time yet.

Edward Marshall – Sidoti & Company

But, you think the momentum will continue in to 2009, is that correct?

William C. Denninger

We said we’re looking for a sequential quarterly improvements which we continue to believe we can do that. The economy is an issue and we’ll see how far we get.

Operator

Your next question comes from Matt J. Summerville – KeyBanc Capital Markets.

Matt J. Summerville – KeyBanc Capital Markets

Greg I’d like to get your view on what your thoughts are with respect to the general industrial economy here in the US?

Gregory F. Milzcik

I have very strong opinions that I shared with anyone who would listen. That is that I think that companies that embrace globalization, those that look at globalization as an opportunity rather than a threat, I think are certainly a different category of performance during this downturn in North America.

The second aspect of it is I think it is very much a segmented downturn within North America. Obviously, if you’re in financial services you have a very bleak view of the current conditions but if you’re in construction it’s probably similar, automotive is somewhat down but there are a lot of areas in the industrial economy that are prospering, especially those that are export driven.

I’d also say the dollarization effort that’s going on with many European OEs to get manufacturing support from North America is very helpful as well. With a weak dollar it’s hard to compete against a good American manufacturing company from an export perspective.

Matt J. Summerville – KeyBanc Capital Markets

With respect to the aerospace business let’s talk a little more about 787. You mentioned a $10 million push or delay if you will. Was that out of the first quarter in to the second quarter? And based on the current engine build schedule of out GE right now, how much 787 revenue, round numbers, are you anticipating in 08? And, how does that compare to your prior expectation?

Gregory F. Milzcik

Certainly the schedule has been pushed to the right in the quarter. I have several comments on the 787. First of all, you can go back to transcripts from a couple of years ago and I have always been stating that this program I expected to be delayed at least a year and I have been very consistent about that over a long period of time. It’s a very complicated aircraft, it’s a step function in efficiency and design as well as the process at which they’re assembling it.

So internally we had always had some Kentucky windage to apply to the schedule so this does not surprise me in the least. In some ways there’s smoothing of the out year schedule that benefits us tremendously because we have a tremendous unseen backlog that’s not reflected in the numbers that you see so when many people are looking at a potential flattening out in 2011 I think that’s where the companies that have positioned themselves on this aircraft are going to see an actual lift rather than a drag to use aircraft terms. As far as revenues out of the year, we built that in to the forecast as a whole but we’re not giving specific numbers for competitive reasons.

Matt J. Summerville – KeyBanc Capital Markets

Greg, maybe you can comment more qualitatively, is the change in your 787 revenue forecast if there was one for the year, is it all that significant?

William C. Denninger

Matt, it’s really not that significant in terms of bottom line impact.

Gregory F. Milzcik

Especially remember Matt that early production units usually have very little profit in them because the learning curve. So, it certainly is insignificant for ‘08.

Matt J. Summerville – KeyBanc Capital Markets

Can you talk Greg with respect to each of the three businesses on what you’re seeing in terms of raw material costs? Then, what you’ve been able to do with pricing? And, are you having availability issues with respect to titanium?

Gregory F. Milzcik

Actually, in aerospace titanium is more readily available than had been. Usually the law of supply and demand does work, it’s a matter of how much time it takes for supply to catch up with demand and I think in the aerospace business titanium supply has certainly been catching up. So availability of material is not a major issue.

Also, as I mentioned in previous calls the material pass through pricing on most of our aerospace product handles any price increase of raw stock and we do have long term agreements in place for most of the miscellaneous items that are not covered by those types of contract coverage. In our industrial business we’ve been able to extend contract coverage up to six months where previously it was in the three month range and we’ve been working very diligently at making sure that we’ve got that aspect mitigated.

There is some small risk, I shouldn’t say small I don’t want to quantify it in that way but we are managing it actively. We have demonstrated success in the pass at getting pass through material, or passing price to the customer on the industrial side although there are some fluctuations here and there. On distribution, we actively manage the material supply aspect of the business and also our global sourcing initiative has been very effective at mitigating price in fact, going the other direction where we’re actually getting price reductions that are significant and contributing to margin.

Matt J. Summerville – KeyBanc Capital Markets

With respect to the industrial business, can you give a little more color on how organic growth is trending in North America versus your international businesses at this point?

William C. Denninger

I think overall Matt internationally or European based we’re seeing high single low double digit organic growth plus currency. In the US we’re seeing a 3% to 4% negative organic growth.

Matt J. Summerville – KeyBanc Capital Markets

Bill, I heard you comment earlier on share repurchase, did you buy any shares back during the first quarter?

William C. Denninger

We did not. We look at the opportunities out there for acquisitions, for RSPs, we think that’s a much better use of our cash but we want the flexibility to be able to buy back when it makes sense.

Matt J. Summerville – KeyBanc Capital Markets

In the press release I looked at in the fourth quarter versus the first quarter of 08 and it looks like your forecast for D&A at the midpoint of the new range is down about $4 million. What would be driving that Bill?

William C. Denninger

It’s overall a refined estimate and it also takes in to account that we sold Spectrum so you’ve got the assets and the intangibles of that business that have gone away.

Matt J. Summerville – KeyBanc Capital Markets

And you said, I think, a full year impact on the top line for that is about $12 million?

Gregory F. Milzcik

$13.

William C. Denninger

$12 to $13, yes.

Operator

Your next question comes from [David Sacks – Hoffy Capital].

[David Sacks – Hoffy Capital]

Could you do me a favor and break down the distribution business between the domestic and international revenue streams?

Brian D. Koppy

The way we can look at that is within distribution in the first quarter about 62% of the revenues is domestic and about 38% is international.

[David Sacks – Hoffy Capital]

Then the operating margin by region? Because you mentioned that it was a record in the United States.

William C. Denninger

We don’t disclose operating margins by geography.

Gregory F. Milzcik

And, in the United States we basically said that it was the best since 1998.

[David Sacks – Hoffy Capital]

And in 1998 was that primarily a US business at that time?

William C. Denninger

Yes.

[David Sacks – Hoffy Capital]

Then just in terms of your 6% to 8% guidance suggesting sequential growth through the year would lead to a well over 8% or close to an 8% at least exit rate for this year. Is that correct?

William C. Denninger

That’s certainly what we’re shooting for.

[David Sacks – Hoffy Capital]

And there’d be no reason if we achieved that by the end of the year that 2009 wouldn’t start at least at that base line level?

William C. Denninger

Correct.

Operator

Your next question comes from Analyst for Peter Lisnic – Robert W. Baird.

Analyst for Peter Lisnic – Robert W. Baird

I noticed that the first quarter debt balances were up a lot, was that just currency translation?

William C. Denninger

No, it’s really working capital. We continue to invest in inventory and the RSPs and one of the operations in aerospace, we’re building a new business. We also so higher receivables related to higher sales. So, we tend to use cash in the first half of the year and generate it in the second half and we’re following that pattern again this year.

Operator

Your last question comes from Matt J. Summerville – KeyBanc Capital Markets.

Matt J. Summerville – KeyBanc Capital Markets

Bill, you talked on the fourth quarter call about a fairly sizeable new overhaul and repair opportunity in the aerospace business. Can you talk about the progress you made in starting to capitalize on that opportunity? And further, can you quantify what that can contribute to the top line on an annualized basis? And, is this a onetime thing or a multiyear deal?

William C. Denninger

It’s really a new product line startup and it’s taking us about six months. We happen to be coming in to the heavy part of the cycle for MRO so that’s giving us a little bit of difficulty. Right now we’re operating that the customers’ demand rate but we’re trying to refine the processes, a lot of lean activities. So, we’ve caught up to the customer we’ve invested heavily in inventory. This could be a $25 million business this year so its significant.

Matt J. Summerville – KeyBanc Capital Markets

If I take in to account the reduction in the share count, the reduction in the tax rate and lower D&A I can more than account for your increasing guidance. I’m struggling to see on an operational basis where you’ve raised expectations.

William C. Denninger

We believe that we’ve increased the guidance to represent roughly half related to diluted shares and the other half improved operations. We think of our tax rate as operational.

Operator

At this time there are no further questions in queue.

Brian D. Koppy

Thank you very much. If there are any additional questions about any matters discussed this morning please feel free to contact me and once again, thank you for joining us today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Barnes Group Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts