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Barnes Group (NYSE:B)

Q2 2012 Earnings Call

July 27, 2012 8:30 am ET

Executives

William Pitts

Gregory F. Milzcik - Chief Executive Officer, President, Executive Director and Ex-Officio Member of Executive Committee

Christopher J. Stephens - Chief Financial Officer and Senior Vice President of Finance

Patrick J. Dempsey - Chief Operating Officer and Senior Vice President

Analysts

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Edward Marshall - Sidoti & Company, LLC

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Bhupender Bohra

Holden Lewis - BB&T Capital Markets, Research Division

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Barnes Group Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. William Pitts, Director of Investor Relations. Please proceed, sir.

William Pitts

Thank you. Good morning, everyone, and thank you for joining us today. With me this morning is Barnes Group President and CEO, Greg Milzcik; Senior Vice President of Finance and Chief Financial Officer, Chris Stephens; and Senior Vice President and Chief Operating Officer, Patrick Dempsey.

If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at bginc.com. During our call, we will be referring to the earnings release supplement slides, which are also posted on our website.

I want to remind everybody that certain statements 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 subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com.

Today's call will begin with customary opening remarks from Greg, including comments about our recently announced agreement to acquire Synventive Molding Solutions, followed by a more detailed review of quarterly results and an updated outlook discussion by Chris. After that, we will open up the call for questions.

At this time, I will turn the call over to Barnes Group's President and CEO, Greg Milzcik.

Gregory F. Milzcik

Thanks, Bill, and good morning. Barnes Group delivered expanded operating income and improved margins in each of our segments during the second quarter in a business environment which remains uncertain and cautious. We believe these conditions will prevail for an extended period of time, and we are adapting to the climate.

Revenues in the quarter were impacted by a number of factors, including foreign exchange loss, planned attrition of underperforming accounts in our Distribution business and an ongoing economic conditions.

However, we expect improved performance in the second half of 2012 based on our current orders trends and existing backlog.

Net sales of $293 million were down 2% from last year, although organic sales growth was up modestly.

In our 2 manufacturing segments, Aerospace and Industrial, we saw a 6% sequential growth and a 29% year-over-year growth in backlog. Total backlog for Barnes Group is now at a record $642 million, up more than $145 million from last year's second quarter.

Before my usual operating review, I would like to say a few words regarding our recently announced agreement to acquire Synventive Molding Solutions, our largest acquisition ever.

Please refer to Slide 2 of our earnings supplement. Synventive is a leading designer and manufacturer of highly engineered and customized solutions, components and services with a complex injection molding applications, and is an excellent strategic fit for Barnes Group. We expect global demand for Synventive's products and services to grow substantially in the future, adding a suite of products and solutions for customers, and this market is expected to speed our global growth and enhance our profitability. It possesses intellectual property-based capabilities, which provide us with an exceptional opportunity to establish a new growth platform, one that includes highly engineered solutions, a leading market position, a stronger global presence and solid profitability.

In addition, the teams and corporate cultures at both Barnes Group and Synventive are closely aligned, sharing the same values in terms of business practices, lean manufacturing techniques and technological innovations in the product, systems and services that we bring into market. Later in our prepared remarks, Chris will touch upon some of the additional details of this transaction.

Now turning our attention back to our second-quarter performance. In Aerospace, what we see reflects much of the same observations coming out of the recent Farnborough Air Show, as well as the recent commentary from several industry participants. Our Aerospace business reflects the general outlook for commercial aviation. Strong orders for our original equipment manufacturing business go back up 39% year-over-year to a record $526 million. This certainly telegraphs a stronger second half as the ramp-up in the aircraft production moves forward. We feel confident that commercial aircraft production over the next several years should show meaningful growth. Continued strong orders taken by aircraft manufacturers, along with the introduction of new aircraft technologies, provide additional data points to support this belief. We feel we're on the right aircraft platforms and we continue our efforts to secure additional content on both existing and future aircraft platforms.

Our aftermarket business saw a 19% year-over-year growth in Maintenance, Repair and Overhaul or, MRO sales, reflecting sustained demand, as well as new process introductions. However, soft spare part sales reflect inventory compression, particularly in Europe. Commentary from a number of market participants mirrored the soft demand for spare parts, although an expected stronger second half in 2012 is still prevalent.

Industrial sales declined in the second quarter as a result of the economic environment combined with an unfavorable foreign exchange impact. Our Nitrogen Gas Products business generated double-digit volume growth and strong order intake. And as for Associated Spring, performance improved year-over-year, as several productivity initiatives helped us expand margins. Orders were up 7% at Associated Spring, and the forecast for North American light vehicle production for 2012 has improved to 14.9 million units, another positive sign.

Our Distribution segment saw sales increase slightly over last year, while operating profit and margins both improved. Profitability benefits derived from a sustained emphasis on productivity and the planned attrition of certain underperforming accounts. While the latter does negatively influence sales growth, it has contributed meaningfully to better flow-through.

In our North American Distribution business, we saw daily sales average, or DSA, continue to improve. That's now 9 consecutive quarters of year-over-year DSA growth. We are watching closely the overall economic environment in Barnes Distribution North America's key markets. And we have noticed the monthly ISM Index dipped below 50 for the first time in nearly 3 years, although the second quarter average remained above 50, signifying growth.

June's numbers is one point in time and we'll certainly be attentive to trends in our customer ordering pattern to see if there's any effect on our ability to grow the businesses further.

To conclude, our second quarter results demonstrated the ongoing emphasis to enhance profitability across our business. In spite of a sales shortfall, we delivered increased operating income and margins. Our second-half outlook remain positive, and we expect to further margin improvements and solid EPS growth for 2012.

Lastly, I look forward to welcoming Synventive's management team and highly skilled workforce to Barnes Group. We are excited about the prospect of having such a high-quality business in our portfolio.

Now let me turn the call over to Chris for some of the financial details over the quarter. Chris?

Christopher J. Stephens

Thanks, Greg. Let me begin our discussion this morning by highlighting the key points made on Slide 3 of the earnings release supplement, which is available on our website.

Net sales decreased 2% to $293 million, while overall organic sales were up 1% in the second quarter after you adjust for a 3% unfavorable impact of FX. Operating income increased 1% to $34 million. And as Greg mentioned, operating margins improved in each of our 3 segments.

For BGI, operating margin improved 30 basis points to 11.6%, reflecting our ongoing focus on driving profitable sales growth and productivity. EPS from continuing operations was up 10% to $0.45 per diluted share, which compares to $0.41 per share from last year's second quarter. I would like to highlight that even though EPS was up 10% for the quarter, we did incur additional costs for aggressively pursuing M&A deals, not of all -- not all of which have materialized. This negatively impacted EPS by about $0.02 in the quarter.

Now let me discuss a few details on the quarter, and then I will wrap up with comments on our updated guidance and the Synventive transaction.

In our Aerospace segment, net sales of $94 million were down 1% from last year. A slight increase in original equipment manufacturing sales, continued strong sales in our aftermarket repair and overhaul activity were offset by a sales decline in our aftermarket spare parts business.

Our Aerospace OEM business generated significant increase in order activity, which drove the meaningful year-over-year increase in backlog from $379 million last year to $526 million this year, that represents a 39% increase. As a reminder, while backlog is a helpful indicator, sales can be affected by a number of factors over time, including insourcing decisions, material changes, production schedules and volumes of specific programs to name a few.

At Industrial, second quarter sales of $110 million decreased 3%, driven by the negative impact of FX, while organic sales were up 2%. And in our Distribution segment, sales were $92 million, up slightly from the second quarter of last year.

Turning now to operating profit. At Aerospace, operating profit decreased 1% to $14.7 million, driven by the profit impact of lower sales and a shift in sales mix. Operating margins improved slightly to 15.7%, up 10 basis points.

Industrial operating profit increased 2% to $11.2 million as the result of the profit impact from higher organic sales at some of our Industrial businesses and overall lower employee-related incentive compensation, partially offset by increased pension expense. Operating margins improved 60 basis points to 10.2%.

Operating profit at Distribution increased 3% to $8.2 million, while margins improved 20 basis points to 8.9%. A reduction in employee-related incentive compensation and further productivity improvements contributed to the expansion and were partially offset by higher pension expense.

As a reminder, when we provided initial full year guidance for 2012, we highlighted the fact that pension expense was going to increase approximately $5 million from 2011. For reporting purposes, this increase is primarily reflected in our Industrial and Distribution segments.

With respect to taxes, the company's effective tax rate for the second quarter of 2012 was 21.5% compared to 26.9% in the second quarter of 2011. Last year's second-quarter effective tax rate included the recognition of $1.8 million of discrete tax expense related to tax adjustments for prior years.

Regarding share count, our second-quarter average diluted outstanding share count was 55.2 million, that's down 2% from last year. And in the second quarter, we repurchased 300,000 shares under the authority of our board-approved 2011 repurchase program of 5 million shares.

At the end of June 2012, we have 3.8 million shares remaining under this program. But with the anticipated closing of the Synventive acquisition, we do not expect to repurchase additional shares over the remainder of 2012.

Turning now to cash flow. In the first half of 2012, operating activities generated cash flow of $34 million versus $40 million in the first half of last year's, reflecting improved operating performance offset by higher cash payments for 2011 employee-related incentive compensation and increased contributions to the company's pension plan.

2012 year-to-date free cash flow reflects a lower level of capital expenditures as compared to last year, which is a function of timing. We still expect full-year CapEx to be in the range of $45 million to $50 million, up from $37 million in 2011.

Let's now discuss our updated 2012 financial guidance on Slide 4 of our supplement. This updated guidance excludes the impact of the announced Synventive acquisition. We now expect lower revenue growth of 3% to 5% due to the effect of FX given the stronger dollar and lower Aerospace spare parts sales in the first half of the year.

Operating margins are forecasted to be approximately 12%, while earnings from continuing operations per diluted share are now expected to be in the range of $1.78 to $1.88, up 9% to 15% from 2011. And for the full year, we expect free cash flow conversion of approximately 90%.

Key factors in our 2012 guidance range includes the following: for the upper end of the range, we would benefit from stronger Aerospace spare parts sales in the second half of the year; better margin leverage or flow-through on increased sales; and incremental productivity gains given our focus on lean, quality and cost management.

At the lower end of the range, we would be negatively impacted by a slowdown in the global economy, a steeper-than-anticipated decline in European Industrial activity and further strengthening of the U.S. dollar.

With respect to the announced Synventive acquisition, we expect their full-year 2012 revenues to be approximately $160 million. Additionally, with Synventive's anticipated EBITDA margins higher than Barnes Group's, we expect to see an improvement in our total EBITDA margins. The transaction is expected to be dilutive to 2012 earnings per share due to the impact of purchase accounting and accretive to 2013. As mentioned, this transaction is expected to be financed with cash on hand and additional borrowing from the company's credit agreement and is anticipated to close in August of 2012.

So to wrap up my prepared remarks, our sustained focus on driving productivity, improving operating leverage and strengthening our balance sheet has allowed Barnes Group to expand profitably during the quarter. These efforts have positioned Barnes Group to capitalize on new opportunities, such as the announcement of the Synventive acquisition, and are expected to drive long-term shareholder value.

Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Peter Lisnic with Baird.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

I guess, Chris, if we could start off a little bit with Synventive and give us a little bit of history there. Just wondering kind of what the growth profile has looked like over the years. And maybe if we could discuss peak and trough revenue and EBITDA profiles, that would be very helpful for us.

Gregory F. Milzcik

I'm going to butt in here, Peter. Since we have not yet closed on this business, there's little we can share with you on some of this information. I think that after the close, which we expect in August, we will have follow-up information that will be able to clear up many of your questions.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay. Is it -- you did mention that the EBITDA profile here is higher than the current Barnes portfolio, is it safe to say that, that would be the case if you look at previous peaks and previous troughs?

Christopher J. Stephens

I would say, as we looked at the past several years during the due diligence process, we clearly recognize the value that Synventive has been able to provide over the past year or 2. And when you think about that being an attractive addition to Barnes Group, we do see that EBITDA margin improvement expected post close.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay, all right. And then if I could switch gears a bit to the Aerospace piece of the portfolio. It looks like the OEM business decelerated a bit from a growth comp perspective from first quarter, second quarter, if I have my numbers right. Can you give us...

Gregory F. Milzcik

You're right.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay. Any reason why that would happen?

Gregory F. Milzcik

Just the timing of the deliveries. The thing that was disappointing in the quarter, as far as top line, our Industrial business performed about what we expected, given the foreign exchange issues. We expected some intentional attrition at our Distribution business, so that was pretty much the same. The thing that was a little disappointing was the Aerospace sales. Why I'm not worried is basically because the backlog has swelled. When we look at the profile for the balance of the year, I think we're going to see that driving sequential improvement throughout the year. So if I were to profile the earnings through the year, it would be an improvement in third quarter and fourth quarter sequentially. So it's a little different than what the current profile looks like on the street right now.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay, got it. And then last question, just you mentioned inventory correction in the spares business. Is that essentially done? Have you saw -- did you see incremental takedown of inventory in July? Kind of where are we at on the inventory situation there?

Gregory F. Milzcik

No. We think we're there, and this largely comes out of GE's conference call that was held recently, where they pointed out that there was a correction of spares in Europe. We saw that reflected in our business as well. So most of the people who participate in the spare parts market have seen that in the first half of the year. We're hopeful, but at the same time, we're also looking at it a little differently. Revenue Sharing Program as a percentage of our overall profit is not as great as it used to be, as the rest of the businesses are improving. We don't think that it's the big driver that it had been in the past and going forward. We think it's going to be a smaller portion of our overall profitability as well.

Operator

Our next question comes from the line of Edward Marshall with Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

So what -- I know you mentioned existing backlog. You also mentioned the pace of orders. I mean, what gives you confidence that you're going to see the back-half acceleration that the guidance implies? It's 7% year-over-year even at the bottom end of the range, your -- or rather second half versus half in EPS range, even at the bottom end of the range. So is it what slated to be shipped in the second half that you see in your backlog, is that what you're saying?

Gregory F. Milzcik

Exactly. When we do our detailed quarterly reviews and we also look at everything from the delivery cycle, et cetera, and the easiest thing to forecast in our business portfolio is the Aerospace OE side of the business because it is a long cycle from order, backlog, delivery. So we feel pretty confident that the year will unfold the way we expect. Aerospace is about half of the profitability of Barnes Group historically, so it is a driver going to the back half of the year. And it is certainly going to change the profile that was traditionally first-half heavy versus back-half. We see the back half being bigger this year, basically, as we enter the ramp. And I think the ramp is real and it's going to happen for several more years.

Edward Marshall - Sidoti & Company, LLC

Is it related to the 787, out of curiosity? I mean knowing that engine has some pretty good year-over-year growth already.

Gregory F. Milzcik

Yes. Both 777 and 787 are, for us, are some of the key drivers. We also have some other work here and there that's driving the improvement in backlog. So we're pretty happy with the package that we have and the profile of the platforms that we're on. It looks pretty robust. I've been in Aerospace for a very long time, and I haven't seen a commercial Aerospace outlook this bright in my whole career.

Edward Marshall - Sidoti & Company, LLC

I know Chris mentioned spares outperforming could get you to the high end of the range. My expectation is that your -- you don't expect that to happen. You would assume that's relatively flat from here?

Gregory F. Milzcik

Well, that's what we built into, that's why I took the top end down. And in order to get back above the range, it would have to be some pretty robust sales growth. But at the same time, we're trying to be as accurate as possible. We're not trying to underestimate or overestimate. And we don't guestimate this stuff. We do a very detailed buildup and look a the macroeconomic conditions and make sure that we think we have something that's solid. We don't want to keep changing guidance.

Edward Marshall - Sidoti & Company, LLC

Point of clarity. The top end of the range, I think -- I mean, rather the revenue guidance was 3% to 5% growth. Are you referring to organic growth?

Gregory F. Milzcik

Yes.

Edward Marshall - Sidoti & Company, LLC

Okay. So not including Synventive, which could add additional what, let's say $70 million to $80 million of sales for the year?

Gregory F. Milzcik

Right, right. And that's with the FX.

Christopher J. Stephens

Yes, I would add FX -- the impact of FX as well as organic growth in the business, but it does not include Synventive at this point.

Edward Marshall - Sidoti & Company, LLC

It includes your FX expectations as well?

Gregory F. Milzcik

Exactly.

Christopher J. Stephens

Right.

Edward Marshall - Sidoti & Company, LLC

Okay. And then finally, the Aerospace backlog. Did you give out a number? I missed it.

Gregory F. Milzcik

The Aerospace backlog was...

Christopher J. Stephens

On the OEM side?

Gregory F. Milzcik

Yes, it's 500 and...

Christopher J. Stephens

$526 million.

Gregory F. Milzcik

$526 million.

Christopher J. Stephens

On the OEM side.

Edward Marshall - Sidoti & Company, LLC

$526 million?

Christopher J. Stephens

$526 million, right.

Edward Marshall - Sidoti & Company, LLC

Okay. And that was $492 million last quarter if I'm right?

Gregory F. Milzcik

It was $480 million -- $492 million was all of Aerospace, so we've got some MRO work in there. So you've got -- all of -- overall Aerospace was $492 million last quarter and $533 million this quarter.

Edward Marshall - Sidoti & Company, LLC

So we saw a significant pickup, and I guess that's what's you're referring to in your guidance?

Christopher J. Stephens

Yes.

Gregory F. Milzcik

Exactly. It's not only sequential, but it's year-over-year. And it's a very bright picture. It's going to be a strong second half, at least, we expect it.

Operator

Our next question comes from the line of Matt Summerville with KeyBanc.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

A couple of questions. First on the Aero OEM side, what sort of year-over-year growth rate did you experience in the first half of the year and what year-over-year growth rate do you expect to see in the second half to help us kind of think through this?

Gregory F. Milzcik

On the second quarter, we had -- it was just about 2%. And I think...

Christopher J. Stephens

Yes, the second quarter was 2%. For the first half of the year, it was actually up 4%. So we expect that to improve, as Greg mentioned in his comments, sequentially increasing quarter-to-quarter, third quarter and fourth quarter. So we expect a stronger second half, Matt, on the OEM deliveries.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

I want to make sure I have one of the numbers correct that you provided. You said aftermarket, overhaul and repair was up 19%, is that the correct number

Christopher J. Stephens

It is, yes.

Gregory F. Milzcik

That's correct. But it's also -- not just market. We have been investing heavily in new process or new product introduction. So that's a combination number. It does exceed many of the current numbers out in the marketplace, but it does not include spares. So I think that it's a good sign in some ways that there is aftermarket activity, although the MRO market for the past several years has been confusing, to say the least.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

If you try and parse that then, Greg, maybe you can talk about some platforms where you have aftermarket content now that you did not in the past and maybe how much of the 19% do you think is being driven by your own sort of internal push in that business?

Gregory F. Milzcik

A lot of it is the Rolls-Royce product line, the Trents in particular. And I think that as we go forward, we're going to continue to see that strong relationship with Rolls-Royce continue to expand. But we also have invested in a variety of CFM56 overhaul work and things of that nature. So we've been paying a lot of attention to the demographics of the fleet out in the field and investing where it makes sense.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

So then, if MRO was up 19%, how much was the spares business down?

Gregory F. Milzcik

We don't break it out but it was significant.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

How much was total aftermarket down?

Christopher J. Stephens

Matt, total aftermarket was basically down maybe 3% to 4%. It was not a significant decrease. So you've got a combination of the MRO strength offset by spare parts softness, as we commented.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Okay. And then if we can move over to Industrial for a moment. So in the quarter, can you talk about, at Associated Spring, how much that business grew organically versus production? Just trying to get a feel for where you're at with content there and market share. And then what your experience was in your European auto businesses and then maybe speak to both how you're thinking about the second half?

Gregory F. Milzcik

Well, first, we don't go so granular in the Industrial businesses as that. But I could basically say that in general, we had good growth in North America. There was some sluggishness in Brazil in particular. Associated Spring has little in Europe as far as automotive content. But our European Manufacturing business, when you adjust for local currency, was up, with the exception of our lower differentiated businesses that are auto-orientated. They were impacted by a slower growth of auto in Europe.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

So what are your thoughts on the back half? And I guess, what have the incoming order rates been telling you with, let's say, nitrogen gas, with Seeger and maybe with your Hänggi business?

Gregory F. Milzcik

Well, first of all, Nitrogen Gas Products is really booming. It's going nicely. There are so many promising things going on at Heinz Hänggi that I don't want to get into. But I'm very happy with the direction we're heading there. And Seeger has been impacted because they have a fair amount of domestic auto content. And it is the lower margin of the 3 businesses, so it does have a minimal effect on the overall.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

So then net-net, you're seeing favorable mix shift. Has the capacity constraints you've had in nitrogen gas been fully alleviated at this point?

Gregory F. Milzcik

Yes. And I can tell you, I'm really thrilled with the way the team performed there. When you're doing -- it's not quite a greenfield, but close to building a plant expansion of that magnitude, et cetera. It's been managed extremely well, it has hit all the targets, capital equipment was purchased early, et cetera. So we're expecting that to be part of the second half recovery is the fact that we're going to be seeing the insourcing of work that was previously outsourced. And I think that we've alleviated the capacity issue.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Has some of that benefit already -- did we see that in the margin in Q2 already or not?

Gregory F. Milzcik

No, no. Because the building has just been completed and the equipment is going in.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

And then just lastly, I understand that you can't give particulars on the Synventive in terms of financials, but can you talk at a high level about the market size, the addressable market, the competitive landscape in the industry that you are looking to get into here?

Patrick J. Dempsey

Yes, Matt, this is Patrick Dempsey. Just to talk about hot runner marketplace. Overall, the injection molding industry is estimated to be about $32 billion. Within that, the global hot runner marketplace is estimated to be approximately $1.7 billion. So clearly, lots of room for expansion as it pertains to Synventive, which, as you know, specializes in the design and manufacture of custom hot runner systems. In terms of the value proposition that Synventive brings to the marketplace, it's one of the lowest total cost of ownership across the platform life cycle. And so in that, the unique technology that Synventive brings to the marketplace reduces downtime, reduces scrap, lower failure rates and increased faster cycle times.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

I was just going to ask, in terms of -- you mentioned 2012 sales are roughly $160 million, so we'll just round and say Synventive has roughly 10% of this $1.7 billion addressable market. I guess where would that sort of rank them competitively and who are some of the other players that we should be thinking about in this space?

Patrick J. Dempsey

Okay. From a competitive standpoint, what I would highlight is that the market for hot runners is highly fragmented. And subsequently, it features competitors with varying capabilities, scope, scale and expertise. And the majority of competitors compete in niche applications and/or geographies. The great thing about Synventive is that it's one of the few global players in the industry. But to give you some examples of competitors where there's some overlap, it would include companies such as Udall, [ph] Mold-Masters, Inco [ph] as examples.

Operator

Our next question comes from the line of Bhupender Bohra with Jefferies.

Bhupender Bohra

Just following up on the question, which was asked before on Synventive. Just wanted to get your thinking what actually you thought when you made this acquisition what was the thinking behind this? And just want to fit into Industrial segment. If you can just give us some color on, will this be like an expansion platform for you guys or how it's going to benefit like synergies on the top line and...

Gregory F. Milzcik

Right, exactly. If you've been looking at our investor presentation over the past couple of years, we've been telegraphing this exact type of move. We're looking at increasing our differentiation both organically and through acquisition. So when we look at the overall industry, we're looking for things that have growing markets, for example. And in this particular case, not only is global auto growing but plastic as a percentage of content is growing. So you have a double overlap. That's a nice place to be. Leading positions, we found businesses that are leaders in particular niche areas tend to have higher profit margins and are being our price leaders. Significant intellectual property as a differentiator and also a barrier to entry leads to higher margins. Global access is one of the things that we really looked at because we think that the markets will grow faster outside of Western Europe and North America and some level of cyclical moderation. So when we look at all those things and bring it to bear on Synventive, it really fits in nicely with our overall strategy where we're going forward. And as Patrick mentioned, it is a fractured market, and in that sense, that there is probably room to have additional acquisitive growth, as well as continued investment in the business for long-term organic growth as well.

Bhupender Bohra

Okay. So are you going to -- I mean, right now, the business that you have is like the hot runner, right? Synventive actually does that.

Gregory F. Milzcik

Right. Hot runner, yes.

Bhupender Bohra

Yes, will that expand to like making molding machines or...

Gregory F. Milzcik

I wouldn't go that far. What we're looking at is focusing on this market. We think that there's good investment that we can make in that business, and I want to reemphasize that we are not making parts. This is a system that supports an industry that manufactures parts. And this is also a capital item rather than an expense item. So there's a variety of things in the business model that are attractive compared to other businesses. And I would say that it's similar to our Nitrogen Gas Products business in that sense, where Nitrogen Gas Products doesn't make parts. They make systems and components that go into the tool and die industry, again, a capital item, and we like that model.

Bhupender Bohra

Okay. The next question, you gave a number aftermarket, actually, totally -- total aftermarket declined 3% to 4%. That's for the first half or the second quarter?

Christopher J. Stephens

That would be second quarter.

Bhupender Bohra

Second quarter. Now on top of that actually, you said for the second half, if you need to achieve your higher end of the guidance, something needs to happen on the spare parts. It needs to grow or -- I don't know. If you can just give some color on what needs to happen in spare parts actually for you to achieve...

Gregory F. Milzcik

I think if the inventory destocking is over, as we expect, we should be able to see increased back half year sales. And there's only so far you can go with destocking. I think that there's a lot of stress in European economy, which is driving the cash conservation associated with the destocking. So I'm not overly worried about it. And as I mentioned before, RSPs as a percentage of our overall profitability have declined. So I think that we're in pretty good shape.

Bhupender Bohra

Okay. Are we done with destocking or we still have it in front of us?

Gregory F. Milzcik

Well, we can't confirm it but we believe it's mostly done.

Operator

Our next question comes from the line of Holden Lewis with BB&T Capital Markets.

Holden Lewis - BB&T Capital Markets, Research Division

As it relates to sort of your 12% margin goal, as I'm sort of looking at how the year is playing out, I mean, obviously, through the first half, you weren't there. So you're kind of expecting the, I guess, sequential improvement in the operating margin in the second half. But when you look at sort of your Distribution and Industrial business, correct me if I'm wrong in this assumption, but the combination of seasonality and weaker markets might suggest that the Q2 margin might be sort of the peak for those 2 businesses, which then suggests that there's going to be some real heavy lifting done in Aerospace. And can you do that if spares are flat? Or do you really require spares to get better and influence the mix in order to make that 12%?

Gregory F. Milzcik

No. We're heading in the right direction. Actually, when I look at the numbers, we're doing exactly what we said we would do. We said that a high upper single digit for distribution, which is we're at, what, 8.9% or something like that. We said that we'd be low to -- or mid to upper teens for Aerospace. And we still believe that, and that's where it's at right now. And we said low double digit for Industrial, which is where we're at. I think they're all going to improve for varying reasons. One is some of the expenses in distribution that were in the first half and some of the attrition is going to dissipate in the back half of the year, so we expect that to continue to improve. We also expect with Nitrogen Gas Products leading the way in the back half of the year, that's going to continue to help improve the Industrial business. Associated Spring in it -- that mix is continuing to see ramp-up of auto production, so we're looking at some expansion there. There's also productivity initiatives, and -- but we clearly expect the Aerospace to lead the way as far as the back half of the year.

Holden Lewis - BB&T Capital Markets, Research Division

Okay. And again, assuming spares don't come back, and maybe they do. And if they do, that would obviously be beneficial just to the Aerospace mix. But you've sort of been in this 16%-ish kind of range for a while on the Aerospace. If you -- what kind of incremental margins or what kind of step-up in the margin would you expect to see if it's just the OEM backlog flowing through and spares don't contribute? Or if spares don't contribute, you're looking at a kind of a 16% type of margin.

Gregory F. Milzcik

It should improve about 16% with the increased flow-through from OE side. I don't see a problem. As I mentioned, since 2008, we've had the management fees nipping at the RSP percentage, which drives down the margin. So there's not a apples-to-apples comparison there. But at the same time, the rest of the business as a percentage of the profitability has improved significantly. So I think going forward, we're going to be pretty comfortable with that -- between mid teens and upper teens regardless of the mix.

Holden Lewis - BB&T Capital Markets, Research Division

Okay. And what costs have burdened sort of the first half in distribution that you think could slide away in the second half?

Gregory F. Milzcik

There were just some investments that were made in a variety different areas. And it's not a huge magnitude, but at the same time, I think it's going to improve in the back half of the year.

Holden Lewis - BB&T Capital Markets, Research Division

Okay. And then in the Industrial, what kind of impact do you think this insourcing could have? But maybe I don't know if you can give us some sense of what benefit you think it will have or maybe what the decrement has been to date from outsourcing, but what's kind of the magnitude of impact there?

Christopher J. Stephens

Yes. Holden, this is Chris. I would just say like we talked about for overall Industrial, Nitrogen Gas Products had the first-half pressure of insourcing. So we'll get the second half benefit of -- outsourcing, I mean, in terms of pressure of outsourcing. And then insourcing, given the fact that we've added to the facilities and capacitized accordingly, we would expect that to continue to improve. So overall, Industrial margins to be in that low double-digit, we continue to drive for margin expansion in that business. So that's what the second-half improvement should look like.

Operator

Our next question comes from the line of Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Just going to try a little bit more on Synventive. Could you offer us some sort of order of magnitude of the EBITDA margin relative to yours and/or any color on the multiple?

Christopher J. Stephens

Hey, it's Chris. First of all, it doesn't hurt trying.

Gregory F. Milzcik

I'll just chime in. Until we close this business, we're really not going to comment too far other than to say that we did not pay an extraordinary number, low or high. We paid basically the market for good quality business.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Okay. And then, you mentioned employee-related compensation benefits a couple of times. Are there any freezes in response to the economic environment in place?

Gregory F. Milzcik

No. No freezes. This is just a -- last year, we had a terrific year, and you think about just from an incentive comp, bonus payout, we've had the organizer across BGI. We just really did exceptionally well. As we look to this year, continue to track to our plan profile, as reflected in our guidance, $1.78 to $1.88. So you're getting that comp benefit. But I would just say, 2011 was just a blowout year for Barnes Group.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Makes sense. And then just lastly, the FX. How does that play on Industrial operating margin? Does that give you like upward...

Christopher J. Stephens

Yes. No significant difference at all actually on the op margin line.

Operator

Our next question is a follow-up that comes from the line of Matt Summerville with KeyBanc Capital Markets.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Just a couple of follow-ups. Early on in the third quarter, Greg, have you seen any change in, I'll call it -- and this is a question on Distribution, netting out what you're deliberately letting attrit, have you seen a deceleration or a reversion into negative territory sequentially on the DSA there?

Gregory F. Milzcik

No. Actually, our DSA has improved for 9 consecutive quarters. Our flow-through is better than expected. I'm pretty happy with the direction we're going. The one comment I will have that is an indicator that I'll throw out for Distribution, even though that our numbers are good, they're heading the right direction. I think the overall market's continuing to improve, although slowly, is the average order size decline even though DSA improved. And that's indicative of a more cautious customer when the order size is reduced, that means they're doing a little bit of destocking themselves or reducing their inventory levels to meet the end demand. So that's the only other color I could give you on that. But other than that, the DSA continues to improve.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

That's an interesting data point. When you see a shift in the ISM, and again, I know 1 month doesn't make a trend, but I don't necessarily think it's going over 50 next month. Do you typically see the DSA react first or the average order size like you're talking about here? Is there a historical pattern to call on here?

Gregory F. Milzcik

That's a great question, but I think I'm going to have to defer that because I don't know.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Okay. And then lastly -- or maybe second to the last. The backlog in Nitrogen Gas, can you give some sort of qualitative color on that? And if we're thinking about things continuing to grind along or slow in Europe, things maybe not quite as robust in North America, how do you -- are you cautious at all about bringing that new capacity online as the macro environment is kind of shaky here?

Gregory F. Milzcik

Not at all. And the primary reason is, first of all, they have a very small backlog, their delivery cycle is much shorter than Aerospace so we really don't track backlog in that sense. It's a much smaller bucket. But second of all, their orders are very strong, they continue to be strong. What we're seeing is anything that's export-driven or capital budget, it's not really being affected that much. And a lot of their product, though, is -- it's a global business. So even with Synventive, one of the things that attracts is the global aspect of the business. It protects us from particular geographies and the downturn. And Nitrogen Gas products is just a great business, and they're a great team over there.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

How much on the top line should we kind of think about modeling in for the deliberate attrition you're letting occur in Distribution for the full year?

Gregory F. Milzcik

I don't think we have given that out in the past. But it's roughly 3% of sales, something like that, on an annualized basis. But again, like I said, I think that if you look at the profile for the remainder of the year, we're going to see EPS growth sequentially both in third and fourth quarter. And it's a little different than the profile that's out there currently.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

And then just -- this is my last question. On the aftermarket spares business, as you moved through the second quarter and what you've seen thus far in Q3, do you really get the sense that your incoming order rates have bottomed? Have you seen any inflection at this point or is that something that you feel is still out in front of you yet?

Gregory F. Milzcik

No, but I wouldn't expect it at this time because in the summer, it typically is a low. And aircraft are most active, flying people around on vacation. Typically, they start to look at bringing aircraft down after Labor Day, and they'll preorder based on their numbers later into August. So I wouldn't expect to be able to define anything at this point, so I'm not excited one way or another.

Operator

Our next question is a follow-up that comes from the line of Holden Lewis with BB&T Capital Markets.

Holden Lewis - BB&T Capital Markets, Research Division

Can you guys -- I understand that from a pricing standpoint, you're probably seeing an increase in pricing distribution from attrition. And then there's some questions, I guess, about maybe content and things like that in Aerospace. But can you just give a broad sense now that conditions seem to be softening, at least in your Industrial business, of what you're seeing in price? Does that seem firm? Is there some downward wiggle there? How are we looking at pricing going forward?

Gregory F. Milzcik

The odd thing, we aren't having that much of a pricing effect. And I've been saying that for several years now that the one big surprise I've had through the economic crisis, as well as the follow-on, is we haven't seen major pricing pressure. And it's still confusing to me, but I think a lot of it has to do with availability, et cetera. But we get the normal stuff, but nothing extraordinary.

Holden Lewis - BB&T Capital Markets, Research Division

Okay. And then how long do you expect the Distribution attrition to go on kind of at this level? I mean, are we at the point where we've kind of done it or it's just something where it's going to keep on going and so margins will continue to benefit because the mix is going to continue to skew towards more profitable business? How should we look at the timing of that?

Gregory F. Milzcik

Yes. It should be the back half of the year should start to dissipate. So the comps year-over-year will be improving.

Operator

Ladies and gentlemen, since there are no further questions in queue, I'd now like to turn the call over to Mr. William Pitts for closing remarks.

William Pitts

Thank you, operator. Well, we want to thank everybody for joining us this morning on the call. We look forward to speaking with you next quarter. And so at this time, we will conclude the call. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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