Barrick Mining Corp (B) 2002 Q1 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Barnes Group Incorporated first quarter earnings conference call. At this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to , Director of Investor Relations. Please go ahead sir.

Thanks and thanks everyone for joining us on the call today. With me are Ed Carpenter, Barnes Group's president and CEO; and Bill Denninger, our senior vice president of finance and chief financial officer.

Before we start our presentation, I'd just like to ask that you hold any number- or data-specific questions for me after the conference call, and I'll be happy to take those questions later on today. That's going to allow us to focus on some more broad and strategic issues that I think will be of more interest to everyone on the call.

Second, before we start, I'd just like to remind everyone that certain statements we make on the call today during the presentation and during the Q&A session may be forward-looking information as Private these forward-looking statements are are subject to risks and uncertainties that may cause our actual results to differ materially from those contained in the statements. We would encourage investors to consider these risks and uncertainties that are periodic filings with the Securities and Exchange Commission.

With that said, let me now turn the call over to Ed Carpenter.

Thanks, Phil. Good afternoon.

As some of you may know, we conducted an annual meeting of our shareholders today, and I made just a few points at that meeting I thought would be helpful to repeat here, and then I'll walk you through how we see our last quarter.

Our key focus as a company has really been to build lasting value for our shareholders. We've approached it in really three ways: adding strategic pieces to the company, integrating those pieces rapidly and smoothly, and investing for future growth.

We're now in the process of closing our seventh acquisition since late 1999. Each one of those acquisitions was really done to build shareholder value, to add or expand our product offering to specific customers, and to give us a better geographic reach. We've been successful with the acquisitions we've done so far. All the ones that we've owned for a year, as most of you know, have been accretive to earnings. A big part of this success is our ability - frankly, our operating team's ability to rapidly but smoothly integrate these businesses, minimizing the disruption to the customers and, frankly, our employees.

And finally, we've worked hard in the - in the - in the past 18 months to manage our assets. Bill will talk about that some more, but it's been through the consolidation at Barnes Distribution, creation of shared services functions, closure - beginning in the closure of our Dallas Associated Spring plant, reduction of capital expenditures to below depreciation, and the effective use of foreign cash in our purchase of Seeger-Orbis.

And besides the - despite the turmoils - the economic turmoils of the last 18 months, we've not really stopped investing in our business for future growth. We view this as very critical. We continue to fund sales, engineering, R&D throughout the company. In fact, the size of the sales force in our two industrial businesses has doubled. And because of this we think we'll be able to grow in areas that have not been in our traditional markets and diversify our customer base.

With that , let me now make some brief comments about what we saw in the past quarter. I would characterize that we're fairly happy with the quarter. It matched our expectations on where we thought we'd be, maybe even a little better than we had planned six months ago.

Some pockets of strength, we saw an encouraging sign that the economy, especially industrial production there are starting to improve. We've continued our aggressive cost cutting and facility consolidation that we started in the year 2000 and really are starting to show the benefit as the volumes stabilize in our three businesses. We continue to focus on doing these to build long-term value, not just short-term results.

Let me just make some comments more specific to each one of the three businesses. Associated String a very solid quarter. Excellent efforts by that management to control costs, and they've really been at it for a long time but with a vengeance since the slowdown started almost a year ago.

Transportation, especially light vehicle has strengthened relative to where we've been. GM, Ford, the Japanese transplants are doing particularly well in North America. Orders for April and May deliveries continue to be strong and published reports suggest this strengthening should continue at least through the end of the second quarter.

However, in electronics and telecom end markets we're not seeing that improvement that we're seeing in transportation and sales are well off of a year ago. And nothing suggests a turn in this environment until later in the year.

Nitrogen gas spring sales, an initiative we've had for a little over two years, continues to remain very solid especially to our Japanese and European customers. And it's a function of auto makers in Asia changing external vehicle designs every year or two, creating demand for additional tooling with nitrogen gas springs and manifold systems. European automakers, it never really went in to a recession, so the sales there have remained solid particularly in Germany.

A couple of quick comments on the acquisition area for Associated Spring, we announced in November that we bought Forward Industry and we've now fully integrated that in to our existing , Ohio nitrogen gas facility. We're focusing now on productivity improvements for the acquired product line. We'll continue to market under the Forward name. We're dramatically improving their service level, which was, frankly, not acceptable.

Seeger-Orbis, which we acquired in January, is now operating as a business unit of Associated Spring. We're seeing a good transition there. We've reinstated the Seeger-Orbis brand Europe, which is widely recognized, and we're - and fact is, a lot of engineers in Europe would refer to a - the - a lot of the types of rings that we produce as Seeger rings. We're beginning to develop some excellent cross-selling opportunities with technology transfer between North America and Europe, and early results suggest that this is going to be the long-term winner that we expected it to be.

Just recently, we announced our intent to acquire Spectrum Plastics, which is a plastic insertion molding company, which will complement many of our product lines for the medical device, telecommunications, and electronics, as our end customers like to buy a combined product - the plastic and metal - and not just the two separate things. Acquisition is really on track and to close either later this month or early in May.

As I said at the beginning on Associated Spring, their cost containment that started in late 2000, they've lowered all their costs in all the plants, and we've got good, profitable leverage as the volume improves versus last year.

Barnes Distribution, decent results given the overall economy. They seem to have reached a bottom late in the fourth quarter or early this quarter, but the sales are very chappy with - choppy, with some strength in some sectors, but certainly not all. More positively, the trends are improving throughout the quarter, and we're seeing month-over-month improvements, especially in March.

Distribution center consolidation, which many of you know is part of our value creation in the Curtis-Bowman merger, is going very well. All the remaining facilities will be shipping the full line of products next month. We'll have the consolidation completed early in the third quarter with little disruption to fill rate and service level.

Key going forward will be the recovery in sales volume. As you - as many of you know, we have excellent gross margins in this area, and if - and if you get an uptick, it tends to have very positive results. We kept investing during the downturn. The financial strength of BGI is a selling point right now, especially with a number of our competitors having certain difficulties.

We realigned the sales force last year. That's taken very well. It's always a little tricky to do these things, but it worked out very well and we feel we're excellently positioned in our channel.

Finally on to Barnes Aerospace, the third business. At this point things are pretty well as we expected them to be. The orders remain solid at 45 to 47 million dollars, and the backlog held at 158 million dollars. Commercial flying, if you look at the end market, is recovery but still substantially down from pre 9/11 time. And most industry gurus don't expect a full recovery until early next year. And then following that everyone is hopeful that the exceleration of deliveries in 2004 as the desert fleet is retired. And because of the lead times for our products, we would expect to see that benefit in mid 2003.

Non-commercial which has been an area of focus for us, biz jets, government, we're about half of the orders booked in Q1, which is a big improvement for us. We expect to see further gains in these markets this year. And business jets, especially the fractional program will stay strong, as they are an alternative to commercial travel.

We're seeing various military programs move more fully into development but we're not really seeing the benefit of some of the discussed increases in defense budget, but it's holding very nicely. The will be an important contributor in 03 and beyond. And even if the market softens somewhat it will, we believe because of our penetration improvements, we'll do well.

In Aerospace the overhaul and repair business is an important area for growth for us. And while the sales have moved lower quickly as expected, domestic down around 20%, we're seeing Asia strong where we have a facility in Singapore. And the impact to profitability was mitigated by aggressive cost control and a reduction in the workforce.

We know order downturn is looming in the commercial area and we've anticipated that by quickly taking some action over the last three months. We've reduced down in aerospace by about 150 people, which represents just shy of 15 percent of their workforce. We're obviously being very careful on capital expenditures, pushing hard on sales, engineering to diversify the business and we've put a strengthened effort in to our government sales area.

I think that kind of gives you a quick capsule of the way we see the three businesses and I'd ask Bill to talk about a financial review here.

Thank Ed and good afternoon. I wanted to make a few points on the financial detail from the schedule that was sent out today regarding the three businesses, our balance sheet, and our cash flow. If you would please refer to schedule one.

First, Associated Spring, as you can see, sales 75.6 million, just down slightly from last year's first quarter. That does include about 4.4 million from recent acquisitions, mainly Forward Industries and Seeger-Orbis in Q1 2002.

Operating profit, Spring, was steady. As you can see, 7.1 versus 7.2. We see this as a very good achievement, given the organic sales decline, and this through excellent cost controls, as Ed said, and we think this will continue to benefit the results as volume starts to improve, as we expect it will.

Let me also mention that at Spring, compared to a year ago, we've taken about $20 million, or 14 percent, out of their capital . This was a combination of better working capital results and reduced through lower capital expenditures.

Ed mentioned the Dallas plant closure. That is on schedule as we transition approximately seven million of sales to our other Associated Spring plants, improving capacity utilization in the receiving locations.

Back in December, we indicated we'll have about 1.6 million in costs related to closing this plant in the first half of 2002. Very little of that amount was spent in the first quarter. Most will hit in the second quarter. Cost savings as a result of the shutdown in the second half of the year will, we think, offset these expenses, so what we're looking at is essentially an earnings-neutral event in 2002.

Move on now to Barnes Aerospace, as you can see, sales 47.4 million, up just about a percent from last year. Operating profit of 2.7, down from 3.9 a year ago. We did incur related to the workforce reduction Ed mentioned. Profit was also impacted by learning curve costs on the OEM side related to a significant number of new products introduced late last year. Let me say, though, that these cost variances were cut more than in half compared to the run rate we were at in the fourth quarter of last year, so very good progress was being made there.

As Ed said, orders remain solid at 47 million, and roughly 50 percent of the incoming orders in the quarter were non-commercial, which we take as a real positive. Backlog at 158 million was flat with one year ago and down only about six million from 9/11.

Moving on now to Barnes Distribution, sales were down about eight percent from the 79 million a year ago. Average daily sales in the U.S. were off about six percent from the year-ago period but up sequentially from the fourth quarter 2001, and that's encouraging. Operating profit two million, down from three. We believe the profitability actually held up very well there, given the high gross margins, and that was the result of a number of factors. Gross margin did pick up a bit in the US in the quarter, that was driven by selective pricing actions and vendor leverage and some careful calling of unprofitable accounts.

Substantial cost reduction, nearly two million came through the P&L in the areas of warehouse, as we consolidate the and other personnel reductions that have been taken.

Finally, last year we spent quite a bit of money on the integration of the Bowman and Business System, those costs did not recur in Q1 2002.

Moving on to the corporate level now and I'd ask you to turn to take a look at Schedule Two, the completed interest expense was down about 20 percent from last year. This was all were slightly higher and included the benefits of a move we made last year to get our debt portfolio at roughly 50/50 fixed versus floating rate, from what had been a higher fixed portion. The effective tax rate of 20 percent is down from 25 percent a year ago, this is due primarily to the country mix of where we generate profit.

Move now to schedule three of the cash flow. You'll note in the depreciation and amortization a reduction there. That is primarily due to the non-amortization goodwill in 2002, roughly a million dollars pre-tax. The working capital increase is primarily receivables and this relates to the 11 million higher sales we had in Q1 versus Q4 2001. In fact these sales outstanding at the end of March were down two days compared to a year ago.

Cap ex continues to be tightly controlled at four million. And as you can see, well below depreciation. You'll note the 14 million of cash proceeds from the sale of a debt swap in the first quarter 2001. That did not recur this year. This was a fortunately a non-taxable proceed that had no P&L impact a year ago.

Our spend on acquisitions in the quarter was 23 million, of that 21 was Orbits of which, as we said, was cash with-held, I'm sorry, cash held offshore. And roughly two million was spent to complete the Forward Industries at that purchase. As a result, debt moved up about 14 million in the quarter and as you can see on Schedule Four, that moved our net debt to total capitalization ratio from 48 percent at the end of 2001 to 51 percent. You'll see that ratio is about even with a year ago, despite the cash we spent for acquisition during the year.

That's it on the schedules. From my perspective there are a few key take-aways from the first quarter results. The first is with Associated Spring where it's sales increase with the economic recovery the profit impact should be quite positive due to the cost reduction actions the management team there has taken over the past year-and-a-half.

At Distribution, the profit impact of the lower sales has been largely offset by significant cost reductions and a slight improvement in gross margin. The sequential improvement in U.S. average daily sales is encouraging.

Finally, at the Aerospace business, which held up very well in the first quarter, we've adjusted the operations for expected commercial demand, and we had a very good level of non-commercial business in the incoming orders in Q1.

I would echo Ed in saying that on balance, we think it was a good quarter.

Let me now turn the call back over to Ed for a quick recap.

Thanks, Bill.

One thing I wanted to mention as part of this call because you'd wonder why I wouldn't mention it when you may hear the news. We had a work stoppage this morning at 9:00 a.m. in our plant - our Associated Spring plant. Affected only about 130 employees. This plant in size, as it goes, is about our sixth or seventh largest facility and is down considerably from where it was 10 years ago. Management is working in the plant. We believe all issues in regards to the contract - this is with a UAW Local - are resolved, except the economics, and we'll be meeting later this week on that - on this particular issue.

But in general, as I said, I think we've got the first quarter off to a good start. We're not planning any radical departures from our game plan. Spring and Distribution are well positioned to succeed, particularly if the economic climate continues to hold or improve. The team at Aerospace has taken a lot of appropriate steps to ride out the disruption in the commercial aircraft market. And we'll continue to look.

Thanks for listening, and I'll turn it back to Phil to begin the Q&A session.

Thanks, Ed. , if we can go ahead and start queuing up the Q&A process, please.

Sure. The question-and-answer session will begin now. If you are using a speaker phone, up the handset before pressing any numbers. Should you have a question, please press one, followed by four on your push-button phone. If you would like to withdraw your question, please press one, followed by three. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from . Please state your question, sir.

Good afternoon. Actually ...

Good afternoon.

... two quick questions. One on the service side of the Aerospace business. Are there any plans there to open up another location, either domestically or overseas? And is there any growth opportunity related to homeland defense or security or anything along those lines that maybe wasn't there before?

Good question. I probably should have spent a little more time on that. As part of an acquisition that we made in August of last year at , we were able to obtain an FAA repair license in Westchester, Ohio. We've reconfigured the plant that allows us to have a overhaul facility in that. We've started to make sales in that and we're seeing that although modest on a month by month basis. We've got good coverage in the U.S. and we, or in North America I should say, and in Singapore. The question is whether or not we need something in Europe as we talk to our customers right now, they're very comfortable with our ability to service them from where we are but we're constantly looking at that either on a green field basis or whether or not we ought to be looking at somebody. But we like that side of the business. We've done the management team there has done a very good job at managing the change from some of the older model that were on the 727's that are really being parked in the desert and now we're seeing more and more product on the current engines.

In terms of homeland defense, I'd say that would be tied more to military and that part of the thing that we're looking hard at is having our government sales people deal with the various air bases that tear down the engines and my guess is that'll give us some help over the next two or three years particularly as you see the hours on those planes going up dramatically.

OK, and I know nothing is in stone yet in the defense budget but is there anything that could potentially maybe get you excited that you're hearing in the grapevine or through the pipeline or anything?

No, I don't think there's anything totally specific. We think that the F22/V22 programs are moving more fully into development and we're to participate in those.

OK, great. Thank you very much.

Thank you. Our next question comes from . Please state your question.

Good afternoon guys.

Good afternoon Holden.

that with the stoppage at the Bristol plant. Can you give us a sense of whether that's going to be material to the revenues in terms of its production? How long? Do you expect it to end once you meet at the end of this week and, for that matter, is there any issues that might be emerging with the unions at any of your larger shops in the near term?

We let me just kind of give you a thumbnail sketch of where we are on unionization. We are primarily a company with non-union facilities. We have three UAW facilities in the U.S., and they are not under a - they're individually contracted except for the pension and the health benefits. And so this is a local contract here in .

It's 130 people. To give you a feeling, if you think about that in terms of the company having 5,000, you'll get some feeling for the impact. Again, if it goes any extensive period of time, we would reposition the product and work salary people to build the product.

OK. So no expected impact at this point?

None that we can see, and I - and I think it's, I mean, this happened at 9:00 today, so I, you know, the team has had plans in place. They're implementing it. I'll have a 4:15 phone call when I get off of this thing, and we'll hear how they're doing.

OK. In the Aerospace side, is it 47 or 45 million in orders for the quarter?

.

I'm sorry?

Forty-five.

Forty-five.

OK. You know, it sounds like, even though that's a pretty good level, didn't really note any real drop-off, it sounds like you guys are anticipating, you know, an additional drop-off going forward out of that commercial side. Is that - is that a correct sense?

Sure. I think you would - you would be critical of us if we didn't expect that when Boeing and Airbus both announced they're going to build between 55 and 56 percent of last year's production. Now that, you know, we saw some of that in the fourth quarter, but we really aren't seeing that, Holden, in the detail releases that we get from the engine builders or from the airframe builders, but we just expect that that will happen, and so we're laying the plans accordingly.

In addition, we've, you know, tried to pull forward work in , government, and .

That's why I'm sort of wondering. I would have expected to see a little bit more of a tick-down in the orders in this quarter, which you didn't see. And so that's why I'm wondering whether you're just kind of, you know, guiding on speculation that it's going to happen based on the, you know, the headlines you read, or whether you're actually seeing, you know, something below that 45 sort of pace that you saw in Q1 as we go forward now.

I think we're just being careful. And it's more than headlines. You know, we spend a reasonable amount of effort to get detailed analysis by airframe, by engine, by month, so that we know, you know, whether they've got green tails or whether they've actually got logos on the tails. So we're pretty comfortable we understand where we're at, and we're just watching it very carefully. And so when we - when we brought down the headcount, we're really just, I think, being prudent here.

OK. And then have you done the analysis to be able to put, you know, some speculative number as to what you think the trough order levels will wind up being in this cycle?

With the retirement of Johnny Carson, .

Your not in that game then - not the heir apparent. OK, on the operating margin, that was even thought the revenues held up reasonably well, the margin was down. I think you noticed the severance charges in there, but you also noticed some timing issues in regards to new platforms, that's a learning curve issue you'll climb. But will you give us a sense of how rapidly you should be able to climb that learning curve and be able to result in some decent improvement in the margin?

in the first quarter year the product introduction program really haven't begun so there were very little cost, if any, in that quarter. We indicated we had pretty heavy cost running monthly, these will variances related to new product learning curve in the fourth quarter. The first quarter result reflected a reduction in those variances by more than half, we'd expect to see that trend continue. Depends upon the order level for these curves and how quickly we are able to move them through. But certainly the second quarter we would expect a sequential over the first quarter.

Yeah, explain the reduction variances because I'm looking at I mean your lowest operating income tally certainly in over a year, even though the you know the revenues have held up reasonably well. You know I'm not seeing a dramatic improvement in the level of profitability there so I'm just trying to get a sense of you know what kind of ramp we can expect going forward?

I think you've got to take into account the severance, which was certainly a material number in the quarter. Results on issue as to country mix, where we're making the profit? For instance, one of the operations the operations, which does Honeywell and Boeing orders are well down there, sales are down and that tends to hit you when you hit your fixed cost level. So it's not a straight shot, you've got to really dig in and look at it by location. But again, that we're expecting the commercial side to fall a bit further. We've taken the right actions there, and we'll just be pushing the whole bit the margins as best we can.

OK, and what do anticipate in the power side? Because I mean GE has been saying they're looking for that to drop pretty sharply going in to 2003. Wonder if they left mature for you, but I mean is that a business that you are going to have a difficult time growing in that environment going forward?

Its where we never were a source before, so I would view that more as even if the overall market for independent power slides off that we'll be on their newer models, and we've not been on anything of any - of any magnitude before. So this looks like plus business to us.

OK. Great. Thanks. I'll jump back in queue.

Thank you.

Thanks, Holden.

If there are no further questions, I will turn the conference back to Penn to conclude.

Well, I just want to thank everybody else for joining us on the call today. If anybody has any follow-up questions, you can reach me in my office at 860 ...

Excuse me, Mr. Penn. Mr. Lewis has one more question.

Why don't we let him go ahead with one more, then.

OK.

Can you give a sense of, you know, what you're seeing on the country level that might have some bearing on your tax rate? I'm assuming you, you know, you referenced strong European automotive business. I assume that's one reason why your tax rate was so low. Seeing any changes in that - in that country mix that might have some bearing on the tax rate going forward?

Holden, we would expect to see, based on the hope - the continued recovery of Spring, primarily North American automotive, a bit more profit on a on a pro rata basis out of North America. That is a high - one of the highest tax rate jurisdictions, so there's a chance that rate could boost up a bit. We don't think it's going to be significant. the number based on our best look at this year and where the profits will be coming from.

OK.

All right. That's great. I just want to thank everybody for being with us on the call today. If you have any follow-up questions, I can be reached at 860-973-2126. I look forward to talking to you in a couple of months here. Thank you.

Ladies and gentlemen, that concludes our conference for today. Thank you all for participating, and have a nice day. All parties may disconnect now.