Barrick Mining Corp (B) 2002 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Barnes Group Incorporated third quarter earnings conference call. I'd like to inform you that this conference is being recorded and all participants are in listen-only mode. We'll open up for questions and answers at the end of the presentation. I will turn the conference over to Phillip Penn.

Phillip Penn (ph): Thanks everyone for joining us on the call this morning and on the webcast as well. With me is Bill Denninger, Chief Financial Officer and joining us from another location, if the technology works the right way is Ed Carpenter, our President and CEO. I'd like to ask that you hold any number or data specific questions for me after the conference call. That's going to allow us on the call to focus on broad issues.

Second, I'd like to remind everyone that certain statements we make on the call today both during the presentation and during our q & a session may be forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to the risks and uncertainties and may cause our actual results to differ materially from those contained in the statements. We'd encourage investors to consider these risks and uncertainties that are described in our periodic filings with the Securities and Exchange Commission.

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

Thanks, Phil. I assume everything is working fine. Just before we get into looking at the results, I thought maybe it's worth noting, that from our perspective, everything that we see looking forward hasn't dramatically changed since we last spoke with you three months ago, in fact, six months ago. Perhaps without the rebound that we had hoped for at the end of the year, but well within our planning parameters from a year ago December and so we continue to feel at least that we plan for the correct environment.

I recognize that environment for many money managers is difficult and, frankly, is frustrating some of the operating people at Barnes in terms of their total return to the shareholders as they believe our relative performance is positive, but we'll take what we can get.

Let me start with the first schedule that we sent out for the call. As you can see, our top line grew modestly in this past quarter, about 5%, $10 million up. $15 million for the year to date. Acquisitions accounted for about 12 million of the growth, internal Associated Spring growth was about 3 million, aerospace was down 5 and we'll talk more about that. And Barnes Distribution was flat to just a hair down.

Operating income was down primarily at Barnes Aerospace. Net income and EPS was up year-over-year about 20%, which mirrored our improvement in Q2.

If you look at schedule 2, it, again, shows the year-to-date numbers - I mean, the third quarter numbers for both sales and our operating profit. No surprises there of existing operations. They performed as planned. And the three acquisitions that we made over the last nine or ten months are on plan. So we feel pretty good about that.

Let me talk about each one of the businesses right now. Associated Spring, first of all, you can see the results were. We're pleased with that both from a top and a bottom line perspective. Sales were up sharply, which reflected not just the acquisition growth, but volume for both our light vehicle transportation and our nitrogen gas spring product line. It improved substantially from the bottom line did, from last year reflecting the volume and productivity at about an 8% operating income.

Clearly, we can see that Associated Spring has benefited from the uptick in the domestic light vehicle production this year. And our releases as well as published estimates would suggest that that strength will continue in the fourth quarter. And based on new awards, we think that next year our market share ought to grow, we'll have to see how, as we get farther into the year, how the actual numbers will play out.

As to when the case was when we spoke to you in July, the visibility on that part of our spring business remains quite good. We tend to temper that outlook a bit because of the lackluster in markets for electronics and Telecom. While it's no longer declining as sharply as it had been, we're certainly not seeing any uptick or improvement in there. Also Associated Spring, just a quick update on acquisitions. Forward Industry, which was a small nitrogen gas supplier, which we acquired last November has been fully integrated. We consolidated their plant into our operations, have done the engineering work on some new products and we're out trying to grow that particular product line. I would say, from our point of view that, business has been integrated.

Seeger-Orbis (ph), which we bought in February, which is a spring manufacturer in Germany, has undergone a very smooth transition. Our focus there is on growing the business and we're excited about the level of quoting activity we're getting for those products in the United States as well as some of - using their assistance to leverage our production here in the United States to go over to Europe.

Spectrum Plastics, which closed this past April is moving along well with largely cosmetic issues to be finalized. But as you know in our prior conversations, we've viewed this as a longer term strategy and we continue to feel this is the right place for us to be the combination of plastic and metal parts. And as their end-markets improve we think that will be an outstanding acquisition. All told, given what we see on the radar screen, we think that Associated Spring is going to have a strong 2002.

Barnes Distribution, sales essentially flat, dropping a million dollars from 73 to 72. But - and a little bit below where we had hoped for, frankly. As probably most of you are aware, after we saw an uptick earlier this year, the North American industrial activity has sputtered for the last three months and it's had a negative impact on our top line, although we are seeing good improvement in serving corporate accounts, our overall daily sales rate in the U.S. was down about 3% from the June quarter and about 4% from a year ago. We did see some uptick in September, but not nearly enough to suggest that an upturn is at hand at all, but the good news here is the profitability improvements at Barnes Distribution continue to be one of the bright spots for the quarter.

Cost savings associated with our distribution infrastructure consolidation are now running well above $5 million a year and we - as we've taken out about six locations - not about - six in North America, we completed the packaging consolidation that we talked about in the last call during the third quarter and the guys are busy putting together the consolidation and accomplishing the consolidation for the Master distribution center in Q4.

Second point I'd make on Barnes Distribution is the gross margin has continued to improve throughout the years. This is now two years. Procurement savings are now about $2 million a year. Some of that flows through in terms of customer benefits, but we are able to hold some at the gross margin level.

Third, we did restructure our sales management at the end of last year and we continue to see as I mentioned earlier, strong activity at the national accounts level, with our national accounts up about 40%, new accounts opened this year up about 40% from last year. With these initiatives in place, we think Barnes Distribution should enjoy strong profitability on a year-over-year comparison for the foreseeable future. And with much longer - lower cost structures now embedded in the organization, there's some interesting operating earnings leverage available as sales volume begin to increase.

Let me now turn to Barnes Aerospace. Again, they're not much different than what we talked about on our last call. Sales were off from last year. But about on plan from our perspective. Orders, which are not on schedule to - we're at $39 million, again in line with expectations. And the backlog remained at about $143 million, which is down about 10% from their year-end number. Operating profit is down, but is really fairly consistent with lower sales volume. Some severance and asset write-downs that we booked and additional manufacturing costs as we work our way through a reduced workload.

Barnes Aerospace has reduced its work force by about 20% this year. You may recall that at the end of the second quarter we said they're down 15% or 16%.So we continue to take strong actions in that area. We don't highlight it. You don't see a lot of that, but it's just good, hard work by the management team there to work hard to make sure that we'll remain profitable through this tough trough period.

All told, I think what you saw from Barnes Aerospace this quarter probably reflects what we're going to see going forward until orders begin to improve. Frankly, we think that's going to be a while. Particularly in the civil aviation area.

So in aggregate, we think we had a solid performance in this past quarter and all things being equal, we look forward to this kind of performance going forward.

Let me hand it off to Bill for discussion of some of the financial details. Bill?

Thank you and good morning. As indicated, we do believe this was a good quarter in terms of sales, earnings and cash flow. I'd like to give you a bit more detail on the operations and our current financial position.

The operating margin was 5.2% in the third quarter, off slightly from last year, but certainly in line with our expectations for a lower contribution from the aerospace group. There were a number of items worthy of note in the quarter. I'll cover those with you now in a bit more detail.

You'll first note Associated Springs first quarter sales of 81 million were up 24%, that included just over 12 million from recent acquisitions, but the underlying organic growth rate was 5%, which we think is pretty solid, given the condition of the non-transportation markets, such as Telecoms or electronics.

Operating profit was 6.5 million up from 5.2 last year, primarily the result of a contribution from the higher organic sales and productivity improvements that Spring has made. I should note the acquisition related inventory step-up we discussed for Spring in the second quarter call did not have a material impact on Spring's Q3 results. During the quarter, we took a hit of 500,000 in relation to the closure of the Spring's Dallas operation. That closure is just about complete. The total cost will come in below the original protection. This should start to contribute to the bottom line beginning in the fourth quarter.

Turning down to Barnes Distribution, sales came in at 72 million, dipped down just about a percent from last year. We think that should be somewhat better than the industry average given the headway Ed mentioned we've made with corporate and regional accounts this year. Ed mentioned BSA down about 4% last year. That does seem to correlate with industrial production data you've probably seen from ISM and other sources. Despite the sale shortfall, operating profit was up to by about a million to about 2.5 million in the quarter. As we indicated in July, we expected to see operating profit rise even if sales were flat to slightly down as occurred in the first half because of the major effort to reduce infrastructure and procurement costs. This quarter results confirmed that outlook and we should see the same year-over-year benefit going forward for another quarter.

Gross margin also played into the profitability improvement at Distribution this quarter, improving slightly over last year on the procurement cost savings I just mentioned. A good quarter for Distribution.

Moving on to Barnes Aerospace, sales 46 million, down about 9% from last year. Operating profit down to 1.3 million, from a record third quarter last year at 5 million. And that reduction was due to lower sales volume, certainly, about 700 additional severance in the quarters. We adjusted head count down.An asset write-down of about 350 and higher manufacturing costs being incurred to adjust to the lower volume level. And this is critical that we spend this money, we reduced staffing levels by about 20% and certainly been able to maintain the quality, on-time delivery and we need to continue to do that going forward.

With that said for operations, let me make a few points from our income statement highlights, which you'll find on schedule 3.

Interest expense was about flat with last year due to lower rates on slightly higher borrow borrowings in the quarter. You'll see the 15% effective tax rate we booked this quarter, we've moved down our expectations for effective tax rate for the full year to slightly below 20%. As many of you know from prior calls, changes in our effective rate are largely dependent on the ratio between foreign and domestic income. Our latest estimates do reflect stronger results in the foreign locations, thus the lower full-year rate Outlook for next year assumes some recovery in the US economy and so expectation of the tax rate in 2003 should be somewhere in the low 20s.

Let's move now to the cash flow summary on schedule 4. The free cash flow, 16 million in the third quarter. That's a significant improvement over the first half results with most categories on the plus side. We're especially pleased with the progress made during the quarter on working capital reductions of almost 8 million. You'll note we sold a debt swap during the quarter for nearly 5 million. That sale had no impact on the P & L but did generate the cash amount shown. We put on a new fixed reporting rate that swapped on one of our shorter term notes to take advantage of today's low rates. Our floating to fixed profile of total dote is about 40% floating ,60% fixed, after that, swap.

As you can see, from paying the dividend and some stock repurchases reduce that by about 10 million in the quarter. Finally then on schedule 5 with cash of 39 million, our net debt stands at 204 million with a net debt total cap ratio of about 48%. That rate is a couple points better than it was a year ago, which we think is impressive, given the 20 million we spent on capital expenditures and 33 million on acquisitions in the last 12 months.

In summary, from both an operating an financial perspective, we turned in a fairly strong quarter. I think you'll see another good performance in the fourth quarter and we certainly intend to build on that as we move into 2003.

Let me turn the call back to Ed now for his wrap-up. Ed?

We said in our second quarter call that we weren't aware of anything in our business that required major shifts in our strategy, that we viewed that we were going ahead with the way we were headed and now three months later, I think that statement still holds. Associated Spring and Barnes Distribution are performing very well given their end markets and that performance should be sustainable, especially if the industrial economy shows any improvement. I'm confident, as I said earlier, that the team at Barnes Aerospace has and is doing the right things to position their business in this current downturn and am certain that the business will remain fairly profitable until conditions improve.

As you might expect, the stress and strain of the slowdown in Aerospace has given us some opportunities to look at acquisitions and, frankly, in the other business. While we're reviewing a bunch of possible targets, we're still very, very slow buyers. The three acquisitions that we completed in the last 12 months took us a long time to do it and I think we'll do the same thing in the future.

At the end of the day, our strategies are about getting generating profitable growth and building lasting value for our shareholders and we're going to continue to do that. Thanks for your time and let me turn it back to Phil to see if we have any Q & A.

Phillip Penn (ph): If we could please go ahead and start the Q and A session.

Thank you. The Q & A session will begin now. If you have a question, press star one on the telephone. If you wish to withdraw your question, press star two. Gentlemen, please stand by for the first question.

Our first question comes from David Seno (ph). Please state your affiliation.

David Seno (ph): Good morning, David Seno (ph), (inaudible).Equity went down in the quarter; was it related to the swap?

No, it was more related to foreign currency translation impact on equity. We had a pickup in the second quarter and gave some of that back in the third.

David Seno (ph): And the other income line, was that JVs performing better than last year?

That would be one - this is Ed. Excuse me. It would be in part because of that, but the biggest change, of course, is the goodwill not being amortized now.

David Seno (ph): Okay.

Let me also comment - In the quarter - it's been true for the whole year, we have about a reduction of about $1 million in expense in that area for goodwill, David. But I think more important, the positive results that we got from a task force that Bill put in place at the first part of the year with treasury folks and some other financial people to focus on our, not only our interest costs, but primarily on FX exposures, it has dramatically changed the company in terms of better balance and particularly in the strong versus weak area.

David Seno (ph): Right. The third quarter looks quite a bit stronger than the first two on that line.

We had a pickup in the third quarter in foreign exchange compared to a year ago of almost a million that related to the continued devaluation of the Riaz (ph) down in Brazil.

David Seno (ph): Okay. Moving over to Distribution, how are the existing accounts looking? You implied strong growth in the new accounts. I mean, are - if new accounts are up 40% ...

No, new account openings. They're not - I'm sorry if I misspoke and I probably did. The number of new accounts we opened is up 40% so that we're seeing that in national accounts. And they take - the national accounts take a while to roll out. So the fact that we are awarded a national account with multiple locations, say, in Q2 or Q3 will take us a while to get that, to see any impact at all on that. Phil can give you, I think, the detail on that offline.

David Seno (ph): Okay. I guess last question for you, Ed, the increase in Cap-X (ph) in the quarter, is that any reflection whatsoever, if you're thinking about the business going forward?

No. I think we continue to think that we want to invest in the areas where we see growth and while we're careful about it, we continue to feel good about these fundamental businesses. Obviously, we're a lot more careful right now about Aerospace than we are some of the - in some of the others.

David Seno (ph): So the bulk of the increase in Cap-X (ph) is just related to fixing the Aerospace business and working it out?

No, I didn't say that.I think what I said was is, we're being careful about the amount of expenditures that we're making. For Cap-X (ph) in the Aerospace, because we want to make sure we don't add capacity at this point in the curve. As you can see, that while it's up slightly during the third quarter, in fact, year-over-year we're down a little over $2 million.

David Seno (ph) Right. Thank you very much.

Our next question comes from Holden Lewis (ph). Please state your affilliation followed by your question.

Holden Lewis (ph): Holden Lewis (ph) at BB & T. Good morning. A few things. You referred to both acceleration and new account signings and you've already referred to in the Springs business, I think, some awards that you've gotten from the automotive space, both of which seemed to suggest a market share gain. Can you maybe, if you consider that next year volumes might be flat across, you know, the industrial business, you know, what is the likely top line impact from the new accounts beginning to flow through in distribution and the new awards beginning to flow through on Associated Springs?

Well, obviously we believe, and some of the new awards at Associated Spring have been coming in for the last 12 or 13 months. As you know on some of their businesses, they're long-cycle businesses. But having said that, I think the reason we feel good about that is, we think our investment in sales and marketing to grow the market share is helpful if in fact the market doesn't come back. Most of the aerospace companies that you all watch and look at have seen volumes down fairly significantly, more than ours. We think in part that's because our guys have done a good job over the last 18 months to grow their market share. We think we've done the same thing in the other two businesses.

Holden Lewis (ph): Okay, but - no sense, if you assume your environment is flattish, is the award that we've got, that will have an incremental benefit next year, order of magnitude, would it be material growth if you were in a flat environment based on the share gains or does it get lost as noise?

I still think because of the overall size of the impact to the economy it still would be noise.

Holden Lewis (ph): Okay. Fair enough. Then referring to Aerospace, you've talked about not expecting much in the way of improvement in the order trend for a while. In terms of 39 million in the quarter, what are you guys expecting in terms of kind of trough levels of orders? Are you seeing enough activity at this point that you can bottom out at 35 to 40 and stick there or is this on a negative slope?

I think it's on a negative slope. If you look at commercial aviation, they've started to flatten out in terms of their forecast. The last three years have been big drop years. The real question is when will it flatten out right now or will it slide down further?

Holden Lewis (ph): Do you have any visibility on that issue?

Not yet.

Holden Lewis (ph): Okay. So difficult to say whether...

Well, you have half of it is, is that the OEMs, if you take that side of the business, the OEMs are not sure what the airlines are going to order and the MRO business, the airlines aren't sure how many seats they're going to fill. Both of those put a lot more than normal uncertainty into that business. That's one of the reasons why you've seen us consistently take our work force numbers down so that we're anticipating, you know, difficult times.

Holden Lewis (ph): And has the discussions coming out of the OEMs, have they generally been - the OEM has held the line with respect to their expectations for deliveries over the next couple of years. Any sense that their commitment to that is wavering or are they sitting on their former projections?

I think they're sitting on their former projections.

Holden Lewis (ph): You've done a lot of good work, as you mentioned, with regards to trying to manage the tax rates and your foreign currency exposures and things like that. Anything you can do - if I understand this correctly, you use a pretty good balance of cash on the balance sheet because you can't repatriate some of it. Anything we can do to repatriate more of that cash and put it into debt reduction?

We work on it hard all the time. We have one fundamental problem. That as much as we keep bringing it in, it keeps getting generated overseas. So, yes, we work on that all the time to look at fundamental reasons to have a different operation and bring it in. Bill might comment more, but they generate off-shore (inaudible) earnings.

We are always concerned about having that level of debt on the balance sheet that we can't pay to pay down debt in the states. We used about 20 million back in February for the purchase of Seeger (ph), which was an excellent use of cash. We're always looking for alternatives.

Holden Lewis (ph): Would that include taking out foreign lines of credit or anything of that nature? Are you transferring your debt overseas and paying it off in kind.

That would cause it to go the other way.

That is not part of any planning we're looking at at the moment.

Holden Lewis (ph): The last thing is, can you give more detail on the asset write-down in Aerospace?

Yes. This is the facility out in Utah that has been on the market for about three years. It's vacant. We were finally able to get what we think is a pretty reasonable offer. That offer is about 350,000 less than book at the moment, but we're going to go ahead, write it down and sell the property.

Holden Lewis (ph): Okay. Thank you.

Our next question comes from Keith Hughes (ph). Please state your affiliation.

Keith Hughes (ph): Keith Hughes from Suntrust Robinson Humphrey. Which end-user market does the nitrogen spring go after.

It's primarily used in capital equipment, tool and die for transportation, appliance and other high volume stamping industries. And we're the largest global supplier in that area. We're seeing some strengthening now as we look ahead in both Europe and North America.

Keith Hughes (ph): So that's continued into October from what you saw from the third quarter?

I was with those guys two hours ago and they feel pretty good about their October/November.

Keith Hughes (ph): That's pretty current. Thank you very much.

Ladies and gentlemen, again, as a reminder, should anyone have any questions please press star one at this time.

Okay.

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

Thanks. I want to thank you for joining us on the call today.If you have any follow-up questions following the call, call me at 860-973-2126. Otherwise, I look forward to talking to you again in another three months. Thanks.

If you wish to access a replay, dial 1-800-428-6051 or 973-709-2089. With an I.D. number of 261597.

This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.