Barrick Mining Corp (B) 2003 Q1 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Barnes Group, Inc. first quarter earnings conference call. At this time, I would like to inform you that this conference is being recorded 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 Phillip Penn, Barnes Group, Inc.'s Director of Investor Relations. Please go ahead, Mr. Penn.

Thanks, Anna. And thanks, everyone, for joining us on the call and Webcast to discuss our first quarter results. With me today are Ed Carpenter, Barnes Group's President and CEO; and Bill Denninger, Barnes Group's Senior VP of Finance and Chief Financial Officer.

In keeping with our past practice on these calls, I'd like to ask that if you have any questions that are purely data related, you hold them for me after the conference call. That will give us more time to focus on the broader issues that are of more interest to everyone on the call today.

Second, I'd like to remind everyone that certain statements we make on the call today, both during the presentation and during the 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 risks and uncertainties and 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 described in our periodic filings with the Securities and Exchange Commission, copies of which are available on our Web site.

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

Good morning. As we begin our presentation today, there are couple of key messages that I have listed on the first schedule that you'll see. It was a great quarter for us. We felt very good about it. We think that things went as planned. I would encourage you to look at our press release which I think really sets out how the results were, but we hope to expand on those in our session today.

The first thing I'd mention is that the net sales reached a new quarterly record. That's a record for any quarter, not just the first, despite a challenging or, as I call it, a tricky in market. Our operating income increased 14%. Our operating margins expanded. Our diluted EPS was up in spite of a little higher tax rate and an increase in our share count.

Importantly, the integration of Kar Products, which we'll get into a little bit later, that we acquired in the middle of Q1, is running at or ahead of schedule, which is important for us. Switching to the next schedule, we really had--it's a good quarter for Associated Spring, growing both in sales and operating income. Driven by acquisitions, we saw incremental sales growth from Seeger-Orbis and Spectrum Plastics, a really nice, strong growth in sales of Nitrogen Gas Springs [ph] which has grown over the last four years and is not just a quarter-over-quarter phenomenon. And we saw an increase in our sales to the light vehicle market.

The sales at Associated Spring were tempered by a couple other shifts in the market. One would be the telecommunications and electronics which we continued to see drop. We've got an important position in that, not only in North America but also in Asia-Pacific. And frankly, we don't see any improvement in that market, and right now we're really hoping for flat, frankly.

We also saw a drop in our sales for products for the heavy truck industry, but that really was in large part based on our planned exit from the brake spring business when we closed our brake spring plant last year in Dallas. We moved about half that production to other facilities, and the brake spring business we exited because we didn't feel that was an attractive business. But in aggregate, we saw the sales move up nicely year over year and the profits were up as well. This was offset to a degree by the additional personnel expenses which we talked about in our February call which Associated Spring takes about three quarters of our Barnes Group pension and post-retirement benefits expenses and we saw quite big hit there.

Moving on to Barnes Aerospace, the volume was off in the quarter, which should be expected where we are in the commercial aerospace cycle, but the profitability held, I think, very well considering the sales drop, and I think that has done very well. The orders of $38.3m net of a large cancellation of over of one particular cancellation of $7m we felt very good about. We continue to deal with cancellation and push outs, but in general we feel that we've kind of reached a plateau in this business as we look forward and are pleased with our backlog.

Barnes Distribution is a terrific story. Kar Products is already contributing almost $20m to sales for the half of a quarter, and frankly, a profitability at plan. We also see, importantly, good year-over-year improvement in profitability at Barnes Distribution, continued plusses for a number of quarters there. As I mentioned, the integration of Kar is off to a good start, and we started some administrative consolidation already. We've owned the business we only owned the business for about half of the first quarter or about seven weeks. And also, most importantly, the Kar people now have access to the Barnes Distribution sales catalogue and we're finding that this is a terrific strong base for our overall business and we're very pleased with that.

I think that as we go forward, this will continue. The profitability of this business will continue to accelerate as we go forward. It would seem to me that as you read in the press release, we continue to have good success in both our national and regional sales focus and our e-commerce platform. We've opened about 150 new national and regional accounts since initiating that focus at the beginning of '02, and in our letter to shareholders, we indicated that this would generate between $10m and $20m, and in spite of the rough industrial environment, we still believe in achieving in that range during '03.

Our e-commerce is moving up and we would achieve something like $3m to $6m in the year of '03 with just over $800,000 this quarter. We continue to see this as a leading edge and it helps us very much in our national and regional accounts.

So in summary, all three of our businesses in '03 got off, I think, to a very solid start, and we're working hard to keep that momentum. Let me turn the call over to Bill, who's going to give you some more details on the financial view of this quarter, Bill Denninger.

Thank you, Ed, and good morning, everyone. Let me recap some of the financial highlights from the quarter and provide some more detail for each of our three businesses. If you would please turn to Schedule Three, you'll see sales for Barnes Group, Inc. were up 12.6%to about $219m for the first quarter, setting a quarterly sales record for the company. I'll cover how that sales growth breaks down between acquisitions and organic as we look at each of our three businesses in a moment.

Operating income increased by over 14% in the quarter, generating a slight improvement in operating margin from 5.9% to 6%. Cost of sales increased 9%, selling expenses were up 31%, admin expenses were up 9%. Both selling and admin increases were due primarily to the addition of Kar in February. Interest expense increased due to the additional drawdown on our revolving line of credit to fund the Kar Product acquisition. Average borrowings for the quarter were $270m, up from $245m in the first quarter last year. Net income for the first quarter of 2003 increased almost 9% to $7.4m while diluted EPS rose to 37 cents, up from 36 cents a year ago. All told, we think, a good set of numbers and a solid quarter.

Let's move on now to Schedule Four. Spring's first quarter sales included $9.9m of incremental sales from the acquisitions of Seeger and Spectrum last year and reflected continued growth in the sales of Nitrogen Gas Spring products. Sales to the Big Three auto OEMs were up $1.4m, or about 6.5%, and to the transplant $.5m or 12.5% in the quarter. As I've mentioned, these increases were partly offset by lower sales of heavy truck brake springs, the product line from which we withdrew last year when we closed Dallas, and the decline in organic sales to the telecom and electronics markets.

The growth in operating profit at Spring reflected a contribution from the higher sales volume and cost savings from the closure of the Dallas facility last year. Partly offsetting those plusses was higher pension and other post-retirement expense. We indicated on our February call that our pension income would drop by about $3m year over year. That said, the bulk of that charge or change was absorbed by Spring. But even with this impact, the team at Spring delivered another quarter of strong, profitable growth.

Let's take a look now at Barnes Aerospace. The 10.7% drop in sales was actually a bit less than we'd planned. Military government content during the quarter was slightly over 30% or about $10m. Operating profit, down only $200,000 on a $5m sales drop, reflects the benefit of all the actions taken last year to size the business for a flat commercial market and sales of about $40m a quarter. Last year's first quarter did include about $500,000 of severance expense, which did not repeat this year.

We've also seen a significant profit improvement at the Aerospace Westchester, Ohio, facility, where we invested heavily last year in process improvements. For the first quarter Barnes Aerospace order backlog remained strong at $148m, down only about 2.5% on the quarter despite the $7m order cancellation that Ed mentioned. Government military content in backlog was about 30% at the end of the quarter. On that of Barnes distribution, Kar Products, which Barnes Group acquired on February 6 of this year, contributed $19.2m in sales to the first quarter, indicating about $2m of organic growth from the rest of the group. Some of this was currency related from our distribution operations in Europe, but we were still pleased with the sales results given the state of the industrial economy.

Daily sales average of DSA in the U.S. increased sequentially each month during the quarter. And DSA for the quarter was up about 6% from the fourth quarter of 2002. Kar sales, by the way, were slightly favorable to the plan we'd established in February. Of the significant operating profit improvement and distribution, roughly half was attributable to better profitability in North America, with the balance reflecting incremental operating profit from Kar. Excluding the impact of Kar, gross margin climbed by about a half a point in the U.S. operations, reflecting both mix and some selective pricing actions. With Kar, gross margin in the U.S. was up about three points year over year.

Let me move on now to Schedule Five. The increase from the effective tax rate to 22% in the first quarter of 2003 reflects our full-year expectation for a higher mix and higher tax profits from the U.S. in 2003 versus 2002, primarily due to the Kar acquisition. We indicated in February that a range of 21 to 24 percent was reasonable for the full year, and we continue to think that's the case. Also on Schedule Five, the increase in average diluted shares outstanding is primarily due to the issuance of about 920,000 shares of Barnes Group, Inc. stock to the seller of Kar Products.

Turning now to Schedule Six, net debt to total capital stood at 52% at the end of the quarter, and as we've indicated in previous calls, our long-term objective is to maintain that ratio at under 50%. We will, however, move above that threshold periodically as we did in this case to complete an acquisition .

One final comment, and this relates to the last schedule we sent out with the press release, an analysis of change in net debt before acquisitions. We reduced net debt before acquisitions by about $2m in the first quarter of 2003. This was accomplished with good control of working capital and capital expenditures and compares to an increase in net debt before acquisitions of over $7m in the first quarter of last year. Historically, Barnes has been a consumer of cash in the first half of the year, so the positive cash generation we achieved in the first quarter has set in motion what we expect to be a very strong cash generation year.

Now, let me turn the call back to Ed for his wrap up before we take questions.

Let me first begin with the obvious. Since we last spoke with you in mid-February, I think it's safe to characterize the overall environment, both in the U.S. as well as our overseas situations, as a bit more tenuous. Industrial production has slowed, and somewhat unexpectedly in the final two months of the quarter we've all been watching the war on TV and its affect on consumer sentiments is clearly on the mind of purchasing decision makers.

Because of this, I don't really see any big lift or rising tide from our end markets over the back half of the year because I think we've demonstrated in the first quarter numbers we have the ability to grow the business, and more importantly to grow it profitably, even without the rising tide. And even with a large transaction just completed, we'll continue to seek out, I think, (inaudible) opportunities where they add strategic value to our existing business, either in scale, product line extensions, technology or geographic reach.

Thanks for your time, and now I'd like to turn it over to Phil [ph] to begin the Q&A session. Phil [ph]?

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

Thank you, Mr. Penn. The question-and-answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your pushbutton telephone. If you wish to withdraw your question, please press star two. Your question will be taken in the order it is received. Please stand by for your first question.

The first question comes from Holden Lewis with BB&T. Please state your question.

Good morning, thank you. Can you give a little more detail on the distribution operating margin? I mean it was up a little bit year over year, obviously, you know? But in terms of that composition, were there any sort of, like, integration costs that were embedded as a result of the Kar acquisition? And from this level, I mean when you say that you believe that you'll just see that operating margin accelerate going forward, what is that based on? What are the components that's going to lead you to even higher margins than where you are currently?

Holden, there were no impacts in the first quarter that would have impacted cost of sales or gross margin at distribution other than, as I said, a slight change in mix in some selective pricing. But no actions have been taken yet relative to Kar that would have hit the P&L. Going forward, as you know, Kar has higher margins than does our existing business, and we saw that impact, as I said, in the first quarter. When you add Kar in, the gross margin was up about three points. So I don't expect any significant changes other than the ones we've talked about.

OK. But do you anticipate taking integration type charges that would have, say, one quarter would have a kind of negative impact relative to where you were in the Q1?

We are still finalizing the various integration plans. It's a little too early to comment on a specific quarter. There will be some impact later on this, but I can't be any more specific than that at this point.

OK. And if Kar were not in there, what would the operating margin have been?

Operating margin would have been up half a point with Kar, percentage wise.

But it still would have been about 3.2%?

I'm sorry. I thought you were talking about gross margin.

No, I'm just referring mostly to the operating margin.

Kar contributed about $600,000 I'm sorry, $1.25, pre-tax.

On $19.2m sales.

Right.

Holden Lewis. So since it has a higher operating margin, that certainly should be...?

No, no. A higher gross margin.

OK, I'm sorry.

Yeah. You're being [inaudible] in between General Brooks and Secretary Rumsfeld.

But it has an operating margin, too. I mean $1m on $19.9 sales?

About 6%, and that's where we had pegged them.

Right, OK. So but then you only got partial benefit of that in Q1, so that should lead to another step up in margin in Q1 as you get the full affect of that.

True.

OK. And there's nothing unusual in the 3.4 that makes that artificially high, by any means?

No.

OK. I'll jump back in the queue.

OK.

Thanks.

The next question comes from David Siino with Gabelli & Company. Please state your question.

Hi, good morning.

Good morning, David.

Good morning.

One question on the canceled order in aerospace. Any more details...

Can you speak up a little bit, David?

Is that better?

Yeah, thanks.

OK. One question on the canceled order in aerospace. Can you give us any more detail whether it was military or commercial or whether it's reflective of your customer or…?

Sure. David, that's a good question, and I probably should have spent a little more time on that in the intro. It's a one-time event. It's OEM commercial and it was a situation where we've known about them for about six months and chose not to (inaudible) of the competitors bid it at a different price and we chose not to retain that business.

So you walked away from it, then. It wasn't the customer...

In sales, you never walk away.

Right.

But, yes. The answer is we were, we had the last look at the table and we chose not to bid it.

The business was resourced.

OK, thank you.

But it was commercial and it was not military. And it didn't have a great spares opportunity out in the future.

And as far as the long-term relationship with this customer, it's not impacted.

Oh, absolutely not. No, we're doing fine.

OK, thank you.

The next question comes from Matt Summerville with McDonald Investments. Please state your question.

Hey, good morning.

Hi, Matt.

A couple of questions. First, can you talk about whether you had mentioned on the last call that you had some costs incurred in the fourth quarter in the distribution related to the new national regional account as well as the e-commerce initiative. Did that repeat in the first quarter, and was the magnitude similar?

It certainly would have repeated, Matt. If anything and I would have a number for you, but the number probably was just slightly higher as we continue to roll out more and more accounts. But this is now embedded in the business. It's not something we'd normally talk about.

OK, very good. And then a follow up to that, Ed, if you could comment on--you talk about a $10m to $20m range for, I believe that's the national regional account initiative, specifically for 2003. What differentiates the high and low point of that range? Can you talk about that a little bit?

Yeah, our success in achieving the award? I think and it was interesting, because I happened to chat with one of the fellows out in the field yesterday, and I think what we're seeing is an awful lot of opportunities to quote on business. And it really, Matt, goes into two pieces. One is, how many chances we get, and what is the speed of the rollout? In other words, right now we're seeing a lot of opportunities and they vary from, "We'll give you a chance to compete for the business at the local level," to the other extreme, which where the corporate center says to our sales guys, "If you win the award, we will mandate you as a supplier." And then that is overlaid by how quickly they're willing to roll it out. So I think it's not a matter of awards and successes as much as the speed of the roll out.

OK. And then secondly, with respect to your aerospace business, can you differentiate what you saw in the first quarter on the OE side versus the overhaul and repair, and talk about what the outlook is more specifically for the overhaul and repair business in the second quarter and beyond. And if you could differentiate a little bit between what we're seeing domestically and what your guys are telling you internationally?

Let me give you, while Bill's looking up the numbers on OEM, I think what we're seeing right now and we've seen for the last 35 or 40 days, Matt, is the overhaul and repair business has slowed down, not substantially, but more than we'd like, because of not only the watching the war, but obviously SARS. We have a terrific operation in Singapore and that hasn't that is just now starting to see the impact of the Asian customers reducing their flights, reducing their schedules.

On balance, I would say that our OEM plants, with one notable exception, are still running fairly close to last year and I'm very pleased with it. We've seen orders from Europe and military improve, and the fact is we're now starting to sell direct to some European situations instead of through tier one suppliers. But I'd say the biggest concern that I have on aerospace is to watch that MRO business.

Is there any way that you can quantify the down side that you anticipate in the international O&R as a result of, you know, the war, as you mentioned, but, you know, more recently the SARS issue?

No. And I also don't know, you know, I wish I was plugged into Atlanta a little closer and understood where SARS is going to end up. To the extent that that's an ongoing issue over a long period of time, I think it will have an impact. To the extent that it's just a short-run impact, and there are solutions found other than wearing face masks, that we'll go forward with it, particularly as we approach the high volume summer season. But right now, I think it's an unknown and I think everybody's trying to figure it out, probably including you and me.

Is there anything near term on the cost side of things with that operation as a result of what's happening out there?

We always do things on the cost. You know us well enough to know that we take early and quick action.

OK.

Matt, I could comment, too, that for the quarter the MRO business based in Singapore was flat. It was down about 9% in the month of March. And I think it's fair to assume that until the SARS issue is resolved, we'll see a bit of a hit there on the sales line. But management's clearly aware of that, anticipates it, and, as you would expect and as Ed said, we'll be taking the right action to try and maintain the profitability.

Can you compare then 3/4 you mentioned the Singapore MRO being down 9 percent in March 3/4 what your domestic MRO business looked like in March?

In the month of March it was up quite strongly. I mean it was actually up about 30%.

OK.

But again, you've got to remember, our MRO business when we talk about it domestically or internationally, we're talking about where the repairs are made, not necessarily where the demand is generated. Because most of our MRO business is fairly is fungible, if I can use a financial term I get scared when I do that is that we take in a lot of parts in our domestic operations that come from overseas, and frankly, our overseas operations do the same. And this is one of the things that helps us in the balance and in fact is my guess is the actual Asian market was probably down more than 9%, but we were doing other work.

Thanks a lot, guys.

Thanks, Matt.

The next question comes from [Tom Spiro] with [Spiro Capital].

[Tom Spiro], Spiro Capital. Good morning.

Hi, [Tom].

Hi. A question for Ed regarding Barnes Distribution. I keep reading various publications that suggest U.S. manufacturing is migrating over to China at an accelerating rate. I wonder what impact, if any, you think that may have over time on our distribution business.

It's one that we're careful about, Tom. It is not a trend that we ignore, because just like you guys who invest in the market, you don't fight Mr. Market. And so we look at that carefully. I think it's a geographic phenomena inside of North America also. And if you look at where we're positioned, and for example, one of the reasons for Kar that we felt was a not only a good acquisition overall in terms of logistic synergy in terms of distribution and so on. We were very, very pleased to see their presence in the South and Southwest and West Coast, which was frankly stronger than ours. That doesn't mean we didn't have a good position, but that historically has been theirs.

So I think inside North America, we're very careful of those trends. And we're also very careful of the trends, not only into China but also into Mexico, South America and so on. And so I think it's a balance that we'll maintain. We want to make sure that our value proposition would work in those areas. It seems to be working in the developed countries in Europe and we're studying how to handle that in China. But we're very well aware of it and it's something we watch carefully.

Having said that, we still think that our approach to the market will lead ultimately to some nice growth, but we think we offer more value than some of our competitors.

The other issue, too, is that a significant portion of our distribution business in the States is not directly related to what you might call industrial production. There's an automotive component in other sectors that aren't necessarily moving offshore, Tom .

Thanks, much.

You're welcome.

The next question comes again from Holden Lewis with BB&T. Please state your question.

OK, thank you. Back to the aerospace business, a bit. You had made a comment that you felt that at least the order side of it had kind of hit maybe a baseline type, but the orders that you reported, you know, this quarter, I guess took out about $7m from the order cancellation. When you talk about stability, are you talking about sort of the orders which you put up in Q4 and then, you know, sort of adjusting for the $7m in Q1, sort of like a mid 40s level? Or are you talking about settling in, in the high 30s?

I think certainly my view would be mid to low 40s would probably be what we'd expect for the next couple of quarters.

OK. And can you give an update in terms of where the 300 ER program is? Whether that seems like it's intact to be on the timing you've talked about before? And whether you're still expecting to kind of see a ramp in orders from that as you progress through the year?

Yeah. I think first of all I'd listen to GE's call more carefully on that, or Boeing's. But we feel very good about it. They seem to be on track, and we're looking forward to starting we obviously have to produce our units, our parts of that, about that engine, well ahead of when they hang it on the wing. So we continue to see the schedule hold very well.

But there were no orders from that program in the orders in this quarter?

No.

No, and we wouldn't expect to see any orders until the second half probably the fourth quarter of this year for shipment next year.

OK. And can you just comment a bit. The volume is up, at least sequentially, Q1 over Q4, you know, yet the margin was down, you know, 2 percentage points despite that. Again, this is on the sort of sequential. What's behind that?

I'll have to get back to you on that. I'll have to get back and we'll do that.

OK, thank you.

Yep. Because of the Holden, just because of the little bit of a seasonality to our business it's not huge we tend not to think about sequential changes as much as we do year over year.

The next question comes again from Matt Summerville with McDonald Investments. Please state your question.

Thanks. A follow up, actually two follow ups related to Spring. Can you talk about if you've changed your internal forecast in terms of auto builds here in North America and Europe, and what you're looking for there for Q2 and for the year 2003? And also can you talk about the kind of growth you experienced in your Nitrogen Gas Spring business and what the outlook is there for the balance of the year?

We have not yet moved our forecast down for the year on an official basis. We were a little lower than the industry when we entered the year, and we think, by and large, that shift has moved to us. I think, by and large, people are still looking at a nudge above $16m, and we think that's fine. We tend to enjoy a pretty good balance. I know you know this. We have a pretty good balance in terms of the vehicles and the name plates that are selling, so that helps us very much. Nitrogen Gas Springs continues to grow. They were above where we expected them to be in the first quarter. They continue to do an outstanding job, both in products offered and in customers gained. I would expect that that will continue to move forward.

We're very cognizant of the fact, as you know, that some of their sales are dependent on what I'll call general capital expenditures in the marketplace, and that still is at a fairly benign level. And so we're very pleased with where that is, but we continue to see that their replacement as well as certain foreign markets we're very strong outside the U.S. in Nitrogen Gas Springs continues to hold at a good level and we hope that with any uptick in capital expenditures and I frankly don't see anything in the short run but with any in the future, that this business will even accelerate above where it's growing now.

OK. And then actually, if I can just ask a couple of follow ups. If you look at the telecom and electronics piece of business, I would mention briefly as being down in the first quarter. Can you quantify that perhaps a little bit more?

Actually, we saw a drop over the first quarter last year of about $2m in sales organically, forgetting the acquisition.

OK. And then with Seeger-Orbis, you talk about the expectation for some sort of ramp in cross selling related revenues versus your core North American operations. Can you update us on how that's progressing, and are there any numbers there that you can talk about?

You know, we continue to see very good what I'll call indications and orders, but you would not expect to see sales on what I'll call the cross selling for probably another couple or three quarters. What I would say to you is that we're seeing very good results in that, but it really doesn't have a bite here.

Yeah, Matt. That really has to do with the ability to get in on a design of a product or on a program and then just convert that over to sales at some point after you get the design win.

But we're seeing in without enumerating them, I would say that I saw a list and talked to somebody yesterday of probably five or six fundamental major programs, both in Europe and in North America where the cross selling is very close to fruition in terms of agreeing on purchase orders and so on. But again, I think that you're looking at Q4 or Q1 next year.

OK. Thanks a lot, guys.

We're very pleased with Seeger, though.

Once again, ladies and gentlemen, if you do have a question, please press star one on your pushbutton telephone at this time.

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

Thanks again for joining us today. If anyone has follow-up questions after the call, please call me at 860-973-2126. Otherwise, I'll look forward to talking with you next time.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 288805. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.