Barrick Mining Corp (B) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Barnes Group fourth-quarter 2004 earnings conference call. My name is Rachel, and I will be your coordinator today. At this time, all participants are in a listen-only mode, and we will be conducting a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Brian Koppy, Director of Investor Relations. Please proceed, sir.

Good morning, and thank you for joining Barnes Group's fourth-quarter 2004 earnings call and webcast. This is Brian Koppy, Director of Investor Relations for Barnes Group. And with me this morning are Barnes Group's President and CEO, Ed Carpenter, and our Senior VP of Finance and Chief Financial Officer, Bill Denninger. Following their prepared remarks, we will be happy to answer your questions.

In addition, I want to remind everyone that certain statements we make on today's call both during the formal presentation 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 contained in the statements. We encourage everyone to consider these risks and uncertainties that are described in our periodic filings with the Securities and Exchange Commission which are available through the Investor Relations section of our corporate web site. In addition, on today's call, certain non-GAAP measures related to the Company's performance for the full year and the fourth quarter of 2004 are discussed. Reconciliations to these measures are provided in our fourth-quarter 2004 earnings press release and financial conference call slides. These reconciliations are available on the Investor Relations section of the barnesgroupinc.com website.

Now let me turn the call over to Ed. Ed?

Thanks, Brian. Busy time of the year -- let us get quickly into our remarks so that we have enough time for Q&A. Today, we will review our fourth quarter and the year 2000 and to look ahead to 2005. Bill will walk you through the financial numbers in a minute as presented in our press release. As we walk through the information on our call today, we will present what we think is support for a $1.70 to $1.80 earnings per share in 2005.

A couple of highlights looking back. First of all, the sales for the quarter fourth quarter were 252 million -- were at record levels for the Company, along with record-setting full-year sales of just under $1 billion. The record sales year was driven by organic growth in all of the Company's operating groups, which I think reflects the underlying traction and positive momentum needed as we move into 2005.

Second, operating income for the fourth quarter was 7.6 million. However, excluding the fourth-quarter charges of $4.5 million, operating income would have increased about 39 percent over the fourth quarter of 2003.

Third, strong performance across the board at Aerospace included record operating profits, continued sales and order momentum, and record-setting backlog.

Fourth, Barnes Distribution customer service are back at our targeted range. And with the current integration efforts now complete, the field sales forces are positively reacting, positioning the group for better profitability as we move into 2005.

A final takeaway might be that the startup Associated Spring Monterey, Mexico facility began preproduction during the fourth quarter, and during this quarter, will begin customer shipments for what we call Phase I, which will positively impact future costs and capacity issues for Associated Spring in the second half of 2005.

During the fourth quarter, 3 circumstances adversely impacted profit performance. One was steel price. As we moved into the fourth quarter, we anticipated some level of price recovery or reduction in steel costs as a result of actions we were taking at Associated Spring. But this did not happen.

Second, as we said in October, our service levels within Barnes Distribution took longer than anticipated to recover to the target levels adversely impacting operating results.

Finally, a number of very positive items in 2003 did not reoccur in the fourth quarter of '04. As a result, we took some difficult and necessary actions as we moved into 2005. First, we implemented significant personnel reductions within Associated Spring to help counter the current and future impact of higher raw material costs. Second, with our strong current customer service level and the integration effort completed, we implemented personnel reductions to reflect our operating efficiencies in distribution. Third, we appointed new leadership people within the Company to accelerate the implementation of actions to improve operating results. These actions have positioned our Company for continued sales and operating profit growth in 2005.

Let me briefly review the important steps we took within each business.

In Associated Spring, our effort to continue to convince our key automotive OEM customers to share in steel prices were met with little success, and we have now reduced our workforce to offset these increased costs. The effect on our salaried workforce, which is now complete, reduced approximately 13 percent of the total North American salaried workforce.

While refocusing our domestic Associated Spring operations was an essential step to accomplishing our long-term goals, driving that change is new leadership. Early in the fourth quarter, Greg Milzcik was named President of Associated Spring to lead a renewed effort to improve operating results. Greg was, as you recall, President of Barnes Aerospace, where he successfully let that group's recovery during the commercial aerospace steep downturn during the events following 9/11.

Raw material prices, particularly for steel, continue to affect operating profits as suppliers are exerting cost pressures and worldwide steel supplies remain challenging. We continue to work aggressively with our customers to reach mutually beneficial arrangements through cost sharing and ensuring product availability.

Revenue growth is an important driver at Associated Spring. Associated Spring's revenue grew over 20 percent in the fourth quarter and over 12 percent on an annual basis. Increasingly, the importance of the non-U.S. automakers on Associated Spring's overall business mix has been and will continue to be an important initiative for us. Our success in this effort has resulted in a reduction of the big 3 light vehicle OEM sales concentration on Associated Spring overall business from 35 percent in 1999 to less than 23 percent last year. From a total Company perspective, we've reduced the big 3 OEM sales from 16 percent of our sales to 9 percent of the total Company sales in '04 (ph).

For Barnes Distribution, 2004 was an important year as critical initiatives were completed, providing the necessary supply network for future growth. The current integration of Barnes Distribution involved the opening of large distribution centers reducing the number of distribution centers in North America from 19 to 12 and implementing an expansion of products into another 4 of our major distribution centers.

During the integration, the highest priority was on maintaining customer service level, but the associated costs obviously negatively impacted our reported results. Early in the fourth quarter, as Barnes Distribution targeted customer service levels were achieved and key performance indicators continued their sequential improvement, we were able to do more with less. Workforce reductions, which are now completed, affected approximately 7 percent of the non-salesforce. Further, as a result of the completion of the integration efforts, we were able to reduce our lease obligations, which provided additional integration savings.

As part of our ongoing efforts to improve operations effectively in February, we close the customer-facing operations in our Elizabethtown, Kentucky distribution centers. Our other distribution centers are now shipping those customer orders at lower cost and with better service metrics.

In an effort to provide more intense focus on Barnes Distribution North American operations, which represents over 80 percent of the group total, Idelle Wolf, previously the Chief Operating Officer of Barnes Distribution, was named to lead Barnes Distribution North America. Our 2005 effort in Barnes Distribution will seek to capitalize that anticipated growth in our end-market and support our ability to increase revenues as we reduce operating expense, inventory, and freight cost, resulting in higher operating margins.

Turning now to Barnes Aerospace -- 2004 was a banner year, as we achieved record operating profit, sales, orders, and our highest-ever backlog. Our fourth-quarter momentum positions Barnes Aerospace well for continuing growth as we enter 2005.

Several major factors support this. Volume within the OEM business continues to expand. For example, our participation in the GE90-115 engine continues to look favorable as the Boeing 777-ER and -LR models are now in full production. Military sales are strengthening. And we have broadened our sales coverage and qualified new parts.

Importantly, opportunities within aftermarket business continue to grow. Aftermarket sales now represent 22 percent of the total group sales, compared to only 18 percent a year ago. For the aftermarket, air traffic continues to increase, resulting in increased shop visits.

However, fuel prices are significantly impacting airline profitability. And operators are still deferring some heavy maintenance during shop visits. As a result, demand for components has been slow to respond. But increased volume is expected this year. Also, within the aftermarket, in 2005, we will benefit from a full year of sales for those RSP agreements executed in 2004.

Rounding out our top operational leaderships was the promotion of Patrick Dempsey to President of Aerospace. Patrick had been the Vice President of Operations for all of Barnes Aerospace manufacturing. And prior to that, he was responsible for our worldwide aftermarket operations. All 3 of these key leadership changes came from within the Company.

Each of our business segments has laid out challenging goals for '05 and will maintain its focus to accomplish these objectives. Looking ahead to the full year, as I've said, we believe our positive momentum will continue, and project earnings per diluted share in the range of $1.70 to $1.80. We expect our success in '05 to reflect solid topline revenue growth and expansion of our operating margins across all of our businesses from higher sales volume, disciplined pricing, raw material cost management, and additional operating and expense efficiencies.

As a final note (technical difficulty) adds his financial perspective, I'd like to take this opportunity to recognize and thank all of the Barnes Group employees for their dedication and hard work last year and what I know will be even a greater effort in '05. Bill?

Thank you, Ed. Turning now to Schedule 2, net income for Barnes Group in the fourth quarter was 3.3 million or 14 cents per diluted share. Included in those results were pretax charges of 4.5 million, or 12 cents per diluted share, for actions implemented to offset higher raw material cost going forward at Associated Spring and the realization of benefits from the Kar Products integration, and improved customer service levels at Barnes (technical difficulty) Distribution (ph). These charges include 3.5 million of severance cost, which are estimated to generate annualized savings of about 5.5 million, the 2005 impact of which was about 4 million, 1 million in inventory and facility charges. The charges were partially offset by a 700,000 pretax benefit, related primarily to the reduction of lease obligations on vacant facilities within Barnes Distribution.

Full-year net income was 33.4 million, or $1.40 per diluted share. Results excluding the fourth-quarter charge of 4.5 million were $1.52 per diluted share, reflecting a slight improvement over 2003 full-year results, but certainly below our budgeted performance.

Sales for the fourth quarter were up over 14 percent, reflecting year-over-year organic growth in all 3 operating groups, generating positive momentum as we enter 2005. Cost of sales of 67 percent for the quarter increased at a slightly higher rate than sales. And this was due in part to a shift in sales mix toward our manufacturing businesses, which have higher cost of sales and lower gross margins in distribution.

Total selling and admin expense of 75.7 million for the quarter was flat as a percentage of sales with prior year at 30 percent. However, the 3.5 million fourth-quarter charge related to severance cost adversely impacted this ratio by about 1.4 percentage points.

As Ed mentioned, the 39 percent increase in fourth-quarter operating income, excluding the fourth quarter charge of 4.5 million, was a substantial improvement and is the product of the sound financial fundamentals of each of our operating groups. Results for the fourth quarter were, however, adversely impacted by lower other income and higher other expenses, interest, and the effective tax rate.

Other income was down approximately 600,000, primarily due to the results of our NASCO joint venture, which was impacted by higher raw material costs. Other expenses were up approximately 550,000, primarily due to increased power and exchange losses as a result of the weakening U.S. dollar. Interest expense was up this quarter about 500,000, due to higher average borrowing levels, primarily to fund the DE-STA-CO acquisition, and higher rates.

The full year 2004 effective tax rate was 19.2 percent, down from our prior estimate of 21 percent, and up from last year's rate of 14 percent. You may remember that last year, we had 2 discrete tax reserve reversals in the fourth quarter that brought the full year tax rate from about 19 percent down to the reported 14 percent.

On Schedule 3, I will review the results of each of the businesses, starting with Barnes Distribution, where sales for the fourth quarter of 104 million were up about 6 percent compared to the fourth quarter of 2003. Sales from key growth initiatives there, such as targeted national accounts, e-commerce, and tier 2 relationships were up approximately 50 percent to a bit over 8 million. The Raymond division of Barnes Distribution, which distributes specialty springs, continued a solid performance with a sales increase of over 7 percent.

Barnes Distribution's fourth-quarter operating loss of 1.1 million includes a 2.3 million pretax charge related to severance costs -- of 1.3 million, and inventory and facility charges of 1 million. Excluding this charge, operating profit was 1.2 million or an increase of 27 percent over the fourth quarter of 2003.

Operating profit there was also negatively impacted by increased costs related to strategic growth initiatives, partially offset by benefits related to the reduction of lease obligations resulting from successful subleasing of vacant facilities.

In the fourth quarter, we realized approximately 3.2 million of Kar-related integration savings, bringing the full year total to 11.6 million within our target range of 10 to 12 million. At a result of the initiatives undertaken and completed during 2004 and the planned execution of our critical initiatives in 2005, Barnes Distribution is projecting operating profit improvement in 2005.

Moving now to Associated Spring, fourth-quarter sales increased 16.7 million, up about 21 percent from prior year. Fourth quarter sales growth was reflected in each of Associated Spring's key customer markets, and included 7.2 million related to the DE-STA-CO manufacturing acquisition and 2.6 million from foreign exchange adjustments.

Sales of light vehicle products grew by about 11 percent to 42 million in the quarter. Sales growth to the transplants continued to outpace the overall U.S. automakers. One of our 2005 sales challenges will be within the light vehicle market. Its growth in the first half of '05 is expected to be soft due to higher dealer inventories at the end of '04.

Sales into the heavy truck market were 6 million, a 21 percent increase over prior year and the second consecutive quarter of at least 6 million. Demand for heavy trucks continues to look favorable as we move into 2005. Importantly, the nitrogen gas spring business ended the year very strong, with sales increasing over 17 percent to 20.2 million for the quarter. This growth is due to product enhancements and additional sales penetration, and we expect the momentum to continue in 2005.

Industrial product sales at Spring were up a solid 35 percent to 26 million, driven by success in our reed valve product line.

Finally, telecom and electronics sales increased approximately 13 percent to 3 million for the quarter. The electronics end-market continues to improve, and we are well positioned to capitalize on the rapid growth of high-brightness LEDs, or light-emitting diodes, and the new technologies within the cell phone market, as our manufacturing capabilities are well aligned with the newest generations of phones and some of their internal components.

Associated Spring's operating profit in the quarter was 3.3 million, compared to 5.1 million reported in the fourth quarter of '03. Included in the fourth-quarter results were pretax charges of 2.2 million for severance cost. Excluding this charge, operating profit was approximately 5.5 million, an increase of 8 percent over the fourth quarter of 2003 driven by the higher sales volume. Associated Spring results were also adversely impacted by approximately 2.6 million related to increase raw material prices. I should also note that we will be negotiating labor agreements in the first half of '05 at certain Associated Spring locations, and any resulting cost increases or labor actions could negatively impact 2005 operating results.

Moving on now to Barnes Aerospace, the fourth quarter wrapped up a tremendous year as we achieved full-year record sales of 206 million; record orders of 254 million, significantly surpassing our goal of 200 million; and our highest-ever backlog of 194 million. The fourth quarter alone generated a record operating profit of 5.5 million and near-record sales of 51.4 million, an increase of 19 percent from the fourth quarter of '03. Aftermarket sales in the fourth quarter of 12 million were up 72 percent. In the same period, OEM sales were up 9 percent to 40 million. The sales from the GE90-115B engine were at the highest level since the program began.

Fourth-quarter orders were 71.5 million, up 66 percent from 2003 -- included military orders were the strongest we have seen in a quarter at 24 million. As part of our aftermarket operations, we signed an additional RSP agreement during the fourth quarter, to which we committed a participation fee of 21 million. We've now committed a total of 98.5 million toward RSPs and paid out nearly 50 million. The remaining payments will be made during 2005. All the payments we've made to date have come from cash held outside the U.S., and we expect our future payments will be, as well.

The RSP agreements provide exclusive rights to distribute spare parts in a particular family of engines for the remainder of that engine's life. These agreements continue to provide a strong level of return and are performing in line with our expectations and remain an excellent investment of our capital. And in 2005, as Ed mentioned, our aftermarket business will benefit from the full year impact of those agreements that we signed in 2004.

Barnes Aerospace operating profit in the fourth quarter of 5.5 million compared to 3.4 million in '03. An significant improvement was driven by higher sales volume and increased percentage of aftermarket activity. In 5 (ph), we will look for continued improvements in operating profit from Barnes Aerospace.

Turning to Schedule 4, our capital expenditures for the quarter were 7.1 million, bringing our full year total to 28.5 million compared to 18.4 million a year ago and in line with our full year projections. The year-over-year increase was primarily driven by growth investments in the Gainesville (ph) distribution facility and the Associated Spring Monterey, Mexico facility.

Let's turn now to schedule 5. I'd like to make a few comments. Our cash flow for the year and balance sheet at year-end remained very strong. We generated over 54 million in cash flow from operating activities during 2004 and, as you can see, ended the year with 36 million in cash. And this is after RSP payments during the year of 32 million. The Company's ability to generate cash from operations in excess of its internal operating needs remains one of its financial strengths.

Our gross debt to capitalization ratio was 44 percent, within our targeted range of 40 to 45. Our debt to EBITDA ratio was 2.7 times versus the debt covenant of 3.25 times, giving us additional borrowing capacity of over $50 million. As a result, we continue to feel that the balance sheet is well positioned to support near-term growth initiatives.

4 other key financial metrics for 2005 -- 1, an expected average total company tax rate in the mid-20s. Our tax rate is depended upon the mix of business between domestic earnings and international earning. And our 2005 tax rate is projected to increase due to an expectation of higher content of U.S. pretax profit. Number 2, maintenance of our gross debt-to-cap levels was in the 40 to 45 percent range.

3, projected capital expenditures in the range of 30 to 33 million, with expected depreciation in about the same range. The projected year-over-year increase in CapEx is primarily due to additional investments needed to increase capacity. The estimated amortization of intangible assets is projected to be 3.5 million in 2005. And 4, an anticipated level of diluted weighted average shares for the year of approximately 24.5 million compared to the full-year 2004 level of 23.8 million.

I'd like to take a minute and comment on the FASB-issued Standard Number 123-R relating to share-based payments. Currently, the Company grants stock options and discloses the pro forma effect of the related compensation expense under Standard 123 in the financial statement footnotes. Under standard 123-R, the Company will be required to record this compensation expense in its results beginning in the third quarter (technical difficulty) 2005 (ph). While we are currently evaluating the transition alternatives and the effect of this statement on the (technical difficulty) expect (ph) that the impact upon adoption will be dramatically lower than amounts previously disclosed in our SEC filings as a result of expected changes in the structure of equity-based awards.

As a final comment, let me mentioned that our Sarbanes-Oxley 404 compliance effort was successfully completed at year-end. Thank you. I will now turn the call back to Brian.

Thank you, Bill. We will now open the call to your questions. We ask that you limit your (technical difficulty) question and 1 follow-up so that as many individuals as possible have an opportunity to ask their question. Operator, the first question, please?

(Operator Instructions). Matt Summerville, McDonald Investments.

A couple of questions. First, in terms of your raw material cost outlook '05 versus '04, Ed or Bill, can you kind of talk about what kind of increase you're budgeting for, and then whether or not that 5.5 million you feel will fully or more than offset that incremental impact, first and foremost -- the 5.5 million being the cost savings you expect.

Let me respond to that, Matt. We are obviously still in negotiations -- a bit of a moving target. But the outlook for '05 would be in the range of 2 to 3 million of incremental costs from higher raw materials compared to the roughly 5 million that we took the hit on in 2004. And certainly that's a number well below the overall savings range we mentioned of 5.5 million.

Okay.

The 5.5 million, Matt, was also included both -- Associated Spring impact as well as Distribution. So we tended to think about those in 2 buckets. Second thing is that the 5.5 was an annual number, which we, because we implemented those changes in January, will not be the total we're looking at between 4 and 4.5 for the total year (multiple speakers) for the year -- total year '05.

Okay, got you. Out of that 5.5, do you have a relative split between Spring and Distribution, Ed?

Sure.

It's roughly -- about 3 million Associated Spring, and a little over 1 million at Distribution.

Okay. And that's for '05?

Yes.

Perfect. And then, onto Aerospace -- what do you expect out of your OEM business in '05 versus '04, excluding the GE-90 in terms of underlying growth?

Okay -- are you looking at it in terms of sales, Matt?

Yes, you know, production schedules -- or excuse me, delivery schedules look up to be about 10 or 12 percent. Should you perform in line with that, outperform it -- again, ex the GE 90 -- and maybe put some color as to why or why not?

One, clearly we expect that the 115B to be an outlier in our sales growth. There are a couple of other programs that are down. But, overall the rest of the sales should grow at approximately the number you've quoted. We've got a few programs that are phasing down. But in general, we continue to see the guys doing a great job there. I think overall, we're very pleased with that it.

Okay, and then 1 more question and I'll get back in queue. The revenue growth in distribution, outside of the initiatives you highlighted, looked rather light in the sense that you would expect given where we are in the cycle that you guys would be seeing a stronger ramp in revenues.

When should we actually see that? I mean, have we missed the big opportunity? If you look at industrial production, we're kind of at all-time record levels. I guess I'm trying to get a feel for what your revenue outlook is for that business next year. And then maybe if you can talk a little bit about pricing trends, as well --?

We saw, during the fourth quarter, as the service levels -- it's one thing to improve the mathematical number of the service levels. It's another thing for the guys in the field to see it and to recognize it. But we saw nice improvement as we moved through the fourth quarter and continue to see those kind of -- those sales ramp-ups in the first quarter.

I would say that we expect to continue to see that move forward in the first quarter. Our sales base in general is not necessarily only driven by the industrial production but other things like automotive, retail, and so on. As you know from prior discussions, construction is not a big piece of our business. But we continue to feel very good about the momentum we're having, the service levels that we have, and the order rate and average order size that we're seeing.

Yvonne Varano, Jefferies & Company.

Particularly with Distribution, I just want talk about the margins there a little bit and what the expectations might be for '05. I know at one time, we had talked about a number -- 8 percent. Is that more of an '06 event, and where do you think we come in in '05, because looking at fourth quarter, that seemed a little bit disappointing after we've talked about all these initiatives to integrate Kar being behind you.

Yvonne, the 8 percent in my view is a bit on the high side for '05. We certainly expect a significant improvement in '05. And I would peg it somewhere in the 5 to 7 percent range. That's certainly an improvement over '04.

Okay. And then on the Aerospace, I know you talked about military orders coming in strong in the fourth quarter. What was driving that, and is that something we expect to continue?

Well, one of the things is, it was very broad-based, which we were very pleased about. So those of you on the call may recall that in '03, we had a couple of big programs from TACOM and others that really drove our military sales. But this is much broader-based, both land as well as air products. And that's where were very happy about it, because it reflects a broader initiative and gives us a better balance and not so dependent on 1 single program.

Is that something that you think is going to continue in '05?

We're continuing to invest in that area, both in terms of our application engineering, our calling on the customer, as well as making submissions on products that are existing in production right now. So we view this as part of our major strategic thrust in Aerospace to get a better balance between OEM commercial, military, and importantly, the aftermarket, which includes both military obviously and commercial. But we 5 or 6 years ago were way, way too dependent on OEM commercial airplane production, whether that be engines or the actual airframes themselves. And this is what you can expect us -- to continue to focus on a balance there.

Okay, so most of this has really been driven by company-specific initiatives as opposed to any change in the market?

Exactly, although I would report to you that it's not exactly a receding tide.

Right. And then (multiple speakers)

But if it were a receding tide, we would still be focused on trying to get that balance. So your question is right on.

And then just 1 other quick question. I was wondering what had changed from the time that you had sort of preannounced your expectations for 4Q and the end of the quarter that might have been a bit different from your expectations?

First off, Yvonne, the fourth-quarter charge -- as you know, in the press release during December, we talked about 14 cents -- came at 12. That was an estimate we made in December. And it was refined and actually turned out to be 12 cents. And I think we also saw some pretty solid growth -- sales line, Associated Spring. Those would be the 2 items that would stand out.

Karl Oehlschlaeger, Banc of America Securities.

A question on Aerospace. I wonder -- maybe I missed it, but can you talk about the growth rate you saw in commercial OEM and commercial aftermarket, both -- and I guess stripping out the RSP impact as well in the fourth quarter?

One of the things about the way in the aftermarket that we look at that business, Karl, is it tends not to drive as much sales topline growth as it does profitability. But if you look at our order backlog or our key sales in OEM, we continue to see a pretty good growth rate in all of our customers except for a couple of what I will call tier 2 customers. I'm trying to find -- I don't really have a number at my fingers that I could do ex GE-90 for commercial. But we can get that for you. Brian will be more than happy to do it.

Karl, just overall terms, we said the aftermarket, which includes RSP, was up 72 percent. And the OEM side was up 9 percent in the quarter.

And looking into '05, what sort of aftermarket expectations do you have baked in?

We would expect -- not 72 percent, but we continue to see a number of factors, both in terms of teardowns on engines improving during the year versus '04, as well as a full year of our aftermarket our RSPs will bite (ph) for us. So we would continue to see that part of the business along with military as being the faster-growing segments for us.

And then just real quickly on the military side, can you comment at all on the supplemental and how we should think about that impacting you guys and your guidance?

I think because -- you may recall a minute ago, I spoke about the broad-based nature of our military. And yet, we're such a small piece of it that we don't believe that the rising tide or the lowering tide is going to affect our military sales as much as our effort in focusing on that and our successes, which I think the guys have done a terrific job last year. And we expect to continue to do it.

So we would look for those kind of increases to continue during '05. We have not -- if anything, we've increased our investment in marketing and in product engineering in that area.

Peter Lisnic, Robert W. Baird.

Quick question on Associated Spring. If I look at the numbers that you've posted, it appears as though you're gaining traction on the transplant front and not just because the OEMs here are getting traction. It looks like you are gaining share, for lack of a better phrase. Can you just talk about what kind of initiatives or what kind penetration you're getting at OEMs, and how you're capturing some share there?

First of all, I think that as you probably know -- as I know you know, most of the portion of the automotive that Associated Spring works in tend to be long, long, long, long leadtime items, so that I think that improvement at Honda, Nissan, and Toyota are really reflections of what we have invested in over the last 2 or 3 years.

For example, we saw our total sales for the big 3 went down year over year in '04 -- only 1 percent, but clearly not the same way as they went down in production. But our transplants -- our sales maintained traction there, and we were about 10 percent increase in sales volume, year over year. So --

If that's the general trend and if it's a longer tail, I guess, looking to '05 and maybe into '06, then, is it safe to assume that you kind of get that long tail continuing, meaning that you kind of outgrow what we'd see in production numbers for transplants?

Yes, although you've got to watch the total balance. They're still -- the big 3 is still 3 times -- about 3 times our sales to the transplants. But as you were observing, the rate of change is growing. And for example, the first customer that we will be shipping this quarter out of the Mexican facility is a transplant.

Okay. And if I look at profitability for that business, if I strip out kind of the raw materials impact and the charges that you had in the fourth quarter, it looks like profitability was as good as it's been in several quarters, I guess. And when you look at historical profitability, we've gotten well into double digits. How do you think about profitability heading into '05 and maybe longer-term versus kind of the numbers you've put up in 2000 or earlier?

First, I wish you were in the compensation committee meeting of Barnes Group to strip out those costs. That would have been very helpful.

Realistically, your observation is correct. And I would echo that we see longer-term profitability in what I will call the non-big 3 as really being more attractive. And it isn't that we don't like that business. It isn't that we haven't been in it for a long time, but that we continue to believe that as we look around the globe at opportunities for Associated Spring that have long-term implications, we see the profitability -- because of our relative market position and our size and our purchasing power, which sounds funny to say in the middle of a steel price crisis -- sounds difficult -- but in fact, is we feel very good about it.

(Operator Instructions). Matt Summerville, McDonald Investments.

A couple of follow-ups on Aerospace. Ed, can you remind me -- does your backlog typically ship in 12 months?

Generally is 12 to 15 months, Matt.

All right, so if you look to your backlog of about $195 million, that does not include anything from aftermarket, as I recall. So are you basically looking for topline growth in Aerospace in '05 via '04 pretty similar to what you had this year -- in the high teens kind of range?

That's a fair assumption, yes.

Yes, one comment I might make which will be in the backlog not yet -- not in the backlog numbers you see, but in those that we will report for the first quarter of '05. Because of the extended leadtimes for certain raw materials, we -- the OEMs, primarily on titanium, have started to give us longer leadtimes. But we'll identify that for you at the end of the first quarter so it isn't a number that isn't transparent to you.

Okay, so maybe the usual 12 to 15 gets extended a bit, but not anything (multiple speakers)

Yes, and in specific categories. I think in some cases, they were going from 45 weeks to 60 weeks and things like that.

We are, as I said, capturing that, Matt, so we can identify it.

Okay, and then do you see any raw materials shortages outside of what you just said in Aerospace, either for the high-grade spring wire you buy for Spring or on the faster (ph) side in distribution?

I would say to you is that we are spending a lot of time worrying about the specialty steel area for Spring. And our focus is not only on the spring wire itself, but on the rod that is used to make that. And we monitor it. And we've got people that are spending a lot of time -- we're talking to our larger customers about trying to lock in the positions on that, because we believe that's an issue you've got to worry about. And we've been talking to them about 6 months about that.

Second point would be is -- I think in Aerospace, you've got to watch the titanium market which, in some cases, is not an issue for us, because our customers negotiate either for forgings or castings. And then we add values to that product. But in the case of sheet, we have to be very mindful of that. But so far, so good on titanium.

Okay, and then question on both the fourth quarter and '05 in Spring. How much pricing, if any, did you get in your auto-related businesses versus your non-auto-related businesses?

We've got overall probably 0.5 percentage points in Spring in the fourth quarter -- in '04, I should say. And virtually all that came from the industrial accounts. A minor portion from sort of tier 2 or 3 automotive.

Okay, and then within your guidance that you laid out today, are you assuming you get any price relief, either via an increase or a lower price concession than what you originally expected in your automotive-related business?

We do expect progress versus '04 and '05, probably in the second half. And the number I gave you was a net number in terms of after any increases we are able to push through.

What number? The 2 to 3 million?

Yes.

Okay, so that is a net number.

Yes.

Okay.

The other thing I'd mention to you, which you brought up in your question is what are called cost-downs or demands by the (technical difficulty) whether it be in Aerospace or in automotive. And we're obviously using their lack of dealing with our price issues in steel as a reason not to do traditional cost-downs. So when Bill talks about a net number that had some impact there.

Third, you ask -- you mentioned fasteners for distribution. We've really attacked that on 2 fronts. One is domestic, and that continues to be an issue as their demand has gone up and their steel prices have gone up. But further to that, we -- by establishing a Far East purchasing office, we think that during this year, we will see a dramatic shift in where we're buying some of that product.

Okay, so you don't expect as much of an impact, obviously.

No, but we're really watching it.

And then what are you guys thinking as far as pension expense '05 versus '04?

On a global basis, Matt, we're looking at an increase of about 0.5 million versus last year, which would take us to about 1.5 million of expense in '05.

Okay. And then in nitrogen gas, that business came back pretty nicely in Q4. Can you talk a little bit more specifically about what transpired and why you feel good that, in fact, the third quarter was just a blip and that trend is going to continue?

Well, number 1 is I think that we were surprised -- I think everyone was surprised in the third quarter, because this is a product line that we continue to see increasing as it replaces the traditional mechanical springs. We've talked about that. We saw some cutbacks, particularly in Europe, by major tooling programs and by a renewed -- if I can term it "watchfulness" on the part of replacement nitrogen gas products that are used as the initial set is worn down. That demand came back.

I think it will be very important to see how our first quarter in 2005 works out. And to that extent, we saw an improvement as we entered the first half of the first quarter, but not at the 17 percent. So we will watch that carefully and report it.

Okay. And then last, just on Spring, if you look at the anticipated net increase in raw materials, largely offset, if not maybe a little more than offset by cost savings. You know, your pension will have a little bit of a negative impact on the business, I'm sure, as you mentioned. But realistically, how much margin expansion is really in the cards for you guys in Spring in '05 versus '04 before taking into account the negotiations I think Bill mentioned?

That was a good question. I think one of the things that in the next 2 months we'll know where we are on our big negotiations. And we'll also get a better view of where we are on our steel price increases. We've got a pretty good idea of where we are probably going to land on the price increases to the OEMs. Again, that's not as important as our broader-based customers.

So I still think we're optimistic about margin expansion -- clearly, not back to some of the historical highs, but back to a location that would put us as a good, strong manufacturer with good margins. But we'll have to see on those 2 items that you identified. And it's not like we're not going to figure that out until September. We'll know April, May, June.

Okay, and then -- actually, this will be my last one. Bill, when will we have more color on the anticipated options expense? Is there any sort of round number or thought that you could give us initially there?

We're still looking at it. But it's, as I said, going to be significantly below the sorts of numbers we've had in our footnotes. We don't really have a number for you yet. But it will be certainly in the mid to low single digits.

Mid to low single -- what he meant was pennies per share, not -- I think we reported in our footnotes 19 cents.

It was 18, 19, something like that, yes.

Yes, and it's nowhere near that.

Holden Lewis, BB&T Capital Markets.

Just trying to get the math right on the raw material cost. I guess you exited the year at a run rate of 2.6 million in terms of the hit. If you annualize that and then you subtract kind of the incremental hits over the course of the year, don't I come up with something more like a 5 million incremental cost hit in '05 versus -- I think you said 2 to 3 million? Are you assuming that you get some price increases, or what's in that number?

Holden, exactly -- we are assuming that we're able to push through some increases we weren't able to get last year. And that brings it down to the number that I quoted.

-- which Bill called a net number, Holden, not a gross.

Okay, and those increases are -- maybe they're not finalized yet but you're far enough down the path that you have a high degree of confidence that they're going to be there, or they're already there? Or are you just -- or is it sort of a speculative -- (multiple speakers)

I think lawyers use the term "more likely than not."

Okay, okay.

I don't mean to be cute with you on it. But these things are really a subject of a lot of negotiations. And it's not -- the big thing that we see is that the big 3 have, I think, decided they have bankrupt enough suppliers, and they're going to have to deal with people.

Okay, okay. And can you just comment -- I may have missed this but, what do you expect the tax rate in '05 to be?

We said the mid-20s, Holden. And that's a function of expected higher pretax income in the U.S. versus offshore in relative terms.

Fair enough. And then, your share count was pretty flat over the course of the year. Why did it step up significantly in '05?

I don't know that it goes up significantly. But it's things like contributions of shares -- for instance, the 401(k) incentive comp in its various forms, would make it move up each year.

Okay, did you have less of that in '04? Only because, like I said, from Q4 '03 through all four quarters of '04, it really didn't budge from 23 8, 23 9, and now it is stepping up. Is there something different?

We actually during '04 for most of the year were contributing cash rather than stock to the 401(k).

(multiple speakers) But it's not a big -- the change that Bill foreshadowed for you is not a big deal (multiple speakers) diluted shares tend to get more impacted by share price than a lot of other things.

And there's -- in your guidance, there's no assumption whatsoever about the end game for the labor negotiations?

I think the assumption is that we don't take a major strike or have any crazy results.

And what about, just, you know --

It includes what we would call normative results.

Okay so there's some assumption of higher labor cost, but that's standard?

Yes, it would be no different than what we assume for salaries, labor, wages, and benefits. But it doesn't assume either a strike or a huge change in benefit positions, because frankly, it makes it difficult to have a U.S. manufacturer -- well, you all know the drill. It's just getting more and more difficult to explain to yourself why you have claims (ph) in high-cost labor situations.

And then, just last thing -- I guess sort of more of a big picture thing for you, Ed, is when you came on at Barnes, I think the Company had done a lot of cutting out the SG&A and cutting out the R&D and the engineering and things like that in response to continue -- sort of cost of goods or gross margin pressure. And I guess I'm just a bit concerned that you see some of similar shades taking place in the Associated Springs business now, where raw material costs go up, raw material costs go down over the course of cycles, but the reaction here really is to start whacking away at heads. I mean, any risk that we cut into some of the good meat here that allows this business to grow in the name of trying to offset the raw material costs? I mean, strategically, where do we place this?

First of all, I think if you look at our strategic initiatives to grow the business where we're growing it, whether that be evidenced in the amount of money we're spending to start up a second facility in Mexico, which is an important initiative -- and that not only contains headcounts, but contains -- particularly in the first quarter, will contain real dollars of investment. The accountants say we expense it, but they are really investment dollars.

Second thing is I'd say if you looked at most of the classification of the folks that we cut, they really were in what I would call administrative, or in some cases, in some of the selling opportunities where we didn't think we wanted to continue to invest the dollars. So I think I felt very good about the balance of where we took the costs out. But clearly, we had let a number of areas build up hoping for returns. And where we're really getting the returns today are in, as we've said a number of times, the non-big 3. So if you look at, for example, your sales force that you're putting on and your application engineer that you're putting on something that continues to be a less and less vibrant part of your business, you are more likely to put into nitrogen gas, to reed valves and so on rather than just into build-to-print products for the OEMs.

So I think -- I feel very good about. I don't think we have -- I think we took out some fat. Did we probably get a little meat? Maybe we did, maybe we didn't. But I can assure you we didn't get any bone, which was the problem. We're still well above -- in terms of sales marketing, we're still well above the levels in I'll call our traditional spring market than we were 6 years ago.

All right. Thank you very much. If there are any questions about the matters discussed this morning, please feel free to contact the Investor Relations department. And thank you again for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Have a wonderful day.