Barrick Mining Corp (B) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Barnes Group third quarter 2005 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. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, 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. Please proceed, sir.

Good morning and thank you for joining Barnes Group's third quarter 2005 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 Website.

I would also like to note that on today's call, certain non-GAAP measures related to the Company's performance for the year-to-date and third quarter of 2005 is discussed. Reconciliations to these measures are provided in our third quarter 2005 earnings press release and financial conference call slides. These reconciliations are available on the investor relations section of the Barnes Group Website at BarnesGroupInc.com. Now let me turn the call over to Ed. Ed?

Good morning. If we could turn to schedule 1, I would like to review the highlights for the record third quarter in 2005. First point is that it's the 11th consecutive quarter of double-digit revenue growth. Our growth remains solid even in the wake of some disruptive macroeconomic events which we will discuss later. We had balanced and stronger results across all three businesses with progress that is expected to be sustainable. Third, we completed a successful $100 million convertible debt offering with a net share settlement feature at the end of July. And we had a 42% adjusted net income growth with EPS of $0.55 per diluted share.

Turning to schedule 2, key takeaway in each segment includes, first of all, Barnes distribution. Two nice bolt-on acquisitions -- Toolcom in the UK and Service Plus in the USA -- will provide additional top and bottom-line future growth. Service metrics and distribution costs continued to be favorable. A drive to increase the average order size is positively impacting both our freight and operating costs in North America.

At Associated Spring, specialty operations, which we term to mean include nitrogen gas spring products, Seeger-Orbis retaining rings and precision valve, continue to generate substantial revenue growth and profits. These operations have global competitive advantage and offset our domestic legacy spring business. Precision Spring is seeking to further enhance its profitability through organizational efficiency initiatives, primarily moving product from high-cost facilities to Brazil, Singapore, and to low-cost domestic facilities. Finally, through the first three quarters of 2005, Associated Spring operating profit has exceeded 2004 full-year results already, and the organization continues to be firmly focused on profitability.

At Barnes Aerospace, we garnered significant tax breaks through Pioneer status in Singapore for our current and, importantly, our future operations. We expanded the aftermarket RSP programs into the CF 6 program, and our aftermarket continues to provide very strong financial results.

Third point -- we're making good progress on new engine programs, including the GENX engine, where we have already secured content of approximately $250,000 per engine, which further strengthens our strategy of end-market diversification.

Before handing it over to Bill, as a result of substantial progress in improving operating results this year, we are increasing our outlook for the year to $2.15 to $2.20 per diluted share. These numbers exclude the onetime benefits of the gain on the sale of NASCO, prior year retroactive Singapore tax benefits, and the positive out-of-period adjustment relative to accounts payable. A detailed reconciliation has been provided in our press release.

Looking ahead for continued improvement in the last part of the year and in 2006, we will need to successfully add capacity by transitioning Aerospace RSP manufacturing from U.S. to Singapore operations; two, effectively execute the streamlining of certain Associated Spring production from high-cost facilities into Brazil, in other cases Mexico and Singapore, and low-cost domestic facilities.

Associated Spring also needs to continue to focus on improving the operation effectiveness of its legacy domestic spring operations. We need to make sure that we integrate Barnes Distribution's Toolcom and SPD acquisitions and further realize the benefits of Barnes Distribution global purchasing initiatives.

With that said, let me turn it over to Bill.

Thank you, Ed, and good morning, everyone. I'm pleased to report to you today another quarter reflecting strong operating performance for Barnes Group.

As I begin, I would like to discuss certain items in the third-quarter results that should be viewed as retroactive or out of period. This should help you in comparing our year-over-year results.

The most significant item was the designation of Pioneer status by the Republic of Singapore for the production of aircraft turbine engine components for original equipment manufacturers and for the spare parts market. The retroactive tax benefits associated with this include approximately 1.5 million, or $0.06 per diluted share, for the periods prior to January 1, 2005.

For the first half of 2005, the tax benefits were an additional 1.1 million, or $0.04 per diluted share. So, there was a total retroactive tax benefit of approximately 2.6 million, or $0.10 per diluted share, recorded during the quarter.

Also during the quarter we identified and recorded a 1.8 million pre-tax adjustment to accounts payable and cost of sales at Barnes Distribution. It was determined that the cost of sales was overstated in prior periods due to minor inaccuracies in recording certain inventory receipts from 2002-2005. The after-tax impact of this positive adjustment was 1.1 million, or $03.05 per diluted share. Excluding these items, operating income adjusts to 20.8 million from 22.6 million, and net income adjusts to 13.7 million from 17.4 million, generating an adjusted EPS of $0.55 per diluted share versus the recorded $0.70 per diluted share for the third quarter. A detailed reconciliation of these items is provided in our press release.

Now turning to schedule 3. Third-quarter sales growth of 11% included about 3% acquired growth from our Barnes Precision Valve business, formerly known as DE-STA-CO, and from Barnes Distribution's Toolcom acquisition. In addition, there was an approximate 1% related to changes in foreign exchange rates.

For the sixth consecutive quarter, each of our three business segments had solid organic growth. I will go into more detail on sales when I discuss the results for each business in a few moments.

The benefits from our double-digit sales growth were compounded by a 1.3 percentage point improvement in adjusted gross margin, as the cost of sales improved to an adjusted 64% from 65.3% in the prior year, with reductions in all three businesses. Selling and administrative expenses as a percent of sales improved slightly from the prior year to about 28%. As a result, adjusted operating income of 28 million increased 36%, with an increase in operating income margin of 140 basis points to 7.7%. Interest expense of 4.4 million was up about 17% due to an increase in the effective borrowing rate and higher average borrowings, which were up 15 million in the third quarter as the result of increased working capital needs, driven by higher sales.

As Ed mentioned, we successfully completed our 100 million 3.75% senior subordinated convertible debt offering during the quarter. The offering was structured in a manner that limits current shareholders' dilution by providing a net share settlement feature. The proceeds were used to pay down debt outstanding on our revolver. This offering significantly increases the fixed-rate portion of our outstanding debt, moving it from 56% pre-offering to 90% at quarter-end.

Turning to schedule 4. Year-to-date effective tax rate is approximately 24% and includes the impact of a number of retroactive and out-of-period items. The adjusted current year rate is about 20%, down from the 24% we projected last quarter due to the current-year impact of the Pioneer status in Singapore. Average diluted shares outstanding increased by approximately 4% to 24.7 million. The projected weighted average diluted shares for the year is about 24.5 million.

Our capital expenditures for the quarter were 6.7 million compared to 4.5 million a year ago. Capital expenditures for the full year 2005 are now expected to be around 25 million, lower than previously anticipated due to a push-out of certain projects into 2006. Capital expenditures continue to be focused primarily on investments needed to increase capacity. Depreciation should be around 30 million for the year. The estimated amortization of intangible assets is projected at 3.6 million in '05. This number has increased due to recent acquisition and aftermarket RSP activity.

Turning to schedule 5, I will review the results of each of the businesses, starting with Barnes Distribution, where sales for the third quarter of 114 million were up about 7%, including 2.1 million, or 2%, from the Toolcom acquisition and 900,000, or 1%, from currency changes. Distribution sales growth continues to be driven by our corporate accounts and Tier 2 initiatives which generated sales of 23.1 and 4.5 million, respectively, in the quarter. This represents growth of 10% for corporate accounts and 39% for Tier 2.

Barnes Distribution's adjusted operating profit was 6.8 million, up 17% from 5.8 million in 2004. The adjusted operating margin for the third quarter was 5.9%, up from 5.4% last year. This improvement came from the higher sales volume and improved gross margins which were driven by higher selling prices, cost savings and operational improvements, partially offset by increased product and sales personnel costs.

Barnes Distribution continues to make progress in reducing its logistics costs, which were down about 12% from last year and have now declined for seven consecutive quarters. The continued reduction is the result of improved fill rates, increased average order size, and continued operational improvements within the distribution centers.

For continued growth, Barnes Distribution will pursue the necessary investments in strategic sales initiatives, operational improvements and global sourcing capabilities. Year-to-date, Barnes Distribution's adjusted operating margin is 5.7%. The full-year 2005 adjusted operating margin is expected to be around the same level, up from 3.2% in 2004.

Moving on to Associated Spring, the focus there is on improving profits, growing high potential businesses, improving underperforming domestic legacy operations, and generating profitable new sales. The third quarter reflects continued progress toward these objectives.

Our specialty operations, namely nitrogen gas products, Seeger-Orbis retaining rings and Barnes Precision Valve, continued their strong profitable growth during the quarter. Precision Valve will be moving forward with plans to streamline its global operations to be more cost and customer-focused. It will maintain its roots in North America to be near critical customers and expand its low-cost centers in South America and Asia and increase its presence in Europe.

Associated Spring sales of 100 million were up 14% from prior year and reflect strong growth in the specialty operations, particularly of nitrogen gas products, which saw sales increase 37% to 21 million as a result of solid activity in Europe and Asia. Acquisition-related sales were an incremental 6.1 million and the foreign exchange impact was a positive 1.5 million at Spring.

Looking closer at some of our key sales categories, we experienced 14% growth within our transportation category, as well as 4% growth in industrial products sales, primarily driven by acquisition. The increase in the importance of specialty operations to Associated Spring's overall business mix has been and will continue to be an important strategic initiative. Our success in this effort has resulted in a reduction of the Big Three direct light vehicle sales concentration on Associated Spring's overall business from 35% in 1999 to 19% in the third quarter. This translates to a reduction from 16% to 7% of total company sales.

Additionally, as we continue to penetrate and further diversify our customer base, single-customer events are less likely to materially impact operations. A recent example of the benefits of our diversification strategy is our limited and immaterial exposure to the Delphi bankruptcy filing. We do continue to monitor our customer base and supply chain very closely to mitigate the potential effects of customers that are in financial distress.

Associated Spring's operating profit in the third quarter was 6.6 million compared to 4.3 million reported in the third quarter of 2004. This 55% increase was driven by the profit contribution on higher sales volume, including the Precision Valve business acquisition, partly offset by higher-than-anticipated domestic operational costs. We also continued to make progress on our price improvement strategy and significantly mitigated the effects of increasing raw material costs during the quarter. Associated Spring's operating margin for the third quarter was 6.6% compared to 4.8% in the third quarter of last year. Year-to-date, Spring's operating margin is 8.3%. For the full year we continue to project an operating margin of about 8%. Regarding the ongoing negotiations between UAW and Associated Spring, both sides continue to discuss the key issues in an effort to reach settlement.

Turning now to Barnes Aerospace, which continues to generate strong top and bottom-line growth. Third-quarter sales of 59.3 million were up 15% (ph) and operating profit at Aerospace improved 36% for a very nice drop-through. OEM sales for the third quarter were up 9% to 45 million, including sales from the GE 90 engine family of 11 million, which grew approximately 22% from a year ago. Commercial sales were 31.3 million, military sales were 10.6 million, and industrial gas turbine sales were approximately 900,000 for the third quarter.

Barnes Aerospace orders for the quarter were 69.8 million and backlog increased to 255.7 million, of which about 70% is scheduled to ship in the next 12 months. Commercial orders of 35.9 million were down from a year ago, which we see as an issue of timing and not of concern. Commercial backlog of 185 million was up 34% from prior year.

Military orders in backlog in the third quarter were up significantly to 16.7 million and 65 million, respectively. Aftermarket sales increased 36% to 14.4 million for the quarter, including MRO sales of 10.3 million and aftermarket RSP sales of 4.2 million. As previously announced, we entered into an additional aftermarket RSP agreement during the quarter with a participation fee of 17 million. These aftermarket RSP agreements continue to be a good addition to our Aerospace portfolio and provide excellent returns. (indiscernible) of the RSP agreements we have now committed 134 million of participation fees and paid out approximately 90 million. The balance will be paid out over the next three quarters.

Barnes Aerospace has now produced consecutive growth in operating profit for eight quarters. The third-quarter results reflect a 36% increase from a year ago with record operating margin of 12.6% compared to 10.6% last year. This improvement was driven by higher sales volume and the increased percentage of aftermarket activity, primarily in Asia, and by operational improvements from Six Sigma and lean manufacturing initiatives. Year-to-date Barnes Aerospace operating margin is 11.7%. For the full year we're now projecting it to be about 12%.

Turning to schedule 6, cash was 32 million at the end of the quarter. The gross asset capitalization ratio was 42%, within our targeted range of 40 to 45. Our trailing 12-month debt-to-EBITDA ratio was 2.4 times versus a debt covenant of 3.25 times, giving us additional borrowing capacity of about 100 million. As a result, we continue to feel that our balance sheet is well-positioned to support near-term growth initiatives.

So, in summary, we are pleased with our third-quarter and year-to-date results which reflect consistent and steadily-improving operating results in each of our businesses.

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 yourself to one question and one follow-up so that as many individuals as possible have an opportunity to ask their questions. Operator, the first question please.

(OPERATOR INSTRUCTIONS). Robert Stallard, Banc of America Securities.

I've just got a couple of quick questions for you. First of all, Ed, you talked about the ongoing efforts in Associated Spring to move production to lower-cost countries and improve the profitability in North America. I was wondering if you could touch on some of the expected financial implications for this. Are there going to be restructuring charges, for example? What do you think the underlying improvement in profitability could be?

Why don't I talk a little bit about what we are trying to get done in more specifics, and I will let Bill comment on the financial aspects, Rob. A couple of very specific things we're trying to do is we have announced inside of Precision Valve that we will be closing an operation in Southeast Michigan and transferring that work to a number of facilities that we had always contemplated as part of that acquisition. We leased that facility for only two years from the original owners, and it was contemplated that if things progressed as we had hoped that we would be able to relocate that production out of an expensive Southeast Michigan facility to lower-cost domestic and also, importantly, to South America and Far East facilities. In addition to that, we will be moving product, particularly newly-sourced product in Associated Spring, into the Mexico operation as we start up the second line there. Bill can comment on the financials.

Rob, we are expecting to take a P&L charge related to the move Ed is talking about of roughly 500,000 this year in the fourth quarter and somewhere in the neighborhood of 1 million or so next year.

And that about 500,000 charge is in your guidance, yes?

Yes it is.

Just moving on to Aerospace and, you had a particularly strong quarter in the aftermarket. I was wondering if you could break down what some of the drivers are there are, how much of that has come from the RSP agreements that are there this year but weren't there last year. Which are the strongest end markets you're seeing in that area?

Obviously, we continue to enjoy both good sales growth, but even more importantly, operating profit growth in our RSPs, both as the one through seven start to continue to grow, as well as the seventh one which was added late in the third quarter which won't really see a full effect until the fourth quarter this year. As you know, our RSP programs are designed to have fairly quick start-up revenue and profits; there's not a long leadtime once we have signed the contract and committed the funds.

In addition, we are seeing MRO improvement in our standard overhaul and repair business, and that continues to get stronger. We particularly saw a nice increase in Asia, I believe. Bill?

Yes. This year was up about almost 50% in sales in the quarter.

And if you were to try to attribute an organic number to the Aerospace aftermarket this quarter, what do you think it would be?

Rob, this is Brian. Are you referring to the RSP sales for the quarter?

No, looking at the commercial aerospace aftermarket as a whole. You reported over a 30% growth year-on-year. That's a lot stronger than what the rest of the industry is reporting. I'm just trying to work out what an organic number is there.

We can probably get you that number.

Rob, I can get you that. Why don't I -- I'll follow-up with you on the detail on that.

Peter Lisnic, Robert W. Baird.

A quick question on the RSPs, if I could. You signed the recent agreement. Can you just maybe talk about what you see as the incremental opportunity going forward in terms of what other -- or how much other potential there is, and then kind of combine that with you also did two bolt-on acquisitions -- how you kind of look at the bolt-on versus RSP opportunity that could be out there.

Really two different approaches to the use of capital. Let me first start with the RSP and what do we see out there. As we have described in the past, we take a very narrow and a funneled look at RSP spare parts opportunities. The initial six were on the CFM 56 engine. The reason we looked hard at that engine was because of the large number of engines out in the existing fleet, and it is an engine that continues to be installed on a number of aircraft.

In addition to looking at that as a big opportunity, we look at our capability to manufacture the parts. We look at the capability to others to do PMAs on parts. And we have a fairly rigorous set of algorithms that we go through. And we end up with what we believe is a good business model. Obviously, as we sorted through the opportunities in the CFM 56, we felt that we were coming near the end of that, although we continue to look at some. One of the reasons that the Nexstar SP (ph) was on the CF-6 was to get some diversity, and also to take advantage of some of our capability.

We are open to negotiations with -- obviously, with GE, as well as other aircraft manufacturers, as well as engine manufacturers. And we continue to look hard at those kind of opportunities. But I think we're trying to be selective and prudent in terms of our investments here. We look at those. They're put together -- and I'll ask Bill to comment on this in a minute in terms of the financial discipline we have. But when we look at bolt-on acquisitions as we did in SPD, which is in the U.S. which is going to -- became part of Raymond, a very profitable operation for us in a distribution sense -- as well as Toolcom in the UK, we can leverage those already profitable operations with our own and get a much quicker payback, as well as an internal rate of return that's very attractive. We tend to look at things incrementally. We also sort the opportunities by -- to make sure not only do we have the capital resources, but do we have the people assets to successfully integrate those operations. Bill, you want to comment on the financial (multiple speakers)?

Many of these investments (indiscernible) the acquisitions, RSP investments we tend to look at IRR, EVA; we have an internal EVA measure we apply. All of this is done relevant to perceived risk. Is it something new or is it something we understand, and how strong do the value drivers appear to be in any given investment situation? So, we are pretty tough from a financial point of view.

Okay. And then in terms of the couple of acquisitions that were added, can give us a sense as to what profitability or financial performance of those two businesses looks like relative to the overall company or segment that they are in?

In both cases they are more comparable (ph) than the current Barnes Distribution segment profitability. As you know, we look for any acquisition to be accretive in year one, excluding any onetime charges related to that acquisition. These both meet that criteria.

(OPERATOR INSTRUCTIONS). Holden Lewis, BB&T.

Can you just comment a little bit? Obviously, you're looking for declines sequentially in earnings. And historically that has always been the case. But can you just give a little bit of color as to what exactly causes that seasonality, and sort of typical order of magnitude within your businesses?

Let me just touch on a couple of the factors first, and Bill will wrap it up in terms of actual facts. One of the -- if you look at each segment, they have different characteristics. For example, in Aerospace we typically don't see a decline in revenue during the fourth quarter, although that could be mitigated this year by certain early cutoffs in terms of when people will take parts. But normally that's a business that has 20, 25 -- I'm sorry -- 25 to 26% of their sales will occur in the fourth quarter.

On the other hand, Distribution, with the shortage in workdays during that time period, does see a drop-off both in terms of calendar days, but also with the Thanksgiving holiday as well as the end-of-year holiday schedule. Many of our customers really stop receiving Class C MRO products from the second half of December on. And so we see a limited amount of activity in that time period. This has been traditional seasonality, and we have seen that.

In addition to that, although to a lesser extent as we become more of a global supplier, at Associated Spring we do see the transportation sector usually cutting us off in the second or third week in December for the rest of the year. Bill?

I would just confirm what I said. It's volume related in Associated Spring. We do expect the fourth quarter to be slightly better than the third at about the same volume level. Aerospace, there is no seasonality issue. And at distribution we expect fourth-quarter profitability as we said, at about the same rate of where we are year-to-date, but sales will be down just slightly.

Right. But, obviously, that implies a little bit of a down-draft on the operating income side also. I mean, there's some seasonality there, at least over the past few years. I think both in Distribution and Spring, Spring has had a bunch of sort of reorganizations and such. But can you speak to the profit side? Is it just a volume issue, or are there other costs and stuff that tend to hit in Q4 in Distribution and Spring?

On the Spring side, no. I mentioned the BPV expense, what we expect to pay. But aside from that it is strictly volume. And really the same situation in Distribution; there's no costs that tend to hit us in the fourth quarter that are out-of-period or onetime.

And fact is, Holden, if you look at our balance on a global basis across the three businesses, we think that we have helped that seasonality going forward, but it still exists. And I would like to change that but I don't really know how to do that. I don't think I can stop color in the fall in Vermont nor a little bit of seasonality we have.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's call. I would like to turn the presentation back to Mr. Brian Koppy for any closing remarks.

Thank you, Rachel. If there are any additional questions about any 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.