Barrick Mining Corp (B) 2005 Q4 法說會逐字稿

(technical difficulty) listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). 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 afternoon and thank you for joining Barnes Group's fourth-quarter and full-year 2005 earnings call and webcast. This is Brian Koppy, Director of Investor Relations for Barnes Group and with me this afternoon are Barnes Group's President and CEO, Ed Carpenter; our Senior VP of Finance and Chief Financial Officer, Bill Denninger; and Greg Milzcik, Executive Vice President and Chief Operating Officer and President of Associated Spring.

Following our 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.

On today's call, certain non-GAAP measures related to the Company's performance for the full year and fourth quarter 2005 are discussed. Reconciliations of these measures to U.S. GAAP are provided in our earnings press release. These reconciliations are also available on the investor relations section of the Barnes Group website at BarnesGroupInc.com. Now let me turn the call over to Ed. Ed.

Thanks, Brian. Today, we reported our fourth-quarter and full-year 2005 results. While our result in 2005 is attributable to many factors, I would first like to make a special mention and thank the Company's employees for their contribution to our success last year.

Also equally important, I would like to note that Bill Denninger and Greg Milzcik have now joined the Barnes Group Board of Directors with Greg being promoted to Chief Operating Officer.

(technical difficulty) mentioning that for the Q&A period, Bill and I as always are fair game but this is Greg's first conference call so some courtesy would be appreciated. Next quarter, no holds barred.

First moving to Slide 1, last year, we achieved a significant milestone for the Company as we surpassed $1 billion in sales for the first time in our 148-year history, actually $1.1 billion.

Broadly speaking, I think Barnes Group's accomplishments in 2005 were results of a combination of really two key effects -- rigorous focus on generating balanced, sustainable and profitable growth in all three businesses; our revenue grew 11%, including organic growth in all three businesses; and our adjusted operating income improved 37%. And we maintained our strong corporate culture of financial discipline. Our balance sheet fundamentals remain strong and the financial efficiency of the organization has been enhanced as evidenced by our convertible bond offering in August, which increased the fixed-rate portion of our debt going forward to approximately 90%, up from 56%.

Another key effort was in executing effective aftermarket alliances and acquisitions. We committed $63 million to aftermarket revenue-sharing programs and to some traffic bolt-on acquisitions. I might mention that prior acquisitions continue to demonstrate consistent and strong growth, validating our strategy of acquiring high-growth, high-margin companies that complement our existing businesses.

Finally, these accomplishments allowed us to generate 46% improvement in net income and a 42% increase in diluted earnings per share, excluding adjustments, and importantly positioned us for continued growth in 2006.

But beyond those measures, there are a number of significant operating accomplishments achieved during the year within each of our businesses that enable them to enter 2006 in a much stronger position compared to one year ago.

On Schedule 2, I will begin with Barnes Distribution. They are positioned to focus on executing growth initiatives as a result of the very successful 2005 operational and service level improvements. For example, their operational improvements have enabled them to enter 2006 with delivery service levels that have been sustained within outstanding ranges for some time now. Customer service metrics, such as average order size and line items per order, are up 16 and 11%, respectively, from the first quarter last year. And Distribution costs are down 11% from where they were a year ago in spite of rising energy costs.

At Associated Spring, their profit focus and growth in specialty operations are essential for continued success. Specialty operations generated substantial revenue growth and profits for 2005 and continued to demonstrate our competitive advantage and importantly reduced our exposure to the domestic legacy businesses.

Associated Spring's 13% revenue growth was driven entirely by our specialty operations, which now represent 52% of the total revenue as we enter 2006.

Finally, with national and two local union negotiations completed, Associated Spring has established a basis for continued competitiveness in growth. These agreements represent a significant step towards dealing with escalating costs of long-term health care, retiree medical and other costs that represent a challenge to the competitive position of Associated Spring.

Turning to Barnes Aerospace, they're positioned nicely to accelerate growth in each one of their end markets. The total year backlog increased 39%, which will benefit commercial OEM growth going into 2006 and the growth in the aftermarket MRO and RSP's is expected to continue to generate solid returns as we move into this new year.

Through 2005, Barnes Aerospace improved its sales balance between OEM and aftermarket, currently at 75% OEM and 25% aftermarket, a 4 point percentage improvement in the aftermarket ratio. Importantly, profit contributions are now approximately 50-50. The operating efficiency of Barnes Aerospace continues to improve as sales per employee increase 17% going into 2006.

On Schedule 3, now let's look ahead at our opportunities for 2006. Our results in 2005 provide us with a terrific platform from which we can continue our growth trajectory into 2006 and beyond. At Distribution, 2005 generated organic sales growth in U.S. as well as Canada and Europe. Operational advances and successful integration of our recent bolt-on acquisitions should provide the necessary efficiency, geographic and product scope for sustainable profitable growth. We will also look to leverage our global footprint through growing global distribution networks and global purchasing initiatives. Global purchasing initiatives began in earnest last year with global purchases over 5% of our total receipts. Clearly, this is not our targeted level and we would expect to increase that contribution significantly in 2006.

Within Associated Spring, operational flexibility and product rationalizations are imperative to continued improvement. The transfer of certain productions from high-cost facilities to Brazil, Singapore, Mexico and low-cost domestic facilities, along with streamlining the operational effectiveness of domestic Spring operations, will provide incremental margin improvement over time. And the addition of businesses with products, services, capabilities or markets with high-growth prospects will diversify and balance Associated Spring's business portfolio.

Within Aerospace, their balanced portfolio strategy remains essential to their continued success. The GE90 engine has now penetrated approximately 85% of all Boeing 777 planes sold. Going forward, our level of content on strategic engine platforms will be critical to our OEM success and we've already made significant progress on the new GEnx engine. The RSP's and the CFM56 and CF6 families to which they apply will continue to drive aftermarket growth.

Rounding out Barnes Aerospace portfolio, our military IGT businesses, which now represent 21% of sales and have growth opportunities that are expected to continue to benefit us in the future. We expect our success in 2006 to reflect solid top-line revenue growth and expansion of our operating margins across all of our businesses due to higher sales volume and the operating and expense efficiencies. I will now turn the call over to Bill.

Thank you, Ed, and good afternoon. I'm pleased to report to you today the completion of the year with strong operating performance in all three businesses, driving record results for Barnes Group. I would like to begin with Schedule 4 by mentioning certain items on the quarterly and full-year results that should be viewed as discrete, out of period or onetime, as this should help you in your comparisons. I will only highlight each item as a detailed reconciliation as contained in our press release.

First the adoption of FIN 47 generated a change in accounting in the fourth quarter of a negative $0.02 per diluted share. Also during the third quarter, we identified in the quarter an adjustment to Accounts Payable in cost of sales of Barnes Distribution with a positive after-tax impact of $0.05 per diluted share. Also during the third quarter, Barnes Aerospace, which made a pioneer [tax] status in Singapore, including periods prior to January 1, 2005 were $0.06 per diluted share. And finally, the sale of our interest in the NASCO joint venture generated $0.17 per diluted share onetime gain during the second quarter. As a result of these adjustments, the fourth-quarter EPS was $0.49 and the full year adjusted EPS was $2.22 per diluted share or $0.02 above the high end of our guidance.

Now turning to Schedule 5, which details the adjusted income statement. This was the twelve consecutive quarter of double-digit quarter-over-quarter sales growth. The 10% fourth-quarter sales growth includes about 2% from Barnes Distribution's Toolcom and SPD acquisitions and for the first time all year, sales were adversely impacted by approximately 1% due to changes on foreign exchange rates. 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 1.6 percentage point improvement in gross margin as the cost of sales improved to 64.7% from 66.3% in the prior year, driven primarily by gross margin improvement in Distribution and Aerospace. As a result, operating income increased 45% with an increase in adjusted operating income margin of 1.7 percentage points to 6.9%. Interest expense was up approximately 13% due to an increase in the effective borrowing rate and higher average borrowings, which were up 12.2 million in the fourth quarter.

Turning now to Schedule 6, fourth-quarter effective tax rate was 17% on an adjusted basis and the full year rate was about 20%, excluding the impact of the discrete and out of period items. The 2005 rate also reflects the shift in income to jurisdictions with higher tax rates, offset in part by the favorable impact in 2005 of the Singapore pioneer status.

Adjusted net income for the fourth quarter was 12 million, a 79% increase over last year. Adjusted net income for the fourth quarter of 2004 excludes after-tax charges of approximately 2.8 million or $0.12 per diluted share. Once again, our press release provides detailed reconciliations of all these adjustments.

Turning to Schedule 7, I will review the results of each of the businesses starting with Barnes Distribution, where sales for the fourth quarter of 113 million were up about 8%. These results include 5.2 million or 5% from the Toolcom and SPD acquisitions and a negative impact of 700,000 or 1% from currency changes. Distribution sales growth continues to be driven by corporate account and tier 2 initiatives, which generated sales of 22.3 million and 5 million, respectively. This represents growth of 10% for corporate accounts and 54% for tier 2.

Barnes Distribution's operating profit was 5.3 million, up significantly from last year's adjusted 1.4 million. The operating margin for the fourth quarter was 4.7%, up from 1.3%. This improvement came from 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.

Associated Spring sales of 101.1 million were up 4% from prior year and reflect continued growth in specialty operations and flat sales in its traditional businesses. Foreign exchange negatively impacted sales by 1.5 million.

Spring's operating profit in the fourth quarter of 5.5 million was down slightly compared to last year's adjusted profit level and continues to be adversely affected by higher than anticipated domestic operational costs. As such, Spring's focus continues to be on improving profits, growing high potential businesses, improving underperforming domestic legacy Spring operations and generating profitable sales growth.

Turning now to Barnes Aerospace, which continues to achieve record sales levels. Fourth-quarter sales of 64.2 million were up 25% and operating profit improved 32% for an impressive drop through. OEM sales for the fourth quarter were up 18% to 46.9 million, including sales of components for the GE90 engine family of 15.5 million, which was up 37% from a year ago.

Commercial sales were 29.7 million; military sales, 13.7 million; and industrial gas turbine sales were 1.1 million in the fourth quarter. Barnes Aerospace orders for the quarter were 77.7 million and backlog increased to 269.3 million, of which about 70% is scheduled to ship in the next twelve months. Commercial orders of 40.4 million were up 21% from a year ago and commercial backlog of 195.1 million was up 34% from prior year. Military orders and backlog in the fourth quarter were 17.8 million and 69.1 million, respectively.

Aftermarket sales increased 48% to 17.3 million for the quarter, including MRO sales of 10.7 million and aftermarket RSP sales of 6.6 million. During the fourth quarter, monitoring of the RSP programs identified certain alternate use purps, which under terms of the RSP agreements, generated additional sales of approximately 900,000. These fourth-quarter sales relate to shipments made by GE during the first three quarters of the year.

Barnes Aerospace has now produced quarter-over-quarter growth in operating profit for eight consecutive quarters. The fourth-quarter results reflect a record operating margin of 13%, up from 12.3% in '04. This improvement was driven by higher sales volume and the increase in percentage of aftermarket activity, primarily in Asia and by operational improvements from Six Sigma and lean manufacturing initiatives.

Turning to Schedule 8, cash was 28.1 million at the end of the quarter. The gross debt to capitalization ratio was 42%, within our targeted range of 40 to 45%. Our debt to EBITDA ratio was 2.3 times versus a debt covenant of 4 times, giving us additional borrowing capacity of at least 208 million. Our borrowing capacity level reflects the covenants in our new revolver, which was negotiated in January and which increased our borrowing capacity by approximately 92 million at year end.

Our strong balance sheet and our new international structure provides the necessary financial flexibility to utilize cash where it is needed globally and enable the Company to continue to generate balanced and sustainable profitable growth.

Turning now to 2006, our targeted earnings for the full year are in the range of 2.50 to 2.60 per diluted share. These estimates do include the impact of FAS 123(R), which was estimated at about $0.05 per diluted share in 2006, down from $0.27 per diluted share in 2005. This reduction relates to changes made in our long-term incentive program, which reduced the 2006 accounting impact of FAS 123(R). I would also like to mention that we will be restating prior-year results as we adopt 123(R).

Operating margins assumptions by segment for the full year 2006 are as follows. For Distribution, 6 to 7%, up from an adjusted 5.4% in 2005; for Associated Spring, 8 to 9%, up from 7.6% in 2005; and for Aerospace, 12 to 13% compared to the full-year 2005 level of 12.1%.

Other key financial metrics for 2006 would include an average total Company tax rate in the mid-20s. Changes in our tax rate are dependent upon the mix of business between domestic earnings and international earnings and our 2000 tax rate is projected to increase due to our expectation of higher U.S. pretax profit. The anticipated weighted average of diluted shares for the year is approximately 25 million compared to the full year 2005 level of 24.4 million. The level of capital expenditures should be in the 30 to 35 million range with depreciation around 30 million for the year. Capital expenditures continue to be focused primarily on investments to increase capacity. The estimated amortization of intangible assets is projected to be about 5 million in 2006, which is increasing due to acquisitions and aftermarket RSP activity.

So in summary, we have a very good year with results driven by real sales growth and operating improvements in all three 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 as many individuals as possible have an opportunity to ask their questions. Operator, the first question, please?

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

First off, regarding 2006, [you also] had a pretty good revenue performance in 2005. What's your thinking in regards 2006? Do you see this rate of momentum that you currently enjoy accelerating or roughly staying the same?

Clearly, it will depend on which part of our business you're talking about, Rob. And you know a couple of our businesses better than we do probably. But Aerospace ought to continue its momentum. And the real question is can we get the momentum in Barnes Distribution to grow at a better rate than we have. We have not grown quite as fast as some of our competitors. We have been very happy with our growth rate but we need to step that up.

In the area of Associated Spring, it very much depends on the sectors that we're talking about in the specialty area, we have got really terrific growth. And I just think it's going to be hard to do year-over-year growth, particularly on a global basis but we feel very good about that.

In the legacy business, which is primarily North American focused, we are not as buoyant on North American light vehicle production as some other folks are so we're being a little cautious there. Again, that would reflect probably a five or six-year strategy of where we place our bets and where we have made our investment.

Looking at raw materials, back in 2004, you obviously had some issues with the high steel price. That seems to have gotten a little bit better in 2005. How is your thinking on how things are going to pan out in 2006? Why don't I let Greg handle that one because that's a softball one; thank you, Rob.

Material is always a good softball question. But I think right now we're looking at material price that's fairly stable through the first half of 2006. We're looking for some improvement but we don't see it yet for the back half of the year. So fairly flat.

What sort of key date should we look to on the raw material front? When are your renegotiations with suppliers coming up?

It will be midyear.

(OPERATOR INSTRUCTIONS). At this time there no questions -- correction -- your next question? Holden Lewis, BB&T Capital Markets.

Thank you very much. On your Aerospace, just sort of, you continue to see the orders go at a pretty good clip and you've certainly seen the backlog continue to rise. Can you give some sort of expectation for how that delivery is going to flow through in 2006? I mean, are we kind of expecting at this point that we're going to begin to ship a bunch of this and that the backlog is going to come down in 2006? Do we expect the backlog is going to continue to build and at some point if it does build, does that become something of a problem?

Good question, deal with the last part first. We obviously are doing a lot of work on both getting our material ordering in place as well as doing a lot of scenarios on capacity utilization. We believe we have got significant opportunities for capacity but we want to be very careful there. We do not see the backlog coming down in the near term at all, Holden. If anything, we have got planning scenarios that say that certain of the models that we are on, whether that be commercial OEM, whether that be military, whether that be industrial gas turbines, as continuing to have a very strong pace. Obviously, we all are aware of the cycles that occur in Aerospace and in military but right now, we think we have got pretty good visibility for the next 18 to 24 months. And frankly, the guys in Aerospace are doing a terrific job to meet their customer requirements and to plan ahead and make sure they can meet their deliveries.

And just so I'm clear, I mean the reason that you think the backlog will continue to rise, is it more because you're capacity constrained, you can't get anything else through the plants right now? Or is it because you see orders continuing to grow from what was a pretty good rate in 2005? Where is the bottleneck?

The bottleneck? We don't have a bottleneck. We are meeting our customer delivery requirements; we're not behind schedule on any significant basis. What we see is accelerated orders and accelerated delivery schedules. We are on very good platforms, we're on very good engines and that's a big plus for us.

Okay, but there's no issues with not being able to meet schedules, things like that?

Absolutely not.

Okay, so there's no risk in this backlog that you start to lose business?

If anything, I think we ought to continue to gain business.

Okay. And then as my follow-up, can you talk a little bit about the mix? You kind of alluded to the fact that your mix of aftermarket went from I think we'll just say 21 to 25% I think in '05?

Exactly, that's -- yes, right.

What are you expecting in '06? Obviously I think we're beginning to get some momentum out of the commercial side. Using your comments about the mix of revenues and the relatively balanced margins, it looks like there's a pretty big difference between the margin of commercial and the margin of aftermarket. Are you expecting the mix to begin to shift in '06 back towards commercial? And is that something which is going to have a meaningful drag on the margin just from a mix standpoint?

The answer is no.

Which one?

Well, to your question. We don't think the mix is going to dramatically change. If anything it may improve very slightly in terms of revenue, aftermarket to OEM because we continue to see opportunities in the aftermarket even though we're having very good order input in the OEM area. And yes, you are right that the margins in the aftermarket are significantly better than they are in the OEM. That's not to say the OEM is a bad margin but it just says that between providing pretty good -- very good engineering, good quality parts, high turnaround -- I mean we have to turn these parts around very quickly, and we have to make investments in inventory, we're seeing good response to our aftermarket offerings.

Okay, but you think that those two businesses can continue to grow at sort of similar paces, given what you're seeing in the markets, so there will be no meaningful shift in the mix?

Yes, I think that's [fine].

Yvonne Varano, Jefferies.

Thanks. I was wondering if you could give us a little more color on the costs that you were seeing in Associated Spring. You mentioned that they were operational but I was just looking for some more detail there.

I thought we said that it wasn't polite to ask Greg on his first conference call! But we will let him do it anyway. Go ahead, Greg.

I think they were exactly that, operational issues that have largely been resolved. It's typical of some operations during the year that you have had problems with production schedules or sorting operations and we incurred those type of issues in the fourth quarter and we've resolved them. We had a good team put together and we're moving forward.

Okay. So I guess whatever you put in place, you've made some changes and these shouldn't be reoccurring.

Yes.

Just, you mentioned light vehicle production. Can you tell us what outlook you have included in your forecast?

I think overall, we're looking at it a fairly flat as far as year-over-year performance. We're looking at -- depending on the mix and every company has its own particular mix -- in our case, we may be slightly below last year in some of our light vehicle deliveries but overall I think we're looking at a flat market.

Most of the industry is calling the number 16. I'd say we would be a hair under that.

Okay. And then just on the Aerospace --

We spend more time trying to figure out how many GE90's that are going to hang on 777's than we do how many light vehicles are going to be built.

Good, then I will shift to Aerospace. I have a few questions on that. On the backlog, how much is GE related?

I don't have that number here and I guess Brian could give you that off-line. But our sales as a percentage are --

It's significant on the GE sales. But I can get you the detail on the backlog, Yvonne.

Okay, that's great. On the backlog, I just missed it, you said 70% was going to ship in the next how many months?

Twelve months.

Twelve months. Okay, I just didn't understand what you said. In the Distribution side, you talked about a foreign sourcing. Where do we think that that number can go? It's 5%, you think it grows but how much does it grow to?

I don't think we know yet. You're getting kind of a crosscurrent of two situations. One is continuing to see very aggressive pricing, particularly from the Far East. But at the same time, domestic manufacturers are coming up with new ways to do it. Clearly, we would be disappointed if we didn't double that or better in '06. So we see that, a ramping up now and we're also talking about foreign sourcing not only for the Far East but from Mexico and South America. It traditionally used to be in many of our markets that we sold into that they would not consider a product that wasn't made in America. We don't see that pressure any more.

Just another comment there, the 5% was for the full year. If you look at the run rate in the fourth quarter, it ramped up during the year; it was close to 12% in the fourth quarter, so real progress on the second half.

Okay, terrific.

That's why I was pretty confident about saying we would double it!

I can use that run rate to continue, right?

Or improve.

Or improve a little bit. And then I know you want to kind of jump up your sales in Distribution. What do you do there to drive that higher sales growth?

We have done a slight reorganization already of the sales force in terms of the way we have got the management there. We are going to see about the third year of what we call Tier 2 accounts that is growing much faster than our old traditional core accounts. We're seeing the same thing in corporate counts. And as we begin to address those kind of markets in a structured basis, we're seeing improvements. We are very optimistic.

Peter Lisnic, Robert W. Baird.

Good afternoon, guys, very nice quarter, nice year. If I could ask a question on just running through the growth opportunities for each of the businesses, what you see in not necessarily just '06 but maybe beyond? And then kind of work in what you're thinking in terms of acquisitions in terms of the growth mix.

Okay. How do you want to start it?

We could do it by segment?

We don't really -- we don't discuss acquisitions, Peter, as you know, before we get there. And while we look in all three sectors for acquisitions, which I will address first and then we can come back to some growth issues.

We tend to look at two kinds of assets that are necessary for acquisition. One is financial and Bill and his finance team have really organized well our balance sheet and our capital assets so that we think we can undertake most things that we look at. The second thing are people assets and we try and balance where we are doing acquisitions so that we don't overload any one of the three sectors because frankly all three sectors have some terrific opportunities, particularly whether it's North America or once you get outside of that. And that's because we are primarily in consolidating industries.

I think, clearly, we would say that in the short run, meaning the next 24 to 36 months, Aerospace has got greater growth rates. But right now a lot of any acquisitions that we look at there can be very pricey so we have to be very careful there, whereas we're not seeing the same thing in Distribution or in Associated Springs' specialty operations.

Okay, fair enough. On the organic side, particularly in the Distribution/Spring businesses, are there certain I guess markets or geographies where you think you are underrepresented, where there's more of a focus for organic growth? How do you think about that?

First of all, Distribution is such a large market that I don't think we're contained by geography. We really have opportunities to grow that it really takes a focus, takes manpower, takes our ability to deal with customers that are going to grow. We will continue to look at non-North American opportunities (technical difficulty) as domestic. But I think we'll look at that. Bill might comment on specific growth.

If we look at where we were last year in terms of organic growth, Spring was up about 6%. All of Aerospace was organic and Distribution was up 4.5%, 7% overall for the Company. And we would certainly hope to maintain if not increase those kind of growth rates over the next two to three years.

I will follow protocol and get back in queue. Thanks.

(OPERATOR INSTRUCTIONS). Holden Lewis.

Thanks. Over the past few quarters, you've done a good job of sort of telling us what the incremental effect from raw material costs has been. I think in Q3 it was a negative 200,000. What was it in Q4? Did it slip into a positive given the pricing and all that? Or what should we sort of assume for that?

In Q4, Holden, it was about a breakeven.

It was about breakeven?

Yes.

Okay. So for the year, you wound up probably losing behind the curve again by about 1.5 million? Is that right?

Roughly 1.5 million, yes, net of any recoveries.

Okay. And then so you expect that that incremental impact will be zero or a slight negative again in 2006?

As Greg said, we [strong] started off the second half of the year but based on everything we know now would expect it to be basically flat.

Okay, and that assumes that you get some pricing in the second half?

Yes.

At this time, there are no further questions in queue.

Thank you, operator. If there are any additional questions about matters discussed this afternoon, please feel free to contact the investor relations department. Thank you again for joining us today.

Thank you for your participation on today's conference. This concludes the presentation. You may now disconnect. Good day.