Barrick Mining Corp (B) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Barnes Group Earnings Conference Call. My name is Minosha [ph], and I will be your coordinator for today. [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. Sir, you may proceed.

Good afternoon, and thank you for joining Barnes Group’s first quarter 2006 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 statement 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 are discussed. Reconciliations of these measures to US GAAP are provided in our earnings press release or available on the Investor Relations section of the Barnes Group website at BarnesGroupInc.com.

We will begin our discussion today referencing schedules that are also available on our website. If you’ll please turn to Schedule 1, I will now turn the call over to Ed. Ed?

Thank you, Brian, and good afternoon. Today we reported our first quarter 2006 results. As I discussed on our last call, our success in 2006 would depend on solid top-line revenue growth and expansion of our operating margins across all of our businesses. The first quarter results are a terrific step in that direction, as all three of our businesses performed above our expectations.

Some of the highlights on Schedule 1 include, first, net income of $18.5 million was up 61% from 2005 with comparable diluted EPS of $0.73, up 52% from $0.48 in the first quarter last year.

Second, for the 13th consecutive quarter, we achieved substantial quarter-quarter growth. Revenue growth was 10% this quarter above this year driven by strong sales growth in both Barnes Aerospace and Barnes Distribution.

Third, operating margins improved across all three groups. Total company operating margin for the first quarter was 9.4%, a 2.5 improvement over last year.

And a final takeaway -- with balanced results across all 3 businesses, we are increasing our outlook for the full year 2006 to $2.55 to $2.65 per diluted share, reflecting more than a 30% increase over the adjusted full year 2005 diluted EPS of $1.95. These estimates include the impact of FAS 123R, which has minimal impact in 2006 but was approximately $0.27 in 2005. Our EPS projections take into consideration that it’s still early in the year and our results will continue to be seasonally impacted inasmuch as the first half of the year is traditionally stronger than the second.

In addition, as our stock price has appreciated 23% in the first quarter, our share dilution is increasing. In the first quarter, our average share diluted outstanding increased by about 6% to 25.4 million, well ahead of our initial estimates. We are now projecting our weighted average diluted shares for the full year to increase to approximately 25.5 million to 26 million shares.

Moving on to Schedule 2. There are a number operational accomplishments I would like to highlight within each of our businesses that will enable them to continue to enhance their financial performance.

Let’s begin with Distribution. Strategic acquisitions and organic sales growth initiatives are providing significant contributions to sales growth. Initiatives that have focused on customer diversification, such as our corporate accounts program and Tier 2 Partnerships, have generated sales growth of 11 and 37%, respectively.

In addition, restructuring our sales model has begun to bring tangible results by focusing on accelerating organic growth, acquiring new accounts, and improving retention of high-quality skilled technical salespeople.

These growth initiatives are complemented by two important activities -- global sourcing and business process improvements. In regards to global sourcing, our recently sourced abrasives, batteries, and gloves are winning marketplace acceptance. Business process improvements continue to drive down our costs and improve customer service metrics such as average order size, which is now over $400; and lines per order, which is up 10%.

Moving on to Associated Spring, this business continues to focus intently on profitable sales and improving the overall effectiveness of their operations. These efforts generated a 1.7 percentage point improvement in operating margins to 9.6%. Strategic acquisitions will further diversify and balance Associated Spring’s business portfolio. In addition, Associated Spring will continue to look to expand into new markets by leveraging its sophisticated equipment, excellent technical skills, and experienced sales force to develop new products and customers.

Turning now to Barnes Aerospace, our balanced portfolio strategy continues to generate record sales and profits and continues to enable Barnes Aerospace to capitalize on strong industry fundamentals. We are increasing the capacity of our operations to meet increased production demands from our customers through investments in businesses such as the purchase of additional state-of-art equipment and driving operational excellence initiatives in each one of our facilities.

In addition, we have expanded our operations in Singapore with the opening of our third aerospace facility. This new manufacturing operation in one of the major aviation centers in Asia adds to our worldwide capacity and leverages our existing technical expertise and resources to better serve our customers around the globe.

After-market growth continues with sales growth of 37% over last year. Our outlook remains favorable and, as we recently announced, we have continued to identify and enter into after-market RSP agreements on successful engine programs. These after-market RSPs are an excellent complement to our after-market maintenance and overhaul operations and provide further portfolio diversification in support of our objective of generating balanced, sustainable, and profitable growth.

In summary, these accomplishments, along with many other initiatives underway within each one of our businesses, should provide the necessary means to accomplish our full-year goals.

Before I turn it over to Bill, I’d like to mention two important shareholder actions taken by our Board of Directors today, as detailed on Schedule 3. First, the company announced a 2-for-1 split of the stock, to be paid out in the form of a 100% stock dividend, which will provide added liquidity for our stock.

Second, the company announced its intention to increase the quarterly cash dividend to $0.25 per share on a pre-split basis. The new quarterly rate will provide an annual dividend of $1.00 per share on a pre-split basis compared to the previous annualized dividend of $0.88, reflecting a 14% increase.

Barnes Group’s strong operational and financial performance enables us to take these steps to deliver value to our shareholders. These actions reflect our confidence in our ability to achieve our long-term objective of balanced, sustainable, profitable growth. I’ll now turn the call over to Bill.

Thank you, Ed, and good afternoon, everyone. I’m pleased to report to you today traditionally strong first quarter results with solid operating performance across all three businesses.

Turning to Schedule 4, this is the 13th consecutive quarter of double-digit quarter-over-quarter sales growth and the 8th consecutive quarter of organic growth in all 3 businesses. The 10% first quarter growth rate was comprised of about 8% from organic growth and 2% from Barnes Distribution, Toolcom, and SPD acquisitions. I will go into more detail on sales when I discuss the results for each business in a few moments.

The benefits from our strong sales growth were compounded by a 0.6 percentage point improvement in gross margin as the cost of sales improved to 63.6% from 64.2% in the prior year, driven by gross margin improvement in both Distribution and Aerospace. Gross margin as Associated Spring was flat year-over year.

We also realized expense efficiencies across all three businesses as our SG&A expense ratio improved 1.7 percentage points over last year, and this was driven by reductions in stock-based compensation and operating efficiencies. As a result, operating income increased 48%, with an increase in operating income margin of 2.5 percentage points to 9.4%.

Please note that periods prior to January 1, 2006, have been restated to reflect the change in accounting for stock-based compensation in accordance with FAS 123-R. The impact of the first quarter 2005 was to reduce pretax income by $2.1 million and diluted earnings per share by $0.06.

Interest expense was up approximately 5% in the quarter due primarily to increase in the average borrowings, which were up $27 million to fund higher working capital requirements.

First quarter effective tax rate was 21%. This rate does reflect the favorable impact of the Singapore Pioneer status, offset in part by additional income in jurisdictions with higher tax rates. Total company tax rate is expected to be in the low 20s for 2006. As I think you know, changes in our tax rate are largely dependent upon the mix of business between domestic and international earnings.

Net income for the first quarter was $18.5 million, a 61% increase over last year. And, on a comparable basis, diluted EPS was $0.73, a 52% increase. Prior year’s results do not reflect the previous pro forma Singapore tax benefit reclassification of roughly $0.02 per diluted share.

Turning to Schedule 5, I will review the results of each of the businesses, starting with Barnes Distribution, where sales for the first quarter of $124.4 million were up about 10%. These results include $5.9 million, or 5%, from the Toolcom and SPD acquisitions, and the negative impact of $200,000, or less than 1%, from currency changes.

Distribution’s operating profit was $9 million, up 74% from last year’s $5.2 million. And the operating margin for the first quarter was 7.2%, up from 4.5% a year ago. This improvement came from higher sales volume and improved gross margins, which were driven by higher selling prices, cost savings, and operating improvements.

The full-year 2006 operating margin of Barnes Distribution is expected to be in the 6 to 7% range.

Associated Spring’s sales of $111 million were up 1% from prior year. Foreign exchange negatively impacted sales there by $400,000. Specialty operations sales were flat from prior year due to the timing of sales as a result of customer inventory adjustments and push-outs as well as the adverse effect of foreign exchange. Traditional operations realized a modest sales improvement due primarily to price increases and to strength in the heavy-duty truck and telecommunications end markets.

Even though Spring’s sales were up only slightly, operating profit in the first quarter of $10.6 million, along with a 9.6% operating margin, were up significantly compared to last year’s levels. This improvement is a result of the continued focus on profitable sales as part of our rigorous price improvement strategy begun last year, which has enabled us to offset raw material price increases.

Associated Spring will continue to focus on improving profit levels by growing high-potential businesses, improving underperforming traditional Spring operations, and generating profitable sales growth. Also, while not as significant as last year, Associated Spring will continue to prepare for local union negotiations at two domestic Spring facilities.

The full-year 2006 operating margin at Associated Spring is expected to be in the 8 to 9% range.

Turning now to Barnes Aerospace, this business continues to achieve record results. First quarter sales of $67 million were up 25% and operating profit improved 63% for another quarter with very impressive drop-through.

Total OEM sales for the first quarter were up 21% to $48.9 million from a year ago. Commercial sales were $35.5 million, which include a 25% increase in sales of components for the GE 90 engine family to $14.2 million. Military sales in the quarter were $12.4 million and industrial gas turbine sales were $1 million.

Barnes Aerospace orders for the quarter were $72.5 million. This is down from prior-year level of $88.9 million, which included approximately $16 million due to a one-time raw material lead time adjustment. Excluding that adjustment, orders were roughly in line with the first quarter of 2005.

Backlog increased to $274.6 million, of which just under 70% is scheduled to ship in the next 12 months. Commercial orders of $41 million were down 26% from a year ago due to the adjustment mentioned previously. Commercial backlog of $207.6 million was up 23% from prior year. Military orders and backlog in the first quarter were $8.8 million and $58.8 million, respectively. After-market sales increased 37% to $18.1 million for the quarter, including MRO sales of $11.6 million and after-market RSP sales of $6.4 million.

Barnes Aerospace has now produced quarter-over-quarter growth and operating profit for 9 consecutive quarters. First quarter results reflect a record operating margin of 12.8%, up from 9.8% in the first quarter of ’05. This improvement was driven by higher sales volume and the increased percentage of after-market activity, including the RSPs, and by operational improvements from Six Sigma and Lean Manufacturing initiatives.

The full-year 2006 operating margin for Barnes Aerospace is expected to be around 13%.

Turning to Schedule 6, cash was $36.5 million at the end of the quarter. The capitalization ratio was 43%, within our targeted range of 40 to 45%. Our debt-to-EBITDA ratio was 2.4 times versus the debt covenant of 4 times, giving us additional borrowing capacity of at least $206 million.

Capital expenditures for the first quarter were approximately $13 million. The level of CapEx for the full year should be in the $30 to $35 million range, with depreciation around $30 million. Capital expenditures continue to be focused on investments to increase capacity, primarily in Barnes Aerospace.

The estimated amortization of intangible assets is projected to be approximately $5.6 million in 2006, which is increasing due to acquisitions and after-market RSP activity.

A strong balance sheet continues to enable the company to enter into strategic acquisitions and after-market RSPs in order to help generate balanced, sustainable, and profitable growth.

So in summary, we have a very strong start to the year, with results driven by sales growth and operating improvements in all businesses. Thank you. I’ll now turn the call back to Brian.

Thank you, Bill. We will now open 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.

[Instructions] Your first question comes from the line of Robert Stallard with Banc of America. Please proceed, sir.

Good afternoon, gentlemen.

Good afternoon.

I’ve just got a couple of questions -- after Brian’s instructions. First of all, Ed, you mentioned that you were cautiously optimistic for the rest of the year. I was wondering if you could give us a little more detail in the areas where you feel you are being a little bit cautious with regard to your guidance.

Well, I think-- it’s just my nature to be a little cautious this early in a year. We’ve come off a series of quarters in ’05 that we thought were terrific buildings blocks, and ’06 just culminated in a terrific first quarter result.

And so we-- as you look across where we are, you could wonder whether or not we would have increased our guidance a little bit more. But I think (a) it’s early in the year, (b) we tend to have some seasonality, as you know, in our earnings between the first half and the second half. And we’d just like to see it play out a little farther.

We’re certainly not reluctant, if we see that it’s stronger, to revise our annual look at where we think we’re going to end up, but I think this early in the year, we’re being a little cautious. Last year, for example, as you may recall, we didn’t move our projection until July.

Okay. And something else you’ve talked about in the past has been raw materials, particularly steel. There’s a lot of other raw materials that have been heading up at a high rate of naughts recently. Is this-- anything else out of this has been giving you any cost headwinds?

Why don’t I let Greg handle both? Probably the two commodities that are-- the ones that we watch the most here are steel and titanium. Greg?

Well, first of all, I think in the Associated Spring arena, the steel prices have been flat throughout the first half of the year. In fact, we’ve had some minor adjustments downward. But we don’t foresee any second half improvement in our material pricing; but at the same time, we don’t see a significant increase in pricing.

On the other end, in the Aerospace side, titanium is one of the big volatile commodities. And for the most part, we have the vast majority of our contracts on long-term agreements all the way out through 2008 and we’ve also increased our raw material buffer stock inventory. And when we have the ability, we have pass-through agreements, as well. So in general, I think it’s pretty solid.

Thank you.

That’s great; thanks very much.

Your next question come from the line of Matt Summerville with Keybanc. Please proceed, sir.

Thanks. A couple of questions. Can you talk about different trends-- or, just expand upon the detail that you provided relative to what occurred in your specialty Spring operations versus the traditional business? I think you referred to push-outs there. Can you just expand on that?

Certainly. Based on our sales folks’ input, there have been a number of projects that have been deferred; they have not been awarded. And we expect these to come forward through the back half of the year. We remain optimistic in general. I think that there was some timing issue as far as the placement of orders with distributors. And all in all, I think it’s very optimistic. And I think that a large part of it was domestic in the sense of the nitrogen gas products bottom line.

So can you talk a little bit about-- you usually have talked about, in the past, what nitrogen gas volumes were doing on a quarterly basis. Is there a number you can share with us just to give us an idea of how much the business was done?

Matt, it’s Bill. From a volume point of view, Sweden had a pretty solid quarter. We saw a strength and some softness in the US operation, and then there was a negative of about $700,000 of foreign currency. So nitrogen gas, over all, was flat from volume with the two offsets and then down a bit from currency.

Okay. Then, what about the remainder of your specialty operations? Can you talk about business trends there -- orders, etc.?

Yeah. Burns Precision Valves had a solid quarter; sales were up nicely. Seeger-Orbis was soft; we do believe that was timing. Part of that business is distribution-related. And we did see a pickup in the order rate in March and in early April, so we’re optimistic that we’ll see some recovery there in Q2.

And then, in the other side of the business, what have you seen out of the Big 3 versus transplants at this point?

Currently, our sales with the Big 3 were down about 3% year over year. And I think that’s a trend that’s been consistent. We do not spend a lot of our time focused on growing this business; it’s more focusing on our profitable sales within the limited automotive industry that we focus on. So we spend much more of our time trying to focus on the specialty operation than growing it.

Okay, thanks.

Your next question comes from the line of Holden Lewis with BB&T. Please proceed, sir.

Thank you very much. Good afternoon. Sort of along that line, you sort of-- if you look at the organic growth rate of the Associated Spring business, it really has been decelerating gradually over the past 4 or 5 quarters to the point that we’re now up 1-ish percent. What are the pieces that have been causing that deceleration? I mean, are we seeing any of the market getting worse and sort of a trend that’s continuing that way? Or are we kind of expecting that that 1% might be the trough as maybe we get some of these SBUs [ph] doing a little bit better? I’m just trying to get a better feel for some of the trends in the pieces that might be causing us to see this behavior.

I think what Bill enumerated in terms of what we saw in the first quarter is exactly what happened. That is, in other words, while global nitrogen gas had nice increases, domestic did not. And our Seeger-Orbis business was really the down business in the first quarter, with consecutive months improving in March and what we’re seeing in April.

Okay. Then the precision valve business has been pretty solid?

Yep.

And what about the plastics, [inaudible] spectrum business?

Relatively flat.

That was relatively flat as well? Okay, so the feeling is--

Well, the plastics business, flat; the electronics business that’s in the traditional spring business had a nice increase during the first quarter.

Okay. All right, so you’re kind of feeling like maybe this 1% will represent the trough and we’ll see some sort of pickup in the rates of growth? It sounds like you’re confident that’s going to happen on the SBU side. There’s nothing in the traditional springs business that’s offsetting that?

Offsetting it in which way?

Well, I mean, are we seeing-- you’ve mentioned that the Big 3 is down. Maybe the heavy-duty truck stuff is starting to come into the hard part of its cycle. I’m just curious whether the traditional springs, which is up slightly-- whether that’s sort of on a downward slope or whether that’s something you can continue to grow as well.

Well, heavy duty, as you know, is going to have a very strong year over all, and so we don’t see any slowdown in that. We’re obviously trying to be very careful about any kind of inventory capacity we build up based on the emissions changes that are going to occur on January 1, ’07.

Okay. So it does sound like-- I mean, this 1% number-- it doesn’t like that’s 1% on your way to contraction; you think that that’s probably sort of the bottom and the SBUs get better?

Yeah, I think that I’d reiterate what was said by Bill earlier, and that is, we’re focusing on the profitability of our sales and there will be some adjustments here and there. But for the most part, I think that we’re trying to grow the business, not shrink it.

Yeah, we’re trying to grow the profitable part. You saw the margin increase and that’s the kind of thing we tend to focus on. We’re not just trying to have sales to get sales, particularly in this environment.

Right. And are you actively shedding any business? Is that a part of sort of the weakening revenue growth and the improving margin, is actually shedding of business, or no?

In some cases, yes.

Products.

If the product doesn’t make sense for us, and if it-- if someone else can do it more effectively, then yes.

Was that a significant factor in the trends that we’re seeing, or it’s sort of on the margin?

No, I think that’s on the margin.

Okay, great. Thanks.

[Instructions] Your next question comes from the line of Peter Lisnic with Robert W. Baird. Please proceed, sir.

If I could ask a question on the Distribution business, and in terms of, I guess, your profitability forecast there? It looks like the last couple of quarters, you put up, I don’t know, incremental margin close to 40%. And if you kind of run the numbers for-- or, assume that incremental margin can continue, it just looks as though you’re being conservative on the profitability outlook there. Can you maybe talk about (a) what you’re doing there to improve profitability and (b) maybe some sort of estimate or what you think kind of a peak margin in that business could be at some point?

Where we’re seeing the improvement, Peter, is in our distribution costs, in our costs to provide the product to the customer. As you know, last year we reported that we were seeing fairly substantial reductions in our distribution costs. We continue to see that in the first quarter relative to the first quarter last year. And so, that part of the equation continues to pay out, and then we get the leverage on the improved sales growth. So that it’s a combination of a little higher sales growth and lower distribution costs, even in spite of the fact that we’re seeing higher volumes. Bill might comment on the--

Sure. I think the other thing to add to what Ed said is that we continue to push pricing and distribution, sort of the market pace, if you will. We have said, Peter, that over the sort of medium term, we think distribution should be high single-digit, low double-digit margins. The business has done it before, some time ago.

All right. So if I, I guess, pressed a gun to your head and said, “When do you think you can get to double-digit margins in that business--?”

As I said, medium-term.

And the answer is, if you put a gun to our head, we’ll cal the police.

[Laughs] What if I were the police, I guess? Okay. And just unrelated follow-up question, if you would. In terms of acquisitions, you closed-- or, announced one relatively recently. Can you maybe talk about just the environment -- what you’re seeing in terms of pricing? Whether things have eased from a multiple perspective? And in particular, what you’re seeing in aerospace as well?

One, we announced that we had singed a letter of intent; we haven’t closed that transaction, which is the Hanggi transaction, which we would-- we’re working hard to try and do in the second quarter.

I would say the environment is expensive in aerospace; that we’re having difficulty looking at businesses that we think are attractive for us and then putting them into our economic models and making sense out of them. And so what we do is we go look at things, and if it doesn’t make financial sense for us, we say, “Thank you very much, Godspeed, and I hope it all works out.”

Okay, great. Thank you very much.

Your last question is a follow-up from the line of Holden Lewis with BB&T.

Great, thank you.

Thank you again. Does the trajectory of the distribution revenues-- again, if you take out the acquired business-- You’ve kind of gone from 3% growth, I guess, to 4% growth or so in Q1. What is driving that? Is it the new sales structure? Is it the market? And 4% is okay, but it’s certainly not tremendous, and I’m sort of curious-- I mean, where do you think that that growth rate can get to on distribution as the new sales structure matures or any of the initiatives you have in place bear fruit?

If you look at most of the initiatives that we’ve had over the last 2 or 3 years in Barnes Distribution -- and you’ve watched us during that time frame -- the bulk of them had to do with service-level and distribution costs and our sales force reorganization was taking place then, but we really didn’t put the emphasis on growing our sales force and improving penetration in what we would call our core business. We did do a nice job, and we’ve reported that consistently on our corporate accounts and our Tier 2, but we really didn’t focus on growing our core sales force.

The first quarter this year was the first time-- Brian can go back for you and tell you when, but I think it’s probably the first time in maybe 6 or 7 or 8 quarters where we physically have grown the sales force because we felt we were ready to do it, we had the sales management reorganization, we had the team selling in place. And the operations and the logistics in the supply chain could support that. So I think we feel better about starting to make the investment there. I think it would have been premature 2 years ago to make that kind of investment when we didn’t have the other things fixed in our supply chain.

Okay. So you’re starting to add people to that effort again?

Yes. I should know the number, and I’m sorry, I forgot it.

That’s all right. And where are we in terms of the team conversions? I may be wrong in the numbers, but weren’t we kind of at 30% to end ’05, and you’re trying to get to 70% by the end of ’06? Are those numbers right, and where are we on that?

You’re about right on that, Holden. Right now, we’re 33% at the end of the first quarter. And we’re doing it carefully -- it’s got to be the right people in the right territory, the right team put in place for each territory. But it’s working and it’s-- we’ll continue to build the teams.

That doesn’t mean we’re not going to stay with the traditional model in certain locations and certain regions where people that have been there for a long time and are successful don’t continue to do that. It isn’t something where we believe that we have to go to 100%.

Okay. But you are seeing that the team approach is driving better growth rates and better margins than the old approach?

There’s a start-up period, but certainly after x number of months, yes, we’re seeing significantly higher sales growth. It’s also helping with retention of skilled sales reps.

Okay. And then, if I can follow up on the balance sheet. Again, I guess 4% growth in Distribution organically; 1% growth on Springs. Why did we have to add so much working capital in a growth environment like that? Is there something seasonal or-- what’s sort of behind that?

A couple of issues. If you look at our days, receivables are trending well; payables are about where they ought to be. The issue is inventory. We are buildings some strike inventory in Spring and we continue to build inventory in Aerospace for new product introduction support, for titanium price reasons -- those would be the two or three big reasons. But it’s under control, and it’s done with intent. I mean, we don’t see the numbers and act surprised; we know what we’re doing.

Okay. And there was a big increase, I think, in your non-goodwill intangibles. What was that?

This would have been the RSP-8 investment.

Okay, great. Thank you.

Great. Thank you, everyone. And if there are any follow-up questions, please don’t hesitate to contact me or the Investor Relations department. And thank you again for joining us today.

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