Barrick Mining Corp (B) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Barnes Group earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Brian Koppy, Director of Investor Relations.

Thank you for joining Barnes Group's fourth-quarter and full-year 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, Greg Milzcik, and Senior VP of Finance and Chief Financial Officer, Bill Denninger. 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 financial 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.

On today's call, certain non-GAAP measures related to the Company's 2005 performance are discussed. Reconciliation of these measures to U.S. GAAP are provided in our earnings press release and are available on the investor relations section of the Barnes Group Web site, at BarnesGroupinc.com. Our discussion today will reference schedules that are also available on our Web site. If you would please turn to schedule 1, I will now turn the call over to Greg.

Thanks, Brian. Good afternoon. Today Barnes Group reported excellent fourth-quarter results, which completed a strong year for the Company. The fourth-quarter and full-year results are driven by our talented employees, whom we thank, and our ability to deliver high-quality engineered products and innovative logistics services to our customers.

Building on a strong 2005, we finished 2006 with the highest sales and earnings in our history, reflecting solid organic revenue growth and the benefit of acquisitions that have strengthened existing competitive positions and opened up new opportunities. Revenues for 2006 of $1.3 billion grew by 14%, benefiting from a strong fourth quarter, which realized revenue growth of 19%, the 16th quarter of quarter-over-quarter double-digit sales growth.

Acquisitions and alliances are important to our ability to grow the top and bottom-line. Our global focus allows us to balance our businesses among domestic and international operations, thereby limiting the effects of potential adverse economic cycles in any particular region. During 2006 we continued to invest in our future through a commitment of over $235 million for acquisitions and alliances across all three of our businesses.

Barnes Distribution significantly strengthened its global presence when it acquired KENT, a specialty distributor in Europe. KENT has operations in nine European countries and has distributor relationships in 22 additional countries.

Associated Spring acquired Heinz Hanggi, a high-tech and scalable business line extension that adds additional capabilities, products, geography and customers. In addition, Associated Spring enhanced its nitrogen products offering by acquiring the Nitropush product line, providing greater access into the growing European market for nitrogen gas products.

Barnes Aerospace entered into two major programs which enhanced its portfolio. The Goodrich agreement and investments in aftermarket RSP programs continue to diversify and strengthen Barnes Aerospace's long-term outlook.

Our effective execution of acquisitions and operational strategies continued to deliver strong financial growth. Operating profit within all three businesses grew more than 50% compared to an adjusted 2005 level. Net income was up 54% from the adjusted full-year 2005 results, with comparable diluted EPS of $1.39, up 42% from the adjusted $0.98 for the full year of 2005.

Moving on to schedule 2, as we turn our attention to 2007, the Company is focused on three company-wide areas of development.

First, employees. Employees are the foundation for all improvement. We will look to increase our investments in education and personal development. Second, processes. Led by our expanded lean enterprise effort, we will seek to drive our business activities to new levels of efficiency and effectiveness. And finally, strategy. We will evolve our strategy to meet changing business dynamics, while maintaining our focus on building long-term stockholder value.

More specifically, Barnes Distribution will continue to emphasize programs to accelerate organic growth. These programs build upon the 2006 successes in corporate and tier two account growth, further development of the team selling model, and a continued focus on improving the efficiency of our distribution centers, sales force and purchasing activities.

In addition, 2007 will require the successful integration of the KENT acquisition to realize the benefit of our enlarged European footprint.

Associated Spring will focus on growing businesses with differentiated technology and market positions. Operationally, we will continue to drive productivity improvement through employee efficiency, product rationalization and raw material cost improvement. Additionally, we continue to improve our delivery and quality systems to ensure we meet customer's expectations.

To achieve the necessary operational improvements, Associated Spring is redoubling its commitment to lean practices throughout its businesses. With the commercial aerospace cycle expected to continue through 2007 and our continued success in the aerospace market, there is greater emphasis on Barnes Aerospace's ability to continuously improve its operational efficiency. During 2007 Barnes Aerospace's primary operational initiatives are focused on managing volume with disciplined capacity expansion, transitioning of workload to key facilities, such as Singapore, and continuous improvement in productivity and key operational processes.

A significant initiative this year will be to expand our large fabrication business to support the long-term growth prospects for the GEnx and Trent 1000 engines. Our goal is to enhance our operational performance and global competitiveness to deliver profitable growth.

While we are pleased with our results, we are not satisfied with our success. We recognize that continued profitable growth for our stockholders requires the necessary long-term investments and hard work. Our 2007 guidance is in line with our long-term objectives of achieving over time an average of 10 to 15% annual earnings per share growth.

Last, I would like to highlight that the year 2007 represents an important milestone in the history of Barnes Group. It marks the 150th anniversary of the founding of the Company. Barnes Group has a history of innovation and technological advances in manufacturing and distribution. A business that began as a small manufacturer in Bristol, Connecticut, U.S.A. in 1857 has become a diversified world leader in engineering and manufacturing of precision industrial components, and a distributor of a broad range of maintenance, repair, operating and production supplies. Though the markets and environments have changed through the years, Barnes Group's talented employees and culture of innovation have enabled the Company to serve its customers for a century and a half.

Now I will turn the call over to Bill for a financial update.

Thank you, Greg, and good afternoon, everyone. Turning to schedule 3, the 19% fourth-quarter sales growth rate is comprised of about 7% from organic growth, 8% from Barnes Distribution's KENT acquisition, and 3% from Associated Spring's Heinz Hanggi acquisition. Currency changes added another 1%. I will go into more detail on sales when I discuss the results for each business in a few moments.

The benefit of our double-digit sales growth was compounded by a 2.4 percentage point improvement in gross margin, as cost of sales improved to 62.3% from 64.7% last year, with the largest improvement realized in Associated Spring. The higher gross margin was due primarily to higher sales prices and volumes, as well as operating efficiencies and a shift in the mix of the business to the distribution segment, which has a higher gross margin.

SG&A was reduced by 0.8 percentage points to 28.7% of sales. The reduction was driven by continued productivity improvements, lower stock-based compensation, and expense savings activities within Associated Spring, partially offset by higher costs in Barnes Distribution as a result of the KENT acquisition.

Operating income increased 86%, with an increase in operating income margin of 3.2 percentage points to 9%. Interest expense of 6.8 million was up 46%, primarily due to higher average borrowings, which increased 148 million over the prior year to fund organic growth initiatives, acquisitions and RSP investments.

The fourth-quarter effective tax rate was 18%, really a function of adjusting the full-year rate to 20.8%. Changes in our tax rate are largely dependent upon the mix between domestic and international earnings.

Net income for the fourth quarter was 18.5 million. This was an 83% increase over last year's net income of 10.1 million. Before the cumulative effect of the change in accounting principle, and on a comparable basis, diluted EPS was $0.34, a 70% increase.

Turning to schedule 4, I'll review the results of each of the businesses, starting with Barnes Distribution, where sales for the fourth quarter of 142 million were up approximately 26%. Organic sales growth was approximately 5%, driven primarily by North America, with contributions from Europe and the Raymond division. The KENT acquisition contributed 20.8 million, or 18%. Currency changes provided 1.9 million, or about 2%.

Barnes Distribution's operating profit was 4.5 million, up 9% from last year's 4.2 million, and resulted in an operating margin of 3.2%. During the quarter, and as part of the KENT acquisition (technical difficulty) we implemented a restructuring of our European operations, which resulted in a charge of approximately 1.7 million for the planned closure of our headquarters and distribution center in Elancourt, France and sales office in Epone, France. These closures, as well as the expansion of our existing facility in Flers, France, are expected to be completed by mid-2007.

In addition, higher field sales compensation and commissions adversely impacted results during the quarter. Partly offsetting these charges was a 1.5 million gain on the sale of our facility in Edmonton, Canada.

Associated Spring sales of 111 million were up 10% from prior year. The sales growth results included 7.2 million from the Hanggi acquisition and a favorable impact of 2.6 million from foreign exchange. Excluding acquisitions and the impact from foreign exchange, base revenues were flat over the prior year.

Associated Spring continues to have success in driving profit levels, growing higher-margin businesses and improving profit margins in the traditional operations. The nitrogen gas business has achieved sequential sales growth the past two quarters. Also, our results within the traditional business were bolstered by continued strength in the heavy-duty truck and telecommunications end markets, both of which are expected to climb in the first half of 2007.

Associated Spring remains profit-focused and we continue to see broad-based improvement. Both the specialty operations, which include Heinz Hanggi, and the traditional business, contributed to the 8.5 million increase in operating profit and the corresponding increase in operating margin of 7.3 percentage points to 11.7%. Operating results also benefited from continued productivity improvements and the lower allocation of corporate expenses, partially offset by the final expenses of approximately 300,000 for closing Barnes Precision Valve's suburban Detroit facility.

Turning now to Barnes Aerospace, which continues to achieve record results. Fourth-quarter sales of 79 million were up 23%, and operating profit improved 66% with continued impressive dropthrough. Total OEM sales for the fourth quarter were up 10% to 51.6 million. Commercial sales were 40.1 million, which includes a 32% increase to 20.4 million, and sales of components for the GE90 engine family. Military sales were 10.4 million.

Barnes Aerospace orders for the quarter were 113.7 million, up approximately 46% from the prior-year level of 77 million. Backlog increased 50% from a year ago to a record 403 million, of which approximately 58% is scheduled to ship in the next 12 months. Commercial backlog of 306 million was up 51%. Military orders and backlog in the fourth quarter were 26.6 million and 89.7 million, respectively.

Aftermarket sales increased [58]% to 27.2 million for the quarter, including MRO sales of 17.5 million and aftermarket RSP sales of 9.7 million. Aftermarket MRO activity continues to be driven by strong industry fundamentals and Barnes Aerospace's special skills and capabilities.

Barnes Aerospace has now produced quarter-over-quarter growth in operating profit for 12 consecutive quarters. Fourth-quarter results reflect a record operating margin of 15.4%, up from 11.4 in 2005. This improvement was primarily driven by higher sales volume and the increased percentage of aftermarket activity.

Turning to schedule 5, cash was 35 million at the end of the quarter. The debt to capitalization ratio was 45% after a net charge to equity of approximately 17 million for the accounting for our pension and other post-retirement benefit plans, which includes the adoption of FAS 158. Despite the effects of FAS 158, we were able to remain within our targeted debt to capitalization ratio of 40 to 45%. Our debt to EBITDA ratio was 1.9 times, versus a debt covenant of 3.25 times, giving us additional borrowing capacity of over 230 million. Capital expenditures for the fourth quarter were approximately 9.1 million and our full-year CapEx was 41.7 million.

Our fourth-quarter results cap out the successful 2006. Our continued financial success is a testament to the dedication of our employees, and with their continued hard work and capabilities, we look forward to a successful 2007.

For 2007 our targeted full-year diluted earnings per share are $1.53 to $1.60, which is 10 to 15% over the 2006 level of $1.39.

Operating margin projections by segment for the full year are as follows. For distribution, about 7%, up from 6% in 2006. For Associated Spring, about 10%, up from 9.6% in '06. And for Barnes Aerospace, about 15%, up from 14.4% for the year 2006.

Other key financial metrics for '07 include -- an average total company tax rate in the low to mid-20s; an anticipated weighted average diluted share count of approximately 56 million; capital expenditures in the $40 million to $50 million range. Capital expenditures continue to be directed primarily to investments needed to increase capacity and improve operational efficiency. Depreciation is expected to be around 35 million, and the estimated amortization of intangible assets is projected to be around 10 million.

In summary, fourth-quarter and full-year 2006 results have demonstrated the benefits of deploying our capital to activities that generate stockholder value. As our businesses continue to focus on employee development, process improvement and strategic development, we remain confident in our ability to raise the bar on Barnes Group performance.

Thank you. I'll 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). Matt Summerville, KeyBanc.

A couple questions. First on distribution. The margins here were the worst you've had in several quarters. You can basically net the gain you had against the severance charge of 1.7 million. So I guess I'm wondering why -- I guess the explanation you provided was that commissions were up, which means you're not getting any leverage out of the business. Help me understand more what's going on there. There has to be something else other than higher commissions that [dis-enabled], I guess, more meaningful dropthrough.

A number of factors here in the fourth quarter. First off, we have been increasing sequentially our investment in the sales force. And last year we increase that sales force by 51. When you bring somebody on on a salary basis, which is what we're doing, there is quite a period before you get any payback. So we're investing for organic growth. That's a factor.

We did see some pricing pressure on corporate accounts in the quarter, and we're dealing with that [finally]. KENT [ROS], as I think you know, is lower than the rest of the group. We have not yet realized any synergies. We've just begun that process, and that will culminate in the mid of 2007. So we do see upside here. We've increased our guidance for Barnes Distribution for '07, and we expect to meet or exceed that guidance.

With respect to any ongoing acquisition integration expenses or any additional severance, that's in your guidance for the 7% margins in distribution in '07?

Yes it is. We accrued 1.7 million. That covers what we expect to do.

I guess, how many people did you end the year with on your sales force and distribution versus the end of '05?

As I said, it was an increase of 51.

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

The aerospace business -- kind of curious. No matter how you measure it, the amount, or the rate at which you're recognizing revenues doesn't seem to be sort of in line with the rate at which you're booking backlog. I guess my question is, simply, when do we expect the logjam to sort of break, resulting in significantly higher revenues and shipments in the Aerospace business? Because I would be surprised if you can continue to build up the backlog indefinitely at this kind of rate. I'm trying to get a sense of when we -- with a 50% increase in backlog, when do we start seeing that translating into very rapid growth in the Aerospace revenue line?

First of all, very good growth rate during 2006. As you saw, we had substantial growth in the Aerospace business to begin with. The second thing is, a certain portion of that backlog is due to longer leadtime items, such as titanium purchases in advance and things of that nature. And also, different customers have different characteristics for how long they place orders, so the Goodrich program that we announced last summer may have different characteristics than had been the traditional trend in some of the original equipment manufacturers. But we expect to continue to improve our sales going forward, and I think that we're planning to handle the capacity.

The backlog, 58% is scheduled for shipment in 2007, per the customer request. So we've seen an extension in leadtimes. We continue to book orders at a higher rate than sales, which is why the backlog is strong. The key question is, and our mission is to ship the orders in line with the customer expectation.

Okay. And, I guess, to some extent, the orders were getting booked because of concerns about materials and things of that sort. How comfortable are we that the backlog is in place? Do we have a history to go back and sort of say, well, they sort of put in these orders a bit on spec, and then ultimately they pull it out if conditions [change] or what have you?

We actually take a look at the orders and match it to forecasted aircraft and engine production. So we have a very good track record of forecasting our production requirements. And by matching the internal and external expectations, we're able to clarify any discrepancies.

We very rarely have a backlog or an order de-booking out of backlog.

Okay. So, when I think about it -- again, I understand that you were up 26% in revenues for the year. I certainly wasn't suggesting that wasn't a good number. But again, backlog was up 50 to finish out the year. In effect, I guess, we're kind of delivering 24, 25 -- in any given quarter we're delivering 24 or 25% of the prior quarter's backlog. And I know that's not [necessarily] the way to look at it, but it allows me to sort of get a sense of what rate we're delivering at. Are we sort of expecting to deliver a similar rate in '07 as we were in '06? Is that the way to look at it, rather than an acceleration in the shipments?

I think the way to look at it is that 58% of the year-end backlog is scheduled for shipment in '07.

Peter Lisnic, Robert W. Baird.

It's actually John Haushalter on for Pete. Good quarter, guys. Just had a couple of questions for you. If you look at Aerospace, and you kind of look at how your aftermarket business has grown -- and I think a large portion of it has been RSPs -- as kind of the RSPs start to annualize, is that number going to return to kind of more overall aerospace industry growth rates? Or is there a way that you can kind of keep that growing at the rate it has been growing at?

Peter -- or John, the RSPs are ultimately based on the number of shop visits for the engines where we have the parts. And that number doesn't grow real quick. It's single-digit growth. And the reason the RSP sales have been increasing is because we've been adding RSPs each year. But if there were a period where we weren't adding additional RSPs, the growth rate would be relatively slow.

Are there more RSPs or more kind of activities likely to be forthcoming in this year, in terms of new agreements signed?

We're always considering new alliances, new agreements, new acquisitions. And that's typically all we disclose.

And then, I guess, as a follow-up -- if you kind of look at how you're executing, or kind of across all three segments, it seems like things are going well across all three, with distribution actually looking like it has some positive momentum with the investments you're making. Does it seem like this is a year where you would -- if your long-term target is 10 to 15% growth, it seems like this would be a year where you would be above that, to kind of compensate for an off year that you're going to have some other time. Are you just really being conservative here?

We think 10 to 15% growth is a good number. We think it's aggressive but achievable. We've taken everything into account, understanding the businesses very thoroughly, and I think our outlook is solid.

(OPERATOR INSTRUCTIONS). Matt Summerville, KeyBanc.

Another question on distribution. Pricing pressure -- that's the first time I've heard that in probably a long time. How severe is it? And as a percent of your revenue, distribution revenue, how much -- your North American revenue, I should say -- how much is corporate accounts?

Corporate accounts is about a third of North America. We did see pricing pressure on negotiations on some existing business in the quarter. As I said, we're dealing with it, and we'll react this quarter.

I guess, then, where are your raw material costs in distribution trending? And then, outside of corporate accounts, are you getting positive pricing?

I wouldn't say we're getting positive pricing, Matt, but we are trying to offset the increase in raw material costs. It's copper, it's brass; it's really fasteners.

Moving onto Spring, can you talk a little bit more about the margin performance in the quarter, and why -- obviously, you're guiding to sort of 10% in 2007 -- the fourth-quarter number doesn't appear sustainable?

There's a couple factors in there that you have to take into consideration. One was the buildup of heavy-duty trucks toward the end of the year, and the second was telecom. Those two factors play into our forecast going forward.

And then, I guess, with truck -- Bill, in your prepared remarks, did I hear you say that you expect it to climb further in the first half of the year, or decline?

Decline.

On Spring again, more detail in terms of how the other pieces of the business are faring. How did the automotive piece of the business do versus production, Big Three and transplants? What's your outlook for the automotive piece of Spring in '07?

If you look at the -- I would say the Big Three, they're holding their own. They may be slightly down year-over-year. But as you know, we're focusing on profitable growth. So that's where we're going from there. And if you look at overall production for the North American vehicles, they were down about 7% year-over-year as well. So, nothing out of the ordinary there.

Despite the fact that sales were relatively flat in traditional Spring, we did see a nice increase in profitability there due to pricing and profitability initiatives within the businesses.

So moving into 2007, is there any reason that you see that your automotive-related business won't meaningfully outperform production?

A long pause. (multiple speakers)

Are you talking about sales?

Yes. If North American production is down, whatever -- pick a number -- do you anticipate your sales to that market, or to the Big Three, to fall at a commensurate rate, or do you believe you will be able to outperform?

I think the sales will trend their production.

But at the same time we also expect -- and we built all this into our forecast. We expect the lean enterprise initiatives to have an effect on productivity. And we have taken all this into account, and it's countered some of the declines in heavy-duty truck, etcetera.

I wouldn't worry about auto. We've got six [SBUs] in Associated Spring, one of which is a traditional spring business. And the automotive content, even within traditional spring, continues to drop.

Perfect. That's really what I wanted to hear. And then, with respect -- what's you're outlook for the nitrogen gas business in 2007 as you progress throughout the year?

The place we've seen weakness has been the U.S., and we are starting to see signs now of some -- I won't say dramatic, but a significant increase there. The business operated out of Sweden had a good year. The softness has been here in the U.S. We have seen sequential sales growth the last two quarters, and we look for that to continue.

Holden Lewis, BB&T.

On the revenues in the Distribution business, traditionally, from a seasonal standpoint, those would have been down in Q4 versus Q3. I recognize you had a little bit more incremental revenues out of KENT. But frankly, the big jump in that business -- it seems to be somewhat greater than even -- the KENT revenues don't seem to fully explain that jump. And in an environment where a lot people kind of said that the macro conditions softened a bit in Q4, I was surprised to see the organic rate jump that way.

We also had the impact of Toolcom and SPD year-over-year.

Right. But you're talking about 4 million incrementally from acquisition, regardless of source, right, in the quarter?

Yes.

Probably -- considering traditional seasonality, you probably, with the acquisitions, would have been flat year-over-year or flat quarter-to-quarter. And you were up a pretty good amount, and the organic growth rate stepped up at a time when I think most people were saying the market slowed a bit. Can you just sort of talk a bit about where you saw the strength, if it's sustainable or what have you, how you achieve that?

I think we saw continued growth in our tier two accounts, and that's been one of our key initiatives in the distribution business.

Is that any greater than it has been, that growth? You've been growing double-digit for a while.

It was a solid 33% increase quarter-over-quarter for our tier two. It certainly continues to be strong. I'd say that, coupled with corporate. But I also get back to the end markets, where we continue to focus on those infrastructure markets that are important to the continued organic growth of the business.

I would now like to turn the call over to Brian Koppy for any closing remarks.

Thank you, operator. Thank you, everyone, for joining us today. If there are any additional questions or matters that were discussed this afternoon, and you have additional comments or questions on that, please don't hesitate to contact the investor relations department. Thank you for joining us today.

This concludes your presentation. You may now disconnect, and have a wonderful day.