Barrick Mining Corp (B) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Barnes Group, Inc. 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 Mr. Brian Koppy. Please proceed, sir.

Good morning and thank you for joining the Barnes Group's third quarter 2007 earnings call and Webcast. This is Brian Koppy, Director of Investor Relations and Corporate Communications for Barnes Group. With me this morning are Barnes Group's President and CEO Greg Milzcik, and Senior Vice President of Finance and Chief Financial Officer Bill Denninger.

I want to remind everyone that certain statements we make on today's call, both during the opening remarks 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, at barnesgroupinc.com.

Before I turn the call over to Greg, I would like to comment on the enhanced press release issued this morning. We implemented a new process this quarter as part of our continuing efforts to enhance our communication with the investment community and be a leader in investor relations activities. Our enhanced press release has incorporated information that was previously only provided as part of the prepared remarks portion of the quarterly conference call. As a result, we will begin today's call with only a brief opening statement by Greg Milzcik, and then open the call up to answer your questions. Now let me turn the call over to Greg.

Good morning. As Brian mentioned, I'd like to make a few comments regarding the quarter and then we will be happy to take your questions.

First, I am pleased with the third-quarter results, as they continued the momentum we saw in the first half of the year. Once again we delivered double-digit top-line growth and sharply grew our operating margin, net income, earnings per share and cash flow. Ongoing operational improvements utilizing lean enterprise techniques continue to derive the Company's profitability. Process improvement investments centered on our lean program remain one of our key corporate priorities, and will enable us to drive our business activities to new levels of efficiency and effectiveness.

Barnes Aerospace had an exceptional quarter with record sales, profit and backlog. As strong aerospace demand is expected to continue throughout 2008, Barnes Aerospace's commitment to disciplined capacity expansion, prudent transitioning of workload to other facilities, such as our Singapore operations, and continued improvement in productivity and operational processes are key to the continued success.

The underlying results of Barnes Distribution did underperform this quarter. However, we expected volatility. With a new leader in place and the Barnes Distribution team firmly focused on Project Catalyst, we remain committed to delivering 8% operating margin in this business next year. The investment and the actions we are taking this year at Barnes Distribution are necessary and vital to the accelerated improvement in operations and the establishment of a solid foundation for profitable growth.

Barnes Industrial generated a 3.5% increase in revenues, but importantly, a 27% increase in operating profit, an impressive 83% flow-through. The strong results highlight the benefit of improvements in a number of key markets and geographies, as well as gains from lean activities. As Barnes Industrial closes out this year and looks to 2008, they are focused on establishing processes to drive organic growth.

Overall we're encouraged by our performance thus far this year. We continue to make significant progress in achieving our objectives within each of our businesses, as both growth and operational improvement initiatives continue to build momentum. Despite some areas of softness during the quarter, we believe our business and end markets remain relatively healthy, and our outlook for the remainder of 2007 and 2008 continues to be positive.

Now I will turn the call over to Brian.

Thank you, Greg. We will now open the call to your questions. Operator, first question please.

(OPERATOR INSTRUCTIONS). Christopher Glynn, CIBC World Markets.

On the Project Catalyst, I think you called out 1.5 million in costs in the third quarter, and the implication is for 3.3 in the fourth quarter. It seems like you had quite a lot going on in the third quarter, so I'm just wondering what the step-up is there.

It's just a gradual ramp-up in each of the elements of Catalyst.

It's not maybe the Canadian warehouse being a particularly big piece or something?

No.

And then in Barnes Industrial, some of -- from a top-line perspective, obviously, the margins are very good. But from a top-line perspective, some markets are challenging, like HD truck, and some of the things going pretty well. Just wondering how you're looking at the mix of headwinds and tailwinds from a top-line perspective over the next few quarters with -- in particular with realignment of the product rationalization that might take place versus the near-term outlook for HD truck, telecom and electronics.

I think in general, we're pretty bullish on the industrial market. One of the big benefits that we have is the geographic dispersion of our end markets. Europe is still very robust for sales as well as orders. We continue to export to Asia from a variety of our different product lines. So we feel fairly confident that for the foreseeable future, being the next couple periods, that the markets are strong.

Just in particular (inaudible) what's going on with the telecom market maybe?

Our telecom market content is relatively small, but we've been pretty stable as far as all the numbers we've seen. In addition, I think that we're continuing to expand some new products in a variety of different areas. But I think in the end, telecom is not a core driver for us.

Matt Summerville, KeyBanc.

A couple questions. First, you mentioned 2.5 to $3 million worth of actions you're going to be taking in industrial, and some that includes product line rationalization. I was wondering if you could give a little more detail on that, and then what you'll be doing with the footprint, if you can mention that at this point. And then looking into '08, how much net savings should these actions yield?

First, we haven't completed all the planning cycle, so I can't really release all the data currently. And second, when we go through the full-year guidance next year is when we will provide more information on 2008 impact.

Bill, can you help me understand the ramifications on taxes as far as Mexico goes?

That's a onetime non-cash, in effect, write-down of deferred tax assets related to this change in the laws there. So it's a onetime hit in the fourth quarter.

Okay. Looking at -- let's see -- what you're doing in Aerospace as far as the Utah plant, can you give us an idea of what the capacity of that plant is going to be that you're bringing online in '08, and at capacity how much incremental sales that facility can add to the business?

We're looking at doubling the capacity of our existing operation. So we're -- we also have the ability to expand it beyond that footprint as well. We think that the Goodrich deal that we signed last year, for example, tied to the 787, is a wonderful driver that will provide the type of workload that we need in order to support the expanded operations. But it's also building a state-of-the-art operation that will be able to reduce cost to our customers as well as improve the profitability overall. So we're looking at being able to double the capacity of our superplastic forming operation.

You mentioned Singapore and the ongoing migration of production over to that plant. What is your utilization rate in Singapore? I think you recently added capacity there, but I'm just trying to remember.

We have, but we have opportunities to expand that in incremental steps as well because of the way we've located the plant and have options on further expansion. We can essentially double or triple capacity there; it's a matter of how fast we want to install equipment. And we want a smooth transition. We're trying not to throw dollars at issues; we're trying to do it as smoothly and as efficiently as possible to ensure the quality and the performance of the operation.

In the press release under distribution it was mentioned that you've had an increase or something like that in your fixed cost sales force. Can you give color on that? I would think these guys would be commission-based.

There is a variety of different compensation plans. We have both commission and salary sales reps, and there's -- the newer sales reps are on more of a salary basis. So it is increasing our fixed cost ratio. And part of that ties to the team selling model, where we want a team that will go in and open new accounts and service new accounts. So we're splitting this up in a team selling model.

Can you kind of go over the overall structure of the organization going forward, in terms of -- I think you mentioned that you're focusing the organization maybe more around end markets, and then layer in how that team selling thing plays into that.

That's very true. We're looking at three core vertical markets as well as a number of segments within the marketplace. And this will allow us to do several things. One is it will allow us to service our customers better because we will be able to target specific markets with products that make the most sense for that particular market segment. As well as we're also looking at areas that value the vendor-based model that we use, which is a vendor managed inventory model. And obviously, different business end markets value that model differently. So we're looking at customizing, essentially, the delivery to our customers around those end markets. One of the things we did in the last quarter was to integrate the sales force nationwide around the Barnes Distribution nameplate. And that was important in order to carry out the next step, which is the vertical market integration of the strategy.

What are the three vertical markets? How are you looking at that?

Transportation, natural resources --

Manufacturing.

-- and manufacturing.

From just an end market overview in distribution, I guess, or maybe first a geographic overview, can you talk about what you saw in terms of organic sales ex-currency international versus -- obviously, domestic, there is no currency -- but what your core sales domestically did?

Domestically we were down about 1.5 points. We did see a slight increase in Europe, primarily the KENT operation. That is, again, the core business.

Thanks. I'll get back in queue.

Karl Oehlschlaeger, Banc of America.

More on the Distribution segment (inaudible) the top-line you had the second sequential decrease in a row. (inaudible) doing multiple things with Project Catalyst that are impacting it. I think you mentioned before that one (inaudible) is customer rationalization, if I'm correct. Can you talk about how big that impact was, if that's true, and how we should think about that going forward?

That's hard to measure. But I think that there is some disruption, certainly, when you look at the fact that just the reorganization of the sales force -- you have roughly half the field sales force has new leadership with the way it was realigned. We expected some disruption, and actually it was not as bad as it could have been. In general, I'm encouraged. I think most of these steps we're taking in Catalyst, while not perfect, we're moving in the right direction and we seem to be making progress in key areas. And we're optimistic.

I don't know if Patrick is there, but can you talk about how quick he's kind of come up to speed on the segment and (multiple speakers)

He is completely integrated right now. We told him his honeymoon ended last week. Actually, he is doing very well. He is a very talented manager, and we've been offering him a lot of support as well. He is diving in with both feet. There's a very good management team over at Barnes Distribution, and I think that they're educating him very rapidly. Very optimistic.

Is he -- has he had any input in terms of how your procedures to implement Project Catalyst might change? Are you going to allow him to do that? Or what's --

Certainly we're going to give him the latitude to make adjustments. We believe that nothing is perfect in planning, and you have to be able to have countermeasures for every occurrence that comes up. The one thing that we are determined on is to make the changes necessary. And if we need to alter direction here and there in order to make it happen, Patrick will absolutely have that ability.

Switching over to Aerospace, can you talk about your OEM growth in the quarter and what are the drivers there?

OEM was about 32%; again, the same drivers we mentioned in previous calls. The GE90-115B is probably the biggest driver, follow shortly by the 787. Those would be the two main drivers.

With respect to the RSPs, you had another big increase, almost doubling. When do the comps there start to get more difficult?

Keep in mind, too, that there were additional RSPs. So you have to look at it as it's not just organic growth.

The last RSP was, I believe, in the second quarter. So that's when (multiple speakers) equals out year-over-year.

So the second quarter of '08 is --

Right.

Okay. Thank you.

Peter Lisnic, Robert W. Baird.

It's actually John Haushalter on for Pete. Just want to say first off, thanks for providing all the disclosure in the press release; I think it's really helpful.

And we'll be improving that as it goes along once we get some feedback on how the data is interpreted.

I guess, focusing on Aerospace, Greg, it's a business I think you know really well, having run it. And just if you look at the operating margin potential there, where do you think things can go to? And just how is your thoughts about kind of the margin potential that business changed over the past two years as you guys have kind of had these 4 or 500 basis point improvements year-on-year?

There's a couple things you should know about Barnes Group. First of all, we're an EVA-orientated company, which means that we focus on essentially a rate of return. So when we talk in the Aerospace group, we tend not to really focus on the operating margin as much as we do the rate of return, because there's a lot of things I could do to influence operating margin; simply bidding on product that has high material content and lower profit. So you have to take that with a grain of salt.

What we focus on is what we call PPAT, performance profit after-tax, which is an EVA-like measure. And from that perspective, I think, there's a lot of growth potential, because we're adding new sales. We're getting more efficient, which means we can deliver to our customer a high-quality product at a lower cost. We've rationalized our plants well so that we're very efficient. We're implementing a new level of lean, the lean enterprise process, that goes a step further than we have in the past with some of the lean activities we've had. So I think that there's continued growth and profitable growth, as we'd say, in the business. But I wouldn't focus that much on the operating margin.

Just turning over to kind of Industrial, you commented -- and I don't know if it was for the Industrial segment as a whole, or just for the precision valve business, but your customers kind of moving overseas, or relocating to lower-cost countries. Is that something where to follow them you would have to put kind of additional cash capacity in the ground? Or is that something where you can do it from -- you can follow them over time from existing facilities?

I'll speak generically first, and that is one of the things I noticed over time, especially the past five years, is the customer is increasingly -- is less and less concerned about where the product is produced as long as it's available at their assembly area or their manufacturing site when it's necessary. So frequently, you can actually substitute low-cost warehousing in the geographic location that you need to service. This allows you to concentrate your production in fewer locations and gain some scale and efficiency. And I think that's the same thing we're seeing in some of the low-cost country moves. Obviously, we're not going to chase every customer to every corner of the earth simply because they're not consistent. Some are going to China, some Vietnam, some Thailand, wherever. But at the same time, we're still looking to provide a lower-cost -- a low-cost, high-quality product.

Final question. If you look at Distribution, you kind of noted construction and transportation were a little bit soft. Were there pockets that offset that where you were actually seeing kind of strong growth within the segment by end market, not kind of by tier two or things like that?

It's really the offsets continue to be corporate accounts and tier two, which are pretty much across the board. There's no particular segments there.

We have an advantage in corporate accounts because we're a nationwide business, and that eliminates a lot of regional players and a lot of the ma-and-pa players from servicing nationwide accounts, such as trucking fleets.

Thank you. I'll get back in queue.

Holden Lewis, BB&T Capital Markets.

Also I will say that I like the release, but more importantly I like that you don't reread it on the call. That's fantastic from my perspective. Two things. First, it looks like you had very good cash flow in the quarter, and have been for the year. And you commented about how you're kind of doing some warehouse management systems and sort of looking through that, and you talked about the change in the sales force, and those sorts of things, which could conceivably be somewhat disruptive from a service standpoint. Have you been building up any inventory, or otherwise taking some actions in working capital that may unwind and boost cash flow further as we go forward? Or is cash flow pretty lean and where you want to see it, working capital?

The area where we have built some inventory is in Europe as we go through the KENT integration. In the US we're in pretty good shape. We have not been building inventory, but we do watch the service level fill rates on a daily basis to make sure we're performing there in the US. And the fill rates have held up very well.

Fair enough. So there's nothing else -- so working capital where it is today, there is -- is there anything that we should be thinking about as we go into Q4 or '08 that would suggest that the cash flow out of working capital is going to get better, worse? What are the moving pieces?

It will get -- in terms of days or percent of sales, it should improve somewhat as we complete the integration in Europe. But that's about the only major swing. We have been building inventory in Aerospace for the RSPs and some of the new projects we have underway, but that will continue. We won't see an offset there.

Thank you. On Aerospace, what was the order number for the quarter? I don't think I saw that.

The order number was 133.6 million. But again, we have been trying not to emphasize the order number as much, simply because it doesn't really reflect the aftermarket side of the business. So over time, the order number is not as good of a leading indicator as you might want to rely on.

Lastly, and I'll jump back in, you kind of talk about being comfortable with where the industrial cycle is and that sort of thing in your businesses. But, if you kind of look at where sort of the local currency organic growth is out of Distribution, that seems like it's been getting somewhat weaker as the year has progressed. When you look at it in Industrial, it's been steadier, but really between zero and 1% growth. Again, that's adjusting for acquisition and currency, so it's local. Those seem like relatively tepid growth levels given your statement that you're pretty comfortable with what you're seeing out there. Can you sort of comment on that?

The first thing we've said in the previous calls is that the first key -- and it's my firm belief that improving margin before you focus on growing the business is an important component to growing a profitable business. You have to be more selective and targeted. But we are definitely investing in organic growth initiatives from a variety of perspectives. I think that we've cleaned up a lot of the brush, so to speak, in some of the businesses. And we've also seen good sales growth in some of the businesses that have the higher margins -- the (inaudible) products, the (inaudible), (inaudible) etcetera. So I think that in general it's been a good trend, a good trade-off. And I think that's where you're seeing the margin improvement.

[So mix within mix], you're trying to boost the growth in the higher margin areas, and you're sort of not sweating the growth, or maybe rationalizing some of the customers into slower growth?

I couldn't have said it better myself.

How long do you think that sort of rationalization, culling, what have you, how long will that go for?

As I mentioned before, or just to prior to the question, we're starting to make some significant investments in growth, not only in processes but in particular investments in sales and marketing and in new product introductions. I think that over some period, and I won't give you a quote yet -- but at the same time, we recognize that you can't do that forever, that you have to make a significant investment to grow the business organically.

On the sales force adjustment, are you finding that as you go to sort of a team approach, is that also, obviously, necessitating a lot more salespeople? So obviously, it's a bit more of an SG&A burden. How long do you expect to be in build mode versus getting a stable level in terms of the number of sales?

There's several components to that. One of the things that we mentioned in previous calls is the sales force automation. So we're looking at making the sales folks more efficient so they could deliver more product to the customer for less sales dollars. But also that will be helpful to the sales rep because he'll be able to provide more sales with the same amount of time and, therefore, make more money personally. So I think it's a win-win situation when we look at it, helping the sales force become more efficient. So we haven't tied ourselves so much to the number of salespeople out in the field as much as how efficient we could make them with improved ordering capability with what we call -- we have essentially a PDA that the sales force has out in the field that they could actually check stock levels, they could check pricing, they could check everything right on the spot. And that's showing up to be very helpful right now.

Christopher Glynn, CIBC World Markets.

On the product sourcing, you mentioned two-thirds of new suppliers identified. Just wondering exactly what identified means. I guess it presumes there is some kind of a roll-out to actually (multiple speakers)

We're using a pretty sophisticated tollgate system where we go through a series of processes in order to ensure the quality and the integrity of the system throughout the process. And we've identified target products as well as vendors through this tollgate process. There's a variety of different steps. There's roughly five steps in the tollgate process. The targets that we've identified have been in one of those tollgates, and will be on target for the 2008 number that we've identified for Project Catalyst component. So we're actually very pleased with not only how quickly we've been able to set up the sourcing center, but to be able to staff it and receive competitive quotes. It's been very, very smooth.

Is it easy to shop for the remaining third?

I don't want to use the term easy, but I think that it's something that we've proven we know how to do up to this point. And I think that we're satisfied at this point that we would give it a green as far as that component of Project Catalyst for 2008.

Just a little cleanup on the RSPs. That's kind of a run rate of revenue, really, barring further RSPs?

Pretty much. There are changes due to things like volume increases in the number of airline flight hours and things of that nature, and management fees. But overall, I think, that's what we're forecasting right now.

(OPERATOR INSTRUCTIONS). Matt Summerville, KeyBanc.

Within Distribution, the 2 to 3% margin guidance you have for 2007, just to verify, that does include all the charges you're taking in that business?

Yes it does.

What's the full-year anticipated charge, Bill?

7.7 million, roughly.

Will there be any charges in 2008 associated with Project Catalyst?

We haven't disclosed that. There will be a charge, but it will be quite a bit less than this year.

And then with -- when I think about the 8% target you've set for '08, that's a full-year -- first, is that a full-year target? And then second, with the charges, are you -- when you set that target, does that target contemplate the charge you just mentioned?

It is a full-year 8%, and it includes any charges related to Catalyst in '08.

Just in terms of, I guess, the end market trend in Distribution, can you throw some sort of numbers around what you're seeing in transportation? I think that's your biggest end market there.

I'm not sure we have any specifics on that. Brian can certainly get back to you. We haven't seen any particular weakness in the transportation fleet side that I know about at this point.

Okay. Just going over to Aerospace, do you have any stats on what the anticipated build rates are out of GE associated with the 787, how many engines are being built in '07, '08, and then kind of beyond? We're a little bit beyond Boeing's announcement related to the six-month delay. Do you see or do you envision any impact from that?

We see no impact, and we're not anticipating an impact, simply because the -- if you look at the production schedules going forward and the backlog, I think that it's going to be a successful program. I will say that I have said many times over the past couple of years that I thought that at least a year delay was built into my mind at any one time. So I think the six-month delay in a program is complex as the 787 is, which it is a revolutionary aircraft, it is not impacting us, and we anticipated it.

In terms of production rates on the 115B, has that peaked yet?

It's close to it if you look of the schedules that have been published going forward. And it's been a very successful program. I salute GE and the folks out there for putting together a program that robust. It's approaching 180 engines a year. When we started the program back in 2001, we were guessing it would get up to about 80. So it's been a very, very successful program.

In the past you've given out some rough content numbers. Can you review where you should be at with the GEnx and Trent, and then remind me where you're at with the 115B?

115B, we're at around 600, 625 per engine. The 787, last number I saw was about 750 per plane, 325 per engine.

And we've been using plane basically because on the -- with the Goodrich deal, for example, it's an airframe component rather than an engine. And predominantly, we're an engine-orientated aerospace company. But this is one exception.

Within Industrial, when you mention transportation is weak, I would assume that includes your legacy automotive-related business. In terms of a percent of sales, I guess, what is transportation now? Because over the years that's been declining.

It depends on how you define transportation, whether it includes heavy-duty trucks, off-road.

I guess the way I think about it, anything to the Big Three or any transplants, and then what you sell to tier one and two. You can throw truck in there, because I remember that's about 5% or something like that.

You have that handy, Brian?

Within Barnes Industrial, the total percentage of direct sales to light vehicles is running about 14%. It's actually at our lowest level ever. And within the Company it's under 5% now, which is the lowest percentage ever as well.

Does that include tier one and two, or is that direct to OEM?

That's direct to OEM. That's the measure we've been using (multiple speakers) over this period.

Can you talk about what you're seeing -- again, more detail -- in nitrogen gas?

Basically nitrogen gas is -- has a cycle based on tool builds. And the tool builds could be from, let's say, new air-conditioning systems, launch of new programs on electronics, whatever it happens to be where they need new die sets. But the orders have been very solid. We expect to continue through the balance of the year with a solid orders book.

What's the book-to-bill in that business then?

It's about 1.2. In the second half of this year we've seen a real solid orders increase.

Then typically, when do we expect orders that are booked at this time to be shipped? Is this more of a first half '08, or does this give you visibility already into the second half of the year? I guess I'm trying to understand what the leadtime is in that business.

Leadtime is relatively short. A lot of the products are off-the-shelf.

Okay. So does that book-to-bill of 1.2 mean you're going to have a huge fourth quarter in that business?

I don't know if it's huge, but it's going to certainly represent some significant growth. Yes.

To get to that 2 to 3% margin in Distribution, if I go back the last couple of years, fourth quarter, Distribution doesn't really make much money, if any. In fact, it's lost money in some fourth quarters. Given that you're going to be encountering a couple million dollars worth of charges, I guess, as I put together my model, it makes sense to factor in an operating loss in that business. Correct?

We haven't disclosed that. We give the full-year guidance, and that's what we stand behind.

That's all I have.

Holden Lewis, BB&T Capital Markets.

You're sort of anticipating doing this product rationalization within industrial, but you haven't included that in the guidance. How should we be thinking about that? It sounds like something is going to come down the pipe; you just haven't included it because it's not completely finalized. But it sounds like at some point during the quarter you're going to kind of revise based on this. Is that a reasonably accurate portrayal of it?

We tend to think of it as a one-off or even non-operational kind of cost that we wouldn't put into the guidance typically. (inaudible) onetime fit for the realignment, which will, obviously, have benefits for next year. But we don't view it as anything but a onetime hit.

You guys have typically embedded those sorts of things. You have not been sort of chronic strippers of that sort of thing in the past.

We've had costs throughout the year that have been embedded, but in this case it was the magnitude that we decided to make the disclosure.

The other issue is it's not final yet. We don't know what the final number is, so we certainly didn't want to bake it into the guidance.

That's the point. Something is going to come out on this of some amount somewhere near where you said. You just don't haven't it finalized, and that's why you didn't include it, right?

Yes.

Yes.

Secondly, you also, I believe, had -- on the subject of truly onetime charges, you had, I think, this quarter a charge related to your convertible? Can you talk about just sort of what the pre and after-tax amount of that was?

This was an item that one quarter ago on the call, we mentioned it looked like we were going have to write off some deferred debt issuance costs related to the convert. Following that, with additional work on the accounting, the proper accounting, it was decided no; it wasn't necessary to take that write-down of those costs. So there was nothing in the quarter.

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

Thank you very much, everyone. Appreciate all the questions. If there are any additional questions, however, on any matters discussed this morning, please feel free to contact me. Thank you for joining us. Thank you.

Thank you for your participation in today's conference. You may now disconnect. Have a great day.