Barrick Mining Corp (B) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2008 Barnes Group earnings conference call. My name is Dan and I will be your coordinator for today. At this time all participants in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes. I'd now like to turn the call over to your host for today's call, Mr. Brian Koppy. Please proceed sir.

(technical difficulty) call and webcast. This is Brian Koppy, Director of Investor Relations and Communications for Barnes Group and 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 website at BarnesGroupInc.com.

Our detailed press release was issued this morning and we hope you have had a chance to review it. 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 you saw on the press release this morning Barnes Group had a record start to the year driven by strong performance across the businesses. Revenues were up 8% with strong organic growth at Barnes Aerospace, earnings per diluted share were $0.60 an increase of 20% over last year and we raised our full year outlook to $2.30 to $2.39 per share an increase of approximately 33% over 2007 results.

Importantly, sales and operating profit per employee were both up 18 and 10%, respectively in the quarter. These key productivity measures are being driven by our enterprisewide operational improvements. As our business landscape becomes more competitive and the economic environment becomes more uncertain, a fully integrated operating system which standardizes, aligns and enhances our operations will enable us to continue to meet and exceed our customers expectations for service quality and delivery.

Our businesses are demonstrating continued improvement. Barnes Aerospace delivered 23% topline growth along with a 33% operating profit growth. Sales in the commercial aerospace manufacturing business are expected to continue to grow based on the strong commercial engine order backlog.

Increased outsourcing trends, capability expansion and strategic platform positioning are expected to add to Barnes Aerospace's growth potential. In addition our current backlog does not reflect the nearly 1000 Boeing 787 aircraft scheduled for delivery over the next eight years. Capacity expansion, new product introduction and enterprisewide investments along with a dynamic industrial setting including globalization and dollarization efforts should enable Barnes Aerospace to continue to deliver solid results throughout the rest of the year and beyond.

Turning now to Barnes distribution. During the first quarter we realized a number of benefits from the organizational and operational initiatives that undertaken in 2007 which reaffirm our expectations for continued momentum throughout the rest of the year. We believe we have made substantial progress within Barnes Distribution North America. We're focused on targeted market segmentation initiatives and a change in sales force compensation which focuses on market pricing, customer retention and penetration and adding new customers to our core markets.

However, Barnes Distribution Europe and specifically the United Kingdom had results which underperformed our expectations during the first quarter. We have taken aggressive actions to solidify and stabilize the business including a new management team, added focus on operational efficiencies through deployment of lean experts and we have expanded our successful global sourcing efforts to include our European business. As we move throughout the year improved performance in Europe is expected as a result of these actions and the strengthening of our fulfillment operations and the recruitment of sales representatives in certain territories.

Barnes Industrial continues to benefit from its globally diverse businesses. Strong growth from Barnes Industrial businesses in Asia and Europe are providing balance within the group as North American businesses have seen pressure in the transportation and consumer home products end markets. As of the end of the first quarter, approximately 59% of Barnes Industrial sales were from outside North America. Barnes Industrial will continue to implement operational improvements to enhance its market competitiveness, grow profitably and expand its global presence and customer base.

In summary, we expect the momentum to continue throughout 2008 as we realize the benefits of our global diversification strategy and drive process improvements and cost reduction activities. Barnes Group's ongoing operational improvements including lean enterprise, and systematic goal deployment, key elements within an integrated operating system will continue to help drive the Company's business activities to new levels of efficiency and effectiveness to meet the customer's needs and improve their performance. We're looking forward to a successful 2008 with increased stockholder value and remain committed to positioning all of our businesses for consistent, sustainable and predictable profitable growth over the long-term. Now I will turn it over to Brian.

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

(OPERATOR INSTRUCTIONS) Peter Lisnic, Robert W. Baird & Company, Inc.

Could you guys -- just if I look through kind of the Aerospace backlog number, the implied order rate is about kind of 2% or so year on year. I'm just curious is there some kind of cancellation of order or pushback of orders from the 787 or can you just give a little more color behind the implied order (inaudible) there?

First of all remember that there's a couple different aspects to the backlog. First of all it reflects primarily on the original equipment manufacturing side of business since the higher margin aftermarket business is a shorter cycle. So on the OE side the backlog was affected by 787 pushouts as well as some horizon changes due to the ability to obtain titanium sheet more readily etc. But it was a relatively good order for the quarter. I think we had somewhere around $10 million of pushouts for 797 in the quarter.

And then just just kind of looking at kind of what you did in the first quarter and clearly kind of results were above our expectations. I am assuming they're kind of above -- they were above kind of what you were planning also. It seems like the EPS increase was really kind of the magnitude of what you did in the first quarter and is that just conservatism regarding Europe right now or kind of what is behind the relatively small increase in guidance relative to what you just did in the first quarter?

In the first quarter we did benefit from lower diluted share count to the tune of around $0.03 against our internal estimates. We see the full year increase as a combination of lower diluted share count related to the share price and an improvement in operations.

I would also point out too that we are going to continue to make investments to ensure 2009 is going to be successful so that we are going to continue to make investments in Q2 and Q3 for '09.

Bill, just with the convert it looks like the imputed kind of share price that you're using for the full year for purposes for that is about $33.

That's in the ballpark, yes.

And I guess just with where your stock is right now is there any thought towards share repurchases or anything like that?

We have got an open authorization. We are always looking at it. We have bought the shares when we think they're cheap. So that is certainly something we consider.

Christopher Glynn, Oppenheimer.

On the industrial margins, just curious -- it's down a little year-over-year. I know it was a really tough comp but it's usually your strongest quarter seasonally for margin I believe and it seems like you had some pretty good mix in the overseas higher margin stuff versus the domestic.

It really is a mix issue, our offshore businesses versus North America. We did see an impact in North America in our associated spring piece of that business really (inaudible) light vehicles and heavy trucks. It's a high fixed cost business so we did take a bit of a hit there but luckily were able to offset it with the strength in the offshore operations.

Can you talk a little bit about the RSP pipeline and how the execution is going on just the last couple most recent wins?

I think the RSPs are progressing very nicely. For example we've been transitioning the workload to our Singapore operation and that has been fairly well-managed. We have had no pipeline issues with the product to the customer. The quality is exceptional and those are the key driving forces behind ensuring the RSPs perform long-term. Other than that they're performing to our model and expectation.

I guess by pipeline I meant prospects (multiple speakers)

We continue to evaluate RSPs but it is a very difficult negotiating process simply because it's complex as well as demanding financially. So we do not anticipate or forecast or disclose any of the negotiations that are ongoing.

I guess on the distribution side I think of the components within project catalysts the sales impact was a little further out then say procurement and sourcing benefits but should we think about the sales vertical market targeting component as a meaningful offset to the economy and maybe more in the second half?

Certainly. I think there's a couple different things. First of all, I would like to reiterate that Barnes Distribution North America where the majority of our project catalysts initiatives were in 2007 had the best margin performance quarter since 1998. And I think that bodes well for the various levers that we have been using to drive the margin improvement. Certainly, price as well as the lowering of cost through global procurement is a key component to that. But I think when I think about market segmentation a lot of that will benefit 2009.

There's quite an extended training program that we're putting our sales reps through relative to market segmentation and we're really trying to make them experts as they move into these vertical markets.

Lastly, comments on the acquisition pipeline?

Actually I think it's improving. I think generically you could say that margin or multiples are coming down. I think that there's more strategic buyers in the marketplace rather than financial buyers and we're continuing to evaluate opportunities.

Edward Marshall, Sidoti & Co.

I wanted to back up to that acquisition question that was just mentioned. Is there a particular segment? I know we took a hiatus from acquisitions on the distribution segment but would we consider something maybe in the industrials or aerospace and which one would you (multiple speakers) see?

Absolutely, in fact I think that generally multiples in aerospace have moderated somewhat and we will not do an acquisition for acquisitions sake. It has to make strategic sense and it has to make financial sense for our shareholders. But I think that there are opportunities in aerospace that make sense for us also in industrial and later in the year if we continue to see progress in distribution we will revisit the moratorium on distribution acquisitions.

And would it be more of a bolt-on for the aerospace or is it something that would be a third leg for the Company?

Primarily we're looking at bolt-on but that's not to say we're excluding evaluating other marketplaces. But we have done a fairly good job of establishing an organization that has economies of scale that brings value to the customer as well as to the shareholder.

In North America project catalyst obviously had a pretty good impact on the margins in the distribution segment.

Absolutely.

More importantly I think the long-term goal of the upwards of 9 to 10% in 2009 -- at this preliminary stage how does that goal look at this point?

First of all we never committed to double-digit in 2009. I think people have been trying to get us to commit to what date we believe its double-digit. We believe it's -- I'm more convinced now than ever that this is a very healthy business. It's one that we want to continue to reinvest in. It's one that I think that everyone will prosper in but we are going to drive toward that 10% or double-digit growth rate and we're not committed to a particular time yet.

But you consider the momentum will continue into 2009? Is that fair to say (multiple speakers)

We have said we're looking for sequential quarterly improvements. We continue to believe we can do that and we will see -- I mean the economy is an issue. We'll see how far we get.

Matt Summerville, KeyBanc.

A couple of questions. First, Greg, I'd like to get your view on how you -- what your thoughts are with respect to the general industrial economy here in the US.

I have very strong opinions that I've shared with anyone who would listen. And that is I think the companies that embrace globalization, those who looked at globalization as an opportunity rather than a threat I think are certainly a different category of performance during this downturn in North America. The second aspect of it is I think it's very much a segmented downturn within North America. Obviously if you're in financial services you have a very bleak view of the current conditions. But if you are its construction it's probably similar. Automotive is somewhat down.

But there's a lot of areas in the industrial economy that are prospering especially those that are export driven. I'd also say the dollarization effort that is going on with many European OEs to get manufacturing support from North America is very helpful as well. With a weak dollar it's hard to compete against a good American manufacturing company from an export perspective.

With respect to the aerospace businesses let's talk a little more about the 787. You mentioned a $10 million push or delay if you will. Was that one -- was that out of the first quarter into the second quarter? And I guess based on the current engine build schedule out of GE and Rolls right now how much 787 revenue I guess round numbers are you anticipating in '08 and how does that compare to your prior expectation?

Certainly, the schedule (inaudible) pushed to the right a quarter. I have several comments on the 787. First of all you could go back to transcripts from a couple of years ago and I have always been stating that this program I expected to be delayed at least one year. I have been very consistent about that over a long period of time. It's a very complicated aircraft. It's a step function in efficiency and design and as well as the process at which they're assembling it.

So we -- internally we had always had some Kentucky windage to apply to the schedule. This does not surprise me in the least. In some ways there is a smoothing of the out year schedule that benefits us tremendously because we have a tremendous unseen backlog that's not reflected in the numbers that you see. So when many people are looking at a potential flattening out in 2011 I think that's where the companies that have positioned themselves on this aircraft are going to see an actual lift rather than a drag to use aircraft terms. As far as revenues out of the year, we built that into the forecast as a whole but we're not giving specific numbers for competitive reasons.

Well, I guess then, Greg, maybe you can comment more qualitatively. Is the change in your 787 revenue forecast if there was one for the year, is it all that significant?

It's really not that significant in terms of bottom-line impact.

Especially, remember that early production units usually have very little profit in them because of the learning curve. So you know it's not a bad -- it certainly is insignificant for '08.

Can you talk, Greg, with respect to each of the three businesses on what you're seeing in terms of raw material costs and then what you have been able to do with pricing? And are you having availability issues with respect to titanium? I missed a part of your comment there.

Actually in aerospace, titanium is more readily available than it had been. Usually the law of supply and demand does work. It's a matter of how much time it takes for supply to catch up with demand. And I think in the aerospace business, titanium supplies have certainly been catching up. So availability of material is not a major issue.

Also, as I've mentioned in previous calls, the material pass-through pricing on most of our aerospace product handles any price increase of raw stock and we do have long-term agreements in place for most of the miscellaneous items that are not covered by those types of contract coverage. In our industrial business we have been able to extend contract coverages for up to six months where previously it was in a three-month range. And we have been working very diligently at making sure that we have got that aspect mitigated.

There is some small risk but -- I should say small. I don't want to quantify it in that way. But we're managing it actively. We have demonstrated success in the past at getting pass-through material or passing price to the customer and industrial side. Although there are some fluctuations here and there.

On distribution, we actively manage the material supply aspect of the business. And also our global sourcing initiative has been very effective at mitigating price in fact going the other direction where we are actually getting price reductions that are significant and contributing to margin.

With respect to I guess the industrial business, can you give a little more color on how organic growth is trending in North America versus your international businesses at this point, Greg?

I think overall internationally or primarily European based we're seeing high-single, low double-digit organic growth plus currency. In the US we're seeing 3 to 4% negative organic growth.

Perfect, thanks. Bill, I heard you comment earlier on share repurchase. Did you buy any shares back during the first quarter?

We did not. We looked at the opportunities out there for acquisitions for RSPs. We think that is a much better use of our cash but we want the flexibility to be able to buy back when it makes sense.

In the press release I looked at the fourth quarter versus the first quarter of '08 and it looks like your forecast for D&A at the midpoint of the new range is down about $4 million. What would be driving that, Bill?

It's overall (inaudible) estimated. It also takes into account the fact that we sold spectrums so you've got the assets and the intangibles for that business that have gone away.

And you said I think the full year impact on the top line for that is about $12 million?

12 to 13, yes.

David Sachs, Hocky Management Company, LLC.

Could you do me a favor -- break down the distribution businesses between the domestic and international revenue streams and just quantify (multiple speakers)

David, this is Brian. I guess the way we can look that is within distribution in the first quarter about 62% of the revenues is domestic and about 38% is international.

And then the operating margin by region because you mentioned it was a record in the United States (multiple speakers)

We don't disclose operating margins by geography.

In the United States we basically said that it was the best since 1998.

Okay and in 1998 was that primarily US business at that time?

Yes.

Okay and then just in terms of your 6 to 8% guidance suggesting sequential growth through the year would lead to a well over 8% or close to an 8% at least exit rate for this year is that sort of (multiple speakers)

That's certainly what we are shooting for.

Okay and there would be no reason if we achieved that by the end of the year that 2009 wouldn't start at least at that baseline level from (multiple speakers) standpoint or anything?

Right.

Peter Lisnic.

Just a quick follow-up. I noticed the first quarter debt balances were up a lot. Is that just currency translation or --?

No, it's really working capital. We continue to invest in inventory and the RSPs and one of the operations in aerospace where we're building a new business. We also saw higher receivables related to higher sales. We tend to use cash in the first half of the year and generate it in the second half and we're following that pattern again this year.

Matt Summerville, KeyBanc.

Two questions, one you just sort of touched on, Bill. You talked on the fourth quarter call about a fairly sizable new overhaul and repair opportunity in the aerospace business. Can you talk about the progress you had made in starting to capitalize on that opportunity? And further, I guess can you sort of quantify what that can contribute to the top line on an annualized basis? And is this kind of a onetime thing or a multiyear sort of deal?

It's really a new product line startup. It's taking us about six months. We happen to be coming into the heavy part of the cycle for MRO so that's given us a little difficulty. Right now we're operating at the customers demand rate but we're trying to refine the processes, a lot of lean activities. So we have caught up to the customer. We have invested heavily in inventory. This could be a $25 million business this year so it's significant.

Last question, if I take into account the reduction in the share count, the reduction in the tax rate and lower D&A I guess I can more than account for your increasing guidance. I'm struggling to see on an operational basis where you have sort of raised expectations.

We believe we have increased the guidance to represent roughly half related to diluted shares and the other half improved operations. We think about tax rate as operational and (multiple speakers) difference.

At this time there no further questions in queue. I would know like to turn the call back over to Mr. Koppy for closing remarks.

Thank you very much. If there are any additional questions about any matters discussed this morning please feel free to contact me and once again thank you for joining us today.

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