Barrick Mining Corp (B) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Barnes Group's second-quarter 2012 earnings conference call.

At this time all participants are in a listen-only mode. Later on we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. William Pitts, Director, Investor Relations. Please proceed, sir.

Thank you. Good morning, everyone, and thank you for joining us today. With me this morning is Barnes Group President and CEO, Greg Milzcik; Senior Vice President of Finance and Chief Financial Officer, Chris Stephens; and Senior Vice President and Chief Operating Officer, Patrick Dempsey.

If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at BGInc.com. During our call we will be referring to the earnings release supplement slides which are also posted on our website.

I want to remind everybody 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 projected.

Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at BGInc.com.

Today's call will begin with customary opening remarks from Greg, including comments about our recently announced agreement to acquire Synventive Molding Solutions, followed by a more detailed review of quarterly results and an updated outlook discussion by Chris. After that we will open up the call for questions.

At this time I will turn the call over to Barnes Group's President and CEO, Greg Milzcik.

Thanks, Bill, and good morning. Barnes Group delivered expanded operating income and improved margins in each of our segments during the second quarter in a business environment which remains uncertain and cautious. We believe these conditions will prevail for an extended period of time and we are adapting to the climate.

[Revenues] in the quarter were impacted by a number of factors including foreign exchange loss, planned attrition of underperforming accounts in our distribution business, and ongoing economic conditions. However, we expect improved performance in the second half of 2012 based on our current order strengths and existing backlog.

Net sales of $293 million were down 2% from last year, although organic sales growth was up modestly. In our two manufacturing segments, Aerospace and Industrial, we saw a 6% sequential growth and a 29% year-over-year growth in backlog. Total backlog for Barnes Group is now at a record $642 million, up more than $145 million from last year's second quarter.

Before my usual operating review I would like to say a few words regarding our recently announced agreement to acquire Synventive Molding Solutions, our largest acquisition ever. Please refer to slide two of our earnings supplement.

Synventive is a leading designer and manufacturer of highly engineered and customized solutions, components, and services with complex injection molding applications and is an excellent strategic fit for Barnes Group. We expect global demand for Synventive's products and services to grow substantially in the future. Adding a suite of products and solutions for customers in this market is expected to speed our global growth and enhance our profitability.

Synventive's intellectual property-based capabilities, which provide us with an exceptional opportunity to establish a new growth platform, one that includes highly-engineered solutions, a leading market position, a stronger global presence, and solid profitability. In addition, the teams and corporate cultures at both Barnes Group and Synventive are closely aligned sharing the same values in terms of business practices, lean manufacturing techniques, and technological innovations in the product systems and services that we bring to market.

Later in our prepared remarks Chris will touch upon some of the additional details of this transaction.

Now turning our attention back to our second-quarter performance. In Aerospace what we see reflects much of the same observations coming out of the recent Farnborough Airshow, as well as the recent commentary from several industry participants.

Our Aerospace business reflects the general outlook for commercial aviation. Strong orders for our original equipment manufacturing business drove backlog up 39% year over year to a record $526 million. This certainly telegraphs a stronger second half as the ramp up in aircraft production moves forward. We feel confident that commercial aircraft production over the next several years should show meaningful growth.

Continued strong orders taken by aircraft manufacturers, along with the introduction of new aircraft technologies, provide additional data points to support this belief. We feel we are on the right aircraft platforms, and we continue our efforts to secure additional content on both existing and future aircraft platforms.

Our Aftermarket business saw 19% year-over-year growth in maintenance, repair, and overhaul, or MRO, sales reflecting sustained demand as well as new process introductions. However, soft spare parts sales reflect inventory compression, specifically in Europe. Commentary from a number of market participants mirrored the soft demand for spare parts, although an expected stronger second half in 2012 is still prevalent.

Industrial sales declined in the second quarter as a result of the economic environment combined with an unfavorable foreign exchange impact. Our nitrogen gas products business generated double-digit volume growth and strong order intake, and as Associated Spring performance improved year over year as several productivity initiatives helped us expand margins. Orders were up 7% at Associated Spring and the forecast for North American light vehicle production for 2012 has improved to 14.9 million units, another positive sign.

Our Distribution segment saw sales increase slightly over last year while operating profit and margins both improved. Profitability benefits derived from a sustained emphasis on productivity and a planned attrition of certain underperforming accounts. While the latter does negatively influence sales growth, it has contributed meaningfully to better flow through.

In our North American distribution business we saw daily sales average, or DSA, continue to improve. That is now nine consecutive quarters of year over year DSA growth. We are watching closely the overall economic environment in Barnes Distribution North America's key markets, and we have noticed the monthly ISM index dip below 50 for the first time in nearly three years, although the second-quarter average remained above 50 signifying growth.

These numbers is one point in time and we will certainly be attentive to trends in our customer ordering pattern to see if there is any affect on our ability to grow this business further.

To conclude our second-quarter results demonstrated the ongoing emphasis to enhance profitability across our business. In spite of a sales shortfall, we delivered increased operating income and margins. Our second-half outlook remained positive and we expect further margin improvements and solid EPS growth for 2012.

Lastly, I look forward to welcoming Synventive's management team and highly skilled workforce to Barnes Group. We are excited about the prospect of having such a high-quality business in our portfolio.

Now let me turn the call over to Chris for some of the financial details of the quarter. Chris?

Thanks, Greg. Let me begin our discussion this morning by highlighting the key points made on slide three of the earnings release supplement, which is available on our website.

Net sales decreased 2% to $293 million, while overall organic sales were up 1% in the second quarter after you adjust for a 3% unfavorable impact of FX. Operating income increased 1% to $34 million and, as Greg mentioned, operating margins improved in each of our three segments.

For BGI operating margin improved 30 basis points to 11.6%, reflecting our ongoing focus on driving profitable sales growth and productivity. EPS from continuing operations was up 10% to $0.45 per diluted share, which compares to $0.41 per share from last year's second quarter.

I would like to highlight that even though EPS was up 10% for the quarter, we did incur additional costs for aggressively pursuing M&A deals, not all of which have materialized. This negatively impacted EPS by about $0.02 in the quarter.

Now let me discuss a few details on the quarter and then I will wrap up with comments on our updated guidance and the Synventive transaction. In our Aerospace segment net sales of $94 million were down 1% from last year.

A slight increase in original equipment manufacturing sales, continued strong sales in our aftermarket repair and overhaul activity were offset by a sales decline in our aftermarket spare parts business. Our Aerospace OEM business generated a significant increase in order activity, which drove the meaningful year-over-year increase in backlog from $379 million last year to $526 million this year. That represents a 39% increase.

As a reminder, while backlog is a helpful indicator, sales can be affected by a number of factors over time, including in-sourcing decisions, material changes, production schedules, and volumes of specific programs to name a few.

At Industrial second-quarter sales of $110 million decreased 3%, driven by the negative impact of FX while organic sales were up 2%. And in our Distribution segment sales were $92 million, up slightly from the second quarter of last year.

Turning now to operating profit. At Aerospace operating profit decreased 1% to $14.7 million driven by the profit impact of lower sales and a shift in sales mix. Operating margins improved slightly to 15.7%, up 10 basis points.

Industrial operating profit increased 2% to $11.2 million as a result of the profit impact from higher organic sales at some of our industrial businesses and overall lower employee-related incentive compensation partially offset by increased pension expense. Operating margins improved 60 basis points to 10.2%.

Operating profit and distribution increased 3% to $8.2 million, while margins improved 20 basis points to 8.9%. A reduction in employee-related incentive compensation and further productivity improvements contributed to the expansion and were partially offset by higher pension expense.

As a reminder, when we provided initial full-year guidance for 2012 we highlight the fact that pension expense was going to increase approximately $5 million from 2011. For reporting purposes this increase was primarily reflected in our Industrial and Distribution segments.

With respect to taxes, the Company's effective tax rate for the second quarter of 2012 was 21.5% compared to 26.9% in the second quarter of 2011. Last year's second-quarter effective tax rate included the recognition of $1.8 million of discrete tax expense related to tax adjustments for prior years.

Regarding share count, our second-quarter average diluted outstanding share count was 55.2 million. That is down 2% from last year. And in the second quarter we repurchase 300,000 shares under the authority of our Board-approved 2011 repurchase program of 5 million shares.

At the end of June 2012 we had 3.8 million shares remaining under this program, but with the anticipated closing of the Synventive acquisition, we do not expect to repurchase additional shares over the remainder of 2012.

Turning now to cash flow. In the first half of 2012 operating activities generated cash flow of $34 million versus $40 million in the first half of last year, reflecting improved operating performance offset by higher cash payments for 2011 employee-related incentive compensation and increased contributions to the Company's pension plans. 2012's year-to-date free cash flow reflects a lower level of capital expenditures as compared to last year, which is a function of timing. We still expect full-year CapEx to be in the range of $45 million to $50 million, up from $37 million in 2011.

Let's now discuss our updated 2012 financial guidance on slide four of our supplement. This update guidance excludes the impact of the announced Synventive acquisition.

We now expect lower revenue growth of 3% to 5% due to the impact of FX given a stronger dollar and lower Aerospace spare parts sales in the first half of the year. Operating margins are forecast to be approximately 12%, while earnings from continuing operations per diluted share are now expected to be in the range of $1.78 to $1.88, up 9% to 15% from 2011. And for the full year we expect free cash flow conversion of approximately 90%.

Key factors in our 2012 guidance range include the following. For the upper end of the range we would benefit from stronger aerospace spare part sales in the second half of the year, better margin leverage or flow-through on increased sales, and incremental productivity gains given our focus on lean quality and cost management. For the lower end of the range we would be negatively impacted by a slowdown in the global economy, a steeper-than-anticipated decline in European industrial activity, and further strengthening of the US dollar.

With respect to the announced Synventive acquisition, we now expect their full-year 2012 revenues to be approximately $160 million. Additionally, with Synventive's anticipated EBITDA margins higher than Barnes Group's we expect to see an improvement in our total EBITDA margins.

The transaction is expected to be dilutive to 2012 earnings per share due to the impact of purchase accounting and accretive to 2013. As mentioned this transaction is expected to be financed with cash on hand and additional borrowings from the Company's credit agreement and is anticipated to close in August of 2012.

So to wrap up my prepared remarks our sustained focus on driving productivity, improving operating leverage, and strengthening our balance sheet has allowed Barnes Group to expand profitably during the quarter. These efforts have positioned Barnes Group to capitalize on new opportunities, such as the announcement of the Synventive acquisition, and are expected to drive long-term shareholder value.

Operator, we will now open the call for questions.

(Operator Instructions) Peter Lisnic, Robert W. Baird.

Good morning, gentlemen. I guess, Chris, if we could start off a little bit with Synventive and give us a little bit of history there. Just wondering kind of what the growth profiles looked like over the years, and maybe if we could discuss peak and trough revenue and EBITDA profiles that would be very helpful for us.

I am going to butt in here, Peter. Since we have not yet closed on this business there is little we can share with you on some of this information. I think that after the close, which we expect in August, we will have follow-up information that will be able to clear up many of your questions.

Okay. You did mention that the EBITDA profile here is higher than the current Barnes portfolio. Is it safe to say that that would be the case if you look at previous peaks and previous troughs?

As we looked at the past several years during the due diligence process, we clearly recognized the value that Synventive has been able to provide over the past year or two. And when you think about that being an attractive position to Barnes Group, we do see that EBITDA margin improvement expected post close.

Okay, all right. Then if I could switch gears a bit to the Aerospace piece of the portfolio, it looks like the OEM business decelerated a bit from a growth comp perspective from first quarter to second quarter, if I have my numbers right. Can you give us --

You are right.

Okay. Any reason why that would happen?

Just the timing of the deliveries. The thing that was disappointing in the quarter as far as top line, our Industrial business performed about what we expected given that foreign exchange issues. We expected some intentional attrition at our Distribution business, so that was pretty much the same.

The thing that was a little disappointing was the Aerospace sales. Why I am not worried is basically because the backlog has swelled. When we look at the profile for the balance of the year, I think we are going to see that driving sequential improvement throughout the year. So if I were to profile the earnings through the year it would be an improvement in third quarter and fourth quarter sequentially, so it is a little different than what the current profile looks like on the Street right now.

Okay, got it. Then last question, just you mentioned inventory correction in the spares business. Is that essentially done, maybe did you see incremental takedown of inventory in July? Kind of where are we at on the inventory situation there?

We think we are there -- and is largely comes out of GE's conference call that was held recently where they pointed out that there was a correction of spares in Europe. We saw that reflected in our business as well.

So most of the people who participate in the spare parts market have seen that in the first half of the year. We are hopeful, but at the same time we are also looking at it a little differently.

Revenue-sharing program as a percentage of our overall profit is not as great as it used to be as the rest of the businesses are improving. We don't think that it is the big driver that it had been in the past, and going forward we think it is going to be a smaller portion of our overall profitability as well.

Okay. All right, that is very helpful. Thank you for your time.

Edward Marshall, Sidoti & Co.

Good morning, guys. So I know you mentioned existing backlog, you also mentioned the pace of orders. I mean what gives you confidence that you're going to see the back-half acceleration that the guidance implies?

It is 7% year over year even at the bottom end of the range, or rather second half versus first half in EPS range, even at the bottom end of the range. So is it what is slated to be shipped in the second half that you seen in your backlog, is that what you are saying?

Exactly. When we do our detailed quarterly reviews and we also look at everything from the delivery cycle, etc. The easiest thing to forecast in our business portfolio is the Aerospace OE side of the business because it is a long cycle from order backlog, delivery, so we feel pretty confident that the year will unfold the way we expect.

Aerospace is about half of the profitability of Barnes Group historically, so it is a driver going to the back half of the year and it is certainly going to change the profile that was traditionally first half heavy versus back half. We see the back half being bigger this year, basically as we enter the ramp. I think the ramp is real and it is going to happen for several more years.

Is it related to the 787 out of curiosity? I mean knowing that engine has had some pretty good year-over-year growth already.

Yes, there is both 777 and 787, for us, are some of the key drivers. We also have some other work here and there that is driving the improvement in backlog, so we are pretty happy with the package that we have and the profile of the platforms that we are on. It looks pretty robust.

In fact, I have been in Aerospace for a very long time and I haven't seen a commercial aerospace outlook this bright in my whole career.

I know Chris mentioned spares outperforming could get you to the high end of the range. My expectation is that you don't expect that to happen. You would assume that is relatively flat from here?

Well, that is what we built into; that is why I took the top end down. In order to get back above the range, it would have to be some pretty robust sales growth. But at the same time we are trying to be as accurate as possible. We are not trying to overestimate or underestimate.

We don't guesstimate this stuff. We do a very detailed build up and look at the macroeconomic conditions and make sure that we think we have something that is solid. We don't want to keep changing guidance.

Point of clarity, the top end of the range I think -- I mean rather the revenue guidance was 3% to 5% growth. Are you referring to organic growth?

Yes.

Okay. So not including Synventive which could add additional, what, say, $70 million to $80 million in sales for the year?

Right, right. And that is with the FX --

I would add FX. So the impact of FX as well as organic growth in the business, but it does not include Synventive at this point.

Oh, it includes your FX specifications as well?

Exactly.

Okay. And then, finally, the Aerospace backlog; did you give that number? I missed it.

The Aerospace backlog was (multiple speakers)

(multiple speakers) on the OEM side?

Yes, it is --

$526 million.

$526 million on OE.

On any OEM side, yes.

$526 million?

$526 million, right.

Okay. That was $492 million last quarter, if I am right?

I was -- $492 million was all of Aerospace so we have got some MRO work in there, so you have got -- overall Aerospace was $492 million last quarter and $533 million this quarter.

So we saw a significant pickup and I guess that is what you are referring to in your guidance.

Exactly. It is the only sequential but it is year over year, and it is a very bright picture. It's going to be a strong second half, at least we expect it.

Okay, great. Thanks, guys.

Matt Summerville, KeyBanc.

Morning; couple questions. First, on the aero OEM side what sort of year-over-year growth rate did you experience in the first half of the year, and what year-over-year growth rate do you expect to see in the second half to help us kind of think through this?

On the second quarter we had -- it was just about 2% and I think --

In a second quarter it was 2%; for the first half of the year it was actually up 4%. But we expect that to improve, as Greg mentioned in his comments, sequentially increasing quarter to quarter, third quarter and fourth quarter. So we expect a stronger second half, Matt, on the OEM deliveries.

I want to make sure I have one of the numbers correct that you provided. You said aftermarket overhaul and repair was up 19%, is that the correct number?

It is, yes.

That is correct, but it is also not just market. We have been investing heavily in new process or new product introduction, so that is a combination number. It does exceed many of the current members out in the marketplace, but it does not include spares.

So I think that it is a good sign in some ways that there is aftermarket activity, although the MRO market for the past several years has been confusing to say the least.

If you try and parse that then, Greg, maybe you can talk about some platforms where you have aftermarket content now that you did not in the past, and maybe how much of the 19% do you think is being driven by your own sort of internal push in that business.

A lot of it is the Rolls-Royce product line, the Trent in particular, and I think that as we go forward we are going to continue to see that strong relationship with Rolls-Royce continue to expand. But we also have invested in a variety of CFM56 overhaul work and things of that nature.

So we have been paying a lot of attention to the demographics of the fleet out in the field and investing where it makes sense.

So then if MRO was up 19%, how much was the spares business down?

We don't break it out, but it was significant.

How much was total aftermarket down?

Matt, total aftermarket was basically down maybe 3% to 4%. It was not a significant decrease. So you have got a combination of the MRO strength offset by spare parts softness as we commented.

Okay. Then if we can move over to Industrial for a moment, in the quarter can you talk about at Associated Spring how much that business grew organically versus production?

Just trying to get a feel for where you are at with content there and market share and then what your experience was in your European auto businesses. And then maybe speak to both, how you are thinking about the second half.

First, we don't go so granular in the Industrial businesses as that, but I could basically say that in general we had good growth in North America. There was some sluggishness in Brazil in particular.

Associated Spring has little in Europe as far as automotive content, but our European manufacturing business, when you adjust for local currency, was up with the exception of our lower differentiated businesses that are auto-oriented. They were impacted by a slower growth of auto in Europe.

So what are your thoughts on the back half, and I guess what have incoming order rates been telling you with, let's say, nitrogen gas with Seeger and maybe with your Hanggi business?

First of all, nitrogen gas products is really booming. It is going nicely. There are so many promising things going on at Heinz Hanggi that I don't want to get into, but I am very happy with the direction we are heading there. And Seeger has been impacted because they have a fair amount of domestic auto content. It is the lower margin of the three businesses, so it does have a minimal effect on the overall.

So then net-net you are seeing favorable mix shift. Has the capacity constraints you have had in nitrogen gas been fully alleviated at this point?

Yes and I can tell you I am really thrilled with the way the team performed there. When you are doing -- it is not quite a greenfield, but close to it, and building a planned expansion of that magnitude, etc., it has been managed extremely well. It has hit all the targets. Capital equipment was purchased early, etc.

So we are expecting that to be part of the second half recovery is the fact that we are going to be seeing the insourcing of work that was previously outsourced, and I think that we have alleviated the capacity issue.

Has some of that benefit already -- did we see that in the margin in Q2 already or not?

No, no, because the building has just been completed and the equipment is going in.

Then just lastly, I understand that you can't give particulars on Synventive in terms of financials, but can you talk at a high level about the market size, the addressable market, the competitive landscape in the industry that you are looking to get into here?

Matt, this is Patrick Dempsey. Just to talk about hot runner in our marketplace, overall the injection molding industry is estimated to be about $32 billion. Within that the global hot runner marketplace is estimated to be approximately $1.7 billion. So clearly lots of room for expansion as it pertains to Synventive, which as you know specializes in the design and manufacture of custom hot runner systems.

In terms of the value proposition that Synventive brings to the marketplace, it is one of our lowest total cost of ownership across the platform lifecycle. And so in that the unique technology that Synventive brings to the marketplace reduces downtime, reduces scrap, lower failure rates, and increased faster cycle times.

I was just going to ask in terms of -- you mentioned 2012 sales of roughly $160 million sold just round and, say, Synventive has roughly 10% of this $1.7 billion addressable market, I guess where would that sort of rank them competitively and who are some of the other players that we should be thinking about in this space?

From a competitive standpoint, what I would highlight is that the market for Hot Runners is highly fragmented. Subsequently, it features competitors with varying capabilities -- scope, scale and expertise. The majority of competitors compete in niche applications and/or geographies.

The great thing about Synventive is that it is one of the few global players in the industry. But to give you some examples of competitors where there is some overlap would include companies such as YUDO, Mold Masters, INCOE as examples.

Great. Thanks a lot for the help.

Bhupender Bohra, Jefferies.

Good morning, guys. Just following up on the question which was asked before on Synventive, just wanted to get your thinking, what actually you thought when you made this acquisition. What was the thinking behind this?

It's going to fit into Industrial segment; if you can just give us some color on will this be like an expansion platform for you guys, or how it is going to benefit, like synergies and the top line?

Exactly. If you have been looking at our investor presentation over the past couple years, we have been telegraphing this exact type of move. We were looking at increasing our differentiation, both organically and through an acquisition.

So when we look at the overall industry we are looking for things that have growing markets, for example. And in this particular case not only is global auto growing but plastic as a percentage of content is growing, so you have a double overlap. That is a nice place to be.

Leading positions; we found businesses that are leaders in particular niche areas tend to have higher profit margins than our price leaders. Significant intellectual property as a differentiator and also a barrier to entry leads to higher margins.

Global access is one of the things that we really look at because we think that the markets will grow faster outside of Western Europe and North America. And some level of cyclical moderation. So when we look at all those things and bring it to bear on Synventive, it really fits in nicely with our overall strategy where we are going forward.

And as Patrick mentioned, it is a fractured market. In that sense there is probably room to have additional acquisitive growth as well as continued investment in the business for long-term organic growth as well.

Okay. So are you going to -- I mean right now the business you have is like the hot runner; Synventive actually does that.

Right, the hot runner, yes.

Will that expand to making molding machines or --?

I wouldn't go that far. What we are looking at is focusing on this market. We think that there is good investment that we can make in that business, and I want to re-emphasize that we're not making parts. This is a system that supports an industry that manufactures parts, and it is also a capital item rather than an expense item.

So there is a variety of things in the business model that are attractive compared to other businesses. And I would say that it is similar to our nitrogen gas products business in that sense, where nitrogen gas products doesn't make parts, they make systems and components that go into the tool and die industry. Again, a capital item. And we like that model.

Okay. The next question; you gave a number Aftermarket actually -- total Aftermarket decline 3% to 4%. That is for the first half or the second quarter?

That would be second quarter.

Second quarter. Now on top of that actually you said, for the second half, if you need to achieve your higher end of the guidance, something needs to happen on the spare parts. It needs to grow or -- I don't know. If you can just give us some color on what needs to happen in spare parts actually for (multiple speakers)

I think if the inventory destocking is over, as we expect, we should be able to see increased back-half year sales. There is only so far you can go with destocking.

I think that there is a lot of stress in European economy which is driving the cash conservation associated with the destocking, so I am not overly worried about it. And as I mentioned before, RSPs as a percentage of our overall profitability have declined so I think that we are in pretty good shape.

Are we done with destocking or we still have it in front of us?

Well, we can't confirm it, but we believe it is mostly done.

Okay, thanks a lot.

Holden Lewis, BB&T Capital Markets.

Thank you. Good morning. As it relates to your 12% margin goals, instead of looking at how the year is playing out -- I mean obviously through the first half you aren't there so you are kind of expecting the, I guess, sequential improvement in the operating margin for the second half.

But when you look at your Distribution and Industrial business, correct me if I'm wrong in this assumption, but the combination of seasonality in weaker markets might suggest that the Q2 margin might be sort of the peak for those two businesses, which then suggests that there is going to be some real heavy lifting done in Aerospace. Can you do that if spares are flat, or do you really require spares to get better and influence the mix in order to make that 12%?

No, we are heading in the right direction. Actually when I look at the numbers we are doing exactly what we said we would do. We said that a high upper single-digit for distribution, which is -- we are at 8.9% or something like that. We said that we would be low or mid to upper teens for Aerospace, and we still believe that and that is where we are at right now. And we said low double-digit for industrial, which is where we are at.

I think they are all going to improve for varying reasons. One is some of the expenses in distribution that were in the first half and some of the attrition is going to dissipate in the back half of the year, so we expect that to continue to improve. We also expect with nitrogen gas products leading the way in the back half of the year that is going to continue to help improve the Industrial business.

Associated Spring in that mix is continuing to see ramp-up of auto production, so we are looking at some expansion there. There is also productivity initiatives, but we clearly expect Aerospace to lead the way as far as the back half of the year.

Okay. Again, assuming spares don't come back, and maybe they do. And if they do that would obviously be beneficial just for the Aerospace mix.

But you have sort of been in this 16%-ish kind of range for awhile on the Aerospace. What kind of incremental margins or what kind of step up in the margin would you expect to see if it is just the OEM backlog flowing through and spares don't contribute? Or if spares don't contribute are you looking at kind of a 16% type of margin?

It should improve about 16% with the increased flow through from the OE side. I don't see a problem. As I mentioned, since 2008 we have had the management fees nipping at the RSP percentage which drives down the margin, so there is not an apples-to-apples comparison there. But at the same time, the rest of business as a percentage of profitability has improved significantly.

So I think going forward we are going to be pretty comfortable with between mid-teens and upper teens regardless of the mix.

Okay. What costs have burdened the first half in distribution that you think could slide away in the second half?

There were just some investments that were made in a variety of different areas. It is not a huge magnitude, but at the same time I think it is going to improve in the back half of the year.

Okay. And then in the industrial what kind of impact do you think this insourcing could have? I don't know if you can give a sense of what benefit you think it will have or maybe what the decrement has been to date from outsourcing, but what kind of magnitude of impact there?

Holden, this is Chris. I would just say, like we talked about for overall Industrial, nitrogen gas products had the first-half pressure of insourcing but will get the second-half benefit -- of outsourcing I mean, in terms of the pressure of outsourcing. And then insourcing, given the fact that we have added to the facilities and capacitized accordingly, we would expect that to continue to improve.

So overall industrial margins to be in that low double-digit we continue to drive for margin expansion of that business. So that is what the second-half improvement should look like.

All right. Thanks, guys.

Christopher Glynn, Oppenheimer.

Thanks, good morning. Just going to try a little bit more on Synventive. Could you offer some sort of order of magnitude of the EBITDA margin relative to yours and/or any color on the multiple?

Chris, first of all, it doesn't hurt trying.

I would just chime in that until we close this business we are really not going to comment too far, other than to say that we did not take an extraordinary number, low or high. We paid basically the market for a good quality business.

Okay. And then you mentioned employee-related compensation benefits a couple times. Is there any freezes in response to the economic environment in place?

No, no freezes. Last year we had a terrific year and you think about just from an incentive comp, bonus payout we have to organize across BGI, we just really did exceptionally well. As we look to this year we continue to track to our plan profile as reflected in our guidance $1.78 to $1.88, so you are getting that comp benefit. But I would just say 2011 was just a blowout year for Barnes Group.

Makes sense. Then just lastly, the FX; how does that play on industrial operating margin? Does that give you like an upward (multiple speakers)

No, no significant difference at all, actually, on the op margin line.

Great, thank you.

Matt Summerville, KeyBanc Capital Markets.

Just a couple of follow-ups. Early on in the third quarter, Greg, have you seen any change in, I will call it -- and this is a question on distribution. Netting out what you are deliberately letting attrit, have you seen a deceleration or a reversion into negative territory sequentially on the DSA there?

No, actually our DSA has improved for nine consecutive quarters. Our flow-through is better than expected. I am pretty happy with the direction we are going.

The one comment I will have that is an indicator that I will throw out for distribution, even though their numbers are good, they are headed in the right direction, I think the overall market is continuing to improve although slowly, is the average order size declined even though DSA improved. And that is indicative of a more cautious customer.

When the order size is reduced that means they are doing a little bit of destocking themselves or reducing their inventory levels to meet the end demand. So that is the only other color I can give you on that, but other than that the DSA continues to improve.

That is an interesting data point. When you see a shift in the ISM -- and again I know one month doesn't make a trend, but I don't necessarily think it is going over 50 next month. Do you typically see the DSA react first or the average order size, like you are talking about here? Is there a historical pattern to call on here?

That is a great question, but I think I'm going to have to defer that because I don't know.

Okay. Then, lastly, or maybe second to last, the backlog in nitrogen gas, can you give some sort of qualitative color on that? And if we are thinking about things continuing to grind along or slow in Europe, things maybe not quite as robust in North America, how do you -- are you cautious in all about bringing that new capacity online as the macro environment is kind of shaky here?

Not at all and the primary reason is, first of all, they have a very small backlog. Their delivery cycle is much shorter than aerospace, so we really don't track backlog in that sense. It is a much smaller bucket.

But second of all, the orders are very strong; they have continued to be strong. What we are seeing is anything that is export driven or capital budget it is not really being affected that much and a lot of their product it's a global business.

So even with Synventive one of the things that attracts us is the global aspect of the business. It protects us from particular geographies and the downturns, and nitrogen gas products is just a great business and they are a great team over there.

How much on the top line should be kind of think about modeling in for the deliberate attrition you are letting occur in distribution for the full year?

I don't think we have given that out in the past, but it is roughly 3% of sales, something like that, on an annualized basis.

That is helpful.

Again, like I said, I think that if you look at the profile for the remainder of the year we are going to see EPS growth sequentially over the third and fourth quarter. It is a little different than the profile that is out there currently.

Then just -- this is my last question. On the aftermarket spares business, as you moved through the second quarter and what you have seen thus far in Q3 do you really get the sense that your incoming order rates have bottomed? Have you seen any inflection at this point, or is that something that you feel is still out in front of you yet?

No, but I wouldn't expect it at this time because in the summer typically is a lull and aircraft are most active flying people around on vacation. Typically they start to look at bringing aircraft down after Labor Day and they will pre-order based on their numbers later into August. So I wouldn't expect to be able to define anything at this point so I am not excited one way or another.

Great, that helps a lot. Thank you.

Holden Lewis, BB&T Capital Markets.

I understand that from a pricing standpoint you are probably seeing an increase in pricing distribution from attrition, and there are some questions, I guess, about maybe contents and things like that in Aerospace.

But can you just give a broad sense now that conditions seem to be softening, at least in your Industrial business, of what you are seeing in price? Does that seem firm; is there some downward wiggle there? How are we looking at pricing going forward?

The odd thing, we aren't having that much of a pricing effect and I have been saying that for several years now. The one big surprise I have had through the economic crisis as well as the follow on is we haven't seen major pricing pressure. It is still confusing to me, but I think a lot of it has to do with availability, etc. We get the normal stuff, but nothing extraordinary.

Okay. And then how long do you expect the distribution attrition to go on kind of at this level? Are we at the point where we have kind of done it? Or is this something where it is going to keep on going and so margins will continue to benefit because the mix is going to continue to skew towards more profitable business? How should we look at the timing of that?

Yes, it should be the back half of the year should start to dissipate, so the comps year over year will be improving.

Okay, great. Thanks, guys.

Ladies and gentlemen, since there are no further questions in queue, I would now like to turn the call over to Mr. William Pitts for closing remarks.

Thank you, operator. We want to thank everybody for joining us this morning on the call. We look forward to speaking with you next quarter, so at this time we will conclude the call. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.