Barrick Mining Corp (B) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Barnes Group earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to talk conference over to Mr. William Pitts, Director Investor Relations. Please proceed.

Good morning and thank you for joining us today. With me is Barnes Group President and CEO, Greg Milzcik, Senior Vice President of Finance and Chief Financial Officer, Chris Stephens, and Senior 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. In addition, we have posted Synventive Acquisition Supplement to provide you with further details regarding this business.

Our discussion today includes certain non-GAAP financial measures which provide additional information that we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the SEC.

I want to remind everybody that certain statements that 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 the customary opening remarks from Greg, 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. So at this time, I will turn the call over to Barnes Group President and CEO, Greg Milzcik.

Thanks, Bill, and good morning. During the third quarter we achieved a number of significant milestones for Barnes Group. First we closed on the Synventive deal, the largest acquisition in the Company's history. While I fully appreciate that we're really into the integration process of this business, I am pleased with the initial operating performance delivered, the pace at which integration activities are progressing and the quality of the Synventive team.

Second, we've reached another record level of total backlog which now stands at $678 million, up 35%. While Synventive's contribution certainly helped to lift backlog, we also achieved a new record level without it. The backlog level is noteworthy as we move towards the 2012 finish line as it provides a degree of sport heading into what we believe should be a solid fourth quarter. As I mentioned in my second-quarter remarks, the business environment remains uncertain. We've seen this for sometime in Europe and Brazil, and we continue to believe these conditions will prevail for an extended period. In the third quarter, we also saw a slowing that impacted some of our North American businesses, particularly Distribution. These economic factors as well as unfavorable foreign exchange, or FX, impacted our revenues in the quarter.

Net sales of $306 million were up 2% from last year. Our sales growth included a 5% benefit, or $16 million from the Synventive acquisition offset by a 1% decrease in organic sales and a 2%, or negative $5 million impact from foreign exchange. Our recorded earnings from continuing operations were $0.38 per diluted share. However, after consideration of certain Synventive acquisition related items which negatively impacted EPS by $0.06 per share, adjusted EPS from continuing operations was $0.44 in line with last year.

Now turning our attention to the third-quarter segment performance. Our Aerospace business continues to reflect the current industry trends and outlook for commercial aircraft production and after market services. Orders for our OEM business were up 7% year over year and lead to a record OEM backlog of $540 million. We believe the industries forecasted growth rate in commercial aircraft production is achievable and continues to be supported by higher order backlogs at both Boeing and Airbus. We support many aircraft platforms that are forecasted to see increased production, namely the Boeing 777 and 787, and we continue to work on future aircraft and engine platforms to achieve longer term growth such as Airbus 8350.

After two consecutive quarters of double-digit increases and after market MRO sales, third-quarter MRO sales were essentially flat. However, the quarterly run rate throughout the year has been relatively stable. MRO sales have been impacted by a weak European economy, reduced freight traffic and a slowing of growth in flight hours. Sales in our higher margin spare parts business, a revenue-sharing program, experienced a significant decline in the third quarter, indicative of a market trend we've seen for a couple quarters now. This weakening reflects the same factors that impacted the MRO sales as well as continued inventory compression and cannibalization of retired aircraft engines. Soft demand for spare parts has been echoed by a number of industry participants. And although an expectation for stronger spare part volumes has been forecasted, the timing continues to get pushed out further to the right.

Industrial sales increased in the third quarter benefiting from the Synventive acquisition contributions but were offset in part by FX. Our nitrogen gas products business generated double-digit sales and order growth in the quarter. And our facility expansion is on track and should benefit margins in the fourth quarter. In fact, third-quarter sales for nitrogen gas products were at an all-time high. However, our other European manufacturing businesses were negatively affected by the weak economic environment and waning European auto production. At Associated Spring, sales declined modestly in the third quarter driven by slowing growth in its industrial end market and challenging economic conditions in Brazil.

Our Distribution segment experienced a third-quarter sales decline of 5% and the lowering sales volumes impacted segment profitability. We continue to monitor the economic environment in Distribution key markets and note the September PMI index rose above 50 after three months of sub-50 readings. We see this as a positive signal and we do anticipate a return to year-over-year sales and operating profit growth in the fourth quarter.

Before I close my prepared remarks, I'd like to take a moment to commend our Board of Directors for enacting several Corporate governance exchanges that demonstrate their ongoing commitment to enacting sound and responses shareholder focused Corporate governance policies. The Board will recommend to shareholders declassifying the Board and eliminating certain super majority voting standards. Additionally, the Board amended it's Corporate governance policies with respect to majority voting and lead independent director policies and provide shareholders with rights to call special meetings under certain circumstances.

In closing, we expect that the combination of the Synventive acquisitions contributions, continued strength in nitrogen gas products and aerospace OEM and record backlog levels could provide us with the ability to close out of solid year in 2012 and into 2013 with positive momentum. Despite uncertainties on the economic front, we believe that our investments in growth and our focus on operational excellence will allow for 2012 to be one of our best years on record. Now let me turn the call over to Chris for some of the financial details of the quarter. Chris.

Thanks, Greg. Let me begin by highlighting key points of our third-quarter performance on slide 2 of the earnings release supplement which is available on our website. During the quarter, Barnes Group increased net sales 2% to $306 million. On a reported basis operating income was $29.7 million and operating margins were 9.7% in the third quarter. Our reported results include $5.1 million of pretax short-term purchase accounting and acquisition transaction costs related to the Synventive acquisition, which closed in August. So an adjusted basis, operating income increased 2% to $34.8 million and operating margins were 11.4% flat with last year.

Now let me discuss a few details about the quarter and then I'll wrap up with comments about our updated 2012 guidance. In the third quarter, Aerospace generated sales of $98 million, which was up slightly from last year. And as Greg noted, an increase in Aero OEM sales was mostly offset by a sharp decline in after market spare parts sales which were down 20%. While repair and overhaul sales were essentially flat on a year-over-year basis. Backlog for our total Aerospace segment due to a record $547 million, that's up $151 million from last year's third quarter and up $14 million from the end of June. As a reminder, while backlog is a helpful indicator, sales can be affected by a number of factors over time including insourcing decisions, material changes, production schedules and volumes of specific programs to name a few.

Industrial segment sales increased $11 million to $124 million, benefiting from approximately $16 million from sales from Synventive. Organic sales were relatively flat and unfavorable FX reduced sales by $5 million. Weakness in our North America markets impacted our Distribution sales in the quarter which were down 5%, or $86 million.

Turning now to operating profit. Aerospace operating profit of $15.3 million decrease 5% from last year's third quarter primarily driven by unfavorable sales mix. Essentially, the profit impact from lower sales of high-margin after market spare parts was only partially offset by the profit impact from higher OEM sales. This dynamic is also the primary driver of operating margins coming in at 15.6% for the quarter. Industrial operating profit decreased $7.4 million primarily due to $5.1 million in short-term purchase accounting and transaction costs related to the Synventive acquisition, as I previously noted. And on an adjusted basis, operating profit increased $2.2 billion to $12.5 million for an operating margin of 10.1%, up 90 basis points from last year as lower incentive compensation partially offset -- was partially offset by increased pension costs which benefited operating profit.

As a reminder, the Synventive acquisition is expected to be neutral to our full-year 2012 net earnings as additional operating income will be offset by incremental financing costs and approximately $0.07 of short-term purchase accounting adjustments and acquisition transaction costs. We continue to expect the Synventive acquisition to contribute $0.16 to $0.18 earnings per share in 2013.

For Distribution, lower sales had most significant impact on operating profit in the quarter which decreased 11% to $6.9 million. This was partially offset by favorable employee related costs, where lower incentive compensation partially offset by higher pension costs provided a net benefit to the quarter. Operating margins were 8.1%, 50 basis points lower than the prior year. With respect to taxes, our effective tax rate for the quarter was 19% compared to 24% last year. The decrease in the 2012 effective tax rate from continuing operations was primarily driven by a reduction in the planned repatriation of a portion of current year foreign earnings to the US as well as a projected change in earnings mix attributable to higher tax jurisdictions. Regarding share count, our third-quarter average diluted shares outstanding were 55.1 million. As mentioned during last quarter's call, with the closing of the Synventive acquisition, we do not expect to repurchase additional shares in 2012.

Turning now to cash flow. Year to date through September, operating activities generated cash flow of $77 million, reflecting improved operating performance offset by higher cash payments for 2011 employee related incentive compensation and increased contributions to the Company's pension plans. In addition, our sustained focus on operating working capital resulted in lower use of cash this year than the 2011 period.

Let me now discuss our updated 2012 financial guidance on slide 4 of our supplement. Barnes Group expects revenue growth of 4% to 6% and operating margins to be approximately 11% inclusive of the Synventive acquisition. As a result of a softer third quarter, earnings from continuing operations per diluted share are now expected to be in the range of a $1.73 to $1.78. On an adjusted basis, after considering -- after consideration of approximately $0.07 of short-term accounting adjustments and acquisition transaction costs related to Synventive, EPS is expected to be $1.80 to $1.85. And for the full year, we continue to forecast free cash flow conversion of approximately 90%, although we have reduced our CapEx outlook to $35 million to $40 million from $45 million to $50 million that was previously discussed.

As I look -- as we look to close out another successful year for Barnes Group, the key factors in our guidance range remain the following. Upward end of the range we would benefit from stronger Aerospace spare part sales in the fourth quarter, better margin leverage or flow-through on increased sales and further productivity improvements. The lower end of the range, we would be negatively impacted by a continued slowdown in the global economy, a steeper than anticipated decline in European industrial activity including automotive production levels and tighter levels of inventory and management by our customers.

To wrap up my prepared remarks, as our guidance implies, we project to closeout 2012 with a solid fourth quarter by driving productivity, further sales leverage and continue to successfully integrate Synventive. Additionally, we look to reduce the debt level taken on as a result of the acquisition to improve working capital management and to strengthen our balance sheet, enabling us to maintain investments in profitable growth that drive shareholder value over the long term. Operator, we will now open the call to questions.

Thank you. Ladies and gentlemen, your question-and-answer session will now begin.

(Operator Instructions)

Christopher Glynn.

Congratulations on the deal. Just wondering, so on the adjusted basis was-- I'm gathering Synventive was maybe $0.02 accretive in the third quarter?

On a net basis, Chris, I look at it as we're still holding the full year that Synventive will be no significant increase to dilution or accretion. So actually for the third quarter, we saw more of a dilution and that would be coming back in the fourth quarter. The reason for the spike out in the adjustment to the third quarter on an adjusted numbers basically that $0.06 was related to short-term purchase accounting as well as acquisition transaction costs that we wanted to at least highlight because obviously does impact the quarter performance.

But Chris the other way to look at it is, the $0.16 to $0.18 performance that we expect next year it's running in that level of performance currently.

Right. But the neutral comment for this year is on the GAAP basis, right?

That's exactly right. Were not expecting any accretion dilution to the full year.

Right. But the adjusted basis that your pointing out is allowing for some accretion in--

In the fourth quarter. When you think about just-- when we looked at the most impact to us from a dilution point of view and that's why we spiked out that $0.06 was to the third quarter and you can see from a guidance point of view how we are bullish on our fourth quarter mainly because Synventive be contributing. That's the way to look at it. Diluted to the third quarter, accretive to the fourth, full year no change.

Okay and then if you could just give a little color on the benefits relative to the prior few quarters on the insourcing that nitrogen gas brings on the margin and if that was full impact or still some runway on that?

I think right now we're running at the appropriate rate. The expansion was handled exceptionally well. Usually when you're doing an expansion of that sort where you have-- your breaking ground and buying equipment et cetera, I think it's been done incredibly well. We're having the benefit currently and expect the benefit to continue into the fourth quarter. Third quarter, actually, nitrogen gas products had the best quarter on record, sales were up double digits and looked very strong.

Greg, can you just explain why is that growth so robust, is there some real share gain there?

Yes, I think there's a couple things. First of all they have a product line that technology disruptor in the sense that they're replacing mechanical springs in the tool and dye set. So first of all you have a gain from a technical perspective. Second of all, the geographic expansion has gone very nicely over the past several years especially into China. Third, is there-- just like Synventive, nitrogen gas products support the automotive industry primarily, but they're not unit number dependent. They are more orientated toward changes in models or number of nameplates out there et cetera. Frequently, the end product is a capital purchase rather than an expensed item, so there's a number of things that drive that business that are different than the other businesses that are direct to the OE or service business.

Okay and then lastly just a little spike up in the disc ops, what's lingering there and the outlook on that line?

Yes Chris, that was just an adjustment that we had in our retain liability associated with the divestiture of BD Europe.

Okay. Any reason it spiked up three quarters out?

No, again, it's just to retain liability for that business that we had.

Okay. Thanks.

Peter Lisnic.

Hi, good morning, this is Josh Chan filling in for Pete. So if I look at your guidance, if you back out of the Synventive's charges it seems to imply a pretty meaningful acceleration in margin from the third quarter to the fourth quarter, is that the right way to think about it?

Absolutely. The thing that people have to recognize is if you look at historical reported numbers, we're a different business now that we were before. For example Barnes Distribution Europe was in the reported numbers over the past number of years. Also we have a real growth in our Aerospace OE business where we're expecting a significant improvement in the fourth quarter that'll lead into 2013 and this mirrors the acceleration of the actual production of aircraft, so I think that ties in very nicely. Plus you have Synventive contributing into the fourth quarter. All those things combined as well as our Distribution business we're looking at a significant uptick year over year in operating income. All those things combined, leads us to forecast a record fourth quarter.

Okay, yes thanks for the color there, that definitely helps. On the Industrial businesses, could you give some color on monthly progression or cadence in terms of where you're seeing through the quarter and maybe into October, if you will?

I've been looking at this with great intensity because it was concerning at some point. There are several things that are going on in our Industrial business and it's a variety of driving factors. I mentioned nitrogen gas products and Synventive have different driving forces. The rest of the Industrial businesses, if it's direct automotive, it's certainly being impacted by Brazil and Europe. Europe is certainly suffering as well as Brazil does not get a lot of attention, but Brazil is certainly a real issue. They've had nine consecutive quarters of reduction in GDP. They are not in recession yet but if that progression continues, it won't take but a quarter or two more to impact that.

But at the same time, one of the things that we're pleased with is the -- if you look at the PMI index was actually nine consecutive quarters above 50. When you look at the-- or 13 consecutive quarters above 50, and in the summer it was June, July and August were all negative to 50 and it was September that rebounded. And I reflected on it for the past couple of years, it's actually three years in a row where we had slow summers that recovered in the fall. This one was a little more extended but I think that we're expecting it to be slow on the Industrial side for the next-- for the foreseeable future.

Okay, and last question is on the aerospace OEM business. How much did the OE business increase year over year and I guess the aftermarket decline as well in the business?

Well the aftermarket was what really impacted us the most. And I'll make a couple of comments on that, not to go on forever, but there's a couple things going on in the Aerospace aftermarket that are unusual compared to a normal cycle. We've been talking about the rebound for years, actually, and we thought we saw the beginning of it at one point and it never really materialized. And if you look at the way the OEs are reporting where Pratt & Whitney is down 21% on spares and GE is down 18% et cetera, and our business reflects that. The thesis currently, however, is that a lot of that is being driven by cost conscious European airlines. High fuel prices combined with the economic factors there.

And the thesis for 2013 is it will be rebound and it's based on the fact that load factors are around 80%. Anyone who's flying lately knows center seats are not empty anymore. Combined with air traffic growth at 5% and flight hours are only growing at 3%. So the math works basically to say you're going to have to drive flight hours up and if flight hours are up, that it's inevitable that you have to maintain your airplane. So the current thought is that 2013 to be a good year for or Aerospace aftermarket. I'm not going to bet on that, we're going to be a little bit more conservative in our forecasting for next year simply because we haven't seen the rebound last year or the year before like we expected.

Okay, great. Thanks for your time.

Edward Marshall.

I think you just answered my question. How are you doing guys, I'm sorry, good morning. I think you just answer my question, but I just want to get some clarity. One of your customers said they saw stabilization in the aftermarket hit in the third quarter and I was particularly referring to spares. As you mentioned earlier, in the prepared remarks, that you're seeing a flattening and it's been flattening for most of the year but then you talked about the spares parts business seeing significant inventory compression. Can you parse those comments together for me so I can understand exactly what's happening on your side related to maybe your major customer?

Well there's a couple things going on. One of the things our MRO business over the past couple of years has grown above market largely because of significant investments we made in new [profits] introductions, new repairs being introduced, et cetera. So I think that we're happy with that over the past couple of years. However, we haven't seen a great improvement in our MRO year over year although going into fourth quarter we've seen an uptick in orders. One month does not make a quarter, so we'll-- on these short cycle businesses we've got to hold back. I think what the OEs are saying about the stabilization is probably accurate. I think that there's only so much inventory you can take out. There's only so much deferred maintenance you can do. And I think their thesis about air traffic growth and load factors and flight hours are all accurate. It's a matter of when will it occur and modern aircraft engines are very durable and you can do a lot to keep them flying without harming the safety of flight issues.

And the information you gave on the backlog in the release here, is that the Aerospace backlog I'm referring to, is that inclusive of what goes on in the aftermarket business?

Yes but it's only a -- the aftermarket is such a short cycle that it's only a fraction of that total number. So that's dominated by Aerospace OE work.

And you said you saw-- you're going to see significant improvement on the OE side on the Aero for the fourth quarter and into '13.

Exactly.

Is that related to the 9-- the G90 and the GEnx engines that you own?

It's a wide swath of things, everything from some military programs that we won, 777 has-- was announced to hit the 8.3 per month run rate this month, 787 is going from 40 aircraft this year production to almost 75 next year. So there's a number of things going on. I've said many times in the past that after 30 years in Aerospace, it's hard to see the OE side look much better, on the commercial side anyhow, it's amazing.

We're looking at the fourth quarter number and I know I can talk about guidance a little bit. And I know you don't give quarterly guidance but there's one quarter left and you have a full year number (multiple speakers). At the low end, I think it's coming out to $0.54.

Yes, $0.49 to $0.54 is the max.

Seasonality usually says, and I understand that Synventive is in there, and it looks like you're basically saying that you could reverse the $0.07 charge that hit this quarter, $0.06, $0.07 charge. But then I look at the core business and say normal seasonal trends of what would happen and you talked about some weakening in the Industrial businesses, how do I make-- is Aerospace that strong that it's offsetting some of the other weaknesses including normal seasonality that you would see in 4Q?

Exactly, Aerospace is the biggest driver. Synventive, of course, is an adder. Our Distribution business, we have year over year comps that we're pretty confident in. So when you look at it from that perspective, we scrubbed it hard and we believe it's going to be in that range. And like I said earlier in the commentary, if you look at the historical reported numbers, we also had Barnes Distribution Europe which traditionally had a seasonally weak fourth quarter.

That's right. Synventive, you said $160 million that you expect it 2012, is there any seasonality in that business? The third quarter alone looked a little bit weaker but I guess it's just based on timing when you actually acquired that business, that $15.8 million and we're talking about $160 million in revenue, I think I went to the last quarter and that's what you said it would do annually.

Hi, this is Patrick Dempsey. As we look at the Synventive business moving into 2013, basically we feel very confident in terms of a continued growth and again remembering that the drivers behind that business are very much the number of model changes or nameplates that are introduced by the auto OEs with Automotive making up the predominant amount of it's end market. So collectively, as we move into 2013, we see continued growth in robustness in there end markets and a number of changes, model changes that are taking place, so not any real seasonality so to speak over the course of the year.

Okay. I want to get back in line but these questions just keep coming in my head, so I'll ask one last one. (laughter) It's always dangerous when that happens. $0.16 to $0.18 is what you said for 2013?

Exactly.

Thank you.

Matt Summerville.

A couple of questions. First on pension expense, Chris can you remind me what that looks like in '12 and what you're thinking on that for '13?

Sure when we started the year we talked about coming off of 2011 and looking at about a $5 million headwind on pension expense reflected every quarter throughout the year, we've been commenting on that in our quarterly performance. Going into 2013 I think it's not going to be pretty. I think the discount rate clearly is going to be less. We won't know that until December 31, of course, but going into next year if we were-- we ended this year about a-- the discount rate at the end of last year was about 5%. You can think of that going down to potentially 4%, that represents $4 million, $5 million headwind based on current pension accounting on that. So it is going to be a headwind going into 2013 without a doubt. But we won't know that, Matt until the end of the year and we'll provide color on that on our fourth-quarter call.

But Matt think of how lucky we'll be when interest rates move up.

You and everyone else. (Multiple speakers) So just a couple other modeling items. You mentioned in your prepared remarks that your CapEx is-- that's actually a fairly big cut given that you have one quarter left. So can you describe what you're actually cutting from your CapEx budget and then Chris, the fourth quarter implied tax rate, please?

I'll take the first part. One of the things I had reflect on over the past number of years is we had actually above average capital expenditures for a number of years preparing for the Aerospace uptick. So some of the reduction is appropriate over time. As far as the fourth quarter, it's simply moving it to the right slightly and nothing that significant.

Exactly, we're not holding back on CapEx expenditures. We're just take a look at the business conditions as things come through we look to execute on that. But looking at the full year and the timing in which CapEx came in, we're seeing a reduction. And then Matt on your question on the tax rate, in that low 20% rate is what we anticipate for the fourth quarter.

Okay and then I'd be interested in just some color as we think about general industrial markets here in North America, Greg can you maybe spend a moment speaking to in Distribution how the DSA evolved July, August, September and than what you saw from an incoming order rate standpoint in your Industrial segment, that cadence, if you will through the quarter.

That's a great question. I mentioned earlier that this is the third summer in a row where -- a couple summers ago it was talking about are we entering a new recession, and last year there was talk about slowdown, all the rest of those things. It's almost like this is the same cycle that we went through three summers. This year I think however what we saw is an inventory compression based on the in customers outlook. Clearly China is slowing, clearly Europe has got troubles, et cetera. And what they -- this is my perception, what they do is they basically cut back on inventories which is a one-time compression and it's like a slinky, we get sandwiched in there. So we saw that going through the summer.

When I look at the latest reports from our Distribution businesses that in October the number of orders are growing, and work in process is very strong, so I think we're seeing that same type of thing. You look at companies like Caterpillar, they are very vocal about the fact that they're compressing their inventory. And when you're a supplier to the OEs that has the effect. Our Distribution business similarly when we look at the order size and the frequency of orders during the summer, it reflected that type of inventory compression.

And then can you make similar comments on the Industrial business in North America as you went through the quarter?

Exactly. The Industrial business -- the direct automotive, clearly direct automotive continues to improve year over year. The big three are not as robust as the Japanese transplants but at the same time there is improvement. General Industrial is flattish depending on which market and I think that's reflective of the PMI index. So I think that returning in September where September numbers were fairly robust, even excluding aircraft and I hope that'll continue into the fourth quarter. But I think for the foreseeable future, we're expecting low to no growth GDP in some areas and overall it'll be based on specific markets.

If you look at the $0.49 to $0.54 mathematically implied for the fourth quarter, you talked a lot about the Aerospace business, can you help us fill in the blanks how you're thinking about OE you said up, is that up 15%, is that up 20%, is it up 30% and aftermarket, what is your assumption aftermarket for the fourth quarter because that's obviously a big swing factor?

Personally I'm looking at flattish for aftermarket. OE should be upper single digits. As far as top line, Distribution a lot of it has to do with the customer mix and year over year expenses changes, et cetera. So the big -- the net benefit is largely from Aerospace and lesser extent Distribution and Synventive.

If you've had some Synventive now for a couple of months, can you talk about how you're thinking, you mentioned the word integration, to me there doesn't seem like there's a whole lot to integrate, it's not really all that related to your other businesses. But as you've owned it for a couple of months, are you find -- what level of synergy, if any, are you finding with that business?

Matt, this is Patrick, how are you?

Good, thanks.

Well let me say that the integration itself is going very well and we personally continue to be impressed with Synventive Management team and the entire workforce in terms of their overall talent as we continue to work together through the integration. As you mentioned, Synventive represents a new strategic platform for Barnes Group and our intent has been very much focused on building on the success to date and the development of the leading-edge technology that Synventive has in it's hot runners. The integration doesn't require any restructuring as you mentioned, the focus has been more on introducing the Synventive team to the Barnes Enterprise System, which we use as our operating system, and bringing the operations and engineering teams together to leverage the various talents that exist between most-- between both organizations with a view to exploring and leveraging best practices.

I'm looking at the supplemental you posted to the website on Synventive and thank you for doing that, we appreciate it. If you look at the geographic breakdown, 46% Europe, 28% Asia on page 2, then you look at page 3, Europe and China 74%. So pretty much all of Asia is China. What's your view on the level of Automotive investment or incremental investment that you're anticipating in China over say the next 12 months?

For the Synventive business as you point out, one of our fastest growing areas is the Asia market, in particular China. I've been to China twice already since the acquisition and the facility there continues to grow at a great rate. We're also, even as we talk about some of the investments capital wise, some of those are already allocated to the Chinese operations with a view to expanding it's capabilities. So we're also looking at investing in the workforce with continuing expansion of border engineering capabilities as well as the production side of the equation.

Thanks, guys.

Scott Graham.

Chris, my favorite question I like to ask about the inertia of productivity initiatives across the Company, and I know that this has been a big focus here and I was wondering any type of update, type of metrics that you're using, it's something that I know is accelerating and I was just hoping maybe you can give us any type of things that you're watching to show that what you're doing is happening?

Well I'll take that one, this is near and dear to my heart. I think productivity is key to the future prosperity and the last quarter was not as good as it should have been largely because of some investments we're making in particular businesses where we're bringing on workforce without the production behind it and it's forward thinking. We know that we have to train people and get ready for some production in 2013, et cetera. So as we move forward, we continue to express a desire and force the metrics throughout the organization and then drive productivity. Our investment through the Barnes Enterprise System and lean enterprise is significant. We have a lean leadership program that has been terribly, or wonderfully successful, not terrible, wonderfully successful in bringing people into the organization and introducing them to the operation. We expect productivity to continue to grow into next year, however.

Okay, okay. Is there any-- at any point, is there going to be some type of by segment margin targeting you think?

Sure, I think that for the business as a whole, we're looking at an adjusted number approaching 12% for Barnes Group. That will be perhaps a multi-decade record and that's not a goal necessarily but an end result of our strategy. Our strategy is to focus on more intellectual property orientated products and processes and that by nature drives a higher operating margin. When we look at Aerospace, we expect mid to upper teens in the business. Our Industrial business should grow, on an adjusted basis, it's double digits currently, it should be in the low to mid teens over time. And there's no reason why our Distribution business can't be double digit over time. And I think that again, driving the right initiatives for internal cost is one thing, but it's also about driving the investments in top line growth that will benefit from improved flow-throughs at the various businesses.

Very good, that's very helpful. Completely separate question because this Synventive acquisition, obviously, really far off the map year. I mean there's some synergies with respect to your knowledge of the auto end market but not product wise, per se. So I guess my question is, as we look at this, Greg, it's a situation where it feels to me like you have a desire to upgrade the quality of the margin profile of the Company as well as the potential for organic growth. And if I'm right on that, what's next? Where are you looking for the next larger acquisition with any-- I assume it's either in Aerospace or Industrial, but if you can just maybe talk about your thought process over the next couple of years?

Yes, well it's pretty much part of our public presentation on investor presentations is exactly that. We're trying to change the nature of our business by investing organically in differentiated products and processes and through acquisitions the differentiation. In this sense, Synventive fits extremely nicely in the sense that start with leading market positions. We find the businesses that are in leading market positions tend to have higher margins and tend to be price leaders and have better grasp of the market. Intellectual property, and that can come in the form of product or process, looking at global access, in other words being able to capitalize on the growth outside of Western Europe and the US which should be higher for the foreseeable future. Synventive does that very nicely.

And then growing markets. And we're looking at growing end markets. If you look at the number of nameplates in the automotive industry, the automotive industry as a whole is growing about 6% globally, but if you look at the number of nameplates being the number of brands and the number of models and model changes, that's growing much faster than the overall and that's what's driving this business. So when we look at it from a strategic sense, we want to build this segment out. So if you look at acquisitions that would be a highest priority for us right now would be something that could supplement the Synventive acquisition.

All right, thank you.

Holden Lewis.

Great, thank you. You had talked about or made some comment that you're expecting that in North America Distribution that profits would be up nicely in Q4, can you give some color as to what, given that conditions remain sluggish, what provides that confidence?

There's a couple of things. The year over year comparison we had some higher expenses in the fourth quarter of last year that we don't expect to recur and that's one of them. The what other one is that we're looking at the-- in the improvement in October and the number of orders and process workload that's being worked on. If you noticed, that business has had incredible flow-through rates, well above normal over the past couple years. And even under normal circumstances the flow-through rates for operating profit is about 40%. So I'm pretty confident in our Distribution business right now.

Again, so just I can frame the message, when you talk about seeing improvement in the margin, are you comparing that just to Q4 last year or you're comparing that to the 8% that you did in Q3?

No, I'm comparing it to year over year to Q4.

Got you, okay. And then yes I just want to make sure the cadence question. It sounds like what you saw was relatively weak July and August perhaps as inventory culling maybe ran it's course. But it sounds like then you saw the tone of markets and industrial distribution maybe firm up in September and that firming has continued in October. Is that correct, how I'm reading your message about tone?

It's close to that. I take a broader brush to that to the Industrial business as a whole. And I think it's reflective of the past couple of years, too.

Okay. But you are -- but in both Industrial and Distribution, you are seeing some recovery from where we were couple months ago?

As I mentioned the-- in October we're seeing the number of orders growing and the in-process work is looking very good. So I think that that'll continue, at least I hope that continues. It's difficult with a short cycle business like that where you look day-to-day. Some days I like the Aerospace OE because you can see backlog out for years.

Okay. But that's true for both your Industrial segment and your Distribution segment, or is it's just one or the other?

Yes, both.

Both, okay, got it. And then just a couple of numbers, I may have missed, but I think it was asked what your OE Aerospace grew and I didn't catch the number if it was provided.

Yes OEM grew 4% in the quarter.

4% in the quarter, okay. And then going all the way back to the first question that was asked, your-- I think what we're trying to get a sense of in terms of Synventive numbers is you have the $0.06 related to acquisition and-- acquisition costs and purchase accounting, but what was the operational accretion in Q3 from Synventive? In other words, your stripping out the cost, but what was the income from the quarter?

Yes so Holden at a high level, we stripped out the $0.06 it just brought some color to the quarter. We did note that the third quarter will be dilutive, roughly $0.04, if you will, if you net it down. Adding it back in the fourth quarter, which gives us confidence in our full-year outlook and in effect the fourth quarter which was n earlier comment., to be net neutral for the year.

Got it, all right. So $0.06 in cost and $0.02 in accretion, so $0.04 net drag and then it's the reverse in Q4.

Exactly, think of it that way. And the reason for pulling out those one-times is just to give you some color on they're not going to repeat, right? We're talking about short-term purchase accounting mainly the flow-through of step up through cost of goods sold as well as acquisition specific transaction costs on the deal.

Right.

Which won't repeat. So that $0.07 is truly just those one-time items. When we look at our full-year guidance $1.80 to $1.85, we're just trying to give you a better apples-to-apples when we profile out 2013, which we'll do in February.

Got you. And then last thing as it relates to fixed end costs, I'm assuming this quarter it's heavy on acquisition costs and light on purchase accounting that flips in Q4, but can you tell us in Q3 what was the impact on the-- what was the split between COGS and SG&A?

Yes, about-- of that $5 million that we highlighted, think of it as $4 million in cost of goods sold, about $1 million in SG&A.

Okay, so actually it's a pretty heavy purchase accounting even though you only owned it for like maybe two thirds --

Yes, about five weeks.

I've been complaining about that for some time.

Most of it is because they do-- the business is able to turn their inventory pretty quickly, it really just reflects mostly the short-term step up that gets flushed through cost of goods sold which occurred in September.

Okay and I'm guessing that the extra bit in Q4 is going to be mostly again purchase accounting, so COGS impact?

Yes, think about the backlog flushing through, yes.

Okay, perfect. Thank you.

Josh Chan.

Yes, I had a question on Distribution, but you just answered it so thanks.

That's the easiest question so far.

Matt Summerville.

I just had one quick follow up, the nitrogen gas business continues to be strong. It sounds like your order book still looks good there. Given that to your point that is somewhat -- I guess I would think about it as somewhat of a CapEx item, maybe you're thinking about it a little bit differently. I guess given how that business has responded in previous cycles, what is your confidence level that that backlog holds and that you don't see deferrals and cancellations? That's obviously a very nicely profitable business for your Industrial segment.

I'll dive in a little deeper on that. First of all the previous recession we were hit extremely hard but that's largely because it was exceptional period for the auto industry where things just basically stopped and we had a 50% reduction in orders almost instantly. But if you look at previous recessions, we didn't see that level of pruning. And I also think that there's a much more diverse global base than there was in the 2000 recession, for example, many more product lines. So any future recession as long as it's not of the magnitude of the 2008 era, I think the business will hold up fairly well. What we're expecting currently when we look at the number of nameplates, et cetera, is we don't expect it to continue to grow at double-digit rates into 2013, but we expect it to hold up.

Thank you.

Thank you. Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.