Barrick Mining Corp (B) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and full-year 2013 Barnes Group earnings conference call. My name is Mark and I will be your operator for today. At this time all participants are in a 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 turn the conference over to William Pitts, Director Investor Relations for Barnes Group. Please proceed, sir.

Thank you, Mark. Good morning and thank you for joining us today. With me are Barnes Group's President and CEO, Patrick Dempsey, and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens.

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.

Our discussion today includes certain non-GAAP financial measures which provide additional information that we believe is helpful to our 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 would like to remind everyone 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.

Before we begin our prepared remarks I want to remind everyone that our financial results discussion is based on continuing operations. So let's now open today's call with remarks from Patrick, followed by a more detailed review of the results in our 2014 outlook discussion from Chris. After that we will open up the call for questions. Patrick.

Thanks, Bill, and good morning, everyone. Today I am very pleased to report solid fourth-quarter performance to cap an excellent year for Barnes Group. The execution of our profitable growth strategy continues to drive our performance as we remain focused on generating a larger portion of our revenues from differentiated intellectual property based businesses serving our more favorable end markets while achieving greater global reach.

Our 2013 results further validate this strategy. For the fourth quarter sales increased 13%, 5% on an organic basis. Our adjusted operating income increased 18% to $41 million. And adjusted operating margin reached 14.2%, up 60 basis points from last year's fourth quarter.

For the full-year sales increased 18% with organic growth of 4%. Adjusted operating income rose to $141 million, up 25%, and adjusted operating margin increased 70 basis points to 12.9%. The successful execution of our strategy combines organic investment and portfolio enhancements that position the business for sustained long-term growth.

During 2013 capital expenditures increased to $57 million from $38 million last year. Approximately half of this investment relates to growth capital where we are enhancing our manufacturing technologies and service capabilities at both Industrial and Aerospace to support the future customer demand we anticipate on key strategic platforms.

In addition, during the fourth quarter we entered into a component repair program, or CRP, with General Electric that principally provides for the extension of contracts under which we are currently providing certain aftermarket component repair services. In addition, the CRP gives us the right to provide repair services for CF6 and LM family of gas turbine engines as an OEM licensed supplier over the remaining life of these engine programs to other customers.

A total investment of $27 million will be provided over two years, $17 million in 2013 and the balance in 2014. This long-term licensing agreement further solidifies our well-established position as a highly specialized provider of repair and overhaul services to the Aerospace aftermarket.

With respect to our business portfolio, 2013 saw Barnes Group's two most significant transactions -- in April we completed the sale of Barnes Distribution North America and in October we acquired Manner. During 2013 we increased our quarterly cash dividend by 10% and for the full year with combined dividends and share repurchases we returned over $91 million to our shareholders.

Now for a few highlights on our segment performance. In our Industrial segment organic sales increased 4% in Q4, that is three consecutive quarters of solid performance. We ended the full year with 4% organic growth with each of our businesses experiencing year-over-year sales increases. Our nitrogen gas products and [Seeger] businesses both achieved record sales years.

For our recent acquisitions, Synventive also had a record sales year and at Manner the integration is progressing very well with their highly engineered products and services continuing in high demand and they ended 2013 with a record level of backlog of approximately $70 million.

The Industrial performance is set against the backdrop of generally favorable end markets and global GDP expansion. In particular worldwide automotive production looks positive with [load] expected in most geographic markets this year. Excluding Manner we look for mid-single-digit organic sales growth again in 2014. And at Manner we forecast an annual sales contribution of approximately $120 million to $125 million.

At Aerospace our original equipment manufacturing business delivered solid sales growth in the quarter up 12% and ended the year up 7%. OEM order activity was robust as overall Aerospace backlog grew to a record $554 million, up 9% sequentially from the third quarter and up slightly from the last year end. About 60% of this backlog is expected to ship in 2014.

Our long-term outlook for Aerospace OEM remains very positive and we look for high-single-digit sales growth in 2014. Large backlogs at Boeing and Airbus support anticipated production rate increases for both narrow and wide-body platforms, which should provide healthy sales growth over the next several years.

Our elevated investment in new product and process introductions, or NPI, also positions us very favorably to participate on the next generation of new commercial engine platforms. Aerospace aftermarket saw continued softness heading into the fourth quarter as MRO sales were flat and spare parts sales were down about 12%.

MRO sales have been fairly steady over the last three quarters and our expectation for 2014 is mid-single-digit revenue growth as airline profitability continues to improve and increases airline traffic drives aftermarket demand.

In 2013 our RSP aftermarket spare parts business was down 8% primarily due to contractually scheduled incremental management fees. As we previously mentioned, we are at the tail end of incremental management fees. Our expectation for 2014 spare parts sales growth is in the mid-single-digits.

To wrap up my prepared remarks, Barnes Group delivered a very good 2013. Industrial continues to be a positive story with favorable end markets and improving global economic conditions including Europe. At Aerospace continued strength in OEM and an improving aftermarket environment should create further momentum this year.

We continue to make significant investments in our businesses to expand our engineering capabilities, manufacturing technologies and service offerings enabling us to bring new products to market as we see customer and end market demand increasing over the next several years.

So we are excited about the opportunity that 2014 brings and believe we are well positioned to deliver another year of high performance. With that let me pass the call over to Chris.

Thank you, Patrick, and good morning, everyone. I will begin by highlighting key points of our fourth-quarter and full-year 2013 results and end with highlights of our 2014 guidance.

Turning your attention to slide 2 of our supplement, fourth-quarter sales were $291 million, up 13% over last year driven by the sales contribution of the recently acquired Manner business and solid organic growth of 5%. For the quarter income from continuing ops was $26.3 million or $0.47 per share down 4% from $0.49 in the prior period.

On an adjusted basis income from continuing ops was $0.57 per share, up 14% from $0.50 a year ago. The quarter's adjusted earnings from continuing ops excludes the impact of short-term purchase accounting and transaction costs which were $0.10 per share in Q4 2013 for Manner and $0.01 per share in Q4 2012 from Synventive.

For the full-year sales were $1.1 billion, up 18%. Income from continuing ops was $72.3 million or $1.31 per diluted share compared to $79.8 million or $1.44 per diluted share in 2012. For 2013 income from continuing ops per share include $0.10 of short-term purchase accounting and transaction costs related to Manner, $0.12 of nonrecurring CEO transition costs and a tax charge of $0.30 associated with the April 2013 US tax Court decision.

For 2012 income from continued ops per share included $0.08 of short-term purchase accounting and acquisition transaction costs related to Synventive. So excluding these items, which we believe better represents our underlying operations, adjusted EPS from continuing ops was $1.83, up 20% from $1.52 in 2012. As Bill previously mentioned, we have provided a GAAP reconciliation to these adjusted results as part of our press release.

Now let me add to Patrick's comments regarding segment performance beginning with Industrial. Fourth-quarter sales were $184 million, up 17%, the increase was driven by Manner's sales contribution, organic sales growth of 4% and favorable FX of $1.4 million. Operating profit of $15.5 million was down 4% from $16.2 million.

However, this year's fourth-quarter operating profit includes $7.3 million of short-term purchase accounting and transaction costs related to Manner while last year's fourth quarter included $800,000 of similar costs related to the Synventive acquisition.

So excluding these items adjusted operating profit at Industrial was $22.8 million, up 34% driven by the profit contribution of Manner, the profit impact of higher organic sales and productivity improvements. Adjusted operating margin was 12.4%, up 160 basis points.

Full-year sales were $688 million, up 28%. Organic sales increased $22 million while acquisition-related sales from Synventive and Manner contributed $127 million. So full year operating profit was $71.9 million, up 46%, primarily benefiting from the profit contribution of the acquired Synventive and Manner businesses, the profit impact of increased organic sales, favorable pricing and improved productivity.

In the current year operating profit was negatively impacted by $7.3 million in short-term purchase accounting and related costs related to Manner and CEO transition costs of $6.6 million allocated to the segment during the first quarter.

Last year operating profit was negatively impacted by $5.9 million in short-term purchase accounting and transaction cost related to Synventive. So excluding these items adjusted operating margin was 12.5%, up 230 basis points.

Fourth-quarter sales at Aerospace were $107 million, up 6%. An OEM sales increase was offset in part by a decline in aftermarket spare parts sales while aftermarket repair and overhaul sales were essentially flat.

Operating profit was $18.6 million, up 3%, benefiting from higher OEM sales lower employee related costs primarily reduced incentive compensation in the absence of an aftermarket repair and overhaul inventory adjustment taken last year. These benefits were offset in part by lower aftermarket sales.

So operating margin for the fourth quarter was 17.3%, down 60 basis points. Full-year Aerospace sales were $404 million, up 3% as OEM sales increase was partially offset by a decline in the aftermarket repair and overhaul and spare parts business. Operating profit decreased 11% to $51.3 million from $57.9 million.

Operating profit benefited from higher sales in the OEM manufacturing business and lower employee-related cost primarily reduced incentive compensation but was negatively impacted by an $8.6 million inventory valuation charge taken in the third quarter, lower sales in the highly profitable aftermarket RSP spare parts business, increased costs of new product and process introduction and CEO transition costs of $3.9 million allocated to the segment.

Full-year operating margin was 12.7% while adjusted Aerospace operating margin, which excludes the allocated CEO transition costs, was 13.7%, down 110 basis points.

The Company's effective tax rate for continuing ops was 32.8% in 2013 compared to 13.5% in 2012. Included in 2013 income tax is a charge of $16.4 million associated with the April 2013 Tax Court decision. Excluding this charge, the 2013 adjusted effective tax rate is 17.5%.

Regarding share count, our fourth-quarter average diluted shares outstanding was 55.3 million. For the full year diluted average shares outstanding were approximately 55 million. And our basic year-end shares outstanding were 53.9 million. Given the Manner acquisition we did not repurchase shares in the fourth quarter.

During the first three quarters of 2013 we repurchased 2.4 million shares for approximately $69 million. We have 2.6 million shares available for repurchase under existing Board authorizations. At the present time our expectation for 2014 is that share repurchase will be employed to offset dilution from equity-based compensation.

Cash generation continues to be strong. For 2013 adjusted free cash flow, which we define as operating cash flow less capital expenditures, with the income tax payments related to the gain on the sale of BDNA added back was approximately $83 million. So adjusted free cash flow to adjusted net income came in at 110%.

With respect to debt, even with the recent Manner acquisition, our year end debt to EBITDA ratio was 2.3 times.

Now let's turn our attention to 2014 continuing ops outlook on slide 4 of our supplemental slides. For 2014 we expect sales growth between 14% and 17% with organic sales growth of 5% to 8% and adjusted operating margins in the range of 14.5% to 15.5%.

Adjusted EPS from continuing ops is expected to be in the range of $2.15 to $2.30 per diluted share, up 18% to 26% from 2013's adjusted EPS of $1.83. Cash conversion is expected to be approximately 100% to net income.

Our 2014 guidance excludes an estimated $10 million pretax or approximately $0.13 EPS impact of the remaining short-term purchase accounting adjustments related to Manner. And speaking of Manner, given the strong performance to close out 2013, which exceeded our original expectations and with this business ending the year with strong orders and a record backlog, we've updated our review of Manner's 2014 EPS accretion.

Excluding the impact of short-term purchase accounting, we now see a Manner EPS contribution on the higher end of the previously stated range of $0.21 to $0.24 and this assumption is reflected in our 2014 guidance.

A couple of other items related to our guidance for 2014. Capital expenditures are forecasted to be about $60 million in 2014 while depreciation and amortization is expected to be roughly $80 million and about $40 million of that amount reflects our outlook for depreciation.

Interest expense is expected to be approximately $14 million given the increased level of investments planned for the year. For the full year average diluted shares outstanding are anticipated to be in the range of 54 to 55 million shares. With excellent returns on our pension investments in 2013 and a higher discount rate we expect approximately $8 million tailwind on pension expense in 2014.

And lastly, we expect or 2014 effective tax rate from continuing ops to be in the high 20%s due to a greater mix of anticipated earnings from higher tax restrictions, the expiration of certain tax holidays and an increased level planned repatriation of current year foreign earnings.

So in closing, the last 24 months have seen significant portfolio enhancements with the recent Synventive and Manner acquisitions and the exiting of our European and North American Distribution businesses. Coupled with a heightened level of organic investments we are well positioned to deliver continued profitable growth.

2013's strong financial performance and solid cash flow generation have allowed us to position our balance sheet to support this growth and continue to execute on our strategy. Operator, we will now open the call for questions.

Matt Summerville, KeyBanc.

Can you help me understand the difference between the CRP versus an RSP? And if you have to pay $27 million to extend that contract what was the original investment when you did the deal initially?

So the difference, Matt, between a CRP and an RSP is the fact that the RSPs were on spare parts and were exclusive for the life of component -- life of the engine.

With regards to the CRP it is more MRO, so it is repair and overhaul services on a set of existing repair agreements that we have in place, as well as a new licensing agreement for the CF6 and LM family of gas turbine engines.

There was no original payment, to answer your question on that, initially. This is a new program that we have entered into in the fourth quarter which will solidify our position in the Aerospace aftermarket as a repair provider.

Got it. And then can you talk about within Aerospace what your spare parts volume did in the fourth quarter and for the full year, please?

What I would indicate relative to RSP, and it is a great question because what continues to put us out of sync with the industry is the incremental management phase that took place in 2013. When we take them out of the equation what I would indicate is directionally our sales in the RSPs were directionally in line with the industry.

And then just with respect to the Industrial businesses, can you just sort of talk in a little more detail around what you're seeing in terms of incoming order rates? Perhaps add a little geographic color with the larger business units there, Associated Spring, nitrogen gas, etc.?

In terms of Industrial I would indicate that from our perspective the end markets, right now if you think about our sales, they're pretty much evenly split between Industrial, Transportation and Aerospace.

In terms of the industrial side, our end markets continue to show slow to modest growth with the US and European PMI indices being above 50 for some time now indicating continuing expansion.

On the transportation side, the outlook remains positive where we see our global light vehicle production forecast to grow in the low- to mid-single-digits for the next three years.

In terms of our businesses I would suggest that, as I mentioned, both Seeger and NGP both had record sales years coming off of 2013 as did Synventive. And as we go into 2014, whilst it is not totally without its challenges, we continue to remain positive on the outlook across both industrial and transportation.

Got it, thank you.

Peter Skibitski, Drexel Hamilton.

Good morning, guys, nice quarter. Just -- I have a bunch of small questions here I guess. But one thing I want to ask about I guess on the Industrial margin side, adjusted margins for Industrial in the fourth quarter, I think they were 12.4%. They were kind of flattish; it has kind of been flattish for a few quarters now despite the higher volumes in the fourth quarter. And you might have touched on this, but what kind of drove that flat margin rate despite the higher volumes?

Well, I think on our Industrial side, from our perspective we have been somewhat -- we have been pleased with the improvement both between the base businesses as well as of course the contributions from the new acquisitions.

As we look at the overall margins being up on a year-over-year basis, big contributors there for us continue to be productivity improvements across the businesses. And as we look at overall productivity in 2013, we benefited from some of the moves that we took in 2012.

In particular we had done a lot of heavy lifting in terms of transfers of work and Associated Spring. In Synventive we had the heavy lifting of the integration in the fourth quarter of last year. And then if you recall we expanded our NGP business in 2012 and we had the benefit of a full year of insourced work over the course of 2013.

So having said that, there was a lot of noise in terms of the different aspects of both the gives and takes of CEO transition plus the overall impact of the acquisitions as well as divestitures. But overall we thought it was a solid year.

Okay well maybe a way to dovetail into post Manner now, do you guys have an updated view on kind of what you think peak margins could be? I know previously you thought they would be not quite as high as the prior peak cycle, but you're talking maybe 17% to 18%. Is that still what you think kind of post Manner or does the kind of goalpost change at all for you?

Well, but we indicated I think in the past was the fact that we were targeting mid-teens for the overall Barnes Group in terms of operating margins. As we continue to transform the portfolio I would indicate that we are moving that to more high-teens on an outlook basis. Relative to 2014 of course we have indicated that we are looking at a 14.5% to 15.5% range for the full year.

Got you and then just one quick one for Chris. Chris, does the purchase accounting run out in 2014? Will there be nothing left in 2015 or is that a little bit ongoing?

Yes, see the short-term purchase accounting, in the first half of the year that will be out of our results and we will Reg G and adjust accordingly. We have got about -- we've got what, about $10 million left to run out. And then I would normalize -- sorry, go ahead.

So kind of $0.05 a quarter for the first two quarters?

Yes. I would say most of that is going to be in the first quarter, actually.

Okay, got it. Thanks very much, guys.

Ed Marshall. (Operator Instructions).

Let's go on to the next question.

The question Q cleared, I don't know if they pressed star 2 or --.

We will give it a second.

Okay.

Mark, are there technical issues there? Mark, are there any more questions coming in please?

It's Amit Mehrotra from Deutsche Bank, am I live here or --?

Yes, Amit, you are live.

So my first question is on margins. If my math is right the guidance for 2014 implies an incremental operating margin in the high 20% level versus sort of a high teens that Barnes Group has achieved over the last few years. So I mean, the question is, is this sort of the new level of operating leverage in the business that we should assume on the incremental volume growth on a go-forward basis?

Amit, your calculation is correct for 2014 and it is indicative of how we are continuing to change the portfolio of businesses as part of our transformation. Clearly what you are seeing is the benefits of both Synventive and Manner being part of the group as well as continued productivity improvements that we are seeing across the businesses.

Okay, okay, that is great. Just a couple follow-ups here. One question on Manner. Can you just give us some color on what kind of organic growth that business is expected to achieve this year given the disproportionate sort of return profile of that business? And then also longer-term, can you talk about some of the growth opportunities in Manner over the next few years beyond 2014?

Yes. relative to what we are projecting for 2014 it is in the mid-single-digits. As I mentioned earlier we had -- well, we are looking towards is $120-$125 million in revenue. For that business this year we are making some significant investments in terms of increased capacity.

And when I say significant, not so much outside of what we had anticipated from a CapEx dollar amount but more in terms of where we have now assessed the business overall and have identified where there is key critical capacity constraints and how we would address those through new technologies as well as, in some instances, through automation with a view to allowing the existing footprint to continue to expand and grow overall top-line sales.

As we look outward into multiple years we clearly see the opportunity for further expansion globally. The leadership team, our business leader as well as the head of sales, are currently in China on a two week trip with a view to gaining a better understanding of our Asian customer base and their needs and requirements of the next couple of years and how Manner might best support them in that region as well as in the United States where we already have a manufacturing footprint in Atlanta, Georgia.

Okay, that is great. And then just on M&A, it wasn't lost upon me that you highlighted further acquisition opportunities in the release and in that context can you just give us an update on what the pipeline looks like, maybe the size or potential magnitude the size of deals and where you are looking to invest either from an end market or regional standpoint?

Yes. Relative to our M&A activity what I would indicate is that we are actively continuing to source potential businesses that will continue to add to our intellectual property-based strategy. As we continue that we do it in parallel to the organic investments that we're making.

But we see that there are a number of opportunities to where we can continue to build upon not only the acquisitions that we have already acquired in terms of the plastic injection molding industry as an end market. But then even as subsets within that as you know with Manner we moved into the medical packaging and pharmaceutical industries which is a diversification -- a further diversification of our portfolio offerings.

And so as we look at our potential acquisitions I would indicate that the criteria is that we've outlined remains -- we remain firm in terms of what that entails and we hold the bar high so and doing so it will clearly affect timing as we continue to look at new opportunities.

Okay, that is helpful. Thanks. And congrats on a great quarter.

Edward Marshall, Sidoti & Company.

Hey, listen, so as I look at kind of the Aerospace margin in the quarter and obviously it is a noticeable jump, roughly 200 basis points, and I don't know that we have addressed this yet but looking back last year it looks like there was some seasonality in the fourth quarter two about margin. So I am just kind of curious what has been running through that -- is that a repeatable event going forward and something we should assume?

How I would categorize the fourth quarter was just a great effort on behalf of the Aerospace team. And at nearly 17.5% was -- I thought was interesting though it was down 60 basis points. That said, the team there have continued to put a heightened focus on overall margin expansion within Aerospace.

We do see lumpiness from quarter to quarter and -- but from our perspective we are continuing to, as we have always indicated with Aerospace, to drive the business from mid- to high-teens. So the team has done a very nice job. Clearly RSPs have a large impact on overall Aerospace results and even with what was achieved in the fourth quarter you saw that our RSP overall sales were down in the year. So clearly that represents even further upside.

Yes, and that is what is surprising with MRO being flattish, RSPs being down as much. You are 200 basis points above any quarter in 2013 give or take a couple --. So it just leads me to believe that and looking at the trends this year over last year, it is very similar that something is flowing through in the fourth quarter. I am just kind of curious what is different in the fourth quarter than the preceding three over the last two years?

Ed, what I would add to that is just the incentive compensation --.

Okay, that makes sense.

Yes, I mean that is kind of a -- that is an annual, typically a fourth-quarter adjustment. So when you think about that I would say quarter over quarter or even full year, the adjustment on incentive compensation, employee-related costs primarily was definitely a key driver.

Okay. And then looking at the guidance as I kind of back into some numbers and I guess it depends on what you are going to use for a growth rate on Aerospace. But if you look at kind of the mid-to high single-digit range, which I think is what you guided to. You back out the Manner, $1.20 to $1.25.

On the low end of your guidance range it looks like you are almost guiding to kind of flattish revenues on Industrial if you strip out Manner. Can you kind of talk to what maybe went into some of the thought process and the guidance there and what are some of maybe the weaker and some of the stronger points on the Industrial side?

I think relative to overall BGI and what we -- when we put the guidance together relative to the $2.15 to $2.30 on an adjusted basis I would indicate that what we felt was that covered the spend possibilities, both on the downside and the upside.

And as we indicated in our supplement what we looked at would drive the high end would be clearly a strong Aerospace aftermarket recovery both in MRO as well as RSPs, continued expansion of European auto production and of course the leverage that comes from that.

Where on the low-end what we were trying to capture within the 15 points -- the $0.15 spread, was potentially some of the uncertainty that we're seeing across the economy, and our businesses are not all experiencing just positive outlooks with -- there are some examples of where we are seeing some clouds gathering. But we have many NPI programs in place that we believe will overcome that. But the overall spread I think covers the range of possibilities in 2014.

Then if I can ask on the tax rate, as we look kind of 2014 versus 2015, and I know I am going out one more year than what your guidance looks at, but I just kind of want to talk maybe directionally. You mentioned for 2014 you will be in the high 20% tax rate.

As we look out to 2015 I also -- I think there are additional RSP agreements kind of that expire on the Pioneer tax rate. Is that right or is that 2016? And if so, if it is 2015 did that rate go even higher and where do you think that kind of shakes out after all through these RSP kind of Pioneer tax rates?

Yes, Ed, it is Chris. So I would say you're right. I mean all else being equal, we will continue to see pressure on our tax rate going up as a result of the retirement of the Pioneer tax status, which retires over the next three to four years. So each year we will see that.

But again, a lot of things can happen to adjust that tax rate going forward. But again, like I said, all else being equal we would expect that that tax rate would go up year over year.

Okay. And I was curious, I saw the jump in the deferred tax liability. Not to get granular, but I am curious if that is related maybe to the Pioneer tax rate. If not, what? A rather large jump.

No, that is acquisition related. It is related to Manner.

Okay. And then finally if I could, the $8 million tailwind on pension expense, speaking to the segment level, how does that kind of flow through? Is it even across the segments, or I think it probably is more weighted to the Industrial, but I just want to get your opinion.

Yes, I would say it would be more weighted on a sales basis as you think about just the top --.

I see.

You know what I mean? It's the overall makeup (multiple speakers).

Yes, the weighting of sales for the segment via the -- okay. Because it runs at the corporate level and then you segment it out accordingly; is that how it works?

That's right. So that is a fair way to look at it.

I would say the split, Ed, in 2013 is 63% Industrial in terms of revenue, 37% Aerospace.

On the Aerospace side, yes.

Did you say 2013 or did you say 2014?

No, 2013.

Okay, I thought you were giving me additional guidance for 2014. That is why I was asking. Okay, thanks, guys. I appreciate it.

Scott Graham, Jefferies.

So in the guidance for the margin if we sort of choose, let's say, 13% as the adjusted to final for this year, that is up 150 to 250 basis points. I was hoping you guys can maybe give us the buckets for that; how much of that is Manner, how much of that is productivity, how much of that is maybe Aerospace aftermarket recovery maybe? Those are the three big ones that I was hoping for.

Yes, Scott, maybe I can help a little bit on just I would say from a high-level point of view, a couple of things that were impacting the margin. And again, we don't get granular to the SBU level, but if you think about the adjustments that we made in the current year for the exchange inventory and aftermarket, as an example.

So that gives us an opportunity to increase that over time. If you look at the makeup and the mix of our business between what Synventive and Manner are contributing, clearly higher-margin businesses in terms of our acquisition strategy, so they are adding to it.

Manner we talked about in the call, EBITDA margins around 30%, in excess of 30%. So I would say just it clearly is a reflection of us driving productivity, focused on profitable growth in the segment, and doing a nice job through the acquisition strategy of purchasing, acquiring, if you will, higher-margin businesses in our Industrial segment.

So we see -- I think we commented on this before -- we see Industrial margins in kind of that low double-digit, Aerospace being in the high double digits and very pleased to be able to guide this year to be 14.5% to 15.5% operating margin.

But I would say it is the absence of a few charges as well as the mix of our earnings in terms of our acquisition strategy that's given us the confidence of driving margins into that mid-teens.

Okay. So if you were to say that -- let me ask the question this way. If you were to say that -- would you say that Manner and productivity and the costs -- the swings in those costs are maybe the big three?

Yes. The absence of that inventory charge, I would save the introduction of Manner into the mix of our performance and, again, productivity improvements as we look to drive profitable growth. And as the investments that you can see we are making, we're ending the year with $57 million of CapEx and Patrick's comments in terms of the new technologies as well as adding to our capacity are driving that productivity improvements across all of our businesses.

So then -- and I don't want to put words in your mouth here in anyway, particularly seven weeks into the year. But would it be fair to say that if you have a good development in the Aerospace aftermarket businesses that something more toward the high end, perhaps even above the high end is possible?

We would hope so. Clearly if we saw that -- right now we are guiding our high margin RSP business kind of in that mid-single-digit. But that clearly has a big impact, it can have a big impact on the Aerospace margin and the Company margins.

The other thing I will highlight, Scott, on that walk is our comments on pension expense. Getting a tailwind of $8 million would also be reflected in the operating results of our two segments. And that is also contributing to that margin improvement.

Yes, yes, and that was my second question actually, Chris. Could you split that between segments?

Like we talked about before, I would just say do it on a sales basis.

Fine, good.

Call it two-thirds Industrial, a third Aerospace, that would be a fair way to look at it.

Thanks, guys.

Josh Chan, Baird.

Just clarifying on the margin question, would it be fair to assume that most of the margin expansion you are going to experience next year will come from the industrial side? Because presumably you will get somewhat of a negative mix in the Aerospace business as well. Is there a way to sort of add more color to that?

I would think the goal from our perspective we are looking for both businesses to contribute. And one of the things which we mention often is productivity improvements. And an area that we continue to place a lot of focus on is our Barnes Enterprise System.

And there I would indicate that what we are very pleased with is some of the recognitions that we are getting outside from external entities for some of the great improvements that have been made across the Aerospace side of the equation.

In particular, just this year we won the Utah Manufacturer of the Year award on our Aerospace Ogden facility and that is, again, for manufacturing excellence.

You'll also hear us continuing to make reference to the investments we are making in capital equipment and a lot of that is focused on new technologies with a view to drive an overall efficiency into the businesses as well of which today that has been evenly added to both Aerospace as well as Industrial. So a number of factors driving I think the efficiency on both sides.

Okay, thanks for that. And now that you have owned Manner for a couple months, have you identified any type of revenue or cost-related synergies between Manner and Synventive? Or are you thinking about those two businesses largely separately at this point?

Well, I would indicate that the two businesses have clearly brought together their engineering folks in the early stages with a view to sharing opportunities on the technology front.

And as I think about that, the teams have done a wonderful job in terms of identifying where each of them have unique capabilities that they bring to market and where there is opportunities to share technologies. And that could be anything from intellectual property in their patent portfolios to product development and how each of them go about the upfront heavy engineering side of both of their businesses down to simple things like the gating valve styles that are used within the hot runner systems.

Each of these are with a view to leveraging overall technological distinctions in the marketplace, not so much to drive costs but to leverage the capabilities of both businesses to ultimately position them even stronger in their respective markets.

Thank you and congrats on the quarter and the outlook.

Christopher Glynn, Oppenheimer.

Just wanted just to try to build some context around the Aero outlook for next year. If we 2013 the top-line guide kind of slid pretty consistently through the year. I know the aftermarket stayed a little softer than might have been, but seems like maybe multiple layers there. So can we just take a little time and peel back the onion on the narrative of how Aerospace sort of transpired during the year?

Yes. For us overall I think as we have entered into 2013 we were much more bullish on Aerospace aftermarket, in particular the impact that RSPs and MRO could have made to our overall guidance. As the year progressed and it became evident that the aftermarket recovery wasn't happening at the rate at which we had hoped, subsequently we began to taper our overall growth expectations for 2013.

As we look into 2014 today you see that with mid-single-digit growth being projected for both RSP and MRO it is somewhat a reflection of cautious optimism. We continue to remain bullish on the Aerospace aftermarket recovery, but just somewhat more cautious as a result of our experience in 2013.

On the OEM side, clearly we ended the year with a record backlog. And so, as we go into the year with 60% of that projected to shift in 2014. And our participation on some of the key article strategic platforms that we've identified including the 787, which, as you know, has just here in January -- just recently in January achieved a rate increase of 10 per month with Boeing announcing that they are hoping to move that to 12 by 2016 per month and to 14 by the end of the decade.

So in each instance we feel very comfortable (inaudible) and very confident in terms of our Aerospace outlook.

Okay, and then the fourth quarter, if we calculate it on an adjusted tax rate, maybe 15%, maybe 20% was guided. Was that just geographic mix of product -- of profits?

Primarily, Chris, absolutely.

Okay. And then if we look at the 2014 tax rate, depending on how one interprets high 20%, I can span two-thirds of the guidance range. So wonder if we could put a finer point on the 2014 guidance or if that maybe toggles with the segment level guidance.

Call it on the low end of the high 20%s.

Okay, perfect.

That may help you, Chris.

That helps, thank you.

Peter Skibitski, Drexel Hamilton.

Yes, just a couple of follow-ups on Aerospace. You touched on the OE side a little bit there a minute ago. But on the strong OE growth expected in 2014, is that primarily 787? Is it 787 and A350? Or is anything else kind of contributing?

Well, the 787 clearly is a factor in terms of if you think 12 or 18 months ago Boeing was producing them at 5 a month, and in January they are now up to 10 a month. So that is a factor coming into play. Recognizing that we are ahead of that schedule, so we saw some of that benefit in the second half of 2013.

But as we move in also was the GE90, which is a key critical program for us, is forecast at approximately 100 for the year. That, whilst it is looking to somewhat consistent at that rate for a number of years, what fluctuates is spares. And so, the spares can influence above and beyond what the platform rate of production might be.

Okay, yes. So you won't see 777 on the OE side growing, but you will see it through the MRO and spare parts?

Yes, exactly. But while it is recognized that we manufacture spare parts, when we manufacture components for OE some of them may find a way into actual production engines, some of them may go to the spare parts side of the business within GE.

Okay, I see, I see. Okay. So, in terms of the A350, is that more so kind of a year out for you in terms of the ramp there do you think?

We continue to invest heavily in the XWB with regards to NPI. And yet, as you know, the actual ramp against that particular aircraft is projected more out into 2015, of which some of that will flow into the back end of 2014 again because of lead-time.

Got it, got it, okay. And then on the RSPs, guys, now that we're kind of through the incremental management fees I think, if we avoid a recession is there any reason to think that RSPs can't kind of grow kind of mid-single-digits kind of along with the global traffic growth kind of annually, like I said if we avoid a recession?

I think that is reasonable. At this point we are looking at mid-single-digits ourselves for 2014 as our outlook. And as the DASH7 continues to come off wing for first-time overhauls we believe that will be another contributing factor to driving spare part sales.

Okay, okay. And I promise this will be my last one. But as I think I am going to assume you have a dearth of healthcare analysts on the line. And so, I'm wondering, now that you have closed Manner and you have got this additional kind of healthcare and medical exposure, how are you guys thinking about kind of the drivers to that business? I am not sure how it has kind of grown historically and what drives it, but any way you can help educate us to what to look for Manner?

Overall Manner continues to be -- on the hot runner and on the mold side. What I would indicate is that Manner is the very high end of precision engineering as it pertains to molds and hot runner systems. As you look at the overall drivers for what drives their business, and to some degree Synventive, it is the overall usage patterns of plastics in general.

So if you think about what plastic offers as an advantage over its counterparts, which might be metals or ceramics, it is lighter and less expensive, has greater flexibility in terms of its -- the types of contours and shapes that it can conform to. It is also corrosion and environmental resistant.

So it is quick production rates. And so all of these factors well for plastic in general. And then as you think about the hot runner systems and the precision molds that Manner produces, what it allows for is increased injection precision. So in the medical markets where there is a high degree of preciseness or precision on the end products and high volumes, so what the hot runner systems allow for is reduced downtime and reduced scrap and waste.

So all of these factors, they all bode well for both Manner as well as Synventive as it pertains to the plastic injection molding industry, in particular with the hot runner systems and the precision molds.

Okay, so it sounds like you think it is really more kind of a secular story of plastics displacing metals and other materials as opposed to just a pure cyclical GDP type of growth type of story.

Absolutely. From my perspective it is more even trends across the globe as you think about in Asia and movement into middle-class and the demographics of that and the requirements and consumption rates that are associated with everyday products that are produced from plastic, I think that also bodes well for Manner.

Okay, thank you very much.

Matt Summerville, KeyBanc.

Just a couple of quick follow-ups. What would the total year-end backlog have been if you back out Manner? So I am looking at the organic backlog, if you will.

Sure. Matt, it would be [$688 million], so think about $70 million.

Got it. And then does your effective tax rate assumption assume the R&D tax credits comes back into play or not?

It is not a big driver for us. Yes, it is not a big driver for us at all.

And with Manner coming in a little bit better in 2013 what would the accretion have been excluding acquisition-related accounting and transaction costs?

Matt, I'm going to ask that you repeat that.

Okay, so, you mentioned early on that Manner sort of closed out the year quite a bit stronger than what you originally anticipated. And I was just curious as to what the EPS accretion would have been from that business in 2013 if you back out the inventory step up in the [transaction]?

Got it, good question. About $0.04 to $0.05, yes. So when we think about the adjusted number of $0.57 for the quarter, Manner clearly was more meaningful than we originally anticipated.

So then you are looking for roughly an incremental $0.20 of earnings out of Manner in 2014?

About right, that is right.

Okay, cool. I just wanted to clarify. Thank you.

Edward Marshall, Sidoti & Company.

Two quick ones. D&A for 2014 do you know what that is going to be?

Yes, it's in my prepared remarks, Ed, it was $80 million.

$80 million for 2014, okay.

That's right. And $40 million of that is depreciation.

Okay. And then curious on the engines -- we have been hearing a lot for the last maybe year or so from the engine -- metal suppliers about supply chain destocking. And it has been kind of a long grind here and I am curious if you are seeing any of the destocking.

I would assume it would've been at your level. But has that progressed at a level up and your customers are starting to see some destocking? I mean I know that you are about a year or so in advance of an aircraft delivery. So you kind of think about that dynamic, I'm curious if there is any kind of inventory in the supply chain that is starting to back up a bit?

What I would indicate, Ed, is that relative to the destocking that was referenced throughout 2013 in the industry overall, I think a part of that was also based upon the expectations around the Aerospace aftermarket recovery.

And so spares -- spare parts were forecast at certain levels going into 2013. And with those not being realized, then orders that have been placed against those types of components were being pushed to the right or were being canceled. And subsequently maybe the term destocking was all-encompassing of capturing some of that activity.

What I think is that there was definitely a degree of destocking that took place in 2013 and as we move into 2014 my personal beliefs are that that has run its course and now the OEs are forecasting against what they believe to be true demand again.

Okay, thank you.

There are no further questions in queue.

All right. We would like to thank all of you for joining us this morning. We look forward to speaking with you next quarter, and so this will conclude our call. Thank you.

Thank you.

Thank you very much this concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.