Barrick Mining Corp (B) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2014 Barnes Group earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Bill Pitts, Director, Investor Relations. Please proceed.

Thank you, Patrick. Good morning, everyone and thank you for joining us for our second-quarter 2014 earnings call. With me are Barnes Groups' 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 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 everyone that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those 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. We will now open today's call with remarks from Patrick, followed by a more detailed review of the quarter's results and our updated 2014 outlook discussion from Chris. After that, we will open up the call for questions. Patrick?

Thanks, Bill and good morning, everyone. For the second quarter, Barnes Group delivered strong financial performance. Sales increased 20%, up 6% on an organic basis. Adjusted operating income increased 37% with adjusted operating margin reaching 15.4%, up 190 basis points from last year's second quarter. Our industrial segment had a great quarter as overall orders were solid, organic growth returned and we made significant progress in moving beyond the first quarter's operational challenges.

Also, the end markets in which we participate, in particular industrial machinery and global light vehicle production, continues to be favorable. Geographically, Europe continues to be a good growth story for us and feedback from our customer here indicates their need to maintain production through the customary summer vacation period. Asia, likewise, is performing at or above expectations. If any softness exists, I would say that the Americas continued to reflect slower growth for us. All in all, our industrial portfolio is well-positioned to deliver an excellent 2014.

Our European-based manufacturing businesses all generated meaningful revenue growth during the quarter fueled by robust tool and die, global automotive production and medical device end markets. We continued to make considerable progress on new components we are developing that support the growing trend towards higher fuel efficiency standards, in particular with our stamping technology in gas direct injection fuel systems where we are producing higher unit volumes on a more consistent basis.

At Associated Spring, revenues were down in part due to the Saline closure, yet operating profit dollars and margins improved. That business has significantly transformed itself over the last several years by focusing on co-engineered products that deliver greater value to our customers. By shifting the focus away from commodity-like products, coupled with productivity gains, their sustained performance improvement has been impressive.

Within the quarter, among the best performing operations were our two newest businesses, Synventive and Maenner. Synventive had a record quarter for both orders and sales driven by strength in the European and Asian regions. Maenner also delivered another very strong contribution this quarter. Sales were $36 million and order activity was very robust. Maenner's first-half sales reached a record level, but as we cautioned in the first quarter, the expectation for the second half is more tempered given summer holidays and a seasonally lower fourth quarter.

At aerospace, the positive long-term prospects for the industry remain intact. Having just recently returned from the Farnborough Airshow, our discussions with key customers reinforce this view. For the OEM business, demand for commercial passenger jets continues. Recently, Boeing increased its 20-year outlook for aircraft demand providing further support of this assertion.

As we have mentioned before, we continue to invest in new products and process introductions to secure our position on the next generation of commercial jet engines. With respect to the aerospace aftermarket, airlines have been seeing above average demand and improved profitability and this is anticipated to benefit our MRO business and spare parts over the long term.

Our OEM business delivered 18% sales growth in the quarter and backlog remained healthy. Also, during the quarter, our Barnes Aerospace fabrications Ogden, Utah division was awarded the Shingo Prize. This award is internationally recognized as one of the world's most prestigious honors for operational excellence and we are very proud of our Ogden team given the extreme high standards and rigorous criteria it takes to win the Shingo Prize.

In the aerospace aftermarket, sales in our maintenance, repair and overhaul business were up 5% while our spare parts business was down 12%. In our MRO business, we entered into a second component repair program, or CRP, with GE during the quarter. This CRP agreement provides Barnes Group as one of a few GE licensed suppliers the right to sell certain aftermarket component repair services for the CFM56 family of engines over the life of the program directly to the world's airlines and engine overhaul shops. In addition, the agreement extends existing contracts under which we currently provide these services directly to GE also for the life of the program. As the CFM is one of the most successful engines in aviation history with a worldwide in-service fleet of over 20,000 engines according to Aviation Week, this program is expected to benefit Barnes Aerospace for many years.

With respect to our RSP program, our spare parts business, we saw variation in activity for the two engine families that make up these programs with last quarter's trend reversing as the larger portion of the CFM56 family experienced a decline in net sales while the CF6 engine family saw growth. It is important to keep in mind that the RSPs are a valuable, high-margin business within our portfolio and we expect that to be the case for many years to come. Given our first-half results, we now expect the full-year growth in spares to be slightly down to flat in 2014 versus 2013.

To close my prepared remarks, we are very pleased with the operational progress made during the second quarter and the financial results achieved. The continued execution of our strategy to provide differentiated products, processes, systems and services with higher contents of intellectual property and innovation delivered solid, profitable growth and we expect more to follow. We will continue to invest in our engineering capabilities and manufacturing technologies and look to extend our reach deeper into global markets. The outlook for 2014 is very positive and I believe that Barnes Group is well-positioned for value generation over the long term. With that, let me now pass the call over to Chris.

Thank you, Patrick and good morning, everyone. I will begin by highlighting key points of our second-quarter 2014 results and then end with our updated 2014 guidance. Turning your attention now to slide 2 of our supplement, second-quarter sales were $322 million, up 20% over last year, driven by organic sales growth of 6% and the contribution of $36 million of Maenner sales, as Patrick noted. For the quarter, income from continuing operations was $30.2 million, or $0.54 per diluted share, compared to $0.17 in the prior-year period. On an adjusted basis, income from continuing ops was $0.59 per share, up 26% from $0.47 a year ago. Excluded from the second-quarter 2014 adjusted earnings from continuing ops are the impact of Maenner's short-term purchase accounting adjustments of $1.9 million pretax, or $0.02 per diluted share and costs related to the close of production operation at Associated Spring's Saline, Michigan facility, which were $2.3 million pretax, or $0.03 per diluted share. Last year's second quarter excludes the tax charge of $0.30 per diluted share. 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. Second-quarter sales were $213 million, up 25%, driven by Maenner's sales contribution, organic sales growth of 2% and favorable FX of 2%. Operating profit of $28.8 million was up 37% from $20.9 million last year primarily benefiting from Maenner's profit contribution and includes Maenner's short-term purchase accounting adjustments and Saline restructuring charges. Excluding these items, adjusted operating profit was $32.9 million, up 57% from a year ago with adjusted operating margins of 15.5%, up 320 basis points from last year.

At aerospace, second-quarter sales were $109 million, up 13%. Similar to the first quarter, sales increases in OEM and aftermarket repair and overhaul businesses were partially offset by lower spare parts sales. Aerospace backlog was $526 million at the end of the second quarter. Operating profit of $16.6 million was up 9% from $15.2 million last year driven by the profit contributions of increased OEM and MRO sales partially offset by higher employee-related costs and lower profits in our higher-margin spare parts business. Operating margins decreased 50 basis points to 15.2%.

The Company's effective tax rate from continuing operations for the second quarter of 2014 was 27.7% compared to 71.6% in the second quarter of 2013 and 32.8% for the full year 2013. Included in the second quarter and full-year 2013 income tax is a charge of approximately $16 million associated with the April 2013 US Tax Court's unfavorable decision. Excluding this charge, the full-year 2013 adjusted effective tax rate was 17.5%.

As we've discussed on prior calls, the drivers of the tax rate increase include a projected mix of earnings attributable to higher tax jurisdictions, the expiration of certain tax holidays and an increase in planned repatriation of a portion of current year foreign earnings. Regarding share count, our second-quarter average diluted shares outstanding was 55.9 million shares while quarter-end basic shares outstanding were 54.3 million. We did not repurchase any shares during the second quarter and 2.4 million shares remain available for repurchase under existing Board authorizations.

Cash generation continues to be good as year-to-date cash provided by operating activities was $65 million, essentially in line with last year's first half. Free cash flow, which we define as operating cash flow less capital expenditures, was approximately $39 million year to date versus $45 million last year given that our year-to-date capital expenditures were $26 million in the first half of 2014 versus $20 million last year.

With respect to debt, our quarter-end debt to EBITDA ratio remained at 2.3 times, unchanged from both the fourth quarter of 2013 and the first quarter of 2014. During the quarter, we announced the redemption of the remaining balance of our 2007 3 3/8% convertible notes. The timing of the convertible call was dependent on the outcome of growth opportunities available to us like the new aerospace CRP program. Once we determine the financial need and the required funding, we decided to redeem the notes. We expect to settle the redemption or conversion of the notes in cash during the third quarter for a total expected cash outlay of approximately $75 million.

Now let me turn to our updated 2014 continuing ops outlook on slide 3 of the supplemental slides. We now expect total sales growth of between 15% and 17% and organic sales growth of between 5% and 7%. Adjusted operating margins is forecasted to be in the range of 15% to 15.5% and adjusted EPS from continuing operations is expected to be in the range of $2.23 to $2.33 per diluted share, up 22% to 27% from 2013 adjusted EPS of $1.83, reflecting our first-half performance, our new CRP agreement and favorable end-markets. Adjusted cash conversion is projected to be approximately 100% of net income in 2014 and our full-year 2014 guidance excludes an estimated $10 million pretax or $0.13 EPS impact of short-term purchase accounting adjustments related to Maenner and approximately $7 million pretax or $0.07 EPS impact of Saline closure costs.

So in closing, we remain committed to driving profitable growth throughout our portfolio. The strength of our recent Maenner acquisition in conjunction with the benefits derived from heightened organic investment over the last several quarters is contributing to our improved performance. We continue to evaluate our portfolio of businesses while seeking additional opportunities to expand, all with an eye on delivering the long-term objective of increased shareholder value. Operator, we will now open the call for questions.

(Operator Instructions). Scott Graham, Jefferies.

Hey, good morning. I wanted to maybe get underneath the spares situation here. This has been kind of a thorn in the side for a while and I was wondering is there a point at which we maybe go back and look at some of these agreements in total because it just doesn't seem as if the numbers that we are seeing out of that business are jiving with what the market is seeing. Now, certainly, if I'm wrong on that, please let me know, but it does seem to be -- that business seems to be -- been underperforming for some time. Just maybe wondering if you can give us a little bit more color on what you are thinking on the spares side.

Yes, Scott. Relative to the RSP programs, when we entered into them, we entered into them with a view to them being a very long-term value proposition and in doing so, as you know, we participate on both the CFM56, as well as the CF6. The programs are over the life of the engine and what we believe is that monitoring them on a quarter-to-quarter basis is going to tend to be lumpy. At the same time, overall, we believe that they are a great addition and a great piece of our overall portfolio. As you know, they are high margin and so we are not -- I'm not necessarily overly concerned relative to quarter to quarter and more with a view to the longer term and the fact that they are a great part of our portfolio.

Well, I guess I'm with you on that, Patrick, looking at it longer term, but I measure longer term certainly like you, past one quarter and this business, from what I can see from my model, has kind of been down almost every single quarter since 2012. That, to me, constitutes at least an element of longer term. That is kind of what I was getting at, that it just doesn't seem as if there's a correlation at all between the bigger business in here, which is the CFM56 and what you are getting hear from GE.

Yes, well, in terms of the timeframe that you referenced, recognize that we have been going through a transition on the program to where, back in the 2012 timeframe, we were still working our way through a series of management fees that were transitioning into place as agreed upon in the early stages of these programs. Again, from a CFM56 standpoint, the engine itself, as I mentioned in my prepared comments, there's estimates of up to 20,000 engines in the installed fleet whilst the other part of our program, the CF6, was on the back end of its product lifecycle also continues to have a life, a long outlook.

The correlation to any particular quarter is difficult to tie down. Yet again I look at it from an overall perspective and I think that there are some factors that might be influencing any given quarter in terms of whether that be one-time orders or destocking from a particular -- from the distribution channel or whether it's a reflection of just the buying patterns for our particular spare parts, which are a subset of General Electric's overall spares, which is made up of many engines where we are on two of those many.

All right, fair enough. I was also just wondering about the organic side on industrial. If we were to exclude Associated Spring from industrial, what would the organic have looked like? Maybe that's a question for you, Chris.

Sure, Scott. And did you mention sales or on the order side?

Organic sales.

Organic sales, yes. So organic sales for our industrial base business, we talked about that as roughly being 2%. When we look at the Associated Spring business, orders were down roughly 5% to the quarter and sales for that business was down roughly 6%. We attribute about 2% to 3% related to Saline. So a partial driver in that reduction. But again, as we commented in our opening comments, the transformation of that portfolio and what it is contributing on, even though it is flat to down sales, the margin profile has significantly improved and very encouraged by overall performance.

Yes, that's definitely [reading] through the margins for sure. So if we were to X out Associated Spring, which I know is a big piece here, which you don't want to really do per se, but that was the principal -- I mean from Patrick's comments, it sounded to me like Europe up and Americas down in industrial, but if we were to X out Associated Spring, would the Americas have been up?

Yes, absolutely.

And I would just add that the Americas for us have been slow. As you mentioned, Associated Spring is dampening our top-line growth as a result of the actions we took on Saline, but, overall, the industrial business from an orders perspective and from a growth perspective continues to be robust.

Got you. Okay and if I may, just last question. I noticed that the aerospace backlog has been walking along in this sort of $525 million to $550 million territory. It hasn't really grown on a year-over-year basis much since the first quarter of 2013. Is this a concern for you guys with respect to aerospace OE revenues for 2015? Are some of the programs -- the investing that you are doing, do you have maybe line of sight on the benefits of those investments whereby the backlog should start to grow in the second half of the year again? Could you give us a little color on that as well?

Yes, relative to backlog in aerospace, at the current level, it's $526 million. We believe that is at a very healthy level. Overall, there are a number of programs which are steady-state within that. So if you take current production rates against the 777 as an example and yet, at the same time, some of the development work that we've been doing on the A350 will continue to ramp with its entry into service in the fourth quarter.

I will highlight that my overall view of how the OEs are managing the releasing of orders has become much more disciplined and as a result, they are looking to keep the supply chain somewhat as streamlined to ensure that it's accurately reflecting demand. So in doing so, we are watching some lumpiness quarter to quarter, but at the same time nothing that jumps out as being a concern.

Okay, very good. Thanks a lot.

Matt Summerville, KeyBanc Capital Markets.

Good morning. Just a follow-up on the spares, how much is that business down year to date?

Just looking it up for you now.

Roughly 8%.

8%.

Yes.

So that means if it is going to be flat to down slightly, you are looking for mid to high single digit, it sounds like, growth in the back half of the year. Why should we believe that's going to happen?

Well, I would say, Matt, relative to the spares business, it has, as I've just indicated, been somewhat lumpy and at the same time, we think that the overall macro fundamentals of aerospace aftermarket continue to look towards a positive trend and so, into our outlook, we are building on an expectation of benefiting from some of that positiveness.

With respect to the CRPs, the $40 million or so you've invested year to date, can you size up the revenue and/or accretion opportunity you see from that looking out over the next couple years and how the return profile looks compared to the RSPs?

So Matt, good question. So we started off the end of last year with CRP1, the first one primarily on CF6, the second one being on CFM with CRP2. So the total actually cash outlay for CRP2 will be the second one on CFM56, which we are excited about, it will be $80 million. We spent $41 million year to date as you will see when the Q comes out.

As we looked at that program, again, this is over the life of the program for CFM, this is existing work that we do for GE today. This now provides a license to serve over the long term. As you compare I would say the returns on our, I would say, investment profile, looking at them to be actually better than and less risky in our minds than an overall I would call it acquisition.

You mentioned RSPs. The difference between the two is we are talking about an aftermarket service agreement where we provide a service versus a spare parts sale. So it is not going to be as rich as our revenue-sharing programs, but we do feel it's an identifiable market. We are doing the work today, so it is existing business that will continue to extend through the life of the program. So we feel very good about how that is going to provide return to Barnes Group long term.

So, Chris, is there any way to sort of frame if year one is 2014 realizing you don't have CRP2 the whole year what the EPS accretion is from both of these this year?

Yes, so good comment. So we have -- part of the increase in our guidance, although $0.03, but kind of lifting that up, two primary drivers. One, we have got the benefit of CRP2 kicking in. At the same time, Maenner's performance given second quarter was excellent again and we are looking at really those two pieces of our business providing that confidence.

Like CRP1, you are in a year of transition in the beginning parts. Remember, these are providing us licenses to go to the market. It is going to take us some time, as we mentioned, on CRP1 to ramp up that marketing offering if you will. But we are encouraged by what we've seen so far, but there is still a lot more work to be cautious. There is still a lot more work for our teams to do to really capture the value of what we signed up to. And these are over the life of the program, so we are talking about benefits well past 2030.

And then just a follow-up on a couple of the industrial businesses. With respect to Synventive, I think, Patrick, you mentioned sales and orders both up. Can you sort of put some growth rates around that, how is that business performing organically?

In terms of Synventive, as I mentioned, we had a record orders and sales for Synventive in the quarter. In terms of -- and that was driven primarily by our European and Asian geographies for that business. As you know, it is a global business overall and sales were up in the range of plus 10% and our orders were up in the range of 20% plus.

That's a huge order number. Obviously, that is probably not sustainable, but I guess what do you view as the long-term sustainable growth rate in Synventive relative to when you acquired it and I guess what is resulting in this big pop you saw in Q2?

Well, what I would say, Matt, is that Synventive as a business has performed above our expectations since acquisition and we are very pleased with the business in terms of its performance to date and of course, second quarter was an outstanding quarter. It's not that we believe second quarter, as you mentioned, is sustainable on a consistent basis, but what we do see in terms of this business is high single digit growth on a go-forward basis. And that has been driven by a number of macro drivers in terms of the continued presence and increase of plastic consumption overall and also the overall trends that we continue to look to capitalize on in terms of industrial businesses where, in terms of fuel consumption, plastics is a big factor in weight reduction as it pertains to light vehicles.

Great. Thank you, guys.

Josh Chan, Baird.

Hi, good morning. Just looking at the full-year guidance of organic sales growth of 5% to 7%, so at the midpoint or even the higher end, it sort of implies an acceleration into second half. So where in the business are you counting on that acceleration to come from primarily?

Well, as you look at both sides of the business between aerospace and industrial, as I mentioned, we've seen strong order intake in Q2, which we hope to have translate into a strong second half for industrial with some caveats to where we had indicated that, in the case of Maenner as an example, that the second half will not be a reflection of the first half just because of its location in Germany and the normal holiday periods, as well as seasonality that we've looked at in terms of their past sales trends. Having said that, on the aerospace side, we also see continued increase in output for the second half of the year based on the current demand that we are forecasting.

Okay. And --.

On aerospace, it is primarily on the new manufacturing side.

Okay, the OEM business. Got it. And then looking at the industrial organic growth, was there any kind of carryover impact from the operational challenges that existed in the first quarter? Was there any impact of that in the second quarter?

Not that was meaningful. Clearly, we've made a lot of progress in terms of some of those challenges and the teams have done an outstanding job in terms of putting them behind them.

Okay. And in the press release, you mentioned some unfavorable pricing in industrial. Is that a new phenomenon or a change from recent trends?

I don't think it is necessarily -- it's not necessarily new. It's what I think is something that we are putting a lot of focus on right now in terms of our businesses. Order of magnitude, we are talking about probably $1 million. But it is an area that we believe that with focus and attention the businesses have the opportunity to be more selective in terms of the products and services and ensuring that we are extracting the value that we are bringing to the marketplace.

Okay, great. And lastly, now that you've completed this second CRP, could you sort of update us on the capital allocation priorities between buybacks versus further agreements or potentially looking at M&A?

In terms of our focus right now, we continue -- as you mentioned the CRP, I would say that it is a great use of capital for our aerospace business whereas you probably are aware, on the M&A side, valuations are running very high and with the associated challenges that go with it where the CRPs we look at as an investment. So we think in terms of capital allocations, clearly, we are investing in our base businesses from a capital equipment. We have indicated another $60 million in terms of CapEx for the full-year projections between industrial and aerospace. We also continue to actively do our due diligence in terms of new acquisition opportunities. And so a lot of work has been done by the team in that regard as well.

Great, thank you very much for your time and good luck in the second half.

Thank you.

Amit Mehrotra, Deutsche Bank.

Thanks, good morning. Good quarter. I just wanted to ask a couple follow-up questions on the CRP2 agreement. First question is how much of the business is renewal of existing MRO business that you guys have and how much is new that isn't part of the existing revenue base today?

In the short term, the opportunity is work that had been under contract, but those contracts have been extended for the life of the program. In terms of the opportunity on the upside is the open market in terms of the world's airlines and the engine overhaul shops where, in the past, our agreements were exclusive to GE in terms of only being able to provide the services to them where this allows us now to make the offering to the open market.

I would also indicate that, of course, we have the capabilities and are continuing to expand on those capabilities with a view to -- right now, what we are looking at is the planning relative to increased demand that may come as a result over time of securing wins as we project to do against offering these services to the airlines, as well as the engine overhaul shops in the market.

Okay, I just want to put a little bit a finer point more around the economics of the agreement. The Company is investing over $80 million in the CRP2 program. So at some point, I'd imagine we should see $10 million, $15 million, $20 million favorable impact to the EBIT line on an annual basis at some point. How do you think about it in those terms, Patrick, both with respect to sort of magnitude of EBIT dollars that will be added as a result of this investment and also the timing given the fact that this seems to have such a long tail to it?

So in terms of -- as we looked at this particular opportunity, it was -- again, there were a number of factors that we took into consideration and of course, it clearly met our internal hurdle rates relative to the return on the investment. The program overall is one that we believe positions our aftermarket businesses -- our aftermarket business to be a substantial player in this space, in particular continuing to expand our service offerings as it pertains to aerospace.

The program at the EBIT level -- I would highlight again, building on what Chris indicated, these programs are not spare parts programs, so they don't command the same margins as a spare part. But in terms of repair services and the overall accretive nature of the deal to our portfolio, we are very excited about what the program does and will entail.

Okay. If I could just have a couple more cleanups. On aerospace, can you just give us a little bit more color on what the magnitude of content you have on the A350? We are getting pretty close here to entering into service, so it would be helpful to understand what type of impact a ramp of that program can have on the OE side of the business.

It's a great question and we have continued -- even as we speak, we are continuing to work through some final components in terms of they are securing them on a longer-term basis and as a result, what we believe is that in the next six to nine months, we will be in a position to indicate what our content per platform is on the A350 with a number that we believe is somewhat stable on a long-term projection.

Okay. And then just one last one on industrial for me. Last quarter, you guys saw some pretty good momentum in order activity in that part of the business. I think it was up 7% if I remember correctly. Can you provide some color on how orders trended in the entire business, not just the Associated Springs piece and if you saw any acceleration or deceleration into 2Q?

From an orders perspective overall, we saw a positive on a BGI level. So our combined number was positive with clearly Maenner contributing to that on a year-over-year basis, but then also on an organic basis, we saw improvement. On the industrial side, orders were up approximately 5% on -- just over 5% for the industrial side of the business.

Okay, great, guys. Thanks. Have a good weekend.

Thank you.

Pete Skibitski, Drexel Hamilton.

Good morning, guys. So I guess, Patrick, I want to understand a little bit better what is going on at industrial. It sounds like, in general, you are pretty pleased with pretty much the whole segment overall except for we had this phenomenon going on at Associated Spring where much of the business there -- it's a bit unit for you -- a bunch of the business there is becoming commoditized, so you've divested Saline and it sounds like is there more work to go at Associated Spring in terms of kind of maybe shifting the mix there from a less commoditized to a higher end part of the business? And so I guess what I am wondering is will we continue to have headwinds at Associated Spring for maybe three or four more quarters, but then at some point in 2015 that starts being additive to top-line growth at industrial?

With regards to Associated Spring, I would indicate that what we did over the last number of years has been revisiting that entire portfolio of business. Just to clarify on a comment you made, which is that we are not seeing the overall business being commoditized. What we have done is carved out certain product groups that we believe are becoming commoditized and in particular, as we announced in the second quarter, the closure of Saline was against a particular product family that we've chose not to entertain the pricing discussions that needed to take place and subsequently resulted in exiting of that business.

The top-line sales as I also have mentioned I think in the past relative to Associated Spring, as we've gone through this reassessment of the portfolio, what we have permitted the business to do is to move away from certain work that didn't meet the criteria or the hurdles that we'd set overall. The business has done a wonderful job in terms of improving its overall profitability, as well as improving productivity and again, we are going to have on a comp basis the impact of the closure of Saline in the first half as it rolls through into the next six months and the first half of next year.

Okay. Should we expect another weakish year next year from Associated Spring because this is a process you have to go through and is that how to think about it?

Yes, I think an area where we are putting a lot of emphasis in Associated Spring is, as I mentioned earlier I think, we continue to leverage our capabilities to provide innovative solutions that support macro trends emerging in the industries that we are serving. And in Associated Spring in particular, those trends are in terms of fuel efficiency standards and so we are a large player in transmissions and again, our emphasis in terms of new product development and new process introductions on transmissions focus on the 8 to 10 speed as an example. And the business there is focused on transforming to more highly engineered, more of a value -- create more value for the end customers and subsequently that is the transformation that business is moving through.

Okay, understood, okay. Let me ask one on the aerospace side. The weakness in the RSPs, do you think it's getting caught up in this phenomenon of just a flood of brand-new aircraft entering the market as we see with your OE growth and this phenomenon of relatively young aircraft being kind of parted out? Is your RSP growth just kind of suffering from that fact, the fact that there are so many new -- there are fewer and fewer older aircraft out there?

I would say, if you think about the installed fleet overall, what is happening is that you are going through - the demographics or the composition of the installed fleet is somewhat changing, so there is an element of where, even if you think about the CFM56, there is the Dash 3, the Dash 5, the Dash 7 and what is occurring on the Dash 3 is different to the Dash 7 in that they are younger -- the Dash 7 being younger engines relatively speaking. And so I think where in the early stages the bulk of the spare parts may have been driven by the Dash 2, Dash 3, there is a movement in terms of those spares on the CFM56 engine towards the Dash 5 and the Dash 7 as an example. And so as we make that transition, and the CFM Dash 5, Dash 7 has continued to perform exceptionally well, that I think is flowing through as a part reason, and I say a part reason because there are many factors that influence overall spare parts sales.

Okay, understood. That's very helpful. Let me hit Chris with just one before I go. Hey, Chris, can you give us some more detail on the higher employee-related costs in aerospace? And then I was also just wondering, the CapEx profile longer term just directionally, will that continue to head up or will you get some relief from investments running off?

Okay. So on the aerospace side, I would say the higher employee-related costs given the top-line growth primarily in our OEM business, we experienced a significant amount of extra overtime to meet that increased demand, as well as new hires that are happening in the business. But at the same time, we've got -- even when we look at the incentive comp profile, they are doing a great job from a top-line sales point of view. So you are getting impacted by a number of employee-related costs in aerospace to deliver that margin that they did for the quarter.

On the CapEx, we are still forecasting an outlook of $60 million for the year. Every business is getting fed accordingly based on their growth projections for the year. We don't see a change in that. If anything, I would say we may look to increase that over time. There's a lot of business coming our way both in industrial and aerospace that we are not going to shy away from in terms of making those investments on CapEx for good growth programs. But right now, we are still guiding $60 million.

Okay, thank you, guys.

Christopher Glynn, Oppenheimer.

Thanks, congratulations on Shingo.

Thank you.

So with Maenner, it looks like it is performing above expectations. Just wondering what the balance is in your thought process between the thought that this might be creating tough comps for next year versus just building secular expansion of its commercial run rates?

Well, as you know with Maenner, in terms of priorities for that business as we acquired it, one was clearly to make the integration as smooth as possible, but also to expand capacity overall because of the demand that the business was experiencing. So as the business transitioned into Barnes Group, the heavy emphasis for us in the first half was to clearly identify where any constraints were within the business and then deploying the principles of our Barnes Enterprise System leverage to clearly understand where we could add capacity with a view to meeting customers' expectations.

So overall, demand in the marketplace continues to be robust in terms of medical devices. And, of course, what Maenner brings to the market is a highly-engineered set of products and services which clearly is also in demand, serving the medical devices' end markets. So next year while comps will always be a challenge when you've done as well as they have in the first half of this year as we said, they've achieved record level sales which they will remain very positive in terms of the outlook for this business into 2015.

Okay. So it sounds like you got some new capacity up pretty darn quickly.

We did, and I would say that that was, even as we were doing due diligence back in the third quarter of last year, those needs were being identified. And upon the closure of the deal, those purchase orders were placed immediately.

Okay. And then on Synventive, obviously great orders growth. Just wondering what the range of leadtimes there is. Should we think about that batch of orders maybe some lumpiness as feeding a pretty good tail rather than simply the second half of this year?

Synventive we categorize -- when we think about our businesses, we categorize it as a short cycle business as opposed to long cycle. So you are talking six to eight weeks' time frame as opposed to you are not talking four to six months as an example. And that's to put some perspective on short cycle as it pertains to that business.

Great, thanks for the color.

Edward Marshall, Sidoti & Company.

Good morning, guys. So I wanted to kind of go back to the spares if I could. And I guess sorry to continue to hit you guys with these questions, but I think with management fees rolling off this year there was some excitement built into maybe the shares heading into 2014, and especially since they were historically higher margins. And yet we're down 8% this year to date on the sales line, and the margin in aerospace is compressing 100 basis points.

So I just wanted to see if I can get maybe a little bit of understanding of aside from lumpiness, which I think has been there for maybe the past 24 months or so, did you find any competition maybe from PMA parts that are now starting to leak into your channel, or have you lost leverage with the distributor maybe on price? What are the channel inventories like? And maybe even if there is any change in the repair work that maybe prolongs the repair between shop visits with your specific parts. I know there is a lot of questions there, but if you could help me out, that would be great.

So in terms of your commentary to pricing, pricing is not a factor in that pricing for the spare parts goes in line with the overall catalog. So that represents a positive. In terms of the distribution channels, what we are seeing is some variation or volatility in the distribution channel because of the fact that the distributor is using their best judgment to assess demand. So then they order and based on that demand, they will bleed down what they ordered or they will increase their order.

So we are seeing that lumpiness in terms of the distribution channel. As we mentioned earlier, as the fleet of CFM56 transitions off of Dash 2, Dash 3 to the Dash 5, Dash 7, there is a dynamic which is of course with a newer engine. You are seeing the performance or the timeframe of time allocation or the time distance between overhauls going through a normalized rate because the newer engine obviously doesn't need the same level of maintenance as an older engine. And then to your comment on PMAs, we are not seeing anything activitywise that is above a normal low level that has always been there since the start of the program.

Of the 2013 agreement -- I think there is 2013 -- 2012, 2013, can you talk about maybe the -- and I don't know how many is allocated to the 56; I think it's 10. Can you talk about the variances in the engines? Is it weighted to the 5 and 7 or is it weighted to the 2 and 3 and maybe if you have that --?

I don't have the split available in front of me, but what I would indicate is that when we were looking at the programs, we looked at more a concentration on universal part numbers that spanned all of the engine families where possible so that an agreement didn't become say obsolete as a result of a Dash 2 or a Dash 3 retiring. The components we identified were universal in that we tried to ensure that as many as possible spanned the entire family of the CFM56 in this example.

Do you still need to hold a certain amount of headcount in Singapore now that the tax benefits are rolling off? Is there a contract or something with the government? With sales down 8% in that business line, is there an unnatural drag to the aero margin that you will find reverses itself as sales again recover to the levels that you need in that particular business?

In our Singapore business, what I was indicating is that we have both new manufacturing OEMs, as well as aftermarket. So the workforce that we have has been cross-trained in such that we move that workforce very fluidly amongst the businesses and as such, there is no sort of drag, if you want, as you might have put it to the RSPs in particular. And in fact, we continue to grow our business in Singapore and add resources as necessary.

Okay. So what is exactly causing then the 100 basis points or so contraction on the aerospace margin for 2014 versus say 2015 -- or 2013?

Primarily -- are you talking about the quarter or for the full year?

Just the average so far for this year versus the average for 2013.

Yes, so I would say twofold, right, really in what we saw in the second quarter. One was the RSPs being a little soft first half of the year versus first half last year. So RSPs being the higher margin profile in our business clearly will contribute, but the other thing is we have that top-line growth in our aerospace OEM sales, which we saw in the first quarter and the second quarter. The conversion of those sales has not been where we needed to be in terms of I would say just thinking about the rampup of that production level. We commented around overtime, we commented about additional labor in the workforce. So we've got to work through those to be able to ramp up to those larger levels, which we will. But the margin profile of the business for aerospace clearly in that 15%, 16% range, and we talk about high teens often, will be dependent on RSPs. We do feel that the component repair programs, the CRP programs that we have signed with GE, will be contributing also accretive to aftermarket margins, but that is going to take some time as we talk about ramping it up.

Right, okay. Does partnership for success mean anything on your end of the business being mostly engine-related or is there seeing any pricing pressures back on the OE side that might be weighing on the margin just a hair?

Well, I think that overall the entire industry continues to feel the pressures of competition from the air framers, down to the engines, to securing of orders as we move forward with the new generation of aircraft. So I think pricing pressure, as I've always said, is a part of this industry. The key for us is how do we ensure that we create a net positive impact on our businesses in terms of driving say continuous focus on productivity utilizing our Barnes Enterprise system. And as was mentioned earlier, I think we've made tremendous strides to that effect and as mentioned in my prepared comments, the Shingo price was truly an external recognition of what has become a world-class set of tools and cultural change that we've brought our aerospace business through.

And then on the industrial business and the margin there, I mean obviously that's a bright spot not only for the quarter, but it has been trending in the right direction. So as we kind of integrate these acquisitions and digest, where do you think that these margins can go? Is this ultimately a 17%, 18% kind of business or are we topping out kind of here in the mid-15% range?

Well, as you know, for overall BGI, we indicated 15% to 15.5% relative to the full year. We see industrial achieving mid-teens and so we couldn't be more pleased with the performance for Q2. The key for us will be to continue to sustain that and then also continue to focus on how to expand it as we move forward.

Okay. And then, lastly, if I could, Chris, when I look at the cash flow guidance and I back out your CapEx for the year versus I guess what your net income line looks like from your guidance, it looks like you have to generate roughly, I don't know, about $141 million for the back half of the year. How do you get there? You are only at about $39 million year to date, so what are the puts and takes surrounding -- I mean is there some inventory workoff that you plan or --?

Yes, absolutely. So a little bit of inventory growth in the first half of the year. Aerospace is lining up to have a strong second half, third and fourth quarter, primarily fourth quarter, so there will be some relief on the inventory side. I would say historically we typically have a very good strong fourth quarter cash flow generation, but I agree with you as you think about first half of the year and second half. But as we outlook the year on working capital and just cash generation from the business, we are still pretty confident in approximately 100% cash conversion.

Okay. All right, guys. Thanks so much.

Matt Summerville, KeyBanc Capital Markets.

Yes, I just wanted to follow up on the CRP thing again. So help me understand what would be GE's incentive to do this CRP thing? Wouldn't you theoretically then be competing with who you are partnered with? Help me understand the mechanics around that please.

So when we entered into the support of GE in terms of the aftermarket overall on the component repair side, in terms of the particular agreements that we've signed to date on the CF6 and the CFM56, the actual repair capabilities that we have in Barnes Group GE does not have within its own family of repair shops. And so these components -- to your question of whether we will compete with GE in the open market, the answer is no because we today provide GE that capability to them. And as I mentioned, we've extended those contracts for the life of the program and GE does not have that capability in-house.

And then, Chris, with these investments you are making, the $80 million or so that sounds like it will be out this year and kind of your profile for free cash flow and CapEx, what are you looking for as your net debt to EBITDA ratio at the end of the year would you say?

Yes, so Matt, let me just clarify this. So the $80 million on CRP2, we see $41 million was paid in the quarter. We are going to spend $20 million in the fourth quarter and the remaining balance will be paid next year in terms of that overall investment. So I just want to provide that color. And your second question?

Just as of the end of 2014, where would you estimate your net debt to EBITDA ratio is going to look like?

I would put that in the 2s. The profile for the business continues to be managing at less than 3 from a covenant ratio point of view. We will be on the convertible notes, the redemption of the convertible notes using our revolver and as we generate cash globally and be able to reduce our debt, we feel confident that we will be less than 3. We ended the quarter at 2.3 as we noted.

Got it. Thank you.

Pete Skibitski, Drexel Hamilton.

Yes, guys, just a couple follow-ups. I want to make sure I understand your guidance with regard to the second-half margins at the segments. Is it fair to say you are expecting aerospace margins to trend up on higher RSPs and I guess if I look at the 15.5% in industrial, the adjusted margin there in the second quarter, are you expecting that to kind of modestly trend down from lower -- that seasonality at Synventive -- or at Maenner rather? Is that fair?

I think you have categorized it pretty well in that, for aerospace, we expect to see an improvement in the second half and the industrial, we are going to continue to focus on those mid-teens. Albeit, as you highlighted, the contribution of Maenner will be somewhat less than it was in the first half, but nonetheless overall for industrial we still are targeting the mid-teens.

Okay, got it. Thank you very much. And then last one, just I know historically you've been kind of a widebody engine shop, but we've got the A320neo getting closer to entering into service. Can you remind us -- do you expect any meaningful content on that, the engines that go to that aircraft?

The short answer is that we are in active discussions with our customer on the narrowbody, which is -- as you indicated, in the past, we've been more of a widebody type aerospace business, but we are actively looking at opportunities right now on the narrowbody and again, been very selective in terms of ensuring that the components that we would identify and participate in are those that Barnes truly brings value to the customer in terms of our capabilities and the complexity of the manufacturing required, even though a narrowbody engine.

But when do you think you might know or have contracts potentially finalized?

As in the A350, what we've always indicated is that, as it became closer to entry into service, at that point we would look to indicate a content per platform and with the 737 MAX and the A320neo right now, it's still early innings and entry into service isn't for another couple of years. So we are that timeframe out from anything we would announce relative to content on narrowbody.

Okay, thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Bill Pitts for closing remarks.

Thank you, Patrick. We would like to thank all of you for joining us this morning. We look forward to speaking with you next quarter and at this time, we will conclude our call.

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