Barrick Mining Corp (B) 2015 Q2 法說會逐字稿

Good morning. My name is John and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Barnes Group Incorporated second-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you. William Pitts, Director of Investor Relations, you may begin your conference.

Thank you, John.

Good morning and thank you for joining us for our second-quarter 2015 earnings call. 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 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.

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 ever our corporate website at bginc.com.

We'll now open today's call with commentary from Patrick, followed by a review of our second-quarter results and our updated 2015 outlook from Chris. After that, we'll open up the call for questions. Patrick?

Thanks, Bill, and good morning, everyone.

Barnes Group performed well in the second quarter. While sales were down 2% year-over-year, organic sales were up 4%, after adjusting for FX in our industrial segment. Adjusted earnings per share grew 5% to $0.62 and adjusted operating margin grew 90 basis points to 16.3%.

Driving performance was continued strength in our plastics and tool and dye end markets within industrial revenue and our revenue sharing programs within aerospace. However, we are seeing softness developing within some of our end markets, and a portion of my remarks today will focus on what we are seeing. But before we address that, I want to comment on a couple of meaningful highlights related to the continued execution of our profitable growth strategy.

This strategy entails the transformation of Barnes Group into a global provider of highly engineered products and differentiated industrial technologies, bringing innovative solutions to the markets and customers we serve. With that goal in mind, I'm very pleased to highlight that we just signed an agreement to acquire Thermoplay Hot Runner Systems. This acquisition represents an excellent opportunity for Barnes Group to add another high-quality business to our plastic injection molding services portfolio and to expand our presence in an attractive end market. Thermoplay will further complement our strategy to become a provider of the innovative industrial technologies and allow us to globalize our systems capabilities serving the plastic injection molding industry.

Thermoplay specializes in the design, development, and manufacturing of hot runner solutions, primarily serving the packaging, automotive, and medical end markets. The business, which is based in Italy, has annual revenues of about EUR35 million and 200 employees serving customers worldwide. The transaction's headline price is EUR50 million. We will not be providing any additional details until after the closing of the transaction, which is anticipated to occur in August. We're very excited about this acquisition and we look forward to welcoming all Thermoplay employees to Barnes Group. We believe that supplementing our portfolio with strategic acquisitions, like Thermoplay, while simultaneously leveraging the Barnes enterprise system across our Organization, provides the fuel required to sustain profitable growth.

We've demonstrated that successful acquisitions and performance initiatives create a formidable combination and both are key elements of our growth strategy. To that end, during the quarter, we combined four of our businesses within the industrial segment into a new strategic business unit called Engineered Components. The new SBU is comprised of Associated Spring, Seeger-Orbis, Heinz Hanggi, and Associated Spring Raymond. These four businesses have similar automotive and industrial end markets, with complementary precision engineered processes, product portfolios, global footprint, quality, and supply chain needs. This alignment is expected to enable better coordination of regional capabilities and expertise, leverage global customer relationships, and increase overall sales force and effectiveness.

So good progress on strategy execution, with more to come, let's now take a look at our business segments and the markets in which they operate. At Industrial, organic growth continues to be solid, achieving 5% for the quarter. If we exclude the impact of the Saline closure, organic sales growth would have been 7%, so very good results, given the current economic environment. As a reminder, Saline comparables will not be an item to highlight after this quarter. By contrast, FX remains an ongoing challenge, impacting sales by approximately 9%.

Much of that impact relates to the strengthening of the US dollar relative to the Euro; yet other currency fluctuations also have an impact. Within our Plastic Technologies businesses, we achieved low double-digit organic sales growth, as demand for hot runners in automotive, medical, and personal care markets remained strong. Organic orders in the quarter softened, though they remained positive over the first half of the year.

Demand for medical and personal hot runner and molds remained robust in Europe, which is Maenner's primary geographic region. For automotive hot runner systems, North American markets are doing well, while not much has changed in Europe. Performance in Asia has been solid, but the market there remains uncertain. Recent news out of China related to softening automotive demands bears monitoring and we do see some western OEMs delaying new model introductions. That said, the [vendor] continues to be a strong contributor and a record year for all three geographic regions is expected.

Global tool and dye markets continue to provide solid organic sales growth, as well, as nitrogen gas products was up high single-digits in the quarter. We are monitoring its end markets, however, as North American tool and dye is beginning to show signs of slowing and China's export of automotive tooling has weakened.

In our Engineered Components business, organic sales and orders were down low single-digits, as we are seeing some weakness in global industrial end markets. However, for automotive, North American and European production is forecast to be up low single-digits in 2015, and China's automotive build is expected to be 6%, though that expectation is down from previous forecasts. Overall, we should have a good year at Industrial, with organic sales growth in the mid-single-digits, and operating margins in the mid-teens.

Moving to Aerospace, sales grew 3% year-over-year, with sequential strengthening from the first quarter. Our original equipment manufacturing sales were essentially flat compared to the prior-year period. This was lower than our internal expectation, due to various schedule changes and the timing of anticipated sales, which moved to the third quarter. For the full year, we have tempered our OEM sales expectations to be approximately flat as a result of not being successful in generating short-term orders early enough in the year to impact 2015 sales. We are also being impacted by a customer insourcing decision of certain components we manufacture for the Boeing 787 program. The loss of these components will lower our 787 content from $300,000 per aircraft to roughly $250,000 per aircraft and we expect that the sales impact will start to be felt in the fourth quarter of this year.

Aerospace aftermarket revenues grew 17% in total. In our Aerospace aftermarket MRO business, revenues were flat, primarily from sustained lower volumes from a specific OEM customer at one of our repair facilities. We expect this particular softness to linger for the remainder of 2015, though longer term, we do expect that volume to improve. Excluding this customer, we forecast increased MRO sales as we progress through the second half of the year. Our component repair programs provided a positive offset to our traditional MRO sales, and contributed nicely to an increase in MRO profitability. We continue to be very pleased with the level of interest and success in signing up new customers for these preferred OE authorized repair services.

As expected, this will take time to ramp, as each customer has their own approval process to make Barnes Aerospace a qualified repair source within their quality systems. As CRPs gain momentum and traditional MRO activity increases, we expect a solid second half for 2015, with full year MRO revenues up of mid- to high-single digits for 2014 -- over 2014.

For the second quarter in a row, the highlight of our Aerospace aftermarket business was our revenue sharing programs. RSPs sales were up 50%-plus in the second quarter, with volume increases for the CFM56 family of engines driving roughly one-half of the increase, and the restocking on the CF6 program making up much of the remainder. So an excellent first half of the year for a business that, as you know, has limited short-term visibility. Given the year-to-date performance, we now expect RSPs to be up 20%-plus for the full year.

As a whole, we see full-year Aerospace growth in the mid-single-digits, with operating margins in the mid- to high teens. In addition, we expect Aerospace third-quarter sales to be up only modestly on a sequential basis, with the fourth quarter being very soft. So overall, let me say we are happy with our achieved results and positioning relative to the end markets we serve, though we remain cautious given a few market trends which developed during the quarter. We are fully committed to executing our profitable growth strategy and extending our global reach, and we anticipate 2015 to be another year of solid organic sales growth, expanded operating margins, and increased GAAP cash generation.

Chris will now take you through the financial details for the quarter and provide you with the current view of our full-year outlook. Chris?

Okay, thank you, Patrick, and good morning, everyone.

Let's begin with highlights of our second quarter, results starting on slide 2 of our supplement. Sales in the quarter were $315 million, down 2%, as organic sales growth of 4% was more than offset by FX headwind of 6%. Net income was $34.2 million, or $0.61 per diluted share, compared to $30.2 million a year, or $0.54 per diluted share a year ago. On an adjusted basis, net income was $0.62 per diluted share, up 5%. This quarter's adjusted earnings exclude the last remaining Maenner short-term purchase accounting adjustments of $0.01 per diluted share. As a reminder, last year's second-quarter adjusted net income excludes the impact of Maenner's short-term purchase accounting adjustments of $0.02 per diluted share and Saline closure costs of $0.03 per diluted share.

Now let me comment on our segment performance, beginning with Industrial. Industrial's second-quarter sales were $203 million, down 5%. As Patrick mentioned our Industrial's organic growth remains solid, up 5%. However FX negatively impacted sales by approximately $20 million, or 9%. Based on a Euro rate of $1.10, we expect FX to negatively impact sales over the second half by approximately $25 million, with about two-thirds of that in the third quarter. Second-quarter operating profit was $30 million, up from $28.8 million from the prior year, benefiting from $1.3 million in lower Maenner short-term purchase accounting adjustments and the absence of last year's $2.3 million Saline restructuring charge.

Ex these items, adjusted operating profit of $30.6 million was down 7% from $32.9 million a year ago, as the operating profit benefit from organic sales growth was more than offset by lower productivity, including incremental costs related to new product introductions to support future growth programs, and the unfavorable impact of FX. Adjusted operating margin was 15.1%, down 40 basis points from last year.

At Aerospace, second-quarter sales were up 3% to $112 million. Our RSP programs were up significantly, as Patrick noted, while both MRO and OEM were essentially flat. Second-quarter operating profit was up 24%, to $20.7 million, as compared to $16.6 million a year ago.

The operating profit increase was primarily driven by higher contributions from RSPs. In addition, the component repair programs in our MRO business and favorable product mix in our OEM business likewise benefited operating profit. Operating margin for aerospace was 18.4% in the quarter, up 320 basis points from 15.2% a year ago.

Aerospace backlog ended the quarter at $536 million, up 2% year-over-year and down 1% sequentially from the first quarter of 2015. Our effective tax rate for the second quarter was 28.4%, compared to 27.7% in the prior-year period, and 27.6% for the full year 2014. The effective tax rate increase in 2015 over the full-year 2014 rate is primarily due to the expiration of certain tax holidays. For 2015, our tax rate is expected to be between 28.5% to 29%, slightly lower than our previous expectation.

Regarding share count, our second-quarter average diluted shares outstanding was 55.7 million shares, while quarter-end basic shares out standing were 54.7 million. During the quarter, we were an active buyer of our stock. We repurchased approximately 287,000 shares for $11.5 million, for an average price just below $40 per share. Presently, 2.1 million shares remains available for repurchase under existing Board authorizations.

Cash generation continue to be strong, as second-quarter cash provided by operating activities was $86 million versus $65 million a year ago. Free cash flow, which we define as operating cash less capital expenditures was $64 million, versus $39 million last year.

Our balance sheet is in very good shape with senior debt-to-EBITDA ratio of 1.8 times at quarter-end. Under our existing debt covenants, that means additional borrowings of approximately $415 million would be allowed and $377 million remained available with respect to our credit facility.

Turning now to our updated 2015 outlook on slide 3, we now expect 2015 organic revenue growth of 4% to 6%, with essentially flat total revenue after consideration of about approximately 5% FX headwind. As mentioned, our outlook assumes a Euro rate of $1.10, which is anticipated to negatively impact full-year revenue of approximately $65 million. Our operating profit margin outlook is approximately 16.5%. GAAP earnings from continuing operations are forecast to be in the range of $2.43 to $2.53 per diluted share. Excluding the final $0.02 of Maenner short-term purchase accounting adjustments, adjusted diluted EPS is anticipated to be in the range of $2.45 to $2.55, up 5% to 9% from 2014's adjusted diluted EPS of $2.34.

We are forecasting third-quarter EPS to be approximately the same as last year, with a stronger fourth quarter driven by Aerospace. Our CapEx outlook is now approximately $55 million, and cash conversion is forecasted to be approximately 100% to net income.

So in summary, with a good first half of 2015 behind us, we foresee another year of solid financial performance and cash generation. Upon the closing of the Thermoplay acquisition, our balance sheet will remain well-positioned to support additional acquisitions, as well as to fund organic investments to fuel further profitable growth.

Operator, we will now open the call to questions.

(Operator Instructions)

Pete Skibitski, Drexel Hamilton.

Good morning, guys. I apologize, I actually missed the first 5 or 10 minutes, so if you mentioned something, Patrick, I apologize.

No problem.

But little bit disappointed in the first half Aerospace OE volumes. Have you been surprised? You mentioned the schedule changes. I don't know if that is directly related to the 787 insourcing, but maybe you can talk about which engines had the schedule changes and maybe what led to the insourcing, if there was a quality issue or some other issue? It seems unusual to have that happen so early in the product life cycle?

No problem, Pete. Basically, relative to the full year on OE side of the house, we had seen a sequential ramp throughout the year and that was basically something we had seen from the fourth quarter of last year, that there was going to be a step up. In Q2, I would say that the step up was a little lighter than we had expected, primarily because of parts that were ready, fully manufactured to ship, but we didn't receive the necessary customer approvals to ship them off the dock, so they'll ship in Q3. But that said, Q3 and Q4 also are sequentially up as the year progresses. In terms of the 787, effectively what has occurred is that the business which we were doing for one of our large customers, that customer sold the business, and in turn, the new owner of the business had the capabilities and is bringing that work inside.

Okay. Okay, that makes sense. Okay. How should we think about -- I know you haven't given 2016 guidance, but looking into 2016, does your OE business take on less of a focus with less 787 volumes or maybe do you think that can of return to growth with a pick up on narrow body?

The 787 for 2016, we are looking at about 136 aircraft for the year. You are looking at about $50,000 of a reduction in our content per platform, so you are talking about $7 million approximately in annual revenue. So as we look out to 2016, we believe that the other programs we have in place will more than offset.

Very helpful. Thank you.

Thank you.

Thanks, Pete.

Joe Radigan, KeyBanc.

On the Aerospace aftermarket side, it sounds like you have taken your MRO expectations down, and I just want to -- on the first quarter, Patrick, you talked about lower scope of work. And certainly, the folks that have reported in the aftermarket space, the results have been all over the map, really choppy here, so how much of it is -- are you still seeing a continuing trend of that lower scope of work or is it more related to that customer issue that you mentioned in your prepared comments?

For Barnes Aerospace aftermarket, it is primarily driven by the specific OEMs that I mentioned. What's happened there is that they have changed their schedule, to where they are moving out engines into the future from the current quarters. That said, as we look at our aftermarket, it's primarily driven off the CFM56 and CF6 engine models, which make up our RSPs, as well as our CRPs, and as you saw with the RSPs, very strong in the quarter; however, that is lumpy and we've always said that. But overall trends for both programs, for the CFM, in particular, which makes up the majority of our revenues in the aftermarket, continues to be strong, with that engine ramping up to a peak [shop visa] rate by 2024. So another long -- it's a long-cycle business. We entered into these programs for life of program, which was a 20-plus year horizon and so what you are seeing is some of the lumpiness quarter to quarter.

Okay. Then in the Industrial businesses, typically you have to deal with shutdowns in Europe in the third quarter. Last year, you were able to manage through some of that and still drive pretty strong growth, particularly in Maenner. Are you taking a similar approach this year or how should we think about the seasonality in Industrial?

For Industrial, we have, through the rest of the year, a relatively flat projection over the two quarters, with maybe a little higher, seasonality-wise, a little higher projections against the fourth quarter than the third. But we have seen continued strength in terms of our plastics business, in the hot-runners space in particular, as it pertains to Maenner, as well as Synventive, so what we will do is continue to adjust the holiday schedules, certification schedules to ensure that we meet customers' demand throughout the third quarter.

Okay, and then did you say that organic orders for the plastics business has softened in his second quarter? Did I hear that right? And if that's true, then how should we think about the growth rates in those businesses in the back half? Should we see a decelerating growth rate for the balance of the year?

You heard me correctly. I did say that the orders softened in the second quarter, but still up for the first half. What we saw were double-digit sales growth in the second quarter for both of our plastics businesses, and so we continue to remain bullish on both of those businesses for the remainder of the year. So as it pertains -- it's all relative, I would say, Joe, in terms of where we have been, which is at all time highs. We'll continue to see nice demand in both of those businesses.

Okay, great. Thanks, Patrick.

Thank you.

Tim Wojs, Baird.

Hey, guys. Good morning. Just going back to Industrial, margins there were down year over year and that's the first time Industrial margins have been down in several years. So can we just talk about what -- you noted some investments there, maybe how big those were? And was there an impact from mix or anything in the quarter that normalizes in the back half of the year?

Not so much mix as the fact that we continue to make investments in some of the key program. One of the programs that we made large investments in took a little bit of a hit to productivity on in terms of the total flow-through in the second quarter was our GDI program as it continues to develop and ramp out of our Heinz Hanggi business. So productivity was a factor in Industrial. Also what we saw in Industrial in the second quarter was FX hitting the bottom line for the first time. Where prior we've indicated that it was incorporated into our guidance and we believed that it was negligible, this quarter we saw it impacting the bottom line a little more.

Okay. So can margins in Industrial return to expansion mode in the back half of the year?

Well, we are forecasting full-year guidance at mid teens for Industrial and so we are confident with that target.

Okay. And then just a housekeeping question on Aerospace, I just wanted to make sure I get my numbers right. If we are assuming mid, single-digit growth for the full year and Q3 to be pretty similar to Q2, that implies a pretty aggressive ramp in the fourth quarter. Is it really just all driven by the OE backlog coming through or is there a pretty big spares number also built into that forecast?

Not a big spare numbers but what I would say is a combination of OEM and MRO. We have a couple of key programs that we've being doing development work over some time, and that development work is scheduled to ship in the fourth quarter. If possible, we would like to ship it earlier, but unfortunately, sometimes the lead time against castings and forgings pushes to where they are the pacing item. So the way it is currently lined up is for a large fourth quarter and that is something we are working aggressively to try and pull forward as best we're able to, but right now, it's looking as a big fourth quarter.

Okay. Okay. And then on the acquisitions that you announced, I know you didn't want to give a lot more detail, but is it unreasonable for us to assume that the margin profile of that business is much different than your current hot-runner business?

I would suggest that it's in line and meets the hurdle rates that we've set, in terms of our overall strategic criteria. So as we said, we had put strong discipline around all of the criteria pertaining to acquisitions. Thermoplay, we are extremely excited about, will be very complementary to the two existing businesses we acquired in that space, being Synventive and Maenner, and so we're -- recognize -- I will point out that there is no impact of Thermoplay in our guidance for the full year, and so we will address that after closing.

Okay. Great. Thanks, guys.

Thanks, Tim.

Thank you.

Scott Graham, Jefferies.

Hey, good morning. It's funny that I know you have some of these pressures that have popped up around the Company, but I would probably argue that two years ago, that these would have been much more disruptive in the old portfolio than the new. But with that, I do share the prior concern that was asked, that the plastic technologies orders soft or those still up? Obviously, that would indicate a negative trend. Could you tell us which end market that relates to, or end markets?

Two different businesses, one serving automotive, one serving the medical and personal care. On the automotive is where we have seen softening more in the China market than whilst North America continues to be strong and Europe continues to be Steady Eddie, so to speak, but not growing considerably. On the personal care and on the medical side of the business, whilst orders are somewhat sporadic is we are seeing in that business, in that they are lumpy from quarter to quarter, so the demand for the medical and the personal care side of the business remains -- we remain very bullish on it. And so, we are seeing a little bit of softness in our Asian auto side of the equation, but overall, we are very optimistic as it pertains to the plastic side of the business.

Okay. Understood. I was just -- maybe you can take this a bit further. The automotive, I believe, is something like 20%, 25%, 20% of your sales, is that about right?

Sounds about right.

Would you be able to break that down by region? And then I have another question about that, as well?

Without getting into exact numbers, I would say that, clearly, automotive is larger for us in North America, secondarily into Europe, and third on that scale would be Asia.

And if you were to look at automotive as an end market and maybe cut this a different way, what percentage of -- what amount of that 20% is just typical production versus the new model change-overs? Is the new model change-overs just the plastic technologies business?

Think about it this way, Scott. The legacy businesses were more connected to auto production volumes.

Yes.

The newer businesses are connected more to model changes or name plate changes. So where, as we look at automotive as an overall end market, we've become very deliberate in terms of how we want to play in the automotive market, less so on production-driven volumes and more so in terms of industrial technologies, where we are truly creating value and that value is driven by different factors than the actual production rates. So we expect that on the auto side, as it pertains to our Industrial technologies businesses in particular, Synventive, that we would outpace production by virtue of the adoption of plastics into the auto industry, as well as the number of model changes that occur, independent of volume.

Fair enough. Got you. On the organic sales guidance, maybe this is something for both you and Chris, we're still presupposing a pretty good second half, call it in the 5%-plus range, let's just say call it 5% to get to [4% to 6%]. Yet you've talked about a number of different areas where we are a little concerned here, Aerospace OE there, what have you. What are the primary drivers in second-half organic growth in your view?

Scott, this is Chris. As Patrick mentioned, the OEM and MRO business, primarily fourth-quarter driven, is where we see that being the most substantial quarter for the year for us. So Aerospace is driving that confidence in the second half. Industrial, from a quarter-to-quarter point of view has been nice improvement year over year. Sequentially, we are seeing about that -- flat from the Industrial point of view, after you negate out the FX. So it's good growth overall, Industrial, throughout the year, quarter to quarter not much swings.

Okay. The follow-up comment I would make, Chris, would be that obviously we've had some issues with push-outs in both OE and MRO, and to have a fourth-quarter loaded organic, how much risk do you see presented there?

Well it gets back to Patrick's comment around a certain delivery development program that the team has been working on. We have been working on that program. There have been multiple deliveries through the past few years. We have been successful to date and no reason to believe we won't be able to achieve that in the fourth quarter.

I would also highlight that our customers are extremely focused on [their old] shipments, as well, because they're key strategic programs [firm], so all of our resources are aligned against making those parts meet schedule, as we've outlined.

Understood. Thank you. Last question. On Thermoplay, would it be fair to assume that the incoming margin structure of that business, because it's in Italy, is lower margin than your prior two hot-runner acquisitions?

That would be an incorrect assumption.

Really? Very good. That's all I had. Thanks.

Thank you.

Thank you.

Myles Walton, Deutsche Bank.

Good morning, everyone. This is actually Lou on for Myles. Just the Spares business, I know it's been, we'll say, volatile in the past. There's two quarters in a row of positive growth. Should we -- do we think this is the turn now based on whatever you guys can see?

As it pertains to Spare parts, Lou, the aftermarket in general contains -- is normally low visibility and high variation. So quarter to quarter, it is tough to suggest that there is a robustness or there is a linear aspect to this business. We've had two great quarters as it pertains to Spare parts. Half of that has been driven by the CFM56 engine and the other half by restocking on the CF6 engine program, which has an intermediary distributor that stocks the plates, stocks and then destocks. So what that does, of course, is it drives some volatility into our CF6 portion of it. That said, the RSPs are predominantly CFM56, and the engine itself is the largest, the most successful engine program in aviation history, continues to be the largest installed base and the CFM56-5 and CFM56-7 are now starting to come up on time for shop visits, so we are very bullish in terms of the outlook against CFM, in general.

All right. Thank you. Just to stick with Aerospace, you had the slip on the OE side, sounds like from Q2 into Q3, and I know you are expecting the ramp into Q4, but also sounds like Q4 you are going to see some impact from the 787 customer shift there. So is it fair to think that Q3 and Q4, as a result of the slip from Q2, will be more even or am I thinking about that wrong?

No, it will be ramping. We expect that Q3 will be modestly up to Q2 and that Q4 will be significantly up to Q3.

All right, and then just overall China exposure?

Overall?

China exposure?

In terms of our businesses in general?

Yes?

China is a primary market for our Synventive business, as well as our tool and dye nitrogen gas products business. Those two businesses are the primary products and services that we sell into China.

All right, and then, just remind me leverage targets? I know with the -- obviously, the share repurchase, the upcoming acquisition that you said you are going to use cash in, the revolver?

In terms of the covenants?

Yes?

We ended the quarter at 1.8. We don't foresee that changing significantly over time. Even the Thermoplay acquisition, once closed, in terms of how we finance that, we expect to be able to use a combination of cash and debt. But the strong cash generation of our business, especially outside the US, in Europe, we'll be able -- we're not concerned from a covenant point of view. As a matter of fact I would emphasize that the capacity that we have available to do an additional acquisition is quite sizable, so we feel the balance sheet is in great shape.

Perfect. Thank you, guys.

Thank you.

Thank you, Lou.

Christopher Glynn, Oppenheimer.

Thank you. Congratulations on the deal. Sounds very interesting.

Thanks, Chris.

Good morning. I just want to revisit the fourth-quarter comments for Industrial. The comment was 3Q and 4Q similar linearity from a seasonal perspective, 4Q maybe a little bit stronger. I believe that would be potentially unprecedented in looking back over the years at the Industrial segment's linearity, so I just wanted to dive back into that again?

Yes overall the businesses, as we roll up Q3 and Q4, we have anticipated a little lighter Q3 and a little stronger Q4 as it pertains to Industrial. The businesses that are driving that -- overall, tool and dye -- as well as the plastics remain relatively strong, coming off of highs from 2014. In terms of our Engineered Components, we've seen a little bit more clouds gathering, if you like, pertaining to the general industrial markets, and subsequently, there is where some of the hedge is.

Okay. And then what causes the elasticity into 4Q?

The fourth quarter is just really feedback from certain customers around planned programs and changes, model changes in some instances, as it pertains to plastics, scheduled shipments against our Maenner business as it pertains to major programs that they are working, as we speak. So it's a combination, Chris.

Okay thanks. That's helpful color. And then the Industrial margin in the quarter, talked about lower productivity including incremental costs related to new products. I suspect that is a lead laggish, part of the answer to the fourth-quarter tick-up, but in terms of the lower productivity, wondering if we could dive a little into that? Does that include some deal costs related to the new acquisition?

No it doesn't include deal costs. It's really pertaining to some of the major programs, new product development programs, that we were working during the quarter. There was a combination of a couple of challenges there that some related to our operations, some related to the customers' supply of material. And so, as we work through those it impacted the quarter, the margins for Industrial continue to be healthy at mid teens and we expect -- we've indicated that for the full year.

Okay. So that was won and done with some of those supply chain-type inefficiencies?

We've worked through the bulk of the issues and we believe we are at the other side of it. What we are seeing is that as you enter into some of these programs don't underestimate that as we're pushing the envelope in terms of what I'd consider disruptive technologies, that they don't come easy. Subsequently, we have seen some challenges that the team has done a wonderful job in terms of working through, but I would be remiss to say that we are plain sailing, at this point because the nature of new product development brings with it challenges, all the time, but in this particular instance, I believe we are at the other side of it.

Well said. Last one is the tax rate has been going up. We have had the bulk of the big increases, but in terms of the rate of increase that could be incremental over the next year or two, how should we think of that? It is a pretty key modeling item and you are more qualified to judge what a plug is than I am?

Appreciate the compliment, Chris. Guiding 28.5% to 29%, mainly driven by the expiration of certain tax holidays. There are certain expirations that are going to occur over the next two years, so we will see the natural lift in our tax rate going forward, but I wouldn't call it a dramatic change. So we are in this high-20%s, low-30%s tax rate is how we see it. One item that will impact our tax rate is clearly the mix of earnings. We evaluate that, as you know, on an ongoing basis, but that high 20%s, low 30%s is what we foresee over the next year or two.

Okay, and it's only going in one direction, right?

Yes, we don't see a reduction in that. We see an increase -- have the pressure of an increased tax rate over the next few years. Again, we constantly go after tax-efficient strategies, as well as holidays across the globe, and that would potentially impact it, but that's where we see it right now.

Got it. Thank you.

Thanks, Chris.

Thanks, Chris.

Edward Marshall, Sidoti & Company.

Good morning, everyone. The outsourcing that you saw, can you talk to the timing maybe of when that occurred? Was it during the quarter? Was it post quarter? Have you known about it for some time?

Outsourcing, are you talking about the 787?

737.

787, actually. The comment relates to 787. Our outsourcing relates to the 787 (multiple speakers).

Got you.

It is the Boeing 787, the Dreamliner.

Okay. Yes.

And the content is, we've reduced it from $300,000 to $250,000.

Correct, correct.

Per aircraft.

Right.

And that is something that will start to impact Q4 this year. And then going forward, should be thinking about $250,000, as the content per platform on that aircraft into the future.

And I would just add, Ed, that we were -- anticipation, as Patrick mentioned, the selling of this business and the fact that they are in the space, our new customers, in this space, this insourcing decision was not -- I wouldn't call it a surprise, it was something strategically we were keeping an eye on, but it was something that we knew -- like in any part of our business in the build-to-print space, we're recognizing that those decisions can be made. Just as we see insourcing decisions, we see a ton of opportunity on the outsourcing side, as well. This just happened to hit us. It will hit us in the fourth quarter. It is not all that substantial, as Patrick mentioned.

Yes.

But it is changing your average content down to $250,000.

It seems unusual. This is a period of outsourcing and tight capacity as we move up the supply chain so just timing is odd. But is the delta in the backlog? The $536 million? Or is that yet to hit the backlog?

I would say that it's already starting to hit the backlog.

If we look at the RSPs, you mentioned that you expect to have 20% for the year. I'm curious if you can update me on the first half, how much is that up so far year to date, and then maybe parse out the expectations for the second half of the year?

To achieve the 20% for the full year, Ed, it means that the second half needs to be down compared to what we've just accomplished in the first six months. So overall, we're obviously very pleased with regards to the performance in the first six months. That said, we know that this business tends to be lumpy, and so we are being also conservative in the back half.

How much was it up in the first half and how much would the expectation?

It was up 10% year over year in the first quarter, and it was up 50%-plus in the second quarter.

Okay. And the math would be what for the second half - down?

Roughly 30%-some for the first half, recognizing we are guiding better than 20% for the year. So still showing a lift in the second half, but not as substantial as Patrick mentioned for the first half.

Got you.

Ed, as you know, this is lumpy business. Look at 50%-plus growth in the quarter so it is a combination of our CFM growth, which is -- we are anticipating that, that is going to continue to grow on the CFM56-5, CFM56-7s, but the distributor ordering, that happened on the CF6, we saw a nice pop, but you don't see that over quarter, as you know.

Right, right. So that is just changing and [AV all] and so forth, in the way Boeing purchases through the supply chain, right?

That's right. That's right.

Okay. All right. So the cash outflow on the CRP, is that just timing or was that a new product?

No that's final. That's the final --

The final contribution?

Yes, final payment for the two programs that we signed up to over the past two years.

Okay, so nothing to read through on that?

Right.

When I look at the auto business, and I'm curious if the comments surrounding some of the plastic orders, is that across the board? Is that flowing into the legacy Spring business as well?

When I talk about the plastics business, we are seeing strength in North America, we are seeing relatively flat in Europe, and we're seeing a slowing in China. So that's how we are seeing automotive as it pertains to the plastic side of the equation. On the Engineered Components, which is more the legacy automotive businesses, there we are seeing some mix around the globe. One of the areas that we've seen significant decline is in Brazil. That economy continues to -- as you know, we have a business there -- that economy continues to be bearish, and subsequently, that is impacting our legacy Associated Springs. But overall, as I mentioned, volumes -- production for automotive for both North America and Europe still forecast to be up low single digits.

So the Asian markets are still North American producers, I understand. Are you shipping your plastic products to US producers in Asian markets or are you selling to the --?

We are doing both. In Asia, we are selling to both western OEs that are manufacturing and selling in China, as well as to local Chinese companies, as well.

Yes. There's been some growth in, say, polyester needle-felt technology, in certain low-end applications. I'm wondering if maybe in wheel wells and things like that, have you lost any content with hot-runner technology as it moves to that polyester needle felt? Is that the order outflow that you see as we move to new product -- new model orders and so forth?

Not that I'm aware. You used that example, what -- if you think about a wheel well, what it is, is it's the lower -- it's what's hidden, if you like, compared to the naked eye of the consumer.

Yes.

Synventive's products are very much those that are highly visible to the naked eye of the consumer, in particular, the bumpers, the bearings around the grills, the internal dashboards, so again, very high end, high visibility, high aesthetics. So for the most part, I'm not aware of any displacement of different materials as you cited that might impact hot runners in that application.

That's fair enough. Thanks, guys.

Thank you.

I actually have one more question, if I could. The Thermo acquisition, I'm curious, if you can break down packaging, auto, medical as a percent of revenue. I understand you want to take some time, but just from a modeling perspective, it might be helpful if we knew the mix in that business.

I would defer, at this juncture, Ed, if you don't mind, only because it's a privately held business and we want to close on it before we start sharing information around the business.

Yes, I would agree.

Okay, fair enough. Thanks, guys.

Thank you.

Thank you.

Pete Skibitski, Drexel Hamilton.

Just a couple of quick follow-ups, guys. Patrick, interesting you say you have a large amount of Aero OE development work shipping in 4Q because I think that's around the time the A320neo enters service. So I would like to ask is there a connection there? Any good news you are able to share with us?

There is a connection, Pete, but it's something that we will not -- our past practice has been that until an aircraft is just about to enter into service and we are convinced that the fluctuations that happen in development have somewhat settled, then we would communicate a content per platform. I will say that there is a connection and we are doing development work, all of which is scheduled to ship in the fourth quarter.

Okay. Very helpful. Thank you. And then just a last one. Given we all recognize that the macro outlook globally is a little more tenuous right now, a little more unpredictable, do you get the sense, after Thermoplay, that maybe you'd think about shifting your capital returns more so back to share repurchases versus M&A? Just because it is not like your shares are that expensive and we've seen in the past some companies maybe buying into a downturn really get hit pretty hard. So does that enter your thought process about maybe it's time to shift the capital deployment at all?

We remain consistent in terms of our communication around capital allocation. First we are going to invest in the existing businesses to drive our organic growth. We still see opportunities within Maenner, within Synventive, in terms of their continued -- the opportunities that are presented to those businesses globally. So as I've communicated in the past, Phase II of Maenner is very much underway. We continue to look at the investments required to expand in North America. And secondarily, as we think about the M&A side of the equation, we are very much, holding to the high discipline that I continued to reference around the criteria.

So, even as we see some of these markets slowing, if we believe that there is an industrial technology that provides great value to the customer base, and that the customer places a premium on that technology, then it still is going to be something we are willing to pursue in terms of M&A. And then our last and third capital allocation criteria is share repurchase and dividends. So we're going to be continued to be in tune with our shareholders and continue to buy back as we see the opportunity presenting itself opportunistically.

Okay. Thanks so much, guys.

Thank you.

Thank you, Pete.

We have no further questions. I turn the call back over to Mr. Pitts for closing remarks.

Thank you, John. We'd like to thank all of you for joining us this morning. We look forward to speaking with you once again in October with our next quarterly earnings call, and at this point, we will continue include today's call.

This concludes today's conference call. You may now disconnect.