Barrick Mining Corp (B) 2016 Q4 法說會逐字稿

Good morning. My name is Krysta, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Barnes Group Incorporation fourth-quarter and full-year 2016 earnings conference call and webcast.

(Operator Instructions)

Thank you. Mr. Bill Pitts, Director of Investor Relations, you may begin your conference, sir.

Thank you. Good morning, and thank you for joining us for our fourth quarter and full-year 2016 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 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 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 of our corporate website at BGINC.com.

We will now open today's call in our usual fashion with remarks from Patrick, followed by a review of our fourth quarter and full-year results, and our initial 2017 outlook from Chris. After that, will open up the call for questions.

Patrick?

Thanks Bill, and good morning, everyone. Barnes Group performed well in the fourth quarter, capitalizing on the positive momentum building during each quarter in 2016. We delivered fourth-quarter and full-year results that reflect improvement in sales, operating margins, and adjusted earnings per share. We also made considerable progress with our major initiatives during 2016. But before I jump into that, let me begin with a summary of our fourth quarter and full-year results. Chris will provide more detail later.

In the fourth quarter, sales were up 13% compared to last year, while organic sales increased 9%, reflecting strength in both segments, and the benefit of a contract dispute arbitration award in the quarter. Adjusted operating margin increased to 16%, up 50 basis points compared to a year ago. Adjusted diluted earnings per share were $0.67, a 12% increase from last year's adjusted $0.60.

For the full year, sales were up 3%, while organic sales were flat. Organic sales, however, represent a nice second-half recovery, after a slow start out of the gate to begin the year. Adjusted operating margin was 16%, up 20 basis points, and adjusted earnings per share increased 6% to $2.53, versus $2.38 a year ago.

During 2016, Barnes Group significantly advanced the longer journey to position the Company as a leading provider of engineered products and innovative solutions. Our objective is to leverage the extraordinary 160-year history of Barnes Group as a high-precision manufacturer, and using that as the foundation on which to build truly differentiated industrial businesses. We have demonstrated, and will continue to demonstrate, our ability to adapt and re-invent the Company as a provider of advanced technologies, with a clear emphasis on intellectual property as a core differentiator.

In recent years, we've done a nice job of transforming Barnes Group's business portfolio to one with a greater mix of highly engineered products and services. Enhanced through strategic acquisitions, undertaken to accelerate this shift, especially as it relates to our molding solutions business. In 2016, we acquired FOBOHA, a market-leading supplier of highly complex cube molds systems.

At Aerospace OEM, we have made progress on diversifying revenues from our traditional wide-body engine programs to new narrow-body platforms, such as GE's, LEAP-A program for the A320neo. Aircraft like this represent the expected growth platforms for the commercial aerospace market.

Much of our current efforts at aerospace are focused on ensuring seamless execution of this new business. Coupled with our after-market programs for MRO and Spares, we're well-positioned to deliver an expected return to growth in 2017, despite the decline of some legacy OE programs, namely the GE90 on the Boeing 777.

In order to continue along a growth path, the organization is aligned behind three strategic enablers: the Barnes Enterprise System, innovation, and talent management. Each of these is instrumental in helping us to further strengthen our competitive advantage in the market, facilitate our long-term growth and success, and support the continued transformation of the Company. The goal of each enabler is to create value for all of our key stakeholders, our employees, customers, shareholders, and community.

With the Barnes Enterprise System, or BES, we strengthen our competitive advantage by driving scalable and repeatable processes, and improving our operating performance, which is clearly visible in the margin improvement we've produced to date. As we continue on this journey, many of our operational sites and functional departments have attained higher levels of BES maturity, as validated by our objective internal scorecard. This scorecard measures performance on sales effectiveness, technology and innovation, global sourcing, operational excellence, and functional excellence, the key areas of our BES operating system that drive a relentless focus on productivity.

With innovation, we look to develop and commercialize our pipeline of new products and services as we introduce advanced technologies to support growth. We have formalized internal innovation metrics to measure progress across the enterprise. We have worked with a leading University to identify opportunities to improve speed to market, and foster improved collaboration across all of our businesses.

Certainly, innovation is at the heart of our strategy, and will be a crucial factor in our ability to adapt and secure our long-term success.

To achieve our growth targets, we must also develop the necessary skills and drive engagement of our people, through our integrated talent management system. We have re-designed and enhanced our global talent identification, review, and succession planning processes, all in an effort to develop the next generation of leaders for the Company. Additionally, we have implemented many tools to assist our employees in advancing their own career goals.

I'm very pleased, not only with the financial results we delivered, but also on the progress made on our three strategic enablers. Now let's talk about our business segments in the quarter.

The industrial segment's run of solid performance continued, as organic sales grew 8%, and adjusted operating margins increased 120 basis points. Strength in many of the end-markets served by our molding solutions and nitrogen gas products continued, while end-markets for our engineered components business remain mixed.

In molding solutions, sales were up 25% over last year's fourth quarter, and organic sales grew 14%. Our automotive hot runner business continued to be particularly strong, with orders and sales growth well into the double digits. North American, European, and Chinese markets remained very healthy, while Asia's demand excluding China is more modest.

Medical and personal care hot runner markets remain solid. Relative to molds, packaging is doing well, while medical orders lagged in the fourth quarter, although they saw a nice order recovery in January. For molding solutions in 2017, we anticipate favorable demand trends to continue. We will focus on tightly integrating our acquired businesses, in particular our recent FOBOHA acquisition. Simultaneously, we will drive the development of enhanced after-market service capabilities, and continue the global expansion of the business.

We forecast sales growth in the double digits, with organic sales in the mid-single digits. NGP's tool and die end-markets in Asia and Europe were solid, while North American order activity picked up nicely towards the tail end of the quarter. Quarter organic orders and sales were up double digits, continuing their second-half recovery.

NGP had a record year in volume production and shipments, and finished with a strong backlog heading into 2017. Here we anticipate organic growth in the low-single digits.

At our engineered components business, fourth-quarter sales were down slightly on an organic basis, as recurring trends continue to impact this business. Industrial end-markets such as white goods and construction remain challenging, especially in North America.

However, on a positive note, US manufacturing activity expanded in December to its highest level in two years, and the ISM manufacturing index reached its highest level since 2014, in December. Global automotive production remains positive, up low-single digits for 2016, so the expectation for 2017 is for decelerating growth, and perhaps for a plateauing of production. With this in mind, we anticipate a flat revenue year for engineered components in 2017.

At the segment level, our full-year outlook is for total sales growth in the high-single digits, in part due to the full-year contribution of FOBOHA, while organic sales are anticipated to be in the low- to mid-single-digit range. Forecasted operating margin at industrial is in the mid-teens.

Moving to aerospace, the key operational issues we made last quarter still apply. New engine program ramps such as GE's LEAP A and Rolls Royce's XWB are under way, and we remain in the midst of a transition, as legacy engine program sales were lower in the quarter compared to the prior year.

Aerospace total sales were up 12% compared to a year ago, as both OEM and after-market sales out-paced last year's fourth quarter. OEM orders were down a bit from a year ago, though up nicely on a sequential basis. OEM backlog was unchanged from September's quarter end.

For aerospace aftermarket, MRO sales increased 26%, while spare parts were up 8% over the prior-year quarter. We had positive sequential sales growth in MRO for each quarter throughout the year, as the benefits of CRPs and the environment of low fuel prices and high aircraft utilization have all begun to lift sales.

For spare parts, we saw a slightly better sequential run rate in the fourth quarter, though sales volumes throughout the year have held quite steady. Part of that steadiness results from the absence of large re-stocking orders during the year, as compared to 2015. For 2017, our aerospace outlook is for total sales to be up mid-single digits for the year, with OEM, MRO, and spare parts each exhibiting similar growth. Our operating margin outlook is for mid-teens, although as we've previously mentioned, this could range to the high teens if we were to experience higher demand for RSPs.

Overall, I'm pleased with our achieved financial performance, and considerable progress on positioning the Company to perform well as we move ahead. We're driving improved operating margins, and delivering strong cash generation. We transformed the business portfolio significantly, and fully expect to seek additional opportunities that advance our intellectual property base capabilities. Our actions have served to strengthen our competitive positioning, and we look to follow a solid 2016 with an even better 2017, meeting our customer and shareholder commitments along the way.

Let me now turn the call over to Chris.

Thank you, Patrick, and good morning, everyone. Let me begin with highlights of our fourth quarter and full-year results on slide 4 of our supplement, and end with our 2017 outlook. Fourth-quarter sales of $324 million were up 13% from the prior-year period, driven by solid 9% organic sales growth, and 5% or $14 million from our recent acquisition of FOBOHA, while FX unfavorably impacted sales by $3 million, or 1%. Net income in the quarter was $36.7 million, or $0.67 per diluted share, compared to $24.4 million, or $0.44 a year ago. On an adjusted basis, EPS of $0.67 was up 12%, from $0.60 last year.

Fourth-quarter 2016 adjusted income excludes two offsetting items. First, we had $0.03 of FOBOHA short-term purchase accounting adjustments; and second, we had a $0.03 benefit related to a contract termination arbitration award in our aerospace segment. I will provide more color on the arbitration award in a moment.

Last year's fourth-quarter adjusted income excludes restructuring charges of $0.05 per share, and a pension lump-sum settlement charge of $0.11 per share. For the full year, sales were $1.23 billion, up 3% from the prior year, with organic sales essentially flat; however, given the softness we experienced in the first half of 2016, the second half showed nice improvement. Acquisition sales were $47 million, or 4%, and unfavorable FX reduced sales by $10 million, or 1%.

Full-year net income was $135.6 million, or $2.48 per diluted share, compared to $121.4 million, or $2.19 in 2015. On an adjusted basis, EPS was $2.53, up 6% from $2.38 last year. Adjusted 2016 EPS excludes $0.05 of FOBOHA short-term purchase accounting adjustments and acquisition transaction costs in our industrial segment, and the benefit of a contract termination arbitration award, net of related charges in our aerospace segment, which nets to zero for the year.

Now on to segment performance. Industrial's fourth-quarter sales were $215.7 million, up 13% from a year ago, as organic sales grew 8%, driven by sustained strength in nitrogen gas products and molding solutions businesses. Unfavorable FX reduced sales by $3.4 million, or 2%, while FOBOHA contributed $14 million, as previously noted.

Quarterly operating profit was $30.2 million, up from $14.7 million in the prior-year period, driven by the profit impact of increased organic sales, productivity gains, and the absence of pension lump-sum settlement charges, restructuring charges, and higher acquisition short-term purchase accounting and transaction costs. The current year's fourth quarter includes FOBOHA short-term purchase accounting adjustments of $1.8 million. On an adjusted basis, operating profit was $32 million, up 24%, and operating margin increased to 14.8%, up 120 basis points.

2016 full-year sales grew 5% to $824 million, driven mostly by acquisition revenues of $47 million, while organic sales growth of 1% was offset by 1% of unfavorable FX. Full-year operating profit was $129.7 million, up 26%, benefiting from strong productivity gains and the absence of pension lump-sum settlement charges, restructuring charges, and short-term purchase accounting adjustments and acquisition costs that impacted 2015.

For 2016, operating profit included $3.5 million of FOBOHA short-term purchase accounting adjustments and acquisition transaction costs. On an adjusted basis, operating profit was $133.2 million, up 13%, and operating margin was 16.2%, up 120 basis points.

At aerospace, fourth-quarter sales were $108.5 million, up 12% from last year, as OEM sales increased with higher program volumes, including $4 million from the contract termination arbitration award, and both aerospace after-market MRO and spare parts sales grew in the quarter. Operating profit in the quarter was $21.1 million, up from $15.4 million in the prior-year period, reflecting the profit impact from higher sales volumes; a $1.4 million benefit from the contract termination arbitration award; and the absence of pension lump-sum settlement charges and restructuring charges taken last year.

On an adjusted basis, operating profit was $19.8 million, up 6%; and operating margin was 18.2%, down 100 basis points. For the year, aerospace sales were $406.5 million, down 1%, as lower sales from the OEM and spare parts businesses were only partially offset by higher MRO sales.

Operating profit was $62.5 million for 2016, down 5% from last year, due to scheduled OEM price deflation; the profit impact of lower after-market spare parts sales. And unfavorable productivity, offset in part by lower net contract termination dispute charges, and the absence of pension lump-sum settlement charges, and restructuring charges taken last year. On an adjusted basis, operating profit was $64.1 million, down 10%, while operating margin was 15.8%, down 150 basis points.

Aerospace backlog remained solid at $636 million, up 11% year over year, and at a similar level as compared to September quarter end. During the fourth quarter, the arbitrator issued a ruling on the aerospace contract dispute we've been seeking to resolve since the third quarter of 2015, and awarded Barnes Group $9.2 million plus $1.4 million of interest. Let me provide a high-level financial summary of this award on our fourth-quarter results.

As disclosed last quarter, the Company had approximately $8 million of net assets, mostly for inventory and equipment in support of this contract. Aerospace recognized sales of $4 million in the quarter associated with said inventory, which contributed $1.4 million income benefit. Equipment is essentially transferred at book value. The $1.4 million OP benefit has been removed from aerospace's adjusted OP, and OP margin for the quarter and the full year.

The $1.4 million interest component of the award has been recorded as other income net, and is likewise excluded from our fourth quarter and full-year adjusted EPS results. When netted, these two award items benefited fourth-quarter EPS by $0.03. For the full year, previously taken contract termination dispute charges of approximately $3 million, or $0.03 per share, offset the award benefit.

Other items to note for the year, 2016 interest expense increased $1.2 million to $11.9 million, primarily as a result of higher average interest rate versus a year ago. Other income was $2.3 million, compared to $0.2 million a year ago, primarily driven by the interest income component of the contract termination arbitration award. For 2016, the Company's effective tax rate was 25.7%, up from 23.2% last year.

With respect to share count, both our fourth quarter and full-year average diluted shares outstanding were 54.6 million shares. During the fourth quarter, we repurchased approximately 125,000 shares at an average cost of $38.95. At year end, we had approximately 4.4 million shares available for repurchase under existing Board authorizations.

Cash generation and cash conversion remained strong, as full-year cash provided by operating activities was $218 million, which included discretionary $15 million pension plan contribution made earlier this year. Free cash flow, which we define as operating cash flow less capital expenditures, was $170 million, similar to last year. Our free cash flow to net income cash conversion was a solid 125% in 2016.

With respect to our balance sheet, our debt-to-EBITDA ratio as defined by our credit agreement was 1.7 times at quarter end. A positive capital structure highlight: We recently amended our senior unsecured credit agreement, increasing the facility to $850 million, while securing financing through 2022 at attractive pricing, and providing the financial flexibility to drive growth. The new facility includes an expansion option of up to an additional $350 million, subject to certain conditions.

Turning to our initial 2017 outlook on slide 5 of our supplement, we expect 2017 revenue growth of 6% to 8%, with organic sales growth of 3% to 5%, after consideration of negative FX of 1%, and acquisition growth of about 4%. Our operating margin outlook is in the range of 16% to 17%. GAAP net income is expected to be in a range of $2.58 to $2.73 per diluted share. Excluding a final $0.03 charge for FOBOHA short-term purchase accounting adjustments in the first half, adjusted 2017 EPS is expected to be $2.61 to $2.76, up 3% to 9% from 2016's adjusted EPS of $2.53. As we enter 2017, we anticipate adjusted EPS to be roughly a 47% to 53% split between first half and second half.

A few additional guidance items is our CapEx outlook is about $55 million; we expect cash conversion to remain strong at approximately 100% of net income. Our 2017 effective tax rate is expected to be in the range of 27% to 28%, and the euro rate is forecasted at $1.05. Lastly, we are estimating an increase in pension expense of approximately $2 million, or about $0.02 reduction in EPS from 2016. Average diluted shares outstanding for 2017 are anticipated to be 54.5 million shares.

In summary, our operational performance has driven solid financial results. We have a healthy balance sheet that fully supports our investments for growth, both organically and for additional acquisitions. During 2016, we've deployed $48 million in CapEx, about half for growth projects. We invested $129 million in acquisitions, and we've returned $48 million of capital to our shareholders through dividends and share repurchases. We exit 2016 with a continued focus on growth, productivity improvements and superior cash generation, and we will continue to identify and execute value-enhancing opportunities in 2017.

Operator, let's open it up for questions.

(Operator Instructions)

Myles Walton, Deutsche Bank.

Good morning, this is Lou Raffetto on for Miles.

Good morning.

I didn't get the OEM 4Q sales growth?

Q4 OEM was up 7%.

Okay, great. Looking to 2017, is there another planned -- or a planned pension contribution?

Not right now. We're not required -- we're not anticipating a discretionary contribution at this point, but that's subject to change; but right now we're not.

All right, and just to follow up on the contract dispute, make sure I had this clear. You were awarded $9.6 million, you said?

It was a total of -- let me get my notes. It was $9.2 million, but the $1.4 million of interest.

Okay. The fourth quarter had $4 million of sales in aerospace, and $1.4 million of operating profit. You backed out the $1.4 million of operating profit, but there was another $1.4 million that the interest from the award flowed through into Other, but that was not backed out?

They both would have been backed out. As we talked about going into this arbitration, any costs associated with it, as well as any benefits from it, were going to be removed from our adjusted results, and we adjusted for both.

Okay, all right. Thank you very much.

Thank you.

Edward Marshall, Sidoti & Company.

Hi guys, Sidoti & Company. How are you guys this morning?

How are you doing, Ed?

I want to ask about the industrials, the industrial business and the margin in particular. I'm wondering how much of that was seasonality, and how much of that was just the mix in the business? You talked about solid molding solutions, you talked about NGP, and I think of those businesses maybe higher margin than the core. Maybe help me think about what you saw in the fourth quarter, as far as the industrial margin, relative to the first three quarters of the year?

The fourth quarter in general on a comp basis to the prior year obviously was a strong quarter. Sequentially, it was down, and it was down as a result of two primary items. One was volume was down slightly on an organic basis. Then the addition of FOBOHA constituted some significant integration costs in the first quarter as we took that business on. Again, it also had slightly less revenues than anticipated as we converted it over to GAAP and to the Barnes systems.

Got it. As we look forward, can I assume that the volume - the organic volume change, was that relative on a sequential basis to just seasonality? What do you think -- I guess that question?

The contributor in the fourth quarter from a seasonality, or from a -- the decline in revenues within industrial was primarily engineered components. There, a slight softening relative to Q3. But even then, I would highlight that as we move into 2017, we're looking at engineered components, just with respect to the two primary end markets that it serves, transportation and industrial. General industrial has been soft throughout the year, and transportation has a hedge against some decelerating in the auto production. We're forecasting engineered components for the full year to be flat.

Okay. I wanted to talk about the acquisition of FOBOHA. Maybe it's early, but August was when you closed. I'm curious as to when you integrated that -- when you bought that business, you are looking at the cube technology and the integration with some of the other businesses you have. I think it was Maenner. Can you talk about maybe some of the early successes you've seen about the two businesses and the combination there; and then also, the after-market portion of that business, and what you're doing with that?

Absolutely. It's pertinent that I just came back from FOBOHA. I just sat with both teams, both the Maenner Team, the Molding Solutions Leadership, as well as FOBOHA and had an excellent review and a complete review of that business in terms of how the integration has progressed over the last few months.

To that end, I am very pleased with the progress being made. The two teams are working extremely close together. One of the tremendous benefits there is that they're close in terms of geographic proximity. But also, these two Leadership Teams were very familiar with each other in the industry, going back decades. As the two teams come together, a lot of similarities and a lot of cultural chemistry from just the onset.

As we look at the opportunities, clearly what we see with FOBOHA is the opportunity for synergies, more so than what we had identified for prior businesses. There, the cube technology is quite unique to FOBOHA. That will be very separate and distinct. There is the opportunity for the integration of the Maenner hot runner systems into that cube technology on a much larger scale.

As we also mentioned with that business, we are excited about global expansion. FOBOHA came with an operation, a manufacturing facility in Suzhou, China; whilst Maenner, we've spent the last year expanding the Atlanta, Georgia, location. Both businesses now are looking to leverage each other's capabilities in the region.

The primary opportunity that we see right out of the gate is with regards to after-market support of the install base of cubes in North America, and correspondingly, support of Maenner's hot runner systems in Asia. We're excited about the opportunities. It is going to take some time for those synergies to be realized. But progress in the last four months has been above expectations.

That's great to hear. Thanks very much, I appreciate it. I will get back in queue.

Tim Wojs, Baird.

Hi guys, good morning.

Good morning, Tim.

Just going back to the segments, just to clarify for 2017, I think you said both segments should be at mid-teens, and then I think for the total Company you said 16% to 17% for operating margins. Just a clarification, do you expect the margins in both segments to be up in 2017 versus 2016?

Yes, in general the aerospace business we expect to be up. With respect to the industrial business, up slightly as well. We are a little bit cautious of continuing the integration activities and the rate of which we'll accelerate forward the synergies in industrial, but both of them up within that range of 16% to 17%.

Got you, okay. Then on the phasing of [growth] in 2017, Chris I thought you said -- did you say EPS is weighted to the second half of the year? My question with that was I think the comps are actually easier in the first half of the year. If you could talk a little bit about why we have a little bit more EPS weighting in the back half?

Yes, so 2016, remember we had a soft first half of the year, and we progressed each quarter through 2016 in terms of our overall performance. As we look to 2017, a little bit easier comps. When we look at it, I agree with you in terms of the first half, but we still look at the EPS spread about 47/53 for the full year. Most of that benefit would be in the first half, over prior year's first half.

Got you.

For the second half, slight improvement, consistent with -- again, it's early in the year as we all know; but our short-cycle businesses, nitrogen gas products and elements of our molding solutions businesses has given us the confidence that we'll continue that second half 2016 strength into the first half of this year.

Is the 47/53 split, would you characterize that as more normal seasonality? I know last year was weighted to the second half.

Yes, remember we were coming off of a much different year in 2015, so that was definitely how we were looking at 2016, and it played out exactly how we went into the year. As we look at this year, I look at it maybe a more normal year, typically what Barnes Group produces given this portfolio.

Okay. Then just in aerospace, is there -- you've got a lot of moving parts in some of the new programs coming on and some legacy programs falling off. Does that all line up? Will we see something fall off or ramp faster than the other? I'm trying to think of how to think about OE growth through the year in 2017?

Tim, relative to aerospace, in 2016 we highlighted it as a transitional year. That transition was the slow decline of the Boeing 777 GE90 program, as the XWB and the LEAP ramped. We're going to see both of those two programs continuing to ramp into 2017. Within aerospace, you're going to see a sequential increase throughout the year again, offset by the decline of the GE90. In total, we're looking at a mid single digits sales growth within our OEM business. But that mid-single digits has taken into consideration our line of sight right now to all three programs, and how they intertwine over the course of the year.

Okay. Then last question on free cash flow. The conversion of about 100% implies free cash flow maybe being down in 2017. Is there something particularly driving that, or is 100% a ways to target, and you have done better than that the last couple years, and we should maybe expect a little bit better? I'm just trying to understand if there's anything going on with free cash flow conversion versus normal?

I would say it's the latter. We go into the year targeting approximately 100% to net income. We anticipate spending a little bit more on the CapEx side. As Patrick mentioned before, we've got the integration costs, the internal investment we're making to globalize our molding solutions business, the focus on working capital management to continue to get cash out of working capital. I'd say we go into the year with that approximation, but as you mentioned, the last several years we've been a very strong cash generation, and we continue to target that internally, without a doubt.

Great, well thanks for the time. Good luck on 2017.

Yes, thank you.

Michael Kerrane, SunTrust.

Hi, good morning, guys. Thanks for taking my questions.

Good morning, Mike. Welcome back.

Thanks, just to go back to what Tim was talking about, definitely I was pleasantly surprised with aerospace; but can we get a little more color? The 777 headwinds, looking at that. You've got -- that program is going to be down significantly this year, [8.7% to] flat. You've got XWB ramping, the LEAP ramping. Is there a big contribution in there from the max that you are building in? Should we expect -- it sounds like you're managing it well, but is there a margin differential between some of those mature legacy programs like the GE90, or are your new engines on the -- the content on the new engines coming in at the same margin profile?

As you look at the margin profile even throughout 2016 from an aerospace and total standpoint, you'll see that we had a lower first half than a second half in terms of adjusted operating margin. What you're seeing there, Michael, is the impact of just what you highlighted, which is that as we're taking on new programs, they come with costs. We're not down the learning curve in terms of them flowing nicely to the shop. Of course, as a legacy program falls off, it is learned out, and it is a much smoother in how it moves through production, and usually with a higher margin as a result.

2016 and that same phenomenon will happen in 2017; but what you see in 2017 is a much higher volume starting to kick in. The rate of which a legacy goes out is usually quicker than another ramps. That of course is why we constituted 2016 as a transition year. But now in 2017 we're expecting the LEAP to ramp significantly, and the entire Aerospace Team has been doing a wonderful job in terms of allocating the necessary resources. Again, a lot of our CapEx investments have gone to support that program within aerospace. As we look out again to the full year, we're looking at mid single digits sales growth for our OEM business, and for aerospace in total.

Got it. You said there that you see the legacy go out faster. Are you guys already seeing the 777 rates at 5% per month? Is that -- even though they're not going to go down to that level until August, are you seeing that level already?

When we think about how the engine side of the business works, we usually deliver engines six to nine months in advance of the build schedule to the aircraft. The short answer is yes, we're seeing our backlog declining as we speak.

That's another interesting dynamic that's occurring, which I think speaks volumes to the wonderful job that the Aerospace Team has done. That is that our backlog is at near-record levels. At the same time, the GE90, which was a large piece of that backlog historically, has declined significantly over the last 18 months. All the while, that's been replaced by the newer programs.

Got it. Then just the other side of aerospace, the after market obviously seems like a good story. Is it you're just seeing -- you called out in the slides the narrow bodies, the CFM56, favorable trends there. Obviously it's a shorter cycle side, limited visibility; but it sounds like you expect MRO spares and overall after market to stay strong, and perhaps even accelerate throughout the year?

When I look at, Michael, as you said, it's a short-cycle business. What I look at is trends as we have experienced them, and that in combination with the dialogues we're having with our customers. What we saw in after market for the full year was sequential improvement each quarter.

In terms of after market in total, the second half of the year was up 12% over the first half. If I break that -- and that breaks down between MRO and RSPs, which are the spare parts. The spare parts were relatively flat. Whilst our MRO business was up 19% in the second half over the first.

Got it, that's helpful.

We have that momentum, and we've seen that momentum carry into January.

Okay, perfect. All right, very good. Thanks guys, I will jump back in the queue.

Thank you.

Matt Summerville, with Alembic Global Advisors.

Hi, thanks, good morning. A couple questions, back to the same topic Mike was talking about. It might help underscore the outlook for mid-single-digit growth on the OEM side if you were to help maybe quantify how much revenue headwind you see from 777 in 2017 versus 2016; and then perhaps maybe as a percent of OEM sales, what the composition of these new programs was in 2016, and what you expect it to be in 2017? If you could put some numbers around that?

I was going to comment that at a peak, that was a $100 million program for us, right, when you think about where we were a couple years back.

Building on that, to think about $100 million per year, and that was roughly 100 aircraft, because we had a content at its peak of about $1 million per aircraft. Our last number we cited was $900,000 per -- OEM sales per aircraft, and as we pointed out earlier in the year, or last year now, that's a combination of all of our sales that we ship against a given program, divided by the number of aircraft that is forecast to be produced.

Today, as you think about five per month as an example, you're thinking about 60, and so relatively speaking you're talking about $100 million down to less than $60 million, as it pertains to the GE90 as a single-engine program. We have that aspect that's happening over the last two years. In the same time we have the XWB ramping, as well as the LEAP.

The LEAP, as an example, to put some numbers around this, aircraft-wise last year, somewhere in the range of 36 aircraft. Then as we move into this year, our content is 25% of the total number of aircraft that will be produced, because as you think about the A320neo, it splits roughly 50/50 between the GTF and the LEAP program. Then we have 50% as a dual source on the LEAP, so 25% of total aircraft to be produced. So a significant ramp in 2017, and of course why there's such emphasis on the production scalability against that program.

Got it. Then just as a follow-up, you mentioned price deflation in the aerospace side of the business. Is there a way to quantify how much price deflation you see in both aerospace and industrial on an annual basis? What's the right way to think about that? Then maybe tie in what you're seeing in terms of input costs, as well?

Sure, Matt. On the aerospace side, we've got planned price deflation, primarily on the mature programs that we've seen, GE90 as an example. Roughly 1% of sales will experience in terms of price deflation in our aerospace business. It's less than that, maybe 0.5% of sales on the industrial side. You're talking about anywhere from -- on a dollar basis, anywhere from $7 million to $10 million of price deflation on an annual basis.

That's how as you go into the year, clearly things play themselves out for negotiations and additional opportunities, et cetera, material costs, all the above. But that's how we're looking at 2017. For aerospace, think of it as about roughly 1% of sales.

Got it, and then my final question. Any high-level thoughts, preliminary assessment, of any potential impact from corporate tax reform and border tax adjustments, and whether or not Barnes is a net importer versus exporter? Thanks.

As our new administration takes hold, and as we look at what the implications are, in general we're very pleased with the pro-business stance being taken. In particular for us, Matt what stands to be a benefit is tax reform, as well as the regulatory side in terms of reform there. Early stages, relative to where it will all pan out, in general we are a net exporter. From our perspective, we are also global. We're watching very carefully, and excited about the possibilities of what lies ahead in that arena.

Thanks, guys.

Thank you.

Pete Skibitski, Drexel Hamilton.

Good morning, guys. I had one follow-up on FOBOHA. Does FOBOHA have structurally lower margins than the other molding solutions businesses?

Yes, Pete. When we acquired the business, it was below the traditional margins that we had acquired with the prior businesses. As such, we clearly see the opportunity for synergies, as well as the roll-out of the Barnes Enterprise System into that business, with a view to driving the same type of -- our goal will be to get it to the same level of performance as the other businesses.

Okay, so you see that possibility there. It's not an underlying different business, such that it couldn't get to those margins?

No, margin-wise we believe we have the ability to make those improvements and drive those synergies. What is unique about the business or different to the other businesses is that there is a programmatic side of packaging that allows for the molds to be released in large orders, and then to ship on a controlled basis. An aspect of being lumpier from a sales perspective, but not significant in the total scheme of industrial.

Okay, got it. Patrick, just on the success of MRO in 2016 and it sounds like it's looking pretty good into 2017. On the CRPs, it sounds like in particular I remember that the last couple of CRPs you got the ability for your salesforce to go out and market to customers directly, as opposed to waiting for GE to bring the business in to you. Has the salesforce done as you expected? They're going out and finding new work for you? Then what are the prospects of further CRP deals as we get into 2017?

Relevant to your question on the salesforce, the team has been extremely focused in terms of driving new accounts as it pertains to the capabilities that we acquired through the CRPs. As you recall, there were three programs: the CFM56, the CF34, and the CF6. Relative to the performance as we modeled it, I would say they were slightly below our expectations. But recall that these are 25- to 30-year programs. The team has been making nice progress, and we'll continue to drive for additional customers directly to the airlines, as you highlighted.

As you also recall, we have added new leadership over the course of 2016, and the new President of Aerospace has taken a special focus on this particular program, as well with a view to accelerating the rate of which we win those new orders.

Okay, understood. Then in terms of new CRP deals with some of the OEMs are --?

Not in any discussions relative to any at this point. We're continuously in discussions around potential opportunities with all the OEs, but none that are active in the share performance of the CRP, as we've announced previously.

Okay, got it. Thanks very much.

Thank you.

Bhupender Bohra, Jefferies.

Hi, good morning, guys.

Good morning.

First question on FOBOHA, I believe last year when you acquired the company you gave an EPS accretion for 2017, $0.05 to $0.08. I just wanted to get some color on that. Is that still a possible thing for 2017, or has anything changed?

No, Bhupender, that's reflected in our guidance. Yes, no, we're consistent with that thought as we're four or five months now into the integration of the business, and that's still our internal measure.

Okay. Second, Patrick, if you can give us some color on the Maenner business here? I think on the previous calls you've been giving us some augurs within the Maenner business. Just wanted to see how the expansion plan is going in North America, which you started a year or two years back on that? Thank you.

Yes, as I highlighted in my prepared remarks, orders in the fourth quarter were softer than we had expected, but we've seen that rebound into January. But overall for Maenner, Maenner continues to do a wonderful job, and meets or exceed our expectations. They have put a tremendous amount of effort into the expansion of our Atlanta, Georgia, facility throughout the year 2016. Now we will look, as I mentioned earlier, to leverage that also into the arena with FOBOHA, with a view to having it act as a service center for North America, in terms of the cube technology that's already in the install base, if you'd like.

By contrast on the Asian side, I would say that we have made progress on a relatively slower basis as it pertains to expansion of Maenner. But now again, with the new operations that we acquired through the FOBOHA acquisition, we're looking to leverage it going into 2017 for both Maenner and FOBOHA as we embark upon expanding our capabilities there, in particular, hot runner capability as it pertains to Maenner within Asia.

Okay, got it. Lastly, Chris, I just wanted to go through the Barnes Enterprise System here. I think on the last call you gave some numbers in terms of productivity, which contributed to I believe it was aerospace or maybe industrials, actually. It seems with -- if you look at industrials, I think 8% organic growth and 14.6% operating margin. Was there any contribution from productivity during the quarter here? You can hear me?

Ladies and gentlemen, it seems as though we are experiencing some technical difficulties. Please stand by.

The conference is now resuming. Bhupender, may I please have you queue back up? Bhupender, if you are still on the line, may I please have you queue back up? We're going to take the next question, sir, from Patrick [Shushire] from Oppenheimer. Please go ahead.

Hi, guys. I wondered if you could comment on the (inaudible) strength in China auto for Synventive in the quarter? If so, if you could give some color on what that means for comparisons into fourth quarter of 2017?

I didn't catch the question. Can you --?

Can you repeat that, yes please? China orders, automobile?

Yes, I wanted to see if you saw any strength from China auto for Synventive in the quarter? If so, could you give some color on what that means for comparisons into the fourth quarter of 2017?

Yes is the short answer. We saw a nice pick-up in the second half of 2016 in China, particularly driven by transportation markets. Two of our businesses benefited from that, with Synventive and it's as a result of model changes, saw a nice pick-up in its business, with Synventive having a very strong finish to the year, particularly in China.

As we think about that strength, we have seen it roll over into 2017 at the start of the year. Again, these businesses are short cycle, so what it means for the fourth quarter of 2017, remains to be seen. But again, the outlook for light-vehicle production remains positive for China for 2017.

Thanks.

Bhupender Bohra, Jefferies.

Sorry for that hiccup here on the call.

Sorry, Bhupender, it might be on our side. We apologize to everyone on the call.

That's fine. My last question, Chris, was around productivity. I believe on the last call you did give some numbers. The productivity contributed to margin expansion, I believe, on the industrial side, and it has been over the last few quarters, especially with applying Barnes Enterprise System. Could you give us some color how that worked out in the fourth quarter? I don't know if you have any productivity goal number for 2017 which is already built into the margin guidance here? Thank you.

Sure. As you mentioned, industrial -- one thing overall, we're pleased with 120-basis-point improvement when we look at the adjusted operating margin performance out of industrial year over year. As you recall, fourth quarter of 2015 we did announce some restructuring charges, as well as some consolidation of a few facilities that drove performance -- most of that productivity performance for industrial.

We saw all of that plus some, that allowed for about 120-basis-point improvement. We went into the year thinking about $7 million in total. In overall productivity, we're actually well into the teens, mid-teens, in terms of their productivity improvements. That helped 2016. As we look to 2017, we're going to continue on the margin expansion side through productivity. You see our overall guidance of 16% to 17%.

On the industrial side, we don't anticipate as large a margin expansion year over year in industrial, mainly because the investments and the integration that's going on with FOBOHA; but still to be in the healthy mid-teens. Then most of our margin lift actually does give us more confidence on that potentially moving to 17% will be on the aerospace side. As we work through the OEM transition and continued growth, of our after-market business, both in MRO and RSPs.

Okay, got it. Now what's the visibility on the aerospace, especially on the spares and MRO side? We have been hearing about the de-stocking, especially with distributors. Have we seen any changes to that? Are the order patterns pretty much now back, or are they still lumpy?

Relative to the spare parts, 2016 represented probably one of the most steady levels of sales quarter to quarter that we've seen in some time. Again, the primary driver behind the spare parts volume has been the CFM56. To that end, the demographics of that fleet remain excellent in terms of the install base.

In fact, the engine was produced last year at even a new record level in terms of production. A large portion of the install base, which is over 20,000 engines, a percentage of them still have to come in for their first engine overhaul. In general, we continue to be very optimistic as it pertains to that particular engine, and the outlook for it as it continues -- it's expected to peak in terms of engine overhauls in the mid-2020s.

Okay, that's all I have. Thank you.

Great, thank you.

This concludes our question-and-answer session. I would now like to turn the call over to Bill Pitts for closing remarks.

Thank you. We would like to thank all of you for joining us this morning, and we look forward to speaking with you once again in April, when we will host our first quarter 2017 earnings call. For now, we will conclude today's call. Thank you.

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