Barrick Mining Corp (B) 2017 Q3 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Barnes Group Third Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) William Pitts, you may begin your conference.

Thank you, Kelly. Good morning and thank you for joining us for our third quarter 2017 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'll now open today's call in our usual fashion with remarks from Patrick, followed by review of the third quarter financial results and our updated 2017 outlook from Chris. After that, we will open up the call for questions. Patrick?

Thanks, Bill, and good morning, everyone. Continuing the momentum from the first half of the year, Barnes Group posted 15% total sales growth and 8% organic sales growth in the quarter, with solid contributions from both segments. Our businesses continued to work diligently to build a portfolio of differentiated industrial technologies with an emphasis on intellectual property to generate sustainable, profitable growth. That strategy has proven to be very effective over the last several years and while we believe we have more work to do with the transformation of our company, we firmly believe we are well positioned to achieve continuing growth in both segments.

To further illustrate that point, total organic sales for Barnes Group, excluding the impact of acquisitions and FX, were up 32%, with Aerospace up over 80% and Industrial up 12%. Total backlog rose to $1.05 billion, up 17% versus a year ago and up 5% sequentially from the second quarter. To achieve such growth, we continue to push the limits of certain process technologies and our own capabilities to continuously improve. And on occasions, that creates some short term operational challenges.

Overall, we have stepped up and performed admirably within both segments. That's been demonstrated with the meaningful operating margin improvement delivered over many years, reflective of the value we bring to our customers. However, a couple of items that we discussed last quarter continue to weigh on Industrial margins. For the quarter, adjusted operating income declined 10% compared to a year ago, with adjusted operating margin coming in at 13.6%. While that performance is below our expectations, I believe that the lingering impacts are temporary.

Let me now to talk about our business performance in the third quarter, beginning with Industrial. Total sales growth for Industrial was 15%, with solid organic growth of 6%. Our end markets, especially those served by our Molding Solutions and Nitrogen Gas Products businesses, have been very strong and industrial end markets for Engineered Components continue to improve.

Adjusted operating margins were down 510 basis points from last year. However, please keep in mind that last year's third quarter saw an exceptionally strong operating margin. Relative to a mid-teens margin expectation, there were 2 primary factors that caused the shortfall. First, continuing challenges at our Associated Spring business caused a negative 2-point margin impact and a low margin contribution from our recent FOBOHA acquisition caused a 1-point impact. I'll discuss each of these in a minute.

At Molding Solutions, sales increased 23% over last year's third quarter while organic sales grew mid-single-digits. Orders remain robust, up mid-teens organically. Model changes, which drive our automotive hot runner business, remained strong and accordingly, Synventive is on track for another outstanding year. Similar to last quarter, our Molding Solutions medical, personal care and packaging end markets remained healthy, and we saw Männer's orders climb well into the double digits, propelled by mold orders.

Our FOBOHA business, which is a great technology-based basis, delivered decent top line in the quarter, albeit these sales came with margins still below our expectations. We continue to work detailed synergy plans to improve its profitability, inclusive of the facility consolidation we announced last quarter, which will be completed by year-end. Our current projections expect FOBOHA performance to improve meaningfully by mid-2018, as we advance commercial best practices, fine-tune operational processes and expand aftermarket service offerings.

Wrapping up our Molding Solutions discussion. With sustained end market strength, we now anticipate full year organic growth in the low double digits, up from our prior outlook of high single-digit growth.

Our Nitrogen Gas Products business continues to benefit from worldwide tool and die market strength, as third quarter organic sales and orders reached the high teens. While we don't envision this end market to strengthen much farther, we nonetheless foresee a very favorable environment in which sales remain at high levels into the first half of 2018. As such, for 2017, we now anticipate organic growth in the high teens, up from our prior outlook of low double digits.

At Engineered Components, organic sales improved low single digits, while organic orders increased mid-single digits. Recent end market trends have been sustained as the growth is coming from general-industrial and non-auto transportation markets, whereas our categorized automotive is relatively stable at a high level.

Forecasts for global automotive production remain modestly positive for 2017, though North American automotive production, which impacts a portion of our Associated Spring business, anticipates a modest decline. Along those lines, a number of auto OEs have indicated they are planning Q4 shutdowns.

Within our Engineered Components business, and in particular, Associated Spring, our operating profit performance did not meet expectations. As we discussed last quarter, increased costs on certain program launches have negatively impacted our financial performance, and we anticipated this to linger for several months. Presently, we continue to protect customer delivery schedules as a priority, but are incurring higher incremental costs to meet those commitments.

The Associated Spring team is working diligently with our customers to resolve the situation. Part of the resolution of this challenge involves the closure of one plant with the transfer of work to other existing facilities. The transfer, which is paced by the necessary approvals, is taking longer than expected. Looking forward, we see the heavy lifting continuing in the fourth quarter with improvement in early 2018.

With respect to our 2017 revenue outlook at Engineered Components, we anticipate organic sales growth to remain in the low single-digits. With the quarter's solid organic sales growth and strong orders, our segment outlook has increased. Our full year revenue outlook has risen to the mid-teens from the low teens previously, while our organic sales are anticipated to be in the high single-digit. Forecasted adjusted operating margin in Industrial remains on the lower end of mid-teens, unchanged from our prior view.

Moving to Aerospace. Total sales were up 14% as compared to a year ago. Ramping LEAP and XWB engine programs drove 14% growth in OEM, while aftermarket strength lifted MRO sales by 5% and spare parts were up 29% over the prior quarter. Quarterly OEM orders more than doubled from last year, driven by LEAP, Trent XWB and GE90 programs, which lifted OEM backlog to $709 million, a 5% sequential improvement from the second quarter.

Adjusted operating margin was down 120 basis points from last year, primarily from plant price deflation on certain programs and an unfavorable OEM mix and some better margin deliveries originally anticipated to ship in the third quarter has shifted to the right. Overall, we're feeling pretty good about our Aerospace end markets as strong commercial aircraft deliveries are forecasted over the next several years, benefiting our OEM business and demand for aftermarket services and spare parts remains robust, especially on programs like the CFM56.

For 2017, our total Aerospace outlook remains unchanged, as we forecast total segment sales to be up mid-teens, with OEM growth in the mid-teens, MRO up low double digits and spare parts up approximately 20%. For spares, that's a slightly higher outlook. Our operating margin outlook for Aerospace remains the same at high teens.

To summarize, sales growth and continued orders momentum sets us up well to finish 2017 as one of the best years in our long history. It also positions us favorably heading into 2018. I am confident in our team's ability to work through the temporary challenges noted at Associated Spring and to bring FOBOHA's longer-term performance up to our expectations. I also anticipate further improvements in our operating margins as we execute our growth strategy, which has delivered substantial value to our many stakeholders.

Let me now turn the call over to Chris.

Thank you, Patrick, and good morning, everyone.

Let me begin with highlights of our third quarter results on Slide 4 of our supplement and end with our updated 2017 outlook. Third quarter sales of $357 million were up 15% from the prior year period, driven by continuing strong organic sales growth of 8%. Acquisition of FOBOHA -- the acquisitions of FOBOHA and Gammaflux added $15 million or 5%. And with the weakening U.S. dollar to other currencies, FX positively impacted sales by $5 million or 2%.

Net income in the quarter was $35.3 million or $0.65 per diluted share compared to $36.8 million or $0.67 a year ago. On an adjusted basis, EPS of $0.66 was down 7% from $0.71 last year. Third quarter 2017 adjusted income excludes $0.01 for FOBOHA short term purchase accounting and restructuring costs, collectively, in our Industrial segment and last year's third quarter adjusted income excluded $0.03 of FOBOHA short term purchase accounting adjustments and transaction costs in our Industrial segment and a $0.01 charge related to a contract termination dispute in our Aerospace segment.

Now let me talk about segment performance. Industrial's third quarter sales were $240.4 million, up 15% from a year ago. Organic sales were solid, growing 6% with each SBU contributing. Acquisitions contributed $15 million and FX added $5 million. Operating profit was $29.3 million, down 16% from the prior-year period, with lower productivity given higher costs of certain programs within our Engineered Components business continuing to weigh on performance.

The third quarter of 2017 includes costs of $0.3 million from previously announced restructuring actions and $0.5 million of FOBOHA short term purchase accounting adjustments. Excluding these items, adjusted operating profit of $30.1 million was down 18% from $36.7 million a year ago. Adjusted operating margins was 12.5%, down 510 basis points, driven by the factors that Patrick addressed earlier. You may recall that during the second quarter, we undertook a couple of restructuring actions within our Industrial segment. As such, we anticipate another $0.01 charge in the fourth quarter related to these actions.

For 2018, we continue to expect these actions, restructuring actions, will result in annual cost-savings of $5 million. Lastly, the short term purchase accounting adjustments from the FOBOHA acquisitions are now behind us.

At Aerospace, third quarter sales of $116.8 million was up 14% from last year as OEM sales increased with higher volumes from new engine programs and aftermarket MRO and spare parts experienced year-over-year sales growth as well. Operating profit in the quarter was $18.5 million, up 6% from an adjusted $17.5 million in the prior-year period, reflecting the profit impact from higher sales volume and solid productivity improvements, partially offset by planned price deflation and higher employee-related costs.

Operating margin was 15.8%, down 120 basis points from last year's adjusted operating margin of 17%. Total Aerospace backlog grew to $718 million, up 13% year-over-year and up 5% compared to the second quarter of 2017. Of the current backlog, we expect to ship just under 50% over the next 12 months.

Other items to note. Interest expense increased $700,000 to $3.7 million, primarily as a result of a higher effective tax -- higher effective average interest rate versus a year ago. The company's effective tax rate for the third quarter was 19.1% compared with 23.6% in the third quarter of 2016 and 25.7% for the full year 2016. The primary drivers of the lower rate in the quarter are the favorable settlements of tax audits along with the closure of tax years for various jurisdictions. With respect to share count, our third quarter average diluted shares outstanding were 54.6 million.

During the quarter, we were active in repurchasing 300 shares at an average cost of $59.70 per share, and we have 4 million shares remaining available for repurchase under existing board authorizations. Year-to-date, cash provided by operating activities was $168 million versus $160 million last year. Included in those results are discretionary pension plan contributions of $5 million in 2017 and $15 million in 2016. Year-to-date free cash flow, which we define as operating cash flow less capital expenditures, was $126 million compared to $127 million last year.

With respect to our balance sheet. Our debt-to-EBITDA ratio was 1.6x at quarter-end, similar to last quarter. Under our existing debt covenants, additional borrowings of approximately $513 million of senior debt would be allowed, while $457 million remained available on our credit facility at quarter-end.

Turning to our updated 2017 outlook on Slide 5 of our supplement. With sales and organic -- with sales and orders remaining strong, we now expect 2017 revenue growth of 15.5% to 16.5%, with organic growth of 10.5% to 11.5% and acquisition growth of about 5%. FX will have a minimal impact on full year revenues.

Our operating margin outlook is approximately 15%, a bit lower than our previous view. GAAP net income is expected to be in the range of $2.83 to $2.88 per diluted share. Excluding $0.03 in FOBOHA short term purchase accounting adjustments for the year, offset, in part, by a net $0.02 favorable adjustment for restructuring, our adjusted 2017 EPS is expected to be $2.84 to $2.89, up 12% to 14% from the 2016 adjusted EPS of $2.53.

A few additional guidance items. Our CapEx expectation is slightly higher at a range of $55 million to $60 million. Our 2017 effective tax rate is now approximately 22% and average diluted shares outstanding are anticipated to be 54.6 million shares. Lastly, our full year cash conversion expectation has improved to approximately 100%, up from our previous expectation of greater than 90%.

So in summary, with orders sustained at very healthy levels, a high-end growing backlog, good cash generation and a supported balance sheet, we're well positioned to deliver a very good 2017 despite challenges we are addressing in our Industrial segment. And as we communicated at our inaugural Investor Day last month, organic growth investments and accretive acquisitions remain a critical aspect of our strategy to drive long term superior performance.

Operator, we'll now open the call for questions.

I would first like to turn the call over to Bill Pitts.

Just one clarification. Total organic orders for Barnes Group were up 32%, with Aerospace orders up 82% and Industrial up 12%.

Now we can go into Q&A.

(Operator Instructions) And our first question comes from Michael Ciarmoli from SunTrust.

So maybe just on the ongoing headwinds at Associated Spring. I mean, you had the Analyst Day. The guidance was reaffirmed. I guess, 3 weeks left in the quarter, when did you guys realize that there were going to be cost overruns? I mean, obviously it was impactful enough to lower the operating margin forecast. And I think you called out 2 points of headwind. Can you maybe elaborate? I know at one point, there were expedited freight charges in there, but maybe just a little bit more on kind of the challenges and kind of when they were identified?

Yes. So Mike, the challenges, as I highlighted, are contained within our Associated Spring business, primarily as being the primary drivers against the operational challenges. The -- what we announced in the second quarter was the intent to consolidate one of the smallest facilities and to move that business into the larger facilities within Associated Spring.

To that end, the moves that we anticipated have taken a little longer because they're paced by the necessary approvals that are required and that necessarily always isn't within our control. So (inaudible) I think, in the sense of we've anticipated moving quicker than what has actually happened and so as we continue through that consolidation as well as the challenges of some of the program launches that are associated with that, therein lies the source of the increased costs that we've been incurring.

The costs are along the same lines, that's what we previously noted, which is the transfer of work, the coverage of the customer schedule, really, at this point is a little bit -- is at a highest priority. So that's coming with costs that we wouldn't normally incur such as freight expediting additional costs in the manufacturing process. And so again, it has taken longer than we initially anticipated and as such, we expect it to continue into the fourth quarter with a view to improving into the first quarter of 2018.

Okay, perfect. That's helpful. And then just maybe last one for me, on the Aerospace margins. You got out of the gate real strong in the first quarter of the year with 19.5%. They've trended lower. I think you called out the price deflation, some increased employee expenses. There -- is there -- the price deflation, is that coming from some of the rate increases? Are you seeing additional pressure from some of your OEM customers? Is it more mixed with some of the legacy rates down? If you could just maybe elaborate on the Aerospace margins.

It's a combination of everything you said, Mike, in that there is deflation that's built in on legacy programs over time and also, on the newer programs, as you ramp up the volumes. So in the quarter, we did see pressure on the margins from deflation, but also it was driven by mix within the OE side of the business. Because as you saw, MRO and spare parts continue at a healthy clip. So the other one contributing factor was that we did have a number of parts that were previously scheduled to go in the quarter that moved to the right and they were higher-margin components.

Your next question comes from Myles Walton from Deutsche Bank.

I was hoping to follow up on Mike's question as it related to the Associated Spring. And it sounded like you're expecting more of a volume pressure kind of going forward. Can you give us some magnitude of what you're seeing and sensing from the volume pressure, both what you're facing, the conclusion of this year as well into next year from the advanced schedules?

So in terms of Associated Spring, it's -- business is heavily concentrated into North America and in particular, light vehicle has an influence on it. So when we think about light vehicle production, going forward, North America is modestly declining or decelerating and so there is a little -- a slight headwind to the Associated Spring business volume-wise from the transportation side.

But the offset, which is really is reassuring is the fact that we're seeing the general-industrial side of their business improving over the last few quarters, with more improvement in Q3. Not that it will be a complete one-for-one offset, but as we look to EC for the full year, we're talking still to low single digits in terms of organic growth.

Okay, okay. And then the 2020, 18%, 19% targets you put out there, obviously, it wouldn't have changed in the last month. But in terms of the glide slope to get there, it sounds like '18, you'll still be -- at least the front end of '18, you still be comparing some of these challenges in Industrial and then those free up in the second half of '18 into -- and beyond? Is that the way to think about the recovery in margins at Industrial?

Yes, that's the way to think about it. We see the first quarter some bleed over from the items I referenced both in Associated Spring and some of the lower-margin contribution from FOBOHA. But in each instance, what is -- what I take great confidence in is the amount of effort that the teams have placed in on both issues with the definitive plans being executed to resolve them as quickly as possible.

So as indicated, we think that FOBOHA will get back to our expectations in mid-2018 and in the case of Associated Spring, we're looking at that bleeding over into the first quarter but clearing up by the second quarter of the new year.

Okay. And just a quick one for you, Chris. On the [mossy better] cash flow conversion forecast. Is there anything in particular driving...

Yes. Actually on the Molding Solutions side, one thing that we do benefit from on the mold side with Männer and FOBOHA are cash advances. Given the strength of orders out of those 2 businesses within Molding Solutions, higher than our internal expectations than we thought about 3 quarters ago. So given those increased cash advances that we've experienced and plan to experience in the fourth quarter, we are increasing our guidance.

Your next question comes from Matt Summerville from Alembic Global.

First question I want to ask is on Molding Solutions. You mentioned, I believe, in your prepared remarks, you anticipate organic growth for the full year being up low double digits. Is there a way to parse that in terms of how much of that is being driven by market growth? How much of that, if any, is maybe a price component? And then third, how much of that is market share? And if, guys, you could speak to both the hot runner side and the mold side as you sort of walk through the commentary there.

So Matt, the business, the Molding Solutions business, as you said, we think of it as in 3 categories. We think of it as hot runners, molds and controls. The 2 primary drivers, because of the bulk of the revenues goes to the hot runners and to the molds. The hot runners business right now has continued strong for the entire year and as we look at it towards the end of the year, we see that strength continuing. And it's been primarily driven by the auto model changes within Synventive. And as I said, Synventive is having an outstanding year.

But simultaneously, the hot runner business, as it pertains to the medical, personal care and packaging, continues also to have a very strong year, and we see that continuing, in particular, and recognize that the mold side of the business complements the hot runners for every mold. When we see mold strong, there's a hot runner that's also accompanying that. And so we're doing -- addressing both sides of the equation with the strength that we're seeing.

On the -- in the case of market share, I would say that Synventive continues as the market leader and its business has seen strength, particularly this year in North America and in Asia. And to that end, we think that they're continuing to keep that leading position as it pertains to the new products and services that they continue to continuously bring to market in terms of new innovations.

On the mold side of the business, we saw a little slower start to the year, but seen significant strength in Q3 as it pertains to Männer in particular to where orders around the molds have been -- maybe they're a little less predictable in that they're lumpy, so to speak, because entire programs get released at one time. And so today, our Männer business is at a record backlog and of course, we've only owned FOBOHA for a short time. But their backlog is at a record level too as far as we know from a historical standpoint. So both businesses are well-positioned for the remainder of the year and into the 2018.

And then just as a follow-up with respect to the issue at Spring. Is this an issue with the production process itself that you're trying to figure out? And what exactly are the products and end markets that these products are sold into? What is the component you're having the challenge with?

So primarily, transmission components into the auto industry. And the challenges are along the lines that the components themselves have presented a much higher degree of complexity than what I might argue as being previous applications of the same types of products.

And so the team is working through those as well as now, we've clearly saw in the second quarter -- the first -- the end of the first quarter into the second quarter that the resources at the smaller locations was not up to the challenge, so to speak, in terms of the complexities. And so subsequently, the decision to consolidate it into where we have critical mass in the larger facilities.

And then just lastly, with respect to Nitrogen Gas Products, do you have a book-to-bill number for that business in Q3, please?

We could take a look first as we're talking. But as you know, Nitrogen Gas Products had a very strong quarter and a very strong year. In fact, Nitrogen Gas Products had record sales in the quarter. So a -- the team there just have done an outstanding job in terms of stepping up to the increased volumes that we've seen this year.

So Matt, it was related what? The Nitrogen Gas Products, the book-to-bill in the quarter to that specific question? (inaudible)

Yes.

Just under -- exactly, like I said, approximately 95%.

Your next question comes from Pete Skibitski from Drexel Hamilton.

Patrick, just talk more on Aerospace margin. I guess, number one, was it below your expectations this quarter? And then, I guess, just because if I were to -- thought about RSPs being up 29%, I would have thought, overall margin would have been even knocking on 20%, maybe even. Just assuming that the price deflation is kind of a constant thing for you. So could you parse out just a little bit in terms of maybe why the deflation was maybe unusually high this quarter and maybe why it won't be so bad going forward?

Well, to start with your original comment, Pete, I would say yes, the margins were below expectations for the quarter, but not necessarily because of the pricing. And if you look at the aftermarket side of the business, was -- it's up 29% on a year-over-year basis. The aftermarket has been pretty consistent quarter-to-quarter sequentially. And that performance continued into Q3.

The real shift for -- that impacted margins as it compares to expectations was really against the mix within the OEM side of the business because the pricing deflation we had anticipated, the mix was the shift of high margin work that was originally planned to ship in Q3 that has now moved to the right and again, that's a continual communication with the customer to ensure that we are aligned on the timing of those shipments.

I see. Okay. That's helpful. And then can you update us just on how you feel LEAP-1A execution is going and how you think about other LEAP opportunities?

Yes. The LEAP-1A continues to progress, from my perspective, fabulously by the team at Aerospace. They have just done a wonderful job of bringing that program up to the levels that we've achieved even in the third quarter. The plans going towards the end of the year and into the new year is a combination of not only continuing at the levels that we're at in one facility, but we're bringing online a second facility to accommodate the increased levels of production in 2018.

And so that transition or that ramp, even within our own business, is moving ahead extremely well. The -- and again, that's in anticipation of the increased volumes that are coming in 2018 on the LEAP AC. On the LEAP B, we continue to work a number of components within it. The opportunity is still being worked as to potentially additional components. And right now, based on where the LEAP B is in its production schedule, we feel that by the end of the year and hopefully, by the fourth quarter earnings call, we'll be in a position to highlight what our content is on the LEAP B.

Your next question comes from Tim Wojs from Baird.

Maybe just in Industrial. Is there a way to kind of sum up some of the EBIT impacts from Associated Spring and FOBOHA? I am just trying to think of -- as you go into '18, including the restructuring and some of these onetime impacts, what might kind of fall off as you move into next year?

Well, to highlight what I mentioned in the prepared remarks, Tim, the impact of Associated Spring, in the quarter, we've ring fenced it around 2 points and 1 point in terms of FOBOHA. As we move in to 2018, we expect that Associated Spring will come back to its normal operating margin levels by the second quarter of 2018. And then FOBOHA, we're looking at it to meet expectations by midyear as well.

So in both instances, we see these issues as temporary and getting them behind us quickly as we move into the new year. On the consolidation that we announced in Q2, which was the consolidation of one facility inside of FOBOHA and one inside of Associated Spring, our projections are a $5 million savings into 2018 against those 2 actions.

Okay, okay. When I think about the tax rate, Chris, what's -- it's kind of stepped down this year. So what's the -- just to kind of level set us, what do you think normalized tax rate should be?

Yes, consistent with what we talked about at Investor Day, we're in that 27%, 27% would be a normalized rate. 27% to 28%, over the 3 years, 27%, 28%, we expect fourth quarter this year to be around 27%.

Right, okay. And then just on the buyback. It's a little -- it's actually a little bit of a step-up from what you've done historically. Is that just opportunistic in your mind? Or is that any sort of change in how you think about buybacks?

Yes, an opportunistic. We typically go into the year trying to make sure we offset any dilutive effect on employee stock-based compensation to just kind of keep that share count neutral and that was that we had roughly 400,000 shares repurchased on our plan and we executed on that this past quarter.

Your next question comes from Christopher Glynn from Oppenheimer.

Just want to dig a little deeper into Industrial. And Patrick, I think you called out a couple of points, Associated Spring, a point for FOBOHA. It goes down 5 points year-over-year. So just maybe we could speak to the other couple of points of pressure given that there was excellent growth at NGP and molding. Maybe it was a mix within those?

I would say that in terms of Nitrogen Gas Products, we did see a little bit of margin pressure on a year-over-year basis. Not meaningful, but really, I think it comes with the higher volumes. And what's occurring at Nitrogen Gas Products is that when we hit -- capacity levels are hit, volumes that we're hitting right now, as that compares to capacity, we make decisions on how much we will outsource to our vendor base and how much we keep in-house. And if there's spikes, we'll push more out to the vendor base or the supply base, but that has an ultimate decrement, slight decrement on margins. So those are little there, but nothing significant. In terms of...

To your point on Nitrogen Gas Products, I also add the activity we've got in China, right? The growth in China and to be able to satisfy that demand, some expedited freight in terms of getting the units out over to, to satisfy customer demand. So it's a good problem, right? But it's costing us a little bit incremental and [hedge] a few margin side.

Absolutely agree. And on the Molding Solutions side, really, Synventive, as I mentioned, continues extremely strong year. As similar, they are continuing to see a very strong year in China, so goes hand-in-hand with Chris' comments on NGP to where -- but they're locally based. But nonetheless, I do think that the China market is always a competitive market and so with that comes some pressure from time to time.

So all in all, the note that are really counts and addresses the delta, Chris, is the fact that we had an exceptional Q3 in 2016 where everything aligned to the positive and so even at the time we were indicating that 17% was not the new norm, it was more of a great quarter. And so as we think about our Industrial businesses that the expectation that we set at this juncture is at the mid-teens. And so that's where we are considering the base to build off.

Okay, that makes sense. And on Aerospace, it sounds like the mix impacts within OE were kind of peculiar to the third quarter. On the price schedules, is there kind of a timing mismatch between learning curve against the price schedules that was maybe a little out of whack that comes back your way?

I think the learning curve is a real factor and it's one which we track meticulously in terms of ensuring that we're coming down the curve commensurate with the volume increases. Because, to your point and as I mentioned earlier, with those volume increases do come step-downs in pricing. So we, as I mentioned, even to further get ahead of that, we are bringing online the second facility and that second facility will -- is in the process today and will start to ramp up into 2018 and that location is in Singapore. So we are looking to stay one step ahead of it.

The one factor that I also mentioned in Q2, I think, that is a factor in Q3 is that one of the offsetting aspects of margins, as we move through these ramp ups is, if our fabrications business continues strong at the same time as we're absorbing extra costs through the ramp up of the new programs, it offsets. In the third quarter, when I talked about some work moving to the right, it moves out of our fabrications business, which then had the impact of total Aerospace margins, it bleeding through to the total.

And our next question comes from Edward Marshall from Sidoti & Company.

Popular time slot. So I appreciate -- I apologize if anything's been asked. The OEM price deflation that you're seeing, did you -- did you talk about what engine programs you were seeing that price compression in?

It's on -- it's step down pricing on legacy as well as the newer programs. The -- so the legacy being GE90 to some degree, but the newer program is a volume-based price deflation that has been predetermined and so as Chris just asked -- Chris Glynn just asked previously, the timing factor is something that we'd love to keep ahead of so that the learning curve stays ahead of the anticipated price deflation that occurs with -- when we reach certain levels or volumes.

Got it. Now this doesn't change the content per engine program? Or is this already reflected in those kind of base level assumptions? And so why would...

Yes, we've anticipated it. So when we give a OEM sales per aircraft, we're anticipating 1 year, 2 year, 3 year out and in anticipation of what has been agreed to contractually ahead of time.

Got it. Got it. Okay. Okay. And then you talked about increasing the capacity in Singapore. And I'm curious, is that necessary -- mandatory on -- as the part of the OEM for you to secure certain contracts, for you to meet certain ramp programs or is this strategically something that either positions you for additional content or -- on existing programs, or I guess, new programs as well?

I would say, it's a combination of factors, Ed, because we -- from the very onset of this program, we had planned to build capacity in our Singapore facility in addition to our U.S. locations. And so to that end, as we look at the total cost of the program and the associated margins, we anticipated that with deflation in volume -- as the volume increased, that we had a number of approaches to stay ahead of that.

And so the Singapore facility, and this example, was a strategic part of that original modeling against this program. It's not mandatory. It's a Barnes decision, but one which, we believe, allows us to take advantage of our global nature as it pertains to the Aerospace business.

Many years ago, when you went to Singapore, initially, you had tax holidays. Will this expansion provide you with ammunition or opportunity for additional tax holidays?

Absolutely an opportunity, Ed, in that, no matter when we look to bring business to any one of our locations, whether it's in the U.S. or it's in another country, we enter into discussions around what opportunities on a tax basis there may be available to us and that is something that is actively in discussions as we speak.

Could they've been as lucrative as they've been in the past for you?

I would say that they were very lucrative in the past. And so that would be a high bar in terms of what we might get in the tune. So...

I would agree with that.

And so -- but we're going to be diligent in working it, and we're going to push hard. But the previous ones were high bars.

And I'm curious, too, because I know there were certain employee levels, et cetera, that you needed to -- I mean, the OEM build rates are a little bit more cyclical than the aftermarket demand might be, which is where you had those holidays. Will it give you some concerns of offering up so much on your side to go into a -- with that cyclical-type nature of that business?

Yes. We're very conservative, Ed, when it comes to protecting ourselves on the downside. I also would highlight that we have a very strong aftermarket business in Singapore in this example. So we flexed our workforce from one side to the other when we see any type of fluctuations.

And so cross-training is a big factor, both -- in all of our facilities, whether they're domestic or whether they're overseas, to where we have OEM and aftermarket in a number of instances, co-located in the same country and so are in the same location. And so as such, we'll flex the workforce. So we anticipate any particular events in the markets to the best of our ability to be ahead of them.

I'm going to age myself here a bit. Looking at backlog 10 years ago, the quote was, "We typically clear 58% to 61%, 62% of our backlog in any given year." With the ramp that we're seeing now, do those same numbers hold true on a go-forward basis? Or are they slightly higher?

Yes, what we're citing right now is 50% in the next 12 months. And the reason that it's moved from the 58% that you referenced down is that as the OEs are going into new programs and there's a ramp, what they tend to do is open the window to give the supply chain visibility to what that ramp looks like. So they release orders further out than was -- when it's a steady-state program. And so in that, therein lies the reason why we're coming down from the 58% to the 50% because whilst our backlog is increasing, it's also -- we'll get visibility out -- further into the outer years.

Sure. They want you to build capacity so that you can meet potential demand, I guess, right?

That's right.

The last question, I'm sorry, I don't mean to go on so long. But the transmission component that you discussed that were difficult to make. I'm wondering, is that the next generation 10-speed transmission? And point B, is that, are you sole sourced on those components?

We're not sole sourced and it is next generation. And we are, as we said, we're working through those right now with a view to the operational issues and ensuring that we have any -- as we look at any one of these products, if they offer up complexity beyond what we believe is going to meet the margins that are acquired to our internal hurdle rates, we're going to negotiate against those parts as well. So it's a combination.

Our last question comes from Myles Walton from Deutsche Bank.

Just one more follow-up. We got a pretty good idea of where the industrial margin trends are into '18. But given the kind of the step down here in Aero margins in 3Q and I guess implied in 4Q is somewhere around 15% to 16% as well, if the math's right. What does that imply about the '18 margin profile for Aerospace? Is it down from the '17 level given the tough comp in 1H?

I think what we indicate for forward-looking -- and we, usually, as you know, give 1-year guidance. But the -- as we think about Aerospace, we're still targeting the high teens as the benchmark that we move in -- we look to move Aerospace towards consistently. And that is a combination, as you know, of the aftermarket, which is a big influencer. But nonetheless, we see that the high teens for -- in order to achieve it, and it has to be a combination of both OE and aftermarket.

The aftermarket, primarily driven, of course, by our life of program deals on the RSPs and CRPs, which are primarily CFM56-driven. And the demographics of that continue to support a very strong outlook into 2018 and beyond. And then as the OE side contributes to those high teens, it has to meet the -- and come down the learning curves on these new programs as we discussed just a little while ago.

But is there -- I'm just wondering is the second half year performance implied margins more reflective of what we'll experience in '18, because we're still early in those learning curves and we're still ramping up the second facility. I'm just trying to level set if the kind of price deflationary trends here are going to be seen more in '18, kind of like the second half of '17, that's all.

Yes -- no, that's fair. I think that we're -- obviously, as was pointed out, we saw a little bit of pressure over the course of 2017. As we move into 2018, our intent will be to move back, gradually back up towards -- from the mid- to the high-teens.

We have no further questions at this time. I will now turn the call back over to Bill Pitts for closing remarks.

Thank you, Kelly. We'd like to thank all of you for joining us this morning. And we look forward to speaking with you next in February with our fourth quarter 2017 earnings call.

Kelly, we will now conclude today's call. Thank you.

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