Barnes Group Inc. (B) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Barnes Group First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today Bill Pitts, Director of Investor Relations. Please go ahead.
Bill Pitts: Thank you, Megan. Good morning everyone and thank you for joining us for the first quarter 2021 earnings call. With me are Barnes Group's President and Chief Executive Officer, Patrick Dempsey; and Vice President, Controller, and Interim Chief Financial Officer, Marian Acker.
Patrick Dempsey: Thank you, Bill and good morning everyone. Barnes Group delivered a very good quarter to begin 2021 and with the recovery we had anticipated to occur later in the year, starting a little earlier than expected. Strong order intake continuing sequential revenue growth now for the third consecutive quarter and better-than-expected earnings performance add confidence to our view that the second half of the year will show meaningful recovery progress. For the first quarter, organic sales were down 10% compared to a year ago as a result of lower volumes at Aerospace. However, our industrial segment generated high single-digit organic growth which was better than our February expectation given solid orders and sales in March. While we previously envisioned business improving as the year progressed now with the stronger momentum exiting the first quarter, we have increased our outlook for the year. Earnings per share were $0.38, down 46% from last year's adjusted $0.71, though firmly exceeding the high end of our February expectation.
Marian Acker: Thank you, Patrick, and good morning, everyone. Let me begin with highlights of our first quarter results on slide 4 of our supplement. First quarter sales were $302 million, down 9% from the prior year period with organic sales declining 10% as ongoing impacts from the pandemic offset our aerospace end markets. The divested Seeger business had a negative impact of 2% on sales while FX had a positive impact of 3%. Operating income was $32.4 million versus $49.3 million a year ago, compared to last year's adjusted operating income of $51.7 million the first quarter was down 37% and operating margin of 10.7% decreased 490 bps from last year's adjusted 15.6%. It's important to keep in mind that this result was not unexpected. The first quarter of last year saw Aerospace aftermarket performance -- saw record Aerospace aftermarket performance, which generated very strong margins. Interest expense was $3.9 million, a decrease of $400,000 as a result of lower average borrowings offset in part by a higher average interest rate. For the quarter, our effective tax rate was 28.1% lower than last year's 31.5% tax rate. The decrease is largely due to the absence of tax expense related to the completed sale of the Seeger business and a reduction of the statutory tax rate at one of our international operations. Both of which occurred in the first quarter of 2020.
Operator: . Your first question is from Christopher Glynn with Oppenheimer. Your line is open.
Christopher Glynn: Thank you. Good morning.
Patrick Dempsey : Good morning, Chris.
Christopher Glynn: I think a little deleverage industrial margins sequentially probably restoration of incentive comp I guess. But aerospace had almost 2x sequential leverage. Just curious what the kind of moving pieces sequentially are in the aerospace margin?
Patrick Dempsey : Chris, the -- between the two businesses as you saw we had some continuing nice improvement sequentially, whilst a little bit more subdued in aero nice high single-digit growth in industrial. The margin side of the equation effectively both businesses have taken significant actions in the last year with a view to managing the costs of the business. At the same time, we've continued to make very key strategic investments with a view to the longer-term and a clear focus on returning to organic growth. So with respect to Industrial, it has taken on a little bit more of the costs of the innovation efforts that we're experiencing as well as has beefed up its go-to-market strategy with a view to adding additional talent to the sales and marketing organization. With that on the Aerospace side, the team has done an outstanding job, I would say, in terms of managing costs very judiciously throughout the last year. And now, as they move forward, they're going to continue to be very disciplined in that approach. There is a slight shift also with respect to allocations from a total sales perspective. And so with one segment down and the other up, you get -- there's a small shift there as well.
Christopher Glynn: Okay. Thanks for that. And nice job holding leverage as the first quarter rolls off and you hinted at capital flexibility. Curious, what kind of multiples you're seeing in entertaining in the acquisition pipeline?
Patrick Dempsey: Well, one thing we haven't done for the whole year of the pandemic has -- have -- is we have not taken our eye off the ball relative to M&A. And so, we've been very aggressively continuing to look at opportunities, continuing to be diligent in terms of our research. And yet, I would say that, in some of the end markets, they've gotten a little frothy in terms of valuations. And so, we've said disciplined in terms of our position on expectations for returns for any potential acquisition we might do. The team is one thing that has changed, I think, even more significantly in the last year, versus the enthusiasm of each one of the businesses to become even more aggressive, if you like, in terms of looking at opportunities in their end markets. We've made significant investments over the last year in terms of organic opportunities and we announced, as an example, the launch of our vacuum technology. Our Molding Solutions business right now is expanding significantly into a new sector of the medical market. And those -- so our focus continues to be organic growth in the short term, but M&A, we're keeping front and center, just watching carefully in terms of the dynamics of that market.
Christopher Glynn: Thanks, Patrick.
Patrick Dempsey: Thank you, Chris.
Operator: Your next question is from Pete Skibitski with Alembic Global. Your line is open.
Pete Skibitski: Hey. Good morning, Patrick and Marian and Bill, a nice quarter guys.
Patrick Dempsey: Thank you, Pete. Thank you.
Pete Skibitski: Hey. Just a follow-up to Chris' question on the margin, particularly the aerospace margin. So it sounds like you're saying cost takeout benefited the first quarter at aerospace and maybe some corporate allocation shift. But that the guidance implies, you're going to kind of be flat to down the balance of the year, margin-wise, at Aerospace. So is there -- I would think, mix shift will be better-for-you the rest of the year, but is there something I'm missing, as to why it would be kind of flat to down the balance of the year?
Patrick Dempsey: No. I think, in general, the Aerospace team are continuing to look at every opportunity to expand margins. Our guidance at the 13% for Aerospace could shift significantly depending on the recovery of aftermarket. As indicated, we do expect that as vaccinations take hold and passenger traffic improves, that aftermarket will be the first to benefit. That said, we are probably prudently been a little conservative with respect to the rate of which the aftermarket come back -- comes back is uncertain. But as you know, aftermarket is a big driver of profitability into the aerospace business, whilst at the same time, we're optimistic that we have a good line of sight to the OEM side of the business for the full year, because orders there have started to stabilize. And as you saw, we just announced the new win with respect to the defense side of our business with the B2 Bomber from Northrop Grumman. So team is doing a really nice job. We're guiding to the 13% in terms of margin. But depending on how the year progresses, there might be upside there, but I think we're prudent in what we’re guiding towards.
Pete Skibitski: Okay. No, I appreciate the color. And let me ask a top level question about Europe. I feel like maybe a lot of people have been worried about your presence in Europe with Industrial, because of COVID seems to be kind of lingering over there. So are you guys just not experiencing really any work for issues in Europe with regard to COVID, or any other kind of cohort related manufacturing delays or customer issues? It's maybe, I guess, better than maybe people might think?
Patrick Dempsey: Well, it's a great point, Pete. And what I would highlight is that, the team in Europe, particularly, and across all of Barnes Group, right from the onset of this pandemic, first and foremost, what we put at the center was top priority, the safety of our employees. And I think that discipline has remained throughout. So, as you know and we all know, Europe has had its fair share of challenges, no different than the rest of the world. But the teams -- we've remained operational throughout the entire pandemic in our European operations. And nowhere has that been more complementary than to Italy, with the pressure that it came under initially at the onset of the pandemic and the team there did a magnificent job managing and protecting our employees while keeping the operations moving forward. We have – Europe has been a little bit of a bright spot for us in the context of orders, and you see our orders coming through very strong in the industrial business. And Europe has been a – our European business have been a big driver of that.
Pete Skibitski: That's great. I appreciate it. Last one for me. I think I might have asked you this on the last call, but I continue to be kind of fascinated with the downturn – the historic downturn Aerospace has gone through. And I think you continue to see business models kind of disrupted or at least altered in a lot of different cases, whether it be OEM or particularly aftermarket I think, are you guys seeing any ability to really kind of step into good opportunities there to gain share, because of the disruptions that we've seen? Is it still too early, or I'm just was wondering, if I can get some color on how you're seeing the industry and the opportunities out there post downturn.
Patrick Dempsey: No another great point. And I would say that, one thing I give our Aerospace team credit for is that, throughout this pandemic and as brutal as it has been in terms of a downturn on the industry. Our team has not sat on their hands. They've actually looked at it from a really proactive perspective with a view to looking for where those opportunities might be in terms of positioning for the future. We just had a grand opening of an extension on our Westchester Ohio facility, which is primarily aftermarket related. The extension was connected to, which was – is focused squarely on expanding our capabilities and being ready for the return of the industry. The team has also as I mentioned, we had a great announcement of a $30 plus million order for the B2 bomber, which is – and again, I think exemplifies the unique capabilities that the aerospace team have in terms of super plastic forming, hot forming, cold forming on fabrications business. And so what they're doing is picking their spots being very deliberate. We are – one position we took throughout this entire crisis was hold your customers closer than ever because in a crisis there will always be opportunity. And so those dialogues continue daily. And as we sit here today, we remain optimistic that we will come out stronger and gain share in particular areas.
Pete Skibitski: Okay. Thanks so much, guys.
Patrick Dempsey: Thank you, Pete.
Operator: Your next question is from Matt Summerville with D.A. Davidson. Your line is open.
Matt Summerville: Thanks. A couple of questions. First on the Molding Solutions business can we maybe go a layer deeper? Can you delineate what you saw on the hot runner side of the business versus the mold side in terms of organic revenue and orders in the quarter, please?
Patrick Dempsey: So within Molding Solutions, the organic orders overall were 35%. And then as I look at the breakdown of that Horner, again, is split between both our mall business and our automotive end markets and the mall business being, primarily against personal care packaging and medical. With respect to the – I don't have exact breakdowns relative to malls versus hart runners. But I do – I can indicate that, you were – we were in the 25% plus range of organic orders against each of those end markets, I just mentioned, which is a combination of molds and hot runners in terms of medical personal care and packaging automotive is predominantly hard runners.
Matt Summerville: Got it. And then can you maybe speak to the order cadence you experienced in industrial? It sounded like March was markedly better than January and February. Can you maybe put a finer point on that?
Patrick Dempsey: Yeah, we did see a nice – a stronger March than I think we had anticipated and with that it's been a key enabler to us and giving us confidence in terms of up in our guidance for the year. What the team has done. And two things are happening, I believe in terms of our industrial business in general. One is that, the team has taken a much stronger position in terms of it's go-to-market strategy. And then also of course markets are rebounding. I'd like to think that obviously we're benefiting from a stronger set of end markets, but more importantly, I think are the efforts and the focus that has gone into the sales and marketing initiatives all of which have emanated from the enterprise system, our enterprise system in terms of commercial excellence. And so Steve Mole, on the industrial side has been driving a very significant focus around driving growth, driving funnel creation, driving our penetration into certain markets and looking at adjacent markets to where we can expand our capabilities. So there's a multitude of factors. But in general, we entered into 2021 in January with some nice momentum after strong orders in industrial in Q4. And we've just built on that coming into Q1 with each month demonstrating further improvement with March being the strongest.
Matt Summerville: And then just lastly and I think I may have missed it in the prepared remarks. Did you make a comment around what you see as the first half second half earnings sort of cadence or split for the company please?
Patrick Dempsey: Yes. We made a reference to the fact that 43 57 split now between the first half and the second half in terms of EPS.
Matt Summerville: Great. Thank you Patrick.
Patrick Dempsey: Thank you, Matt.
Operator: Our next question is from Michael Ciarmoli with Truist Securities. Your line is open.
Unidentified Analyst: This is on for Mike. Thanks for taking my question.
Patrick Dempsey: Good morning.
Unidentified Analyst: On raw material costs are there any specific materials you can call out that's driving the cost inflation? And just in general to what extent are you able to pass raw material costs through in pricing?
Patrick Dempsey: Yes. It's an area that has been a key focus for us in the first quarter. And actually in 2020 we anticipated through the playbook that we usually execute against in terms of any downturn. What it is that are going to be the first things to raise as issues in a rebound and material, freight or always there front and center. So the material in particular that we've seen a pressure on in terms of inflation has been stale into some of our manufacturing facilities. There what we saw is twofold. One is inflationary pressures. But secondly, then the expansion of lead times. And so the teams are addressing that on board ends. Relative to your question about pass-through then to our end customers, I think that has been addressed very proactively by the team on a case-by-case basis. It's not by any means 100% pass-through, but the teams are working it every day with a view to wherever there's an opener in a particular contract or whether the -- it's a PO to PO then it allows itself to greater flexibility.
Unidentified Analyst: Thanks. And then on Aerospace could you provide some color on what you're seeing from customers in the engine aftermarket business? Just what are you seeing in terms of shop visits or order activity? And is demand there trending any better than what you'd expected that of last quarter?
Patrick Dempsey: Well the one area that's relative to our Aerospace business that is a glimmer of hope relative to a continued improvement, our sequential sales for aerospace was up 2% quarter over -- from quarter-to-quarter Q4 to Q1. Within that 2%, the primary driver was MRO which was up low double digits. So that's a positive. And yet something that I would say has been somewhat sporadic. So it hasn't been linear in any shape. And as a result we remain cautiously optimistic. Of course as I mentioned the driver will continue to be the adoption rate of vaccinations. I traveled myself this week and I will tell you that I was pleasantly surprised just from the volumes going through the airports, and so that again I think remains positive. I think people are enthusiastic to get back traveling. And so again why I -- looking out to the second half of the year, we are optimistic that the aftermarket will take hold a little stronger. Recognize that our aftermarket business particularly our spare parts and our CRP programs, our narrow body for the most part driven. And so as activity picks up domestically most of that activity is coming off of narrow-body aircraft which in turn benefits our spares program and our repair programs.
Unidentified Analyst: All right. Thanks a lot. That’s all for me.
Patrick Dempsey: Thank you.
Operator: Your next question is from Myles Walton with UBS. Your line is open.
Lou Raffetto: Good morning. It's Lou Raffetto on for Myles. So how are you Patrick, Marian?
Patrick Dempsey: Good Lou. Thank you. How are you, Lou?
Lou Raffetto: Excellent. So let me say, I guess industrial growth, you sort of cover this well make sure, the raise for the year seems like it was greater than the outperformance in the first quarter. So is that just I think what you talked about before sort of the trend into March and maybe continuing into April? Is it based on orders? And then how are you hedging because it doesn't sound like a whole lot for some of this slowness you expect in the first and second quarter within EC. You're kind of expecting it to all just come back in the second half I guess?
Patrick Dempsey: Yes. The – our enthusiasm relative to the first quarter was that we had expected a slower start to the year. And then we had always anticipated gradual improvement each quarter as the year progressed. What we saw was a stronger start out of the gate in Q1 than even we had expected, I would argue back in February. And so to that end, we – the up in guidance for the full year was a combination of the base in Q1 with some additional outlook for the full year in terms of the strength we've seen in some of our end markets. Also would highlight the strength in the orders that we received in Q1. Our apps – our true performance in the quarter was solid. But more importantly, I think is the order strength that we've seen the building – which built up backlog as well with into some of our higher-margin businesses.
Lou Raffetto: Okay. Great. Thank you. And then just on cash flow. I guess, I know again above 100% that leaves a big range I guess realistically. So do you see possibility for cash to be up year-over-year? I don't know how much opportunity – additional opportunity you have in working capital. So just curious your thoughts there?
Marian Acker: Yes. So this is Marian. So we're always looking at opportunity in working capital. We talked a little bit about the longer lead times in the supply chain matters, we're addressing. So it puts a little bit more pressure on the inventory but – but yes, we continue to focus on working capital. As far as the cash conversion, we're looking at over 100% is where we're guiding to come out.
Lou Raffetto: Okay. Great. Thank you very much.
Patrick Dempsey: Thanks, Lou.
Operator: Your final question is from Christopher Glynn with Oppenheimer. Your line is open. Christopher Glynn, your line is open.
Christopher Glynn: Sorry I was on mute. Just industrial margins. Second and fourth quarter, it looks like you're going to pull about 14% margin for the rest of the year, that's 400 basis points above the first quarter. You talked about a lot of pluses and minuses in the different – or mainly pluses in the different businesses. But was first quarter mix particularly adverse in industrial to afford that step up?
Patrick Dempsey: I would say, first quarter was – it was a strong quarter in terms of industrial performance. But there was some mix in there which dampened it a little below what we might have expected. That said, we did make some – we've been making some large investments into the industrial business, primarily if you recall Chris, last year we announced the launch of our innovation hub and the innovation hubs projects are predominantly and the resources we've added there are to the benefit of industrial in the short term. Of course, we'll see that they will benefit aerospace as well over the longer term. But in the short term it's – those resources are all allocated to industrial. We also, as I mentioned, Matt the reference to we've added resources in terms of sales and marketing in Q1, which we expect to benefit as the year to receive the benefit as the year progresses. The team is squarely focused on margin expansion throughout the year. So your categorization of it is right on the mark. We do expect to see industrial improve each quarter as the year progresses.
Christopher Glynn: Okay. I’ll follow up offline. Thanks.
Patrick Dempsey: Great. Thanks.
Operator: We have no further questions at this time. I turn the call back to Bill Pitts for closing remarks.
Bill Pitts: Thank you, Megan. We would like to thank all of you for joining us this morning and we look forward to speaking with you next on July 30 with our second quarter 2021 earnings call. Operator, we will now conclude today's call.
Operator: This concludes today's conference call. You may now disconnect.
