Barnes Group Inc. (B) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Barnes Group Inc Second 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. Please be advised that today's conference is being recorded. I would now like to turn the conference over to the speaker today, Mr. William Pitts, Director of Investor Relations. Please go ahead, sir.
William Pitts : Thank you, Angie. Good morning, and thank you for joining us for our second quarter 2021 earnings call. With me are Barnes Group's President and Chief Executive Officer, Patrick Dempsey; and newly appointed Senior Vice President and Chief Financial Officer, Julie Streich.
Patrick Dempsey: Thank you, Bill, and good morning, everyone. Continuing with a clear focus on our business recovery, Barnes Group produced another solid quarter of year-over-year and sequential improvement in orders, organic sales, operating margins and earnings. With total backlog at its highest point since the end of 2019, expanding revenue outlook, strengthening Industrial end markets and a progressing Aerospace environment, we feel confident about the prospects for the second half of the year. More importantly, our improving financial results continue to be supported by significant investments in growth initiatives that position us to sustain performance over the long term. In the second quarter, organic sales were up 31%, with sizable gains in both our operating segments. Industrial was particularly strong, while Aerospace continues to build momentum after the significant effects of the pandemic on that industry. Similarly, orders were very good, as we generated a book-to-bill of 1.3 times with Aerospace driving that result. Our total backlog stands at $984 million at quarter end, reflecting a 12% increase from the end of the first quarter. Adjusted operating income and margins were up 41% and 40 bps, respectively. Adjusted earnings per share were $0.45, up 67% from last year, again, really great results by the team.
Julie Streich: Good morning, everyone, and thank you, Patrick, for the warm welcome to Barnes Group. I am happy to be here and look forward to working with you and the leadership team as we accelerate the ongoing transformation of our portfolio. It's an exciting time for Barnes and it's likewise, exciting to be part of crafting the go-forward story.
Operator: Your first question comes from the line of Myles Walton with UBS.
Myles Walton: I was hoping you could touch on the aerospace aftermarket MRO. It sounds like the spares were nicely up sequentially and year-on-year, and that would be sort of consistent with GD spares. But the MRO business itself is always a little bit more challenging to not worry you guys going to come out. Is that lack of expansion sequentially more an indication of competition for MRO activity constraints or just overall market as you see it?
Patrick Dempsey: No, I think it's -- Myles, I think it's basically timing in that we saw our sales slightly down a couple of percent sequentially. However, our orders were up at 4% in the quarter. So what we saw was over the course was a strong May, a little bit of a dip -- a strong April, a little bit of a dip in May and then a strong June, and that's continued into July. So again, it's nothing, I think, more than just the nuances of the -- how products are coming in to the shops and nothing that we see as other than the natural volatility of what's going to happen, I think, over the coming weeks and months. But nonetheless, with an upward trend, and we see aftermarket is just going to continue to grow sequentially quarter-over-quarter as we move through the year.
Myles Walton: Okay. And your full year look for that the MRO outlook for the year, this is baked in, didn't really change, is that right?
Patrick Dempsey: Yes. No, inside of Aerospace, we have a -- our full year MRO was down low single digits, which is consistent with where we started the year. And the primary reason for that, of course, as you recall, was a strong first quarter in 2020. And then also, I'd bring note to the fact that we had a strong April. As the pandemic hit last year, we saw the strength continuing into April, before it tailed off in May. So you had a comp that was pretty tough on a year-over-year basis as well.
Myles Walton: Okay. And then on the supply chain concerns and in particular, the inflation numbers you provided, the $1.5 million in the quarter and then $2 million for the rest of the year, maybe can you just contextualize that how much inflation is that? How much -- maybe how much more than you expected is that? And maybe just some frame of reference around it.
Julie Streich: Sure. Thanks, Myles. And if you might recall from our first quarter call, we had anticipated full year inflation to be closer to $6 million for the year. And now we're backing off of that slightly as a result of what we've been experiencing. So I would say what we've experienced year-to-date is largely in line with expectations, but we're a bit more optimistic going into the second half of the year.
Myles Walton: Okay. And then the only other 1 to bring up is, is on cash flow. And I know you've raised the greater than 100% or greater than 110%. But -- and I heard you on the working capital in the second half. But unless there's a big working capital build, I guess I'm a little unclear why 110% is the right number as opposed to something materially higher than 110% conversion?
Julie Streich: Well, I'm certainly aligned with your line of thinking that we'd love to see something materially higher than 110%. And clearly, we're going to strive to maximize our cash conversion. But as the business rebounds, we do need to be cognizant of some build in working capital and therefore, are comfortable at 110% or greater.
Myles Walton: Okay. So you do anticipate some relatively material level of working capital build or at least are allowing for that to happen in the second half. Is that right?
Julie Streich: Yes.
Operator: Your next question comes from the line of Michael Ciarmoli with Truist Securities.
Michael Ciarmoli: Maybe just look at the margins in both segments. I mean Aerospace took a step down, sequential incrementals, I guess, less than 4%. You had the spares improve, which presumably carries higher-margin than MRO. Can you just give us color on what's happening with the Aerospace margins and kind of how we should be thinking about that?
Patrick Dempsey: Sure. So if you recall, in the first quarter, our operating margin was 13.6%. And then as you noted, we're down 10 bps to 13.5% in the second quarter. The 13.5%, I would suggest, was a better performance than what we had indicated in the first quarter, because we've given full year guidance of 13% for the full year. And the reason that guidance -- we gave that guidance was just some concerns over mix between the rate of which OEM would grow versus aftermarket, obviously, with aftermarket being higher-margin. So with that improvement in the mix, we actually finished the quarter at 13.5% and now have upped our guidance for the year between 13% and 14% for Aerospace. And clearly, depending on the rate of which aftermarket comes back, that number could be significantly improved upon. It totally depends on the rate of which we see aftermarket recovery over the back half of the year.
Michael Ciarmoli: Got it. And I mean, looking at the commentary from GE, from, I mean clearly, if we see the parts pull-through, I mean, that's going to be the bigger lever for you guys than the MRO?
Patrick Dempsey: Yes. Spare Parts clearly is another area that we saw nice sequential improvement and year-over-year in the mid-teens from -- on the Spares side. So that bodes well for a trend that we continue to see improving. And of course, the repair side of the business continues to be a nice margin business as well. And as the engines come into the shops, clearly, we'll see this -- the repair side also improve.
Michael Ciarmoli: Got it. And then just quickly on the Industrial margins. Obviously, some of the items you mentioned from supply chain, inflation related costs, the investment, how should we think about sort of the trajectory of the recovery of these Industrial margins? And I guess, when do you think you guys can kind of really start showing the benefits here? I mean, obviously, once the supply chain raw materials ease a bit, that should help. But the investments, and I guess I'm thinking trending back up those levels you have been kind of mid-teens. Just how should we think about the overall cadence and maybe even when does the investment subside a little bit?
Patrick Dempsey: Yes. It's a great question. And what I would highlight is that if you think about where -- what is weighing right now on our Industrial margins, which is still pretty healthy even as I compare them back to pre-COVID performance. And so I referenced in my prepared remarks that we had seen total sales higher in the quarter in Industrial than we did in Q2 of 2019 before COVID. Our margins are just slightly below that performance in Q2 of 2019 as well, with significant investments being made into the Industrial side of our business. So the areas that we're making those investments are primarily we announced last year, the launch of our Innovation Hub, and that has continued to build momentum into 2021, and we're excited about the opportunities of the key technologies that the team there are developing. Secondly, obviously, personnel costs on a year-over-year basis, particularly as it pertains to incentive comp, where last year was basically 0. This year, obviously, we're seeing the improvement in the business. The inflation is a factor. And I'm pleased -- very pleased with how the team is managing that. And whilst we tried to put some parameters around it, we've built those parameters into our guidance for the full year. And the last thing I just mentioned, and I mentioned it in the first quarter, the way we allocate out to the 2 segments is based on sales. And so Industrial has taken a little bit more of the wage this year with Aero being down, and that will self rectify as well as Aero comes back, and we move forward through the year. So I would just highlight that our goal and our target of mid-teens with Industrial is still very much where the team is focused. And we're looking for Industrial margins to continue to improve sequentially, just with the -- so the underlying margins to improve, the offset being some of the investments we're making.
Michael Ciarmoli: Got it. Julie, just a housekeeping. I think you said, what was interest expense for the year going to shake out to, $16 million?
Julie Streich: Yes, $16 million.
Operator: Our next question comes from the line of Matt Summerville with D.A. Davidson.
Matt Summerville: Maybe just first put a little finer point on what Mike was talking about with Industrial incrementals at 17%, total company at 13%. Given the volume increase you're seeing running through that business, maybe can you parse out -- you mentioned the input cost pressure, $1.5 million, that would get you a little bit higher on an incremental basis, if we were to exclude that. But I guess I'm a little surprised that incremental is materially better than what they are right now. I know you mentioned some growth investments, but can you maybe get a little more granular on what's driving that and how we should think about incrementals in the back half?
Patrick Dempsey: Yes. So the incrementals, as I pointed out, I look at it from -- internally, we look at it from a perspective of the underlying businesses and what the businesses are doing operationally. And there, we remain very confident that we're continuing to see improvement and that incremental flow-through occurring. The areas that I just highlighted, investments in terms of long -- the mid to long term, those investments are the Hub that I highlighted, our Innovation Hub, and we see that as a key strategic initiative for our long term. And that is primarily focused today on the Industrial business, in particular, as it pertains to technology around Molding Solutions, digitalization, and the whole area of how we use our technology to become a major solutions provider in the quest for reducing plastic waste. And so there, as I highlight that, and with the clear opportunity within that industry and in that space, we think we can be a leading provider of what is a breakthrough solution in the future. The digitalization side of things is where we're looking to move our products and services more towards being smart and connected. And there, we have a number of key projects that are working around, again, opportunities to create recurring revenue streams in the future. Again, another investment that we see as key to our future success. And then the last investment that we're making, which I expect to be -- see a return on, in more the short to midterm is strategic sales and marketing. And there, we've added significant resources in terms of talent on the marketing side as well as feet on the street, salespeople to continue to position ourselves for future growth. So they're what's weighing, Matt, on the incremental margins externally and as I mentioned also, if you just parse it out to Industrial, it's clearly a little bit of a shift in the allocations as well.
Matt Summerville: So as I -- well, maybe it might be helpful, Patrick. Within the Industrial business, how much would you say growth related investments are up on a year-on-year basis '21 relative to '20?
Patrick Dempsey: So they're up, I would say, in the $5 million to $10 million range.
Matt Summerville: Okay. Got it. And then as a follow-up, Industrial book-to-bill at 1.0. Given kind of where we're at with the trajectory of the recovery, I'm a little surprised it's not higher, maybe that's some lumpiness in Molding. So can you talk about that a little bit? What SBUs are trending maybe above that? What's trending below that? Maybe just a little more granularity there.
Patrick Dempsey: Well, as you highlight, I think the primary is the Mold side of the business. And as I highlighted in my prepared remarks, we did see a little bit of lumpiness in medical orders in the quarter, which is not surprising or not something that is -- not something we've seen in the past, because from quarter-to-quarter they tend to be a little lumpy. But within Industrial overall, I would suggest that each of the businesses were in that consistent range of about 1 times.
Operator: Next question comes from the line of Pete Skibitski with Alembic Global.
Pete Skibitski: Nice quarter. So just sticking with Industrial, revenue-wise, you grew 42%. So it's kind of hard to ask this question, but we've heard a lot about the chip shortages in the automotive industry and people having planned shutdowns. We've heard about impacting revenue at other firms. So I'm just wondering, have those kind of phenomenon impacted your sales at all so far kind of year-to-date from a revenue perspective in your automotive end markets?
Patrick Dempsey: Yes, they have clearely impacted us, predominantly in the production side, which is within Engineered Components. And what we've seen is, in the second quarter, we saw about a $5 million impact to revenues with an outlook that we've built into our forecast of another $3 million in the third quarter and $1 million in the fourth quarter. So it dampened a little bit the Engineered Components performance. However, I would highlight that the industrial side of Engineered Components has grown from strength to strength, and that has been an offset to some of the dampening effect of the top line on automotive.
Pete Skibitski: Okay. And so it didn't really impact Molding Solutions at all, really, it sounds like more on...
Patrick Dempsey: No, Molding Solutions, primarily driven by the new model launches and the new model changes. And to that end, they saw some nice increased activity in the quarter, particularly, I think, as it pertains to new electric vehicles and the announcements that have been made around that.
Pete Skibitski: Okay. So let me -- next question, let me beat the dead horse a little bit on the Industrial margins. You took down the full year modestly, but even with that, it looks like you're expecting, call it, 14% to 15% type of a margin in Industrial in the second half of the year. And obviously, it seems like volume will be your friend for a while, it seems, like in Industrial. So I'm just wondering that 14% to 15% and not to back you into the corner on 2022. But is that type of range, something that is reasonable to think about for 2022?
Patrick Dempsey: Well, I think we're definitely looking at margins improving over the course of the back half of the year. And I would suggest that it's going to be a combination of volume and internal activities that the teams are driving. So we're looking to see an improvement in margins both from an operational standpoint and the initiatives being driven by the Barnes enterprise system. And then also, obviously, as you mentioned, a little bit of an uplift as a result of volumes. The -- as we move into 2022, I expect, again, that Industrials will continue to improve and build on that momentum back, as you said, and as we continue to communicate with a goal of getting back to mid-teens.
Julie Streich: And since -- to build on what Patrick's saying, since Industrial margins are very much in focus, I would also add that, remember, $12.4 million of the sales increase was driven by FX in quarter, which has virtually no margin drop-through associated with it. So that is another factor contributing to in quarter performance in Industrial.
Pete Skibitski: Okay. That's helpful. And just 1 last question, switching to Aerospace. On the OEM side, a lot of good things there. And Patrick, I would think that the strong OEM results in Aerospace is -- I would think you're having some headwind on the 787 program. I would think that not much is going on for you on that program at the current time.
Patrick Dempsey: That's correct. I'd say we're at -- we're seeing clearly lower volumes as it pertains to most of the wide-body platforms. And what's driving our activity at the moment is all narrow-body and particularly the LEAP program.
Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer.
Christopher Glynn: So I was curious, the Spares outlook remains down mid teens, but you did up mid-teens in the second quarter and look at a sequential increase. It seems like that trend line would kind of eat up the big down in the first quarter, more than the outlook. So just curious about the arithmetic there.
Patrick Dempsey: Well, the -- as you highlight, there may be some conservatism inside of the outlook for aftermarket. But it is something that is going to continue to be driven by air traffic. And moreover, I think the dynamics of the airlines and how they're managing cash. So there are a number of factors in play, but clearly, domestic travel here in the U.S. has seen a marked improvement, and everybody is pleased about that. Also, within, I'd say, Asia, particularly China, a marked improvement in passenger traffic. The little bit of a laggard has been Europe, and I think that also stands to be an upside in the event that the Europeans and the vaccinations roll out a little quicker there. So all in, Chris, we see sequential improvement in MRO and in Spares through the back half of the year. The question is, how much we gauged the rate of that increase, and I think we've reflected it in the guidance accordingly.
Christopher Glynn: Okay. Yes, I think the comps actually get a little easier, but I'll revisit my notes. And then on MRO or spares there, I'm wondering if you run into any periodic pockets of inventory that are causing some of the volatility. Any idea how that spares channel in front of you is situated?
Patrick Dempsey: Yes. Well, clearly, what happened over the course of the pandemic was with a view to conserving cash, the airlines did everything within their power to bleed down inventories. And to that end, that all bodes well, I think, in that they're going to -- they reach -- they haven't reached it already in the first quarter or the second quarter the point of where the restocking. And so that, I think, is something that is another positive outlook on the aftermarket side of the house, as well as they've run probably a lot of what's known as green time engines, which they've allowed them to defer maintenance. I think they're going to run to the end of that and require to -- be required to pull the engines back into the shops as well.
Christopher Glynn: Switching to industrial. You said automation orders were up well into the double digits. Curious, can we get a little more specific on what the orders did there, sort of a state of play on that Gimatic acquisition, the operations and the pipeline around that, both in organic and organic?
Patrick Dempsey: Sure. So I said it was well up into the double digits, just to put a number on that. It was up north of 70% in terms of organic orders and up north of approximately 60% organically in terms of sales. So just a super strong quarter. And actually, I would highlight a record quarter within Gimatic in the history of the company. So just a very strong all around performance by the team there. And of course, that's been driven, I think, in part by virtue of the Industrial sector wakening up to some of the vulnerabilities in a pandemic and a shift towards more automation and robotics to complement existing workforces. And so that's driven demand across each of the end markets into Q2, and we expect that to continue on a healthy trend going forward.
Christopher Glynn: Sounds great. I missed the updated industrial margin, if you could repeat that?
Patrick Dempsey: Yes. For the full year, we guided 12% to 13%.
Operator: At this time, there are no further questions. I would like to turn the conference back to Mr. Pitts for any additional or closing remarks.
William Pitts: Thank you, Angie. We would like to thank all of you for joining us this morning, and we look forward to speaking with you next on October 29, with our third quarter 2021 earnings call. Angie will now conclude today's call.
Operator: Thank you for participating in today's conference call. You may now disconnect your lines at this time.
