Q1 2020 Earnings Call
He turned 20 earnings conference call and webcast.
Time, all participants are in listen only mode. After the speakers presentation will be a question and answer session to ask a question during the second only to press star one on your telephone if you require any further assistance. Please press star zero I'd now like to hand, the conference over to your speaker today doping. Please go ahead.
Thank you Marcellus.
Good morning, and thank you for joining us for our first quarter 2020 earnings call.
With me are Barnes group's president and Chief Executive Officer, Patrick Dempsey.
In senior Vice President Finance, and Chief Financial Officer, Chris Stevens.
If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate web site at BG I N C Dot 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 it's helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with that see see regulations.
You will find a reconciliation table on our website and as part of a press release in the form 8-K submitted to the Securities and Exchange Commission.
Be advised that certain statements, we make on todays call. Both during the opening remarks and during the question and answer session. Maybe forward looking statement 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 in are described in our periodic filings with the FCC.
These filings are available through the Investor Relations section of our corporate web site at BG Orient Si Dot com.
Let me now turn the call over to Patrick for opening remarks.
And Chris will provide a review of our financial results after that we'll open up the cold for questions Patrick.
Thank you Bill and good morning, everyone.
For the first quarter Barnes group's performance exceeded expectations shared with you on our February call driven by record performance in our aerospace aftermarket business.
Well the total sales ended a little lighter done a forecast.
Adjusted operating profit and margin more better.
The achieved results in the face of significant uncertainty.
Global Cobot 19 challenge demonstrates the benefits of our transform business portfolio and our strong leadership team.
Who took and continue to take proactive often difficult actions for managed Trudy ongoing crisis.
To start Twentytwenty first quarter sales decreased 12%.
Organic sales down 8%.
Adjusted operating income decreased 5% compared to last year, well adjusted operating margin improved 110 basis points to 15.6%.
Physician into businesses for the lower first quarter sales expectation allowed us to proactively manage cost and the liberty improved margin.
Adjusted earnings per share were 71 cents unchanged from a year ago.
That's a company given the magnitude of the disruption from the Corona virus, we delivered solid first quarter performance. However, as you would expect the subject of most interest does not necessarily what happened in the quarter, but rather where to current business environment Stan.
As such my discussion today will focus primarily on where we are versus what we accomplished in the quarter.
I believe it is important to let you know how we see our businesses and end markets progressing from here.
The actions, we're taking to adapt.
Likewise, while providing the customary color on the quarter's financial performance.
Later in the call Chris will discuss in much greater detail unusual our liquidity position and capital priorities.
Relative to the current environment, let me begin by saying that the majority of Barnes group's manufacturing facilities around the globe currently operating.
Albeit at reduced levels.
Appliance manufacturer essentially components and systems for several end markets some of which are directly engaged in to fight against cobot 19.
In keeping all facilities open to provide these essential services.
Primary concern is the safety and well being of our employees and their families.
Our customers and ore suppliers.
To that and we've instituted many additional precautions to protect them, including enhanced deep cleaning staggered shifts temperature checking use of face masks practicing social distancing and limiting non employees at our locations amongst other steps.
Most of our office workers in our manufacturing facilities as well as the corporate and segment headquarters are also working remotely where possible.
Additionally, we've undertaken many aggressive steps to better manage costs in concert with the current environment.
While incredibly difficult these actions are necessary to position the company to manage true to crisis.
To best position us for recovery.
These actions include but are not limited to temporary reductions in compensation for all salaried employees.
Including company officers on Board Directors employee Furloughs short work weeks and reduction of discretionary expenses.
With respect to our global supply chain, our procurement team continues to monitor and manage our ability to operate effectively.
Todays we have not experienced any significant disruptions. So we are constantly maintaining ongoing discussions with our suppliers to identify and mitigate risks.
Let's now move to a discussion of what's happening within our segments beginning with industrial.
Challenging end markets fueled mostly by the cobot 19 pandemic have significantly impacted first quarter order intake and subsequently have reduced our expectations for twentytwenty.
Manufacturing PMI, so faded into contraction territory for North America in Europe, with China, just flowing back to a neutral 50.
Many automotive manufacturing plants in most geographies have been or remain closed.
With China, just beginning to restart production.
And given customer self imposed capital investment restrictions on lower production levels.
General industrial markets remain soft.
One bright spot remains our medical end markets, which have remained strong throughout this time period.
With that backdrop industrials book to Bill was just under one times into first quarter.
At molding solutions.
Team delivered performance, which was better than our previous expectations.
As we noted in our February call, we forecasted first quarter shipments would be lower than last year, an organic sales declined 6% slightly better than what we had anticipated.
For our automotive Hot runner business, we saw a weak first quarter in Asia due to cold at 19, but expect to see a pickup there are beginning in the second quarter.
In North America, Twentytwenty was off to a respectable start and quoting activity was good.
However, given the suspension of auto manufacturing mid quarter, we saw the corresponding disruption.
Impact orders.
European markets remained very slow due to the closure of OEM and tier one suppliers.
So the onset of a restart has already begun.
With respect to our multi cavity mold his business quoting activity has been high however, due to existing uncertainties. Many customers have put their capital spending on hold leading to the deferral of new projects.
This behavior has served to further extend weakness, we'd already being seen in personal care and packaging demand.
As mentioned, our medical mold systems continue to see heightened interest.
At for some motion control organic sales declined approximately 20% a sheet metal forming end markets, primarily auto and industrial related were impacted by the customer suspended or reduced operations and deferred or canceled new programs.
In the quarter sales in China, and Europe were particularly hard hit.
Moving to engineered components.
Organic sales declined 16% driven by lingering weakness in auto production and the onset of the cobot 19 pandemic.
The engineered components management team has been very proactive in managing costs and addressing the fallout from the pandemic.
Im wonder still more work to be done the team has been making solid progress adjusting to the lower demand.
In our automation business. It was a relatively good story in the first quarter posting positive organic sales growth of 4%.
This business is seen favorable trends and medical and pharmaceutical end markets and signs of stabilization in food packaging.
Both of which are targeted growth markets.
Not unlike our other industrial businesses.
Challenges in automotive end markets trusses.
All in a mix story for industrial end markets with a larger end markets under considerable pressure heading into the second quarter.
As we think about how things may progress through through the year, it's important to keep in mind that in the current environment, it's extremely difficult to make definitive calls on the pace of recovery.
Across industrial we anticipate a poor second quarter, followed by gradual recovery as many of our customers come back online.
For general Industrial markets, we expect manufacturing PMI is for Asia, North America to improve.
And help lift sales in our engineered components for some motion control businesses.
With auto manufacturers restarting production, we expect to see it turn towards sequential improvement across our broader component on hot runner end markets.
Medical end markets have been good and we don't envision as a change there.
We expect automation to benefit from global economic stabilization and the release of delayed projects by its customers.
Across the segment, we forecast sequential improvement from Q2 two Q3.
And then again from Q3 Q4.
However, we do anticipate year over year organic sales declines in each quarter.
Moving now to our aerospace business.
All things considered aerospace delivered a very good first quarter with improved operating profit and margin on slightly reduced sales.
Total aerospace sales were down 2% with OEM down 7% versus a year ago, driven by lower shipments related to the Boeing 737 Max.
Aftermarket sales were up 8% with both MRO and spare parts seen similar growth.
Due to the strong aftermarket contribution aerospace operating margin of 23.9% was a record performance.
Aerospace OEM backlog ended the quarter at 703 million down 12% from the end of 2019.
We expect backlog to be impacted by the industry is evolving production schedules with net orders highly variable until that uncertainty settles.
As a result.
Backlog may ultimately settled below the quarter end level.
Aerosmith performance has been very strong over the last few years benefiting from a favorable OEM and aftermarket is an excellent performance from our aerospace team.
However, with the global Cobot 19, pandemic aerospace markets of commander immediately intense pressure.
We anticipate our OEM business to see the impact of lower aircraft demand and production cuts a Boeing and Airbus.
In the aftermarket some substantial reductions in aircraft utilization growing levels of parked aircraft and reduce the airline profitability are expected to impact our business for some time to come.
There is no doubt the aerospace industry is in unchartered territory, we did duration and depth of the disruption not totally clear at the present time.
That said I have full confidence that our aerospace team will adapt the as necessary to deal with whatever challenges the industry faces as we move forward.
Before wrapping up I.
I would like to take a moment to highlight several of the many ways that Barnes group's employees are actively engaged in to covert 19 fight should the many products we manufacture.
Across industrial our manufacturing capabilities in plastic injection molding metal forming specialty springs. Another component parts are being used in a variety of medical applications.
Examples include blood testing devices medical dispensing equipment ventilators oxygen masks and test kits to name just a few.
Our board industrial and aerospace are additive manufacturing capabilities have been employed to produce critical PE parts, such as the frames used to make face masks.
On behalf of bold Barnes group's employees I want to express our sincere thanks to all the medical staff on the front lines of the pandemic.
So to conclude we are unquestionably in a different place since situation than what we all had envisioned twentytwenty would look like.
As we addressed the realities of today, our primary concern remains the wellbeing of our employees suppliers and customers. We appreciate all their collective efforts during this time.
From a business standpoint, we've taken aggressive a necessary actions to adjust our costs and true to disciplined application of the Barnes enterprise system, we continue to adapt to the structural changes taking place in some of our end markets.
Our focus on driving commercial financial and operational excellence is as important as ever.
At the same time, we've continued to make the necessary investments in our future.
By moving forward on our innovation and research and development efforts.
Despite current challenges I have every confidence that the Bernstein will overcome this crisis as we've done so many times before over our long 163 year history.
When we get to the other side of this pandemic.
I anticipate Barnes group will be in an even stronger position to compete in its markets and profitably grow once again.
Now, let me turn the call over to Chris for a discussion on the financial details.
Thank you Patrick and good morning, everyone.
Let me begin with highlights of our 2021st quarter results for the first quarter sales were 331 million.
Down 12% from the prior year period.
With their organic sales declining 8%.
The divestiture of the Seeger business had a negative impact on sales of 3%, while FX had a negative impact of 1%.
Operating income was 49.3 million as compared to 50.6 million in last year's first quarter.
On an adjusted basis, which for 2020 excludes 2.4 million of Sigurd divestiture adjustments.
And for 2019 excludes 4 million of dramatic short term purchase accounting adjustments.
Operating income was 51.7 million a decrease of 5% from $54.6 million in the prior year period.
Adjusted operating margin was 15.6% up 110 basis points.
Interest expense decreased 800000 to 4.3 million primarily from a decrease in average borrowings outstanding.
And a lower average interest rate.
The company's effective tax rate for the first quarter of 2020 was 31.5%.
Compared with 23.4% for the full year 2019.
The increase in the first quarter effective tax rate from 29 teams rate is primarily due to the recognition of tax expense related to the Seeger divestiture.
Partially offset by a benefit related to a refund withholding taxes and a reduction of a statutory tax rate had one of our international operations.
Net income for the first quarter was 58 cents per diluted share compared to 65 cents a year ago.
On adjusted basis net income per share was 71 cents unchanged from last year.
Adjusted net income per diluted share in the first quarter excludes 13 cents of Seeger divestiture adjustments.
Well last year excludes six cents of dramatic short term purchase accounting adjustments.
Let's now move to our segment performance beginning with industrial.
First quarter sales were 199 million down 18% from a year ago organic sales decreased 12% primarily related to volume declines in certain of our end markets.
The impact of Cobot, 19, pandemic and the absence of unfavorable 2.6 million commercial settlement of a patent related matter in last year's first quarter.
So your divested revenues had a negative impact of 4%, while unfavorable FX decreased sales by 2%.
Operating profit in the first quarter declined 17% to 17.9 million.
With the decrease driven by lower sales volumes.
The absence of last year's commercial settlement and Seeger divestiture adjustments.
As a partial offset cost productivity and the non recurrence of dramatic short term purchase accounting adjustments recorded last year were favorable factors.
Excluding the just referenced Seeger adjustments this year and dramatic adjustments last year adjusted operating margin.
Just operating profit was 20.3 million versus 24 to 5.5 million a year ago.
Adjusted operating margin was 10.2% down 30 basis points.
At Aerospace sales were 130 to 132 million down to 2% from last year OEM sales decreased 7%, primarily due to the lower shipments related to the Boeing seven to seven Max while aftermarket sales increased 8%.
Operating profit was 31.4 million up 8%, primarily reflecting the profit impact of higher aftermarket volumes.
The favorable aftermarket mix operating margins improved 220 basis points to 23.9%.
Operating margin was a quarterly record however, as Patrick mentioned, we anticipate challenges going forward in aerospace as a result of the cobot 19 disruption.
Cash provided by operating activities was 47 million down approximately $6 million from last year's first quarter.
Well free cash flow was 35 million versus $39 million last year.
Capex of 12 million.
Was down about 2 million from from a year ago.
With respect to the balance sheet, our debt to EBITDA ratio was 2.4 times at quarter end.
Unchanged from December 2019 level.
Barnes group has liquidity of approximately 430 million consistent consisting of 110 million in cash and 320 million of Undrawn revolving credit facility.
We have not drawn further on our credit lines to secure cash nor do we have current plans to do so.
As the availability of these funds are not believed to be at risk.
The company is in full compliance with all covenants under the revolving credit facility, which matures in February 2020 2022.
We maintain open lines of communication with our banks and we will continue to monitor the credit landscape and the company's cash needs.
Our first quarter average diluted shares outstanding was 51.5 million shares.
During the quarter under a pre existing Tenbfive one plan, we repurchased 396000 shares.
At a cost of 15.5 million.
With the full execution over Tenbfive, one plan, we have now suspended share repurchase activity.
While there remains 3.7 million shares available for repurchase under the Board's 2019 stock repurchase authorization.
We do not have an expectation for one share repurchases will recommence.
With respect to our customer annual outlook highlighted.
Heightened levels of uncertainty in the current environment make it difficult to forecast performance with any reasonable precision.
Accordingly, we continue to continue to spend our full year 2020 outlook.
When the debt depth to the destruction and the pace of recovery in our critical end markets become clear, we will reiterate our full year outlook.
Related to that uncertainty the company has decided to postpone its planned fall 2020 Investor day until next year.
We'll look to provide further details of the rescheduled event at a later time.
However, even with limited visibility, we do anticipate a challenging second quarter significantly impacted by the cobot 19 pandemic.
Our best view at the current time is that organic sales will be lower than last year's second quarter by approximately 30%.
Operating margin is forecasted to be between eight and a half and 10%.
Adjusted earnings per share for the second quarter, our intests anticipated to be in the range of 20 cents to 30 cents.
With respect to capital priorities in the current environment.
The company has a well positioned balance sheet with reasonable leverage Nonetheless, proactive management of our cost structure will continue.
We'll continue to invest in our business, though anticipate 2020 capital expenditures of approximately 45 million lower than the 55 million average annual spending over the past few years.
Well in acquisition or divestiture in the near term is unlikely given the current business environment. We continue to analyze potential acquisition targets and end markets that meet our strategic criteria with an emphasis on proprietary highly engineered industrial technologies.
At present, our quarterly dividend remains unchanged. However, if the economic disruption intensifies or last deep into the year. The board would consider a dividend change.
To close I'd Echo Patrick's comments, while the first quarter results were generally better than our expectation.
The challenge now is to continue to effectively whether the global disruption caused by cobot 19.
For Barnes group, while our balance sheet and liquidity profile are in good standing will focus on the judicial use of our cash.
As heightened as highlighted several actions have been taken and others will be taken as conditions dictate.
Well look to effectively manage working capital, especially inventory.
Where the tradeoff between building inventory and potential future supply chain or interruptions will be closely manage.
Capex will be focused on maintaining our operations and ensuring we're positioned to take advantage of an eventual recovery.
Operator, we will now open the call to questions.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Your first question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Thank you good good morning and.
Good luck here the next few quarters it looks like your.
So in a lot of work done on the margins here.
I was curious about the behavior of the aftermarket deck tend to like hit a wall to four weeks ago or has it been kind of progressive Lee.
Creeping in.
Unless you've mentioned, Chris clearly aftermarket will will definitely see the impact of what's occurring right now and airline industry, our experience and through the first quarter was.
You know a pleasant surprise in terms of is holding up as well as it did and as you know.
From the call are from the script, we actually.
Cheves record operating margins in the quarter as a result of aftermarket what we've seen in the last couple of weeks is a significant slowdown.
In terms of input of orders.
One.
Our major customers.
Across the board have basically turned off the spigot in terms of their cost controls.
And definitely with parked aircraft right now airlines are just looking to conserve cash in every way possible and so it's flowing through and we expect that to be.
Significant in the second quarter.
Okay and.
Yes, how do you see the.
We side rolling and that slowdown.
And Thats, a little more progressive just because it takes a little little more cycle time to slowdown.
Kind of characterize what you're seeing there.
Which side.
Oems OEM sorry.
Sorry, yeah definitely with OEM, it's a longer cycle business. So adjustments there are more gradual as you as you noted and to that end, while we're doing right now is communicate and daily with all of our large OE customers.
As you know from just the public arena some of the.
Our airline our aircraft manufacturers Airbus have been pretty vocal in terms of what their indicating the potential future rates was up this on the other side Boeing has been a little bit more muted.
All in what we're doing is of course is keeping very close.
Correct with the engine always to understand how they are anticipating then.
Adjusting their schedules relative to the coming year.
To that end, what I would say is that thing definitely.
Significant pulled back we're seeing tremendous volatility in terms of the order intake and the runs add that are occurring across the board and so again Q2, we anticipate a.
Slowdown not as significant as aftermarket ours and media as aftermarket, but nonetheless preparing for lower demand Q2 and through the rest of the year.
Thanks.
Thank you thanks, Chris.
Your next question comes from the line of Myles Walton from.
Your line is open.
Okay. Thanks, Thanks, and good morning.
Morning, Patrick from Us.
Chris maybe you can start with.
Anymore color on the shape of the two end markets in that 30% decline in the second quarter and then Conversely, with the the comment about recovery in Threeq and Fourq I think you are pretty explicit that.
That was going to be more in industrial recovery than an aerospace and just to clarify.
I just want to clarify this to two points was good.
No problem relative to being down while we're projecting for second quarter, which is basically the extent that the visibility where we're putting out there because of the uncertainty of Q3 in Q4.
For the full year.
Weve indicated down 30% for Q2 in total for Barnes group.
Industrial we see in the low twentys.
And aerospace within that we see in the high Thirtys from an organic sales perspective.
In terms of the.
Outlook for Q3 in Q4, Wellbores see and right now on our industrial side is the fact that things are coming back online some of our customers are coming back online, albeit at reduced levels. So you're seeing.
China in particular, we saw starting to pick up after a very hard hit Q1.
Expecting that to continue into Q2.
In Europe, you are hearing already have different OE is beginning to come back on in terms of production back online this week and so as things start to.
Ill come back online and production.
Ramp back up, albeit great uncertainty to watch levels, we expect that there will be gradual improvements sequentially from quarter to quarter.
Okay, Okay, and then Chris on the on the leverage.
Liquidity and covenants.
Are you comfortable that the rest of the year, you'll be cash flow positive for the remaining three quarters and then secondly.
As it relates to the senior debt or the total total leverage ratios are you comfortable that.
You want me to renegotiate those in 2020 or is that there will be relatively straight forward to do so.
No at this stage, we are we're pretty confident.
In our ability to maintain.
Compliance with covenant ratios the actions we have taken so far.
Comments, we've talked about for purposes of capital capital deployment in the pullback of Capex, We would expect to see just just operationally the operating working capital improvements as you're shipping less lessen puts on the materials side, you're collecting those receivables. So we expect to get additional improvements out of out of working capital.
But we literally have meant we're managing it weekly I mean, we're in a very much a weekly mindset as it relates to cash decisions that need to be may made as a senior leadership team. We're meeting daily seven days a week to just manage through this.
This crisis, and we're making decisions real time, and making sure we plan accordingly to make sure we avoid any a covenant issues, but as we look out those next three quarters and even into the first quarter of.
2021, which seems like a long time from now right now we are not too concerned we'll adjust accordingly as things as things progress, but taken second quarter, a significant drop in the second quarter and some whatever recovery not an aggressive recovery in the third quarter fourth quarter based on our current view.
We still would remain in compliance.
And we stay in constant dialogue with our banks and make sure. They know exactly where we are in and we get a fuel for where they are.
Okay. Thanks, guys.
Thank you.
Your next question comes from the line of Tim.
From Baird. Your line is open.
Hey, Hey, gentlemen, good morning.
Yes.
Maybe just.
Back on making aftermarket just maybe more of a bigger picture question.
If there is a ramp in retiring aircraft is there any way to just kind of frame what longer term impacts on both may be spares and csps might be.
So if there is a.
An increase in retirements, what that ultimately tends to happen in the industry is it would translate into tear downs at some juncture and so the the concern all was that would be speculated upon is what the impact of that surplus material would meet.
I mean as it came into the market.
For Barnes group, obviously it would.
It's something we'll watch very closely and something that has.
Followed a good side and the bad side to it it's a good side because all that surplus materials has to be overhauled before it could be reuse for the most part and so that would be a positive to our MRO business, albeit that.
You know that may not overcome the drop in overall airline AD demand are.
No maintenance.
On the spare parts side of the equation, if thats surplus mix material comes in Theres always the concerned that it's competing with new spare parts for the most part there what I feel confident in terms of a positive for Barnes group is that most of our spare parts our consumer.
Build in nature, so that the opportunity to repair the components economically those and in many instances makes sense because the spare part the cost of repaired in may and turn and not be feasible or economic so, but nonetheless detrimental.
In the bigger scheme of things for spare parts in general.
Okay. Okay. That's helpful. Thanks, and then just maybe on the cost side could you just help us maybe frame inter I'm wondering if you can frame in terms of dollars maybe some of the the actions that you've taken.
In response to the end market weakness and then you specifically in industrial how should we think of just the decrementals on volume.
So.
We've been very proactive an aggressive but I would suggest in terms of our cost reduction efforts as we came off of the end of last year fourth quarter, we saw softness coming into the first quarter independent of the extent of which the Corona virus took hold and so to that.
And I think we were being very proactive within the Barnes enterprise system, one of the things that we have.
Instituted as a discipline is scenario playing.
So as we entered into the year, we scenario of played.
The extent of which we saw softness in the first quarter and responded accordingly, which allowed us I think too.
Achieved the margins that we did in terms of our first quarter results as we move forward what is currently.
Our our outlook for the second quarter, which is what we're driving towards is a margin profile of between eight and a half and 10% and to that end.
Were clearly look into manage costs, just as aggressively and depending on the extent of which this becomes protracted our doesn't recover as fast as any of US would like then we will continue to look of lost the other alternatives are today, we've we've instituted.
Salary reductions across the board.
Weve for where Furloughing.
Our.
Direct and indirect employees we have.
Taken all over time out of the system all discretionary spending all travel all of those things switch some of which we had a choice in some you don't given the current pandemic, but all in I would say that the team has done a really outstanding job in terms of trying to stand from.
Of the situation with a view to keeping a keen focus on margins as we move forward.
Okay. Okay.
Thanks for all the thanks for all the color here and talk over the next couple of quarters.
Thank you so Mike Thanks, Tim.
Your next question comes from the line of Edward Marshall from Sidoti. Your line is open.
Hey, guys have undergone Patrick Chris Good Hill Barnett Youd, good morning, everyone joining family.
Have you and your families are all doing well say.
Likewise I. Thank you.
Thank you. Thank you.
Just following up knowing that you add some salary cuts.
Well what does the too.
Asked you nailed lumber look like what's embedded in that guidance from 20 to 30 cents.
For Twoq just curious.
Sorry, you broke up a little bit there can you repeat then.
Looking at the at the potential you've you've cut salaries I'm wondering what the SGN a component looks like Q2, what's embedded in your guidance there.
Yes, SGN is going to get somewhat of a benefit not not significantly recognize sales are coming down.
Quite quite meaningfully were as we walk our second more important walk our first quarter performance and then to second quarter. We felt it was important to provide investors and.
And shareholders a look at what we know and that's that's providing guidance for for Q2, specifically to SGN a the actions we're taking our both in the cost of goods sold as well as well as soon as DNA I don't have a specific number for you, but I can tell you in the quarter, we're driving $3 million to $5 million of of actions.
On on the head count side salary side overtime side et cetera to be able to post a margin profile of eight and half to 10% to 10%.
That three to five is total across both Cogs and and other competitors Thats just yeah exactly for the company impacting all of.
Cost of goods sold as well as SGN I don't have a specific SGN a number for God got it. So so airframe OEM manufactured mentioned that they expect 20% to 25% declines in the OE production. This year are there their revenue for over this year your backlog implies 12%.
On a year to year comp I think Thats I think you mentioned that the backlog continue to tier or a through the end of the quarter I just wanted to kind of get a sense as to maybe.
Maybe what the comments of another OEM manufacturer might it might have mentioned for further kind of expectations. This year versus what you think and what the backlog implies thanks.
Thanks relative to Barnes group at the ended the quarter of what we saw was a our OEM backlog was approximately 700 million and that was down I think about a 12% on a since the end of the year.
Too as we look at the volatility in terms of the orders and need the ibrance that we've been receiving then the communications, we expect that it will drop further than that.
In the coming weeks.
Relative to how we're looking out towards.
For the full year.
They are the biggest piece of that drop in backlog came from add the.
Narrow body aircraft, particularly our.
Backlog as it pertains to the leap program.
So again that gives you an indication of where the always have been very proactive in terms of CND a media.
Erle aircraft that were going to be impacted at the same time right now we're seeing movement on the wide body aircraft as well in terms of the backlog, but it wasn't that dramatic in the first quarter, because I think again the airlines were holding R&D aircraft Oems were home.
Moving to you know.
See how things will go into transpire.
So ultimately right now we are it's a very fluid situation I would suggest we internally are managing it with our own judgment against the feedback we're receiving.
What we're looking to do is it just our capacity to a given level for the rest of the year and that may.
Involved some inventory build and it may have involved that we may need to increase slightly if weve under understated. What we think that full year is going to look like but again, it's going to be a real time dynamic I think assessment on a week to week basis.
Got it and that that that 20 to 25 cents 20, 20% to 25% number does that is that kind of god with what's your what's your thinking what's your what's your maybe your your rationalization and your facilities have been.
It is for the second quarter for in insofar as that and it also obviously entails was our current outlook is for the rest of the year in the sense of the adjustment down in volumes that were anticipating on the OEM side.
Got it.
When I look at the and metals in the industrial business.
Just 12%.
I understand some of that Siegel orbis.
And the divestiture there can you true up it with a comp looks like year over year, so that kind of get senses to what maybe the industrial decrementals are are doing.
Yes, you can look at think about Seeger, delivering about 15 million of revenue last year, it's a lower margin business that we divested so you've got to.
A few million dollars and Opie, if you're just trying to walk quarter over quarter, but it'd be 15 million in sales call. It two or 3 million in LP.
If that answers your quite evident.
Yes, I think I can get close enough.
And.
Orders of for cash priority for cash.
Has anything changed I don't know if you mentioned.
Conservative.
[laughter] and in a nutshell I mean, just conserve cash.
You know actions, we're taking across the board on the on the headcount. So I just took the cost side will help will help us.
Meaningfully in terms of how we look at the next several quarters as I answered the question earlier.
But the cash priorities will continue to remain we're going to continue to invest in our business I mean, although we're going to reduce capex. We're not we're still operating our bar businesses are our operational now it's going to be more focused on maintenance capex versus growth, but but we're not going to not.
Invest in our businesses that way you get to the other deployment actions. We I do expect we do expect working capital to continue to improve as you know are incentivized to make sure we try to maximize that as much as possible anytime you go through a downturn you will collect those receivables faster and make sure you're managing inventory.
At a lower level kind of coming in you are going to get the benefit of cash.
On the operating cash side.
So in my prepared remarks, we just wanted to highlight our three priorities of capital deployment and the again thats around capex, it's around acquisitions and it's around.
The dividend and share buyback, we did buy back shares it was a pre existing tenbfive one prior to things getting pretty ugly and that was executed and we're going to hold off on doing anything more at this stage and then I did comment about the quarterly dividend. We do talk about our do talk with our board about that we've got actions literally laid out.
Out in priority of what we would do when we would do it if certain conditions were were met goes back to the scenario planning and triggers we would we would pull so at this stage, we're not I'm not too concerned about.
Barnes group's ability to generate cash and and remain in compliance with covenants I may say something different a quarter from now but right now it's it's we're all over it.
Got it I just want to good sense or something.
Just as I'm thinking looking at your model I, just want to make sure I get this right.
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The drop off in March and April I mean of a sudden sharpened I think you business is still reacting you're adjusting our cost structure as and when you talked about some.
Reinvigoration and some of the market's call China call. It may potentially Europe, restarting and so forth. So as we step back and we think about to Q.
Do you do you see that as kind of a trough scenario for you. This year as that is that the expectation is that what you're building into your full year outlook for your expectations.
Yes short answer is yes.
And that we see we're looking at Q2 as being the the trough or just.
Most severe quarter and at this juncture the bright spots the providing some outlook our upside in terms of even to second quarter is as I mentioned, we're seeing activity pick up order activity.
In China, particularly where it's I would argue it's one quarter ahead of the rest of world in that Europe, and North America, we're seeing.
Clearly going to be impacted and slow to come online in Q2 was we're seeing some nice order activity in terms of China in particular.
Also the other bright spot for us that has held steady throughout this entire.
Crisis has been our medical side of the business and there we've seen increased.
Quoting activity some of which is on that fast track in other words, the customers asking us to expedite particular.
Products in the fight against covert 19 and at the same time, we're seeing a a lot of activity that potentially hasn't been released because of concerns over the uncertainty and restrictions that have been put on capex, but at the same time, it's signaling.
I think a little bit of pent up demand because those.
Quotes are clearly in the indicative of fab projects that we knew were in the pipeline and continuing to continuing to be proactive. If you like in terms of doing the groundwork before ready for release once they get the right signals to do so.
Got it I appreciate your comments guys. Thanks, very much in state and stay safe be well. Thanks. Thanks.
Well thank you.
Your next question comes from the line of Michael Care Molly from Suntrust. Your line is open.
Hey, good morning, guys. Thanks for taking my questions. Good to hear from you and I hope everyone is not shape from well.
Thanks, Mike Thank you.
Patrick maybe more on on the aerospace Im just trying to reconcile is are you confident that 45% of the backlog is going to be shippable over the next 12 months.
Where is that it's that kind of fluid and subject to change I.
I think.
It's somewhat fluid, but at the same time, it's the best estimate to where we we see it obviously is down we normally would suggest 50% first we're talking about 45 in that also recognize that.
I indicated that the 700 as.
We expect that backlog potentially to cone lower sold to 45% will be potentially 45% of a lower number so love where.
We are projecting is.
The application of our best judgment to the many different signals on input stuff, we're getting right now and those it's not even that the inputs are consistent I think third the varian.
Significantly week to week, sometimes they it today. So there's a aspect I think of the industry as a whole is looking to try and get its arms around where demand ultimately is going to settle I think.
Big portion of this of course is going to clearly both to the fly in public and how.
Passenger traffic comes back online and the rate of which that happens is going to be a big determinant.
Got it and then I mean, yes, the demand side of the equation is one thing obviously, we've gone from supply chain constraints you are to turn in the speak it off do you guys have good line of sight into inventory in the channel do you think there's there's a lot of buffer stock within the engine supply chain that.
Has to be removed does the supply chain realigns itself that could be even additive to weakened demand environment that might add further pressure.
I think there adjustments that are going to take place for sure and I do think that you know at a lower level. There is going to be some amount of inventory into channel. So to speak that are into supply chain, that's going to need to adjust accordingly.
The one aspect that we look at from a at Barnes perspective is always the fact that it's been in sits in crisis. Like this are in downturns that we've always stood strong as a very formidable partner to the OE is and so if there is going to be some shakeout.
We expect that we will be.
In a very good position as a strategic long term partner to take maybe even in some insight as to take share if not all of the competition makes it through this.
Turbulent times.
Got it and then just on the aftermarket I mean, obviously.
Some of these engine induction.
They spend some time in a shop the repairs.
Can go up to 90, 180 days, but I would imagine inductions clearly down right now I mean crude in your scenario I mean should we think about aftermarket being down.
60, 70, 80% just in line with utilization here in the short term or I mean could you guys.
Give any short of color around what you're assuming for aftermarket revenues.
Well as a baseline where we're utilizing at 50%.
Reduction.
Then were scenario playing off of that and so we're looking at Q2 being.
At that level or and as I said, then scenario plan. If it were down six the if we were down 70.
Art, if it were down 40 so.
Accordingly.
Obviously creates a lot of judgment calls in terms of walking a type role and monitoring of real time, we're lucky that team is doing a great job or an excellent job of trying to adjust capacity in the lie in.
Line meant with that demand and also manage and the cost side of equation at the same time I will also note that we're continuing our NP I efforts on some of the key projects that were in process.
And continuing to make those investments so was in the short term and this holds true for both sides of our business Aerospace and industrial was we're managing costs very aggressively and commensurate with current demand. We're also keeping our eye on the.
Long term with a view to how to position and come out of this stronger by continuing to invest in those key innovations that we believe are going to be needed by our customers in respect of into future.
Got it helpful. Thanks, guys and Stacey thank.
Thank you thanks, Mike.
Your next question comes from the line of Pete Skibitski from.
Your line is.
[noise] well in terms of health.
Quick one on China.
Patrick.
Just to expand on what you were talking about our virtually all of your manufacturing workers in China back to work now are you almost fully staffed essentially it in China.
We are and it took it took a multiple of months because what happened was as you know what happened in Q1 was with the Chinese new year most of the.
Workforces military so it moved back to their own home provinces and then as this onset of covert 19 took place they got trapped there because they the country frozen in particular the provinces of woo.
In that what happened was mobility in the country for all those for a period of time and so ultimately we closed our operations initially because we didnt have the workforce, even if we wanted to stay open and the demand froze simultaneously so as over the last.
Weeks and months, we're probably back to 90% to 95%.
In terms of our workforce right now would only a handful of you know outstanding items, if you like.
And so again very pleased that our workforce in China has being healthy and safe throughout this albeit that you know day, where quarantined in their respective.
Homes at as they've come back to work we've been very fortunate.
Okay got it sounds good.
And then I had another question on medical I think typically you guys kind of.
I've talked about combined medical and kind of personal care and packaging being almost a quarter of industrial revenue.
Just good because medical drop I think the other personal care and packaging are down. Its medical you know are you thinking that's roughly 10% to 15% of industrial revenue just to get a sense, yet about 15% I would put it that for industrial.
And again had a very you know just relatively speaking our medical business had a strong first quarter.
Year over year.
And.
So the as we move into Q2 were how we're very optimistic that medical is going to continue with the heightened level of quoting activity that we're seeing the the unknown will be the release of those.
Orders and the timing of it as I said, it's definitely taken to prioritize set of sequences in that anything thats touch in a product or service related to call that 19 is on a fast track and anything even though its medico.
That is in coal that 19 related is a little bit on the back burner is how we're seeing the customers prioritize their their release of orders.
Okay, and just last one for me coming you touch on its Patrick but coming into the year, you're talking about 5 million incremental internal R&D investments.
It sounds like that's still the plan you you're sticking to that you want to continue to invest through the downturn.
We will invest through the downturn, but I would indicate is that the 5 million may be modified slightly in so far is that we had anticipated brick and mortar in that 5 million and an investment as some capex in turn but we're doing right. Now is we have continued full speed with the hiring of the.
Necessary resources to continue with our R&D efforts.
Rather then set up a separate location. We've how is the min one of our existing facilities and are utilized in our existing equipment and so theres a slight modification in light of the current environment, but.
Full speed ahead, so to speak in terms of the projects that we've identified and there I would say that well weird looking to and and something I'd give credit to which I think is a unique strengths of Barnes group.
Is the involvement Andy and participation of our board in the current dialogues. We've held two out of session out of cycled board meetings in the last couple of months and there the emphasis from our board has been very much.
I've said it discussions around how to defend and protect first and foremost how to preserve liquid liquidity secondly, thirdly, the importance of looking to make the continued strategic investments that we've been making and then forward challenge in us to look out beyond the hurt.
The reason and to anticipate those new strategic opportunities. After this storm as past so.
Where we're trying to balance what is a very difficult situation booked position ourselves for to come out of it even stronger.
Thanks, guys appreciate the color.
Hey, Thanks, Stacy said.
Your next question comes from the line of Matt Summerville from.
D.A. Davidson your line is open.
Thanks morning couple of questions.
First with respect to incoming order rates in the quarter in industrial can you maybe give a little bit of quantification around how that looks both on a year over year and sequential basis.
The one a year over year basis.
You know overall, what I said was that we were just below slightly below one times in terms of book to Bill would in industrial as a whole the strength and there was.
Just over one times was forced motion control.
Engineered components was at about <unk> 0.85 times.
And our molding solutions business was.
At around the same levels.
So overall, while we saw was a you know.
A definitely a falloff in orders significantly in terms of Asia in the first quarter at impacting.
Our molding solutions business and.
To some degree.
I would suggest for some motion control held up reasonably well in the quarter.
Going into Q2, we expect that.
That to change across the board, depending on which business as we speak to.
With respect to the automotive Hot runner business can you maybe give us a little bit of color in terms of how that business performed in China in Q1, and it's indeed, you are seeing that piece of the business start to rebound at least on us it probably not year over year, but at least on a sequential business on a sequential.
Basis have you indeed seem that.
Yes, we've seen a under Subvented business, which the hot runner business, we've seen that improve into.
Q2, it did clearly it was impacted in Q1 by everything I've mentioned earlier.
With respect to the freeze basically that took place within China in terms of quarantine.
We have seen if you look at our three regions overall I would suggest that for the hot runner business automotive Hot runner business North America has said pretty.
Consistent throughout 20, Nineteena and into the first quarter at 2020 with as I mentioned, a few times, we've seen releases continuing.
To come out a trickle out if you like across North America, which has been positive.
Europe has pretty how you know.
He has been slow and I would suggest as being depressed.
In.
Asia.
A very so first quarter for that business and as I said season.
Lights at the end of the tone of our right now and as we've entered into second quarter with activity picking up.
But I still think it's going to be a tough environment, even within China, because right now most of the activity. We're seeing is domestic rather than the internationals.
Got it and then just one more follow up as you think about.
I think Chris mentioned three to 5 million.
Cost related savings anticipated in Q2 is there a full year number you're able to give around that Chris and then similarly guys.
What would you need to see to think about taking more structural related actions, including in aerospace, but also further in industrial thank you.
Matt So specific to Twoq you'd like you mentioned.
We're in an environment, where we're managing I would call. It daily if not weekly in terms of decision, making and even even going out with providing like I said investors. A look at Q2, we felt were about one month into the quarter. We know what we know today, that's going to change next month and make sure.
Change next week, so that's where we have literally no confidence and being able to put anything out beyond that including savings I mean actions, we've taken root related to furloughs relative to demand do we need to increase that we need to accelerate that versus pulling it back because demand comes in it's very fluid. So I'm I'm going to err on the side.
I have not providing any color around a full year savings number all we can do is look at whats here now.
[noise] in them.
My follow up to that was what you would have to see in the business to contemplate doing things that are more structural in nature, including in aerospace. If indeed, we're looking at something that is maybe more you or else shaped as opposed to reshape.
Yeah. Good point I mean, I look at we look at aerospace business. The backlog, we know today the order activity from the Oems has been pretty volatile as you can see the backlogs going from 800 to 700, you know we could see US 650, we could see a 600, but at the same time. It can go back what we're looking.
That is the next 12 months and trying to somewhat ignore the volatility that happens on the back half of that cold here too.
Your three from a global footprint point of view, we don't feel we're in a situation to have a capacity concern for purposes of restructuring consolidation the way, we're well positioned in the U.S. as well as in Asia on the manufacturing side, we don't we're not having those conversations now.
On the on the aerospace side.
Do we do pretty confident that this will come back it's going to be slow what's going to be from protracted in terms of you know a year or two but right now we want to make sure we maintain the continuity satisfy customer demand.
Got it thank you guys.
Thank you. Thank you.
Your next question comes from the line of Michael Karmali from Suntrust. Your line is open.
Hey, guys. Thanks for taking the follow up just on on the aerospace aftermarket can you comment what you've seen in April.
I know I think you said you were kind of plan for that 50% baseline reduction, but can you comment on since the airlines, obviously seen activity dropped in years year over in April and can you give us a sense of what the aftermarkets looking like right now in terms of.
Order flow or we're kind of daily activity.
We've seen that 50% that I said, we were using as our baseline you've seen that become a reality in April.
And so it is.
Almost immediate in terms of the.
Hey, good being turned off as it pertains to the aftermarket side of the equation okay.
So as I said, what scenario playing off of that and we'll adjust that hard and [noise].
Okay perfect. Thanks, guys.
Yes.
There are no further questions at this time I'll turn the call back over to your host.
Thank you Marcella.
We would like to thank all of you for joining US. This morning, and we look forward to speaking with you next in July with our second quarter 2020 earnings call.
Operator, we will now conclude today's call. Thank you.
This concludes today's conference call you may now disconnect.
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