Q1 2022 Barnes Group Inc Earnings Call
Okay.
Good morning, My name is Rob and I will be your conference operator today at this time I would like to welcome everyone to the Barnes Group, Inc. First quarter 2022 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and.
Session, if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again Press Star one. Thank you Bill Pitts, Vice President Investor Relations you May begin your conference. Thank.
Thank you Rob.
Good morning, and thank you for joining us for our first quarter 'twenty to 'twenty two earnings call.
With me are Barnes senior Vice President Finance, and Chief Financial Officer, and interim Chief Executive Officer, Julie strike.
And Vice President Controller Marian Acker.
If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at Barnes Group, Inc. Dotcom.
During our call we will be referring to the earnings release supplement slides, which are also posted on our website.
Okay.
Our discussion today includes certain non-GAAP financial measures, which provide additional information. We believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with the SEC regulations.
You will find a reconciliation table on our website as part of our press release and in the form 8-K submitted to the Securities and Exchange Commission.
Be advised that certain statements we make on today's call. Both during the opening remarks and during the question and answer session. Maybe forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the S. E C.
These filings are available through the Investor Relations section of our corporate website at Barnes Group, Inc. Dot com.
Let me now turn the call over to Julie for her opening remarks, then Marion will provide a review of our first quarter financial results and our updated outlook for 2022 .
After that we'll open up the call for questions Jewel.
Julie.
Thank you Bill and good morning, everyone before getting into the quarter's details I'd like to take a moment to address the humanitarian crisis, continuing in Ukraine, our thoughts and prayers go out to those affected by the ongoing violence and devastation all of US at Barnes hope for a quick resolution of the hostilities are returned.
Pes and the rebuilding of the many lives disrupted.
Barnes begins 2022 with solid first quarter earnings performance exceeding our February expectation in the face of some significant headwinds.
While January started slowly we saw sequential sales growth each month, ending with strong results in March.
One of the quarters highlights with a book to Bill ratio of 1.15 times indicative of a supportive demand environment with both segments seeing a greater than one times ratio.
First quarter organic sales grew 6% from a year ago and adjusted earnings per share were up 8%.
Our performance was driven by aerospace, which generated strong revenue growth and margin expansion.
Industrial saw several pressure points accelerate in the first quarter, which weighed on margin performance.
While macro environmental headwinds will likely persist throughout 2022 we anticipate the pressure will moderate and with some and with demand remaining healthy we expect the first quarter to be the low point for the year for revenues margins and EPS.
With the ongoing conflict in Ukraine, we have examined potential impacts across our portfolio, including trade with Russia for industrial our Russian exposure is minimal with annual revenue in the $1 million to $2 million range. However, we have seen delivery and other logistical challenges including increased freight cost.
As a result of the conflict.
For aerospace, we do not sell into the Russian OEM market. So there is no direct impact.
With respect to indirect OEM sales or with aftermarket sales, we anticipate minimal impact.
For Barnes the watch item will be the continued availability of titanium to our Russian supplier.
At this point in time titanium has not been sanctioned by the U S government and procuring this material is not a current issue.
We maintain buffer inventory for the components, we manufacture and we are working to assess alternate titanium supply channels should the need arise.
Barnes is complying with all global sanctions and has stopped shipping into impacted regions in accordance with such sanctions.
Within our segments industrials organic orders declined 2% and organic sales declined 1% versus a year ago. They were both up modestly on a sequential basis.
From a macro standpoint, the first quarter proved to be a tough environment sales were impacted by supply chain challenges lockdowns in China and weakness in certain end markets.
Operating margin was squeezed by broad based inflation and costs associated with spikes in COVID-19 related absenteeism across our businesses.
That said our teams around the globe rallied showing great agility to rapidly adapt and mitigate much of the downward pressure.
Across industrial we estimate approximately $2 million to $3 million in net absenteeism related cost in the quarter.
While we expect a greater than normal level of absenteeism to continue it has trended down since early in the first quarter.
We forecast approximately $2 million to $3 million of similar net absenteeism costs over the remainder of 2022.
In addition to the absenteeism costs, we saw $8 million in gross raw material freight and utilities inflation in the quarter.
Through pricing and procurement actions, we were able to mitigate approximately $5 million, resulting in a net $3 million of inflation impact.
We also expect a $2 million to $3 million net impact in the second quarter.
While we see gross inflation continuing at a high level in the second half of 2022, the momentum behind our pricing procurement and productivity actions are anticipated to offset much of this impact.
At molding solutions organic orders were flat year over year.
Automotive orders were positive.
Medical was flat, though up sequentially and packaging and personal care, while at healthy levels were down compared to a year ago.
That said orders improved through the quarter with March up significantly.
Organic sales decreased 2% with personal care and general industrial down and medical and packaging solidly up.
For 2022, we continue to expect our molding solutions organic sales growth to be up mid single digits.
Yeah.
At force <unk> motion control organic orders were up 1% and organic sales up 3% our general industrial markets created the lift.
We anticipate high single digit organic sales growth for the year up from our prior mid single digit expectation.
Engineered components saw organic orders declined 11%, while organic sales decreased 3% automd.
Automotive production markets were the primary driver, though interestingly, both automotive orders and sales improved considerably on a sequential basis up more than 20%.
In the first quarter, we did see automotive revenue push outs of $5 million a bit less than the 6 million, we expected and an improvement from the $8 million in Q4.
We anticipate a further impact of $3 million in the second quarter.
Full year organic sales growth is anticipated to be up mid single digits unchanged from our prior view.
Within automation organic orders were down 4% inorganic sales were down 5%, we had anticipated a slow first quarter to begin 2022.
Our full year view has not changed as we foresee organic sales growth in the mid teens.
For the industrial segment, we continue to forecast 2022 organic growth in the mid to high single digits. However, with the macro headwinds I discussed we have lowered our adjusted operating margin expectation to a range of 10 and a half 211.5%.
Moving to aerospace the recovery continues as sales increased 23% over last year's first quarter.
Both the original equipment manufacturing and aftermarket businesses delivered very strong growth adjusted operating margin improved 300 basis points from a year ago.
In our OEM business orders grew 21% in the quarter with a book to Bill of 1.55 times and sales grew 18%.
<unk> backlog reached $716 million up 5% from December and.
And up 19% versus a year ago.
We expect to convert approximately 45% of this backlog to revenue over the next 12 months.
We continue to anticipate high single digit OEM growth in 2022 supported by increased production of narrow body aircraft at both Airbus and Boeing.
For the aftermarket we generated 34% sales growth with MRO and RSP businesses, delivering strong year over year performance up 24% and 59% respectively.
The positive recovery should continue as airlines are showing strong demand and business travel looks to be returning.
For the year, we anticipate sales growth for MRO to be in the high 20% range with spare parts up in the low twenties, the latter an increase from our prior outlook.
Aerospace adjusted operating margin is now forecast to be between 16, and a half and 17.5%.
Light uptick benefiting from higher spare parts sales.
Okay.
To close my aerospace comments I'd like to take a minute to welcome Ian reason as our new President of Barnes Aerospace Ian brings broad industry experience and understanding of the commercial and defense aerospace markets, making him the ideal person to lead this business through its next phase of profitable growth.
I would also like to offer best wishes to Mike back in his well deserved retirement, we thank Mike for his many years of service and dedication to Barnes.
Shifting gears I'd like to provide an update on our environmental social and governance initiatives.
Barnes is deeply committed to corporate responsibility and furthering ESG principles.
In March of this year, we published our eighth annual ESG report, which addresses our processes policies and products that benefits stakeholders, the environment and society.
This month, we published our baseline metrics and progress for scope, one and two greenhouse gas emissions and water usage.
Both documents can be found on our corporate website under about ESG.
We remain committed to corporate accountability and are honored to have been recognized as one of America's most responsible companies by Newsweek in 2021, and one of America's most trusted companies by Newsweek in 2022.
Before concluding I'd like to acknowledge Patrick Dempsey and his family they are in our thoughts daily and we wish them well.
In closing, we performed well relative to our earnings expectation and our global team showed tremendous resilience in a highly dynamic environment.
Aerospace results continued to be strong and we expect their end markets to remain supportive.
We also expect that pricing procurement and productivity actions taken will gain traction improving industrial margin performance.
Clearly the macro environment holds significant uncertainty, but with solid orders in the quarter and management squarely focused on driving the business forward, we anticipate improvement as we move through the year.
Now, let me pass the call over to Marion for a discussion of the financial detail.
Good morning, and thank you Julie let me begin with highlights of our first quarter results on slide five of our supplement.
First quarter sales were $312 million up 4% from the prior year period with organic sales increasing 6%.
Effects negatively impacted sales by 2%.
Adjusted operating income was $31 8 million this year down 2% from an adjusted $32 4 million last year.
Adjusted operating margin of 10, 2% was down 50 bps to the prior year period.
Net income was $20 5 million or <unk> 40 per diluted share compared to $19 4 million or <unk> 38 per diluted share a year ago.
On an adjusted basis net income per share of <unk> 41 was up 8% from 38 a year ago.
Adjusted net income per share in the first quarter of 2022 excludes <unk> <unk> of restructuring charges from previously announced actions.
In the quarter interest expense was $3 6 million a decrease of approximately 400000 as a result of lower average borrowings compared to a year ago other.
Other expense was $1 6 million essentially in line with last year.
The companys effective tax rate in the first quarter was 21% down from a rate of 28, 1% a year ago.
The primary drivers are an increase in projected earnings in low tax jurisdictions and the absence of additional tax expense related to the global intangible low income tax are guilty recorded in last year's first quarter.
Now I will turn to our segment performance beginning with industrial.
First quarter sales were $212 million down 4% from a year ago.
Organic sales decreased 1%, while unfavorable foreign exchange lowered sales by 3%.
Operating profit was $14 7 million down 31% from the prior year period, while operating margin was 7% down 270 bps.
Excluding 300000 in restructuring charges. This year adjusted operating profit was $15 million down 29% from a year ago and adjusted operating margin declined 260 bps to seven 1%.
As Julie mentioned there are several macroeconomic headwinds facing our industrial segment. The decrease in operating profit was primarily due to broad based inflation, including labor raw materials utilities and freight.
Coupled with supply chain challenges and lower productivity due to COVID-19 related absenteeism. It certainly was a difficult quarter.
At aerospace.
Sales were $101 million, an increase of 23% from a year ago benefiting from the ongoing recovery in aerospace end markets original equipment.
Equipment manufacturing sales increased 18% and aftermarket sales increased 34% compared to the prior year period.
Operating profit was $16 4 million up 48% exclude.
Excluding approximately 400000 of restructuring costs. This year adjusted operating profit of $16 7 million was up 51% from a year ago benefiting from the contribution of higher sales volumes offset in part by unfavorable productivity due to COVID-19 related absenteeism and supply chain challenges.
Adjusted operating margin was 16, 6% up 300 bps.
With respect to cash flow performance cash used by operating activities was $9 million versus cash provided from operating activities of $36 million in the prior year period. The primary drivers of the change are paid incentive compensation related to 2021 and increased working capital in the current year period.
Free cash flow was a use of $17 million compared to a source of $28 million last year capital expenditures were $7 million down slightly from a year ago.
Regarding the balance sheet, our debt to EBITDA ratio as defined by our credit agreement was two four times at quarter end and flat to where we ended 2021.
On a net debt to EBITDA basis, we'd be at two one times.
In light of the rising interest rate environment I wanted to mentioned that Barnes recently amended our revolving credit agreement, which favorably changes the interest spread pricing grid. This change is forecasted to benefit interest rates by 12, 5% to 25 bps, depending upon the computed quarterly leverage ratio.
The amendment also adopt sofer as the base rate, replacing LIBOR, which will be expiring in June of 2023.
You'll note a reduction in our interest expense forecast for the year when we discuss outlook.
Our first quarter average diluted shares outstanding and period end shares outstanding were both approximately 51 million shares.
During the quarter, we did not repurchase shares and approximately $3 6 million shares remain available under the board's 2019 stock repurchase authorization.
Yeah.
Moving to slide six of our supplement let me discuss our updated 2022 outlook.
We continue to expect organic sales to be up 8% to 10% for the year with FX, having a 2% negative impact.
Adjusted operating margin is forecast to be between 12, and a half and 13, 5% down slightly from our previous expectation due to the ongoing pressures in our industrial segment.
Adjusted EPS is now anticipated to be in the range of $2 20 to $2 40.
Up 13% to 24% from 2020 one's adjusted $1 94 per share.
The updated EPS range was reduced by five at the high end of our previous range.
For the year, we expect <unk> impact on EPS for residual restructuring charges with a penny forecasted for the second and third quarters.
We continue to forecast a 40% first half 60% second half split in EPS.
We realize this indicates a significant second half ramp, though with a good book to bill pricing and other actions gathering steam and absenteeism pressures subsiding, we believe our forecast reflects achievable performance.
Rounding out a few other outlook items.
Interest expense is anticipated to be $13 5 million about half a million lower than our previous outlook.
Other expense of approximately $4 million and effective tax rate of 24% to 25%.
Capex of $50 million to $55 million.
Average diluted shares of approximately 51 million and cash conversion of greater than 100%.
In closing despite the first quarter's challenges we exceeded the high end of our earnings expectations shared on our February call. We.
We expect macro headwinds to continue through 2022, however, we see the first quarter as the peak of those pressure points.
Future quarters should benefit from the momentum of pricing and other actions taken to mitigate the impacts.
Operator, we'll now open the call for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Thanks, Good morning.
Good morning, Chris.
Was curious on the titanium from Russia.
Potential impact if there is a.
A major issue timing.
Set up alternative supply, maybe if you could just ring fence the extreme there.
Sure. Thanks.
For the question Chris.
We have already begun working with alternative suppliers, so that we have.
Backstop ready should something happen and as I mentioned, we also do have.
Many months worth.
Scott.
In our inventory and we're partnering with our customers.
Yeah.
Talk to them about alternative sources and quality checks.
I apologize.
Should something happen.
Okay. So with your overall failure ready to weather it with minimal fallout if there is a.
You know some.
Some sudden issue what proportion of your titanium is from the Russian source.
It is our primary source.
Okay.
Okay, and you think back fills.
Good prospects there.
Yes. The open market has availability. It's just there is a cost associated with that.
Okay great.
Great.
And then.
For industrial just curious how to think about.
The progression sequentially.
Revenue and margin, obviously I think both increase through the year, we have our 40 60 EPS, but.
Rather than leave it to triangulation just curious if you could talk about kind of sequential.
Their margin improvement Youre seeing <unk> over <unk>.
So we would agree.
A gradual ramp throughout the year with eight with the second quarter continuing to see impact.
And to use them at this point.
From a modeling perspective really look too.
Pick up in the second half of the year.
Okay.
Okay.
Great and any direct or indirect.
On the China Lockdowns I Didnt hear you mentioned that if you did.
So theres been.
Part of the China Lockdown has been contributing to some of the productivity issues you started the year with Lockdowns in our Tianjin facility and while Joe has not been locked down thus far there are impacts from the Shanghai Lockdown that.
Our customers' ability to accept product that disrupt our ability to ship because of the port congestion et cetera. So there is some impact of that factored in to our second quarter forecast and we at this point anticipate that those impacts will lessen in Q3 and Q4.
That makes sense. Thank you.
Thanks, Chris.
Your next question comes from the line Oh sure.
With me Sam true Shaker from <unk> Securities. Your line is open.
Okay.
Samsung Shanker your line is open.
Can you hear me.
Yes.
Hey, How're you doing good morning, sorry about that.
One for Mike This morning.
Just curious about.
Kind of how you guys see any implications for aerospace in terms of <unk>.
Pricing of materials kind of what your contract site restructured like to be able to pass through some of that pressure.
Yeah. Thanks, Thanks for the question Sam from an aerospace perspective, all of our long term agreements have raw material pass through so we're really not facing the same headwinds on the aerospace side from inflation that we're seeing on the industrial side.
Okay, Great and then.
You guys said you were okay on titanium at least with your current kind of planning are there any other kind of materials that you guys are at all concerned about on the aerospace side of our industrial too I guess.
Theres been intermittent.
Challenges with some of our basic supplies nothing that's alarming and then there is ongoing.
Supply chain challenges with castings, but that's nothing new and as of late our castings have been slowing in risk.
Respectively. So.
I would offer that Theres really no. We don't have any major concerns that would disrupt our production at this point.
Okay, great. Thank you and then just one last one here.
It seems like there's a possibility there was increased demand supply chain could be getting a little bit worse. So just kind of curious how you guys are viewing that in relation to some of the confidence for industrial.
Yeah.
Can you.
Can you repeat the first part of the question again please.
Yes, sorry, just.
With the possibility that it looks like supply chain could be potentially worsening given the increase in demand moving forward throughout the rest of the year. How do you guys kind of gauge that with your confidence in industrial moving forward throughout the rest of the year.
Yeah no.
We're definitely keeping a close eye on what's happening from a supply chain perspective is I think.
There's a lot of dynamics at play what were doing is increasing our buffer stock in some areas. We're looking for alternate supply sources.
For parts that may be in areas that could be more significantly impacted by shutdowns. As an example, if they were coming from China.
And our logistics and procurement teams are just staying on top of everything as closely as they can to help mitigate that that said, it's a dynamic environment and there is risk we could have some impacts, but I think the team leveraging our enterprise system is.
Is staying on top of the challenging environment.
Some of the <unk>.
The indirect impacts of direct impacts of that Mary Anne referred to as the increase in working capital impact on cash flow in the month, you can see on our balance sheet inventories have creeped up a bit and part of that is in anticipation of what the supply chain may bring.
Great makes sense. Thank you very much guys.
Thanks Sam.
Your next question comes from the line of Myles Walton from UBS. Your line is open.
Hey, Lance Louis Federal on for Myles.
Morning, Lou Halo.
Hey, Julie Iran Bill.
I want to come back to the incentive comp I just wanted to sure is there anything different about this year than prior years or the <unk>.
He used to spread it out it's all one quarter anything going on I guess, just with that number.
Hello. This is Marion so on the cash flow what you see is the payout of the prior year incentive comp. So we pay out in the first quarter. So 2021 was a much better year. The payout. We saw in 2022 of course was higher than what we saw a year ago coming off 2020, the first year of Covid.
Okay.
Abnormal in there and then if we switch over to industrial I guess.
Julie I appreciate the commentary about you kind of had I think you mentioned $8 million of sort of added cost and you were able to sort of offset that with 5 million still had an extra $3 million of <unk>.
Impact I guess as we think about that sort of going forward. The rest of 2002 and even into 'twenty three does that make getting the margins up to that mid teen level sort of incrementally more difficult.
Is there anything else more you can do in that business.
So there is a number of things.
We're focusing on clearly as long as the inflationary headwinds continue.
We're working to offset them and it will have an impact however, leveraging again the enterprise system. We're looking at how we take costs, we're focusing on what we can control how do we take cost out of our system, how do we optimize flow through our facilities, how do we seek different sources.
At this point, we do anticipate as I mentioned that in <unk>, two will be at a net neutral position and given the productivity. We're driving there I have total confidence that the portfolio will get back to that mid teen level not in 2022, but going forward.
Without question, we have the potential to be there.
Okay, Great and then just on the aerospace side is there the pull from your customers. I guess are you seeing anything out of the ordinary or are they pulling as expected is there any.
You said in your supply chain, but equally you're going out into their supply chain is that sort of all things normal there on the OE side.
Yes.
I haven't seen any kind of <unk>.
Variance to what our expectations have been on the aerospace side, whether it's timing.
Nothing out of the ordinary.
No.
Okay, Great and then just one trip just to make sure I heard you correctly you said the other income was going to be 4 million. This year instead of the seven previously.
Correct.
Thank you very much.
Thanks, Luke Thanks Lou.
Your next question comes from the line of Sam Somerville from D. A Davidson your line is open.
Yes, this is actually Matt.
Good morning, Matt Good morning.
Okay.
I want to talk about the industrial business.
A finer point on this with.
<unk> orders down too.
Book to Bill looked okay, but the guide up mid single to high single digits helped give give me confidence that we.
We're going to see that kind of ramp in this business through the remainder of the year with global auto still being heavily disrupted I would assume at least through year end supply chain continuing to be challenging at least through year end.
Help me get comfortable with that organic view.
Yeah. It's a good question and the first step is starting with where we are today and the order book and the demand we saw a ramp in the first quarter supports the trajectory going into the second quarter.
So that's the first step. In addition, we are continuing to leverage our strategic marketing and sales initiatives to.
Go after penetration of new markets grow outside of our traditional spaces and the team is confident that they will deliver upon our expectations, there, which allows us to ramp into the second half of the year as we've as we forecast that.
That said there is not without risk right in anybody in this environment who'd say theres no risk hasnt looked around very much but.
Our.
Step one do you have the orders to support your next quarter sales and I would offer that yes that that was our first piece of confidence and we're moving forward from there.
Yes, Matt I would add that January was a very difficult month.
And a lot of our facilities with absenteeism associated with Covid.
The good news is as Julie mentioned as we went through the quarter things sequentially got better and better and March was pretty strong.
So we'd say the underlying demand environment remaining supportive and that's what gives us confidence in kind of maintaining our forecast for the year.
I think the one other thing that I am.
Sorry, if I could just add one other one other thing on the inflation, we talked about the impacts we look at the second half as being able to mitigate.
Mitigate most of that given the pricing actions that are taking hold.
When I look.
At this business.
Got it compare.
It might not necessarily be a fair comparison, but I'm going to do it anyways when I think about my broader coverage universe. The overwhelming majority of my companies are printing like record operating margins and at 7%.
This is the worst margin performance in industrial and like 10 years, I guess I'm really just trying to understand structurally.
Given that you've migrated into automation.
Given how that molding solutions platform has evolved over the years, how are we sitting here today at 7%.
Okay.
So go ahead, Joe No no no that's okay. So.
It's a fair question and it's certainly not where we would have.
Hope to be at this point in time, but.
How we are where we are it has a lot to do.
<unk>.
The volume, we see coming through the facilities.
The inflation impacts.
We were hit heavily by absenteeism Theres a level, Matt that I'm sure you can appreciate.
Of.
Lost productivity when you have.
Perhaps an entire sell out we had locations that had up to 25% of the population out for COVID-19 during parts of the.
Quarter earlier in the quarter, which significantly impacted our January performance.
And while we quantified it as $2 million, which is about 100 basis points of margin in the quarter.
My estimate is it could be ballpark, a little bit higher than that.
So we have the inflation that hit us.
And the team did a great job with their recovery efforts I don't want to underplay, what the team did to offset our inflation, we had some absenteeism and there's that other productivity that comes.
With having people doing jobs that they don't normally do having people out and that's that's how we landed where we are that sad we see that.
We're turning a corner in terms of absenteeism going down which should have an immediate impact on productivity.
We see volume coming up which will also drop through to the bottom line in terms of productivity, our inflation and surcharge efforts will continue to gain traction offsetting more of the inflation and we have our teams leveraging the operating system to double down our efforts.
And increasing our own internal productivity and focusing on what we control within our own four walls. So not sure if that answers your question, but that that's that's where we're at.
Understood and then just one follow up to make sure that.
Understand tug titanium issue.
I realize you're sourcing from from Russia Im sure Thats been the case for a long time, how much titanium inventory do you have on hand now and.
And if you are forced to resource that from another supplier.
The same pass through mechanisms still be valid under that scenario or would you be more open and susceptible to spot pricing in the market. Thank you.
Thanks, Matt so.
We have.
A substantial amount of buffer stock.
For titanium and as I mentioned earlier many of our <unk>.
Contracts have pass through raw material pricing, so should we need to shift to more.
Costly sources of titanium the vast majority of that would be able would be pass through via our contracts.
Yes.
<unk> in the long term agreements that we have Matt.
Okay understood. Thank you guys.
Thank you.
And there are no further questions at this time, Mr. Bill Pitts I turn the call back over to you for some closing remarks.
Thank you Rob.
We would like to thank you all for joining US. This morning, and we look forward to speaking with you next on July 29, with our second quarter 2022 earnings Conference call.
Rob We will now conclude today's call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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