Q2 2022 Barnes Group Inc Earnings Call
Good morning, My name is Chris and I'll be your conference operator today at this time I would like to welcome everyone to the Barnes <unk> second quarter 2022 earnings conference call and webcast.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Bill Pitts VP Investor Relations you may begin.
Thank you Chris.
Good morning, and thank you for joining us for our second quarter 2022 earnings call.
With me are Barnes, new President and Chief Executive Officer Thomas Hook.
And senior Vice President Finance, and Chief Financial Officer, Julie strike.
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. 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 is helpful to investors.
They've met these measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
You will find a reconciliation table on our website as part of our press release and in the form 8-K submitted to the 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 $19 95.
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 SEC.
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 Tom for his opening remarks, then Julie will provide a review of our second quarter financial results and our updated outlook for 2022.
After that we'll open up the call for questions.
Thank you Bill and good morning to everyone.
I am honored to be appointed as the new President and Chief Executive Officer, Barnes and I look forward to leading the company into the next chapter of its remarkable history.
I appreciate Tom Burns and the boards confidence and we'd like to thank the Barnes leadership team for their warm welcome.
In time I look forward to meeting more of the Barnes team as I visit our operations across the globe.
In addition, I would like to acknowledge Patrick Dempsey significant contributions to Barnes over the last 22 years with nearly 10 as the Chief Executive Officer.
All of us in the Barnes team wish him and his family the best.
Having served on the Barnes board since 2016, I am keenly aware of the quality of our portfolio management team and global work Force.
Under Patrick's leadership, the company has seen a significant transformation.
He has built a legacy of teamwork establish via the principals and applications with the Barnes enterprise system.
As my CEO tenure begins I'll be diving deep into the organization to have a more detailed look at our operations.
Core technologies.
Capabilities and opportunities for growth.
In doing so my goal is to extract greater value from the efforts of the entire Barnes team.
We will take an action oriented approach to reduce complexity across the organization.
To attack the critical few initiatives they have the greatest impact.
And to move with increased speed and agility.
This includes <unk>.
<unk> business execution across the portfolio draw.
Driving organic growth.
And tapping into new markets.
I anticipate leveraging Barnes capabilities and my professional experience to grow in markets like medical technologies.
These are the focus areas that I believe will drive shareholder returns and employee engagement to a higher level <unk>.
The actions for which I will hold myself personally accountable.
These are also the things that I will hold the team accountable for.
Regarding the second quarter, our financial performance mirrored the first quarter in many ways second quarter organic sales grew 5% from a year ago and adjusted earnings per share were up 24%. Our book to Bill ratio was a healthy 116 times, giving us two consecutive quarters with a solid result in both.
Segments generated greater than one times ratio.
Performance was driven by aerospace, which once again generated strong revenue growth and margin expansion propelled by a robust aftermarket industrial continues to see mounting economic pressures from several factors, which have inhibited our ability to drive the performance we expect to achieve from these businesses.
Ongoing macroeconomic headwinds, including the shadow of the Ukraine conflict in Europe , and automotive market weakness continue to impact us and we now see these pressures sustained for a longer period of time, leading us to reduce our performance expectations for the second half.
Correspondingly, we have commenced a systematic <unk>.
Multi phased initiative to significantly reduce costs.
And integrate our operations decreasing complexity and focusing on improved performance across our industrial portfolio.
In doing so we anticipate a restructuring charge of approximately $24 million was $17 million of the charge in 2022.
Annualized cost savings are forecasted to be $14 million.
This initial restructuring will be broad based touching much of our industrial portfolio.
Within engineered components.
We will accelerate our move away from high volume Commoditized automotive business, focusing on market segments, where our products and technology are recognized for the value they create for our customers.
This does not mean, an exit from automotive end markets, but rather a focus on where we can generate suitable returns.
Accordingly, as the product lines offered by engineered components are consolidated we will be closing our associated spring Bristol, Connecticut manufacturing plant.
Work force reductions will be a part of these actions.
This integration of our engineered component operations builds upon the consolidation of our Detroit facility, which is already in progress.
Within our automation operations, we will be closing automation centers in Russia, Korea and Japan.
Our employees in Korea, and Japan are largely transferring to channel partners. So we benefit from a lower cost base you can still drive sales in these markets.
Within our molding solutions business, we are transforming our go to market strategy to focus on key regional markets of the Americas, Europe , China and Asia. This represents a significant shift in the current brand based commercial strategy.
While our powerful brands remain intact and integrated focus on the varying needs of customers within individual geographies will allow us to better tailor our extensive technology solutions to their specific needs generating the growth we must see for molding solutions.
Additionally, this integration will improve our cost structure by creating efficiencies and improved cost competitiveness.
Across industrial these actions and others are aimed at improving profitability and return on invested capital in particular, we desire to grow margins beyond what we delivered before the onset of the pandemic.
We will leverage our products and capabilities to expand reoccurring revenues across the portfolio. In addition, we will accelerate our growth ambitions in medical automation and electrification with a focus on less cyclical and more attractive end markets.
Yes.
In closing I'm thrilled to lead Barnes into the future and look forward to creating value for all of our stakeholders for our employees will provide challenging development opportunities and promote engagement empowerment remain an employer of choice.
For our customers will offer reliable service delivery high quality products and leading technologies to support their success.
And for our shareholders, we will work to extract the value potential embedded in our business with a focus on growth.
Profitability and capital returns.
It will move with speed and agility take decisive actions and reaccelerate the transformation of our business portfolio.
Notwithstanding some current challenges our future is bright and I'm excited to get started.
Now, let me pass the call over to Julie for a discussion on the financial details and some end market call.
Good morning, everybody and thank you Tom let me begin with highlights of our second quarter results on slide four of our supplement.
Second quarter sales were $321 million essentially flat as compared to the prior year period with organic sales, increasing 5% foreign exchange negatively impacted sales by 5%.
Operating loss was $20 2 million versus last year's operating income of $38 5 million.
In the second quarter. The company performed its assessment of goodwill at our automation business unit, a worsening economic outlook and weak operational performance led to a downward revision of its sales and cash flow forecast.
Which among other factors triggered a noncash impairment of approximately $68 million.
This impairment relates to the October 2018 acquisition of dramatic.
Excluding the automation goodwill impairment charge and a small amount of residual restructuring adjusted operating income was $40 1 million. This year up 2% from an adjusted $39 2 million last year.
Adjusted operating margin of 12, 5% was up 30 basis points from a year ago.
Net loss for the quarter was $39 6 million or negative <unk> 78 per share compared to income of $24 5 million or <unk> 48 per share a year ago.
On an adjusted basis, excluding the goodwill impairment net income per share of <unk> 56 was up 24% from <unk> 45, a year ago.
In the quarter interest expense was $3 3 million a decrease of approximately $1 1 million as a result of both a lower average interest rates and lower average borrowings versus a year ago.
Other income was 400000 versus last year's other expense of $1 3 million driven by foreign exchange gains in the current year versus losses in the prior year.
Excluding the goodwill impairment, our adjusted tax rate for the second quarter was 22, 8% compared with 25, 3% a year ago and 21, 9% for full year 2021.
Relative to the 2021 full year rate the increase was largely due to last year's benefits related to foreign audit adjustments and a realignment of Italian tax basis goodwill and intangible.
These items were partially offset by a change in our mix of earnings between high and low tax jurisdictions.
Now I'll turn to our segment performance beginning with industrial.
For the second quarter sales were $212 million down 10% from a year ago organic sales decreased 3%, while unfavorable foreign exchange lowered sales by 6%.
Industrials operating loss was $48 7 million versus operating profit of $27 3 million a year ago.
Excluding the goodwill impairment and a small amount of restructuring charges in the current and prior years.
Adjusted operating profit of $19 5 million was down 29% and adjusted operating margin of nine 2% was down 250 basis points.
Adjusted operating profit was impacted by lower sales volume lower productivity in part a result of COVID-19 related absenteeism and the net impact of inflation.
These factors were partially offset by lower incentive compensation.
Across industrial we experienced approximately $1 2 million in net absenteeism costs in the quarter a bit better than our April outlook. These costs have trended down over the first half and we expect that to continue in the second half.
In addition to the absenteeism costs, we saw approximately $10 million in gross raw material freight and utilities inflation in the quarter.
Through continuing pricing and procurement actions, we were able to mitigate approximately $9 million, resulting in a net $1 million inflation impact.
We expect an additional $2 million to $3 million net inflation impact in the second half of 2022.
With respect to orders and end markets at molding solutions organic orders increased 6% year over year, though organic sales decreased 10%.
Medical and personal care orders were up strongly while automotive and packaging were down.
That said orders improved sequentially from April to June and book to Bill was one one times for 2022, we now expect the molding solutions organic sales to be down low to mid single digits.
At force <unk> motion control organic orders were up 7% and organic sales were up 4%, we anticipate mid single digit organic sales growth for the year down slightly from our prior view.
Engineered components saw organic orders declined 3% driven by lower automotive and general industrial orders, while organic sales increased 7%.
Full year organic sales growth is anticipated to be up mid single digits unchanged from our April expectations.
At automation, we had a down quarter with organic orders down, 10% and organic sales down 5%.
Geographically Europe , where we generate approximately 80% of our revenues and automotive end markets drove the weakness.
As mentioned earlier, our full year expectation has declined and we now foresee flattish organic sales growth for automation.
For the industrial segment, we now forecast flat 2022 organic sales and have lowered our adjusted operating margin expectation to the range of 8% to 9%.
As Tom mentioned, the broad based economic headwinds and our performance continued to weigh on industrial results.
At Aerospace sales were $109 million up 26% from a year ago benefiting from continuing end market recovery.
OEM sales increased 14%, while aftermarket sales increased 55% compared to the prior year period, both very strong results.
Operating profit was $26 million up 82% as compared to the prior year period.
Excluding a small amount of restructuring charges in the current and prior year's adjusted operating profit of $20 6 million was up 76% from a year ago.
The adjusted operating profit increase benefited from higher sales volumes in particular robust aftermarket sales offset in part by labor availability.
Availability challenges, which led to unfavorable productivity.
Adjusted operating margin was 18, 9% percent up 540 basis points.
In our OEM business orders were solid and our book to Bill was greater than one five times for the second consecutive quarter for.
For the first time since Q1, 2020 sales crossed the $70 million quarterly threshold.
OEM backlog grew to $753 million up 5% from the first quarter.
We expect to convert approximately 45% of this backlog to revenue over the next 12 months.
Our OEM outlook has increased as we now expect low double digit growth for 2022 with narrow body platforms as the primary driver.
Our aftermarket business remains very strong as we generated MRO and RSP sales growth of 38% and 88% respectively.
<unk> data from an.
International traffic was encouraging and growth in international demand is expected to continue incrementally positive news on what has otherwise been a narrow body led recovery.
For the year, we now anticipate sales growth for MRO to be up in the low 30% and spare parts to be up in the mid 30%, both representing an increase from our prior outlook.
Aerospace adjusted operating margin is now forecast to be between 17, and a half and 18, 5% an uptick reflecting the higher aftermarket contribution.
With respect to cash year to date cash provided by operating activities was $9 million versus $86 million in the prior year period. The primary drivers of the lower cash generation are an increase in working capital and paid incentive compensation related to 2021.
We're working capital inventories increased during the first half as we built buffer stock to combat supply chain constraints and derisked exposure to titanium availability.
Accounts receivable grew with the sales level, which built through the quarter.
Free cash flow was a use of $5 million compared to a source of $68 million last year.
Capital expenditures were $14 million down approximately $4 million from a year ago.
With our balance sheet, the debt to EBITDA ratio as defined by our credit agreements was two three times at quarter end down from the first quarter's two four times and significantly improved from two nine times a year ago on.
On a net debt to EBITDA basis, we'd be at two times.
Our first quarter average diluted shares outstanding at period end shares outstanding were both approximately 51 million shares.
During the quarter, we repurchased approximately 200000 shares at an average price of $33 60.
And approximately $3 4 million shares remain available under the board's 2019 stock repurchase authorization.
Yes.
Moving to our updated 2020 to outlook on slide six of our supplement.
We now expect organic sales to be up 5% to 6% for the year with FX, having a 3% negative impact.
Adjusted operating margin is forecast to be between 11, and 12% down from our previous expectations due to the continuing pressures in our industrial segment.
Adjusted EPS is now anticipated to be in the range of $1 90 to $2 five.
Down 2% to up 6% from 2021, adjusted $1 94 per share.
We expect a 20 <unk> impact on EPS for industrial restructuring charges in the third quarter and another six in the fourth quarter.
In addition included in our 2022 outlook is a <unk> <unk> impact for CEO transition costs we.
We do expect adjusted EPS in the third quarter to be lower than that of the fourth quarter by a few cents.
Yes.
A few other outlook items.
Interest expense of approximately $13 $5 million and other expense of approximately $4 million are consistent with our prior view.
And effective tax rate of 24% to 25%, excluding Reg G items.
Capex of approximately $40 million to $50 million.
Excuse me, 40% to $45 million, which is lower than our prior view.
To close my prepared remarks.
We exceeded our internal expectation for adjusted operating income for the quarter. Our overall outlook for the second half deteriorated based upon deepening industrial pressures and productivity challenges.
We are actively addressing our cost structure and go to market strategy and industrial positioning the business to improve its performance as Tom mentioned, our focus is to drive profitability and returns and we will remain active in managing both through the cycle off.
Operator, we will now open the call for questions.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Christopher Glynn with Oppenheimer. Your line is open.
I had a question on the restructuring the $24 million.
I don't recall burns, having a charge that large but.
Referred as the initial restructuring so I wanted to kind of explore that word initial and.
Why do you use that terminology.
Hey, Chris This is Tom hook.
Julia chance to chime in here at the end.
At Barnes has done significant episodic.
Restructuring in the past as they need individual decisions with under Patrick and prior Ceos leadership.
I believe.
As Julie.
Need to have a systematic ongoing approach.
Driving our revenue and profitability improvement.
And as part of that.
A structured ongoing systematic approach to cost rationalization to drive efficiency and effectiveness needs to be implemented.
This first initial phases, what we're talking about today.
We've outlined here in the investor call and our disclosures.
<unk> issued the 8-K.
And.
We will as we move forward have additional phases that we will implement as we.
<unk> the planning cycle for those that are ready to announce them and implement them.
So thats a prospective expectation that we were going to do this on an ongoing basis as part of our fundamental strategy codified under the Barnes enterprise system.
Julian anything else okay.
Covenant.
How are you thinking about the <unk>.
Timing on the payback that $14 million.
So the payback will be approximately two years on this initial phase.
And from a cash perspective, which may be your next question.
We expect a net cash impact this year of about $3 6 million negative and then it'll be neutral in 2023 is the expectation.
Okay.
And then.
Curious, Tom it's pretty early but curious your view of capital allocation strategy.
From your approach there as CEO , maybe it makes sense to build cash for a while.
If you focus on portfolio interventions.
For now.
Sumit the acquisition strategy might be on hold.
Yes. Thanks for the question Chris is I think first of all let me since I've been on the board since 2016, I want to make it clear that is part and parcel with a strategy that Patrick and jewelry has been executing for years.
So I changed seats to the CEO seat a little bit different perch.
But fundamentally the strategies and approach.
Hi.
10 years, accelerating and foot refocusing, it and prioritizing core business execution.
You will probably recall my 13 years of integer rebranded the company and injury, specifically to do integration and cost out rationalization on an ongoing basis and I believe that strategies.
A very important piece is to have it bonds together and see.
First of a multi phase approach.
Cost rationalization.
I think our best investments are to continue in developing innovative products and driving commercialization, hence why we spoke to those today.
Capital allocation standpoint.
I'd say that were going to continue to look for attractive end markets, where we can pick up technologies and growth clearly automation portfolio had already commenced its foundation.
<unk>.
Is some operational challenges given what's happened during COVID-19 and the automotive industry's upheaval.
But we will continue to look for those areas, where we can invest in and be able to target those sweeter end markets I mentioned specifically.
Medical technologies markets also.
Autonation markets electrification, so I do believe theres good deals out there to have that fits the barns portfolio.
And we're going to look to exploit those.
Great. Thanks for the color.
Welcome.
Our next question is from Peter <unk> with <unk> Securities. Your line is open.
Hey, good morning, I'm on for Mike Chipotle. This morning, Thanks for taking my question.
First I just wanted to ask good morning.
Just wanted to ask on <unk>.
Aerospace given the strong performance and a strengthening outlook that you've got there what are you seeing on the labor front.
Have you been able to meet all your hiring needs in order to support the ramp that you're experiencing has there been a challenges around finding experienced workers with productivity and just kind of wondering if you're seeing conditions in the labor market is improving in the second half or is the environment, becoming more challenging.
Pete Outstanding question Labor, especially in the Americas is going to be a challenge for our aerospace we Ian reason and our <unk> Dawn Edwards are very focused on making Barnes a very attractive employer of choice.
Increasing our competitiveness to get at the labor challenges, we have significant labor needs in aerospace to keep up with growth.
It is a primary area of investment, we're making to be more systematically competitive and individually.
I think as we did lose a lot of talent when the aerospace disruption occurred through the Covid pandemic and it is largely a recovery right now we do have the advantage with both Singapore and Malaysia operations that have a more.
Fluid ability in those markets to attract talent.
More efficiently and effectively what that is in my mind, probably one of the primary vectors of continued aggressive growth at aerospace is the progress on bringing in skilled labor.
Into our aerospace business and that is really one of the primary operating focus is that we have.
And I look forward to as we get into the second half of the year being able to update on how that's progressing but it's from an operating day.
Employee standpoint is there's a lot of focus on this right now.
Okay. That's very helpful color. Thank you and then.
Just had a follow up on the capital that Casey.
<unk> question.
Are there any pieces of the industrial portfolio at this stage that you would view as noncore or might consider for divestiture.
Yes.
So I think from a macro standpoint is coming in as a board member that the CEO .
Im going to take a keen look at our entire overall portfolio as a company and assess how we feel the pieces fit and connect together so that assessment he'll be doing his visit.
Visiting facilities and operational teams and getting into our positions within the market our strength of our portfolio and technologies and we'll make that assessment and kind of communicate if theres anything that we feel we need or we don't need and then we'll make decisions from there. So I'd say, it's everything is under consideration right now for some.
New as the CEO , but we're going to continue to drive each of the product lines businesses and segments. We have as constructed because we have good operational skills.
We have to show that we can make them work. So mostly concerned first about just performance will handle the strategy question next.
Composition and go forward, how we're going to aggregate and collect things from an acquisition or disposition standpoint.
Alright, thanks for taking the question welcome.
Welcome.
Our next question is from Matt Summerville with D. A Davidson your line is open.
Thanks, a couple of questions first on industrial I guess from sort of struck by.
I heard you right.
Full year operating margin guidance to 9% that basically implies little if any improvement in the second half.
I guess, maybe just struggling with that a little bit.
Really trying to understand operationally what is sort of broken here.
Again.
Look across the industrial universe more broadly speaking and there's a lot of names right now that are delivering record margin performance and you guys are kind of it.
A decade low if you will in this business. So maybe just a broader kind of assessment on.
What's maybe gone wrong here.
Certainly is.
So I think when we if we step back and we look at our performance, we're not satisfied with our performance.
In industrial and by each of the underlying pieces, we need to parse and look for our growth.
Trajectories of where they need to improve.
Whether I was a board member and now as the CEO and certainly Julia as CFO .
We've worked with Steve <unk>, who has been on board as our industrial President for the past several years.
How we look prospectively to improve that performance, so you're correct Matt.
The second half guidance is largely mirrored on our trajectory for the first half, but our actions and plans, which we've announced obviously in the engineered component piece.
With the closure of Bristol.
Is to right size cost structure to be able to leverage the operational facilities with more volume in that engineered components business to improve profitability.
For our operations out of our automation segment.
By rationalizing some of the cost structure, we spoke here today some of the technical distribution centers, we have is to start that trajectory as well there.
There will be other actions that were not prepared to speak to today that will also get under Neath summit.
Cost structure of the other business segments as well.
But most importantly, we need to do a better job of managing the exogenous pressures inflation supply chain industry dynamics engage customers and pickup business better.
<unk> core business operational performance takes a lot of hard work and I view it as one of my primary responsibilities coming into the company is to get that momentum picked up through disciplined operations customer engagement and get our service delivery levels. The customers. That's what we will turn our revenues.
And we will turn our profitability.
Is a lot of hard work, but it is very effective in terms of results.
And that's one of my initial primary focuses is that beyond the cost rationalization is to just get the businesses running and being more effective and being from a comparative standpoint relative to other industrial companies.
A higher level performer.
As you look across.
The four different SB used within industrial what is your market share assessment.
As to how board Barnes has performed in that regard over the last couple of years.
Yes, it would be challenging each SBU, obviously has a position within the market, but there is a very base because of the different sizes of the business but.
But I would say that while we are very significant in the molding market in terms of our size and capabilities and presence.
The other areas of the market.
We are positioned differently. So I don't really think of your.
Your direction of your question that is more do we have markets limits I don't think so I think we're very competitive we have operational execution.
We're internally limiting our performance, we're not being market limited.
So we I will not use as an excuse.
Market variables were exogenous variables for a lack of performance we have to perform in a tough market environment and be more competitive because our competitors have shown that we can do they can do that which means we have to be able to do that.
And then I appreciate that answer Tom and then just maybe just final question.
Within industrial your sort of initial assessment, what kind of long term margin entitlement do you envision for this business both.
No.
From the time, we've kind of had your director had to now we're in the CEO has what's your assessment in that regard.
In one word much better.
But is I'll refrain from giving any sort of granular long term guidance I believe that.
The general threshold that im looking at versus a benchmark as we put in our comments because we want to be able to return exceed pre pandemic margins, which I view as the correct initial watermarks seen through the pandemic and the industry dynamics degradation of.
Margins.
Our struggle with managing an insulation and logistics and Covid quarantines all those challenges we have to prove that we can manage and go back and deliver the margins we were delivering before the.
The second half of the question would be is really one more thats prospective that I'm not ready to comment on is what margin should be prospectively when we can.
Better internal operational performance and I will just have to leave you in suspense met on that one will answer that in the future at a future quarterly conference call for you.
I appreciate it thanks Tom.
Thanks for the questions guys.
We have no further questions at this time I will turn it over to Bill Pitts for any closing remarks. Thank.
Thanks, Chris.
We would like to thank all of you for joining US. This morning, and look forward to speaking with you next on October 28, with our third quarter 2022 earnings Conference call.
Operator, we will now conclude today's call.
Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating you may now disconnect.
[music].
Yes.
[music].