Q1 2023 Barnes Group Inc. Earnings Call
Speaker 2: and all lines have been placed on mute to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again.
Speaker 2: Thank you and I will now turn the conference over to Bill Pitts, Vice President of Investor Relations. You may begin.
Speaker 3: Thank you, Abby. Good morning, everyone, and thank you for joining us for our first quarter 2023 earnings call.
Speaker 3: With me are Barnes President and Chief Executive Officer Thomas Hook and Senior Vice President Finance and Chief Financial Officer Julie Strike.
Speaker 3: 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 OneBarnes.com. That's O-N-E-B-A-R-N-E-S dot com.
Speaker 3: During our call, we will be referring to the earnings release supplemental slides, which are also posted on the website.
Speaker 3: Our discussion today includes certain non-GAAP financial measures which provide additional information we believe is helpful to investors.
Speaker 3: These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Speaker 3: You will find a reconciliation table on our website as part of our press release and in the form 8K submitted to the Securities and Exchange Commission.
Speaker 3: The advice is certain statements we make on today's call, both during the opening remarks and during the question and answer session may be forward-looking statements as defined in the Private Security's Litigation Reform Act of 1995.
Speaker 3: These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Speaker 3: Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
Speaker 3: These filings are available through the investor relations section of our corporate website at 1barnes.com.
Speaker 3: Let me now turn the call over to Tom for his opening remarks. Then Julie will provide a review of our financial performance and details of our updated 2023 outlook.
Speaker 3: After that, we will open up the call for questions. Tom,
Speaker 4: Thank you Bill and good morning everyone. As we exit 2022 and enter 2023, Barnes is fully focused on driving core business execution and demonstrating meaningful advancement in our transformation journey.
Speaker 4: Julie will talk about our first quarter financial performance in a few moments.
Speaker 4: I would like to take time this morning to address the meaningful transition actions underway at Burns.
Speaker 4: There are numerous products progressing across the company that will significantly rationalize overhead as we move from a holding company structure to a more agile operating architecture.
Speaker 4: These include streamlining corporate and segment overhead costs.
Speaker 4: to enable barns to compete more effectively in the markets we serve.
Speaker 4: All levels of leadership will be structured better, serve the needs of the operating businesses.
Speaker 4: to drive business performance.
Speaker 4: and to support our Integrate, Consolidate, and Rationalize Initiatives.
Keep in mind, while we expect similar quarterly sales levels for the rest of 2023. The prior year comparable is get tougher and a year over year growth rates will not be as robust.
And R. O M business orders were strong and a quarter up 13% and the book to Bill with 1.6 times.
R O M backlog of 793 million increased by 6% sequentially from December 2022, and was 11% higher than a year ago.
We expect to convert approximately 45% of this backlog to revenue over the next 12 months.
R O E M sales outlook for 2023 is up mid teens.
Slightly more favorable view than our February outlook.
For the aftermarket we forecast 20 twenty-three growth of low double digits, four MRO and high single digits for spare parts, both consistent with our prior view.
Also unchanged is our forecast for aerospace adjusted operating margin of between 18% and 19%.
With respect to cash first quarter cash provided by operating activities with 32 million versus a use of $9 million in the prior year period.
The primary drivers of the increase our lower paid incentive compensation in 2023 relative to 2022, and a lower change in working capital compared to the prior year period.
Free cash flow was $21 million versus a negative 17 million last year.
<unk> expenditures were 11 million up approximately $4 million from the prior year.
With our balance sheet.
<unk> EBITDA ratio as defined by our credit agreement was 2.39 times at order and.
When considering our cash position at year end on a net debt to EBITDA basis, we'd be approximately 2.1 times.
Our first quarter average diluted shares outstanding where 51.3 million shares and period and shares outstanding where $50.6 million.
During the quarter, we did not repurchased any shares in approximately 3.4 million shares remain available under the boards 2019 stock repurchase authorization.
Turning to slide six of our supplement let me share details of our updated outlook for 2023.
We continue to expect organic sales to be up 6% to 8% for the year with suggested operating margin between 12, and a half and 13.5%.
Adjusted EPS is expected to be in the range of $2.15 to $2.30.
Uhm, 9% to 16% from 2020 twos adjusted earnings of one dollar and 98 cents per share.
This revised range reflects an increase of five cents from our previous outlook at the low end given the performance achieved in the first quarter.
In 2023 adjusted.
Justin earnings per share are anticipated to exclude a 50 50.
56 cent impact related to the significant restructuring and transformation related activities announced today.
With 21 recorded in the first quarter, we estimate approximately 24 cents in Q2 seven cents in Q3 and four cents in Q4.
A few other outlook items.
Interest expense is anticipated to be approximately 24, and a half to 25 million driven by a higher interest rate environment.
Other income of 1 million driven by nine operating pension.
A full year effective tax rate between 24, and a half and 25.5%.
Capex of approximately $50 million <unk>.
<unk> diluted shares of approximately 51 million.
And cash conversion of approximately 100%.
In closing, our first quarter exceeded our internal expectations.
Salad organic orders and sales to begin the year provide positive momentum going into Q2.
We are modestly more positive in our earnings outlook for the year they'll remain cautious of the global economic environment.
Across the company the team is actively engaged in.
Plans to dry down inventory and improve working capital efficiency over the course of the year.
Now with a major phases of our restructuring and transformation program announced our focus will shift to delivering the operating and financial progress we expect from the initiatives.
Doing so will drive core business execution.
Cash flow generation.
The value creation, we expect to deliver.
Operator, we will now open the call for questions.
Thank you.
If you would like to ask a question press Star then the number one on your telephone keypad.
And we will pass for just a moment to compile the Q and a roster.
And we will take our first question from Matt Sommer <unk> with a Davidson your line is open.
A couple of questions first maybe starting with the industrial business can you qualify.
<unk> of all absorbed inflation you encountered in Q1 also how much in cost savings benefited Q1.
At the end of the day, what I'm Kinda trying to square is the fact of margins in that business had been coming down sequentially for three or four consecutive straight quarters.
I'm trying to get a feel for when we start to see that stuff function improvement towards the margin range, you're providing for the year and then I have a follow up.
Sure I'll I'll give you a buck.
Kind of a macro answer and then I'll, Julie followed through with numbers.
There is a lot of inflation that has come through as you know it kind of comes through the order book first Smith, and then threw into the P&L. We have over the course of the second half of last year to the order book largely through pricing and productivity actions been able to offset the effects.
Is inflation coming into the order book, but is that is cleared off into our piano behind.
Behind in 22.
Q1 in industrial we've largely around probably pursue basis with inflation, but going forward.
Expectations are now that we have the pricing initiatives taken affects over the past.
Six to nine months that I've been on board.
That is it's clearing.
Order book into revenue will be will be ahead of inflation and the 2023 is Peter continues.
To move forward, so kind of.
Quantifying Unabsorbed inflation Q1, I think we've done a reasonable job of offsetting installation effects on the piano in Q1, we were definitely behind in the second half of 2022.
Give an opportunity for Julie to quantify the positive effects of some of the initiatives on fees wanted to that affected Q1, and what it looks like for the remainder of 23.
Hey, Matt good morning.
So in terms of benefits coming through the P&L in the first quarter, it's largely benefits of phase one and two that are starting to flow in and it was less than $2 million in the quarter that we're starting to see now that will ramp largely in the second half of the year.
Ear, when we hit run rate starting in 2024. So it was a de minimis impact in the first quarter of the year, but we're gonna as I mentioned, we're going to start to see that ramp slowly over the course of the year.
And then in terms of the the margin.
Movement that we've seen you know sequentially, there's been a variety of factors that have contributed to that you know going from Q2 Q3 last year. There was some noise coming out of E. C. With the plant closures, what was happening, especially with inflation at that period in time per times comments, we were.
<unk> not keeping pace with inflation not only in D C, but across the rest of the portfolio, we saw a bit of a dip in dramatic in the third quarter than going from Q3 to queue for.
Was you know a <unk> a one time charge that we took some inventory true ups that we had in the fourth quarter that impacted the margins there.
And then it's time spoke to going from Q4 to Q1, it's really a story about the impact of mix them in some vantiv. The volume was down eight the Asian market was down where margins have historically tended to be higher we saw an increase in in engineered components.
As we mentioned as we received some stacking orders. So my my expectation is that we will start to see us now have steady performance.
In those margins over the balance of this year steady improvement I would not anticipate seeing the ebbs and flows that we saw in prior year periods.
Got it and then as a follow up just sticking with industrial <unk> can you give a little more color.
The benefit you saw from that stock in order either from the top or bottom line standpoint, we're thinking about that in the context of the go for organic cadence for the industrial business and then Thomas it sounded like in your prepared remarks. Please three at least if not so you just want them to is fairly Europe .
P M heavy from a restructuring standpoint.
And.
No that's not an easy.
Especially some of the countries are talking about so maybe give a little more detail to the U K and what are we talking about in terms of number.
Timing and how <unk>, you think about being able to meet the objectives you set forth from both a cost and savings standpoint with phase through thank you.
Sure is I think the short answer and restocking water issues with we really won't give.
You have too much color on that it's a positive effect, but is that something that is so noteworthy that we're gonna break it up.
But.
The good news is that we retained a lot of business with the Bristol move we performed well for the customers and that project is coming in on time.
And is expected as you go through the shutdown period, you typically take final stocking orders before they place their orders into the facilities.
There will be supplying them going forward into the future, but a small reminder, if there's some revenue that we do not plan on moving going forward because of the cough.
Sure margins of that facility sweep discontinue December those product lines uhm, but in the overall mix.
<unk> moving well the.
The wind down is moving well and you know just common around really the last stocking order is more of an indication of that's usually the final step for the final production runs before shutting down the facility and it's on schedule.
But it's got a meaningful health a SEC really to give you a lot of color on it.
Uhm phase three.
The initiative <unk>.
Sex rooftops.
Both on the pitching and catching and in the Americas.
In Asia, and Europe and China.
So uhm, we've comprehensively to look that overhead across the organization and are are overhead actions in this initiative.
At all levels of the organization.
Also has multiple rooftops a handful of rooftops that are affected.
In terms of consolidator here manufacturing footprint to drive more volume higher capable facilities globally.
European facilities involved I noticed several in Germany.
<unk> <unk> <unk> <unk>.
A similar approach on these global issues, whether it's been rooftops effected in the Americas as well as in Europe as well as in Asia. So it.
<unk>.
Part of balancing phase one in phase two and phase three <unk>.
<unk> rooftop consolidations out over time is at a very nice job of it.
And despite already doing multiple facilities in Europe in phase one in phase two we've kept those products and scope on schedule and a target.
So my confidence level on cost savings and achieving the objectives laid out is very high.
Dedicated resources and a business transformation office that are doing these products.
There's shepherd to the business operational teams.
The level of rigor.
That we've used is very similar to what I've seen used in the past and I expect to use despite having a your.
Footprints that are affected.
They will remain on schedule or be executed just as crisply as phase one in phase two and will realize the benefits and phase three just like we haven't.
Realizing in phase, one and phase two in terms of timeframe investment.
Savings.
I appreciate the color. Thank you guys.
Okay.
Think about.
Sure I'll take our next question from Christopher Glen with Oppenheimer. Your line is open.
Thanks, Good morning.
On the restructuring I was curious to hear about what you're looking at for the cash spend relative to the 58 million and the 29 million P&L investment for the three phases.
How are you thinking about the cash component.
Yeah, So Chris for this year, the net cash impact will be about $34 million is what we're looking at and the majority of that will hit the first half of this year. So there was a chunk already in the first quarter associate.
With the first a couple of phases primarily.
And then Q2 is another big cash outflow quarter as its forecast and it.
Trails off over the balance back half of the year.
[noise], Okay and.
Then just taken abroad look at what you're doing a cross the three phases with the fries.
The ambitions admirable the overall action oriented plan, but it's not easy to do I wouldn't pick those culture and habits that you know will be in conflict at times. So wondering what some of the bespoke challengers, you're saying you're anticipating Ah responding is your shake things up.
Well, it's been as you know Chris is busy nine months since transitioning C O chair with Julie and we have done consciously progressing.
Phased approach to this so that we don't result in a cultural Revolution. Just started this process, it's an evolution.
Consciously had been doing this.
Mm across the industrial portfolio as a teen uhm.
It's been a lot of communication has been too almost every industrial major operating facility globally and it led with communications and clarity with what our plans are.
Around our strategy to the T V.
We've recruited and leaders.
That have been able to execute either the programs are the core business execution to back this up.
Done that in a.
Yeah, that's that's very professional.
<unk>, so that we end up making sure that the.
Company understands why we're doing these things.
This is oriented like <unk> around integrating the company.
Consolidated facilities and rationalizing overhead so they're very clear on what the end objectives are and each piece, obviously fitch the macro.
So I find the communication clarity and candor is very important to make sure that the culture is coming along.
It's not an easy journey and I've done a lot of us in my career as well as other leadership team members, including Julie.
And I would say is you never can communicate too much but it it is really driven by the leadership team and consistency of performance.
I think when we started this.
Last year.
Uhm after just getting on board with Julie is much harder to gain momentum in this area.
Today, we have a lot of momentum via products completing.
So then would that momentum it's a lot easier to undertake phase three which is a much larger in scope.
The entire company, including aerospace industrial and.
The overhead structures and that is really the moment it looks as one in phase two is really set that up to be possible.
My last comment I'll make is assistant full coordination and synchronization with the board of directors.
Very tight governance and management of these programs.
I think it's a <unk> there's individual line items that are over 60 line items of initiatives were running and then I'm quite pleased with all professional we're doing it and thus far the culture is still evolving.
<unk> along to a more integrated company.
Process quite nicely and you know the only nine months, Sir I'm quite pleased with how far we've gotten already.
That sounds great I'll leave it there thanks.
Alright.
Alright, we'll take our next question from Michael ceremony with Trust. Your line is open.
Hey, good morning, guys. Thanks for taking my questions nice polka dots of the year.
Tom I guess.
That's just the the confidence level and in the second half industrial margin expansion you need to run rate I guess something just over can I feel like we've been here. We've done this before with bad resolved, there's always been some sort of you know forecast embedded in the outlook outside of your <unk>.
<unk>, but I just wanted to get you know.
<unk> level, maybe some of the variables and if I'd look at you know maybe the negative variables that you outline in the in the deck for 23.
I don't see any any disruption you know in there I mean, just going back to this phase three it it's got a lot of movement a lot of consolidation.
Wanted to get a handle on the risks there and and maybe specifically on aerospace if you're moving.
Anything to new facilities into different geographies, they're requalification risk their timing risks on some of those products specifically.
Yeah, I think it is cabinets logo is hi workload is high.
<unk> moving in parallel Mike.
One clarification on facility consolidations.
Most of the facility consolidations, we've done in phase, one and phase two and also for phase three Bolton industrial in aerospace.
We're moving or operation and production facilities to existing Barnes facilities that already make similar or the same products.
So when.
When you're moving a facility to an existing facility and kind of consolidating your volume, especially if you can move it to a site that has labour advantages cost advantages.
Having all of your production into a central location it does it.
Qualifications for the moves with customers.
But it is it like a greenfield the noble project for everything has to be re qualified from day. One those are much more complex.
Point out like is there sometimes timeline unpredictable.
So the approach. We're taking is is very logical to aggregate or volumes into central facilities Creek larger leveraged by having.
Volume through through that rooftop.
Takes place through the industrial moves, it's taking place through the aerospace moving as part of this project.
We really get down to bypass byproduct line and by customer and I've been having done a lot of this in my career.
Taking has been very successful using this approach and not trying to do I.
Trying to do to know will projects.
Is.
I can imagine with focus.
<unk> called this is execution.
The initiative surround integrate consolidate rationalize.
We know others inflationary pressures higher interest rate dynamics geopolitics potentially a looming recession.
Her job is to manage all of those effects and have the ability to actively manage the business in a way that can mitigate those we're not a new phone with you.
Global pressures, but part of the idea behind you know focusing one instead of the teen corpuscles execution to driving success.
<unk>, we get both done.
So given that we're working on those too and investing heavily in those two areas to deliver results.
We have.
Cautious confidence that we'll be able to deliver against your average out the mixed with all these effects I'm in our favor like aerospace industry recovery, some potential leaving negative effects, but we've got to manage the mall and we do it actively initiatives, obviously, we're leading into extremely aggressively here.
Because we know we need to become a more efficient and effective company. So we can afford more investments into the markets were trying to penetrate either geographically or product wise.
So is you know like my confidence level is high just because we've already successfully been doing this in phase one and phase two to plan.
<unk> K three while larger in scope.
Is a similar type degree difficulty products for us to deliver against.
Got it got it that's helpful.
You know not not to put the card ahead of the horse here, but if I look at the total run rate savings 53 million how much of that is gonna actually dropped to to operating and calm I mean, clearly there's there's inflationary costs that are gonna be sustained whether it's labor or what have you, but I mean a rethinking.
You know if I, if I go back to pre.
Pre COVID-19 thinking about you know you guys operating out of 15 to 16 per cent corporate margin I mean should we be thinking you can take this 18 and a half 19.5% you know with with just kind of run rate savings once we get out past 25.
Mike. Thanks for the question very leading him very forward looking but I would say that is.
I've said before when we.
Address this question.
The expectation is with the court does it even though it's a very different for all pre COVID-19 and postcode.
Which were balances going in terms of executing against core business and with the integration consolidation rationalize initiatives.
Our first objective is to get to the return of our revenue and profitability to levels that are pre COVID-19, even though the macro economy and the global dynamics, an interest rate so Netflix and everything is all changed.
<unk> get the company more efficient and effective to be able to serve the markets.
With the levels of performance that are at or above where we have historically done.
So it's a journey you know I've only been out for nine months working with Julia and the changes we've made a lot of progress.
You barely pointed out to.
Get back to the mid teens margin, which and higher.
Where are these plans and strategies are being invested in to deliver we've got a lot of work to do but directionally you know although we.
We have not confirmed what we communicated investor day for December 20th.
19 timeframe is our objected really assist to continue to press very hard for excuse me, it's a 2019 and the 2021 time for it is.
Press very hard to return to profitability on our registry is back to those levels.
Got it got it helpful. Thanks for your help <unk>.
Thank you.
Okay, we'll take our next question from miles Walton with Wolf Research. Your line is open.
Hi, good morning around this has dragged altered on for miles one quick question on the area I'm outlook. So it looks like a kicked up from mid teens this quarter to a low double digits. Previously I guess is that more confidence in OEM production and kind of supply change in general or can you talk to the pieces there.
Certainly is is we are very good I'll put driven right. Now is there is a lot of supply chain pressured arrive within the.
Yes, it's ramping back up again, I think that 12 document across a lot of industry publication and information that's already disclosed that other companies. We have a lot of backlog working up cause you know.
No comments, we've been stepping up our teams and trying to get some more efficient and productive coming out to perspective. So I would say we are you know.
Certainly have supply chain constraints, you know materials and Kasinger typically.
Sensitive to.
Right now we're trying to do the best we can to get more out the door against the customer requirements. So I still think for <unk> recovery.
I'm sorry.
N.
In a different way and the after market side with obviously more flying occurring.
The aftermarket is also recovered and or in a similar.
Situation, where we're trying to get her outputs up on the aftermarket site to match pace. So I. We are you know, obviously, providing that kind of teens guidance.
Uhm driven by just trying to catch up with you know the pull of the overall industry is your volume is on singling why body's recovery and I would say just in general is that recovery orders behind us and we're pushing hard to continue to catch up but I think it'll take most of twenty-three for us to try to run this down and.
The industry continues to shrink Sir.
Keeps speeding up to maintain pace, so favourable set of circumstances, but we have a lot of operational challenges onboard people get the supply chain of raw materials castings et cetera into our plans to be able to keep pace.
So I do think there's gonna be a delicate balance over the course of 23.
Got it. Thanks, that's helpful. And then just one quick one on leverage so I think you guys are sitting at just around 214 times in the quarter.
Target from the 21 and the rest of your day was 2.5 times I guess.
Swelling that into the core business execution, you know the restructuring efficiency point of view is that kind of the right target to think about more longer term or does that change is efficiencies blow through.
Okay.
Okay, Julie take that <unk>.
Yeah.
<unk>.
So.
2.5 times I think.
Is.
Is a nice target range for us it really depends though strategically and what's happening is Tom mentioned.
We're assessing acquisition options, if if something were to go through that leverage wreck branch may change honestly. The current interest rate environment, we're working to see what cash we have available we want to minimize interest expand so looking at maybe channeling cash to pay down data little would take that.
Leverage ratio down in the near term, but in terms of a long range point, where we'd like to keep things, there's not really been a change in our point of view on around two and a half times.
Got it. Thank you that's helpful I'll hop back in the queue now.
As a reminder to start one if you would like to ask a question.
Alright, we'll take a follow up question from Michael ceremony with Trust. Your line is open.
Hey, Thanks for taking up all of us.
The the hot runner weakness, I guess and into the auto market I mean, what.
You're getting into this business and.
Turn everything upside down <unk>, what should we really be looking at to gauge the help of that business is it model changing or or is it really production or what's <unk>.
Yeah. That's a great question like is it's it's different.
I think for us in the automotive hotter undersides of some kind of business dress in North America, it's getting better penetration into the North American market feed on the street and getting in front of customers more aggressively in our European business I think we've.
We've made a lot of investments last year.
To bring on.
Uhm feed on the street and be able to be more competitive with penetrating accounts in Europe , we do have competitive pressure in Europe .
Significant competition.
But we feel we've got some really nice product line capability and the emergence side.
Part of our cost actions in phase three or the address high cost basis operations that we have in this product line.
Drive better margins by having manufacturing done and lower cost environments to get up profitability, but I think in Europe cider commercial investments and they are <unk>.
Areas, you've been quite successful already.
We've invested and the last thing would be.
China.
The story is more one of product lines Uhm, if you know in China in particular.
Historically, you've been very oriented towards selling or out about a pattern product line is this very premium product line too.
Westernized Oem's manufacturing in China is that market is growing and shifting Tuesday.
<unk> literally is H a V E V type vehicle customers that are trying to base.
Historically sold into that channel. So you don't have a product line that's faction to that channel.
So in that area, we've re energize the commercial pain.
Orienting it away from just the large multinational William automotive manufacturers towards the domestic manufacturers.
And do it from my experience you know.
For coming to Barnes.
I had an automotive industry and <unk>.
Especially with large operations in China.
There's a distinct product line shifts that has to occur between what a multinational company you know kind of like a cherry.
Sherry automotive a D y D with order so reorienting the product line and.
Reconstituting the commercial team there and expectations is overall and automotive hot runners.
Should be a growth area for us like uhm. It is not okay. Then because we have <unk>, we have incorrect solutions five zone.
So it's a very granular answer for you.
The solution set your different by Europe America, and China based on the realities of those markets and I.
Good thing about it is we've done a good job diagnosing it now we're getting in and.
Putting these solutions in place.
<unk>.
Got it that makes sense.
You're welcome.
And with no further questions at this time I will now turn the call back to Bill Pittsburgh closing remark.
Thank you Abbey.
We'd like to thank you all for joining US this morning, and look forward to speaking with you next in July for our second quarter 20 twenty-three earnings conference call.
Operator will now conclude today's call.
Thank you and ladies and gentlemen, this concludes today's conference call and we thank you for your participation you may now disconnect.
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