Barnes Group Inc.
Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Ladies and gentlemen thank you for standing by and welcome to the Barnes Group Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call and Webcast. I would now like to hand the conference over to Mr. Bill Pitts, Director of Investor Relations. Please go ahead.

[Bill Pitts:]

Thank you, Sharon. Good morning and thank you for joining us for our fourth quarter and full year 2020 earnings call. With me are Barnes Group’s President and Chief Executive Officer, Patrick Dempsey and Vice President, Controller and Interim Chief Financial Officer, 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 bginc.com.

[Patrick Dempsey:]

Thank you, Bill and good morning everyone. The resiliency of Barnes Group was apparent once again this quarter as we grew sequential revenues for the second consecutive quarter and delivered adjusted EPS above the high end of our October outlook. Given the historic challenges resulting from the global pandemic for most of 2020, I am very proud of the many contributions of our 5,000 employees across the globe who stepped up to the challenge by going above and beyond to meet the needs of our customers and support our communities. And while I am happy with our performance, given the significance of the disruption, we at Barnes Group remain mindful and respectful of the personal and social hardships caused by the pandemic across the world. From the onset, our response to the pandemic was structured around four phases

[Marian Acker:]

Thank you, Patrick and good morning everyone. Let me begin with highlights of our fourth quarter results on Slide 4 of our supplement. Fourth quarter sales were $289 million, down 22% from the prior year period, with organic sales declining 21% as continuing impacts from the pandemic affect our end markets. The diversified Seeger business had a negative impact of 3% on our net sales for the fourth quarter, while FX positively impacted sales by 3%. Operating income was $32.7 million versus $61.3 million a year ago. Adjusted operating income was $32.9 million this year, down 48% from $63.5 million last year. Adjusted operating margin of 11.4% decreased 580 bps. Net income was $17.7 million or $0.35 per diluted share compared to $41 million or $0.80 per diluted share a year ago. On an adjusted basis, net income per share of $0.36 was down 58% from an $0.86 a year ago. Adjusted net income per share in the fourth quarter of 2020 excludes $0.01 of residual restructuring charges from previously announced actions, with most of the impact reflected in other expense, not operating profit. For the fourth quarter of 2019, adjusted net income excludes a favorable $0.05 adjustment related to the finalization of Gimatic short-term purchase accounting and an $0.11 non-cash impairment charge related to the divestiture of Seeger, both in our Industrial segment.

[Operator:]

First question comes from Myles Walton with UBS.

[Myles Walton:]

Hi, good morning. Thanks for taking the question.

[Patrick Dempsey:]

Good morning, Myles.

[Myles Walton:]

Patrick, you highlighted a couple of areas around the elevated investment, in particular, the CapEx and the R&D, could you – you obviously quantified the CapEx. Could you quantify the R&D headwind as well? Sorry, if I missed it. And then also, is it primarily associated with the LEAP expansion? Is it associated with other things and maybe it’s elevated between Aerospace and Industrial?

[Patrick Dempsey:]

Fair question, Myles, it’s predominantly, at the moment, more focused on the Industrial side of the business. And if you may recall last year, we indicated in our first quarter that we were going to launch our Innovation Hub, which was with a view to developing a new range of capabilities around research and development, particularly applied and fundamental research. So with that, last year, we indicated an approximate budget of around $5 million. We ended up coming in shy of that for the year at approximately $3 million. And then as we think about this year, we are thinking about incremental $2 million to $3 million on top of where the run-rate was last year. The emphasis is primarily on materials, software, hardware and sensors as the areas of focus that the team that we have assembled in the Innovation Hub, are directly focused on all with a view to drive an organic growth primarily in the short-term within our Molding Solutions business.

[Myles Walton:]

And then on the CapEx, is it similar weighted towards Industrial?

[Patrick Dempsey:]

The CapEx is a – somewhat of a two-thirds, one-third split with Aerospace looking at expanded capabilities as we mentioned relative to the win on our last quarter of the new expanded deal with GE. And then on the Industrial side, when we think about our CapEx, usually, it’s approximately 50% maintenance, 50% dedicated to growth programs.

[Myles Walton:]

Okay, okay. And then just a couple of cleanups, on working capital assumptions, I know you’ve got a guidance for greater than 100% cash conversion. Working capital was a pretty big help in 2020. Is it a headwind in ‘21 or is it a neutral in ‘21?

[Marian Acker:]

So Myles, this is Marian. I’ll take that. We had a great cash generation with working capital in 2020. When I look out to 2021, I think that we continue to have some level of opportunity there, particularly in inventory. So we are looking for some modest improvements in 2021.

[Myles Walton:]

Okay, great. And one last one, the margins for aero in 2021 given the outlook you’ve had – you have for aftermarket, particularly RSP, I guess I’m pleasantly surprised that you’re thinking about a 13% to 14% margin with a mix that is obviously not helping. Can you maybe touch on how you’re able to do that? Are the margins improving in the core OEM business? Is this just payoff from restructuring or I don’t know give some color to 13% to 14% with really no help from mix?

[Patrick Dempsey:]

Sure. No, the mix is definitely not our friend as it pertains to margins on the Aerospace side, clearly because of the depressed aftermarket side of the equation. But with that, I would say that our Aerospace team has done an outstanding job over the course of the year with taking out costs and sizing the business to the current outlook in terms of volume. We’re looking at modest improvement in revenues, up mid-single digits on the OEM side. And the team there has really done an outstanding job leveraging the enterprise system to look at how to drive – how to almost look at the business with a reset mindset. And in that reset, they’re looking at clearly how to drive efficiency, take the opportunity now to implement greater flow into the shops with the pressure of the volumes often and so we’re looking for productivity coming out of our OEM business. And with the aftermarket side, what we’re looking at and what we’ve built into our forecast is slice improvement in sales sequentially quarter-over-quarter. Still, as I mentioned, down mid-teens year-over-year. But nonetheless, within that, we see the second half of the year, slightly improving over the first half as it pertains to the aftermarket, in particular, the spare parts in the MRO side.

[Myles Walton:]

Okay, alright. I will leave it there. Thanks.

[Patrick Dempsey:]

Great, thank you.

[Bill Pitts:]

Thanks, Myles.

[Operator:]

Next question comes from Michael Ciarmoli with Truist Securities.

[Michael Ciarmoli:]

Hey, good morning, guys. Thanks for taking the questions here.

[Patrick Dempsey:]

Good morning.

[Michael Ciarmoli:]

Just some housekeeping, just to kind of follow-up on Myles, I don’t think I got the – what was the Industrial segment margin guidance for ‘21?

[Patrick Dempsey:]

The industrial side was 12% to 14%.

[Michael Ciarmoli:]

12% to 14%, got it. And then in the quarter, I know you – Patrick, you kind of went through quickly some of the business unit growth rates sequentially. But can you just quickly run down molding, engineered force and automation, what the actual year-over-year growth rates were in the fourth quarter?

[Patrick Dempsey:]

Yes. So if I look at industrial in total, and did you ask orders?

[Michael Ciarmoli:]

No, no, revenues in the quarter – yes, for the business units.

[Patrick Dempsey:]

Revenues, okay. Yes. So yes, in terms of Force & Motion Control, sales were down modestly, whilst up high single digits sequentially. On Engineered Components, organic sales were up mid-single digits. On automation, our sales were up 20%. And in Molding Solutions, you have Molding Solutions, Bill?

[Bill Pitts:]

Yes, they were down low double-digits.

[Patrick Dempsey:]

Yes, low double-digits.

[Michael Ciarmoli:]

Okay, perfect.

[Marian Acker:]

And just to clarify one thing on Engineered Components, down about 20% year-over-year, up the high-single digits sequentially.

[Michael Ciarmoli:]

Great. Got it. And then just on the Aerospace OEM outlook. I mean, I think I heard it, you’ve got 45% of that backlog shift this year. If my math is correct, that seems to be low double-digit revenue growth if you’ve got 45% shipping. Is there I don’t think there’s any aftermarket in there, but is the math right there in terms of what you guys called out, what’s shippable this year? I guess it implies something around $260 million shippable?

[Patrick Dempsey:]

I believe that’s correct. And where we look at BA on the OEM side, we’re looking to see up mid-single digits at 2021 versus ‘20.

[Michael Ciarmoli:]

Got it. But again that shippable point to like low double-digits, so just some conservatism in there?

[Patrick Dempsey:]

There’s – well, I think we have – we’re looking at a ramp over the course of the year. So with that, we’re looking at slight sequential improvement quarter-over-quarter even within the OEM business. So there may be some cautiousness there. But nonetheless, I think we’re very comfortable with the mid-single digits.

[Marian Acker:]

We also expect some level of orders to come in that will book and ship in the year in addition to what’s in backlog.

[Michael Ciarmoli:]

Okay. So that would imply it’s even stronger then than the kind of guidance you are suggesting of mid single-digit?

[Patrick Dempsey:]

Well, I think on the OE side, Mike, 45% of that backlog is about what we expect the OE to be. Your numbers weren’t too far off.

[Michael Ciarmoli:]

Okay. And then just last one for me, and I’ll get out of the way. Just any color, Patrick, on the aftermarket? Sort of – I know you’ve got the guidance here, but anything you can call out that you’re seeing from customers or anything you are seeing from shop visits or engine inductions, sort of just kind of what you are seeing from your big customer there? I mean how this is tracking? It seems like we’ve heard some of the big airlines need to start spending on these heavy maintenance visits. But what are you seeing from the customers there? I mean, I know you talked about maybe more of a second half, but any color on shop visits or other trends there?

[Patrick Dempsey:]

Yes. Well, we actually finished fourth quarter, I think, in a higher place than what we had expected. Our Aerospace business overall in the fourth quarter sequentially was up 11%. And we saw a strong relative – everything is relative, but a relatively strong finish on the aftermarket, which was more, I think, upside than we had expected. As we move into the New Year, what I would say is that we’re seeing a little bit of volatility week-to-week, month-to-month. And not necessarily anything that constitutes stability – consistent stability. Relative to the spares side of the business, it clearly is lagging right now the MRO activity. So we’re seeing repairs coming in at a higher rate than we’re seeing the spares but at the same time, we actually believe that there is that pent-up demand as the vaccine takes hold and the aircraft start to increase in utilization. Definitely, I think the airlines have managed and deferred maintenance, very prudently. And so in turn – and I also think that depleted their stock relative to spares that they had on hand. So all boding well for once we see that uptick in traffic, we expect that it will flow through into the aftermarket.

[Michael Ciarmoli:]

Got it. Perfect. Thanks guys.

[Patrick Dempsey:]

Thank you.

[Bill Pitts:]

Thanks Mike.

[Operator:]

Next question comes from Tim Wojs with Baird.

[Tim Wojs:]

Yes. Hey, good morning everybody.

[Patrick Dempsey:]

Good morning, Tim.

[Tim Wojs:]

Maybe just the first question I had, just on the restructuring benefits in actions that you took kind of middle part of ‘20. How are you kind of factoring those actions into the 2021 guidance? If you could kind of break out any of the benefits between Industrial and Aerospace?

[Marian Acker:]

Yes. So this is Marian. So in the second quarter, we had talked about annualized savings of approximately $30 million. And we’re tracking and expect to realize that in 2021. What I would say and that split of that is about two-thirds – third or so in the aerospace and two-thirds in the industrial side. What I would say, though, that those cost actions really were to mitigate the impact of the lower sales. So – and we realized a portion of that in 2020 as well really to allow us to maintain those double-digit margins. As we go into 2021, I think we’ll see some lift in the margin on the industrial, some benefit of that. And as we see a – if we see more meaningful recovery, we’d start to bring some of those costs back in.

[Tim Wojs:]

Okay. Okay, that’s helpful. And then just in Industrial, how should we think of the phasing for the year that’s kind of built into the revenue line? I mean, would you expect to see sequential growth in each quarter through the year? Is that kind of built in? Just trying to think about how we should think about the revenue phasing in Industrial?

[Patrick Dempsey:]

Yes. That’s how we’re thinking about it, Tim. What we saw was a the factor between Q4 and Q1 that has had us indicate Q1 as the lowest quarter in the year is a result of just timing of major long lead items, which are the molds for the most part. So orders continue to show strength. However, the timing of deliveries will move into second, third, fourth quarter.

[Tim Wojs:]

Okay. Okay, that’s helpful. And then just kind of a last one and I’ll get back in queue, but inflation, how are you kind of factoring just the inflationary environment into the margin guidance? And just kind of remind us some of the levers you’re able to pull to offset any sort of inflation?

[Patrick Dempsey:]

Well, it’s a great point because it is an area that the team for months now has been out in front of. And as we looked at a rebound into our end markets, effectively, what we’re executing is a playbook, a cyclical playbook in the sense that the teams anticipated a number of key areas where we see inflationary pressures, primarily raw materials, freight. And then we’ve been monitoring carefully tariffs as well, which haven’t gone away. But the – to put it in context, on our aerospace side, recognize that most of our raw materials are passed through on pre-negotiated prices. Whilst the team in Industrial has a portion of their raw materials that are covered under the same type of arrangements with escalation openers, depending on movement of raw material. And then mitigating wise, the – our sourcing team has done a really nice job of looking to manage to the best durability those inflationary pressures, but at the same time, on the sales side, working equally as hard to ensure that we’re passing those through to our end customers so that we are not caught in the middle, so to speak.

[Tim Wojs:]

Right. Okay, okay. That’s helpful. Good luck on the ‘21 guys.

[Patrick Dempsey:]

Thank you very much, Tim.

[Operator:]

Next question comes from Pete Skibitski with Alembic Global.

[Pete Skibitski:]

Hey, good morning guys. Nice quarter.

[Patrick Dempsey:]

Thanks, Pete.

[Pete Skibitski:]

Hey, Patrick, could you just give us explicitly kind of your underlying assumption for global automotive production growth that’s kind of baked in the guidance? And then I’m just curious how you’re thinking about the risk to the guidance that could stem from the semiconductor shortage?

[Patrick Dempsey:]

Yes, great question. So as we look at the pressure that was experienced on auto production in 2020 and now as we look out to the coming 12 months, general consensus is that auto production will bounce back up into the mid-teens growth. We haven’t quite been that bullish. What you see within our Engineered Components business is a forecast for up high single digits, again, realizing that the split on our Engineered Components business, which is predominantly auto production, is about 60-40 between auto and industrial. So we don’t get – we didn’t get the full impact on the downside. We don’t get the full benefit on the upside. So that gives you a sense of where the growth rates that we’re looking at in terms of auto production for the coming year. I will say that the – we’re monitoring closely the semiconductor shortage issue. We do believe that it’s probably going to impact us a couple of million, but we’ve baked that in. What we have a line of sight to, we baked in right now to our forecast. If it were to increase and become even more of an impact to the industry, then we’d keep you informed it at as we move through the year.

[Pete Skibitski:]

Okay. Okay, got it. And then – and just on the model changeovers that you’re expecting in ‘21 and the impact of hot runners, it sounds like you’re expecting model changeovers just maybe conservatism of the auto OEMs that there would be kind of lower growth than the actual production rates. Is that fair?

[Patrick Dempsey:]

It’s fair. And at the same time, I would tell you that the model launches, we remain very bullish on because of the fact that we’ve seen stepped up activity right now, specifically around the electrification of vehicles and the announcements that continue to come out. So electric vehicles for our auto hot runner business is a positive in so far is that as these new models get introduced, each of them drive demand for our services and capabilities.

[Pete Skibitski:]

Okay. Okay, that’s great. Last one for me, I am curious how do you explain automation? Or how should we think about automation’s performance in 2020, right? I mean we went through a cyclical downturn, let’s call it, a pretty severe one. But automation’s revenue was flat year-over-year. How do we think about that? Was FX just a really big tailwind for those guys or something else? Can you talk about that?

[Patrick Dempsey:]

Well, I think the automation team did an outstanding job over the course of the year. And what they did was they pivoted to look to adjacent markets relative to applications that may have not been front and center for them previously. Automotive constitutes a significant piece of the automation market. And so as its downturn, the team turned their efforts to medical and pharma as an example, with a view to developing new capabilities, which I think we helped in 2020, but have also set a stage for the future. The revenues, as you said, overall, were flat to up low single digits. But what we’ve seen throughout 2020 in automation is just some nice growth Q2 to Q3 and Q3 to Q4, with the last sequential quarter being up 20% plus. So team there is doing a nice job. In addition to the investments we made, particularly in automation over the course of 2020, allowed us just here in the last couple of weeks to announce the launch of our vacuum product line. And that has been in development for over a year and choreographed for entry into the marketplace this last January. So we’re excited about that as another incremental opportunity for growth in addition to the already extensive end of arm tooling capabilities that they already bring to market.

[Pete Skibitski:]

Okay. Okay. Thanks so much for the color guys.

[Bill Pitts:]

Thanks, Pete.

[Patrick Dempsey:]

Thank you.

[Operator:]

Next question comes from Myles Walton with UBS.

[Myles Walton:]

Thanks. Just a couple of follow-ups if I could. You mentioned the higher shipset on the MAX, Patrick, when does that cutover happen? Is it immediate? Is it 2022, 2023?

[Patrick Dempsey:]

Well, it will grad – it will move – it will gradually cut in over the next couple of years. But we look at it even with volumes this year we see a slight tick up in terms of demand. So we’re building ahead right now in terms of the LEAP B in anticipation of production catching up. So we’re building a little bit of inventory as we speak, but expect that, of course, that will come in sync with actual production over the latter part of 2021 and into ‘22.

[Myles Walton:]

Okay, good. And then the only other follow-up was on interest and other expense. I know you mentioned, I think, $16.5 million for interest and $8.5 million, I think, was other expense, both of which are higher than I would otherwise have guessed?

[Marian Acker:]

Correct.

[Myles Walton:]

Could you – the run rate of interest and also in the other, how much is sort of non-cash pension amortization driven versus something cash driven?

[Marian Acker:]

Sure. On the interest expense, so we guided to $16.5 to $17 million, which, as you say, is a bit higher than 2020. We do expect the benefit of lower average borrowings in 2021, but that’s offset by a bit of an uptick in our effective interest rate. So we just renegotiated our revolver. We announced that last week. There’s a small uptick in the rates. And as we’ve mentioned also, our covenants were at the higher end of our covenants for over the 3.0 mark, which puts us into a higher pricing grid for about half of this year. So that really explains what’s going on with the interest. On the other expense, on the pension side, there’s about $3 million of headwind in there that’s related to the discount rate. So we – our discount rate dropped in for 2021, and it puts about $3 million of headwind on the pension expense.

[Myles Walton:]

Okay. And no contributions expected this year invention of material sense?

[Marian Acker:]

We don’t plan on any discretionary, any incremental. There’s about $4 million or $5 million. That’s the normal contributions that we make, but no discretionary contributions planned at this point.

[Myles Walton:]

Okay, great. Thanks again.

[Patrick Dempsey:]

Thanks, Myles.

[Operator:]

Next question comes from Pete Skibitski with Alembic Global.

[Pete Skibitski:]

Yes. Just one or two quick follow-ups. Patrick, are you still anticipating CFM56 shop visits, not the peak for several more years? Are we kind of still on that track? To what degree you’re thinking about the early retirements or whatnot?

[Patrick Dempsey:]

Yes. It’s a great point. We definitely see the peak still out in front of us, and it’s potentially move to the right as a result of the reset, if you like, that occurred in 2020. And so as we look out, we think that shop visits will obviously down in the short-term, but still on a growth trajectory as the industry recovers. Relative to retirements, we’ve not seen the rate of what was feared perhaps in terms of a big spike, that I don’t think has manifested itself. And so in general, a lot of movement relative to green time engines within the industry. But at the same time, that bodes well from our perspective in terms of pent-up demand.

[Pete Skibitski:]

Okay. Okay, great. Just one last one for me, more broadly on the aerospace aftermarket, I don’t know how to think about this. Do you see Patrick, any kind of structural changes to the aftermarket as we go through this kind of historic downturn? Anything that would indicate to you that business relationships or freight or people – how OEMs maybe looking at different arrangements, anything that could potentially benefit you as a result of how big this downturn has been?

[Patrick Dempsey:]

Well, I think that the entire industry has had to take a step back and we look as it’s business model from every angle and to that end was I would highlight that we are doing is stay in extremely flows with our larger customers would have view to ensuring that as we move forward, we will look into demonstrate and find even more creative ways of highlighting the value that we can bring to the table as a strategic partner over the long run. As you know, our relationships have been in place for many years, if not decades. And we continue to build upon that and continue the dialogues. Definitely, there is pressure on the entire industry from a competitiveness standpoint. And as I mentioned earlier, I think one area that the Aerospace team has been really focused on is how to take advantage of this reset to position the business in terms of overall effectiveness and efficiency to be even leaner and more streamlined in terms of coming out of this downturn. So looking at it as an opportunity to position for with a night to longer term growth which will come inevitably, but as I mentioned on the OE side, it will take I think a couple – a few years, a couple to a few years, whilst the OEM will just gradually improve as production rates kick back in.

[Pete Skibitski:]

Okay. Just to continue on that efficiency point on the OEM side. Any – are we at the end of the line for content gains on the LEAP-1B or are any further opportunities out to you there?

[Patrick Dempsey:]

I would say that we’re still in dialogue. It definitely is a continuing evolving situation. And so there is clearly negotiations or discussions taking place at present relative to the outlook for potential increases in share and a focus on just overall competitiveness. So the team is actively engaged on that. And we remain optimistic that the value we bring to the table will put us in a good position as we continue to go forward, so…

[Pete Skibitski:]

Got it. Thanks very much for the color.

[Patrick Dempsey:]

Thank you.

[Bill Pitts:]

Thanks, Pete.

[Operator:]

Next question comes from Michael Ciarmoli with Truist Securities.

[Michael Ciarmoli:]

Hey, guys. Thanks for taking the follow-up. Just back to the aero OEM, how big of a headwind is the 787 this year? What rate are you currently shipping at? And do you expect that to be quite a drag? And I guess just looking at this between 870, A350, are you picking up the growth this year with all of the narrow-body on the leaps? Is that’s what’s driving the offset?

[Patrick Dempsey:]

Yes. We see the upside on the narrow body and definitely, the wide-body being more of a drag. The 787 right now is, I think, in the 5 range.

[Bill Pitts:]

5, just under.

[Patrick Dempsey:]

So while we’re – that’s what we’ve done is we’ve adjusted within the shops, our production shops to the rate to the rate that we think is most probable in light of continual feedback from the OEMs, but also then relative to how we’re streamlining the shop. So but I think for the most part now, I would say that our – on the OEM side, we’re starting to see the rate projections which were very volatile for a period of time stabilizing as we look going into the year and the out years.

[Michael Ciarmoli:]

Got it. And no real signs for you guys of inventory destocking, has that sort of run its course?

[Patrick Dempsey:]

I think it’s still happening, to be honest, in certain programs. Specifically on the 737 MAX, as an example, the backlog that was there in terms of parked aircraft and also white tails that have been created or produced. And so yes, but what we’re looking to do is to stabilize our own shops by even if it means building a little inventory because we got it wrong in the short-term. We absolutely believe they will converge, and there’s an opportunity, in some instances, that will bleed down inventory over the course of 2021, whilst in other areas, we might be running a little heavy until the customers catch up with us.

[Michael Ciarmoli:]

Got it. Got it. Perfect. Thanks guys.

[Patrick Dempsey:]

Thank you.

[Bill Pitts:]

Thank you.

[Operator:]

And at this time, I will turn the call over to Mr. Pitts.

[Bill Pitts:]

Thank you, Sharon. We would like to thank everyone today for joining us this morning and we look forward to speaking with you next in April with our first quarter 2021 earnings call. Operator, we will now conclude today’s call.

[Operator:]

This concludes today’s conference call. You may now disconnect.