Barnes Group Inc.
Q2 2016 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good morning. My name is Kelly, and I will be your operator today. At this time, I would like to welcome everyone to the Barnes Group Inc. First Quarter 2018 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to William Pitts, Director of Investor Relations, please go ahead.

[William Pitts:]

Good morning, and thank you for joining us for our First Quarter 2018 Earnings Call. With me are Barnes Group's President and Chief Executive Officer, Patrick Dempsey; and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens. 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. During our call, we will be referring to the earnings release supplement slides, which are also posted on our website. Included in our slides for this quarter is information related to the impact of U.S. tax reform, which Chris will cover shortly. 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 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 SEC. In addition, with our adoption of the FASB’s amended its guidance, for the presentation of pension costs, you'll find a summary of the reclassification adjustments made to our previously recorded financial results on our Investor Relations website and in this morning’s separate Form 8-k submitted to the SEC. Be advised that 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 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 Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com. We'll now open today's call in our usual fashion with remarks from Patrick, followed by a review of our first quarter results and our updated 2018 outlook from Chris. After that, we'll open up the call for questions. Patrick?

[Patrick Dempsey:]

Thanks, Bill, and good morning, everyone. Barnes Group opened the year with solid first quarter performance, exceeding the expectation we had shared with you on our February call. In doing so we now have heightened expectations for 2018 and our end markets remain generally favorable in support of this enhanced outlook. We ended the quarter with record backlog in each of our segments and total backlog now exceeds $1.1 billion. In the first quarter, net sales increased 7% with each segment seeing an increase. Organic sales were up 1%, primarily driven by aerospace strength, while industrial organic sales were down slightly as foreign exchange provided the revenue lift there. Operating income was essentially flat to last year's first quarter and earnings per share improved to $0.72, up from an adjusted $0.71 a year ago. At our Industrial Segment, sales grew 8% over the prior year period. So our organic sales declined slightly. With healthy end markets and favorable FX, we saw a record quarter for orders, which were up 12% in total. Organic orders were up mid-single digits. This result was achieved even with the non-recurrence of a sizable heavy duty suspension order in our Nitrogen Gas Products business, that we booked in Q1 last year. As such we're feeling positive about our prospects for the remainder of 2018. At Molding Solutions, total sales increased 15% while organic sales were essentially flat. Sales in the quarter were impacted in part by mold validation time issues. And while the molds have been manufactured, revenue recognition doesn't occur until final validation and customer acceptance. While we see some to leverage shifting to the right, we still expect Molding Solutions to deliver higher quarterly sales in the three remaining quarters. Within the SBU and with respect to hot runners, we anticipate automotive program launch trend in both Europe and Asia to offset softening demand in North America, given the exceptional year there in 2017. With our molds business we see very strong medical and personal care end markets with a corresponding benefit for hot runners. In particular, Männer generated record quarterly orders and saw a backlog increase to an all time high in the first quarter. For the year we continue to forecast Molding Solutions sales growth in the opened the year. Moving to Nitrogen Gas Products, the global tool and die market has maintained its strength entering the year. And while we don't envision significant - excuse me, and while we don't envision significant growth over the record 2017, sales level we remain positive in our outlook. In the quarter, organic sales declined 7% relative to last year's strong first quarter. So keep in mind that this quarter sales are sustained at a high level. Similar to Synventive we're seeing some relative softness in North American automotive. However, for NGP higher activity in industrial tool and die markets is partially offsetting that dynamic, which has feigned high sales volume, reflective of a difficult comparison. Through the remainder of the year we continue to expect full year total and organic growth to be in the low-single digits. At Engineered Components, first quarter total sales increased 4% with essentially flat organic sales. Sales growth primarily came from transportation end markets for automotive and non-auto. Here too our end markets are favorable. Global automotive production forecasts are modestly positive over the next several years. And manufacturing PMIs for our key regions remain strong. Progress on operational challenges within associated spring has been made. And our forecast reflects sequential margin improvement in Engineered Components in the second half. All in, our revenue expectation is unchanged with 2018 sales in line with 2017 levels. Likewise, at the Industrial Segment level our prior outlook holds with 2018 full year total sales in the low-to-mid single digits with organic growth in the low-single digit. Forecasted operating margin is projected to return to the mid teens. Moving to Aerospace, we delivered another excellent performance quarter. First quarter sales were up 5% as compared to a year ago, while OEM sales increased modestly, which was not unexpected, orders remain very solid and OEM backlog grew to a record level. In the aftermarket business, sales growth was robust up 19% with MRO sales up 16% and spare parts sales up 23%. Certainly, our business is benefiting from a vigorous commercial aerospace environment where aircraft bill rates are expected to remain strong over the next several years and current fleet utilization remains high. On the OEM side, we envision stronger quarterly revenues for the remainder of the year, driven by LEAP and Trent 7000 programs among others. Accordingly, we continue to expect full year OEM sales up in the high single-digits. In the aftermarket, our full year outlook has improved with MRO revenues expected to be up in the high single-digits and spare parts now up mid-to-high single digits. Our operating margin outlook is for the high teens. As a side note, I had the opportunity to attend the MRO-Americas Conference in Orlando a couple of weeks ago. And to no surprise, found the sentiment there was overwhelmingly positive on the current aftermarket environment. With sustained strong industry demand trends which are reflected in our quarter's results and increased full year outlook, we expect a great year for Aero Aftermarket business To close out my comments, we have started the year with solid performance that positions us well for 2018. Operationally, we're making good progress in executing on our plans. In addition, our end markets are supportive of our positive outlook. So with continued momentum and a focus on driving our long-term growth strategy, we remain confident in the prospects for another good year. We look forward to delivering on our outlook and driving further value for our key stakeholders. With that, let me now turn the call over to Chris for a discussion of the financial details of the quarter and a broader update on a current year guidance.

[Chris Stephens:]

Great, thank you Patrick and good morning everyone. Let me begin with highlights of our first quarter results. For the quarter, sales were $367 million, up 7% from the prior year period with an FX benefit of approximately 5%; organic sales growth of 1% and acquisition revenues of 1%. Net income was $38.8 million or $0.72 per diluted share, up from an adjusted $0.71 per share last year. Adjusted net income for share in the first quarter of last year excludes $0.01 of FOBOHA short-term purchase accounting adjustments within our Industrial Segment. Moving now to segment performance, beginning with Industrial. First quarter sales were $246 million, up 8% from the prior year period, driven mostly by the impact of FX. Operating profit was $32.4 million, down 6% from an adjusted $35.5 million in the prior year period as a lower contribution from organic sales inclusive of unfavorable product mix and lower productivity weighed on the quarter's performance. Operating margin was 13.2%, down 200 basis points from an adjusted 15.2% last year, up 170 basis points sequentially from an adjusted 11.5% in the fourth quarter of 2017. For Aerospace, first quarter sales $121 million, up 5% from the same period last year. Operating profit was $24.3 million for the quarter, up 8%, reflecting the profit impact from higher sales volumes, partially offset by schedule price deflation as certain programs transition from development to production. Operating margin was solid, up 60 basis points to 20.1%, clearly benefiting from the mix of aftermarket demand in the quarter. Aerospace total backlog ended March at a record $745 million, up 9%, compared to a year ago and up 3% sequentially from year end 2017. For OEM only backlog was $733 million and we expect to ship just under 50% of that backlog over the next 12 months. Other items to note for the quarter interest expense increased $0.5 million to $3.9 million primarily as a result of a higher average effective interest rate, as compared to a year ago and other expense for the year increased $1.2 million versus last year. With respect to taxes the company's effective tax rate was 23.9% in the first quarter of 2018, compared to 26.9% in the first quarter of 2017. For the full year 2017, excluding the impact of discrete tax expense related to the Tax Cuts and Jobs Act, the effective tax rate would have been 20.2%. With respect to share count, our fourth quarter average shares outstanding were 54.1 million shares. During the first quarter, we were inactive – we were active in repurchasing 533,000 shares at an average cost of $62.93 per share. We now have 3.4 million shares available for repurchase under existing board authorizations. Through March, cash provided by operating activities was $30.5 million versus $51.8 million last year. Two main drivers are working capital needs to support growth and the absence of a legal settlement payment of $10.6 million in the first quarter of 2017. Year-to-date free cash flow, which we define as operating cash flow, less capital expenditures, was $19.3 million compared to $40.1 million last year. First quarter capital expenditures were $11.2 million, down slightly from 2017. With respect to the balance sheet our debt to EBITDA ratio remained at 1.7 times at quarter end. Under our existing debt covenants additional borrowings of approximately $500 million of senior debt would be allowed, while approximately $450 million remained available on our credit facility at quarter end. Turning now to our updated 2018 outlook on Slide 5 of our supplement, we now expect 2018 total revenue growth of 5% to 6% with organic sales growth of 3% to 4%. FX is expected to benefit revenue by approximately 2%. Our operating margin forecast remains in the range of 15.5% to 16.5%. Earnings per share are now expected to be in the range of $3.3 to $3.15, up 5% to 9% – up 5% to 9% from 2017s adjusted diluted earnings per share of $2.88. We continue to see our EPS weighted in the second half of the year with a roughly 47%, 53% first half second half split. Please keep in mind that in the second quarter of 2017, we realized a substantial, discrete tax benefit via consolidation of several Swiss legal entities which provided approximately $0.12 of EPS benefit in the quarter. A few other items to update in our outlook, interest expense is anticipated to be $15.5 million to $16 million. Our effective tax rate for 2018 is expected to be in the range of 25% to 25.5%. Average diluted shares are forecasted to be $53.5 million. Our CapEx expectation remains at $60 million to $65 million and cash conversion is expected to be greater than one hundred percent, OE change from our prior view. So in summary, a very good start to begin 2018. Our earnings expectations have improved, lifted by the continuing strength in our Aerospace segment. Our full year cash generation and conversion expectations remain strong, which coupled with the support of balance sheet allows us to sustain a higher level of CapEx, much of which is directed towards growth programs. And as always, strategic acquisitions that promote our long-term growth objectives remain a key part of our overall strategy. Operator will now open the call for questions.

[Operator:]

Certainly. [Operator Instructions] Our first question comes from Christopher Glynn from Oppenheimer. Please go ahead.

[Christopher Glynn:]

Yes thanks. Good morning.

[Patrick Dempsey:]

Good morning.

[Chris Stephens:]

Good morning Chris.

[Christopher Glynn:]

Just want dive into the comment for having Industrial margins at the mid teens level for the full year. So the first quarter came in at entry level teens, I think, as expected. You're looking at the second half kind of fully normalized relative to the recent plant consolidation related inefficiencies. And then what was the continuing drag from those activities in the first quarter?

[Patrick Dempsey:]

So Chris as you highlighted the margin in the first quarter we saw some nice sequential improvement from Q4 and that again primarily coming from improvements that have continued within the Associated Spring. The team there continues to make solid progress and is on track to achieve the milestones that we previously outlined. And to that end the closure and consolidation of the smaller plant we announced has progressed as planned. And our target effects of that facility by the end of the second quarter. So with that what we're seeing – what we expect is sequential improvement in margins, particularly in the second half of the year from Associated Spring, gives us confidence in the mid teens guidance for total Industrial.

[Christopher Glynn:]

Okay, and then aftermarkets had a – continuing very strong quarter, just wondering if there is a couple of questions, any initial provisioning involved with your portfolio and otherwise comment on RSP, CRP and MRO, really to the point of what burns aftermarket profile versus the market for the next couple of years, the kind of structural dynamic with some of those various components?

[Patrick Dempsey:]

Yes. So with respect to our aftermarket, as you know a big component of it is the CRPs and the RSPs. The CRPs being on the repair side of the equation sometimes you know we also refer to it as MRO. Their both programs are being driven by the CFM56. And the demographics of that particular engine continues to be certainly favorable with a large installed base that is projected to have to come into the shops for overhaul, over the next few – over the next 10 to 15 years for peaking. And we expect peak overhaul shop visit rates in the mid 20s. So as we look out for our aftermarket side of the business, the CFM is a primary driver of our confidence in continued growth. The other engine model that’s a part of both of those programs is the CF6, which is a wide-body aircraft. And that particular engine is that the sunset years of its life cycle. But we've seen a resurgence in demand for that particular engine and spare parts for that engine over the last year and even as strong demanding for the first quarter. So as we look at our aftermarket in general we remain very optimistic, the fundamentals of the industry continue to support a strong aftermarket with respect to aircraft utilization. And specifically for Barnes the great programs that we are on, I think, put us in a great position.

[Christopher Glynn:]

Okay. So would you expect to generally sit a little bit above aftermarket industry trend line?

[Patrick Dempsey:]

I think aftermarkets projected to grow in the mid-single digits. And you’ve seen us far outpace that over the last couple of years have particularly driven by the dynamics I just mentioned. I think mid-single digit is very solid outlook for aftermarket in general. And I think our CFM56 engine content puts us in a nice position to be there or higher.

[Christopher Glynn:]

Great thank you.

[Patrick Dempsey:]

Welcome.

[Chris Stephens:]

Thank you, Chris.

[Operator:]

Our next question comes from Michael Ciarmoli from SunTrust. Please go ahead.

[Michael Ciarmoli:]

Hey good morning guys. Thanks for taking my questions.

[Patrick Dempsey:]

Good morning Mike.

[Chris Stephens:]

Good morning.

[Michael Ciarmoli:]

Good morning guys. Just to stick the aftermarket side, you obviously talked CFM56. Any incremental opportunities for you there given what will likely be a lot of airworthiness directives and accelerated inspections on those older engines and service? I mean it is sad repair work you guys can do, or is that going to go more towards may be Saffron, GKN or – may be if you could provide some color on there if you see that as a incremental driver on the repair side?

[Chris Stephens:]

Yes. So with respect to the airworthiness directives that you’re referring, we do not see any necessary benefit to Barnes Group from that activity because the particular parts effected we do not overhaul and repair or have any content on. That said I also believe that for the engine in its entirety the particular worthiness of directives can be actually performed in line or on line. So they shop the engines themselves may not go into the shop for a complete overhaul, it'll be a in line inspection conducted potentially at airports. But as it pertains to the CFM in its entirety as it's a great, it's one of the most successful engines in aviation history. And it continues to – we produce even as we speak while still LEAP is ramping up, the CFM of course is ramping down. The CFM56 again continues to be produced at high levels and also record levels just a couple of years ago.

[Michael Ciarmoli:]

Got it that's very helpful. And then just at the company level, on guidance. Organic growth narrowed down for the full year. What are the puts and takes weighing on that organic growth?

[Chris Stephens:]

So the two main drivers as we think about organic growth out of the Industrial side come from Molding Solutions and nitrogen gas products. And what we've seen in the first quarter is a little softer start to organic sales in Molding Solutions. And as I mentioned in my prepared remarks, it was really as a result of slippage of some molds out of the quarter due to timing issues with validations. And so we still remain extremely positive on our Molding Solutions business, with a full year outlook of up mid-single digits. On Nitrogen Gas Products by contrast, we saw some softening in North America in the first quarter to recognize the best coming off a very strong 2017. So demand that you're seeing in Europe and Asia for both Molding Solutions and Nitrogen Gas products gives us confidence that there'll be – that they'll offset any softening that were seeing in North America.

[Michael Ciarmoli:]

Got it. And then just housekeeping, on the EPS change tax and share count, anything else driving the EPS change for the full year?

[Chris Stephens:]

Yes I would say, Michael, on the Aerospace aftermarket side. We continue to be very bullish on the comments prior about CFM56. And specifically the benefits of spare parts and aftermarkets. So very strong.

[Michael Ciarmoli:]

Got it. Helpful guys. I’ll jump back in the queue here.

[Chris Stephens:]

Alright, thank you.

[Operator:]

Your next question comes from Edward Marshall from Sidoti. Please go ahead.

[Edward Marshall:]

Hey guys.

[Chris Stephens:]

Good morning Ed.

[Patrick Dempsey:]

Good morning Ed.

[Edward Marshall:]

So I want to on your house. So strengthen MRO I think might be messy any potential recovery in the OE side as you're coming down cost curve. I'm wondering if you could try to give us any detail. I know you won’t breakout the margin portfolio of line, but can you just kind of you kind of talk to that even let us knowing what’s going on in the OE side.

[Patrick Dempsey:]

Yes. So on the OE side, Ed, we continue to make great – there teams have continued to make great progress in terms of ramping up to the increased volumes for merrily, on the LEAP program and on the A350. And as I mentioned, even coming into the back-half this year we see increased volumes in terms of trend seven thousand. As it pertains to the overall performance of Barnes Aerospace, clearly this quarter was driven significantly by aftermarket with 20% operating margins. But on the OEM side, we're pleased with the progress we continue to make. We are moving product through the shop at higher rates than we have been for the last two years. And we are continually focused on margin and have seen margin improvement on the OE side. That said, I also would highlight that we have to keep ahead of the curve because you also are aware that there are price bounce as volumes increase. And so whilst we see nice improvements in terms of efficiencies in the shop, there is a portion of that, which is shared with the customer in terms of already contracted deflation.

[Edward Marshall:]

Got it. And with the LEAP seeing some, I guess, supply chain shortage your turbine disc issues, do you think that’s a potential opportunity for you as we – have you had conversations with your customers as a potential opportunity for you to pick up additional share?

[Patrick Dempsey:]

If there’s issues in the supply chain, we always see it as an opportunity. And for the reason that one thing we’re focused on is performance, performance, performance. And we believe that by being a solid performer and meeting the volumes that are coming to us, the minute there is a glitch in the system with any of our competitors we see it as an opportunity to pick up market share. It has, more often than not, for it to be in the short term, it has to be similar-type products that we're already producing. So in the product line that you referenced has been an issue, that's not something that we participate in. So that particular product may not represent an opportunity while others as if they get into delivery issues may represent the opportunity for us.

[Edward Marshall:]

Got it. With Industrial just a quick question on inflation. Are you seeing – obviously, you're seeing the raw material inflation. How is that conversation with the past?

[Patrick Dempsey:]

It's well it's one that we continue to have dialogues on and, of course, recent announcements around tires and the associated costs that may come with that on aluminum and steel, aluminum is not so much as factors for us. The steel clearly is. But we have a number of contracts in place that allow for escalators and openers for discussions on a periodic basis. We have others, which we're going to continue to dialogue with the customer. But the team, collectively, has rallied around a clear focus on mitigating any costs that come to us in terms of alternative sources or mitigating them with our customers.

[Edward Marshall:]

Got it. And last one from me. I couldn’t help but notice in the balance sheet the receivables taking a big tick up. I don't want to ask about any particular customers or certain customers taking longer to pay than normal, and was it just an anomaly in the fourth quarter?

[Chris Stephens:]

Yes, I would view it more as an anomaly to first quarter. We haven't seen changes in payment terms. Just given the volume we've had in kind of in the March time frame and just looking at receivables. We're still – just from an operating cash flow good performance for the quarter typically Q1 is lighter than us for the full year, but from a cash flow point of view and our focus on working capital, we still expect to have cash conversion greater than one hundred percent.

[Edward Marshall:]

Got it. Great guys. I appreciate the comment. Thanks so much.

[Chris Stephens:]

Alright.

[Patrick Dempsey:]

Thank you.

[Chris Stephens:]

Thank you, Ed.

[Operator:]

Your next question comes from the line of Pete Skibitski from Drexel. Please go ahead.

[Pete Skibitski:]

Good morning guys.

[Patrick Dempsey:]

Good morning Steve.

[Chris Stephens:]

Good morning Steve.

[Pete Skibitski:]

Hey Patrick just on the MRO expansion FOBOHA, kind of the goal of expansions well. Can you just let us know kind of where we are at on the time line there? And when do you think about strategy will be fully implemented?

[Patrick Dempsey:]

So on FOBOHA the team there continues to make great progress in executing the plans that we put in place from the initial time of acquisition. Peter as you know, we announced the closure and consolidation of FOBOHA plant in Switzerland made last year, which the team completed without a glitch by the end of the fourth quarter. And I'm also, to that end, pleased to say that as we are realizing the projected savings as a result of that activity. The team is also making a nice progress as you highlighted on the other areas that we targeted to grow the business and improve profitability. And one of the key focus areas there is putting a lot of emphasis on demonstrating to our customers the exceptional value that FOBOHA's unique queue technology brings to the production process because it allows tremendous throughput on the same actual injection molding press. So that value is something that we have just put in tremendous amount of effort on in terms of demonstrating it to our customer base. On the aftermarket side, we continue to expand our capabilities. As you know, we had a Manner facility in the U.S. And in the acquisition, we acquired a FOBOHA facility in Asia and China. And in both instances, the teams are looking to school up capabilities with a view to expanding aftermarkets globally, both in Europe, North America and Asia and, to that end, we've also put a lot of emphasis on increasing our presence in terms of field services and engaging the customer more and more, with a view to providing overhaul services to our installed base of products. So nice progress all around. And as it pertains to FOBOHA, from an overall level, we think it's well positioned for the year with a healthy backlog, and we're excited about that business more and more as we continue to integrate it into the Barnes family.

[Pete Skibitski:]

It sounds like still early days on the whole lot aftermarket expansion.

[Patrick Dempsey:]

Early days, I would say early days in the sense that it's – when we entered into we thought of it as a multiyear process, and I'd say we're in the early innings.

[Pete Skibitski:]

Okay, okay. Thank you for that. And then just on the whole mold validation issue, I don't know, is that FOBOHA also? And then should we expect that to be kind of complete in the second quarter or more so later this year?

[Patrick Dempsey:]

It’s necessarily – I don't want to project it as being an issue in the sense that what happens is when we produce these complex molds, we actually bring the customer on site to validate them at the end and highlight their performance and demonstrate their performance before the actual product ships. However, in that process requires a customer that's the timing of the customer to be on site for that validation process. And what we saw in the first quarter was a timing issue to where some of those validations shifted to the right, or the validation and the customer acceptance of that validation. As you know, with the mold business, it tends to be a little more lumpy in terms of quarter-to-quarter. But in the full year, we still think it all levels out. We continue to look at that business very positively both in short term and for the full year.

[Pete Skibitski:]

Got it, okay. And then just on the LEAP, there’s more and more talk about Airbus and Boeing going up through 60 a month rate wise over that a couple of years let’s say. Are you guys facilitized in machines to go kind of up to those types of rates? And would it be a lot of incremental capital for you if they did take those decisions?

[Patrick Dempsey:]

I think we have the ability to expand, but we're not at that capacity today. But what has been planned out within our Aerospace business is the next two to three years worth of capacity. And so we're expanding as we speak, even within our Singapore locations and continuing to develop capabilities in our U.S. locations. So it's absolutely represents upside opportunity first. And we also, to some of the earlier comments, we think that the supply chain potentially strains under some of those volumes it may represent additional opportunity for Barnes.

[Pete Skibitski:]

Got you. And my last one if I could, wanted to ask you kind of a high-level technology question. I keep reading more and more about this area of thermoplastics as maybe kind of a replacement for metals. We got the whole manufacturing issue out there as well, which I know you guys monitor but is there plastics and additive, are we getting to a) do you guys have any expertise in thermoplastics? And are these things that could threaten your core business how are you thinking about these technologies?

[Patrick Dempsey:]

So materials, in general, when I think about the plastic injection molding industry and our Molding Solutions business, the team there work with a range of different plastics piece every single day. And in fact, it's one of the aspects of their expertise that, I think, not only draws the customer to them, but also allows them to themselves in terms of the competition. So overall, and as we think about 3D printing, it's something that we're looking to embrace, we have embraced it both within our Molding Solutions business, as well as our Aerospace business. We see it as having definitive applications that we think can add incremental value to the products and services that we provide. And so we're embracing it, at same time, we're also keeping very cognizant of its disruptive nature to where it has great potential and so we keep a watchful eye on that as well.

[Pete Skibitski:]

I appreciate the color. Thanks guys.

[Operator:]

Your next question comes from the line of Timothy Wojs from Baird. Please go ahead.

[Timothy Wojs:]

So I guess just on Molding Solutions. I was wondering if – just I had a question on content and kind of what you're seeing there. I mean, relative to maybe 12 to 18 months ago, I mean, how do you feel about the content opportunity within the automotive part of Molding Solutions, in particular. Has that really changed at all is it getting better, as it may be staying the same some color there would be helpful.

[Patrick Dempsey:]

Right. Well in particular, as it pertains to the automotive side of our hot runners business, what we're seeing is continued strength in Europe and Asia. This particular quarter we saw a little bit of softening in North America. And again, based on a comparison to last year, which was a record year in North America for our automotive hot runner businesses because of the sheer number of program launches that occurred over 2017, we still feel North America represents opportunity, but not at the peak levels that we achieved in 2017. The offset to that, of course, is we continue to see nice order strength in both Europe and Asia in the first quarter, and that bodes well for a continuing solid year.\

[Timothy Wojs:]

Okay. And then, how do you think about the – so for an M&A perspective, I mean, you guys spent a fair amount of time at the Analyst Day, kind of talking about kind of structures of businesses that you're looking at or considering, maybe adding to the portfolio. So I'm curious just how that process is going for you guys? And how you feel about the M&A pipeline, just in general?

[Patrick Dempsey:]

So today, we're going to be spending an about that we time line was it may not translate into announcement as frequent as we would like or maybe would like. I don't want it to diminish the amount of activity that's taking place in the background. And so we continue to be very excited about potential M&A opportunity. And not only within our existing portfolio of capabilities, whether it be the Molding Solutions, as an example, or even some of the other product lines that we're currently producing today. But as we look at other areas, in addition to that, we're excited about potential areas that the Barnes can expand, specifically on Industrial technologies that are highly differentiated and that allow us to replicate similar activity to what we accomplished with Molding Solutions. And so we're being very deliberate and we're being very disciplined in our approach. It's an ongoing active discussion with our board every meeting that we have with them so…

[Timothy Wojs:]

Great well that’s from me good luck on the rest of the year guys.

[Patrick Dempsey:]

Great, thank you.

[Operator:]

Your next question comes from Matt Summerville from Alembic. Please go ahead.

[Matt Summerville:]

A couple of questions. Just within Molding Solutions. Organically, can you tell us what the molds time of the business is versus the hot runner side? And then if maybe you can give a little more granularity on how much North America was down. Being only 25% of Molding Solutions sales, I guess, I'm a little surprised that the strength you saw in Asia and Europe was maybe not enabled?

[Patrick Dempsey:]

Yes. So on the mold side, as I mentioned, in Manner, we have record orders and so our orders where a step function of over prior year. And producing record backlog within our mold business in Manner. On the FOBOHA side, we also saw strong orders in the quarter, but not anything outside of the ordinary in terms of continuing strength. The hot runner side of the business continues to also exhibit some really nice strength. And so as we look at both businesses, molds and hot runners, the backlogs in the mold side have put us in great position for the full year. And hot runners, we also have a healthy backlog, which is a shorter-cycle business but that, again, bodes well for strength.

[Matt Summerville:]

Within our hot runner side of the business, is there a way for you to quantify? I think you mentioned in North America, you’ve seen a bit of a rollover a new model launches. So maybe what the view is regionally in terms of new model launches in 2018 versus 2017 to help us sort of see how the year might build in that business?

[Patrick Dempsey:]

Yes. So the model launches side of the equation is something that we watch closely. And what you saw in North America was unprecedented levels of launches in 2017. Recognizing to that day, launches, in terms of how the business comes to us, precedes the actual model going into production. What we’re seeing into the first quarter of the year is continued strength in Europe and Asia. And so over the course of the year, we continue to believe that both on the hot runners side and on the mold side, not only do we have backlog to support our outlook for a couple of quarters, but the continued favorable environment and the amount of quarter activity taking place with our customers continues instill confidence in terms of the full year.

[Matt Summerville:]

The softness you saw in NGP. I thought you said, Patrick, in your remarks in NGP was down 7% in Q1. Relative to your own internal forecast, how does NGP performed? And were you surprised by the magnitude of the climb you saw there? Is there a destocking issue going on in North America? Can you give a little bit more granularity on that? I would just think, seemingly, with the general Industrial environment we’re in right now globally, that, that business would still be doing pretty well.

[Patrick Dempsey:]

Yes. I do think that it’s doing extremely well. So albeit it’s down 7%, I’m not necessarily overly concerned with respect to that because – and it’s all relative to the high levels of performance in 2017. So NGP, more than anyone of our businesses, has high comps coming into 2018. And so what we did see was, clearly, a little bit of a softening or pull back and North America in the first quarter for that business. But as you said, general Industrial is a nice offset for that particular tool and die business, with its – majority of its revenues generated off of Automotive, as you know. So I’m not necessarily overly concerned about it. I think it’s indicative of operating at high levels. And quarter-to-quarter and a year-over-year basis, I think there’s going to be some ups and downs.

[Matt Summerville:]

Understood. And just one final one. The inefficiencies you saw in Associated Spring in Q4 were what number? And what was that number in Q1? I guess what I’m trying to do is sort of bridge how much sequential improvement you’ve seen in that operational drag, if you will. Chris, are you able to help out with that at all?

[Christopher Stephens:]

Yes. Matt, what I would say that is the sequential improvement that we’re seeing out of our Industrial business. And it’s definitely where the other end of trying to get through the Associated Spring challenges in terms of, as you mentioned, an opening comments in terms of the closure of the facility and just getting through that. So we’re through made some good progress. It’s reflective in the quarter that met our expectations for the first quarter. And that sequential improvement, being up 170 basis points in operating margin and having that outlook, for 2018 as continuous improvement is how the team is profiling it. So we’re pretty optimistic about getting to the mid-teens relatively shortly.

[Matt Summerville:]

Thanks Chris.

[Chris Stephens:]

Thank you, Matt. Thank you.

[Operator:]

And there are no further questions at this time. I will now turn the call back over to Mr. Pitts for closing remarks.

[William Pitts:]

Thank you, Kelly. We’d like to thank everyone today for joining us for our earnings call, and we look forward to speaking with you next on July 27, with our second quarter 2018 earnings call. Operator we will now conclude today’s call.

[Operator:]

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