Barnes Group Inc. (NYSE:B) Q1 2024 Earnings Call Transcript

Barnes Group Inc. (NYSE:B) Q1 2024 Earnings Call Transcript April 26, 2024

Barnes Group Inc. beats earnings expectations. Reported EPS is $0.38, expectations were $0.35. B isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Barnes First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Bill Pitts, Vice President of Investor Relations. Bill, you may begin your conference.

William Pitts: Good morning, and thank you for joining us for our First Quarter 2024 Earnings Call. With me are Barnes’ President and Chief Executive Officer, Thomas Hook; and Senior Vice President, Finance and Chief Financial Officer, Julie Streich. You can access all earnings related materials on the Investor Relations section of our corporate website at onebarnes.com. That’s onebarnes.com. During our call, we will be referring to the earnings release presentation. 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 Securities and Exchange Commission.

Be advised that certain statements we make on today’s call, both during the opening remarks and 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 SEC, which are available on the Investor Relations section on onebarnes.com. I will now turn the call over to Tom for his opening remarks. After that, Julie will provide a review of our financial performance and details of our updated 2024 outlook.

Then we will open up the call for questions. Tom?

Thomas J. Hook: Thank you, Bill, and good morning. Barnes had a solid start to 2024, led by strength in aerospace and underpinned by strong end-market demand. Additionally, we delivered substantial progress on our three strategic pillars to dramatically enhance shareholder value. These pillars are core business execution, scale aerospace and integrate, consolidate and rationalize industrial. We are now five quarters into the execution of our multi-year transformation plan, with many positive steps already completed along this journey. We continue to execute a multitude of products in parallel through 2024 and we’re energized by the momentum we have generated. For the first quarter, revenue of $431 million increased 28% reported and 4% organic.

Adjusted EBITDA grew 38% to $80 million and adjusted EBITDA margin was up 130 basis points. We will discuss the drives momentarily. Our restructuring program, which is aimed at accelerating growth and profitability, has progressed on schedule and planned savings remain on track. We continue to target run rate annualized savings of $38 million by the end of 2024 and $42 million by the end of 2025. Please note that $11 million of the original $53 million target related to the Associated Spring and Hanggi businesses and transferred with the divestiture. Much of that benefit was already realized in part facilitating the sale. Our restructuring savings to-date have largely served to offset inflationary cost pressures and unfavorable industrial mix.

We’ll aggressively pursue additional cost rationalization opportunities, primarily associated with the integrated consolidated and rationalized pillar of our strategy. As mentioned on our last call, Barnes Aerospace is now a truly global business with expanded geographic reach, diverse capabilities and offerings to comprehensively serve customers around the world. The scale achieved with the addition of MB Aerospace positions us as a more significant player in the industry and allows us to compete more effectively. To that end, we successfully closed multiple new profitable long-term agreements. You may recall in February, we spoke to the General Electric agreement to extend the term for LEAP engine programs by 10 years, extend legacy engine programs by four years and expand our portfolio of products on military engines.

In addition, another five long-term agreements have been finalized during the quarter across our large customers, General Electric, Rolls-Royce and Pratt & Whitney. A few other LTAs are agreed to and awaiting finalization. In total, the full term-value of these agreements is approximately $2 billion. Our success in getting these agreements across the finish line, led to incredibly strong orders in the quarter. OEM book-to-bill was 2.6 times, and OEM backlog grew to $1.46 billion up 19% since December 2023. With respect to the aerospace aftermarket, the recent MRO Americas conference highlighted a robust industry outlook. Persistent supply chain concerns and disruptions in new aircraft production have provided lift to the aftermarket. This is increased utilization of older planes, especially for legacy narrowbody engines like the CFM56 and V2500, which are key platforms for Barnes Aerospace.

We expect these dynamics will continue to benefit the aftermarket for some time. Barnes Aerospace is well-positioned in the aftermarket and we have made additional investments to further solidify our standing. For example, in February we opened a new facility in Singapore to increase our capacity for engine component repairs in the Asia Pacific region. This facility will also have the flexibility to expand capacity for future growth. Additionally just this month, we significantly expanded our MRO facility in East Granby, Connecticut. Performance across our aftermarket business is solid. We’re seeing robust demand as MRO sales are up 136% reported and 19% organic in the quarter. In addition, RSPs grew 30% organically. With a robust aerospace industry, a long runway of strong demand for both OEM and the aftermarket and a great team of talented people, we are well on our way to achieve $1 billion in annual aerospace revenue in 2025.

Aerospace is now the largest part of Barnes in terms of revenue and profit. Significant progress on our portfolio transformation continues, as we shift our business mix towards the higher growth, higher margin and higher value aerospace market, while simplifying and optimizing our industrial businesses to deliver improved performance. As disclosed in early April, we closed the sale of the Associated Spring and Hanggi businesses. This divestiture materially reduces our exposure to automotive component manufacturing and represents an important step in our ongoing strategy to integrate, consolidate and rationalize the industrial business. Net cash proceeds of approximately $150 million will be used to reduce debt. Our Barnes transformation office established one year ago continues to make great progress across Barnes.

This work is critical to the margin expansion, supply chain efficiencies and manufacturing footprint optimization needed to deliver our profitability targets. Before concluding my prepared remarks this morning, I would like to speak about a few changes with respect to our Board, including the planned retirements of two of our long-time directors. First, Tom Barnes has served on our Board since 1978 and its Chair since 1995, providing steady leadership and guidance during his long tenure. He has been a stalwart champion of our people and an extraordinary community steward. It has been an honor to serve with Tom, and we are grateful for his lengthy dedication and service to the company that his family founded in 1857. We look forward to his continued contributions as Chair Emeritus.

Second, I want to thank my esteemed colleague, Mylle Mangum, Lead Independent Director for her tireless dedication and meaningful contributions to Barnes over her 21 year tenure as a director. Her energy, passion for our people and impact has been profound. Next, I would like to welcome Adam Katz to our Board. Adam is one of the founders and the Chief Investment Officer of Irenic Capital Management. I look forward to hearing his insights and prospectus as an investor, and welcome his contributions in support of our value creation goals. Finally, I would like to acknowledge Dick Hipple as our new Board Chair. Dick has significant public company experience and wisdom. He has been a great partner and colleague since he joined the Barnes Board in 2017.

I am confident that he will provide strong board leadership necessary to enhance value for our stakeholders. To close my remarks this morning, 2024 is off to a good start. The ongoing execution of our three pillar strategy is making Barnes a more focused and competitive company on the path to unleash profitable growth and a meaningful shift towards aerospace with its higher growth and profitability characteristics will accelerate the unlocking of Barnes value. While we have made great progress in a short period of time, we are only approaching the midpoint of the comprehensive transformation of the company. As such, we are taking additional actions to reduce our cost profile, enhance profitability, drive cash generation and optimize the portfolio in 2024.

With that, I will pass the call to Julie to cover our financial performance and outlook.

Julie K. Streich: Thank you, Tom, and good morning, everyone. As a reminder comparisons are year-over-year, unless otherwise noted. Please turn to Slide 8. For the first quarter, sales were $431 million, up 28% reported and up 4% organic. Foreign exchange was not meaningful in the quarter. Adjusted operating income was $51 million, up 37% and adjusted operating margin of 11.9% was up 80 basis points. Adjusted EBITDA was $80 million, up 38% and adjusted EBITDA margin was 18.7% up 130 basis points. Interest expense was $25 million versus $5 million a year-ago, largely due to higher borrowings given the acquisition of MB Aerospace and higher average interest rates. The company’s effective tax rate was approximately 85%, primarily driven by $6.8 million of tax expense relating to the sale of Associated Spring and Hanggi.

On an adjusted basis, the first quarter tax rate was 28%. Adjusted net income per share was $0.38 compared to $0.47 a year ago. Turning to our segment performance, beginning with Aerospace on Slide 9. As Tom noted, our Aerospace business is well-positioned to participate in the industry’s robust growth and our top-line performance reflects the strength of our scaled aerospace franchise. For the first quarter, total sales were $221 million, up 89% reported and up 19% organic. Adjusted operating profit of $35 million was up 69%, benefiting from the contribution of higher organic sales volume, inclusive of pricing, favorable aftermarket mix and the contribution of MB Aerospace. These benefits were partially offset by the non-cash amortization of long-term acquired intangibles for the MB Aerospace acquisition and lower productivity at certain OEM facilities.

Adjusted operating margin declined 180 basis points to 15.7%. Aerospace adjusted EBITDA was $53 million, up 75% benefiting from higher organic sales and the contribution of MB Aerospace. Adjusted EBITDA margin was 24.2% versus 26.1% a year ago. As a reminder, the year-over-year change in Aerospace margins is in-line with our guidance and reflects the mix between OEM, MRO and RSP sales following our acquisition of MB Aerospace. As Tom mentioned, Aerospace OEM backlog increased 19% sequentially from December and now stands at a record $1.46 billion. We expect to convert approximately 45% to revenue over the next 12 months. Moving to Industrial results on Slide 10. We have made meaningful progress towards delivering our strategy to integrate, consolidate and rationalize our industrial segment in a short period.

April’s divestiture of Associated Spring and Hanggi and our ongoing cost reduction actions evidence our commitment to transform the business. First quarter sales were $209 million, down 4% on both a reported and organic basis. Molding Solutions organic sales decreased 2%, while Motion Control solutions and automation’s were each down 7%. Sequentially, Industrial sales were up 3%, primarily driven by Motion Control Solutions. Adjusted operating profit was $16 million, down 1%, reflecting lower organic sales volumes and unfavorable mix, partially offset by positive pricing and BTO cost initiatives. Adjusted operating margin was 7.8%, up 20 basis points. Adjusted EBITDA was $27 million, down 6% and adjusted EBITDA margin was 13%, down 30 basis points.

Within Industrial’s order book this quarter, we saw the timing of certain customer projects pushed out. At Molding Solutions, hot runner demand remains soft while mold-demand remains healthy. Excluding the domestic business, Motion Control generated soft tool and die orders, but improved orders in general industrial markets. And our automation business experienced lower year-over-year order activity in the quarter. Sequentially, Industrial orders improved 7% with Molding Solutions, Automation and the remaining Motion Control businesses all contributing. Commercial strategies developed by leadership teams named in Q4 are gaining traction, and we anticipate momentum to build in support of our strengthening second half outlook. As Tom mentioned, we completed the sale of Associated Spring and Hanggi in early April.

He provided highlights of the transaction, but let me take a moment to share a few more details. At March quarter end, the assets and liabilities of these businesses were classified as held-for-sale on the balance sheet. Tax charges are estimated at $16 million with $6.8 million of these charges recorded in the first quarter. Turning to the balance sheet and cash flow on Slide 11. Year-to-date cash used by operating activities was $2.3 million versus cash provided of $32.2 million a year ago. The decrease was largely due to cash used for accrued liabilities, working capital and an increase in other current assets. Capital expenditures of $12.8 million were up $1.9 million and relate to the company’s restructuring program and investments for growth.

Free cash flow was a negative $15.2 million. Our net debt-to-EBITDA ratio was 3.62 times at quarter end, which improved modestly from 3.64 times at the end of 2023. We remain on track to achieve a leverage ratio of 3 times or lower by the end of 2024 and 2.5 times by the end of 2025. Liquidity as of March 31 was $426 million, including $82 million in cash on hand and $344 million available under our revolving credit facility. With the debt recapitalization for our MB Aerospace acquisition, there are no major debt maturities until 2028. During the quarter, Barnes refinanced its Term Loan B facility. While the terms are essentially unchanged, we will see a reduction of 60 basis points in the interest rate on outstanding borrowings. Accordingly, we expect interest and tax savings of approximately $1.4 million in 2024 and $4.7 million in 2025.

Turning to Slide 12. Our full year outlook has improved slightly. We now expect total sales to be up 13% to 16%, with organic sales of 5% to 8% both ranges up 1 percentage point at the bottom end, due to Aerospace strength. We expect Aerospace sales growth to be approximately 60%, inclusive of a full year contribution from MB Aerospace and forecast Aerospace organic sales growth in the mid-teens. For Industrial, we continue to expect total sales to be down mid-teens given the divestiture and organic sales to be up low single digits. In addition, our outlook assumes a stronger second half of the year in Industrial. Adjusted operating margin expectations are unchanged and with total bonds between 12% to 14%, Aerospace between 15% to 16% and Industrial between 8.5% to 10%.

Full year depreciation and amortization expense is expected to be approximately $130 million. Adjusted EBITDA margin guidance is unchanged in the range of 20% to 22%. This reflects Aerospace adjusted EBITDA margin of 24% to 25% and Industrial of 15% to 16%. We expect adjusted EPS of between $1.62 and $1.82, up $0.07 on the bottom-end of the range and $0.02 at the top-end of the range versus our February expectation, reflecting the benefit of our first quarter performance and Term Loan B repricing, partially offset by a higher for longer interest rate environment. On Slide 13 of our earnings presentation, we have included additional 2024 guidance assumptions for modeling purposes. One last point on the outlook regarding the portfolio transformation supporting our long-term strategy.

As previously disclosed, the Associated Spring and Hanggi divestiture will reduce year-over-year EPS by $0.28 and the MB Aerospace acquisition will be approximately $0.20 dilutive in year but EPS neutral to accretive exiting 2024. Our portfolio transformation is positioning us for higher, more profitable growth over the long term. We are well-positioned and energized to take advantage of the growth opportunities before us in Aerospace, and we’ll continue to optimize our industrial businesses, as we execute our three-pillar strategy. Operator, we will now open the call for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from Matt Summerville with D.A. Davidson. Please go ahead.

Matt Summerville: Thanks. A couple of questions. The second half better in industrial. I’ve heard that probably a number of times over the course of my covering Barnes in the last 20 years. What underpins the second half better outlook for Industrial today versus what the company has talked about in the past that, again just seemingly hasn’t come to fruition more times than not? So help me with that first, please.

Thomas J. Hook: Certainly, Matt. Thanks for the question. Last year largely was for the Industrial portfolio implementing the strategy of integrate, consolidate and rationalize. It was standing up teams to do the transformation, integrating the management teams and putting them in place, which took place in the third and fourth quarter of last year which gave us a real solid foundation to start on the integration side. A series of transformation products were being implemented. Last year we had to stand up the systems to manage those transformation products. So heading in to 2024, we have a much stronger foundation to kick the year-off. Hence it’s delivered some very nice solid results, as we’ve closed the first quarter that momentum in those teams that have been in place have significantly on a sequential basis, improved penetration to the commercial market excellence initiatives into the market.

Our overall sales funnel is healthier. Our overall look into the markets are healthier and it’s resulting in sequential orders increase on all the businesses that we have in Industrial. And it’s that momentum and the effect of the full year of the transformation product savings coming into effect that make the trajectory into the second half stronger. We are not expecting any macro shifts in the markets but it is just our operational performance and execution will deliver against that. And we feel very well-positioned to do that.

Matt Summerville: Got it. As you think bigger picture around the Industrial segment today, do you view any of these businesses as core at this juncture? And just to review the $38 million of run rate savings, how much will be actually realized? So the $38 million run rate number you build to, I get that. So how much is actually realized ex-Spring and Hanggi in ’24 versus what was actually realized in the P&L in ’23? Thank you.

Thomas J. Hook: Got it. Well, from a big picture perspective, I’ll give you the macro, and then I’ll let Julie talk to the run rate savings on the $38 million. Big picture perspective is, we are strategically looking at the entire industrial portfolio, how it is comprised and fit together and evaluating all of our strategic alternatives. That’s been started in 2023. It is been a very active process into this year. We hit a clear major milestone exiting automotive components with the Associated Spring and Hanggi divestiture. We’re looking at all the other businesses for how they fit into Barnes’ Industrial portfolio, evaluating our alternatives, nothing to communicate at this time. Our macro perspective on the synergies, we expect to be able to preside the full extent of those synergies in 2024 for industrial that we’ve outlined as we head into 2025, part of the three year program.

But I’ll let Julie give you the progression of how that incrementally works in from last year to this year from a numbers perspective.

Julie K. Streich: Hi, Matt, yes, for the full year, we are looking at about $16 million of in-year savings. We realized about $6 million to $7 million of that in the first quarter and we’ll continue to see that build, as Tom mentioned. The nuance this year as well is that we’ll start to see some benefits through the aerospace side of the business is the LEAP transformation program where we are transitioning work from our Windsor facility to Singapore also starts to take effect. So net-net, you’ll see about $16 million in year.

Matt Summerville: Got it. Thanks guys. I will get back in queue.

Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Christopher Glynn: Hi, good morning. Good news for you on the CFM56 kind of shop visit peak extensions here. Just a question on free cash flow guidance. I believe it is unadjusted. So curious what the current year impacts are. You gave us deal taxes, so that $16 million comes back next year. And — but in terms of other transaction costs, restructuring cash, et cetera, so we can think about a bridge to an otherwise clean operating cash number.

Thomas J. Hook: I’ll let Julie answer the free cash flow guidance question. But yes, we — I would reiterate the aftermarket CFM56 extension is very good news. And given our positioning with expansions in our MRO facilities, both in the Americas and in Singapore, we feel very well-positioned on the aftermarket side to respond to increased requirements from the customers to grow the aftermarket business going forward. And I think, that does really position the Aerospace aftermarket well prospectively. I’ll let Julie talk to the free cash guidance question.

Julie K. Streich: So if I think — if I understood your question correctly, Chris on a normalized basis, if you think about unadjusted numbers, we would still look to have cash flow generation and cash conversion exceeding 100%. The numbers this year of 140% cash conversion. If you look at that on an adjusted net income basis, gets you down closer to that greater than 100%. So that’s not a specific numeric answer, but it’s directionally what we would expect the business to generate.

Christopher Glynn: Yes. What’s the impact of cash restructuring this year and transaction costs that you expect that are in your free cash flow number if you have some kind of round-ish numbers there?

Julie K. Streich: Sure. So we have a number of items that are contributing there. Our adjusted taxes are $42 million. There is a transition tax payment of $17 million. We have Associated Spring and Hanggi operating taxes about $16 million. So those are some of the one-time items that are hitting this year.

Christopher Glynn: Okay, thank you.

Julie K. Streich: Yeah, no problem.

Operator: Your next question comes from the line of Sam Struhsaker from Truist Securities. Please go ahead.

Sam Struhsaker: Hi, good morning guys. On for Michael Ciarmoli. I was curious you guys called out lower productivity in some of your Aerospace facilities. Can you just give any more detail on maybe kind of what the drivers were with that? And then also, if you have any idea of maybe sales trajectory with an MB moving forward, that would also be great. Thank you.