Barnes Group Inc. (NYSE: B) Second Quarter 2022 Earnings Conference Call July 29, 2022 8:30 a. m. m. ET
Participating companies
William Pitts – Vice President, IR
Thomas J. Hook – President and Chief Executive Officer
Julie K. Streich, Senior Vice President, Finance and Chief Financial Officer
Conference Call Participants
Christopher Glynn – Oppenheimer
Peter Osterland – Truist Values
Matt Summerville – District Attorney Davidson
Operator
Bonjour. Je called Chris and I will be his convention operator today. At this time, I welcome you all to the Barnes Quarter 2022 Earnings Convention call and webcast. All lines have been muted to hear the background noise. there will be a question and answer session. [Operator Instructions]. Bill Pitts, vice president of investor relations, can get started.
Guillaume Pitts
Thank you Chris. Hola, and thank you for joining us in our call for results for the quarter of 2022. With me is Barnes’ new president and CEO, Thomas Hook; and Julie Streich, Senior Vice President of Finance and Chief Financial Officer. If you have not obtained a copy of our earnings press release, you can find it in our company’s Investor Relations segment in barnesgroupinc. com. During our call, you will be referred to the slides in the Results Publishing Supplement that are also published on ourArray
Our discussion today includes certain non-GAAP monetary measures that provide more information that is useful to investors. These measures have been reconciled with similar GAAP measures in accordance with SEC regulations. You can find a settlement table on our online page as part of our press release and on Form 8-K submitted to the Securities and Exchange Commission. Please note that certain statements we make during today’s call, whether during opening remarks and during the question and answer session, may be forward-looking statements as explained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to the hazards and uncertainties that would possibly cause actual effects to differ materially from those projected. Please note the dangers and uncertainties discussed in today’s call and described in our periodic FILINGs with the SEC. These documents are in the Investor Relations segment of our corp. Orate online page in barnesgroupinc. com.
Let me now turn the word over to Tom for his opening remarks, and then Julie will provide a review of the monetary effects of our current quarter and the updated outlook for 2022. After that, we will open the call for questions. Julia?
Thomas J. Crochet
Thank you Bill and good morning everyone. I am honored to be named Barnes’ new President and Chief Executive Officer and look forward to leading the company into the next bankruptcy of its extraordinary history. control team for your warm welcome. Over time, I look forward to bringing other Barnes team members together as I tour our operations around the world. In addition, I want to acknowledge Patrick Dempsey’s significant contributions to Barnes over the past 22 years, just about 10 of them as CEO. All of us who are part of the Barnes team wish him and his circle of relatives the best.
Having served on the Barnes Board of Directors since 2016, I am keenly aware of the quality of our portfolio, our governance team, and our global workforce. Under Patrick’s leadership, the company has undergone a significant transformation. He has built a legacy of teamwork, established through principles and programs with the Barnes Business System. At the beginning of my tenure as CEO, I will delve into the organization to gain a deeper insight into our operations, core technologies, features and opportunities for expansion. In doing so, my purpose is to get a higher price from the efforts of the entire Barnes team. We will take an action-oriented approach to reduce complexity across the organization, attack the few critical projects that have the greatest impact, and act with greater speed and agility. This includes prioritizing business execution across the portfolio, driving bio expansion, and accessing new markets. I plan to leverage Barnes’ roles and professional experience to expand into markets such as medical technology. These are the spaces of precedence where I will drive shareholder returns and employee engagement to the next level, moves for which I will take personal responsibility. These are also the things I will hold the team accountable for.
At the moment, our monetary functionality reflected the first quarter in many ways. Second quarter bio sales increased 5% year-over-year and adjusted earnings consistent with the constant percentage increased 24%. Our order-to-invoice ratio was 1. 16 times, giving us two consecutive quarters with a false result and either segment generated a higher proportion than once. Functionality was driven through the aerospace industry, which generated strong profit expansion and margin expansion, driven through a physically powerful aftermarket. The commercial sector continues to face expanding economic pressures due to several points that have affected our ability to generate the functionality we expect from those activities. Now I see those pressures that are maintained for a longer and more constant period of time, which leads us to decrease our functional capacity. ity be expectingations for the time part of the year.
As a result, we have introduced a systematic, multi-step initiative to par- ticularly reduce prices and integrate our operations, reducing complexity and focusing on better functionality across our business portfolio. In doing so, we expect a restructuring fee of approximately $24 million, adding $17 million in 2022. Annualized charge savings are expected to be $14 million. This initial restructuring will be extensive and will be a giant component of our business portfolio. Within the engineering components, we will drive our move away from high-volume, off-the-shelf automotive businesses by concentrating on market segments where our products and generation are identified by the price they create for our customers. This does not mean exiting the automotive refinish markets, but rather concentrating on where we can generate adequate returns. Consequently, as the product lines introduced through Engineered Components are consolidated, we will finalize our related production facility in Bristol, Connecticut. Staff discounts will be part of those actions. This integration of our engineered component operations builds on the consolidation of our Detroit plant that is already underway.
As part of our automation activities, we will close automation centers in Russia, Korea and Japan. Our workers in Korea and Japan are largely transferred to distribution components, so we take advantage of a lower cost base that can further increase sales in those markets. Within our molding response business, we are transforming our go-to-market strategy to focus on key regional markets in the Americas, Europe, China and Asia. This represents a significant shift in the existing brand-based business strategy. our hard brands remain intact, an approach built into the varied desires of consumers within each geography will allow us to better tailor our long-generation responses to their expressed desires, driving the expansion we want to see from molding responses.
In addition, this integration will improve our position design through the creation of efficiencies and better competitiveness of positions. Across the industry, those and other moves are aimed at getting a better return and recouping invested capital. In particular, we need to increase our margins beyond what we were delivering before the pandemic began. We will leverage our products and features to generate recurring profits across the portfolio. In addition, we will drive our expansion ambitions in medicine, automation and electrification by focusing on a less cyclical and more corneal finish. markets.
In conclusion, I am excited to lead Barnes over the long term and look to create price for all of our stakeholders. For our employees, we will offer stimulating opportunities for advancement and foster engagement, empowerment, we will remain an employer of choice. Customers, we will be offering reliable service delivery, high quality products and technologies to help this success. And for our shareholders, we will try to unlock the price perspective built into our business with a focus on growth, profitability and return on capital. . We will act on a temporary and flexible basis, take decisive action and drive the transformation of our business portfolio. Despite some of the existing challenges, our long term is brilliant and I’m excited to get started. Let me now turn the call on to Julie for a discussion on the main monetary points and the color of the end market.
Julie K Streich
Hello everyone and thanks Tom. Let me start with the highlights of our moment quarter effects on slide four of our supplement. Second quarter sales were $321 million, necessarily flat with the prior year period as organic sales increased 5%. Exchange rates had a negative effect on sales of 5%. The operating loss was 28. 2 million compared to an operating profit of 38. 5 million last year. In the current quarter, the company performed its goodwill assessment. In our automation business unit, a deteriorating economic outlook and weak operating functionality led to a downward revision of its sales and cash flow guidance, which, among other factors, resulted in deteriorating cash flow money of approximately $68 million. This impairment is related to the acquisition in October 2018 of Gimatic. Excluding automation goodwill impairment rate and a small amount of residual restructuring, adjusted operating profit was $40. 1 million this year, up 2% from last year’s adjusted $39. 2 million. Adjusted operating margin of 12. 5% higher than 30 foundation issues compared to a year ago.
Net loss for the quarter was 39. 6 million or less $0. 78 consistent with percentage consistency, compared to profit of 24. 5 million or $0. 48 consistent with percentage consistency a year ago. On an adjusted foundation goodwill impairment, $0. 56 percent consistent net earnings increased 24% from $0. 45 a year ago. During the quarter, interest expense was $3. 3 million, a low of approximately $1. 1 million due to lower average interest rate and lower average loan compared to a year ago. Other source income was 400,000 compared to other expense of 1. 3 million last year, due to existing year foreign currency substitution gains compared to prior year losses. Excluding goodwill impairment, our adjusted tax rate for the current quarter was 22. 8%, compared to 25. 3% a year ago and 21. 9% for the full year 2021. Compared to the 2021 rate, construction is due largely to last year’s profits from foreign investment. the audit replaces and realigns goodwill and intangible assets to the Italian tax base. These elements were partially offset through a replacement in the distribution of benefits between high and low tax jurisdictions.
Now I will move on to the functionality of our segment starting with the commercial one. At the moment, sales for the quarter were 212 million, down 10% from a year ago. Organic sales decreased by 3% while unfavorable exchange rates reduced sales by 6%. The commercial operating loss was $48. 7 million compared to an operating profit of $27. 3 million a year ago. Excluding impairment of goodwill and a small amount of restructuring fees in current and prior years, the adjusted operating income source of $19. 5 million decreased through 29% and adjusted operating margin of 9. 2% decreased by 250 basis points. The adjusted source of operating income had an effect through a decrease in sales volume, a decrease in productivity due in part to COVID-19-like absenteeism, and the net effect on inflation. These points were partially offset by decreasing incentive compensation.
Across the industry, we recorded approximately 1. 2 million net absenteeism prices in the quarter, slightly more than our April forecast. These prices decreased in the first part of the year and we expect this to continue in the current part of the year. In addition to absenteeism costs, we saw approximately $10 million in gross crude materials inflation, freight and applications during the quarter. Through continued pricing and acquisition actions, we were able to mitigate approximately $9 million, resulting in a net effect on inflation of $1 million. We expect an additional net impact of $2 million to $3 million on inflation in the current part of 2022.
In terms of orders and finishing markets, at Moulding Solutions, biological orders increased by 6% year-over-year, biological sales decreased by 10%. Requests for medical and non-public care rose sharply, while automakers and packaging declined. That said, orders advanced sequentially from April to June and the booking-to-turnover ratio was 1. 1 times. By 2022, we now expect Moulding Solutions’ bio-sales to shrink to a single-digit average.
Engineering parts saw biological orders fall by 3%, driven by declining overall commercial and automotive orders, while biological sales increased by 7%. . In terms of automation, we had a quarter down with a drop in biological orders of 10% and biological sales of 5%. Geographically, Europe, where we generate around 80% of our revenue and the automotive finishing markets, is the cause of the weakness. Discussed above, our full-year orientation has declined and we now expect a slow expansion of biological sales for automation. For the commercial segment, we now expect strong bio sales in 2022 and have reduced our adjusted operating margin guidance to a diversity of 8% to 9%. As Tom commented, widespread economic headwinds and our functionality continue to impact business outcomes.
At Aerospace, sales were $109 million, up 26% from a year ago, reaping the benefits of the continued recovery of the finishing market. either very falsified results. Operating source of revenue $20. 6 million, up 82% from last year. Excluding a small amount of restructuring fees in current and prior years, adjusted operating source of revenue of $20. 6 million increasing 76% year-over-year. The accumulation in the adjusted operating source of revenue benefited from higher sales volumes, i. e. strong sales in the aftermarket, partially offset by labor availability issues, which led to unfavorable productivity. Adjusted operating margin of 18. 9% to 540 basis points.
In our OEM business, orders were strong and our order-to-invoice ratio was more than 1. 5 times for the current consecutive quarter. For the first time since the first quarter of 2020, sales crossed the threshold of 70 million quarterly. The OEM order book reached 753 million, 5% more than in the first quarter. We expect to turn approximately 45% of this order book into profit over the next 12 months. Our OEM outlook has improved as we now expect low double digit expansion by 2022 with narrow body platforms as the main driver. Our aftermarket business is again very strong as we generated MRO and RSP sales expansion of 38% and 88% respectively. Recent information from IATA on foreign traffic was encouraging and the expansion in foreign demand is expected to continue, piecemeal positive news on what has otherwise been a compact body led recovery. For the year, we now expect MRO sales expansion to be around 30% and aftermarket portion sales expansion to be around 30%, which is a build-up from our previous outlook. The adjusted aerospace operating margin is now expected to be between 17. 5% and 18. 5%, an increase reflecting the higher contribution from the secondary market.
On the money side, year-to-date money from operating activities was $9 million, compared to $86 million at the same time last year. The main drivers of the decline in money generation are the accumulation in current capital and the repayment of paid incentives. Similar to 2021. For current capital, inventories increased in the first part of the year as we created an intermediate inventory to fight supply chain constraints and decrease the relevant threat with titanium availability. Accounts receivable accumulate with the point of sale, which increased the quarter. The free cash flow was a use of five million versus a source of 68 million last year. Capital expenditures amounted to $14 million, about $4 million less than a year ago.
With our balance sheet, the debt to EBITDA ratio, as explained through our credit agreement, 2. 3 times at the end of the quarter, down from 2. 4 times in the first quarter and particularly increasing from 2. 9 times a year ago. base net debt/EBITDA, we would be in 2 times. Our average number of first quarter notable diluted percentages and end-of-quarter notable diluted percentages was approximately 51 million percentages. During the quarter, we repurchased approximately 200,000 percentages at an average value of $33. 60 and approximately 3. 4 million percentages remain available under the Board’s 2019 percentage repurchase authorization.
Let’s move on to our updated outlook for 2022 on slide 6 of our supplement. We now expect bio-sales to grow by 5% to 6% for the year, with currency effects having a negative effect on 3 Adjusted % consistent with current margin is expected to be between 11% and 12%, below our previous forecast due to continued pressures in our business segment. Adjusted EPS is now expected to be between $1. 90 and $2. 05, down 2% from 6% from 2021 adjusted to $1. 94 according to participation. We will be expecting a $0. 20 impact on EPS from business restructuring fees in the third quarter and another $0. 06 in the fourth quarter In addition, our outlook for 2022 includes a $0. 04 impact on CEO transition costs. We expect adjusted EPS for the third quarter to be a few cents lower than in the fourth quarter.
Some other elements of the perspective. Interest expense of approximately $13. 5 million and other expenses of approximately $4 million are consistent with our prior opinion. An effective tax rate of 24% to 25%, Reg G, CAPEX pieces of around $40 million to $50 million, excuse me, $40 million to $45 million, which is lower than our previous opinion, average diluted stock of around $51 million and a money conversion of around 100%.
To conclude my ready remarks, while we exceeded our internal expectations for the adjusted operating income source for the quarter, our overall outlook for the time being deteriorated due to worsening business pressures and productivity issues. -commercial and market strategy, positioning the company to improve its performance. As Tom mentioned, our purpose is to drive profitability and return, however, we will remain active in managing the cycle. Operator, we will now open the call for questions.
Q&A session
Operator
Thank you. [Operator Instructions]. The first is by Christopher Glynn with Oppenheimer. Your line is open.
christophe glynn
I had a question about the restructuring, the $24 million, I don’t remember Barnes having such a large charge, but you called it an initial restructuring. So I sought to explore that initial word and why?that terminology?
Thomas J. Hook
Hi, Chris is Tom Hook and I’ll give Julie a chance to speak here at the end. , like Julie, who wants to have a continuous and systematic technique to drive innovations in our revenue and profitability. And within this framework, a structured and continuous systematic technique for charging rationalization to promote potency and effectiveness will have to be put in place. The first initial phase is what we are talking about today and that we have described here in the call to investors in our disclosures that we have published until 8-K. And we will have, as we move forward, more stages that we will put into effect as we complete the cycle of drawing up plans for those who are in a position to announce and enforce them. Therefore, it is a forward-looking expectation that we will do this on an ongoing basis as a t-component of a core strategy codified under the Barnes Enterprise System. Julie, anything else?
Julie K Streich
Oh, no. You have it right.
christophe glynn
How do you know the time of the return, those 14 million?
Julie K Streich
Therefore, the return on investment will be approximately two years in this initial phase. And from a monetary perspective, which may be your next question, we expect a net monetary effect this year of around negative $3. 6 million, and then it will be unbiased in 2023, that’s the expectation.
christophe glynn
It is ok. And then, Tom, it’s pretty early, but he’s curious about his capital allocation strategy from his position as CEO. Can it be put on hold?
Thomas J. Crochet
Yes. Thank you for the question, Chris. I think first of all, since I have been on the Board since 2016, I must make it clear that I am an integral component of the strategy that Patrick and Julie have been implementing for years. So I replaced my seat with that of CEO, a slightly different position. But basically, the methods and the approach, think about my tenures as CEOs that drive and refocus and prioritize the execution of the core business. do not forget my thirteen years in Integer, we marked the corporate and in particular to make the integration in the rationalization of positions on an ongoing basis. And I that strategy is a very vital thesis to have in combination at Barnes, so the first of a multiphase of rationalization in charge.
I think our most productive investments are continuing to expand cutting-edge products and boosting marketing, which is why we’re talking to them today. From a capital allocation perspective, I would say that we will continue to look for hot end markets where we can gain technologies and grow through the automation portfolio that has already started its base and some operational challenges, given what COVID has happened and the turmoil in the automotive industry. But we will continue to look for spaces where we can invest and be able to target those sets of end markets, I talked in particular about the medical generation markets, as well as the automation and electrification markets. So, I think some smart deals can be made to have compatibility with the Barnes portfolio and we’ll see how to exploit them.
christophe glynn
Great, thanks for the color.
Thomas J. Crochet
please.
Operator
The next one is from Pete Osterland of Truist Securities. Su line is open.
Peter Osterland
Hey HELLO. I’m replacing Mike Ciarmoli this morning. Thank you for answering our questions. Given the strong functionality and strengthening of the customers you have there, what do you see on the hard work front?Have you been able to fulfill all your hiring wishes for the rentals you are experiencing?Any difficulty in locating experienced and productive workers, and wondering if you see hard work market situations improving in the current part of the year or if the environment is more challenging?
Thomas J. Crochet
Peter, open question. Labor, especially in the Americas, will be a challenge for our aerospace industry. We, Ian Reason and our CHRO, Dawn Edwards, are very focused on making Barnes a very attractive employer of choice and expanding our competitiveness to meet the workforce challenge. We have significant wishes for aerospace hard work to keep up with the expansion. This is a key direction of the investment we are making to be increasingly competitive and individual. I think we lost a lot of skill when the aerospace disruption from the COVID pandemic happened, and it’s very much a recovery band right now. We take credit with the Singapore and Malaysian operations, which have more fluid skill in those markets, for attracting skill more efficiently and effectively. But that is, in my opinion, probably one of the key drivers for continued competitive expansion in aerospace is the progress that is being made in integrating professional hard work into our aerospace industry. And that’s actually one of the main operational goals that we have. And I can’t wait for us to get into the time of year part so I can take stock of how this is progressing, however, from an operations and workforce perspective, we’re very focused on that right now.
Peter Osterland
It’s a very useful color, thank you. And then I also had a follow-up of the capital allocation factor. Are there elements of the trading portfolio at this level that you would not consider essential or that you could simply compare for a divestment?
Thomas J. Crochet
So I think from a macro perspective, as a board member and then as a CEO, I’m going to take a careful look at our overall portfolio as a company and evaluate how we think parts have compatibility in combination and connection. So, this assessment that I will do by visiting services and operating groups and analyzing our market positions, the strength of our portfolio and our technologies, and we will do this assessment and talk about whether there is anything we feel we want or do. I don’t want it, and then we’re going to make decisions from there. So I would say it’s all under review right now because, obviously, I’m new as CEO. But we’re going to continue to drive each of the product lines, businesses and segments that we’ve built because we have smart operational skills and we want to show that we can make them work. So I’m basically involved in performance. Next, we’re going to address the composition strategy factor and how we’re going to add and assemble pieces from an acquisition or disposition perspective.
Peter Osterland
Okay, thank you for answering the question.
Thomas J. Crochet
please.
Operator
The next one is by Matt Summerville with D. A. Davidson. Your line is open.
Matt Summerville
Thanks. Some questions. First in Industrial. I think I’m a little impressed if I heard you correctly, the full-year operating margin forecast, 8% to 9%, which necessarily implies a small improvement, if any, in the current part of the year. And I guess it would possibly be a little difficult with that, looking to perceive operationally what kind of damage is here. Again, you’re just looking in the business universe more broadly, and there are a lot of correct names. now that they’re delivering record margin performance, and you’re a little bit in debt, so to speak, in that industry. So could it just be a broader assessment of what possibly could have gone wrong here, Tom?
Thomas J. Crochet
Certainly, I think if we take a step back and take a look at our functionality, we’re not satisfied with our functionality in the industry and each of the underlying elements that we want to analyze and study our expansion trajectories to know where array wantsIf I’ve been a board member or now as CEO and, in fact, Julie as CHIEF Financial Officer, we’ve been arguing with Steve Moule, who has been on the board as chief commercial officer for several years, about how we plan that functionality. Correct, Matt is that the instructions of the part of the moment are largely reflected in our trajectory for the first part, but our movements and plans, which we announced, obviously, in the technical component with the closure of Bristol are of load design in the right size, to be able to take advantage of the operational comforts with more volume in this business of technical parts for profitability.
For our operations outside of our Automation segment through the re-rationalization of some of the load designs that we’re communicating here today, some of the technical distribution centers that we have need to start that journey as well. There will be other moves that we’re not in a position to communicate about today, and then we’ll also communicate about some of the charge designs from the other business segments. But above all, we want to do a bigger job of managing exogenous pressures, inflation and supply chain, industry dynamics, engaging consumers and developing businesses to a greater extent. The core operational functionality of the business is to work hard and one of my number one daily jobs going into the business is to gain that momentum through disciplined operations, visitor engagement and offloading our service delivery levels to consumers. This is what will reshape our revenue and reshape our profitability. It’s a lot of paints, but it’s very effective in terms of results. And that is one of my main initial objectives is that beyond the rationalization of charges, it is just about doing business and being more effective and being, a comparative point of view in relation to other more effective commercial companies.
Matt Summerville
As for the other 4 SKUs within the industry, what is your assessment of the market share of Barnes functionality in this regard over the past two years?
Thomas J. Crochet
Yes, I think it’s difficult, each SBU has an obvious position in the market, place, place, place, place, but it varies according to the other sizes of the company. Size, capacity and presence, the other segments of theplaceplaceplace market are located differently. So, I don’t think it’s along the lines of your question, i. e. do we have marketplaceplaceplaceplace restrictions?I don’t think so. I think we are very competitive. We have operational execution. We internally restrict our realization. We are not restricted to the market place place place place. Therefore, I will not use an excuse for the variables market place place place place or exogenous variables for our lack of performance. We have to perform well in a tough market place place environment and be more competitive because our can — they can do it, which means we have to be able to do it.
Matt Summerville
And then, I appreciate that answer, Tom. Et and just my last question. Within Industrial, your initial valuation type, what kind of long-term margin do you foresee for this company, from the moment you had your manager hat to the CEO hat, what is your assessment about it?
Thomas J. Crochet
Yes. In a word, much greater, but I will refrain from giving a granular long-term direction. I that the general threshold that I take into consideration in the first place to be a reference is the one we indicate in our comments. because we need to be able to go back and move beyond the pre-pandemic margins, which I think is the right kind of initial watermark noticed during the pandemic and the dynamics of the industry. Deteriorating margins are difficult to manage inflation and COVID logistics and quarantines. All those challenges, we have to discover that we can handle them and return and make transparent the margins that we used to deliver. The current part of the consultation would be rather what prospective margin it deserves to be when we have a higher internal operational performance. And I’m passing through to have to put Matt on hold about that. We will answer them long-term, in a long-term quarterly convention call for you.
Matt Summerville
Enjoy it, thank you Tom.
Thomas J. Crochet
Welcome. Thanks for the questions guys.
Operator
We have no additional questions at this time. I’ll pass it on to Bill Pitts for any final comments.
Guillaume Pitts
We must thank you all for joining us this morning and looking forward to speaking with you on October 28 on our third quarter 2022 earnings convention call. Operator, we will now conclude today’s call.
Operator
Ladies and gentlemen, this concludes today’s convention and webcast. Thank you for participating. You can now log out.