Barnes Group Inc. (NYSE:B) Q4 2023 Earnings Call Transcript
Barnes Group Inc. (NYSE:B) Q4 2023 Earnings Call Transcript February 16, 2024
Barnes Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Krista and I will be your conference operator today. At this time I would like to welcome everyone to the Barnes Fourth Quarter and Full Year Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. 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: Thank you, Krista. Good morning and thank you for joining us for our fourth quarter and full year 2023 earnings call. With me are Barnes’ President and Chief Executive Officer, Thomas Hook; Senior Vice President, Finance and Chief Financial Officer, Julie Streich; and Ian Reason, President of Barnes Aerospace. You can access all earnings related materials on the Investor Relations section of our corporate website at onebarnes.com. That’s O-N-E-B-A-R-N-E-S.com. During our call, we will be referring to the earnings release supplement 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. Of note, as we announced in today’s earnings press release, following the acquisition of MB Aerospace the company is introducing adjusted EBITDA metrics to its reporting and outlook which Julie will discuss in greater detail. Be advised that certain statements we make on today’s call both during the opening remarks and during the question-and-answer session maybe 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. Then Ian will comment on our Aerospace business and progress on the MB Aerospace acquisition. After that Julie will provide a review of our financial performance and details of our initial 2024 outlook. Then we will open up the call for questions. Tom?
Thomas J. Hook: Thank you Bill. The [Technical Difficulty] Barnes Aerospace business as we transform our portfolio toward a majority contribution from the attractive aerospace market, and in an effort to continually provide transparency into our business, it's important to hear directly from our operational leaders periodically. Ian will provide an update on the integration of MB Aerospace, expected synergies, and the operational and commercial benefits we are already experiencing. First, let me provide an overview of 2023 to highlight our considerable achievements as a team. Please turn to Slide 5. I am pleased with the noteworthy progress made in the execution of Barnes business transformation strategy encompassing our three pillars; core business execution, scaled aerospace, and integrate, consolidate, and rationalize industrial.
Across the company we are committed to unlocking Barnes’ full potential and increasing value. For the full year we turned in a solid performance. Revenue of $1.45 billion grew 15% reported and 5% organic. Adjusted EBITDA margin improved to nearly 19% reflecting benefits from our cost savings efforts. We also improved cash flow significantly due to disciplined cost management, and a focus on working capital while still investing in our business for long-term growth. Our restructuring program continues to progress. We delivered $25 million in savings in 2023 above our previously communicated $22 million target. These savings are partially mitigating higher material and labor costs, and isolated productivity challenges. Importantly, we are seeing costs abate somewhat and supply chain health improve.
Despite more work ahead, and I'm proud of our team accomplishments in a short period of time we've been at it. We delivered meaningfully on our key strategic priorities during the year and are gaining momentum. Please turn to Slide 6 in our first strategic pillar, core business execution. As I've said before, we are focused on top line, bottom line, and pipeline growth across the company. We continue to identify opportunities to strengthen our direct connection with customers for top line growth and leverage these opportunities through commercial excellence, combined with operational productivity to improve bottom line profitability. These actions in turn, fund future pipeline investments and increase our sales funnel. During 2023, we extended two long-term aerospace agreements with Safran.
In Molding Solutions, we deployed an integrated channel management approach and a global go to market alignment to drive commercial excellence. Operationally, we are applying heightened cost management and working capital discipline across the organization. Please turn to Slide 7 and our second strategic pillar Scale Aerospace. In 2023, we made a massive leap with a strategic acquisition of MB Aerospace, which closed in August. Barnes Aerospace is now a truly global business with an expanded geographic reach, diverse capabilities, and offerings to serve markets and customers around the world. The addition of MB Aerospace to our portfolio positions us as a more attractive partner that enables deeper customer relationships and the ability to win additional contracts.
To that end, we have already closed on two large contract renewals, and expect to close on several other large contract wins and extensions with customers. Ian will discuss this in more detail in a moment. We continue to further scale this business through integration and synergies which will drive growth, operational excellence, and margin expansion. Please turn to Slide 8 and our final strategic pillar; integrate, consolidate and rationalize our industrial segment. During the year, we formed the Barnes Transformation Office or BTO to enable a more agile, responsive organization using standard tools, processes, and systems. We are experiencing solid momentum as we execute numerous transformation initiatives in support of accelerating our growth and profitability.
We advance our manufacturing facility optimization through footprint rationalization with plant closures and Molding Solutions, Motion Control Solutions, and several smaller underperforming technology and service centers in the automation business. At Molding Solutions after several months of planning, we recently announced a new organization structure to fully integrate and streamline the business to drive efficiency and expand manufacturing capacity globally. Last month, we took another important step forward with the announced sale of our Associated Spring in Hänggi businesses. With this divestiture, we will exit automotive components manufacturing and simplify the industrial segment. Post close, the expected net cash proceeds of approximately $150 million will be used to reduce debt, supporting our leverage target goals.
On Slide 9, you can see how these strategic actions are dramatically shifting our portfolio, moving us towards higher growth and margin opportunities while increasing our exposure to more stable business. As we move forward, our Aerospace segment will account for the majority of our consolidated revenues and even larger percentage of our earnings, positioning us for long-term profitable growth. In closing, our teams drove an incredible amount of progress in 2023, where we have faced challenges, we have taken actions to improve performance. We had a clear vision for Barnes. A solid strategy that we're in the process of executing to make that vision a reality and a passionate team that has proven they know how to deliver results. While we still have a lot more to do, we are committed to reshaping and positioning Barnes for success by executing our strategic priorities to maximize value for our shareholders.
As such, you should expect more progress in 2024. We will continue to drive multiple working capital, cash management, and cost reduction activities with a focus on business fundamentals and deleveraging our balance sheet. Now before passing the call to Ian, I want to take a moment to thank the global Barnes team of 6,500 employees for their hard work, contributions, and dedication to the success of Barnes and its transformation. Their collaborative attitude and willingness to embrace change in a fast-paced environment is what will allow us to achieve our desired outcomes and for that, I am truly grateful. Ian, I'll now pass the call to you for an update on Barnes Aerospace.
Ian Reason: Thank you, Tom and good morning, everyone. I'm happy to participate in today's call to provide an update on Barnes Aerospace including the MB Aerospace acquisition and share my excitement about the opportunities to capitalize on the strength of the combined business. Please turn to Slide 10. In the five months since the acquisition closed, we have made significant progress with our key integration objectives. We approached the integration with a guiding principle of stronger together to inform our decisions and actions, and we now operate as One Barnes Aerospace. A new organizational structure is in place, including the senior management team that combines leaders from both Barnes Aerospace and MB Aerospace, and we are going to market as a single unified Barnes Aerospace brand.
With core integration activities complete, we are now focused on optimizing and improving the combined business. There has been solid advancement in identifying and executing synergies. As we exit 2023, we have secured $8.5 million of run rate synergies and have line of sight to increase the run rate to $12 million by the end of 2024. We fully expect to realize the $18 million run rate target shared upon closing of the transaction by the end of 2025. In addition, we are enabling greater flexibility and best practice sharing to optimize our existing facilities. For example, in January in Connecticut we created a new OEM Operations Center of Excellence, or COE, primarily focused on military related components, resulting in management and operational efficiencies.
This COE approach creates opportunities to optimize global facility capacity which enables us to position work in the right COE location from our extensive global footprint to best meet program and customer needs. As Tom noted, our now larger aerospace business is seeing new commercial and defense opportunities given our expanded capabilities and solution set. Our increased scale also provides greater diversification of customers, markets, and platforms. Customer feedback regarding our combined value-added offering has been very positive. We've been working diligently on renewing multiple long-term agreements with all of our major engine OEM customers and have largely concluded negotiations on all the agreements. We have already signed two major LTAs and are now working towards finalizing the remainder of the agreements over the coming few weeks.
These deals, a combination of program extensions and incremental new work will generate significant order strength for the business over time. An example of an LTA we have recently signed, which illustrates our competitive position is a long-term agreement with General Electric 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. This agreement has an estimated sales value of over $1 billion to 2035 with most of the value from program extensions. In addition, we have signed an LTA extension with the legacy MB Aerospace engine OEM customer, and we are close to finalizing several others. Building on the previously announced Safran long-term agreement for the repair and overhaul components for the LEAP and CFM engine programs and the increasing demand for aftermarket repairs from other customers, we are expanding our existing MRO footprint in Singapore with the opening of a new facility in the Seletar Aerospace Park in 2024.
Furthermore, to ensure we can offer a truly global repair solution to our customers, we have initiated planning for a new European MRO component repair facility utilizing our existing footprint in Poland. In closing, we have made significant advancements on many fronts in becoming a near $1 billion aerospace business as we position ourselves for further organic and inorganic growth. Our team is excited about the progress, and I look forward to sharing more highlights with you in the future. With that, I'll now pass the call to Julie to cover our financial performance and outlook.
Julie K. Streich: Thank you, Ian and good morning, everyone. Before I walk through our results, I want to first share that we are introducing adjusted EBITDA metrics to our reporting and outlook. We believe this addition better reflects our core operating and cash generating capability and provides increased transparency into our performance. Also, as Tom discussed, we recently announced the divestiture of Associated Spring and Hänggi. Combined, these businesses generated approximately $200 million in revenue in 2023. The combination of our MB Aerospace acquisition, coupled with this divestiture, shifts our portfolio to a more focused and higher-value business. It is truly an exciting time as we position Barnes for sustainable, profitable growth, and further value creation.
My comments today will focus on our fourth quarter results and 2024 outlook. We have provided full year results for the total company and by segment within our earnings presentation, which is posted on our Investor Relations website for your reference. Also, comparisons are year-over-year, unless otherwise noted. Please turn to Slide 12. For the fourth quarter, sales were $416 million, up 33% reported and up 2% organic. Foreign exchange was a benefit of 2%. Adjusted operating income was $48 million, up 36% and adjusted operating margin of 11.5% was up 30 basis points, largely attributable to our restructuring program. Adjusted EBITDA was $78 million, up 36% and adjusted EBITDA margin was 18.8%, up 50 basis points. Interest expense was $24 million versus $4 million due to higher borrowings given the acquisition of MB Aerospace and a higher average interest rate associated with our debt recapitalization.
The fourth quarter adjusted tax rate was 12%. During the quarter, we completed an intercompany transaction between related entities in several tax jurisdictions, which based on the tax law in those jurisdictions provided a favorable tax benefit. On an adjusted basis, net income per share was $0.41 compared to $0.52, reflecting revenue growth and margin improvement, offset by higher interest and tax expense. I will now turn to our fourth quarter segment performance, starting with aerospace on Slide 13. We have made significant strides in integrating our aerospace business and are better positioned to participate in the strong industry growth opportunity. For the fourth quarter, total sales were $213 million, up 96% reported and up 15% organic.
Excluding the impact of MB Aerospace, organic OEM sales increased 17%, MRO sales grew 15%, and RSP sales were up 7%. These results demonstrate the strength of our underlying aerospace business. Adjusted operating profit of $27 million was up 53% and while adjusted operating margin declined 360 basis points to 12.8%, reflecting the impacts of MB's portfolio mix and the amortization of long-term acquired intangibles. Aerospace adjusted EBITDA was $46 million, up 69% benefiting from higher organic sales and the contribution of MB Aerospace. Adjusted EBITDA margin was 21.5% versus 24.9% a year ago, impacted by portfolio mix and productivity. As Ian mentioned, we are working diligently on several new long-term agreements with customers. Our backlog remains healthy.
With the combined Barnes and MB Aerospace business, our OEM backlog now stands at $1.23 billion, and we expect to convert approximately 50% to revenue over the next 12 months. Moving to industrial results on Slide 14. We have made significant progress to integrate, consolidate, and rationalize our Industrial segment. This includes our restructuring program aimed at reducing our cost structure, the closing of numerous locations over the last year and half, and more recently the announced agreement to sell Associated Spring and Hänggi. Fourth quarter sales were $203 million, down 1% reported and down 4% organic. Molding Solutions organic sales increased 1%, while Motion Control Solutions organic sales were down 10% and Automation was down 7%.
Adjusted operating profit was $20 million, up 19% and adjusted operating margin was 10.1%, up 170 basis points. Adjusted EBITDA was $33 million, up 4% and adjusted EBITDA margin was 16%, up 80 basis points benefiting from positive pricing and favorable productivity due in part to transformation-related activities, partially offset by lower sales volumes and mix. Turning to the balance sheet and cash flow on Slide 15. Cash provided by operating activities for the full year was $112 million versus $76 million a year ago. This significant improvement was driven by a lower investment in working capital. Free cash flow was $57 million versus $40 million and capital expenditures were $56 million, up $21 million from the prior year as we continued to reinvest in our businesses.
About 60% of the CAPEX is related to growth and transformation. Our net debt-to-EBITDA ratio was 3.6 times at year-end, which improved from 3.8 times at the end of the third quarter due to both higher EBITDA and lower debt. Liquidity as of December 31st was $447 million, comprising approximately $90 million in cash on hand and $357 million availability under our revolving credit facility. With the debt recapitalization of our MB Aerospace acquisition, there are no major debt maturities until 2028. Turning to Slide 16, we continued to maintain a disciplined approach to capital allocation. Our priorities are the health of our balance sheet, organic investments that will drive sustainable, profitable growth, and remaining committed to shareholder returns.
Net cash proceeds from the divestiture of approximately $150 million will be used to reduce debt. We continue to target net leverage to be 3 times or lower by the end of 2024 and 2.5 times by the end of 2025. We also continued to invest in the business for long-term growth, with most of the increase in CAPEX directed towards business transformation activities and MB Aerospace. In addition, we will continue to return capital to our shareholders through a dividend, which we have been paying for 90 consecutive years. Turning to our outlook on Slide 17, our 2024 guidance reflects the strategic actions we have taken to shift our portfolio towards aerospace, which offers higher growth and higher-margin opportunities. This guidance assumes one quarter contribution from Associated Spring and Hänggi as we expect the transaction to close in early 2024.
We expect the impact to 2024 to be a negative 11% to revenue and negative 10% to adjusted EBITDA. For the year, we expect total sales to be up 12% to 16% with organic sales up 4% to 8%. Given the shift in our portfolio and streamlining of our businesses, starting this quarter and going forward, we are providing our outlook at a segment level only. Looking at our segments, we expect our aerospace sales growth to be over 55%, inclusive of a full year contribution of MB Aerospace. We expect organic sales growth in the low double digits. For Industrial, we expect sales down in the mid-teen range with organic sales growth up low single digits when taking the announced divestiture into account. Regarding our restructuring program, as Tom mentioned, we achieved $25 million of savings, $3 million ahead of our previously communicated commitment.
For 2024, we expect to achieve $38 million in run rate savings, and the program remains on track to deliver against our 2025 run rate target. Expected run rates are impacted by the pending divestiture and a reconciliation table is included on Slide 18 of our investor presentation. Adjusted operating margin is expected to be in the range of 12% to 14%. This reflects aerospace adjusted operating margin in the range of 14.5% to 16% and industrial in the range of 8.5% to 10%. Depreciation and amortization expense in 2024 are expected to be between $130 million and $140 million. Adjusted EBITDA margin is expected to be in the range of 20% to 22%. This reflects aerospace adjusted EBITDA margin of 23.5% to 25% and industrial of 15% to 16.5%. We expect adjusted EPS to be between $1.55 on the low end and $1.80 on the high end.
This guidance reflects the impact of MB Aerospace and our announced divestiture, which combined are dilutive to adjusted EPS by approximately $0.47 per share. Top line growth and margin expansion from ongoing cost savings offset this dilution. On Slide 18 of our investor presentation, we have included additional 2024 guidance information for modeling purposes. Please turn to Slide 19. Given the moving pieces and to assist with modeling our business in the near term, we wanted to provide some additional transparency into our first quarter performance expectations. We expect revenue growth of 25% to 27%, adjusted operating margin of 11% to 12%, adjusted EBITDA margin between 19% and 20%, and adjusted EPS between $0.32 and $0.37. Operator, we will now open the call for questions.
Operator: [Operator Instructions] Your first question comes from the line of Matt Summerville from D.A. Davidson. Please go ahead.
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