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Edited Transcript of B earnings conference call or presentation 26-Jul-19 12:30pm GMT

Q2 2019 Barnes Group Inc Earnings Call

BRISTOL Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Barnes Group Inc earnings conference call or presentation Friday, July 26, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Stephens

Barnes Group Inc. - Senior VP of Finance & CFO

* Patrick J. Dempsey

Barnes Group Inc. - President, CEO & Director

* William Pitts

Barnes Group Inc. - Director of IR

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Conference Call Participants

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* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* Kai Shun Chan

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Louis Harold Raffetto

UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Peter John Skibitski

Alembic Global Advisors - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes Group Inc. Second Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions)

Thank you. Bill Pitts, Director, Investor Relations, you may begin your conference.

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William Pitts, Barnes Group Inc. - Director of IR [2]

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Thank you, Sharon. Good morning, everyone, and thank you for joining us for our Second Quarter 2019 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.

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 8K submitted to the Securities and Exchange Commission.

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 SEC. These filings are available through the Investor Relations section of our corporate website at bginc.com.

Let me now turn over the call to Patrick for his opening remarks, then Chris will provide a review of our second quarter results and our updated 2019 outlook. After that, we'll open up the calls -- the call for questions. Patrick?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [3]

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Thank you, Bill, and good morning, everyone.

During the second quarter, we saw the continuation of several market trends that were present in the first quarter which had both a favorable and unfavorable impact on our performance. At Aerospace, business performance remained strong and our expectation for the near to medium term has again improved. At Industrial, many of our global end markets remained soft, with lingering trade uncertainties causing customers to postpone new projects. Accordingly, our near-term expectation for Industrial is now slightly lower.

For Barnes Group, second quarter revenues declined 1% with organic sales down 4%. Adjusted operating income declined 9% while adjusted operating margin was 15.7%, down 130 basis points. Adjusted earnings per share were $0.75, down $0.15 from a year ago. However, keep in mind that last year's second quarter had an $0.08 EPS benefit related to favorable discrete tax adjustments.

As we execute our strategy, we remain squarely focused on transforming our business portfolio by increasing the level of differentiated industrial technologies and intellectual property. Supplementing the portfolio evolution has been an enterprise-wide deep integration of the Barnes Enterprise System to drive productivity improvement, and as a result, lift margins higher.

While our overall margin and earning trends have been favorable, in the current climate, we are not immune from the influence of softening end markets and existing geopolitical challenges. That said, our team is fully committed and energized to deliver performance regardless of the cycle. Our leadership team has taken, and will continue to take, proactive steps to offset current headwinds through a range of different go-to-market strategies seeking to opportunistically increase market share and launch new innovative products and services. All these activities are focused on driving top line improvement. At the same time, equally intense emphasis has been placed on cost management across all of our businesses to ensure alignment with current market demand.

Our commitment to our long-term growth strategy remains steadfast. Building a world-class company focused on growth-oriented, high-margin businesses will allow us to produce the greatest value for our varied stakeholders over the long term.

Combined with our relentless pursuit of being a consistent generator of strong cash flows, we are driving ongoing strategic organic and acquisitive investments to secure the future. As such, we are confident that we're on the right path for the long term and believe that we are well positioned as the markets improved.

Let's now move to a discussion on our second quarter performance, beginning with Industrial, where total sales were down 6% and organic sales declined 11%. Certainly, today's industrial environment is challenging given the multitude of factors. We've seen global trade uncertainty and evolving environmental regulations drive customers to defer the launch of new programs. This is especially true in auto, where the industry is simultaneously impacted by decreasing global production levels. Such pressures are reflected in the generally declining manufacturing PMI trends in Europe; China; and to a lesser extent, North America. That said, our general Industrial business is providing some resistance to current conditions with organic sales or organic orders up slightly in the quarter.

At Molding Solutions, sales declined in 16% over last year's second quarter with organic sales declining 12%, impacting our second quarter revenues by about $8 million, where mold pushouts that are now expected to ship in the second half. Demand for automotive hot runners was particularly soft and order activity reflected the same on a year-over-year basis. However, we did see sequential improvement quarter-over-quarter with orders and sales up mid-single-digits and high single-digits, respectively. Our expectation for this part of Molding Solutions has been lowered, although we do expect continued sequential improvement in Q3 and Q4 as program launches start to pick up in the second half, which we are starting to see in North America.

Our molds business is seeing solid demand in global medical markets while packaging and personal care has softened somewhat. Mold backlog levels are healthy and support our significant sequential growth forecast for the third and fourth quarters. For Molding Solutions overall, we now anticipate full year organic growth to be down mid-single-digits as compared to a record 2018.

At Force & Motion Control, organic orders were down high single digits and organic sales were down low double digits. The tool and die market continues to see global softness, especially in Europe and Asia, while general industrial markets have proven to be more resilient, particularly in North America. We see positive indications that the tool and die markets has bottomed and anticipate some sequential improvement as we progress through the second half. For 2019, we continue to forecast organic growth to be approximately flat to 2018.

At Engineered Components, organic sales declined high single digits and orders declined low single digits driven by lingering weakness in auto production end markets. While global auto production remains at a relatively high level, we now expect 2019 production to be down approximately 4%, with China, Europe and North America all seeing a reduction. Consistent with our prior view, our 2019 organic growth outlook for Engineered Components is to be down low single digits.

At Automation, we've seen lower-than-anticipated first half revenues and now expect sales of approximately $60 million for 2019. While automation markets and the demand for robots has slowed year-to-date, we continue to see this business as a great-growth, high-margin opportunity for Barnes Group over the long term.

Our global growth initiatives are ongoing, and leveraging customer relationships through our Molding Solutions business, especially in China, are progressing. We've seen high levels the quoting activity, but the transition from quote to orders is currently more protracted as market uncertainties translate into customer programs being deferred.

Overall, our full year outlook for the Industrial segment has been trimmed. We now anticipate a low-single-digit organic revenue decline. Forecasted adjusted operating margin is expected to be approximately 12% to 13%, likewise down from our prior view.

Moving to Aerospace. And with the same opening statement as last quarter's call, excellent execution and strong industry fundamentals have provided another quarter of record revenues and operating profit. Total sales were up 10% with OEM growth of 11% and aftermarket growth of 8%. Operating margin in the segment was once again very strong at 21.4%, up 110 basis points from a year ago.

In the first half, one of the most discussed industry topics has been the grounding of the Boeing 737 MAX. We continue to monitor the situation closely but don't envision the delayed return to flight as having any meaningful impact on our OEM business in the near term. In fact, in our OEM business -- our OEM business is solidly positioned through 2020, reflecting good program execution and a healthy backlog level. Currently, our team is primarily working towards filling 2021 in 2022 production.

In the aftermarket, the demand for MRO services and spare parts, especially on programs like the CFM56, remain healthy, and our 2019 aftermarket outlook has again been improved. For the full year, we've increased our revenue and margin outlook, with Aerospace sales growth in the high single digits and with operating margins of approximately 21% to 22%. OEM sales growth continues to be forecasted in the high single digits. In aftermarket, MRO growth is now anticipated to be up mid- to high single digits and spare parts up high single digits, both incrementally better than our first quarter outlook.

So in summary, the second quarter of 2019 was a clean operating quarter with sales volume being the key driver for both Industrial and Aerospace performance. Lower sales at Industrial have weighed on our performance, however, the team has taken the necessary top and bottom line actions to mitigate the impact where possible and to drive overall productivity. We continue to monitor market conditions closely and will take further actions as warranted.

At Aerospace, increased volumes and solid execution have helped to deliver outstanding sales and margin performance. And we continue to see solid fundamentals for that portion of our portfolio. Importantly, investments in organic growth and value-enhancing acquisitions will be sought out to better position the portfolio for long-term growth as industrial end markets recover. Our near-term emphasis is on ensuring that we are well positioned to power forward as conditions improve.

Now let me turn the call over to Chris for a discussion on the financial details.

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Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [4]

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Thank you, Patrick, and good morning, everyone. Let me begin with highlights of our second quarter results on Slide 4 of our supplement and then move to a discussion on our updated outlook for 2019.

For the second quarter, sales were $372 million, down 1% over the prior year period. Organic sales declined 4% and FX had a negative impact of 2%. The IGS and Gimatic businesses contributed a positive 5% of acquisition sales. Operating income was $57 million, down 11%. Excluding $1.4 million of Gimatic short-term purchase accounting adjustments, adjusted operating income declined 9% to $58.3 million; and adjusted operating margin was 15.7%, down 130 basis points.

Interest expense was $5.4 million, up $1.3 million from a year ago due to an increase in average outstanding debt as a result of the Gimatic acquisition, partially offset by a lower average interest rate.

With respect to taxes. The company's effective tax rate was 24.5% for the second quarter of 2019 compared with 15.9% for the prior year period. In the second quarter of last year, an $0.08 per share tax benefit from the reversal of certain international valuation allowances and a $0.03 per share tax benefit of U.S. tax reform adjustments contributed to lower end -- to the lower-than-usual tax rate. Partially offsetting these items in the current period was the benefit of a foreign tax holiday granted late in 2018.

Net income was $37.6 million or $0.73 per diluted share compared to $49.4 million or $0.93 per diluted share a year ago. Excluding $0.02 of Gimatic short-term purchase accounting adjustments in the quarter, adjusted net income per share was $0.75, down 17%.

With respect to share count. Our second quarter average diluted shares outstands was 51.7 million shares. Under the 2019 stock repurchase authorization, we repurchased 900,000 shares at a cost of approximately $50 million in the second quarter, leaving 4.1 million shares available for repurchase.

Year-to-date cash provided by operating activities was $108 million versus $89 million a year ago primarily driven by working capital improvements. Free cash flow, which we define as operating cash flow less capital expenditures, was $83 million compared to $64 million last year. Year-to-date CapEx was $25 million, up approximately $1 million over the first half of last year.

With respect to the balance sheet. Our debt-to-EBITDA ratio was 2.7x, up slightly from the end of our first quarter. Of -- under our existing debt covenants, additional borrowings of approximately $289 million of senior debt would be allowed.

Moving now to our segment performance, beginning with Industrial. For the second quarter, sales were $233 million, down 6% from last year. Organic sales decreased 11% due in large part to ongoing softness in our automotive end markets. Unfavorable FX decreased sales by 3% while IGS and Gimatic contributed 7% of acquisition revenues. Operating profit was $27.4 million, down 28%, primarily driven by the profit impact of lower organic sales volume and short-term purchase accounting adjustments. Overall, a clean quarter with the lower sales volume having the greatest impact.

Excluding Gimatic short-term purchase accounting adjustments in the current quarter, adjusted operating profit of $28.8 million was down 25%, and adjusted operating margin was 12.3%, down 310 basis points. However, on a sequential basis, adjusted operating margin was up 180 basis points from 10.5% in the first quarter, and we anticipate further improvements as we progress through the second half of 2019.

Moving to Aerospace. Second quarter results were once again excellent. Record quarterly sales of $138 million were up 10%, OEM sales increased 11% and aftermarket sales increased 8% from solid growth in both our MRO and spare parts businesses. Operating profit was $29.5 million, up 16% due to the profit contribution of higher sales volumes. Operating margin of 21.4% was up 110 basis points from 20.3% a year ago. Once again a high-quality quarter, with the Aerospace team driving sales leverage to increase margin performance.

Aerospace total backlog ended the quarter at $803 million, down 3% compared to a year ago and down 2% sequentially from last quarter. For OEM specifically, backlog decreased to $791 million from $804 million a quarter ago. And consistent with our Q1 view, we expect to ship approximately 50% of our Aerospace backlog over the next 12 months.

Turning to our updated 2019 outlook on Slide 5 of our supplement. We now expect total revenue growth of 3% to 4%, with organic sales growth of approximately flat to 1% for the year, which is lower than our previous view. We forecast FX to negatively impact revenues by approximately 1% and acquisitions revenues to contribute approximately 4%, these factors are unchanged. Adjusted operating margin continues to be forecasted in the range of 15.5% to 16%.

Adjusted EPS is now expected to be in the range of $3.18 to $3.28. Consistent with our prior guidance, we see our full year adjusted EPS split being 45% first half, 55% second half. Additionally, given the increased mold deliveries expected in the fourth quarter from Molding Solutions, we see the Q3-Q4 EPS split also being approximately 45% and 55%.

A few other outlook items. Interest expense is anticipated to be approximately $20 million. The effective tax rate is forecasted to be between 23.5% and 24%. Our CapEx expectation is approximately $60 million. Average diluted shares are forecasted to be between 51 million and 52 million shares. And cash conversion is now forecasted to be approximately 100%. While the cash conversion metric is lower than our prior view, it now includes a discretionary $15 million pension contribution which will be reflected in our operating cash flow in the third quarter.

So to end, like last quarter, Aerospace strength is helping to offset some of the weakness being experienced in our industrial markets. We are focused on protecting margins to the extent possible by driving productivity. At the same time, our cash generation remains strong, and we will look to both organic and acquisitive investments for future profitable growth.

Sharon, we'll now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) your first question comes from Myles Walton with UBS.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [2]

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It's Lou Raffetto on for Myles. Chris, thanks for the color on the pension contribution next quarter. That explains a little bit of things. Just wanted to see if you guys -- sounds like you're still planning on this second half recovery and based on the shipment of additional molds in 4Q, I guess. And so I mean, do you have really good clarity on that? Or is there still some expectation of sort of end market pickup?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [3]

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Lou, this is Patrick. Relative to the second half, as we look out over the next 6 months, the mold business is a -- one of the more solid aspects of that outlook in that we have the backlog you already booked, and in many instances, already in the manufacturing cycle for both Q3 and Q4. So we have a significant sequential ramp in Q3 and Q4 within our molds business. But again, team is very clearly focused on executing to make those shipments happen. The second aspect that's key to that happening is coordination with our customers for validation, and that has been closely choreographed as well.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [4]

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Okay, great. And then just if I could ask about the M&A pipeline. I guess you guys still seeing potential further consolidation opportunities within the Gimatic sort of end market or Gimatic area?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [5]

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Yes. We continue to be active in that space as well as in a number of other spaces for our other businesses, Molding Solutions and Force & Motion Control. So we're actively looking at prospects, but remaining disciplined in terms of not only our strategic criteria but also valuations. With that said, the team has been active and we're looking to continue to invest as we go forward from the strong cash flows that we're generating to both organic and acquisitive opportunities.

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Operator [6]

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Next question comes from Christopher Glynn with Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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So looking at the flat industrial guide, it sort of implies the second half run rate for Industrial rev is about $20 million above the average first half run rate. Just curious if that is all molds, so that magnitude step up? And what you have assumed for short-cycle volumes.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [8]

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Yes, no. Good question, Chris. The molds do make up the majority of the sequential step-up. But we do have also built in some optimism in terms of the short-cycle businesses. And there, what we've seen is -- particularly within our automotive hot runner business has been sequential improvement from Q1 to Q2. And we believe that as the year progresses, we'll see continued improvement within that business. A reassuring fact has been that for the first 3 weeks, albeit it only is 3 weeks of July, we've seen incremental orders week-over-week for the first 3 weeks, building on the trend that we've seen from Q1 to Q2.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [9]

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Okay. The -- but the hot runners, that's part of the long-cycle backlog, right?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [10]

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No, no. The hot runners, what I referenced was automotive hot runners, and that is very much a short-cycle business.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [11]

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Okay. And then just on the Industrial margin in the second quarter, was up a couple of percentage points sequentially on actually lower revs. So just wonder if there's accounting timing accruals. Or if that was just -- reflects your reaction time and execution to the first half revenue levels?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [12]

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I think I would give full credit to the leadership team with a view to driving the Barnes Enterprise System, with a view to driving overall productivity. And so to your point, Chris, while I was pleased with, albeit that it was a challenging top line quarter, was the sequential improvement of 180 basis points from Q1 to Q2 in terms of operating margins. And that was a tremendous, I think, credit to the leadership team in Industrial.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [13]

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Yes. That looked good. Last one would be in terms of trade strife. Is -- and Synventive's position in China. Does that get caught up at all in any backlash by U.S. suppliers. And in China, comment on Synventive mix of the global OEMs versus China domestics, and if there's any learnings to be gleaned from your answer.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [14]

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Well I think for us, within China, we've seen clearly a slowing down in the market. Recognizing that we serve the auto -- we serve the Chinese market in 2 areas, primarily auto in terms of our hot runners; our tool and die business; and then thirdly, the medical. What we've seen impact the auto significantly in just the last few months is the implementation and the acceleration of what they call China 6 emissions regulations. And so the regulation itself was supposed to be implemented close to a year from now and a lot of the cities have taken a proactive step and implemented it almost immediately. And with that, what it's created is a glut of inventory in the auto industry that's created this sort of backlog of a sort of log jam, if you like. And so overall, we continue to see signs of continued green shoots within China. But clearly, the market there has been under pressure.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [15]

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So no impact on your position from treatment of U.S. companies or backlash?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [16]

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No, we have not seen anything to that effect.

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Operator [17]

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Your next question comes from Matt Summerville with D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [18]

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Just sticking on the hot runner side of the business. Can you give us a little bit better sense, how much that business was down year-over-year in Q2 and versus '18 for the full year? What's sort of in the guide as far as where Synventive shakes out for the year?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [19]

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Our automotive hot runners, Matt, pretty much went in line with light vehicle overall within our business. And so what we saw were high teens to the 20s, depending on which aspect of our business touched automotive.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [20]

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And then, Patrick, what is your expectation for auto hot runners then for the full year that's in your current guidance? And can you sort of give a little bit granularity sequentially, first half, second half? I'm just trying to understand how this business sort of bridges. Because to me, it sounds like it's pretty key that in fact you see higher revenue in auto hot runners in order to hit the guide for the year in addition to that mold business getting shipped in Q4.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [21]

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You're correct, Matt. It is clearly a factor in that we have built in a sequential improvement in our hot runner business Q3 to Q4. And again, what you've seen is, is that in terms of our overall guidance for the business, we've also split our revenues 45-55 between Q3 and Q4. So what I'm confident in is that the step-up between -- from Q2 to Q3 and Q3 to Q4 is reasonable and not overly aggressive with respect -- and is backed up by some of the improvements we've seen already year-to-date.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [22]

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If you look at incoming order rates for the Industrial business in the second quarter, I believe that's a number you've disclosed before. If you guys are able to provide that? And then what your book-to-bill was in Q2 in Industrial?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [23]

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So book-to-bill in Industrial for Q2 was 1. And incoming organic orders for Q2 in Industrial were down low double digits.

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Operator [24]

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Your next question comes from Pete Skibitski with Alembic Global.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [25]

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Patrick, what are you hearing from your customers in terms of -- is there a timeframe in which, even if the China tariffs stay on, maybe assume a worst case, that they just kind of stay on indefinitely. At some point, I would think that no matter what production rates are, the OEMs [stuck to] their model changeovers, which should drive hot runner demand for you. So I'm just wondering, is this year a particularly tough comp on the model changeovers? Or should we expect at some point, OEMs to just say, "Hey, we're [sticking with] the model changeovers even if tariffs stay on." I just want to understand that whole kind of dynamic better.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [26]

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Well to that point, Pete, what we're seeing right now are model changes being released even with the hangover -- the tariff issue and the trade disputes hanging over them. And so to that end, we've seen releases in North America and also releases in China and the releases in China from Western OEs, particularly European. And then you have -- internally, you have the releases that would come from the domestic Chinese which are not impacted by the tariff disputes because they're domestic production, domestic sales.

What we have clearly outlined in terms of our guidance for the full year is now a consideration that we think that the resolution of the trade disputes are going to be more protracted. And so we're not relying on a trade resolution to support our guidance as much as we are feeling -- sensing from the customers, what we're seeing in terms of Q2 and what we've now seen in addition to that beginning in Q3, which has been the slow release, albeit at a lower level, but nonetheless the release of model changes.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [27]

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Got it. Okay. Can you just -- not being an auto guy, can you help me understand why China 6 is negatively impacting auto over there?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [28]

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Because what happens -- China 6 is the equivalent of the emissions controls that were implemented in Europe. And basically, what it is, is that the OEs were to meet those new standards in their new cars that were being produced. What they thought they had was 1 year, 1.5 years. But they've been given notice for many years, but they thought they still had another 1.5 years to meet those requirements. What's happened inside of China is that certain large cities and provinces have taken it upon themselves to pull those requirements forward and implement it or mandated them almost immediately. And with that, what you have is a complete logjam of existing inventory that's now sitting on the dealerships that the dealers are trying to move. And of course, the issue is that consumer is looking at do they really want to buy a car that has -- doesn't meet the new standards?

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [29]

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Okay. So they've got noncompliant inventory right now.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [30]

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Effectively. But they still can sell it on -- off the dealers. And what they're doing is discounting heavily to make that happen.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [31]

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Okay, okay. Let me switch to some good news, maybe. GE in Paris seemed pretty bullish, I thought, on the outlook for quite a number of years. I thought -- even into the middle of next decade for CFM56 shop visits. Are you hearing the same thing from them? Does that feel like visibility on the RSP programs is kind of extended in terms of time to peak shop visits?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [32]

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What we used to reference was 2022, 2023. And even now as we talk to the OEs, and you know that there are 2 in the CFI -- CFMI JV, what we're now hearing is 2025. So there is a slight extension there in terms of where the peak is. And I think that all bodes very well for Barnes in terms of not only our spare parts business via the RSPs, but also our MRO business via the CRPs.

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Operator [33]

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Next question comes from Michael Ciarmoli with SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [34]

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Patrick, did I hear you correctly? Organic Industrial incoming orders down low double digits. Is that a year-over-year? And can you give us any color? Did that -- did those organic orders worsen sequentially? Just a little color on that, maybe.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [35]

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So the -- yes, you are correct in what you heard in that I mentioned that organic orders for Q2 '19 year-over-year to Q2 2018 were down 12% or low double digits. The -- what we saw -- if you go back to 2018, we saw a very strong Q1 and Q2 in terms of our Molding Solutions business. And as I've highlighted, where we've seen softness within that business has been in the automotive hot runner side for the reasons that I've cited. So sequentially between Q1 and Q2, there was a slight downtick but nothing significant.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [36]

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Okay. And then just what are -- what's now the Industrial operating margin outlook for 2019...

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [37]

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So for 2019 -- yes, it is approximately 12% to 13%.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [38]

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Okay. And then should we think about -- you kind of talked about initiatives to rightsize. How should we think about some of those costs? Are they going to be meaningful? Should we expect that to be a headwind? Or maybe if you could just quantify if there's going to be any costs associated with some of these ongoing initiatives.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [39]

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So I think what I would suggest is that the teams evaluate on an ongoing basis current market conditions, their outlook relative to those conditions. And also looking at whether there's opportunities for to leverage even further the Barnes Enterprise System to drive overall productivity. And so those dialogues are taking place weekly. I would say that, at this juncture, they're very much in process and not -- none of those have been factored in, in terms of any significant costs to our guidance. At the same time, the benefit of ongoing productivity -- normal productivity through the enterprise system is factored in.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [40]

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Got it, got it. And then maybe just last one. You guys had the 2020 targets out there. I think you kind of lowered them a little bit earlier in the year. I mean, how should we think about progression to 2020? I know you had the organic sales CAGR 3% to 4%, the 17% to 18% operating margin. Obviously, we've got a little bit of a spot of Industrial weakness here on global softening. But how should we think about those targets now?

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Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [41]

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Yes. Mike, what I would add is that on that -- given the trade uncertainty and how are looking at the first half, second half. And we're focused on the near term, fortunately, just based on what we're seeing in terms of the -- again, the trade uncertainties. A little premature to kind of call it out. For purpose of 2020, we're clearly guiding a good ramp up for purposes of the second half. Felling pretty confident because most of that second half ramp up is sitting in backlog, so it is a matter of us executing, and then on the Molding Solutions side, our customers accepting those molds in that time period. But I'd say it's a little premature. What we'll do is as we kind of execute 3Q and into the fourth quarters, we'll provide an update accordingly.

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Operator [42]

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Next question comes from Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [43]

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So I wanted to ask -- I mean, looking at the guidance for Industrial margin, it looks like to get to the midpoint of that range, you need to about 200 basis points above the first half pace. That's the math. What do you think -- is that the molds business coming in that's driving that margin improvement? Just maybe you can talk to that for just a moment.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [44]

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Yes. Primarily molds, and in that what we see is a large piece of the backlog within our Industrial business sits within the molds. And those molds are very much scheduled in terms of both Q3 and Q4 in terms of the fact that we're working closely to meet our customers' requirements, but also as I mentioned earlier, key that our team executes. So for the most part, the margin uptick comes from the fact that molds constitutes a higher-margin business, but also some incremental improvement from our automotive hot runner business which is also high-margin.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [45]

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Got it, got it. So aside from the hot runner business in general, it looks like -- can you go back and talk about maybe what's affecting the molds? I mean, it sounds like you're seeing more of a push out than cancellations or outright sluggish demand. Kind of talk about maybe what's -- what the dynamic is there, if you don't mind.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [46]

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Yes. Pushouts, let me define what I think push out. Pushouts means different things, I think, to different people. For us, a pushout may be simply the fact that, at the final validation of a mold, the customer realizes that there is an enhancement that can be made to the final product. And as such, what they will ask for is a slight modification. But if that slight modification takes the 5 days, which for us, again, is potentially an incremental change order, we're happy to do it. But it then moves the part from -- if it was scheduled to ship at the end of a quarter into the next quarter. So it's a timing issue.

And what we've seen in our mold business is these dramatic movements quarter-to-quarter, which you -- if you look back at our business over the last few years since we moved into the mold business, there's major swings quarter-to-quarter both in terms of orders and in terms of shipments just because the nature of the business is a little bit more programmatic in that once the customer wants a shipment of molds, they will ship them all at once. And that could be 12 molds, it could be multiple molds all at once. But none of the molds can leave until all of them are ready.

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Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [47]

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And then what I would add to Patrick's comments is also recognize on a cash -- on the cash side, we typically get a good 30% payment upfront at order and then we get cash through the program in terms of execution, roughly around 60%. It's only that last 10% from a cash point of view that we get -- when we recognize the sale. And that -- so it's not so much a cash issue for us, it really is a revenue recognition and the profitability associated with that. And as you heard in the quarter, roughly $8 million of those molds we anticipated to be shipped in the month of June, which is now just carrying into second half of the year.

So pretty high degree of confidence from the team. We status it often, open dialogue, just understanding where we are, the percent complete on those programs. So -- and if we didn't have the confidence, we wouldn't be guiding the way we are. But we look at it as that ramp going from roughly 45% third quarter from an EPS point of view to 55% in the fourth quarter. It's how we see it, and that's mostly dependent on 2 pieces of our business: Both Aerospace -- the continued strength out of Aerospace as well as molds being shipped by year-end.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [48]

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Got it. And I guess what I'm getting at -- I mean, God, I've covered you guys for a long time. But if I look at the Molding Solutions business, I mean, that's some of your higher-margin business down 16%; the hot runners down, I think you said high teens, maybe 20% -- high 20s or low 20s. And these are significantly higher. But the margin in the Industrial business has kind of held in there in a relative basis through past recessions or past weaknesses in industrials. So -- and I guess as this business come back, do you see kind of improvement? I'm curious if you'd comment on a -- the differential on the margin from peak to trough that you've seen kind of in the Industrial businesses relative to past cycles. I know that's a loaded question, but any thoughts you could give would be great.

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Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [49]

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It's a good question.

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [50]

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Yes. Well Ed, I would highlight that I think what you see in this quarter is an example of the resilience of the portfolio compared to maybe where would have been 6 -- 10 years ago. And so what you're clearly seeing is that there is tremendous flow-through in terms of leverage of incremental dollars on the top line. There's that leverage on the upside and then there's the, obviously, decrement on the downside. So what we've done over the course of the last 6 months has been very diligent in terms of driving, through the Barnes Enterprise Systems, all of the actions that we believed were necessary for -- to anticipate softness in these businesses, which we had anticipated just based on global auto and also trade uncertainties.

And so one of the disciplines that the teams drive through is what we've referred to as contingency planning. And basically, they are -- they have a playbook that says, "If I see a headwind of plus 5, minus 5; if I see a upside of plus 10, a downside of minus 10, what are the actions? What are the initiatives that we're going to drive?" And what you've seen in Q2, I think, is indicative of that, whereby we're up 180 basis points sequentially on lower sales.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [51]

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Yes, yes. It's good to see. I'm curious, we haven't spent a lot of time on Aerospace in this call. It's been a bright spot of your portfolio. As I look forward, I know we've asked this question before, but anything that you can add on the GE9X? I know that's the -- that's an engine program that you're working on. I'm curious if you can offer some of the solution that -- of the -- maybe some of the problems that have been going on with that engine. And ultimately, do you have any sense as to what your content might be?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [52]

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Yes. We are definitely actively working the GE9X, Ed, and it's an area that we're working closely with the OE on. We're not -- unfortunately, we're not a part of the solution for the current issue in that it's not in our -- it's not anything we've been involved in. The -- obviously, the GE9X, we believe, will be another great program. In the meantime, the 777 continues to get produced at approximately 3.5 a month and that's a solid contributor to us. We wouldn't go out with content on the 9x until it was closer into entering into service. What I have indicated previously is that it will not be in the same range as what was the base GE90.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [53]

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And when you say base GE90, you mean content today or where it started when you first were awarded the program?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [54]

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No. I mean -- no, I just mean content today. If you think about that GE90 on the 777, the base 777, we have -- it was one of the most successful programs in Barnes with, approximately at its peak, $1 million per aircraft. And so what has happened with the GE9X is that the engine was shared through revenue-sharing programs to where pieces of the engine which were available to us in the past were bought into by large partners. And so that took some of the potential for the same content that we saw on the base GE90 off of the GE9X.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [55]

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Got it. And the final question for me is on capital deployment. I mean, Chris, you mentioned earlier that the leverages kind of eked up a little bit. I guess it's a little bit of the weakness on maybe EBITDA. But you also repurchased 50 million shares -- or $50 million worth of stock in the quarter. I know that's off the $140 million pace last year. But as the stock's kind of fallen, do you find that there's some opportunistic value in the stock that prompted you to invest $50 million in repurchases?

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Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [56]

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No -- that's a good way to look at it. I guess I look at it as we typically, on an annual basis, plan for quantity to generally offset the dilutive impact of what gets issued. And what we are looking, like last year, we were being opportunistic based on share price. I view it as now -- as we don't have much of those discussions at the Board level, this buyback was relative to our plan. It was executed on. We are, as we always have, been squarely focused on the M&A side as well as the internal growth in terms of CapEx. Although our CapEx guidance come down -- came down slightly as we look to the full year, we're still committed to organic growth as that #1 priority. So Ed, I would just summarize, it's opportunistic, but right now, but we don't foresee much in the way of share repurchases as we kind of close out 2019, meaning we've acquired what we feel was appropriate.

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Operator [57]

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Next question comes from Josh Chan with Baird.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [58]

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The first question is on the Industrial business. I mean, if you look at the Force & Motion Control and Engineered Components businesses, somewhat of a softness in both businesses there, but your guidance didn't change for the year. So I know we talked about the ramp in the Molding business, but is there a ramp assumed in these other 2 businesses as well?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [59]

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Not anything significant. What we've seen in the Force & Motion Control business is, as you may recall, the Force & Motion Control, as we've created that SBU now is comprised 60% tool and die, 40% general industrial. And what we've seen in the general industrial within Force & Motion Control and the rest of our Industrial businesses is general industrial has held up pretty well. It's offered some resistance to some of the downward pressures that we've seen in some of our other end markets. And so with that, we've basically planned on this remaining pretty level through the rest of the year. On the tool and die side, what I would suggest is that we've seen it -- we think we've seen the bottom. And so with that, we have some slight incremental improvement Q3 to Q4, but nothing that's challenging in terms of expectations there. Pretty steady.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [60]

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Okay. That helps. And on the end markets, I know you broke out growth by each business. But is there any color that you can give us in terms of how geographies performed within the Industrial businesses in the quarter? Where you saw more softness and maybe more resilient in terms of geographically?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [61]

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Well, as we go to geographic, Josh, I would say that you have to think about it in terms of the end markets themselves, so rather than broad-based Industrial. But if you look at our Industrial business in general, total BI, our revenues are coming about 35% from the Americas, approximately 40% from Europe and 25% from Asia, or China predominantly. And so that gives you a flavor of where our revenues have been generated on an approximate basis worldwide.

As you think about the end markets we're serving, our largest market is light vehicles; followed by general industrial; medical, personal care and packaging, which we sort of lumped together and is driven primarily by the molds business. And then we have our tool and die and Automation. So they're the end markets -- the dominant end markets. When we think about light vehicle, we saw -- in terms of revenues, we saw the most pressure in Europe. Whilst if you think about general industrial, we saw -- in terms of orders, we saw an uptick in North America.

So again, it's a -- in general, it depends on the end market that we're serving, but for the most part, I would say that Europe and Asia saw the most pressure whilst North America was where we saw the most resilience.

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Operator [62]

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Your next question comes from Matt Summerville with D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [63]

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Just a couple of quick follow ups. With respect to that mold pushout, I believe you saw some of this around this time last year. So to your earlier comments, is this sort of becoming a normal thing that we should just expect to encounter from time to time? And maybe can you give a little more color on what end market or type of application that this particular product might be getting used for?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [64]

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Yes. I do think, Matt, that it is a part and parcel of the business in that there is -- there are always going to be slippages from one quarter to another as it pertains to these molds. It's sort of the nature of the beast. And we coordinate very closely from a manufacturing standpoint, recognize that the mold itself is probably completed in terms of the manufacturing process in advance of the quarter -- the end of a quarter when we schedule and build that into our guidance.

The issue then becomes right after the manufacturing is complete, there is what's known as a validation process. And in that validation process, the customers actually come in on-site and they witness the first runs of the mold and the quality of the product and the -- if the mold is meeting the specifications that they outlined, which for the most part, normally is right on the money. However, in that process, they then look to make tweaks or adjustments that they feel is going to improve their overall production rates and subsequently ask, in a number of instances, to make modifications. And in that situation, we will always accommodate it, but at the expense, sometimes, of it shipping in the quarter that we had planned.

So it's going to be a common aspect of this business along with what I said, which is large spikes in shipments one quarter versus another quarter. There's a lot of variation because the molds don't ship one at a time, they usually ship as a group for -- to serve a particular program.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [65]

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Got it. And then just to maybe drill down a little bit further on the strength you saw in medical. Maybe you put some numbers around that, similarly, the weakness you saw in packaging and personal care, and on the latter, whether you think that's a blip or more of a discernible change in trend in that business?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [66]

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Well, the medical side of our business has been strong for a period of time now, 2018 and 2019. So we've seen continued strength there in terms of the medical end markets. And recognize that our specialty in that regard are medical devices that are unfortunately in high demand because of certain epidemics as a human race.

That said, the packaging and personal care side of the business, what we've seen there is when I make reference to some of the regulatory requirements that are changing in terms of different parts of the globe, we believe that's affecting packaging at the moment in that there are clearly regulations that are being contemplated, particularly in Europe, as it pertains to single-use plastic and biodegradable plastics. And we are actively involved in those discussions and the creation of solutions for those issues. But in the meantime, until there's resolution and there's clarity as to where those regulations are going to come down, we see customers pausing to place new orders in terms of new programs.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [67]

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Got it. And then just finally, you mentioned aftermarket in Aero was up 8%. Can you give the numbers for how much MRO and RSPs were up, please?

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Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [68]

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MRO was up 5% and RSPs was up 13%.

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Operator [69]

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

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William Pitts, Barnes Group Inc. - Director of IR [70]

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Thank you. We would like to thank all of you for joining us this morning, and we look forward to speaking with you next in October with our Third Quarter 2019 Earnings Call. Sharon, we will now conclude today's call.

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Operator [71]

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