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Edited Transcript of B earnings conference call or presentation 21-Feb-20 1:30pm GMT

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Q4 2019 Barnes Group Inc Earnings Call BRISTOL Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Barnes Group Inc earnings conference call or presentation Friday, February 21, 2020 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Edward James Marshall Sidoti & Company, LLC - Senior Equity Research Analyst * Michael Frank Ciarmoli SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst * Myles Alexander Walton UBS Investment Bank, Research Division - MD & Senior Analyst * Peter John Skibitski Alembic Global Advisors - Research Analyst * Timothy Ronald Wojs Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Barnes Group Inc. Fourth Quarter and Full Year 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to Bill Pitts, Director of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- William Pitts, Barnes Group Inc. - Director of IR [2] -------------------------------------------------------------------------------- Thank you, Sharon. Good morning, and thank you for joining us for our fourth quarter and full year 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 8-K submitted to the Securities and Exchange Commission. Be advised that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com. Let me now turn the call over to Patrick for opening remarks. Then Chris will provide a review of our financial results, our 2020 outlook and progress on the 3-year targets we established in 2017. After that, we'll open up the call for questions. Patrick? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Bill, and good morning, everyone. Barnes Group wrapped up 2019 with evidence that the power of our ongoing transformation has indeed changed the company for the better. In a year where several of our industrial markets were soft, excellent performance in our Aerospace business helped Barnes Group to deliver record operating profit on total sales that were slightly lower than 2018's record level. Across the company, the Barnes team navigated the choppiness and delivered adjusted earnings that were among the best achieved in the company's long history. The results are a testament to our talented management team, an engaged workforce and the Barnes Enterprise System, which provides a solid bedrock to our operations. For the fourth quarter, sales decreased 4%, both total and organic. Adjusted operating income increased 8% over last year's results, while operating margin improved 190 basis points to 17.2%. Adjusted earnings per share were $0.86, up 2% from $0.84 last year. Looking at the full year, sales were down slightly from a year ago with organic sales down 2%. Adjusted operating income was a record $244 million. Given the year's challenged industrial top line, this represents solid performance. Adjusted operating margin increased 40 basis points to 16.4%, and adjusted earnings per share were $3.21, ending the year at the midpoint of our previous guidance. Let's move now to a discussion on the current business environment and a high-level view of what 2020 may look like. At Industrial, full year 2019 organic sales declined 8% while book-to-bill was just under 1x. Select end markets remained stubbornly soft, given persistent economic and trade uncertainties, leading to deferred new program launches by customers in several of our Industrial businesses. At Molding Solutions, 2019 organic sales declined 8%. And as we've seen for a few quarters now, automotive hot runners, personal care and packaging end markets have been weak. Medical molds, on the other hand, continue to see strong demand. In fact, our Manner business saw record revenues for both the fourth quarter and full year relative to the 5 years of Barnes ownership. For 2020, we anticipate Molding Solutions organic growth to be up mid-single digits, primarily driven by sustained medical mold demand and some stabilization in automotive markets, particularly new program releases in North America. One word of caution, we do anticipate the first quarter being down versus the prior year period, with sequential improvement beginning in the second quarter. At Force & Motion Control, organic sales declined 7% in 2019. As mentioned previously, tool and die product lines, which serve a wide range of metal-forming end, markets, have been down while industrial markets have performed better. For 2020, we see mid-single-digit organic growth with Q1 at the run rate of the last couple of quarters. After that, we expect to see incremental improvement and the benefit of favorable comps. Moving to Engineered Components. Organic sales declined 9% driven by lingering weakness in auto production. 2019 saw global auto production decline approximately 6% with reductions experienced across each of our major geographic regions. The expectation for global auto production growth in 2020 is flat. And given what's happening in China at present with the coronavirus outbreak, I suspect that outlook might deteriorate. While manufacturing PMIs for the U.S. and China are above 50 and showed positive momentum exiting 2019, Europe remains weak. During the fourth quarter, we announced the divestiture of our Seeger business based in Germany, with the transaction closing in early February. Seeger is a leading brand of quality retaining snap rings primarily serving automotive end markets. I would like to thank all the employees at Seeger-Orbis for their many contributions to the Barnes Group and wish them continued success and growth in the future. The impact of this divestiture on 2020 sales for our Engineered Components SKU is about $60 million. And with that, we anticipate about $0.10 of foregone EPS contribution. For Engineered Components, we expect 2020 organic sales to decline mid-single digits. At Automation, reduced robotics demand in Germany and China, coupled with customers deferring new program launches, led to slower-than-anticipated growth in 2019. For the long term, we see Automation end markets poised for growth as the outlook for adoption rates of robotics remains very favorable to aid further advances in industrial productivity. For 2020, we anticipate high single-digit organic growth, driven by geographic expansion, the buildout of adjacent end markets and the leveraging of our Molding Solutions customer relations. In 2020, as we continue to execute our vision of being a global leader of highly engineered products, differentiated industrial technologies and innovative solutions, we plan to make incremental investments of approximately $5 million in accelerating and capitalizing on our innovation efforts. Under the leadership of our Chief Technology Officer, Pat Hurley, we will further advance our engineering development approach by expanding our applied and fundamental research capabilities and scientific resources, creating a full spectrum of innovation to exceed our customers' expectations and needs for the future. Initial focus will be on our Industrial businesses and 4 key technology platforms: materials, software, hardware and sensors, each of which will be instrumental to the future success of the company. These combined technologies will be at the core of the next generation of products and services we bring to market. We're excited about these investments and believe they are the next logical step in the execution of our profitable growth strategy. For 2020, at Industrial, our sales outlook is for low single-digit organic revenue growth. Operating margin is expected to be around 12% to 14%, given the incremental innovation investments. Before I move on to our Aerospace discussion, I would like to take a moment to welcome Steve Moule to Barnes Group as President of our Industrial segment. Steve brings extensive experience in driving performance within diversified industrial businesses. He's a strong leader, who has successfully developed high-performance teams with an operating system focus. Steve's skill set, coupled with our Barnes Enterprise System, sets up heightened expectations for our Industrial segment. Moving now to our Aerospace business. Aerospace delivered an excellent 2019, inclusive of continuing solid performance in the fourth quarter with strong OEM and aftermarket sales. In fact, for 14 consecutive quarters now, we've seen year-over-year sales growth with 8 quarters showing double-digit increases. Continuation of this strong performance led to record sales and operating profit in 2019. For the quarter, total Aerospace sales were up 8%, with OEM and aftermarket both seeing an increase. Operating margin was once again solid, up 230 basis points from a year ago to 22.3%. As we look to the future, certainly, the biggest story in commercial Asian is the Boeing 737 MAX production stop and the timing of its return to service. For us, the 737 MAX is a good platform helping to support growth in our OEM business. That said, on a relative basis, it's not our largest program. And while we previously noted a slowing production line not having a meaningful effect on our OEM expectations, the current situation is more impactful. Our view on the 737 MAX, as you would expect, is not unlike what you've heard from our customers, Boeing and GE. This program will weigh on our OEM growth expectation in 2020 as the return to service is not expected until midyear. As such, we anticipate our shipments on this platform to decline by approximately 50% this year, impacting revenues by about $20 million. The lost contribution of those sales will also serve to dampen earnings growth. Clearly, this is a fluid situation with multiple complexities, and the impact of all of this is expected to become more apparent in the coming months. As the situation is resolved, we will be prepared to reramp as required by our customers. As to whether the current OEM environment provides some offset in the aftermarket, certainly, the current fleet has been worked harder, and that may provide some aftermarket benefit. But keep in mind, with the heightened utilization of existing aircraft, they're just not coming out of service for aftermarket support at the level you would expect. All in, as we now look to our expectations for 2020, we expect OEM sales to be relatively flat compared to 2019 as a result of the 737 MAX. And in the aftermarket, we forecast both MRO and spare parts to be up low to mid-single digits. One final point on Aerospace. Our estimates of OEM sales per aircraft for our major programs are unchanged from our prior view. Before concluding my remarks, I would be remiss not to acknowledge the serious public health concern playing out with respect to the coronavirus outbreak. Our primary concern relates to the safety and welfare of our associates in China and around the world. We have temporarily suspended all travel for our entire workforce in and out of China. And while manufacturing facilities were closed for an extended period of time, they are slowly coming back online. At this point, we are monitoring the situation daily for new developments and any additional government mandates. At present, we see potential risk revenue -- potential revenue risk in the first quarter of $10 million to $15 million. So in conclusion, 2019 presented us with a number of challenges in our Industrial business, while Aerospace experienced sustained strength throughout the year. The Barnes team have definitely navigated through the choppy environment to improve both operating profits and margin. By leveraging the Barnes Enterprise System through our 3-pronged focus on commercial, financial and operational excellence, we look forward to another good year in 2020. And as always, we remain committed to driving value for our many stakeholders. Now let me turn the call over to Chris for a discussion on the financial details. -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [4] -------------------------------------------------------------------------------- All right. Thank you, Patrick, and good morning, everyone. Let me begin with highlights on our fourth quarter results on Slide 4 of our supplement. Fourth quarter sales were $370 million, down 4% from the prior year period with organic sales declining 4%. Acquisition sales contributed 1%, while FX negatively impacted sales by 1%. Operating income was $61 million versus $52 million a year ago. On an adjusted basis, operating income was $64 million, up 8% from last year's fourth quarter. Adjusted operating margin increased 190 basis points, reaching 17.2%. Net income was $41 million or $0.80 per diluted share compared to $39 million or $0.75 per diluted share a year ago. On an adjusted basis, net income per share of $0.86 was up 2% from $0.84 a year ago. Adjusted net income per diluted share in the fourth quarter of 2019 excludes a $0.05 adjustment related to the finalization of Gimatic short-term purchase accounting and $0.11 noncash impairment charge related to the divestiture of Seeger, both in our Industrial segment. Moving now to our 2019 full year highlights on Slide 4 -- 5, sorry, of our supplement 2019 sales were $1.5 billion, down slightly from the prior year as organic sales were down 2%. Acquisitions provided a 4% sales lift while unfavorable FX was 2%. Operating income was a record $236 million versus $232 million a year ago. On an adjusted basis, operating income of $244 million versus $240 million last year was up 2%. Adjusted operating margin increased 40 basis points to 16.4%. For the year, interest expense was approximately $21 million, an increase of $4 million, primarily as a result of increased borrowings, partially offset by the impact of lower average interest rates. Our effective tax rate in 2019 was 23.4% compared with 19.9% a year ago, with most of the increase due to the absence of adjustments to certain valuation reserves and final adjustments related to U.S. tax reform. For 2019, net income was $158 million or $3.07 per diluted share compared to $166 million or $3.15 per diluted share a year ago. On an adjusted basis, net income per share was $3.21, approximately flat to last year. Full year cash provided by operating activities was $248 million versus $237 million in 2018. In the third quarter of 2019, the company made a discretionary $15 million U.S. pension contribution, which reduced full year operating cash flow. Clearly, we continue to generate solid cash flows from our businesses with working capital a good story in 2019. Free cash flow was $195 million compared to $180 million last year. Capital expenditures were $53 million, down $4 million from a year ago, and adjusted cash conversion of 119% was an excellent result. With respect to the balance sheet, our debt-to-EBITDA ratio was 2.4x, down from 2.5x at the end of the third quarter. Under our existing debt covenants, additional borrowings of approximately $300 million of senior debt would have been allowed at quarter end. Our full year average diluted shares outstanding was 51.6 million shares. We did not repurchase any shares in the fourth quarter. For the full year, we did repurchase 900,000 shares at a cost of $50 million. There remains 4.1 million shares available for repurchase under the Board's 2019 stock repurchase authorization. Let's now move to our segment performance, beginning with Industrial. For the fourth quarter, sales were $231 million, down 9% from last year. Organic sales decreased 10% primarily due to the softness in certain end markets. Unfavorable FX decreased sales by 1%, while acquisition revenues contributed 2%. Fourth quarter operating profit was $30 million, up 14% from the prior year period. Excluding a short-term purchase accounting true-up adjustment for Gimatic and a noncash impairment charge related to the Seeger divestiture, adjusted operating profit was $32 million versus $33 million a year ago. Adjusted operating margin was 14.1%, up 120 basis points, driven by solid productivity gains. For the full year, sales were $939 million, down 6% from last year. Organic sales were down 8%. Acquisitions contributed 5% while FX was unfavorable at 3%. Operating profit of $114 million was down 13%. And on an adjusted basis, operating profit was $122 million, down 12% from 2018. Adjusted operating margin declined 90 basis points to 13%. At Aerospace, fourth quarter sales were $139 million, up 8%. OEM sales increased 7% while aftermarket sales increased 10%, with MRO up 12% and spares up 7%. Operating profit was $31 million, up 21% primarily reflecting the profit impact of higher sales volumes. Operating margin was 22.2%, up 230 basis points. Full year 2019 sales were a record $553 million, up 10%, while operating profit was a record $122 million, up 21%. As a result, operating margin improved 200 basis points to 22.2%, another great year for our Aerospace team. Aerospace OEM backlog ended the year at $801 million, down 1% from the end of the third quarter of 2019. The company expects to ship approximately 50% of this backlog over the next 12 months. Turning to our 2020 outlook on Slide 6 of our supplement. We expect organic sales to be up 1% to 3% for the year, with total revenue down slightly as a result of the Seeger divestiture, which has a 4% impact. FX is not expected to have a meaningful impact. Operating margin is forecasted to be between 16% and 17%. Adjusted EPS is expected to be in the range of $3.12 and $3.32, down 3%, up 3% from 2019's adjusted earnings of $3.21 per share. Please keep in mind that the divestiture of the Seeger business, innovation investments, lower 737 MAX deliveries and a $2 million pension headwind have been incorporated into our 2020 expectations. Also, we do see a higher weighting of adjusted EPS in the second half with a 45% first half, 55% second half split. In particular, we see the first quarter of 2020 being approximately $0.05 lower than last year's first quarter adjusted EPS of $0.71 per share. A few other outlook items. Interest expense is anticipated to be approximately $17 million; other expense, approximately $7 million; an effective tax rate of 24% to 24.5%, excluding Seeger divestiture taxes; CapEx of approximately $60 million; average diluted shares of approximately 51 million shares; and again, this year, cash conversion of greater than 100%. For modeling purposes, one item to note, we anticipate approximately a $5 million charge related to the Seeger sale primarily related to taxes, which will occur in the first quarter. This charge, worth approximately $0.10, will be excluded from our adjusted earnings, and after-tax cash proceeds from the sale will primarily be used to reduce debt. Lastly, turning now to Slide 7. Let's discuss an update of our 3-year financial targets introduced at our 2017 Investor Day. Relative to our 2017 view, we've seen a stronger aerospace OEM and aftermarket, an improved view of the Medical Molds business, benefits of global tax management actions and the benefit of incremental share repurchases. To the downside, automotive end markets remain weak. There is a heightened level of uncertainty weighing in on global trade, and we see the China economy and its contribution to our growth slowing. In addition, a lower production level in 2020 for the 737 MAX aircraft will have an impact. Taken together, our current view, which excludes the impact of our recent acquisitions as well as the U.S. tax reform benefit, has us generating 2020 3-year organic sales CAGR of flat to up to 1%, adjusted operating margins of 16% to 17% and adjusted 3-year EPS CAGR in the range of 4% to 5%. Our cash conversion target of greater than 100% remains unchanged, while our ROIC target is expected to be approximately 9%. We do plan on hosting another Investor Day this year on September 24 in New York City. Details will be forthcoming over the next few months. So in summary, we delivered overall solid performance in the face of some persistent headwinds in 2019. Strong cash flow generation with excellent cash conversion, coupled with a well-positioned balance sheet, allow for ongoing investments in innovation and growth that will help propel Barnes group forward as we execute on our value creation strategy. Sharon, let's open the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) First question comes from Myles Walton with UBS. -------------------------------------------------------------------------------- Myles Alexander Walton, UBS Investment Bank, Research Division - MD & Senior Analyst [2] -------------------------------------------------------------------------------- Just wondering if I could start off with the free cash flow, Chris. So the $195 million in 2019 included that $15 million discretionary contribution. As you look to 2020, any reason why operating cash flow can't be as good or better in 2020? Just maybe talk about some of the moving parts on working capital, if any. -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [3] -------------------------------------------------------------------------------- Sure. So good question. So when we look at 2019, clearly, good strides in working capital reduction when you kind of net out the pension contribution. We don't expect any meaningful pension contribution as we look to 2020 right now. So nothing leads us to believe that we wouldn't continue to work on working capital reduction throughout 2020 and be able to provide a meaningful number, probably consistent with, if not somewhat better, than our '19 performance. -------------------------------------------------------------------------------- Myles Alexander Walton, UBS Investment Bank, Research Division - MD & Senior Analyst [4] -------------------------------------------------------------------------------- Okay. And then on the investment that you're making on the industrial side, $5 million on the base of an R&D base, I think, is like $15 million today. I don't know if that $5 million investment you're talking about is all R&D qualified, but maybe just talk about the level of sustainability of that investment and what kind of payoff, you think, from an acceleration of growth that you'll get in '21 and beyond. -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- So Myles, this is Patrick. The investment is in line with our ongoing strategy with respect to differentiating ourselves clearly from the competition around the products and services that we bring to market. The $5 million right now is lined out for this year in terms of the addition of resources in terms of new levels of talent from an engineering and a scientific standpoint. The emphasis that we're clearly targeting is materials, hardware and software and sensors, those 4 areas of technology. The intent being that as we continue to differentiate, our goal is to create a full spectrum of innovation that will go above and beyond meeting our customers' expectations. We think we're really nicely placed in the market relative to being in a position to truly become a solution to some of the current concerns within the plastics industry. On the materials side, as an example, we're developing new materials and working with people that are developing those materials to process biodegradable polymers, as an example, which will be the next generation of Earth-friendly polymers. On the hardware and software side, what we're looking at is how to make Barnes Group and, in particular, our Molding Solutions business, even more relevant in terms of the products that we bring to market. And that's based around data analytics, advanced algorithms, artificial intelligence, just to name a few. The investment is a long-term investment. We expect that we're going to continue to invest in these types of technologies for the coming years. And the returns are expected to translate into the coming years with the products and services that we'll bring to market. -------------------------------------------------------------------------------- Myles Alexander Walton, UBS Investment Bank, Research Division - MD & Senior Analyst [6] -------------------------------------------------------------------------------- Okay. And so just to be clear, this kind of is a step up. It's not a onetime investment. It's kind of an elevated investment going forward we should think about? And then in that context, I guess, back at that Analyst Day, the targeted margin for Industrial, I think, was around 18% to 19% or at the low end of that 18% to 19%, I guess, on a combined basis. And now we're looking for 12% to 14% in 2020. Obviously, a lot has happened. But maybe just to look forward, what's the run rate on this business that we should think about as you get your footing back, ex Seeger, and with these investments fully loaded? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Yes. So if you think about our Industrial business over the last year, we've been targeting the mid-teens. And if you look at the innovation that I highlighted in terms of the $5 million and backed that out, it would put us back in the mid-teens. As we move forward, we're going to continue to push towards the high teens as a goal for our Industrial businesses. And so we have not come off that as an internal goal and one which the teams collectively are focused on. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Next question comes from Pete Skibitski with Alembic Global. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [9] -------------------------------------------------------------------------------- Nice job on the margins and the cash flow, again, for sure. I guess, Patrick, just on the Aero OEM backlog, as you look forward in 2020, certainly, you have the MAX headwinds, but with the $800 million in backlog and your comment about 50% of that being delivered this year, just my math, in the case that's pretty much all of your OEM revenue, $400 million or so, so do you have essentially 100% visibility right now in 2020 on the Aero OEM side? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- I think we have a lot of visibility. And the $400 million that you referenced, which is half, 50% of the $800 million backlog is in the right ballpark pertaining to our OEM business. The aspect that has a lot of uncertainty, and it is, as I mentioned, the 737 MAX, and there, there are many moving parts, none more so than the fact that what will happen on the corresponding Airbus A320neo side of the equation and if that might represent upside. So all in, we feel confident in terms of our Aerospace OEM business. Yes, unfortunately, due to current circumstances with the MAX, see it has been relatively flat for the year. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [11] -------------------------------------------------------------------------------- Yes. Okay. And then I did want to ask about aftermarket as well. And I know you touched on it in your opening remarks, but from the standpoint of the grounding of all these Chinese flights and now IATA is predicting, I think, lower airline revenue, have you started to see some headwinds to aftermarket just from fewer planes flying? And are you thinking about that at all into 2020? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- It hasn't translated into what we're seeing in terms of income and orders, Pete. So the -- clearly, it's another new factor that's entered into the equation. The -- as I said, aircraft utilization around the rest of the globe continues to be pretty robust. In fact, with the delays around the MAX that the current fleet continues to stay in the air, even longer perhaps than what would be the norm. So with all of those, what we continue to watch very closely is incoming orders within our MRO business, which are very short lead time, as you know. And orders there have continued to be strong. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [13] -------------------------------------------------------------------------------- Okay, that's great. That's great. Just one last one for me. Just switching to the divestiture of Seeger, maybe I missed it, but can you give us the rationale for the divestiture? Maybe you just wanted less exposure to automotive production. I'm not sure. And margin-wise, the way I did the math, it looked like kind of maybe low double digit type margins there. And just maybe how much cash you received for the sale, given it's closed now. -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes. So basically, as we continue to execute the strategy, as we've communicated, I think, very clearly, the emphasis is to continue to transform the portfolio. In 2019, our 2 major efforts were, one, on the integration of Gimatic; and, two, the divestiture of our Seeger business. And the Seeger business was a great business overall. As we move forward, we felt that it would be better served under a new owner that focus primarily into the end markets that Seeger serves, which is primarily automotive. Whilst we continue to support the automotive industry, we are looking continually to differentiate ourselves in terms of our offerings. And so as we move forward, the transformation of the portfolio is something that we're keenly focused on moving towards more intellectual property, moving more towards enabling technologies. And as we continue to raise the bar, we've continued to challenge each of our businesses to step up to that new level of performance. -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [15] -------------------------------------------------------------------------------- Yes. And Pete, maybe I'll add. What I'll add is on the financial side. Just -- and we'll disclose this, since we closed it in the first quarter, you'll see that in our Q for the first quarter, is roughly that the headline price is around USD 47 million for the business. We're going to get after-tax cash proceeds, roughly $36 million, that we'll use to reduce debt. It is, from an EBITDA margin point of view, relative to the company's average, less than our EBITDA margin. But the business is sizable enough, not as large to kind of move the needle. But to Patrick's point, happy to get the transaction done and conclude on that and continue to execute on our strategy. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Next question comes from Edward Marshall with Sidoti & Company. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [17] -------------------------------------------------------------------------------- I want to look -- looking at the divestiture of Seeger and then the mix of business improvement that you anticipate for 2020, even adding back that $5 million of R&D, I would have thought that the margin swing would have been a little bit higher than the 12% to 14% that you're guiding. And then for the full business, it looks like you're -- maybe you can just provide the operating profit margin in the Aero that you anticipate on the same kind of context that you gave us for Industrial. -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [18] -------------------------------------------------------------------------------- Yes. So with respect to Aerospace, we'll -- we are targeting the 21%, 22% range for the full year. Again, that will -- that could improve depending on the mix between aftermarket and OEM. But with everything we see at this moment, we think that's a good range. On the Industrial side, clearly, the team did a really nice job. If you look back at 2019, what we saw was a slower start to the year in terms of margins, but with a nice sequential improvement for the first 3 quarters. So you saw 10.5%, 12.3%, 15% for the first 3 quarters sequentially, and then the fourth quarter came in at 14%. So -- on an adjusted basis. As we look into 2020, what I would say is that, as noted, some of the challenges that we're experiencing right now in the first quarter, primarily coming out of Asia, is putting some pressure on -- will put some pressure on margins in the first quarter. As I highlighted, we're thinking right now, with the best information we have, about a $10 million to $15 million revenue impact out of our Asian businesses. And that, coupled with basically just a slower start to the year, I think what you're going to see is the same trend throughout the year a sequential improvement in margins quarter-to-quarter. But with the investments we're making, we've put a range on that of the 12% to 14%. The one area that I think I give the team tremendous credit for last year, and I think they're just equally as focused on this year, is productivity. And that, in itself, I think, through the Barnes Enterprise System continuous to offer upside to those ranges given. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [19] -------------------------------------------------------------------------------- Got it. And remind me again. The mix of -- remind me where you're concentrated in the -- in Asia. I know it's Asia auto, but what else might be in there in the different business segments? Just remind me. -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- So you're talking about -- our business in Asia is about 10% of Barnes Group total. And the primary businesses in there are Molding Solutions in the form of molds and our automotive hot runners and FMC in terms of the tool and die, primarily through the nitrogen gas products, spring products. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [21] -------------------------------------------------------------------------------- Got it. So there is some high-margin stuff in there. So really, if I step back, I just look at it, so you're seeing some caution into the first quarter. That's kind of laying up the guidance for the full year. It doesn't seem like there's been much deterioration, if any, in the Aerospace side. It's just really around the first quarter caution that you're kind of spelling out here? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- That's true. And the other really bright spot is our medical end market demand. What I know, which I think is also another bright spot from our perspective, is that we monitor, as you can imagine, ahead of orders, is the quoting activity. And what we saw in quoting activity in personal care, packaging and medical molds was a strong fourth quarter. And that's a heightened level of activity continuing into January. So was -- what we've seen in 2019 is a little bit of a pause in those end markets as a result of pending regulations. But as I highlighted, those regulations from our vantage point is something to be embraced because, ultimately, what it's going to drive is an emphasis on newer materials, newer way of processing those materials. And that goes hand-in-hand with the innovation, the investment we're making, as I highlighted around the materials, the hardware, software, which is the mechanism by which you control the flow of the material and then sensor technology. And as you know, we acquired Priamus a couple of years ago. And now under our CTO, he's even more excited about where we can take that sensor technology. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [23] -------------------------------------------------------------------------------- Got it. Got it. And I guess, I want to know if there's any change in the collection of receivables from your key customer on Aerospace. Have you been able to kind of -- it doesn't seem like there is, but I just want to double check. -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [24] -------------------------------------------------------------------------------- No, no major change, Ed. No significant change there. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [25] -------------------------------------------------------------------------------- Got it. And then finally, Chris, what's a good number for interest expense for -- with all the debt reduction and so forth? What would you think 2020 looks like? -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [26] -------------------------------------------------------------------------------- Roughly $17 million is what is kind of what we look at for... -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [28] -------------------------------------------------------------------------------- For the full year 2020. Right. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Next question comes from Michael Ciarmoli with SunTrust. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [30] -------------------------------------------------------------------------------- Nice quarter. -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [31] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [32] -------------------------------------------------------------------------------- Just on the Aerospace, the spares -- the aftermarket spares growth, only 7% year-over-year, it was one of the easier comps you had all year. I think you're only lapping at 12%. The environment's good, but, I guess, maybe if you saw any changes in the trends there, and thinking about as we move into this first quarter, does that $10 million to $15 million revenue headwind you contemplated, does that include any potential Aerospace aftermarket disruption from maybe some of these Asian China carriers if they are seeing dramatically reduced traffic or if they pull back dramatically on their spending? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- The short answer is no relative to the $10 million to $15 million in corporate managing for the Aerospace side of the equation. The $10 million to $15 million is truly what we're seeing relative to our businesses that are located in China and have been subject to the closures that I mentioned and, even as we speak, are only slowly coming back online. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [34] -------------------------------------------------------------------------------- Okay, okay. And then any color on just the spares level of growth? Anything that you saw different in the fourth quarter? Or has it still been pretty steady because even on a absolute revenue dollar, it did dip sequentially there? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- Yes. Well, I think, as I mentioned, within Aerospace right now, we've seen 14 consecutive quarters of year-over-year growth. And what it is, is that the RSPs have been a key part of that, and they have performed extremely well over the last few years. So each year as we enter, we revert back to what we see as the normalized growth rate of the shop visits that are driving those spares requirements. And that's primarily the CFM56 and the CF6 engine models. And so there, when we look outward for the CFM, we use a mid-single-digits growth rate as was -- is our benchmark, if you like. We've clearly outstripped that and outperformed that over the last couple of years, but, again, the question becomes, how many times can you lap it by double digits? And so we've been somewhat conservative and taking our low to mid-single-digit outlook both for spare parts and MRO. As you know, it's a very short visibility, short lead time business. So -- and as has been highlighted on this call, a number of moving parts in the aftermarket that probably tend to have us be a little bit more cautious than bullish pushing our outlook in terms of percentage growth. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [36] -------------------------------------------------------------------------------- Got it. That's helpful. And then just maybe one more on Aero. You clearly talked about the MAX impact and how much revenue you're taking out there. What are the thoughts on the 787 reduction? I think based on your most recent deck, it's about $200,000 of content there. Does that start to show up this year? Or is that going to be more of a '21 impact? And then even, I guess, tied in with the MAX volume reduction and maybe even a 787, does that complicate anything on driving that working capital down? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- It's not necessarily -- we don't necessarily see it as a complication and not that meaningful, if you like, in terms of the reduction that's taken place. So we're confident that we can -- with the rest of the mix of everything we have, both commercial and on the defense side that we can make up the -- any shortfall that might filter into the system from the 787. What the team has continued to do is streamline the whole process of NPI within our Aerospace business. And to that end, they feel very confident that they have enough new developments, which is alternatives to existing manufacturing processes that are being used today. They're very keenly focused on differentiating themselves by employing newer technologies that can differentiate even on existing platforms and put us in a great place as we continue to move forward. So a lot of good things happened there that. I think, overall, the guidance includes the outlook for the 787, which you highlighted. But also note that the 777X, which was the spin-off to a slow start, is also forecast to come online towards the end of the year into the new year. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [38] -------------------------------------------------------------------------------- Got it. No, that's helpful. And then maybe, Chris, I'll just -- I'll try one here. I don't want to put words in your mouth, but I'll try anyway. The September '17 operating margin target of 18% to 19%, if I assume some sustaining investment, maybe that's a 50 bps hit. Has anything, in your view, structurally changed? Obviously, end markets aside, anything that you guys looking at today that would prevent you from driving those same margins? And again, obviously, if Aero aftermarket were to roll over some change, but just as you're looking at the company today, structurally, has anything changed in your view to achieve those margins? -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [39] -------------------------------------------------------------------------------- No. Yes. No, very good question. I look at the -- as we look at 2020 targets, and we communicated kind of an update last year, taking a look at this year, we understand the implications of global trade uncertainties. When we identified, I will call it, the drivers, in terms of the upside and the downside, it -- really, for the most part, are things that were market-driven, I'll call it, out of our control somewhat. Clearly, the tax actions we've taken globally and the incremental share repurchase helps. But getting back to the margin profile, that was the big driver. You had the Aerospace upside, which provided a little bit lift to exceed our expectations of what we thought back in 2017. But the bigger drag was the implications of industrial, specifically, global trade uncertainty lately, obviously, with China. So as we look to 2020, you kind of put those aside, there was nothing necessarily that leads us to believe that we cannot continue to drive this company to a high teens operating margin. We do -- as I did mention, we do plan on having another Investor Day in September, and a lot of, obviously, preparation will be done through that. We're going to have our strategic planning reviews with our teams in the May, June time frame leading up to the September view. But we're anxiously looking forward to that because we've made a lot of transition with the portfolio over the past 3 years, and we plan on putting out another 3 years. So those are the main drivers. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- (Operator Instructions) We have a question from Tim Wojs with Baird. -------------------------------------------------------------------------------- Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41] -------------------------------------------------------------------------------- Maybe just -- the first one's a housekeeping question. Chris, do you have the SBU growth rates by -- for the fourth quarter for the Industrial businesses? -------------------------------------------------------------------------------- Christopher J. Stephens, Barnes Group Inc. - Senior VP of Finance & CFO [42] -------------------------------------------------------------------------------- Sure. So from a fourth quarter point of view, overall growth -- this is going to be a quarter-over-quarter look. So our Engineered Components business was down 14%. Our Force & Motion Control business was down 10%, and Molding Solutions was down 11%. And I will comment, although we don't have comps because of the timing of when we bought Gimatic, but as we communicated last quarter that we expected Gimatic to hit $55 million in revenue. That's what they were able to achieve in the fourth quarter. So for Industrial, overall, it represents a -- on an absolute basis, not so much organic, 9% down. Is that helpful? -------------------------------------------------------------------------------- Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [43] -------------------------------------------------------------------------------- Okay, yes. No, no, very much. And then just on the automotive programs and some of the new programs that are out there, what type of visibility do you have to those happening in, I guess, 2020 just in terms of time lines? Is it kind of fluid between quarters, and the commitments are there for the year? How would you kind of describe the visibility there on the Molding Solutions piece? -------------------------------------------------------------------------------- Patrick J. Dempsey, Barnes Group Inc. - President, CEO & Director [44] -------------------------------------------------------------------------------- So Tim, I'd say it's a combination of all of what you've just highlighted, which is that there are certain programs that are moving to the right in terms of being delayed, while others have been launched. And so between our businesses, what they're keeping very close tabs on is communication with the customers around the world because our businesses are such that one of the great advantages they have is that they can service a given customer anywhere in the world. So we have that global footprint in that regard. So what we're doing is we're keeping tabs at the headquarters of the OEs as well as then the local regional areas. And what ultimately translates is that any particular program is timed to launch. It could launch in one region before another and then flow out. And so there is an aspect of its dynamic. But overall, we've seen some nice green shoots in terms of North America over 2019, and we expect that to continue. We also feel there's a little bit of pent-up demand. Because if you consider all of the factors that are in play with not only existing models requiring refreshes, which drives demand for our automotive hot runners, but then also as the move to electrification and hybrids, each of those comes with a new model configuration, which drives demand, not only for our Molding Solutions business, but also then for our FMC. So overall, from an industry standpoint, we think a great step in the right direction was the signing of the trade agreement in the first quarter in January between the U.S. and China. Not so much because it lifted the tariffs immediately, but more because it sent a clear signal of alleviating some of the business uncertainty. And that progress has been made, and I think that gives comfort into the industry that we're moving forward. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- At this time, I'll turn the call back over to Mr. Pitts. -------------------------------------------------------------------------------- William Pitts, Barnes Group Inc. - Director of IR [46] -------------------------------------------------------------------------------- Thank you, Sharon. We would like to thank all of you for joining us this morning, and we look forward to speaking with you next in April with our first quarter 2020 earnings call. Sharon, we will now conclude today's call. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.