Barnes Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes First Quarter 2023 Earnings Conference Call and Webcast. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. Quarter.

Operator

After the speakers' remarks, there will be a question and answer session. Quarter. Thank you. And I will now turn the conference over to Bill Pitts, Vice President of Investor Relations. You may begin.

Speaker 1

Quarter. Thank you, Abby. Good morning, everyone, and thank you for joining us for our Q1 2023 earnings call. Quarter. With me are Barnes President and Chief Executive Officer, Thomas Hook and Senior Vice President, Finance and Chief Financial Officer, Julie Strike.

Speaker 1

Call. 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 Quarter atonebarnes.com. That's onebarnes.com. Quarter. During our call, we will be referring to the earnings release supplemental slides, which are also posted on the website.

Speaker 1

Quarter. Our discussion today includes certain non GAAP financial measures, which provide additional information we believe is helpful to investors. Quarter. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. Quarter Conference Call.

Speaker 1

You will find a reconciliation table on our website as part of our press release and in the Form 8 ks submitted to the Securities and Exchange Commission. Quarter. 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 Call and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks Quarter and Quarter Results and Earnings Conference Call.

Speaker 1

Thank you, everyone. Thank you, everyone. Thank you, everyone. Quarter. These filings are available through the Investor Relations section of our corporate website at 1barnes.com.

Speaker 1

Call. Let me now turn the call over to Tom for his opening remarks. Then Julie will provide a review of our financial performance Quarter and Details of our updated 2023 outlook. After that, we will open up the call for questions.

Speaker 2

Call. Tom? Thank you, Bill, and good morning, everyone. As we exit 2022 and enter 2023, quarter. Barnes is fully focused on driving core business execution and demonstrating meaningful advancement in our transformation journey.

Speaker 2

Quarter. While I am pleased with the progress and energy to date, there remains considerable work to do. Julie will talk about our Q1 financial performance in a few moments. Call. I would like to take time this morning to address the meaningful transition actions underway at Barnes.

Speaker 2

Call. There are numerous products progressing across the company that will significantly rationalize overhead as we move from a holding company structure quarter. To a more agile operating architecture. These include streamlining corporate and segment overhead costs call to enable Barnes to compete more effectively in the markets we serve. All levels of leadership will be structured to better serve the needs of the operating businesses Quarter to drive business performance and to support our integrate, consolidate and rationalize initiatives.

Speaker 2

Quarter. Our restructuring and transformation execution remains on track for Phases 1 and 2 announced in July October, respectively. Call. Collectively, we anticipate approximately $26,000,000 of annual savings with total restructuring quarter. We expect to achieve run rate savings in 2024.

Speaker 2

Call. We are now ready to announce the final significant phase of our restructuring and transformation program. Call. Phase 3 will impact our industrial and aerospace segments and address functional efficiencies globally. Quarter.

Speaker 2

These products will be implemented over the next 24 months. Phase 3 will include aerospace and industrial facility quarters of work to generate production efficiencies and reduce costs. Last week, we engaged with the works council at one of our German facilities quarter and provided notice to employees at a second facility in Germany. Some work from these locations will transition to existing production facilities call in Italy and China. In the U.

Speaker 2

S, the company has elected to freeze the benefits associated with one of its defined benefit pension plans, call, which will provide pension savings over time. We will share further program details as they unfold. Quarter. The total investment for Phase 3 is forecast to be $58,000,000 including $28,000,000 of restructuring charges, quarter. $16,000,000 of external transformation related charges, most of which were incurred in the Q1 quarter and $14,000,000 of capital investment.

Speaker 2

For Phase 3, we anticipate run rate savings of approximately Quarter $27,000,000 in 2025. We will continue to dedicate resources to lead the execution of this program, quarter. So we delivered products on time and budget. Our operations and functional teams will remain focused on delivering core business execution. With the appropriate deployment of resources, you can drive enhanced bottom line profitability effectively as each initiative is fully implemented.

Speaker 2

Quarter. We will continue to provide quarterly updates and the progress being made with the company's transformation. Quarter. Moving to our business operations. I'm encouraged by the organic orders and sales growth this quarter at Industrial compared to a year ago.

Speaker 2

Quarter. Our targeted growth areas in the automation business and multi cavity mold systems within our molding solutions business performed well. Quarter. The same is true at Motion Control Solutions, which benefited from an automotive customer stocking order and sales ahead of our Bristol plant closure. Quarter.

Speaker 2

We will see a continued benefit in the second quarter as well. Therefore, a few top line positives to celebrate in the quarter. Quarter. However, we delivered asymmetric performance given lower organic quarters and sales for our automotive hot runner product line within our molding solutions. Quarter.

Speaker 2

Also the sheet metal forming product lines and motion control solutions generated more organic orders, quarter. So we delivered a modest increase in organic sales compared to a year ago. The European market impacted this product line. Call. Regarding Industrial's bottom line, adjusted operating margin improved modestly year over year.

Speaker 2

Quarter. However, margins remain below our expectation. Positive pricing actions are taking hold and making a difference, but clearly inflationary pressures persist. Quarter. Additionally, with molding solutions, an unfavorable mix of lower hot runners and higher mold systems had a detrimental impact and Industrials margin.

Speaker 2

To address pipeline opportunities, commercial feet on the street investments are being made to produce a strengthening sales funnel. It is our expectation to deliver sales growth across all industrial business units in 2023 quarter. And building the pipeline is the first step. In Aerospace, the broad based recovery continues with deepening customer relationships, generating quarter. The orders pipeline for both the OEM and aftermarket businesses is ahead of plan.

Speaker 2

We quarter. We anticipate continued order strength with improving operational and on time delivery performance. Additionally, quarter. Our reenergized commercial outreach is presenting growth avenues with both new and existing customers. Aerospace industry trends have been favorable call.

Speaker 2

With the International Air Transport Association, IATA, recently reporting that February global domestic travel quarter. It was up more than 25% versus a year ago and at over 97% of February 2019 levels. Quarter. International traffic was up nearly 90% for February versus a year ago and has reached approximately 78% Quarter 2019 levels. With China's reopening, the Asia Pacific region has seen a strong rebound.

Speaker 2

Quarter. Air freight metrics likewise saw sequential improvement in February. While there are concerns regarding the global economy, quarter. Air travel continues to demonstrate solid recovery and demand trends point to further improvement. These trends support our favorable view for both the OEM and Aftermarket Businesses.

Speaker 2

On the top line, we're generating solid revenue growth with steadily improving operational execution and efficiency. Quarter. With respect to bottom line profitability, we see productivity initiatives and solid management execution driving improvement. Call. Some of our facilities are delivering performance recovery at pace, though this is not universal.

Speaker 2

Call. The good news is that each operational site is demonstrating performance improvement and additional productivity actions are targeted, quarter, especially within facilities where there is a significant percentage of newly hired team members. In addition, we expect mitigation of inflationary pressures call through ongoing contractual price recovery and other actions. Overall, I'm pleased with the performance and competitive positioning of our Aerospace business. Quarter.

Speaker 2

Let me take a moment to comment on capital deployment in our portfolio. As previously discussed, industrial M and A activity remains paused quarter. That said, we continue to identify opportunities to drive enterprise value in a more compelling fashion call. The ongoing strategic evaluation of our industrial portfolio businesses, brands and products. Within aerospace, quarter.

Speaker 2

We are evaluating targeted M and A opportunities with a focus on assets, with a strong strategic fit, call with significant post close integration opportunities and revenue and cost synergies. Before concluding, quarter. As you may have seen with last week's announcement, Steve Muhl, our Industrial Segment President, has resigned his position to accept a role in another company. Call. I would like to thank Steve for his leadership and contributions to Barnes since joining us in 2019.

Speaker 2

I know the Barnes team wishes Steve well in his new position. Call. In closing, we stay highly focused on driving core business execution and delivering the full value embedded in our portfolio of Quarter and Growth. Our major restructuring and transformation program has moved past planning quarter and comprehensively into execution. We are committed to enhancing operational and financial performance to deliver the benefits and savings of this key initiative.

Speaker 2

Quarter. Let me now pass the call over to Julie for a discussion of our Q1 performance as well as some end market color.

Speaker 3

Quarter. Good morning, everyone, and thank you, Tom. Let me begin with highlights of our Q1 results on Slide 4 of our supplement. Quarter sales were $335,000,000 up 7% from the prior year period quarter. With organic sales increasing 9%.

Speaker 3

Foreign exchange negatively impacted sales by 2%. Quarter. Adjusted operating income was $37,200,000 this year, up 17% from an adjusted $31,800,000 last year quarter. And adjusted operating margin of 11.1 percent was up 90 basis points. Net income was $13,200,000 or call.

Speaker 3

$0.26 per diluted share compared to $20,500,000 or $0.40 per diluted share a year ago. Quarter. On an adjusted basis, net income per share of $0.47 was up 15% from $0.41 last year. Quarter. Adjusted net income per share in the Q1 of 2023 excludes $0.21 of restructuring and transformation related charges.

Speaker 3

Call. As Tom mentioned, with today's announced Phase 3 actions, we have reached the end of what we expect quarter for major transformational actions and our focus now turns to execution. Interest expense quarter was $5,300,000 an increase of $1,700,000 due to an increase in average interest rates. Quarter. Other expense was $1,300,000 down $300,000 from last year, primarily driven by an increase quarter in non operating pension income, offset in part by foreign exchange losses.

Speaker 3

The effective tax rate in the Q1 quarter of 2023 was 20.9%, essentially in line to the comparable period last year, quarter, the lower than 64.7 percent for the full year 2022. The decrease in the 1st quarter effective tax rate from the full year 2022 rate is primarily due to the absence of a goodwill impairment charge incurred in 2022, quarter, which is not tax deductible for book purposes. Now I will turn to our segment performance beginning with Industrial. Quarter. For the Q1, sales were $218,000,000 up 3% from the prior year period.

Speaker 3

Quarter. Organic sales increased 6%, while unfavorable foreign exchange lowered sales by 3%. Industrial's operating profit was $4,500,000 versus $14,700,000 a year ago. Quarter. Excluding $12,100,000 of restructuring and transformation related charges in the current year, adjusted operating profit of 16 point $1,000,000 was up 11% and adjusted operating margin of 7.6% was up 50 basis points.

Speaker 3

Quarter. Adjusted operating profit was impacted by lingering inflationary pressures and unfavorable mix, offset in part by positive pricing. Quarter. With respect to orders and sales for the quarter across our industrial businesses, Molding Solutions organic orders increased quarter, while organic sales increased 4%. Our multi cavity mold system product line was very strong Quarter with personal care, packaging and general industrial end markets driving the orders and medical driving the sales.

Speaker 3

Quarter. These were offset in part by weakness in our Cementiv hot runner product line serving automotive end markets. Quarter. For 2023, we expect Molding Solutions total and organic sales to be up mid single digits. Call.

Speaker 3

At Motion Control Solutions, organic orders were up 12% in the quarter, while organic sales grew by 7%. Quarter. The business saw strong organic orders intake driven by transportation related end markets, while we saw softness in the tool and die end market. Quarter. We expect MCS to see mid single digit total and organic sales growth in 2023.

Speaker 3

Call. At automation, organic orders were up 7%, while organic sales increased 8%. Quarter. We expect high single digit total and organic sales growth for automation in 2023. Quarter.

Speaker 3

For the overall segment, we anticipate mid single digit total and organic sales growth for 2023 quarter with adjusted operating margins between 9.5% 10.5%, the latter a slight uptick from our prior view. Call. At Aerospace, sales were $117,000,000 up 16% from a year ago. Quarter. OEM sales were strong, up 11%, and our aftermarket remains robust with sales growing 27% in total.

Speaker 3

Quarter. Within the aftermarket, MRO was up 19% and spare parts were up 41%. Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and

Speaker 4

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Speaker 3

Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter and Quarter. Quarter, up 23% from last year. Driving the performance in adjusted operating profit is the strength of the aftermarket business. Quarter. Adjusted operating margin of 17.5 percent was up 90 basis points.

Speaker 3

Quarter. Our spare parts RSP business was solid in the quarter, consistent with our prior outlook. Keep in mind, while we quarter. We expect similar quarterly sales levels for the rest of 2023. The prior year comparables get tougher quarter and the year over year growth rates will not be as robust.

Speaker 3

In our OEM business, quarter. Orders were strong in the quarter, up 13% and the book to bill was 1.6 times. Quarter. Our OEM backlog of $793,000,000 increased by 6% sequentially from December 2022 call and was 11% higher than a year ago. We expect to convert approximately 45% quarter.

Speaker 3

Our OEM sales outlook for 2023 is up mid teens, quarter, a slightly more favorable view than our February outlook. For the aftermarket, we forecast 2023 growth of low double digits for MRO and high single digits for spare parts, both consistent with our prior view.

Speaker 4

Quarter.

Speaker 3

Also unchanged is our forecast for Aerospace adjusted operating margin of between 18% 19%. Quarter. With respect to cash, 1st quarter cash provided by operating activities was 32,000,000 quarter versus a use of $9,000,000 in the prior year period. The primary drivers of the increase are lower paid incentive compensation in 2023 relative to 2022 and a lower change in working capital compared to the prior year period. Quarter.

Speaker 3

Free cash flow was $21,000,000 versus a negative $17,000,000 last year. Capital expenditures were $11,000,000 quarter, up approximately $4,000,000 from the prior year. With our balance sheet, the debt to EBITDA ratio as defined by our credit agreement was 2.39 times atquarterend. When considering our cash position at year end, on a net debt to EBITDA basis, quarter. We'd be approximately 2.1 times.

Speaker 3

Our first quarter average diluted shares outstanding were 51,300,000 shares quarter and period end shares outstanding were $50,600,000 During the quarter, we did not repurchase any shares and approximately quarter. 3,400,000 shares remain available under the Board's 2019 stock repurchase authorization. Quarter. Turning to Slide 6 of our supplement, let me share details of our updated outlook for 2023. Quarter.

Speaker 3

We continue to expect organic sales to be up 6% to 8% for the year with adjusted operating margin between 12.5% 13.5 percent. Adjusted EPS is expected to be in the range of $2.15 to 2 $0.30 quarter, up 9% to 16% from 20 22's adjusted earnings of $1.98 per share. Quarter. This revised range reflects an increase of $0.05 from our previous outlook at the low end given the performance achieved in the Q1. Quarter.

Speaker 3

In 2023, adjusted earnings per share are anticipated to exclude a 0 point $0.56 impact related to the significant restructuring and transformation related activities announced today. Quarter. With $0.21 recorded in the Q1, we estimate approximately $0.24 in Q2, quarter, $0.07 in Q3 $0.04 in Q4. A few other outlook items. Quarter.

Speaker 3

Interest expense is anticipated to be approximately $24,500,000 to $25,000,000 driven by a higher interest rate environment. Quarter. Other income of $1,000,000 driven by non operating pension, a full year effective tax rate between 4.5% 25.5 percent CapEx of approximately $50,000,000 quarter. Average diluted shares of approximately 51,000,000 and cash conversion of approximately 100%. Quarter.

Speaker 3

In closing, our Q1 exceeded our internal expectations. Solid organic orders and sales call to begin the year provide positive momentum going into Q2. We are modestly more positive in our earnings outlook for the year, quarter. We remain cautious of the global economic environment. Across the company, the team is actively engaged quarter in plans to draw down inventory and improve working capital efficiency over the course of the year.

Speaker 3

Quarter. Now with the major phases of our restructuring and transformation program announced, our focus will shift to delivering the operating and financial progress we expect call from the initiatives. Doing so will drive core business execution, cash flow generation quarter and the value creation we expect to deliver. Operator, we will now open the call for questions.

Operator

Quarter. Thank you. Call and we will pause for just a moment to compile the Q and A roster. And we will take our first question from Matt Summerville with D. A.

Operator

Davidson. Your line is open.

Speaker 5

Thanks. A couple of questions. First, maybe starting with the industrial business. Can you quantify the magnitude of unabsorbed inflation that you encountered in Q1? Quarter.

Speaker 5

Also how much in cost savings benefited Q1? At the end of the day, what I'm kind of trying to square is quarter. The fact that margins in that business have been coming down sequentially for 3 or 4 consecutive straight quarters. And I guess I'm trying to get a feel for when we start to see that step function improvement towards the margin range you're providing for the year.

Speaker 2

Quarter. I'll give you a kind of a macro answer and then I'll let Julie follow through with numbers. Quarter. There is a lot of inflation that has come through. As you know, it kind of comes through the order book first, Matt, and then through into the P and L.

Speaker 2

Quarter. We have over the course of the second half of last year through the order book largely through pricing and productivity actions quarter. We've been able to offset the effect of inflation coming into the order book, but as that has cleared off into our P and L, we were behind in 'twenty two quarter. Into the Q1 in industrial, we've largely are on a how we pursue basis with inflation. Quarter.

Speaker 2

But going forward, my expectations are now that we have the pricing initiatives that have taken effect over the past quarter. 6 to 9 months that I've been on board, that as it's clearing through the order book in new revenue quarter. We'll be ahead of inflation into 2023 as the year continues to move forward. So kind of, quarter. As you said, quantifying unabsorbed inflation in Q1, I think we've done a reasonable job of offsetting inflation effects in the P and L in Q1.

Speaker 2

Quarter. We were definitely behind in the second half of twenty twenty two. I'll give an opportunity for Julie to quantify the quarter. Positive effect of some of the initiatives on Phase 1 and Phase 2 that have affected Q1 and what it looks like for the remainder of 2023.

Speaker 3

Quarter. Hey, Matt. Good morning. So in terms of benefits coming through the P and L, quarter. In the Q1, it's largely benefits of Phase 1 and 2 that are starting to flow in.

Speaker 3

Quarter. And it was less than $2,000,000 in the quarter that we're starting to see. Now that will ramp largely in the second half of the year when we hit run rate quarter starting in 2024. So it was a de minimis impact in the first quarter of the year, but we're going to as I mentioned, we're going to start to see that ramp slowly over the course of the year. And then in terms of the margin quarter.

Speaker 3

Morgan Gasior:] There's been a variety of factors that have contributed to that. Going from Q2 to Q3 3 last year. There was some noise coming out of EC with the plant closures, what was happening especially with inflation at that period in time per quarter. Tom's comments, we were still not keeping pace with inflation, not only in EC, but across the rest of the portfolio. Call.

Speaker 3

We saw a bit of a dip in Gimatic in the 3rd quarter. Then going from Q3 to Q4, quarter. There was a one time charge that we took some inventory true ups that we had in the 4th quarter that impacted the margins there. And then as Tom spoke to going from Q4 to Q1, quarter. It's really a story about the impact of mix, in Simventive.

Speaker 3

The volume was down. Quarter. The Asian market was down where margins have historically tended to be higher. We saw an increase in engineered components as quarter. We mentioned, as we received some stocking orders.

Speaker 3

So my expectation is that we will start to see us now have quarter. Steady performance in those margins over the balance of this year, steady improvement. I would not anticipate quarter, seeing the ebbs and flows that we saw in prior year periods.

Speaker 5

Got it. And then as a follow-up, quarter. Just sticking with Industrial, maybe can you give a little more color on the benefit you saw from that stocking order either from a top Core bottom line standpoint as we think about that in the context of the go forward organic cadence for the industrial business. And call. Tom, it sounded like in your prepared remarks, Phase 3 at least, if not Phase 1 and 2 is quarter.

Speaker 5

Fairly European heavy from a restructuring standpoint. And we know that's not an easy feat, quarter, especially in some of the countries you're talking about. So maybe give a little more detail to the extent you can. What are we talking about in terms of number of rooftops, call. Timing and how kind of you think about being able to meet the objectives you set forth call from both a cost and savings standpoint with Phase 3.

Speaker 5

Thank you.

Speaker 2

Quarter. Sure. I think the short answer on the stocking order is that we really won't give too much color on that. It's a positive effect, quarter. But it's not something that's so noteworthy that we're going to break it out now.

Speaker 2

But the good news is that we've retained a lot of business quarter. With the Bristol move, we performed well for the customers and that product was coming in on time. And as expected, as you go through the shutdown period. You typically take final stocking orders before they place their orders into the facilities quarter. There will be supplying them going forward into the future.

Speaker 2

But a small reminder is there's some revenue that we do not plan on moving quarter. Going forward because of poor margins of that facility, so we've discontinued some of those product lines. But in the overall mix, quarter. The product is moving well. The wind down is moving well.

Speaker 2

And this comment around really the last stocking order is more of an quarter. It's got a meaningful enough effect really to give you a lot of color on it. Phase 3 is a global initiative, Matt. It affects rooftops call, both on the pitching and catching end in the Americas, in Asia, in Europe and China. Call.

Speaker 2

So, we've comprehensively looked at overhead across the organization and there are overhead actions in this initiative Quarter at all levels of the organization. It also has multiple rooftops, a handful of rooftops that are affected quarter. In terms of consolidating our manufacturing footprint to drive more volume, higher capable facilities globally, quarter. There are European facilities involved. I noted that there are several in Germany already.

Speaker 2

And as you know, we've in Phase 1 and Phase 2 quarter. I had a similar approach on these global initiatives where there's been rooftops affected in the Americas as well as in Europe as well as in Asia. Call. So as I've part of balancing Phase 1 and Phase 2 and Phase 3 is to spread these rooftop consolidations out over time. We've done a very nice job of it.

Speaker 2

And despite already doing multiple facilities in Europe in Phase 1 and Phase 2, we've kept those products in scope, on schedule and on target. Quarter. So my confidence level on cost savings in achieving the objectives we've laid out is very high. We have dedicated resources and the business transformation office that are doing these projects. They're separate from the business operational teams.

Speaker 2

So the level of rigor quarter. That we've used is very similar to what I've seen used in the past. And I expect these despite quarter. Having a European footprints that are affected, that they will remain on schedule and be executed just as crisply as Phase 1 and Phase 2, quarter. And we'll realize the benefits in Phase 3, just like we haven't we are realizing in Phase 1 and Phase 2 in terms of timeframe, Investment and Savings.

Speaker 5

Appreciate the color. Thank you, guys.

Speaker 2

Quarter. Welcome.

Speaker 1

Thank you, Matt.

Operator

We'll take our next question from Christopher Glynn with Oppenheimer. Your line is open.

Speaker 6

Quarter. Thanks. Good morning.

Speaker 2

Good morning, Chris.

Speaker 1

Good morning.

Speaker 6

So on the restructuring, I was curious call. To hear about what you're looking at for the cash spend relative to the $58,000,000 and the quarter. $29,000,000 P and L investment for the 3 phases. What how are you thinking about the cash component of that?

Speaker 3

Call. Yes. So Chris, for this year, the net cash impact will be about quarter. $34,000,000 is what we're looking at and the majority of that will hit the first half quarter. So there was a chunk already in the Q1 associated with the first couple of phases primarily.

Speaker 3

Quarter. And then Q2 is another big cash outflow quarter as it's forecast and quarter. It trails off over the balance back half of the year.

Speaker 7

Okay.

Speaker 6

And quarter. Then just taking a broad look at what you're doing across the three phases with the enterprise. Quarter. The ambition is admirable, the overall action oriented plan, but it's not easy to do. I wouldn't think there's culture and habits call.

Speaker 6

That, we'll be in conflict at times. So wondering what some of the bespoke challenges you're seeing or anticipating and

Speaker 2

quarter. Well, it's been, as you know, Chris, a busy 9 months call. Since transitioning in the CEO chair with Julie and we have been consciously progressing a phased approach to this, call. So that we don't result in a cultural revolution as part of this process. It's an evolution and we've already consciously have been doing this call.

Speaker 2

Come across the industrial portfolio as a team. It's been a lot of communication, has been to Quarter. Almost every industrial major operating facility globally and as we've led with communication and clarity with what our plans are call. Around our strategy to the team, we've recruited in the leaders that have been able to execute quarter. The programs are the core business execution to back this up.

Speaker 2

And we've done that in a Fashion. It's very professional, highly communicative, so that we end up making sure that the company understands why we're doing these things. Call. This is oriented like we say in our initiative around integrating the company, consolidating facilities and rationalizing overhead. Call.

Speaker 2

So they're very clear on what the end objectives are and each piece obviously fits that macro. So I find the communication and clarity and candor, is very important, to make sure that the culture is coming along. Call. It's not an easy journey. I've done a lot of this in my career as well as other leadership team members, including Julie.

Speaker 2

And I would say is call. You never can communicate too much, but it is really driven by the leadership team and the consistency of performance. Call. I think when we started this last year, after just getting on board with Julie, it's much harder to gain momentum in this area. Quarter.

Speaker 2

Today, we have a lot of momentum. We have products completing. So then with that momentum, it's a lot easier quarter to undertake Phase 3, which is much larger in scope. It's across the entire company, including aerospace, industrial and the overhead structures. Call.

Speaker 2

And that is really the momentum of Phase 1 and Phase 2 has really set that up to be possible. Last comment I'll make is this is in call. Full coordination and synchronization with the Board of Directors. We have very tight governance and management of these programs. I think in totality, there's quarter.

Speaker 2

Individual line items and over 60 line items of initiatives that we're running. And then I'm quite pleased with how professional we're doing it. And thus far, the culture has been call. Evolving along to a more integrated company. I'm in the process quite nicely.

Speaker 2

And we're only 9 months in. I'm quite pleased with how far we've gotten already.

Speaker 6

That sounds great. I'll leave it there. Thanks.

Speaker 2

Welcome.

Operator

And we will take our next question from Michael Ciarmoli with Truist. Your line is open.

Speaker 7

Hey, good morning guys. Thanks for taking the questions. Nice start to the year here. Quarter. Good morning, Mike.

Speaker 7

Tom, I guess just the confidence level in the second half industrial margin expansion. You need to run rate, I guess, something just over 10%. I feel like we've been here. We've done this before with bad results. Question.

Speaker 7

There's always been some sort of forecast embedded in the outlook outside of your control. But I just wanted to get quarter. The comfort level, maybe some of the variables. And if I look at maybe the negative variables that you outlined question. In the deck for 2023, I don't see any disruption in there.

Speaker 7

I mean, just going back to this Phase three. It's got a lot of movement, a lot of consolidation. Wanted to get a handle on the risk there and maybe call. Specifically on aerospace, if you're moving anything to new facilities into different geographies, is there requalification risk? Is there quarter.

Speaker 7

Timing risk on some of those products specifically?

Speaker 2

Yes, I think is confidence level is quarter. Hi. Workload is high. There's a lot moving in parallel, Mike. Call.

Speaker 2

One clarification on facility consolidations. Most of the facility consolidations we've done in Phase 1 and Phase 2 quarter. And also for Phase 3, both in industrial and aerospace. We're moving our operations and production from facilities call. So when you're moving a facility to an existing facility and kind of consolidating your volume, especially if you can move it to a site quarter.

Speaker 2

It has labor advantages, cost advantages. You're moving all of your production into a central location. It doesn't it requires qualifications for the moves with customers, but it isn't like a greenfield de novo product where everything has to be re qualified from day 1. Quarter. Those are much more complex.

Speaker 2

And as you fairly point out, Mike, is there sometimes timeline unpredicted. Call. So the approach we're taking is very logical to aggregate our volumes into central facilities, create larger leverage by having quarter. No more volume through that rooftop. And that takes place through the industrial moves.

Speaker 2

It's taking place through the aerospace move as part of this project. Quarter. And we really get down by product line and by customer. And having done a lot of this in my career, the approach we're taking has been very successful using quarter. This approach and not trying to do de novo projects is quarter.

Speaker 2

As you can imagine with focus in 2 areas, core business execution and the initiatives around integrate, consolidate, rationalize. Call. We know there's inflationary pressures, high interest rates, global dynamics, geopolitics, potentially a looming recession. Call. Our job is to manage all of those effects and have the ability to actively manage the business in a way that can mitigate those.

Speaker 2

Call. We're not immune from global pressures,

Speaker 1

but part

Speaker 2

of the idea behind focusing one quarter. So the team on core business execution to driving success and other initiatives, we get both done. So given that we're working on those 2 and investing heavily in call. We have a degree of cautious confidence that we'll be able to deliver against the year quarter. We average out the mix of all these effects, some in our favor, like aerospace industry recovery, some potential looming negative effects, call.

Speaker 2

We've got to manage them all and we do it actively. And the initiatives, obviously, we're leaning into extremely aggressively here call. Because we know we need to become a more efficient and effective company, so we can afford more investments into the markets we're trying to penetrate either geographically or product wise. Call. So is my confidence level is high just because we've already successfully been doing this in Phase 1 and Phase 2 to plan.

Speaker 2

Call. And I think Phase 3, while larger in scope, is a similar type degree difficulty projects for us to deliver against.

Speaker 7

Call. Got it. Got it. That's helpful. And I guess not to

Speaker 1

put the cart ahead of

Speaker 7

the horse here, but if I look at the total run rate savings, $53,000,000 How much of that is going to actually drop to operating income? I mean, clearly, there There's inflationary costs that are going to be sustained, whether it's labor, what have you. But I mean, are we thinking, if I go back to call. Pre COVID, thinking about kind of you guys operating at a 15% to 16% corporate margin. I mean, quarter.

Speaker 7

Should we be thinking you can take this 18.5%, 19.5% with these kind of run rate savings once we get out past 25?

Speaker 2

Call. Mike, thanks for the question. Very leading and very forward looking. But I would say that as I've said before, call. When we address this question, the expectation is with the core business, even though it's a very different world pre COVID and post COVID, quarter.

Speaker 2

With where Barnes is going in terms of executing against core business and with the integration consolidation rationalize initiatives, quarter. Our first objective is to get to the return of our revenue and profitability to levels that are pre COVID. Even though the quarter. Macroeconomy and the global dynamics and interest rates and FX and everything has all changed. Our job is to get the company more efficient and effective call to be able to serve the markets with levels of performance that are at or above where we've historically been.

Speaker 2

So it's a journey. Quarter. I've only been a board 9 months working with Julie and the team. We've made a lot of progress. But as you fairly pointed out, quarter.

Speaker 2

To get back up into the mid teens margin, which and higher, where are these plans and strategies are being invested in to deliver, we've got a lot of work question. But directionally, although we have not reconfirmed what we communicated at Investor Day for December of 20 2019 timeframe is our objective really is to continue to press very hard for the delivery excuse me, I said 2019 and 2021 timeframe. We continue to press very hard to return the profitability of our revenue streams back to those levels. Call.

Speaker 7

Got it. Got it. Helpful. Thanks, guys. I'll jump back in the queue here.

Speaker 2

Thanks. Thank you.

Operator

Quarter. We will take our next question from Myles Walton with Wolfe Research. Your line is open.

Speaker 8

Hi, good morning, everyone. This is Greg Dahlberg on for Myles. Call. One quick question on the OEM outlook. So, it looks like it kicked up from mid teens this quarter to low double digits previously.

Speaker 8

Call. I guess is that more confidence in OEM production and kind of supply chains in general? Or can you talk through the pieces there?

Speaker 2

Quarter. Certainly. It is we are very output driven right now. There is a lot of supply chain quarter, Greg, within the OEM as it's ramping back up again. I think it's well documented across a lot of industry publication and call.

Speaker 2

Information that's already disclosed at other companies. We have a lot of backlog that we're working off. As you know, from our comments, we've been staffing up our teams and trying to get them more efficient and productive from an output perspective. So I would say we are certainly have supply chain constraints quarter. Materials and castings are typically very sensitive to what is right now.

Speaker 2

We're call. Trying to do the best we can to get more out the door against customer requirements. So I still think there's a fair amount of recovery on the OEM side quarter. And in a different way, on the aftermarket side, with obviously more flying occurring, quarter. The aftermarket has also recovered and we're in a similar situation where we're trying to get our outputs up on the aftermarket side to match pace.

Speaker 2

Quarter. So we are obviously providing that kind of teens guidance, driven by just trying to catch up with quarter. The pull of the overall industry as air volume is on single and wide body is recovering. And I would say just in general is quarter. That recovery, we're just behind on it and we're pushing hard to continue to catch up.

Speaker 2

And I think it'll take almost a 23 for us to quarter. Try to run this down and as the industry continues to strengthen, we'll have to keep speeding up to maintain pace. So it's a favorable set of circumstances, but we have a lot of operational challenges to onboard people and get the supply chain of raw materials, castings, etcetera, into our plants to be able to keep pace. Quarter. So I do think there's going to be a delicate balance over the course of 2023.

Speaker 8

Got it. Thanks. That's helpful. And then, just one quick one on leverage. Call.

Speaker 8

So I think you guys are sitting at just around 2.4 times in the quarter. The target from the 'twenty one Investor Day was 2.5 times, I guess. Flowing that into the core business execution, the restructuring efficiency plans, is that kind of the right target to think about more longer term or does that change as efficiencies flow through?

Speaker 2

Quarter. I'll let Julie take that.

Speaker 3

Yes. Hey, Greg. Quarter. So 2.5 times, I think, is a nice target range for us. It really depends though strategically on what's quarter.

Speaker 3

As Tom mentioned, we're assessing acquisition options. If something were to go through, that leverage range may change. Quarter. Honestly, in the current interest rate environment, we're working to see what cash we have available. We want to minimize interest quarter expense.

Speaker 3

So looking at maybe channeling cash to pay down debt a little would take that leverage ratio down in the near term. But in terms of a long range point where we'd like to keep things, there's not really been a change in our point of view on around a 2.5 times.

Speaker 8

Got it. Thank you. That's helpful. I'll hop back in the queue now.

Operator

Quarter. And we will take a follow-up question from Michael Ciarmon call with Trist. Your line is open.

Speaker 7

Hey, thanks for taking the follow-up guys. Just on the hot runner Weakness, I guess, into the auto market. I mean, what as Thomas, you're getting into this business and question. Kind of turn everything upside down. What should we really be looking at to gauge the health of that business?

Speaker 7

Is it model changes quarter. Or is it really production or what's kind of the view there?

Speaker 2

Yes, it's a great question. Mike is, it's different by zone. I think for us on the automotive hot runner side, this has been a business for us in North America. It's getting quarter. Better penetration into the North America market, feet on the street and getting in front of customers more aggressively.

Speaker 2

In our European business, I think, quarter. As you know, we've made a lot of investments last year to bring on feet on the street and be able to be more competitive with penetrating accounts quarter. In Europe, we do have competitive pressure in Europe. It's a significant competition, but we feel we've got some really nice product line capability. On the margin side, part of our cost actions in Phase 3 are to address high cost basis operations call.

Speaker 2

We have in this product line to be able to drive better margins by having manufacturing done in lower quarter. Environment to get profitability. But I think in the Europe side, our commercial investments in the automotive hot runners areas have been quite successful already call that we've invested in. The last thing would be Asia, China. There, the story is more one of product lines.

Speaker 2

Quarter. As you know in China in particular, we've historically been very oriented towards selling our automotive quarter. Product line is a very premium product line to Westernized OEMs manufacturing in China as that market is growing and shifting to a quarter. Hundreds literally of HEV and EV type vehicle customers that are China based. And we have not historically sold into that channel.

Speaker 2

We don't have a product line match into that channel. So in that area, we've reenergized the commercial team. We're reorienting it away from just quarter. The large multinational OEM automotive manufacturers towards the domestic manufacturers. And due to and from my experience that quarter.

Speaker 2

Before coming to Barnes that I had in the automotive industry and molding, especially with large operations in China, call. This is a distinct product line shift that has to occur between what a multinational company and a kind of a, you know, with a Cherry Automotive, a BYD would order. Quarter. So reorienting the product line and we're reconstituting the commercial team there. And expectations is overall in automotive hot runners quarter.

Speaker 2

Should be a growth area for us, Mike. It is not then because we have incorrect solutions by zone. Quarter. So it's a very granular answer for you, but the solution sets are different by quarter. Europe, America and China based on the realities of those markets.

Speaker 2

And good thing about it is we've done a good job of diagnosing it. Now we're getting in and quarter. Putting these solutions in place to drive growth.

Speaker 7

Got it. That makes sense. Thanks, guys.

Speaker 4

Quarter.

Operator

And with no further questions at this time, I will now turn

Speaker 3

the call back to Bill Pitts for closing remarks.

Speaker 1

Quarter. Thank you, Abby. We'd like to thank you all for joining us this morning and look forward to speaking with you next in July Quarter Q2 2023 Earnings Conference Call. Operator, we will now conclude today's call. Quarter.

Operator

Thank you. And ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.

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Earnings Conference Call
Barnes Group Q1 2023
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