Barnes Group (NYSE:B) Inc., a global industrial and aerospace manufacturer, recently held its earnings call to discuss the company's financial performance for the fourth quarter and full year of 2023. The company reported a 15% increase in full-year revenue to $1.45 billion and a significant improvement in adjusted EBITDA margin to nearly 19%.
Barnes exceeded its savings target through a restructuring program and extended two key aerospace agreements, positioning the company for future growth. Despite challenges such as long lead times and market weakness in China, Barnes is optimistic about its aerospace segment and plans to expand its repair and overhaul facilities in Singapore and Poland.
Key Takeaways
- Full-year revenue increased by 15% to $1.45 billion.
- Adjusted EBITDA margin improved to nearly 19%.
- $25 million in savings achieved through restructuring, exceeding targets.
- Two long-term aerospace agreements with Safran (EPA:SAF) extended.
- Acquisition of MB Aerospace enhanced Barnes's market position.
- New repair and overhaul facilities planned for Singapore and Poland.
- 2024 sales expected to grow by 12% to 16%, with organic sales up 4% to 8%.
- Long lead times and competition in the Hot Runner markets are ongoing challenges.
- Streamlined molding solutions have stabilized Hot Runner sales.
- Aerospace segment expects high teens organic growth for the full year.
Company Outlook
- Barnes anticipates a total sales increase of 12% to 16% in 2024, with organic growth of 4% to 8%.
- Mid-single digit growth expected for the year, despite market challenges.
- The company plans to open new repair and overhaul facilities, expanding its MRO footprint.
- Margin expansion anticipated in the Aerospace business, with high teens organic growth expected for the full year.
Bearish Highlights
- Long lead times have affected the company's ability to book business.
- Market weakness observed in China and wavering conditions in European markets.
- Competition has impacted market share in the Hot Runner markets.
Bullish Highlights
- Successful restructuring program led to significant savings.
- Strategic acquisition of MB Aerospace has strengthened Barnes's market position.
- Strong financial performance in Q4, with sales up 33% reported and 2% organic.
Misses
- The company was late in responding to inflation, only partially mitigating its impact.
- Decline in aerospace orders due to timing issues, though a strong backlog remains.
Q&A Highlights
- Barnes addressed the decline in aerospace orders, attributing it to timing and maintaining a strong backlog.
- The company expects margin expansion in aerospace despite initial impacts from the MB Aerospace acquisition.
- Cash flow conversion rate is 140% of GAAP, despite noncash impacts.
- Working capital outlook for 2024 is expected to be flat year-over-year.
In conclusion, Barnes Group Inc . (NYSE: B) has reported a solid financial performance for the fourth quarter and full year of 2023, with strategic initiatives in place to foster growth and overcome current market challenges. The company's focus on expanding its aerospace capabilities and streamlining operations across its segments positions it well for the future, despite some headwinds and the need for further pricing adjustments to offset inflationary pressures.
InvestingPro Insights
Barnes Group Inc. has demonstrated resilience and strategic growth, as reflected in their recent earnings call. To provide further context to their financial performance and future outlook, here are some InvestingPro Insights that may be of interest to investors.
InvestingPro Data shows that Barnes Group Inc. has a market capitalization of $1.84 billion and is trading at a P/E ratio of 76.77, which indicates a high earnings multiple. This aligns with one of the InvestingPro Tips, suggesting that the company is trading at a premium. However, when looking at the adjusted P/E ratio for the last twelve months as of Q3 2023, it stands at a more moderate 22.85, which may reflect the market's expectations for future earnings growth.
Another InvestingPro Tip highlights that Barnes has maintained dividend payments for 54 consecutive years, which is a testament to its stability and commitment to shareholder returns. This is further supported by a dividend yield of 1.75% as of the last recorded date. Additionally, the company's liquid assets exceed its short-term obligations, indicating a solid liquidity position.
Investors may also note the strong return over the last three months, with a 43.32% price total return, suggesting a positive short-term performance trend. This could be indicative of market confidence following the company's strategic moves and financial results.
For more detailed analysis and additional InvestingPro Tips, investors can visit https://www.investing.com/pro/B for a comprehensive look at Barnes Group Inc. To access more insights, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, which includes a total of 7 InvestingPro Tips related to the company.
Full transcript - Barnes Group Inc (B) Q4 2023:
Operator: Good morning. My name is Krista and I will be your conference operator today. At this time I would like to welcome everyone to the Barnes Fourth Quarter and Full Year Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Bill Pitts, Vice President of Investor Relations. Bill, you may begin your conference.
William Pitts: Thank you, Krista. Good morning and thank you for joining us for our fourth quarter and full year 2023 earnings call. With me are Barnes’ President and Chief Executive Officer, Thomas Hook; Senior Vice President, Finance and Chief Financial Officer, Julie Streich; and Ian Reason, President of Barnes Aerospace. You can access all earnings related materials on the Investor Relations section of our corporate website at onebarnes.com. That’s O-N-E-B-A-R-N-E-S.com. During our call, we will be referring to the earnings release supplement presentation. Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the Securities and Exchange Commission. Of note, as we announced in today’s earnings press release, following the acquisition of MB Aerospace the company is introducing adjusted EBITDA metrics to its reporting and outlook which Julie will discuss in greater detail. Be advised that certain statements we make on today’s call both during the opening remarks and during the question-and-answer session maybe forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today’s call and are described in our periodic filings with the SEC, which are available on the Investor Relations section on onebarnes.com. I will now turn the call over to Tom for his opening remarks. Then Ian will comment on our Aerospace business and progress on the MB Aerospace acquisition. After that Julie will provide a review of our financial performance and details of our initial 2024 outlook. Then we will open up the call for questions. Tom?
Thomas J. Hook: Thank you Bill. The [Technical Difficulty] Barnes Aerospace business as we transform our portfolio toward a majority contribution from the attractive aerospace market, and in an effort to continually provide transparency into our business, it's important to hear directly from our operational leaders periodically. Ian will provide an update on the integration of MB Aerospace, expected synergies, and the operational and commercial benefits we are already experiencing. First, let me provide an overview of 2023 to highlight our considerable achievements as a team. Please turn to Slide 5. I am pleased with the noteworthy progress made in the execution of Barnes business transformation strategy encompassing our three pillars; core business execution, scaled aerospace, and integrate, consolidate, and rationalize industrial. Across the company we are committed to unlocking Barnes’ full potential and increasing value. For the full year we turned in a solid performance. Revenue of $1.45 billion grew 15% reported and 5% organic. Adjusted EBITDA margin improved to nearly 19% reflecting benefits from our cost savings efforts. We also improved cash flow significantly due to disciplined cost management, and a focus on working capital while still investing in our business for long-term growth. Our restructuring program continues to progress. We delivered $25 million in savings in 2023 above our previously communicated $22 million target. These savings are partially mitigating higher material and labor costs, and isolated productivity challenges. Importantly, we are seeing costs abate somewhat and supply chain health improve. Despite more work ahead, and I'm proud of our team accomplishments in a short period of time we've been at it. We delivered meaningfully on our key strategic priorities during the year and are gaining momentum. Please turn to Slide 6 in our first strategic pillar, core business execution. As I've said before, we are focused on top line, bottom line, and pipeline growth across the company. We continue to identify opportunities to strengthen our direct connection with customers for top line growth and leverage these opportunities through commercial excellence, combined with operational productivity to improve bottom line profitability. These actions in turn, fund future pipeline investments and increase our sales funnel. During 2023, we extended two long-term aerospace agreements with Safran. In Molding Solutions, we deployed an integrated channel management approach and a global go to market alignment to drive commercial excellence. Operationally, we are applying heightened cost management and working capital discipline across the organization. Please turn to Slide 7 and our second strategic pillar Scale Aerospace. In 2023, we made a massive leap with a strategic acquisition of MB Aerospace, which closed in August. Barnes Aerospace is now a truly global business with an expanded geographic reach, diverse capabilities, and offerings to serve markets and customers around the world. The addition of MB Aerospace to our portfolio positions us as a more attractive partner that enables deeper customer relationships and the ability to win additional contracts. To that end, we have already closed on two large contract renewals, and expect to close on several other large contract wins and extensions with customers. Ian will discuss this in more detail in a moment. We continue to further scale this business through integration and synergies which will drive growth, operational excellence, and margin expansion. Please turn to Slide 8 and our final strategic pillar; integrate, consolidate and rationalize our industrial segment. During the year, we formed the Barnes Transformation Office or BTO to enable a more agile, responsive organization using standard tools, processes, and systems. We are experiencing solid momentum as we execute numerous transformation initiatives in support of accelerating our growth and profitability. We advance our manufacturing facility optimization through footprint rationalization with plant closures and Molding Solutions, Motion Control Solutions, and several smaller underperforming technology and service centers in the automation business. At Molding Solutions after several months of planning, we recently announced a new organization structure to fully integrate and streamline the business to drive efficiency and expand manufacturing capacity globally. Last month, we took another important step forward with the announced sale of our Associated Spring in Hänggi businesses. With this divestiture, we will exit automotive components manufacturing and simplify the industrial segment. Post close, the expected net cash proceeds of approximately $150 million will be used to reduce debt, supporting our leverage target goals. On Slide 9, you can see how these strategic actions are dramatically shifting our portfolio, moving us towards higher growth and margin opportunities while increasing our exposure to more stable business. As we move forward, our Aerospace segment will account for the majority of our consolidated revenues and even larger percentage of our earnings, positioning us for long-term profitable growth. In closing, our teams drove an incredible amount of progress in 2023, where we have faced challenges, we have taken actions to improve performance. We had a clear vision for Barnes. A solid strategy that we're in the process of executing to make that vision a reality and a passionate team that has proven they know how to deliver results. While we still have a lot more to do, we are committed to reshaping and positioning Barnes for success by executing our strategic priorities to maximize value for our shareholders. As such, you should expect more progress in 2024. We will continue to drive multiple working capital, cash management, and cost reduction activities with a focus on business fundamentals and deleveraging our balance sheet. Now before passing the call to Ian, I want to take a moment to thank the global Barnes team of 6,500 employees for their hard work, contributions, and dedication to the success of Barnes and its transformation. Their collaborative attitude and willingness to embrace change in a fast-paced environment is what will allow us to achieve our desired outcomes and for that, I am truly grateful. Ian, I'll now pass the call to you for an update on Barnes Aerospace.
Ian Reason: Thank you, Tom and good morning, everyone. I'm happy to participate in today's call to provide an update on Barnes Aerospace including the MB Aerospace acquisition and share my excitement about the opportunities to capitalize on the strength of the combined business. Please turn to Slide 10. In the five months since the acquisition closed, we have made significant progress with our key integration objectives. We approached the integration with a guiding principle of stronger together to inform our decisions and actions, and we now operate as One Barnes Aerospace. A new organizational structure is in place, including the senior management team that combines leaders from both Barnes Aerospace and MB Aerospace, and we are going to market as a single unified Barnes Aerospace brand. With core integration activities complete, we are now focused on optimizing and improving the combined business. There has been solid advancement in identifying and executing synergies. As we exit 2023, we have secured $8.5 million of run rate synergies and have line of sight to increase the run rate to $12 million by the end of 2024. We fully expect to realize the $18 million run rate target shared upon closing of the transaction by the end of 2025. In addition, we are enabling greater flexibility and best practice sharing to optimize our existing facilities. For example, in January in Connecticut we created a new OEM Operations Center of Excellence, or COE, primarily focused on military related components, resulting in management and operational efficiencies. This COE approach creates opportunities to optimize global facility capacity which enables us to position work in the right COE location from our extensive global footprint to best meet program and customer needs. As Tom noted, our now larger aerospace business is seeing new commercial and defense opportunities given our expanded capabilities and solution set. Our increased scale also provides greater diversification of customers, markets, and platforms. Customer feedback regarding our combined value-added offering has been very positive. We've been working diligently on renewing multiple long-term agreements with all of our major engine OEM customers and have largely concluded negotiations on all the agreements. We have already signed two major LTAs and are now working towards finalizing the remainder of the agreements over the coming few weeks. These deals, a combination of program extensions and incremental new work will generate significant order strength for the business over time. An example of an LTA we have recently signed, which illustrates our competitive position is a long-term agreement with General Electric (NYSE:GE) to extend the term for LEAP engine programs by 10 years, extend legacy engine programs by four years, and expand our portfolio of products on military engines. This agreement has an estimated sales value of over $1 billion to 2035 with most of the value from program extensions. In addition, we have signed an LTA extension with the legacy MB Aerospace engine OEM customer, and we are close to finalizing several others. Building on the previously announced Safran long-term agreement for the repair and overhaul components for the LEAP and CFM engine programs and the increasing demand for aftermarket repairs from other customers, we are expanding our existing MRO footprint in Singapore with the opening of a new facility in the Seletar Aerospace Park in 2024. Furthermore, to ensure we can offer a truly global repair solution to our customers, we have initiated planning for a new European MRO component repair facility utilizing our existing footprint in Poland. In closing, we have made significant advancements on many fronts in becoming a near $1 billion aerospace business as we position ourselves for further organic and inorganic growth. Our team is excited about the progress, and I look forward to sharing more highlights with you in the future. With that, I'll now pass the call to Julie to cover our financial performance and outlook.
Julie K. Streich: Thank you, Ian and good morning, everyone. Before I walk through our results, I want to first share that we are introducing adjusted EBITDA metrics to our reporting and outlook. We believe this addition better reflects our core operating and cash generating capability and provides increased transparency into our performance. Also, as Tom discussed, we recently announced the divestiture of Associated Spring and Hänggi. Combined, these businesses generated approximately $200 million in revenue in 2023. The combination of our MB Aerospace acquisition, coupled with this divestiture, shifts our portfolio to a more focused and higher-value business. It is truly an exciting time as we position Barnes for sustainable, profitable growth, and further value creation. My comments today will focus on our fourth quarter results and 2024 outlook. We have provided full year results for the total company and by segment within our earnings presentation, which is posted on our Investor Relations website for your reference. Also, comparisons are year-over-year, unless otherwise noted. Please turn to Slide 12. For the fourth quarter, sales were $416 million, up 33% reported and up 2% organic. Foreign exchange was a benefit of 2%. Adjusted operating income was $48 million, up 36% and adjusted operating margin of 11.5% was up 30 basis points, largely attributable to our restructuring program. Adjusted EBITDA was $78 million, up 36% and adjusted EBITDA margin was 18.8%, up 50 basis points. Interest expense was $24 million versus $4 million due to higher borrowings given the acquisition of MB Aerospace and a higher average interest rate associated with our debt recapitalization. The fourth quarter adjusted tax rate was 12%. During the quarter, we completed an intercompany transaction between related entities in several tax jurisdictions, which based on the tax law in those jurisdictions provided a favorable tax benefit. On an adjusted basis, net income per share was $0.41 compared to $0.52, reflecting revenue growth and margin improvement, offset by higher interest and tax expense. I will now turn to our fourth quarter segment performance, starting with aerospace on Slide 13. We have made significant strides in integrating our aerospace business and are better positioned to participate in the strong industry growth opportunity. For the fourth quarter, total sales were $213 million, up 96% reported and up 15% organic. Excluding the impact of MB Aerospace, organic OEM sales increased 17%, MRO sales grew 15%, and RSP sales were up 7%. These results demonstrate the strength of our underlying aerospace business. Adjusted operating profit of $27 million was up 53% and while adjusted operating margin declined 360 basis points to 12.8%, reflecting the impacts of MB's portfolio mix and the amortization of long-term acquired intangibles. Aerospace adjusted EBITDA was $46 million, up 69% benefiting from higher organic sales and the contribution of MB Aerospace. Adjusted EBITDA margin was 21.5% versus 24.9% a year ago, impacted by portfolio mix and productivity. As Ian mentioned, we are working diligently on several new long-term agreements with customers. Our backlog remains healthy. With the combined Barnes and MB Aerospace business, our OEM backlog now stands at $1.23 billion, and we expect to convert approximately 50% to revenue over the next 12 months. Moving to industrial results on Slide 14. We have made significant progress to integrate, consolidate, and rationalize our Industrial segment. This includes our restructuring program aimed at reducing our cost structure, the closing of numerous locations over the last year and half, and more recently the announced agreement to sell Associated Spring and Hänggi. Fourth quarter sales were $203 million, down 1% reported and down 4% organic. Molding Solutions organic sales increased 1%, while Motion Control Solutions organic sales were down 10% and Automation was down 7%. Adjusted operating profit was $20 million, up 19% and adjusted operating margin was 10.1%, up 170 basis points. Adjusted EBITDA was $33 million, up 4% and adjusted EBITDA margin was 16%, up 80 basis points benefiting from positive pricing and favorable productivity due in part to transformation-related activities, partially offset by lower sales volumes and mix. Turning to the balance sheet and cash flow on Slide 15. Cash provided by operating activities for the full year was $112 million versus $76 million a year ago. This significant improvement was driven by a lower investment in working capital. Free cash flow was $57 million versus $40 million and capital expenditures were $56 million, up $21 million from the prior year as we continued to reinvest in our businesses. About 60% of the CAPEX is related to growth and transformation. Our net debt-to-EBITDA ratio was 3.6 times at year-end, which improved from 3.8 times at the end of the third quarter due to both higher EBITDA and lower debt. Liquidity as of December 31st was $447 million, comprising approximately $90 million in cash on hand and $357 million availability under our revolving credit facility. With the debt recapitalization of our MB Aerospace acquisition, there are no major debt maturities until 2028. Turning to Slide 16, we continued to maintain a disciplined approach to capital allocation. Our priorities are the health of our balance sheet, organic investments that will drive sustainable, profitable growth, and remaining committed to shareholder returns. Net cash proceeds from the divestiture of approximately $150 million will be used to reduce debt. We continue to target net leverage to be 3 times or lower by the end of 2024 and 2.5 times by the end of 2025. We also continued to invest in the business for long-term growth, with most of the increase in CAPEX directed towards business transformation activities and MB Aerospace. In addition, we will continue to return capital to our shareholders through a dividend, which we have been paying for 90 consecutive years. Turning to our outlook on Slide 17, our 2024 guidance reflects the strategic actions we have taken to shift our portfolio towards aerospace, which offers higher growth and higher-margin opportunities. This guidance assumes one quarter contribution from Associated Spring and Hänggi as we expect the transaction to close in early 2024. We expect the impact to 2024 to be a negative 11% to revenue and negative 10% to adjusted EBITDA. For the year, we expect total sales to be up 12% to 16% with organic sales up 4% to 8%. Given the shift in our portfolio and streamlining of our businesses, starting this quarter and going forward, we are providing our outlook at a segment level only. Looking at our segments, we expect our aerospace sales growth to be over 55%, inclusive of a full year contribution of MB Aerospace. We expect organic sales growth in the low double digits. For Industrial, we expect sales down in the mid-teen range with organic sales growth up low single digits when taking the announced divestiture into account. Regarding our restructuring program, as Tom mentioned, we achieved $25 million of savings, $3 million ahead of our previously communicated commitment. For 2024, we expect to achieve $38 million in run rate savings, and the program remains on track to deliver against our 2025 run rate target. Expected run rates are impacted by the pending divestiture and a reconciliation table is included on Slide 18 of our investor presentation. Adjusted operating margin is expected to be in the range of 12% to 14%. This reflects aerospace adjusted operating margin in the range of 14.5% to 16% and industrial in the range of 8.5% to 10%. Depreciation and amortization expense in 2024 are expected to be between $130 million and $140 million. Adjusted EBITDA margin is expected to be in the range of 20% to 22%. This reflects aerospace adjusted EBITDA margin of 23.5% to 25% and industrial of 15% to 16.5%. We expect adjusted EPS to be between $1.55 on the low end and $1.80 on the high end. This guidance reflects the impact of MB Aerospace and our announced divestiture, which combined are dilutive to adjusted EPS by approximately $0.47 per share. Top line growth and margin expansion from ongoing cost savings offset this dilution. On Slide 18 of our investor presentation, we have included additional 2024 guidance information for modeling purposes. Please turn to Slide 19. Given the moving pieces and to assist with modeling our business in the near term, we wanted to provide some additional transparency into our first quarter performance expectations. We expect revenue growth of 25% to 27%, adjusted operating margin of 11% to 12%, adjusted EBITDA margin between 19% and 20%, and adjusted EPS between $0.32 and $0.37. Operator, we will now open the call for questions.
Operator: [Operator Instructions] Your first question comes from the line of Matt Summerville from D.A. Davidson. Please go ahead.
Matt Summerville: Thanks, good morning. Maybe just start -- maybe just starting with the Molding Solutions SBU, can you talk a little bit about the organic performance across the mold and Hot Runner businesses in 2023 and what your expectation is in 2024 and specifically delve into, to the extent you can, a little more detail on some of the headwinds you may be facing in the Chinese Hot Runner market? And then I have a follow-up.
Thomas J. Hook: Yes, certainly Matt. So in 2023, obviously, we had a lot of activities and success on the multi-cavity molds in particular. Our lead times due to the amount of work that we've won and have in operations that we're actively trying to keep pace with has increased our lead times. It's really almost doubled our lead times from about 26 weeks up to more complex molds for 50 to 52 weeks. That has met a very intensive period for the operations team to output. And we've been obviously struggling with long lead times to continue to book business with customers until we can clear that backlog. So on -- we still are leading from a mold standpoint globally, very effectively on the multi-cavity molds Hot Runners, asymmetric story. We do see market weakness in markets like China. We have seen a little bit of wavering in the European markets, but that has kind of stabilized. We sell across the Hot Runner product lines from the midrange all the way to the high end. We feel that we have struggled competitively in certain markets against other competition in the Hot Runner markets that have hurt our market share. But the organization we put in that streamlined molding solutions has also allowed us to invest more in the go-to-market focus and commercial market excellence will stabilize and have stabilized the Hot Runner sales funnel that we're feeding. We still are concerned about China market weakness. We have seen a -- still good market in the Americas. It's not a -- for us, it's more of the Hot Runners in the automotive side than it is broadly across Molding Solutions. We're making more investments in North America to have a more significant presence across the Molding Solutions product lines. So we feel that while the market in North America is not as favorable as it was last year, we feel the investments we're making both in molds and Hot Runners will continue to allow us to capitalize on market growth in North America. But primarily right now, I would say, in China, we were expecting kind of weaker conditions. I think all competitors are seeing that. We're expecting stable conditions in Europe. And I think for the overall year, we expect a level of growth that's kind of mid-single digits across those product lines. If we get more output of multi-cavity molds, we could have an upside opportunity to that. But I think Hot Runners for the most part in the hot heads [ph] part of the product lines globally will be kind of a recovery year from some of the market share loss in 2023. Hopefully, Matt that answers that question.
Matt Summerville: Yes. I appreciate the detail. Flipping over to Aerospace, I think you've guided high teens organic for the full year. You came in mid-teens. Maybe talk about what sort of shortfall you may have experienced there and I think last quarter, you commented that the business was having some productivity challenges, if you could maybe elaborate on the state of the union, if you will, in that regard?
Ian Reason: Yes, and thanks Matt. It's Ian and I'll take that. We certainly had some productivity challenges from two of our OEM locations in Q4 but we saw good progress on all our other 15 locations, including one underperforming business that's turned around their performance in Q4 back to expectations. Where we did have the challenges, we understand the issues and are working to fix them with robust plans in place. As an example, we've taken actions to drive high attrition levels down at one side to ensure we have a more stable workforce and we're now investing heavily in the right training and employee engagement should be both retain our employees, but also accelerate their development to enable higher productivity and efficiency levels. We've also made some key leadership changes at those two impacted sites. On top of that, we do have some persistent supply chain issues that haven't helped, but we're working with our customers and suppliers to mitigate these, and we're making solid progress. We've seen a good start to Q1, although it's going to take time to fully mitigate productivity challenges in a small number of our sites, I'm confident we're seeing the improvements, and we have the right action plans in place.
Matt Summerville: Got it, thanks guys. I will get back in queue.
Operator: Your next question comes from the line of Christopher Glynn from Oppenheimer. Please go ahead.
Christopher Glynn: Thanks, good morning guys. And congrats on the spectrum of Scale, bold moves in the past year. I had a question about the $0.38 of the divestiture impact. How much of that pertains to core earnings in 2Q to 4Q versus ancillary impacts or stranded costs or kind of transaction related adjacent that maybe you don't adjust out?
Julie K. Streich: So the $0.47 we referred to on the call was related to all of the adjusted impacts that we will see throughout the course of the year. And it's a combined number. As Tom mentioned in his remarks, both the acquisition of MB Aerospace and these divestitures are clearly aligned with our two strategic pillars to Scale and Barnes Aerospace and integrate, consolidate and rationalize industrial, and combined there's no doubt they create a step change towards achieving our objectives next year. So giving you a little more color around what's driving the $0.47 picture…
Christopher Glynn: Julie, I think I saw $0.38 dilution from divestiture impacts in the bridge from adjusted earnings to GAAP earnings guidance. I'm not identifying with the $0.47, but the question predicated the $0.38 from the press release.
Julie K. Streich: Alright. I can pivot to a $0.38 -- those are the, oh, you're talking about the Reg G items. You're talking about the Reg G items, not with staying in. So the Reg G items, you're nail -- I apologize for that, Chris. I was answering a different question. Those include, yes, transaction costs, loss on gains, the impact of the gain on sale and some pension-related items.
Christopher Glynn: Okay. So the core earnings loss isn't -- I'm wondering what the kind of operational -- foregone operational earnings.
Julie K. Streich: Correct. So that is what I was describing. The core operational impact coming out of Alpha, that's where I was going. The core operational impact coming out of Alpha is approximately $0.28. But remember, the proceeds of the divestiture will be used to pay down debt, which is generating interest expense and tax benefit. And in the end, now going back to the total $0.47 of EPS dilution we talked about in the year, MB will be approximately $0.19 and it's really important to point out that, that is all noncash. There's about $24 million of intangible amortization that flows through the P&L. And so the $0.19 dilution is all noncash and we expect to exit the year approximately neutral to accretive on the deal.
Christopher Glynn: Okay. And then the automation, how do you guys view that? It's got some nice niche technology, but it's small scale and the technology is kind of isolated in the context of automation markets generally. So curious if you could update the strategic fit for automation?
Thomas J. Hook: Certainly, well, is the automation business for us. We've done a refresh of the management team. We laid out in the second half of last year in parallel with Molding Solutions, kind of a streamlined automation strategy as well. We've added a very important product line. We've been traditionally mechatronic scripting. We've added a vacuum product line, and we're launching that globally. So we're quite excited about the growth potential for automation. Emanuele Orlando is the new President of Automation. He's off to a very good start. I'd remind you, Emanuele Orlando was the architect and the executor of a very successful multi-cavity molding strategy and molding solutions, which earned him the opportunity to move to that business. So we're strategically -- it is a small business. We see this a nice strategic fit into the tooling side, and we're toolmakers a lot on the industrial portfolio between molding automation, tool and die industry. So that's the fit from the automation business strategically, sell through a combination of dealers and direct selling through automation centers that have been highly successful. So we see that as a very nice business with good growth trajectories. As we know, due to labor demand, labor productivity, automation and robotics and the genetic business we run there is an end-of-arm tooling specialist application solutions for customers has been very successful. So we very carefully have been investing in that to grow it and expand that new product line globally and opening up some new market opportunities primarily through the automation center channels that we've been developing. So the strategic fit really is that as we've exited or exiting Associated Spring and Hänggi, we're kind of focusing industrial on a tool and die Molding Solutions, which is tool and die and then automation, which is obviously tooling. So we think that the connections of those product lines are quite nice. And we think we've made the required adjustments in leadership and focus of the business for go-to-market. It will be successful as we get into 2024. Of course, we're always looking at the overall strategy of the company in combination, and we think that's a nice fit with where we've made these pending dispositions exiting Associated Spring and Hänggi to bring those into focus and alignment.
Christopher Glynn: Okay. So you don't see it as being handicapped in the channel not being part of a broader automation portfolio?
Thomas J. Hook: Right now, I think we're focused, Chris, on getting the businesses to perform top line, bottom line pipeline. So in Industrial, we've been focused on rather than trying to scale the portfolio like we are in aerospace. We're focused on getting the business performing on the basic fundamental of generating organic growth and profitability by pricing correctly productivity. Once we have, and of course 2024 is a pivotal year for the industrial businesses to do this, once we have that level of integration, which we're aligning on right now as we have that level of performance, top line, bottom line pipeline, then we'll talk about investing into the business for future growth. But until we get to that point, we'll continue to hold on industrial M&A activities because we're not prepared to add to the portfolio in that manner.
Christopher Glynn: Okay, great. And last one from me, you have the 30% to 32% tax rate guide. I'd like a clarification on how that should translate to the adjusted tax rate and that level of taxation is certainly an outlier. So curious how that -- what your expectations are for general tax rate paradigm understanding that there are a lot of influences on deductibility and non-deductibility in the current year?
Julie K. Streich: So going forward, the 30% tax rate would be our standard tax rate in terms of -- I want to make sure I'm answering your question correctly. But that would be our standard tax rate going forward in light of where we sit with our interest expense and the geographic composition of our business.
Christopher Glynn: Okay. We'll take that back more online -- offline. Thank you.
Julie K. Streich: Okay, thanks.
Operator: Your next question comes from the line of Myles Walton from Wolfe Research. Please go ahead.
Myles Walton: Hey, thanks so much. I just had a couple of quick questions, if I could. The first one is around orders within the aerospace business, and you went through sort of LTAs on the horizon. But -- just wanted to make sure that I'm thinking about this right to see order declines both in the quarter that were pretty big in order declines for the year that were still there. I'm trying to reconcile that with sort of the market expansion and if you're just saying that it's timing related and we will see a flood of these LTAs actually pop into backlog in the near term?
Ian Reason: Thanks. You're absolutely right. Our orders are lumpy, just with the nature of the business, but absolutely solid. The LTAs we have in play at the moment, including the one we've announced had just over $2.5 billion of order value across about 7 LTAs. So we're seeing very strong orders. It's just a timing issue. We'll be announcing a number of new LTA signatures as we go forward, but absolutely no issues with the orders. A very strong backlog. And as we all know, a very growing demand on both the OEM, new build and the aftermarket. So we're seeing strength on both sides of the business.
Myles Walton: Okay. And I think the margins were expected to be a bit stronger in Aero, they ended up a bit lighter. Is that simply RST mix not coming through or something else and then by -- within Aero, the low double-digit organic growth you have for 2024, is aftermarket expected to grow at a faster pace than that average, any color there?
Ian Reason: Certainly on the mix, RSP is a big part of the driver there. And of course, we're bringing MB in which doesn't have an RSP program, that's going to drive our overall margin down. But of course, it's a good story. It's just that the RSP is a bit of a heavy weight there in terms of its profit contribution. But looking forward, we expect to see margin accretion. Some of the productivity challenges that I talked about earlier on the OEM side of the business as we work through those and we get the work through the factories, those sales fall to the bottom line in a very predictable way. So we expect to see incremental margin expansion. And on the aftermarket side, yes, we expect to see higher growth levels than the average level. It's very difficult to predict. The aftermarket business is something that is very cyclical, but we are seeing a very big up cycle and demand certainly in Q1 across RSP and our repair shops have been phenomenally high. So we're seeing that come strong. But that continues strong throughout the year. Do we see cycles, we don't know, but we're expecting to see solid growth year-on-year in the aftermarket side and then growth on the OEM side as production rates start to ramp, particularly on the narrow bodies.
Myles Walton: Okay. And last one, Julie, on cash flow. The conversion, I see on the slide is 140% of GAAP, but obviously, you've got a very large adjusted number in there that had sounded to the answer to Chris' question was largely noncash. And so I'm curious, from a working capital perspective, I'm backing into something like a $40 million consumption, is that correct?
Julie K. Streich: $40 million consumption from what area?
Myles Walton: In 2024 to get to $75 million to $90 million of free cash flow, what is the working capital outlook that you have for 2024?
Julie K. Streich: The working capital outlook, let me get to that one. It is -- let me get back to you on that on the follow-up call. I do have it. It's just not right in front of me.
Myles Walton: Okay, no worries. Thanks again.
Operator: Your next question comes from the line of Michael Ciarmoli from Truist Securities. Please go ahead.
Michael Ciarmoli: Hey, good morning guys. Thanks for taking the questions. Just a couple of follow-ups for clarity first. Julie, did you say MB is now expected to be neutral to accretive, I guess by the end of this year? And then I think I heard the operational impact from the divestitures is $0.28 and I think you called out maybe 50 bps of margin impact from the divestiture, so I guess you're losing $200 million at maybe a 4% margin, the $0.28 sounded high, so did I have that right?
Julie K. Streich: Yes. You have that approximately right from what's falling out of the portfolio. And you did hear correctly that we anticipate MB will be exiting the year neutral to accretive.
Michael Ciarmoli: Okay. What's the $0.28 operational impact, it doesn't seem to reconcile with the 50 bps margin?
Julie K. Streich: So from a dollar perspective, it's about a $20 million outflow of operating income. And remember, the reason it might not be reconciling for you is that we have a quarter of the -- we have one quarter performance in the outlook for the year. So that reflects three quarters of a year. Hopefully, that helps triangulate your math.
Michael Ciarmoli: So you're losing $20 million of operating income on that. That seems to be fairly high margin then. What's actually in all of that operating income, that just -- I thought this was more of a margin-dilutive business that you were selling?
Julie K. Streich: Yes. So in 2020, it -- in the range of our margins it was absolutely on the low end of our margin portfolio. In 2023, we experienced some benefits in the business, which temporarily inflated that margin as we were closing the Bristol facility. We had the Ford (NYSE:F) final buys, and we had some other final type sales, which supported the profitability of the business in 2023 that would not be recurring if the business remained in our portfolio. And that's probably what's skewing what you're thinking about.
Thomas J. Hook: Basically, Mike, just the end-of-life programs for the transfers that -- what the Bristol associates bring Bristol shutdown ran out and the onetime benefit onetime revenues for 2023, and they weren't going to repeat under any circumstances prospectively.
Michael Ciarmoli: Okay. Got it. And I guess just shifting to industrial. The outlook for the year on low single-digit organic, what gives you the -- I know you gave a lot of color originally to Matt’s question but I think the organic order flow was down 11%. I mean what gives you the confidence in that industrial organic outlook?
Thomas J. Hook: Mike, going out of industrial, as you know, and I'll focus my comments away from -- even though there's a quarter of Associated Spring and Hänggi in here, I'm going to focus on Molding Solutions, Motion Control Solutions and Automation. Each of those pieces we've kind of done some streamlining in the -- what we call the integrated consolidated rationalize industrial. So we've made a lot of investments there to streamline our approach to the businesses, focused management teams, and commercialization initiatives. And with the reduction in G&A, we've been able to put more feet on the street and focus on sales funnels. We have seen multiple places where that's been very successful. Certainly, in multi-cavity molds, we've been highly successful last year seeing that initiative, and we've been rolling that out more broadly into the industrial go-to-market teams, more resources, and the additional one for Molding Solutions is selling the entire portfolio globally. We don't typically sell comprehensively in North America for Molding. That's a big pickup opportunity for us. We've appropriately looked at upsides and downsides to be balanced in providing our guidance. We know we also have more full year effects of some of the commercial investments in 2023 coming through in 2024, which would be pricing for a full year effect. So we're starting to see more full year benefits and also see some of the returns in those prospective views from the investments we've made in the second half of last year when I was running the Molding Solutions business. And we've got good stable leadership in place, and we're kind of beyond those integrated consolidate initiatives that have already been completed. So we're going to end up seeing the benefits of those come through. We understand and have -- and are recognizing that the markets may not be as favorable in 2024 as they were in 2023 in some of these markets. So we've tempered our expectations accordingly based on the information we have from competitive and market information. So I think we've ended up with a very balanced view, but also a growth perspective that kind of supports the investments we have already made to improve those businesses and make sure we get the performance and returns that we are expecting.
Michael Ciarmoli: Okay, got it. And then just last one. On the Aerospace LTAs, I know historically, you guys made some upfront investments in the RSPs and CSPs. Is there any nuance to these new LTAs or extensions where you have to make any upfront investments or are these -- should we think of it as more traditional kind of industry orders that went out any upfront investment?
Ian Reason: Thanks for the question, Michael. No, there's no significant investments required for any of the LTAs. Most of them are follow-on with some new work in there and some volume expansions. But no, these are just normal orders and not requiring any significant investments at all.
Michael Ciarmoli: Okay, perfect. I will jump back in the queue.
Julie K. Streich: Hey, and this is Julie. I just wanted to hop in and follow up on Myles' question on working capital. We actually have working capital expectations to be approximately flat year-over-year as we continue to work through backlog reserves -- excuse me, inventory reserves we have that we're still working down and as we continue to drive additional productivity. So we despite sales growth and growth in some of our AR areas are looking and working with the business very closely on driving down working capital overall. So it's a net neutral in the year.
Operator: Your next question comes from the line of Matt Summerville from D.A. Davidson. Please go ahead.
Matt Summerville: Thanks. I just want to clarify one item, kind of getting back to Mike's question and maybe a question prior. How much in operating income dollars are you foregoing in 2024 for the nine-month period, you will not own Spring and Hänggi and if you need to normalize that, if it was over earning in 2023, can you please make that normalization, I just wanted to be crystal clear how much OP dollars you're foregoing? Thank you.
Julie K. Streich: So in the back three quarters of 2024, we'll forego approximately $155 million in sales and approximately $20 million in operating margin. Normalizing that, I don't want to throw out a number that is directionally incorrect for you. So when we have our follow-up call, I'll -- we can dissect that a bit. Because I know you're trying to use this for modeling purposes, and I just don't want to give you incorrect information, but there was -- there was a meaningful increase in our sales this year as those end-of-life programs came in, and happy to get you the figures when we have our follow-up.
Matt Summerville: Perfect. And then just a final one on pricing. Tom, can you maybe talk about how much price you were able to realize in industrial in 2023 and how much incremental price capture we should be thinking about for 2024? Thank you.
Thomas J. Hook: Yes. I'll give a qualitative answer, and then I'll let Julie give the analytical answer. The short answer is not enough to my satisfaction. We've been hit with a lot of inflation, energy, freight, labor, materials, supply chain disruption, longer lead times. So offsetting all that has required a comprehensive across all of industrial even the Associated Spring and Hänggi businesses go to reach out to customers to pass on those inflationary pressures and to either reprice the book of business we have or to price business prospectively for future orders. That has been a battle, as you can imagine, across the portfolio that's been our primary -- over the last -- since my 18 months in this company has been one of the primary customer interface negotiation points. I'll let Julie give the analytics behind it. We were late in getting started. We only partially mitigated this in 2022 and 2023. I would say today, we passed the even keel point, and now we're really in a position of recovering price and making up for inflation that we've already experienced, but we were late in responding and only partially in mitigating it. So I would say that we've done an incomplete job there but prospectively better balance. And certainly, the curing supply chains and the lower inflationary environment make that normalization in equilibrium better. But I'll let Julie give the analytics behind those qualitative statements to help out.
Julie K. Streich: Yes. Thanks, Matt. For pricing, we realized approximately, and this is a gross number, approximately $30 million of price in the year that was used, as Tom said, to largely offset what we saw in terms of inflation and mix impacts and other productivity challenges that we faced. And that's across the whole portfolio. Not just -- that's not just industrial, that's across the whole portfolio, of which about $19 million was industrial.
Matt Summerville: Okay. And then how much incremental price capture should we be thinking about it in 2024 across total Barnes and then Industrial as a subset? Thank you.
Julie K. Streich: Yes. So for total Barnes, we're looking at a number that's around the $20 million range at this point. And that would be skewed towards aerospace with industrial, call it, 7 to 10.
Matt Summerville: Perfect, thank you for that color.
Julie K. Streich: Yeah, no worries.
Operator: Your next question comes from the line of Michael Ciarmoli from Truist Securities. Please go ahead.
Michael Ciarmoli: Hi, sorry guys. Just right back to Matt's question to make this clear, Julie, $155 million of revenue goes away from the divestiture. And Matt was asking the op income dollar loss for the nine months. Forgetting about year-on-year, is it fair to say the $155 million was generating 4% to 5% margin, so maybe it's a $6 million op income loss for the remaining nine months this year?
Julie K. Streich: No, I don't think that's the right way to be looking at it. We would be -- it's the $20 million, which would be closer to about like a 12% or 13% margin is what we would expect to see going out going out the door as a result of the divestiture.
Operator: And that's all the time we have for questions today. I will now turn the conference over to Tom Hook, Chief Executive Officer, for closing remarks.
Thomas J. Hook: Thank you for joining our call today. It is an exciting time as we reshape the company and position Barnes for sustainable, profitable growth. We remain laser-focused on executing our strategic business transformation and delivering solid results in 2023. Might is building, and we have a clear path to drive growth, margin expansion and cash flow in 2024 which will support our commitment to reduce debt. There are multiple work streams underway across the company for improved predictable financial performance and to maximize value. Thank you for your continued interest in Barnes.
Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
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