Categories Earnings Call Transcripts, Industrials

Barnes Group Inc (B) Q1 2023 Earnings Call Transcript

B Earnings Call - Final Transcript

Barnes Group Inc (NYSE: B) Q1 2023 Earnings Call dated Apr. 27, 2023

Corporate Participants:

William E. PittsVice President, Investor Relations

Thomas J. HookPresident and Chief Executive Officer

Julie K. StreichSenior Vice President, Finance and Chief Financial Officer

Analysts:

Matt SummervilleD. A. Davidson — Analyst

Christopher GlynnOppenheimer & Co. — Analyst

Michael CiarmoliTruist Securities — Analyst

Greg DahlbergWolfe Research — Analyst

Presentation:

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. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions].

Thank you. And I will now turn the conference over to Bill Pitts, Vice President of Investor Relations. You may begin.

William E. PittsVice President, Investor Relations

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

If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at 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 slides, which are also posted on the website.

Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the Securities and Exchange Commission.

Be advised that certain statements we make on today’s call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today’s call and are described in our periodic filings with the SEC. These filings are available through the Investor Relations section of our corporate website at onebarnes.com.

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

Thomas J. HookPresident and Chief Executive Officer

Thank you, Bill. And good morning, everyone. As we exit 2022 and enter 2023, Barnes is fully focused on driving core business execution and demonstrating meaningful advancement in our transformation journey. While I am pleased with the progress and energy to-date, there remains considerable work to do. Julie will talk about our first quarter financial performance in a few moments.

I would like to take time this morning to address the meaningful transition actions underway at Barnes. There are numerous products progressing across the company that will significantly rationalize overhead as we move from a holding company structure to a more agile operating architecture.

These include streamlining corporate and segment overhead costs 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 to drive business performance and to support our Integrate, Consolidate, and Rationalize initiatives.

Our restructuring and transformation execution remains on track for phases 1 and 2 announced in July and October, respectively. Collectively, we anticipate approximately $26 million of annual savings with total restructuring costs of $29 million for these phases. We expect to achieve run rate savings in 2024.

We are now ready to announce the final significant phase of our restructuring and transformation program. Phase 3 will impact our Industrial and Aerospace segment and address functional efficiencies globally. These projects will be implemented over the next 24 months. Phase 3 will include Aerospace and Industrial facility transfers of work to generate production efficiencies and reduce costs.

Last week, we engaged with the Works Council at one of our German facilities and provided notice to employees at a second facility in Germany. Some work from these locations were transitioned to existing production facilities in Italy and China. In the US, the company has elected to freeze the benefits associated with one of its defined benefit pension plans, which will provide pension savings over time. We’ll share further program details as they unfold.

The total investment for Phase 3 is forecast to be $58 million, including $28 million of restructuring charges, $16 million of external transformation-related charges, most of which were incurred in the first quarter, and $14 million of capital investment. For phase 3, we anticipate run rate savings of approximately $27 million in 2025. We’ll continue to dedicate resources to lead the execution of this program, so we deliver 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. We’ll continue to provide quarterly updates on the progress being made with the company’s transformation.

Moving to our business operations. I’m encouraged by the organic orders and sales growth this quarter at Industrial compared to a year ago. Our targeted growth areas in the automation business and multi-cavity mold systems within our molding solutions business performed well.

The same is true at motion control solutions, which benefited from an automotive customer stocking order and sales ahead of our Bristol plant closure. We’ll see a continued benefit in the second quarter as well.

Therefore, a few top-line positives to celebrate in the quarter. However, we delivered asymmetric performance given lower organic orders and sales for our automotive hot runner product line within our molding solutions.

China was particularly soft.

Also, the sheet metal forming product lines in motion control solutions generated lower organic orders, though delivered a modest increase in organic sales compared to a year ago. The European market impacted this product line.

Regarding Industrial’s bottom line, adjusted operating margin improved modestly year-over-year. However, margins remain below our expectation. Positive pricing actions are taking hold and making a difference, but clearly inflationary pressures persist. Additionally, with the molding solutions, an unfavorable mix of lower hot runners and tire mold systems had a detrimental impact on Industrial’s margin.

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 and building the pipeline is the first step.

At Aerospace, the broad-based recovery continues with deepening customer relationships generating strong orders across single aisle and widebody platforms. The orders pipeline for both the OEM and aftermarket businesses is ahead of plan. We anticipate continued order strength with improving operational and on-time delivery performance.

Additionally, our re-energized commercial outreach is presenting growth avenues with both new and existing customers. Aerospace industry trends have been favorable, with the International Air Transport Association, IATA, recently reporting that February global domestic travel was up more than 25% versus a year ago and at over 97% of February 2019 levels. International traffic was up nearly 90% for February versus a year ago and has reached approximately 78% of 2019 levels. With China’s reopening, the Asia-Pacific region has seen a strong rebound. Airfreight metrics likewise saw sequential improvement in February.

While there are concerns regarding the global economy, 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.

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

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

Let me take a moment to comment on capital deployment in our portfolio. As previously discussed, Industrial M&A activity remains paused until core business execution is stronger and more consistent. That said, we continue to identify opportunities to drive enterprise value in a more compelling fashion via ongoing strategic evaluation of our Industrial portfolio of businesses, brands, and products.

Within Aerospace, we are evaluating targeted M&A opportunities with a focus on assets with a strong strategic fit, with significant post-close integration opportunities and revenue and cost synergies.

Before concluding, as you may have seen with last week’s announcement, Steve Moule, our Industrial segment President has resigned his position to accept a role in another company. I’d like to thank Steve for his leadership and contributions to Barnes since joining us in 2019. I know the Barnes team wishes Steve well in his new position.

In closing, we stay highly focused on driving core business execution and delivering the full value embedded in our portfolio of strong brands and leading industrial technologies. Our major restructuring and transformation program has moved past planning and comprehensively into execution. We are committed to enhancing operational and financial performance to deliver the benefits and savings of this key initiative.

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

Julie K. StreichSenior Vice President, Finance and Chief Financial Officer

Good morning, everyone. And thank you, Tom. Let me begin with highlights of our first quarter results on slide 4 of our supplement. First quarter sales were $335 million, up 7% from the prior year period with organic sales increasing 9%. Foreign exchange negatively impacted sales by 2%.

Adjusted operating income was $37.2 million this year, up 17% from an adjusted $31.8 million last year. And adjusted operating margin of 11.1% was up 90 basis points.

Net income was $13.2 million or $0.26 per diluted share compared to $20.5 million or $0.40 per diluted share a year ago. On an adjusted basis, net income per share of $0.47 was up 15% from $0.41 last year.

Adjusted net income per share in the first quarter of 2023 excludes $0.21 of restructuring and transformation-related charges. As Tom mentioned, with today’s announced phase 3 actions, we have reached the end of what we expect for major transformational actions, and our focus now turns to execution.

Interest expense was $5.3 million, an increase of $1.7 million due to an increase in average interest rates. Other expense was $1.3 million, down $300,000 from last year, primarily driven by an increase in non-operating pension income, offset in part by foreign exchange losses.

The effective tax rate in the first quarter of 2023 was 20.9%, essentially in line to the comparable period last year, though lower than 64.7% for the full-year 2022. The decrease in the first quarter effective tax rate from the full-year 2022 rate is primarily due to the absence of a goodwill impairment charge incurred in 2022, which is not tax deductible for book purposes.

Now, I will turn to our segment performance beginning with Industrial. For the first quarter, sales were $218 million, up 3% from the prior-year period. Organic sales increased 6%, while unfavorable foreign exchange lowered sales by 3%.

Industrial’s operating profit was $4.5 million versus $14.7 million a year ago. Excluding $12.1 million of restructuring and transformation-related charges in the current year, adjusted operating profit of $16.6 million was up 11%, and adjusted operating margin of 7.6% was up 50 basis points. Adjusted operating profit was impacted by lingering inflationary pressures and unfavorable mix, offset in part by positive pricing.

With respect to orders and sales for the quarter across our Industrial businesses, molding solutions organic orders increased 6%, while organic sales increased 4%. Our multi-cavity mold system product line was very strong with personal care, packaging, and general industrial end markets driving the orders and medical driving the sales. These were offset in part by weakness in our Synventive hot runner product line serving automotive end markets. For 2023, we expect molding solutions total and organic sales to be up mid-single-digits.

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

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

For the overall segment, we anticipate mid-single digit total and organic sales growth for 2023 with adjusted operating margins between 9.5% and 10.5%, the latter a slight uptick from our prior view.

At Aerospace, sales were $117 million, up 16% from a year ago. OEM sales were strong, up 11%, and our aftermarket remains robust with sales growing 27% in total. Within the aftermarket, MRO was up 19% and spare parts were up 41%. Operating profit was $18.8 million, up 14%.

Excluding restructuring and transformation-related charges of $1.8 million, adjusted operating profit was $20.5 million, up 23% from last year. Driving the performance in adjusted operating profit is the strength of the aftermarket business. Adjusted operating margin of 17.5% was up 90 basis points.

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

In our OEM business, orders were strong in the quarter, up 13%, and the book-to-bill was 1.6 times. Our OEM backlog of $793 million increased by 6% sequentially from December 2022 and was 11% higher than a year ago. We expect to convert approximately 45% of this backlog to revenue over the next 12 months. Our OEM sales outlook for 2023 is up mid-teens, 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. Also unchanged is our forecast for Aerospace adjusted operating margin of between 18% and 19%.

With respect to cash, first quarter cash provided by operating activities was $32 million versus a use of $9 million 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.

Free cash flow was $21 million versus a negative $17 million last year. Capital expenditures were $11 million, up approximately $4 million from the prior year.

With our balance sheet, the debt-to-EBITDA ratio as defined by our credit agreement was 2.39x at quarter end. When considering our cash position at year-end, on a net debt-to-EBITDA basis, we’d be approximately 2.1 times.

Our first quarter average diluted shares outstanding were 51.3 million shares and period-end shares outstanding were 50.6 million. During the quarter, we did not repurchase any shares and approximately 3.4 million shares remain available under the Board’s 2019 stock repurchase authorization.

Turning to slide 6 of our supplement. Let me share details of our updated outlook for 2023. We continue to expect organic sales to be up 6% to 8% for the year, with adjusted operating margin between 12.5% and 13.5%.

Adjusted EPS is expected to be in the range of $2.15 to $2.30, up 9% to 16% from 2022’s adjusted earnings of $1.98 per share. This revised range reflects an increase of $0.05 from our previous outlook at the low end, given the performance achieved in the first quarter. In 2023, adjusted earnings per share are anticipated to exclude a $0.56 impact related to the significant restructuring and transformation-related activities announced to date. With $0.21 recorded in the first quarter, we estimate approximately $0.24 in Q2, $0.07 in Q3, and $0.04 in Q4.

A few other outlook items. Interest expense is anticipated to be approximately $24.5 million to $25 million, driven by a higher interest rate environment. Other income of $1 million driven by non-operating pension, a full-year effective tax rate between 24.5% and 25.5%, capex of approximately $50 million, average diluted shares of approximately 51 million and cash conversion of approximately 100%.

In closing, our first quarter exceeded our internal expectations. Solid organic orders and sales to begin the year provide positive momentum going into Q2. We are modestly more positive in our earnings outlook for the year, though remain cautious of the global economic environment.

Across the company, the team is actively engaged in plans to draw down inventory and improve working capital efficiency over the course of the year.

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 from the initiatives. Doing so will drive core business execution, cash flow generation, and the value creation we expect to deliver.

Operator, we will now open the call for questions.

Questions and Answers:

Operator

Thank you.

[Operator Instructions].

And we’ll take our first question from Matt Summerville with D. A. Davidson. Your line is open.

Matt SummervilleD. A. Davidson — Analyst

Thanks. Couple of questions. First maybe starting with the Industrial business, can you quantify the magnitude of unabsorbed inflation that you encountered in Q1? Also, how much in cost savings benefited Q1? At the end of the day, what I’m kind of trying to square is the fact that margins in that business have been coming down sequentially for three or four 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. And then I have a follow-up. Thank you.

Thomas J. HookPresident and Chief Executive Officer

Sure. I’ll give you a kind of a macro answer and then I’ll let Julie follow through with numbers. 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&L. We have, over the course of the second half of last year, through the order book, largely through pricing and productivity actions, been able to offset the effect of inflation coming into the order book. But as that is cleared off into our P&L, we were behind in 2022 into the Q1 in Industrial. We’ve largely — are on a pari passu basis with inflation. But going forward, my expectations are, now that we have the pricing initiatives that have taken effect over the past six to nine months that I’ve been on board, as it’s clearing through the order book into revenue, we’ll be ahead of inflation into 2023 as the year continues to move forward.

So, kind of as you said, quantifying unabsorbed inflation in Q1, I think we’ve done a reasonable job of offsetting inflation effects in the P&L in Q1. We were definitely behind in the second half of 2022. I’ll give an opportunity for Julie to quantify the 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.

Julie K. StreichSenior Vice President, Finance and Chief Financial Officer

Hey, Matt. Good morning. So in terms of benefits coming through the P&L, in the first quarter, it’s largely benefits of phase 1 and 2 that are starting to flow in. And it was less than $2 million 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 starting in 2024. So it was a de minimis impact in the first quarter of the year. But we’re going — 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 movement that we’ve seen sequentially, there’s been a variety of factors that have contributed to that. Going from Q2 to Q3 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 Tom’s comments. We were still not keeping pace with inflation, not only in EC, but across the rest of the portfolio. We saw a bit of a dip in Gimatic in the third quarter. Then going from Q3 to Q4, there was a one-time charge that we took some inventory true-ups that we had in the fourth quarter that impacted the margins there.

And then, as Tom spoke to going from Q4 to Q1, it’s really a story about the impact of mix. In Synventive, the volume was down. The Asian market was down where margins have historically tended to be higher. We saw an increase in engineered components, as we mentioned, as we received some stocking orders. So my expectation is that we will start to see us now have steady performance in those margins over the balance of this year, steady improvement. I would not anticipate seeing the ebbs and flows that we saw in prior year periods.

Matt SummervilleD. A. Davidson — Analyst

Got it. And then as a follow-up, 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 or bottom line standpoint as we think about that in the context of the go-forward organic cadence for the Industrial business.

And then, Tom, it sounded like in your prepared remarks, phase 3 at least, if not phase 1 and 2 is fairly European heavy from a restructuring standpoint. And we know that’s not an [Indecipherable], 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, timing and how kind of you think about being able to meet the objectives you set forth from both a cost and savings standpoint with phase 3? Thank you.

Thomas J. HookPresident and Chief Executive Officer

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, but it’s not something that’s so noteworthy that we’re going to break it out, Matt.

But the good news is that we’ve retained a lot of business with the Bristol move. We’ve performed well for the customers and that product was coming in on time. And as expected as you go through this shutdown period, you typically take final stocking orders before they place the orders into the facilities that we’ll be supplying them going forward into the future. But a small reminder is, there’s some revenue that we do not plan on moving going forward because of core margins of that facility. So we’ve discontinued some of those product lines.

But in the overall mix, the product is moving well, the wind down is moving well, and the comment around really the last stocking order is more of an indication of that’s usually the final step for the final production runs before shutting down the facility and it’s on schedule. It’s positive, but it’s not a meaningful enough effect really to give you a lot of color on it.

Phase 3 is a global initiative, Matt. It affects rooftops both on the pitching and catching end, in the Americas, in Asia, in Europe and China. So we’ve comprehensively looked at overhead across the organization and there are overhead actions in this initiative that are at all levels of the organization. It also has multiple rooftops, a handful of rooftops that are affected in terms of consolidating our manufacturing footprint to drive more volume, higher capable facilities globally. There are European facilities involved. I noted that there are several in Germany already that — and as you know, we, in phase 1 and phase 2, 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.

So 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. 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. So my confidence level on cost savings in achieving the objectives we’ve laid out is very high. We have dedicated resources and a business transformation office that are doing these products. They’re separate from the business operational teams. So, the level of rigor that we’ve used is very similar to what I’ve seen used in the past. And I expect these, despite having European footprints that are affected, that they will remain on schedule and be executed just as crisply as phase 1 and phase 2 and we’ll realize the benefits in Phase 3. Just like we have in — we are realizing in phase 1 and phase 2 in terms of timeframe, investment and savings.

Matt SummervilleD. A. Davidson — Analyst

Appreciate the color. Thank you, guys.

Thomas J. HookPresident and Chief Executive Officer

Welcome.

William E. PittsVice President, Investor Relations

Thank you, Matt.

Operator

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

Christopher GlynnOppenheimer & Co. — Analyst

Thanks. Good morning. So on the restructuring, I was curious to hear about what you’re looking at for the cash spend relative to the $58 million and the $29 million P&L investment for the three phases. What — how are you thinking about the cash component of that?

Julie K. StreichSenior Vice President, Finance and Chief Financial Officer

Yes. So, Chris, for this year, the net cash impact will be about $34 million is what we’re looking at. And the majority of that will hit the first half of this year. So there was a chunk already in the first quarter associated with the first couple phases primarily. And then Q2 is another big cash outflow quarter as its forecast, and it trails off over the balance — back half of the year.

Christopher GlynnOppenheimer & Co. — Analyst

Okay. And then just taking a broad look at what you’re doing across the three phases with the enterprise, 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 that will be in conflict at times. So wondering what some of the bespoke challenges you’re seeing or anticipating and how responding as you shake things up?

Thomas J. HookPresident and Chief Executive Officer

Well, it’s been, as you know, Chris, a busy nine months since transitioning the CEO chair with Julie. And we have been consciously progressing a phased approach to this, so that we don’t result in a cultural revolution as part of this process. It’s an evolution, and we already consciously have been doing this across the industrial portfolio as a team.

It’s been a lot of communication. I’ve been to almost every industrial major operating facility globally. And as we’ve led with communication and clarity with what our plans are around our strategy to the team, we’ve recruited in leaders that have been able to execute the programs of the core business execution to back this up. And we’ve done that in a fashion that’s very professional, highly communicative, so that we end up making sure that the company understands why we’re doing these things.

This is oriented, like we say, in our initiative around integrating the company, consolidating facilities and rationalizing overhead. So they’re very clear in what the end objectives are. And each piece obviously fits that macro. So I find that communication and clarity and candor is very important to make sure that the culture is coming along.

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. And I would say, you never can communicate too much, but it is really driven by the leadership team and consistency of performance.

I think when we started this last year after just getting onboard with Julie, it’s much harder to gain momentum in this area. Today, we have a lot of momentum. We have products completing. So then, with that momentum, it’s a lot easier to undertake phase 3, which is much larger in scope. It’s across the entire company, including Aerospace, Industrial, and the overhead structures. 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 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 individual line items that are 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 evolving along to a more integrated company and in the process quite nicely. And with only nine months in, I’m quite pleased with how far we’ve gotten already.

Christopher GlynnOppenheimer & Co. — Analyst

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

Thomas J. HookPresident and Chief Executive Officer

Welcome.

Operator

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

Christopher GlynnOppenheimer & Co. — Analyst

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

Thomas J. HookPresident and Chief Executive Officer

Good morning, Mike.

Michael CiarmoliTruist Securities — Analyst

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 and there’s always been some sort of forecast embedded in the outlook outside of your control. But I just wanted to get the comfort level, maybe some of the variables. And if I look at maybe the negative variables that you outline in the deck for 2023, I don’t see any disruption in there. Just going back to this phase 3, it’s got a lot of movement, a lot of consolidation. Wanted to get a handle on the risk there. And maybe specifically on Aerospace, if you’re moving anything to new facilities into different geographies, is there requalification risk? Is there timing risk on some of those products specifically?

Thomas J. HookPresident and Chief Executive Officer

Yes. I think confidence level is high. Workload is high. There’s a lot moving in parallel, Mike. One clarification on facility consolidations, most of the facility consolidations we’ve done in phase 1 and phase 2, and also for phase 3, both in Industrial and Aerospace, we’re moving our operations and production from facilities to existing Barnes facilities that already make similar or the same products.

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 that 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 project where everything has to be requalified from day one. Those are much more complex.

And as you clearly point out, Mike, is sometimes timeline unpredictive. So the approach we’re taking is it’s very logical to aggregate our volumes into central facilities, create larger levers by having more volume through that rooftop. And that takes place through the Industrial moves. It’s taking place through the Aerospace move as part of this project.

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 this approach and not trying to do de novo projects.

And you can imagine, we have focus in two areas, core business execution and the initiatives around integrate, consolidate, rationalize. We know there’s inflationary pressures, high interest rates, global dynamics, geopolitics, potentially a looming recession, 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.

We’re not immune from global pressures. But part of the idea behind focusing one set of the team on core business execution to driving success and another on initiatives, we get both done. So given that we’re working on those two and investing heavily in those two areas to deliver results, we have a degree of cautious confidence that we’ll be able to deliver against the year when we average out the mix of all these effects, some in our favor, like Aerospace industry recovery, some potential looming negative effects, but we’ve got to manage them all and we do it actively.

And the initiatives, obviously, we’re leaning into extremely aggressively here 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. So, my confidence level is high just because we’ve already successfully been doing this in phase 1 and phase 2 to plan, and I think phase 3, while larger in scope, is a similar type degree difficulty project for us to deliver against.

Michael CiarmoliTruist Securities — Analyst

Got it. Got it. That’s helpful. And I guess not to put the cart ahead of the horse here, but if I look at the total run rate savings, $53 million, how much of that is going to actually drop to operating income? Clearly, there’s inflationary costs that are going to be sustained, whether it’s labor, what have you, but are we thinking — if I go back to pre-COVID thinking about kind of you guys operating at a 15% to 16% corporate margin, are — should we be thinking you can take this 18.5%, 19.5% with these kind of run rate savings once we get out past 2025?

Thomas J. HookPresident and Chief Executive Officer

Mike, thanks for the question. Very leading and very forward looking. But I would say that as I’ve said before, when we’ve addressed this question, my expectation is with the — even though it’s a very different world pre-COVID and post-COVID, with where Barnes is going in terms of executing against core business, and with the Integration, Consolidation, Rationalize initiatives, our first objective is to get to the return of our revenue and profitability to levels that are pre-COVID. Even though the macro economy 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 to be able to serve the markets with levels of performance that are at or above where we’ve historically been. So it’s a journey.

I’ve only been onboard nine months working with Julie and the team. We’ve made a lot of progress. But as you’ve clearly pointed out, to get back up into the mid-teens margin and higher, these plans and strategies are being invested in to deliver. We’ve got a lot of work to do. But directionally, although we have not reconfirmed what we communicated in Investor Day for December of 2019 timeframe, it’s our objective really is to continue to press very hard for the delivery — excuse me, I said 2019 and the 2021 timeframe, is continue to press very hard to return the profitability of our revenue streams back to those levels.

Michael CiarmoliTruist Securities — Analyst

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

Julie K. StreichSenior Vice President, Finance and Chief Financial Officer

Thanks.

Thomas J. HookPresident and Chief Executive Officer

Thank you.

Operator

And we’ll take our next question from Myles Walton with Wolfe Research. Your line is open.

Greg DahlbergWolfe Research — Analyst

Hi. Good morning, everyone. This is Greg Dahlberg on for Myles. One quick question on the OEM outlook. So looks like it kicked up from mid-teens this quarter to low-double-digits previously. I guess is that more confidence in OEM production and kind of supply chains in general, or can you talk through the pieces there?

Thomas J. HookPresident and Chief Executive Officer

Certainly. As we are very output driven right now, there is a lot of supply chain pressure, Greg, within the OEM as it’s ramping back up again. I think that’s well documented across a lot of industry publication and 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. Materials and castings are typically — we’re very sensitive to what is right now — we’re 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.

And in a different way, in the aftermarket side, with obviously more flying occurring, 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. We are obviously providing that kind of teams guidance, driven by just trying to catch-up with the pull of the overall industry as air volume is on single and widebodies recovering. I would say just in general is that recovery, we’re just behind on it and we’re pushing hard to continue to catch-up. And I think it’ll take most of 2023 for us to try to run this down. And as the industry continues to strengthen, we’re going to 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, et cetera, and do our plans to be able to keep pace. So I do think there’s going to be a delicate balance over the course of 2023.

Greg DahlbergWolfe Research — Analyst

Got it. Thanks. That’s helpful. And then just one quick one on leverage. So I think you guys are sitting at just around 2.4 times in the quarter. The target from the 2021 Investor Day was 2.5 times, I guess. Flooring 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?

Thomas J. HookPresident and Chief Executive Officer

I’ll let Julie take that.

Julie K. StreichSenior Vice President, Finance and Chief Financial Officer

Yes. Hey, Greg. So 2.5 times, I think, is a nice target range for us. It really depends though strategically on what’s happening. As Tom mentioned, we’re assessing acquisition options. If something were to go through that, leverage range may change. Honestly, in the current interest rate environment, we’re working to see what cash we have available. We want to minimize interest expense. 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 2.5 times.

Greg DahlbergWolfe Research — Analyst

Thank you. That’s helpful. I’ll hop back in the queue now.

Operator

[Operator Instructions].

And we’ll take a follow-up question from Michael Ciarmoli with Truist. Your line is open.

Michael CiarmoliTruist Securities — Analyst

Hey. Thanks for taking the follow-up, guys. Just on the hot runner weakness I guess into the auto market. Tom, as you’re getting into this business and kind of turn everything upside down, what should we really be looking at to gauge the health of that business? Is it model changes or is it really production or what’s kind of the view there?

Thomas J. HookPresident and Chief Executive Officer

Yes, it’s a great question, Mike. It’s different by zone. I think, for us, on the automotive hot runner side, the Synventive business for us in North America, it’s getting better penetration into the North America market, feet on the street and getting in front of customers more aggressively. In our European business, I think 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 at penetrating accounts in Europe.

We do have competitive pressure in Europe. That’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 that we have in this product line to be able to drive better margins by having manufacturing done in lower cost environments to get at profitability. But I think on the Europe side, our commercial investments in the automotive hot runners areas, they’ve been quite successful already that we’ve invested in.

The last thing would be Asia, China. There, the story is more one of product lines. As you know, in China, in particular, we’ve historically been very oriented towards selling our automotive hot runner product lines, which a very premium product line, to westernized OEMs manufacturing in China. As that market is growing and shifting to hundreds literally of HEV and EV type vehicle customers that are China-based, and we’ve not historically sold into that channel, we don’t have a product line that’s matched into that channel.

So in that area, we’ve re-energized the commercial team. We’re reorienting it away from just the large multi-national OEM automotive manufacturers towards the domestic manufacturers. And from my experience, before coming to Barnes that I had in the automotive industry and molding, especially with large operations in China, this is a distinct product line shift that has to occur between what a multi-national company and kind of like Chery Automotive, a BYD would order. So, reorienting the product line and we’re reconstituting the commercial team there.

And expectations is, overall, in automotive hot runners, should be a growth area for us, Mike. And it has not been because we have incorrect solutions by zone. So it’s a very granular answer for you, but the solution sets are different by Europe, America, and China based on the realities of those markets. And good thing about it is we’ve done a good job of diagnosing it and now we’re getting in and putting these solutions in place to drive growth.

Michael CiarmoliTruist Securities — Analyst

Got it. That makes sense. Thanks, guys.

Thomas J. HookPresident and Chief Executive Officer

You’re welcome.

Operator

And with no further questions at this time, I will now turn the call back to Bill Pitts for closing remarks.

William E. PittsVice President, Investor Relations

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 for our second quarter 2023 earnings conference call. Operator, we will now conclude today’s call.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

WBA Earnings Preview: Will Walgreens’ Q3 report bring cheer to investors?

Walgreens Boots Alliance, Inc. (NASDAQ: WBA) has been facing challenges due to higher operating costs, rising competition, and an unfavorable retail environment. These factors have put pressure on the drugstore

Main points from Accenture’s (ACN) Q3 2024 earnings report

Shares of Accenture (NYSE: ACN) rose 6% on Thursday, following the company’s announcement of its third-quarter 2024 earnings results. Although revenue and profits missed expectations, the stock jumped after the

ACB Earnings: Aurora Cannabis reports narrower Q4 loss on higher revenues

Aurora Cannabis, Inc. (NASDAQ: ACB) on Thursday reported a net loss for the fourth quarter of 2024. The company’s revenues moved up 5% year-over-year during the quarter. The Canada-based recreational

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top