Barnes Group - Q4 2023

Transcript

Operator (participant)

Good morning. My name is Krista, and I'll 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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Bill Pitts, Vice President of Investor Relations. Bill, you may begin your conference.

Bill Pitts (VP of Investor Relations)

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 dot com. During our call, we will be referring to the earnings 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, 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, which are available on the Investor Relations section on onebarnes.com. I'll 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'll open up the call for questions. Tom?

Thomas Hook (President and CEO)

Thank you, Bill. Of the 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 five. I am pleased with the noteworthy progress made in the execution of Barnes' business transformation strategy, encompassing our three pillars: core business execution, scale 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, I'm proud of our team accomplishments in the 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 six in our first strategic pillar, Core Business Execution. As I have 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 seven on our second strategic pillar, Scale Aerospace.

In 2023, we made a massive leap with the 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 eight and our final strategic pillar: integrate, consolidate, and rationalize our industrial segment.

During the year, we formed a 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 and 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 nine, 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 have a clear vision for Barnes, a solid strategy that we are 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 priority 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 (President)

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 strengths of the combined business. Please turn to slide ten. 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 organization structure is in place, including a 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're 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 toward 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 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 a 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 of 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 billion-dollar 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 Streich (SVP of Finance and CFO)

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%, 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 a 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. The 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 continue 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 continue 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 -11% to revenue and -10% to Adjusted EBITDA. For the year, we expect total sales to be up 12%-16%, with organic sales up 4%-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%-14%. This reflects aerospace adjusted operating margin in the range of 14.5%-16% and industrial in the range of 8.5%-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%-22%. This reflects aerospace adjusted EBITDA margin of 23.5%-25% and industrial of 15%-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%-27%, adjusted operating margin of 11%-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 (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw that question again, press star one. Your first question comes from the line of Matt Summerville from D.A. Davidson. Please go ahead.

Matt Summerville (Managing Director and Senior Research Analyst)

Thanks. Morning.

Thomas Hook (President and CEO)

Morning, Matt.

Matt Summerville (Managing Director and Senior Research Analyst)

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 Hook (President and CEO)

Yeah, 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 meant 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, we still are, you know, leading from a mold standpoint, globally, very effectively on the multi-cavity mold. Hot runners, asymmetric story.

You know, 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 mid-range 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 and has also allowed us to invest more in the go-to-market focus and commercial market excellence will stabilize and has stabilized the hot runner sales funnel that we're feeding. We still are concerned about China market weakness. We have, you know, seen a still good market in the Americas.

It's not a, you know, for us, it's more of the hot runners on 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, but 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're 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, you know, kind of mid-single digits across those product lines.

If we get more output of multi-cavity molds, we could, you know, have an upside opportunity to that. But I think, hot runners, for the most part, and the hot halves, part of the product lines globally will be a kind of a recovery year from some of the market share loss in, 2023. Hopefully, Matt, that answers that question.

Matt Summerville (Managing Director and Senior Research Analyst)

... Yeah, I appreciate the detail. Flip it over to aerospace. I think you 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 (President)

Yes, and thanks, Matt. It's Ian, I'll take that. Yeah, we certainly had some productivity challenges, primarily at two of our OEM locations, in Q4. But, you know, we saw good progress at all our other fifteen 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 site to ensure we have a more stable workforce, and we're now investing heavily in the right training and employee engagement to ensure we 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 at 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 (Managing Director and Senior Research Analyst)

Got it. Thanks, guys. Okay, thank you.

Operator (participant)

Your next question comes from the line of Christopher Glynn from Oppenheimer. Please go ahead.

Christopher Glynn (Managing Director and Senior Analyst)

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, you know, core earnings in 2Q to 4Q versus, you know, ancillary impacts, around, you know, stranded costs or, you know, kind of transaction related adjacent that maybe you don't adjust out?

Julie Streich (SVP of Finance and CFO)

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. You know, 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 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 it a little more color around what's driving the $0.47 picture-

Christopher Glynn (Managing Director and Senior Analyst)

Sorry, Julie, I think I saw a $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 Streich (SVP of Finance and CFO)

All right. 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 what's staying in. So the Reg G items, I apologize for that, Chris. I was answering a different question. Those include, yes, transaction costs, loss on gain of... The impact of the gain on sale and some pension related items.

Christopher Glynn (Managing Director and Senior Analyst)

Okay. So the core earnings loss isn't part-- I'm wondering what the kinda-

Julie Streich (SVP of Finance and CFO)

Yes, so

Christopher Glynn (Managing Director and Senior Analyst)

operational... foregone

Julie Streich (SVP of Finance and CFO)

The-the

Christopher Glynn (Managing Director and Senior Analyst)

operational earnings.

Julie Streich (SVP of Finance and CFO)

Correct. So that is what I was describing, the core operational impact-

Christopher Glynn (Managing Director and Senior Analyst)

Oh.

Julie Streich (SVP of Finance and CFO)

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 non-cash. There's about $24 million of intangible amortization that flows through the P&L, and so the $0.19 dilution is all non-cash, and we expect to exit the year approximately neutral to accretive on the deal.

Christopher Glynn (Managing Director and Senior Analyst)

Okay. And then the automation, how do you guys view that? You know, 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 Hook (President and CEO)

Certainly. Well, as the automation business for us, we've done a refresh in 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. You know, we've been traditionally, you know, mechatronics gripping. 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. To 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 it as a nice strategic fit into the tooling side. You know, we're tool makers a lot on the industrial portfolio between molding, automation, tool and die industry. So that's the fit from the automation business strategically.

It sells 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, you know, demand, labor productivity, automation, and robotics in the automation 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, you know, as we've exited or exiting Associated Spring and Hänggi, we're kind of focusing industrial on tooling 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. We think we've made the required adjustments in leadership and focus of the business for go-to-market. It'll 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 (Managing Director and Senior Analyst)

Okay. So you don't see it as being handicapped in the channel, not being part of a broader automation portfolio?

Thomas Hook (President and CEO)

Right now, I think we're focused, you know, 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 basics, fundamental of generating our organic growth and profitability by pricing correctly, productivity. 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, once 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 (Managing Director and Senior Analyst)

Okay, great. And last one from me. You have the 30%-32% tax rate guide. I'd like a clarification on, you know, how that should translate to the adjusted tax rate. And, you know, that level of taxation is certainly an outlier. So curious how that, you know, what your expectations are for, you know, general tax rate paradigm, understanding that there are a lot of, you know, influences on deductibility and nondeductibility in the current year.

Julie Streich (SVP of Finance and CFO)

So going forward, the 30% tax rate would be our standard tax rate in terms of... I wanna 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 (Managing Director and Senior Analyst)

Okay, we'll pull that back more offline. Thank you.

Julie Streich (SVP of Finance and CFO)

Okay, thanks.

Operator (participant)

Your next question comes from the line of Myles Walton from Wolfe Research. Please go ahead.

Myles Walton (Managing Director)

Great, 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, Ian, you went through, sort of LTAs on the, 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 and, and 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'll see a lot of these LTAs actually pop into backlog in the near term.

Ian Reason (President)

No, thanks, Myles, and 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, has just over $2.5 billion of order value across about seven LTAs. So we're seeing very strong orders. It's just a timing issue. We'll be announcing a number of new LTA signatures, you know, as we go forward, but absolutely no issues with orders, a very strong backlog. And as we all know, a very, you know, growing demand on both the OEM new build and the aftermarket. So we're seeing strength on both sides of the business.

Myles Walton (Managing Director)

... Okay, and I think that the margins were expected to be a bit stronger in Aero, they ended up a bit lighter. Is that simply RSP mix not coming through or something else? And then, 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 (President)

It's certainly on the mix. You know, RSP, you know, is, you know, is a big part of the driver there, and of course, we're bringing MB in, you know, which doesn't have an RSP program. You know, that's gonna drive, you know, our overall margin down, but of course, you know, it's a good, it's a good story. It's just that the RSP, you know, is, is a bit of a heavy, heavy weight there in terms of its profit contribution. But looking, looking forward, you know, we expect to see margin, margin accretion.

You know, 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, you know, that, those sales fall to the bottom line in a very predictable way. So, you know, 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. You know, the aftermarket business, you know, is something that is very cyclical, but we are seeing a very big upcycle and demand, certainly in Q1, across RSP and, our repair shops have been phenomenally high. So we're seeing that come strong now, you know. Does that continue strong throughout the year? Do we see cycles?

You know, 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, you know, particularly on the narrow bodies.

Myles Walton (Managing Director)

Okay. And last one, Julie, on cash flow. The conversion I see on the slide is 100% of GAAP, but obviously, you've got a very large adjusted number in there that it sounded to the answer to Chris's question, was largely non-cash.

Julie Streich (SVP of Finance and CFO)

Mm-hmm.

Myles Walton (Managing Director)

And so I'm curious, from a working capital perspective, I'm backing into something like a $40 million consumption. Is that correct?

Julie Streich (SVP of Finance and CFO)

A $40 million consumption from what, what area? There's-

Myles Walton (Managing Director)

In 2024. In 2024, to get to $75 million-$90 million of free cash flow, what, what is the working capital outlook that you have for 2024?

Julie Streich (SVP of Finance and CFO)

The working capital outlook, let me, let me get to that one. It is... Let me get back to you on that one-

On the follow-up call. I do have it, it's just not right in front of me.

Myles Walton (Managing Director)

Okay, no worries. Thanks again.

Operator (participant)

Your next question comes from the line of Michael Ciarmoli from Truist Securities. Please go ahead.

Michael Ciarmoli (Managing Director)

Hey, morning, guys. Thanks for taking the questions. Just, just a couple of follow-ups or 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, I think I heard the operational impact from the divestitures is $0.28, and I, I think you called out maybe 50 basis points of margin impact from the divestiture. So I guess you're losing $200 million at, at maybe a 4% margin. That $0.28 sounded, sounded high. So did, did I have that right?

Julie Streich (SVP of Finance and CFO)

Yeah, 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, you know, neutral to accretive.

Michael Ciarmoli (Managing Director)

Okay. What, what's the $0.28 operational impact? It doesn't seem to reconcile with the 50 basis points margin.

Julie Streich (SVP of Finance and CFO)

So from a dollar perspective, it's about a $20 million outflow of operating income.

Michael Ciarmoli (Managing Director)

Twenty-

Julie Streich (SVP of Finance and CFO)

Remember, the reason it might not be reconciling for you is that we have a quarter of the business. 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 (Managing Director)

So you're losing $20 million of operating income on that? That, that seems to be fairly high margin then. What's actually in all of that operating income? I mean, that just... I thought this was more of a margin dilutive business that you were selling.

Julie Streich (SVP of Finance and CFO)

Yeah. 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 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 Hook (President and CEO)

Basically, Mike, they're just the end of life program-

Michael Ciarmoli (Managing Director)

Okay

Thomas Hook (President and CEO)

They're the end-of-life programs, and for the transfers, that's what the Bristol associates from Bristol shut down.

Michael Ciarmoli (Managing Director)

Okay

Ian Reason (President)

... ran out and ended.

Julie Streich (SVP of Finance and CFO)

Yep.

Ian Reason (President)

They're a one-time benefit, one-time revenues for 2023, and they weren't going to repeat under any circumstances prospectively.

Julie Streich (SVP of Finance and CFO)

Nope.

Michael Ciarmoli (Managing Director)

... 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 Hook (President and CEO)

Mike, Mike, going out in industrial, as you know, and I'll focus my comments away from, you know, even though there's no quarter of Associated Spring Hänggi in here, I'm gonna focus on Molding Solutions, motion control solutions, and automation. Each of those pieces we've, you know, kind of done some streamlining in what we call the, you know, integrate, consolidate, rationalize, industrial. So we've made a lot of investments there to streamline our approach to the businesses, focus management teams on 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.

You know, 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. Now, 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, you know, more full year benefits and also see some of the returns in those per, you know, 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 integrate, consolidate initiatives that have already been completed.

So we're gonna end up seeing the benefits of those come through. We understand and are recognizing 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've already made to improve those businesses and make sure we get the performance and returns out we are expecting.

Michael Ciarmoli (Managing Director)

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 these as more traditional kind of industry orders that you know, without any upfront investment?

Ian Reason (President)

No, 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-

Michael Ciarmoli (Managing Director)

Okay.

Ian Reason (President)

-in there and some volume expansions, but no, these are just normal orders, and not requiring any significant investments at all.

Michael Ciarmoli (Managing Director)

Okay, perfect. I'll jump back in the queue. Thanks.

Julie Streich (SVP of Finance and CFO)

Hey, 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 (participant)

Your next question comes from the line of Matt Summerville from D.A. Davidson. Please go ahead.

Matt Summerville (Managing Director and Senior Research Analyst)

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 overearning in 2023, can you please make that normalization? I just want it to be crystal clear how much OP dollars you're forgoing. Thank you.

Julie Streich (SVP of Finance and CFO)

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, 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 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 (Managing Director and Senior Research Analyst)

Perfect. And then, just final one on, 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 Hook (President and CEO)

Yeah, 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. You know, 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 business is got to, you know, 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. Since my 18 months in this company, it's been one of the primary customer interface negotiation points.

I'll let you know, Julie, you know, give you know the analytics behind it, but 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, you know, 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 securing supply chains and the lower inflationary environment make that normalization and equilibrium better. But I'll let Julie give the analytics behind that, those qualitative statements to help out.

Julie Streich (SVP of Finance and CFO)

Yeah. Thanks, thanks, Matt. You know, for pricing, we realized approximately, and this is a gross number, approximately $30 million of price in 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 industrial. That's not just industrial, that's across the whole portfolio, of which about $19 million was industrial.

Matt Summerville (Managing Director and Senior Research Analyst)

Ah, okay. And then how much incremental price capture should we be thinking about in, in 2024 across total Barnes and then industrial as a subset? Thank you.

Julie Streich (SVP of Finance and CFO)

Yeah. 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, you know, call it $7 million-$10 million.

Matt Summerville (Managing Director and Senior Research Analyst)

Perfect. Thank you for that color.

Julie Streich (SVP of Finance and CFO)

Yeah, no worries.

Operator (participant)

Your next question comes from the line of Michael Ciarmoli from Truist Securities. Please go ahead.

Michael Ciarmoli (Managing Director)

Hey, sorry, guys. Just to 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 the year-on-year, is it fair to say the $155 million was generating 4%-5% margin, so maybe it's a $6 million op income loss for the remaining nine months this year?

Julie Streich (SVP of Finance and CFO)

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 a 13% margin, is what we would expect to see going out the door as a result of the divestiture. W-

Operator (participant)

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 Hook (President and CEO)

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. Momentum 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 (participant)

This concludes today's conference call. Thank you for your participation, and you may now disconnect.