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spk01: Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes Second Quarter 2024 Earnings Conference 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. And if you'd like to withdraw that question, again, press star one. Thank you. I will now like to introduce Bill Pitts, Vice President of Investor Relations. Bill, you may begin your conference.
spk06: Good morning, and thank you for joining us for our second quarter 2024 earnings call. With me are Barnes President and Chief Executive Officer Thomas Hook and Senior Vice President Finance and Chief Financial Officer Julie Stryke. You can access all earnings related materials on the investor relations section of our corporate website at onebarnes.com. That's O-N-E-B-A-R-N-E-S.com. During our call, we will be referring to the earnings release 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 the press release and in the form 8K submitted to the Securities and Exchange Commission. Be advised that certain statements we make on today's call, both during the opening remarks and 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 onebarns.com. I will now turn the call over to Tom for his opening remarks. And after that, Julie will provide a review of our second quarter financial performance and details of our updated 2024 outlook. Then we will open up the call for questions. Tom. Thank you, Bill.
spk08: And good morning, everyone. Today, I will provide an update on our transformation progress and strategy execution in addition to second quarter highlights. I will also provide some color on the current macro and industry environments. Julie will then cover quarterly performance in more detail, including updates to our annual outlook. As we approach the halfway point of Barnes' multi-year transformation journey, we have executed on several significant milestones. Following my appointment as Chief Executive Officer two years ago, and after visiting our global operation shortly thereafter, We developed a more comprehensive understanding of our strengths to leverage and the business challenges to address. In early 2023, we articulated a clear and concise three-pillar strategy to move Barnes forward. First, core business execution. Second, scale aerospace. And third, integrate, consolidate, and rationalize industrial. The work to improve our underlying performance and value creation is not yet complete. However, we have made noteworthy progress and am pleased with the positive momentum. With last fall's acquisition of MB Aerospace, the largest deal in the company's lengthy history, we have significantly scaled aerospace. More recently, in the second quarter of this year, we completed the sale of our associated spring and hangy businesses. a meaningful step in rationalizing our industrial segment. Given that Associated Spring can be traced back over 165 years to the founding of Barnes, this transaction clarifies we are considering all alternatives to unlock enterprise value. For the second quarter, we generated a revenue of $382 million, an increase of 13% reported and 5% organic. Adjusted EBITDA grew 14% to $76 million and adjusted EBITDA margin was up 20 basis points. As a result of the portfolio transformation progress just discussed, Aerospace now contributes two thirds of our adjusted EBITDA. Our focus on core business execution through our top line, bottom line, pipeline growth philosophy continues to guide the actions we take across the company. Through the Barnes Transformation Office, or BTO, we are implementing cost mitigation actions to improve our competitiveness, drive operational efficiencies, enhance margins, and increase cash flow. The majority of our BTO products are focused on the industrial segment, where savings to date have largely served to offset inflationary cost pressures and unfavorable mix. We have rationalized closed or divested facilities across the globe resulting in a reduction over 500,000 square feet of commercial office and manufacturing space, reducing cost and complexity across the organization. While this is a strong start, work continues to identify additional optimization opportunities. As we have shared previously, we continue to target run rate annualized savings of $38 million by the end of 2024 and $42 million by the end of 2025. Across Barnes, we have also streamlined each of our business unit leadership teams and are now well positioned to further build on our momentum. We have complete confidence in our strategy and are committed to further actions to unlock Barnes' full growth potential. Aerospace remains a good growth market with durable demand. Barnes Aerospace's recently scaled business operation and greater customer, geographic, and platform diversification makes us a more meaningful player in the industry. Between the deal announcement and closing, we developed a comprehensive integration plan. This enabled us to quickly optimize the leadership team, pulling from both legacy Barnes Aerospace and MB Aerospace, and begin capturing synergies from day one. We identified $18 million of cost synergies to attack, and our integration progress is firmly on track with $15 million of annual run rate savings now identified and actioned. We expect to realize the full extent of those cost synergies by the end of 2025 as planned. More recently, we have seen cross-selling green shoots that should benefit the business in the future. Overall, there are several positive trends for aerospace, and we continue to forecast good performance. However, we do anticipate OEM to ramp more slowly than our prior expectations, and this will impact our outlook for the year. Julie will touch on that momentarily. In the aftermarket, we expect excellent growth to continue as the dynamic of lower OEM aircraft production output will lead to a favorable step up for the aftermarket as existing fleets stay in service longer to compensate. Across the OEM landscape, both Boeing and Airbus has spoken to production ramp delays due to existing supply chain bottlenecks and labor productivity. Likewise, we have experienced supply chain and labor efficiency challenges. We continue to actively address what is within our control, but believe market supply chain challenges are likely to persist. While we are well positioned to support the re-ramp, we have dialed back our OEM outlook for 2024. It is prudent to take a more conservative view over the near and medium term for new aircraft production as the environment is dynamic and exhibits less specificity. We see the industry OEM challenges as a timing issue, with stronger, longer-term demand still intact. We are using this transition phase to make capital investments in our Singapore OEM capabilities for new equipment in anticipation of leap engine growth when production ramps. For the aftermarket, very strong growth persists as air travel demand and aircraft utilization remain high. Pressures on the OEM side of the market will continue to support extended flying of legacy aircraft platforms, especially for important narrowbody engines like the CFM56 and V2500. Given engine component repair capacity constraints within the industry, we have significantly expanded capacity in both Singapore and East Granby, Connecticut, supporting our enduring growth expectations for the aftermarket. In addition, we are investing in European aftermarket capacity at our facility in Poland. During the quarter, at the MRO America show in Chicago, Barnes Aerospace and RTX's Pratt & Whitney Canada announced a long-term extension of a repair services agreement for the maintenance, repair, and overhaul of highly complex parts used in aero engine cases, rotating components, shrouds, and seals. Despite a more challenging OEM environment, the commercial aftermarket remains robust. This MRO agreement comes on top of multiple new long-term agreements reached with our large customers this year, including General Electric and Rolls-Royce, in addition to Pratt & Whitney. In total, the full term value of these agreements is approximately $2 billion. We have positioned Barnes as an integral global partner to customers in the aerospace supply chain with expanded geographic reach and capabilities. The strategic balance of our OEM and aftermarket capabilities is unique in the market and will serve us well as the industry works to normalize supply chain and production flow. Moving to industrial, second quarter performance was solid, albeit asymmetrical. We saw improvements in certain areas and lingering softness in others. Our molding solutions business generated solid year-over-year organic sales growth as new commercial leadership and product offerings gained traction. Importantly, we returned to sales growth in China for our automotive hot runner systems. Synvented posted its best quarterly orders and sales levers in China since the end of 2021, a positive sign. In molds, our lead times are holding at 40 weeks, a significant improvement from several quarters ago. as we drive operating rigor throughout our business. At Forreston Motion Control, the remaining business within motion control solutions after the divestiture of Associated Spring and Henge, we generated low single-digit growth in organic orders year over year, while organic sales were relatively flat. Sequentially, orders and sales improved, supported by Europe and China. Lastly, automation organic orders grew year over year, while organic sales declined. To close my remarks this morning, much has changed at Barnes in the last two years, and we remain steadfast in executing our three-pillar strategy to drive improved growth, profitability, and returns. Additional actions to lower cost and boost cash generation are in active deployment. We continue to elevate opportunities to optimize your business to unlock the full value of the company. With that, I will pass the call to Julie to cover our financial performance and outlook.
spk02: Thank you, Tom, and good morning, everyone. As a reminder, comparisons are year-over-year and looked otherwise noted. Please turn to slide eight. For the second quarter, bills were $382 million, up 13% reported, and up 5% organic. Foreign exchange was not meaningful in the quarter. Adjusted operating income was $48 million, up 9%, and adjusted operating margin of 12.4% was down 40 basis points. Adjusted EBITDA was 76 million, up 14%, and adjusted EBITDA margin was 20% up 20 basis points. Interest expense was 21 million versus 7 million a year ago due to higher borrowings given the acquisition of MV Aerospace and higher average interest rates. On an adjusted basis, the company's second quarter tax rate was 31%. Adjusted net income per share was 37 cents compared to 58 cents a year ago. Turning to our segment performance, beginning with aerospace on slide nine. For the second quarter, sales were 218 million, up 79% reported, and up 8% organic. OEM organic sales increased 1%, and aftermarket organic sales increased 19%. As Tom mentioned, lower-than-expected growth in OEM was due to a combination of external supply chain challenges and select labor efficiency issues. Adjusted operating profit of $32 million was up 56%, benefiting from the contribution of higher organic sales volumes, inclusive of pricing, and the contribution of MB Aerospace. These benefits were partially offset by the non-cash amortization of long-term acquired intangibles for the MB Aerospace acquisition and lower productivity at certain OEM facilities. Adjusted operating margin declined 220 basis points to 14.8%. Adjusted EBITDA was 50 million, up 64%, benefiting from higher organic sales and the contribution of MB Aerospace. Adjusted EBITDA margin was 23.1% versus 25.2% a year ago. As a reminder, the year-over-year change in aerospace EBITDA margin reflects the new mix between OEM, MRO, and RSP sales following our acquisition of MD Aerospace. In the second quarter, this mixed impact was approximately 230 basis points. Notably, OEM book-to-bill was 1.3 times and OEM backlog increased to $1.5 billion, up 3% from March 2024. We expect to convert approximately 40% to revenue over the next 12 months. As Tom mentioned, we are monitoring lower aircraft production levels to determine the potential impact on our OEM backlog and revenue estimates. That said, we are well positioned to capture increased aftermarket activity. Our well-balanced OEM MRO portfolio allowed us to mitigate much of the OEM volume impact on margin performance in the quarter, and we remain well-positioned to benefit from ongoing aftermarket growth. Nonetheless, with a heightened expectation for continued OEM softness in the second half, we have proactively taken additional cost reduction actions and remain focused on managing the things within our control. Moving to industrial results on slide 10. In early April, we closed on the divestiture of the Associated Spring and Hange businesses, materially reducing our exposure to automotive component manufacturing. The headline price of the transaction was $175 million, and net cash proceeds of approximately $150 million were used to reduce debt. Second quarter sales were $164 million, down 24% on a reported basis due to the sale of Associated Spring and Hange. Adjusting for this, organic sales were up 3% from a year ago. Molding solution sales increased 8%, while force and motion control was approximately flat, and automation was down 6%. Adjusted operating profit was $15 million, down 33%, reflecting the divested businesses partially offset by positive pricing and Barnes' transformation office cost initiatives. Adjusted operating margin was 9.3%, down 120 basis points. Adjusted EBITDA was 25 million, down 28%, and adjusted EBITDA margin was 15.3%, down 70 basis points. Excluding the divestiture from the prior year comparison, adjusted EBITDA growth was 12%, and adjusted EBITDA margin was up 120 basis points. Of note, while automation orders grew in the quarter, growth was slower than expected. Accordingly, we have trimmed our sales and cash flow forecast for this business, which among other factors, resulted in a non-cash impairment charge of approximately $54 million in the second quarter. This charge has been excluded from our adjusted earnings. Turning to the balance sheet and cash flow on slide 11. Year-to-date cash provided by operating activities was $3.1 million versus $42.5 million a year ago. The decrease was largely due to an increase in working capital, namely inventory, and divestiture-related income tax payments. Capital expenditures of $29.9 million were up $8.2 million versus the first half of 2023 in support of the company's restructuring program and growth investments. After adjusting for the income tax payments related to the sale of associated spring and hanging, free cash flow was negative 14.5 million. Our net debt to EBITDA ratio was 3.48 times at quarter end, exhibiting further deleveraging from 3.62 times at the end of March. We remain focused on achieving a leverage ratio of three times or lower by the end of 2024, and 2.5 times by the end of 2025. Liquidity as of June 30th was $485 million, including $66 million in cash on hand and $419 million of borrowing capacity under our revolving credit facility. There are no major debt maturities until 2028. Turning to slide 12 and our updated full year outlook. Amid an increasingly challenging backdrop, including recent developments with OEM customers, we believe it is prudent to reduce our annual guidance. We now expect total sales growth of 10% to 12%, down from 13% to 16%, and organic sales growth of 4% to 6% versus 5% to 8%. We expect aerospace sales to grow approximately 50% inclusive of a full year contribution from MV Aerospace with organic sales growth in the low double digits. For industrial, we continue to expect total sales to be down mid-teens given the divestiture. Excluding this impact, we expect sales to grow in the low single digits. Adjusted operating margin expectations for total barns of between 12 and 14% and industrial of between 8.5 to 10% are unchanged. For aerospace, we now expect adjusted operating margin of 15.5 to 16.5% of 50 basis points on each end due to a higher mix of aftermarket sales. Full year depreciation and amortization expense is now expected to be approximately $120 million versus $130 million previously, primarily driven by the timing of capital expenditures and sales-related amortization. Adjusted EBITDA margin guidance is unchanged in the range of 20% to 22%. This reflects aerospace adjusted EBITDA margin of 24% to 25% and industrial of 15% to 16%. We expect adjusted EPS of between $1.55 and $1.75, down 7 cents at the midpoint versus our April outlook. On slide 13 of our earnings presentation, we have included additional 2024 guidance assumptions for modeling purposes. In closing, while our outlook for aerospace OEM performance is tempered in the second half of the year, the longer-term outlook for the sector remains robust. We are energized by the strategic transformation of the business. Through the acquisition of MB Aerospace and divestiture of associated spring and hanging, Barnes has pivoted to a more strategic and focused player in the aerospace industry. Discipline developed through our emphasis on core business execution has created enduring business efficiency and revitalized a continuous improvement mindset. We are only at the midpoint of our journey and already see the positive impact of our three pillar strategy driving shareholder value. Operator, we will now open the call for questions.
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw that question, again, press star one. Your first question comes from Gregory Dahlberg with Wolf Research. Please go ahead.
spk04: Hi. Good morning, everyone. This is Greg Dahlberg on for Miles Walden. Good morning, Greg.
spk08: Hey, Greg.
spk04: Good morning. Maybe this one's for Julie. I think you mentioned in your prepare remarks, I was just hoping to dig a little bit more into the aero margins in 2Q. I know you mentioned the mixed dynamics. Just given the higher aftermarket lower OEA, I would have expected better margins. So can you just dig into that a little bit deeper?
spk02: Sure. Happy to do that. Yes, we definitely had the benefit of a more robust sales profile in the aftermarket segment. However, on the OEM side, as I think I may have mentioned in the remarks, we did see productivity challenges as a result of fluctuations in demand. As you can expect, there's inefficiencies that come from starting and stopping lines. from keeping people employed so that we can meet customer needs. And we're seeing the impact of that flow through on OEM impacting the overall margin position.
spk04: Got it. That makes sense. And then I guess just a quick cleanup on cash. So just given cash conversion for this year looks to be a little bit below 100. I guess, how do you think about that for 2025? Is there a path to return to 100% or exceed?
spk02: While we tend not to provide forward-looking guidance, I would offer that the blip we're seeing this year in our free cash flow is directly correlated with an increase in working capital, namely inventory, that's coming from the disruptions we're seeing in the OEM space, where there's a lag between when we can cut off supplies and inventory coming in and when the customers are changing orders. So all that said, there's no reason we should not be back to our normal cash conversion going forward.
spk04: Got it. Thank you so much.
spk01: Your next question comes from Matt Somerville with DA Davidson. Please go ahead.
spk03: Thanks. A couple questions. Just getting back to the aerospace OEM side of things, you had been having your own internal productivity challenges prior to I think what you're describing this quarter. So I'm trying to understand how much of the OEM outlook change is more Barnes internal sort of issues versus the market itself. And on the market, are you having issues procuring material, procuring things like titanium and forgings and things like that? If you could expand on all of that, that'd be helpful. And then I have a follow-up.
spk08: Yeah, certainly that is, let me first on the OEM side on productivity draw a distinction that I think is very important. We have had a few facilities that have been productivity issues of getting people rehired, retrained, and be able to get up to the output levels we want to support our OEM customers. We've done a great job of investing to fix those productivity issues. What we have right now is what I would call a labor efficiency issue. After bringing all these teams in at all our facilities to maintain the rate output to support our customers, those short-term rates have come down, the take rates have come down, but the long-term rates have held up. And it is an input problem. We have plenty of capacity and capability in our plants. We don't see really the productivity of that workforce, but we've made a conscious decision to maintain that workforce engaged not fitting out our labor or our capacity waiting for the return for those ramp that will come after this temporary repositioning of output that's an important because if you look at the inputs right now which is really the rate limiting step from castings forgings and raw materials but not really titanium because we've got plenty of buffer stock on titanium it's more other other components that would be more rate limiting there is you can see a shift because of the end market shift, particularly between the mix of Airbus and Boeing. What's happening is that what our input castings and forgings are coming are shifting as well towards Airbus higher rate, lower Boeing. That shift takes some time for that input to adjust. We're consciously not reducing labor and capability within the plant. So that's where the labor efficiency issue comes because we want to be on the ability to re-ramp our customers when they uh over the next 24 to 25 time frame as they come back up to the rates for the end market we know that we have the offset to the aftermarket to buffer that and we're positioned to handle it that way so mark the supply chain is the rate limiting stuff right now for us um and that because that makes us shifting it's going to take a quarter or two for that to absorb and we're not the constraint over the course of this period of time or going forward And we plan on making sure we can maintain pace with whatever the output rates or whatever the mix is for our customers. But it is a short-term pain because we do have to take in castings and forgings where we're tempering output demand. And we will end up having to be patient to wait for the correct casting forgings and raw materials to come in for the higher rates to go to the end market.
spk03: Got it. And then as a follow-up, I want to understand a little more, Tom, about where Barnes is at in terms of the strategic thinking on the business and how additional portfolio shaping may evolve from here and putting that in context of some of the reports out that you've indeed hired a financial advisor to evaluate strategic options for the company. Can you touch on that, please?
spk08: absolutely matt is as you know last year uh you know after we launched the operational you know vector you know what we call growth vectors the three pillar strategy that we spoke to in my prepared remarks um we've been rolling that out now for a year and a half or about halfway through that journey and we've accomplished a great deal we also have obviously over the past year deeply looked at underlying strategic optionality within the portfolio and you've already seen some of these things being implemented the acquisition of mb aerospace which we enabled off the recapitalization of the company. We've divested of the hanging business. We've divested of the associated spring business. We are very actively looking at what the portfolio should look like prospectively, how it best drives enterprise value. And we're looking at the operational and strategic optionalities we have. Nothing to communicate at this time, but we're considering everything. And as you know, we've done quite a bit to operationally and strategic already. transform the company. We're only halfway through this journey, so you can expect that there'll be more to communicate, but just nothing at this time really to update you on.
spk03: Got it. Thanks. I'll get back to you.
spk08: You're welcome.
spk01: Your next question comes from the line of Sam Struesaker with Truist Securities. Please go ahead.
spk05: Hi. Good morning, guys. I'm from Mike Trimoli. So I guess To begin, I was just hoping you guys could maybe give a little bit more color on what is giving you the confidence to maintain the industrial guide for the year, just kind of given some of the downward revisions we're seeing across that sector. Yeah.
spk08: Sam, fundamentally, as you know, we've taken a look at the entire industrial portfolio last year and have been making some major investments in transforming, you know, through the integrate, consolidate, rationalize. Each of the management teams within industrial has now been reconfigured, streamlined, and de-layered, and they're in place. They have their, what I would call, simplified and direct strategies that are under a set of business-specific themes that they're implementing. And while we started that in the molding solution business at the end of last year, we really only got into the first quarter and second quarter of this year, the automation and the, what we call, force and motion control businesses now. So those teams are in place. We have a lot of momentum behind the BTO initiatives. We now have better visibility to our sales funnels across those businesses. And while we're not expecting really great market conditions, we've digested a lot of the realities of the markets. We've launched some new products in businesses like molding solutions. It's picking up some momentum where we've lost some market share, particularly in the hot runner side of the business, which is the short cycle side of the business. And we've got confidence that those strategies are working. despite the tough market conditions. And we have confidence that they're going to continue to be deployed effectively by those new teams. And we're going to be able to meet what expectations we've laid out.
spk05: Great. Thank you. And then turning to more the Arrow OEM side, could you guys give any detail to kind of specifically what rates you are producing to now for Boeing and Airbus or any of the platforms?
spk08: Sam, that's an excellent question and one that I wish I could actually understand myself is after coming back from Farnborough, there's a great deal of what I would call uncertainty and dynamics in what the rate is going to be in 24 into 25 and when they would get up to the, what I would call stated rate of, you know, the, you know, kind of, you know, 75, you know, to 55 on the Boeing side. So I think those output rates can't be achieved right now. we're consciously making some albeit painful choices to have pain in working capital and labor inefficiency to make sure we can maintain synchrony with our OVM customers. It's clear it's going to take over a year in order to get up to the rates that the end market really is looking for. We know we're going to get mitigation to the aftermarket side, and we've already seen that. That's already reflected in our guidance. But there's somewhat of a short-term decision here to kind of – maintain over capacity and over capability and some level of labor inefficiency when we are over the second half of this year we think it's the right thing to do it's an investment in our customer relationship and our capability and we think it really at the end of the day that investment is going to pay off as the re-ramp occurs we also know that we can take some of those employees on the oe side and we can move them over to aftermarket facilities in the short term for labor support given the heavy demand on that side so there's offsets we can do But it's kind of a conscious investment decision that's going to be painful as the industry kind of re-normalizes. It's paced absolutely by casters, forgers, and raw materials inputs due to the shifting in market mix. And that shift, we feel we have to make that investment to stay within balance. So I feel that right now that we're in synchronization with our customers, literally in daily and weekly communication with them on this, almost order by order. But I think it's going to be a tough period of time for the entire supply chain across the industry to get back up the rate. And we will not. And we currently are not a rate limiting step in that. So we're going to maintain ourselves one step ahead. We've invested too much and have worked too hard to make sure that we're in this position. And while it's painful to be in this place right now, we're going to make sure that we're not a laggard and we can be a leader because we think it helps us in the aftermarket side. And when the recovery on the OE side, it's going to help us there, too.
spk05: I appreciate that. Thanks, guys. Welcome.
spk01: Your next question comes from the line of Christopher Glenn with Oppenheimer. Please go ahead.
spk07: Thanks. I wanted to start with just a clarification on you not being a rate limiter, limiting input in the air OEM industry, Tom. That suggests that the orders that the customers want from you right now is the reflection of the broad backdrop for forgers or casters, or are there some specific forgers and casters you source from that are gating you, but you're kind of putting the issue on that rather than what you're able to do in your factories if and when you get these forgings and castings?
spk08: Yeah, let me try to explain it this way, Chris. It's an excellent question. It's really the heart of the matter here is, you know, we have an end market signal that it comes, you know, six to 12 months in advance of what our demand patterns are. We plan our production around that. We have the ability to flex with the customer in the short term to send them what completed assemblies and components that we've made. And if their shift changes because of their end demand, we will end up having capacity and having produced and working capital and raw materials, products that they don't have the demand for yet. And they'll have over demand from the supply chain that we don't have castings and forgings for. So there's an asymmetry, an equilibrium imbalance there. We have plenty of machining capacity and plenty of special process capacity to meet whatever the mix is. We also have the employees to do that as well. So we're very The rate of our output is controlled by what the aero engine OEMs would like from a mixed standpoint. They can change that very quickly within a month to a quarter, but the supply chain can't respond for multiple quarters. And that right now is why the second half is out of equilibrium. We have plenty of castings and forgerings and intermediate and work in process for products that we, frankly, just have too many of. And that makes us shifting over to the opposite side of the market. There's an inadequate amount of supply chain inputs for those products that is being rapidly cured as the shift is changing. Castings and forgings and materials are shifting into that direction. And we'll be able to pick up those materials and output them very rapidly. But it does mean in the short term, higher working capital levels, which is a painful investment, but it's how we have to service and win with our customers. We have the offset to the aftermarket, which is very visible to us from our customers. We're being rewarded because we're taking OEM side pain in the supply chain right now. And we feel that we'll be able to, you know, take that working capital and purge it out in the, you know, 25, you know, timeframe to be able to renormalize and get back to equilibrium again. And in that way, we're never the rate limiting step in that investment philosophy and that positions us to win across the entire aero engine cycle with every single OEM. But it does mean in the short term it's a change in our guidance and it's a change in our working capital, which is painful.
spk07: Okay, thanks. And then, you know, you took up the aero margin guidance a bit, noting the mixed shift. But the inefficiencies were sort of the explanation of not seeing that you know, mix kind of kiss in the second quarter. Does that just reflect an adjustment period in timing where, you know, the mix kind of has more weight over the productivity issues on the OEM side in the second half versus the second quarter? Yeah, Chris, that's a fair question.
spk08: I think you can imagine when the output from us to our customer shifts quickly, we've really lost the opportunity to mitigate that OE labor efficiency argument. Now in the second, you know, exiting the second quarter into the second half of the year, knowing that the shift is occurring, we can make some choices to make that labor inefficiency smaller. We can rationalize some of the workforce that is kind of low skilled that we haven't invested in to do high amounts of training. We can shuffle some of the workforce, the high skills over into the aftermarket side. You know, we have, close facilities in the Connecticut area, in the Ohio area, and also in Singapore that have both combined OE and MRO capabilities. So we can shuffle some of that talent. So in the second half of the year, we can mitigate this kind of conscious decision we've made to retain workforce. But at the end of the day, it'll be incomplete mitigation. But since we're expecting and have seen don't want to call it insatiable demand on the aftermarket side but an extremely high level of demand in the aftermarket side we know we have that mitigator and we can more fully leverage that by shifting some of the workforce without losing them and you know at the end of the day we all know last year we had a labor productivity issue that really was vexing us because of this training loop in it and being able to attract talent so we don't want to lose the talent and have to go back through labor productivity pains in 2025 and that's why we're taking this approach Albeit, you know, like we don't get the level of upside in the aftermarket, you know, push through that we like to see. But it'll be gradually improving as we just temper that OE effect on labor efficiency.
spk07: Yeah, it makes perfect sense. Understand the strategic kind of investment and retention and everything. And your overall aftermarket capacity and throughput, you talked about three locations with expansions.
spk08: uh that should all be pretty pretty clean and straightforward to capture the demand that in the aftermarket that you otherwise could first that's fair and thank you for the question because it lets me give you the highlights that we've been supporting visit as a team we're going to bring on aftermarket capability out of our polish facilities we've been making those investments We have been already making investments well ahead of the aftermarket push in our East Granby facility and also in our Singapore facility. And you already know that we've made a lot of investments in our Westchester, Ohio facility in the aftermarket. We're going to maintain capacity head. We had a lot of very productive discussions at Farnborough with our aftermarket partners, and I see very, very strong market And a lot of it will be contingent upon our ability to maintain turnaround time with customers. But we don't see a market limit to our ability to ramp aftermarket. It's going to be purely how fast we can keep our capacity capability ramp going, which has been going exceptionally well so far. But we don't want to get ahead of ourselves in the second half of the year. But we see quite a healthy aftermarket for years to come. And that would extend from all the MRO work that we do all the way through the RSPs.
spk07: Great, thanks. Thanks for all the color. Welcome.
spk01: And that concludes our question and answer session. I will now turn the conference back over to Thomas Hook, Chief Executive Officer, for closing comments.
spk08: Thank you for joining our call today. We continue to execute on our transformation to maximize Barnes value, and we are focused on customer synchronization and discipline operations as we navigate an increasingly dynamic market. While there is more work to deliver against our profitable growth ambitions, we are making strides every quarter in executing our strategy. Thank you for your continued interest in Barnes.
spk01: This concludes today's conference call. Thank you for your participation and you may now disconnect.
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