Jul 25, 2014
Executives
Bill Pitts - Director, IR Patrick Dempsey - President & CEO Chris Stephens - SVP, Finance & CFO
Analysts
Scott Graham - Jefferies Matt Summerville - KeyBanc Capital Markets Josh Chan - Robert W. Baird Amit Mehrotra - Deutsche Bank Pete Skibitski - Drexel Hamilton Christopher Glynn - Oppenheimer Edward Marshall - Sidoti & Company
Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Barnes Group Earnings Conference Call. My name is Patrick and I will be your moderator for today.
At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.
(Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to Mr. Bill Pitts, Director, Investor Relations.
Please proceed.
Bill Pitts
Thank you, Patrick. Good morning everyone and thank you for joining us for our second quarter 2014 earnings call.
With me are Barnes Group's President and CEO, Patrick Dempsey; and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens. 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 bginc.com.
During our call, we will be referring to the earnings release supplement slides, which are also posted on our website. Our discussion today includes certain non-GAAP financial measures, which provide additional information that 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 SEC.
I want to remind everyone 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 Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com.
Before we begin our prepared remarks, I want to remind everyone that our financial results discussion is based on continuing operations. We will now open today's call with remarks from Patrick, followed by a more detailed review of the quarter's results, and our updated 2014 outlook discussion from Chris.
After that, we'll open up the call for questions. Patrick?
Patrick Dempsey
Thanks, Bill, and good morning everyone. For the second quarter Barnes Group delivered strong financial performance.
Sales increased 20%, up 6% on an organic basis. Adjusted operating income increased 37%, with adjusted operating margin reaching 15.4%, up 190 basis points from last year's second quarter.
Our Industrial segment had a great quarter, as overall orders were solid, organic growth returned, and we met significant progress in moving beyond the first quarter's operational challenges. Also the end markets in which we participate, in particular, industrial machinery and global light vehicle production continued to be favorable.
Geographically, Europe continues to be a good growth story for us, and feedback from our customer here indicates there need to maintain production, through the customary summer vacation period. Asia likewise is performing at or above expectation.
If any softness exists I would say that the Americas continue to reflect slower growth for us. All in all our industrial portfolio is well positioned to deliver an excellent 2014.
Our European based manufacturing businesses all generated meaningful revenue growth during the quarter, fueled by robust tool and dye, global automotive production, and medical device end markets. We continue to make, consider those progress on new components we are developing that support the growing trends towards higher fuel efficiency standards.
In particular, with our stamping technology in gas direct injection fuel systems, where we are producing higher unit volumes on a more consistent basis. At Associated Spring, revenues were down in part due to the Saline closure.
Yet operating profit, dollars and margins improved. That business has significantly transformed itself over the last several years by focusing on co-engineered products that deliver greater value to our customers.
By shifting the focus away from commodity like products, coupled with productivity gains, there sustained performance improvement has been impressive. Within the quarter, among the best performing operations were our two newest businesses Synventive and Manner.
Synventive had a record quarter for both orders and sales driven by strength in the European and Asian regions. Manner also delivered another very strong contribution this quarter.
Sales were $36 million and order activity was very robust. Manner's first half sales reached the record level.
But as we cautioned in the first quarter, the expectation for the second half is more tampered given summer holidays and a seasonally lower fourth quarter. At aerospace, the positive long-term prospects for the industry remain intact.
Having just recently returned from the Farnborough Air Show, our discussions with key customers reinforce this view. For the OEM business, demand for commercial passenger jets continues.
Recently, Boeing increased its 20-year outlook for aircraft demand providing further support of this assertion. As we have mentioned before, we continued to invest in new products and process introductions to secure our position on the next generation of commercial jet engines.
With respect to the aerospace aftermarket, airlines have maintained above average demand and improved profitability. And this is anticipated to benefit our MRO business and spare parts over the long-term.
Our OEM business delivered 18% sales growth in the quarter and backlog remained healthy. Also during the quarter, our Barnes's Aerospace Fabrications Ogden, Utah Division was awarded the Shingo prize.
This award is internationally recognized as one of the world's most prestigious honors for operational excellence. And we are very proud of our Ogden's team, given the extreme high standards and rigorous criteria it takes to win the Shingo prize.
In the aerospace aftermarket, sales in our maintenance repair and overhaul business were up 5%, while our spare parts business was down 12%. In our MRO business we entered into a second component repair program or CRP with GE during the quarter.
This CRP agreement provides Barnes Group as one of a few GE license suppliers, the right to sell certain aftermarket component repair services for the CFM56 family of engines over the life of the program directly to the World's Airlines and engine overhaul jobs. In addition, the agreement extends existing contracts under which we currently provide these services directly to GE also for the life of the program.
As the CFM is one of the most successful engines in aviation history, with a worldwide in-service fleet of over 20,000 engines according to Aviation Week, this program is expected to benefit Barnes Aerospace for many years. With respect to our fee program, our spare parts business, we saw variation in activity for the two engine family to make up these program with last quarter's trend reversing as the larger portion; the CFM56 family experienced a decline in net sales, while the CF6 engine family saw growth.
It's important to keep in mind that the RSPs are a valuable high margin business within our portfolio and we expect that to be the case for many years to come. Given our first half results, we now expect the full year growth in spares to be slightly down to flat in 2014 versus 2013.
To close my prepared remarks, we are very pleased with the operational progress made during the second quarter and the financial results achieved. The continued execution of our strategy to provide differentiated products, processes, systems, and services with higher content from intellectual property and innovation delivered solid profitable growth and we expect more to follow.
We will continue to invest in our engineering capabilities and manufacturing technologies and look to extend a reach deeper into global markets. The outlook for 2014 is very positive and I believe that Barnes Group is well-positioned for value generation over the long-term.
With that, let me now pass the call over to Chris.
Chris Stephens
Thank you, Patrick, and good morning, everyone. I will begin by highlighting key points of our second quarter 2014 results and then end with our updated 2014 guidance.
Turning your attention now to Slide 2 of our supplement. Second quarter sales were $322 million, up 20% over last year, driven by organic sales growth of 6% and the contribution of $36 million of Manner sales, as Patrick noted.
For the quarter, income from continuing operations was $30.2 million or $0.54 per diluted share compared to $0.17 in the prior year period. On an adjusted basis, income from continuing ops was $0.59 per share, up 26% from $0.47 a year ago.
Excluded from the second quarter 2014 adjusted earnings from continuing ops are the impact of Manner's short-term purchase accounting adjustments of $1.9 million pretax or $0.02 per diluted share and costs related to the close of production operations at Associated Spring's Saline, Michigan facility which were $2.3 million pretax or $0.03 per diluted share. Last year's second quarter excludes the tax charge of $0.30 per diluted share.
As Bill previously mentioned, we have provided a GAAP reconciliation to these adjusted results as part of our press release. Now let me add to Patrick's comments regarding segment performance beginning with Industrial.
Second quarter sales were $213 million, up 25% driven by Manner's sales contribution, organic sales growth of 2%, and favorable FX of 2%. Operating profit of $28.8 million was up 37% from $20.9 million last year primarily benefiting from Manner's profit contribution and includes Manner's short-term purchase accounting adjustments and Saline restructuring charges.
Excluding these items, adjusted operating profit was $32.9 million, up 57% from a year ago, with adjusted operating margin of 15.5%, up 320 basis points from last year. At aerospace, second quarter sales were $109 million, up 13%.
Similar to the first quarter sales increases in OEM and aftermarket repair and overhaul businesses were partially offset by lower spare part sales. Aerospace backlog was $526 million at the end of the second quarter.
Operating profit of $16.6 million was up 9% from $15.2 million last year driven by the profit contributions of increased OEM and MRO sales, partially offset by higher employee related costs and lower profits in our higher margin spare parts business. Operating margin decreased 50 basis points to 15.2% The company's effective tax rate from continuing operations for the second quarter of 2014 was 27.7%, compared to 71.6% in the second quarter of 2013, and 32.8% for the full year 2013.
Included in the second quarter and full year 2013 income tax is a charge of approximately $16 million associated with the April 2013 U.S. tax court's unfavorable decision.
Excluding this charge, the full year 2013 adjusted effective tax rate was 17.5%. As we discussed on prior calls, the drivers of the tax rate increase include a projected mix of earnings attributable to higher tax jurisdictions, the expiration of certain tax holidays, and an increase in planned repatriation of a portion of current year foreign earnings.
Regarding share count, our second quarter average diluted shares outstanding was 55.9 million shares, while quarter-end basic shares outstanding were 54.3 million. We did not repurchase any shares during the second quarter and 2.4 million shares remain available for repurchase under existing board authorization.
Cash generation continues to be good as year-to-date cash provided by operating activities was $65 million essentially in line with last year's first half. Free cash flow, which we define as operating cash flow less capital expenditures, was approximately $39 million year-to-date versus $45 million last year, given that our year-to-date capital expenditures were $26 million in the first half of 2014 versus $20 million last year.
With respect to debt, our quarter-end debt to EBITDA ratio remained at 2.3 times unchanged from both the fourth quarter of 2013 and the first quarter of 2014. During the quarter, we announced the redemption of the remaining balance of our 2007 3.38% Convertible Notes.
The timing of the convertible call was dependant on the outcome of growth opportunities available to us like the new aerospace CRP program. Once we determine the financial need and the required funding, we decided to redeem the notes.
We expect to settle the redemption or conversion of the notes in cash during the third quarter for a total expected cash outlay of approximately $75 million. Now let me turn to our updated 2014 continuing outlook on Slide 3 of the supplemental slide.
We now expect total sales growth of between 15% and 17% and organic sales growth of between 5% and 7%. Adjusted operating margins is forecasted to be in the range of 15% to 15.50% and adjusted EPS from continuing operations is expected to be in the range of $2.23 to $2.33 per diluted share, up 22% to 27% from 2013 adjusted EPS of $1.83, reflecting our first half performance, our new CRP agreement, and favorable end markets.
Adjusted cash conversion is projected to be approximately 100% of net income in 2014, and our full year 2014 guidance excludes an estimated $10 million pretax or $0.13 EPS impact of short-term purchase accounting adjustments related for Manner and approximately $7 million pretax or $0.07 EPS impact of Saline closure cost. So in closing, we remain committed to driving profitable growth throughout our portfolio.
The strength of our recent Manner acquisition, in conjunction with the benefits derived from heightened organic investments over the last several quarters, is contributing to our improved performance. We continue to evaluate our portfolio of businesses, while seeking additional opportunities to expand, all with an eye on delivering the long-term objective of increased shareholder value.
Operator, we will now open the call for questions.
Operator
(Operator Instructions). And your first question comes from the line of Scott Graham with Jefferies.
Scott Graham - Jefferies
I wanted to maybe get underneath on the spare situation here. This has been a kind of a thorn in the side for a while and I was wondering, is there a point at which we may be go back and look at the -- some of these agreements in total?
Because it just doesn't seem as if in numbers that we're seeing at that business are trying to jiving with what the market is seeing. Now if -- certainly, if I'm looking at that, please let me know that business seems to be underperforming for some time.
Just may be wondering, if you can give us little more color on what you're thinking on the spare side?
Patrick Dempsey
Yes, Scott. Relative to the RSP programs, when we entered into them, we entered into them with a view to them being a very long-term value for our position.
And in doing so, as you know the -- we participate on both the CFM56, as well as the CF6, and the programs life are over the life of the engines. And what we believe is that monitoring them on a quarter-to-quarter basis is going to tend to be lumpy.
At the same time, overall we believe that there are great addition and a great piece of our overall portfolio, as you know they are high margins. And so we're not -- I'm not necessarily overly concerned relative to quarter-to-quarter and more with a view to the longer-term and the fact that they are great part of our portfolio.
Scott Graham - Jefferies
Well, I just missed you on that Patrick. I'm looking at longer-term.
But I measure longer-term certainly like you past one quarter and this business is -- from what I can see from my model, has kind of been down almost every single quarter since 2012. That to me constitutes at least an element of longer-term, that's kind of what I was getting at.
That it just doesn't seem as if there is a correlation at all between the bigger business inhales the CFM56 and what you're getting here from GE?
Patrick Dempsey
Yes. Well, in terms of the timeframe that you referenced recognize that we have been going through a transition on the program to where back in the 2012 timeframe, we were still working our way through a series of management fees that were transitioning into place as agreed upon in the early stages of these programs.
The -- again, from a CFM56 standpoint, the engine itself as I mentioned in my prepared comments there is estimates of up to 20,000 engines in the installed fleet plus the other part of our program the CF6 was on the back end of its product life cycle, also continues to be -- to have a life along outlook. The correlation to any particular quarter where is difficult to tie down, yet again I look at it from an overall perspective and I think that there are some factors that might be influencing any given quarter in terms of whether that be one-time orders or one -- or the stock-in from a particular -- from the distribution channel or whether it's a reflection of just the buying patterns for our particular spare parts, which are as subset of General Electric's overall spares which is made up of many engines, where we're on two of those many.
Scott Graham - Jefferies
All right. Fair enough.
I was also just wondering about the organic side on industrial. If we were to exclude Associated Spring from industrial, what would be organic look like?
May be it's a question for you Chris.
Chris Stephens
Sure Scott. And did you -- you mentioned sales or on the order side?
Scott Graham - Jefferies
Organic sales.
Chris Stephens
Organic sales, yes. So organic sales or our industrial base business, we talked about that as roughly being 2%.
When we look at the Associated Spring business, orders were down roughly 5% to the quarter and sales for that business was down roughly 6%. We attribute about 2% to 3% related to Saline, so a partial driver in that reduction.
But again, as kind of we commented in our opening comments, the transformation of that portfolio and what it's contributing on even though its flat to down sales, the margin profile has significantly improved and very encouraged by overall performance.
Scott Graham - Jefferies
Yes, that's definitely be reading through the margins for sure?
Chris Stephens
Yes.
Scott Graham - Jefferies
So if we X out Associated Spring, which I know is a big piece here, which you don't want to really do per se, but that was the principal -- I mean, from Patrick's comments it sound to me like Europe up and America is down in industrial but if we were to X out Associated Spring, would the Americas have been up?
Chris Stephens
Yes, absolutely.
Patrick Dempsey
And I would just add that the Americas as far as have been slow and as you mentioned Associated Spring is dampening our top-line growth as a result of the actions we took on Saline. But overall the industrial business from a orders perspective and from a growth perspective continues to be robust.
Scott Graham - Jefferies
Got you. Okay.
And if I may just last question I noticed that the aerospace backlog has been kind of walking along in this sort of $525 million to $550 million territory hasn't really grown on a year-over-year basis much since the first quarter of 2013. Is this a concern for you guys with respect to aerospace OE revenues for 2015 or some of the programs that you're investing that you're doing do you have may be you're in a sight on the benefits of those investments whereby the backlog just start to grow in the second half of the year again could you give us a little color on that as well?
Patrick Dempsey
Yes, relative to backlog in aerospace at the current level its $526 million. We believe that is at a very healthy level.
Overall there are a number of programs which are steady space within that. So if you say current production rates against the 777 as an example and yet at the same time some of the development works that we have been doing on the A350 will continue to ramp with essentially into service in the fourth quarter.
I will highlight that my overall view of how the OEs are managing the releasing of orders has become much more disciplined and as a result they're looking to keep the supply chain somewhat as streamlined to ensure that it's accurately reflecting demand. And so in doing so we are watching some lumpiness quarter-to-quarter but at the same time nothing that's jumped out as being a concern.
Operator
Your next question comes from the line of Matt Summerville with KeyBanc Capital Markets. Please proceed.
Matt Summerville - KeyBanc Capital Markets
Good morning. Just a follow on the spares, how much is that business down year-to-date?
Patrick Dempsey
Just looking it up for you now.
Chris Stephens
Roughly 8%.
Patrick Dempsey
8%.
Chris Stephens
Yes.
Matt Summerville - KeyBanc Capital Markets
So that means this is going to be flat to down slightly you're looking for mid-to-high-single digits it sounds like growth in the back half of the year why should we believe that's going to happen?
Patrick Dempsey
Well, I would say Matt that the relative to the spares business that has as I just indicated being somewhat lumpy and at the same time we think that the overall macro fundamentals of aerospace aftermarket continues to look towards a positive trend. And so into our outlook we're building on an expectation of benefit from some of that positiveness.
Matt Summerville - KeyBanc Capital Markets
With respect to the CRPs of $40 million or so you have invested year-to-date can you size up the revenue and/or accretion opportunity you see from that looking out over the next couple of years and how the return profile looks compared to the RSPs?
Chris Stephens
Matt, good question. So we started off in the last year with CRP1 the first one on primarily on CF6 the second one being on CFM with CRP2.
So the total actually cash outlet for CRP2 will be the second one on CFM56 which we're excited about will be $80 million. We spent $41 million year-to-date as you will see when the Q comes out.
As we looked at that program this again is over the life of the program for CFM. This existing work that we do for GE today has now provided a license to serve over the long-term.
As you compare I would say the returns on our, I would say investment profile looking at them to be actually better than and less risky in our mind than an overall I would call it acquisition. You mentioned RSPs; the difference between the two is we're talking about an aftermarket service agreement where we provide a service versus a spare part sale.
So it's not going to be as rich as our revenue sharing programs but we do feel it's an identifiable market we're doing the work today. So it's existing business that will continue to extend through life of the program.
So we feel very good about that how that's going to provide return to Barnes Group long-term.
Matt Summerville - KeyBanc Capital Markets
Is there any way to sort of frame kind of, if year one is 2014 realized and you don't have CRP2 the whole year what the EPS accretion is from both of these this year?
Chris Stephens
Yes, so good comment. So we have a part of that -- part of the increase in our guidance although $0.03 but kind of lifting that up two primary drivers, one we've got the benefit of CRP2 kicking in at the same time Manner's performance given second quarter was excellent again.
And we're looking at those two pieces of our business providing that confidence. Like CRP1, you are in a year of transition in the beginning parts; remember these are providing us licenses to go to the market.
It's going to take us sometime as we mentioned on CRP1 to ramp up that marketing offerings, if you will. But we're encouraged by what we've seen so for but there is still lot more work to be cautious there is still a lot more work for our teams to do, to really capture the value of what we signed up to and these over the life of the programs.
We're talking about benefits well past 2030.
Matt Summerville - KeyBanc Capital Markets
And then just a follow-up on a couple of the industrial businesses. With respect to Synventive I think Patrick you mentioned sales and orders both up.
Can you sort of put some growth rates around that, how is that business performing organically?
Patrick Dempsey
In terms of Synventive, as I mentioned, we had a record order than sales for Synventive in the quarter in terms of an average driven primarily by our European and Asian geographies for that business. As you know it's a global business overall and sales were up in the range of plus 10% and our orders were up in the range of 20% plus.
Matt Summerville - KeyBanc Capital Markets
So what's I mean that's a huge order number, obviously that's probably not sustainable but I guess what do you view as the long-term sustainable growth range in Synventive relative to when you required and I guess what's resulting in this big path you saw in Q2?
Patrick Dempsey
What I would say Matt is that Synventive as a business has performed above our expectation since acquisition. And we are very pleased with the business in terms of its performance to-date and of course second quarter was an outstanding quarter.
It's not that we believe second quarter as you mentioned is a sustainable on a consistent basis, but what we do see in terms of this business is high-single-digit growth on a go forward basis and that's been driven by a number of macro drivers in terms of the continued presence and increase of plastic consumption overall, and also the overall trend so we continue to look to capitalize on in terms of our industrial businesses where in terms of fuel consumption plastics is a big factor in weight reduction as it pertains to light vehicles.
Operator
Your next question comes from the line of Josh Chan with Baird. Please proceed.
Josh Chan - Robert W. Baird
Hi, and just looking at the full year guidance of organic sales growth of 5% to 7%. So at the midpoint or even the higher end it sort of implies an acceleration in the second half.
So where in the business are you sort of counting on that acceleration to come from primarily?
Patrick Dempsey
Well, as you look at both sides of the business between aerospace and industrial, as I mentioned, we've seen strong order intake in Q2, which we hope to have translate into a strong second half for industrial, with some caveats that where we had indicated in a case of Manner as an example that the second half will not be a reflection of the first half just because of its location in Germany and the normal holiday periods as well as seasonality that we looked at in terms of their past sales trend. Having said that, on the aerospace side, we also see continued increase in output for the second half of the year based on the current demand that we're forecasting.
Josh Chan - Robert W. Baird
Okay.
Patrick Dempsey
And the aerospace is primarily on the new manufacturing side.
Josh Chan - Robert W. Baird
Okay. So OEM business got it.
And then looking at the industrial organic growth was there any kind of carryover impact from the operational challenges that existed in the first quarter, was there any impact of that in the second quarter?
Patrick Dempsey
Not that was meaningful. Clearly we've made a lot of progress in terms of some of those challenges and the teams have done an outstanding job in terms of putting them behind them.
Josh Chan - Robert W. Baird
Okay. And in the press release you mentioned some unfavorable pricing in industrial.
Is that a new phenomenon or a change from recent trend?
Patrick Dempsey
I don't think it's necessarily -- it's not necessarily new. It's what I think is something that we are putting a lot of focus on right now in terms of our businesses order of magnitude we're talking about probably a $1 million.
But it is an a area that we believe that with focus and attention the businesses have the opportunity to be more selective in terms of the product and services and ensuring that we're extracting the value that we're bringing to the marketplace.
Josh Chan - Robert W. Baird
Okay. Great.
And lastly, now that you've completed this second CRP could you sort of update us on the capital allocation priorities between buyback versus further agreements or potential looking at M&A?
Patrick Dempsey
In terms of our focus right now we continue, as you mentioned at CRP, I would say that it is a great use of capital for our aerospace business where as you probably are aware on the M&A side valuations are running very high and with the associated challenges to go with it, where the CRPs we will look at it as an investment. So we think in terms of capital allocations clearly we're investing in our base businesses from a capital equipment we've indicated another $60 million in terms of CapEx for the full year projection between industrial and aerospace.
We also continue to actively do our due diligence in terms of new acquisition opportunities and so a lot work is being done by the team in that regard as well.
Operator
Your next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed.
Amit Mehrotra - Deutsche Bank
Good quarter. I just wanted to ask couple of follow-up questions on the CRP2 agreement.
First question is how much of the business is renewal of existing MRO business that you guys have and how much is new that isn't part of your existing revenue base today?
Patrick Dempsey
Let's see the opportunity -- in the short-term the opportunity is work that has been under contract but those contracts have been extended for the life of the program. In terms of the opportunity on the upside is the open market in terms of the World's Airlines and the engine overhaul shops.
Where in the past our agreements were exclusive to GE in terms of only been able to provide the services to them where this allows us now to make the offering to the open market. I would also indicate that of course we have the capabilities and are continuing to expand on those capabilities with a view to and right now what we're looking at is the planning relative to increased demand that may come as a result of overtime of securing when as we project to do against offering these services to the airlines as well as the engine overhaul shops in the market.
Amit Mehrotra - Deutsche Bank
Okay. And just want to put a little bit of finer point more around the economics of the agreement.
The company is investing over $80 million in this CRP2 program. So at some point I would imagine we should see $10 million, $15 million, $20 million favorable impact to the EBIT line on an annual basis at some point.
How do you think about it in those terms, Patrick, and both with respect to sort of magnitude of EBIT dollars that will be added as a result of this investment and also the timing given the fact that this seems to have such a long tail to it?
Patrick Dempsey
Yes. So in terms of -- as we looked at this particular opportunity, it was again -- there was a number of factors that we took into consideration and of course it clearly met our internal hurdle rates relative to the return on the investment.
The program overall is one that we believe is a positions our aftermarket businesses, our aftermarket business to be a substantial player in this space in particular continuing to expand our service offerings as it pertains to aerospace. The program at the EBIT level, I would highlight again, building on what Chris indicated these programs are not spare part programs because they command the same margin as a spare part.
But in terms of repair services and the overall accretive nature of the deal to our portfolio, we are very excited about what the program does and will entail.
Amit Mehrotra - Deutsche Bank
Okay. If I could just have a couple of more cleanups on aerospace, can you just give us a little bit more color on what the magnitude of content you have on the A350 we're getting pretty close here to entry in the service.
So it will be helpful understand what type of impact a ramp of that program can have on the OE side of the business?
Patrick Dempsey
It's a great question and we have continued even as we speak we are continuing to work through some final components in terms of their securing them on a longer-term basis. And a result what we believe is that in the next six to nine months we will be in a position to indicate what our content per platform is under A350 with a number that we believe is so much stable as on a long-term projection.
Amit Mehrotra - Deutsche Bank
Okay. And then just one last one on industrial for me, last quarter you guys saw some pretty good momentum, in order activity in that part of the business.
I think it was up 7% if I remember correctly can you provide some color on how order's trended on the entire business not just the Associated Springs piece and if you saw any acceleration or deceleration into Q2?
Patrick Dempsey
From an orders perspective overall we saw positive on a BGI level. So a combined number was positive with clearly Manner contributing to that on a year-over-year basis.
But then also on an organic basis we saw improvement on the industrial side orders were up approximately 5% on a -- just over 5% for the industrial side of the business.
Operator
Your next question comes from the line of Pete Skibitski with Drexel Hamilton. Please proceed.
Pete Skibitski - Drexel Hamilton
So I guess Patrick I want to understand a little bit about what's going on at industrial. It sounds like in general you're pretty pleased with pretty much the whole segment overall except for we have this phenomenon going on at Associated Spring where much of the business there, it's a big unit for you, so much of the business there is becoming commoditized, so you've divested Saline.
And it sounds like is there more to go at Associated Spring in terms of how to may be shifting the mix there from a less commoditized to a higher end part of the business and so. I guess what I'm wondering is will we continue to have headwinds at Associated Spring for may be three or four more quarters but that at some point 2015 that starts being additive to top-line growth at industrial?
Patrick Dempsey
Yes. With regard to Associated Spring what I would indicate that we did over a -- the last number of years has been revisiting that entire portfolio of business.
Just to clarify on the comment you made which is that we're not seeing the overall business being commoditized, what we have done is carved out certain product groups that we believe are becoming commoditized and in particular as we announced in the second quarter the closure of Saline was again a particular product family that we chose not to entertain the pricing discussions that needed to take place and subsequently resulted in exiting of that business. The top-line sales, as I also mentioned, I think in the past relative to Associated Spring we, as we've gone through this reassessment of the portfolio what we have permitted the business to do is to move away from certain works that didn't need the criteria or the hurdles that we've set overall.
The business has done a wonderful job in terms of improving its overall profitability, as well as improve in productivity. And again, we are going to have on a comp basis the impact of the closure of Saline in the first half as it rolls through into the next six months and the first half of next year.
Pete Skibitski - Drexel Hamilton
Okay. I mean should we expect another week-ish year next year from Associated Spring because this is a process you have to go through and is that how you think about it?
Patrick Dempsey
Yes. I think -- an area where we are putting a lot of emphasis in Associated Spring is, as I mentioned earlier, I think we continue to leverage our capabilities to provide innovative solutions that support macro trends emergent -- emerging in the industries that we're serving.
And in Associated Spring, in particular, those trends are in terms of fuel efficiency standards. And so we are a large player in transmissions.
And again, our emphasis in terms of new product development and new product -- new process introductions on transmissions, focus on the 8 to 10 speed as an example. And the business there is focused on transforming a more highly engineered, more of a value, create more value for the end customers, and subsequently, that is the transformation that business is moving through.
Pete Skibitski - Drexel Hamilton
Okay. I understood.
Okay. Really ask one on the aerospace side.
The weakness in the RSPs, do you think it's getting caught up in this phenomenon of -- just a flood of brand new aircraft entering the markets as we see with your OE growth and this phenomenon of relatively young aircraft being kind of parted out? Is your RSP growth is just kind of suffering from that fact, the fact that there is so many new -- I guess there is fewer and fewer older aircraft out there?
Patrick Dempsey
I would say if you think about the installed fleet overall, what's happening is that you are going through -- the demographics or the composition of the installed fleet is somewhat changing. So there is an element of where even if you think about the CFM56, there is the Dash 3, the Dash 5, the Dash 7.
And what's occurring on the Dash 3 is different to the Dash 7, in that there younger -- the Dash 7 being younger, engines relatively speaking. And so I think we're in the early stages the bulk of the spare parts may have been driven by the Dash 2, Dash 3.
There is a movement in terms of those spares on the CFM56 engine towards the Dash 5 and the Dash 7 as an example. And so as we make that transition and the CFM, Dash 5, Dash 7 has continued to perform exceptionally well that I think is flowing through as a part reason.
And I say a part reason because there are many factors that influence overall spare part sales.
Pete Skibitski - Drexel Hamilton
Okay. Understood.
That's very helpful. Let me -- Chris, well just one before I go.
Hey Chris, could you give us more detail on the higher employee related cost in aerospace? And then, I was also just wondering, the CapEx profile longer-term just directionally.
Is that -- will that continue to add up or will you get some relief from investments running off?
Chris Stephens
Okay. So on the aerospace side, I would say the higher employee related cost given the top-line growth, primarily in our OEM business, we experience significant amount of extra overtime to meet that increased demand, as well as new hires that are happening in the business.
But at the same time, we've got -- we even look in the incentive comp profile where they're doing a great job from a top-line sales point of view. So you're getting impacted by a number of employee related costs in aerospace to deliver that margin that they did for the quarter.
On the CapEx, we're still forecasting an outlook of $60 million for the year. Every business is getting feed accordingly based on their growth projections for the year.
We don't see a change in that. If anything, I would say we may look to increase that overtime.
There is a lot of business coming our way both in industrial and aerospace that we are not going to shy away from in terms of making those investments on CapEx for good growth program so. But right now, we're still guiding $60 million.
Operator
Your next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed.
Christopher Glynn - Oppenheimer
Thanks. Congratulations on Shingo.
Patrick Dempsey
Thank you.
Chris Stephens
Thanks, Chris.
Christopher Glynn - Oppenheimer
So with Manner, looks like it's performing above expectations. Just wondering what the balance is in your thought process between the thought that this might be creating tough comps for next year versus just building secular expansion of its commercial run rates?
Patrick Dempsey
Well, as you know, with Manner, none in terms of priorities for that business as we acquired it, one was clearly to make the integration as smooth as possible. But also to expand capacity overall because of the demand that the business was experiencing.
So as the business transitioned into Barnes Group, the heavy emphasis for us in the first half was to clearly identify where any constrains were within the business and then deploy in. The principals of our Barnes Enterprise System leverage to clearly understand where we could add capacity with a view to meeting customer expectation.
So the overall demand in the marketplace continues to be robust in terms of medical devices. And of course, what Manner brings to the market is a highly engineered set of products and services, which clearly is also in demand serving the medical devices and market.
So next year while comps will always be a challenge when you've done as well as they have in the first half of this year as we said. They have achieved record level sales.
We still remain very positive in terms of the outlook for this business into 2015.
Christopher Glynn - Oppenheimer
Okay. So sounds like you got some new capacity up, pretty down quickly?
Patrick Dempsey
We did. And I would say that that was -- even as we were doing due diligence back in the third quarter of last year, those needs were being identified and upon the closure of the deal those purchase orders were placed immediately.
Christopher Glynn - Oppenheimer
Okay. And then, on Synventive, obviously great orders growth.
Just wondering what the range of lead times there is. As we -- should we think about that the active orders may be some lumpiness as feeding a pretty good tail rather than rather simply the second half of this year?
Patrick Dempsey
Synventive, we categorize -- when we think about our business, we categorize that as a short cycle business as opposed to long cycle. So you are talking as six days weeks' time frame as opposed to -- you are not talking four to six months as an example and that's the push, some perspective on short cycle as it pertains to that business.
Operator
Your next question comes from the line of Edward Marshall with Sidoti & Company. Please proceed.
Edward Marshall - Sidoti & Company
So I wanted to kind of go back to the spares, if I could. And I guess, sorry to continue to hedge you guys with these questions.
But I think with management fees rolling off this year, there were some excitement built into may be the shares heading in the 2014 and especially since there are historically higher margins in -- yet we're down 8% this year date on sales line, in the margin, and the aerospace is compressing 100 basis points. So I just kind of wanted to see if I can get maybe a little bit understand aside from lumpiness, which I think has been there for may be the past 24 months or so, did you find any competition may be from PMA parts that are now starting to leak into your channel or have you lost leverage with distributor maybe on price?
What are the channel inventories like and may be even if there is any change in the repair work that may be prolongs the repair between shops visits with your specific parts? I know there is a lot of questions there but if you can help me out that would be great.
Patrick Dempsey
Yes. So in terms of that commentary to pricing, pricing is not a factor in that pricing for the spare parts goes in line with the overall catalog.
And so that represents a positive. In terms of the distribution channel, what we are seeing is some variation of volatility in the distribution channel because of the fact that the distributor is using their best judgment to assess demand and so then they order.
And based on that demand, they will lead down what they ordered or they will increase their order. So we are seeing that lumpiness in terms of the distribution channel.
As I mentioned earlier, as the fleet of CFM56 transitions off of Dash 2, Dash 3, to the Dash 5 Dash 7, there is a dynamic which is of course with a newer engine you're seeing the performance or the timeframe of time allocation -- or the time distance between overhaul going through a normalized rate because the newer engine obviously doesn't need the same level of maintenance as an older engine. And then to your comment on PMAs, we're not seeing anything activity-wise that is above a normal low level that has always been there since the start of the program.
Edward Marshall - Sidoti & Company
Of the '13 agreement, I think there's 13, 12-13, can you talk about may be the -- and I don't know how many is allocated to the 56 I think its 10 but can you talk about the variances in the engines? Is it weighted to the 5 and 7 or is it weighted to the 2 and 3?
And may be if you have that share?
Patrick Dempsey
I don't have the split available in front of me, but what I would indicate is that when we were looking at the programs we look at more a concentration on universal part numbers that spanned all of the engine families where possible so that an agreement didn't become say obsolete as a result of a Dash 2 or a Dash 3 retiring. The components we identified were universal in that we tried to ensure that as many as possible span the entire family of the CFM56 in this example.
Edward Marshall - Sidoti & Company
Do you still need to hold a certain amount of headcount in Singapore now that the tax benefits are rolling off? I mean, is there a contract or something with the government?
I mean with sales down 8% in that business line is there an unnatural drags the aero margin that you will find reverses itself as sales again recovered to the levels that you need in that particular business?
Patrick Dempsey
In our Singapore business what I had indicated is that we have both new manufacturing OEM as well as aftermarket. And so the workforce that we have has been cross-trained in such that we move that workforce very fluidly amongst the businesses.
And as such, there is no sort of drag, if you want, as you might have put it, to the RSPs in particular. And in fact, we continue to grow our business in Singapore and add resources as necessary.
Edward Marshall - Sidoti & Company
Okay. So what is exactly then the 100 basis points or so contraction on the aerospace margin for 2014 versus say 2015 or 2013?
Chris Stephens
Yes, primarily, are you talking about the quarter or for the full year, what are you --?
Edward Marshall - Sidoti & Company
Well, I mean, just so that the average so far for this year as versus the average for 2013?
Chris Stephens
Yes, so I would say two-fold, right, really in what we saw in the second quarter. One was the RSPs being a little softer first half of the year versus first half last year.
So RSPs being the high margin profile in our business clearly will contribute. But the other thing is we have that top-line growth in our aerospace OEM sales which we saw in the first quarter and second quarter.
The conversion of the sales has not been where we needed to be in terms of just thinking about the ramp up of that production level, right. We commented around overtime, we commented about additional labor in the workforce.
So we got to work through those deal to ramp up to that those larger levels, which we will. But the margin profile of the business for aerospace clearly in that 15%, 16% range and we talked about high teens often will be dependent on RSPs.
We do feel that the component repair programs, the CRP programs that we have signed with GE will be contributing also accretive to aftermarket margins but they're going to -- that's going to take some time as we talk about ramping it up.
Edward Marshall - Sidoti & Company
Right. Okay.
And does partnership for success mean anything on your end of the business being mostly engine related or as you've seen any pricing purchase back on the OE side that might be weighing on the margin just to hear?
Patrick Dempsey
Well, I think that overall the entire industry continues to feel the pressures of competition from the air framers down to the engines to securing of orders as we move forward with the new generation of aircrafts. So I think as pricing pressures has evolved with that as a part of this industry.
The key for us is how do we ensure that we create a net positive impact on our businesses in terms of driving a continuous focus on productivity, utilizing our Barnes Enterprise business. And as was mentioned earlier I think we've made tremendous stride to that effect and as mentioned in my prepared comments the Shingo prize was truly an external recognition of what has become a world-class instead of tools and cultural change that we've brought our aerospace business through.
Edward Marshall - Sidoti & Company
And then on the industrial business and the margin there I mean obviously that's a bright spot not only for the quarter but it's been trending in the right direction. So as we kind of integrate these acquisitions and digest, where do you think that these margins can go?
I mean, is this ultimately a 17%, 18% kind of business or are we topping out kind of here in the mid-15 range?
Patrick Dempsey
Well, as you know for overall PGI we indicated 15 to 15.5 relative to the full year. We see industrial achieve in mid-teens.
And so we couldn't be more pleased with the performance for Q2. The key for us will be to continue to sustain that and then also continue to focus on how to expand it as we move forward.
Edward Marshall - Sidoti & Company
Okay. And then lastly if I could, Chris, when I look at the cash flow guidance and I kind of back out your CapEx for the year versus I guess what your net income line looks like from your guidance.
It looks like you have to generate roughly I don't know about $141 million for the back half of the year? How do you get there?
I mean, you're only about $39 million year-to-date? So what are the puts and takes surrounding, I mean is there -- is there some inventory work off that you plan or --?
Chris Stephens
Yes, absolutely. So little bit of inventory growth in the first half of the year.
Aerospace is lining up to have a strong second half, third and fourth quarter, primarily fourth quarter so there'll be some relief on the inventory side. I would say historically we're thinking about a very good strong fourth quarter cash flow generation.
But I agree with you as you think about the first half of the year and second half. But as we outlook the year on working capital and just cash generation from the business, we're still pretty confident in the -- in approximately 100% cash conversion.
Operator
We have a follow-up question from the line of Matt Summerville with KeyBanc Capital Markets. Please proceed.
Matt Summerville - KeyBanc Capital Markets
Yes, I just want to follow-up on the CRP thing. So help me understand what would be GEs incentive to do this CRP thing?
Wouldn't you theoretically then be competing with who you're partnered with, help me understand the mechanics around that please?
Patrick Dempsey
So, when we entered into say support of GE in terms of the aftermarket overall on the component repair side, in terms of the particular agreement that we've signed today on the CF6 and CFM56 the actual repair capabilities that we have in Barnes Group GE does not have within its own family of repair shops. And so these components to your question of whether we will compete with GE in the open markets the answer is no, because we today provide GE that capability to them and as I mentioned we've extended those contracts with the life of the program and GE does not have that capability in-house.
Matt Summerville - KeyBanc Capital Markets
And then Chris with these investments you're making the $80 million or so sounds like that will be out this year and kind of your profile for free cash flow and CapEx what are you looking for as your net debt to EBITDA ratio at the end of the year would you say?
Chris Stephens
Yes, so Matt let me just clarify this. The $80 million on CRP2 is we see $41 million was paid in the quarter.
We're going to spend $20 million in the fourth quarter and the remaining balance will be paid next year in terms of that overall investments, so I just wanted to provide that color. And your second question.
Matt Summerville - KeyBanc Capital Markets
Just as of the end of 2014 where would you estimate your net debt to EBITDA ratio is going to look like?
Chris Stephens
Yes, I would put that in the 2s, where -- the profile for the business continues to be managing it less than 3 from a covenant ratio point of view. We will be on the convertible notes, the redemption of the convertible notes using our revolver, and as we generate cash globally and be able to reduce to our debt we feel confident that we will be less than 3.
We ended the quarter at 2.3 as we noted.
Operator
We do have a follow-up question from the line of Pete Skibitski with Drexel Hamilton. Please proceed.
Pete Skibitski - Drexel Hamilton
Yes, guys. Just a couple of follow-ups.
I want to make sure I understand kind of your guidance with regard to the second half margins at the segments. Is it fair to say you are expecting aerospace margins to trend up on higher RSPs?
And I guess, if I look at the 50.5% in industrial adjusted margins in second quarter, are you expecting that to kind of modestly trend down from lower debt seasonality at Synventive or at Manner rather? Is that fair?
Patrick Dempsey
So I think you categorized it pretty well. In that for aerospace we expect to see an improvement in the second half and the industrial will -- we're going to continue to focus on those mid-teens, albeit as you highlight it.
The contribution of Manner will be somewhat less than it was in the first half. But nonetheless, overall for industrial we still are targeting the mid-teens.
Pete Skibitski - Drexel Hamilton
Okay. Got it.
Thank you very much. And then, last one just, I know historically, you've been kind of a wide body engine shop but you've got the A320neo getting closer entering the service.
Can you remind us -- do you expect any meaningful content on that, the engines that goes to that aircraft?
Patrick Dempsey
The short answer is that we're in active discussions with our customer on the narrow body, which would, -- which is -- as you indicated in the past, we've been more of a wide body type aerospace business but we're actively looking at opportunities right now on the narrow body. And again, been very selective in terms of ensuring that the components that we would identify and participate in are those that Barnes truly brings value to the customer in terms of our capabilities and the complexity of the manufacturing required.
Even though with --
Pete Skibitski - Drexel Hamilton
Okay. Well --
Patrick Dempsey
Even though narrow body engines.
Pete Skibitski - Drexel Hamilton
One more just. You might know -- do you ever have a contract potentially finalized?
Patrick Dempsey
I -- what I -- as in the A350, what we've always indicated is that, as we come closure for -- to entry into service if -- at that point we would look to indicate a content for a platform. And with the 737 MAX and the A320neo right now it's still early innings and entry into service is not for another couple of years.
So we've got timeframe out from anything we would announce relative to content on narrow body.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mr.
Bill Pitts for closing remarks.
Bill Pitts
Thank you, Patrick. We would like to thank all of you for joining us this morning.
We look forward to speaking with you next quarter. And at this time, we will conclude our call.
Operator
Ladies and gentlemen that concludes today's conference. Thank you for your participation.
You may now disconnect. Have a great day.