Barnes Group Inc (B) Q1 2021 Earnings Call Transcript

Image source: The Motley Fool.

Barnes Group Inc (B -4.01%)
Q1 2021 Earnings Call
Apr 30, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Barnes Group First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Bill Pitts, Director of Investor Relations. Please go ahead.

William Pitts -- Director, Investor Relations

Thank you, Megan. Good morning, everyone, and thank you for joining us for the first quarter 2021 earnings call. With me are Barnes Group's President and Chief Executive Officer, Patrick Dempsey; and Vice President, Controller and Interim Chief Financial Officer, Marian Acker. 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 we believe is helpful to our investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the Securities and Exchange Commission.

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

Let me now turn the call over to Patrick for his opening remarks, then Marian will provide a review of our financial results and details of our updated outlook for 2021. After that, we will open up the call for questions. Patrick?

Patrick J. Dempsey -- President and Chief Executive Officer

Thank you, Bill, and good morning, everyone. Barnes Group delivered a very good quarter to begin 2021, with the recovery we had anticipated to occur later in the year starting a little earlier than expected. Strong order intake continuing sequential revenue growth now for the third consecutive quarter and better than expected earnings performance add confidence to our view that the second half of the year will show meaningful recovery progress.

For the first quarter, organic sales were down 10% compared to a year ago as a result of lower volumes at Aerospace. However, our Industrial segment generated high single-digit organic growth, which was better than our February expectation given solid orders and sales in March. While we previously envision business improving as the year progressed, now with the stronger momentum exiting the first quarter, we have increased our outlook for the year. Earnings per share were $0.38, down 46% from last year's adjusted $0.71, so firmly exceeding the high end of our February expectation.

Moving now to a discussion of end market dynamics, beginning with Industrial. Our Industrial segment had a strong first quarter, with each of our SBUs generating year-over-year organic sales and revenue growth. For the segment, orders were up 25% organically, with a book to bill of approximately 1.1 times. Sequential orders were up 7% further exemplifying the momentum we're seeing. On a macro level, manufacturing PMIs in the US and eurozone remain particularly robust. China, while a bit softer, remains an expansion territory. And despite the semiconductor issue that's impacting automotive bills, IHS still predicts 2021 global production to be up 12% over last year.

Within the segment, our Molding Solutions business had strong orders across all brands, up 35% organically. Our larger end markets, automotive, medical, packaging and personal care, each saw in excess of 25% orders growth, some well above that. Sequentially, orders improved high single digits, marking the fourth quarter in a row of sequential growth. Organic sales were up mid-single digits, while sequential sales were up low single digits. Book-to-bill was approximately 1.1 times. Backlog, which is predominantly our longer cycle mold systems, grew by approximately 25% year-over-year and low double digits from the fourth quarter of 2020. There is definitely a lot to like about the activity of Molding Solutions and the business has been recently adding more talent to the sales and marketing team with a clear focus on driving long-term growth and margin expansion. While near-term investments in such talent coupled with our innovation and digital initiatives, that I discussed last quarter, will hinder short-term margins. We expect long-term performance to benefit [Phonetic]. Our 2021 expectation for Molding Solutions has improved, as we now forecast organic sales growth to be in the low teens.

Moving to Force & Motion Control. Organic orders were up low double digits with organic sales up high single digits. FMC via sheet metal forming end market is seeing the benefit of its automotive customers push to electric and hybrid vehicles. Year-over-year orders are up across each of our primary geographic markets, North America, Europe and China. Likewise, we're seeing good demand in our general industrial end markets, particularly heavy-duty truck and industrial equipment. Our FMC sales growth expectation has likewise increased, as we now anticipate organic sales to be up in the mid-teens for 2021.

Engineered Components generated organic orders growth in excess of 25% and organic revenue growth in the low double digits. Sequentially, we saw a modest growth in orders and sales, constrained somewhat by the automotive semiconductor concern. As a result of this issue, we estimate a first quarter impact of approximately $1 million, with the second quarter impact likely to be in the range of $4 million to $5 million before recovering in the second half. General industrial markets remain very healthy. Our 2021 outlook has increased for this business as well with organic sales now forecast to be up mid-teens.

Moving to Automation, we continue to see sequential performance in both orders and sales, up low teens and high-single digits, respectively. On a year-over-year basis, organic sales were up high single digits and organic revenues up mid-teens. A very good quarter of growth and execution from the Automation team. Demand for our end-of-arm tooling solutions in automotive, medical and pharma and industrial automation applications remain good, as has been the trend now for a few quarters. We now expect 2021 to deliver total growth of 20%, with organic growth in the mid-teens, again, better than our February expectation. Overall, for the Industrial segment, we see 2021 organic growth in the mid-teens, with operating margins of approximately 13%.

Moving now to Aerospace. Our Aerospace business experienced continuing impact from the pandemic as OEM sales were down 32% from the prior year and aftermarket sales were down 48%, not surprising as commercial aviation remain significantly disrupted. However, we still believe that the bottom is behind us and that we're slowly recovering. Case in point for the third quarter in a row, we have seen total Aerospace sequential sales improve. In the first quarter, the sequential improvement was driven by our MRO business. Our expectations for the Aerospace industry overall has not changed. We continue to believe that OEM production levels for narrow bodies will show modest improvement, while wide bodies will remain pressured. We did see a second consecutive quarter of good orders and OEM book-to-bill was approximately 1.5 times.

In the aftermarket, industry challenges of lower aircraft utilization, weakened airline profitability and government imposed travel restrictions all remain. Recovery will depend on the pace and effectiveness of vaccinations. Domestic travel activity will proceed any improvement in international travel. We continue to expect aftermarket activity to gradually improve beginning in the second half of 2021. In the meantime, the Aerospace team continues to execute on several items to best position our business for recovery. For example, in the first few months of the year, we completed an extension of our West Chester, Ohio facility, expanding our capabilities, received supplier recognitions from Boeing and Rolls-Royce and announced a significant B-2 Bomber Exhaust System Contract award from Northrop Grumman.

Our 2021 expectation as for OEM sales to be up mid-single digits over 2020 and spare parts down in the mid-teens, both are unchanged from our prior view. Our forecast for MRO is slightly improved, now down low single digits versus our prior view of been down mid-single digits. Segment operating margin is anticipated to be approximately 13%.

Before concluding, as you may have seen with yesterday's press release, I'm happy to announce the appointment of Julie Streich to the position of Senior Vice President and Chief Financial Officer. Julie is a proven leader with significant experience, leading the financial operations of global businesses. Her extensive background and proven strategic leadership in corporate finance, financial planning and analysis, mergers and acquisitions, and risk management will help us advance our long-term profitable growth strategy. At the same time, I want to acknowledge Marian for her tremendous leadership during this transition period.

In closing, we're off to a good start in 2021. Favorable macroeconomic indicators and our solid orders generation provide us with a high degree of confidence in our improved outlook for the year. However, that's not to say there aren't challenges that remain, so our teams are proactively implementing risk mitigation plans. As we move forward, we'll continue to add the necessary talent and skill sets to enable us to drive growth and improve profitability. Those efforts will be supported by our organic investments in innovation, digitalization and strategic marketing. Our focus remains squarely on controlling our own destiny and positioning the Company to prosper as global markets recover.

Now, let me turn the call over to Marian for a discussion on the financial details.

Marian Acker -- Vice President, Controller and Interim Chief Financial Officer

Thank you, Patrick, and good morning, everyone. Let me begin with highlights of our first quarter results on Slide 4 of our supplement. First quarter sales were $302 million, down 9% from the prior year period with organic sales declining 10% as ongoing impacts from the pandemic offset our Aerospace end markets. The divested Seeger business had a negative impact of 2% on sales, while FX had a positive impact of 3%. Operating income was $32.4 million versus $49.3 million a year ago. Compared to last year's adjusted operating income of $51.7 million, the first quarter was down 37% and operating margin of 10.7%, decreased 490 bps from last year's adjusted 15.6%. It's important to keep in mind that this result was not unexpected. The first quarter of last year saw Aerospace aftermarket performance -- saw record Aerospace aftermarket performance, which generated very strong margins.

Interest expense was $3.9 million, a decrease of $400,000 as a result of lower average borrowings, offset in part by a higher average interest rate. For the quarter, our effective tax rate was 28.1%, lower than last year's 31.5% tax rate. The decrease is largely due to the absence of tax expense related to the completed sale of the Seeger business and the reduction of the statutory tax rate at one of our international operations, both of which occurred in the first quarter of 2020. Offsetting these items is the impact of the global intangible low taxed income tax or GILTI tax on foreign earnings in the first quarter of 2021.

Net income was $19.4 million or $0.38 per diluted share, compared to $29.7 million or $0.58 per diluted share a year ago. On an adjusted basis, net income per share was down 46% from last year's $0.71. Last year's first quarter adjusted net income per diluted share excluded $0.13 of Seeger divestiture adjustments.

Turning to our segment performance, beginning with Industrial. First quarter sales were $220 million, up 10% from a year ago. Organic sales increased 8%. The foregone sales from the Seeger divestiture had a negative impact of 3%, while favorable FX primarily driven by the euro to US dollar exchange increased sales by 5%. Relative to the fourth quarter of 2020, sequential sales were up 5%. So good news on the revenue front with three sequential quarters of improvement and a positive year-over-year result. Industrial's operating profit for the first quarter was $21.3 million versus $17.9 million in the prior year period. Operating profit increased from the contribution of higher volumes and productivity improvements. These were offset in part by higher personnel costs, including incentive compensation. Last year we saw a reduction in the quarter for incentive comp, while this year sees an uptick based on performance expectations for 2021.

On an adjusted basis, which excludes $2.4 million of Seeger divestiture adjustments last year, first quarter operating income was up 5% from last year's $20.3 million. Compared to a year ago, adjusted operating margin was down 50 bps from 10.2%. One of the contributing factors is the additional investments being borne by the Industrial segment. As Patrick mentioned, these investments squarely put a focus on our long-term growth strategy.

While our end markets and businesses within Industrial showing -- are showing signs of the solid recovery, there are some supply chain concerns related to raw material availability and inflation, as well as increased freight costs. With respect to raw materials, we've seen instances where certain customers have extended the time horizons of their order commitments, looking to ensure availability of supply and acknowledging the longer lead times required for some materials. In the first quarter, we experienced approximately $1 million of combined freight and material inflation in the Industrial segment. For the full year, we expect an impact of about $6 million, which is built into our outlook. Our teams are working on [Phonetic] these issues, looking to decrease the risk exposure and to take actions to offset the inflation where appropriate.

Moving to Aerospace, sales were $82 million for the first quarter, down 38% from last year. Operating profit of $11.1 million was down 65%, primarily driven by the lower sales volume. Operating margin was 13.6%, versus a strong 23.9% a year ago. You may recall, last year's margin was a high watermark, driven by the contributions of the aftermarket. Aerospace OEM backlog ended the quarter at $600 million, up 5% from the fourth quarter and we expect to ship 45% of this backlog over the next 12 months.

First quarter cash provided by operating activities was $36 million, a decrease of $12 million versus a year ago, free cash flow was $28 million, versus $35 million last year, and capital expenditures of $8 million were down about $4 million from a year ago. Regarding the balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was 3.1 times at quarter end, essentially flat to the prior quarter result. The Company is in full compliance with all covenants of our credit agreements and maintains adequate liquidity to fund operations. While we anticipated the leverage ratio to peak with our first quarter 2021 results, we performed better than expected with the stronger financial results of the first quarter. We see leverage further declining from this point absent any acquisition activity.

Our first quarter average diluted shares outstanding was 51 million shares. We now expect to resume some share repurchase activity to offset equity compensation dilution, with respect to incremental share repurchases that will depend on a number of factors related to capital deployment and growth opportunities that are available to us.

Turning to Slide 5 of our supplement, let's discuss our updated financial outlook for 2021. We now expect organic sales to be up 10% to 12% for the year, an increase from our prior view of up 6% to 8%, driven by stronger industrial growth. FX is expected to have a 2% favorable impact on sales, while divested revenue -- divested Seeger revenues will have a small negative impact. Operating margin is forecasted to be approximately 13%. At this point, we're not anticipating significant residual restructuring charges to come through, so no forecasted adjustments to 2021 net income. EPS is expected to be in the range of $1.78 to $1.98, up 9% to 21% from 2020's adjusted earnings of $1.64, that expectation is an increase from our prior view of $1.65 to $1.90, and we expect the first half of the year to contribute approximately 43% of 2021's earnings.

A few other outlook items. Interest expense is anticipated to be approximately $16 million, while other expense is forecasted at [Phonetic] $8 million, both a bit better than our prior view. We now expect capex to be approximately $50 million, down $5 million, average diluted shares of 51 million and cash conversion of over 100% are consistent with our prior outlook. And lastly, we forecast a full year tax rate of approximately 30%. However, we continue to analyze potential tax planning strategies to manage and reduce our overall tax cost.

To close, a very good start to 2021, supported by healthy orders for both segments. With our focus on driving growth across the organization, we'll continue to invest in the business through capital expenditures and the funding of key strategic initiatives. We believe that these investments will help us accelerate the recovery in our financial performance. Leverage remains very manageable and should improve from this point, so the balance sheet can accommodate our approach.

Operator, we'll now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Christopher Glynn with Oppenheimer. Your line is open.

Christopher Glynn -- Oppenheimer & Co. -- Analyst

Thank you. Good morning.

Patrick J. Dempsey -- President and Chief Executive Officer

Good morning, Chris.

Christopher Glynn -- Oppenheimer & Co. -- Analyst

So I think a little delevering [Phonetic] Industrial margin sequentially, probably restoration of incentive comp, I guess, but Aerospace had almost two sequential leverage, just curious with the kind of moving pieces sequentially are in the Aerospace margin?

Patrick J. Dempsey -- President and Chief Executive Officer

Chris, the -- between the two businesses as you saw, we had some continuing nice improvement sequentially. It was a little bit more subdued in Aero and nice high single-digit growth in industrial. The margin side of the equation, effectively both businesses have taken significant actions in the last year with a view to managing the costs of the business. At the same time, we've continued to make very key strategic investments with a view to the longer term and a clear focus on returning to organic growth.

So with respect to Industrial, it has taken on a little bit more of the costs of the innovation efforts that we're experiencing, as well as has beefed up its go-to-market strategy with a view to adding additional talent to the sales and marketing organization. With that, on the Aerospace side, the team has done an outstanding job, I would say, in terms of managing costs very judiciously throughout the last year, and now as they move forward, they're going to continue to be very disciplined in that approach. There is a slight shift also with respect to allocations from a total sales perspective and so with one segment down and the other up, there is a small shift there as well.

Christopher Glynn -- Oppenheimer & Co. -- Analyst

Okay, thanks for that. And then, nice job holding leverages, the first quarter rolls off and you hinted a capital flexibility, curious what kind of multiples you're seeing and entertaining in the acquisition pipeline?

Patrick J. Dempsey -- President and Chief Executive Officer

Well, one thing we haven't done for the whole year of the pandemic is we have not taken our eye off the ball relative to M&A and so we've been very aggressively continuing to look at opportunities, continuing to be diligent in terms of our research and yet, I would say that in some of the end markets, they have gotten a little frothy in terms of valuations. And so, we've stayed disciplined in terms of our position on expectations for returns for any potential acquisition we might do.

The team is -- one thing that has changed, I think, even more significantly in the last year for us is the enthusiasm of each one of the businesses to become even more aggressive if you like in terms of looking at opportunities in their end markets. We've made significant investments over the last year in terms of our organic opportunities and we announced as an example, the launch of our vacuum technology, our Molding Solutions business right now is expanding significantly into a new sector of the medical market and those. So our focus continues to be organic growth in the short-term, but M&A, we'll keep in front and center just watching carefully in terms of the dynamics of that market.

Christopher Glynn -- Oppenheimer & Co. -- Analyst

Thanks, Patrick.

Patrick J. Dempsey -- President and Chief Executive Officer

Thank you, Chris.

Operator

Your next question is from Pete Skibitski with Alembic Global. Your line is open.

Pete Skibitski -- Alembic Global -- Analyst

Hey, good morning, Patrick and Marian and Bill, and nice quarter, guys.

Patrick J. Dempsey -- President and Chief Executive Officer

Thanks, Pete.

Marian Acker -- Vice President, Controller and Interim Chief Financial Officer

Thank you.

William Pitts -- Director, Investor Relations

Thank you.

Pete Skibitski -- Alembic Global -- Analyst

Hey, just a follow-up to Chris' question on the margin, particularly the Aerospace margin. So it sounds like you're saying cost takeout benefited the first quarter in Aerospace and maybe some corporate allocation shift, but that it, the guidance implies you're going to kind of be flat to down the balance of the year margin wise at Aerospace. So is there -- I would think mix shift will be better for the rest of the year, but is there something I'm missing as to why it would be kind of flat to down the balance of the year?

Patrick J. Dempsey -- President and Chief Executive Officer

No, I think in general, the Aerospace team are continuing to look at every opportunity to expand margins. Our guidance at the 13% for Aerospace could shift significantly depending on the recovery of aftermarket. As indicated, we do expect that as vaccinations take hold and passenger traffic improves that aftermarket will be the first to benefit. That said, we are probably prudently been a little conservative with respect to the rate of which the aftermarket come back -- comes back is uncertain. But as you know, aftermarket is a big driver of profitability into the Aerospace business, while at the same time, we're optimistic that we have a good line of sight to the OEM side of the business for the full year, because orders there have started to stabilize and as you saw, we just announced a new win with respect to the defense side of our business with the B-2 Bomber from Northrop Grumman. So team has done a really nice job and we're guiding to the 13% in terms of margin, but dependent on how the year progresses, there might be upside there, but I think we're prudent involve [Phonetic] our guidance toward.

Pete Skibitski -- Alembic Global -- Analyst

Okay, and I appreciate the color. And then let me ask a couple of question about Europe. I feel like maybe a lot of people have been worried about your presence in Europe with Industrial because of COVID, it seems to be kind of lingering over there. So are you guys just not experiencing really any workforce [Phonetic] issues in Europe with regard to COVID or any other kind of COVID-related manufacturing delays or customer issues, it's maybe I guess better than maybe people might think?

Patrick J. Dempsey -- President and Chief Executive Officer

Well, it's a great point, Pete, and what I would highlight is that the team in Europe, particularly and across all our Barnes Group, right from the onset of this pandemic, first and foremost what we put at the center was top priority, the safety of our employees and I think that discipline has remained throughout. So, as you know and we all know, Europe has had its fair share of challenges, no different than the rest of the world, but the teams, we've remained operational throughout the entire pandemic in our European operations and nowhere has that been more complementary than to Italy with the pressure that it came under initially at the onset of the pandemic and the team there did a magnificent job managing and protecting our employees, while keeping the operations moving forward.

We have -- Europe has been a little bit of a bright spot for us in the context of orders, and you see our orders come in through very strong in the Industrial business and Europe has been -- our European businesses have been a big driver of that.

Pete Skibitski -- Alembic Global -- Analyst

That's great. And I appreciate it. Last one for me, I think I might have asked you that in the last call, but I continue to be kind of fascinated with the downturn, the historic downturn the Aerospace has gone through and I think you continue to see business models kind of disrupted or at least altered in a lot of different cases, whether it be OEM or clearly aftermarket, I think, are you guys seeing any ability to really kind of step into good opportunities there to gain share because of the disruptions that we've seen? Is it still too early or just -- I'm just -- was wonder if I get some color on how you're seeing the industry and the opportunities out there post downturn?

Patrick J. Dempsey -- President and Chief Executive Officer

Another great point and I would say that one thing I give our Aerospace team credit for is that throughout this pandemic and as brutal as it has been in terms of a downturn on the industry, our team has not sat on their hands, they've actually looked at it from a really proactive perspective with a view to looking for where those opportunities might be in terms of positioning for the future. We just had a grand opening of an extension on our West Chester, Ohio facility, which is primarily aftermarket related the extension was connected to, which was -- is focused squarely on expanding our capabilities and being ready for the return of the industry.

The team has also, as I mentioned, they -- we had a great announcement of a $30 million plus order for the B-2 Bomber, which is and again, I think, exemplifies the unique capabilities that the Aerospace team have in terms of superplastic forming, hot forming, cold forming on fabrications business. And so, what they're doing is picking their spots, been very deliberate. We are -- one position we took throughout this entire crisis was hold your customers closer than ever, because in a crisis there will always be opportunity and so those dialogs continue daily. And as we sit here today, we remain optimistic that we will come out stronger and gain share in particular areas.

Pete Skibitski -- Alembic Global -- Analyst

Okay, thanks so much guys.

Patrick J. Dempsey -- President and Chief Executive Officer

Thank you.

Operator

Your next question is from Matt Summerville with D.A. Davidson. Your line is open.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks. Couple of questions. First on the Molding Solutions business, can we maybe go a layer deeper, can you delineate what you saw on the hot runner side of the business versus the mold side in terms of organic revenue and orders in the quarter, please?

Patrick J. Dempsey -- President and Chief Executive Officer

So within Molding Solutions, the organic orders overall we're 35%, and then as I look at the breakdown of that, hot runners again is split between both our mold business and our automotive end markets and the mold business been primarily against personal care packaging and medical. With respect to the -- I don't have exact break downs relative to molds versus hot runners, but I do -- I can indicate that we were in the 25% plus range of organic orders against each of those end markets I just mentioned, which is a combination of molds and hot runners in terms of medical, personal care and packaging, automotive is predominantly hot runners.

Matt Summerville -- D.A. Davidson -- Analyst

Got it. And then, can you maybe speak to the order cadence you experienced in Industrial, it sounded like March was markedly better than January and February. Can you maybe put a finer point on that?

Patrick J. Dempsey -- President and Chief Executive Officer

Yeah, we did see a nice, a stronger March than I think we had anticipated and that's -- with that, it's been a key enabler to us and given us confidence in terms of upping our guidance for the year. The team has done an -- two things are happening I believe in terms of our Industrial business in general. One is that the team has taken a much stronger position in terms of its go-to-market strategy, and then also of course markets are rebounding. I'd like to think that obviously, we're benefiting from a stronger set of end markets, but more importantly, I think are the efforts and the focus that has gone into the sales and marketing initiatives, all of which have emanated from the enterprise system, our enterprise system in terms of commercial excellence. And so, [Indecipherable] on the Industrial side has been driving a very significant focus around driving growth, driving funnel creation, driving our penetration into certain markets and looking at adjacent markets to where we can expand our capability.

So there is a [Indecipherable] factors, but in general, we entered into 2021 in January with some nice momentum after strong orders in Industrial in Q4. And we've just built on that coming into Q1 with each month demonstrating further improvement with March being the strongest.

Matt Summerville -- D.A. Davidson -- Analyst

And then just lastly, and I think I may have missed it in the prepared remarks, did you make a comment around what you see as the first half, second half earnings sort of cadence or split for the company, please?

Patrick J. Dempsey -- President and Chief Executive Officer

Yes, we made a reference to the fact that 43%, 57% [Phonetic] split now between the first half and the second half in terms of EPS.

Matt Summerville -- D.A. Davidson -- Analyst

Great. Thank you, Patrick.

Patrick J. Dempsey -- President and Chief Executive Officer

Thank you, Matt.

Operator

Your next question is from Michael Ciarmoli with Truist Securities. Your line is open.

Pete Osterland -- Truist Securities -- Analyst

Good morning. This is Pete Osterland on from Mike. Thanks for taking my question.

Patrick J. Dempsey -- President and Chief Executive Officer

Good morning.

Pete Osterland -- Truist Securities -- Analyst

On raw material costs, are there any specific materials you can call out that's driving the cost inflation and just in general, to what extent are you able to pass raw material costs through in pricing?

Patrick J. Dempsey -- President and Chief Executive Officer

Yeah, it's an area that has been a key focus for us in the first quarter, and actually in 2020, we anticipated true -- the playbook that we usually execute against in terms of any downturn, what it is that are going to be the first things to raise as issues in a rebound and material freights are always there front and center. So, the material in particular that we've seen a pressure on in terms of inflation has been steel into some of our manufacturing facilities, there what we saw is two-fold, one is inflationary pressures, but secondly, then the expansion of lead times. And so, the teams are addressing that on both ends.

Relative to your question about pass through then to our end customers, I think that has been addressed very proactively by the team on a case-by-case basis, it's not by any means a 100% pass through, but the teams are working it every day with a view to wherever there is an open in a particular contract or whether it's a PO-to-PO then it allows itself to greater flexibility.

Pete Osterland -- Truist Securities -- Analyst

Thanks. And then on the Aerospace, could you provide some color on what you're seeing from customers in the engine aftermarket business, just the, what are you seeing in terms of shop visits or order activity and is demand that are trending any better than what you would expect with as of last quarter?

Patrick J. Dempsey -- President and Chief Executive Officer

Well, the one area that's relative to our Aerospace business that is a glimmer of hope relative to a continued improvement. Our sequential sales for Aerospace was up 2% quarter-over -- from quarter-to-quarter, Q4 to Q1. Within that 2%, the primary driver was MRO, which was up low double digits. So that's a positive and yet, something that I would say, has been somewhat sporadic, so it hasn't been linear in any ship. And as a result, we remain cautiously optimistic, of course, as I mentioned, the driver will continue to be the adoption rate of vaccinations.

I traveled myself this week and I will tell you that I was pleasantly surprised just from the volumes going through the airports. And so that again, I think, remains positive, I think people are enthusiastic to get back traveling. And so, again, why I -- looking out to the second half of the year, we are optimistic that the aftermarket will take hold a little stronger. Recognize that our aftermarket business, particularly our spare parts and our CRP programs, our narrow-body for the most part driven and so as activity picks up domestically, most of that activity is coming off of narrow-body aircraft, which in turn benefits our spares program and our repair programs.

Pete Osterland -- Truist Securities -- Analyst

All right, thanks a lot. That's all from me.

Patrick J. Dempsey -- President and Chief Executive Officer

Thank you.

Operator

Your next question is from Myles Walton with UBS. Your line is open.

Louis Raffetto -- UBS -- Analyst

Good morning. It's Louis Raffetto [Phonetic] on from Myles. How are you Patrick, Marian and Bill?

Patrick J. Dempsey -- President and Chief Executive Officer

Good, Louis, thank you. How are you, Louis?

Louis Raffetto -- UBS -- Analyst

Excellent. So let me say, I guess, Industrial growth, you sort of covered this, will make sure the range for the year, it seems like it was greater than the outperformance in the first quarter. So is that just, I think, we talked about before some of the trend into March and maybe continuing into April, is it based on orders? And then how are you hedging, because it doesn't sound like a whole lot for some of this slowness you expect in the first and second quarter within -- you're kind of expecting that all orders come back in the second half, I guess?

Patrick J. Dempsey -- President and Chief Executive Officer

Yeah, our enthusiasm relative to the first quarter was that we had expected a slower start to the year and then we had always anticipated gradual improvement each quarter as the year progressed while we saw it was a stronger start out of the gate in Q1 than even we had expected, I would argue, back in February. And so to that end, we -- they up in guidance for the full year was a combination of the base in Q1 whereas some additional outlook for the full year in terms of the strength we've seen in some of our end markets, also would highlight the strength in the orders that we received in Q1. Our apps are true performance in the quarter was solid, but more importantly I think is the order strength that we've seen, which built up backlog as well with into some of our higher margin businesses.

Louis Raffetto -- UBS -- Analyst

Okay, great. Thank you. And then just on cash flow, I guess, I know again above 100%, that leaves a big range, I guess, realistically. So do you see possibility for cash to be up year-over-year, I don't know how much opportunity -- additional option you have been working capital, so just curious your thoughts there?

Marian Acker -- Vice President, Controller and Interim Chief Financial Officer

Yeah, so this is Marian. So, we're always looking at opportunity in working capital. We talked a little bit about the longer lead times in the supply chain matters we're addressing, so it puts a little bit more pressure on the inventory, but yeah, we continue to focus on working capital. As far as the cash conversion, we're looking at over 100% is where we are guiding to come out.

Louis Raffetto -- UBS -- Analyst

Okay, great. Thank you very much.

Patrick J. Dempsey -- President and Chief Executive Officer

Thanks, Louis.

Operator

Your final question is from Christopher Glynn with Oppenheimer. Your line is open.

Christopher Glynn, your line is open.

Christopher Glynn -- Oppenheimer & Co. -- Analyst

Sorry, I was on mute. Just Industrial margin, second and fourth quarter, it looks like you're going to pull about 14% margin for the rest of the year, that's 400 basis points above the first quarter. You talked about a lot of pluses and minuses in the different -- were mainly pluses in the different businesses, but was first quarter mix particularly adverse in Industrial to afford that step-up?

Patrick J. Dempsey -- President and Chief Executive Officer

I would say first quarter was -- it was a strong quarter in terms of Industrial performance, but there was some mix in there which dampened it a little below what we might have expected. That said, we did make some -- we've been making some large investments into the Industrial business, primarily, if you recall, Chris, last year we announced the launch of our innovation hub and the innovation hub's projects are predominantly and the resources we've added there are to the benefit of Industrial in the short term. Of course, we will see that they will benefit Aerospace as well over the longer term, but in the short-term, it's -- those resources are all allocated to Industrial.

We also, as I mentioned, made the reference to, we've added resources in terms of sales and marketing in Q1, which we expect to benefit as the year -- to receive the benefit as the year progresses. The team is squarely focused on margin expansion throughout the year. So your categorization of it is right on the mark. We do expect to see Industrial improve each quarter as the year progresses.

Christopher Glynn -- Oppenheimer & Co. -- Analyst

Okay. I'll follow up offline, thanks.

Patrick J. Dempsey -- President and Chief Executive Officer

Great, thanks.

Operator

We have no further questions at this time, I'll turn the call back to Bill Pitts for closing remarks.

William Pitts -- Director, Investor Relations

Thank you, Megan. We would like to thank all of you for joining us this morning and we look forward to speaking with you next, on July 30th, with our second quarter 2021 earnings call. Operator, we will now conclude today's call.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

William Pitts -- Director, Investor Relations

Patrick J. Dempsey -- President and Chief Executive Officer

Marian Acker -- Vice President, Controller and Interim Chief Financial Officer

Christopher Glynn -- Oppenheimer & Co. -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

Matt Summerville -- D.A. Davidson -- Analyst

Pete Osterland -- Truist Securities -- Analyst

Louis Raffetto -- UBS -- Analyst

More B analysis

All earnings call transcripts