Q4 2020 EnPro Industries Inc Earnings Call
Greetings and welcome to the <unk> Pro Industries fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over.
The Gerri Johnson senior Vice President of strategy corporate development and Investor Relations. Please go ahead Sir.
Thank you.
Good morning, and welcome to <unk> quarterly conference call I'll remind you that our call is being webcast at intro industries Dot Com, where you will find the presentation that accompanies the call.
With me today are Marvin Riley, our CEO and Milt Childress our CFO.
We are holding our call virtually in a day.
All of them from different locations. So we ask for your understanding should we encounter any technical issues as we coordinate our responses during Q&A.
Before we begin our discussion a friendly reminder, that we will be making statements on this call that are not historical facts and that are considered forward looking in nature.
These statements involve a number of risks and uncertainties, including impacts from the COVID-19, pandemic and related governmental responses and their impact on the general economy as well as other risk and uncertainties that are described in our filings with the FCC Inc.
<unk>, our most recent form 10-K and 10-Q.
We do not undertake to update any of these forward looking statements also during the call. We will reference a number of non-GAAP financial measures.
Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials.
I'll also note that during this call we will be providing full year guidance, which excludes changes in the number of shares outstanding impact.
The impacts from future acquisitions dispositions and related transaction costs restructuring costs incremental impacts of tariffs and trade tensions on market demand and costs subsequent to the end of the fourth quarter.
The impact of the.
Foreign exchange rate changes subsequent to the end of the fourth quarter impacts from further spread of Covid, 19, and environmental and litigation charges.
I also want to remind you that as a result of the sale of Fairbanks Morse in January of 2020, the form of power systems segment is accounted for as discontinued operations in our financial statements for both the current year and prior year periods.
Yes, otherwise noted all of our comments today will refer to continuing operations.
Also as of this fourth quarter's financial results. The company is updating its reported adjusted EPS to exclude the after tax effect of acquisition related intangible amortization.
The company believes reporting adjusted EPS in this manner better reflects the core operating results and offers a more meaningful measure for comparison against the prior periods a full reconciliation between GAAP and adjusted EPS is included in the appendix at the end of the accompanying presentation.
As communicated in February for 'twenty 'twenty, One press release, the company changed its segment reporting structure effective with the fourth quarter of 2020 on.
Our new reporting segments are sealing technologies, Inc.
Surface technologies in engineered materials.
Current and prior year quarters, and full year from natural metrics have been recast to reflect the new segment structure.
Historical data for the new reporting structure is available at the Investor Relations section of Intros Company website.
We were pleased to announce the intro is planning to host.
A virtual Investor day on Thursday may 27th.
Marvin Riley President and Chief Executive Officer, Milt Childress Executive Vice President and Chief Financial Officer, and other members of <unk> Executive management team will provide an overview and update of the company's long term vision growth strategy business segments and opera.
And from natural objectives registration information for the virtual event will be forthcoming and we hope you will mark your calendars for what we believe will be an informative and exciting meeting on the direction of our company and now I'll turn the call over to Marvin.
Thanks, Gerry and.
And good morning, everyone.
Thank you for joining us today I hope you and your families continue to remain safe and healthy.
Yes.
As vaccines to become available we're hopeful that the severe impacts of the global COVID-19 pandemic will begin to subside. Our organization continues to remain vigilant about enhancing safety protocols updating operating processes and adapting to new ways of working together, we are exemplifying <unk> core values of say.
Ft Excellence and respect for all people, while continuing to excel at delivering quality products and services to our customers.
We have remained steadfast in our commitment to these core values and to all of our team members, which has been demonstrated through our public stance against discrimination and social injustice.
Human capital management, including diversity and inclusion has enabled <unk> to achieve success.
Over the last year, we have made progress and our commitment to our employees and society, including establishing our charitable foundation with an initial commitment of $1 million in support of education equality diversity and the preservation of the human dignity.
At our February 11 press release.
Developing our working together from anywhere it makes the data to enable our global work force to collaborate on new ways.
Increasing the number of emails and minority on our senior leadership to the 35%.
Creating and filling of diversity and inclusion of the leadership position to further strengthen our commitment to equality for everyone and developing a platform for small groups of talk openly about biases belief systems and the importance of value different perspectives.
Moving on to our fourth quarter highlights I'd like to discuss three key themes reflected in our results.
First I am pleased to report better than expected fourth quarter results.
The continued challenges created by the pandemic and further lockdowns across much of Europe.
Our fourth quarter, adjusted EBITDA margin expanded 230 basis points.
17, 4% with adjusted EBITDA of $48 $1 million, an increase of 11% year over year.
The strong performance was the result of actions taken to reshape our portfolio, including the acquisition of the Luxor and several strategic divestitures as well as our quick and decisive cost mitigation initiatives in response to Covid.
Second we maintained a disciplined approach to capital allocation and a strong balance sheet as we drive long term shareholder returns.
With approximately $230 million.
Of cash on the balance sheet at the end of the quarter, an untapped revolver and our relentless focus on cash generation, we are well positioned to consider additional bolt on acquisition opportunities.
And third we have made significant progress over the last 18 months on stabilizing our financial results and evolving our portfolio towards more profitable businesses and higher growth markets to improve cash flow return on investment.
With the successful acquisitions of lean Sac N D. A separate group during 2019 and the most recent acquisition of of luck. The we have a solid foundation for our organic and inorganic strategies to drive profitable growth.
Turning to slide five.
As we look back over the year, we have adjusted successfully to pandemic conditions and are now in the final stage of our Covid pandemic response plan as.
As the consequence of the pandemic, we fundamentally changed several aspects of our business.
We developed the number of enhanced safety practices during the pandemic and we will continue to you even after the pandemic has subsided.
We have established appropriate inventories of PPE and the.
Full loop system, the test trace and monitor employee health.
We hope the safety of our team members to the highest standards, while they continue to deliver exceptional level of service. The then pro customers expect.
We are committed to maintaining the advantages of our working together from anywhere initiatives for salaried employees, where it makes sense on a permanent basis.
Our it team has put new tools in cyber protocols in place to allow us to enhance connectivity engage collaboratively and work productively across our businesses and geographies.
Our re imagine way of working on has provided the new lens through which to think about how we can take advantage of the unique talents of colleagues across our global organization.
The new way of working has allowed us to experiment and as a result has provided us with insight on how we might connect in a more meaningful way with our customers.
Our supply chain team remains of notable strength as we have had no significant supply chain disruptions during the pandemic we.
We fortified our supply base in 2020 by establishing strategic secondary sources for critical raw materials.
We work with reliable suppliers in multiple geographic regions to mitigate a broad spectrum of risks and promote supply continuity.
Transportation agreements with multiple ocean over the road and small parcel carriers.
<unk> for flexibility and how we optimize inbound and outbound movement of goods.
Our nimble response.
The COVID-19 pandemic and robust cost mitigation initiatives together with our portfolio reshaping actions enabled our company to achieve flat year over year adjusted EBITDA. Despite a nearly 11% decline in sales during 2020.
This represents an adjusted EBITDA margin expansion of 170 basis points for the full year of tremendous seat for the N protein of mid 2020 macroeconomic challenges.
Our strategy has remained clear and consistent.
We're focused on four areas.
First reshaping our portfolio to accelerate growth of niche high margin materials science related businesses with strong cash flow.
Second.
Maintaining our high aftermarket exposure and increasing our exposure to faster growth businesses.
Third leveraging the end broke capability center to increase margins and cash flow return on investment and force maximizing long term shareholder returns through our commitment to disciplined capital allocation.
Through the capability center, we leverage continuous improvement methods across the company to improve productivity efficiency pricing and sales force effectiveness to drive increased margins and increased cash flow.
Since its inception, the capability center is utilized industry best practices and the collaborative approach the problem solving to drive improvement throughout our businesses the.
Capability centered methods and tools are fully integrated in our company, serving both existing and newly acquired businesses and reaching from the C suite all the way to the shop floor. We look forward to talking more about the capability center at our upcoming Investor day.
We continued our actions to reshape our portfolio during the fourth quarter by closing the acquisition of of luck the pain.
October completing the sale of stem code Air Springs business in November and completing the sale of GGP Bushing block business at the beginning of December.
The Air Springs, and Bushing block the divestiture will allow us to refocus the respective businesses on.
On higher margin product line.
Specifically the sale of stem code Air Springs business marks the completion of our efforts to reduce our heavy duty truck market exposure. Our remaining stem go heavy duty truck business will now be focused on high margin wheel and sealing systems and suspension components with these actions we anticipate.
Our heavy duty truck business annual sales will range from $125 million to $175 million, reducing the percentage of our total sales in trucking from the mid 'twenty two of the mid teens.
On February four we issued a press release announcing the re segmentation of our business into three reporting segments.
The re segmentation aligns our technical and operational expertise improves performance management decision, making and enhances transparency for investors.
Our new segments are first sealing.
Sealing technologies, which is comprised of garlock temco and the tech net healing businesses.
These businesses are focused on safeguarding critical environment.
Second the.
Advanced surface technologies, which is composed of of Luxor in our semiconductor business, including latex. These businesses are focused on advancing precision services and solution.
And third engineered materials, which is composed of GGP and CPI. These businesses are focused on enabling high performance polymer applications.
Let me now highlight the success of our recent acquisitions.
The three acquisitions made within the last year and a half are great. Examples of investments, we're making to execute our profitable growth strategy.
The accepted group acquisition closed in July of 2019, followed by lean Tech, which closed in September of that year, and the Luxor, which closed in October 2020.
These acquisitions expand our reach into the attractive semiconductor aftermarket.
Pharmaceutical biopharmaceutical and life Sciences industry.
All of these companies have strong competitive positions in high growth markets excellent margins robust cash flow and serve markets with secular trends supporting long term growth.
These acquisitions also align with our capabilities and growth strategy due to their technical expertise niche market leadership mission critical applications and recurring revenue model.
The aseptic group, which designs manufactures and distributes a septic fluid transfer products to support manufacturing of next generation biopharmaceutical by the world's largest pharma company has performed well since joining and growth and has been integrated into the sealing technologies.
Yeah.
During this integration our growth initiatives focused on geographic and product range of expansion.
By leveraging our resources and the capability Center, we moved quickly to bring in talent increase warehouse capacity and implement new supply chain policies to improve response time to our customers. This resulted in a 30% increase in backlog, mainly driven by an increased order flow from heightened.
Man for clean room services.
Cleantech, which provides cleaning services for critical components used in leading edge semiconductor equipment has been a very successful acquisition.
Over the past year. The business has maintained its high profit margins, while increasing revenue of approximately 40% driven by continued demand for advanced node semiconductor chip.
To manage the tremendous growth we're experiencing we're on.
Opening new capacity in a different facility in Taiwan that is specifically designed to increase our capabilities in five and three nanometer applications. We're also in the midst of increasing capacity utilization within lean Tex No Peter's, California facility to support next generation wafer fab equipment.
<unk> development.
And finally of Luxor, which provides precision optical filters and thin film coatings for the industrial technology life Sciences, and semiconductor markets. While we're still in the early stages of integrating this business and its potential contribution is every bit as promising as lean tech.
Our integration approach is very balance focusing on utilizing the end broke capability center.
Being careful not to disrupt day to day business.
Even in the early innings the capability center has already identified ways to reduce logistics costs and is currently working to enhance the quality system of Luxor.
Our goal is to allow the experienced management teams of the successful businesses the <unk>.
Lot of G to continue to run their operations effectively and efficiently, while providing them with and per our resources in the form of capital talent functional and organization of support.
With the Luxe, we anticipate the strong for first quarter, given the order intake momentum and backlog heading into the year, which gives us great confidence in the initial stages of the acquisition.
We've been very pleased with the overall performance of these acquisitions to date and as we enter 2021, we're focused on capturing the full benefits of these acquisitions to drive further value creation for shareholders now.
Now I will turn the call over to note for a deeper dive into the financial results for the quarter milk.
Thank you Marvin and good morning, everyone.
In the fourth quarter sales of $276 million decreased three 7% year over year.
<unk> weakness in oil and gas general industrial and aerospace markets.
This was offset in part by positive momentum in the semiconductor food and pharma automotive power generation and heavy duty truck markets as well as the contribution from the acquisition of Alexa.
While demand increased in the heavy duty truck market revenues declined as a result of the portfolio reshaping actions.
Excluding the impact of foreign exchange translation and sales from acquired and divested businesses sales for the quarter declined one 6% compared to the fourth quarter of 2019.
As Marvin indicated our fourth quarter performance was significantly better than our expectations at the time of last quarter's conference call.
On a sequential basis sales in the fourth quarter increased two 9% over the third quarter.
And markets, where we saw the greatest sequential sales improvement included general industrial automotive power generation and food and pharma.
Sequential sales also benefited from the <unk> acquisition.
Gross profit margin of 37.5% increased 330 basis points versus the prior year period, driven by the benefit of divesting low margin businesses as well as the initiatives supported by the <unk> capability center, including supply chain and other company wide cost reduction.
<unk> programs.
The year over year improvement in gross profit margin was achieved despite of $3 million amortization of acquisition related inventory write up in the fourth quarter of 2020.
Adjusted EBITDA of $48 $1 million increased 11, 1% over the prior year period as the result of strategic acquisitions, and previously announced the cost reductions taken across the company in response to Covid.
Adjusted EBITDA margin of 17, 4% increased approximately 230 basis points compared to the the fourth quarter of 2019.
Corporate expenses for the quarter were $10 $6 million of decline of two 8% compared to the prior year period.
Adjusted income from continuing operations attributable to info industries was $25 $4 million, an increase of 27% compared to the fourth quarter of 2019.
Adjusted diluted earnings per share of $1 24 increased 27, 8% compared to the prior year period.
As noted in our earnings release and mentioned by Jerry commencing with the fourth quarter of 2020, we're changing the adjusted EPS from the previous presentation of this non-GAAP measure to one that excludes after tax acquisition related intangible amortization.
We believe presenting adjusted EPS in this manner that of reflects core operating results and offers a more meaningful measure for comparison against prior periods.
Amortization of acquisition related intangible assets in the fourth quarter was $10 9 million compared to $11 $1 million in the prior year period.
We've also updated our estimated normalized tax rate used in determining adjusted net income.
And adjusted earnings per share to 30% from the previously used normalized rate of 33%.
This update is driven largely by our portfolio of portfolio reshaping. The moves that have resulted in a greater percentage of earnings in lower tax rate jurisdictions, such as the U S and Taiwan.
In the fourth quarter, we recognized environmental charges of $22 million, which led to our GAAP net loss in the fourth quarter.
These charges were principally for reserve increases associated with estimated remediation costs for two legacy environmental matters, where we do not have sufficient information to estimate certain remediation costs until the fourth quarter.
The responsibility for these matters, which contributed Inc. Pro at the time of the 2002 spin off from Goodrich Corporation.
One of these matters involves the eight uranium mines in Arizona operated by corporate predecessor, and the 19 fifties.
<unk> had been closed for decades the.
Second matter involves the cleanup underneath the plant at the water Valley, Mississippi site owned by a third party, which is incremental to the immediate remediation work at other areas of water valley ongoing for some time.
We booked reserves to reflect our baseline estimate of the remediation cost for the sites based on information on potential remediation plans that developed in the quarter.
We separately recorded an asset of $3 $8 million related to an expected recovery from the U S government associated with the uranium mine remediation, which is included in other non current assets.
We now have established baseline reserves from all sides, where we hadn't known environmental remediation obligations adjust.
Adjustments to these reserves may be required in the future as remediation plans further develop or to reflect changes in estimated costs to implement these plans.
We're not aware of any need to make any such adjustments at this time.
Cash outlays for all environmental matters were $33 $8 million in 2020.
For 2021, we expect environmental cash payments to decline to approximately $13 million.
Beyond 2021, we anticipate annual cash payments for the next four to five years to declines of low single digits, reflecting the significant progress we have made over the past two years.
Dressing on resolving our most significant legacy environmental liabilities.
Let's take a look at the segment performance.
Sealing technologies, which includes carlock stinko and the tech net sealing business had sales of $154 $7 million on the fourth quarter the year over year decline of 11, 3%, which do the softer demand in general industrial and aerospace markets offset in part by stronger performance in food and pharma and <unk>.
The duty truck markets.
The sales decline was impacted meaningfully by the divestiture of Sim because air Springs manufacturing business in late November and the sale of stem because motor oil Christian businesses during the third quarter.
Excluding the impact of foreign exchange translation and sales from acquired and divested businesses sales decreased two 9% versus the prior year period.
On a sequential basis sales in the fourth quarter decreased 2% and excluding portfolio reshaping activities sales growth would have been in the high single digits.
For the fourth quarter adjusted segment EBITDA increased five 4% true to.
The $34 $9 million, despite the decline in sales and adjusted segment EBITDA margin expanded 360 basis points to 22, 6%.
Improved margin was driven primarily by production and operational cost reduction initiatives and the portfolio reshaping of the segment.
Excluding the impact of foreign exchange translation acquisitions, and divestitures adjusted segment EBITDA increased 10, 6% compared to the prior year period.
Turning now to advanced surface technologies, which includes the Luxor in our semiconductor business.
Fourth quarter sales of $49 $9 million increased 27, 3% driven.
Driven primarily by the acquisition of Alexa and continued strength in the balance of the segment.
<unk> is showing strength as the five nanometer platform is ramping quickly and we are responding to demand with the agility by expanding our capacity in both Taiwan and the U S.
In addition demand for of Lexis products from Nike remains robust with strong performance across its end markets and solid order intake and backlog heading into 2021.
Excluding the impact of foreign exchange translation of sales from acquired businesses sales increased 10, 7% versus the prior year period.
On a sequential basis fourth quarter sales increased by approximately 12% from the third quarter driven by the acquisition of election at the end of October.
For the fourth quarter adjusted segment, EBITDA increased 57, 1% to $15 $4 million and adjusted segment EBITDA margin expanded 590 basis points to 39% driven primarily by the likes of acquisition and growth in the balance of the segment.
Excluding the impact of acquisitions divestitures and foreign exchange translation adjusted segment EBITDA increased 10, 2% compared to the prior year period.
In engineered materials, which consist of GGP in CPI fourth quarter sales of $73 $6 million decreased two 5% compared to the prior year, primarily due to weakness in oil and gas and general industrial and petrochemical markets.
Partially offset by strength in the automotive and power generation markets excluding.
The impact of foreign exchange translation sales for the quarter decreased five 6%.
Sequentially sales increased approximately 9% as we saw demand rebound in automotive and general industrial markets.
For the fourth quarter adjusted segment EBITDA decreased two 6% and adjusted segment EBITDA margin of 15, 5% was flat versus the prior year period.
This was driven primarily by sales declines partially offset by cost reduction initiatives that include the decreases in head count and discretionary spending.
Excluding the impact of foreign exchange translation adjusted segment EBITDA decreased seven 7% comp.
Compared to the prior year period.
Now, let's turn to our financial position.
Our balance sheet remains strong.
We ended the quarter with cash of $230 million and had full availability of our $400 million revolver less $11 million from outstanding letters of credit.
At the end of December our net debt to adjusted EBITDA ratio was approximately one six times.
During the fourth quarter, we financed the <unk> acquisition through a combination of $238 million of cash and rollover equity from Alexa executives equating to 7% of the acquisition of price.
When taking this transaction into account as well as divestitures and exits since December 31 2019.
Our pro forma net debt to adjusted EBITDA leverage ratio would be comparable to the year end reported level.
Other than nominal amortization of our term loan we have no debt coming due until 2024 subject to applicable reinvestment requirements related to the Fairbanks Morse and other divestitures.
We have largely met these requirements as a result of the Alexa acquisition.
And in January we obtained an amendment to waive that requirement under our credit facility.
Part of our senior notes, we have until April 25th to satisfy any remaining outstanding reinvestment requirements, which can be satisfied if needed by paying down a portion of the term loan under the credit facility.
2020 free cash flow of $39 $3 million was down from $109 $2 million from the prior year, primarily driven by higher 2020 payments related to environmental settlements and a third quarter legal settlement, both of which we discussed on our third quarter earnings call.
As well as significantly higher year over year tax payments, resulting largely from the gain on the sale of Fairbanks Morse.
Excluding environmental and legal settlements as well as tax payments in both years free cash flow increased 12% from the prior year.
Okay.
During the fourth quarter, we paid a <unk> 26 cents per share quarterly dividend totaling $5 $5 million.
Last week, our board of directors approved of 4% increase of the quarterly dividend from 26 per share to 27 cents per share.
We continue to prioritize investments in organic and inorganic growth and have not made any repurchases under the two year of share repurchase authorization announced last quarter.
Under this authorization, we may repurchase up to $50 million in shares providing us with the flexibility to return capital to shareholders subject to balance sheet and growth investment considerations.
Now I want to provide a high level look at the impact of our portfolio reshaping on sales adjusted EBITDA and adjusted EBITDA margins.
Slide 14 provides results for 2020, as if acquisitions and divestitures completed in 2020 had had closed effective January one 2020 of.
As shown on the slide on a full year basis, our 2020 pro forma sales are $983 million or eight 5% lower than reported sales.
2020 pro forma adjusted EBITDA is $167 $5 million are relatively flat with reported adjusted EBITDA, resulting in a net adjusted EBITDA margin increase of approximately 130 basis points to 17%.
This information shows the trailing effect of the portfolio changes and we expect our strategic actions to enhance sales growth and margin improvement in the years ahead.
Moving now to 2021 guidance taking into consideration of all the factors that we know at this moment, including the ongoing global economic recovery from the Covid pandemic.
We expect 2021, adjusted EBITDA to be in the range of $178 million per $188 million.
On sales growth of 6% to 10% over 2020 pro forma sales of $983 million.
We expect adjusted diluted earnings per share from continuing operations to be in the range of $4.32.
The $4 66.
The table on the earnings call presentation provides additional assumptions to help bridge from the adjusted EBITDA to adjusted EPS.
We currently anticipate slightly less than half of our full year adjusted EBITDA and adjusted EPS guidance to be realized in the first half of 2021 with acceleration as the first half progresses.
Now I'll turn the call back to Marvin for closing comments.
Yeah.
Thanks Mel.
I'm extremely proud of the progress you've made during 2020 and transforming and grow into a leading industrial technology company using materials science of push boundaries in semiconductor and life Sciences and other technology enabled sectors.
Our strategic achievements during 2020 has built a solid foundation for profitable growth in 2021 and beyond.
Our teams have adapted remarkably well during the COVID-19 pandemic and we're now positioned to capture growth as our markets recover our current order trends of strong surpassing what we saw in January 2019, we're encouraged by what we're seeing and hearing from our customers, particularly.
In the semiconductor heavy duty truck and automotive market.
We're expecting year over year improvement in most of the markets and geographies we serve we.
We continue to focus on driving operational excellence by leveraging the end brokers capability center to reduce costs improve productivity and maintain high quality control across all our businesses, including those recently acquired and.
And from success will be determined by our adherence of commitment to our profitable growth strategy, our experienced leadership team our increasingly diverse and dedicated workforce, our strong financial position and our focus on driving the long term shareholder value.
And before we open the line for questions I'd like to share that both tech medics and DGB supplied part.
He has been the Mars landing of the perseverance of Rover last Thursday did you be provided metal polymer bushings and the <unk>.
Pension components for drill spindle attached to a robotic arm that drilled and brakes rock the collect samples for analysis.
<unk> provided edge welded metal bellows that are a part of the sample collection systems and function of vacuum induction for the system to support the goal of returning the cleanest sample possible from ours, we are happy and proud to be suppliers to such a historic mission.
You again for joining us on the call today, let's open the line for questions.
Thank you will now be conducting a question and answer session. The people that can be placed on the question queue. Please press star one under telephone keypad of.
A confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up of handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Jeff Hammond from Keybanc.
Capital markets. Your line is now live.
Hey, good morning, guys how are you.
Good morning, Jeff on Jeff.
So just.
I know a lot of the moving pieces, but I think of mill you you mentioned, the 6% to 10%.
Growth from a pro forma standpoint is that kind of the way to think about core sales.
Or can you can you give us kind of of core sales range.
Kind of.
Adjusting for Alexa coming in and some of the business is coming out in any.
FX in there.
Yeah, that's a that's a good question, Jeff, especially given all of the changes.
The changes that we had in our.
Our business over the past year, the best way to look at us for the baseline going into 2021, and it's exactly what you pointed to and that was the pro forma.
The information that.
That I provided in you see of slides summarizing that in the presentation that accompanies this call and so that that will give you a pretty good idea. So we're going in to 2021 on a pro forma basis because this assumes the.
That the Alexa.
Alex acquisition happened at the first of 2020 as well as the divestitures in heavy duty truck the move.
In dos in GGP that all of those things happened.
At the first of 2020 of how much of the purpose of putting the pro forma together.
So you say you see what that shows in terms of the.
The sales change versus reported the margin change versus reported.
And I think that addresses your question, but anything else.
Please jump back in.
And as you look at the three segments do you think the growth rates within each of those on an organic basis or kind of be similar or is there outsized growth because I know I know certainly you know S. T is kind of a long term higher grower, but certainly you've got some cyclical juice from the other two.
Yes, that's another good question Martin if you want on I'll provide a little bit of color, but my might help you a little bit and think about it in terms of pro forma.
And then Marvin if you want to comment on growth rates because there certainly are some differences.
Among the segments when it comes to growth.
But if you look at sealing.
Can you break down the eight 5%.
Delta between reported and pro forma sales in total.
You don't find most of that declines from sealing obviously, because that's where we had.
A good bit of heart of divestiture activity on the heavy duty truck side, it's all on that segment.
So on a pro forma basis.
Versus reported a sealing would be down about 17% as the results of those moves.
Advanced surface technologies would be up about 16% on a pro forma basis versus actual and engineered relatively flat down.
A few percentage points.
<unk> was a fairly small business, but call it down 4% or so.
And then on the margin front.
On a pro forma basis from sealing as a result of the news.
We had an expansion of the around 150 basis points in margin.
Again reported versus pro forma on.
Advanced sealing the vast surface technologies of nice expansion.
The reported versus pro form of 250 basis points or so and then engineered materials.
You know of small a small increase because of the dos operation was operating essentially at a slight loss at the EBITDA level. So you know less than a 100 basis points of improvement in engineered materials reported versus pro forma.
Okay.
Hey, Marvin if you've a lot of field.
The channel shifts.
Yes in terms of growth rate, Jeff I think the best way to think about it is.
Selling has a lot of our legacy businesses that.
On that are really strong.
The resilient businesses that.
Our GDP plus kind of businesses, we might see a little bit more growth. This year, just because of the kind of year that we're coming out of.
Industrial production for this year is roughly four 5%.
And so that a lot of the businesses. There is industrial production and then you've got heavy duty truck, which.
It might have some outsized growth this year, just because of what's happening in the market does rebound there if you look at FTR true.
<unk> builds of trailer builds are going to be up over 30% of ton miles are going to be up over 5%. So we might see a little bit more growth.
And <unk> this year than we would typically see so that gives you a little bit of color on what's going on in sealing and then S. T. Our new segment, that's a double digit grower just because of what's in there and the end markets that they serve so that that's what you should anticipate there and then.
In engineered I think you've got another unique situation going into 2021, where we should experience of rebound.
Automotive.
If you look at automotive from a light vehicle.
The production perspective on a global basis, that's up around 14%.
Sort of in aggregate, so we will see a little bit more lift this year than we typically see.
But our other businesses in engineered is CPT and Thats impacted on the downside by.
By oil and gas so it's hard to give you exact numbers right. We've given you a good full year forecast, but we're going to see some strength in some pockets that.
Depending on our ability to meet demand.
And the.
The resiliency of the demand that we're seeing.
We could we could have some stronger growth areas than normal, particularly heavy duty truck semiconductor and automotive.
Okay, and then just last one.
So on your pro forma EBITDA margin for <unk>.
In your slide 17% of I think the guidance is just above that like low seventeens.
I guess on on kind of robust growth I would of thought the incremental margins would've would've given of a bigger lift.
You know then kind of flattish or slightly up EBITDA margins.
Yes, Jeff it's a good observation.
If we do get robust sales of.
We're expecting to.
Be able to at least perform at the same level as we have on a pro forma basis once against pro forma it's still a nice increase year over year.
Part of what we have is where we're planning on some of the costs that we took out and we talked about this earlier.
In the year or or or last year on previous calls.
Some of the costs that we took out in two.
2020, as a result of Covid coming back into our system.
So.
That's part of part of the reason why.
<unk> observed in our guidance, we're not showing kind of more margin expansion than you see.
How much of the temp question of coming back.
We estimate that that we were able to take out roughly $30 million as a result of the initiatives that we put in place last year and I would say that you know that.
Those plans were put in place.
Kind of the middle of middle of the second quarter of last year.
And and we estimate about $15 million would.
Would be coming back so 15, we'll be able to hold on to 15 coming back and then obviously we have year over year.
The cost increases.
We're managing that are offsets against the per.
The net reductions.
Okay very helpful. Thanks, guys.
Mhm.
Thank you. Thank you as a reminder of that star one to be placed in the question queue. Our next question today is coming from Justin Bergner from G. Research. Your line is that a lot.
Good morning, Marvin good morning milk morning, Jerry.
Good morning, Jeff how are you doing range.
Gotcha.
Good morning.
A good end to 2020.
Just had one quick follow up question on the sort of growth guys are I guess to sort of flow.
The questions. There you know what currency tailwind are you assuming in the revenue guide.
And you know outside of the sort of faster growth of advanced surface technologies that you described versus the business as a whole are there any of their material mix issues affecting sort of the margin outlook as you look into 2021 of the rest of the 2021.
Yeah, Hey, Jonathan This is Mel I'll, let me take the first question.
On the on currency.
But when we provide.
Our outlook and this is true throughout the year.
We're always doing it.
With the perspective of of the kind of where we are currently at the time and so.
If you look at our biggest currency exposure it would be the euro.
The dollar $20 21, or so at the end of the year and it stayed at about that level since the end of the year.
So.
Our guidance is based on right. So we're not we don't we don't project.
Of what might happen to currency, so yeah the currency move.
Moves of good bad either of the dollar continues to weaken or if it reverses and strengthens.
No that'll have some impact.
On our guidance and we'll comment on that as the year progresses.
Martin do you want to take the second question on costs, Yes, I'm, a little color on the sort of mixed piece and the cost piece. So Justin as you know.
We've been through a couple of these downturns before and have some history in terms of what typically happens right. So coming out of these downturns.
Typically get.
On a nice nice rebounds in all of the end markets that we serve we're seeing that today minus the aerospace and oil and gas everything else is really rock solid, but we also see commodity prices start to take off as well right. So on the cost side.
We're managing right now is increases in steel pricing increases and bronze pricing, we're pretty well positioned.
With PTFE, which is the largest commodity that we purchased but you know.
Some of the the mix.
Issues that we will see this year that impact our cost basis is we do have a.
A strong recovery in automotive, but we also have steel on Brian's powder increases that will impact our automotive business is a little bit as well as the.
The <unk> business. So we are real thoughtful in how we thought about the full year, taking those things into consideration, obviously, we price and price aggressively we put some good processes in place during the downturn to really link the supply chain group the commercial group of little bit tighter. So that we can pass on price increases immediately.
As we start to see them and we've already started that process, but.
I think it's mindful, we're mindful of that.
We have to manage the sort of an increasing.
Cost exposure, particularly with our commodity.
Great. Thanks, that's helpful.
Maybe with respect to just the portfolio reshaping.
Your comments on the call use the words for bolt on to describe your current M&A focus.
The press release.
You know just sort of spoke to general inorganic.
Growth.
As we look forward from the recent you know more material sized acquisitions of sort of out of new legs of the business.
Are you thinking of additional edge of the business or are we sort of more of bolting onto the the new platforms at and pros added over the last two years.
That's a great. That's a really really good question, let me, let me just take a step back and just.
Maybe give you a sense of you know.
How we think about.
M&A.
And I think that might give you a little bit of color, but I'll start first and foremost with.
What what is what is a good fit look like for us, particularly as we think about material science. So in the in its most simplistic way, we think about it from the perspective of is the business we're looking at.
Does it fall in the materials science umbrella of meaning does is there some kind of of substrate.
That you place a performance material on top of that enhances that <unk>.
Solutions performance in a specific application right. So whether it's the bearing where you have steel on you layer on PTFE.
Whether it's the luxe that where you have maybe of glass substrate in the layer on some deposition material. So that you could perform better as the filter at the end of the day, that's kind of the lens that we look at it with right are we putting a performance material on top of the substrate right. Then it then it's the question of do we have the capabilities.
House to enhance what that business is doing whether it be whether it's from the perspective of the customer.
Whether it's from the perspective of from an operations perspective.
And whether it's supply chain et cetera, et cetera, we look at the customer buying patterns do they care about technical specifications and lead time more than the care about cost those are the kinds of things that we look at the.
The science itself is a little bit more agnostic, because we think we have deep expertise within our businesses.
So as we added the Luxor.
For us it's.
It's really.
Building on skill sets and capabilities that we have in the business. So we added lean tech we are building on the skill sets of capabilities that we have on the business as we look at other acquisitions, we'd be looking at it through the same line. So can we can we build on.
On skill sets and capabilities that we have in the business as someone taking its dropped straight adding some kind of performance of material using some deposition process that we know really really well that we can add on to the business. That's how we look at it it keeps the aperture wide enough, but it keeps us focused enough around where we have the.
Skill sets of capabilities to participate right, we like the strong management team, we'd like in attractive segments with strong growth.
We want a strong competitive position, we werent robust IP and trade secrets right those of the kinds of things that we think about so any acquisition. We look at will be looked at through that lens and so.
We think about businesses in the future.
As long as it fits those criteria, we would we would be very very interested.
And obviously, if it is something that enhances something that we've already acquired we'd be super Super excited about that if we found the business that.
Supercharged with the Luxe is doing we would be excited supercharged with Mediatek is do it wouldn't be deciding if the supercharge what we're doing in sealing technologies, we'd be excited right. So that's how we think about it.
I Hope I hope that's helpful.
No that is very helpful. So I guess the distinction on so much as you said around bolt on.
Versus larger it's around the <unk>.
Material science and the performance that's right.
Okay. That's helpful and then just lastly.
I guess of lot of moving parts on the environmental on legal liabilities.
Imagine the 10-K, we'll have the specifics, but I mean should I think of the remaining sort of unpaid environmental liabilities to sort of be that around $30 million thinking about that $13 million in 2021, plus a few million you know going out of the following five years yeah.
It remains sort of on the legal side beyond the.
The environmental claims.
Yes.
Justin we will have a lot of disclosure on the K. So yeah, you're right you can you can look at.
At the details that we provide there essentially what we've tried to provide or what I tried to provide on the call.
Does just indication of what to expect from us from there.
Our cash outlay over.
Over the next few years, because we've had some pretty large reserve increases this year, we've had had some settlements.
There were pretty big dollars relatively speaking in 2020.
But it's all in an effort to bring these larger legacy environmental matters to completion and as you know.
The liabilities of this type of really long long tails and so the good news is.
After a pretty significant cash outlay of year in 2020.
Partly because of settling some third party claims.
And partly because of remediation.
We're expecting that number to step down significantly.
The cash payments significantly in 2021, and then to tail off.
Significantly after that for several years now some of the.
The the effect of the of the reserves that we took.
For the uranium mines for example, you know the.
Actual remediation of that could be out a number of years and so.
We don't think over the next four of five years.
Net the cash outlays are going to be significant and then we just have to deal with what the final solution is we provided the estimate in the reserves to the best of our ability.
And as you know for open ended matters like this we have estimates when when.
We have of low end of the estimate and it's it's it's no better than any other estimate in a range that's what we accrued for.
So that gives you a little bit of color, but you can expect the.
The cash that goes out over the next few years to decline fairly dramatically from what we saw in 2020.
Okay, great. Thank you for taking my questions.
Thank you.
Thank you we reached the end of our question and answer session of it is from the floor back over for any further or closing comments.
Thank you Kevin and thank you all for joining us this morning and half of free.
Okay.
Thank you Jerry. Thank you all of that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Yeah.
Yeah.