Q4 2020 Barnes Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Barnes Group, Inc, fourth quarter and full year 2020 earnings.
The call and webcast at this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
Close to hand, the conference over to Mr. Bill Pitts Director of Investor Relations. Please go ahead. Thank you Sharon.
Good morning, and thank you for joining us for our fourth quarter and full year 2020 earnings call.
With me are Barnes group's president and Chief Executive Officer, Patrick Dempsey.
And vice President.
I know on an 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 B G. I N C dot com.
During our call, we will be referring to the earnings release supplement.
Controls, 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 investors.
These measures have been reconciled to the related GAAP measures in accordance with FCC regulations.
You will find a reconciliation.
Filiation 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.
But 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.
Arctic filings with the SEC.
These filings are available through the Investor Relations section of our corporate website at B G. I N C dot com.
Let me now turn the call over to Patrick for his opening remarks, then Maryann will provide a review of our financial results and some of the details.
<unk> of our initial outlook for 2021.
After that we'll open up the call for questions Patrick.
Thank you Bill and good morning, everyone.
The resiliency of Barnes group was apparent once again this quarter as we grew sequential revenues for the second consecutive quarter and.
And delivered adjusted EPS above the high end of our October outlook.
Given the historic challenges, resulting from the global pandemic from most of 2020 on.
I'm very proud of the many contributions of our 5000 employees across the globe, who stepped up to the challenge by going.
Above and beyond to meet the needs of our customers.
And support our communities.
And while I am happy with our performance given the significance of the disruption.
We at Barnes group remain mindful and respectful of the personal and social hardships caused by the pandemic across the world.
From the onset on.
Our response to the pandemic was structured around four phases.
First and foremost the health and safety of our employees.
Second adjusting the business for the stark realities of lower demand.
Third anticipating and adapting to structural shifts.
And some of our end markets.
And Ford, making key strategic investments to position Barnes group for an economic recovery.
While we moved our current while we have moved our current focus to phase four we have not lost sight of the first three phases as they continue.
To be important.
Through 2021 thing that has remained unchanged is our vision to be a leading global provider of highly engineered products.
Differentiated industrial technologies, and innovative solutions, serving our diversified end markets.
For the fourth quarter organic sales were down 21%, primarily as a result of lower volumes given the pandemics continuing the impact on our end markets.
Especially at aerospace the.
Fourth quarter saw a 7% increase over the third quarter with both segments generating sequential sales improvement.
<unk> adjusted earnings per share were 36 cents.
58% from last year.
So as mentioned just above the high end of our October outlook.
Looking at the full year organic sales were down 22%, while adjusted earnings per share were one.
$1 64 down nearly 50% from a year ago.
As difficult as those numbers are early cost actions and a focus on cash generation allowed us to maintain double digit margin positive earnings and strong cash flow throughout the year.
As we turn to page on 2020, our mindset is shifting.
And our focus has returned to driving growth both organically and through acquisitions.
With a keen focus on our strategic filters, we continue to explore enabling technologies and market leading businesses.
That would complement.
Our current portfolio with several potential targets in the pipeline being analyzed.
We remain enthusiastic and our pursuit of value, adding transactions that strategically advance our transformation.
More immediately and emphasis on organic investments with target growth orientated.
<unk> capital expenditures.
Research and development efforts and further build out of our newly established innovation hub capabilities.
While these investments will influence margins in the short term.
They are instrumental to position the company more favorably for the long run.
It's my.
The expectation that we'll be talking frequently about our innovation and digital initiatives as we progress through 2021.
Moving now to a discussion of end market dynamics.
<unk> with industrial.
At industrial we see the continuation of favorable trends.
As discussed on our last call.
Manufacturing PMI and our major geographic markets remained strong.
And correspondingly, we've seen fourth quarter organic orders at industrial grow 10% over a year ago.
Sequential industrial orders were up 9% over the third.
Trends.
And segment book to Bill was slightly better than one times.
So as we think about our industrial expectations for the upcoming year, we feel bullish about the prospects for this part of our business.
Molding solutions generated very strong orders in medical end markets.
Quarter with year over year and sequentially, each with well over 50% growth.
Medical sales lagged a bit in the quarter, given a very challenging comparable.
And the timing of deliveries.
We see that as normal given the nature of this business and expect sales to bounce back by the second quarter.
Packaging orders were very strong on both a year over year and sequential basis.
<unk> were up over 20% from a year ago.
Meanwhile, personal care orders took a dip in the quarter.
Sales were slightly down versus a year ago. However, sequential sales were strong.
<unk>, placing over 20%.
Our <unk> business, which is predominantly automotive hot runners saw a modest increase in orders both year over year and sequentially.
Although sales were relatively flat to a year ago, they were up 20% sequentially on.
All in our expectations.
<unk> increased 21 is on organic sales growth to be up in the low double digits for molding solutions.
Sheet metal forming markets also continued to see a rebound as for some motion control orders were up high single digits over last year on up high teens over the third quarter.
While sales were down modestly from a year ago.
Sequential sales were up in the high single digits.
We forecast forced the motion control to generate organic sales growth in the low double digits for 2021.
At engineered components organic.
For 12 orders were up nearly 20% on a year over year basis with organic sales up mid single digits versus a year ago.
Total sales were up high single digits sequentially, continuing to rebound that we've seen over the last couple of quarters.
With general industrial markets on the upswing and globally.
Ganic automotive production forecasted to be up meaningfully in 2021, we anticipate engineered components to grow high single digits organically.
That said, we are very mindful about the current impact semiconductor shortages are having on automotive production.
And we will monitor.
Global actuation carefully as it unfolds.
Looking next at our automation business at.
It continues to demonstrate signs of a positive rebound as mid single digit orders growth over a year ago in third quarter were achieved total sales growth was strong with both year over year.
<unk> and sequential growth of 20%.
Like last quarter demand for our end of arm tooling solutions, and automotive and medical and pharma applications remains solid.
We expect 2021 to deliver low double digit organic growth as these markets remain healthy and as we launch.
Debt to innovative products.
Speaking of new products as I mentioned earlier, our investments in innovation and R&D are aimed at providing a solid foundation for organic growth.
As an example, we recently launched our comprehensive vacuum solutions product line with.
<unk> newly gripping solutions advanced control systems and high quality components.
The vacuum product product range consists of about 1100 items, including high performance suction cups vacuum pumps sensors and related accessories that allow our customers to handle.
And those different objects and various industrial sectors with low energy consumption and reduce downtime.
Overall.
For the industrial segment, we see 2021 organic growth in the low double digit range with adjusted operating margins of 12% to 14%.
Moving now to our aerospace business.
For the fourth quarter Barnes aerospace sales were down nearly 40% at OEM and nearly 50% in the aftermarket from the from the prior year.
Not surprising as commercial aviation remains significantly disrupted by the global pandemic.
Our outlook for aerospace is certainly not as bullish as for our industrial businesses.
That being said, we continue to believe the trough quarter of sales is behind us.
With OEM production levels of narrow body aircraft are expected to improve from here modestly on.
Wide bodies.
We remain pressured.
The journey back to pre Covid levels will most likely take a few years.
The Oems silver lining for the fourth quarter was book to Bill of one six times relative.
Reflective of the strongest orders quarter since the third quarter.
<unk> 2019.
One last point on our aerospace business OEM business in particular, our estimates of OEM sales per aircraft for our major programs are unchanged from our prior view, except for the 737 Max.
With the award of the long term agreement.
Order a T aviation on the Leap program mentioned on last quarter's call. We now forecast approximately $100000 of sales per aircraft up from our previous estimate of $50000.
For the aftermarket many of the factors discussed last quarter.
With GE lower aircraft utilization weakened airline profitability and government imposed travel restrictions are still affecting the industry.
Recovery will require mold more widespread vaccine distribution allow.
Allowing people to feel more comfortable about flying combined.
Quarter of the various travel restrictions that currently exist.
Only then will we see commercial commercial flights return in earnest likely led by domestic travel while international flights are expected to take a little longer to resume.
Until then.
We anticipate afterwards.
With the letter volume to remain pressured.
However, we do expect aftermarket activity to gradually improve beginning in the second half of 2021.
With that as the backdrop for 2021, we see OEM sales up mid single digits over 2020 with MRO down.
Aftermarket single digits on spare parts down in the mid teens.
We anticipate 2021 segment operating margin to be in the range of 13% to 14% surely compressed by the lower aftermarket expectation.
In line with our continued focus on addressing.
<unk> made a various topics of interest to our stakeholders you may recall that last quarter on the topic of ESG I took a few moments to address our commitment to make Barnes group of more sustainable socially responsible and diverse and inclusive company.
While we've made great progress there is definitely.
Dressing work to be done.
Related to our ESG efforts.
I'm proud to highlight that Barnes group was recently named as one of America's most responsible companies by Newsweek.
This acknowledgment is a testament to our employees across the globe, who embrace our Barnes group values each.
And every day.
Before finishing my remarks, I'd like to take a moment to acknowledge Chris Stephens, our former CFO for all his contributions to the success of Barnes group and the key role he played in our ongoing transformation.
On behalf of the entire Barnes group team, we wish him all the best.
And these new endeavors.
So to conclude.
The extraordinary disruption in 2020 required many businesses to play defense, including Barnes group.
Securing employee safety, keeping our essential operations running.
Adjusting to the lower debt.
<unk> levels of demand.
Focusing on costs and preserving liquidity where of Paramount importance.
Given the circumstances the financial results achieved are indicative of the quick and decisive actions taken by the strong leadership team and talented workforce at Barnes.
With the arrive.
Naval of 2021, we now turn to a more offense minded view, increasing our investments in innovation.
Research and development and growth programs across the enterprise.
While the high level of economic uncertainty still exists we are squarely focused on controlling our own destiny.
Okay.
Seeking out new opportunities and setting the company up for long term profitable growth.
Now, let me turn the call over to Marion for a discussion on the financial results.
Thank you Patrick and good morning, everyone.
Let me begin with highlights of our fourth quarter results on slide.
<unk> of our supplement.
Fourth quarter sales were $289 million down 22% from the prior year period with organic sales declining 21% as continuing impacts from the pandemic affect our end markets.
The diversified Seeger business had a negative impact of 3% on our net.
Slide six for the fourth quarter, while FX positively impacted sales by 3%.
Operating income was $32 7 million versus $61 3 million a year ago adjust.
Adjusted operating income was $32 $9 million this year down 48% from $63 5 million.
Last year.
Adjusted operating margin of 11, 4% decreased 580 bps.
Net income was $17 7 million or <unk> 35 per diluted share compared to $41 million or <unk> 80 per diluted share a year ago.
On an adjusted basis net income.
Sales of 36.
Was down 58% from an 86 a.
A year ago.
Adjusted net income per share in the fourth quarter of 2020 excludes a penny of residual restructuring charges from previously announced actions with most of the impact reflected in other expense not operating profit.
Per share for the fourth quarter of 2019, adjusted net income excludes a favorable <unk> adjustment related to the Finalization of dramatic short term purchase accounting and an 11 noncash impairment charge related to the divestiture of Seeger, both in our industrial segment.
Moving to 2000.
These full year highlights on slide five of our supplement sales.
Sales were $1 1 billion down 25% from the prior year.
Organic sales were down 22% for the year.
The Seeger divestiture negatively impacted sales by 3%, while FX had a minimal positive impact.
Operating.
20 of them was $123 4 million versus $236 4 million a year ago.
On an adjusted basis operating income was $144 million this year versus $244 1 million last year, a decrease of 41%.
Adjusted operating margin decreased.
<unk> 360 debt to 12, 8%.
For the year 2020 interest expense was approximately $15 9 million a decrease of $4 7 million as a result of lower average borrowings and lower average interest rates on.
Other expense was $5 9 million a.
<unk> increase of $3 million, primarily as a result of lower FX losses, this year as compared to last year, partially offset by higher pension expense.
The companys effective tax rate in 2020 was 37, 6% compared with 23, 4% last year with the increase largely.
Due to a decline in earnings in jurisdictions with lower rates the.
The recognition of tax expense related to the completed sale of the secret business during the first quarter of 2020.
The impact of the global intangible low taxed income or guilty tax on foreign earnings and the U S and tax charges related to pre.
Higher year stock Awards.
Sure.
For 2020, net income was $63 4 million or $1 24 per diluted share compared to $158 four or $3 <unk> per diluted share a year ago on.
On an adjusted basis 2020, net income per share was $1 60.
64 down 49% from $3 21, and 2019 adjusted.
Adjusted earnings per share for 2020 excludes 27 of restructuring cost and 13th of Seeger divestiture adjustments, while 2019, adjusted EPS excludes <unk> <unk> of dramatic short term purchase.
Tuning adjustments and an 11 noncash impairment charge related to the disposition of the Seeger business.
Turning to our segment performance beginning with industrial.
Fourth quarter sales.
We're $209 million down 9% from a year ago organic sales decreased 8%.
Seeger divested revenue has had a negative impact of 5% while favorable FX increased sales by 4%.
Sequential sales were up 6% from the third quarter.
Industrial operating profit for the fourth quarter was $24 5 million versus $30 2 million last year.
As has been the consistent.
<unk> since the second quarter. The primary driver is lower sales volume offset in part by our cost mitigation efforts.
On an adjusted basis, which excludes a small amount of restructuring charges and Seeger divestiture adjustments fourth quarter operating income was down 24% to $24 7 million and adjusted operating margin.
<unk> found 230 bps to 11, 8%.
For the year industrial sales were $770 million down, 18% from $939 million a year ago with organic sales down 14%.
The Seeger divestiture had an unfavorable sales impact of 5% while.
While favorable foreign exchange had a positive impact of 1%.
Operating profit of $66 6 million was down 42% from the prior year.
On an adjusted basis operating profit was $85 million a decrease of 30% from last year adjusted operating margin was 11% down 200 bps.
<unk> was down.
Moving to aerospace.
Sales were $80 million for the quarter down 43% from last year and operating profit was $8 2 million down 74%, primarily driven by the lower sales volume.
Operating margin was 10, 2% as compared to 22, 3% a year ago.
All in especially considering the meaningful decline in the high margin aftermarket the aerospace team continues to respond well in a challenged environment.
For the full year aerospace sales were $354 million down 36% from a record $553 million a year ago Apo.
Operating profit was.
On a $6 8 million down 54% from last year's record.
$122 5 million.
On an adjusted basis, which excludes $2 3 million in 2020 restructure charges operating profit was $59 million and adjusted operating margin was 16, 7%.
Aerospace.
Was 50 backlog ended the quarter at $572 million up 7% from the third quarter and we expect to ship approximately 45% of this backlog in 2021.
2020 cash provided by operating activities was $215 million, a decrease of approximately $33 million versus.
Last year, Nonetheless solid performance in the current environment, given our focus on driving working capital improvement.
Free cash flow was $175 million versus $195 million last year and capital expenditures of $41 million were down approximately $13 million from a year ago.
OEM hitting the balance sheet, our debt to EBITDA ratio as defined by our credit agreement was approximately three times at quarter end. The company is in full compliance with all covenants of our credit agreements and maintain adequate liquidity to fund operations.
As a reminder, the company amended on a temporary basis the debt limit allowed.
Loud under our credit agreement through the third quarter of 2021.
Our senior debt Covenant maximum our most restrictive covenant has increased from three to five times EBITDA as defined to 375 times, we anticipate leverage to peak with our first quarter 2021 results fell well below.
Regarding covenant level.
Our fourth quarter average diluted shares outstanding was 51 million shares and our share repurchase activity remains suspended.
Turning to slide to slide six of our supplement let's now discuss our initial outlook for 2021.
We expect organic sales to be up.
The <unk>, 8% for the year.
FX is not expected to have a meaningful impact.
Adjusted operating margin is forecasted to be between 12 and 14%.
We expect a couple of pennies worth of residual restructuring charges to come through likely split evenly in the first and second quarters.
Adjusted.
60 S is expected to be in the range of $1 65 to $1 90, approximately flat to up 16% from 2000 Twenty's adjusted earnings of $1 <unk> dollars 64 per share.
We do see a higher weighting of adjusted EPS in the second half with a 40% first half 60% second half.
I'd Epo in particular, we see the first quarter of 2021 being the low quarterly point give.
Given delivery schedules in our longer cycle business in the range of 27 to 32.
Significantly lower than last year's strong first quarter.
A few other outlook items interest.
Half splits is anticipated to be between $16 $5 million and $17 million on.
Other expense approximately $8 5 million driven by pension on.
On effective tax rate of approximately 30%.
Capex of $55 million.
Average diluted shares of approximately 51 million.
Expense and cash conversion of over 100%.
To close 2020, certainly was historic in terms of business disruption. The Barnes group team rose to the occasion to rapidly adapt to the realities of the economic environment with a focus on cost management and cash generation.
Sure and as Patrick mentioned, it's now time to shift our mindset to growth with necessary investments in key initiatives like innovation and digital that are targeted to help us accelerate through the anticipated recovery our balance sheet is supportive of such investments in our sales volume and as our sales volume returns, we expect further margin expansion.
Operator, we will now.
Now open the call for questions.
If you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key first question comes from Myles Walton with UBS.
Hey, good morning. Thanks.
Thanks for taking the question.
Patrick.
You highlighted a couple of areas around the elevated investment.
Particularly on the Capex on the R&D.
You, obviously quantified the Capex could you quantify on the R&D headwind as well.
Sorry, if I missed it and then also is it primarily associated with the leap.
As well on Shannon.
Those weighted with.
Other things and maybe.
Elevated between.
Aerospace and industrial.
Fair question Myles, it's predominantly at the moment more focused on the industrial side of the business.
If you may recall last year.
The expense we indicated in our first quarter debt, we will go on to launch our innovation hub.
It was with a view to develop in.
Our new range of capabilities.
Around research and development, particularly.
Particularly applied fundamental research so with that last year, we ended.
David.
An approximate budget of around $5 million, we ended up coming in shy of that for the year.
The approximately $3 million and then as we think about this year, we're thinking about incremental $2 million to $3 million.
On top of where the run rate was.
The cash cost year, the emphasis is primarily.
On.
Materials software hardware and sensors as the areas of focus that the team that we've assembled.
The innovation hub are directly focused on all with a view to driving organic growth primarily.
Similarly in the short term within our molding solutions business.
And then on the Capex, there's a similar weighted towards industrial.
Capex is a.
So a lot of us two thirds, one third split.
With.
Aerospace.
Looking at us.
Expanded capabilities, we mentioned relative to.
On the the win on our last quarter of the new extended deal with.
GE and then on the industrial side.
When we think about our capex usually.
It's approximately 50% maintenance, 50% dedicated to growth programs.
Okay. Okay, and then just a couple of cleanups on working capital assumptions I know you've got to our guidance for greater than 100% cash conversion working capital was a pretty big help in 2020 is it a headwind in 'twenty.
'twenty, one or is it a neutral in 'twenty one.
On Myles this is Mary and I'll take that we had a a great cash generation with our working capital in 2020, when I look out to 2021, I think that we continue to have some level of opportunity there, particularly in inventory. So we are looking for some modest improvements.
Rents in 2021.
Okay, great and on one last one on the margin for Aero in 'twenty 'twenty, one given the outlook you've had you have for for aftermarket in particular, RSP I guess I'm pleasantly surprised that that youre thinking about 13% to 14% margin.
You know a mix that is.
It's really not helping.
Can you maybe touch on how you're able to do that or their margins improving in the core OEM business.
Is this just payoff from restructuring or give some color to 13% to 14% with with really no help from mix sure no. The mix is definitely not our friend as it pertains.
On the margins on the aerospace side.
Clearly because of the depressed aftermarket side of the equation, but with that I would say that our aerospace team has done an outstanding job over the course of the year with taken out costs in sizing the business to the current outlook in.
<unk> volume.
We're looking at modest improvement in revenues.
Up mid single digits on the OEM side and the team there has.
Really done an outstanding job leveraging the enterprise system to look at how to drive how to almost look at the business with a re.
In terms of mindset and in that reset they're looking at clearly how to drive efficiency take the opportunity now to implement.
Greater.
Flow into the shops with the pressure of the volumes off them.
And so we're looking for productivity.
Sat out of our OEM business and with the aftermarket side, while we're looking at and what we've built into our forecast is slight improvement in sales sequentially quarter over quarter still as I mentioned down mid teens year over year, but nonetheless within that we see the second half.
<unk> of the year slight.
Slightly improving over the first half.
As it pertains to the aftermarket in particular to spare parts on the MRO side.
Alright ill leave it there thanks.
Thank you thanks miles.
Next question comes from Michael <unk> with <unk> Securities.
Come on Hey, good morning, guys. Thanks for taking the questions here.
Good morning, just.
Some housekeeping just to kind of follow up on miles I don't think I got the what was the industrial.
Margin guidance for 'twenty one.
The industrial side was.
Well as on the 14th.
Got it and then in the quarter I know Patrick you kind of went through quickly some of the business unit grew.
Growth rates sequentially, but can you just quickly run down molding engineered forced in automation, what the actual year over year gross.
Were in the fourth quarter.
So if I look at industrial in total.
And did you ask orders.
Oh, no no revenues and net revenues for the okay for the business units, yes. So.
Yeah in terms of.
<unk> motion control.
Right.
Sales were down modestly was up high single digits sequentially.
On engineered components.
Organic sales were up mid single digits.
On automation on our sales were up 20%.
<unk> and in molding solutions, you have molding solutions Bill, yes, they were down.
Low double digits download double digits.
Okay perfect Yeah, just to clarify.
Just to clarify one thing on engineered components down down about 20% year over year up.
The.
On high single digits sequentially.
Alright got it and then just on the debt.
Aerospace OEM outlook, I mean, I think I heard it you've got a 45% of that.
Backlog ships. This year, if my math is correct that that seems to be low double digit.
Revenue growth if you've got 45% shipping is there I don't think there's any any aftermarket in there, but it is the math right. There in terms of what you guys called out what's shippable. This year I guess, it implies something around 260 million shippable.
I believe that's correct.
Where we are.
Look at.
On the OEM side, we're looking to see up mid single digits at 'twenty and 'twenty one versus 'twenty.
Got it but again not shippable points still like low double digits. So just some conservatism in there.
There is well.
I think we have we're looking at a ramp over the course of the year so with that.
We're looking at.
Slight sequential improvement quarter over quarter, even within the OEM business. So there may be some.
Cautiousness, there, but nonetheless.
So I think we're very comfortable with the mid single digits. We are.
So expect some level of orders to come in it will book and ship in the year.
In addition to what's in backlog.
Okay, so that would imply it's even stronger on them.
On the kind of guidance, you're suggesting mid.
Mid single digit.
<unk>.
I think on the OE side Mike.
45% of that backlog is about what we expect to be.
Okay numbers werent too far off okay.
And then just last one from me and I'll get out of the way it just any color Patrick on on.
Market sort of I know you've got the guidance here, but anything you can call out that you're seeing from customers or any anything you're seeing from shop visits or engine inductions sort of you know just kind of on what youre seeing from your big customer there I mean, how this is tracking it seems.
Like we've heard some of the big Airlines need to start spending on these heavy maintenance visits but what are you. What are you seeing from the customers. There I mean, I know you talked about maybe more of a second half, but any any color on shop visits or other trends there.
Well, we actually finished fourth quarter I think in a in a.
A higher place than what we had had expected our aerospace business overall in the fourth quarter sequentially was up 11% and we saw a strong.
You know relative everything is relative but a relatively strong finish on the aftermarket which.
Was more I think.
Outside than we.
We had expected as we move into the new year, what I would say is that we're seeing a little bit of.
Volatility.
Week to week month to month, and not necessarily anything that constitutes stability.
Consistent.
Ability.
Relative to <unk>.
The spares side of the business.
It clearly is.
Lagging right now the MRO activity. So we're seeing repairs coming in at a higher rate than we're seeing the spares, but at.
At times, we actually believe that.
There is that pent up demand as the vaccine.
Hold on the aircraft start to increase in utilization.
Definitely I think the airlines have managed and deferred maintenance very.
<unk>.
Prudently and so in turn.
And I also think that depleted their stock relative to spares that they had on hand, so all boding well for once we see that uptick in traffic, we expect that it will flow through into the aftermarket.
Got it perfect. Thanks, guys.
Thank you.
Next question comes from Tim Walsh with Baird.
Yeah, Hey, good morning, everybody on it.
Tim.
Maybe just a first question I had just on the <unk>.
<unk> benefits.
The actions that you took kind of middle part of 'twenty.
How are you kind of factoring you know those actions into the 2021 guidance, if you could kind of break out any of the benefits between industrial and aerospace.
Yeah. So this is marion so in in the second quarter, we had talked about on an annualized savings of approximately $30 million and we are.
We're tracking and expect to realize that in 2021, what I would say and that split of that is about a two thirds.
Third or so in the aerospace and two thirds in the industrial side.
What I would say, though that those cost actions really were to mitigate the.
The impact of the lower sales.
So you know and we realized a portion of that in 2020 as well really to allow us to maintain you know those double digit margins as we go into 2021 I.
I think we'll see some lift in the margin on the industrial some benefit of that and you know as we see a if we see more meaningful recovery we'd start.
To bring some of those those costs back in.
Okay. Okay. That's helpful. And then just just in industrial how should we think of the.
The phasing for.
For the year, that's kind of built into the revenue line I mean would you expect to see sequential growth.
You know in each quarter through the year is that kind of built in just trying to think about.
If you think about the revenue phasing in industrial yes, that's how we're thinking about it Tim.
What we what we saw was a.
The factor between Q4 and Q1 that has.
How does indicate Q.
Q1 is a the.
How each quarter and the year as a result of just timing of major long lead items, which are the malls for the most part so orders continue to you know.
<unk>.
Show strength, however, the timing of deliveries.
We'll move into.
Second third fourth quarter.
Okay. Okay. That's helpful. And then just a last one on and I'll get back in queue, but inflation.
How are you going to factoring just the inflationary environment into the margin guidance can you just kind of remind us some of the levers you were able to pull to offset any sort.
Sort of inflation.
Well, it's a great point because it is an area that the team for months now has been out in front of and as we looked at a rebound into the into our end markets.
Effectively while we're executing our playbook a cyclical playbook.
Book in the sense that the team's anticipated a number of key areas, where we'd see inflationary pressures, primarily raw materials freight and then we.
We've been monitoring carefully tariffs as well, which haven't gone away but.
To put it in context on our aerospace.
Space side recognize that most of our raw materials are pass through on.
On a pre negotiated pre.
Prices.
Was the team on industrial has a portion of their raw materials that are covered under the same type of arrangements with escalation open.
<unk>.
Pending on movement of raw material, and then mitigate and was the our sourcing team has done a really nice job of looking to manage to the best durability.
Those inflationary pressures, but at the same time on the sales.
Sales side working equally as hard to ensure that we're passing those through.
To our end customers so that we're not caught in the middle so to speak.
Okay. Okay. That's helpful Global good luck on the on 'twenty one guidance.
Thank you very much Tim.
Again to ask a question. Please press Star then the number one on your telephone keypad expression comes from Pete's Kubicki with Alembic Global.
Hey, good morning, guys nice quarter.
Thanks, Amit.
Patrick could you just give us explicitly kind of your underlying assumption for global automotive production.
<unk> growth, that's kind of baked into guidance and then I'm just curious how youre thinking about the risk to the guidance you know that could stem from the semiconductor shortage.
Yes, great question.
So as we look at the the pressure that was.
Experienced on auto production in 2020.
One on now as we look out to the.
The coming 12 months General General consensus is that auto production will bounce back up into the mid teens growth.
We haven't quite been that bullish what you see within our engineered components business is.
A forecast for up high single digits again, realizing that.
The split on our engineered components business, which is predominantly auto production is about 60 40 between auto and industrial So we don't get.
We don't we didn't get the flow.
Impact on the downside, we don't get the full.
Benefit on the upside so that gives you a sense of where.
The growth rates that we're looking at in terms of auto production.
For the coming year, I will say that the we're monitoring closely the semiconductor shortage issue we.
We do believe that it's probably going to impact this a couple of million, but we've baked that in.
While we have a line of sight to we baked in right now to our forecast if a word to increase.
<unk>.
And become even more.
Of an impact to the to the industry.
Then we'll keep you informed as we move through the year.
Okay. Okay got it and then just on.
On the model changeovers that youre expecting in 'twenty, one and the impact of hot runners it sounds like Youre expecting model changeovers.
Maybe conservatism on the auto Oems that they would be.
Industry growth in the actual production rates is that fair.
It's fair and not at the same time I would tell you that the model launches, where we remain very bullish on because of the fact that we've seen stepped up activity right now specifically around the electrification of vehicles on.
On a lower on Smiths that continue to come out so.
Electric vehicles for our auto Hot runner business is a positive insofar as that as these new models get introduced each of them drives demand for our services and capabilities.
Okay. That's great last one from me I'm curious how do you explain automation or how should we think about automation is performance in 2020 right. I mean, we went through a cyclical downturn, let's call it pretty severe one automation as revenue was flat year over year.
How do we think about that was FX.
Okay, that's a big tailwind for those guys or something else.
Could you talk about that well I think the automotive automation team did an outstanding job over the course of the year and what they did was they pivoted to under.
Look to adjacent markets relative to.
Applications that may have not been front and center further on previously.
Automotive.
Constitutes a significant piece of the automation market and so is it downturn the team turned our efforts to medical and pharma as an example, with a view to.
Developing new capabilities, which I think.
Helped in 2020, but are also set a stage for the future.
<unk> revenues as you said overall.
Flat to up low single digits.
But what we've seen throughout 2020 and automation is.
Just some nice.
Gross Q2 to Q3 and Q3 to Q4 with the.
The last sequential quarter being up.
20% so.
There is doing a nice job in addition to the investments we've made particularly.
<unk> and automation over the course of 2020.
Allowed us just here in the last couple of weeks to announce the launch of our vacuum product line.
And that has been in development for over a year.
On choreographed for entry into.
The marketplace.
<unk>. This January this last January so we're excited about that as another incremental opportunity for growth. In addition to the already extensive end of arm tooling.
Capabilities that they already bring to market.
Got it okay. Thanks, so much for the color guys. Thanks.
Thank you.
Once again to ask a question. Please press star one on your telephone Keypad next question comes comes from Myles Walton with UBS.
Thanks, just a couple of follow ups, if I could you mentioned the higher ship set on the on the Max Patrick when does that cutover happened is it is it immediate as of 2022 2023.
Well, it'll it'll move it'll gradually cut.
Cut in over the next couple of years.
But we look at it.
Even with volumes this year.
We see a slight tick up in terms of demand.
Building ahead right now in terms of the leap day in anticipation of production catching up so we're building a little bit of inventory as we speak but expect that of course that will come in sync with actual production over that.
The latter part of 2021 and into 'twenty two.
Okay. Okay, and then the only other crop was on interest and other expense.
You mentioned I think 16 5 million for interest and eat in the house I think was other expense both of which are higher than I would otherwise have guests could you.
The run rate of interest and also.
Any other how much is sort of noncash pension amortization driven versus something cash for.
Sure on the interest expense, so we guided to 16 $5 million to $17 million, which as you say, it's a bit is a bit higher than 2020, we do expect the benefit of lower lower average borrowing.
In 2021, but that's offset by a bit of an uptick in our effective interest rates. So we just renegotiated our a revolver, we announced that last week. There was a small uptick in the in the rates and and as we've mentioned also our covenants were at the higher end of our covenants for over the three point on Mark.
Which puts us into a higher pricing grid for for about half of this year.
So that really explains what's going on with the interest on the on the other expense on the pension side Theres about $3 million of headwind in there that's related to the discount rate. So we you know our discount rate.
<unk> for 2021 and.
And it puts about $3 million a headwind on net on the pension expense.
Okay and no contributions expected this year and pension on material since we don't plan on any discretionary any incremental there's about four or 5 million. That's the normal contributions that we make but no no discretionary contributions planned at this point.
Okay, great. Thanks again.
Craig Barnes.
Once again to ask a question. Please press star one on your telephone Keypad next question comes from Peter Kubicki with Liberty Global.
Yes, just one or two quick follow ups.
Patrick are you still anticipating CFM 56 shop visits not the peak for several more years, we kind of still on that track.
I wouldn't draw on tour.
Degree, you're thinking about the early retirements or whatnot.
Yes, it's a great great point.
Definitely see the peak still out in front of us and it's.
Potentially move to the right as a result of the reset if you like that.
It occurred in 2020.
And so as we look out we think that.
Shop visits will.
Obviously down.
In the short term, but still on a growth trajectory as the.
Industry recovers relative to retirement.
<unk>.
We've not seen the race.
You know of what was.
Third perhaps in terms of.
Spike that.
I don't think has manifested itself in so in general.
A lot of movement relative to.
<unk> Green time engines within the industry, but at the same time.
That bodes well from our perspective in terms of pent up demand.
Okay. Okay, great just one last one from me more broadly on the aerospace aftermarket I don't know how to think about this day.
You see Patrick any kind of structural changes.
As to the aftermarket.
I'll go through this kind of a historic downturn and anything that would indicate to you that.
Business relationships of freight or people or Oems may be looking at different arrangements on anything that could potentially benefit you as a result of how big this downturn has been.
Well I think that the entire industry.
<unk> has had to take a step back and really look at.
Its business model from every angle and to that end plus I would highlight that we are doing is staying extremely close with our larger customers with a view to ensuring that.
As we move forward.
Word.
Looking to demonstrate and find even more creative ways of.
Highlighting the value that we can bring to the table as a strategic partner over the long run as you know our relationships have been.
In place.
For many years.
Three decades.
And we continue to build upon that and continue the dialogues.
Definitely there is pressure on the entire industry from a.
A competitiveness standpoint, and as I mentioned earlier I think one area that the aerospace team has been.
Ears are really focused on is how to take advantage of this reset to the physician.
The business in terms of overall.
Effectiveness and efficiency.
To be even leaner and more streamlined in terms of coming out of this downturn so looking at it as.
In <unk> to position for a night to longer term growth, which will come inevitably, but as I mentioned on the OE side, it'll take I think a couple of few years coupled to a few years.
Does the OEM will just gradually improve.
On our part as production rates kick.
Kick back in.
Okay, just to continue on that efficiency point on the OEM side.
Or are we at the end of the line for content gains on the leap <unk> or any further opportunities there.
I'd say that we're still in dialogue it definitely is a.
Continuing.
Evolving situation and so there is clearly.
Negotiations or discussions taken place at present relative to.
The outlook for potential increases in share and.
On.
A focus on just overall competitiveness. So the team is actively engaged on that.
And we're we remain optimistic that.
The value we bring to the table will put us in a good position as we continue to go.
And so.
Got it thanks, so much for the color.
Thanks Pete.
Once again to ask a question. Please press star one on your telephone Keypad next question comes from Michael <unk> with <unk> Securities.
Hey, guys. Thanks for taking the follow up just back to the Aero OEM, how big of a.
Of a headwind is this.
787, this year what rate are you currently shipping at and.
Do you expect that to be quite a drag on I guess just looking at this between the 870 <unk> hundred 50.
Are you picking up.
On the growth this year with all of the narrow body on the leases that were.
Forwarding answer.
Yes, we see the upside on the narrow body and definitely the wide body being more of a drag.
The 787 right now is I think in the 555 range under.
So well.
That's.
<unk> done is we've adjusted within the shops are production shops.
To the right to us.
The rate that we think is most most probable.
In light of continual feedback from the Oems, but also then.
Relative to.
Well, we know how Howard streamline into shop, so, but I think for the most part now I would say that on the OEM side, we're starting to see the the race <unk>.
Projections.
Which we're very volatile for a period of time stabilizing as we look going into.
On to the year end.
The out years.
Got it and no real real signs for you guys of inventory Destocking has that sort of run its course.
I think it's still happening to be honest on certain programs.
Specifically on the 737 Max as an example.
The.
The backlog that was there in terms of parked aircraft and also white sales that had been created are produced.
And so yes, but what we're looking to do is to stabilize our own shops by even if it means building.
A little inventory because we got it wrong in the short term.
Absolutely believes they will converge and there is an opportunity in some instances that will bleed down inventory over the course of 2021, whilst in other areas, we might be running that ended with heavy until.
Okay.
Customers catch up with us.
Got it got it.
Thanks, guys.
Thank you.
At this time I will turn the call over to Mr. Pitts.
Thank you Sharon.
Wed like to thank everyone today for joining us this morning, and we look forward to speaking with you next in April with our first.
First quarter 2021 earnings call.
Operator, we will now conclude today's call.
This concludes today's conference call you may now disconnect.
Okay.
Okay.
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