Q4 2020 Timken Co Earnings Call
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Please standby we're about to begin.
Good morning, My name is Katie and I will be your conference operator today.
As a reminder of this call is being recorded.
At this time I would like to welcome everyone to Timken fourth quarter earnings release Conference call all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session I would like to ask if you would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question. Please press. The Star then the number two one of your telephone keypad.
Mr from an Apple you may begin your conference.
Thanks, Katie and welcome everyone to our fourth quarter 2020 earnings Conference call. This is Neil from an Apple director of Investor Relations for the Timken Company. We appreciate you joining us today.
Before we begin our remarks. This morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access and this material through the download feature on the earnings call webcast link.
With me today are the Timken company's president and CEO, rich, Kyle and sulfur costs of our Chief Financial Officer.
We love opening comments this morning from both rich and Phil before we open up the call for your questions. During the Q&A I would ask that you. Please limit your questions to one question and one follow up at the time to allow everyone the chance to participate.
During today's call you may hear of forward looking statements related to our future financial results plans and business operations, our actual results may.
Differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and and our reports filed with the SEC, which are available on the timken Com website.
We have included reconciliations between non-GAAP financial information and its GAAP equivalent and the press release and presentation materials.
Today's call is copyrighted by the Timken company and without expressed written consent, we prohibit any use recording or transmission of any portion of the call.
With that I would like to thank you for interest and attempting the company and I'll now turn the call over to rich.
Thanks, Neil Good morning, everyone and thanks for joining us today.
Our fourth quarter revenue was higher than we anticipated of the sequential strengthening of our markets that started late in the second quarter of 2020 continued to accelerate.
Sales were down slightly from 2019, plus the and 1% of total and 3% organically.
And that market momentum is continuing through the start of 2021, which I will talk more about at the moment.
While earnings per share and margins for the quarter were in line with prior year on a similar sales level and they were below our expectations and currency was a significant year on year impact on the bottom line.
And we do not expect that to recur at this level to start 2021.
Our mix was the headwind and then we experienced a variety of cost challenges primarily related to improving demand, which Phil will elaborate on as it goes for the details of the quarter.
Expect to see a significant step up from the fourth quarter and revenue earnings per share and margins and the first quarter of 2021.
The full year of 'twenty and 'twenty I'm very proud of how timken navigated the unexpected challenges that came out of through the year and how we serve customers and perform financially.
Safety is always a top priority for us and in 2020 and took on an entirely different meeting and our leaders and associates adjusted to the challenges of working through the pandemic.
We were there for our customers when they were ramping down and when they were ramping back up we won new business and had a record year and renewable energy and across Asia Pacific.
Our results demonstrate our resiliency and how the company today is better positioned to perform through industrial cycles.
Slide seven and the debt compares our 'twenty and 'twenty financial performance for the industrial contraction of 2016 and highlights how far we've advanced as the company.
Our revenue was down 7% in 'twenty, and 'twenty, which given the market was good performance and demonstrates the improved diversity of our portfolio.
Our EBITDA margins of 18, 8% or 400 basis points higher than 2016, despite the turbulent market conditions.
Charts on slide eight highlight the progress we've made as a company and financially.
<unk> thousand 17 to 19, we demonstrated how we could perform and good industrial markets and 2020, and we demonstrated how we could perform and weak industrial markets and Oh.
Over the period, we have demonstrated the ability to grow and generate value for the industrial cycle.
And as we look forward, we're even better positioned to day than we were coming out of 2016 to set new levels of performance as the world recovers and expands from the pandemic.
Some additional highlights from the year include the generation of over $450 million and free cash flow.
The acquisition of Aurora, and bearings, which broadens, our leading position and the global bearing market.
The integrations and synergy realization of Banco lubrication systems and Diamond chain.
The advancement of our product vitality manufacturing footprint operational excellence and digital initiatives.
And finally, we grew our renewables business by over 50 per cent, a breakout year for us and 2020 and renewable energy became our single largest market representing 12% of company revenue.
The strong underlying market share gains and our competitive advantage of application engineering and R&D drove this growth.
Our active pipeline of new business wins, and ongoing investments have positioned us for growth of around 15% again this year.
And our recently announced $75 million of investments will prepare us for further growth in renewables and 2022 and beyond.
And we achieved all of those accomplishments and the middle of the global pandemic 'twenty and 'twenty was not a year that any of us expected or would like to repeat what we made the most of the situations while advancing the company for the better times ahead.
As we look forward to this year and a few comments on what we're seeing and our markets and planning for the year.
First I would say the certainly continues to diminish but it does remain higher than normal.
For customers and Timken continued and navigate the pandemic related challenges to our workforces and our supply chains.
We have experienced cost and supply issues of logistics material and labor as of our customers and we expect that the continued through the first quarter.
So we expect Lumpiness over the next few months, but much of that is being driven by improving demand and such.
Situation across our end markets. These are normal issues for us and an upturn and we are confident and our ability to manage through the ishares effectively.
So we're planning for first quarter revenue to be up at least high single digits sequentially from the fourth quarter.
And mobile industries heavy truck and off highway continued strength of the significantly while automotive and the defense side of aerospace are also strong and above prior year rail.
Rail and commercial aerospace will start the year down.
We expect commercial aero to remain down through the year, but rail to improve and turn positive as the year progresses.
And process industries, and we expect renewables and marine to start 2021 strong and be up double digits for the year.
Industrial distribution and finished 2020 week as expected, but picked up the January and is continuing to strengthen and early February and we plan to be up meaningfully for the full year.
Industrial services General industrial and power transmission and start the year down, but we see of good improvement trend and expect them to strengthen and turn through the first half of the year.
After the step up in the first quarter revenue our guide assumes a modest sequential increase for the second quarter and the normal seasonality, which is a slightly weaker second half of the year and the first half.
Should market demand continued to accelerate across global industrial markets greater than those assumptions, we would be and in excellent position to respond.
And regardless of where our markets go and the second half of the 'twenty. One we will continue to aggressively pursue our new application pipeline and product vitality initiatives to make sure. We are capturing more of that our share of the market growth.
We expect to deliver record bottom line performance on the improving revenue situation, where the earnings per share of $4.90 and EBIT margins up slightly from 2020 of the midpoint.
Also expect to deliver solid free cash flow of over $300 million for the year.
There are a lot of moving pieces in both directions from a cost perspective and the guidance.
And the bottom line projections and we have accounted for the cost pressures, we're currently experiencing and our operations.
The impact of variable costs and ramping back up with volume.
Benefit of the structural cost reductions taken last year as well as those planned for this year and the non recurrence of the temporary cost actions taken primarily in the second quarter of last year.
And we expect pricing to be roughly flat for the year.
From a balance sheet perspective, we are back and are positioned to deploy capital in 2021.
After the dividend and Capex, our bias remains towards M&A.
Finally find summary points that I would like to wrap with before turning it over to Phil.
We performed very well and a challenging market and 'twenty and 'twenty.
Over the last five years, we've demonstrated our ability to grow the earnings power and cash generation of the company through the industrial cycle.
We will continue to create value through strong free cash flow generation and disciplined capital allocation.
Our markets have strong momentum to start 2021.
And we were well positioned to deliver record results and 21 for building the future of the company for shareholders and employees on the.
And I'll turn it over to Phil to go into more detail.
Okay, Thanks, rich and good morning, everyone.
For the financial review and I'm going to start with a summary of our results on slide 14.
Revenue for the fourth quarter was 892 million down less than 1% from last year, and almost flat sequentially compared to the third quarter.
We delivered an adjusted EBITDA margin of 16, 2% and adjusted earnings per share of 84 cents.
The roughly in line with last year.
Turning to slide 15, let's take a closer look at our fourth quarter sales performance.
<unk> sales were down three 2%.
Both of our segments seeing lower net sales volume versus a year ago period, while pricing was positive.
Acquisitions and currency each added a little over 1% of the topline in the quarter.
On the right hand side of the slide we show year on year organic growth by region.
So excluding both currency and acquisitions.
Let me comment briefly on each region.
In Asia, we saw strong growth once again in the quarter.
Up 16%.
Our sales were up in both China, and India, driven by strong growth of renewable energy and other sectors like off highway and heavy truck and.
And Latin America, we were up 6%.
Driven by growth and both the on and off highway sectors.
And in North America, and Europe, most sectors were still down versus last year. However, the rates of decline moderated compared to what we saw in the last couple of quarters.
Turning to slide 16, adjusted EBITDA was $144 million or 16, 2% of sales and the fourth quarter.
Compared to a $146 million was $16 three per cent of sales last year.
Slight decline and adjusted EBITDA reflects the impact of lower volume and unfavorable price mix.
Negative mix more than offset positive pricing in the quarter.
Most of the negative mix as a function of the higher OEM sales and the quarter Cup.
Coupled with lower industrial and aftermarket revenue.
Currency was also a significant headwind on EBITDA and the quarter is the experienced FX transaction losses, this year versus gains and the year ago period.
The impact of currency.
Negative would reduce EBITDA margins by over 100 basis points and the quarter.
On the positive side, we benefited from favorable manufacturing performance and lower operating expenses across the enterprise.
Let me comment a little further on our manufacturing and expense performance.
And the manufacturing line and our team responded well and the quarter the increasing customer demand.
We had higher production volume versus last year, which gave us better fixed cost absorption.
Also continued to benefit from ongoing cost reduction actions and other productivity initiatives across our footprint.
Which more than offset some cost headwinds related to production and ramp ups, including at our new bearing manufacturing facility and the Americas.
Material and logistics costs were lower than last year, but they were a little higher than we expected.
And we encountered from supply chain and logistics challenges during the quarter to serve accelerated customer demand.
And finally on the SG&A line, we saw a significant reduction in expense versus last year, which reflects the benefit of structural cost reduction initiatives and lower discretionary spending.
We also had lower incentive compensation expense and the quarter.
On slide 17, you'll see that we posted net income of 53 million or <unk> 69 per diluted share for the quarter on a GAAP basis.
This includes 15 and sense of net special charges, driven by pension mark to market expense and other items.
On an adjusted basis, we earned <unk> 84 per share for.
And that with last year.
Our fourth quarter adjusted tax rate was 23, 6%, which brought our full year rate down to 25, 5%.
And the lower than our previous production projection of 26% the <unk>.
Improving and the tax rate reflects the geographic mix of earnings and the benefit of the some tax planning initiatives completed in the quarter.
Next let's take a look at our business segment results starting with process industries on slide 18.
For the fourth quarter process industry sales of $458 million.
One five per cent from last year organically sales were down one four per cent drip.
Driven by declines and distribution and other industrial sectors.
Mostly by strong growth and renewable energy.
And marine revenue and positive pricing.
The favorable impact of currency translation added roughly two per cent of the topline in the quarter.
While the impact of acquisitions added around 1%.
The process industries, adjusted EBITDA and the fourth quarter was $102 million or 22 four per cent of sales.
Compared to 98 million for 'twenty, one eight per cent of sales last year.
The increase and adjusted EBITDA reflects the impact of lower operating expenses and other cost reductions.
Favorable manufacturing performance and positive pricing.
Offset partially by the impact of lower organic volume and unfavorable mix and currency.
Now, let's turn the mobile industries on slide 19 and.
And the fourth quarter mobile industries sales for 434 million down two six per cent from last year.
Organically sales declined five 1%, reflecting lower shipments and the rail aerospace and automotive sectors.
And I've said personally by growth and off highway and heavy truck and positive pricing.
Acquisitions added nearly 2% of the topline in the quarter, while currency translation.
The installation was slightly favorable.
Mobile industries adjusted EBITDA for the fourth quarter was $54 million were $12 four per cent of sales.
For the $60 million for 13.5% of sales last year.
The decline and adjusted EBITDA reflects the impact of lower volume and unfavorable mix and currency.
And I'll say personally by the favorable impact of lower operating expenses and cost reductions.
Turning to slide 20, and you'll see the details of our strong cash flow performance for the fourth quarter and full year.
We generated operating cash flow of the 121 million and the quarter.
And after Capex free cash flow was $85 million.
Our full year free cash flow was $456 million and represents nearly a 150 per cent conversion on adjusted net income for.
Free cash flow was nearly $50 million higher than last year. Despite lower earnings as we benefited from improved working capital lower capex and lower cash payments for employee benefits.
During the fourth quarter, we raised our dividend by 4% to 29 per share and <unk>.
Back of 100000 shares of company stock.
In total we repurchase $1 1 million shares during 2020.
Taking a closer look at our capital structure. We ended 2020 of the strong balance sheet as we reduced net debt by over $275 million during the year.
Our leverage as measured by net debt to adjusted EBITDA was one nine times at year end.
From two one times at the end of 2019.
Our leverage is solidly within our targeted range and positions us well for opportunities going forward.
Our liquidity position remains very strong.
With cash and unused committed credit lines totaling just under 1 billion at December 31st.
Now, let's turn to the outlook for the summary on slide 21.
And as Rich mentioned, we expect strong revenue and earnings growth and 2021.
We're planning for sales to be up around 12% in total at the midpoint of our guidance versus 2020.
Organically, we're planning for sales to be up around 9% of the midpoint with roughly similar growth rates in both mobile and process industries.
And as we expect most market sectors to be up and 2021.
Currency translation should contribute about 2% to the top line based on your and exchange rates and.
And the Aurora bearing acquisition should add close to 1%.
And the bottom line, we expect record adjusted earnings per share and the range of $4 70 to $5.10.
Which is up about 20% from last year at the midpoint.
The midpoint of our earnings outlook implies the consolidated adjusted EBITDA margins will be up slightly from 2020.
Driven by higher organic volume offset partially by higher operating expenses to sort of increased customer demand.
And price cost, we expect roughly flat pricing for the year, but we do expect higher material costs, which is not unusual at this point and the cycle.
For the first quarter, we're planning for sales to increase and the high single digits compared to the fourth quarter.
We also expect first quarter adjusted EBITDA margins to be up meaningfully from the fourth quarter, but the below last year's first quarter level.
For 2021, we estimate that we'll generate free cash flow of at least $300 million.
Which reflects higher working capital to support the sales of term.
Higher capex spending versus last year, and a more normalized level of cash used for employee medical benefits.
We are planning for Capex of around 150 million in 2021 Richard.
Just under 4% of sales at the midpoint.
Which includes several growth related projects, including investments, we recently announced the explained our capabilities and renewable energy and marine.
Yes.
For the full year, and we anticipate net interest expense of around $60 million and estimate that our adjusted tax rate will remain and the 25 and a half per cent range.
And finally I want to point out that our guidance is based on the assumption that COVID-19 conditions will improve as we move through the year.
So to summarize we delivered strong performance in 'twenty and 'twenty despite challenging conditions.
Our topline was resilient and wood.
Demonstrated our ability to generate higher margins and cash flow through the cycle.
Confident and the outlook for 2021 and we.
We're excited about the opportunities that lie ahead.
Concludes our formal remarks and we.
I'll now open the line for questions operator.
Thank you if you would like to ask the question you may signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
We will take our first question from Rob Wertheimer with Melius research.
Hey, good morning, everybody.
Good morning.
And if I can sneak in and I guess I'd be honest thing is just the margin in the quarter and and if it's a fair question do you have where came in versus your EBITDA expectation and so maybe if you could detail the currency issue that happened how do you typically kind of manage through that are of manage against that was the was it more unexpected the normally that's more again and maybe just talk to the dynamics of that.
I'll start with the expectation part and I'd say it was it was slightly less.
Currency ended up being 100 basis points of year on year more than of 100 basis points of the margin impact year on year.
And if you if you if that were the neutral which weren't sort of extending it.
We expect the neutral per thousand and neutral Arctic we would've been in line with our expectations. So it was you know as we said in last call we were expecting to be up.
A little bit on and slight.
Slightly less revenue so what's the revenue beat we would've liked to have been up a little bit more than that but and I'll, let phil expand a little bit more on the specifics of the expectation yeah sure. Rob. So I mean, you know relative you know honestly of big picture relative to the quarter in terms of EBITDA margin expectations overall and it was really.
Three three buckets, if you will as Richard talked about the mix was a little negative relative to what we thought most of the sales beat was on the OEM side.
Distribution was more in line with where we thought two and a little bit of mix, there and even within the OE sector was mixed with good debt on favorable relative to what we were expecting going in.
You know the currency, which I'll talk about the currency was negative and you know typically with currency.
And with the benefit on the top line. So there's translation and those transaction and normally the translation comes through and an EBIT. The type margin and then the transaction really depends on.
Individual currencies around the world and in that particular case, we had just happening of gains last year and.
The larger losses, the children, the anticipated, which kind of drove the big negative and we do hedge currencies, we hedge on call. It the developed market currencies. So we've all had euro you know, we don't have 100% will hedge.
A portion of the exposure.
But euro and Canada, Australia et cetera, but a lot of the losses, we saw in the quarter were coming out of China.
And particularly with some U S dollar balances, we had there and in Brazil, with some imports into Brazil, with the China currency weakening against the dollar debt.
The China currency strengthening against the dollar you know Brazil.
And Brazil weakening so it was it was sort of a mixed bag and I think as we sit here today, we have seen a little bit more stability to start the year for wouldn't expect that to recur.
At the same level moving into 2021, and then the third bucket would probably be the logistics costs, which talked about with some of the you know and.
Normal ramp and when we're ramping and markets like off highway and heavy truck you know, having some level of logistics challenges as common I'd say the were exacerbated by Covid with some of the additional challenges we had the face around for.
Freight and the mental employee.
Absenteeism, both of them and our plans, but also and some of our suppliers etcetera. So it did that was the combination of the sort of what caused margins for the quarter to come and a little bit lower there won't be thought and the good news is and you look at those three you know the.
They are they are all transitory to a degree we do get on top of the logistics overtime.
We do expect as I said the currency not to recur at the same level and then the mix as we look ahead, we are expecting.
Cover across most sectors in 'twenty and 'twenty, one, including the industrial distribution to be up high single digits plus for the year and I think that would make mix zone sort.
Less of the headwind.
In 2021, and it was in 2025th and.
Yeah, I would also sort of put it and prospective as well and we weren't pleased with the result of the margins and EPS for flat with prior year on organic revenue decline of 3% and the currency headwind of over 100 basis points of margin. So.
I think we also need to put it and perspective.
Perfect. Okay. Thanks, and if I may I mean, one of the many things that improve the timken and I guess, if you focus on pricing of systems on sort of better.
The processes managed pricing I wonder if he'll share how you're thinking about flat pricing and the next year, but and you don't need and what do you you've had too much in recent years, but he could take more of just some of them out of curiosity on that number which I might have thought would've been a little bit of higher when all of a stop there. Thank you.
Well I think there's a couple of elements of that on the.
The first on the pricing was one of the costs that we began experienced for the fourth quarter and are experiencing to start this year and again as Phil said like logistics, it's pretty normal for us when our business and flex to go up the steel costs.
That is an example that we typically do recover of that through pricing mechanisms, we have in and our contracts and or price increases that will pass through but there's generally a little bit of of lag.
So we would expect if it.
That continues to strengthen you would also start to see us pick ups of recovery of that as the year goes on and so we do have the ability to do that as the year goes forward.
From a contractual basis.
Yeah again, one of our contracts were negotiated.
The four or five months ago for this year and I think we are generally there we've got pricing mechanisms of if costco out of wine, but we.
We would generally be locked in on those prices for the year and move some prices up and.
And you know a little bit and some down a little bit, but we've been expecting flattish pricing for the year and and bank will be will deliver.
Good results with that.
But I guess that the other final point I put the saying theres, a well over half of our business.
Is not contractually tied and any sort of a way for them from a pricing standpoint, so we do have the ability.
As the year progresses, if if we have to to to do more of that area.
Thank you.
Thanks, Rob Thank you.
We'll take our next question from Stephen Volkmann Volkman with Jefferies.
Good morning, guys.
Steve one for you.
I guess I can answer it took out and and as well and it's just that means G O a T but that's the.
Probably overstating my my experience, but anyway.
Can I, just back up and and sort of ask a really big picture question, you know Phil I think in the past you've.
Provided some thoughts about what sort of a normal incremental margin should be for you guys and clearly 21 is a bit of a mess of year with various costs and things happening, but as we move out into 'twenty two 'twenty three.
What's the normal incremental margin for the new Timken. These tests.
Yeah, Let me comment first on 'twenty.
'twenty and 'twenty, one and then.
Richard can comment on the expectations for 'twenty, two and two and three but.
And what we saw in 'twenty you know we did variable is a significant amount of our costs last year and so the decrementals were quite good you know when it was 24 per cent of all of them, but if you take the currency and acquisitions out which were significant headwinds of the organic decremental of is kind of on the order of 14 and 15% So really strong decrementals last year, which does.
Does create a challenge and base as we move to 'twenty. One so I think as you look to move for the 'twenty One day.
Sort of how that the deal with and not to mention the some of the cost headwinds, we normally seen and an inflection year and yeah.
We have talked about our incremental decremental margin framework and the high level. We've always said haynesville start at the gross margin line and then probably do a little probably do less than that of an inflection year of which 22021 is I'd say, it's exacerbated a little bit by the strong Decrementals. We did last year, and then obviously and the move up cycle.
Moving to year two year, three you could get back up to.
The gross margin level of few wells, you're leveraging your and your SG&A and your are you moving into year two year three of an up cycle and in the past and some years, we've done and even a little bit better than that but but if you look at 'twenty. One you know the ability for us with revenue being up despite some of the you know some of the year on year cost Delta.
Out of managed true I think the ability to expand margins and the implied incrementals of about 21%, which again is.
As you know is lower than what maybe a normal year, one would be a little bit lower but given where we're starting from the midpoint of the guidance would imply EBITDA margins of around 19% with with the with revenue and at that level I think historically speaking and so it's quite good.
And kind of.
And that's why I said that the.
Phil's point on the 14% debt.
And the middle of last year.
Strategy for multiple years has been to verbalize more of our cost structure and to the degree of we're successful doing that and the.
14% Decrementals when volume comes back and we need to add back more variable cost and win.
Higher percentage of our costs with the Texas some of it is the.
The strategy of becoming.
Having a greater variable cost structure and tightening the range of our margins through cycles, and you talked a lot about various things of that we're doing to do that and.
And then I think the.
This year is obviously, a little bit unique and regards to the comps being a little different as well and then you know.
And I think on the longer term and are really managing more towards margin targets and we still got our long term margin target out there of 20% EBITDA margins, which is where we're really focused on doing.
Okay, Alright, that's that's helpful. And then I don't know if you want to get into this or not.
So but.
Is there any way to kind of bucket the cost that come back and 21, you know, whether it's incentive comp or whatever temporary stuff and then sort of net that against the benefits of the restructuring that you did and so forth just of kind of give us a sense of.
All those things kind of play out in 'twenty, one and that's as you said rich there a little bit of unusual so.
That'd be helpful and she can.
Yeah, I would say you know and we'd really want and get you guys a little bit more focus on the margin outlook for the year, but I mean.
For the talk Directionally I mean, clearly you had a lot of temporary actions and.
In 2020 of they were mutually and when the second quarter. You did have some we did have some and the third and live and in the fourth we put some structural cost actions and to.
They give us some benefits in 'twenty and 'twenty, one to help mitigate cost the absence of the temporary actions that we do the structural cost actions and are there, but as Richard mentioned you know of.
As volumes go up and you move back up cycle costs, some costs to come back and how we.
Got the inflation to deal with on the materials side and some of the logistics, which I think I think the logistics challenges.
Persist through the first quarter certainly.
But then you know incentive comp would be would be a negative as the as you know if we hit if we hit the guidance number and we'll pay out a little bit more and for 2021 and we go for for 2020, So and you couple that with ongoing cost reduction initiatives looking to offset the material cost increases looking to continue to streamline and.
And implement lean principles of et cetera, and what it all kind of nets too.
The incrementals, a little bit a little bit lower than what you might expect to see otherwise, but still you know still expanding margins from 2020 to 2021, and you know the last point and on the pricing and.
Pricings mutual.
That's a headwind and as you know the history history would tell us that we do have years of like this on occasion, where pricing is flat and when volumes moving up the revenue is moving up and they usually year two as rich said, usually no later than two when the repricing some contracts you're you're typically picking.
Picking it up if not if not more than more than recapturing. It. So yeah, you get to the <unk> will have that benefit and incentive comp can typically them for.
Latin out at some point as well so just looking at 'twenty, one I mean, if there is a law.
Lot of pluses and minuses and of the temporary actions and the minus the permanent actions and a plus and we'll see those the.
The permanent actions more Frontloaded and then he went out as they move through the year.
But the net effect would be expanded.
And the margins for the full year and as Richard said Q1 will be a little bit.
And a little bit lower than the last year, just given some of the mix and and logistics headwinds and then we would expect margins to improve in Q2, and Q3, and then with normal seasonality would probably be down a little debt and Q4.
Okay I appreciate it thanks.
Okay.
Thank you we'll take our next question from Ross Gilardi with Bank of America.
Hey, good morning, guys.
Alright.
Yes.
You know on all of the puts and takes for margins. This year I mean, Archie guys and we also just reinvesting in the renewables business and it isn't that a big part of it and you don't seem to really be calling that out and.
I don't know that debt.
So it gets worse and you know based on what you said in the past this debt.
And I didn't I understood.
Not just renewables, but I think investing and the business or our footprint work and again, that's why we've really tried to.
The talk more about margin ranges and and and when we're running high utilization levels for looking to invest and when we were and are down your last year, we continued to invest so.
Yeah, and we are not focused not 'twenty, one on absolute margin optimization of of go out and.
Meg of pricing and capital and running full utilization, we're working to grow the earnings power of the company through the cycle of Big part of that is what you highlight of the investment and renewables.
And we've got the.
Investment and the Mexico plant, which is a which is the margin drain this year will be of margin help the long term.
And a lot of our other.
The other investments and and our digital initiative or product vitality initiatives etcetera. So yes.
So for what's what's the incremental investment and renewables. This year from an opex perspective, not and I don't know if some of its capex as well.
Well I don't know we provided back so we didn't really breakout the of the Capex last year, but and but we put in a fair amount of Capex last year, that's helping us get the 15% growth. This year, we're not.
The full utilization for the for years, and we still can do better than that of our if the markets come through.
But all of all of that.
Yeah, I've seen and putting any sort of the SG&A and resources or capex into something that's not going to deliver until 2022 of 2023 is going to be a negative impact on.
And this year.
I know for you guys seem almost apologetic for your for your Incrementals. This year and it's good to see the company actually reinvesting in the core business for a change and certainly not seeing that across a lot of other companies and the industry didn't you say that you and.
And your press release, when you put out there of the reinvestment and renewables that you and it's something like $75 million over the next.
Several years I don't know if I'm recalling that properly. So yeah and then the next five ish quarters, we would expect to complete the $75 million and and yeah and I think that is.
You're hitting on a point that we are one of the reasons why when we came out with the 20% EBITDA margin target and the while I can't get to 22 and and for where we're going to grow at 20, and that's really what our strategy is and and and yeah.
And I think you look at those charts on the.
And the deck that we put out for the last five years, we've been doing that and and again I think we're doing even more of it today. The one whereas we started the last upcycle and and early 17.
Okay got it and and then just on the growth the you're saying mid teens growth and and the renewables business. This year. I mean, you grew over 50% and 2020 and are you seeing any like real and.
And then it's hard to repeat on 50% growth I realize but are you seeing any real deceleration of your order book or is that just.
And of what you've got up until now and you're keeping of Conservatives.
Well yeah the most.
The other for you Greg I don't think we'll have another 50% you're probably under any circumstance and obviously, it's on a much bigger base now so 15% and absolute dollars is is still quite a bit as compare to historical.
And we generally have I'd say the.
Longer than normal five six months of visibility into that and I think we're gonna have and excellent first half of the year last.
The last year at this time, we don't we're going to have an excellent first half for I'm sure about the second half and in the second half got even better.
In the second half of it's got more of a leveling off of and in other than another step up in the in the renewable side, but.
But we're going to have a very good first half and it's got a little less visibility on the solar and that's a little bit of of shorter.
Shorter lead time, but we have a very of the first quarter on the on solar as well.
Thank you.
Thanks for all things for us.
<unk>.
We'll take our next question from Steve Barger with Keybanc capital markets.
Hey, good morning, guys.
And just thinking about this you know revenue forecast of looks really strong and I want to make sure I understand the focus is it really just adjusting back to growth and managing those variable costs or do you have the bandwidth to also push the team on specific growth or market share of initiatives beyond what the just the cycle is going to give you.
Well definitely we have the bandwidth and we're doing and and I think some of that is embedded and the numbers I think I'm certainly a renewable numbers. The last few years have been above market. The market's been good so it certainly helped us.
With those numbers, but it's it's a our number should be on out of St. Louis with Marine we have a good year for marine and embedded in that guidance and we've made some announcements last year on bonds.
And some new programs that were.
That really kick in and this year.
Off highway certainly the big number would be cyclical the cyclical return of that but we've been winning new platforms. There for the last couple of years. So I think a lot of what we're talking here is the self help and certainly feel of what you're at 9% organic the.
You know again of our targets one to two basis, the 102 hundred basis points of the outgrowth of the year and most of that nine of certainly are the markets.
Yep.
And as I, just think about and you know I I hear of the conversation on the EBITDA margin.
Being slightly up this year and if you if you drive some growth and operating leverage this year and next year, you're going to end up closer to that 20% EBITDA margin.
So two questions. One can you keep of 15% SG&A as you drive towards that and to you know just any thought on when you might reset what that target might look like just given all of the progress that you've made.
Yeah, we're not certainly not ready to reset it now and I'd say the SG&A.
Over cycles have been a little more of our 16 probably than the than the 15 and the 15 would of had some favorable Isaac and some fixed costs last year and it.
And I think the you know the real answer your question is really what losses are willing to and which is.
We're really get our eyes out for three or four years, and we're really trying to grow.
And grow the company and the these high teen margin levels.
And to do that requires SG&A and requires capital.
And some of that hits and the.
Good years like this year and some of the hits and bad years like last year, but we keep plowing through that and and I think we'll continue to do that so certainly not ready to increase the 20%, but I think its certainly not far out of our range two to get there yeah, the only and I would add Steve as you know, it's you know we'd obviously.
We want to grow and grow and hit the 20% versus are you now versus say shrink and expand but you know when you look at the margins.
And particularly within the segments you know like process industries is an example of you.
And when distribution was actually down you know, we did EBITDA margins of close.
Close to the EBITDA margins of close to 25% I mean that would put us easily top quartile of of.
You know suppliers of companies that serve those sectors, and even and mobile and mobile margins were down from 2019, but still the mid teens kind of EBITDA margins and mobile we do expect mobile margins to be up.
Could be up and 2021, but that would put US also when you look at the companies that serve the sectors you know top quartile type margins and so while as rich said always looking to improve mix, which can which can give us a little bit of margin and margin uplift. We feel like if we can grow and and hit the 'twenty that we've set and who knows maybe reset it at some point, but.
And that would be a clear path to create shareholder value and our mind.
And you know really understood the they're always relentlessly driving the efficiency you're always and.
Our.
And.
And the acquisition and integration and driving the leverage but.
But again, it's a balance of of doing that while investing and the AR and the business for for growth opportunities at the same time and again, we think we think we can do both and that margin range.
Yeah.
Everybody always wants more of it the track record and clearly speaks for itself.
Thanks Stacy.
Well take our next question from Chris Dankert with Longbow Research.
Hey, good morning, guys.
Good morning, Chris.
I guess coming back to the renewables again, great outlook. This year on top of good growth last year, obviously, but I assume is that mid teens number of that principle still driven by ongoing strength in Asia and kind of some of those offshore projects, you know and I assume any kind of shift you know and the new administration's priorities here in North America.
That's more of a 'twenty and 'twenty, two and beyond kind of renewables opportunity and my thinking about that the right way.
Yes, I would say we have a.
Very little North American impact on the on wind the.
Solar business for us is much more global those installs.
More.
Spread around the world, but the.
Well, we really have no impact factored in from any sort of incentives or acceleration in North America for the U S.
Got it got it thanks for that and and thanks much for the the break out and the color on the margin for the year I guess, you've taken another chop at that full year margin outlook, I guess, one and make sure I'm understanding it correctly on a year over year basis first quarter down a bit does the the full year guide assume we can hold EBITDA margin flat in the second.
Despite almost for training costs, and then kind of the back half of where we could potentially get some lift is that the right way to think about it.
Well I think when you look and you kind of 'twenty, one credit when you say flat and the second quarter of flat with last year.
Yeah, Yeah, Yeah. It was the second quarter of last year.
I think the as we said the guidance for the probably the first credit will be higher than the fourth quarter, probably a little bit below last year, just because of some of the challenges and I think when you look at the second quarter in particular, the temporary cost permanent cost phenomenon and will likely stay well and margins will step step up from the first to the second quarter not not really.
For the hit a lot.
The laws of the levels, we had last year, just given the magnitude of the temporary cost actions in that quarter, having said that they will step up nicely and.
And then obviously the QC and normally normal seasonality would say, which is what we're assuming just a slight a slight step down and the second half of which again would get you to that kind of call. It roughly.
19 ish percent at the midpoint for the year.
Got it okay. Thank you for that clarification really appreciate it guys and best of luck and to the new year here.
Thanks for the space Crisp.
We'll take our next question from Ronny Scardino with Goldman Sachs.
Hey, guys. Thanks for taking the question.
Hi, Randy Good morning, Hey.
So the two.
Focusing on price cost you mentioned negative credit costs for 'twenty and 'twenty one.
How should we think about it and really across the segments I think half of your process business of really in the industrial and distribution. So even though the thing that most of your price cost pressures will be on the mobile side, and if you're able to quantify that that'd be the football.
Yeah, I would say we don't.
And we don't typically quantify the magnitude of if you live and I would say on the on the.
And the pricing side, it would be I think the flattish of assumption.
And pricing would be would be comparable across the segments.
And just given the you know the OE and he was the right. We do of distribution and we do typically take prices up and distribution of every year and we do have the OE the.
We offset so I think I think the right way to think about pricing across the whole thing, which we roughly flattish and I think the segments. We'll see some you know some material cost inflation and the timing will vary depending on the geographies processes more international mobile with more and North America and the timing of of the.
A lot of pass throughs from our suppliers vary a little bit but.
And I think we'd see a relatively.
You know modest amount of inflation for the year, but it's running and it's probably running a little bit high.
Present.
It's the it's not a big number it's just it's a it's been positive for the last couple of years. So the.
Invert the inflection from positive to negative and makes it a little more of an impactful on the for the year over year comparisons.
Great. Thanks, guys and then the specific question on the cost savings for the quarter and have.
Have you quantified how much came through and pork you and I think we were thinking around $30 million out of there roughly.
Number.
And then let Phil answer that before I do though I did want to add on the.
On your last question and the other the other thing with mobile and I would say mobile is disproportionately benefiting from the structural cost savings that we.
And at the last year's Wells, those and we have and the pipeline for this year. So.
To the degree of there is a little more material costs of errors or the things I think we also have more cost savings coming through mobile.
Yeah, and then on the and on the cost save in particular around and so I mean, if you look at the majority of the the.
Which would be on slide 16.
<unk> put the full year EBITDA bridge, you know you'd see the SG&A benefit and the corridor and one of the $27 million and and that's mostly most of that would be you know cost savings and the quarter either structural or long.
And you know temporary spending reductions and we're still seeing much.
And much lower than normal travel levels and lower discretionary spend and there's also an element of the lower incentive compensation and there as well and then of the manufacturing line, it's a little bit and add it in there because we did have some cost savings and manufacturing, but we also had some of the ramp the ovarian.
Headwinds that we talked about earlier, which which are a little bit offset in there, but it was certainly meaningful and the quarter and as rich said last call. You know, we don't see major changes and the cost structure heading into Q1.
No we don't see the discretionary spending really coming back as we sit here of the day. We do we would expect of the year progresses, we will have some travel coming back as I said, our assumption is for COVID-19 conditions would improve as we move through the year. So we will have some.
Some of that coming back as we move through the here and not 100 per cent probably.
But the but for the first quarter, we think the cost structure. We ended the year with will be you know the.
Cost structure, we're gonna of what we'll have for Q1 and the other than some of the inflationary and logistics kind of things that are and it's difficult to control. The other you know we'd mentioned on costs and cash.
As I said and my task this was not abnormal for us and certainly.
There is a corona virus element to this and and the logistics side in particular is making a maybe a little more.
Amplify the normal but if you go back the 16 to 17.
And 17, we were talking about logistics costs, we were talking about compensation costs, we were talking about steel cost.
And being up and we grew earnings 30 per cent. So this is a matter of margins expanded as well so this.
This is normal for us.
And we're good at good at managing it and we're good at optimizing it and when we get and advantage and it through the cycle, So and again, there's a lot of theirs.
Unique situations with coronavirus run out and absenteeism and some things like that that are magnified and things of that.
I would not turn this on Corona virus I would turn it on improving demand.
And that's the situation that we want to be in and we're glad to be there.
Thanks, that's very helpful context.
Thanks, Craig Thank you.
And we'll take our next question from Courtney <unk> with Morgan Stanley.
Hi, Thanks for the question guys and I guess I don't want to the Linkedin and pension of more but just on the on the price cost kind of I think last quarter, you guys had talked about potentially peaking out and positive price cost and I haven't seen how it.
Switching to negative even though pricing was expected to be part of.
The quarter in this quarter. So is the only thing really just steel price inflation and that's impacting that view or is there anything else to be thinking about and then I guess.
And as steel prices given that 50 per cent of your of your.
Sales and they'll have.
And it's the more variable pricing why wouldn't you increase your pricing at the point or it's the just your expectation for it.
The C store prices fall by the back half of this year.
Well I think the the the.
The thing that's changed over that time is of the volume outlook has continued to improve and improved and the fourth quarter burden and the third quarter, the fourth quarter and it's improved again to start this year and again with that volume and generally come some of the cyclical type of cost pressures like steel so steel.
Specifically.
Scrap costs and the U S went up by a lot and the last three months and in the U S. Our prices are the.
And we pay for raw material of our scrap base too and index now again, we pass that through to the market with time.
So yes, it would be of factor, but I think everything that goes along with volume there's been a.
The greater factor that we've.
Brought more people into our plants were working more shifts for working more overtime than what we were and all those things are.
Part of again, the normal ramp up that we worked to optimize but.
And again, we're it's a.
The offset to an incremental or is it still going to be expanding revenue expanding margins and expanding earnings per share.
And I would say on the and on the pricing on the praise from question Corey I mean, obviously, a lot goes and the pricing, but as you know we went through 2018 19 and 23 years of.
100, plus tips and the pricing of net pricing across the company. So we feel we're in a good good position from the pricing standpoint, there is the timing element, which can which can enter into it and you're exactly right and when you look at our business about half of OEM and the OEM piece of the split between multi year with pass throughs, which talked about the other half of his annual debt we've got a.
Wait till the contracts renew the other the other half with the distribution of end user of when we do have the technical we have the ability to price.
As the as conditions warrant and I and I think of what goes into it and we've already and we did put through some price increases at the beginning of the year.
That said I mean, depending on how the situation evolves and that's always.
Available to us, but it but at this point seeing of our planning assumption is for relatively flat pricing and then I think you'll see next year.
And as I said, if history repeats itself, we'll see some positive pricing next year, which will more than make up for probably the headwinds we're getting a material part of this year.
Okay, Great and and then just.
And you commented on the the negative mix this quarter the sales distribution being relatively in line with what you saw I think you guys were expecting them to continue the destock and the fourth quarters is that what you saw and then given the increase and so you can see and kind of sequentially and in January and February is it safe to assume that the are starting to see the REIT stocks and the first quarter on the.
And the distributor channel.
So we definitely saw the.
Destocking in the fourth quarter and industrial distribution inventories came down I don't know if that would be ready to say, we're restocking, but I think we are through Destocking is what we would at least say and Ah.
The year over year.
Comps were quite weak and the fourth quarter of last year and that was on a down for.
Fourth quarter of 19, so they've and if there are coming back to start this year and I think that's a big part of the mix, if or the strength and that market would be it would.
It would be a big factor for us and to have them.
A little better top line growth on the distribution side and in the process industries, and then that mixes us up with and processes well, Yeah, I would I would only and I would say you know the momentum we do see the momentum. There you know we were distribution was up slightly sequentially ex.
Third the fourth although Richard we did see some destocking of inventories in good shape and the order book.
And really supports the.
The full year outlook for distribution to the you know up and the.
For the high single digits range.
Okay, great. Thank you.
Thanks Corey.
Thank you and we'll take our next question from Justin Bergner with G Research.
Good morning, rich fill of deal.
Good morning.
Good morning, a lot's been covered but.
One thing and it hasn't been covered the acquisition you recently made of Aurora bearings.
If I'm reading your cash flow statement correctly, you only expended 17 million and the acquisitions in the fourth quarter I'm, assuming that's for Aurora, which would seem to be of very small outlay for $30 million of sales and plain spherical barings sold into the aerospace end markets and maybe if you could just comment.
And you know how we should think about the price paid is that sort of of distressed asset.
Or what enabled sort of at the low price to sales.
Expenditure.
The.
The price paid is directionally accurate that you are and that you mentioned and there are as are the sales.
So obviously it is a pretty low multiple of sales.
It also comes to us as a marginally profitable cash generating business.
That being said, we also know its a segment.
And that its peers and competitors do quite a bit better than.
They do in that space a family owned business.
And.
And again, probably run for you know a little a little differently than the than how we're going to run out and we are very confident we've got a really good cost synergies.
With that business, both in this year and longer term.
And you know of long term, we would expect that to be a business. That's at least at the fleet average.
I think business, we really it long term it'll be become more of a product line within the company that of the business, but it will be at.
And at least at the fleet average of the of the company. So.
Small so it's not huge but we think it's of a significant value creator and then it makes our portfolio of stronger as well.
Great Congrats on that deal.
And maybe secondly, you mentioned that the outgrowth of assumption was pretty modest dessert and nothing in terms of outgrowth from the 9% organic or is it just more of the low end of your of hundred to 200 basis point range, but I assume the renewables must have some outgrowth and and if it's growing mid double digit.
Yeah, No there's definitely I would say more than 100 basis points of more than 100 basis points of outgrowth embedded in the 9% organic some.
Some of that would be again, and whether there'd be some and every sector I don't know that we have anything.
Welcome to the West of I don't think we have anything that's negative this year and when we do lose platforms are the debt.
And the wife and things, but certainly after of renewables.
And off highway.
He's working for the you know the general industrial and general industrial side, all of that tends to be smaller and and heard other filings.
Automotive hasn't been a growth engine for us, but oh, it'll be a net winner for us this year as well.
Great maybe if I could slip one more and you mentioned and the third quarter of that you know 2000 and trim and frameworks for margin sort of had mix is a slight positive I believe would you say that's sort of shifted to a neutral maybe slightly negative just given the strong OE growth that is driving the strong sales outlook.
Versus where you saw things a quarter ago.
Yeah, I would say and I would say Justin so for the full year 2020, and he can certainly mix was of a sizable negative just in terms of the yeah. The strong growth on the OE side and the distribution being done and I think as we as we look ahead. The 'twenty, one with distributions coming back and really the strong growth across the portfolio mix will be far of.
Less of the headwind I would I would kind of think of mixes more neutral.
And you know year on year, and and you know and it could be and it could be a slight positive but in that range that in that range. If you will.
Great. Thanks, and good luck for this year.
Thanks, Justin.
Thank you we'll take our next question from Brett Linzey with vertical research partners.
Hi, good afternoon, everyone and thanks for squeezing me in.
The first question just similar line of questioning on bandwidth, but less about the organization and more about the supply chain are we've been hearing a number of areas of short and stretch supply are you seeing that in your value chain early in the year and and just curious how much of that is factored into the revenue guide.
Yes, we are seeing I would say tightness across the various supply chains around the world are and then compounded by tightness within the logistics and we're having tightness in getting product through the ports are and in the containers and so I would say.
Okay.
The fairly broad and nothing.
Nothing that's that's disruptive that we can't get enough steel or can't get enough of the things, but but just delays and I think some of our customers are seeing that.
As well and we're seeing some interruptions and inefficiencies in our and our deliveries are as a result of of that so.
That was the factor in the fourth quarter. It's a it's a factor to start the year. This year I think we are we've got of baked in and again I.
Probably go back to again, it's a little more complicated because because of coronavirus, but I would also say this is normal.
And not all that different and what we were faced and early 2017, which are again year on year ended up data of very good year for us.
Okay, Great and then just the last one on the 75 million of the investments can you just talk about the the payback you expect and how that's being allocated and then as out of that took the capacity ramps and it should we anticipate some buffers buffer stock build and.
And that renewables business as you work through the transition.
The last part I would say no.
And within that market space, we definitely don't.
The build anything.
On the kind of forecast were it's pretty much all tied to our end user demand and firm customer orders.
You know on the ramp up.
It's not one project, it's multiple projects and we're gonna see.
The solar piece of that as an example, we're moving for we've grown into three or four buildings, we're moving to and do a larger and more modern more automated operation and that'll largely be done by the second quarter.
We're expanding our one of our facilities are in China, and that'll be one of the longer ones, because we got puts and bricks and mortar onto onto that operations. So it's it's not one big investment. It's a it's a handful and we're also expanding putting some new assets into our Romanian operation. So it's a combination.
And of things that will come on and online at different times the return on investment on these.
Initiatives is very good.
And which is why you know our general bias is towards our organic growth and capex, but.
It's the there'll be a very good returns.
Okay, Great and best of luck.
Thank you and thanks Brett.
Yeah.
With no further questions and I will turn the call back over to our speakers for any additional or closing remarks.
Okay. Thanks, Katie and thank you everyone for joining us today, if you have any further questions. After today's call. Please contact me again my name is Neil from Apple and my number is 2342622 310. Thank you and this concludes our call.
That concludes today's call. We appreciate your participation.
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