Q4 2020 Gates Industrial Corporation PLC Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Gates Industrial Corporation Q4, 'twenty and 'twenty earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session for <unk>.
Ask a question during the session you will need to press star one on your telephone for you.
Acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Milwaukee head of Investor Relations. Thank you. Please go ahead.
Thanks, Meghan and thank you. Thank you everyone for joining us this morning on our fourth quarter 2020 earnings call and I'll briefly cover our non-GAAP and forward looking language before passing the call over to our CEO Evo Europe, who will be followed by Brooks Mallard our CFO.
Before the market open today, we published our fourth quarter and full year results a copy of the release is available on our website at investors <unk> gates Dot com.
Today's call is being webcast and is accompanied by a slide presentation.
On this call we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.
Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website.
Please refer now to slide two of the presentation, which provides a reminder that our remarks will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward looking statements.
These risks include among others.
<unk> that we have described and our most recent annual report on form 10-K, and and other filings, we make with the SEC, including our first quarter report on form 10-Q filed in May of last year.
We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings call if at all.
I'll now hand things over to Eva.
Thank you Bill and.
Good morning, all and thank you for joining us on our fourth quarter earnings call.
As we begin I would like to recognize and thank each of our global gates associates for their commitment and they displayed throughout 2020 working diligently through a very challenging COVID-19 induced economic environment, while staying true to gates core values.
Not only did we step up to meet these challenges head on and we also continued to deliver on our mission to drive above market organic growth and expand margins.
And we accelerated innovation and improved profitability generated strong cash flow and strengthened our balance sheet by reducing gross debt.
Our fourth quarter results demonstrate the benefits of our transformation and highlight the resilience and strength of our business model.
As we return to strong year over year growth.
The improved business activity, we saw in the third quarter continued and expanded to all of our regions and both segments.
The solid growth performance in the quarter was accelerated nicely by our initiatives.
Sales of our newer products performed well and continuing the trajectory that has been largely unaffected by the pandemic.
The flexible posture, we maintain throughout the pandemic and allowed us to efficiently navigate the transition back to growth and expand margins in the quarter compared to the prior year, despite COVID-19 related costs and inefficiencies.
Our new manufacturing plant and the increased labor flexibility day provide played a key role in scaling up to support the growth.
The gates production system continues to provide a solid foundation for our operational performance.
Delivering strong productivity gains that drove outstanding year over year margin expansion.
Additionally, our restructuring program is proceeding well and it will deliver more significant savings later this year and aligned with the plan. We originally laid out.
The fourth quarter looks strong for cash generation.
Given the large amount of cash we had accumulated we took the first step in demonstrating our firm commitment to deleverage the business and reduced our gross debt by $300 million.
We believe the strong cash generation capabilities of our business combined with our solid liquidity position provide us with plenty of flexibility moving forward.
Gates exited Q4 well positioned.
And we are expecting a return to healthy growth in 2021.
We are re initiating our annual guidance, which I will touch on later in the presentation.
So we the highlights covered let's move on to more details on the results.
Slide four provides an overview of our fourth quarter results.
Total revenue of $794 million increased nine 4% year over year, including a positive foreign currency impact of 80 basis points.
Core revenue in the quarter increased by eight 6% year over year.
Our performance was significantly better than the high end of our guide we provided on our Q3 earnings call.
The elevated uncertainty surrounding COVID-19 related shutdowns did not materially affect our results.
And we were able to drive mid single digit market outperformance through new products and growth initiatives.
We saw significant improvement across the business with all of our regions returning to positive core growth.
Sales into replacement channels continued to accelerate nicely from Q3.
And most notable improvement came in our OEM business, particularly in the industrial and markets.
Fourth quarter, adjusted EBITDA was $163 million, representing growth of 20% compared to the prior year and margin expansion of 190, <unk> 90 basis points.
This margin expansion was primarily driven by growth margin improvement achieved through a combination of volume benefit and strong operational execution offsetting COVID-19 costs and inefficiencies.
Neuro <unk> variable compensation in Q4 2019, this would represent an incremental margin of approximately 55%.
We maintained a positive price cost position in the quarter.
And are confident in our ability to continue to offset raw material inflation.
Our fourth quarter adjusted earnings per share for 'twenty.
And increase of 5% compared to the prior year period.
The increase we saw in operating income was partially offset primarily by higher income tax.
Moving now onto slide five which shows the geographic breakdown of our revenue.
We delivered a healthy growth across all of our regions with China performing the best.
Growth in China was led by strong performances in the automotive replacement and industrial businesses.
Growing the automotive replacement channel and China has been a significant initiative of ours and we have made great progress exiting the year with our highest level of quarterly revenues there.
Our businesses in Europe, and North America continue to perform similarly, both displaying solid high single digit growth in the quarter.
Both regions saw above market growth rate, driven by new products and growth initiatives.
In Europe growth was driven primarily by a significant improvement in sales into OEM channels.
Sales into the automotive replacement channel also continued to grow nicely.
While the industrial replacement channel improved substantially from Q3.
The high single digit growth in North America was also led by a meaningful improvement in first fit channels.
In our industrial markets, nearly all experienced year over year growth.
With the strongest performance coming and agriculture and diversified industrial applications.
The automotive replacement channel continued its strength of solid growth.
I will note that we saw the industrial replacement channel distributors increased their purchases to meet rising and user demand.
Any notable increases in their inventory levels.
Lastly, our business in East Asia, and India showed the most significant improvement from the third quarter.
The nice improvement we saw in the month of September there continued in the fourth quarter with particularly strong growth in our OEM business.
Slide six.
Highlights of our segments.
Both of which had strong performance in our fourth quarter core.
Core revenue in our power transmission segment grew 9% on a year over year basis, and improved nine 4% sequentially.
After our total sales into replacement channels return to core growth in Q3.
We saw sales into OEM channels follow in Q4 for returning to strong core growth as well.
Segment, EBITDA margins improved 170 basis points, driven by strong operational execution and volume.
Our fluid power core revenue increased 8% year over year, representing significant sequential acceleration of 17% from Q3.
Similar to power transmission the growth was led by a recovery in our OEM business, primarily in the on highway and off highway industrial applications.
Sales into replacement channels also grew nicely.
Fluid power segment profitability improved by 200 basis points due to higher volume execution on our operational initiatives and higher efficiencies and our new plans, we brought online in 2018.
So across both segments volume benefits pricing and operational initiatives more than offset some raw material inflation and the elevated COVID-19 related inefficiencies.
With that I will now turn the call over to Brooks for some additional detail on our financials.
Thank you Eva move.
Moving now to slide seven and some additional detail on key balance sheet and cash flow items.
On an LTM basis or.
Our fourth quarter free cash flow of $242 million.
Presented 118% of our adjusted net income.
Our cash flow performance was driven by lower capital spending.
Lower cash taxes, and interest and better working capital performance.
As a percentage of annualized Q4 sales.
Trade working capital decreased by 340 basis points compared to the same quarter and 2019.
While volume accelerated during Q4, we were able to reduce our overall investment and working capital by approximately $16 million net.
Net of FX impact.
Our return on invested capital was a solid 15% despite the challenging conditions that we experienced for most of the year and.
And represents an improvement of 100 basis points compared to Q3.
On slide eight we provide detail on our available liquidity and debt maturities.
At the end of the fourth quarter, we used cash on the balance sheet to repay $300 million of our U S dollar term loan.
And which will result in approximately $11 million of annual savings and interest expense.
After this debt repayment, we continue to maintain ample liquidity with over $900 million of cash and revolving credit lines available at the end of the quarter.
We will remain opportunistic with respect to our capital structure and are committed to continue to reduce our overall gross debt.
Yes.
Net debt and the quarter improved from Q3 to four three times adjusted EBITDA.
As our end markets continue to recover and based on our current view of 2021, we expect to be at or near net leverage of three times by the end of this year.
Moving now to slide nine and a brief summary of off of our full year performance and 2020.
Which from an operational perspective was one of the most challenging years. The company has experienced and a tale of two halves.
For core revenues declined eight 4% with an 18, 1% adjusted EBITDA margin. However, our business recovered strongly after bottoming in Q2.
We delivered 2% positive core growth and the second half and and associated incremental EBITDA margin of 66%.
We took relatively limited temporary cost actions to protect both our ability to supply our critical components to our global customer base and to continue to advance our growth initiatives.
While the year was difficult, we executed well and built strong momentum exiting 2020.
With that I will now turn it back to Eva.
Thank you Brooks.
With 2020 behind US, let's move on to 2021.
Despite the remaining macroeconomic uncertainty.
And market environment has steadily improved and our business has strength, giving us the confidence to introduce our full year outlook for 2021.
Based on the broad demand trends, we are seeing we are.
We expect core revenue to increase in a range of 9% to 14%.
We expect our adjusted EBITDA margin to be in the range of 21% to 22%, reflecting significant margin expansion.
This is in line with our commitment to deliver elevated incremental margin. Despite a significant COVID-19 related cost headwinds during a return to growth.
Capex is expected to be in line with our historical average of roughly 3% of sales ranging from $90 million to $110 million to support both maintenance and growth growth requirements.
We also expect to continue to generate a substantial amount of free cash flow in 2021 in excess of 80% of our adjusted net income.
Given the unique dynamics of 2020.
We are planning to provide additional detail on the prevailing quarter on a rolling basis.
For Q1, we expect our total revenue to be in a range of $810 million to $840 million and our adjusted EBITDA to be in a range of $170 million to $185 million.
Now, let me move on to slide 11.
The fourth quarter marked and excellent performance and highlighted and anticipated business transformation driven turning point for the business.
As evidenced by our guidance, we believe 2021 will be a strong year.
We also believe the investments we have made in our portfolio and the work we have done to reposition the business provide us runway not adjust in 2021, but well into the future.
The diversified nature of our business provides us with exposure to highly attractive end markets, which we have broken down in more detail year on slide 11.
A significant number of these end markets are benefiting from nice secular tailwind.
As we have spoken about in the past we continue to bring in key design wins in industrial automation and logistics and personal mobility applications to name a few examples.
Many of these design wins have been made possible by our new products.
As we move forward, we believe our revitalized product portfolio and investments directed towards targeted commercial initiatives in these attractive and market provide us with an opportunity to deliver above market growth over the midterm.
Moving now to slide 12 to wrap things up we.
We delivered results that significantly exceeded our expectations for the quarter.
I am very pleased with the momentum we have seen in our business and the execution of our teams globally.
With significant progress that we attain on driving structural changes to our business and we maintain that we are in much stronger position today than when we entered this pandemic induced recession.
Our end markets are recovering.
And the investments we have made over the last several years are serving us well.
Our new plans and providing the intended benefits and sales for our new products continue to grow nicely.
And it by solid secular market trends.
We are driving significant operational productivity and.
And thoughtfully managing price and material economics through our gates operating system, which in combination with the savings from our restructuring program, we expect to contribute to additional margin expansion in 2021.
Our commercial teams are focused on delivering above market growth by executing on large organic initiatives that leverage our global scale.
<unk> portfolio revitalize products and system design expertise into structurally attractive end markets and <unk>.
<unk> and a positive view of 2021.
2020 was obviously a uniquely challenging year. However, one that we believe validates the resilience and the quality of our business.
We are excited about the potential that 2021 holes and look forward to demonstrating further progress on the investments we have made both in our product portfolio and footprint.
We believe these investments in combination with improvements to our cost structure provide a runway for above market growth margin expansion and strong cash generation.
With that I will now turn the call back over to Megan to begin the Q&A.
Certainly at this time, we would like to take any questions. You may have for us today to ask a question. Please press star one on your telephone keypad.
Our first question is from Andrew Kaplowitz with Citi. Your line is open.
Good morning, everyone and hope everyone is well.
Good morning, Andy Good morning.
Can you give us some more color into your 9% and 14% core sales growth guidance for the year, because if I look at Q1, the 25 and leased at the midpoint you are baking in in Q1 that would be the high watermark in terms of quarterly sales for gates. So is that just conservatism given the short cycle nature of the business is there anything else going on and are you concerned.
And it all but the recent auto production shutdowns that we've seen.
Thank you for the question Andy look we're going to stay away from further breakdown of our guide beyond what we have already provided but fundamentally our market for supported from our growth initiatives are performing well.
Look there is some macro does remain but we are quite constructive for the full year.
Easy enough and then Eva maybe you could give us a little more color on the status of all your new product initiatives. I think this is the first time, you've quantified the impact of new product growth. Both in your quarter was quarterly results and now and your forward guide and that mid single digit outperformance and maybe give us a little more color into the <unk>.
Acceleration youre seeing on the new product from which segment is actually having more impact if we look at the 9% to 14% core growth going forward.
And it is.
And reasonably broad broad based we have been able to see the acceleration of some of those.
And our highlights that we have provided over the last one.
Want to say five to six quarters.
We've seen really nice gains in businesses like personal mobility as an example, which grew over 20% in 2020, despite all of the Covid related headwinds that we have seen.
We have seen.
A significant amount of design wins.
In some of the attractive end markets that I've highlighted on.
On slide 11.
That are associated with industrial automation and logistics and robotics.
And we also see a pretty nice setup.
Optic in demand for our new products and fluid power I've spoken quite a bit about the NXT and <unk> product portfolio revitalization those sales exited at.
And frankly the best.
The best position that we have seen since those products were introduced in December and we are very optimistic that as we work with our customers and they are looking at some of their.
Underlying trends and building their machinery and equipment that they want to.
They want to launch that is more efficient lighter consumes less energy and provides more uptime, that's really the sweet spot of what the reinvention of our product portfolio brings to those customers.
So it was very broad based it was across all regions and.
It was nicely represented across both from a segment.
Thanks, David I'll turn it over.
Your next question is from Jeff Hammond with Keybanc capital markets. Your line is open.
Hey, good morning, guys.
Good morning.
Just on.
Just on the inventory levels it sounds like.
Inventory is still low and youre not really seeing any restock of note or maybe maybe there are some areas just.
Talk about what you think or what Youre hearing from your customers and what you're what you've kind of built into the guide in terms of any restock happening.
Yeah I think thank you for the question first of all Jeff.
Look.
Thank you.
As I've mentioned in my prepared remarks, we really have not seen and.
Any elevate elevation and in the channel and the particularly and the industrial replacement channel.
We have seen that our customers are starting to buy more products and I think that are feeling more confident about their end market demand and from the data that we look at monthly basis.
And we've seen that those purchases that very much in line with that with.
With the end user demand so no elevation there on the automotive replacement side.
The market has been performing quite well, we have been able to.
Outperformed the market with our results and.
And I think that we are benefiting from.
Operational continuity that we have been able to demonstrate throughout the second half of the year and and we also have not seen a significant or frankly any elevation and inventories on the OEM side as you know, Jeff It becomes a little more tricky.
We generally speaking billed to what our customer releases look like.
But if you take a look at some of the publicly disclosed data from some of the large Oems.
And the expectation is that that day.
I have seen and inventory decline and unnecessary and inventory rebuild of there.
Of their equipment. So my sense is that.
The market, suggesting a hearing stage not really.
And a significant.
A restocking phase.
Okay, that's great and then just.
And your slide 11, and I was really helpful. In terms of the end market breakdowns and updates.
A look at that 9% to 14% kind of growth Youre building and.
And you look at the end markets are there any that are clearly going to be at the top and are outperforming the top and vice versa.
And when do you see as bigger laggards within that.
Yeah.
Yeah look.
My sense is that.
And again I think and.
And then.
And he was.
At the helm of questioning there look we are very constructive on personal mobility.
We have been building a very nice product portfolio there.
And our differentiation, particularly replacing chain and.
And personal mobility and some other trends that you are seeing with people staying away from public transportation that.
That bodes well for us and we expect.
And performance above that debt.
And that guide that we have provided you. We also very constructive on diversified industrial day lots of secular trend wins.
And.
We have spoken quite a bit about the design wins and warehousing logistics robotics.
Some of the E commerce strength that debt.
And that continue we'll continue to see and benefit from.
So we are very constructive on that on that.
Market segment, and we have a very good presence and we we have done a lot of work, particularly over the last couple of years.
Automotive replacement is very strong and we have continued to.
To do a terrific job in growing our presence there and I've spoken about.
China business and automotive replacement and particular it exited.
And on the.
Exited 2020 kind of on a $100 million run rate and just kind of a per reference.
R.
And our China team has more than doubled that business and under three years. So we continue to see that there is some positive tailwind in that business as well so.
I'd sales lots of green shoots versus where we were maybe as recently as two quarters ago and.
And the fact that.
Our view is that the markets are just hearing not really kind of being.
Totally robust yet.
We think that all of our segments with the exception of energy resources is going to be a plus in 2021.
Okay, Great coloring book.
Jumping back in queue.
Your next question is from day, Ma'am Cross with UBS. Your line is open.
Hi, good morning, everyone really nice quarter.
Thank you Amy and good morning.
So we have been hearing from some other companies operating.
And in some of the same and markets.
About supply chain.
Just wondering if you could give us any color on what you're seeing and hearing and.
And to what extent if at all you've maybe accounted for such issues and your guidance for the year.
Yes sure.
And I think about your question Damian and I kind of think about it and.
In two ways one is.
Inflation.
And we have seen a moderate increase in inflation and raw material inflation and particularly in fourth quarter, but this is something that we have anticipated taking into an account and what you see in terms of liquidity and would you see in demand some of the demand coming back.
And to be nicely and.
So we have been very actively managing our raw material costs.
And we certainly are very confident that we will be able to to offset any raw material inflation with actions that we have taken either by.
New products that are more efficient, they're using less raw material to perform the same.
Function and or positive price realization and so there will be on one side on the other side look lots of disruptions associated particularly with with logistics, but again.
And that the work that we have done the transformation that we have driven at gates, particularly with the new plants that came online in 2018.
Are giving us a great in region for region operating strategy and it gives us multiple sources for raw materials and.
And certainly we have not seen much in terms of disruption of our supply chain.
But I would tell you that if youre trying to get product on.
On the ocean or air ship it is.
It's very difficult as.
The additional complexity associated with the availability of freight, but I think that thats, where our ability to.
<unk> gotten and lean forward in the.
Transformation process that we have gone through and giving us the opportunity to be much more in region for region, frankly, with very de Minimis amount of.
Trent transatlantic Transpacific cross shipments I think its positioning as well and the last point of your question is that we've anticipated.
Inflation, and we've anticipated incremental logistics in our guidance.
Okay got it that's really helpful.
And then I wanted to also ask you about the margin guidance here in 'twenty, one and 22% adjusted EBITDA margins I was wondering how much discretionary cost savings from this past year, you expect to come back if any at all.
Maybe you could just kind of bridge the margin in terms of the fixed cost savings kind of still have yet to hit the P&L any of that discretionary costs coming back potentially and I.
Just any other considerations factoring into that margin guidance.
Hey, this is and this is brooks I'll take that one so first on the <unk>.
Just kind of highlight the restructuring we're still on pace to deliver our run rate of.
$40 million by the time, we get the end of 'twenty, one we've got some savings and 'twenty.
We will get most of the incremental savings in 'twenty, one and then we will still have a little bit leftover that we get and 22. So that's going to help drive the margins as far as discretionary cost I would say that we're still seeing more headwind from an efficiency perspective, and the factories then we're saving on a discretionary basis on the SG&A line.
And so.
Sure.
Do you have absenteeism, you have people moving in and out you have training and have these different headwinds that we're seeing as we make sure we were able to supply our customers and so.
And as that starts to alleviate through the year that'll probably offset the comeback of the discretionary cost. So so net net probably still a little bit of a headwind as we get through COVID-19, but but.
But should start to abate as we get towards the end of the year and we get out of this.
Okay got it thanks, a lot I'll pass it along.
Your next question comes from Jamie Cook from Credit Suisse. Your line is open.
Hi, Good morning, I guess my first question, obviously the margin guidance is strong for.
2021, and I'm just wondering how we should think about and margins by segment you know at what point tense fluid power start to catch up more.
With that power transmission business. So I guess, that's my first question and then my second question. Obviously, you said you all Neil hit your <unk> and you should hit your leverage target of about three.
And three times by the end of the year, just sort of you know thoughts on on capital allocation beyond that thank you.
Thank you for your question Jamie.
Look from.
Margin recovery into fluid power and fluid power is still <unk>.
Reaching the potential.
Of volume that we have seen in 2018, and so we still have ways to go and we anticipate that as the volume start catching up youre going to start seeing those gross margins too and EBITDA margins to come up nicely in line with that.
We have been able to accomplish and 18 and beyond.
So.
Probably the biggest driver Jamie in terms of seeing that EBITDA margin and recover on fluid power.
In terms of.
In terms of.
Our capital allocation priorities I would say that.
Our primary focus still is to deleverage our balance sheet, but.
We are frankly.
Going to remain very opportunistic on growth related set.
Set of priorities as well I think net we are.
And significantly better positioned and I think most folks anticipated when we exited Q2.
We are very constructive and committed to get to and below three times net.
And net leverage we believe that we will get to three times leverage by end of this year and it will.
Substantially open up.
Additional flexibility for us.
And well into the future. So we feel quite good where we sit and we believe that everything is on the table.
Thank you.
Your next question is from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Good morning, good morning.
I'm wondering if you folks can talk about where lead times stand today and the levers that you would pull if you had to scale production.
And above the high end of your sales range. So.
Sales continues to demand continues to improve or so expectations can we just talk about the levers we will pull in the footprint today and then how that compares from last cycle.
Thank you for your question Gerry I think that I'll come back to that.
The expansion of our capacity that we have.
And we've brought online in 2018 and beginning of 2019 that gives us quite a substantial headroom to be able to deliver volume above.
That <unk>.
Net year that we have experienced in 2018.
We've also been able to create a lot more flexibility in essence, if you remember <unk> been talking a lot about getting two locations, where we can hire folks and the ramp up production more readily so we have machine capacity.
In place that give that will give us a very nice.
Opportunity to to deliver would have a volume of incremental volume.
Thats potentially.
Coming in and we May we may realize.
And lead times lead times.
For us still.
No.
And within a reasonable level, we anticipate and lead times will start stretching a little bit.
As we are able to support the customers that.
They're not coming in but and maybe more robust demand and with the new design wins that we've spoken about and.
We have the opportunity and the flexibility to be able to ramp up and support and SaaS as that may occur.
And you know what's interesting is.
'twenty, one and the first year of recovery and your margin guidance is just a point away from where margins peaked in the last cycle and I'm wondering if you could talk about if the recovery continues into 2022 can you sustain the level of operating leverage that you're delivering and in 'twenty one.
One or how should we think about.
Potential for new hires and margin if the cycle does continue.
Yeah, So Jerry I don't want to get over my skis and here too.
Too far but look.
I think sometimes in 2019 during our capital markets update day, we've talked about about 24% EBITDA margins and frankly, we don't see any reason to be committed we believe that.
That is certainly in plan.
And I believe that the quality of our business as such and the.
The transformation that we have driven both operationally as well as from a portfolio perspective is such that we should be in a situation to be able to.
And to come within striking distance of that 24% EBITA margin.
Okay.
Appreciate the discussion thanks.
Thank you Jerry.
Your next question is from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe just a first question around the.
The margin outlook.
Looks like you're dialing in and sort of 45% to 50% incremental margins and then.
Q1 and for the year.
Yeah.
So just wanted to check.
And if that's roughly the right ballpark and it is the way to think about it it's about 35% sort of baseline incremental and.
And then you're adding on.
A good chunk of those restructuring savings for the Bally.
And.
And then what's the sort of medium term expectation around incrementals.
Okay.
This is Brooks I'll take I'll take that one so I think youre thinking about it the right way the one caveat I would put on that is we are seeing some some tailwind from FX and.
And so we're not going to.
And we're not going to lever up.
The same rate on the FX thats going to be about our normalized EBITDA margins of 20%, so you're going to have to separate the core growth out from the FX. When you. When you do those calculations as we go forward based on the profile of the business and I think what we've said before is 35% to 40% on the on the top line lever.
<unk> on a go forward basis as.
And as what we would expect once we get through these restructuring activities that are that are obviously additive.
Thanks, and then Brookline and the follow up for you as well around the margin and cash flow has been touched on yet and the Q&A.
So I understand that the capex and seeing a decent rebound and 21.
Just wanted any more color you could give us around what scale of working capital cash headwind, we could expect from that revenue bounce and it seemed like in Q4.
The working capital cash.
And that strict discipline, even with the revenue turning around but I wanted it for the full year 'twenty, one and how.
How big the headwinds could be and should.
Should we expect free cash flow dollars.
And to still be up year on year, and 21, even with that working cap and capex headwind.
Yes.
So I'm going to be careful about predicting the dollars on working capital because thats going to be.
Pretty pretty tied to how how the volume looks from the second half of the year, which is which is obviously a ways out there and and.
As <unk> said, we don't want to provide any further.
Update on that in terms of other than the guidance that we've given I will tell you that Q4. This year, our working capital performance was really strong.
We know our collections were good.
We did a good job managing inventory.
Payables offset a lot of the increase in raw material inventories that we tried to lay in as we're ramping up production and we had a little bit of help because we were a little bit more.
Mix towards the first fit business and Q4 and that helps us a little bit on the terms, but they are so we are able to collect a little bit more cash than normal.
I would say that's probably the single biggest thing when you think about.
And we're working capital is that when you get back to more normalized mix of products, we will see a little bit of terms creep toward the replacement business and so.
So thats certainly one of the factors that's going to.
And thats going to affect US and then also as we and <unk> toward growth and theirs.
Going to be some investment and working capital. So that's just one other things that.
And that we're going to we're going to have to deal with right.
Great. Thank you.
Your next question is from Deane Dray with RBC capital markets. Your line is open.
Hello, and good morning, everyone and thanks again for moving to the morning call time frame.
Good morning, Dan.
Just to follow up.
And Julians question on free cash flow for Brooks, what's the on.
The increase year over year and Capex dollars could you talk through some other projects that those are targeting.
Dana I think that.
Our normalized rate of May.
Maintenance Capex is kind of index, one to one 5%.
We also are doing quite a bit of work in Europe.
Additional.
Infrastructure, so that's going to get some capex allocation.
Probably.
A good chunk of the increase and then we generally speaking we have about a 115% of growth Capex and we have done terrific.
And of work over the last three or four years and.
In rebuilding our capital structure.
Putting new equipment and desktop whole lot about.
Our innovation frankly is driven by our ability to revitalize our per.
Production.
The processes that are unique and differentiated to us that gives us and ability to accelerate our our innovation cycle and develop these new products that give us the opportunity to.
And to drive growth and so we will continue to maintain the growth capex about one and one 5% and so that's really kind of the composition. So maybe what's different this.
A little bit of and investment into our it infrastructure and Europe too to help ourselves on that on.
And the enterprise side, yes, the only thing I would add to that as you know typically we have we have more good projects.
And to go after and so for US it's all about allocating our time and resources towards the best projects and what's what's going to deliver the best Bang for the part.
2020 was obviously a one off so it was really kind of back to normal and in terms of the good projects that are going to they're going to drive strong cash flow and good IRR for the business. So.
Alright, that's real helpful and then.
You mentioned that Youre seeing higher efficiencies from the new plant investments that you've made how is that translating just.
Qualitatively what are you doing better.
Is it shorter lead times higher efficiency more automation and just how that is.
New plant investments translating into.
And better margins.
I Wonder if you were and our plans Daniel you just did a very nice summary of that so obviously the new plants. They are larger in scale. So they give us the opportunity to have.
So much more efficient usage.
Of manufacturing overheads.
New semi automated and semi automated equipment that we have launched and dose.
Particularly these three new facilities that.
And there'll be a build and brought online and 18 and early 19.
That gives us the ability frankly to be much more flexible.
And with supporting our global customer base and.
And keep our lead times more and check but.
And I think its overall cost structure that is lower and.
And much more efficient manufacturing infrastructure that we have put in place.
Give us.
A and ability to scale up more rapidly and frankly do it at lower cost.
Great and then just last question for me and Evo the past couple of quarters, you've been real good about highlighting some of the COVID-19 macro trends that are translating into your business like last.
Less use of mass transit, so you're seeing more people getting a second I'll share a car.
And as well as more investment and personal mobility.
And so I'm interested in hearing when you talk about all of these.
On the diversified industrial part of slide 11.
Automation and logistics robotics warehouse.
That from what we're saying, it's going to be a big growth opportunity for industrials.
Over the next several years what are the chances that you're going to be able to have that except for one of these separate categories that we would see on slide 11.
How much do they represent today and what kind of growth rate or are they expected to see the next year or so just those like what I'll call hyper growth opportunities.
I think that you hit something that I have been trying to.
And several of these earnings calls hint that and that is that those are macro trends that we are front and center on.
There's couple of.
Very good customers of ours that reported over the last.
Quarter that half.
And market leadership and industrial automation as an example here and the U S and have very good customer of ours and.
We are working very diligently and particularly on a chain to belt opportunities. It can imagine dean and the big opportunity here is to drive efficiency not just because there is more.
And efficient equipment, that's being launched and everybody is trying to automate, but you also want to eliminate.
Any potential.
Potential hazards that industrial change have a tendency to bring in environmental hazards and we are.
A much lighter and much more efficient consume less energy.
Eliminate and.
Significant amount of.
No.
Problematic chemicals and manufacturing our products.
So we see these opportunities.
Very big for us secular in nature.
And.
Hello Guy.
My mission in life is to eliminate all industrial chain and as we have highlighted.
In the past and that's a very large market opportunity for us where we don't necessarily compete with traditional competitors, we are competing with a completely different and unique technology.
To your point.
Big opportunity for us and we're very constructive about.
What it may represent for us as we as we get out of 'twenty, one into 'twenty, two and 23.
That's real helpful. Thank you.
Thank you Dan.
Your next question is from Josh for Glinski with Morgan Stanley. Your line is open.
Hi, Good morning, guys good morning.
Good morning, Josh.
So.
Brian you've covered a lot of ground already but maybe putting together a couple of other questions that were already asked.
I think at the midpoint of the guidance you guys are above where you were in 2017.
Margin is not quite back to those levels. So maybe a little bit of conservatism, just putting that together with some of the comments you made about your factory efficiency eval.
Maybe taking that and the next logical step when you guys get back to 2018 levels, presumably margin should be higher right like that conversion.
And that extra couple of hundred million dollars between those two years sounds like it should be structurally higher between the savings and 22 that Brooks mentioned and that operating leverage is that is that a fair point.
Absolutely, Josh and I think that you are you are thinking about it the right way and I think as I have pointed out we don't certainly we don't believe that we need to <unk>, 24% EBITDA margin target over the mid term here as we get out from completing the transformation that we have driven with this with this business.
And this.
I would also point out that.
We are trying to be realistic about.
Covid, although we all I think learning how to operate with Covid.
And our significant amount of inefficiencies that we are still facing all of the companies around the globe are facing.
Facing dose with.
Folks getting infected.
And not necessarily and your factories and so your facilities, but they get infected by.
On the outside that means the day and up in and quarantine and net debt.
And quite a significant amount of disruptions in your facilities because in general you don't.
And you don't get it.
A sprinkling of.
Few people across the entire enterprise journeys you generally speaking get hit.
And locations quite well and it ends up causing and pretty pretty significant disruption. So we anticipate and thats going to be with us Josh at least for the first half of 2021.
Or until we start getting more robust level of vaccinations that.
We will be all able to.
To live with.
Once that that occurs so those are probably the two big two big points that I would like to make.
Okay. That's helpful. And then just on the the first fit side and automotive.
And obviously a lot of activity going on with new startups through technologies.
Spak every three days.
And presumably some new customers to go along with that even I know you've mentioned that your your entitlement on and EV can be just as high or higher than on the first fit side, but.
What is the actual pipeline, telling you or are you kind of living up to that especially with some of these newer players.
Is there any discernible difference there just as kind of the mix changes on the <unk>.
The first fit market here over the next several years.
Yes, sure a really good question, Josh Thank you for asking it but.
And I think about electrification.
And mobility in particular, I actually look at it more broadly I look at it if we were looking at our slide 11 allocated from mobility and recreation and all the way to on highway applications.
And we see a very substantial set of opportunities and across that the span of the universe. We are probably I would say.
Much more pressure.
Present in the personal mobility, and the recreation space and we see.
And opportunity to drive growth quite nicely kind of over the midterm double digit level of growth.
With a degree of consistency facilitated by the fact that it is much easier to electrify.
Rotor cycle, scooter and and bicycle and we already see that and we had a premium premier player in those applications.
I would say that on the automotive side.
We have board wrap pro so a couple of years ago three years ago, and we are seeing good opportunities that we will be executing on as we move forward and.
And we are winning today programs in on highway heavy duty truck. So we we are quite bullish actually about.
And the opportunities that remain ahead of US we are well positioned as you know.
Despite the fact that there.
There is an incredible amount of bullishness.
You also have to maintain focus on managing our business that we generate revenue and profitability on today and if I look at.
Places like automotive replacement, we are building a very strong.
Vio coverage vehicle and operation coverage.
On the Evs and are on the market today, we have launched over 25, new products and in the last couple of quarters. So we are building that very very nicely.
Very small aged car park that that represents and we.
We are also.
Focusing on the mild and full hybrids and there'll be we maintain will give us the opportunity to generate and incremental set of revenue generation opportunities kind of over the next five to 10 years. So very bullish on electrification really delighted with the progress we make.
And.
I anticipate that sometime mid year, when we will have our capitals updates day again, we will spend quite a bit of time on giving you a really good per view.
What truly this opportunity represents for us over and many many years to come in the future.
Okay. Thanks for that best of luck.
Yeah.
And we have no further questions at this time I'll turn the call back to presenters for closing remarks.
Okay. Thanks, everyone for your time today and thank you for your interest and the company and we look forward to updating you again on our progress and May.
Okay.
This concludes today's conference call you may now disconnect.
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