Q4 2020 Altra Industrial Motion Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Altra Industrial motion Q4, 'twenty 'twenty earnings call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question. During this time you will need to press Star then one on your telephone.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your first speaker today, Ryan Flaim. Please begin.
Thank you good morning, everyone and welcome to the call to help you follow management's discussion on this call. They will be referencing slides that are posted to the altra motion dot com website under events and presentations in the Investor Relations section. Please turn to slide three.
During the call management will be making forward looking statements as defined in the private Securities Litigation Reform Act of 1995 forward looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks uncertainties and other factors described in the company.
And its quarterly reports on form 10-Q, and annual report on form 10-K, and in the Companys other filings with the U S Securities and Exchange Commission.
Except as required by applicable law Altra industrial motion Corp, does not intend to update or alter its forward looking statements, whether as a result of new information future events or otherwise.
On today's call management will refer to non-GAAP diluted earnings per share non-GAAP income from operations non-GAAP net income non-GAAP adjusted EBITA non-GAAP operating income margin non-GAAP adjusted EBITDA margin non-GAAP organic sales non-GAAP gross margin non.
Non-GAAP operating working capital non-GAAP net debt non-GAAP free cash flow and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading discussion of non-GAAP financial measures and any other items that management believes should be.
Excluded when reviewing continuing operations the reconciliations of altra as non-GAAP measures to the comparable GAAP measures are available in the financial tables at the Q for 2020 financial press release on Altra website.
Please turn to slide for with me today are Chief Executive Officer, Carl Christenson, and Chief Financial Officer, Christian storage with that I'll now turn the call over to Carl.
Thank you Ryan and thank you all for joining us today to review, our Q4 and 2020 full year results.
It was abundantly clear through the events of 2020 is that our people our greatest asset and I would like to begin by expressing my sincere. Thanks to every member of the Altra team.
Credibly proud of the resilience and agility that you all demonstrated throughout the year as you served our customers maintain business continuity and delivered exceptional financial results.
All while navigating through the unprecedented circumstance circumstances, we faced.
Since the onset of the pandemic, we've remained disciplined in our focus around for top priorities.
Putting the safety of the Altra team first.
Managing our operations to minimize customer disruption and ensure continuity of supply for our customers, including those responsible for supplying critical components and equipment to help in the fight against COVID-19.
Prudently managing cost to maintain a strong balance sheet and manage our leverage.
And playing offense to position of altra to emerge from this period a stronger company.
As a result of our team's focus and efforts we ended a solid year with very strong fourth quarter.
Now please turn to slide six.
By leveraging our market position and demand improvements in several markets, including wind and class eight trucks in China.
We exceeded our revenue expectations with sales of $453 million in the fourth quarter and a total of $1 $72 6 billion for the full fiscal year.
Through our focus on applying altra is world class business system to drive efficiencies and carefully manage costs, we exceeded our bottom line expectations from.
Non-GAAP adjusted EBITDA margin by 100 basis points and achieved excellent working capital performance.
On a full year basis 2020, net income was a loss of 20 $25 $5 million or a loss of 39 per share.
Full year 2020, non-GAAP diluted EPS was $2.88, the strongest EPS and Altra history.
A testament to the value of the broad diversity of our portfolio as a result of the <unk> combination and our ability to act nimbly to control cost since the onset of the pandemic.
Yeah.
We also generated a record $229 million in non-GAAP free cash flow in 2020, which allowed us to pay down $160 million of debt and make tremendous progress delevering our balance sheet.
We exited the year with net debt to non-GAAP adjusted EBITDA leverage below 3.2 times far exceeding our expectations and advancing us towards our goal of reaching the historical leverage levels of.
Two to three times.
Now turning to slide seven for an update on our strategic initiatives.
We remain committed to our strategic priorities of leveraging our world class business system to create sustainable competitive advantage.
Managing costs and drive margin enhancement and Delevering our balance sheet.
The highlights I just shared clearly demonstrate that we are making terrific progress across these three priorities.
We also remain focused on directing resources to opportunities that position altra to grow and thrive as a premier industrial company for the long term.
This includes making targeted organic investments and innovative new technologies as well as customer collaboration initiatives that move us further up the technology spectrum.
In 2020 for example, we formed a strategic partnership with the manufacturing software company Amtech industry, a b to expand our capabilities within our <unk> business and factory automation offerings.
Another top priority for altra as to further advance our environmental social and governance journey crew.
Critical ESG priorities have long been ingrained in the Altra business system is an extension of our culture and the way we conduct ourselves.
This includes a robust robust set of tools and processes designed to systematically identify and eliminate waste and reduce emissions as well as strategies and systems to foster a work environment that stimulates and fully develop the capabilities of our people.
The Altra business system serves as a compass for ESG journey, and I'm proud to share with you today, a few highlights demonstrating the progress our team has made in this area.
To ensure that diversity equity and inclusion is ingrained into our culture in such a way that is enduring and true to our company. We recently formed a DNI committee.
I'm also proud to have recently signed the CEO pledge for CEO action for diversity and inclusion which is aimed at rallying the business community to advance diversity and inclusion within the workplace.
Another focus for Altra is ensuring a safe and healthy work environment, while also advancing our efforts to manage our business in an environmentally responsible manner.
We recently appointed a new director of EHS, who will be instrumental in advancing our efforts in this area.
We also remain committed to providing our customers with innovative solutions that help make the world a better place.
For example in support of the effort to help reduce greenhouse gas emissions are Jacobs vehicle systems business is developing innovative technology that will reduce emissions and improve fuel efficiency and heavy duty class eight trucks.
Our solutions also help the move towards alternative energy through the installation of engineered power transmission products and solar title and wind energy applications and.
And our electro mechanical power transmission products help wastewater equipment manufacturers and treatment facilities worldwide increase their efficiency, while reducing costs and downtime.
With our people is our most valuable asset employee engagement is another top focus area.
We conduct annual engagement surveys to solicit candid and actionable feedback from our teams.
On average we had 78 purchase 78% participation in these surveys which have validated that the vast majority of our employees feel supported by leadership have a clear understanding of expectations.
And our engaged as part of a team.
We believe that our foundation of understanding and commitment to change is what supports lean growth and continuous improvement and we are using a valuable and targeted input from these surveys to drive improvement across the organization.
We also support our employees and efforts to get involved in organizations and activities that improve their communities.
In the coming year, we plan to implant our first materiality assessment to ensure that we are focusing on the ESG priorities that are of greatest interest to our shareholders.
Align best with our business and drive our strategy forward.
We're looking forward to updating you as we continue forward on our ESG journey.
Before I turn the call to Christian Please turn to slide eight for a review of the markets in more detail.
<unk> with those that performed well in the quarter.
Yeah.
Transportation was up high single digits as class eight truck demand in China, and North America finished the year strong.
On balance we expect the market to be slightly up to flat in 2021 as demand in China, which remained strong through January returns to more normal levels, while demand in North America is expected to improve as the pandemic subsides.
Turf and garden had another strong quarter up low double digits.
The housing market remains strong and our customers continue to accelerate purchasing after delaying builds earlier in the year.
We expect the market will slow in 2021 due in part to tough comps.
Medical equipment was up low double digits year over year and flat sequentially.
Demand remained very strong for COVID-19 related medical equipment, such as ventilators and respirators.
We expect demand in the medical market to moderate in 2021 as requirements for Covid related components are not expected to repeat and elective surgeries in hospital capital expenditures don't rebound to pre them to pre pandemic levels till 2022.
Renewable energy was up low single digits and down sequentially in line with expectations due to a tough comp and some anticipated industry supply chain issues, which are unrelated to altra.
On balance, we expect 2021 to be flat unless the new administration implements policy changes that could have a positive impact.
Distribution was up low single digits, and we continue to expect the distribution markets to track in line with general industrial economy.
The AG market was up double digits for the quarter as well as sequentially driven in part by improving net farm income.
Which drove increased equipment spending.
On balance, we expect modest, albeit lumpy demand this year.
Defense was up double digits and is expected to remain strong going forward as we continue to see strong performance with many of our OEM customers.
Commercial aerospace, which remains the smallest piece of our overall A&D business was down mid single digits due to the ongoing struggles facing the airline industry.
We expect this market will rebound at some point, but not likely until 2022.
Factory automation and specialty machinery was flat year over year and down low single digits sequentially.
We began to see softening in the semi semiconductor market, which offset the strength in robotics Adv in general factory automation.
Overall, we expect the market will improve in 2021 with particular strength in technology markets.
Other market facing headwinds in Q4 included.
Metals, which was down low double digits, but up sequentially as capacity utilization in the mills continued to improve.
Overall, we are increasingly positive for 2021.
We expect manufacturing and automotive markets to improve.
In the later part of the year and that we will support.
And that will support demand for metals.
In mining demand was down double digits for the quarter is a continued result of low commodity prices last year.
We're seeing iron ore starting to come back the coal remains down and we expect the market to be flat to slightly off in 2021.
Oil and gas, which remains a very small component of our business at well less than 5% of overall sales for 2020 was down double digits for the quarter and up low single digits sequentially.
We expect the market to be flat in 2021 with some possible modest demand improvements towards the end of the year. If the price of oil continues to go up.
With that I'll turn the call over to Christian to provide a detailed review of the quarter and our 2021 guidance. Thank you Carl good morning, everyone.
Our strong fourth quarter results were highlighted by careful cost management strong cash flow generation and significant progress deleveraging the balance sheet.
In addition, we once again demonstrated the resilience of our balanced portfolio of up goes.
Let's start with a review of our top line performance in the fourth quarter.
Sales were up two 6% compared with the prior year period excluding.
Excluding FX effects sales grew modestly year over year.
At first in 2020 as price contributed 90 basis points foreign exchange rates had a strong positive effect of 230 basis points.
Excluding the effects of foreign exchange net sales for the PTT segments were down seven 6% as key end markets like oil and gas mining and metals continue to be very weak.
And net sales for the E&S segment were up eight 2% compared with the same quarter last year driven by strong top line performance across several end markets.
Particular.
Our ventilator business.
In the medical segment.
Taking a closer look at our performance by geography Asia and the rest of the world. Once again was a strong performer with revenues up 28%, primarily driven by strong sales into the class eight truck market in China for the Chinese wind market.
In Europe sales declined five 7% while sales in North America declined for 4%.
As a result of the actions we took in the flow to manage cost we were able to increase non-GAAP operating margins by 80 basis points.
Non-GAAP non-GAAP income from operations increased by $5 2 million or seven 2%, reflecting our team's incredible efforts to reduce cost and manage cash in this environment.
We achieved year over year cost reductions of approximately $60 million and temporarily avoided cost of another $10 million.
We estimate that approximately $30 million related to synergies consolidations and other activities and therefore will repeat in 2021.
The balance does primarily to pandemic related cost savings such as travel medical expenses Furloughs Merit increase suspensions rent concessions and other temporary savings.
We were very pleased with our working capital performance in the fourth quarter.
Where we exceeded our targets and took $23 million all of year over year. Despite.
Despite FX pushing balances up.
We continue to benefit from lower LIBOR rates and lower outstanding debt levels. As a result in interest expense in the fourth quarter, excluding the impact of the terminated interest rate swap decreased $2 7 million year over year.
As we noted last quarter rec changes related to tax reform and other changes have lowered our tax rate the provision for income taxes for the fourth quarter was 21%.
Non-GAAP adjusted EBITDA was $96 1 million for the fourth quarter for 'twenty, one 2% of net sales.
Up 100 basis points compared with last year.
Please turn to slide 10 for a closer look at our balance sheet improvement cash flow and liquidity.
We continue to be very pleased with how our cash generative business model the financial strength of the new altra and our team's ability to manage cash has proven out to through the prolonged challenging market environment for.
Free cash flow for the quarter was very strong at a record $91 3 million compared with $60 7 million a year ago.
We generated $263 5 million and non-GAAP adjusted free cash flow in 2020, and 29% increase compared with the price.
We continue to manage Capex spend given the top line headwinds capital expenditures during the quarter totaled $9 4 million up sequentially as expected as we directed investments to growth opportunities in automation and technology enhancements.
As Carl has shared earlier.
We ended the quarter with 254 for $254 for millions of cash and $295 5 million availability under the revolving credit facility.
In the quarter, we paid an additional $70 million in our term loan, bringing our total debt pay down in 2000 $20 million to $160 million.
Which is more than the total pay down in 2019 and 2018 combined.
Another testament to our ability to effectively manage the balance sheet, even during the most difficult times.
Since completing the merger we have paid down $310 million of term low debt.
We decreased our net leverage to below three two times.
And we remain committed to deleveraging the balance sheet. We now expect net leverage to be below three times by mid 2021.
Notably.
Net debt to total equity improved meaningfully in 2020.
We remain very comfortable with a substantial room, we have in.
Covenants.
As we have shared before the terms of our net debt leverage covenant excludes the $400 million of senior secured notes the.
For covenant step down to $4 75 at the end of 2020.
We also have no short term debt maturities as these are not due until October 2025 in October 2026.
In terms of use of cash our top priorities in the current environment continue to be to reduce our debt balance managed leverage at preserve optionality for investing in future growth, while continuing to support our quality dividend.
Let's turn to slide 11.
For a review of our outlook for 2021.
Today, we are providing guidance for full year 2021, which reflects our best estimates and practical assessment of the financial impact of COVID-19 to altra businesses at this time.
We are taking a cautious approach to our initial outlook for 2021 due to the ongoing uncertainties related to the duration of the pandemic and the timing of the economic recovery.
While we assume that we will return to year over year growth.
Revenue growth in the first quarter.
The guidance assumes that the general industrial economy will not begin to meaningfully recover until late in 2021.
In addition, the guidance guidance reflects approximately $40 million of cost savings realized in 2020 that will gradually phase back through 2021 with the full effect of the cost coming back by the second half of the year.
As a result, the guidance assumes that we will see SG&A expenses increased sequentially throughout the year.
We also assume that China's demand in class eight truck.
We'll trucks will normalize in the second half of 2021.
We are hopeful that market conditions improve sooner than our guidance currently assumes that we gained better visibility and as we gain better visibility, we will revisit our outlook as appropriate.
Additionally, we continue to closely monitor other situations are prepared to implement further cost reductions.
Cost measures showed topline demand to celebrate.
With that as a background our guidance for 2021 is as follows.
Sales in the range of $1 79 billion to $1 83 billion.
GAAP diluted EPS from a range of $1 97 to $2 10.
And non-GAAP diluted EPS in the range of $2 95.
For the $3 15.
Non-GAAP adjusted EBITDA in the range of $370 million to $385 million depreciation and amortization in the range of $120 million to $125 million.
Capital expenditures in the range of $45 million to $50 million and.
And our normalized tax rate for the full year in the range of 20% to 23%.
We expected adjusted non-GAAP free cash flow in the range of 185 million to $210 million.
With that I will turn the discussion back to Carl.
Thank you Christian.
Please turn to slide 12.
And as we look ahead to 2021, we have we have complete confidence that we have the talented people financial discipline and market strength to drive strong performance build critical customer relationships.
Nurture an engaged employee experience and advance our strategic priorities to thrive and grow as a world class Premier Industrial company long after the pandemic is behind Us I.
I will leave you with for reasons, we continue to feel extremely positive about the long term opportunities for altra.
Our efficient cash generative business model continues to prove to be highly resilient.
The combination of our legacy PTT businesses with our E&S businesses has continued to prove to be an exceptional strategic move.
We expect to benefit from demand across several of our diverse end markets, particularly as the economy recovers.
And altra value proposition continues to resonate deeply with our customer base.
As always we are grateful for the ongoing support of our customers partners and shareholders and I would like to once again. Thank the altra team for all that we were able to accomplish together during an extraordinary year.
With that we'll now open the call up for questions.
At this time, ladies and gentlemen, if you would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.
Again, Thats star one to ask a question.
Your first question today comes from the line of Jeff Hammond with Keybanc. Please proceed with your question.
Hey, good morning, guys how are you.
Well, Jeff how are you.
Good good.
Just wanted to go through kind of the EBITDA bridge. It looks like you've got kind of a nominal growth in the guide just wanted to get a sense of what's built in on the guide in terms of how much of that $40 million of temp cost is coming back are there any kind of carryover restructuring or synergy savings that youre building in and what kind of the underlying.
Business incremental margins you're assuming.
So I think Jeff.
A couple of components three.
Three main components I think.
First for.
270 basis points of topline growth is FX related.
And our assumptions and we assume that we that those incremental sales dollars FX related.
Incremental margins of 20%.
We currently assume that the $40 million will come back in full in debt.
We'll not be able to offset a meaningful amount of that potentially has enabled a $5 million.
And then on the Incrementals outside of the $40 million and the FX, we assumed 35% incremental margins.
Okay, but the temp costs aren't going to all come back this year right. Because you just you don't really have G&A through.
<unk> <unk> I guess through the first half or.
So we assume debt this year about 40% of 2019 travel expenses will come back and 60% will still be.
I'm not going to be.
<unk> much in the first half for you at least.
So.
The vast majority outside of travel.
Of cost will come back when we look at the $40 million, what other components of the $40 million.
This is around $26 million of that is people cost.
That includes European government support for short weeks.
And retention credits and some foreign jurisdictions that we received to keep people on the payroll those will disappear furloughs have disappeared.
We had in some jurisdictions.
Where people were asked to take temporary pay cuts if you add that all up that's $26 million.
Sure.
And that will come back next year is $4 million of medical savings and we assume that those medical savings people will go back and have surgeries, maybe not all of that for me will come back, but right now other guidance assumes it will.
And the remaining $10 million is related to.
Facility costs remember, we got some rent concessions.
For several low leased properties.
Those have expired.
It's the element of <unk> that will come back.
And then other cost reductions or temporary price concessions, we got from service providers.
Some of our suppliers.
That's the nature of the $40 million therefore.
<unk> will come back there will be like I said travel will be the exception exception, where we currently assume 40% of travel will come back.
Okay, Great and then.
With your FX assumption it looks like your core growth is kind of 2% to 4% can you just talk about which end markets. You think are going to outgrow or meaningfully outgrow kind of.
The overall range. Thanks.
So I'll kick it off and then Carl will give you more color.
One of the big headwinds, we're facing is the second half of 2021 were between.
Class eight truck demand softening in China.
Given that what I call other cash for Clunkers program will expire by the end of June.
That and the rest are strong respirator sales that we had this year.
Component sales that go into respirators debt as of $30 million $31 million.
Top line headwind in the second half of next year.
And that's about.
That's a meaningful headwind.
For the rest of the businesses in general have a strong second half book.
<unk> and show some some good growth.
That is a headwind, but we don't in the guidance.
Depending on where you are in that range, we make certain assumptions around debt headwind and how much of that we can compensate.
And then follow on the market Carl.
And so some other upside.
So the way I think we're looking at 2021, Jeff is that its a transition year.
And I thought last year was difficult to kind of predict what was going to happen and give guidance. We did give guidance and I think we came pretty darn close to the guidance that we gave.
This year was as difficult if not more difficult to put together because there's so many.
Variables that are going to influence. It so are the COVID-19 varying et cetera out there or are they going to do.
Are they going to have an impact as the vaccine rollout.
The vaccine is going to work fully and are they is the rollout globally going to go well.
<unk>.
And.
The tariff exemptions and what kind of relationship are we going to have with China.
Semicon industry and the chip shortages that are now impacting the automotive industry.
Sure.
It is just so many headwinds.
Headwinds that were facing and on the other side. There are some really good potential tailwind or we're going to get an infrastructure build that will drive some demand when we start to see capex for.
Some of our Oems.
Will that start to occur will their customers start to spend capex again, we will see the medical industry start to do better we're expecting to see a delay between when the COVID-19 related equipment drops off.
And capex in the hospitals and the elective procedures start to come back we expect to see some delay there.
Low interest ratio remained low and have.
A good impact on people being able to make investments in the future.
Material inflation, what's going to happen with material inflation in food.
We're very good at getting prices to offset material cost increases.
But what's going to happen with material inflation. Some of the later cycle markets. If if commodity costs go up will mining come back quicker than than we'd anticipated oil and gas as the oil prices up now and will that continue to improve so there's just so many.
Factors and one other that I would like to kind of joke about but not really.
As it opens up if you look back after the $19 17 pandemic now you had the Roaring twenties are people going to want to go out and celebrate that this is over and travel again.
The real wildcard expectation is that they won't.
But.
Certainly.
A possibility.
So we think it was just a really difficult year to predict what markets do we think have the potential to do to do well next year, we think that the automation space.
And the continued even semicon I think it was down a little bit for us this quarter, but we think thats going to come back in long term have good growth.
If we see capital investment again things like forklift trucks were.
Relatively weak.
If people start to invest in their factories again things like forklift trucks could come back we've seen good order recovery in Europe relative to the to where it was.
Midway into the pandemic.
And we've started to see some recovery there so.
I have some optimism, but I think thats just.
There are so many potential headwinds that were remain cautious.
Okay. Good color thanks Carl.
Your next question comes from the line of Bryan Blair with Oppenheimer.
Please proceed with your question.
Thanks, Good morning, guys.
Morning, Brian.
Very good color there, obviously, a lot of moving parts to to help us.
Gage the.
Get your top line outlook in.
What what is contemplated in that guide what are you seeing on.
On an order basis to start the year, how does that relates to.
The sequential momentum you've had throughout the second half.
And then.
Given the.
And market outlook and the moving parts that you walked us through.
How should we think about your segments growth relative to that 4% to 6% range consolidated.
Yes, so when I look at the at the order trends I think.
That the fourth quarter, probably starting in September.
We saw the orders.
Pick up and.
<unk> kind of at that level.
Since then.
Into the bin.
Into January and the beginning of February.
I think the order trend has been pretty stable at a.
At a reasonable level.
Supports supports our guidance.
Well.
And.
So I think the back half of the year next year or this year the back half of 'twenty, one and the headwinds that Christian mentioned, that's where the uncertainty is and will be order rates pick up if the general industrial economy comes back.
Two more than offset what we're going to see as the declines in some of the.
Some of the Covid related medical equipment.
The class eight trucks in China, where that was stimulated by the Chinese government.
For the order trends pretty solid and stable since that September time frame.
Bryan if I can add to that.
If you look at that order trend that Carl just describes that would point you to the first quarter sequentially flat to maybe up a little bit which would be for 4% to 5% topline growth year over year.
Then when we come to the second quarter.
We have easy comps so we expect.
Probably low double digit growth in that quarter and then the second half is that one where we have that high degree of uncertainty.
And our.
Guide that we've talked about to the class a truck in China.
The medical side of the business. So those are the two big variables and then theres a little bit of wind.
I'm in the camp just lay call, where we don't believe that certainty is returned to financial forecasting at this point of time is still.
There is still a lot of noise.
If you look at.
And the extended Lockdowns in Europe.
And the slow vaccination rollout in Europe, there's still a lot of although from a noise.
Okay, that's perfectly fair.
Carl you mentioned material inflation.
Is there a specific price cost figure that.
That you can cite that's baked into your current debt.
No no.
The main.
Commodity we procure is copper.
We are.
All cases.
We pass that through to our customers through surcharges that growth both ways.
After that it's probably.
Steel.
And then the majority of what we buy is.
I'll machine components.
For proponents that already have some value add and the processing.
And as Paul said I think in the past we've done a good job in passing through those.
Those input costs to our customers.
I think in that regard Bryan we usually assume that the price increases that we're going to get will offset whatever material cost we see.
Based on the fact that we can react pretty quickly.
It takes a little while for our suppliers to pushed through the price increases to us because it is converted materials that we buy castings machine castings.
Lots of parts forgings.
And so by the time, we get the price increase we already see it coming and can pass the price increase along to offset that so thats one of the disciplines. We have to have this year is to make sure that we that we pushed through the price increases to offset debt.
The other big wildcard is the system, while it's not a wildcard is the wage increases that we need to have pricing to offset the wage increases that we're seeing delayed the wage increase last year by six months. So effectively this year, we have I.
I don't know, maybe a wage increase and a half.
That we have to offset.
Okay understood.
And then one more just kind of a housekeeping one.
As we update 2021 modeling.
What should we factor in for working capital movement.
At this low.
Yes.
We have tremendous working capital for months in the fourth quarter, we don't think debt will be able to repeat that but I would say $10 million to $50 million.
A reduction in working capital is what we're targeting.
Got it thanks again guys.
Thanks, Brian.
Your next question comes from the line of Mike Halloran with Baird. Please proceed with your question.
Hey, good morning, guys.
So a couple here one maybe just some thoughts on supply chain channel inventory levels. I know you said, there's some supply chain headwinds I think it was wind side, but maybe some more broad commentary there and then also where you think channel inventory standard as we sit here today.
Yes, so the supply chain, that's one that's like the whack a mole game where.
Right now in Malaysia has got.
Something shutdown I think theres some things in Taiwan.
And just kind of go wherever the diseases impacting some.
Some place we will see a particular supplier shutdowns and we just have to keep working those.
<unk>.
And in the case and when that was not it was not it did not impact us it impacted it was another supplier into some of our Oems. It was unable to keep up with the demand so kind of slowed things down a little bit.
<unk>.
And I think that's just going to continue until we get the.
Get the disease really under control.
So we just keep pushing back India has been an issue with getting parts out of India. I think you've seen net logistics are an issue. So the supply chain is requires extreme management right now and our teams are doing a great job taking.
Taken care of that.
And then the inventory in the channel.
We think is in pretty good shape, I think I've said it before that we didn't see a big buildup or cutback in our inventories maybe a little bit of reduction in inventories last year, but not tremendous so I don't think theres a big.
Potential.
Pop in demand because of trying to build back inventory in the channel and our supply and our ability to supply has gotten so much better as a result of our business system implementations.
Debt I don't think our channel partners feel like they need to have excess inventory.
Our demand has been very consistent and very good.
<unk>.
I think we're our supply has been.
All for them.
Okay, and then sub three two times net leverage.
Youre going to be below three which is in the target range as you get middle of the year.
Maybe talk about how you guys are thinking about when you start pivoting.
What cash usage looks like whether it becomes a little more bounce and debt paydown and playing a little more offense.
I suppose the related question is how are you guys preparing.
For that swing and are you starting to dip your toe just to see what's in the channel from an M&A perspective, where it's just too early at this point.
So I think.
That was a huge highlight for <unk>.
Debt Paydown and the Delevering of the balance sheet I think you saw.
Like we were for last time, we said, we thought we'd be sub three and a half so to be sub $3 to us.
Huge accomplishment for us and I think a real highlight.
And then.
I would have told everybody is we're right now working on.
Really a portfolio analysis and what end markets do we want to go after what technologies do we want to.
Add to the products that we have and to better serve our customers.
And it's.
And that work's coming along and I think by the.
Certainly by the second half of the year, we will have a very good roadmap as to where we would like to.
Inorganic growth.
Now whether theres anything that's actionable.
<unk> holdings.
A question Mark, but I think we will have that road map pretty well detailed by the second half we will have the balance sheet in good shape and certainly by the end of the year, we should be.
Ready to start to move on from acquisitions again.
And provided that we can find the right partners.
And <unk>.
Find some things that are actionable.
Makes sense I appreciate it thanks.
Thank you Mike.
Your next question comes from the line of Scott Graham with Rosenblatt.
Please proceed with your question.
Yes, hi, good morning.
Thanks Scott.
I had a couple of questions for you I was wondering on.
The conversion of orders into shipments.
Has that.
Tightened up because of demand.
It.
Spread out a little bit lengthened a little bit because of concerns over COVID-19 can you maybe kind of characterize what customers are doing.
I would say that from the customer standpoint there.
Their demand has not changed significantly they have not.
Asked us to do anything either faster or slower than they have in the past.
What we're starting to see in some areas.
A little bit of a lead time extension from suppliers. So planning the demand is.
It's getting a little bit more difficult in some areas, it's not across the board it's in some specific.
Areas, but what we have seen some.
Some extension on lead times from suppliers.
And that's one of the we've just got to plan for that.
Make sure we can.
Vik, when we're going to get it in when we're going to be able to satisfy the customers demand.
Got it. Thank you and then also.
The semi side of factory automation and specialty you said that that was down this quarter.
What do you attribute that to.
Well, it's it's pretty lumpy for us.
<unk>.
I think yes.
I wouldn't read much into that Scott I think.
We look at Semicon and look at what the expectations are that is expected to have.
Growth in the mid single digits this year and growth in the mid single digits next year and I think when we think about.
What's going on to drive that growth for debt. That's realistic so I would I would just re debt.
Lumpy business.
And each one of our segments and we've got so many different segments of markets that we serve that I'm not reading a lot into it.
Okay Gotcha.
I'm also trying to maybe we'd like to get energy to your comments in the press release Christians comment about this as well that you know.
You bet your guidance as you're kind of starting off the year conservatively, which is which is great and I think understandable.
I guess two questions on that one would be.
What do you need to see.
To upgrade your guidance I mean, we know we know which of your bigger end markets I'm assuming.
I had an upturn in a couple of those.
But maybe that would be one question, but then I would also follow that on by asking this is kind of like cash.
<unk> to that because when a CEO calls a year a transition year.
But wanted to just trying to understand what you mean by that.
Carl I do know that there are a lot of moving parts decisions about cost put backs timing and all of that get all of that.
What was what did you mean more to within that Theres, just a lot of moving parts.
What I meant really was last year was.
Extra ordinary year rate with Covid I think we saw in may our incoming order rate dropped by like 25% then it recovered by the end of the year and so this year I think is there is a lot of uncertainties. You asked what are the drivers and what what's going to make us feel better about the future.
One is if the vaccine rollouts start to go really well.
I'm way at the bottom of the list if I can get my vaccine in March I'm going to feel a whole lot better than if I get it in September or October.
Okay.
So that's one thing if we start to see Capex spending from some of our customers and some of the end markets that our customers serve then that's going to make me feel a whole lot better if we start to see the logistics and the important law and then Hong Kong start to free up and start to see stuff moving again.
Whenever we need it that's going to make me feel a whole lot better.
If we start to see people going back to the hospital and getting elective surgeries need nutrients need replacements and hip replacements.
Things that drive that elective surgery, if we start to see people get excited about getting out of the house again and traveling and doing some things that are going to drive the general economy ramping up restaurant activity I'm, just getting the general economy gone done I'm going to get excited so so what I meant is a transition.
Year as those things arent certain yet.
Phil.
I think we've got probably until the back half of the year before we get through some of that uncertainty. So it is not a transition year for for us internally in the company, it's more of a transition year and the economy in my mind.
And then I think my belief is 2022 is going to be an awesome year for the industrial world, that's going to be a blowout.
So.
So that's what I mean by a transition we would come out of this 2020, which was awful and.
Just really tough to manage through.
Distress level on everybody that's been terrible 2021 for this transition year, where we start to get back to normal life in 2022, we're off to the races.
Yes, youre going to have a pent up demand from lots of different industries, it's going to be a super year. So I think we're right in the <unk>.
'twenty, one is that middle year there.
That's very clear thank you and other states.
Second for touch with Tracy.
As to when you get your vaccine Carl and.
Dan.
I'm not going to try to jump the line I'm going to wait my turn but.
But if I can get it in March I'll take it.
Christian did you want to add something for the second part of your question.
Whereas the potentially upside to the guide.
I think as Carl referred earlier.
Potentially if the medical market recovers faster than we think in terms of surgical vineet for surgical equipment.
If China.
The truck it doesn't deteriorate as we currently assume that the guys in the second half of the year turf and garden could have some upside our wind business could have some upside.
Oil and gas as Carl mentioned, if the oil price stays above 60.
We will see we have already seen a modest increase in rig count, but maybe we see some.
So more capex spend in that area for maintenance spend.
But it's just too early to call because it's all in the second half that's pretty far away.
<unk>.
So we wanted to continue to be.
I'd be cautious and you've known known us long enough, Scott that if mining and oil and gas and AG and some of those leaders that are.
Heavier duty equipment businesses come back those are really profitable for us too so.
Yes, sure, but it is also good to hear that youre not counting on those so hey, thanks, a lot for your time okay.
Okay. Thanks, Scott.
And again, ladies and gentlemen, if you would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.
Your next question comes from the line of Joel <unk> with BMO. Please proceed with your question.
Hey, guys How's it going.
Good Joe how are you.
Right.
It's been a lot of questions about the end markets from the guidance and all of that and I. Just wonder if you can give us a little sense of maybe some of the lessons you learned through 2020.
<unk>.
How to how to maybe accelerate some of your structural margin changes and im not so much thinking about 'twenty, one, but maybe 'twenty 2345 and is it more investment that's needed to.
You know to really drive kind of customer connectivity and capabilities and new products or is it more about like reducing costs and layers of management and just any any little things you've learned.
Yeah.
I think Joel it's going to be a mix.
We are.
I think we've talked about.
The organizational structure of the company and as we mature how will we think we can simplify that some and that will reduce the cost over time.
For.
Facility consolidations, we've demonstrated those can have a huge impact so.
Where those opportunities exist.
We'll do that and then I think the real driver.
Is the work that we're doing on what are the end markets what technologies do.
Do we want to go after that are more profitable and have higher growth that are really going to drive the performance of the company.
So in my mind, there's three factors one is getting the economy to recover.
And.
And having some help from the top line leverage that we get because we get great topline leverage.
Then driving us into the end markets.
And applications that we wanted to debt, we think can be more profitable and it can be very similar to what we do today niche engineered products.
And then working on those.
<unk> simplification projects too.
To take some cost out.
And that leads me to my next question, which is in terms of acquisitions. Your balance sheet is pretty well reloaded and I wondered are you thinking more sort of like a strategic tuck ins or more transformational and really the sika.
Whatever the part of my question that that's unspoken.
Not anymore.
Jeff.
I'm trying to gauge like how long are you willing to wait for the right deal.
Thinking more like second half of 2021 that you'll look for smaller things or or maybe wait a little bit longer and do bigger transformational. Thank you.
Yes Joel.
I mean, you know this space well.
Ill enough that there's really good companies that are in.
$20 million to $50 million range, which would be nice tuck ins and then theres. Some that are in the $50 million to $200 million range that would be really nice.
Additions to our business.
Theres not that many that would be transformational like we did with Tanf's teal.
So that I think might come every 10 years.
Although that was a pretty effective transaction for the business. So.
Terrific.
I would expect it will probably be on the lower end initially just until we get the.
The balance sheet in even better shape than we.
Nurture some of the pipeline.
And then I think the sweet spot for us is probably in that $50 to $250 million range, where it's big enough to make a difference, but not so big that we're taking a huge risk.
And I think if you look back at the deals that we've done.
<unk> been <unk>.
Very much in line with what we already do today so.
From a big believer in.
Getting involved in businesses that should know and understand.
If you don't know and understand it and the markets don't overlap.
It's just too much risk.
So I think thats probably.
To stick to our knitting and probably in that 50 to $2 50 range will be ideal for us.
Okay. Thank you very much thank.
Thank you thanks.
And there are no further questions left in queue at this time I'll turn the call back to the presenters for any closing remarks.
Okay, I just would like to thank everyone for joining us today, and we will once again be on the virtual road this quarter and we look forward to engaging with many of you in the months ahead.
So thank you again for your time.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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