Timken Company (The)

Good morning. My name is Katie, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I'd like to welcome everyone to Timpkins' fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, please press the star, then the number two on your telephone keypad. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Katie, and welcome everyone to our fourth quarter 2020 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for the Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the Earnings Call webcast link. With me today are the Timken Company's President and CEO, Rich Kyle, and Phil Forcasa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the FCC, which are available on the Timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by the Timken Company and without express written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in the Timken Company and I will now turn the call over to Rich. Thanks Neil.

Good morning everyone and thanks for joining us today. Our fourth quarter revenue was higher than we anticipated as the sequential strengthening in our markets that started late in the second quarter of 2020 continued to accelerate. Sales were down slightly from 2019, less than 1% in total and 3% organically. That market momentum is continuing through the start of 2021, which I will talk more about in a moment. All earnings per share and margins for the quarter were in line with prior year on a similar sales level. They were below our expectations. Currency was a significant year-on-year impact on the bottom line, and we do not expect that to recur at this level to start 2021. Our mix was a headwind, and then we experienced a variety of cost challenges, primarily related to improving demand, which Phil will elaborate on as he goes through the details of the quarter. We expect to see a significant step up from the fourth quarter in revenue, earnings per share, and margins in the first quarter of 2021. For the full year of 2020, I'm very proud of how Timken navigated the unexpected challenges that came at us through the year and how we served customers and performed financially. Safety is always a top priority for us, and in 2020, it took on an entirely different meaning as our leaders and associates adjusted to the challenges of working through the pandemic. We were there for our customers when they were ramping down and when they were ramping back up. We won new business and had a record year in renewable energy and across Asia Pacific. Our results demonstrate our resiliency and how the company today is better positioned to perform through industrial cycles. Slide 7 in the deck compares our 2020 financial performance to the industrial contraction of 2016 and highlights how far we have advanced as a company. Our revenue was down 7% in 2020, which, given the market, was good performance and demonstrates the improved diversity of our portfolio. Our EBITDA margins of 18.8% were 400 basis points higher than 2016, despite the turbulent market conditions. Charts on slide 8 highlight the progress we have made as a company financially. In 2017-19, we demonstrated how we could perform in good industrial markets Thank you all for joining us. Thank you for joining us today. In 2020, renewable energy became our single largest market, representing 12% of company revenue. The strong underlying market, share gains, and our competitive advantage in application engineering and R&D drove this growth. Our active pipeline of new business wins and ongoing investments have positioned us for growth around 15% again this year. And our recently announced $75 million of investments will prepare us for further growth in renewables in 2022 and beyond. And we achieved all those accomplishments in the middle of a global pandemic. 2020 was not a year that any of us expected or would like to repeat, but we made the most of the situation while advancing the company for the better times ahead. As we look forward to this year, a few comments on what we are seeing in our markets and planning for in the year. First, I would say that uncertainty continues to diminish, but does remain higher than normal. Our customers and Timken continue to navigate the pandemic-related challenges to our workforces and our supply chains. We have experienced cost and supply issues with logistics, material, and labor, as have our customers, and we expect that to continue through the first quarter. So we expect bumpiness over the next few months, but much of that is being driven by an improving demand situation across our end markets. These are normal issues for us in an upturn, and we are confident in our ability to manage through the issues effectively. We're planning for first quarter revenue to be up at least high single digits sequentially from the fourth quarter. In mobile industries, heavy truck and off highway continue to strengthen significantly, while automotive and the defense side of aerospace are also strong and above prior year. Rail and commercial aerospace will start the year down. We expect commercial aero to remain down through the year, but rail to improve and turn positive as the year progresses. In process industries, we expect renewals in marine to start 2021 strong and be up double digits for the year. Industrial distribution finished 2020 weak as expected, but picked up in January is continuing to strengthen in early February, and we plan to be up meaningfully for the full year. Industrial services, general industrial, and power transmission start the year down, but we see a good improvement trend and expect them to strengthen and turn through the first half of the year. After the step up in first quarter revenue, our guide assumes a modest sequential increase to the second quarter and then normal seasonality, which is a slightly weaker second half of the year than the first half. Should market demand continue to accelerate across global industrial markets greater than those assumptions, we would be in an excellent position to respond. And regardless of where our markets go in the second half of 21, We will continue to aggressively pursue our new application pipeline and product vitality initiatives to make sure we are capturing more than our share of the market growth. We expect to deliver record bottom line performance on the improving revenue situation with earnings per share of $4.90 and EBITDA margins up slightly from 2020 at the midpoint. We also expect to deliver solid free cash flow of over $300 million for the year. There are a lot of moving pieces in both directions from a cost perspective in the guidance. In the bottom line projection, we have accounted for the cost pressures we're currently experiencing in our operations, the impact of variable costs ramping back up with volume, the benefit of the structural cost reductions taken last year, as well as those planned for this year, and the non-recurrence of the temporary cost actions taken primarily in the second quarter of last year. We expect pricing to be roughly flat for the year. From a balance sheet perspective, we are back in a position to deploy capital in 2021. After the dividend and CapEx, our bias remains towards M&A. Finally, five summary points that I would like to wrap with before turning it over to Phil. We performed very well in a challenging market in 2020. Over the last five years, we've demonstrated our ability to grow the earnings power and cash generation of the company through the industrial cycle. We will continue to create value through strong free cash flow generation and disciplined capital allocation. Our markets have strong momentum to start 2021, and we are well positioned to deliver record results in 21 while building the future of the company for shareholders and employees. I'll now turn it over to Phil to go into more detail.

Okay, thanks, Rich. And good morning, everyone. For the financial review, I'm going to start with a summary of our results on slide 14. Revenue for the fourth quarter was $892 million, down less than 1% from last year, and almost flat sequentially compared to the third quarter. We delivered an adjusted EBITDA margin of 16.2% and adjusted earnings per share of 84 cents, both roughly in line with last year. Turning to slide 15, let's take a closer look at our fourth quarter sales performance. Organically, sales were down 3.2%, with both of our segments seeing lower net sales volume versus the year-ago period, while pricing was positive. Acquisitions in currency each added a little over 1% to the top line in the quarter. On the right-hand side of this slide, we show year-on-year organic growth by region, So excluding both currency and acquisitions. Let me comment briefly on each region. In Asia, we saw strong growth once again in the core, up 16%. Our sales were up in both China and India, driven by strong growth in renewable energy and other sectors like off-highway and heavy truck. In Latin America, we were up 6%, driven by growth in both the on and off-highway sectors. and in North America and Europe, most sectors were still down versus last year. However, the rates of decline moderated compared to what we saw the last couple of quarters. Here in the slide 16, adjusted EBITDA was 144 million or 16.2% of sales in the fourth quarter compared to 146 million or 16.3% of sales last year. The slight decline in adjusted EBITDA reflects the impact of lower volume An unfavorable price mix as negative mix more than offset positive pricing in the quarter. Note that the negative mix is a function of the higher OEM sales in the quarter coupled with lower industrial aftermarket revenue. Currency was also a significant headwind on EBITDA in the quarter as we experienced FX transaction losses this year versus gains in the year ago period. The impact of currency negatively reduced EBITDA margins by over 100 basis points in the quarter. On the positive side, we've benefited from favorable manufacturing performance and lower operating expenses across the enterprise. Let me comment a little further on our manufacturing and expense performance. On the manufacturing line, our team responded well in the quarter to increasing customer demand. We had higher production volume versus last year, which gave us better fixed cost absorption. We also continued to benefit from ongoing cost reduction actions and other productivity initiatives across our footprint which more than offset some cost headwinds related to production ramp-ups including at our new bearing manufacturing facility in the Americas. Material and logistics costs were lower than last year but they were a little higher than we expected as we encountered some supply chain and logistics challenges during the quarter to serve accelerated customer demand. And finally, on the SG&A line, we saw a significant reduction in expense versus last year, which reflects the benefit of structural cost reduction initiatives and lower discretionary spending. We also had lower incentive compensation expense in the quarter. On slide 17, you'll see that we posted net income of 53 million or 69 cents per diluted share for the quarter on a GAAP basis. This includes 15 cents of net special charges driven by pension mark-to-market expense and other items. On an adjusted basis, we earned 84 cents per share, flat with last year. Our fourth quarter adjusted tax rate was 23.6%, which brought our full year rate down to 25.5%, slightly lower than our previous projection of 26%. The improvement in the tax rate reflects our geographic mix of earnings, and the benefit of some tax planning initiatives completed in the quarter. Next, let's take a look at our business segment results, starting with process industries on slide 18. For the fourth quarter, process industry sales were $458 million, up 1.5% from last year. Organically, sales were down 1.4%, driven by declines in distribution and other industrial sectors offset mostly by strong growth in renewable energy, higher marine revenue, and positive pricing. The favorable impact of currency translation added roughly 2% to the top line in the quarter, while the impact of acquisitions added around 1%. Process industries adjusted EBITDA in the fourth quarter was $102 million, or 22.4% of sales, compared to $98 million, or 21.8% of sales last year. The increase in adjusted EBITDA reflects the impact of lower operating expenses and other cost reductions, favorable manufacturing performance, and positive pricing, offset partially by the impact of lower organic volume and unfavorable mix in currency. Now let's turn to mobile industries on slide 19. In the fourth quarter, mobile industry sales were $434 million, down 2.6% from last year. Organically, sales declined 5.1%, reflecting lower shipments in the rail, aerospace, and automotive sectors, offset partially by growth in off-highway and heavy truck, and positive pricing. Acquisitions added nearly 2% to the top line in the quarter, while currency translation was slightly favorable. Mobile industries adjusted either down for the fourth quarter with $54 million, or 12.4% of sales, compared to $60 million, are 13.5% of sales last year. The decline in adjusted EBITDA reflects the impact of lower volume and unfavorable mix in currency, offset partially by the favorable impact of lower operating expenses and cost reductions. Turning to slide 20, you'll see the details of our strong cash flow performance for the fourth quarter and full year. We generated operating cash flow of $121 million in the quarter, and after CapEx, Our full year free cash flow was $456 million and represents nearly 150% conversion on adjusted net income. Free cash flow was nearly $50 million higher than last year, despite lower earnings, as we benefited from improved working capital, lower CapEx, and lower cash payments for employee benefits. During the fourth quarter, we raised our dividend by 4% to $0.29 per share. and bought back 100,000 shares of Company stock. In total, we repurchased 1.1 million shares during 2020. Taking a closer look at our capital structure, we ended 2020 with a strong balance sheet as we reduced net debt by over $275 million during the year. Our leverage, as measured by net debt to adjusted EBITDA, was 1.9 times at year end, down from 2.1 times at the end of 2019. Our leverage is solidly within our targeted range and positions us well for opportunities going forward. Our liquidity position remains very strong with cash and unused committed credit lines totaling just under $1 billion at December 31st. Now let's turn to the outlook with a summary on slide 21. As Rich mentioned, we expect strong revenue and earnings growth in 2021. We're planning for sales to be up around 12% in total at the midpoint of our guidance versus 2020. Organically, we're planning for sales to be up around 9% at the midpoint, with roughly similar growth rates in both mobile and process industries, as we expect most market sectors to be up in 2021. Currency translation should contribute about 2% to the top line based on year-end exchange rates, and the Aurora bearing acquisition should add close to 1%. On the bottom line, we expect record adjusted earnings per share in the range of $4.70 to $5.10, which is up about 20% from last year at the midpoint. The midpoint of our earnings outlook implies that consolidated adjusted EBITDA margins will be up slightly from 2020, driven by higher organic volume, offset partially by higher operating expenses to serve increased customer demand. On price cost, We expect roughly flat pricing for the year, but we do expect higher material costs, which is not unusual at this point in the cycle. For the first quarter, we're planning for sales to increase in the high single digits compared to the fourth quarter. We also expect first quarter adjusted EBITDA margins to be up meaningfully from the fourth quarter, but be below last year's first quarter level. For 2021, we estimate that we'll generate free cash flow of at least $300 million. which reflects higher working capital to support the sales upturn, higher CapEx spending versus last year, and a more normalized level of cash used for employee medical benefits. We're planning for CapEx of around 150 million in 2021. We're just under 4% of sales at the midpoint, which includes several growth-related projects, including investments we recently announced to expand our capabilities in renewable energy and marine. For the full year, we anticipate net interest expense of around $60 million and estimate that our adjusted tax rate will remain in the 25.5% range. And finally, I want to point out that our guidance is based on the assumption that COVID-19 conditions will improve as we move through the year. So to summarize, we delivered strong performance in 2020 despite challenging conditions. Our top line was resilient and we demonstrated our ability to generate higher margins and cash flow through the cycle. We are confident in the outlook for 2021, and we are excited about the opportunities that lie ahead. This concludes our formal remarks, and we'll now open the line for questions. Operator?

Thank you. If you would like to ask a question, you may signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take our first question from Rob Wertheimer with Mellius Research.

Hey, good morning, everybody. If I can sneak in, I guess the obvious thing is just the margin in the quarter. And if it's a fair question, do you have where it came in versus your expectation? And so maybe if you could detail the currency, you know, issue that happened, how do you typically kind of manage through that or manage against that? Was it was it more unexpected? Do you normally hedge more? Maybe just talk to the dynamics of that.

I'll start with the expectation part. I'd say it was slightly less. The currency ended up being 100 basis points of year-on-year, more than 100 basis points of margin impact year-on-year. That would have been neutral, which we weren't necessarily expecting neutral, but that would have been neutral. I think we would have been in line with our expectations. As we said at the last call, we were expecting to be up A little bit on slightly less revenue. So with the revenue beat, we would have liked to be up a little bit more than that. But again, I'll let Phil expand a little bit more on the specifics of the expectation.

Yeah, sure, Rob. So, I mean, you know, obviously big picture relative to the quarter in terms of EBITDA margin expectations overall. I mean, it was really, you know, three buckets, if you will, as Rich talked about. You know, the mix was a little negative relative to what we thought. Most of the sales beat was on the OEM side. and, you know, distribution was more in line with where we thought, so we had a little bit of mix there. And even within the OE sectors, mix was a little bit unfavorable relative to what we were expecting going in. You know, the currency, which I'll talk about, the currency was negative. And, you know, typically with currency, you know, with a benefit on the top line, so, you know, there's translation and there's transaction. Normally the translation comes through at an EBITDA-type margin, and then the transaction really depends on, You know, individual currencies around the world. And in that particular case, we had just happened to have gains last year and had larger losses this year than we anticipated, which kind of drove that big negative. And we do hedge currencies. We hedge, call it the developed market currencies. So we will hedge Euro. You know, we don't hedge 100%. We'll hedge a portion of the exposure. But Euro and Canada, Australia, et cetera. But a lot of the losses we saw in the quarter were coming out of China. in particular with some U.S. dollar balances we had there and Brazil with some imports into Brazil with the China currency weakening against the dollar, the China currency strengthening against the dollar, you know, Brazil weakening. So it was sort of a mixed bag, but I think as we see here today, We have seen a little bit more stability to start the year, so wouldn't expect that to recur, you know, at the same level moving into 2021. And then the third bucket would probably be the logistics cost, which talked about, you know, with some of the, you know, normal ramp, you know, when we're ramping in markets like off-highway and heavy truck, you know, having some level of logistics challenges is common. I'd say they were exacerbated by COVID with some of the additional challenges we had to face around freight and You know, not only, you know, employee absenteeism both in our plants, but also in some of our suppliers, et cetera. So it did, that was the combination of sort of what caused margins for the quarter to come in a little bit lower than what we thought. I think the good news is when you look at those three, you know, they are all transitory to a degree. We do get on top of the logistics over time. We do expect, as I said, the currency not to recur at the same level. And then the mix, as we look ahead, we are expecting You know, recovery across most sectors in 2021, including industrial distribution to be up, you know, high single digits plus for the year. I think that would make mix certainly less of a headwind in 2021 than it was in 2020.

Yeah, I would also just maybe put it in perspective as well. We weren't pleased with the result. The margins in EPS were flat with prior year on organic revenue decline of Thank you very much for joining us.

That number, which I might have thought would have been a little bit higher, and I will stop there. Thank you.

Well, I think there's a couple elements on that. There's first on the pricing. One of the costs that we began experiencing in the fourth quarter and are experiencing to start this year, and again, as Phil said, like logistics, it's pretty normal for us when our business inflects to go up is steel costs. That is an example that we typically do recover that through pricing mechanisms we have in our contracts and or price increases that will pass through, but there's generally a little bit of a lag. So we would expect if If that continues to strengthen, you would also start to see us pick up some recovery of that as the year goes on. So we do have the ability to do that as the year goes forward. From a contractual basis, again, while our contracts were negotiated, Thank you for joining us. But I guess the other final point I put in there is well over half of our business is not contractually tied in any sort of way from a pricing standpoint. So we do have the ability as the year progresses if we have to do more in that area.

Thank you.

Thanks, Rob.

Thank you. We'll take our next question from Stephen Volkman with Jefferies.

Good morning, guys.

I guess I can answer to Goatman as well, if it means G-O-A-T, but that's probably overstating my experience. But anyway, can I just back up and sort of ask a really big picture question? You know, Phil, I think in the past you've provided some thoughts about what sort of a normal incremental margin should be for you guys. And clearly 21 is a bit of a messy year with various costs and things happening. But as we move out into 22, 23, you know, what's a normal incremental margin for the new Timken these days?

Yeah, let me comment first on 20 and 21 and then, you know, maybe Rich can comment on the expectation for 22 and 23. but you know what we saw in 20 you know we did variable eyes a significant amount of our cost last year and so the decrementals were quite good you know it was 24 percent all in but if you take the currency and acquisitions out which were significant headwinds the organic decrementals was kind of on the order of 14 15 percent so really strong decrementals last year which does create a challenging base as we move to 21 so I think as you look move forward to 21 we do sort of have that to deal with and and not to mention the Some of the cost headwinds we've normally seen in an inflection year. As we have talked about our incremental, decremental margin framework at a high level, we've always said, hey, we'll start at the gross margin line and then probably do less than that in an inflection year, which 2021 is. I'd say it's exacerbated a little bit by the strong decrementals we did last year. and then obviously you move up cycle, you know, you move into year two, year three, you know, you get back up to, you know, to that gross margin level, if you will, as you're leveraging your, you know, your SG&A and you're, you know, you're moving into year two, year three of an up cycle. And in the past in some years we've done even a little bit better than that. But as you look at 21, you know, the ability for us with revenue being up despite some of the, you know, some of the year-on-year cost deltas we've got to manage through, I think the ability to expand margins and the implied incrementals about 21%, which again is lower than what maybe a normal year one would be a little bit lower. But given where we're starting from, the midpoint of the guidance would imply EBITDA margins of around 19% with revenue at that level, I think historically speaking is quite good. Richard, do you want to come in?

I just want to add to Phil's point on the 14%. Our strategy for multiple years has been to variabilize more of our cost structure and to the degree we're successful doing that in 14% decrementals when volume comes back, we need to add back more variable costs than when a higher percentage of our costs were fixed. Some of it is the strategy of having a greater variable cost structure and tightening the range of our margins We've talked a lot about various things that we're doing to do that. This year is obviously a little bit unique in regards to the comps being a little different as well. I think on the longer term, we're really managing more towards margin targets. We've still got our long-term margin target out there of 20% EBITDA margins, which is where we're really focused on going.

Okay. All right. That's helpful. And then I don't know if you want to get into this or not, probably, Phil, but is there any way to kind of bucket the costs that come back in 21, you know, whether it's incentive comp or whatever temporary stuff, and then sort of net that against the benefits of the restructuring that you did and so forth, just to kind of give us a sense of How those things kind of play out in 21. As you said, Rich, they're a little bit unusual. So that'd be helpful if you can.

Yeah, I would say, you know, we really want to get you guys a little bit more focused on, you know, the margin outlook for the year. But I mean, I'll try to talk directionally. I mean, you know, clearly, we had a lot of temporary actions in In 2020, the majority of them were in the second quarter. We did have some in the third and a little bit in the fourth. We put some structural cost actions in to give us some benefits in 2021 to help mitigate the absence of those temporary actions. The structural cost actions are there, but as Rich mentioned, as volumes go up and you move back up cycle, some costs do come back in. We've got the inflation to deal with on the materials side and some of the logistics, which I think the logistics challenges could persist through the first quarter, certainly. But then incentive comp would be a negative as if we hit the guidance number, we'll pay out a little bit more for 2021 than we will for 2020. You couple that with ongoing cost reduction initiatives, looking to offset the material cost increases, looking to continue to streamline and implement lean principles, etc. It all kind of nets to incrementals a little bit lower than what you might expect to see otherwise, but still expanding margins from 2020 to 2021. Then the last point on the pricing, when pricing is neutral, That's a headwind and as history would tell us that we do have years like this on occasion where pricing is flat when volume is moving up or revenue is moving up. Usually year two, as Rich said, usually no later than year two when you're repricing some contracts, you're typically picking it up if not more than recapturing it. You get to year two, we'll have that benefit. Instead of comp, can typically... Thank you for joining us. to improve in Q2 and Q3, and then with normal seasonality, probably be down a little bit in Q4.

Okay. I appreciate it. Thanks.

Thank you. We'll take our next question from Ross Gilardi with Bank of America.

Hey, good morning, guys.

Hi, Ross.

Just, you know, on all the puts and takes for margins this year, I mean, aren't you guys also just reinvesting in the renewables business? I mean, isn't that a big You don't seem to really be calling that out. I don't know. Based on what you said in the past, that seems like an issue.

Not just renewables, but I think investing in the business, our footprint work, and again, that's why we've really tried to talk more about margin ranges and When we're running high utilization levels, we're looking to invest. And when we were in a down year last year, we continued to invest. So yeah, I mean, we are not focused on 21 on absolute margin optimization of going out and mega pricing and capital and running full utilization. We're looking to grow the earnings power of the company through the cycle. A big part of that is what you highlight of the investment in renewables. We've got the investment in the Mexico plant, which is a margin drain this year, will be a margin help long-term, and a lot of other investments in our digital initiative, our product vitality initiatives, etc. So, yes.

But what's the incremental investment in renewables this year from an OpEx perspective, not, I don't know, some of its CapEx as well?

Well, I don't know that we provided that because we didn't really break out the CapEx last year. But we put in a fair amount of CapEx last year. That's helping us get the 15% growth this year. We're not at full utilization for the full year, so we still could do better than that if the markets come through. But all of that... You know, obviously putting any sort of SG&A resources or CapEx into something that's not going to deliver until 2022 or 2023 is going to be a negative impact on us this year.

I know you guys seem almost apologetic for your incrementals this year, and it's good to see a company actually reinvesting in the core business for a change. We're certainly not seeing that across a lot of other companies in the industry. In your press release, when you put out the reinvestment in renewables, it was something like $75 million over the next several years? I don't know if I'm recalling that properly.

Yeah, I mean, the next five-ish quarters, we would expect to complete the $75 million. And, yeah, I mean, I think that is – you're hitting on the point that we are – it's one of the reasons why when we came out with the 20% EBITDA margin target, and we can't get to 22, and – Well, we're working to grow at 20, and that's really what our strategy is. And again, I think you look at those charts in the deck that we put out for the last five years, we've been doing that. And again, I think we're doing even more of it today than we were as we started the last upcycle in early 17.

Okay, got it. And then just on the growth, you're saying mid-teens growth in the renewables business this year, and you've grown over 50%. In 2020, I mean, are you seeing any like real, I mean, it's hard to repeat on 50% growth, I realize, but are you seeing any real deceleration in your order book or is that just kind of what you've got up until now and you're keeping it conservative?

Well, I don't think we'll have another 50% year probably under any circumstance. And obviously, it's on a much bigger base now. So 15% in absolute dollars is still quite a bit as compared to historical. You know, we generally have, I'd say, longer than normal five, six months of visibility to that. And I think we're going to have an excellent first half of the year. Last year at this time, we thought we were going to have an excellent first half. We're unsure about the second half, and then the second half got even better. In the second half, we've got more of a leveling off than another step up in the renewable side, but we're going to have a very good first half. We've got a little less visibility on the solar. That's a little bit of a shorter lead time, but we're going to have a very good first quarter on solar as well.

Thank you.

Thanks, Ross. Thanks, Ross.

We'll take our next question from Steve Barger with KeyBank Capital Markets.

Hey, good morning, guys. Just thinking about this revenue forecast that looks really strong, I want to make sure I understand the focus. Is it really just adjusting back to growth and managing those variable costs, or do you have the bandwidth to also push the team on specific growth or market share initiatives beyond what just the cycle is going to give you?

Well, definitely we have the bandwidth and we're doing it, and I think some of that is embedded in the numbers. I think certainly our renewable numbers the last few years have been above market. The market's been good, so it's certainly helped us with those numbers, but our numbers will be on that. Same thing with marine. We have a good year for marine embedded in that guidance, and we made some announcements last year on some new programs that really kick in this year. off-highway certainly the big number would be you know cyclical the cyclical return of that but we've been winning new platforms there for the last couple of years so I think a lot of what we're talking here is the self-help but certainly if you look at nine percent organic the you know again our targets one two two basis one one hundred two hundred basis points of outgrowth a year and most of that nine is certainly the markets yeah and

As I just think about, you know, I hear the conversation on the EBITDA margin being slightly up this year. If you drive some growth in operating leverage this year and next year, you're going to end up close to that 20% EBITDA margin. So two questions. One, can you keep a 15% SG&A as you drive towards that? And two, you know, just any thought on when you might reset what that target might look like, just given all the progress that you've made?

Yeah, we're not certainly not ready to reset it now and I'd say the SG&As, you know, over cycle has been a little more over 16 probably than the 15 and the 15 would have had some Variabilizing some fixed costs last year in it and I think the you know, the real answer your question is really what Ross was alluding to and which is You know, we're really get our eyes out for three four years and we're really trying to grow and Thank you for joining us.

Yeah, the only thing I would add, Steve, is, you know, we'd obviously, you know, we want to grow and grow and hit the 20% versus, you know, versus, say, shrink and expand. But, you know, when you look at the margins, in particular within the segments, you know, like process industries, as an example, you know, in a year when distribution was actually down, you know, we did EBITDA margins close to 25%. I mean, that would put us easily... and many more. Thank you very much. Margin Uplift, we feel like if we can grow and hit the 20 that we've set, and who knows, maybe reset it at some point, but that would be a clear path to create shareholder value in our mind.

And you know, Steve, we're always relentlessly driving efficiency, always in acquisition integration, driving leverage, but But again, it's a balance of doing that while investing in the business for growth opportunities at the same time. And again, we think we can do both in that margin range.

Yeah, you know, everybody always wants more, but the track record clearly speaks for itself. Thanks. Thanks, Steve.

We'll take our next question from Chris Dankert with Longbow Research.

Hey, morning, guys.

Morning, Chris.

I guess coming back to renewables again, great outlook this year on top of good growth last year, obviously. But I assume is that mid-teens number, is that principally still driven by ongoing strength in Asia and kind of some of those offshore projects? And I assume any kind of shift in the new administration's priorities here in North America, that's more of a 2022 and beyond kind of renewables opportunity. Am I thinking about that the right way?

Yes, I would say we have very little Thanks for that.

Thanks so much for the breakdown and the color on the margin for the year. I guess just taking another chop at that full-year margin outlook, I guess, I want to make sure I'm understanding it correctly. On a year-over-year basis, first quarter down a bit, does the full-year guide assume we can hold EBITDA margin flat in the second quarter despite all those returning costs, and then kind of the back half is where we could potentially get some lift? Is that the right way to think about it?

Well, I think when you're looking at 21, when you say flat in the second quarter, flat with last year?

Yeah, yeah, with the second quarter of last year.

I think, as we said, the guidance would imply the first quarter will be higher than the fourth quarter, probably a little bit below last year just because of some of the challenges. And I think when you look at the second quarter in particular, this temporary cost, permanent cost phenomenon will likely say, well, margins will step up from the first to the second quarter. Not likely to hit the levels we had last year, just given the magnitude of the temporary cost actions in that quarter. Having said that, they will step up nicely. And then obviously, normal seasonality would say, which is what we're assuming, just a slight step down in the second half, which again would get you to that, call it roughly 19-ish percent at the midpoint for the year.

Got it. Okay. Thank you for that clarification. Really appreciate it, guys. And best of luck into the new year here. Thanks, Chris. Thanks, Chris.

We'll take our next question from Ronnie Scardino with Goldman Sachs.

Hey, guys. Thanks for taking the question.

Hi, Ronnie. Good morning.

Hey, so just focusing on price costs, you mentioned negative price costs for 2021. How should we think about it really across the segments? I think half your process business is really in the industrial distribution, so is it really fair to say that most of your price-cost pressures will be on the mobile side? And if you're able to quantify that, that would be really helpful as well.

Yeah, I would say we don't typically quantify the magnitude, if you will, but I would say on the pricing side, it would be, I think the flattish assumption on pricing would be comparable across the segments. Just given the OE, while you're right, we do have distribution and we do typically take prices up in distribution every year. We do have the OE offset, so I think the right way to think about pricing across both segments would be roughly flattish and I think both segments will see some material cost inflation. The timing will vary depending on the geographies, processes more international. and the timing of pass-throughs from our suppliers vary a little bit, but I think we'd see a relatively modest amount of inflation for the year, but it's probably running a little bit high at present.

It's not a big number. It's been positive the last couple of years, so the inflection from positive to negative makes it a little more impactful on the Thank you.

Great. Thanks, guys. And then this is a specific question on the cost savings for the quarter. Have you quantified how much came through in 4Q? And I think we were thinking around $30 million. Is that a roughly correct number?

I'm going to let Phil answer that before I do, though. I did want to add on the On your last question, the other thing with mobile, I would say mobile is disproportionately benefiting from the structural cost savings that we implemented last year as well as those we have in the pipeline for this year. So to the degree there is a little more material cost there, other things, I think we also have more cost savings coming through mobile.

Yeah, and on the cross-save in particular, Ronnie. So, I mean, if you look at the bridge, which would be on slide, I think it was 16, but the full year EBITDA bridge, you know, you'd see The SG&A benefit in the quarter of around $27 million. Most of that would be cost savings in the quarter, either structural or temporary spending reductions. We're still seeing much lower than normal travel levels and lower discretionary spend. There's also an element of lower incentive compensation in there as well. On the manufacturing line, it's a little bit netted in there because we did have some cost savings in manufacturing, but we also had some of the ramps. The ramp headwind that we talked about earlier, which, you know, it's a little bit offset in there, but it was certainly meaningful in the quarter. And as Rich said last call, you know, we don't see major changes in the cost structure heading into Q1. You know, we don't see the discretionary spending really coming back as we see here today. We would expect as the year progresses, we will have some travel coming back. As I said, our assumption is for COVID-19 conditions would improve as we move through the year, so we will have some Some of that coming back as we move through the year, not 100% probably, but for the first quarter, we think the cost structure we ended the year with will be the cost structure we'll have for Q1, other than some of the inflationary and logistics kind of things that are difficult to control.

We mentioned on costs, and as I said, Mike Thomas, this is not abnormal for us, and certainly There is a coronavirus element to this, and in the logistics side in particular, it's making it maybe a little more amplified than normal. But if you go back to 16 to 17, in 17, we were talking about logistics costs, we were talking about compensation costs, we were talking about steel costs being up, and we grew earnings 30%. So this is, and our margins expanded as well. So this is normal for us, and we're good at managing it, and we're good at optimizing it, and we're good at managing it through the cycle. So again, there's some unique situations with coronavirus right now with absenteeism and some things like that that are magnified things, but I would not pin this on coronavirus. I would pin it on improving demand and that's a situation that we want to be in and we're glad to be there.

Thanks, guys. Really helpful context.

Thanks, Randy.

Thank you. We'll take our next question from Courtney Yakovonis with Morgan Stanley.

Hi, thanks for the question, guys. I guess I don't want to belabor this point much more but just on the price-cost comment, I think last quarter you guys had talked about potentially Speaking out some positive price costs, obviously now switching to negative, even though pricing was expected to be flat both last quarter and this quarter. So is the only thing really just steel price inflation that's impacting that view, or is there anything else to be thinking about? And then I guess if it is steel prices, you know, given that 50% of your sales still have and some more variable pricing. Why wouldn't you increase your pricing at this point, or is it just your expectations that you'll see steel prices fall by the back half of this year?

Well, I think the big thing that's changed over that time is the volume outlook has continued to improve and improved in the fourth quarter, improved in the third quarter, the fourth quarter, and it's improved again to start this year. And again, with that volume outlook, and generally comes some of these cyclical type of cost pressures like steel. So steel specifically scrap costs in the U.S. went up a lot in the last three months and in the U.S. our prices that we pay for raw material are scrap based to an index. Now again we pass that through to the market with time. So, yes, steel would be a factor, but I think everything that goes along with volume, there's been a greater factor that we've brought more people into our plants. We're working more shifts. We're working more overtime than what we were, and all those things are part of, again, a normal ramp-up that we worked to optimize, but, again, it's a... It's an offset to an incremental. It's still going to be expanding revenue, expanding margins, and expanding earnings per share.

Yeah, I would say on the pricing question, Courtney, I mean, obviously a lot goes into pricing, but as you know, we went through 2018, 19, and 20, three years of 100-plus bips of net pricing across the company, so we feel we're in a good position from a pricing standpoint. There is this timing element, which can which can enter into it. You're exactly right. When we look at our business, about half is OEM and that OEM piece is split between multi-year with pass-throughs Rich talked about. The other half is annual that we've got to sort of wait until the contracts renew. The other half would be distribution end user where we do technically have the ability to price as conditions warrant and I think a lot goes into it. We did put through some price increases at the beginning of the year. But as Rich said, I mean, depending on how the situation evolves, that's always available to us. But at this point, you know, our planning assumption is for relatively flat pricing. And then I think you'll see next year, you know, as I said, if history repeats itself, we'll see some positive pricing next year, which will more than, you know, make up for probably the headwinds we're getting on material this year.

Okay, great. And then just, you know, you commented on the negative mix this quarter. The sales distribution being relatively in line with what you saw. I think you guys were expecting them to continue to destock in the fourth quarter. So is that what you saw? And then given the increases that you've been seeing kind of sequentially in January and February, is it safe to assume that we are starting to see the restock in the first quarter on the distributor channel?

So we definitely saw destocking in the fourth quarter. Industrial distribution inventories came down. I don't know. If I'd be ready to say we're restocking, but I think we are through destocking is what we would at least say. And the year-over-year comps were quite weak in the fourth quarter of last year, and that was on a down fourth quarter of 2019. So they're coming back to start this year. And I think that's a big part of the mix. The strength in that market would be a big factor for us and to have a little better top line growth on the distribution side and process industries, and then that mixes us up with end process as well.

Yeah, I would only add, I would say, you know, the momentum, we do see the momentum there. You know, we were, distribution was, you know, up slightly sequentially, actually third to fourth, although Rich said we did see some destock. We think inventory is in good shape in the order book. certainly supports the full year outlook for distribution to be up in the high single digits range.

Okay, great. Thank you. Thanks, Corey.

Thank you. We'll take our next question from Justin Bergner with G-Research.

Good morning, Rich, Phil, and Neil.

Good morning. Hey, Justin.

Good morning. A lot's been covered, but... One thing that hasn't been covered, the acquisition you recently made of Aurora Bearings. If I'm reading your cash flow statement correctly, you only expended $17 million on acquisitions in the fourth quarter. I'm assuming that's for Aurora, which would seem to be a very small outlay for $30 million of sales and plane spherical bearings sold into the aerospace and market. So maybe if you could just comment on how we should think about the price paid. Is that sort of a distressed asset or what enabled sort of the low price to sales expenditure?

The price paid is directionally accurate that you mentioned there, as are the sales. So obviously it is a pretty low multiple of sales. It also comes to us as a marginally Profitable Cash Generating Business. That being said, we also know it's in a segment that its peers and competitors do quite a bit better than they do in that space. Family owned business and again probably run for a little differently than how we're going to run it. We are very confident we've got really good cost synergies with that business both in this year and longer term. Long term, we would expect that to be a business that's at least at the fleet average. I'd say business. Long term, it'll become more of a product line within the company than a business, but it will be at least at the fleet average of the company. So it's not huge, but we think it's a significant value creator, and then it makes our portfolio stronger as well.

Great. Congrats on that deal. Maybe secondly, you mentioned that the outgrowth assumption was pretty modest. Is there nothing in terms of outgrowth in that 9% organic, or is it just more the low end of your 100 to 200 basis point range? Because I assume the renewables must have some outgrowth in it if it's growing mid-double digit.

Yeah, no, there's definitely, I would say, more than 100 basis points of outgrowth embedded in the 9% organic. Some of that would be, again, in, well, there'd be some in every sector. I don't know that we have anything, looking through the list here, I don't think we have anything that's negative this year. I mean, we do lose platforms that hit end of life and things, but certainly after renewables, marine, off-highway, Always working the general industrial side, although that tends to be smaller and harder to identify with. Automotive hasn't been a growth engine for us, but it'll be a net winner for us this year as well.

Great. Maybe if I could slip one more in. You mentioned in the third quarter that your 2021 framework for margins sort of had mixed as a slight positive, I believe. Would you say that's sort of shifted to a neutral, maybe slight negative, just given the strong OE growth that is driving the strong sales outlook versus where you saw things a quarter ago?

Yeah, I would say, you know, I would say, Justin, so for the full year 2020, I mean, certainly mix was a, you know, was a sizable, you know, negative just in terms of the, you know, the strong growth on the OE side and distribution being down. Now, I think as we As we look ahead to 21 with distribution coming back and really the strong growth across the portfolio, Mix will be far less of a headwind. I would kind of think of Mix as more neutral year on year. It could be a slight positive, but in that range, if you will.

Great. Thanks and good luck for this year. Thanks, Justin.

Thank you. We'll take our next question from Brett Lindsey with Vertical Research Partners.

Hi, good afternoon, everybody. Thanks for squeezing me in. First question, just similar line of questioning on bandwidth, but less about the organization and more about the supply chain. We've been hearing a number of areas of short and stretched supply. Are you seeing that in your value chain early in the year? And just curious how much of that is factored into the revenue guidelines?

Yes, we are seeing, I would say, tightness across various supply chains around the world and then compounded by tightness within logistics. And we're having tightness in getting product through ports and into containers. And so I would say fairly broad, nothing Thank you for joining us. It's a little more complicated because of coronavirus, but I would also say this is normal and not all that different than what we were faced in early 2017, which again, year on year, ended up being a very good year for us.

Great. And then just the last one on the $75 million of investments, could you just talk about the payback you expect and how that's being allocated? And then as that capacity ramps, Should we anticipate some buffer stock build in that renewables business as you work through the transition?

The last part I would say no. Within that market space, we definitely don't build anything on a forecast. It's pretty much all tied to end user demand and firm customer orders. On the ramp up, It's not one project. It's multiple projects. So we're going to see the solar piece of that as an example. We've grown into three or four buildings. We're moving to a new, larger, more modern, more automated operation. That will largely be done by the second quarter. We're expanding one of our facilities in China. That will be one of the longer ones because we've got to put some bricks and mortar in. on to that operation. So it's not one big investment. It's a handful. We're also expanding, putting some new assets into our Romanian operation. So it's a combination of things that will come on online at different times. The return on investment on these initiatives is very good, which is why our general bias is towards organic growth and CapEx, but they'll be very good returns.

Okay, great and best of luck. Thank you. Thanks Brett.

With no further questions in queue, I will turn the call back over to our speakers for any additional or closing remarks.

Okay, thanks Katie and thank you everyone for joining us today. If you have any further questions after today's call, please contact me. Again, my name is Neil Frohnapple and my number is 234-262-2310. Thank you and this concludes our call.

That concludes today's call. We appreciate your participation.