Good morning. My name is Katie, and I’ll be your conference operator today. As a reminder, this call is being recorded. At this time, I’d like to welcome everyone to Timken’s Fourth Quarter Earnings Release Conference Call. [Operator Instructions] 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 Fracassa, 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. [Operator Instructions] 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 SEC, 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 expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for 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 of our markets has started late in the second quarter of 2020, continued to accelerate. Sales were down slightly from 2019, less than 1% of total and 3% organically. That market momentum is continuing through the start of 2021, which I will talk more about in a moment. Our 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. 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 serve 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 in 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 now the company today is better position to perform through industrial cycles. Slide 7 in the deck compares our…

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 $0.84, 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 a year ago, period, while pricing was positive. Acquisitions and currency, each added a little over 1% of the top line in the quarter. On the right-hand side of the slide, we show year-on-year organic growth by region, so excluding both currency and acquisitions. Let me comment briefly on each region. In Asia, we saw strong growth once again in the quarter, up 16%. Our sales were up in both China and India driven by strong growth 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 have declined moderating compared to what we saw in the last couple of quarters. Turning to Slide 16. Adjusted EBITDA was $144 million or 16.2% of sales in the fourth quarter compared to $146 million or 16.3% sales last year. The slight decline in adjusted EBITDA reflects the impact of lower volume and unfavorable price next as negative mix, more than offset positive pricing in the quarter. Note that the negative mix is a function of the…

Thank you. [Operator Instructions] We’ll take our first question from Rob Wertheimer with Melius Research.

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 EBITDA expectation? And Phil, maybe if you could detail the currency issue that happened, how do you typically kind of manage through that or manage against that? Was it more unexpected? Do you normally have 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 a 100 basis points of year-on-year – more than a 100 base points of margin impact year-on-year. And if you fell in a neutral, which we weren’t necessarily expecting neutral, but that would’ve been neutral, I think, we would have been in line with our expectations. So it was – as we said at last call, we were expecting to be up a little bit on slightly less revenues. So at the revenue beat, we would have liked to been up a little bit more than that. But I think we’ll expand a little bit more on the specifics of the expectation.

Yes. Sure, Rob. So, I mean, obviously big picture relative to the quarter in terms of EBITDA margin expectations overall, I mean, it was really three buckets if you will, as Rich talked about. The mix was a little negative relative to what we thought most of the sales beat was on the OEM side. And 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 on favorable relative to what we were expecting going in. The currency which we’ll talk about the currency was negative. And typically with currency, with a benefit on the top line, there’s translation and there’s transaction. Normally, the translation comes through at an EBITDA type margin, and then the transaction really depends on individual currencies around the world. In that particular case, we had just happened to have gains last year and had larger losses this year. We anticipated which kind of drove that big negative. And we do hedge currencies. We hedge, call it, a developed market currency, so we both had zero – we don’t have a 100% large portion of the exposure but Euro, in 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 in Brazil, with some imports into Brazil, with the China currency, weakening against the dollar, China currency strengthening against the dollar, Brazil weakening. So it was sort of a mixed bag, but I think as we sit here today, we have seen a little bit more stability to start the year. So we wouldn’t expect that to recur at the same level. Moving into 2021, and…

Yes, I would in all system, 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 3%, the currency headwind of over 100 basis points of margin. So I think we also need to put it in perspective.

Perfect. Okay. Thanks for that. And if I may, I mean, one of the many things is improved attention, like I guess, as your focus on pricing of systems on sort of better processes and manage pricing, I wonder if you’ll share how you’re thinking about flat pricing in the next year whether you don’t need it, whether you you’ve had too much in recent years, whether they could take more? And just a little bit of curiosity on that number, which I might’ve thought would have been a little bit higher? And I will stop there. Thank you.

Well, I think, it is a couple of elements on that. First, on the pricing, one of the costs that we began experienced in the fourth quarter and are experiencing the start this year and again, as Phil said, like logistics, it’s pretty normal for us when our business in flux to go up as steel costs. That as an example, though, 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 that continues to strengthen, you would also start to see us pickup 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 four or five months ago for this year and I think we generally there, we’ve got pricing mechanisms, if Costco out of line, but we would generally be locked in on those prices for the year. We moved some prices up and a little bit and some down a little bit, but we’ve been expecting flattish pricing for the year and I think we’ll be – we’ll deliver good results with that. But I guess, the other final point I’d put, saying there is a well over half of our business is not contractually tied in any sort of a 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.

Thank you. We’ll take our next question from Stephen Volkmann with Jefferies.

Good morning guys. I guess I can answer to goat men as well as if it means G O A T, but that’s probably overstating my experience, but anyway. Can I just backup and sort of ask a really big picture question? Phil, I think in the past, you’ve provided some thoughts about what sort of the normal incremental margin should be for you guys. And clearly 2021 is a bit of a messy year with various costs and things happening, but as we move out into 2022, 2023, what’s a normal incremental margin for the new Timken these days.

Let me comment first on 2020 and 2021. And then maybe Rich can comment on the expectation for 2022 and 2023. But what we saw in 2020, we did variabilize a significant amount of our costs last year. And so the decrementals were quite good. It was 24% all in, but if you take the currency and acquisitions out, which were significant headwinds, the organic detrimental that’s kind of on the order of 14%, 15%, so really strong decrementals last year, which does create a challenging base as we moved to 2021. So I think as you look to move forward to 2021, we do sort of have that to deal with and not to mention the some of the cost headwinds we’ve normally seen an inflection year. And as we have talked about our incremental decremental margin framework, the high level was always said, hey, well, let’s start at the gross margin line and then probably do a little – probably do less than that inflection year, which 2021 is, I’d say. It’s exacerbated a little bit by the strong decremental we did last year. And then obviously, we move up cycle, move into year two, year three, you’d get back up to that gross margin level, if you will, as you’re leveraging your SG&A and 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 better than that. But if you look at 2021, the ability for us with revenue being up, despite some of the year-on-year costs deltas, we’ve got to manage through, I think the ability to expand margins and have the implied incremental 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 now, the midpoint of the guidance would imply EBITDA margins around 19% with revenue at that level. I think historically speaking is quite good. Rich, do you want kind of…

I’d say, instead – it still point on the 14% decremental last year. Our strategy for multiple years has been to variabilize more of our cost structure and to the degree we’re successful of doing that. And the 14% decremental 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 becoming having a greater variable cost structure and tightening the range of our margins through cycles. And we’ve talked a lot about various things that we’re doing to do that. And then I think, this year is obviously a little bit unique in regards to the comps being a little different as well. And then I think on the longer-term and really managing more towards margin targets and 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 2021, 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 2021? As you said, Rich, they’re a little bit unusual, so that’d be helpful if you can.

Yes. I would say, we really want to get you guys a little bit more focused on the margin outlook for the year, but I mean, I’ll try to talk direction landing. Clearly, we had a lot of temporary actions in 2020, they were – 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 cost the absence of those temporary actions that we do. Now the structural cost actions are there, but as Rich mentioned, as volumes go up and you move back up cycle costs, some costs do come back in. We’ve got the inflation to deal with on the material 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 in for 2021 and we will work for 2020. So you couple that with ongoing cost reduction initiatives, looking to offset the material cost increases, looking to continue to streamline and implement lean principles, et cetera, it all kind of nuts to incrementals a little bit lower than what you might expect to see, otherwise, but still expanding margins from 2020 to 2021. And then lastly, 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 volumes moving up or revenues moving up. Now 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 itself. You get to year two. We’ll have that benefit instead of comp can typically flatten out at some point as well. So and just looking at 2021, I mean, there’s a lot of pluses and minuses, the temporary actions are minus, the permanent actions are plus. We’ll see those – the permanent actions more front-loaded and then even out as they move through the year. But the net effects would be expanding margins for the full year. And as Rich said, Q1 will be a little bit lower than last year, just given some of the mix in and logistics headwinds. And then we would expect margins 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.

Good morning, guys. First, on the all puts and takes for margin this year, I mean, aren’t you guys always also just reinvesting in the renewables business. I mean, isn’t that a big part of it? You don’t seem to really be calling that out and – be worth. Based on what you said in the past that seems to be…

Yes. I mean, it’s 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, yes, when we are not focused on 2021 on absolute margin optimization of going out in 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 or product vitality initiatives, et cetera. So, yes.

Well, what’s the incremental investment in renewables this year on of OpEx perspective, not on some of its CapEx as well?

Well, I don’t know we provided that. So 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, I’ve seen in 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, but you guys seem almost apologetic for your incremental 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. Didn’t you say that in your press release when you put out there the reinvestment in renewables that you – it was something like $75 million over the next several years? I don’t know if I’m recalling that properly.

Yes. I mean, the next five-ish quarters we would expect to complete the $75 million. And yes, I mean, I think that is you’re hitting on point that we are – it’s one of the reasons why when we came out with the 20% EBITDA margin target and when we can’t get it to 22% and we’re working to grow at 20% and that’s really what our strategy is. And I think you look at those charts on 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 up cycle and in early 2017.

Okay. Got it. And then just on the growth that you’re saying, mid-teens growth in the renewables business this year, I mean, you grew 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 a conservative…

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. 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’re going to have an excellent first half. We’re unsure about the second half. And then the second half got even better, so in the second half, we’ve got more of a leveling off than another – than another step up in the renewable side. But we’re going to have a very good first half then it’s got a little less visibility on the solar. That’s a little bit of a shorter lead time, but we’re going to have varies first quarter on solar as well.

Thank you.

We’ll take our next question from Steve Barger with KeyBanc Capital Markets.

Good morning, guys. Just thinking about this revenue forecast, it 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’s going to give you?

Well, it definitely we’ve the bandwidth and we’re doing it. And I think some of that is embedded in the numbers. I think certainly, our renewable numbers of last few years have been above market. The market’s been good, so it’s certainly helped us with those numbers, but it’s – our numbers will be announced, 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 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, it certainly feels like it at 9% organic. Again, we’re targets 100, 200 basis points of outgrowth a year and most of that 9% is certainly the markets.

Yes. And as I just think about, I hear the conversation on the EBITDA margin being slightly up this year. If you drive some growth and 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, just any thought on when you might reset what that target might look like, just given all the progress that you’ve made?

Yes. We’re absolutely not ready to reset it now. And I’d say, the SG&A over cycle it’s been a little more over 16 probably than the 15 and the 15 would have had some verbalizing some fixed costs last year in it. And I think the rule answer to your question is really what Ross was alluding to and which is, we’re really get our eyes out for three, four years, and we’re really trying to grow the company in these high-teen margin levels. And to do that requires SG&A. It requires capital and some of that hits in good years like this year and some of the hits in bad years, like last year, but we keep plowing through that. And I think we’ll continue to do that. So certainly, not ready to increase the 20%, but I think it’s certainly not far out of our range to get there.

Yes. The only thing I would add Steve is, we’d obviously – we want to grow and grow and hit the 20% versus say shrink and expand. But when you look at the margins in particular, within the segments, like Processing Industries, as an example, when a year when distribution was actually down, we did EBITDA margins close to 25%. I mean, that would put us easily top core tile of suppliers or companies that serve those sectors. And even in mobile, mobile margins were down from 2019, but still did, mid-teens kind of EBITDA margins in mobile. We do expect mobile margins to be up in 2021, but that would put us also, when you look at the companies that serve those sectors top core tile plate margin. So while, as Rich said, always looking to improve next, which can give us a little bit of margin – a margin uplift. We feel like if we can grow and hit the 20 that we’ve set. Who knows, maybe reset it at some point, but that would be a clear path to create shareholder value in our mind.

Understood.

We’re always relentlessly driving efficiency, always – acquisition integration, driving leverage. 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.

Yes. 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.

Good morning, guys.

Good morning, Chris.

I guess, coming back to renewable 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 off shore 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 renewable opportunity. Am I thinking about it the right way?

Yes. I would say we have a very little North American impact on wind. The solar business for us is much more global. Those installs are much more spread around the world. But there as well, we really have no impact factored in from any sort of incentive or acceleration in North America for the U.S.

Got it. Got it. Thanks for that. And thanks so much for the breakdown in the color on the margin for the year. I guess, just taken 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 look at 2021, when you say flat in the second quarter flat with last year.

Yes, with second quarter of last year.

I think the – as we said, the guidance would imply, the first quarter will be higher than 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, 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 a 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.

We’ll take our next question from Ronny Scardino with Goldman Sachs.

Thanks for taking the questions.

Hi, Ronny. Good morning.

So just focusing on price costs. You mentioned a negative price costs for 2021. How should we think about it really across the segment? I think half your process business is really in the industrial distribution. So is it really fair to say that most of your price costs pressures will be on the mobile side? And if you able to quantify that that’d be really helpful as well.

Yes. 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 – you’re right, we do have distribution and we do typically take prices up in distribution every year. We do have OE offset. So I think the right way to think about pricing across those segments roughly flattish. And I think both segments will see some material cost inflation, timing will vary depending on the geographies processes, there’s more international, mobile is more North America and the timing of pass through 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 running – 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 year-over-year comparisons.

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’re thinking around $30 million. Is that roughly a correct number?

I’m going to let Phil answer that before I do. Though, I did want to add 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 there is a little more material costs there, I think we also have more cost savings coming through mobile.

Yes. And on the cost saves in particular Ronny. 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’d see the SG&A benefit in the quarter of around $27 million. I mean, that’s mostly that would be cost savings in the quarter, either structural or temporary spending reductions. Like 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. And then 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 ramp headwinds that we talked about earlier, which a little bit offset in there. It was certainly meaningful in the quarter. And as Rich said last call, we don’t see major changes in the cost structure heading into Q1. We don’t see the discretionary spending really coming back as we sit here today. We would expect it to – 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 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 – the cost structure we’re going to – we’ll have for Q1, other than some of the inflationary and logistics things that are difficult to control.

The other thing I would mention on costs is, as I said in my comments, this is not abnormal for us. And certainly there is a coronavirus element to this. In the logistics side, particularly it’s making maybe a little more amplified than normal. But if you go back to 2016 to 2017, in 2017, 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 absenteeism and some things like that that are magnifying 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. That’s really helpful context.

Thanks, Ronny.

Thank you. We’ll take our next question from Courtney Yakavonis 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 seeking 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 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 given that 50% of your sales still have 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 and generally come some of these cyclical type of cost pressures like steel. So steel specifically scrap costs and the U.S. went up by a lot in the last three months and in the U.S., our prices are – 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, it would be a factor, but I think everything that goes along with volume there’s then a greater factor. 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 work to optimize. But again, it’s offset to an incremental, it’s still going to be expanding revenue, expanding margins and expanding earnings per share.

Yes. And I would say on the pricing on the pricing question, Courtney. I mean, obviously a lot goes into pricing, but as you know, we went through 2018, 2019 and 2020, three years of 100 plus bps of pricing – 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 enter into it. You’re exactly right. And when we look at our business about half is OEM, and that OEM piece is split between multi-year with pass-through that 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 have the – technically, we 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 that’s always available to us, but at this point, our planning assumption is for relatively flat pricing. And then I think you’ll see next year, again, as I said, if history repeats itself, we’ll see some positive pricing next year, which will more than make up for probably the headwinds we’re getting on material this year.

Okay, great. And then just, you commented on the negative mix this quarter with 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 if the strength in that market would be a big factor for us to have a little better top line growth on the distribution side and process industries and then that mixes us up within process as well.

Yes. I would only add, I would say, the momentum – we do see the momentum there. We were – distribution was up slightly sequentially, actually third to fourth, although Rich said, we did see some destock. We think inventory is in good shape and 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, Courtney.

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

Good morning, Rich, Phil and Neil.

Good morning.

Good morning. A lot’s been covered, but one thing that hasn’t been covered. The acquisition you recently made with Aurora Bearing’s, 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 plain spherical bearings sold into the aerospace end 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 through a little differently than how we’re going to run. We are very confident, we’ve got a really good cost synergies with that business in this year and longer-term. And 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 be 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 small, 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 because it’s just more the low end of your 100 to 200 basis point range? I assume the renewables must have some outgrowth in it if it’s growing mid double digit?

Yes. No, there’s definitely, I would say more than 100% basis points of – more than 100% basis points of outgrowth embedded in the 9% organic. Some of that would be again in – well, there’d be some in every sector. I don’t know that we have anything. I’m looking through the list here. I don’t think we have anything that’s negative this year. I mean, we do lose platforms that that hit end of life and things. But certainly after renewable, marine, off-highway always working the general industrial side all that tends to be smaller and [indiscernible] automotive, hasn’t been a growth engine for us, but it will 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 2021 frameworks for margin sort of head mix 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?

Yes. I would say Justin, so for the full year of 2020, I mean, certainly mix was a sizable negative just in terms of the strong growth on the OE side and distribution being down. I think as we look ahead to 2021 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 is more neutral year-on-year and it could be a slight positive. But we’re in that range, if you will.

Great. Thanks and good luck for this year.

Thanks, Justin.

Thank you. We’ll take our next question from Brett Linzey with Vertical Research Partners.

Hi. Good afternoon, 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 shortened stretch 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 guide?

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 into containers. And so I would say fairly broad, nothing that’s disruptive that we can’t get enough steel or can’t get enough things but just delays. And I think some of our customers are seeing that as well, and we’re seeing some interruptions and inefficiencies in our deliveries as a result of that. So that was a factor in the fourth quarter. It’s a factor to start the year this year. I think we’ve got it baked in. And again, I probably go back to again, 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.

Okay, great. And then just 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 where 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’re moving – we’ve grown into three or four buildings, we’re moving to a 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’ll be one of the longer ones, because we’ve got to put some bricks and mortar onto 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 biases towards organic growth and CapEx, There’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.