Altra Industrial Motion Corp (AIMC) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Altra Industrial Motion Q4 2020 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your first speaker today, Ryan Flaim. Please begin.

Thank you. Good morning, everyone, and welcome to the call. To help you follow management's discussion on this call, they will be referencing slides that are posted to the altramotion.com website under Events and Presentations in the Investor Relations section.

Please turn to Slide 3. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors described in the company's quarterly reports on Form 10-Q and annual report on Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Altra Industrial Motion Corp. does not intend to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP adjusted EBITDA, non-GAAP operating income margin, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt, non-GAAP free cash flow and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading, Discussion of Non-GAAP Financial Measures, and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q4 2020 financial press release on Altra's website.

Please turn to Slide 4. With me today are Chief Executive Officer, Carl Christenson; and Chief Financial Officer, Christian Storch.

With that, I'll now turn the call over to Carl.

Thank you, Ryan, and thank you all for joining us today to review our Q4 and 2020 full year results. What was abundantly clear through the events of 2020 is that our people are our greatest asset, and I would like to begin by expressing my sincerest thanks to every member of the Altra team. I'm incredibly proud of the resilience and agility that you all demonstrated throughout the year as you served our customers, maintained business continuity and delivered exceptional financial results, all while navigating through the unprecedented circumstances we faced.

Since the onset of the pandemic, we have remained disciplined in our focus around 4 top priorities: putting the safety of the Altra team first; managing our operations to minimize customer disruption and ensure continuity of supply for our customers, including those responsible for supplying critical components and equipment to help in the fight against COVID-19; prudently managing costs to maintain a strong balance sheet and manage our leverage; and playing offense to position of Altra to emerge from this period a stronger company. As a result of our team's focus and efforts, we ended a solid year with very strong fourth quarter.

Now please turn to Slide 6. By leveraging our market position and demand improvements in several markets, including wind and Class 8 trucks in China, we exceeded our revenue expectations with sales of $453 million in the fourth quarter and a total $1.726 billion for the full fiscal year. Through our focus on applying Altra's world-class business system to drive efficiencies and carefully manage costs, we exceeded our bottom line expectations through non-GAAP adjusted EBITDA margin by 100 basis points and achieved excellent working capital performance.

On a full year basis, 2020 net income was a loss of $25.5 million or a loss of $0.39 per share. Full year 2020 non-GAAP diluted EPS was $2.88, the strongest EPS in Altra's history, a testament to the value of the broad diversity of our portfolio as a result of the A&S combination and our ability to act nimbly to control costs since the onset of the pandemic. We also generated a record $229 million in non-GAAP free cash flow in 2020, which allowed us to pay down $160 million of debt and make tremendous progress delevering our balance sheet. We exited the year with net debt to non-GAAP adjusted EBITDA leverage below 3.2x, far exceeding our expectations and advancing us towards our goal of reaching the historical leverage levels of 2 to 3x.

Now turning to Slide 7 for an update on our strategic initiatives. We remain committed to our strategic priorities of leveraging our world-class business system to create sustainable competitive advantage, managing costs and drive margin enhancement, and delevering our balance sheet. The highlights I just shared clearly demonstrate that we are making terrific progress across these 3 priorities. We also remain focused on directing resources to opportunities that position Altra to grow and thrive as a premier industrial company for the long term. This includes making targeted organic investments in innovative new technologies as well as customer collaboration initiatives that move us further up the technology spectrum. In 2020, for example, we formed a strategic partnership with a manufacturing software company, MTEK Industry AB, to expand our capabilities within our AGV business and factory automation offerings.

Another top priority for Altra is to further advance our environmental, social and governance journey. Critical ESG priorities have long been ingrained in the Altra business system as an extension of our culture and the way we conduct ourselves. This includes a robust set of tools and processes designed to systematically identify and eliminate waste and reduce emissions as well as strategies and systems to foster a work environment that stimulates and fully develops the capabilities of our people. The Altra business system serves as a compass for our ESG journey, and I'm proud to share with you today a few highlights demonstrating the progress our team has made in this area. To ensure that diversity, equity and inclusion is ingrained into our culture in such a way that is enduring and true to our company, we recently formed a D&I committee. I'm also proud to have recently signed a CEO pledge for CEO action for diversity and inclusion, which is aimed at rallying the business community to advance diversity and inclusion within the workplace.

Another focus for Altra is ensuring a safe and healthy work environment while also advancing our efforts to manage our business in an environmentally responsible manner. We recently appointed a new director of EH&S, who will be instrumental in advancing our efforts in this area. We also remain committed to providing our customers with innovative solutions that help make the world a better place. For example, in support of the effort to help reduce greenhouse gas emissions, our Jacobs Vehicle Systems business is developing innovative technology that will reduce emissions and improve fuel efficiency in heavy-duty Class 8 trucks.

Our solutions also help the move towards alternative energy through the installation of engineered power transmission products in solar, tidal and wind energy applications. And our electromechanical power transmission products help wastewater equipment manufacturers and treatment facilities worldwide increase their efficiency while reducing costs and downtime.

With our people as our most valuable asset, employee engagement is another top focus area. We conduct annual engagement surveys to solicit candid and actionable feedback from our teams. On average, we had 78% participation in these surveys, which have validated that the vast majority of our employees feel supported by leadership, have a clear understanding of expectations and are engaged as part of the team. We believe that a foundation of understanding and commitment to change is what supports lean growth and continuous improvement. And we are using a valuable and targeted input from these surveys to drive improvement across the organization. We also support our employees in efforts to get involved in organizations and activities that improve their communities.

In the coming year, we plan to implement our first materiality assessment to ensure that we are focusing on the ESG priorities that are of greatest interest to our shareholders, align best with our business and drive our strategy forward. We're looking forward to updating you as we continue forward on our ESG journey.

Before I turn the call to Christian, please turn to Slide 8 for a review of the markets in more detail, starting with those that performed well in the quarter. Transportation was up high single digits as Class 8 truck demand in China and North America finished the year strong. On balance, we expect the market to be slightly up to flat in 2021 as demand in China, which remained strong through January, returns to more normal levels while demand in North America is expected to improve as the pandemic subsides.

Turf and Garden had another strong quarter, up low double digits as the housing market remained strong and our customers continued to accelerate purchasing after delaying builds earlier in the year. We expect the market will slow in 2021 due in part to tough comps.

Medical equipment was up low double digits year-over-year and flat sequentially. Demand remained very strong for COVID-related medical equipment, such as ventilators and respirators. We expect demand in the medical market to moderate in 2021 as requirements for COVID-related components are not expected to repeat and elective surgeries and hospital capital expenditures don't rebound to pre-pandemic levels until 2022.

Renewable energy was up low single digits and down sequentially, in line with expectations due to a tough comp and some anticipated industry supply chain issues, which are unrelated to Altra. On balance, we expect 2021 to be flat unless the new administration implements policy changes that could have a positive impact.

Distribution was up low single digits, and we continue to expect the distribution markets to track in line with general industrial economy. The ag market was up double digits for the quarter as well as sequentially, driven in part by improving net farm income, which drove increased equipment spending. On balance, we expect modest albeit lumpy demand this year.

Defense was up double digits and is expected to remain strong going forward as we continue to see strong performance with many of our OEM customers. Commercial aerospace, which remains the smallest piece of our overall A&D business was down mid-single digit due to the ongoing struggles facing the airline industry. We expect this market will rebound at some point but not likely until 2022.

Factory automation and specialty machinery was flat year-over-year and down low single digit sequentially. We began to see softening in the semiconductor market, which offset the strength in robotics, AGV and general factory automation. Overall, we expect the market will improve in 2021, with particular strength in technology markets.

Other markets facing headwinds in Q4 included metals, which was down low double digits, but up sequentially as capacity utilization in the mills continued to improve. Overall, we are increasingly positive for 2021. We expect manufacturing and automotive markets to improve in the later part of the year and that we will support -- and that will support demand for metals.

In mining, demand was down double digits for the quarter as a continued result of low commodity prices last year. We're seeing iron ore starting to come back, but coal remains down, and we expect the market to be flat to slightly off in 2021.

Oil and gas, which remains a very small component of our business at well less than 5% of overall sales for 2020, was down double digits for the quarter and up low single digit sequentially. We expect the market to be flat in 2021 with some possible modest demand improvements towards the end of the year, if the price of oil continues to go up.

With that, I'll turn the call over to Christian to provide detailed review of the quarter and our 2021 guidance.

Thank you, Carl. Good morning, everyone. Our strong fourth quarter results were highlighted by careful cost management, strong cash flow generation and significant progress, deleveraging the balance sheet. In addition, we once again demonstrated the resilience of our balanced portfolio of OpCos.

Let's start with a review of our top line performance in the fourth quarter. Sales were up 2.6% compared with the prior year period. Excluding FX effects, sales grew modestly year-over-year at first in 2020 as price contributed 90 basis points. Foreign exchange rates had a strong positive effect of 230 basis points. Excluding the effects of foreign exchange, net sales for the PTT segments were down 7.6% as key end markets, like oil and gas, mining and metals, continue to be very weak. And net sales for the A&S segment were up 8.2% compared with the same quarter last year, driven by strong top line performance across several end markets, in particular, our ventilator business in the medical segment.

Taking a closer look at our performance by geography, Asia and the rest of the world, once again, was a strong performer, with revenues up 20.8%, primarily driven by strong sales into the Class 8 truck market in China and the Chinese wind market. In Europe, sales declined 5.7%, while sales in North America declined 4.4%. As a result of the actions we took in the quarter to manage costs, we were able to increase non-GAAP operating margins by 80 basis points. Non-GAAP income from operations increased by $5.2 million or 7.2%, reflecting our team's incredible efforts to reduce costs and manage cash in this environment.

We achieved year-over-year cost reductions of approximately $60 million and temporarily avoided costs of another $10 million. We estimate that approximately $30 million are related to synergies, consolidations and other activities and, therefore, will repeat in 2021. The balance ties primarily to pandemic-related cost savings, such as travel, medical expenses, furloughs, merit increase suspensions, rent concessions and other temporary savings. We were very pleased with our working capital performance in the fourth quarter, where we exceeded our targets and took $23 million out of year-over-year despite FX pushing balances up.

We continue to benefit from lower LIBOR rates and lower outstanding debt levels. As a result, interest expense in the fourth quarter, excluding the impact of the terminated interest rate swap, decreased $2.7 million year-over-year.

As we know in the last quarter, [rate] changes related to tax reform and other changes have lowered our tax rate. The provision for income tax in the fourth quarter was 21%. Non-GAAP adjusted EBITDA was $96.1 million for the fourth quarter or 21.2% of net sales, up 100 basis points compared with last year.

Please turn to Slide 10 for a closer look at our balance sheet improvements, cash flow and liquidity. We continue to be very pleased with how our cash generated business model, the financial strength of the new Altra and our team's ability to manage cash has proven out through the prolonged challenging market environment. Free cash flow for the quarter was very strong at a record $91.3 million compared with $60.7 million a year ago. We generated $263.5 million in non-GAAP adjusted free cash flow in 2020, a 29% increase compared with the prior year. We continue to manage CapEx spend given top line headwinds. Capital expenditures during the quarter totaled $9.4 million, up sequentially as expected, as we directed investments to growth opportunities in automation and technology enhancements, as Carl had shared earlier.

We ended the quarter with $254.4 million of cash and $295.5 million availability under the revolving credit facility. In the quarter, we paid an additional $70 million in our term loan, bringing our total debt pay down in 2020 to $160 million, which is more than the total pay down in 2019 and 2018 combined, another testament to our ability to effectively manage the balance sheet even during the most difficult times.

Since completing the A&S merger, we have paid down $310 million of term loan debt. We decreased our net leverage to below 3.2x, and we remain committed to deleveraging the balance sheet. We now expect net leverage to be below 3x by mid-2021. Notably, net debt to total equity improved meaningfully in 2020. We remain very comfortable with the substantial room we have in our covenants. As we have shared before, the terms of our net debt leverage covenant exclude the $400 million of senior secured notes. The covenant stepped down to 4.75 at the end of 2020.

We also have no short-term debt maturities as these are not due until October 2025 and October 2026. In terms of use of cash, our top priorities in the current environment continue to be to reduce our debt balance, manage leverage and preserve optionality for investing in future growth while continuing to support our quarterly dividend.

Please turn to Slide 11 for review of our outlook for 2021. Today, we are providing guidance for full year 2021, which reflects our best estimates and practical assessment of the financial impact of COVID-19 to Altra's businesses at this time. We are taking a cautious approach to our initial outlook for 2021 due to the ongoing uncertainties related to the duration of the pandemic and the timing of the economic recovery. While we assume that we will return to year-over-year growth -- revenue growth in the first quarter, the guidance assumes that the general industrial economy will not begin to meaningfully recover until late in 2021. In addition, the guidance reflects approximately $40 million of cost savings realized in 2020 that would gradually phase back through 2021, with the full effect of the cost coming back by the second half of the year. As a result, the guidance assumes that we will see SG&A expenses increase sequentially throughout the year. We also assume that China's demand in Class 8 truck will -- trucks will normalize in the second half of 2021. We are hopeful that market conditions improve sooner than our guidance currently assumes and we gain better visibility. And as we gain better visibility, we will revisit our outlook as appropriate.

Additionally, we continue to closely monitor the situation, are prepared to implement further cost reductions -- cost measures should top line demand decelerate. With that as a background, our guidance for 2021 is as follows: sales in the range of $1.79 billion to $1.83 billion; GAAP diluted EPS in the range of $1.97 to $2.1; and non-GAAP diluted EPS in the range of $2.95 to $3.15; non-GAAP adjusted EBITDA in the range of $370 million to $385 million; depreciation and amortization in the range of $120 million to $125 million; capital expenditures in the range of $45 million to $50 million; and a normalized tax rate for the full year in the range of 20% to 23%. We expect adjusted non-GAAP free cash flow in the range of $185 million to $210 million.

With that, I will turn the discussion back to Carl.

Thank you, Christian. Please turn to Slide 12. And as we look ahead to 2021, we have complete confidence that we have the talented people, financial discipline and market strength to drive strong performance, build critical customer relationships, nurture an engaged employee experience and advance our strategic priorities to thrive and grow as a world-class premier industrial company long after the pandemic is behind us.

I will leave you with 4 reasons we continue to feel extremely positive about the long-term opportunities for Altra: our efficient cash-generative business model continues to prove to be highly resilient; the combination of our legacy PTT businesses with our A&S businesses has continued to prove to be an exceptional strategic move; we expect to benefit from demand across several of our diverse end markets, particularly as the economy recovers; and Altra's value proposition continues to resonate deeply with our customer base.

As always, we are grateful for the ongoing support of our customers, partners and shareholders. And I would like to, once again, thank the Altra team for all that we were able to accomplish together during an extraordinary year.

With that, we'll now open the call up for questions.

(Operator Instructions) Your first question today comes from the line of Jeff Hammond with KeyBanc.

Just want to go through kind of the EBITDA bridge. It looks like you got kind of nominal growth in the guide. Just wanted to get a sense of what's built in on the guide in terms of how much of that $40 million of temp cost is coming back. Are there any kind of carryover, restructuring or synergy savings that you're building in? And what kind of the underlying business incremental margins you're assuming?

So I think, Jeff, there are a couple of components, three main components, I think. First, about 270 basis points of top line growth is FX related in our assumptions, and we assume that we -- that those incremental sales dollars, FX related, have incremental margins of 20%. We currently assume that the $40 million will come back in full and that we'll not be able to offset a meaningful amount of that potentially in the neighborhood of $5 million. And then on the incrementals, outside of the $40 million and the FX, we assume 35% incremental margins.

Okay. But the temp costs aren't going to all come back this year, right? Because you just -- you don't really have T&E through -- as much T&E, I guess, through the first half? Or...

So right, we assume that this year, about 40% of 2019 travel expenses will come back and 60% will still be -- we're not going to be traveling much in the first half of the year at least. So the vast majority, outside of travel, of cost will come back. When we look at the $40 million, what are the components of the $40 million? There is -- around $26 million of that is people cost. That includes European government support for short work weeks and retention credits in some foreign jurisdictions that we received to keep people on the payroll, those will disappear. Furloughs have disappeared. We had -- in some jurisdictions, where people were asked to take temporary pay cuts, if you add that all up, that's $26 million. And that will come back next year.

There's $4 million of medical savings, and we assume that those medical savings, people will go back and have surgeries. Maybe not all of that $4 million will come back, but right now the guidance assumes it will. And the remaining $10 million is related to facility costs. Remember, we got some rent concessions for several of our leased properties that were -- those have expired. It's the element of T&E that will come back. And then other cost reductions or temporary price concessions we got from service providers and some of our suppliers. That's the nature of the $40 million. Therefore, those will come back. There will some be, like I said, travel will be the exception where we currently assume 40% of travel will come back.

Okay. Great. And then with your FX assumption, it looks like your core growth is kind of 2% to 4%. Can you just talk about which end markets you think are going to outgrow or meaningfully outgrow kind of the overall range?

So I'll kick off and then Carl will give you more color. One of the big headwinds we're facing is the second half of 2021. We're between Class 8 truck demand softening in China, given that, what I call the cash flow compass program will expire by the end of June. Between that and the rest, strong respirator sales that we had this year, component sales that go into respirators, that is a $31 million top line headwind in the second half of next year. And that's about -- that's a meaningful headwind. While the rest of the businesses, in general, have a strong second half performance and show some good growth, that's a headwind but we don't -- in the guidance, depending on where you are in that range, we make certain assumptions around that headwind and how much of that we can compensate.

And then color on the markets, Carl will add, and some other upside.

So the way I think we're looking at 2021, Jeff, is that it's a transition year. And I thought last year, it was difficult to kind of predict what was going to happen and give guidance. We did give guidance, and I think we came pretty darn close to the guidance that we gave. This year was as difficult, if not more difficult, to put together because there's so many variables that are going to influence it. So are the COVID variants that are out there, are they going to have an impact? Is the vaccine rollout going to -- or the vaccine is going to work fully? And are they -- is the rollout globally going to go well? And the tariff exemptions and what kind of relationship are we going to have with China? The semicon industry and the chip shortages that are now impacting the automotive industry.

There's just so many headwinds that we're facing. And on the other side, there's some really good potential tailwinds. Are we going to get an infrastructure build that will drive some demand? Will we start to see CapEx from some of our OEMs? Will that start to occur? Will their customers to spend CapEx again? Will we see the medical industry start to do better? We're expecting to see a delay between when the COVID-related equipment drops off and CapEx in the hospitals and the elective procedures start to come back. We expect to see some delay there.

Interest rates still remain low and have a good impact on people being able to make investments in the future. Material inflation, what's going to happen with material inflation? We're very good at getting prices to offset material cost increases. But what's going to happen with material inflation? Some of the later cycle markets, if commodity costs go up, will mining come back quicker than we'd anticipated? Oil and gas, the oil price is up now, and will that continue to improve? So there's just so many factors. And one other that I'd like to kind of joke about, but not really, is as it opens up, if you look back after the 1917 pandemic, you had the roaring '20s. Are people going to want to go out and celebrate that this is over and travel again? That's a real wildcard. Expectation is that they won't, but it's certainly a possibility.

So we think it was just a really difficult year to predict. What markets do we think have the potential to do well next year? We think that the automation space and the continued -- even semicon, I think, was down a little bit for us this quarter, but we think that's going to come back and long term have good growth.

If we see capital investment again, things like forklift trucks were relatively weak, that if people start to invest in their factories again, things like forklift trucks could come back. We've seen good order recovery in Europe relative to where it was midway into the pandemic. We've started to see some recovery there. So I have some optimism, but I think it's just -- there's so many potential headwinds that we'll remain cautious.

Our next question comes from the line of Bryan Blair with Oppenheimer.

A very good color there. Obviously, a lot of moving parts. To help us gauge the -- gauge your top line outlook and what is contemplated in that guide. What are you seeing on an order basis to start the year? How does that relate to the sequential momentum you had throughout the second half? And then given the end market outlook and the moving parts that you walked us through, how should we think about your segment's growth relative to that 4% to 6% range, consolidated?

Yes. So when I look at the order trends, I think that the fourth quarter, probably starting in September, we saw the orders pick up, and they've maintained kind of at that level since then and into January and the beginning of February. So I think the order trend has been pretty stable at a reasonable level and supports our guidance quite well. And so I think the back half of the year, next year -- or this year, the back half of '21 and the headwinds that Christian mentioned, that's where the uncertainty is and will the order rates pick up if the general industrial economy comes back to more than offset what we're going to see as declines in some of the COVID-related medical equipment, the Class 8 trucks in China where that was stimulated by the Chinese government. So the order trend is pretty solid and stable since the September time frame.

Yes. And Bryan, if I can add to that. If you look at that order trend that Carl just described, that would point you to the first quarter sequentially flat to maybe up a little bit, which would be 4% to 5% top line growth year-over-year. Then when we come to the second quarter, we have easy comps, so we expect probably low double-digit growth in that quarter. And then the second half is that one where we have that high degree of uncertainty in our guide that we talked about, the Class 8 truck in China, the medical side of the business. So those are the 2 big variables and then there's a little bit of wind. And I'm in a camp just like Carl, where we don't believe that certainty has returned to financial forecasting at this point of time. There's still a lot of noise. If you look at extended lockdowns in Europe and the slow vaccination rollout in Europe, there's still a lot of noise.

Yes. That's perfectly fair. Carl, you mentioned material inflation. Is there a specific price cost figure that you can cite that's baked into your current guide?

No, no. The main commodity we procure is copper, where, in all cases, we pass that through to our customers through surcharges that go both ways. After that, it's probably steel. And then the majority of what we buy is machine components or components that already have some value-add in the processing. And as Carl said, I think in the past, we've done a good job in passing through those input costs to all customers.

Yes. So I think in that regard, Bryan, we usually assume that the price increases that we're going to get will offset whatever material costs we see based on the fact that we can react pretty quickly. It takes a little while for our suppliers to push through the price increases to us because it is converted material. So we buy castings, machine castings, lots of parts, forgings. And so by the time we get the price increase, we already see it coming and can pass the price increase along to offset that. So that's -- one of the disciplines we have to have this year is to that we push through the price increases to offset that. The other big wildcard is -- well, it's not a wildcard, it's the wage increases, that we need to have pricing to offset the wage increases that we're seeing. Delayed the wage increase last year by 6 months. So effectively, this year, we have, I don't know, maybe a wage increase in half that we have to offset.

Okay. Understood. And then one more, just kind of a housekeeping one. As we update 2021 modeling, what should we factor in for working capital movement at least on a base case scenario?

Yes. We have tremendous working capital performance in the fourth quarter. We don't think that we'll be able to repeat that. But I would say $10 million to $15 million reduction in working capital is what we're targeting.

Your next question comes from the line of Mike Halloran with Baird.

So a couple here. One, maybe just some thoughts on supply chain and channel inventory levels. I know you said there's some supply chain headwinds, I think, on the wind side, but maybe some more broad commentary there. And then also where do you think channel inventory stand as we sit here today?

Yes. So the supply chain, that's one that's like the whack-a-mole game where right now, Malaysia has got something shut down. I think there's some things in Taiwan that are -- and just kind of go -- wherever the disease is impacting some place, we'll see a particular supplier shut down. So we just have to keep working on those. And then the case in wind, that was not -- it did not impact us. It impacted -- it was another supplier into some of our OEMs that was unable to keep up with the demand, so kind of slowed things down a little bit.

And I think that's just going to continue until we get the disease really under control. So we just keep pushing back. India has been an issue with getting parts out of India. I think you've seen that logistics are an issue. So the supply chain is -- requires extreme management right now. And our teams are doing a great job taking care of that.

And then the inventory in the channel, we think, is in pretty good shape. I think I've said it before that we didn't see a big buildup or cutback in our inventories, maybe a little bit of a reduction in inventories last year but not tremendous. So I don't think there's a big potential pop in demand because of trying to build back inventory in the channel. And our supply and our ability to supply has gotten so much better as a result of our business system implementations that I don't think our channel partners feel like they need to have excess inventory. Our demand has been very consistent and very good. So I think we're -- our supply has been exceptional for them.

Okay. And then sub 3.2x net leverage, you're going to be below 3, which is in the target range as you get middle of the year. Maybe talk about how you guys are thinking about when you start pivoting, what cash usage looks like, whether you've become a little more balanced in debt pay down and playing a little more offense. And I suppose the related question is, how are you guys preparing for that swing? And are you starting to dip your toe just to see what's in the channel from an M&A perspective? Or is it just too early at this point?

Well, I think that was a huge highlight for us was that the debt pay down and the delevering of the balance sheet. And I think you saw -- I think last time we said we thought we'd be sub 3.5%. Sort of be sub 3.2% was a huge accomplishment for us and, I think, a real highlight. And then what I would have told everybody is we're right now working on really a portfolio analysis and what end markets do we want to go after, what technologies do we want to add to the products that we have and -- to better serve our customers. And it's -- and that work is coming along. And I think by the -- certainly, by the second half of the year, we will have a very good road map as to where we would like to have inorganic growth.

Now whether there's anything that's actionable is always a question mark, but I think we'll have that road map pretty well detailed by the second half. We'll have the balance sheet in good shape, and certainly by the end of the year, we should be ready to start to move on some acquisitions again and -- provided that we can find the right partners and find some things that are actionable.

Your next question comes from the line of Scott Graham with Rosenblatt.

I had a couple of questions for you. I was wondering on the conversion of orders into shipments. Has that tightened up because of demand? Has it spread out a little bit, lengthened a little bit because of concerns over COVID? Can you maybe kind of characterize what customers are doing?

I would say that from the customer standpoint, their demand has not changed significantly. They have not asked us to do anything either faster or slower than they have in the past. I think what we're starting to see in some areas is a little bit of a lead time extension from suppliers. So planning the demand is getting a little bit more difficult in some areas. It's not across the board. It's in some specific areas, but we have seen some extensional lead times from suppliers.

And that's one of the -- we've just got to plan for that and make sure we can predict when we're going to get it and when we're going to be able to satisfy the customers' demand.

Got it. And then also, the semi side of factory automation and specialty, you said that, that was down this quarter. What do you attribute that to?

Well, it's pretty lumpy for us. And I think I wouldn't read much into that, Scott. I think if we look at semicon and look at what the expectations are, that's expected to have growth in the mid-single digits this year and growth in the mid-single digits next year. And I think when we think about what's going on to drive that growth, that that's realistic. So I would just read it as a lumpy business. In each one of our segments -- we've got so many different segments of markets that we serve that I'm not reading a lot into it.

Okay. Got you. I was also trying to maybe -- would like to get underneath your comment in the press release, Christian's comment about this as well that your guidance is -- you're kind of starting off the year conservatively, which is great, and, I think, understandable. I guess 2 questions on that. One would be what do you need to see to upgrade your guidance? I mean we know which are your bigger end markets. I'm assuming that an upturn in a couple of those maybe, but maybe that would be one question. But then I would also follow that on by asking this as kind of like counter to that because when a CEO calls a year a transition year, I wanted to just try to understand what you mean by that, Carl. I do know that there are a lot of moving parts, decisions about cost put-backs, timing and all of that -- get all of that. But was -- did you mean more to it than that? There's just like a lot of moving parts.

What I meant really was last year was an extraordinary year, right, with COVID. I think we saw -- in May, our incoming order rate dropped by like 25%. Then it recovered by the end of the year. And so this year, I think, there's a lot of uncertainty. So you asked what are the drivers and what's going to make us feel better about the future. Well, one is, if the vaccine rollout starts to go really well, and I'm way at the bottom of the list. If I can get my vaccine in March, I'm going to feel a whole lot better than if I get it in September or October. So that's one thing.

If we start to see CapEx spending from some of our customers in some of the end markets that our customers serve, then that's going to make me feel a whole lot better. If we start to see the logistics in the port in L.A. and then Hong Kong start to free up and start to see stuff moving again whenever we need it, that's going to make me feel a whole lot better. If we start to see people going back to the hospital and getting elective surgeries, knee replacements and hip replacements and things that drive that elective surgery, if we start to see people get excited about getting out of the house again and traveling and doing some things that are going to drive the general economy, ramping up restaurant activity and just getting the general economy going, then I'm going to get excited.

So what I meant as a transition year is those things aren't certain yet. So I think we've got probably until the back half of the year before we get through some of that uncertainty. So it's not a transition year for us internally in the company, it's more a transition year in the economy, in my mind. And then I think, my belief is that 2022 is going to be an awesome year for the industrial world. It's going to be a blowout. So that's what I mean by a transition. We were coming out of this 2020, which was awful and just really tough to manage through. I think the stress level on everybody has been terrible. 2021 is this transition year where we start to get back to normal life. In 2022, we are off to the races. We're going to have pent-up demand from lots of different industries. It's going to be a super year. So I think we're right in the -- 2021 is that middle of the year there.

Christian, did you want to add something?

The second part of your question, where is there potentially upside to the guide? So I think, as Carl referred to earlier, potentially, if the medical market recovers faster than we think in terms of surgical, the need for surgical equipment. If China -- the truck market doesn't deteriorate as we currently assume in the guide in the second half of the year. Turf and Garden could have some upside. Our wind business could have some upside. Oil and gas, as Carl mentioned, if the oil price stays above $60, maybe we'll see -- we've already seen a modest increase in rig count, but maybe we'll see some more CapEx spend in that area and maintenance spend. But it's just too early to call because it's all in the second half. That's pretty far away. So we want to continue to be cautious.

And you've known us long enough, Scott, that if mining and oil and gas and ag and some of those latest or heavier duty equipment businesses come back, those are really profitable for us, too.

Yes. Sure. But it is also a good thing that you're not counting on those.

(Operator Instructions) Your next question comes from the line of Joel Tiss with BMO.

There's been a lot of questions about the end markets and the guidance and all that. And I just wondered if you can give us a little sense of maybe some of the lessons you learned through 2020 that -- how to maybe accelerate some of your structural margin changes. And I'm not so much thinking about '21, but maybe '22, '23, '24, '25? And is it more investment that's needed to really drive kind of customer connectivity and capabilities in new products? Or is it more about like reducing costs and layers of management? And just any little things you've learnt?

Well, I think, Joel, it's going to be a mix. We're -- I think we've talked about the organizational structure of the company. And as we mature, how we think we can simplify that some, and that will reduce the cost over time. And facility consolidations, we've demonstrated those can have a huge impact. So where those opportunities exist, we'll do that. And then I think the real driver is, the work that we're doing on what are the end markets and what technologies do we want to go after that are more profitable and have higher growth, that are really going to drive the performance of the company.

So in my mind, there's 3 factors: one is getting the economy to recover and having some help from the top line leverage that we get because we get great top line leverage; then driving us into the end markets and applications that we want -- that we think can be more profitable. It can be very similar to what we do today, niche engineered products, and then working on those business simplification projects to take some cost out.

And that leads me to the next question, which is, in terms of acquisitions, your balance sheet is pretty well reloaded. And I wondered, are you thinking more sort of like strategic tuck-ins or more transformational? And really, the secret, whatever, the part of my question that's unspoken, not anymore, is just that I'm trying to gauge like how long are you willing to wait for the right deal? Are you thinking more like second half of 2021 that you'll look for smaller things or maybe wait a little bit longer and do bigger transformational?

Yes. No, Joel, I mean you know the space well enough that there's really good companies that are in the $20 million to $50 million range, which would be nice tuck-ins and then there's some that are in the $50 million to $200 million range that would be really nice additions to our business. There's not that many that would be transformational like we did with A&S deal. So that, I think, might come every 10 years, although that was a pretty effective transaction for the business. So that was terrific.

So I would expect it will probably be on the lower end initially just until we get the balance sheet in even better shape and we nurture some of the pipeline. And then I think the sweet spot for us is probably in that $50 million to $250 million range, where it's big enough to make a difference, but not so big that we're taking a huge risk.

And I think if you look back at the deals that we've done, they've been very much in line with what we already do today. So I'm a big believer in getting involved in businesses that you know and understand. And if you don't know and understand it, and the markets don't overlap, it's just too much risk. So I think that's probably -- we're going to stick to our knitting, and probably that $50 million to $250 million range would be ideal for us.

And there are no further questions left in queue at this time. I turn the call back to the presenters for any closing remarks.

Okay. I just would like to thank everyone for joining us today. And we'll once again be on the virtual road this quarter, and we look forward to engaging with many of you in the months ahead. So thank you, again, for your time.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.