Timken Co (TKR) 2019 Q4 法說會逐字稿

Good morning. My name is Anita, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's Fourth Quarter Earnings Release Conference Call. (Operator Instructions)

Mr. Frohnapple, you may begin your conference.

Thanks, Anita, and welcome, everyone, to our fourth quarter 2019 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.

Let me also remind everyone that we will be talking about EBITDA today as our new operating metric. As you probably saw, we posted an 8-K last week with EBITDA detail for relevant prior periods.

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 the call up 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 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 thank you for joining us today. Our fourth quarter revenue and cash flow were in line with our expectations and concluded a record year for Timken. Our margins in -- our earnings for the fourth quarter, however, were below our expectations. First, for revenue, we continued to see strength in renewable energy, marine, aero and rail, but that was more than offset by weakness across a wide range of markets, in particular, heavy truck, off-highway equipment and then broadly across North America. This produced an organic decline of around 4%. Acquisitions contributed 3.5%, while currency was unfavorable, which produced a net decline of 1.5% in the quarter.

In regards to margins and earnings as compared to our expectations, mix was not as favorable as expected, and we had higher costs across several areas of the company. We don't expect these higher costs to continue into the first quarter. The mix was largely attributable to North America being down double digits year-on-year. The bottom line was also impacted by lower production levels as we reduced inventory again in the quarter.

As expected, the acquisition of BEKA was also dilutive to margins. We anticipate that earnings and margins will significantly improve sequentially in the first quarter, and both Phil and I will talk more about that through our comments.

While we are not satisfied with Q4 earnings, Timken performed very well for the full year of 2019, and I want to spend time on some of the highlights. We grew revenue by almost 6% in total, including a third straight year of positive organic growth and that was despite weakening industrial markets and another year of significant currency headwinds. We expanded EBITDA margins by 110 basis points on a modest organic growth.

We also continued to build scale in markets outside the U.S., and we widened our product range organically and through acquisitions. More specifically, the acquisitions of Cone Drive and Rollon from 2018 contributed slightly ahead of plan levels and were accretive to both margins and EPS. Strong growth in solar markets as well as modest year 1 synergies more than offset currency and industrial market headwinds. Synergies will increase this year and both businesses enhance our portfolio, both financially and strategically. We also completed the acquisitions of Diamond Chain and BEKA Lubrication, and I'll speak more to those shortly.

As always, we drove our operational excellence initiatives across the company. We provided industry-leading service levels to our customers with outstanding quality and reliability in our products. We managed price effectively, lowered working capital levels, and we're going into 2020 with a very active and full pipeline of cost-reduction initiatives across the company.

We remain focused on enhancing our customer experience and investing in projects that advance our product vitality, engineering leadership and digital platforms. We're always committed to operating responsibly with ethics and integrity as we demonstrated in our 2019 Corporate Social Responsibility report. We also delivered record safety performance in the year.

We delivered record earnings per share of $4.60, up 10% from 2018's record. We increased our full year dividend payout for the sixth consecutive year. We continue to reduce our pension and post-employment obligations and we delivered a step-change in cash flow of $410 million in free cash flow and ended the year with a strong balance sheet. In total, 2019 was an excellent year for the company. Today, Timken is stronger and more diverse, and we are well positioned to continue to perform in 2020.

Turning to this year. There remains a lot of uncertainty in our end markets, which is now being compounded by the coronavirus situation in China, which I'll speak to first. We are monitoring the coronavirus situation very closely. We do not have operations in Wuhan, the epicenter of the virus. We have precautions in place to protect the health of our employees and are abiding by the guidance established by the Chinese government as well as the World Health Organization. Over the Chinese Lunar Holiday, the majority of our operations were shut down for planned holidays, which were then extended by 1 week per government recommendations. Right now, we plan to restart operations next week per the government authorization. If the disruption is only a week or even if it extends another week, we would expect a nominal impact on results. We have not factored in a longer disruption at this point into our outlook for the year, and we'll continue to monitor the situation and provide an update if the impact is greater than currently anticipated.

Consistent with our December guidance, we're planning for revenue to be between down 2% and up 2% for the full year driven by a 3% contribution from 2019 acquisitions. For the first quarter, we expect to start the year down from last year but up mid-single digits from the fourth quarter. We're then planning for normal seasonality, which would be another modest sequential increase from the first quarter to the second quarter and then a slight decline from the first half to the second half. That would result in organic growth flattening out in the second half of the year on much lower comps.

We expect continued weakness in Mobile, while Process is expected to be up slightly. In Mobile, we're planning for continued significant declines in off-highway and heavy truck, while automotive is expected to be down slightly. In Process, we expect continued strong growth in renewable energy and industrial services, with distribution down modestly. We believe we have taken a middle of the road to slightly cautious approach to market conditions, and we do not have a second half strengthening factored into the guidance. Should that happen, we'd be in excellent position to capitalize on better-than-planned market conditions. And regardless of short-term market demand, we continue to pursue our outgrowth initiatives by focusing on increasing our global penetration in attractive markets.

Our earnings per share range off the planned revenue is between $4.25 to $4.65. The implied compression in EPS and margins on flattish revenue is due to the acquisition revenue coming in at lower margins and not fully offsetting the decline in organic revenue as well as a slightly weaker mix. As mentioned, a modest interruption from the coronavirus is contemplated in that guide, as is modest contribution through the year from capital allocation. We're planning for another strong year of cash flow, similar in magnitude to 2019 levels at over $400 million.

We expect price to be modestly positive, call it, roughly 50 basis points and price cost to be slightly higher than that. From a cost-reduction standpoint, we have an active pipeline of footprint and productivity initiatives. We recently announced the relocation and consolidation of our Diamond Chain operation into existing operations. And we continue to drive cost-reduction projects across our global bearing footprint.

From a capital allocation standpoint, while we're always actively working on our pipeline, we are focused on integrating the Diamond and BEKA acquisitions and getting the margins in these businesses up to the company average. We do not anticipate any M&A activity in the first half of this year. And strong cash flow expected for the full year will provide opportunity for buyback, debt reduction or possibly second half M&A.

Before I wrap, I'll provide a little more color on the 2 2019 acquisitions of Diamond and BEKA. Both businesses have been impacted by the industrial market slowdown, Diamond more so due to heavier North American concentration of the sales. On Diamond, we continued to implement synergy cost reductions in the fourth quarter, bringing our implemented cost savings in the 9 months since the acquisition to over $3 million on an annualized basis. This quarter, we announced the long-term plan to consolidate manufacturing facilities. We expect to incur some cost for that activity this year and then to see net benefits beginning next year. Adjusted for the market slowdown, after a slow start, Diamond is performing in line with expectations.

On BEKA, we anticipated a weak first 2 months, and they were even weaker than we anticipated. We expect a step-up in performance from the fourth quarter to the first quarter and then continued sequential improvements through the year as we drive improvements in the business and synergies with Groeneveld. It's still early, but the business appears to be what we expect it to be in regards to market position, product technology and potential for margin expansion and growth. We will continue to provide updates through the year.

In summary, we are pleased with our full year 2019 results. We advanced our strategy while delivering record financial results. We continue to take a balanced approach to pursuing growth, margins, returns and cash flow. And we remain focused on driving value through outgrowth, operational excellence and disciplined capital allocation, all in pursuit of the long-term financial targets that we rolled out in December.

I'll now turn it over to Phil to take you through more detail.

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 13. The fourth quarter capped a record year for Timken despite a relatively soft industrial market environment. And you can see a summary of our results for the quarter on this slide.

Revenue for the fourth quarter was $896 million, in line with our expectations in total and down about 1.5% from last year. We delivered an adjusted EBITDA margin in the quarter of 16.3% and adjusted earnings of $0.84 per share, which compares to last year's fourth quarter record of $1 per share. And as Rich mentioned, earnings came in below our expectations due to some factors I'll discuss further in a moment. And finally, we generated strong free cash flow of $138 million in the quarter, which drove our free cash flow above the $400 million mark for the full year.

Turning to Slide 14. Let's take a closer look at our fourth quarter sales performance. Organically, sales were down about 4% in the quarter, with most of the declines coming in Mobile Industries. Recent acquisitions added 3.5% to the top line as we benefited from Diamond Chain and 2 months of BEKA, while currency translation continued to be a headwind, negatively impacting revenue by around 1%.

On the right-hand side of this slide, we outlined organic growth by region, so excluding both currency and acquisitions. As you can see, we saw strong growth in Asia and modest growth in Europe, while we were down in the Americas. I'll provide some additional color on regional performance as I go through the segments.

Turning to Slide 15. Adjusted EBITDA was $146 million or 16.3% of sales in the fourth quarter compared to $163 million or 17.9% of sales last year. The decline in adjusted EBITDA was driven mainly by the impact of lower volume and higher operating costs in the quarter, with these headwinds seen in both the manufacturing and SG&A buckets. Currency was also slightly negative. On the positive side, we saw favorable pricing once again in both segments, and we're continuing to benefit from lower material and logistics costs.

Let me comment a little further on manufacturing and SG&A. Our manufacturing performance in the quarter versus last year was impacted mainly by lower production volume as we work to bring inventory levels down. SG&A was impacted by targeted spending to support growth initiatives in areas like renewable energy as well as other increases year-over-year, offset partially by lower incentive compensation expense.

On Slide 16, you'll see that we've posted net income of $114 million or $1.48 per diluted share for the quarter on a GAAP basis. Special items in the quarter amounted to roughly $49 million of after-tax income or $0.64 per diluted share with the largest items being pension and OPEB remeasurement income and the reversal of a deferred tax valuation allowance in Germany. On an adjusted basis, we earned $0.84 per diluted share in the quarter. Note that our share count is down about 1% from last year due to ongoing share buybacks.

The valuation launch reversal is actually an acquisition synergy as we are now able to use historical Timken tax NOLs in Germany to offset future income from recent acquisitions like BEKA and Rollon. Excluding the valuation allowance reversal and other discrete items, our adjusted tax rate in the quarter was 24.3%, bringing our full year rate to 26.5%. For 2020, we're planning for an adjusted tax rate of around 27%, up slightly from 2019 and reflecting our expected geographic mix of earnings.

Now let me touch a little further on what caused this shortfall in earnings in the fourth quarter versus the implied guidance we provided previously. It was driven by 3 main things. First, we had some higher-than-normal expenses late in the quarter, including employee medical claims and other accrual true-ups. These expenses were individually pretty small, but they all went the wrong way in the quarter and collectively added up to just over half of the variance versus what we expected. The other 2 items were BEKA performance and unfavorable mix, which were also headwinds relative to our prior guidance. We expect profitability to improve from fourth quarter levels moving forward as we don't see the higher expenses persisting, and we're planning for BEKA performance to improve.

Now let's take a look at our business segment results, starting with Process Industries on Slide 17. For the fourth quarter, Process Industries sales were $451 million, up slightly from last year. Organically, sales were down 1.8% with lower revenue in industrial distribution, marine and heavy industries, offset mostly by strong growth in renewable energy and positive pricing. Currency translation was unfavorable by 1%, while acquisitions added 3.5% to the top line in the quarter.

Looking a bit more closely at the markets. Industrial distribution revenue was down organically in the quarter as lower demand in North America more than offset growth in Asia. Marine sales declined due to the timing of releases and production on our long-term contract with the U.S. Navy. We continue to have a strong backlog in this business. And heavy industries revenue was also down due to lower demand in power generation, metals and other markets.

On the positive side, we experienced strong revenue growth in renewable energy, mainly in Asia, reflecting continued positive market momentum and share gains. For the quarter, Process Industries EBITDA was $97 million. Adjusted EBITDA was $98 million or 21.8% of sales compared to $109 million or 24.4% of sales last year. The decrease in adjusted EBITDA margin versus last year was driven by the impact of lower volume, unfavorable mix, higher operating expenses and the impact of BEKA, offset partially by favorable pricing.

Our current outlook for Process Industries is for 2020 sales to be flat to up 4% in total. Organically, we're planning for sales to increase about 1/2 of 1% at the midpoint, reflecting growth in renewable energy and industrial services, offset partially by a decline in industrial distribution. We expect price/cost to be positive for the year and for Process Industries adjusted EBITDA margins to be slightly below 2019 levels driven mainly by mix and the impact of BEKA.

Now let's turn to Mobile Industries on Slide 18. In the fourth quarter, Mobile Industries sales were $445 million, down 3.6% from last year. Organically, sales were down 6.3%, reflecting lower shipments in off-highway and heavy truck partially offset by growth in rail and aerospace as well as the impact of positive pricing. Acquisitions added 3.3% to the top line in the quarter, while currency translation was unfavorable by almost 1%.

Looking a bit more closely at the markets. In off-highway, we were down in all regions and across the major subsectors, including agriculture, mining and construction. Heavy truck was also down broadly, with the largest declines in Asia. Rail was up in Asia and Europe and roughly flat in the Americas. And finally, aerospace was up solidly in the quarter driven primarily by defense-related shipments.

Mobile Industries EBITDA was $58 million in the quarter. Adjusted EBITDA was $60 million or 13.5% of sales compared to $65 million or 14.1% of sales last year. The decrease in adjusted EBITDA margin of only 60 basis points year-on-year reflects the impact of lower volume, higher manufacturing expenses and the impact of BEKA, partly offset by favorable price/mix and lower material and logistics costs. This represents a decremental margin of less than 15% on an organic basis year-on-year. So good operating performance from Mobile Industries in the quarter.

Our outlook for Mobile Industries is for 2020 sales to be flat to down 4% in total. Organically, we're planning for sales to be down 5.5% at the midpoint compared to 2019. This includes lower shipments in off-highway, heavy truck and automotive. We expect positive price/cost for the year, and we expect Mobile Industries' adjusted EBITDA margins to be below 2019 levels due mainly to the impact from lower organic revenue and related manufacturing utilization. We also expect to incur some costs for our ongoing manufacturing footprint initiatives.

Turning to Slide 19. You'll see we generated strong operating cash flow of $195 million during the quarter. After CapEx spending, fourth quarter free cash flow was $138 million. Our full year free cash flow of $410 million was up almost $200 million from last year and represents about 115% of adjusted net income for 2019. The year-over-year improvement was driven primarily by higher earnings and improved working capital performance.

We ended the quarter with a strong balance sheet. Net debt to adjusted EBITDA was around 2.1x at December 31 so near the middle of our 1.5 to 2.5x target range. This sets us up well for 2020.

You can see some highlights with respect to capital allocation at the bottom of the slide, including the payment of our 390th consecutive quarterly dividend in December. We also repurchased over 150,000 shares in the fourth quarter, bringing the total for the full year to 1.4 million shares.

Let's turn to the outlook with a summary on Slide 20. As you know, we've previously provided preliminary guidance for 2020 back in December. We're still planning for 2020 net sales to be down 2% to up 2% in total versus last year or roughly flat at the midpoint, but the composition has changed slightly. Specifically, we now expect currency translation to be only a 50 basis point headwind at the midpoint, which is slightly better than before. And organically, we now expect sales to be down roughly 2.5% at the midpoint, which is slightly worse.

Acquisitions should add about 3% to the top line for the year. This is unchanged and includes 10 months of BEKA and 1 quarter of Diamond Chain. On the bottom line, we now expect adjusted earnings per share in the range of $4.25 to $4.65, which is down slightly at the midpoint, both from our preliminary guidance and versus last year.

The midpoint of our 2020 outlook implies that corporate adjusted EBITDA margins for the year will be down roughly 50 basis points from 2019 driven by lower organic volume and unfavorable mix, including BEKA, offset partially by positive pricing and lower material costs. I want to reiterate that we are on track with the BEKA integration and expect profitability to improve in 2020 as we realize synergies. However, it will be dilutive to EBITDA margins for the year.

So to summarize our current guidance versus what we had out there before: revenue was unchanged in total, but earnings are slightly lower, reflecting the impact of slightly lower organic revenue and unfavorable mix along with a slightly higher tax rate. We estimate that we'll generate strong free cash flow of around $425 million in 2020 or over 120% of adjusted net income at the midpoint. That would represent a 4% improvement versus 2019. Our cash flow outlook assumes CapEx spending of around $160 million or just over 4% of sales for the year. Also, our guidance assumes that we will end the year with net debt to adjusted EBITDA near the middle of our 1.5 to 2.5x target range.

And finally, turning to Slide 21. I want to remind everyone of the long-term financial targets we provided at our recent Investor Day. We remain confident in our ability to achieve these targets, which we believe will drive significant shareholder value over the next 5 years and beyond.

In closing, I'd like to commend our more than 18,000 dedicated Timken associates for delivering record performance in 2019. We look forward to delivering solid performance again in 2020.

And with that, we will conclude our formal remarks, and we'll now open the line for questions. Operator?

(Operator Instructions) And we'll take our first question from Joe O'Dea with Vertical Research.

First question, could you expand a little on the mix comment and the degree to which that's largely regional or other things that you saw from an end-market perspective? And then related to that and the cost comments and where you stand on sort of the 3 areas that you called out, as we get into the first quarter, should we think that the higher-than-normal expense items in the fourth quarter are now behind you? And are you sort of more on track on the BEKA margin side of things?

Okay. That was quite a few questions mixed in there. Let me go backwards, I think, on that and hit the BEKA margin question first. So I'd say our biggest issue with BEKA was, frankly, closing on the business on November 1. So we really had the worst 2 months of the year for BEKA as well as most businesses within Timken. November and December would be a couple of the weakest months.

So then on top of that, you're taking what would be, I'd say, some normal integration and transaction closing activities and cost and now amortizing them over the 2 weakest months of the year versus a full quarter and/or a better quarter. So that was a big issue. So I think we automatically get a significant step-up in those margins from the integration and transaction activities being behind us and then seasonality and then having a full quarter versus 2 months.

I was just over there this last month and feel really good that we are building a great market position in a good market. I would say, expectation, though, is that it's probably going to be bumpier this year, but we definitely don't expect the kind of results we saw in the fourth quarter for -- in 2020. And we're already making progress on structural cost reductions in that business in addition to other synergies. I think the difference in -- I think we've been clear on this from when we bought it, very different -- comes in with a very different financial profile and management of the business in regards to information management systems and focus on the things that come out of those systems, of productivity and cost and margins and profit by geography, et cetera, than what we -- the other businesses that we've acquired recently. But we have done this before. Lovejoy was similar and other family-owned businesses.

And after spending -- the management team's got a good line of sight on it. And I think, again, it's going to be a little bit bumpy this year, but it's going to be -- it is sequentially improving through the course of the year. And it's going to be a really good acquisition, I think, by the time we get to the end of this year.

So then I'll jump to North America. And I think -- so that was the first part of your -- or your mix, which again, I'd say 2 things on mix in the fourth quarter that both also have a little bit of an impact to the outlook this year, and that would be North America. North America was down double digits in the fourth quarter and then also distribution, I'd say, globally, but a little bit of that within North America as well. And both of those hit our mix a little bit.

On the North America part of it, I think, encouraging. The recent ISM numbers being the best they've been in some months is encouraging for the outlook. I think the weakening of the automotive industry last year had some ripple effects on some other industries within our space, and then probably even the 737 MAX probably is having some -- had some ripple effects as well. But I think we've got a conservative look into our guide for North America and distribution for this year, and we'll see how that plays out. And then I'll let Phil comment on the cost side.

Sure. Yes. So on the cost, Joe -- I appreciate the follow-up question. So as I went through, I mean, we would expect these expenses to subside as we move into the first quarter. And it was really, as I said, a combination of things. At the end of the year, you're always looking at accruals and that kind of thing. They can typically go in either direction. This time, they all went the wrong way on us. Individually, very small, the medical claims, as I mentioned, as well as some other accruals. So I would expect as we move forward, a more normal run rate on those items. And so I would expect a bump-up we saw in the fourth quarter, which affected our margins and obviously affected the earnings to subside and get us back to more of a normal run rate going forward.

And now we'll take our next question from Steve Barger with KeyBanc Capital Markets.

This is Ken on for Steve. First question is just for Process, guys. If you could just tell us how you're thinking about OE sales versus distribution. Understood that industrial distribution probably went the wrong way for you in the quarter, but just how you're kind of looking at that industry within your 2020 outlook. And as a follow-up to that, just any color on the state of inventory and the distribution channel that you're seeing today.

I'd say, Process Industries revenue is largely being driven by renewable energy, wind and solar, which is predominantly an OEM market for us today, heavily weighted to the OEM market for us today. For the outlook, we do have significant growth in industrial services, which would be more end-user base.

And then on the distribution side -- so if anything, the mix would be shifting a little heavier within process to OEM versus aftermarket in '19 as well as '20. And on the distribution channel side, I would say, the inventory came down proportional to sales, but sales were not -- didn't move that much. So I think it's going to play out with our guide. We've got a little bit of inventory correction baked in there for the reduction in sales. And if there's a strengthening in the market in the second half, I think we'd actually see a compounding impact of that to some degree.

So I think the -- our view would be the inventory is roughly in line in the distribution channel. There was not big movement there last year, but there also wasn't big movement in the top line. We're definitely -- switching subjects a little bit, but definitely in the heavy truck and off highway side, on the OEM side, we experienced significant destocking in the second half of the year in the OEM channel, where our revenue to our customers was significantly below their production rates as they took inventory out of the channel.

Okay. And then just switching topics here. I mean if -- I understand that you're taking or you believe you're taking the middle-of-the-road approach to guidance in terms of conservatism. But if demand starts to work against you and, let's say, revenue falls towards more of a high single-digit versus mid-single digit, any way you can kind of help us think about the operating leverage profile for both segments? What could decrementals really look like for both of those segments, if revenue starts to decline at a more accelerated pace than maybe what you expect?

Yes. Thanks, Ken. I'll take that. This is Phil. So good question. I mean, obviously, one thing I wanted to point out, so we do have a pretty wide range on the guidance of 2% in either direction on the revenue and $0.40 on earnings. Obviously, with the uncertainty out there, we felt it was prudent to keep a slightly wider guide to start the year. And obviously, we look to narrow it as we move through the year.

I think your question really gets to the heart of, hey, what would move us to the low end of that guide. Obviously, if markets turn negative on us, that would move us to the low end of the guide. From an operating leverage standpoint, I think the implied -- the guidance that we have out there now at the midpoint would have a pretty good organic decremental in -- it's difficult to look at the organic -- or the decremental in total because the acquisitions can kind of cloud it a bit. BEKA is clouding it a bit in 2020. But organically, on the decline of the 2.5% at the midpoint, it's an organic decremental of around mid-20s, and which I think is what we've talked about before in an environment like we're in today. I mean, if we were to take another step down, obviously, we'd have the impact of the lower volume and the manufacturing utilization. And we'd be likely cushioned a bit by material costs and incentive compensation and things like that.

So would expect to run attractive incrementals probably a little worse than the 25 to mid-20s that we have in here on the 2.5% midpoint, but would still expect to run attractive incrementals relative to what we've done in the past.

And just to clarify, that mid-20s comment is on EBITDA given that's your operating metric today, correct?

Yes. On EBITDA at the midpoint on the organic revenue decline, correct.

And now we'll take our next question, Ross Gilardi from Bank of America.

Just on the SG&A and the costs not repeating in Q1 versus Q4. Could we just talk in absolutes a little bit? I mean, your SG&A equated to, I think, $152 million in the fourth quarter. And prior to that, well, kind of run in the $140 million to $150 million range. It was $140 million in the first quarter of 2019. And your revenue, at least organically, is going to be down a little bit in the first quarter of 2020. So do we go back to kind of $135 million to $140 million run rate in Q1? Or can you just help us on the raw dollars a little bit rather than just the qualitative view?

I'll just start high level. I think if you look at the full year of '19 SG&A, what we're looking at for the full year of 2020, we're -- acquisition aside, we're looking at a pretty flattish SG&A for the full year.

Yes, right. Right. Yes. And I think when you look at the SG&A, in total -- I mean, a couple of things to keep in mind. The acquisitions do impact the SG&A line. So when you look at the SG&A line on the income statement what we're finding with a lot of the acquisitions we've done, BEKA included, they'll come in with maybe more attractive gross margins but higher SG&A. So that does mix that up a little bit, if you want to look at it that way.

Now there's opportunity in there relative to BEKA as we look to integrate and drive synergies. Because if we look at core SG&A in the quarter, we would have said up about $6 million year-on-year. And that would have been -- we're still investing in Process Industries, the other areas where we're growing like renewable energy. And obviously, we had year-on-year increases for normal inflation, offset by the incentive comp.

So looking ahead, as Rich said, we'd expect structural SG&A to be a pretty flattish move in '19 to '20 all-in. But we'll continue to invest for growth, continue to manage other parts of the business very tightly and continue to manage the SG&A well. But as we do M&A, and like we've done M&A in the last couple of years, that will push the SG&A dollars up and push, in many cases, the SG&A margin up with it.

Well, just from where we sit, we can't tell how much of this is core SG&A versus acquisition-related SG&A. I'm just trying to get a better sense for how far you start the year in the hole for your EPS guide. You've told us that you're going to be up mid-single digits sequentially in the first quarter, but that SG&A number is a huge swing factor in determining where you end up in Q1. So can you have -- I mean, you can give all these moving pieces, but I don't know that I totally understand what you're saying. Is SG&A going to be a $10 million to $15 million swing factor from Q4 to Q1 in 2020?

No. It wouldn't be that high sequentially Q4 to Q1. But when we talk about the items that hit us in the fourth quarter, I said it was about half or a little bit more than half of the miss relative to our expectations. So it would have been, call it, $0.06, $0.07 that we'd expect to subside moving forward.

But if I look at the full year -- and just to give you a little bit more color to be as clear as possible, if I look at the full year of SG&A, I mean, I would say more than -- taking the special items out, I would say, more of the -- more than -- it was more than accounted for by acquisitions coming in at -- with the SG&A to come in. So excluding the acquisition, the SG&A was structurally down in '18 and '19.

Okay. I'll follow up afterwards. The -- your MAX exposure, I mean, you touched on it briefly. I mean my understanding is your SG&A -- sorry, your aerospace business, aerospace defense is really more towards the rotorcraft in defense and whatnot versus commercial. But can you help us think about what your MAX exposure is? And what you might have buried in your general engineering and/or industrial distribution segment as sort of perhaps indirectly exposed?

So yes, I'm glad you asked that because it's like creating confusion. Our direct exposure to the 737 MAX is we are -- we do have content on it, but it's immaterial to, call it, $1 million of revenue. So my comment more was somewhat same on the automotive. Our automotive business held up pretty well last year from the mix we're in and the platforms we're on and the platform winning rate that we had. But both of that, I think, had some impact on North America.

So indirectly, I would just -- whatever impact that you think the 737 MAX is having on U.S. industrial production, ISM-type numbers, is obviously that is what has a ripple effect through our -- so I just -- I referenced that as one other element that I think between that and the automotive situation could be some upside this year.

Okay. And then just lastly, on heavy industry and in the mining, construction and ag. You didn't move it in terms of the buckets on your slide, but your bucket is down high single digits and above. So obviously, it's an open-ended range. Have you actually dialed back your expectation for that end market over the last 6 weeks given what we learned from one of the big bellwether companies? Or has it -- do you still have the same number plugged in there that you would have had in mid-December at your Analyst Day?

I would say the heavy truck and off-highway are similar and have not moved materially positively or negatively with the last 6 to 8 weeks.

Did you have visibility on the production cuts that are actually happening in the early part of 2020? Do you feel like based on what you -- everything you might have learned in the last few weeks when you gave that initial guide?

Yes. I would say we have not seen any changes with that to our outlook. And again, I think where we sit in the supply chain, we felt more of that pain last year. Because of we get cut on the inventory stocking ahead of those production cuts for -- would be the normal cycle.

So I think we felt a lot of that pain. And obviously, we're really starting -- both those markets are starting the year at a much lower run rate. So that's really what's driving the negative high single-digit category that they're in versus a continued decline from where we're at today.

And now we take our next question from Chris Dankert from Longbow.

I guess first off, Asia up [11%] in the quarter, a nice result. But moving into 2020, there's a lot of uncertainty. I assume that's significantly weaker in the guide. Just give us kind of some way to think about Asian growth in the context of your guidance here for the year.

No. I'd say it's still strong. And to my earlier comments, we're looking at the coronavirus situation being more of an immediate issue, but there'll be efforts, assuming it deescalates, for our customers as well as us to make up that lost production of a week through the course of the year. So I would say, again, that's driven mostly by the local wind energy business that we do there, some solar as well, though the solar is more of a global play for us than just a China play. But even the general industrial is much stronger than what we would see in North America.

So leading up to the Lunar Holiday in China, we got off to a very good start to the year in China and very strong backlog in renewable energies.

Okay. But the expectation would be for some level of positive growth still in 2020 then?

Yes. And then I'll comment on our second biggest market in Asia as well, India. Tough year last year in India, heavy truck and I'd say, general industrial. And similar comment to what I said that market globally, we took some pretty significant hits in the second half of that last year with inventory destocking. So that looks significantly better this year for the full year than last year as well. Although, again, start out with a lower backlog and a lower run rate to start the year. But as -- again, the -- in some of those markets it would appear, like in the heavy truck case in that, that the demand situation for us has bottomed.

Got it. Got it. And then just thinking about some of the cost-out actions. I guess you mentioned there was some of the consolidation with Diamond, but how much of this is kind of belt tightening and discretionary versus the actual footprint changes? Any detail there would be great.

I think it's some of both. And I'd say -- I wouldn't say as much belt tightening, some level of belt tightening, but more so, I would say, our general cost reduction, lean manufacturing efforts to always improve productivity and then a fair amount of things happening structurally across our footprint. We closed small -- 4 small facilities through the course of last year and consolidated them into existing operations. We've got another small facility that's been communicated that's being closed this year as well as the larger Diamond operation, which I mentioned.

We've got a lot of activity going to increase the utilization of the ABC Bearings acquisition that we made some 15 months ago now, which obviously provide us low-cost manufacturing capability for other global markets beyond India and a lot of activity happening there to improve our cost structure with that.

And then I would say, within the U.S., we have a fair amount -- a higher-than-normal amount of consolidation activity happening within our footprint. I would also say, in aggregate, that there's some costs that we're looking at for that for this year, that the bigger payday for that will actually come in 2021. We get some benefit this year, but there's also costs that we're incurring that offset some of that.

Got it. Just quick to follow up on that comment. I guess a lot of the savings could be offset by additional internal investment or can you guys stake out kind of a savings for '21 at this point or a bit too early yet?

No. I think we would be looking at a net savings for next year. You look at '19, obviously, there was a lot of moving pieces in there with price and inflation and acquisitions but very modest organic growth. We expanded EBITDA margins 110 basis points. We're looking for giving some of that back this year, but in a -- certainly, in a flat or expanding market, we would expect the net positive on that by the time you get to 2021.

Got it. Got it. And I did hear that your new IR Director is looking very much forward to all the D&A questions from everybody after the call. So just a reminder then.

That he is. Thanks, Chris.

And now we take our next question from David Raso from Evercore ISI.

On Mobile, they are down 5.5% organic for the year. Can you give us a sense of cadence. I assume it gets a little worse than the fourth quarter. We just saw the negative 6.3%. It gets worse in the first quarter, also a bit high single-digit negative in the second and then it starts to flatten out? I'm just trying to get a sense of how much pain do you take in the beginning of the year. And do you have any quarter for the year where Mobile is back to flat?

No. I would say -- David, thanks for the question. Yes, it would be certainly a more first-half loaded than back-half loaded. But I would say the guidance would assume that we would be organically down year-on-year in Mobile every quarter through the year.

But certainly, a lot of the pain in the first quarter with the much higher comp that we would have to compare against for the first quarter of '19?

Yes. Highest in the first quarter, higher in the first half and then moderating but still negative in the second half.

Okay. So for second quarter, both down pretty significantly, but not getting to flat in the third or fourth quarter at all? Okay. Just to be clear. And also the guidance reduction for the year, the $0.15 that you took out. Just to sanity check my numbers. The numbers, it looks like the 50 bps of organic is worth maybe $0.07. The higher tax rate -- [the 27], maybe 50 bps higher than people thought. That's about $0.03. And it also looks like BEKA, you must have lowered structurally your view of the margins for '20 to account for some of the difference. Is that a fair assessment that you lowered your...

No. No. No, we did not lower our outlook for the full year for BEKA for '20.

So I think the other item there, David would be -- so I think you got it right on the organic. You got it right on the tax. But I would say the mix got a little negative on us. And you note in the market chart, we actually moved distribution from the middle column back in December to the down mid-single-digits column. And that hasn't been -- that was, frankly, a big, big reason we took the organic downwards for that. And that was a big part of it as well.

Okay. I mean the currency will give you a couple of pennies. But it sounds like the organic, I was trying to hit it pretty hard with a 40% decremental, but it sounds like it's more like a $0.60 decremental to get the whole ball of wax to a $0.15 drawdown. So it's -- again, the mix hurt a lot. Industrial distribution is obviously very profitable, and that was a big drag.

In that regard then, what are the distributors telling you? Is this end-market weakness that's disappointing them? Or are they taking their inventories down even further? And any hint, because I know it's hard. There's -- you have better visibility in North America than other geographies, but this has been going on for a little bit. I'm just trying to get a better handle on what are they telling you on is this destock or strictly retail? And when does it end?

I would say it's their revenue, and their revenue down in the fourth quarter and a little softer to start the year and led by that and then a proportionate inventory reduction associated with it. And I think it really comes back to the North American numbers globally, the distribution business quite good.

In that regard, obviously, that's a channel, I would argue, maybe a little bit easier to get price than to OEMs. But your price/cost was pretty positive in the fourth quarter. Can you give us a 2020 view of how you're viewing from an EPS perspective, dollars, however you want to do it, price/cost for the full year, especially distribution a little weaker?

Yes. I think we factored the distribution being weaker into my comments and we're looking at price roughly 50 basis points and price/cost being a little above that. So net cost being slightly favorable as well.

Yes. So I'm just going to maybe give you a little bit more directional on that would be. And obviously, you're right, the pricing would be tilted more toward Process and Mobile, obviously, because of distribution. So positive in both segments, but is more positive or significantly more positive on the Process side.

And now we take our next question from Courtney Yakavonis from Morgan Stanley.

Just on industrial services, I think that was one of the few end markets that you commented -- or that you raised in your outlook. But if you can just comment on what's driving the pickup there.

I would say that it's predominantly Timken self-help and some platforms and wins that we are expecting through the course of 2020 in what's probably a flattish market.

Okay. Great. And I think you answered some of this in David's question. But just on the actual quarter, you said that half is higher than -- or half of the miss is higher than normal expect -- costs and then the other half was a combination of BEKA and mix. Was that equal between the 2 of them? And then it sounds like it's just really the mix out of the 3 of those that we should be expecting to carry forward through next year?

Yes. I think -- Courtney, I think that's a good way to look at it. So as we said, slightly more than half would be the expenses and of the remainder kind of split between BEKA and mix with the mix persisting as we talked about with David, with the guide -- with the $0.15 down and EPS from the prior guide for 2020. It is the -- and obviously, the organic coming down hurt us. And then we also have more unfavorable mix than we were factoring in before, which is the added factor, which kind of purges into the $0.15.

Okay. Got you. And then just lastly, obviously, the BEKA performance is weaker than you had expected. You had some challenges earlier this year with Diamond. Can you just talk maybe about any learnings from the integrations and with some of these early months being weaker than expected and how you're addressing that going forward?

Yes. I think on -- well, I think, one, we've got to be go in eyes wide open on what we have to do with the integration activities and closing and just some normal issues probably that we lose a little bit of productivity in some of these. Two, you're always going in the risk profile of M&A and making sure what you bought and are buying was properly represented in your diligence and all that. And I think in both these cases, we've confirmed that that's the case.

And then I think it varies so much, it's hard to answer. I think, specifically, Courtney, I would say, if you looked on the aggregate of the deals we've done over the last 4 years, there's probably been over half that have outperformed in the first 3 to 6 months versus underperformed. And we just happened to hit 2 that started off slower. And I would say, again, the biggest issue with that is the -- both these businesses were affected by the same sequential decline in revenue that we saw across our broader industry, and particularly Diamond being a North American-centric business. And as you look at our North American numbers, and that North American number is being weighted after the first quarter, which is when we bought them was a pretty significant decline.

So -- and that's the thing. We make these acquisitions for longer than a quarter or 2 quarters. And I think our track record has been good, and I think both Diamond and BEKA are going to continue to contribute to that track record longer term. But there is a cyclical nature of the timing of these as well.

And we'll take our next question from Stanley Elliott with Stifel.

On the M&A piece, was the comment about weighting more towards the back half of the year, is that just to give yourself a little more time to integrate Diamond and BEKA? Is it -- do you have a specific asset in mind? Or was it more just general commentary? Just trying to get a feel for that.

I would say, if left to our preferences, we would probably not want to do anything in the first half but focus on those 2. Obviously, there's an opportunistic element of this that if something presented itself that was going to be sold, whether we participated or not, we would certainly look at it. But then I would also say with what we're looking at with our pipeline today, we are not going to be buying anything in the next few months because we don't -- we aren't presented anything that way.

So I would say the answer to all your questions, I think, was yes to all of them. We would rather focus on those. So while we're working the pipeline, we're certainly not looking necessarily to pry anything loose in the short term. We want to get good line of sight to the improvement in the margin, and we'll start delivering it, which we already have on Diamond, and now we want to do that on BEKA.

And then also our cash flow tends to be a little heavier weighted on capital. I'll jump to capital allocation in general. We still, as we sit here today, do not have any burning platform to reduce leverage. We're about at the midpoint of our leverage guidance, which when you put the cash flow on top of that, if the M&A isn't there and the EBITDA progresses as we're currently guiding to, would mean we would be deploying a fair amount of capital through the course of the year. And I think you'll see us do that steadily through the course of the year, unless M&A presents itself in the latter part of the half -- latter half of the year.

And we'll take our last question from Justin Bergner from G Research.

I had a few questions to get through, I don't think they have been covered. You mentioned that capital allocation was built into your guide this year. I assume that's buybacks. Can you give us a sense as to what's built in? I mean, are you actually assuming enough buybacks to keep your net debt-to-EBITDA relatively flat or just something more modest?

Yes. I think the best way to look at it, Justin, would be, yes, we are assuming we'll end the year around the middle of our target range. So I would look at the midpoint of our guidance as if we were to do -- not do that and be all debt reduction, we'd probably be a few pennies below that. If we get all buyback, we might be a few pennies above that. If you did M&A, you might be in the middle. So we kind of took a middle-of-the-road approach on it. And if we do, we happen to be -- if we're more tilted towards buyback, there's probably a few pennies of upside there. If we did all debt reduction, probably a few pennies of downside. But it's kind of all in, call it within a nickel range around the midpoint, if you will.

Okay. And was that in your earlier guidance that you gave back at your investor event, the nickel?

We sort of talked about it, but we would have said probably not to that degree.

Okay. Understood. Secondly, is there any under-absorption built into your 2020 guide vis-à-vis your earlier guide as you sort of generate free cash flow above adjusted earnings and maybe take some inventories down further?

Yes. I think that's a great question. So I think the answer would be yes. So we -- with the lower organic outlook, we are planning to reduce inventory during 2020. So that would have been embedded, a modest -- I would say, a modest impact on the lower organic volume. And again, that is -- when I look at -- when you look at the cash flow, walking forward from 2019 to 2020, we expect higher free cash flow despite lower earnings and higher CapEx. And that's in part due to we'll be taking inventory. We expect to take some inventory down, barring any change in the outlook.

Okay. And was some of that not in your earlier guide? It's just showing up sort of in the new guide today. Or was it all in the earlier guide, that view?

I'd say it was slight because yes, we only took the organic down slightly. So it would have been included, to a slight degree, I would say.

Okay. Great. And one last question, if I may. I'm having trouble just piecing together what the adjusted corporate expenses in fourth quarter and in 2019 as a whole, adjusted corporate EBITDA. I'm not sure if you have those numbers handy and sort of a view as to how that might change in 2020. If not, I could take it off-line.

Yes. We might -- maybe we'll take it off-line with you, just so we can have the numbers in front of us, and we can kind of walk you through it.

It appears there are no further questions at this time. Mr. Frohnapple, I'd like to turn the conference back to you for any additional or closing remarks.

Thanks, Anita, and thank you, everyone, for joining us today. If you have 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.

This concludes today's call. Thank you for your participation. You may now disconnect.