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Altra Industrial Motion Corp (NASDAQ:AIMC)
Q4 2020 Earnings Call
Feb 12, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Ryan Flaim -- Investor Relations

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 US 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.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you, Ryan, and thank you all for joining us today to review our Q4 and 2020 full year results. It was abundantly clear through the events in 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, maintain business continuity and delivered exceptional financial results, all while navigating through the unprecedented circumstances we faced.

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

Now please turn to Slide 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 of $1.726 billion for the full fiscal year. Through our focus on applying Altra's world-class business system to drive efficiencies, carefully manage costs, we exceeded our bottom line expectations, grew non-GAAP adjusted EBITDA margin by a 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 cost, 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 de-levering our balance sheet. We exited the year with net debt to non-GAAP adjusted EBITDA leverage below 3.2 times, far exceeding our expectations and advancing us toward our goal of reaching the historical leverage levels of 2 times to 3 times.

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 de-levering our balance sheet. The highlights I just shared, clearly demonstrate that we are making terrific progress across these three priorities. We also remain focused on directing resources to opportunities that position Altra to grow and thrive as a premier industrial company for the long-term. This includes making targeted organic investments and innovative new technologies as well as customer collaboration initiatives that move us further up the technology spectrum.

In 2020 for example, we formed a strategic partnership with 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 develop 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 the CEO pledge for CEO action for diversity and inclusion, which is aimed at rallying the business community to advance diversity and inclusion within the workplace.

Another focus for Altra is ensuring a safe and healthy work environment, while also advancing our efforts to manage our business in an environmentally responsible manner. We recently appointed a new Director of 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 and support of the effort to help educe 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 toward alternative energy through the installation of engineered power transmission products in solar, tidal and wind energy applications and our electromechanical power transmission products help waste water equipment manufacturers and treatment facilities worldwide, increase their efficiency, while reducing costs and down-time.

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 our foundation of understanding and commitment to change is what supports lean growth and continuous improvement. And we are using a valuable and targeted input from these surveys to drive improvement across the organization. We also support our employees and efforts to get involved in organizations and activities that improve their communities.

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

Before I turn the call to Christian, please turn to Slide 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 continue to accelerate purchasing, after delaying builds earlier in the year. We expect the market will slow in 2021 due in part to tough comps. Medical Equipment was up low double-digits year-over-year and flat sequentially. Demand remained very strong for COVID 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 till 2022. Renewable Energy was up low single-digits and down sequentially, in line with expectations due to a tough comp and some anticipated industry supply chain issues, which are unrelated to Altra. On balance, we expect 2021 to be flat, unless the new administration implements policy changes that could have a positive impact.

Distribution was up low single-digits and we continue to expect the distribution markets to track in line with general industrial economy. The Ag market was up double-digits for the quarter as well as sequentially, driven in part by improving net farm income, which drove increased equipment spending. On balance, we expect modest albeit lumpy demand this year. Defense was up double-digits and is expected to remain strong going forward as we continue to see strong performance with many of our OEM customers. Commercial Aerospace, which remains the smallest piece of our overall A&D business, was down mid single-digits, due to the ongoing struggles facing the airline industry. We expect this market will rebound at some point, but not likely until 2022.

Factory Automation and Specialty Machinery was flat year-over-year and down low single-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 as well less than 5% of overall sales for 2020, was down double-digits for the quarter and up low single-digits sequentially. We expect the market to be flat in 2021 with some possible modest demand improvements toward the end of the year if the price of oil continues to go up.

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

Christian Storch -- Executive Vice President, Chief Financial Officer

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

Let's start with the 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 segment 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 E&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 cost 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 related to synergies, consolidations and other activities and therefore will repeat in 2021. That balanced us 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 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 noted last quarter, tax 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 flows and liquidity. We continue to be very pleased with how our cash generative business model, the financial strength of the new Altra and our team's ability to manage cash has proven out to improve 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 Carlos 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 3.2 times and we remain committed to deleveraging the balance sheet. We now expect net leverage to be below 3 times 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 excludes the $400 million of senior secured notes. The covenant stepped down to 4.75 times 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 quality dividend.

Please turn to Slide 11 for a review of our outlook for 2021. Today, we are providing guidance for full year 2021, which reflects our best estimates and practical assessment of the financial impact of COVID-19 to Altra'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 2020. In addition, the guidance reflects approximately $40 million of cost savings realized in 2020 that will gradually phase back through 2021 with the full effect of the costs 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 and prepare 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 $2.10 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 that 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.

Carl R. Christenson -- Chairman and Chief Executive Officer

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 and engaged employee experience and advanced 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 four 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're 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.

Questions and Answers:

Operator

[Operator Instructions] Your first question today comes from the line of Jeff Hammond with KeyBanc. Please proceed with your question.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. How are you?

Carl R. Christenson -- Chairman and Chief Executive Officer

Well, Jeff. How are you?

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Good, good. Just wanted 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 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?

Carl R. Christenson -- Chairman and Chief Executive Officer

So I think, Jeff, there are a couple of components, three main components, I think. First, our 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 and fall in that -- will 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.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. But the temp costs are 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?

Carl R. Christenson -- Chairman and Chief Executive Officer

So right -- we assume that this year, about 40% of 2019 travel expenses will come back and 60% will still be -- not going to be much -- 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? This 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 we add that all up, that's $26 million. And that will come back next year. There is $4 million of the 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 leased properties that were -- those have expired. It's the element of T&E that will come back. And then other cost reductions with temporary price concessions we got from service providers and some of our suppliers. That's the nature of the $40 million, and 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.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Christian Storch -- Executive Vice President, Chief Financial Officer

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 are between Class 8 truck demand softening in China, given that what I call the Cash for Contest 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 $30 million -- $31 million top line headwind in the second half of next year. That's about -- that's a meaningful headwind. While the rest of the businesses in general have strong second half performance and show some good growth. That's a headwind, where we don't -- and 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 follow on the markets, Carl will add.

Carl R. Christenson -- Chairman and Chief Executive Officer

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 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 there are COVID variants that are out there. Are they going to have an impact, there is the vaccine rollout going to -- 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 Semi con industry and the chip shortages that are now impacting the automotive industry. It is just so many headwinds that we're facing and on the other side, there is some really good potential tailwinds or we're 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 start to spend capex again? We'll 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 ratio remained low and have a good impact on people being able to make investments in the future. Material inflation, what's going to happen with material inflation and -- 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 cost go up, will mining come back quicker than we had anticipated. Oil and gas is -- the oil price is up now and will that continue to improve? So there is so many factors in one other that I'd like to kind of joke about, but not really as it opens up. If you look back after the '19 -- '17, pandemic, now you had the roaring 20s, are people going to want to go out and celebrate that this is over and travel again, that's a real wild card. The expectation is that they won't, but certainly a possibility. So we think it was just a really difficult year to predict. Now what markets do we think have the potential to do well next year? We think that the automation space and the continue even Semi con, I think it 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 the -- to where it was midway into the pandemic. We've started to see some recovery there, so I have some optimism, but I think that's just -- there is so many potential headwinds that will remain cautious.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. Good, color. Thanks, Carl.

Operator

Your next question comes from the line of Bryan Blair with Oppenheimer. Please proceed with your question.

Bryan Blair -- Oppenheimer -- Analyst

Thanks. Good morning, guys.

Christian Storch -- Executive Vice President, Chief Financial Officer

Good morning, Bryan.

Bryan Blair -- Oppenheimer -- Analyst

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 growth relative to that 4% to 6% range consolidated?

Carl R. Christenson -- Chairman and Chief Executive Officer

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 the -- 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 if you know the headwinds that Christian mentioned, that's where the uncertainty is and will be order rates pick up if the general industrial economy comes back 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 that September timeframe.

Christian Storch -- Executive Vice President, Chief Financial Officer

Yes, Bryan, if I can add to that. If you look at that order trends that Carl just describes 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 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 two big variables and then there's a little bit of wind. And I'm in the camp just like Carl, where we don't believe that certainty has returned to financial forecasting at this point of time, there is still a lot of noise. If you look at continued and extended lockdowns in Europe and the slow vaccination rollout in Europe, there is still a lot of noise.

Bryan Blair -- Oppenheimer -- Analyst

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

Christian Storch -- Executive Vice President, Chief Financial Officer

No, the main commodity we procure is copper. Where in all cases -- we pass that through to our customers, through surcharges that bodes both ways. After that is probably Steel and then the majority of what we buy is a machine for bonus 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 our customers.

Carl R. Christenson -- Chairman and Chief Executive Officer

So I think in that regard, Bryan, we usually assume that the price increases that we're going to get will offset whatever material cost we see based on the fact that we can react pretty quickly. It takes a little while for our suppliers to push through the price increases to us. Because they -- its 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 make sure that we push through the price increases to offset that.

The other big wild card is the -- well, it's not a wild card, it's the wage increases that we need to have pricing to offset the wage increases that we're seeing. Delayed wage increase last year by six months so effectively. This year we have maybe a wage increase in half that we have to offset.

Bryan Blair -- Oppenheimer -- Analyst

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?

Carl R. Christenson -- Chairman and Chief Executive Officer

We had tremendous working capital performance in the fourth quarter. We don't think that we will be able to repeat that, but I would say $10 million to $15 million a reduction in working capital is what we're targeting.

Bryan Blair -- Oppenheimer -- Analyst

Got it. Thanks again guys.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thanks, Bryan.

Operator

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

Mike Halloran -- Baird -- Analyst

Hey, good morning guys. So a couple here. One, maybe just some thoughts on supply chain and channel inventory levels. I know you said, there are some supply chain headwinds I think with wind side. But maybe some more broad commentary there and then also where you think channel inventory stand as we sit here today?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yes, so the supply chain that's one of like the guacamole game where right now Malaysia has got something shut down, I think there are some things in Taiwan had our -- and it's just kind of go wherever the diseases impacting some place, we'll see a particular supplier shutdown, so we just have to keep working those. And in the case of wind that was not -- it did not impact us, it impacted -- it was another supplier and 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 it's in pretty good shape. I think of -- I said it before that we didn't see a big buildup or cut back in our inventories, may be a little bit of a reduction in inventories last year, but not tremendous. So I don't think there is 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.

Mike Halloran -- Baird -- Analyst

Okay, and then some 3.2 times net leverage, you're going to be below 3 times, 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 and what cash you should look like, where it becomes a little more balanced and 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 it's just too early at this point?

Carl R. Christenson -- Chairman and Chief Executive Officer

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

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

Mike Halloran -- Baird -- Analyst

Makes sense. I appreciate it, thanks.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

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

Scott Graham -- Rosenblatt -- Analyst

Yes, hi, good morning.

Carl R. Christenson -- Chairman and Chief Executive Officer

Good morning, Scott.

Scott Graham -- Rosenblatt -- Analyst

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, tightened [Phonetic] a little bit because of concerns over COVID. Can you maybe kind of characterize what customers are doing?

Carl R. Christenson -- Chairman and Chief Executive Officer

I would say that from the customers' 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 extension or lead-times from suppliers. And that's one of the -- we've just got a plan for that and make sure we can -- when we're going to get it and when we're going to be able to satisfy the customers demand.

Scott Graham -- Rosenblatt -- Analyst

Got it. Thank you. Then also, the semi side of factory automation and specialty, you said that that was down this quarter. What do you said that [Indecipherable] too?

Carl R. Christenson -- Chairman and Chief Executive Officer

Well, it's pretty lumpy for us. And I think -- I wouldn't read much into that, Scott. I think, we look at Semi con 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's realistic. So I would just read that as a lumpy business and each one of our segments and we've got so many different segments of markets that we serve that I'm not reading a lot into it.

Scott Graham -- Rosenblatt -- Analyst

Okay, got you. I was also trying to maybe would like to get an [Indecipherable] to your comment in the press release, Christian's comment about this as well that that your guidance is, you kind of starting off the year conservatively, which is great and I think understandable. I guess two questions on that. One would be, what do you need to see to upgrade your guidance? I mean, we know we know which 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 is 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 putbacks, timing and all that, get all of that. But was -- did you mean more to it than that, there is just like a lot of moving parts?

Carl R. Christenson -- Chairman and Chief Executive Officer

What I meant really was, last year was an extraordinary year, right with COIVD. I think we saw in May our incoming order rate drop by like 25%. And have recovered by the end of the year. And so this year, I think is -- there is 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 and some of the end markets that our customers serve, then that's going to make me feel a whole lot better. If we start to see the logistics in the Port in LA 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 as 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 blow out. 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 there has stress level on everybody has been terrible. 2021 is a transition year where we start to get back to normal life and 2022 we're 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 -- 2021 is the middle year there.

Scott Graham -- Rosenblatt -- Analyst

That's very clear. Thank you. And I'll say for us with the [Indecipherable] as to when do you get your vaccine Carl and [Indecipherable] then.

Carl R. Christenson -- Chairman and Chief Executive Officer

I'm not going to try to jump the line. I'm going to wait my turn. But if I can get it in March, I'll take it. So, Christian, do you want to add something?

Christian Storch -- Executive Vice President, Chief Financial Officer

The second part of your question, where is that potentially upside to the guide. So, I think as Carl referred 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 I think in the second half of the year. Turf and Garden could have some upside. Our Wind business could have some upside. Oil and gas, as Carl mentioned, if the oil price stays above $60, we will see -- we've already seen a modest increase in rig count, but may we see some more capex spend in that area and maintenance spend. But it's just too early to talk, because it's all in the second half. That's pretty far away and so we wanted to continue to be cautious.

Carl R. Christenson -- Chairman and Chief Executive Officer

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

Scott Graham -- Rosenblatt -- Analyst

Yes, sure. But it is also clear that you are not counting on those, so. Hey, thanks a lot for your time.

Carl R. Christenson -- Chairman and Chief Executive Officer

Okay. Thanks, Scott.

Christian Storch -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Joel Tiss with BMO. Please proceed with your question.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. How's it going?

Carl R. Christenson -- Chairman and Chief Executive Officer

Good, Joel. How are you?

Joel Tiss -- BMO Capital Markets -- Analyst

All right. It has 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 or '25. And is it more investment that's needed to really drive kind of customer connectivity and capabilities and new products or is it more about like reducing cost and layers of management and just any little things you've learned?

Carl R. Christenson -- Chairman and Chief Executive Officer

Well. I think, Joel, its going to be a mix, where 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 will 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? So that are more profitable and have higher growth that are really going to drive the performance of the company.

So in my mind, there's three factors. One is getting the economy to recover and 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's going to be very similar to what we do today in niche engineered products and then working on those business simplification projects to take some cost out.

Joel Tiss -- BMO Capital Markets -- Analyst

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 is not anymore. Is just that I'm trying to gauge like how long you're 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? Thank you.

Carl R. Christenson -- Chairman and Chief Executive Officer

Yes. No, Joel. I mean you know the space well enough that there is really good companies that are in the $20 million to $50 million range, which would be nice tuck-ins. And then there is some that are in the $50 million to $200 million range that would be really nice additions to our business. There is not that many that would be transformational like we did with A&S Steel. So that I think might come every 10 years. Well that was a pretty effective transaction for the business, so that was terrific. So I would expect that we'll probably be on the lower end initially just until we get the balance sheet and even better shape and we nurture some of the pipeline. And then I think the sweet spot for us is probably going to have $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 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 no one 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 in that $50 million to $250 million range will be ideal for us.

Joel Tiss -- BMO Capital Markets -- Analyst

Okay, thank you very much.

Christian Storch -- Executive Vice President, Chief Financial Officer

Thank you.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thanks.

Operator

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

Carl R. Christenson -- Chairman and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Ryan Flaim -- Investor Relations

Carl R. Christenson -- Chairman and Chief Executive Officer

Christian Storch -- Executive Vice President, Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Bryan Blair -- Oppenheimer -- Analyst

Mike Halloran -- Baird -- Analyst

Scott Graham -- Rosenblatt -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

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