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..

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’ve 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. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone an opportunity to participate.

During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations.

Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website.

We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by the Timken Company. And without expressed written consent, we prohibit any use, recording or transmission of any portion of the call.

With that, I would like to thank you for your interest in the Timken company, and I will now turn the call over to Rich..

Thanks, Neil. Good morning, everyone, and 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 and our earnings for the fourth quarter, however, were below our expectations.

First, for to 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, our 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 diluted the 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. But 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 continue to build scale and 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 planned levels and were creative 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 advanced 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 one week per government recommendations.

Right now we plan to restart operations next week for 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 of 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 declines 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 in 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 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 will provide a little more color on the two 2019 acquisitions of Diamond and BEKA, both businesses have been impacted by the industrial market slowdown.

Diamond more so due to the heavier North American concentration of the sales. On Diamond, we continue to implement synergy cost reductions in the fourth quarter, bringing our implemented cost savings in the nine 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 costs 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 two 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 we've grown about.

It's still early, but the business appears to be what we expected to be in regards to market position, product technology and potential for margin expansion and growth. We'll 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. 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 a $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 add a 3.5% to the top line as we've benefited from Diamond Chain and two months of BEKA.

While currency translation continue to be a headwind, negatively impacting revenue by around 1%. On the right hand side of the 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 $153 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 1WITH these headwind seen in both the manufacturing and estimate 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 posted net income of $114 million or $1.48 per diluted share for the quarter on a gap basis.

Special items in the quarter amounted to roughly $49 million of after tax income or $54per 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 allowance 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 by BEKA and Rollon.

Excluding evaluation 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 three 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 long way in the quarter and collectively added up to just over half of the variance versus what we expected. The other two 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 industry 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%.

Well, acquisitions they had a 3.5% of the top 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 to the lower demand and 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 industry EBITDA was $97 million. Adjusted EBITDA was $98 million or 21.8% of sales compared to $109 million, the 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 favorably 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 1.5 of 1% at the midpoint, reflecting growth in renewable energy and industrial services, offset partially by a decline in Industrial distribution.

We expect price costs to be positive for the year, and for Process industries adjusted EBITDA margin to be slightly below 2019 levels driven mainly by mix and the impact of BEKA. Now let's turn to mobile industry on Slide 18. In the fourth quarter, mobile industry sales are $445 million, down 3.6% from last year.

Organically, sales were down 6.2% percent, reflecting lower shipments in our highway heavy truck, partially offset by growth in rail and aerospace, as well as the impact of positive pricing. Acquisitions had a 2.3% of the top line in the quarter. While currency translation was unfavorable by almost 1%. Looking a bit more closely at the markets.

In our highway, EBITDA in all regions and across the major sub sectors, including agriculture, mining and construction. Heavy truck is was also down, probably 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 industry EBITDA was $58 million in the quarter. Adjusted EBITDA were $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 $65 basis points year-on-year reflects the impact of lower volume, higher manufacturing expenses and the impact of BEKA. Personally offset by favorable price mix and lower material and logistics costs. This represents a detrimental margin of less than $15 on an organic basis year-over-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, planning for sales to be down 5.5 at the midpoint compared to 2019. This includes lower shipments in our highway, heavy truck and automotive.

We expect positive price costs for the year and we expect mobile industry, the 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 cost the increase in costs for 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. 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 $398 consecutive quarterly dividend in December, but also we purchased over 150000 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 previously provided preliminary guidance for 2020 back in December. We're still planning for 2020 net sales to be down 2% to up 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% of top line for the year.

This is unchanged and includes 10 months of data and one 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 personally 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 is 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. Yes, mate, that will 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, just over 4% of sales for the year. Also, our guidance assumes that we will end the year with net debt to adjusted EBITDA and we’re the middle of 1.5x to 2.5x target range. And finally, turning to slide21.

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 five years and beyond.

In closing, I'd like to commend more than 18,00 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 will now open the line for questions. Operator.

Thank you. [Operator Instructions] And we take our first question from Joe O'Dea - Vertical Research. Please go ahead. Your line is open..

Hi. Good morning..

Good morning..

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 through the three 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, our biggest issue with BEKA was frankly closing on the business on November 1, so we really had the worst two 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 two weakest months of the year versus a full quarter and/or a better quarter. So that was 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 two 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 are 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 very different financial profile and management of the business in regards to information management systems and focus on all the things that come out of those systems, of productivity and cost and margins and profit by geography, etcetera.

Then 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 -- the management team's got a good line of sight on it.

And I think, again, it could be a little bit bumpy this year, but it's going to be 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 that was the first part of your mix, which again, I'd say two things on mix in the fourth quarter that both also have a little bit of an impact to the outlook this year and that will 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 both of those hit our mix a little bit. On the North America part of it, I think, encouraging. The recent, I assume, numbers being the best they've been in some months is encouraging for the outlook.

I think the weak -- weakening of the automotive industry last year have 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 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 accrual.

So I would expect as we move forward to a more normal runway on those items and so we would expect a bump up we saw in the fourth quarter, which affected our margins and actually affected the earnings to subside and get us back to more of a normal run rate going forward..

I appreciate those details. And I will consider that first question as a follow-up included. So I will stop there. Thanks very much..

Thanks, Joe..

Thanks, Joe..

Thank you. And now we will take our next question from Steve Barger with KeyBanc Capital Markets. Please go ahead. Your line is open..

Hey, good morning, guys. This is Ken on for Steve..

Good morning, Steve..

Thanks for taking the question. First question is just for Process, guys. If you could just tell us how are you thinking about OE sales versus distribution. Understood that industrial distribution probably went the wrong way for you in the quarter, but just how are you kind of looking at that industry within your 2020 outlook.

And as a follow-up to that, any color on the state of inventory in the distribution channel that you’re seeing today..

I would say Process industries revenues 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 and there was not big movement there last year, but there also was a big movement in the top line.

We 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 rate as they took inventory out of the channel..

Okay. And then switching topics here. I mean, if -- I understand that you’re taking or you believe you’re just 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 those segments. If revenue starts to decline at a more accelerated phase than maybe what you expect..

Yes, thanks, Ken. I will take that. This is Phil. So good question and obviously one thing I wanted to point out, so we do have a -- we 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 are looking here or as we move through the year.

And I think your question really gets to the heart of it, 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 with the midpoint would have a pretty good organic decremental. And 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. Again, which I think is what we’ve talked about before in an environment like we are in today.

I mean, if we were to take another step down, obviously we would 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 we would expect to run attractive incrementals probably a little worse than the 25 to mid-20 that we have in here on the 2.5% midpoint, but we still expect to run attractive incrementals relative to what we’ve done in the past..

And just to clarify that midpoint comment is on EBITDA given that your our operating metric today, correct?.

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

Got it. Thanks for the color..

Thanks..

Thank you. And we take our next question Ross Gilardi from Bank of America. Please go ahead. Your line is open..

Hey, good morning, guys..

Good morning, Rose. .

Hey, Rose..

Just on the SG&A and the cost not repeating in Q1 versus Q4. We just talk in absolute -- little bit on SG&A, right so I think a $152 million in the fourth quarter and prior to that well, kind of running the $140 million to $150 million range, it was a $140 million in the first quarter of 2019.

And the revenue at least organically is going to be down a bit in the first quarter of 2020.

So do we back to kind of a $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 a qualitative view?.

I will just start high level. I think if you look at the full-year of '19 SG&A, what we are looking at for the full-year of 2020, we are acquisition side, we are looking at pretty flattish SG&A from four year..

Yes, I think when you look at the SG&A, in total, I think in confidence keep in mind when the acquisition deal impact the SG&A lines. When you look at the SG&A line on the income statement, we will find with lot of the acquisitions we’ve done, that included -- they will come in with maybe more traffic 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 is opportunity in there relative to the BEKA as we look to integrate and drive synergies.

But as we look at core SG&A in the quarter, we'd have said -- up about 6 million year-over-year and that would have been -- we are still investing in Process industries, the areas where we are growing like renewable energy. And obviously, we had year-on-year increases for normal inflation offset by the incentive comps.

So, looking ahead, as Rich said, we would expect structural SG&A to be -- pretty flattish move in '19 to '20.

All in, but we will continue to invest for growth, continue to manage other parts of the business very tightly and continue to manage SG&A well, but as we do M&A and like we’ve done M&A in the last couple of years, that will post the SG&A dollars up and push in many cases, the SG&A margin uplift..

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 whole for your EPS guide, you 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 -- I mean, you give all these moving pieces, but I don’t know whether I probably understand what you’re saying.

Is SG&A kind of be a $10 million to $50 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 is in the fourth quarter, I said it was about half or a little bit more than half to be mix relative to our expectation. So it would have been, call it, even $0.06, $0.07 that we would 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, 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 -- it was more than accounted for by acquisitions coming in at -- with the SG&A coming.

So excluding the acquisition, the SG&A was structurally down '18, to '19..

Okay. I will follow-up that towards. The -- your MAX exposure, I mean, you touched on briefly I mean my understanding is your SG&A -- sorry, your aerospace business, aerospace defenses is really more towards the more towards the rotorcraft and 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. There are direct exposure to the 737 MAX. We are -- we do have content on it, but its immaterial, about $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 are in and the platforms we're on and the platform winning rate that we had. But both of that it could 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, obviously that is what has a ripple effect through our -- 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-digit and above. So obviously it's an open-ended range.

Have you actually dial back your expectation for that end market over the last six weeks given what we learn from one of the big bellwether companies, or has it -- do you still have the same number plugged in there that you 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 or negatively with the last 6 to 8 weeks..

Good thing that 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've 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 the supply chain we felt more of that paying 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 are at today..

Okay. Got it. Thanks guys..

Thanks, Ross..

And now we take our next question from Chris Dankert from Longbow. Your line is open. Please go ahead..

Good morning, guys. Thanks for taking my question..

Good morning, Chris..

I guess, first off, Asia up 11 in the quarter. Nice result. But moving into 2020 there is a lot of uncertainty. I assume that's significantly weaker in the guide.

Can you 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 early comments, we're looking at the coronavirus situation being more of an immediate issue, but there'll be efforts assuming it deescalate for our customers as well as us to make up that lost production of the week through the course of the year.

So I would say again, it's driven mostly by the local wind energy business that we do there. Some solar as well. 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 see in North America.

So leading up to the Lunar Holiday, in China will get 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 2021?.

Yes. And I'll comment on our second biggest market in Asia as well, India. Tough year last year in India, heavy truck and I would say, general, industrial. consumer comment to 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, some of those markets appear, in the heavy truck case, the demand situation for us has bottomed..

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

I think it's some of both, I'd say. I would say as much belt tightening, some level belt tightening, but more so I'd 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 -- four small facilities through the course of last year and consolidated them into existing operations. We've got another small facility that some that's been communicated. It's been closed this year, as well as the larger diamond operation, which I mentioned.

So 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 this 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, 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 follow-up on that comment.

I guess a lot of the same 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?.

No, I think we would be looking at a net savings for next year. If 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 of 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 a net positive on that by the time we get to 2021..

Got it. Thanks for the help. And I did hear that your new IR Director is looking very much forward to all the DNA questions from everybody after the call. So just a reminder there..

Thanks, Chris..

Thank you. And now we take our next question from David Raso from Evercore ISI. Please go ahead. Your line is open..

Hi. Good morning..

Good morning, David..

On mobile came 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 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?.

I would say, David, thanks for the question. It would be certainly more first half loaded than back half loaded, but I would say the guidance that I would assume that it would be organically down year-on-year in mobile every quarter through the year..

But certainly a lot of pain in the first quarter will see much higher comps that we would have compare against for the first quarter of '19?.

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

Okay. So for second quarter, both down pretty significantly, but not getting to the 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 by numbers. The numbers, it looks like the 50 bps of organic is worth maybe $0.07.

The higher tax rate, a little with the 27, maybe 50 bps higher than people thought. That's about $0.03. And it also looks like BEKA, you must have lowered structural your view of the margins for a 20 to account for some of the difference.

Is that a fair assessment that you lowered you …?.

No..

No..

No, we did not lower our outlook for the full-year for [indiscernible] 20. I think the other item there, David, would be. So I think you got it right in your gain. You've got 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 need distribution from the middle column back in December to the down mid-single digits column. And that was frankly a big, big reason we took the organic downwards for that. And that was a big that was a good part of it as well..

Okay. I mean, currency will give you a couple 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, it's a 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 and market weakness that's disappointing them or are they taking their inventories down even further? Any hints? I know it's hard, you have better visibility in North America than other geographies, but this has been going on for a little bit.

I'm 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..

Okay..

And I think it's really comes back to the North American numbers globally. The distribution business, quite good..

And in that regard, obviously, it's a channel I would argue maybe a little bit easier to get price than to OEMs. But your price cost is pretty positive in the fourth quarter. Can you give us a 2020 view of how are you viewing from an EPS perspective dollars, however you want to do it.

Price costs for the full-year, especially distribution a little weaker..

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

Yes, I'm 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 than normal, obviously because of distribution. So positive in both segments, but it is more positive or significantly more positive on the Processor..

All right. That's helpful. I appreciate it. Thank you..

Thanks, David..

And now we take our next question from Courtney Yakavonis from Morgan Stanley. Please go ahead. Your line is open..

Hi. Thanks for the question. 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 is predominantly Timken self-help and some platforms, and wins that we are expecting through the course of 2020 and what’s probably a flattish market..

Okay, great. Thanks. And I think you answered some of this in David's question, but just on the actual quarter, you said that, half was higher than or half of them was higher than normal expected costs. And then, the other half was a combination of BEKA and mix.

Was that equal between the two of them? And then it sounds like it's just really the mix out of the three of those that we should be expecting to carry forward through next year. A I think, Courtney, I think that's a good way to look at it.

So, as we said probably more than half would be the expenses and the remainder, kind of split between BEKA and mix with -- with the mix persisting, as we talked about with David [indiscernible] $0.50 down EPS from the prior guide for 2020. It is the organic coming down hurt us.

Then we also have more on mixed and we were factoring in before, which is the added factor, which kind of [indiscernible] $0.15..

Okay, got it. And then just lastly, obviously the BEKA performance is weaker than you would 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 year.

You're always going in the risk profile of M&A making sure what you bought and are buying is was properly represented and your diligence and all. And I think in both these cases, we've confirmed that that's the case. And then I think it vary 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 in the last four years, there's probably been over half that have outperformed in the first three, six months versus underperform. And we just happened to hit two that start off slower.

And I would say, again, the biggest issue that as the both these businesses were affected by the same sequential decline in revenue that we saw across our broader industry, in particularly Diamond being a North American centric business.

And if you look at our North American numbers, and that North America numbers being weighted after the first quarter, which is when we bought them, there is pretty significant decline. So that the [indiscernible] we would make these acquisitions for longer than a quarter or two 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..

Okay. Thank you..

Thanks, Courtney..

We will take our next question from Stanley Elliott with Stifel. Please go ahead. Your line is open..

Good morning, everybody. Thank you for taking me in. On the M&A piece, was that -- was a comment about weighing more towards the half of the year. Is that just to give yourself a little more time to integrate Diamond, BEKA? Is it you have a specific asset in mind or was it more just general commentary? Just try to get a feel for that..

I would say it is left to our preferences. We would probably not want to do anything in the first half. The focus on those two, obviously there is an opportunistic element of this that if something presented itself that was going to be sold, whether we participate in it or not, we would certainly look at it.

But then I would say with what we are 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 presenting anything that way. So I would say answered 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 to sort of pry anything loose in the short-term. We want to get a good line of sight to the improvement in margin. We'll start delivering it on which where we 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 the 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 will 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 that half -- latter half of the year..

Perfect. Thank you very much..

Thanks, Stanley..

And to take our last question from Justin Bergner from G. Research. Please go ahead. Your line is open..

Good morning, Rich. Good morning, Phil..

Good morning, Justin..

Hi, Justin..

I had a few questions to get through, I don’t think they've 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? You’re 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 one year around the middle of our target range. So, I would look at the midpoint of our guidance as you know, we would clear to do -- not to have the debt reduction, we would probably be a few pennies below that. If we did all buyback, we would be a few pennies above that.

If we did M&A, we might be in the middle, so we can't take a middle of the road approach on it. And if we do, we have to -- if we more tilt it towards buyback it's probably a few pennies of upside there. If we did all debt reduction, probably a few, a few pennies, a 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 will see 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 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.

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 2019 as a whole, just the corporate EBITDA.

I'm not sure if you have those numbers handy in sort of a view as to how that might change in 2020, if not, I can take it off line?.

Yes, we might. Maybe we'll take it off line, but we just -- if we can have the numbers in front of us and we can kind of walk you through it..

Okay. Thanks so much..

Thanks, Justin..

Thanks, Justin..

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..