Barnes Group Inc. (B) Q4 2020 Earnings Call Transcript

Barnes Group Inc. (NYSE: B) Q4 2020 earnings call dated Feb. 19, 2021

Corporate Participants:

William Pitts — Director, Investor Relations

Patrick J. Dempsey — President and Chief Executive Officer

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

Analysts:

Myles Walton — UBS — Analyst

Michael Ciarmoli — Truist Securities — Analyst

Timothy Wojs — Robert W. Baird & Co. — Analyst

Pete Skibitski — Alembic Global Advisors — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Barnes Group Inc. Fourth Quarter and Full-Year 2020 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to Mr. Bill Pitts, Director of Investor Relations. Please go ahead.

William Pitts — Director, Investor Relations

Thank you, Sharon. Good morning, and thank you for joining us for our fourth quarter and full-year 2020 earnings call. With me are Barnes Group’s President and Chief Executive Officer, Patrick Dempsey; and Vice President, Controller and Interim Chief Financial Officer, Marian Acker.

If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at bginc.com. During our call, we will be referring to the earnings release supplement slides, which are also posted on our website.

Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the Securities and Exchange Commission.

Be advised that certain statements we make on today’s call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today’s call and are described in our periodic filings with the SEC. These filings are available through the Investor Relations section of our corporate website at bginc.com.

Let me now turn the call over to Patrick for his opening remarks, then Marian will provide a review of our financial results and some of the details of our initial outlook for 2021. After that, we’ll open up the call for questions. Patrick?

Patrick J. Dempsey — President and Chief Executive Officer

Thank you, Bill, and good morning, everyone. The resiliency of Barnes Group was apparent once again this quarter as we grew sequential revenues for the second consecutive quarter and delivered adjusted EPS above the high end of our October outlook. Given the historic challenges resulting from the global pandemic for most of 2020, I’m very proud of the many contributions of our 5,000 employees across the globe who stepped up to the challenge by going above and beyond to meet the needs of our customers and support our communities. And while I am happy with our performance, given the significance of the disruption, we at Barnes Group, remain mindful and respectful of the personal and social hardships caused by the pandemic across the world.

From the onset, our response to the pandemic was structured around four phases. First and foremost, the health and safety of our employees. Second, adjusting the business for the stark realities of lower demand. Third, anticipating and adapting to structural shifts in some of our end markets. And fourth, making key strategic investments to position Barnes Group for an economic recovery. While we moved our current — while we have moved our current focus to Phase 4, we have not lost sight of the first three phases as they continue to be important. Through 2020, one thing that has remained unchanged is our vision to be a leading global provider of highly engineered products, differentiated industrial technologies and innovative solutions serving our diversified end markets.

For the fourth quarter, organic sales were down 21%, primarily as a result of lower volumes given the pandemics’ continuing impact on our end markets, especially at Aerospace. The fourth quarter saw a 7% increase over the third quarter with both segments generating sequential sales improvement. Adjusted earnings per share were $0.36, down 58% from last year. Though, as mentioned, just above the high end of our October outlook.

Looking at the full-year, organic sales were down 22%, while adjusted earnings per share were $1.64, down nearly 50% from a year ago. As difficult as those numbers are, early cost actions and a focus on cash generation, allowed us to maintain double-digit margins, positive earnings and strong cash flow throughout the year.

As we turn the page on 2020, our mindset is shifting and our focus has returned to driving growth, both organically and through acquisitions. With a keen focus on our strategic filters, we continue to explore enabling technologies and market-leading businesses that would complement our current portfolio with several potential targets in the pipeline being analyzed. We remain enthusiastic in our pursuit of value adding transactions, that strategically advance our transformation. More immediately, an emphasis on organic investments will target growth-orientated capital expenditures, research and development efforts and further build out of our newly established innovation hub capabilities. While these investments will influence margins in the short-term, they are instrumental to position the Company more favorably for the long run. It’s my expectation that we’ll be talking frequently about our innovation and digital initiatives as we progress through 2021.

Moving now to a discussion of end market dynamics, beginning with Industrial. At Industrial, we see the continuation of favorable trends discussed on our last call. Manufacturing PMIs in our major geographic markets remain strong and correspondingly, we’ve seen fourth quarter organic orders at Industrial grow 10% over a year ago. Sequential Industrial orders were up 9% over the third quarter and segment book-to-bill was slightly better than 1 times. So, as we think about our Industrial expectations for the upcoming year, we feel bullish about the prospects for this part of our business.

Molding Solutions generated very strong orders in medical end markets, both year-over-year and sequentially, each with well over 50% growth. Medical sales lagged a bit in the quarter given a very challenging comparable and the timing of deliveries. We see that is normal given the nature of this business and expect sales to bounce back by the second quarter.

Packaging orders were very strong on both a year-over-year and sequential basis. Sales were up over 20% from a year ago. Meanwhile, personal care orders took a dip in the quarter and sales were slightly down versus a year ago. However, sequential sales were strong increasing over 20%.

Our Synventive business, which is predominantly automotive hot runners, saw a modest increase in orders, both year-over-year and sequentially. Although sales were relatively flat to a year ago, they were up 20% sequentially. All-in, our expectations for 2021 is organic sales growth to be up in the low-double digits for Molding Solutions.

Sheet metal forming markets also continue to see a rebound, as Force & Motion Control orders were up high-single digits over last year and up high-teens over the third quarter. While sales were down modestly from a year ago, sequential sales were up in the high-single digits. We forecast Force & Motion Control to generate organic sales growth in the low-double digits for 2021.

At Engineered Components, organic orders were up nearly 20% on a year-over-year basis, with organic sales up mid-single digits versus a year ago. Total sales were up high-single digits sequentially, continuing a rebound that we’ve seen over the last couple of quarters. With General Industrial Markets on the upswing and global automotive production forecasted to be up meaningfully in 2021, we anticipate Engineered Components to grow high-single digits organically. That said, we are very mindful about the current impact semiconductor shortages are having on automotive production and we will monitor that situation carefully as it unfolds.

Looking next at our Automation business. It continues to demonstrate signs of a positive rebound as mid-single-digit orders growth over a year ago and third quarter were achieved. Total sales growth was strong with both year-over-year and sequential growth of 20%. Like last quarter, demand for our end-of-arm tooling solutions in automotive, and medical and pharma applications remain solid. We expect 2021 to deliver low-double-digit organic growth as these markets remain healthy and as we launch new innovative products.

Speaking of new products, as I mentioned earlier, our investments in innovation and R&D are aimed at providing a solid foundation for organic growth. As an example, we recently launched our comprehensive vacuum solutions product line with complete gripping solutions, advanced control systems and high-quality components. The vacuum product range consists of about 1,100 items, including high-performance suction cups, vacuum pumps, sensors and related accessories that allow our customers to handle different objects in various industrial sectors with low energy consumption and reduce downtime. Overall, for the Industrial segment, we see 2021 organic growth in the low-double-digit range with adjusted operating margins of 12% to 14%.

Moving now to our Aerospace business. For the fourth quarter, Barnes Aerospace sales were down nearly 40% at OEM and nearly 50% in the aftermarket from the prior year. Not surprising as commercial aviation remains significantly disrupted by the global pandemic, our outlook for Aerospace is certainly not as bullish as for our Industrial businesses. That being said, we continue to believe the trough quarter of sales is behind us. With OEM, production levels of narrow-body aircraft are expected to improve from here modestly, although wide-bodies will remain pressured. The journey back to pre-COVID levels will most likely take a few years. The OEM silver lining for the fourth quarter was book-to-bill of 1.6 times relative — reflective of the strongest orders quarter since the third quarter of 2019.

One last point on our Aerospace business, OEM business, in particular, our estimates of OEM sales per aircraft for our major programs are unchanged from our prior view except for the 737 MAX. With the award of the long-term agreement with GE Aviation on the LEAP program, mentioned on last quarter’s call, we now forecast approximately $100,000 of sales per aircraft, up from our previous estimate of $50,000.

For the aftermarket, many of the factors discussed last quarter, lower aircraft utilization, weakened airline profitability and government imposed travel restrictions are still affecting the industry. Recovery will require more widespread vaccine distribution, allowing people to feel more comfortable about flying, combined with the lifting of the various travel restrictions that currently exist. Only then will we see commercial flights return in earnest, likely led by domestic travel, while international flights are expected to take a little longer to resume. Until then, we anticipate aftermarket volume to remain pressured. However, we do expect aftermarket activity to gradually improve beginning in the second half of 2021.

With that as the backdrop, for 2021, we see OEM sales up mid-single digits over 2020, with MRO down mid-single digits and spare parts down in the mid-teens. We anticipate 2021 segment operating margin to be in the range of 13% to 14%, surely compressed by the lower aftermarket expectation.

In line with our continued focus on addressing the various topics of interest to our stakeholders, you may recall that last quarter on the topic of ESG, I took a few moments to address our commitment to make Barnes Group a more sustainable, socially responsible and diverse and inclusive Company. While we’ve made great progress, there’s definitely more work to be done. Related to our ESG efforts, I’m proud to highlight that Barnes Group was recently named as one of America’s Most Responsible Companies by Newsweek. This acknowledgment is a testament to our employees across the globe who embrace our Barnes Group values each and every day.

Before finishing my remarks, I’d like to take a moment to acknowledge Chris Stephens, our former CFO, for all his contributions to the success of Barnes Group and the key role he played in our ongoing transformation. On behalf of the entire Barnes Group team, we wish him all the best in his new endeavors.

So, to conclude, the extraordinary disruption in 2020 required many businesses to play defense, including Barnes Group, securing employee safety, keeping our essential operations running, adjusting to the lower demand — levels of demand, focusing on costs and preserving liquidity were of paramount importance. Given the circumstances, the financial results achieved are indicative of the quick and decisive actions taken by the strong leadership team and talented workforce at Burns. With the arrival of 2021, we now turn to a more offense minded view, increasing our investments in innovation, research and development and growth programs across the enterprise. While the high level of economic uncertainty still exists, we are squarely focused on controlling our own destiny, seeking out new opportunities and setting the Company up for long-term profitable growth.

Now, let me turn the call over to Marian for a discussion on the financial results.

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

Thank you, Patrick, and good morning, everyone. Let me begin with highlights of our fourth quarter results on Slide 4 of our supplement. Fourth quarter sales were $289 million, down 22% from the prior year period, with organic sales declining 21% as continuing impacts from the pandemic affect our end markets. The diversified Seeger business had a negative impact of 3% on our net sales for the fourth quarter, while FX positively impacted sales by 3%.

Operating income was $32.7 million versus $61.3 million a year ago. Adjusted operating income was $32.9 million this year, down 48% from $63.5 million last year. Adjusted operating margin of 11.4% decreased 580 bps.

Net income was $17.7 million, or $0.35 per diluted share, compared to $41 million, or $0.80 per diluted share a year ago. On an adjusted basis, net income per share of $0.36 was down 58% from an $0.86 a year ago. Adjusted net income per share in the fourth quarter of 2020 excludes $0.01 of residual restructuring charges from previously announced actions with most of the impact reflected in other expense not operating profit. For the fourth quarter of 2019, adjusted net income excludes a favorable $0.05 adjustment related to the finalization of Gimatic short-term purchase accounting and an $0.11 non-cash impairment charge related to the divestiture of Seeger, both in our Industrial segment.

Moving to 2020 full-year highlights on Slide 5 of our supplement. Sales were $1.1 billion, down 25% from the prior year. Organic sales were down 22% for the year. The Seeger divestiture negatively impacted sales by 3%, while FX had a minimal positive impact.

Operating income was $123.4 million versus $236.4 million a year ago. On an adjusted basis, operating income was $144 million this year versus $244.1 million last year, a decrease of 41%. Adjusted operating margin decreased 360 bps to 12.8%.

For the year 2020, interest expense was approximately $15.9 million, a decrease of $4.7 million as a result of lower average borrowings and lower average interest rates.

Other expense was $5.9 million, a decrease of $3 million, primarily as a result of lower FX losses this year as compared to last year, partially offset by higher pension expense.

The Company’s effective tax rate in 2020 was 37.6% compared with 23.4% last year, with the increase largely due to a decline in earnings in jurisdictions with lower rates, the recognition of tax expense related to the completed sale of the Seeger business during the first quarter of 2020, the impact of the global intangible low-taxed income or guilty tax on foreign earnings in the US and tax charges related to prior year’s stock awards.

For 2020, net income was $63.4 million, or $1.24 per diluted share, compared to $158.4 million, or $3.07 per diluted share a year ago. On an adjusted basis, 2020 net income per share was $1.64, down 49% from $3.21 in 2019. Adjusted earnings per share for 2020 excludes $0.27 of restructuring costs and $0.13 of Seeger divestiture adjustments. While 2019 adjusted EPS excludes $0.03 of Gimatic short-term purchase accounting adjustments and an $0.11 non-cash impairment charge related to the disposition of the Seeger business.

Turning to our segment performance, beginning with Industrial. Fourth quarter sales were $209 million, down 9% from a year ago. Organic sales decreased 8%. Seeger divested revenues had a negative impact of 5%, while favorable FX increased sales by 4%. Sequential sales were up 6% from the third quarter.

Industrial’s operating profit for the fourth quarter was $24.5 million versus $30.2 million last year. As has been the consistent theme since the second quarter, the primary driver is lower sales volume, offset in part by our cost mitigation efforts. On an adjusted basis, which excludes a small amount of restructuring charges and Seeger divestiture adjustments, fourth quarter operating income was down 24% to $24.7 million and adjusted operating margin was down 230 bps to 11.8%.

For the year, Industrial sales were $770 million, down 18% from $939 million a year ago, with organic sales down 14%. The Seeger divestiture had an unfavorable sales impact of 5%, while favorable foreign exchange had a positive impact of 1%.

Operating profit of $66.6 million was down 42% from the prior year. On an adjusted basis, operating profit was $85 million, a decrease of 30% from last year. Adjusted operating margin was 11%, down 200 bps.

Moving to Aerospace. Sales were $80 million for the quarter, down 43% from last year and operating profit was $8.2 million, down 74%, primarily driven by the lower sales volume. Operating margin was 10.2% as compared to 22.3% a year ago. All-in, especially considering the meaningful decline in the high-margin aftermarket, the Aerospace team continues to respond well in a challenged environment.

For the full-year, Aerospace sales were $354 million, down 36% from a record $553 million a year ago. Operating profit was $56.8 million, down 54% from last year’s record $122.5 million. On an adjusted basis, which excludes $2.3 million in 2020 restructure charges, operating profit was $59 million and adjusted operating margin was 16.7%.

Aerospace OEM backlog ended the quarter at $572 million, up 7% from the third quarter and we expect to ship approximately 45% of this backlog in 2021.

2020 cash provided by operating activities was $215 million, a decrease of approximately $33 million versus last year. Nonetheless, solid performance in the current environment, given our focus on driving working capital improvement. Free cash flow was $175 million versus $195 million last year and capital expenditures of $41 million were down approximately $13 million from a year ago.

Regarding the balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was approximately 3 times at quarter end. The Company is in full compliance with all covenants of our credit agreements and maintained adequate liquidity to fund operations. As a reminder, the Company amended on a temporary basis, the debt limits allowed under our credit agreement. Through the third quarter of 2021, our senior debt covenant maximum, our most restrictive covenant, has increased from 3.25 times EBITDA, as defined, to 3.75 times. We anticipate leverage to peak with our first quarter 2021 results, though, well below the amended covenant level. Our fourth quarter average diluted shares outstanding was 51 million shares and our share repurchase activity remains suspended.

Turning to Slide 6 of our supplement, let’s now discuss our initial outlook for 2021. We expect organic sales to be up 6% to 8% for the year. FX is not expected to have a meaningful impact. Adjusted operating margin is forecasted to be between 12% and 14%. We expect a couple of pennies worth of residual restructuring charges to come through, likely split evenly in the first and second quarters. Adjusted EPS is expected to be in the range of $1.65 to $1.90, approximately flat to up 16% from 2020’s adjusted earnings of $1.64 per share. We do see a higher weighting of adjusted EPS in the second half with a 40% first half, 60% second half split. In particular, we see the first quarter of 2021 being the low quarterly point, given delivery schedules in our longer cycle business in the range of $0.27 to $0.32, significantly lower than last year’s strong first quarter.

A few other outlook items. Interest expense is anticipated to be between $16.5 million and $17 million. Other expense approximately $8.5 million driven by pension, and effective tax rate of approximately 30%. Capex of $55 million. Average diluted shares of approximately 51 million shares and cash conversion of over 100%.

To close, 2020 certainly was historic in terms of business disruption. The Barnes Group team rose to the occasion to rapidly adapt to the realities of the economic environment with a focus on cost management and cash generation. As Patrick mentioned, it’s now time to shift our mindset to growth with necessary investments in key initiatives like innovation and digital that are targeted to help us accelerate through the anticipated recovery. Our balance sheet is supportive of such investments and our sales volume and, as our sales volume returns, we expect further margin expansion as well.

Operator, we’ll now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] First question comes from Myles Walton with UBS.

Myles Walton — UBS — Analyst

Hey. Good morning. Thanks for taking the question.

Patrick J. Dempsey — President and Chief Executive Officer

Good morning, Myles.

William Pitts — Director, Investor Relations

Good morning, Myles.

Myles Walton — UBS — Analyst

Patrick, you highlighted a couple of areas around the elevated investment, in particular the capex and the R&D. Could you — you be able to quantify the capex, could you quantify the R&D headwind as well? Sorry if I missed it. And then also, is it primarily associated with the LEAP expansion? Is it associated with other things and maybe it’s elevated between Aerospace and Industrial?

Patrick J. Dempsey — President and Chief Executive Officer

Fair question, Myles. It’s predominantly at the moment, more focused on the Industrial side of the business. And if you may recall, last year, we indicated in our first quarter that we were going to launch our innovation hub, which was with a view to developing a new range of capabilities around research and development, particularly applied and fundamental research. So, with that, last year we indicated an approximate budget of around $5 million. We ended up coming in shy of that for the year at approximately $3 million. And then as we think about this year, we’re thinking about incremental $2 million to $3 million on top of where the run rate was last year. The emphasis is primarily on materials, software, hardware and sensors, as the areas of focus that the team that we’ve assembled in the innovation hub are directly focused on, all with a view to driving organic growth, primarily in the short-term within our Molding Solutions business.

Myles Walton — UBS — Analyst

And then on the capex, is it similar weighted towards Industrial?

Patrick J. Dempsey — President and Chief Executive Officer

The capex is a — somewhat of a two-thirds, one-third split with Aerospace looking as an expanded capabilities, as we mentioned, relative to the win on our last quarter of the new extended deal with GE. And then on the Industrial side, when we think about our capex, usually, it’s approximately 50% maintenance, 50% dedicated to growth programs.

Myles Walton — UBS — Analyst

Okay. Okay. And then just a couple of cleanups. On working capital assumptions, I know you’ve got a guidance for greater than 100% cash conversion. Working capital was a pretty big help in 2020. Is it a headwind in ’21 or is it a neutral in ’21?

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

So, Myles, this is Marian, I’ll take that. We had a great cash generation with working capital in 2020. When I look out to 2021, I think that we continue to have some level of opportunity there, particularly in inventories. So, we are looking for some modest improvements in 2021.

Myles Walton — UBS — Analyst

Okay. Great. And one last one. The margin for Aero in 2021, given the outlook you’ve had — you have for aftermarket, particularly RSP, I guess I’m pleasantly surprised that you’re thinking about a 13% to 14% margin with a mix that is, obviously, not helping. Can you maybe touch on how you’re able to do that? Or are the margins improving in the OEM business? Is this just payoff from restructuring or give some color to 13% to 14% with really no help from mix?

Patrick J. Dempsey — President and Chief Executive Officer

Sure. No, the mix is definitely not our friend as it pertains to margins on the Aerospace side, clearly, because of the depressed aftermarket side of the equation. But with that, I would say that, our Aerospace team has done an outstanding job over the course of the year with taking out costs and sizing the business to the current outlook in terms of volume. We’re looking at modest improvement in revenues, up mid-single digits on the OEM side and the team there has really done an outstanding job leveraging the enterprise system to look at how to drive, how to almost look at the business with a reset mindset and in that reset, they’re looking at, clearly, how to drive efficiency, take the opportunity now to implement greater flow into the shops with the pressure of the volumes of them [Phonetic]. And so, we’re looking for productivity coming out of our OEM business.

And with the aftermarket side, what we’re looking at and what we’ve built into our forecast is slight improvement in sales sequentially quarter-over-quarter. Still, as I mentioned, down mid-teens year-over-year. But nonetheless, within that, we see the second half of the year slightly improving over the first half as it pertains to the aftermarket, in particular the spare parts and the MRO side.

Myles Walton — UBS — Analyst

Okay. All right. I’ll leave it there. Thanks.

Patrick J. Dempsey — President and Chief Executive Officer

Great. Thank you.

William Pitts — Director, Investor Relations

Thanks, Myles.

Operator

Next question comes from Michael Ciarmoli with Truist Securities.

Michael Ciarmoli — Truist Securities — Analyst

Hey. Good morning, guys. Thanks for taking the questions here.

Patrick J. Dempsey — President and Chief Executive Officer

Good morning.

Michael Ciarmoli — Truist Securities — Analyst

Just some housekeeping just to kind of follow-up on Myles. I don’t think I got the — what was the Industrial segment margin guidance for 2021?

Patrick J. Dempsey — President and Chief Executive Officer

The Industrial side was 12% to 14%.

Michael Ciarmoli — Truist Securities — Analyst

12% to 14%. Got it. And then, in the quarter, I know you — Patrick, you kind of went through quickly some of the business unit growth rates sequentially. But can you just quickly run down Molding, Engineered, Force and Automation, what the actual year-over-year growth rates were in the fourth quarter?

Patrick J. Dempsey — President and Chief Executive Officer

Yeah. So if I look at Industrial in total — and did you ask orders?

Michael Ciarmoli — Truist Securities — Analyst

No, no. Revenues in the quarter.

Patrick J. Dempsey — President and Chief Executive Officer

Revenues. Okay.

Michael Ciarmoli — Truist Securities — Analyst

Yeah. For the business units.

Patrick J. Dempsey — President and Chief Executive Officer

Yeah. So, yeah, in terms of Force & Motion Control, sales were down modestly, whilst up high-single digits sequentially. On Engineered Components, organic sales were up mid-single digits. On Automation, our sales were up 20%. And in Molding Solutions — do you have Molding Solutions, Bill?

William Pitts — Director, Investor Relations

Yes. They were down low-double digits.

Patrick J. Dempsey — President and Chief Executive Officer

Down low-double digits.

Michael Ciarmoli — Truist Securities — Analyst

Okay. Perfect.

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

Yeah. Just to clarify one thing on Engineered Components, down about 20% year-over-year, up high-single digits sequentially.

Michael Ciarmoli — Truist Securities — Analyst

All right. Got it. And then just on the Aerospace OEM outlook. I mean, I think I heard it you’ve got 45% of that backlog ships this year. If my math is correct, that seems to be low-double-digit revenue growth if you’ve got 45% shipping. Is there — I don’t think there’s any aftermarket in there, but is the math right there in terms of what you guys called out what’s shippable this year? I guess, it implies something around $260 million shippable.

Patrick J. Dempsey — President and Chief Executive Officer

I believe that’s correct and where we look at BA on the OEM side, we’re looking to see up mid-single digits at 2021 versus 2020.

Michael Ciarmoli — Truist Securities — Analyst

Got it. But again that’s shippable points go like low-double-digit. So, just some conservatism in there?

Patrick J. Dempsey — President and Chief Executive Officer

There is — well, I think we have — we’re looking at a ramp over the course of the year. So, with that, we’re looking at a slight sequential improvement quarter-over-quarter, even within the OEM business. So there may be some cautiousness there. But nonetheless, I think we’re very comfortable with the mid-single digits.

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

We also expect some level of orders to come in and we’ll book and ship in the year in addition to what’s in backlog.

Michael Ciarmoli — Truist Securities — Analyst

Okay. So that would imply it’s even stronger in the kind of guidance you’re suggesting of mid-single-digit?

William Pitts — Director, Investor Relations

I think on the OE side, Mike, 45% of that backlog is about what we expect the OE to be.

Michael Ciarmoli — Truist Securities — Analyst

Okay.

William Pitts — Director, Investor Relations

Your numbers weren’t too far off.

Michael Ciarmoli — Truist Securities — Analyst

Okay. And then just last one for me and I’ll get out of the way. Just any color, Patrick, on the aftermarket sort of I know you’ve got the guidance here, but anything you can call out that you’re seeing from customers or anything you’re seeing from shop visits or engine inductions sort of just kind of what you’re seeing from your big customer there? I mean, how this is tracking? It seems like we’ve heard some of the big airlines need to start spending on these heavy maintenance visits. But what are you seeing from the customers there? I mean, I know you’ve talked about maybe more of a second half, but any color on shop visits or other trends there?

Patrick J. Dempsey — President and Chief Executive Officer

Yeah. Well, we actually finished fourth quarter I think in a higher place than what we had expected. Our Aerospace business overall in the fourth quarter sequentially was up 11% and we saw a strong relative — everything’s relative, but a relatively strong finish on the aftermarket, which was more I think upside than we had expected. As we move into the new year, what I would say is that, we’re seeing a little bit of volatility week-to-week, month-to-month. And not necessarily anything that constitutes stability — consistent stability.

Relative to the spare side of the business, it clearly is lagging right now the MRO activity. So we’re seeing repairs coming in at a higher rate than we’re seeing the spares. But at the same time, we actually believe that there is that pent-up demand as the vaccine takes hold and the aircraft start to increase in utilization. Definitely, I think the airlines have managed and deferred maintenance very prudently. And so, in turn — and I also think that depleted their stock relative to spares that they had on hand. So, all boding well for once we see that uptick in traffic. We expect that it will flow through into the aftermarket.

Michael Ciarmoli — Truist Securities — Analyst

Got it. Perfect. Thanks, guys.

Patrick J. Dempsey — President and Chief Executive Officer

Thank you.

William Pitts — Director, Investor Relations

Thanks, Mike.

Operator

Next question comes from Tim Wojs with Baird.

Timothy Wojs — Robert W. Baird & Co. — Analyst

Yeah. Hey. Good morning, everybody.

William Pitts — Director, Investor Relations

Good morning, Tim.

Timothy Wojs — Robert W. Baird & Co. — Analyst

Maybe just a first question I had, just on the restructuring benefits and actions that you took kind of middle part of ’20. How are you kind of factoring those actions into the 2021 guidance, if you could kind of break out any of the benefits between Industrial and Aerospace?

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

Yeah. So, this is Marian. So, in the second quarter, we had talked about annualized savings of approximately $30 million and we’re tracking and expect to realize that in 2021. What I would say — and that split of that is about two-thirds — a third or so in the Aerospace and two-thirds in the Industrial side. What I would say, though, that those cost actions really were to mitigate the impact of the lower sales. So — and we realized a portion of that in 2020 as well, really, to allow us to maintain those double-digit margins. As we go into 2021, I think we’ll see some lift in the margin on the Industrial, some benefit of that. And as we see a — if we see more meaningful recovery, we’d start to bring some of those costs back in.

Timothy Wojs — Robert W. Baird & Co. — Analyst

Okay. Okay. That’s helpful. And then just in Industrial, how should we think of the phasing for the year that’s kind of built into the revenue line? I mean, would you expect to see sequential growth each quarter through the year? Is that kind of built in? Just trying to think about how we should think about the revenue phasing in Industrial?

Patrick J. Dempsey — President and Chief Executive Officer

Yes. That’s how we’re thinking about it, Tim. What we saw was a factor between Q4 and Q1 that has had us indicate Q1 as a — the lowest quarter in the year as a result of just timing of major long lead items, which are the molds for the most part. So, orders continue to show strength. However, the timing of deliveries will move into the second, third, fourth quarter.

Timothy Wojs — Robert W. Baird & Co. — Analyst

Okay. Okay. That’s helpful. And then just kind of last one and I’ll get back in queue. But inflation, how are you kind of factoring just the inflationary environment into the margin guidance? And just kind of remind us some of the levers you’re able to pull to offset any sort of inflation?

Patrick J. Dempsey — President and Chief Executive Officer

Well, it’s a great point because it is an area that the team for months now has been out in front of and as we looked at a rebound into the — into our end markets, effectively what we’re executing is a playbook — a cyclical playbook in the sense that the teams anticipated a number of key areas where we’d see inflationary pressures, primarily raw materials, freight and then we’ve been monitoring carefully tariffs as well, which haven’t gone away.

But the — to put it in context, on our Aerospace side, recognize that most of our raw materials are pass through on pre-negotiated prices. Whilst the team in Industrial has a portion of their raw materials that are covered under the same type of arrangements with escalation openers depending on movement of raw material. And then mitigating was the — our sourcing team has done a really nice job of looking to manage to the best of their ability. Those inflationary pressures. But at the same time, on the sales side, working equally as hard to ensure that we’re passing those through to our end customers so that we’re not caught in the middle, so to speak.

Timothy Wojs — Robert W. Baird & Co. — Analyst

Right. Okay. Okay. That’s helpful. Good luck on ’21, guys.

Patrick J. Dempsey — President and Chief Executive Officer

Thank you very much.

William Pitts — Director, Investor Relations

Thanks, Tim.

Operator

[Operator Instructions] Next question comes from Pete Skibitski with Alembic Global.

Pete Skibitski — Alembic Global Advisors — Analyst

Hey. Good morning, guys. Nice quarter.

Patrick J. Dempsey — President and Chief Executive Officer

Thanks, Pete.

Pete Skibitski — Alembic Global Advisors — Analyst

Hey, Patrick, could you just give us explicitly kind of your underlying assumption for global automotive production growth that’s kind of baked in the guidance? And then I’m just curious how you’re thinking about the risk to the guidance that could stem from this semiconductor shortage.

Patrick J. Dempsey — President and Chief Executive Officer

Yeah, great question. So, as we look at the pressure that was experienced on Auto production in 2020 and now as we look out to the coming 12 months, general consensus is that, auto production will bounce back up into the mid-teens growth. We haven’t quite been that bullish. What you see within our Engineered Components business is a forecast for up high-single digits. Again, realizing that the split on our Engineered Components business, which is predominantly auto production is about 60-40 between Auto, and Industrial. So, we don’t get — we didn’t get the full impact on the downside. We don’t get the full benefit on the upside. So that gives you a sense of where the growth rates that we’re looking at in terms of Auto production for the coming year.

I will say that the — we’re monitoring closely the semiconductor shortage issue. We do believe that it’s probably going to impact us a couple of million but we’ve baked that in. What we have a line of sight to we’ve baked in right now to our forecast. If it were to increase and become even more of an impact to the industry, then we’d keep you informed of that as we move through the year.

Pete Skibitski — Alembic Global Advisors — Analyst

Okay. Okay. Got it. And then just on the model changeovers that you’re expecting in ’21 and the impact of hot runners. It sounds like you’re expecting model changeovers just maybe conservatism of the Auto OEMs that there would be kind of lower growth than the actual production rates. Is that fair?

Patrick J. Dempsey — President and Chief Executive Officer

It’s fair and at the same time, I would tell you that the model launches, we are — we remain very bullish on because of the fact that we’ve seen stepped up activity right now specifically around the electrification of vehicles and the announcements that continue to come out. So, electric vehicles for our auto hot runner business is a positive insofar is that, as these new models get introduced each of them drive demand for our services and capabilities.

Pete Skibitski — Alembic Global Advisors — Analyst

Okay. Okay. That’s great. Last one for me. I’m curious, how do you explain Automation or how should we think about Automation’s performance in 2020. Right? I mean, we went through a cyclical downturn, let’s call it, a pretty severe one, but Automation’s revenue was flat year-over-year. How do we think about that? Was FX just a really big tailwind for those guys or something else? Can you talk about that?

Patrick J. Dempsey — President and Chief Executive Officer

Well, I think the Automation team did an outstanding job over the course of the year and what they did was they pivoted to look to adjacent markets relative to applications that may have not been front and center for them previously. Automotive constitutes a significant piece of the automation market. And so, as it downturn, the team turned their efforts to medical and pharma as an example, with a view to developing new capabilities, which I think we helped in 2020 but have also set a stage for the future. The revenues, as you said, overall were flat to up low-single digits. But what we’ve seen throughout 2020 in Automation is just some nice growth, Q2 to Q3 and Q3 to Q4 with the last sequential quarter being up 22% [Phonetic]. So, the team there is doing a nice job.

In addition to the investments we made, particularly in Automation over the course of 2020, allowed us just here in the last couple of weeks to announce the launch of our vacuum product line. And that has been in development for over a year, and choreographed for entry into the marketplace this January — this last January. So, we’re excited about that as another incremental opportunity for growth in addition to the already extensive end-of-arm tooling capabilities that they already bring to market.

Pete Skibitski — Alembic Global Advisors — Analyst

Okay. Okay. Thanks so much for the color, guys.

William Pitts — Director, Investor Relations

Thanks, Pete.

Patrick J. Dempsey — President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Next question comes from Myles Walton with UBS.

Myles Walton — UBS — Analyst

Thanks. Just a couple of follow-ups, if I could. You mentioned the higher ship set on the MAX. Patrick, when does that cut over happen? Is it immediate? Is it 2022, 2023?

Patrick J. Dempsey — President and Chief Executive Officer

Well, it will move — it will gradually cut in over the next couple of years. But we look at it — even with volumes this year, we see a slight tick up in terms of demand. So, we’re building ahead right now in terms of the LEAP B in anticipation of production catching up. So we’re building a little bit of inventory as we speak, but expect that, of course, that will come in sync with actual production over the latter part of 2021 and into 2022.

Myles Walton — UBS — Analyst

Okay. Good. And then the only other follow-up was on interest and other expense. I know you mentioned I think $16.5 million for interest and $8.5 million I think was other expense, both of which are higher than I would otherwise have guessed. Could you — the run rate of interest and also in the other how much is sort of non-cash pension amortization-driven versus something cash-driven?

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

Sure. On the interest expense, so we guided to $16.5 million and $17 million, which as you say, is a bit higher than 2020. We do expect the benefit of lower average borrowings in 2021, but that’s offset by a bit of an uptick in our effective interest rate. So, we just renegotiated our revolver. We announced that last week. There is a small uptick in the rates. And as we’ve mentioned also, our covenants — we’re at the higher end of our covenants for over the 3.0 mark, which puts us into a higher pricing grid for about half of this year. So that really explains what’s going on with the interest.

On the other expense, on the pension side, there is about $3 million of headwind in there, that’s related to the discount rate. So, we — our discount rate dropped in — for 2021 and it puts about $3 million of headwind on the pension expense.

Myles Walton — UBS — Analyst

Okay. And no contributions expected this year in pension of material sense?

Marian Acker — Vice President, Controller and Interim Chief Financial Officer

We don’t plan on any discretionary, any incremental, there’s about $4 million or $5 million that’s the normal contributions that we make, but no discretionary contributions planned at this point.

Myles Walton — UBS — Analyst

Okay. Great. Thanks, again.

William Pitts — Director, Investor Relations

Thanks, Myles.

Patrick J. Dempsey — President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Next question comes from Pete Skibitski with Alembic Global.

Pete Skibitski — Alembic Global Advisors — Analyst

Yeah. Just one or two quick follow-ups. Hey, Patrick, are you still anticipating CFM56 shop visits, not the peak for several more years? Are we kind of still on that track? To what degree you’re thinking about the early retirements or whatnot?

Patrick J. Dempsey — President and Chief Executive Officer

Yeah. So it’s a great point. We definitely see the peak still out in front of us. And it’s potentially moved to the right as a result of the reset, if you like, that occurred in 2020. And so, as we look out, we think that shop visits will, obviously, down in the short term, but still on a growth trajectory as the industry recovers.

Relative to retirements, we’ve not seen the rate of what was feared perhaps in terms of a big spike. That I don’t think has manifested itself. And so, in general, a lot of movement relative to green time engines within the industry, but at the same time, that bodes well, from our perspective, in terms of pent-up demand.

Pete Skibitski — Alembic Global Advisors — Analyst

Okay. Okay, great. Just one last one for me. More broadly on the Aerospace aftermarket. I don’t know how to think about this. Do you think, Patrick, any kind of structural changes to the aftermarket as we go through this kind of historic downturn? And anything that would indicate to you that business relationships of freight or people — OEMs maybe looking at different arrangements. Anything that could potentially benefit you as a result of how big this downturn has been?

Patrick J. Dempsey — President and Chief Executive Officer

Well, I think that the entire industry has had to take a step back and relook at its business model from every angle. And to that end, what I would highlight that we are doing is staying extremely close with our larger customers with a view to ensuring that as we move forward we’re looking to demonstrate and find even more creative ways of highlighting the value that we can bring to the table as a strategic partner over the long run. As you know, our relationships have been in place for many years, if not decades, and we continue to build upon that and continue the dialogues. Definitely, there is pressure on the entire industry from a competitiveness standpoint.

And as I mentioned earlier, I think one area that the Aerospace team has been really focused on is, how to take advantage of this reset to position the business in terms of overall effectiveness and efficiency to be even leaner and more streamlined in terms of coming out of this downturn. So, looking at it as an opportunity to position for — with an eye to longer term growth, which will come inevitably. But as I mentioned, on the OE side, it will take I think a couple — a few years, a couple to a few years, whilst the OEM will just gradually improve as production rates kick back in.

Pete Skibitski — Alembic Global Advisors — Analyst

Okay. Just to continue on that efficiency point on the OEM side, any — are we at the end of the line for content gains on the LEAP-1B or any further opportunities out to you there?

Patrick J. Dempsey — President and Chief Executive Officer

I would say that we’re still in dialogue. Definitely, is a continuing, evolving situation. And so, there is clearly negotiations or discussions taking place at present relative to the outlook for potential increases in share. And a focus on just overall competitiveness. So, the team is actively engaged on that. And we’re — we remain optimistic that the value we bring to the table will put us in a good position as we continue to go forward, so.

Pete Skibitski — Alembic Global Advisors — Analyst

Got it. Thanks so much for the color.

Patrick J. Dempsey — President and Chief Executive Officer

Thank you.

William Pitts — Director, Investor Relations

Thanks, Pete.

Operator

[Operator Instructions] Next question comes from Michael Ciarmoli with Truist Securities.

Michael Ciarmoli — Truist Securities — Analyst

Hey, guys. Thanks for taking the follow-up. Just back to the Aero OEM. How big of a headwind is the 787 this year? What rate are you currently shipping at? And do you expect that to be quite a drag? And, I guess, just looking at this between the 870, A350, are you picking up the growth this year with all of the narrow-body on the LEAP? So is that what’s driving the offset?

Patrick J. Dempsey — President and Chief Executive Officer

Yeah. We see the upside on the narrow-body and definitely the wide-body been more of a drag. The 787 right now is, I think in the 5 range. So, while we’re — that’s — what we’ve done is, we’ve adjusted within the shops — our production shops to the rate to the rate that we think is most probable in light of continual feedback from the OEMs but also then relative to how we’re streamlining the shop. So — but I think for the most part now, I would say, that our — on the OEM side, we’re starting to see the rate projections which were very volatile for a period of time stabilizing as we look going into the year and the out years.

Michael Ciarmoli — Truist Securities — Analyst

Got it. And no real signs for you guys of inventory destocking? Has that sort of run its course?

Patrick J. Dempsey — President and Chief Executive Officer

I think it’s still happening, to be honest, in certain programs. And specifically on the 737 MAX, as an example, the backlog that was there in terms of parked aircraft and also white tails that had been created or produced. And so, yes, what we’re looking to do is to stabilize our own shops by — even if it means building a little inventory because we got it wrong in the short-term. We absolutely believe they’ll converge, and there’s an opportunity, in some instances, that will bleed down inventory over the course of 2021, whilst in other areas, we might be running a little heavy until the customers catch up with us.

Michael Ciarmoli — Truist Securities — Analyst

Got it. Perfect. Thanks, guys.

Patrick J. Dempsey — President and Chief Executive Officer

Thank you.

William Pitts — Director, Investor Relations

Thank you.

Operator

And at this time, I will turn the call over to Mr. Pitts.

William Pitts — Director, Investor Relations

Thank you, Sharon. We’d like to thank everyone today for joining us this morning. And we look forward to speaking with you next in April with our first quarter 2021 earnings call. Operator, we will now conclude today’s call.

Operator

[Operator Closing Remarks]