Timken Company (The)

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 Team 10's first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Anita, and welcome everyone to our first quarter 2020 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for the Timken Company. We appreciate you joining today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are the Simpkins Company's President and CEO, Rich Kyle and Phil Fricasa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call 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 FCC which are available on the Timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by the Timken Company and without express written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in the Timken Company and I will now turn the call over to Rich.

Thanks Neil, good morning everyone and thanks for joining us today. I'll start with some very brief comments about the first quarter and then spend most of my time discussing the impact that the COVID-19 pandemic is having on our business and the actions that we are taking in response. We had a good first quarter, particularly in light of the impact from the coronavirus in China in February and then the bigger impact it had across the globe in March. Our end markets were largely in line with our projections for the first two months of the year. Then in early March, we began to experience various adverse impacts from the virus. Our execution was good both in regards to our results as well as our quick response to the impact from the virus. For the quarter, organic revenue was up 3% from the fourth quarter and down 9% from the first quarter of 2019. The acquisitions of Becker and Diamond added 5% to our revenue Thank you very much. The business will not be immune to the short-term COVID-19 issues we are facing, but after six months of ownership, we remain very optimistic about the potential of this acquisition and the synergies with Cronovel. Again, it was a good quarter, but as you all know, our markets have changed significantly since February, and I will expand on the impact that we have seen from the coronavirus. Our first experience with the coronavirus was in China in late January and early February. We were shut down in China for one full week due to government mandate and then we lost about the equivalent of another week due to ramp issues that impacted us and our customers. By the end of the first quarter, our China customers and our China operations were back to normal levels. We grew year on year in March and again in April. After China, our next business impact was in Italy. We have three manufacturing facilities in Italy that serve local as well as export markets. From there, the virus and government mandates spread through Europe to the US and other parts of the world. In the beginning of March, we were experiencing a modest revenue and production impact in Italy. And by the last week of March, our revenue in Europe was down by over 50%. The global automotive and truck industries were essentially shut down. India had mandated a shutdown of all industrial manufacturing, and the impact was starting to hit industrial markets in the US and the rest of the world. In the last two weeks of March, we have temporarily idled over 30% of our production, primarily due to weak customer demand. And all of those issues are included in our $1.11 of earnings per share and our 19.2% EBITDA margins. So again, we performed very well given the environment in the first quarter. Let me now jump to April. From a supply perspective, Tempcon operations have largely been deemed essential around the world, and we have been able to meet customer demand. We've had some supply challenges and inefficiencies, primarily in Italy and India, but supply has not been a major contributor to our revenue decline, and we are filling the needs of our customers. Our expectation is that this coming Monday, restrictions in India and Italy will be lifted, at which point we will be able to operate all Pimpton Global facilities to the degree that we need to. We expect April revenue to be down slightly more than 30% from prior year. Some more color on that number. Europe has been the hardest hit geography for Timken. Our revenue in Europe bottomed for about three weeks starting in late March. It bounced up meaningfully off that bottom in mid-April, and we believe we have more customer demand coming back in the next couple of weeks as customers restart or step up operations. The U.S. has been about three to four weeks behind Europe in regards to impact, and we've been hovering around what appears to be a bottom for the last three weeks or so in the U.S. Our automotive business in the U.S. has been down over 80% in April, and while we do not have definitive restart dates, we do expect more automotive revenue in May and June than April. China, as I said earlier, was up year on year in April, largely driven by renewable energy. and India with close to zero revenue for the entire month of April. We expect India customers to restart demand beginning next week but starting at modest levels. Our other smaller geographies are all experiencing various and in most cases significant declines in demand and have not yet shown signs of a rebound. In regards to the outlook for the rest of the second quarter of the year, the situation remains dynamic and our visibility is limited. We are in close contact with customers. We're managing our supply chains tightly and we plan to remain flexible through the second quarter. There are a lot of variables and possibilities for the second quarter and we will continue to be responsive to changes in demand. As we look out, there are positive signs as well as negative signs. I'll start with some of the positives. The spread of the virus appears to be much better than the worst case scenarios that we were contemplating in late March and early April. The world in general appears to be headed to reopen and work through the pandemic in the coming weeks, and Timken and other manufacturers are quickly implementing new work practices to aid in safely working through the pandemic. Our customers have not made structural reductions in capacity. They have furloughed employees and temporarily shut down plants, but they have not closed plants, permanently reduced staffing levels, or reduced inventory. They are planning and prepared for a rebound. A significant amount of customers are telling us that they intend to ramp up production through May and June, and that they expect the third quarter to be better than the second. Simpkins should see improvement off of April revenue levels for automotive, commercial, truck in India, which have all been at extremely low levels, as well as several other markets where revenue has also been low in March and April. And also positive, The diversity of our revenue by in-market, customer, and geography has put us in good position to weather the storm. As an example of that, our demand in China, wind, solar, aerospace defense, marine, logistics, and several niche markets has remained strong through the pandemic. On the negative and uncertain side, we do not know how the pandemic will play out, including if there is a resurgence in the virus as the world lifts restrictions and returns to work. And while, as I said, our customers generally remain optimistic on ramping production back up in May and June in the third quarter, they also do not know how this plays out. They don't know how the virus plays out, and they don't know how their own customer demand will develop in the coming months. And while we have several markets and customers that appear to have bottomed, we also have several that are likely to weaken or taken more time to recover, commercial aerospace, oil, and longer cycle markets like our industrial services are all likely to be lower in the coming months. There's also the risk of channel destocking. As I said, our customers have largely responded to this with temporary actions, but if demand remains down, we could experience inventory destocking impacts. And while China and several of our other markets remain strong, there's no guarantee that they will be immune to the economic spillover from the other markets. Based on all these factors, we are planning for a very challenging second quarter. but also for the second quarter to be the bottom and to see sequential revenue improvement off the second quarter and the third quarter. But again, there are a lot of variables in play. The situation remains dynamic and we are preparing for a wide range of revenue possibilities. The Tempter Management Team has responded quickly and decisively to the pandemic. We've taken significant actions to retain our employees while keeping them healthy, to serve customer demand, reduce costs, and assure liquidity and financial strength through the crisis. Let me expand on each of those. Safety has always been at the top of Timken's priorities and remains at the top through the pandemic. We've been very proactive across our global operations in assuring safe workplaces and safe practices for our associates. We were early adopters of preventative measures that included work from home and restricted travel, PPE, social distancing within our facilities, and more. And we will continue to lead in our safe operating practices. As I said, we are prepared for a wide range of demand possibilities. While we hope the worst doesn't happen, we will be prepared if it does, and we believe we can stay profitable and positive quarterly cash flow through a significant and sustained decline in demand. We've taken short-term steps to increase our liquidity, which Phil will go into in a moment. We hope this will prove to have been unnecessary, but again, we are prepared for a wide range of demand scenarios. We've increased our focus on cash generation and are confident that we will generate strong cash flow in a contracting or expanding market in 2020. And again, Phil will elaborate on this in a moment. We will be more conservative on capital allocation until the virus and our demand stabilizes, including the suspension of share buyback and the deployment of free cash flow after dividends to the reduction of debt. We have quickly reduced production in line with reduced demand. We do not expect to reduce inventory levels significantly until we get better clarity on the outlook, but we will manage working capital in line with demand levels as the year progresses. In a down market scenario, working capital will be a significant generator of cash for us. We slowed capital spending in the second quarter and expect the full year to be more than 20% below our prior guide of $160 million. We could go further, but that will depend on better visibility of the second half. as we continue to believe in the long-term attractiveness of investing in our markets and the value creation of our capital projects. But we will slow it further if the recovery is slower. We came to the year with a good pipeline of cost reduction activities, the partial results of which were evident in our first quarter margins. We will continue to execute these initiatives through the year to drive structural cost improvements. Through April, we have retained our global workforce and their benefits. However, we have all taken various forms of temporary reductions in our compensation, and I appreciate our employees' sacrifices and support of these measures. We've taken an aggressive approach to temporary cost reductions in the second quarter that include reductions in spending, furloughs, and compensation reductions. We expect compensation costs to be down more than 25% in the second quarter. However, these are temporary measures. During May and June, we will prepare to make structural cost reductions in the second half of the year if they are deemed necessary as visibility to demand improves. We remain closely connected with our customers, their production plans, their new product plans, and we remain focused on our long-term objectives to outgrow our markets. In summary, the Pentium Company is well-positioned to perform through this crisis. Our strategy is to diversify the revenue of the company by product, by end market, and by geography, and that diversity will serve us well. Our products are critical elements of our customers' equipment and supply chains. We have been solid generators of cash and will continue to be in shrinking or growing market conditions. We have been disciplined allocators of capital and entered the downturn with a good balance sheet. And we have a management team that has significant experience in managing through challenging cycles. and a dedicated and talented workforce that is committed to our success. I'll now turn it over to Phil.