Timken Company (The)

Please stand by. Good morning. My name is Kathryn and I'll 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 third 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 the star then the number one on your telephone keypad. If you'd like to withdraw your question, press the star then the number two on your telephone keypad. Thank you. Mr. Frohnapple, you may begin your conference.

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

Thanks Neil, good morning and thank you all for joining us for our third quarter call. Simpkin delivered a solid third quarter as we experienced sequential strengthening off the second quarter above our expectations across most end markets and geographies. Strengthening markets combined with strong growth in renewable energy and the BECCA acquisition resulted in sales up 11% from the second quarter and down just 2% from the third quarter of last year. We delivered solid EBITDA margins of over 19% with good operating performance, positive price, and the benefit of cost reduction initiatives all contributing to the results. Earnings per share of $1.13 was down just one cent from last year. We reduced inventory in a quarter and generated over $120 million in free cash flow. Even where we and our customers were early in the second quarter, the third quarter was a solid rebound and strong performance by Timken. To expand further on revenue, the trend of sequential strengthening that we began to experience in May continued through the third quarter. As a general statement, the markets that were the most depressed in the second quarter were the strongest in the recovery. Automotive, truck, India and off highway equipment are all examples of markets that were extremely depressed in early Q2 and have been improving sequentially since then. Our strategy to increase our presence in renewable energy markets continue to pay off with very strong year-on-year growth in both wind and solar begin this quarter. China also remained a bright spot as the country continues to be significantly less impacted by the coronavirus than most of the rest of the world. India, Defense, Marine, and Ag were also solid in the quarter. The BECCA acquisition contributed about 3% to the top line. Outside of the markets just mentioned, most other markets were down year on year from mid-single to high-teen percentages. Total revenue was down a little over 5% organically and strengthened sequentially through the quarter, which is a solid step up from the second quarter It is indicative of the strength and diversity of Timken's product portfolio and market mix. We have a few slides in the deck on renewable energy which provide some industry forecasts on the global shift to renewables as well as illustrate where we participate in the market. 2020 has been an excellent year for our renewable energy business with strong growth in both wind and solar. Market outlook for 2021 has continued to improve. and combined with our penetration initiatives we are planning for another year of positive organic revenue in both wind and solar in 2021 on top of 2020's record year. We recently announced our new military marine contract and we expect year-on-year growth in marine in 2021 as well. In other markets, customer engineering activity on new product platforms remains robust with a lot of emphasis on energy efficiency and miniaturization. Timken is well positioned to win more than our share of new platforms in 2021. Despite organic revenue being down, EBITDA margins were within 40 basis points of last year and earnings per share was only down one cent. We had a modest impact in the quarter of temporary cost and compensation actions and we believe the quarter is largely indicative of our ongoing cost structure. Pricing remained modestly positive year on year and flat sequentially. We expect price in 2021 to be flash. From a cost perspective, the temporary cost actions related specifically to compensation reductions and furloughs were relatively modest in the third quarter, roughly $0.03, and are not expected to extend into the fourth quarter or 2021. However, there are other and larger temporary and volume-related cost reductions, such as travel and reduced plant headcounts, that contributed to results and will continue for at least the next several quarters. From a structural cost perspective, we come into every year with a plan to reduce costs from acquisition integrations, our digital investments, our footprint transformation, our CapEx projects, and our ongoing drive for productivity and efficiency improvements. With the onset of the coronavirus, we began to accelerate various initiatives and added an SG&A rightsizing initiative in the third quarter. We continue to have a healthy level of activities around reducing structural costs in manufacturing and SG&A. The bottom line is that we are confident that the reduced cost structure in the third quarter results is sustainable for the next several quarters, and we will continue to launch additional initiatives in 2021. While we are not providing a specific revenue outlook for the fourth quarter due to the elevated uncertainty levels, we are planning for normal seasonality to end the year and to start 2021. A few more details on that outlook. First is a reminder that our normal seasonality would be a modest sequential decline from the third quarter to the fourth in the 2% range. And then typically a larger sequential increase from the fourth quarter to the first quarter. Despite the strong October, that is what we were planning for this year, as well as to start 2021. With the level of uncertainty we are facing, the possibilities around that as a midpoint are wider than normal, but we believe normal seasonality is a good middle of the road for us to plan around and then move up or down as the situation develops. Second point, we have not seen any change in demand from the recent uptick in coronavirus cases around the world. Customers continue to operate and demand has not been impacted. Clearly, there are risks that are beyond our control. The governments appear to be more focused on social restrictions than industrial restrictions and we continue to take extra precautions to keep our operations safe and running. As I said in my comments, revenue improved sequentially through the third quarter and that trend is on track to continue in October. We expect October to be slightly stronger than September and our strongest month since January. However, November and December are typically among our weakest months of the year, so sequential strengthening off of October would be a challenge. My final comment on the revenue outlook is a reminder that we were a few quarters into cyclical decline when coronavirus hit, so now after the third quarter, we are at five quarters of cyclical decline in many industrial markets, which includes a lot of inventory destocking across multiple channels, all of which bodes well for a rebound at some point soon. We expect cash flow to be solid in the fourth quarter and to end the year with a solid balance sheet which brings me to capital allocation. Capital allocation remains a critical element of our value proposal and we remain committed to our framework with CapEx and the dividend as the top priorities. We are on track to be back in position to shift from debt reduction to greater value creation opportunities in 2021 and we will have a bias to M&A with share buyback as a viable option. M&A activity did return in the third quarter. Our most recent acquisition, BECA, will hit its one-year anniversary at the end of this month. Despite coronavirus, we've managed to improve margins several hundred basis points this year through the consolidation with Gronevelt, with more margin expansion expected in 2021. And we are doing so while building a global leader in automatic lubrication technology. In summary, Timken continues to perform well through a very challenging year. We are keeping our operations safe, serving our customers, delivering solid financial results including strong free cash flow, and advancing our strategy to build a high-performing industrial leader. Phil?