Timken Company (The)

Good morning. My name is Katie, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I'd like to welcome everyone to Timpkins' fourth 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 1 on your telephone keypad. If you would like to withdraw your question, please press the star, then the number two on your telephone keypad. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Katie, and welcome everyone to our fourth 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 Forcasa, 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 a chance 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. Our fourth quarter revenue was higher than we anticipated as the sequential strengthening in our markets that started late in the second quarter of 2020 continued to accelerate. Sales were down slightly from 2019, less than 1% in total and 3% organically. That market momentum is continuing through the start of 2021, which I will talk more about in a moment. All earnings per share and margins for the quarter were in line with prior year on a similar sales level. They were below our expectations. Currency was a significant year-on-year impact on the bottom line, and we do not expect that to recur at this level to start 2021. Our mix was a headwind, and then we experienced a variety of cost challenges, primarily related to improving demand, which Phil will elaborate on as he goes through the details of the quarter. We expect to see a significant step up from the fourth quarter in revenue, earnings per share, and margins in the first quarter of 2021. For the full year of 2020, I'm very proud of how Timken navigated the unexpected challenges that came at us through the year and how we served customers and performed financially. Safety is always a top priority for us, and in 2020, it took on an entirely different meaning as our leaders and associates adjusted to the challenges of working through the pandemic. We were there for our customers when they were ramping down and when they were ramping back up. We won new business and had a record year in renewable energy and across Asia Pacific. Our results demonstrate our resiliency and how the company today is better positioned to perform through industrial cycles. Slide 7 in the deck compares our 2020 financial performance to the industrial contraction of 2016 and highlights how far we have advanced as a company. Our revenue was down 7% in 2020, which, given the market, was good performance and demonstrates the improved diversity of our portfolio. Our EBITDA margins of 18.8% were 400 basis points higher than 2016, despite the turbulent market conditions. Charts on slide 8 highlight the progress we have made as a company financially. In 2017-19, we demonstrated how we could perform in good industrial markets Thank you all for joining us. Thank you for joining us today. In 2020, renewable energy became our single largest market, representing 12% of company revenue. The strong underlying market, share gains, and our competitive advantage in application engineering and R&D drove this growth. Our active pipeline of new business wins and ongoing investments have positioned us for growth around 15% again this year. And our recently announced $75 million of investments will prepare us for further growth in renewables in 2022 and beyond. And we achieved all those accomplishments in the middle of a global pandemic. 2020 was not a year that any of us expected or would like to repeat, but we made the most of the situation while advancing the company for the better times ahead. As we look forward to this year, a few comments on what we are seeing in our markets and planning for in the year. First, I would say that uncertainty continues to diminish, but does remain higher than normal. Our customers and Timken continue to navigate the pandemic-related challenges to our workforces and our supply chains. We have experienced cost and supply issues with logistics, material, and labor, as have our customers, and we expect that to continue through the first quarter. So we expect bumpiness over the next few months, but much of that is being driven by an improving demand situation across our end markets. These are normal issues for us in an upturn, and we are confident in our ability to manage through the issues effectively. We're planning for first quarter revenue to be up at least high single digits sequentially from the fourth quarter. In mobile industries, heavy truck and off highway continue to strengthen significantly, while automotive and the defense side of aerospace are also strong and above prior year. Rail and commercial aerospace will start the year down. We expect commercial aero to remain down through the year, but rail to improve and turn positive as the year progresses. In process industries, we expect renewals in marine to start 2021 strong and be up double digits for the year. Industrial distribution finished 2020 weak as expected, but picked up in January is continuing to strengthen in early February, and we plan to be up meaningfully for the full year. Industrial services, general industrial, and power transmission start the year down, but we see a good improvement trend and expect them to strengthen and turn through the first half of the year. After the step up in first quarter revenue, our guide assumes a modest sequential increase to the second quarter and then normal seasonality, which is a slightly weaker second half of the year than the first half. Should market demand continue to accelerate across global industrial markets greater than those assumptions, we would be in an excellent position to respond. And regardless of where our markets go in the second half of 21, We will continue to aggressively pursue our new application pipeline and product vitality initiatives to make sure we are capturing more than our share of the market growth. We expect to deliver record bottom line performance on the improving revenue situation with earnings per share of $4.90 and EBITDA margins up slightly from 2020 at the midpoint. We also expect to deliver solid free cash flow of over $300 million for the year. There are a lot of moving pieces in both directions from a cost perspective in the guidance. In the bottom line projection, we have accounted for the cost pressures we're currently experiencing in our operations, the impact of variable costs ramping back up with volume, the benefit of the structural cost reductions taken last year, as well as those planned for this year, and the non-recurrence of the temporary cost actions taken primarily in the second quarter of last year. We expect pricing to be roughly flat for the year. From a balance sheet perspective, we are back in a position to deploy capital in 2021. After the dividend and CapEx, our bias remains towards M&A. Finally, five summary points that I would like to wrap with before turning it over to Phil. We performed very well in a challenging market in 2020. Over the last five years, we've demonstrated our ability to grow the earnings power and cash generation of the company through the industrial cycle. We will continue to create value through strong free cash flow generation and disciplined capital allocation. Our markets have strong momentum to start 2021, and we are well positioned to deliver record results in 21 while building the future of the company for shareholders and employees. I'll now turn it over to Phil to go into more detail.