Timken Company (The)

Good morning. My name is Anna, 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 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 two on your telephone keypad. Thank you. Mr. Fraunappel, you may begin your conference.

Thanks, Anna, and welcome everyone to our first quarter 2021 earnings conference call. This is Neil Fraunappel, 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 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 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, everyone, and thank you for joining us for our first quarter earnings call. I'm very pleased to report that we delivered both record revenue and earnings in the first quarter. The revenue results reflect broad strengthening across most of our end markets, excellent execution by Timken in managing our supply chains and our operations, the diversity and strength of our portfolio, and our outgrowth initiatives. Revenue of $1,025,000,000 was up 11% from last year. The strengthening in our markets that began mid-last year accelerated in the quarter, and despite a wide variety of supply chain challenges, we responded to the increase and delivered revenue that was up 15% from the fourth quarter. The sequential strengthening from Q4 was broad, as most of our end markets were up double digits sequentially. The year-on-year growth was again led by renewable energy as Timken continues to increase penetration in global wind and solar markets. Off-highway, heavy truck, automotive, and general industrial markets were also up double digits year-on-year. Geographically, Asia at plus 30% drove much of the year-on-year growth, but more importantly, we are now seeing sequential growth across all major geographies. The sharp increase in demand combined with the lingering impacts from the pandemic stressed many of our supply chains and operations. We experienced labor challenges, freight delays, supplier delays, and unanticipated changes in customer demand. We were impacted negatively by both the Suez Canal as well as chip shortages in the quarter. And while these two issues grabbed a lot of the headlines, they were just two of the many issues across our global supply network that we successfully managed our way through. We continue to experience some inflationary pressures, primarily in freight and raw material, but they continue to be very manageable. Pricing was slightly positive in the quarter as material surcharges kicked in. Despite the inefficiencies and cost pressures, we were able to ramp up to meet the increased demand and, in the process of doing so, deliver record earnings per share of $1.38 and EBITDA margins just shy of 20%. Cash flow was seasonally low and impacted by the significant increase in accounts receivable from the sequential sales growth. Cash flow the remainder of the year is expected to be strong. We continued to advance our strategic initiatives in the quarter. We delivered strong year-on-year growth in renewable energy of over 30% while continuing to advance our announced $75 million investment plan. Many of our smaller outgrowth initiatives across multiple end markets also contributed to the record Q1 revenue results. Aurora Bearing had an excellent first full quarter as part of Timken, and we were rapidly moving to integrate the business. Our Groeneveld-Becca transformation into an integrated and globally leading automatic lubrication systems business is also on track and is already accretive to company margins. We continue to advance our footprint Our New Mexico plant is in production and will be ramping up through the course of the year. And we are completing several footprint consolidation initiatives, including the relocation of our diamond chain plant and the expansion and modernization of our solar operations in China. We also plan to convert two more operations to our primary ERP and digital platforms in the second half of the year, which will facilitate both revenue and cost synergies. Overall, an excellent quarter from Timken in delivering results in a dynamic environment while advancing the company for long-term success. And while the pandemic has improved in many parts of the world, it has hit new peaks in others, and I want to reinforce that we continue to place employee safety at the forefront of all of our operating decisions. As we look forward to the rest of 2021, market demand remains very strong and Temkin remains in an excellent position to capitalize on the markets. We are now estimating full year revenue to be up 18% over last year to a record $4.1 billion. We're planning for normal seasonality with a slightly weaker second half than first half. On the bottom line, we are getting to a record $5.30 of earnings per share at the midpoint, which would be almost 30% higher than last year and 15% higher than 2019's record of $4.60. In support of our top line and bottom line estimates, orders and customer demand are very strong. Customer sentiment on the second half of 2021 and into 2022 is bullish. We continue to win in the marketplace with our outgrowth initiatives, and we are focused on creating shareholder value and driving future growth through capital allocation. I would like to caution that there is more uncertainty than normal in our estimates. We are currently facing daily supply chain and cost challenges, which continue to elevate the level of uncertainty in our business. In both the revenue and earnings estimates, we have assumed continued supply challenges at our customers. our operations, and our suppliers' operations. We expect the issues to continue at roughly the first quarter pace through the second quarter and then to improve through the second half. But these issues have not been predictable and the range of possibilities remains wider than normal. Over the last several years, including in this first quarter, we have consistently and reliably demonstrated the ability to successfully navigate highly dynamic markets and macroeconomic forces and we're confident in our ability to continue to do so in today's environment. We delivered strong EBITDA margins in the first quarter, which we expect to translate to solid margins for the full year, and we remain committed to our long-term target of 20%. The price-cost situation remains a modest headwind, but a manageable one, and it is being more than offset by volume and other cost improvements. We expect a good year for cash flow and expect to continue to generate value through capital allocation with a bias to M&A. The impact of all three of our strategic pillars of outgrowth, operational excellence, and capital allocation are evident in our first quarter results as well as our outlook for the year, and we will continue to build our pipeline and advance our initiatives. While short-term, there remains a high level of anxiety around the pandemic and the associated supply chain challenges, customers in global capital equipment markets are very optimistic about the future. We are well positioned to continue to grow in renewables, but the Timken story is bigger and broader than just renewables. Across our markets, there is an enormous amount of new equipment design work taking place at our customers, with a particular emphasis on improving sustainability. In Timken's value proposition in contributing to the efficiency of future generation equipment designs, is a core strength and competitive differentiator for the company. The renewed interest and increased infrastructure spending will also favorably ripple through many of our markets in the coming years. Timken is well positioned to continue to grow and win in the marketplace. In summary, we achieved outstanding results in the quarter and are on track to deliver a record year. And with that, I will turn it over to Phil.