Timken Company (The)

Please stand by. We're about to begin. Good morning. My name is Paula 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 Tim Kim's 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, 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. Froneppel, you may begin your conference.

Thanks, Paula, and welcome everyone to our fourth quarter 2021 earnings conference call. This is Neil Froneppel, 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, and thank you for joining us today. The fourth quarter was consistent with the trend that we saw early in 2021 and that ran through the full year, with strong revenue across most end markets and geographies, rising costs, particularly in steel and logistics, and an abnormally high amount of inefficiencies across our operations from labor and supply chain challenges. The result was revenue of $1.01 billion and earnings per share of 78 cents. Revenue was up 13% from 2020 and up 10% from the prior fourth quarter record. We delivered this revenue growth despite continued supply chain and operational challenges. The revenue strength was broad-based and orders were also strong across almost all markets. Backlog grew despite the record level of shipments and is up significantly sequentially and over prior year. Ramping up to meet the demand continued to require a significant cost premium as costs increased further in the quarter and price costs remained negative. Price was up both year on year as well as sequentially in the quarter and contributed modestly to the revenue growth but lagged the cost increases. Result was a year-on-year decline in margins of 280 basis points and a decline in earnings per share of 7% for the fourth quarter. For the full year of 2021, Timken delivered record revenue of $4.1 billion, which was an 18% increase over 2020 and a 9% increase over 2019, the prior high mark for revenue. We delivered strong revenue levels despite significant challenges with supply chains, including labor shortages, transportation delays, and material shortages. The growth was driven by robust industrial demand across most end markets and was boosted further by our outgrowth activities, including delivering a fourth consecutive year of double-digit growth in renewable energy and a 12th consecutive year of completing at least one acquisition. Our focus in 21 on responding to our customers' demand and increase in our market position did come with a significant cost premium. Costs increased sequentially each quarter through the year. The primary drivers were steel, logistics, and supply chain inefficiencies. The challenges ranged from higher than normal absenteeism and onboarding costs within our plants to transportation delays, material shortages, and premium costs associated with securing supply. Price costs went modestly negative early in the year and by the second half had a significant impact on margins. Our price realization in 21 lagged the cost increases in magnitude and timing due to a combination of factors that included contractual commitments as well as inflation exceeding our expectations. We began increasing prices in the second quarter of the year and price realization increased sequentially each month from April through December. Price for the year was up under 1%. and margins for the year declined by 140 basis points as the negative impact of costs more than offset the benefits of increased revenue and price. Despite the supply chain challenges and rapid increase in costs, Timken did deliver record earnings per share of $4.72 in 2021, and we were positioned for another record year in 22. We added 5% more employees to our global plant staffing levels through the course of the year, We also added inventory to serve increased customer demand and to accommodate for supply chain issues. We made progress on mitigating internal and external supply chain constraints and inefficiencies, and we expect productivity gains in 2022. We have negotiated or implemented price increases for much of the portfolio, which will be evident in the 2022 results. We enter 2022 confident that price realization will be significantly higher than it was last year. Due to strong markets, our rapid response to the increase in demand, and our outgrowth initiatives, our backlog grew significantly through the course of the year, and we are well positioned to deliver another year of double-digit top-line growth. During the year, we executed well against our long-term strategy. We completed the acquisition of IMS, strengthening our linear motion offering and robotics. We continued our investment in our digital platform with the elimination of two legacy ERP systems. We advanced our footprint with the closure of a facility in Italy, the opening of a facility in Mexico, and the investment of $150 million in CapEx, including the advancement of our previously announced $75 million investment in renewable energy. The 21 CapEx will help us achieve new levels of revenue in 22, as well as mitigate the cost and labor issues that we faced last year. We continue to deliver financially and strategically on our acquisitions, including the 2019 acquisition of Beka lubrication systems. Despite the challenges from the pandemic and the supply chain issues, which started within a few months of closing, we continue to deliver synergies and value from the Beka acquisition. We have completed integration of Groenevel and Beka's management teams, product lines, and sales forces. We've invested in and launched new products that are being well received by the market. and we advanced the footprint, including the closure of our manufacturing operation in the UK and the expansion of our operations in the US and China. We continue to pursue M&A opportunities, and we expect our M&A activity to increase in the next couple of years. We ended the year with a strong balance sheet and would expect capital allocation to be a significant contributor to our results in the coming years. We also advanced our corporate social responsibility program in the year, and our Timken team continues to prioritize employee safety and employee diversity, giving back to our communities, and advancing environmental sustainability in our operations and through our products. As a result, Timken was once again recognized as one of America's most responsible companies. Turning to the 22 outlook, we are guiding the 10% revenue growth across the portfolio. 10% is comprised of 7% volume, 4% price, and negative 1% currency. We are expecting almost all markets to be up at least mid-single digits. As I mentioned earlier, our backlog to start the year is high, order flow is strong, customer sentiment is bullish, our growth pipeline is robust, and our production, plant staffing, and inventory levels are all up. We are still dealing with various supply chain issues, but we are off to a good start to achieving the 7% volume growth, and we have the backlog and momentum to support the revenue outlook for the full year. On the 4% price, the actions needed to achieve this level have already been implemented or negotiated, and we are confident that we will realize at least 4% this year. The majority of the pricing is in effect today, so it will be evident in the first quarter results. We're also guiding to $5 to $5.40 of earnings per share, which would be up about 10% at the midpoint, with EBITDA margins of about 17%. In those estimates, we're assuming that the increased cost levels we experienced in the second half of 21 hold for the full year of 22. That is what we are experiencing to start the year. We believe we've been conservative in our cost assumptions. We're including market, inflationary, and manufacturing costs. But the supply chain situation remains very dynamic, and the range of possibilities remains wider than normal. We remain very focused on both mitigating the supply chain costs and recovering costs with pricing. In summary, we expect to deliver record revenue and record earnings per share in 22 in what remains a robust but very choppy industrial market expansion. And we will do it while continuing to advance and grow our market position as a diversified industrial leader creating long-term value for all stakeholders. Phil?