Timken Company (The)

Good morning. My name is Christina, 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. Frohnapel, you may begin your conference.

Thanks, Christina, and welcome everyone to our first quarter 2022 earnings conference call. This is Neil Frohnapel, 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. Finally, I would like to announce that we are planning to host an Investor Day on Wednesday, September 28th in New York City So please stay tuned for more details. 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. Timken delivered an excellent first quarter with record revenue, record earnings per share, and 20% EBITDA margins. And we delivered the results in the face of continued inflationary pressures, supply chain challenges, and lingering COVID issues. Our performance demonstrates the resiliency of the company and builds on our track record of delivering strong financial results through industrial cycles and dynamic market conditions. In the quarter, demand continued to be very strong across almost all markets and geographies. Despite the persistent supply chain and COVID challenges, we increased revenue by 10% over last year's first quarter and by almost 12% compared to the fourth quarter. Even with the strong revenue, incoming orders continued to outpace shipments and backlog grew sequentially. We achieved neutral price cost in the quarter, which was the primary driver of the improved EBITDA margins. We repriced many of the annual contracts at the start of the year, and we continued to move spot and aftermarket pricing through the quarter. We were on track to achieve greater than 4% price this year. Earlier in the year, we forecasted that costs would hold at fourth quarter levels, and that is largely what happened until late in the quarter when we saw costs tick higher after the Russia-Ukraine war began. As a result, price realization in the quarter completely offset the significant year-on-year increases in material and logistics costs, and manufacturing costs were essentially flat from prior year. Sequentially, performance strengthened each month through the quarter, both operationally and financially. COVID and supply chain issues persisted but improved as the quarter progressed. However, the Russia-Ukraine war and the China COVID disruptions did not become issues until late in the quarter, and we are assuming they will both have a bigger impact on the second quarter results. More on that in a moment. In terms of capital allocation, we repurchased 1.5 million shares of stock in the quarter, or approximately 2% of the outstanding shares, and we paid our 399th consecutive dividend. On Friday, we announced the acquisition of Spinea. Spinea is a technology leader in serving robotics and automation OEMs, particularly in the factory automation sector. The business is an excellent complement to Cone Drive, and together the businesses will provide customers a package of leading technology solutions for their factory automation systems. Spinea comes to Timken as a solid financial performer with pre-synergy EBITDA margins of around 20%. We are excited to soon have it in the portfolio and welcome Spinnea employees to Timken. Overall, it was an excellent start to the year. Timken has established its ability to deliver results through all sorts of varying economic and geopolitical conditions, including inflation, and now, unfortunately, a war in Europe. Timken will perform well in an inflationary environment. While rising commodity prices and input costs may pinch our margins in the short term, like they did at the end of last year, we will recover those costs in the market with time. And while the inflation we've experienced in the last year is significantly more pronounced than any we have seen in the last couple of decades, we remain confident that we can recover input costs in the market through pricing, and the first quarter demonstrated that ability. Turning to the outlook, uncertainty remains elevated and the range of possibilities for the rest of the year remains wider than normal. We lowered our revenue outlook slightly for the full year, due to the possibility of headwinds from the Russia-Ukraine war, currency, and the continuation of the supply chain issues. We suspended Russia operations near the end of Q1, and we are assuming in our guide no Russia revenue for the remainder of the year. Last year, Russia was about 1% of sales. The change in revenue outlook is not a reflection of current demand for our products or our ability to supply. Demand for our products continued to grow through the first quarter and remains very strong. Pricing environment for Timken is also very positive. Pricing took a step up in Q1 from the fourth quarter, and we expect it to continue to increase modestly through the remainder of the year. We have continued to increase production levels through capacity adds, increases in staffing, and through productivity gains. We are in good position to deliver the 10% organic revenue for the full year. And that assumes that we, our customers, and our suppliers all continue to deal with various supply chain issues at an elevated level for the full year. Across the company, April shipments continued at roughly the March pace, and that is despite a slowdown in China from the COVID restrictions and no revenue in Russia. Overall, the demand situation is stronger than our revenue outlook as we continue to assume in the revenue forecast that there will not be any significant improvement in supply chain performance through the course of the year. As I mentioned, our China revenue was impacted in April from COVID restrictions. Our plants are running and have not been significantly impacted, but customer shipments as well as exports are both down as customers and logistics networks have been impacted. We have assumed that this will improve by the end of the second quarter and will not be an issue in the second half, but that remains uncertain. From an earnings perspective, we are holding the prior guidance range of $5 to $5.40, which also reflects the higher level of uncertainty that we are facing. We are assuming our costs to be higher in the second quarter than they were in the first and to hold at the higher level for the rest of the year. We saw energy, steel, and commodity prices increase with the start of the war, and other costs, including logistics, have not eased. We don't know if the recent uptick in costs will hold or be transitory, but I would say that we are being significantly more cautious on our cost outlook than we were at this same point last year. Last year at this time, we assumed that much of the inflation would be transitory. This year, we are assuming that it will stick. We are, of course, working tirelessly to mitigate both the inflation and supply chain costs, And there's also the possibility that the cost eases through the balance of the year. But we're also preparing that we will need to realize more pricing both this year and in 23 to offset the net impact of these higher costs. We expect cash flow to seasonally improve the rest of the year, but to remain well below 100% conversion. This is due to increasing working capital to serve the growth and to mitigate supply chain challenges. Our balance sheet remains strong. We remain active in the M&A market. and we expect to continue to allocate capital through the remainder of 22. In closing, I want to reiterate that our performance the last several years, including our first quarter results, has really demonstrated the enduring strength of our product portfolio, the diversity of our market mix, and the capabilities of the Timken team. Timken has been a mid- to high-teen EBITDA margin business every year for over a decade. That's through the highs and lows of industrial cycles, falling and rising commodity prices, special tariffs, currency swings, a pandemic, and now most recently, through inflation, unprecedented supply chain challenges, and a war. Through all of those conditions, whether positive or negative, demand for Timken products and technology remains strong, and we continue to grow and deliver for our customers, investors, and employees. In 2022, Timken is on track to deliver record revenue and earnings per share for the fourth year out of the last five, while at the same time continuing to advance our strategy to grow the company's industrial leadership position. Phil?