Timken Company (The)

Good morning. My name is Emily and I'll be your conference operator today. 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 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. Frontuple, you may begin your conference.

Thanks, Emily, and welcome everyone to our third quarter 2022 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 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 our call. Timken delivered another excellent quarter with year-on-year revenue growth of 10%, earnings per share growth of 29%, and margin expansion of 160 basis points. We continue to demonstrate Timken's ability to grow and deliver strong results through a variety of macroeconomic conditions. Our financial performance is driven by the successful execution of our strategy and the diversity and attractiveness of our portfolio and in-market mix, and our disciplined approach to capital allocation. Demand continued to be strong across most markets and geographies, and when combined with our outgrowth initiatives and positive pricing, resulted in organic growth of just under 14%. All regions except Europe were up double digits in the quarter, And as noted on slide eight, revenue is forecast to be up for the year mid-single digits or higher for nearly all of our end markets. Supply chain issues continue to ease gradually, although they remain a challenge and the operating environment remains dynamic. We continue to face persistent inflation pressures, costs increased in the quarter and are well above prior year and pre-pandemic levels. Price realization was up significantly over prior year and up modestly sequentially. Price cost was positive for the quarter, and price realization has increased sequentially for eight consecutive quarters. Cash flow improved sequentially, but conversion remains modest year-to-date due to the working capital required to support the organic growth and the supply chain challenges. From a capital allocation standpoint, we paid our 401st consecutive dividend and purchased about 1% of the outstanding shares. We're investing CapEx into the business for growth and margin, including investing in our footprint and capabilities. Examples include our state-of-the-art bearing facility in Mexico, which has ramped up through the course of the year and provides additional capacity at a very competitive cost position. We are also close to completing our plans to consolidate our chain operations into one facility in Illinois. which will further improve our productivity and cost structure. We also continue to allocate capital to M&A. The first full quarter of Spinae has gone well, and we remain excited about the growth potential of the business across the global automation space. We're also excited about our agreement to acquire GGB Bearings. GGB is a global supplier of highly engineered plane and metal polymer bearings. The plane bearing category is highly complementary to Timpkins' roller and ball bearing offering, and we expect significant synergies in the coming years as we integrate the businesses. We are on track to close the acquisition in the fourth quarter. We also recently reached an agreement to divest Arrow Drive Systems. ADS is a supplier of flight-critical components for rotorcraft applications. We're always reviewing our portfolio for strategic and financial fit. and we determined that ADS will be better positioned to succeed in the market under other ownership. It represents just over 1% of Timken revenue, and we expect to close in the fourth quarter. We do not expect any other sizable divestitures near term. We have an attractive and diverse portfolio, and we're investing in it to win in the marketplace. I'd also like to point out that aerospace will continue to be an important end market for us. We also released our annual corporate social responsibility report in the quarter, The report both highlights our accomplishments and outlines many of our forward-looking activities and goals. Overall, it was an excellent quarter in both delivering strong results in a dynamic environment while also continuing to position the company for greater levels of performance in the years to come. Turning to the outlook, we are planning to achieve record revenue, record earnings, and an improvement in year-over-year margins again in the fourth quarter. We have increased our full-year revenue outlook to 9% to reflect continued strong organic growth, acquisitions, and price realization, partially offset by increased currency headwinds and the ADS divestiture. Through late October, our revenue and order run rates support our fourth quarter outlook. On the bottom line, we are expecting input costs to remain elevated and for the supply chain challenges to persist with only gradual improvements. We also expect the fourth quarter to be our ninth consecutive quarter of sequential price realization and for price cost to be positive. We have increased our full year earnings per share forecast to $5.80 to $5.95. At the midpoint, this would be a 25% increase over last year's performance. And finally, from a cash flow standpoint, we expect very strong cash flow in the fourth quarter from both seasonality and improving execution around inventory management. Turning to 23 in the longer term, we are always closely monitoring our global end markets and channels for signs of demand strength or softening, and we are very aware of the concerns around a global recession. However, as demonstrated in our recent results, as well as our outlook for this quarter, demand for our products remains very strong, and we expect the positive momentum to carry over to start 2023. We have a high backlog, and orders continue to come in at a healthy pace, We typically see a seasonal step up in demand and margins from the fourth quarter to the first, and our orders and backlog support a strong start to 23. We would also expect price to be up sequentially again from the fourth quarter to the first. We are not expecting any relief from inflation in the near term, but we believe we are well positioned to keep price in line with costs as we move forward. And additionally, we have a lot of self-help heading into 23. including improving our operational performance as supply chains stabilize, delivering on our CapEx and margin enhancement initiatives, outgrowth, the GGB and Spinea acquisitions, and the full-year impact of share buyback. We will provide our full-year outlook for 23 early next year, but we have a lot of positive momentum as we end 2022. And finally, longer term, I'd like to take you back to slide 11 in the deck. which summarizes our five-year financial performance. As we discussed in our recent investor day, Timken has delivered consistent and top-quartile financial results through what has been a particularly volatile macroeconomic period. We will enter 23 a stronger company than we were entering 2018, and we are in excellent position to continue to properly scale our business as a diversified industrial leader and deliver strong shareholder returns. I'll now turn it over to Phil for more color on the results and the outlook.