Timken Company (The)

Good morning. My name is Glen, and I'll be your conference operator today. At this time, I would like to welcome everyone to TeamCAN's fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, 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, please press star, then the number two on your telephone keypad. Thank you. Mr. Frone-Apple, you may begin your conference.

Thanks, Glenn, and welcome everyone to our fourth quarter 2022 earnings conference call. This is Neil Frone-Apple, 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, which concluded an outstanding year. Organic revenue in the fourth quarter was up 10%. Demand continued to be strong, with North America and Asia both up double digits. Price contributed meaningfully to the fourth quarter revenue gain, and our outgrowth initiatives also added to the results. Fourth quarter EBITDA margins improved 380 basis points from prior year, with improved price costs being the largest driver. Earnings per share of $1.22 was a record for the fourth quarter and was up 56% from prior year. We also closed on the GGB bearings acquisition and the Arrow Drive Systems divestiture and purchased 250,000 shares. And free cash flow in the quarter was very strong at $186 million. For the full year, we delivered 9% total growth and around 12% organic growth, which was the second consecutive year of double-digit organic growth. Organic growth was at least 10% all four quarters of the year, and we start 23 with very good momentum. EBITDA margins of 19% were up 160 basis points from 21 and were more consistent through the course of the year. Our price realization exceeded the 4% that we guided to at the beginning of the year, and price improves sequentially each quarter for the second straight year. The rate of cost increases leveled off around mid-year, but costs were up over prior year each quarter, and we remain in an inflationary environment. There have been a lot of moving pieces on costs. Steel and logistics were the early inflationary pressures. They have both eased off peak, but labor, energy, other material, and SG&A costs all increased. Internal inefficiencies from supply chain and labor challenges were better than 21 and improved through the course of the year, but remained elevated. Earnings per share of $6.02 was 28% over last year's record level. Free cash flow of $285 million was up from prior year. In addition to the M&A, we continued to invest about 4% of sales in CapEx for growth and cost initiatives. We advanced our products, advanced our footprint, improved our productivity, invested in our digital platform, and expanded our capacity through these investments. We also purchased about 4% of our outstanding shares during the year, and we ended the year with a strong balance sheet. We were also named one of America's most responsible companies by Newsweek for the third year in a row. This recognition underscores our commitment to being an excellent corporate citizen. We are driving sustainability through the products we make, the industries we serve, and across our global operations. We also invest in the development of our people, the diversity of our workforce, and safety across the enterprise. In summary, 2022 was a very good year for industrial demand, but also had a lot of unexpected challenges. And we once again capitalized on the opportunities while navigating through and responding to the challenges to deliver outstanding results for both our customers and our shareholders. Before I turn to 23, I want to highlight slide 12 in our quarterly deck. This slide is from our recent investor day and is updated for our 22 results and our new adjusted EPS definition. Through the five-year period, we delivered an 8% revenue CAGR, an 18% earnings per share CAGR, and an average EBITDA margin of 18.5%, with only 180 basis points of margin variation through the five years. When you reflect back on the macroeconomic volatility through that five-year period, from tariffs, pandemics, inflation, supply chain challenges and more, these results demonstrate the resiliency of the demand for our products and technology, the diversity of our business, and our commitment and capability to drive value through economic cycles. So while uncertainty remains elevated today, Timken is well positioned to continue to create value in the years to come through industrial cycles and through evolving technologies. Timken enters 23, a larger and better version of the company that we were in 2018. And we are confident that we will be able to continue the trajectory of this performance in the years to come. And we expect that 23 will be a good start to the next five years. Turning to 2023, I will start with our recently announced acquisitions. First, American Roller Bearing, or ARB. ARB has been family owned and operated in the United States for three generations. They have a longstanding position in the U.S. process industries markets. They have a large installed base of products throughout the U.S. and sell primarily through bearing distributors to a fragmented base of OEMs and end users. These are markets and channels that Timken knows very well, and we are confident that we can create value for customers and shareholders through integrating ARB into Timken's engineered bearings portfolio. ARB enters the portfolio at modest EBITDA margins, but we expect over time to get it to process industries level margins. Nadella will add a combination of new products to our portfolio and also expand existing product lines and market positions. The largest product line is linear motion actuators. The product complements and scales our linear motion platform, and we will deliver strong synergies with our role on business. Nadella also brings industrial needle roller bearings, ball screws, and rod ends to the portfolio. Timken entered the rod end market with the 2020 acquisition of Aurora, and adding Nadella will globalize our rod end market position. Nadella will further scale our position in several of our targeted markets as they serve a fragmented customer base across markets like automation, packaging, food and beverage, logistics, and medical. Nadella will join Timken with a margin profile slightly above the company average, and with synergies, we will both expand margins and accelerate the global growth rate. We're excited to be adding both ARB and Nadella to our portfolio. Upon completion, we will remain comfortably within our targeted leverage ratios. And with our 23 cash flow, we can continue to be opportunistic with capital allocation opportunities through the year. Turning to our markets and slide seven in the deck, we are guiding to a 3% organic revenue increase in total. We expect price to be over 2% for the year, so price comprises over half of the organic revenue outlook. We are confident in achieving at least the 2% price. Starting on the right, we're expecting a strong full year in renewables driven by Asia Wind, both from the market as well as from our outgrowth tactics. This is a market where we have good visibility into demand for several quarters out. The order book and backlog are strong and customers are committed to a step up in revenue for the full year. We're planning for the rest of our markets to range from flattish to up mid-single digits. I'll talk more about the first quarter in a moment, but this guide assumes we will start the year well above the 3% level and then moderate the second half of the year, partly from tougher comps, but primarily from taking a cautious view of the markets where we do not have extended visibility. We're also anticipating some channel inventory pullback in this outlook as supply chains improve and customers return to managing inventory with higher precision. If our outlook for the second half proves to be low, we'll be in excellent position to capitalize on the situation. From a margin standpoint, we are guiding to roughly flat margins for the year. As I said in my 22 comments, there have been a lot of moving pieces on the cost and margin front, and that continues into 23. We are expecting price costs to be modestly positive for the full year. We also expect margin help from better operational execution, supply chain improvements, our 22 capex and footprint investments, and lower steel and logistics costs. However, we remain in an inflationary environment, and we do anticipate further cost increases in SG&A, labor, and other purchase materials. Currency and mix are also expected to be margin headwinds for the year. We have been dealing with a rising and volatile cost situation for a couple of years, and I'm confident that we will successfully navigate through the price-cost dynamics again in 23. Earnings per share would be up about 5% at the midpoint. We expect much stronger cash flow in 23, primarily from higher earnings and lower working capital requirements due to both moderating growth rates as well as improved supply chain execution. While we are taking a cautious view on the second half, we are starting the year strong. We have good visibility for the first quarter and well into the second quarter, and we expect organic revenue to be up high single digits in the first quarter. We have a healthy backlog, good order input, and the benefit of another sequential price improvement. We would also expect our normal sequential step-up in margins from the fourth quarter to the first. In summary, we delivered an excellent year in 2022, both strategically and financially, and we are off to an excellent start to 23. We're in a great position to extend our strong performance. We're excited about the opportunities in front of us. and we feel confident in our ability to continue to create shareholder value for our long term as we continue to advance Timken as a diversified industrial leader.