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 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'd 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, Emily, and welcome everyone to our first quarter 2023 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. 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 an excellent first quarter, which puts us on track for another record year of performance. We maintained our strong momentum and achieved record revenue enterings per share in the quarter while expanding our operating margins. Organic revenue was up 11% in the quarter. This is a slight acceleration from the fourth quarter rate of 10%. And it is our eighth consecutive quarter of double digit organic growth. While demand strength remained broad-based, drivers of the organic growth included price realization, strong growth in renewable energy, and strong sales in China and India. In total, revenue was up over 12%, with the benefit of acquisitions more than offsetting the impact from divestitures and currency. EBITDA margins of 21% were up 100 basis points from last year. Margin improvement was driven by the benefits of price mix, volume, improved manufacturing efficiencies, and lower logistics costs, which more than offset the headwinds of inflation, currency, and SG&A. While some costs have declined from peak levels and we are operating more efficiently as supply chain challenges have eased, we remain in an inflationary environment with costs up over last year. But as we've demonstrated over the last several years, we can operate effectively and advance the company in either a low or a high inflationary environment and through a wide variety of macroeconomic conditions. Earnings per share of $2.09 was up 22% from last year and was a new record for Timken. In addition to the benefit of growth and margin expansion, both share buyback and acquisitions contributed to the record level of earnings. Free cash flow in the quarter was $72 million better than last year, primarily as a result of greater EBITDA and improved working capital management. The working capital improvements are a result of both supply chain stabilizing as well as our improved execution. We continue to invest in expanding and improving our manufacturing footprint and capabilities. The benefits of these actions were evident in the first quarter and will ramp up through the year. completed the previously announced closure of our Indianapolis industrial motion manufacturing facility in the quarter and we announced the end of year closure of an engineered bearings facility in South Carolina our Mexico bearings facility continues to ramp up each quarter and will contribute positively to results this year and our renewable energy investments are continuing to come online to support our continued growth in this sector Additionally, in the quarter, we paid our 403rd consecutive quarterly dividend, closed on the acquisition of American Roller Bearing, and purchased just under 1% of the outstanding shares. We also continued to be recognized for our outstanding corporate citizenship and innovative products and culture. In the quarter, Timken was named one of America's most innovative companies by Fortune, one of America's best large employers by Forbes, and one of the world's most ethical companies by Ethisphere. Our Timken team is committed to advancing our corporate social responsibility programming as we give back to our communities and drive sustainability in our products and global operations and across the industries we serve. And finally, we completed the previously communicated resegmentation of the company to engineer bearings and industrial motion, reflecting Timken's advancement as a global diversified industrial leader. Slide 7 in the IR deck breaks down the 2022 market mix for each of the two segments and highlights how far the company has evolved its market mix over the last decade with automation, renewable energy, and industrial distribution being the largest end markets for the two segments. It was an excellent quarter, and 2023 is on track to be another excellent year. Turning to the outlook, we are increasing our outlook for the full year for revenue, margin, earnings per share, and free cash flow. For revenue, we've increased the revenue outlook from 6% to 9.5% at the midpoint of the guide. Market demand, outgrowth, price, and our most recent acquisition of Nadella are all contributing. While growth across markets is moderating, backlog and demand are strong, as evidenced by the first quarter's 11% organic growth. As you see on slide eight, We are forecasting all end markets to be flat to positive for the full year. There are no significant areas of weakness across our portfolio, and demand in total is strong. We have factored into our outlook continued channel inventory reduction from supply chain normalization through the course of the year. Additionally, we still have limited visibility into the second half of the year, and we are therefore maintaining a relatively cautious outlook for the second half due to the macroeconomic concerns that exist. The midpoint of the guide implies flattish organic revenue sequentials for the second quarter and then slightly greater than normal seasonal declines for the third and fourth quarters. If the revenue expectation proves to be too low, we'll be in an excellent position to capitalize on the situation. We've also modestly increased our expectation for price for the full year, primarily due to the persistence of inflation. The majority of the price is in the first quarter actuals, and we do not expect much further sequential price improvement as we move through 2023. Our outgrowth and market diversification efforts continue to show results. We expect a strong year in renewables, marine, and automation, in addition to traditional Timken markets, such as heavy industries and rail. We closed on the Nadella acquisition in early April, and that is also now included in the full-year outlook. Nadella furthers our market diversification with positions in automation, medical, and material handling. The midpoint of the revenue outlook is to be up just under 10% and would mark the fifth year out of the last six for a new revenue high for Timken. We are now forecasting a margin improvement for the full year with margins of around 19.5%. Price mix, volume, and improved operational performance are all contributing and more than offsetting headwinds from inflation, SG&A, and currency. Earnings per share of $7.25 at the midpoint would be up 12% from last year and again would mark five of the last six years setting new levels. In addition to the contributions from growth and margin, capital allocation to both M&A and buyback is also contributing to the results. And finally, we're expecting free cash flow conversion of around 100% from improved working capital management and moderating growth in the second half. After accounting for Nadella and CapEx, we forecast to end the year below the midpoint of our leverage range, which puts us in an excellent position to continue to create value through disciplined capital allocation through the remainder of this year and into 2024. In summary, the first quarter was a strong start to what we anticipate will be another excellent year for Timken. We continue to demonstrate the strength of our improved portfolio and our ability to execute at a high level through a wide variety of macroeconomic conditions as we continue to advance the company as a diversified industrial leader. I'll now turn it over to Phil to go into more detail on the results and the outlook.