Timken Company (The)

Good morning, my name is Brica and I will be your conference operator for today. At this time, I would like to welcome everyone to Timpkins' second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise and 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 and the number one on your telephone keypad. If you would like to withdraw your question, please press star Thank you. Mr. Frohnapel, you may begin your conference.

Thanks, Brica, and welcome everyone to our second 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 second quarter and we remain on track to deliver another record year of performance. We achieved record revenue and record second quarter earnings per share. We expanded operating margins over last year and we delivered significantly higher free cash flow. Organic revenue was up nearly 5% in the quarter. Acquisitions contributed close to 7% on the top line and in total revenue was up more than 10% over prior year despite continued currency headwinds. EBITDA margins of 20.7% were up 70 basis points from last year. While inflation is moderated, costs were up over prior year and inflation remains persistent. Productivity continued to improve and supply chain performance has essentially returned to normal. Despite the persistence of inflation, price costs remained positive and will for the remainder of the year. Earnings of $2.01 were up 13% from prior year and were a record for the second quarter. In addition to the organic growth, acquisitions and share buyback contributed to the growth in earnings. And cash flow stepped up significantly, both sequentially and year over year. During the quarter, we completed the acquisition of Nadella, expanding our linear motion portfolio, and we purchased just under 2% of the outstanding shares of the company. The Nadella acquisition is off to a good start, and we've already integrated several areas of the management team and organization within our roll-on group. Linear motion has been a key contributor to our market diversification initiatives and continues to improve our organic growth profile. We also reduced our ownership position in our listed entity in India, which Phil will expand on in a moment, and we continue to invest CapEx into the business as we advance our footprint and manufacturing technologies. We are now two quarters into operating under our new segmentation of engineered bearings and industrial motion, and the reorganization is already yielding results. We have two market-leading segments with ample headroom to continue to expand both organically and inorganically. Before I turn to the outlook, I want to reference slide 10 in the investor deck, which highlights our five-year performance for revenue, earnings, and margins. Timken continues to perform at a high level through a wide variety of macroeconomic conditions. We have strong market positions in both industrial motion and engineer bearings. Both businesses are strong generators of cash, and we have proven over time the ability to create value through a balanced and disciplined approach to capital allocation And that includes our steadily growing dividend, CapEx back into the business, share buyback, and M&A that has created both strategic and financial value. The result has been record revenue and earnings per share performance each year, except for the COVID year of 20. And our margins have varied only a couple hundred basis points during what has been a particularly volatile economic cycle. We are confident in our ability to continue to perform at a high level moving forward. and to continue to grow the revenue and earnings of the company. Turning to the outlook, we are now forecasting full-year revenue growth of 8% at the midpoint. As a reminder, our normal seasonality is to decline from first half to second half, both for revenue and earnings. We are continuing to forecast a greater than normal decline this year on very strong 2022 comps. During the second quarter, we continue to see customers reducing inventory levels and orders to adjust the supply chains that are now operated at normal lead times and reliability levels. We expect that to continue through the end of the year. While we're forecasting sequential softening for the rest of the year, the macro drivers remain constructive and customers across most sectors and geographies remain bullish on their demand into 2024. You can see on slide six in the IR deck that there have been some movements in our full year outlook for markets, some up, some down, with our updated guide reflecting recent order activity and backlog. As has been well publicized, China's rebound coming out of COVID this year has been less than expected. Our Asia results are up double digits year to date, but we have factored in a less bullish outlook for Asia, and specifically China, in the second half. This would include renewable energy. From a bottom line perspective, we're forecasting earnings per share in the range of $6.90 to $7.30, which would be up 10% at the midpoint. That guidance includes the impact of all capital allocation actions taken through the second quarter of 23. The midpoint of the revenue and earnings guide would imply margins to be up slightly from last year. While we expect better manufacturing performance from improved supply chain dynamics, we are factoring in volume headwinds as we continue to get our own inventory levels in line with improved lead times and on-time deliveries. We expect costs to remain elevated, although for the pace of further increases to continue to moderate. Similarly, we expect price realization to remain positive versus the prior year, but to continue to moderate partially due to tougher comps. We also plan for price costs to remain positive through the year. We assume cash flow to be strong in the second half of the year, And with net debt at 1.9 times EBITDA at the end of June and strong second half cash flow, we expect to continue to be active from a capital allocation standpoint in the second half of the year with a continued bias to M&A. We are operating more efficiently today, and we are very focused on driving our operational excellence initiatives across the portfolio. From inventory management and productivity initiatives to our CapEx investments in automation, capacity, and plant consolidation, We would expect these actions, along with capital allocation and our outgrowth initiatives, to provide significant self-help heading into 24. We will also be publishing our annual corporate social responsibility report in the upcoming quarter. 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. Examples of our progress will be evident in the report. It was an excellent first half of 23. We remain on track for another year of record revenue and earnings, and we are well positioned to continue to drive value for all of our stakeholders in 2024 and beyond as we continue to advance Tempkin as a global, diversified, industrial leader. And with that, I will turn it over to Phil to go into more detail on the results and outlook.