Timken Company (The)

Good morning, everyone. My name is Bruno and I'll be your conference operator today. At this time, I would like to welcome everyone to Timken's fourth 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, please press star followed by two on your telephone keypad. Thank you. Mr. Frone-Apple, you may begin your conference.

Thanks, Bruno, and welcome everyone to our fourth quarter 2023 earnings conference call. This is Neil Frone-Apple, head 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 a record fourth quarter, which concluded an excellent year. Revenue was up 1% for the quarter, with the benefit of acquisitions and currency slightly more than offsetting a 5% organic decline in revenue. As expected, wind energy and China were the largest headwinds in organic revenue, with wind revenue down more than 30% from prior year. Given the significant decline in wind and softening demand across many other industrial markets, we responded well to the situation and delivered a very solid quarter. We expanded margins 70 basis points versus last year, despite the lower volume levels. Price costs remained positive, and sequential cost increases continued to moderate. We continued to adjust our inventory and production levels down to both normalized supply chain performance as well as softer demand. Earnings per share of $1.37 was a record for the fourth quarter and was up 3 cents over last year. We closed on two acquisitions and one divestiture in the quarter, and we also purchased 450,000 shares. Despite a very active year for capital allocation, we ended the year near the middle of our targeted debt to EBITDA range. Before I turn to the full year, let me comment on the two acquisitions completed in the quarter. IMEC expands our industry-leading engineered bearing product portfolio with a niche product line of bearings that are focused on operating in extreme conditions in process industries. The business sells almost exclusively in the United States, and we will leverage Timken's global channels to expand their position beyond the U.S. We acquired Lagerschmidt near the end of the year. Lagerschmidt is a leader in sealing systems in the European marine market. Synergies here are in cross-selling our other bearing and industrial motion products into Loggerschmidt channels and expanding their global position outside of Europe. Both IMEC and Loggerschmidt will be accretive to earnings and margins in 24. For the full year, we delivered record revenue, record earnings per share, and our highest operating margins in recent times. Revenue was up 6% for the year. Earnings per share were up 9%. and margins were up 70 basis points. This was achieved despite a sudden and deep decline in demand in our largest market, renewable energy, continued inflationary pressures, any general softening in industrial demand through the year as supply chains returned to normal. Timken continued to demonstrate the strength and diversity of its portfolio and our ability to profitably grow and perform through a wide variety of market conditions. We achieved positive price costs for the full year, and have demonstrated over the last several years that we can perform through declining, flat, or inflationary cost environments. We advanced our strategic initiatives both organically and inorganically. Organically, we continue to drive outgrowth through our focus on innovative product solutions, leadership in customer engineering, channel excellence, and outstanding service. Inorganically, we completed six acquisitions during the year. Our organic growth continued to both scale us in existing products and markets, like the acquisitions of American Roller Bearing and Rosa Sistemi, and expand us into new products and markets, like the acquisitions of Desk Case and Lager Schmidt. Our focus on operational excellence and the subsequent results have returned to pre-COVID levels as we drive safety, quality, productivity, and capital efficiency across our operations and supply chains. We ramped down our production costs through the course of the year, and by the end of 23, we had lowered the staffing levels in our plants by over 8% from the start of the year, with most of that taking place in the second half. We continued to advance our manufacturing footprint with the investment of over $180 million into capital projects and the consolidation of three manufacturing facilities into existing plants. Additionally, we purchased over 4% of the outstanding shares during the year, and we increased the annual dividend payout for the 10th consecutive year. The full year once again demonstrated our ability to respond to and perform at a high level through a variety of macroeconomic conditions. And in addition to our strong financial performance, our Timken team was recognized by several third parties for our leadership as a responsible corporate citizen, as an employer of choice, and as an innovator. Turning to 2024, we were planning for revenue to be down over 3% for the full year and over 6% organically at the midpoint. Let me separate our wind energy outlook from the rest of the markets. We had a very strong first half of 23 in wind and then faced a steep decline for the rest of the year. We expect the first half of 24 to be down slightly more sequentially from the fourth quarter and then to level off in the second half. We do not have firm visibility of demand in the second half, but at this point we are not seeing any imminent catalyst for a rebound in demand in China. If it plays out as we're planning, wind demand would be down year over year over 40% in the first half and then be flash in the second half on the much lower comps. So we expect to start 24 with a sizable renewable energy headwind, but we also expect that headwind to moderate significantly in the second half of the year. Longer term, we believe this is just a cyclical decline, and we remain bullish on the long-term outlook for growth in wind energy. Beyond wind, we are currently experiencing a relatively normal softening of demand across a broad range of industrial markets. The outlook for the rest of our markets range from up slightly to down roughly 10%. This includes the expectation that inventory will continue to be reduced across many of our channels. In most of our markets, we only have a few months of firm visibility to demand. While we are not forecasting a strengthening in the second half of the year, it is certainly possible, and if so, we will be ready to capitalize on it. We are guiding to margins of over 18% for the full year and a decline in earnings per share in the mid-teens, with lower volumes being the primary driver. We are planning for modest inflationary pressures through the course of the year and price to be modestly positive less than 1%. We expect to generate a step up in free cash flow from 23 with conversion of over 100%. We have a good pipeline of self-help initiatives intended to mitigate the revenue and margin impact. The six acquisitions and one divestiture we completed in 23 are expected to add over 2% to the top line and be accretive to both margins and earnings. We also have a good pipeline of new business activities and cross-selling opportunities that will support our long-term outgrowth objectives. From a cost perspective, we have excellent focus and good momentum on our operational excellence initiatives. We will benefit from the CAPEX and plant closures completed last year and the additional planned actions for this year. We have four more plant consolidations currently underway for 24, and our productivity is the best it has been in several years. We will also benefit from integration synergies. As an example of this, we took further steps in the second half of 23 to integrate both TGB and American Roller Bearing further into our global bearing organization. These actions will deliver improved business results and do so at lower cost levels. We expect the first quarter to be the toughest revenue comp. The last few years, our first quarter was up sequentially over 10% on the top line. We are expecting that to be in the mid to high single digits this year, primarily due to wind and China headwinds. We still expect a sequential step up in margins and earnings per share in the first quarter, but not enough to get us back to 23 levels. Before I turn it over to Phil, I want to reference slide 11, which highlights our financial results for revenue, margins, and earnings per share the last five years. We've set new revenue and earnings per share records in five of the last six years, and new margin highs in two of the last five years. Since 2016, we've been demonstrating our ability to perform and profitably grow the business through a wide variety of market conditions. And while we're starting 24 in a challenging demand environment, the Timken portfolio is strong, resilient, and diverse. We're confident that our strategy and our execution have put us in position to quickly return to setting new levels of performance. The cash flow of the business is solid, and we have proven to be excellent allocators of that capital. Our acquisitions have made the portfolio more diverse, less cyclical, higher margin, and higher growth. We are well positioned to continue to grow the earnings power of the company and to advance and scale Timpton as a diversified industrial leader. Phil?