Timken Company (The)

Good morning, all. My name is Lydia and I'll be your conference operator today. At this time, I'd like to welcome everyone to Timken's first call to 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'd like to withdraw your question, please press star, then the number two. Thank you. Ms. Elmblad, you may begin your conference.

Thanks, Lydia, and welcome everyone to our first quarter 2024 earnings conference call. This is Megan Elmblad, Interim Manager 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 Fercasa, 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, Megan. Good morning and thank you for joining our call. Timken delivered a solid first quarter with organic revenue in line with the industrial market conditions and strong margin performance. Our results continue to demonstrate the strength and diversity of Timken's portfolio and the successful execution of our strategy. Revenue was down 9% organically from last year's record first quarter, driven by the significant decline in wind energy in China that began mid last year. To frame up the impact of wind, organic revenue would have been down less than 4%, excluding wind. I'll talk more about wind in a moment. While organic revenue increased around 8% sequentially from the fourth quarter, we attribute that to normal seasonality. In aggregate, we didn't see any significant strengthening of markets or orders to start the year. Across that 4%, most other markets were down as the softness that started in the second half of last year continued through the first quarter. Notable exceptions included aerospace, rail, services, and India, all of which were up from prior year. Including acquisitions and currency, revenue was down less than 6%. First quarter cash flow was seasonably weak, but this will increase through the year, and we remain confident in the cash generation of the business. EBITDA margins of 20.7% were down just 30 basis points from last year, despite the organic revenue decline. There were several contributing factors to the margins that I'd like to highlight. First, we've made significant progress over the last decade to diversify and steadily improve the Timken portfolio, which continues to result in greater performance in both the top and bottom lines. This includes the six acquisitions we completed last year, which contributed positively to the results in the quarter. Second, we are benefiting from our investments in operational excellence and other self-help initiatives. Our Mexico operation is one example. The bearing plant ramped up through last year and is now performing well and contributing to year-over-year results. Acquisition synergies are also helping margins. Margins are up at several of our recent acquisitions, including Spinea, American Roller Bearing, and GGB, as we have successfully delivered cost synergies across the portfolio. Mix and price are also contributing to margins. We came into the year expecting price to be modestly positive for the full year, less than 1%. We started the year well, and we still expect full year price to be positive. We also expect price cost to be modestly positive for the full year as the pace of inflation, particularly in raw material and logistics, has eased. And finally, we've been steadily improving operating performance the last two years as we've come out of COVID, supply chain, and inflation issues. We sequentially improved each quarter last year, and we continue to improve into the start of 2024. We were operating much better today than we were a year ago, and when I would say that our supply chains are back to pre-COVID levels. We also have great focus on continuing this momentum through our CapEx spend and our operational excellence initiatives. We're also continuing to adjust our cost levels to the realities of the demand. We lowered our headcount by about 8% through the course of last year, and we lowered another 2% during the first quarter. Earnings per share of $1.77 was down 15% from last year's record quarter. $1.77 marks the fourth highest quarter in company history. Both the earnings as well as the 20.7% EBITDA margins in the face of a 9% decline in organic volume reflect the strength and diversity of the portfolio, excellent execution, and the impact of years of consistent and effective capital allocation. The first quarter was a good start to the year in a challenging market environment. To add more color to the biggest challenge in our markets, I'll expand on our wind energy results. We signaled mid-last year that after several years of very strong growth, we saw a significant decline in forward demand. While I won't share the specific figure, our wind revenue was down over 50% in the quarter from last year's record level. The demand situation has stabilized at this level. we do not see any imminent catalyst to return to growth and our full year guidance doesn't reflect any improvement in the market through the course of the year again the market appears to have stabilized we don't expect further erosion in the market and the comps get significantly easier in the third quarter but we not do not expect the remainder of the year to sequentially improve longer term we still believe in the growth of the global wind energy market the value of our technology in making wind a reliable and cost-effective source of energy the aftermarket potential of servicing our installed base, and our ability to profitably win in the wind market long term. I'd also like to point out that we absorbed a steep decline in wind revenue and the associated cost issues in the first quarter and still delivered 20.7% even of margins. Turning to the rest of the outlook, we were modestly increasing the outlook for the remainder of the year for revenue, margins, and earnings per share, but we are continuing to take a cautious outlook on second half revenue. Sequentially off the first quarter, we're planning for flattish revenue in Q2 and then seasonal declines in the second half of the year. From a year-over-year perspective, the comps get significantly easier in the third and fourth quarters. We will continue to adjust our operating costs and inventory levels down with the revenue. We expect to deliver good margins for the year despite the general market softness and we expect to deliver a step-up in cash flow through the rest of the year. If markets are stronger than we were expecting, we will be able to pivot and capitalize as we've done before. Looking at the longer-term outlook, we remain confident in the growth potential for our portfolio, and we will continue to invest in our growth and margin initiatives. For example, we're advancing our digital capabilities. We completed two ERP upgrades in the first quarter. and introduce new digital selling tools for distributors. We also recently announced the expansion of our Mexico operation and the consolidation of several smaller manufacturing facilities to optimize our footprint. The six acquisitions completed last year are performing well, and we continue to drive both revenue and cost synergies across all of the recent acquisitions. Our application engineering pipeline remains active as customers continue to invest in their next generation of equipment. Customers turned to Timken as a development partner in advancing and differentiating their equipment designs, and as further support of that, Timken was recently recognized as being one of the world's most innovative companies by Fast Company. Additionally, our portfolio is well positioned today to capitalize on several secular growth trends, including infrastructure spend, reshoring, defense, automation, and sustainability. We will also continue to create value through strong cash generation and the disciplined allocation of capital to CapEx, the dividend, M&A, and share repurchases. Our debt levels are about at the midpoint of our targeted leverage range, and when 2024 and 2025 cash flow are factored in, we have ample capacity to continue to add value through capital allocation with a bias to M&A. Before I turn it over to Phil, I also want to comment on the upcoming CEO transition. The Board is excited to welcome Turok Mehta as Timken's next CEO in September. Turok brings significant experience in global industrial markets, strong leadership skills, and a proven track record of creating value for all stakeholders. He will inherit a market-leading franchise that is both delivering results today and is poised for further growth in the future. You will also assume leadership of an executive team with a proven track record that is supported by 19,000 committed Timken employees around the world. We'll provide more information about Turok and the leadership transition as we near September. Until then, we remain focused on delivering for our shareholders through the current market softness while positioning for a return to growth. We remain committed to achieving the company's long-term financial targets and in scaling Timken as a diversified global industrial leader. Phil?