Q3 2020 Timken Co Earnings Call
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Good morning, My name is Catherine and I'll be your conference operator today.
<unk>. This call is being recorded at this time I would like to welcome everyone to 10 Kids third quarter earnings release Conference call.
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Thank you Scott and welcome everyone to our third quarter 2012 earnings Conference call. This is Neil Frohnapple director of Investor Relations for the company.
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, we will reference as part of today's review of the quarterly results.
You can also access this material through the Dobbs feature on the earnings call webcast work.
With me today are attempting company's president and CEO, rich, Kyle and sulfur cost <unk>, 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 Q1 <unk> I would ask that you. Please limit your questions to one question and one follow up but its hard to allow everyone an opportunity 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 us to see which are available on that site.
<unk> Dot 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 without expressed 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 and its something company and I will now turn the call over to rich.
Good morning, and thank you all for joining us for our third quarter call.
Duncan delivered a solid third quarter, we experienced sequential strengthening off the second quarter above our expectations across most end markets and geographies.
Strengthening markets combined with strong growth renewable energy the Beck acquisition, resulting sales up 11% from the second quarter down just 2% from the third quarter of last year.
We delivered solid EBITDA margin of over 19% with good operating performance positive price.
<unk> cost reduction initiatives, all contributing to the results.
Earnings per share of $1.13 cents was down just one cents last year.
We reduced inventory in the quarter and generated over $120 million and free cash flow.
Overall.
Given where we and our customers were early in the second quarter. The third quarter was a solid rebound and strong performance by tempted.
It's been for on revenue the trend of sequential strengthening that we began to experience in Mary continued through the third quarter.
General statement the markets that were the most depressed in the second quarter was strongest in a recovery.
Automotive truck, India and off highway equipment are all examples of markets that were extremely depressed in early Q2.
Been improving sequentially sense.
Our strategy to increase our presence in renewable energy markets continued to pay off very strong year on year growth in both wind and solar again this quarter.
China also remained a bright spot as the country continues to be significantly less impacted quite a quota virus that most of the rest of the world.
India since marine in AG were also solid in the quarter.
Beck acquisition contributed about 3% to the top line.
Outside of the markets just mentioned most other markets were down year on year from mid single to high teen percentages.
Total revenue was down a little over 5% organically and strengthened sequentially through the quarter.
Solid step up from the second quarter.
Indicative of the strength and diversity of took its product portfolio and market mix.
Yeah, you slides in the deck on renewable energy, which provides some industry forecasts on the global shift to renewable as well as all straight where we participate in the market.
2020 has been an excellent year for our renewable energy business with strong growth in both wind and solar.
Market outlook for 2021 has continued to improve.
Finally, our penetration initiatives, we're planning for another year of positive organic revenue, both wind and solar 2021 on top of 2000 Twentys record year.
The recently announced our new military Marine contractor, we expect year on year growth in marine 2021 as well.
Other markets customer engineering activity and new product platforms remains robust, but a lot of emphasis on energy efficiency administration Kimpton is well positioned to win more than our share of new platforms in 2021.
Despite organic revenue being down EBITDA margins were within 40 basis points of last year and earnings per share was only down 1%.
Very modest impact in the quarter temporary costs through compensation actions, we believe the quarter is largely indicative of our ongoing cost structure.
Pricing remain modestly positive year on year and flat sequentially, we expect price 2021 to be flattish.
From a cost perspective, the temporary cost actions related specifically to compensation reductions and furloughs were relatively modest in the third quarter roughly three cents and are not expected to extend into the fourth quarter or 2021.
However, there are other and larger temporary and volume related cost reductions such as travel reduce plant headcounts that contributed to results and will continue for at least the next several quarters.
Structural cost perspective, we come into every year with a plan to reduce cost from acquisition integrations. Our digital investments are footprint transformation, our capex projects that are ongoing drive for productivity and efficiency improvements.
With the onset of the krona buyers would be any accelerate various initiatives and added an F G and H rightsizing they should in the third quarter.
We continue to have a healthy level of activities around reducing structural costs in manufacturing and asked Tonight.
The bottom line is that we are confident that the reduced cost structure of the third quarter results is sustainable for the next several quarters and we will continue to launch additional initiatives in 2021.
While we're not providing specific revenue outlook for the fourth quarter due to the elevated uncertainty levels, we're planning for normal seasonality to end the year and to start 2021.
A few more details on that outlook first.
First as a reminder, that our normal seasonality will be a modest sequential decline from the third quarter to the fourth in the 2% range.
And typically a larger sequential increase from the fourth quarter to the first quarter.
Despite these call October that is what we're planning for this year.
It's wells to start 2021.
What's the level of uncertainty we're facing the possibilities around that at the midpoint are wider than normal. We believe normal seasonality is a good middle of the road for us to plan around and then move up or down is the situation develops.
Second point, we have not seen any change in demand from the recent uptick in Corona virus cases around the world.
Customers continue to operate demand has not been impacted.
Clearly there are risks that are beyond our control the governments appear to be more focused on social restrictions and industrial restrictions and we continue to take extra precautions to keep our operations safe and running.
As I said in my comments revenue improved sequentially through the third quarter and that trend is on track to continue in October.
Specked October to be slightly stronger than September and our strongest month. Since January However November and December are typically among our weakest months of the year. So sequential strengthening off of October would be a challenge.
My final comment on the revenue outlook is a reminder, that where we were a few quarters into cyclical decline when krona virus Kid. So now after the third quarter, we were at five quarters cyclical decline in many industrial markets, which includes a lot of inventory destocking across multiple channels.
All of which bodes well for a rebound at some point soon.
We expect cash flow to be solid in the fourth quarter end to end the year with a solid balance sheet, which brings me to capital allocation.
Capital allocation remains a critical element of our value proposal and we remain committed to our framework with capex and the dividend as the top priorities.
We are on track to be back in position to shift from debt reduction greater value creation opportunities and 2021.
A biased M&A share buyback as a viable option.
M&A activity did return in the third quarter.
Our most recent acquisitions Becker will hit its one year anniversary at the end of this month. Despite Corona virus, we managed to improve margins several hundred basis points. This year through the consolidation of Cornbelt.
More margin expansion expected in 2021, and we're doing so while building a global leader in automatic lubrication technology.
In summary, Timken continues to perform well three very challenging year, we are keeping our operations safe serving our customers delivering solid financial results, including strong free cash flow.
Dancing, our strategy to build a high performing industrial leader.
Phil.
Okay, Thanks, rich and good morning, everyone.
Financial review I'm going to start on slide 14 of the materials.
Timken delivered solid performance across the board in the third quarter and you can see a summary of our results on this slide.
Revenue for the third quarter was 895 million down 2% from last year and up 11% sequentially from the second quarter.
We delivered an adjusted EBITDA margin of 19.4%.
And adjusted earnings of $1.13 per share just shy of last year's record third quarter earnings.
Turning to slide 15, let's take a closer look at our third quarter sales performance.
Organically sales were down about 5%.
With most of the year on year declines coming in mobile industries.
Pricing was positive in both segments.
The pack acquisition added approximately 3% to the topline in the quarter.
Currency was roughly neutral.
On the right hand side of this slide we outlined organic growth by region. So.
So excluding both currency and acquisitions.
Let me comment briefly on a few regions.
In Asia, we were up 29% in the quarter.
Our sales in China increased significantly versus the prior year due mainly to strong growth in renewable energy.
Sales were also up year on year, India.
As the country continues to recover from the cold weather related shutdowns that impacted in the second quarter.
In both North America and Europe.
Most doctors were still down versus the prior year, but the rate of decline improved meaningfully compared to the second quarter sequentially.
Sequentially, we saw solid improvement from the April lows and we benefited from a strong recovery in sectors like automotive and heavy truck, which were hit especially hard during the second quarter.
Turning to slide 16, adjusted EBITDA was 174 million or 19.4% of sales in the third quarter compared.
Compared to 181 million or 19.8% of sales last year.
Modest decline in adjusted EBITDA reflects the impact of lower volumes and unfavorable price mix as negative mix more than offset positive pricing in the quarter.
Note that the negative mix reflects the significant significant growth we saw in OE sales, but in process industries, coupled with lower aftermarket distribution revenue.
Currency also had a negative impact on EBITDA.
Experience transactional losses, this year versus gains in the year ago period.
And I would point out that this FX headwind more than accounts for the year on year decline in adjusted EBITDA margins.
On the positive side, we benefited from significantly lower as chenier expenses.
Favorable manufacturing performance and modestly lower material and logistics costs.
In addition, bucket contributed roughly 4 million EBITDA in the quarter with margins around 13%.
Excluding currency in acquisitions.
Our organic decremental margin in the quarter was only 6%.
Now, let me comment a little further on manufacturing industry in <unk>.
On the manufacturing line, we executed well in the quarter.
Team responded to rapidly changing customer demand and delivered improved operating performance.
We had slightly higher production volume in the third quarter versus the year ago period, which gave us better fixed cost absorption well.
We also benefited from ongoing cost reduction actions and other productivity initiatives in our plans.
The significant reduction in <unk> expense reflects the ramp up of structural cost reduction initiatives.
Lower controllable and discretionary spending.
And the benefit of some temporary cost actions that occurred early in the quarter.
On slide 17, you'll see that we posted net income of $89 million or $1.16 per diluted share for the quarter on a GAAP basis.
This includes three cents of net income from special items.
Mainly by pension mark to market income, which more than offset restructuring charges and other items.
On an adjusted basis, you know the dollar 13 per diluted share in the quarter down one cents from last year.
Our third quarter adjusted tax rate was 24%.
As our geographic mix of earnings produced a favorable change in our forecasted full year effective tax rate to 26% from the previous projection of 27%.
The tax rate to remain 26% in the fourth quarter.
Now, let's take a look at our business segment results starting with process industries on slide 18 for.
The third quarter process industries sales were 456 million up 1.5% from last year.
Organically sales were down 8.6% as strong growth in renewable energy and positive pricing largely offset declines across other sectors, including industrial distribution.
The favorable impact of acquisitions added almost 2% of the topline in the quarter.
Process industries adjusted EBITDA in the third quarter was 115 million or 24.7% of sales compare.
Compared to 119 million or.
Or 26% of sales last year.
The slight decline in adjusted EBITDA reflects modestly lower organic volume and the unfavorable impact of mix and currency.
Mostly offset by the favorable impact of cost reductions manufacturing performance and positive pricing.
The decline in adjusted EBITDA margin in the third quarter versus last year can be attributed entirely to the sizable currency headwind in the quarter.
Now, let's turn to mobile industries on slide 19.
In the third quarter mobile industries sales were 429 million down 5.8% from last year.
Organically sales declined close to 10%.
Reflecting lower shipments across most sectors, partially offset by positive positive pricing.
Acquisitions added 4.4% for the top line in the quarter what.
While currency translation slightly unfavorable.
Mobile industries sales were up 25% from the second quarter.
We saw strong sequential demand and automotive off highway heavy truck and rail.
Lets customers ramped up production following kogut related interruptions in the second quarter.
Well the industry's adjusted EBITDA for the third quarter was $68 million or 16% of sales.
Sure the 72 million or 15.8% of sales last year.
Adjusted EBITDA margins were up 20 basis points compared to last year on lower revenue.
The improvement in margins reflects the favorable impact cost reduction and strong execution in the quarter, which more than offset the impact of lower volumes.
This represents this represents a year on your decremental margins clearly a long way around 9% on an organic basis.
Very strong performance in mobile industries this quarter.
Turning to slide 20, you'll see that our strong cash flow performance continues.
We generated operating cash flow of 154 million in the third quarter and after Capex free cash flow was 124 million.
Capex in the quarter was 29 million includes spending to support the growth opportunities, which highlighted earlier.
Our year to date free cash flow of 372 million represents a 150% conversion on adjusted net income.
It's also 100 million better than last year, despite lower earnings.
We're benefiting from improved working capital performance lower cash taxes.
Lower cash used for medical expenses and 2020.
Also in the third quarter, we paid or 390, threerd consecutive quarterly dividend and reduced net debt by roughly 80 million.
Taking a closer look at our capital structure, we ended September with a strong balance sheet we.
We have liquidity of greater than 900 million, which includes 313 loan cash on hand, plus.
Plus over 600 million of availability under committed credit lines.
Our net debt to adjusted EBITDA ratio improved to two times at September Thirtyth.
Which puts us squarely in the middle of our one and a half to two and a half times target range.
Overall, our balance sheet liquidity and expected strong cash flow put us in a great position to navigate this still uncertain and work environment, while continuing to drive our strategic imperatives.
Now, let's turn to slide 21 for additional commentary on the outlook.
Which provided some color on expectations for revenue in his remarks so.
Let me touch on some of the other items.
In the fourth quarter, we expect to generate strong free cash flow and to further reduce net debt.
For the full year 20, Twond, we expect capex of around $125 million or just over 3% of sales and.
Net interest expense of around 65 million.
It's roughly in line with the prior outlook.
As rich discussed we continue to execute on initiatives to improve our cost structure and support our operating margins.
We expect to generate 55 to 60 million of your on your cost savings.
In the second half of 2020, which is essentially the high end of the range. We provided in early August.
We have better visibility now with just two months left in the year.
Finally for the fourth quarter, we expect EBITDA margins to be modestly lower than the third quarter right.
Reflecting the seasonally lower volume that rich discussed.
On the positive side, we expect margins to be quite a bit higher than last years fourth quarter.
Get a better cost performance.
This includes the benefit of current your cost reduction actions and also reflects the fact that last year, we had some higher than normal operating expenses in the fourth quarter, which should not repeat.
In addition, we expect stuck as margins to be up in the fourth quarter versus last year.
So to summarize the timken team delivered strong performance in the third quarter as we capitalize on better than expected revenue.
Executed very well to deliver strong margins and earnings.
We are demonstrating our ability to generate higher margins and returns through the cycle.
While continuing to drive our strategy.
And we're in great position as we look ahead to 2021.
This concludes our formal remarks, and we'll now open the lines for questions operator.
Thank you and again, ladies and gentlemen that is star one if youd like to ask a question well.
Well go first to well within my Smelliest research.
Right right.
Sorry about Hello, Gary.
So obviously, some good and steady results I'm really the renewable side is becoming more material is pretty exciting and I wondered if you could just give a little more commentary breaking down the growth you there or whether you're expanding the geography is your new customers.
Students sources of growth and how that continues to expand and then.
Sure Phil My other question would just be as you look to next year, no if you're going to deploy capital given where you're putting up this year how much do you factor in your own stock price when when you sort of think about the the trade offs on all acquisitions. Thanks.
Yeah. So on the renewable side, a really a breakout year for us for probably about a decade of activity in the space on when that a couple of years on solar and.
And clearly helping to mitigate weakness in other markets would have been great. If it would have been additive to the.
The other strong markets.
As you know we've.
We we really built what I would say is a full bearing portfolio. If you look back 10 years ago, we really weren't in they're the turbans then we really started into gear drives which was our healthcare technology Sweet spot and then we've really expanded across.
The entire platform with a range of bearings now up to several meters and.
In diameter I would say our.
A pipeline of this is.
Mostly OEM revenue for us and it's engineered to order product, it's not something that substituted it's not something or.
If you're in the design you're going to be in the design for.
Some period of time.
I would say our forward looking platform wins over the next couple of years is stronger than its been at any point in time, So I think the.
Our.
[noise] penetration in the growing market is going to continue to improve.
And then we knew this year was set up to be a big year, particularly in China and Asia. That's happened we had a little concerned about Asia, a leveling off or declining a little for next year that that situation has improved through the first three quarters of the year our backlog.
Is strong to start next year and really probably through the middle of next year we.
We continue to be I'd say disproportionately weighted towards Asia from an end.
End market mix.
China being the predominance of that the.
China has been very.
Very consistent in their commitment to moving more to renewable energy and it's been.
Wes radical say then than the U.S.
Followed by Europe, and then followed by the U.S., but we have presence everywhere. It doesnt mean that we really done in the last couple of years and it's going to be even better in the coming years, we used to be pretty concentrated.
Well a couple of your dry manufactured a couple of turbines, we really have some level of content across a much wider swap of Oh, Oems and a and platforms in the coming in the coming year. So.
I think it's going to continue to be a higher and higher percentage of.
The Timken company's revenue and is a really good secular growth story.
And then longer term.
We are we are seeing an aftermarket that you know that after markets, probably 10 plus years out, but there will be a significant after.
Aftermarket revenue stream.
Starts to kick in and probably more so for a solid eyes Oh.
Replacements at some point, so I'm at us because it's a ways out there, but but it's it started and will continue to trickle up at the OEM has got ER.
Dominate that.
On the solar side, we really moved into that market first with the acquisition of Lovejoy several years ago in a small way and then moved to Oh Gosh, Let me go back to when the other piece of wind or the Becca.
Acquisition moved us into a leadership position in Asia in lubrication systems, the difference with lubrication systems versus bearings.
There's not an enormous amount of dollar content on a lubrication system in our wind turbine as compared to a bearing so the upside is certainly not there, but it's it's still an attractive growing part of the business and then organically we're working on some of the other product platforms that we have.
Joy and P.T. tack to expand our presence there as well.
Then come back to the solar side, you didn't do in a small way with lovejoy into a much bigger with P.T. tower with with Coned drive acquisition.
And we are a leader in those precision drives isn't there's not a lot of moving parts on solar, but where there are we have a significant amount of content.
Again similar comments that.
Probably a little less visibility a little shorter sales cycle than wind will store it technology cycle than when but feel very good about 2021 that we will have an increased presence there and again the market outlook is pretty solid.
That business is very global we have installations that the direct customers or our are heavily in Europe, but the installations are very global very project oriented.
And again the outlook for 2021 stays very strong and then Rob I Didnt catch the last part of your question about.
That versus M&A.
Yeah. Thanks, rich. So so that was a very comprehensive answer and that it's a pretty exciting once you're done question would just I mean, you've accomplished a lot. This year your stock price is not super high and I Wonder just philosophically how you weigh.
Back versus M&A, you mentioned the preference from an AD and all of that evaluation comes in player.
Well evaluation definitely comes into play and certainly agree with your.
Your comments are on our stock price and certainly believe that share buyback is we'll share buybacks are very accretive and and makes the bar for M&A high.
That being said I think.
The results that we are delivering this year would not be what they are had we not had we sat out completely in the M&A market. The last few years. So we always look at a at the comparison, we have the bar established for that and I think the likely answer.
Sure going forward is going to be some of both like it has done looking backwards.
Thanks very much.
Thanks, Rob.
We will now take our next question from Steve Volkmann of Jefferies.
Hey, good morning, guys. Thank you.
Good morning, Steve.
And we I think you mentioned rich a couple of times in your comments about distribution in industrial distribution can you just dive into that a little bit more for us or are you seeing that business improving as well how do you think the inventory situation is there and do you think 20 due to your comments about you know five six core.
Enters into a downturn is 21 potentially setting up for more of a restock here in distribution.
Yeah. So I would say distribution was a phone our weaker sequentially performing.
Parts of the business from Q2 to Q3 part of that was it.
Decline.
Oh.
Well.
Quite a little bit.
Second quarter.
Because automotive and.
Other markets.
But we really didnt see.
Well I think that any strong permanent I think just as much.
Much of that is due to de stocking so as you looked at our U.S.
Distributors that are public gives us as a benchmark of that they both lowered inventory in the quarter and their sales were down in the low double digits. So when you come down low double digits with some inventory reduction year on year for us it's a pretty.
Pretty weak I, we had we expect further inventory reductions in the fourth quarter.
Big inventories way off and they made those comments as well publicly that but they continue to see some a slight a greater sell through than the purchase of some inventory reduction so we see that likely for the fourth quarter as well.
And.
Yeah, I think it depends on demand, but certainly the opportunity I think is greater for restocking than de stocking or as you get past the first quarter of next year and those channels.
Okay. Thanks, and does this sort of surprise you at all because they have seen other cycles, but you know the those kind of consensus around all these end markets as things are improving kind of quarter over quarter month over month, and we've heard a fair amount about some tight levels of inventory in some of the n.
Products through this and yet we seem to be de stocking in the channel. It just seems like there's a disconnect there.
I think certainly one of the things that's different this time is the disparity where.
If you really look from the full channel, we have restocking happening and I think in automotive we have restocking happy then truck believe we started to see some reason saw some restocking in third quarter in AG, but then we have de stocking in probably general industrial distribution rail.
So I think we have a more hasn't has not within that.
But no I don't think so Steve because I think the decline that we saw in revenue Oh and use of our products and the idling of.
Factories around the world that reduction I think that was a real reduction in demand for a period.
And.
Inventory generally asked to come out for that I think that that extended.
Much beyond early into next year or really even much beyond the end of this year than I think it would start to be.
Unusual and a and its duration.
Yes, Steve This is Phil building out what I would add to what rich said is we did see in the quoting them globally.
Our order book in distribution was up slightly year on year, obviously up a lot sequentially, but so we you know to Rich's point, we do feel like.
While there may be some further de stock you know here through the end of the year, we do think inventory should be hopefully a decent shape and you know set us up reasonably well for 2021.
Okay I appreciate it thanks guys.
Thanks, Steve.
Our next question will be from Joe O'dea of vertical research.
Hi, good morning, everyone.
Hi, Joe.
I wanted to ask about the the set up over the next couple of quarters and talking about no more or less normal seasonality and so some some stabilization after a.
Q2 decline Q3 bounce back and what do you think we need to see in order to.
Trigger the next wave of recovery pumps at these levels.
From an end market puts and takes perspective, but you're looking at more more tailwinds and headwinds here I'm not sure. If many end markets that stand out as ones that you would see a little bit of pressure next year, but you don't.
Really what we need to see in terms of getting that that next stage of recovery growth underway.
Well I think.
We clearly have net momentum.
The sequential strengthening has been there since may continuing through October and I would not.
Consider a slight decline in November December as a slowdown of that so I think I you start the year would really.
Would it be the determinant of that.
Certainly as all of you know a you know these are a lot of these markets truck and off highway markets their momentum markets. Once they start moving sequentially in the right direction. They tend to move in that direction for multiple quarters indoor years, not a quarter or two to.
To Steve's point could this be different with Corona virus. It it could be but you know I think as we sit here today.
Our world is set up that we think we're going to we're going to grow sequentially from the fourth quarter to the first quarter and that this momentum will continue I think to little more tepid done than probably what it would be given the depth of where we went in the second quarter.
Largely due to some pretty weak consume a weak consumer economy unemployment and all the all the things obviously that are out there plus the the risk around proto viruses have a resurging.
Researching here in the winter months, but I think.
General as you look across our markets don't the momentum has been favorable for five six months and you know is largely set up to start 2021 favorable.
Got it and then I wanted to ask one on the cost side of things. It sounds like in terms of the temporary costs that are out that those would be managed out over the next couple of quarters or so.
As you think about the kinds of scenarios in which those costs start to come back.
Do you anticipate bringing them back in a way that normal incrementals or are still achievable or is it a matter of some of these cost cuts will make normal incrementals.
In a recovery scenario, a little bit harder to achieve.
Well, let me, let me probably give a longer answer that a than what you asked the <unk>.
Isn't break down our costs into various buckets.
First of all we do a lot of work every year to increase the variability of our cost structure and this work has been ongoing for well over a decade.
I think we're better at it today than we were in the 2015 16 period and we were better at it 15 16, and we were at eight nine.
And you know, it's everything from the vertical integration of flexing the labor costs in the plants or incentive compensation system design, the cyclicality of our of our material cost structure.
And just a relentless focus on.
Moving more more fixed cost to where there's some level of variability in them. So that's the biggest part that's the most important part as you look at our cost too.
Good Decrementals and it again I think we're better at that being said there is definitely some compression there things that that we.
That we can't flights and those costs largely all come back when volume comes back in.
And then he and then as we talk about temporary cost reductions I break that down into two pieces, there's what really be extraordinary things. We did at the depths of the krona virus situation around compensation and furloughs.
Those are over and would not be expected to repeat at all and that is what I was referring to was really a fairly small impact even in the third quarter. So.
Largely say they were over in the second quarter. They were big in the second quarter small in the third quarter largely over there.
There's this other part of temporary Crossfire's costs, which I think is really where you were getting at a travel controllable expenses. Some part of our headcount or that you know we that we've gotten tighter on just as we add more cautious on as we've gone through this period.
That is where I really don't see any of that coming back in the next couple of quarters travel is a big part of that as an example, and you know our travels probably going to remain closer to zero through the next two quarters, then that it was prior to the call.
One of ours. So your point of how that comes back I think there's some of that remains to be seen but certainly we will have control of that well make sure. We have some volume coverage for that is that happens.
Using this meeting as a as an example, I probably used to do 80% of my IR work.
Face to face I'm doing zero percent of it face to face now.
Where will I be a year from now probably not 80, probably not zero. So there'll be some probably permanent savings that and you know that and that permeates I think a lot of these things. So we're really dissect in a lot of that to figure out how much that we can capture internally.
But I would also tell you in the next couple of quarters.
It's not coming back or is it so and that's even <unk> volume continues to improve.
And and then there's the.
You know the piece that I talked about structural cost savings, which I think we went too. So I think we're going to control or any cost coming back in and and I think it's probably two or three quarters away before that's a material amount off of the third quarter that was a long answer.
No I really appreciate those details thank you.
Thanks, Dan.
And our next question will come from Steve Barger at Keybanc capital markets.
Thanks, Good morning.
I want to see just.
Going back to the renewables do you build your own industry forecasts are using using a service and can you tell us what either you or they expect for kind of three or five year growth rates for renewable installations.
I would say, we certainly use external but we really use more customers because.
It really matters.
A much more what content, we have and which customers around and which geography is wrong and so these are this is probably one of our longest lead time, a firm order book or items that we have seen that we typically have.
Quarters of Oh from backlog and visibility to a business that we don't have today that we may not start commercializing for 12 months 18 months. So definitely our internal data is is more relevant but then we use a variety of external benchmarks off that.
And I think the the numbers that we showed you there of the eight ish percent I think is a pretty good.
Benchmark for us overtime, but it is it is not been a linear progression for us as we moved into the market and I would expect it not to be linear going forward there hasn't been any major pullbacks, but there's been some pauses or as as weve as weve been in the market now for a decade.
Plus but next year again with where we participate.
I'm pretty bullish I don't think it certainly won't be the same level percentage that we did this year. This year was.
Some significant capacity come online so you.
New platforms come online and then also a good market next year, we have the same but not at that same level of magnitude, but we will have another round of capex plans for next year that'll.
Put us in position for the next couple of years.
Okay can you tell us what's your average content per terabyte as our what and what it can be if you're selling the the whole bearing and lubrication product suite.
No well one it varies quite a bit depending on the size of the turban ER and then how much we participate in that turban and I would say it'd be rare for us to have.
Every application across the turban typically it's it's split amongst us and some competition.
But.
You know, it's it's tens of thousands of dollars to six figures.
Got it and and similar question for solar I know this there's less content there but.
Is it content per panel our content per megawatt how do you even think about or or how should we think about measuring content relative to growth rate.
Yes, it's dramatically smaller on solar and.
And one is not in every every solar application. Some solar applications are fixed although the the premium commercial loans generally have precision motion control device. So now you're talking thousands to $10000.
And it would be more per panel as be the graphic that we have in the <unk> in the deck illustrates and then there would be some conservative so I think it's.
Steve I think our intent in the and our next Investor time doesn't give you a lot more information on both those questions wanted to.
Dip into it today and and affirm our confidence in it but I think but your questions are fair in terms of relating our revenue back to.
Actual a unit of energy and a well we'll come back to you again in the next couple of quarters with more information on that.
Great. Thank you.
We will now go to Joe Ritchie of Goldman Sachs.
Thanks, Good morning, everyone.
Hey, Joe.
Hey, guys I, just wanted to try to understand that the trends a little bit better I know that you talked about sequentially revenues being down a little bit in the fourth quarter, So third quarter, but.
You also stated that October was I think the best month since January and I know theres to be less selling days all seven for Q. So.
Is there any color you can give us around like kind of like the magnitude around how trends that have have gone across your business and particularly in October.
Yes, again, I would say it varies but net we have positive momentum and then add positive momentum since the may timeframe.
When you factor in.
Holidays and shipping days of November and December.
A flat to down a couple percent from Q3 to Q4, we're actually still be positive momentum.
Just the shipping days alone are close to 5%.
So but that being said it's not it's.
It's not a equal we're we're not expecting sequential strength in distribution from Q3 to Q4 as an example, because we think we'll see some de stocking there.
We did see really just the sequential strength from September to October there, but.
<unk> automotive, but particularly I'd say more the mobile markets are continuing.
To strengthen and then you know that we've got some secular growth stories in there as well in regards to renewables. So I would say it is Paul.
Positive market momentum.
Being no.
Mitigated by a.
Fewer shipping days year end holidays in a normal seasonality.
Yeah. That's that's that's helpful Rich and I guess, maybe just following up on that on that one comment and I know, we've talked about it a little bit here on that the de stocking trend in the fourth quarter.
Yeah, I guess, just given that you know we have been in a in a period of de stocking for quite some time and you know seeing negative growth for several quarters now on it. It's curious to me that we're still in this de stocking mode with a distributor. So what is going on with them specifically any any other color that you can.
To buy there on distributor destocking trends in the forecast.
No I don't think so I think I I guess, which sits modest you know these are are these are.
You know their sales year on year or down 10% our sales to them are down 11 or 12. It's these are not huge swings in their inventory one of our customers make some comments on their call. This week as well about.
They have invested a lot in information technology and improved.
Digital connectivity with their suppliers, one of which would be us and they and us manage inventory better. So I think it's it's largely.
If sales are 10% lower you need less inventory to support that and and therefore that inventory has to come out our sales have to be a little lower so I think.
I think it's just a normal or normal channel on the flip side of it the distribution side, but.
It was also was pretty heavy destocking in some of our off highway channels for US, we really started experiencing that.
Last year significantly in the fourth quarter.
Our customers are talking about a more impacting them now in the <unk>.
In in the third quarter and fourth quarter, but for US we're actually on the other end of that where we're starting to see our sell through to them.
Be after sales level or a little greater because we took a lot of that hit last year and then it merely parks crowbar. So it varies and to the earlier comments I wouldn't say.
That there's anything abnormal happening it except for the a three or four month period that was extremely abnormal in the earlier part of this year.
Got it and then one real quick one for for a for sale at the $55 million to $60 million in savings in the second half how much came through in the third quarter, how much is expected in Fourq <unk>.
Yeah. Great question, you know you think of it as pretty close maybe slightly below half in the third quarter, and maybe slightly above half in the fourth quarter, but but reasonably close and as we've talked about before you know we think the.
Full year effect of those savings next year will that plus some other initiatives, we're working on should should essentially mitigate.
He asked as a temporary actions next year, so while you're on your comps will be a little bit.
Little bit messy, just given everything that went on in the second quarter, but we do think for the full year would not expect you know the temporary cost actions that we did this year to be a headwind per se, we think we ought to be able to fully offset it.
Great. Thank you both.
Thanks.
We will now go to Ross the likes of Bank of America.
Thanks, guys good morning.
Hey, Ross.
More renewables question, but I'm guessing you guys are happy to talk about this call. All day right. Now you know you gave that a couple of those great slides you show, 12% sales in 2020, I mean, it's a $400 million business right now.
It looks like I didn't quite break out there will there, but it looks like it's more than doubled in the last two years. So me if I'm wrong, what I'm wondering is.
Can this be a billion dollar business and I don't know five eight years and.
Is the manufacturing capacity a distinct from it and can can you.
Because then it to.
As a separate sort of standalone business and any thought being given to breaking it out at that segment at some point you kids clearly this is a business that's growing way faster than anything else in the banking industry right now that you know probably wants a much higher multiple.
Well a lot of interesting thoughts.
Thoughts it within that I would say that.
First on your on your breaking out the rule or a you know directionally jaeson and that was a slight was intended to be directionally, we made some significant investments and.
And they're delivering this year and we expect them to for for years to come.
And I think Directionally, Yeah, I think with this is a business. We think we can keep day or a double digit type Taylor on for some time, which often numbers that you just rattled off there would or what gets to be a pretty sizeable part of the company in the next five years.
I would say we have a really even contemplated the.
Segmentation a question.
And it would probably have to get quite a bit bigger before that would that would be a valid discussion.
But certainly I think to the questions you just raised questions, Steve earlier et cetera, we need to provide more.
Color on what we're thinking about it what we're going to be investing in it and what the growth that the industry is going to mean for the Timken company.
In the coming years, and we do plan, we certainly do plan to do that with.
The baby in a small step in that direction.
Like I answered all your questions did I leave anything else.
No that's definitely rich I mean can you comment on what do you think your share has gone over the last three to five years for a.
Although particularly in win.
Well it.
<unk>.
It's it's it's Verizon in the gear drives I would say, it's it's quite high.
Certain certainly still have Ah, we still have a couple of large competitors out there, but we I would say are one or two in the year dry space.
You know on the main shaft, which tests, which tends to be the two meter three <unk> meter very large bearings were still actually very small we were zero not very long ago, and and we broken into double digits, but we're still a third or.
Well, where we participate we're third we're not really in a <unk> and in Japan. So.
I think there's still a lot of upside there a lot of the capex that we put in this year and that's planned for next year is in that space.
And.
There's room for us both from a share perspective, then and and and in a market perspective, Yeah. Ross. This is Phil I was just as you know to Rich's comments you know the vast majority of our growth this year and when would have done more on the gear drives.
And then the makeshift but I think with the tech with the investments, we're making in technology and in footprint I think we're in a great position to for that to be you know the next or the next really good story for us and when does a increasing our penetration and share on dementia, which is the longer cycle quite frankly, the longer cycle of the two portions that are there.
Cemetery side.
Oh, I know what do they didnt fit so I'd say I'll say, it's a concentrated industry right. There are up there it's not the longest list of customers and a and the same thing with competitors Sun, we have competitors and.
There their formal competitors, but it's not a long list of.
Both companies that have the technology to do what we're doing.
I would just the only open right absolutely.
A separate.
Possibly or.
The wind business.
So far as it goes it commingled.
With the rest of your footprint.
Well the.
It's largely a size issue so certainly when you get it up to.
Bearings two meters above there's not much of a market ticket precision bearings that typically when you'd be up to that size you might get something in a.
Marine application or something but they would typically be a lower precision bearing so when you get the precision bearings of that size. It is largely a dedicated manufacturing.
Manufacturing technology, you get to the gear dry sizes do it fills a williams it was big part of our growth those are sized bearings or that would be in steel mills would be in other large industrial some mining equipment applications et cetera, so they're not unique but it has become such a sizable part.
Of of the bearing industry that it's it's also that's it it's it's a the growth and it is made at the largest part of that industry, whereas.
10, or 20 years ago would it would not have done.
Got it thanks guys.
That's perfect for us.
And now we'll move to Justin Bergner of GE research.
Good morning, Rich myself.
Hi, Justin.
Just on the renewables quickly a lot's been hashed out when.
When I do the math and look at the bars. It looks like there's about 50% growth in 2020, I guess, there's some contribution inorganically from Becca.
Just it sort of in the right ballpark there and you did say that you are expecting further growth and in 2021.
In the right ballpark and yes, a further growth and 21 not at that same percentage it would be a lower lower percentage.
Okay, great switching to the price cost side, you mentioned I think you expect flat price in 2021 or was it flat sort of price cost.
My comment was flat.
Nice and obviously, we've got a lot of self help on the cost side not ready to call. The I'll say the a more variable part of the cost side of the cyclical cost of steel cost but.
With flat price I think price cost could be positive with the exception what Phil said, we got the onetime benefit in the second quarter to be a little bit messy, but for the year. We think we could eke out a little bit of price positive price cost.
Okay, and then lastly, just on the <unk> the destock restock dynamic.
It seems like you still expect across the system sort of slight destocking in fourth Q, but.
But you know the de stocking is you know coming down in four Q and sort of call. It flat in one Q and shifting to a restock their after what seemed like normal seasonality would actually you know.
Be equivalent to a very weak recovery 'cause it de stocking restocking trend to starting to shift even if it's still negative.
Is that accurate.
No I don't think so because I think if you look back at.
Particularly the end of 16, which was when our markets inflected off off of a tough 15 beginning of 16.
And then you look at 17, where.
We have broad based market strength.
A really strong.
Q3 to Q4.
For us would be flat to up one or 2% and so.
Just again just Miss this season.
Seasonality impact and is you know, it's pretty hard to overcome so but then you look at what we did for the first quarter of those.
You know if you're if you're say down to flat Q3 to Q4, you look at Q4 to Q1 in the last four years has been.
Plus two which was not a strong market going from 19 to 20, plus seven plus 12 and plus seven so I think the Q4 to Q1 is more indicative of the strength of the markets.
Okay. Thank you.
We will now take our last question from Matt, Chris Dankert of Longbow Research.
Hey, good morning, guys.
Oh, yes.
Scott I wanted to dig in here again, it was a difficult question, but is there any way to kind of quantify the cross selling benefit we've been seeing from including Diamond and Lovejoy kind of expanding further into power transmission overtime or perhaps another way. It just how these past acquisitions been performing versus expectations maybe.
Well you know I think.
If it's a great question and it's really one where you know obviously one of the big synergies, we look for in adding products to the portfolio is the opportunity to cross sell so which mentioned you know the ability the relationships. We have with a you know the wind turbine manufacturers and the gearbox manufacturers puts us in a position to bring the lubrication system that.
That does so known for into that space, which then gives US you know obviously more revenue opportunity.
With chain, we've talked about you know the opportunity to take take time, and which is <unk>, which is a premier brand in North American distribution combined it with our drives business and really ticket take it to the next level with both distributors and even even receding somebody installed base. We know we've dealt with a great story, where we were able to take what was a predominant.
Only oh, he business with our industrial power transmission belts ticket into distribution, where every time every sale when making distribution is a really nice mix up opportunity. You know I think you know and you know I think the list goes on and on it varies by product I think you've hit the nail on that I think the the coupling chain you know the adults.
Probably provide the closest lubrication, obviously the close the synergies with a with our bearing product portfolio. You know the linear motion is a little bit different but still some nice opportunities there as well and then obviously on the carrier side now we've got.
Not only that you know the premier like your services business and what we think in the World and Philadelphia Gear. We've also got cone derive a in its product portfolio as well as the the marine business, we've been building and continue to add onto so you know it is.
It is clearly part of the value proposition a you know we're seeing that it's one where it's not a lot of home runs its a lot of singles and doubles, but but our teams around the world as you know, but when they go to their go to visit customers diverting the entire timken portfolio with them, making.
Making joint sales calls, where they need to and and you know we're really excited about what we see we think we're probably still in the early to mid innings of this opportunity and then they will be a lot to look forward to that over the coming quarters and years.
Gotcha. Thanks.
Outstanding because it's been a pretty powerful combination its not.
Again with our business model of the opportunities we're seeking to fill a sports analogy, it's it's singles and doubles not not home runs.
And it also takes a little time and and.
You know a lot of it's again over time when you get the digital connectivity are done.
Done where does the.
On the same CRM system can consolidate shipments et cetera.
I'd say, it's it's pretty powerful.
Got it that makes a lot of the details guys.
I guess just last one for me renewables in China, Obviously, an incredible story for you, but you mentioned the China was up year over year or excuse me, India was up year over year, as well and if I'm remembering correctly, that's more heavy truck off highway focus though is that the demand for turning in India.
It is I would say the third quarter of last year was a oh, an easier comp than the first half. So we had that and then also India.
Has become a renewable energy market for us as well.
So I would say the Indian market was solid year on year, but probably the growth was renewable driven.
Right.
Got it got it. Thanks, so much guys and best of luck going forward here.
Thanks, Chris.
And with that ladies and gentlemen that does conclude our question answer session I would like to turn the conference back over to Mr. found outlets for any additional or closing comment.
Okay. Thanks, Catherine and thank you everyone for joining us today, if you have any questions. After todays call. Please contact me again my name is Neil Frohnapple and my number is 234 to six to two 310. Thank you and this concludes our call.
Oh.
And again, ladies and gentlemen that does conclude today's call we'd like to thank you again for your participation you may now disconnect.
Hmm.
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