Q1 2021 Timken Co Earnings Call
Good morning, My name is Anna and I will be your conference operator today.
This call is being recorded.
At this time I would like to welcome everyone to Timken and first quarter earnings release conference call on.
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Yeah.
And Mr. Fred Apple you May begin your conference.
Thanks, Anna and welcome everyone to our first quarter 2021 earnings Conference call. This is Neil thrown Apple and 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.
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 for Casa our Chief Financial Officer.
We will have opening comments this morning from both rich and so before we open up the call for your questions during.
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 on today's press release and and our reports filed with the F. C C which are available on the.
Timken Dot com website.
We have included reconciliations between non-GAAP financial information and its GAAP equivalent and the press release and presentation materials today.
Today's call is copyrighted by the Timken company and 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 the Timken company and I will now turn the call over to rich.
Thanks, Neil Good morning, everyone and thank you for joining us for our first quarter earnings call.
I'm very pleased to report that we delivered both record revenue and earnings and the first quarter.
The revenue results reflect broad strengthening across most of our end markets.
Excellent execution by Timken, and managing our supply chains and our operations.
The diversity and strength of our portfolio.
And our outgrowth initiatives.
Revenue of $1.025 billion was up 11% from last year.
The strengthening and our markets that began mid last year accelerated in the quarter and despite a wide variety of supply chain challenges. We responded to the increase and delivered revenue that was up 15% from the fourth quarter.
The sequential strengthening from Q4 was broad as most of our end markets were up double digits sequentially.
The year on year growth was again led by renewable energy is timken continues to increase penetration and global wind and solar markets.
Off highway heavy truck automotive and general industrial markets were also up double digits year on year.
Geographically Asia, plus 30% drove much of the year on year growth, but more importantly, we are now seeing sequential growth across all major geographies.
The sharp increase in demand combined with the lingering impacts from the pandemic stressed many of our supply chains and operations.
We experienced labor challenges freight delays supplier delays and unanticipated changes in customer demand.
We were impacted negatively by both the Suez Canal as well as chip shortages in the quarter and while these two issues grabbed a lot of the headlines. They were just two of the many issues across our global supply network that we successfully managed our way through.
We continue to experience some inflationary pressures, primarily in freight and raw material, but they continue to be very manageable.
Pricing was slightly positive and the quarter as material surcharges kicked in.
Despite the inefficiencies and cost pressures, we were able to ramp up to meet the increased demand and and the process of doing so deliver record earnings per share of $1.38 and EBITDA margins just shy of 20%.
Cash flow was seasonally low and impacted by the significant increase in accounts receivable from the sequential sales growth cash flow. The remainder of the year is expected to be strong.
We continue to advance our strategic initiatives and the quarter, we delivered strong year on year growth and renewable energy and over 30%, while continuing to advance our announced $75 million investment plan.
Many of our smaller outgrowth initiatives across multiple end markets also contributed to the record Q1 revenue results.
Rory Barry and had an excellent first full quarter as part of Timken.
And we are rapidly moving to integrate the business on.
Our groeneveld Becker transformation into an integrated and globally, leading automatic lubrication systems business is also on track and is already accretive to company margins.
We continue to advance our footprint, our new Mexico plant is in production and will be ramping up through the course of the year.
And we're completing several footprint consolidation initiatives, including the relocation of our diamond chain plant and the expansion and modernization of our solar operations in China.
We also plan to convert to more operations to our primary ERP and digital platforms and the second half of the year, which will facilitate both revenue and cost synergies.
Overall, an excellent quarter from timken, and delivering results and a dynamic environment, while advancing the company for long term success.
And while the pandemic has improved in many parts of the world. It is hitting new peaks and others and I want to reinforce that we continue to place employees safety at the forefront of all of our operating decisions.
As we look forward to the rest of 2021 market demand remains very strong and timber timken remains on an excellent position to capitalize on the markets.
We're now estimating full year revenue to be up 18% over last year to a record $4 $1 billion.
We're planning for normal seasonality with a slightly weaker second half and first half.
On the bottom line, we were guiding to a record $5.30 of earnings per share at the midpoint, which would be almost 30% higher than last year, and 15% higher than 2019 and record of $4 60.
And support of our topline and bottom line estimates.
Orders and customer demand are very strong.
Customer sentiment on the second half of 'twenty, 'twenty, one and into 2020 two is bullish.
Continue to win and the marketplace with our outgrowth initiatives and we're focused on creating shareholder value and driving future growth through capital allocation.
I would like to caution that there's more uncertainty than normal and our estimates. We are currently facing daily supply chain and cost challenges, which continue to elevate the level of uncertainty and our business.
And both the revenue and earnings estimates, we have assumed continued supply challenges that our customers.
Our operations and our suppliers' operations.
We expect to use us to continue at roughly the first quarter pace through the second quarter, and then to improve through the second half.
But these issues have not been predictable and the range of possibilities remains wider than normal.
Over the last several years, including in this first quarter, we've consistently and reliably demonstrated the ability to successfully navigate highly dynamic markets and macroeconomic forces and we're confident and our ability to continue to do so in today's environment.
We delivered strong EBITDA margins and the first quarter, which we expect to translate to solid margins for the full year and we remain committed to our long term target of 20%.
The price cost situation remains a modest headwind, but a manageable one and it is being more than offset by volume and other cost improvements.
We expect a good year for cash flow and expect to continue to generate value through capital allocation with a bias to M&A.
Okay.
The impact of all three of our strategic pillars of outgrowth operational excellence and capital allocation are evident and our first quarter results as well as our outlook for the year and we will continue to build our pipeline and advance our initiatives.
While short term there remains a high level of anxiety around the pandemic and the associated supply chain challenges.
Customers and global capital equipment markets are very optimistic about the future.
We are well positioned to continue to grow and renewables, but the timken story is bigger and broader than just renewables.
Across our markets. There is an enormous amount of new equipment design work, taking place for our customers with a particular emphasis on improving sustainability and.
Timken value proposition and contributing to the efficiency of future generation equipment designs is a core strength and competitive differentiator for the company.
The renewed interest and increased infrastructure spending and will also favorably ripple through many of our markets and the coming years Timken is well positioned to continue to grow and win in the marketplace.
In summary, we achieved outstanding results and the quarter and are on track to deliver a record year and with that I will turn it over to Phil.
Okay, Thanks, rich and good morning, everyone for.
<unk> for the financial review and I'm Gonna start on slide 10 of the presentation materials.
Timken delivered strong performance across the board and the first quarter and you can see a summary of our results on this slide.
For the first quarter was a record one point O 3 billion up 11% from last year and up 15% sequentially from the fourth quarter.
We delivered an adjusted EBITDA margin of 19, 9% up 70 basis points from last year's strong first quarter.
We also delivered record adjusted earnings per share of $1 38 up 24% from last year.
Turning to slide 11, let's take a closer look at our first quarter sales performance.
Organically sales were up seven 5%.
Both of our segment saw higher sales volumes versus the year ago period, and pricing was slightly positive as well.
Currency had a two 7% of the topline in the quarter, while the Aurora bearing acquisition contributed just under 1%.
On the right hand side of the slide we show year on year organic growth by region.
So excluding both currency and acquisitions.
Let me comment briefly on each region.
And Asia, we delivered strong growth again in the quarter up 30%.
Our sales were up broadly across most sectors and the region with renewable energy distribution and off highway and heavy truck posting the strongest gains.
And Latin America, we were up 25% led by higher revenue and distribution and the on highway auto and truck sectors.
And Europe, we were up 6% as growth returned in several sectors led by off highway and distribution.
And finally, and North America, our largest region, we were down slightly versus last year, driven mainly by lower aerospace rail and marine revenue, which more than offset growth and other sectors like off highway.
However, we were up double digits from the fourth quarter, and we were up year on year and March we expect North America to be up for the full year.
Turning to slide 12 and.
Adjusted EBITDA was $204 million or 19, 9% of sales and the first quarter.
Paired with 177 million or 19, 2% of sales last year.
This represents an incremental margin of roughly 26% all in or 33% and on organic basis.
The increase and adjusted EBITDA reflects the impact of higher volume favorable manufacturing performance and lower SG&A expenses.
Which more than offset higher material and logistics costs and unfavorable mix.
The unfavorable mix was driven by the relatively higher OEM revenue growth in the quarter as compared to distribution.
Currency had a slight positive impact on EBITDA and the quarter and the Aurora bearing and Aurora bearing contributed about $1 million with margins running ahead of our expectations.
Let me comment a little further on our manufacturing and operating expense performance.
On the manufacturing line and our team responded well during the quarter to the significant step up and customer demand.
We benefited from higher production volume versus last year, which enabled us to more than offset some cost headwinds related to ramping up production.
We also continued to benefit from ongoing cost reduction actions and other productivity initiatives across our footprint.
And as expected, we did experienced higher material and logistics costs versus last year, some of which was driven by the higher volumes.
As rich mentioned, we're in a challenging and volatile supply chain environment right now.
And while our team is managing through it very well, we expect these conditions to persist through at least the second quarter.
And finally on the SG&A line, we saw a reduction in expense versus last year as we continued to benefit from cost reduction initiatives and lower discretionary spending which more than offset the impact of higher incentive compensation expense.
So overall, we delivered solid adjusted EBITDA margin expansion and the first quarter.
Driven by solid execution on higher volumes and despite supply chain and other challenges.
On slide 13, you'll see that we posted net income of 113 million or $1 47 per diluted share for the quarter on a GAAP basis.
This includes nine cents of net income from special items.
Driven by discrete tax benefits in the period.
And on adjusted basis, we earned $1 38 per share.
Up 24% from last year, and a new quarterly record for the company.
Our first quarter adjusted tax rate was 25.5% inline with our expectations and slightly lower than last year.
The current period rate reflects our geographic mix of earnings and other structural benefits.
Next let's take a look at our business segment results starting with process industries on slide 14.
For the first quarter process industries sales were $521 million up 14% from last year.
Organically sales were up nearly 10% driven by strong growth and renewable energy distribution and general industrial sectors.
And I've said, partially by lower marine revenue.
The favorable impact of currency translation added roughly 3.5% to the topline in the quarter.
While the impact of the Aurora bearing acquisition added nearly 1%.
Process industries, adjusted EBITDA, and the first quarter was $136 million or 26% of sales.
Compared to a $112 million or 24, 4% of sales last year with merchants up 160 basis points.
The increase and adjusted EBITDA reflects the impact of higher volume favorable manufacturing performance lower SG&A expenses and the benefit of currency on.
Partially by unfavorable mix and higher material and logistics costs.
Now, let's turn to mobile industries on slide 15.
And the first quarter mobile industries sales were 505 million up about 8% from last year.
Organically sales increased five 2%, reflecting higher revenue and the off highway heavy truck and automotive sectors, offset partially by lower shipments and rail and aerospace.
Currency translation added two percentage of the top line and the quarter, while the Aurora bearing contributed nearly 1%.
Mobile industries adjusted EBITDA for the first quarter was 80 million or 15, 9% of sales.
Compared to 76 million were 16, 3% of sales last year.
The increase and adjusted EBITDA versus last year reflects the impact of higher volume and lower SG&A expenses, offset partially by unfavorable mix and higher material and logistics costs.
Turning to slide 16, you'll see we generated operating cash flow of $32 million in the first quarter.
After capex spending of $29 million free cash flow was 2 million and the period, which was in line with our expectations.
The drop from last year reflects the impact of higher working capital to support our sales growth.
Which more than offset the impact of higher earnings in the period.
In particular, we saw a large increase in accounts receivable during the quarter driven mainly by March sales being significantly higher than December.
Note that the first quarter is normally the lowest quarter for free cash flow generation.
Given seasonal working capital needs and our annual incentive compensation payouts that occur in March we expect a significant step up and free cash flow over the remainder of the year, but it will be more back half loaded.
From a capital allocation standpoint, and the first quarter, we returned 50 million to shareholders with the payment of our 395th consecutive quarterly dividend and the repurchase of 350000 shares of company stock.
Taking a closer look at our capital structure, we ended the quarter with a strong balance sheet and strong liquidity.
Our leverage as measured by net debt to adjusted EBITDA was one nine times at March 31.
Unchanged from the end of 2020.
This puts us and a great position to continue to drive our growth and capital allocation strategy.
Now, let's turn to the outlook on slide 17.
We now expect sales to be up around 18% in total at the midpoint of our guidance versus 2020.
Which is up from our prior outlook of 12% growth.
Organically, we're now planning for sales to be up around 15% at the midpoint.
Up from the previous outlook of 9% growth.
The higher outlook reflects our strong first quarter performance and improving market conditions.
We expect both segments to be up double digits organically, but with higher growth in mobile industries and process industries.
Our assumptions for currency and acquisitions are unchanged from our prior outlook.
Currency is still expected to contribute about 2% at the topline.
And there were a bearing is expected to contribute close to 1%.
On the bottom line, we now expect adjusted earnings per share and the range of $5 15 to $5 45 per share.
Which is also up from our prior outlook.
At the midpoint, our current outlook represents nearly 30% earnings growth versus last year.
The midpoint of our earnings outlook implies that consolidated adjusted EBITDA margins will be up slightly from 2020 day.
Unfavorable mix and the non recurrence of the significant temporary cost actions, we took last year and response to the pandemic.
For 2020, one we now estimate that we'll generate free cash flow and a range of $325 million to $350 million, which represents just over 80% conversion on adjusted net income at the midpoint.
This assumes capex spending at around 150 million or just over three and a half percentage of sales.
Which includes ongoing growth investments and areas like renewable energy.
For the full year, we anticipate net interest expense of around $60 million and estimate that our adjusted tax rate will be about 25, 5% consistent with the first quarter and both of which are unchanged from our prior outlook.
So to summarize we delivered record first quarter performance and are raising the outlook for the rest of the year.
The global Timken team is executing well on this environment and we're confident and our ability to delivered record performance in 2020, one and beyond.
This concludes our formal remarks, and we'll now open the line for questions operator.
And.
And if you would like to ask a question. Please.
Star one on your telephone keypad.
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And once again that is star one if you would like to ask a question.
And we will take our first question from Stephen Volkmann with Jefferies.
Hi, good morning, guys.
Good morning, Mark and Stephanie.
I wanted to ask a little bit about your distributor network I think rich you might have said that the that it was not as robust as the OEM channel this quarter and so I guess I'm a little surprised by that you would think that would come back fairly quickly. So what do you think's happening there with dish.
Tribunal, and and where where do you think they are with kind of a restock.
And that might have to happen at some point and I'll leave it there. Thanks.
Okay.
So yeah I would say it's on a relative situation. It was industrial distribution was up double digits sequentially in the first quarter from the fourth quarter.
But not is not up as much as a mobile Oems and Oems and general.
And then I would also say to your point on inventory inventory, while the revenue was up double digits sequentially, where we have visibility of inventory the inventory was flat to down a little bit. So I think there's a whole phenomenon and area of inventory restocking to take place.
And I think that's upside for us as as the cycle moves forward on and from a mixed perspective cause very much the rebound since the pandemic Loews had it has been a OEM and primarily mobile OEM led rebound.
But we are beginning to see other parts of that kick in and obviously the mobile OEM pieces is unfavorable mix for us and I think that will improve as time goes on and I believe their optimism.
Within that channel is and has improved significantly on month to month to start the year.
Is there any distributor restocking and your guidance.
Yeah, I would say Theres, a theres there would there would definitely be some and there I think there is a possibly some upside with that though.
Okay. Thank you.
Yeah.
And well take our next question from Rob West Mira.
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Hey, I just wanted to see if I could ask two questions on growth.
And I just saw on renewables are you able to outgrow the strong rebound you're seeing and the rest of the business. This year and I'm just curious how far your pipeline and Kodak and can see and that business and some of the larger projects and second Richard if you'd just be willing I think I understand what you're talking about with the new opportunities and energy efficiency and your customers are all innovating and stuff.
Fourth just wonder if you could flesh that out a little bit whether it's a share gain situation or you know.
Any more color you want to get thank you.
Yeah on on renewables.
So probably for the year now in the guidance. The renewables forecast has stayed roughly where it was to start the year up and the mid teens and the other parts of the business have come up so I would say it is.
Growing in line with the company average this year as opposed to leaving it. It was it was still leading and the first quarter, but we do expect the growth and renewables this year to be a little front end weighted.
In terms of the visibility are very good visibility certainly to the current quarter and expect a very strong second quarter and the space.
And have would have some pretty good visibility and into the start of the third quarter. So generally out three to four months.
We do expect some seasonality usually the fourth quarter, even last year, which was a very good year. The fourth quarter was a little softer. So expect some of that phenomenon to continue and then obviously the comps.
As we move through the year get significantly more challenging so we do expect the growth rate to moderate and the second half off what we are what we delivered and the first quarter and and.
We expect to deliver on the second quarter.
Still very bullish on the market long term and then the other part of the visibility you know these are long design cycles.
We have a very active pipeline with with turbine Oems with a drive Oems and feel very good about winning our share of business over the next several years, but a lot of the design work and won't go into production until 'twenty two 'twenty three but the pipeline is very strong.
On the on the other piece I'd say, it's just the the timken business model of bearings belts, couplings et cetera, and differentiating at the OEM with our technical capabilities of helping them design a better equipment.
And a more efficient equipment wider equipment, whatever whatever the need is and you know just really wanted to reinforce on a call that we think our engineering pipeline there well we know our engineering pipeline. There is as active as it's ever been and and you know some of those things are kicking in and this year some will kick.
And next year, some will kick in.
Beyond 2022, but theres a lot of design activity happening and from agriculture to construction equipment, obviously automotive and get electric vehicles get a lot of the the media attention, but a lot of that is happening across our.
Most of the markets, we participate in and we think it's it's certainly always been a big differentiator force from the smaller competitors and emerging competitors, but also a differentiator force for our major competitors and we like where we sit and looking forward.
Okay. Thank you.
Thank you thanks Ron.
Our next question will come from Ross Gilardi with Bank of America.
Rich I'm going to piggyback off of that one a little bit. So just on on on a vs and I think the common perception is that variance intensity goes down not up. So can you can you elaborate on that and is it can you be any more specific on on like what kind of design changes on our leading our day, leading to greater bearing intensity and general or is it just.
And the opportunity for you to be in front of your customers and.
You know sell other services and you know that type of thing.
Well I think your point on E V. As is correct I think and the the on highway vehicle electric electrification generally reduces total bearing and and really and mechanical power transmission and content.
In the vehicle and total although it also is a new design cycle and and as we as we look at that again.
It's not affecting where we participate as much as it is the industry in total, but where it is affecting where we participate we see us being a marginal net winter and there, but again as you certainly know Ross that that also is not where we're targeting to be the growth engine. When you move into a more industrial equipment.
And the more hybrid design solutions and so.
What case, you're increasing the way you know Julien out full electrification, sometimes around emissions and they're right. There I think our you know our content is is holding or growing and and our ability.
To Rob's question really to win more as the design and and mix up as we do that.
<unk> is is really where we're focused and I think are really well positioned right now.
Yeah.
Okay. Thanks, that's helpful and then.
And I just wanted to talk to you little bit about your raw material costs and.
Steel and just how and how your pyramid process really works I mean, I remember back on the day. When you you know you have the steel business.
And I used to always talk about how you enter and the negotiations for most of the rest of the human needs and and in the fourth quarter of the you know.
On the prior year and is that still the case and you know what percentage of your steel buy is and still have procured in that manner, and I and I guess, what I'm getting out and that's the case are all the spot movements that we're seeing and commodity grades of steel really more of a 2020 issue.
At this point when we're thinking about price cost dynamics for this year.
Well I would say the.
And the prices generally have moved globally.
For the last several years and and we plan on them moving globally, so globally steel prices increased significantly and the fourth quarter.
And we got pinched by that a little bit and in the fourth quarter and they moved up a little bit more and the first quarter and pinched, a little bit, but laughs, because with a quarter lag or are pricing and some of our surcharge mechanisms kicked in so to your question about where and and that's really the part of that that's moving is.
And to your point, we generally negotiate base prices for steel.
And then I have a surcharge mechanism that is that the steel passes through the surcharge mechanism and you know is typically 20, 30% of the total steel cost. So even when you talk about a 50% increase or a 30% increase on that smaller element. It. It is a it's not on the entire unit so on.
And the U S. We've typically have base price is fixed for a year.
And and that would be the bulk of the U S spend and then the surcharge mechanism would move through the year. So we generally know what our base prices are the surcharge was and at a pretty high level and the first quarter. We did fine with it we know where it's gonna be and the second quarter feel good about it and obviously that moves.
Difficultly up or down a it could be a little bit of a small.
Good guy or bad Guy for us and the in the quarter, but and we really when you look at our full year. There have since we are since we divested the steel business there as well on steel business. There has not been a year, where we've really talked about steel being a material impact on our margins for the year and and I think we're still on a pretty.
Positioned to do that we get to rest of world.
And we buy generally and shorter terms are usually more like six months.
So again as we sit here today, we have pretty good feel for our pricing for the for the next several months.
And again feel we have that baked into our baked into our guidance and feel pretty good that we're in a good position to cover.
Fuel cost going forward.
That's helpful. Richard could you just repeat you threw some numbers out there, but you broke up a little bit when you were going over them about 20% or something.
It was towards the beginning of your answer could you just repeat that.
Well, yes, typically we have a base steel price and then we pay a surcharge based on a on an index and usually the and the surcharge is less than a quarter to a third of the.
Of the total price that we're paying for the steel so when that if that index part moves by a significant percentage is moving up by a significant percentage on again and maybe a fourth of the steel. So it takes a big move on that for our steel prices to go up 10%.
Okay.
Okay, and got Gotcha, all right I'll follow up and just some questions later thank you.
Thanks, Roger Ross.
Well now take a question from Joe Ritchie with Goldman Sachs.
Hi, Thanks, good morning, everybody.
Good morning, Good morning, Joe.
Richard I was and that was good color on on just that and place it and how it impacts your business I guess.
The follow on question to that and maybe to follow on question to that.
First is there a portion of your customer contracts that you are kind of locked in for this year that ultimately are going to be covered and maybe get some pricing on until next year and then secondly.
And your slide Slide 12, when you when you lay out that price mix issue and that the materials logistics issue and the first quarter or are they a headwind how does that look like for the rest of the year.
So I'll take that and a couple of different chunks. The certainly we have a significant amount of our business that is on annual <unk>.
Contracts that we would've walked in and most of that most of those annual contracts are counter not all of them.
And again, we had.
Had we been and the environment. We're in today and in October November of last year, we might've been a little bit more aggressive on the price side.
But as we sit here today, we do have a fair amount of that locked in.
Pricing did go up and the first quarter much of that and again, a reflection of steel surcharges. So on and in the majority of those contracts, whether they're annual or multi years. We we have some mechanism to pass through some part of that steel inflation.
And some of that started to happen and in the.
And here, but we are we certainly as in this environment is contracts open we would expect to begin to move pricing up and you know would see doing that over the next 12 to 18 months, but we're not counting a lot on price.
And this quarter or the next quarter so and.
And that'll be happening over a period of time I think as you look at price cost price material cost in total and on that chart on.
We see it at a it's a significant number but but it typically is a hedge with volume and our material. It's normal for our material costs to go up as our volume goes up we fight that we resist that and and negotiate against that but it but also there's a natural hedge with volume.
Going up with it and then we pass it through with time, So I mean I think.
With the exception of the speed at which it went up in the fourth quarter, there's really nothing abnormal about what we're dealing with in and steel today versus 17, and 18 or 12, and and 11, except maybe despite that happened again in the fourth quarter. So.
Yeah, I think the you feel good about our margins and and thank our you know the combination of it all what is the implied guidance would be around 19% our EBIT margins for the full year and feel good about that and the only and a rising cost environment. Yeah. I don't think I would maybe add Joe and obviously it kind of goes without saying, but I mean, obviously we.
The complexity of our business with with customer contract supplier contracts and I think we've shown over the years that we can get pricing to more than offset the impact and material cost quite frankly, but it's not going on it just doesn't match up perfectly quarter to quarter and I think we're in right now and not an unusual environment and obviously the material moving up as it has what was.
Quite rapid but I mean, the the.
<unk> and are being at a point where materials moving.
Price is going to follow and I think as rich said, you know price will follow and as contracts renew and we will we will get price.
And then obviously when we put pricing through next year I think you'll see next year be a year, where we will make up for a lot of it and a and b and a situation where 'twenty two will be a year, where we would generate we'd expect to generate positive price cost.
And that's that's Super helpful. Thank you for that and maybe you want and my one quick follow up.
And thinking about the growth environment, clearly very encouraging what you guys are seeing across your business I'm, just curious as you're and you're thinking through this footprint consolidation and and volume and collecting how are you managing and make sure. You know there are no kind of hiccups, along the way and as you're as you're consolidating and footprint.
Well, yes, it's a good question day, and and I would say you know we had a fair amount of hiccups and the first quarter I don't think they were associated with our consolidation activities, but those those add a layer of complexity certainly to it. So I think we're managing that very conservatively and you know we're very focused.
Just on having fewer hiccups this week than we had last week and continuing to drive that down.
But it is an environment, where you know the first quarter was not as efficient as what we would would certainly have liked it to have been within our plants and from raw material and parts are arriving late higher absenteeism in our and our operations our supply.
Fire operations, and and then customer changes it was certainly not as efficient and again part of that would be normal and are in an upturn and force a and then part of it is compounded by.
The pandemic, but we think we will definitely get better as.
As the year progresses, and certainly there'll be upside if we can get better sooner because we didn't really factor any improvement from the second quarter.
Okay.
Got it that's great to hear thank you.
Thanks, Joe.
Well now take a question from David Raso with Evercore.
Hi, Thank you for the time.
Just to speak to the second quarter margins being above one Q.
But not quite what to Q a year ago was I was just curious with the strong first quarter margin can you reset that for us and I'm, just trying to think and the implied second half if you're looking at full year EBITDA margins at 19.
Yeah, well I think certainly looking at you know the last last year's comps.
Started getting a little abnormal even in the first quarter because as you'll recall by March of last year, we were having a pretty significant impact in Italy, and other parts of Europe and had already gone through it and in Asia. So we'd already begun to do some things with temporary costs and and the second quarter.
Comps are also are going to be really abnormal so I think definitely the better way to look at 2021 is the margins and.
Pleased with the 19, 9%.
You know normal seasonality would be a little lower and the second half and the first half.
So I mean, we're basically projecting flattish margins from Q1 to Q2 and on a little bit of decline from the first half.
To the second half.
Yeah. The other thing I'd say on the on the margins or is the mix as I talked about earlier is quite unfavorable force and has been for the last couple of quarters and in regards to a mobile and OEM.
What demand and most of our revenue increase was was mobile versus vs process. I think there are certainly some upside if that mix would improve as the as the year progresses and then the I think the other upside for our margins I've already mentioned it was is more operational efficiency.
Sooner and then what we have have in this guidance.
And that was sort of related to my follow up about mix I know, it's you know many months away, but when you think of what customers are describing their needs beyond this year.
You know your assumed inventory levels and the channel by the end of the year just your views on the markets or any you know longer term maybe projects you have when we think of the mix for 'twenty two and it just base case right now and should we think of process growing as fast or faster the mobile or the mobile market still giving you some long lead time.
And aerospace be it you know on cat on mining and whatever may be.
We shouldn't necessarily assume yet process outgrows mobile and 22.
Yeah, and I'm, probably not ready to to call that but you know I just go back to my earlier comment that you know industrial distribution was up nicely sequentially.
But you have what off highway was up sequentially and.
And as you look at the input we're generally getting today from a mobile OEM customers is pretty bullish on 22 on automotive heavy truck.
All the segments of off highway and construction mining and power sports, which is relatively small for us but are extremely bullish on that so I think both but I think naturally to your point it would normalize and you.
You know that the MRO market will follow this and inventory restocking to some degree will follow it as well so.
At predicting when that happens and what mix I don't think we're ready to do yet.
Okay. Thank you. Thank you for the perspective.
Thanks, David Thanks, David.
Well move to our next question from Chris Dankert with Longbow Research.
Hey morning, guys. Thanks for taking the question good morning, Chris.
I guess, it's kind of open the lens a bit look internationally I guess you know good to see EMEA returned to growth just any comments on kind of the key drivers there and whats leading what's lagging and then maybe if we just get a quick comment on on Timken, India as well given the current situation that'd be great.
Yeah, Let me take Timken, India, and then I'll, let Phil answer the first one.
So I think.
And as an example for the first quarter and we started the year a.
Pretty good and in and Europe, and then Europe actually deteriorated for US we had a a lot of plant challenges with staffing and and that improved a really kind of towards the end of the quarter and now India has started to surface as more of a problem I would tell you as we as we sit here today.
And.
Our India business.
Both locally is doing quite well as well as the plants, where we export into other parts of the world are are fine.
That being said, we have seen you know and uptick in a small uptick and absenteeism hasn't hit the levels that we saw in Europe, and the first quarter, yet, but we do have some anticipation that a that situation is going to deteriorate further and the quarter and we will have.
Some impact on our production levels.
Out of out of India and.
And.
You know obviously it again it could be better it could be worse and that's one of those unpredictable items that are that I mentioned.
But I would I'll segue and we've been dealing with those four now five six quarters in a row.
And and again to scale.
India as a as a market.
And it's it's a <unk>.
Single digit percentage of the company. So it's and it's not in a situation where it's going like it did last year from 100 down to zero for a couple of months I think it can go from 100.
<unk> 95, or 90, but that's more of what we're looking at vs. The cliff that we went down last year.
Yeah, and then and then on Europe, Chris I mean, obviously it was great to see Europe get back to growth in the quarter and and it was it was really several sectors as I said off highway and distribution and led the way, but I think the way to think about it we were up 6% and Europe. It was more mobile and process. So on the mobile side off highway was positive we were up a little bit heavy truck and.
And and a little bit and rail as well and most of the real headwinds were or in North America and other parts of the world and on the <unk>.
Process side as I said distribution was positive, which was which was nice to see and we also saw some strengthening and the general general industrial sectors as well so nice to see the region back to growth, obviously still some still some challenges there with with the pandemic, but good momentum building there like like in North America, and rest of the world and.
We have a real positive outlook for Europe for the rest of the year.
Got it thanks, so much for the context, there guys and I guess the quick follow up just at a high level can you give us kind of are where we are and you have a lot of digital upgrades you know at the analyst day and the past, it's kind of where are we like innings wise in terms of the upgrade on the on the shop floor automation and the ERP and CRM upgrades.
Any kind of quick hitters that'd be great.
Well I think on the what we call our primary digital platform, which is the core of its ERP, but then we have CRM off although we have engineering systems off of it et cetera, you that we feel is a best in class solution and is in 70% of our revenue stream.
<unk> and we are a small part of the business that are really our services part and some other element that we don't really look to bring into that and and really most of what we're doing is bringing on acquisitions into that digital platform, which again, we think one brings as cost synergies are.
And the information technology stream alone brings cost synergies and brings us ability to.
Integrate things are better and then it also brings a sales synergy so.
That was what I was referring to and the comment where are two of the acquisitions that we did have a few years ago, we were bringing into that digital platform and then we do have other initiatives, where we're looking to extend it so last year, we extended it further into our supply base and and more digital connectivity with our suppliers.
Got a leading platform already on the distributor side, but but always looking to augment that and improve it and.
And and then there are places where we take it down to the factory floor automation. There are other places, where we where we keep it separate but.
But we feel it's already a.
And I'll say competitive advantage as well as a cost advantage for us that we run such a significant part of the company are already on it and the more and it is something that we really look at from an acquisition standpoint that we know we bring value.
And to the smaller businesses that don't have the ability to have a system with this level of capability and connectivity to customers and suppliers.
Okay. That's really helpful color. Thanks, so much for the time guys and congrats again on the quarter.
Thanks, Thanks, Chris.
And well now take our next question from Brett Linzey with vertical research partners.
Hi, good morning, all.
And I appreciate the detail yeah wanted to come back to Asia Pac I imagine youre going to begin to see a moderation and the rate of growth, but just in terms of the underlying level of demand and the order tempo there.
And any signs of pent up demand post COVID-19 and that region is beginning to level off or would you characterize and activity is still pretty active.
I would say, it's very it's still very active the India situation, we already touched on its low tenuous at the moment I think you know I would have two months ago said that the customers. There we're very optimistic about the year and and next year are that's gotten a little more.
Touching go here today, but but again I think.
Hopefully the pandemic transpires there like it has and other places and peaks quickly and and and starts to starts to pull back China are I would say is has done very well certainly year on year number was helped a little bit by last year's are the impact of China and the pay.
And demick last year still looking for a really good year on year comps and the second quarter and then they will moderate a little bit.
And the and the second half, but and markets look pretty solid over there and optimism is high and again sequentially.
But again with probably the exception of India is what what's happened with India, just and the last few weeks sequentially geographically all major geographies are sequentially, improving yeah, and maybe Brent I would just add you know its interesting about Asia as you know last year. It was very much a renewable story and.
And it was really late and here, we started to see a lot of the other markets improve but first quarter. This year was much broader so it wasn't just true obviously renewables and still a big contributor, but we saw good growth and distribution and significant growth and off highway heavy truck. So I do think.
And we certainly believe it can run longer because it really does feel like.
It can continue for some time.
Got it great and then shifting back to the Guy and you did point to outgrowth as being a factor of the increase and the sales outlook.
Are you able to parse out or quantify whats market versus <unk>.
Our growth initiatives things, you've been working on individual idiosyncratic wins for the company.
Well you know we target the 100 200 basis points, a year and it's hard to really come back and hold yourself accountable that until you can look back in the rearview mirror and do a lot of analysis of what competitors reported et cetera. So certainly on the first quarter.
Yeah, it would be it would be hard to pinpoint.
Pinpoint that certainly we you know we know, we're winning and and renewable energy are both wind and solar.
Bleed and we know were one our share of platforms and in the off highway market et cetera.
So we feel good over the timeframe that we're on track for that 100 plus basis points.
But you know in any given quarter.
Hard to pinpoint and a lot of what matters and the quarters are you in the right markets with the right customers and and and certainly I.
And I think our mix is showing that that was the case this quarter and this year as well.
Okay, Great I'll leave it there thanks.
Thanks Brent.
Yeah.
And well now take a question from Steve Barger with Keybanc capital markets.
Good morning, guys.
Hey, Steve.
Rich you said this has been and OEM lead to recovery and I know. This example, maybe more industry specific but our railcar OEM recently said that higher steel prices could cause some delays and ordering and our railcars are obviously all steel, but do you have concerns that dynamic could bleed over into other types of capital equipment or is the message from customers just all about availability.
Yeah.
I I would say we are not seeing those concerns at all today and the discussions are about short term availability and and.
And longer term availability is and into 2020 two.
Rail.
And is a market for us that was still down pretty significantly year on year, and but similar to my other comments was up sequentially from the fourth quarter to the first quarter double digits. So again, we see the strengthening and the market.
But the depth of where it went last year, we have not clawed back to a positive there yet for for a quarter. So that that one is a bit of a bit.
Bit of a and exception for us within mobile that and arrow would be the two pieces of mobile that are improving sequentially, but are still not back to prior year and prior peak numbers.
Got it thanks, and and Phil spot freight rates are up a lot and I think contact track pricing is renewing at high single high single or low double digits step ups do you have arrangements, we're afraid as a pass through or how much of your volume is contract versus spot.
Well I would say most of it and most of it would be.
Contract, but we are subject to.
Pass throughs relative to fuel and other and other input costs. So I think we do a little bit like material, where we are subjected to movements and fuel costs and you know for US a lot of the freight we've seen we saw on the first quarter was was just premium premium for your air Freighting as we were trying to keep up with demand and I would say and core think of it as similar base.
This contract with with adjustments from time to time for four fuel fuel costs.
And your comments Steve is is.
And is appropriate for our experienced inflation and a lot of cases, a spot buy a freight on spot buy of anything including a bearing right now is going to be.
Pretty expensive, but you know our suppliers are not running and raising prices right and left and so it's you know if you are looking for something new looking for something abnormal and.
Fly scenario.
Pressures are there, but I think our suppliers and timken are playing it through you know playing for the long term and we'll look to it there's certainly going to look to get some price over time.
But we're not we're not seeing from them.
Mass inflow of of inflationary pressures.
Yeah I understood. It it just I guess the question is how long can can these spot increases persist before that starts to flow through and a more meaningful way to you know to just general operations right.
And I think it will and I think certainly if the market stay as robust as we think they can for 'twenty two it will but timken and we'll have more pricing by that and as well.
Right.
Yes.
Thanks, Steve.
Yeah.
Our next question will come from Justin Bergner with G Research.
Good morning, Rich and myself.
Yeah.
So first off congratulations on a great start to the year and and outlook going forward Mike.
My question relates to the increase and Guy and so you increase you know EPS guidance at the midpoint by 40 sensor, 8% on 6% faster organic sales growth. So I mean normally the organic sales growth would.
You know lever up more in terms of the increased your EPS guide so I assume that increased price cost headwinds and some of these supply chain issues are the negative factors you know holding back what could have even been a larger EPS guide increases and are those sort of the right factors and sort of which of those would be.
Larger from sort of it.
No incremental headwind point of view versus what you anticipated a quarter ago, but price start with mix again that the raise was.
Mobile and OEM revenue dominated so I think that inherently comes in and of a little lower and then after that I, Yeah I would go to the.
Tempt the ramp cost and the inefficiencies that we were that we experienced in the first quarter and are planning for a similar levels in the second quarter, and then and then starting to abate and and I think it is a.
Yes, it is a volume.
Driven.
EPS increase.
Versus.
Passengers will probably some more price than then things, but in this case it is primarily <unk>.
On a volume situation and it is partially being mitigated by the inefficiencies, but we feel very good and those inefficiencies we will they will smooth out over time, it's a matter of when not if.
And again, we'll we'll move pricing up.
Over time, and again that will be more a case of when not if.
Okay. So its it seems like there's not much more incremental price cost headwind and the guide than what.
It was envisioned a quarter ago is that sort of fair.
Yeah, I I would yeah, I think so I think.
And we largely took it up and wine with what are the Incrementals were so I don't think the incrementals changed much and it was largely a volume race.
Okay, and then just to sort of finish that chain of questions. I mean, if I look at 2022, I mean, it seems that with better mix and sort of you know.
Price cost, maybe shifting from a negative to breakeven or a slight positive you know even if there was no sales growth I'm not suggesting there will be no sales growth and 2022 you'd be poised to expand EBITDA and EPS just because some of these margin headwinds.
Will dissipate and 2022 and is that sort of a fair way to look at things and then sort of.
You know any sort of for their sales growth and volume growth will be incremental on top of what should be margin expansion, even in a flat sales environment and looking out.
Yeah, I, certainly wouldn't want to call on flat sales environment, but I think your.
Thesis there is is accurate and we believe we would have a lot of both cost improvement heading into next year as well as some price improvement.
Okay. Thank you.
Yeah.
And it appears there are no further telephone questions I'd like to turn the conference back over to Tamara presenters for any additional or closing remarks.
Okay. Thanks, Anna and thank you everyone for joining us today, if you have any further questions. After today's call. Please feel free to contact me again. This is Neil from Apple. Thank you and this concludes our call.
Okay.
And once again that does conclude today's conference. We thank you all from your participation you may now disconnect.
Yeah.
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