Q3 2021 Timken Co Earnings Call
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Thanks, Anna and welcome everyone to our third quarter 2021 earnings Conference call. This is Neil thrown Apple director of Investor Relations for the Timken Company. We appreciate you joining us today.
Before we begin our remarks. This morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link.
With me today are the Timken company's president and CEO, Rich, Kyle and Phil for Casa our Chief Financial Officer.
We will have opening comments this morning from both rich and Phil before we open up the call for your questions.
During the Q&A I would ask that you. Please limit your questions to one question and one follow up at a time to allow everyone a chance to participate.
During today's call you may hear forward looking statements related to our future financial results plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with U S. D C which are available on.
The timken 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 in the Timken company and I will now turn the call over to rich.
Thanks, Neil Good morning, everyone and thank you for joining timken is third quarter earnings call.
Our third quarter results reflect what is a very strong but also unpredictable industrial market.
The results also demonstrate the resiliency of our business to respond to a wide variety of market conditions as well as the strength of our team and their ability to successfully navigate through the issues as they arise.
Our revenue of $1.037 billion was up 16% from last year.
The revenue set a new third quarter record and was 13% higher than the previous record set in the third quarter of 2019.
Additionally, order input continued at a strong pace and we ended the quarter with a very healthy backlog.
Demand continued to be more erratic than normal due to customers battling through multiple supply chain issues, such as the global chip shortage international freight delays, but demand remains a very positive situation and one that we expect to continue through next year.
Given our own supply chain challenges, we're pleased with the 16% revenue gain but it did come at a significant cost premium.
Earnings per share of $1.18 was also a record for the third quarter was four cents over the prior record.
EBIT margins declined 220 basis points from last year, two is still very respectable 17, 2%.
I want to remind everyone that our year over year comps for the quarter and year to date include the temporary cost actions, we took last year at the height of the pandemic.
[noise] twenty-twenty temporary cost comps normalize in the fourth quarter of this year.
From a cost perspective steel freight and other purchase material were all up significantly from prior year and up sequentially from the second quarter.
Labor efficiency in our plants also continue to suffer from a variety of issues that included volatile plant schedules due to demand and supply changes P&A.
Pandemic related absenteeism.
And the Onboarding of new hires to meet the increased demand.
Pricing was up over 100 basis points year on year, but continues to lag cost increases by a significant margin.
Sequentially price realization increase from Q2 to Q3 and has increased sequentially each month from June through September.
Our cash flow performance reflects continued inventory build to serve increased customer demand.
And to account for the extended lead times within the supply chains.
We're not providing specific revenue or earnings guidance due to the supply chain uncertainties, but I will provide additional color on what we're seeing.
Demand remains strong in total across markets and geographies.
Channel inventories are also favorable to provide support for the demand strength to continue well into next year.
Timken is steadily ramped up our ability to supply the market through the course of the year, but the uncertainty around supply and cost remains elevated.
Some of the issues that impacted us in the third quarter of improved someone's gotten worse and some new ones have arisen.
The chip shortage is not forecasted to stabilize anytime in the near future.
Logistics delays are not expected to improve until after the holiday shipping season at the soonest.
<unk> costs continue to rise.
Steel costs appear to have leveled off but remained much higher than they were a year ago and are not moving down.
We're doing very well addressing our internal labor inefficiencies, but new issues continue to surface such as the intermittent power outages at our plants in China.
In a recent resurgence of the virus in Romania.
We expect pricing to increase sequentially from Q3 to Q4, but we still expect price cost to be negative in Q4.
Our revenue typically declines modestly from the third quarter to fourth call. It low to mid single digits and we expect a sequential decline this year to be slightly greater than recent history.
This would still result in solid year on year revenue growth in the mid to high single digit range.
We expect EBITDA margins to decline sequentially in the fourth quarter as they normally do.
And I again caution that the supply chain situation remains very dynamic so the range of possible outcomes is wider than normal.
As we look out to 'twenty two we're planning for the demand situation remains strong.
Comparing the start of 'twenty two to the start of 'twenty. One we will enter next year with a much higher backlog higher order input levels and higher production levels.
We also expect more self help in 'twenty, two both from pricing as well as operational initiatives.
We predominantly price at the time of shipment and we expect a step up in price at the start of the year from the fourth quarter.
Keep in mind, many annual price agreements will open for repricing at year end, and we will benefit from other pricing actions, which continue to gain traction, including our material recovery mechanisms.
We also expect to operate more official it efficiently and 'twenty two as we get deeper into our production ramp and the labor issues specific to the pandemic ease.
We no longer expect near term cost relief in material logistics or labor, but we do expect price to be a much larger contributor to margins and we also expect to improve our internal labor efficiencies.
We are planning for a very strong start to 'twenty two with a step up in sequential revenue and margins in the first quarter from the fourth.
We also expect contribution to our full year 'twenty two results from capital allocation. We continue to have a bias to M&A with share buyback as an attractive option.
I want to take a moment to highlight two of our acquisitions roll on and I M. S.
Roll on was our first step in the linear motion.
One is a leader in the engineered linear space developing unique customer applications for a wide range of markets and applications.
The business has a strong management team a strong technical value proposition and it's been an excellent addition to the timken portfolio.
One is a small but growing position in linear systems for factory automation too.
To expand their product offering last quarter, we acquired intelligent machine solutions, where I M S.
This bolt on acquisition gives us a full size range of linear systems for the factory robotics space. It gives us greater scale in the U S market.
We will continue to drive financial and strategic value for the corporation through the acquisition of businesses like Rwanda and I M. S.
I also want to highlight that we recently released our 2020 corporate social responsibility report.
Sustainability has been core to our products for more than 120 years.
Being an excellent corporate citizen as a priority for all of us attempting.
We're proud of our work in developing renewable energy sources and the actions we are taking to reduce our own environmental impact.
We're also committed to being a top global employer with a diverse workforce, giving back to our communities and leading the corporation ethically and with strong governance practices.
Before I turn it over to Phil Let me close with saying that while the last couple of years had been filled with unplanned events.
Our response to those events has really demonstrated the strength and resiliency of the company for all stakeholders.
After delivering record revenue and record earnings per share in 2019, our world was turned upside down in early 'twenty with the onset of the pandemic.
Yet as the year progressed, we manage the downturn well with strong cash flow and earnings excellent decremental margins and an increase in the dividend.
And while we delivered good financial results. We also continued to advance the company strategy, including delivering a breakout year for our renewables business and completing the acquisition of Aurora bearings.
2021.
They've been dealt with the surge in inflation across many of our key input cost.
As well as unexpected supply chain and labor market challenges.
Despite these challenges.
We are once again on track to deliver another year of record revenue and earnings per share as we continue to advance the company strategy with our outgrowth operational excellence and capital allocation initiatives.
Looking at 'twenty, two we're confident that the company can and will perform well if the inflationary environment persists, we're in great position to deliver new record levels of revenue and earnings again in 2022, all while continuing to advance the company's long term strategy to grow as a diversified industrial leader.
Phil.
Okay, Thanks, rich and good morning, everyone.
<unk> for the financial review I'm going to start on slide 11 of the presentation materials with a summary of our results.
Revenue in the third quarter was $1 $37 million up 16% from last year and up more than 13% from the third quarter of 2019.
We delivered an adjusted EBITDA margin of 17, 2%.
Adjusted earnings per share of $1 18 up 4% from last year.
Both revenue and adjusted earnings per share were Timken records for the third quarter.
Turning to slide 12, let's take a closer look at our third quarter sales performance.
Organically sales were up 13% versus last year at both segments delivered double digit growth led by process industries.
We also saw double digit growth across both our bearings and power transmission product lines.
Okay.
Pricing was positive in the quarter as we continued to implement price increases across the portfolio.
In addition currency added almost 2% of the topline while there.
Acquisitions, including Aurora bearing from last year and the recent I M. S acquisition contributed close to 1%.
On the right hand side of this slide you can see organic growth by region.
This excludes both currency and acquisitions.
All regions were up in the quarter versus the year ago period led by Latin America and Europe.
With broad based growth across most sectors.
Let me comment a bit further on each region.
In Latin America, we delivered strong growth in the quarter up 27% with distribution and off highway posting the strongest gains.
In Europe, we were up 22% with broad growth across most sectors led by off highway distribution and general industrial.
In North America, our largest region, we were up 10% driven mainly by strong gains in the distribution off highway.
Marine and general industrial sectors.
Were partially offset by lower automotive shipments.
And finally in Asia, we were up 7% driven by growth in the off highway distribution and general industrial sectors, a lot of motive was down.
Turning to slide 13.
Adjusted EBITDA was $179 million or 17, 2% of sales in the third quarter compared to 174 million or 19, 4% of sales last year.
The increase in adjusted EBITDA dollars compared to the prior year reflects the favorable impact of higher volume and related manufacturing utilization.
Along with positive price mix and favorable currency.
But as you can see these items were almost fully offset by significantly higher material logistics and other costs.
Let me comment a little further on our manufacturing and operating expense performance in the quarter.
On the manufacturing line, we benefited from higher production volume in the quarter.
But this was mostly offset by higher labor and other costs to serve the increased demand.
From a footprint standpoint, our new bearing plant in Mexico continues to ramp and we are in the process of closing a bearing plant in Italy.
Moving to material and logistics, we saw significant increase in costs compared to last year in the quarter.
Reflecting inflationary pressures and higher international freight costs.
Looking at the year on year change, we believe this will be the largest quarterly headwind of the year.
And finally on the SG&A other line costs were up slightly year on year, as we had higher spending to support the higher sales levels offset partially by lower incentive compensation expense in the period.
And recall that we had a small amount of temporary cost actions in the third quarter of last year that did not repeat.
On slide 14, you'll see that we posted net income of 88 million or $1.14 per diluted share for the quarter on a GAAP basis.
Which includes four cents of net charges from special items.
On an adjusted basis, we earned $1 18 per share up 4% from last year.
Our third quarter adjusted tax rate was 23, 3%.
Bringing our year to date adjusted tax rate to 24.5%.
This reflects our geographic mix of earnings and the impact of tax planning initiatives.
Next let's take a look at our business segments, starting with process industries on slide 15.
For the third quarter process industry sales were $550 million up 18% from last year.
Organically sales were up roughly 14, 5% driven by growth across most sectors with distribution and general industrial posting the strongest gains.
Marine was also up year on year, driven by increased activity and new business wins.
We also benefited from higher pricing in the quarter.
In addition, the favorable impact of currency translation added about 2.5% to the top line.
Acquisitions added nearly 1%.
Process industries adjusted EBITDA in the third quarter was $131 million or 23, 8% of sales.
<unk> to a $115 million or 24, 7% of sales last year the.
The increase in adjusted EBITDA reflects the impact of higher volume related manufacturing utilization positive price mix and the benefit of currency, partially offset by higher material and logistics costs.
Now, let's turn to mobile industries on slide 16.
In the third quarter mobile industries sales were $487 million up 13, 7% from last year.
Organically sales increased nearly 12% with off highway and heavy truck posting the strongest gains while automotive was down.
And while aerospace was relatively flat in total we did see higher commercial revenue in the quarter versus the year ago period.
We also benefited from positive pricing in the quarter.
And currency translation and acquisitions, each added about 1% to the top line.
Mobile industries adjusted EBITDA for the third quarter was $58 million or 11, 9% of sales.
Compared to $68 million or 16% of sales last year.
The decrease in adjusted EBITDA versus last year reflects the impact of higher material logistics and other operating costs.
Offset partially by higher volume related manufacturing utilization and positive price mix.
Looking at our two operating segments mobile industries was more negatively impacted by the customer and supply chain supply chain disruptions during the quarter.
These temporary disruptions resulted in relatively higher operating costs and.
And greater manufacturing inefficiencies in mobile industries versus process.
Turning to slide 17.
You'll see we generated operating cash flow of 106 million in the third quarter and.
And after Capex free cash flow was $63 million in the period.
The decline in free cash flow reflects the impact of higher working capital to support our sales growth.
Compensate for supply chain disruptions and serve customer demand.
We also had higher capex to fuel our growth initiatives.
From a capital allocation standpoint, timken paid at 397th consecutive quarterly dividend.
And repurchased 400000 shares during the third quarter.
Taking a closer look at our capital structure, we ended the quarter with a strong balance sheet our.
Our leverage as measured by net debt to adjusted EBITDA was one six times at September 30th.
Which is near the low end of our targeted range.
This puts us in a great position to continue to drive our growth and capital allocation strategies moving forward include.
Including M&A and share buybacks.
Yeah.
Now, let's turn to slide 18 for additional commentary on the outlook.
Rich provided color on the outlook in his remarks, so I'll just touch on a few other items.
For the full year, we continue to expect capex spending of around $150 million.
Which includes ongoing growth investments in areas like renewable energy and marine.
We anticipate net interest expense of around 58 million for the full year and we currently expect the tax rate to equal the year to date rate of 24, 5%.
Finally for the fourth quarter as rich indicated we are expecting adjusted EBITDA margins to be lower than the third quarter driven.
Driven by lower driven by the lower anticipated revenue.
And persistent cost and supply chain headwinds.
Note that we continue to implement price increases and other operational excellence initiatives across the enterprise to offset the headwinds.
We expect significant price realization next year and we also expect a positive impact from our ongoing manufacturing footprint initiatives.
So to summarize we delivered strong revenue and solid operating performance in the quarter, despite the very challenging environment.
We will continue to focus on serving customers and mitigating the cost headwinds while advancing our strategy.
And we're confident in our ability to generate higher levels of performance in 2022.
This concludes our formal remarks, and we'll now open the line for questions operator.
Yes. Thank you.
And just a reminder, if you would like to ask a question. Please signal by pressing star one on your telephone.
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We will now take our first question from.
Stephen Volkmann with Jefferies.
Hi, Good morning, guys. Thanks for taking the question good morning, Steve.
I guess, the only thing that sort of surprises me is this price situation and I guess I am a little surprised that you only had 1% or so I think you said in the quarter.
It just feels like more of your.
Revenue base should be sort of adjustable more quickly, but maybe I'm wrong about that but I guess the key question is when you talk about significant price and 22, you know I think most industrial companies. We follow are talking kind of mid single digits. I don't know if you can just sort of.
Dave into that a little bit more in and I guess, what's keeping you from sort of pushing this more aggressively.
Ah well maybe hit the last one I don't think there's anything keeping us from pushing it more aggressively with the exception of probably in hindsight. We certainly started late and started a little too small, but I think.
We're certainly looking to make up for that in the AR in the coming months.
So maybe going back to your comment on the 1% comp.
Tom was was greater than 1% and you know what.
Where to your point, where we can move price, which is roughly half the portfolio.
We started that late in the second quarter.
I set our pricing improved from May to June June July and improved each month through through September and will prove again in October so that that is happening.
I think as you look to NEK.
Next year, it's probably a little early for us to get very specific on where we would expect the wan is quite a bit of that is in discussion today, but I think if you look at our our objective.
Certainly would be to cover our cost increases.
We've had to date with our with our price and get to positive price cost in 'twenty, two and if you look at the financial walk on slide 12 and see that.
Negative $53 million of material logistics that we have.
Have in the in the third quarter are certainly 1% to 2% are wouldn't wouldn't make that happen. So far what am I getting too specific you know the numbers the numbers need to be certainly above the low single digit range to to make that happen.
I think the other comment I would make on being a little weight emetic we.
It anticipated that you know more of these logistics costs and things would be a little more transitory then than what they have been so we're we're moving to catch up with that now.
Okay, that's great color and just a quick follow up on that as you know I know you have some big contracts with big customers and I'm guessing, they're probably not excited about price increases, but in the past you've actually been a willing and able to exit some unprofitable type contracts should we be thinking along those lines.
Again in 'twenty, two as we try to write this.
Yeah.
No I don't think so I think the risk of us losing.
Business from pricing in 'twenty. Two is is very slim and if anything I think.
We will net I think a positive on the share side next year.
To your point of what keeps you from going farther than that you know short term.
First question Shawn.
Short term, there's very little I think are our customers would generally have a tough time moving anything that they produce that they buy from us in a timeframe and at a cost position with available capacity et cetera.
In a time frame. So we have a lot of short term price Barbara as you know we also look to price when we look to move pricing up we don't tend to move it back with the exception of the material flow throughs that we have so you know we're looking to find that right spot that that covers the cost gets us positive price.
Cost, but also isn't something that when markets level off that we're having to walk back in any ways and I think I'm as I said, there's a quite a bit of room for us to move in that direction to start the year.
Great. Thanks, I'll pass it on.
Thanks, Dave.
Yeah.
Well now take a question from.
Bob.
With Melius research.
Hey, sorry to have an excellent about price also and that was helpful. I'm. Just curious if that's just the pace at which you look at pricing is changing right. Now you mentioned you were a little bit behind at all if that's just structurally how.
All your agreements work or whether you felt like the organization kind of responded faster and if you change things to make you know in a new inflationary environment.
Swifter decisions and then out of curiosity was that was the surprise in the quarter and I assume it was on cost was almost entirely transit it was kind of more balanced and did that contribute to be behind the curve.
Yeah, and then on the price I would say you know a big part of us being behind on prices is by design that we.
Pass through material price increases typically at least a quarter late sometimes two quarters late and then we also have a fair amount of our business tied up on 12 month pricing agreements Ah.
So as material costs, and it's probably only the second time in 20 years that material costs have gone up. This quickly are the only other time would have been in the O eight timeframe.
So typically it's not a real big deal to have that lag, but it's definitely caught us in in the first couple of quarters as well actually beginning in the fourth quarter of last year. It started to catch us, but we again, we make that up so that happens by design are when the costs go the other way it happens the opposite way and there's a lag where we hold that material.
That meant that elevated material costs freight they.
Extended time before it comes back down and then the other part is where we have a pricing contracts and again I think its generally the nature of the business and as a general rule.
Rule right now shorter is better because it gives you a better time to do that but our customers generally expect us to to commit to one year. So I think you look forward.
We're we're in a position right now as you know again, we've got a fair amount of pricing power and are we just got to make sure with where we land.
To start the year that we've got enough price to cover to cover the cost So I think.
And the last part you know certainly would would probably move a little bit faster, where where we had the opportunity but the cost curve. You know this is pretty unique cost curve and how quickly. This came at US and you know from one quarter to the next.
International freight cost the price of a container from India to Europe, you know doubling in and things like that so.
Wouldn't be too critical of of where where we landed and again, there's usually a little bit of lag. There. So I think I think we'll be okay. There yeah. Robyn this is Phil.
Regarding the second part of your question in terms of what you know what changed relative to expectations in the quarter. I mean, certainly logistics was a was a big shocker in terms of some of the ocean freight rates in the international freight rates, but I would say across the board you know the the supply chain disruptions beyond that broadly got a little bit worse, the inflation and then some of the inefficiency.
Is that sort of sort of emanate from that it was probably across the board, but no question the logistics would've been the would've been the big.
You know the big one in the core.
Yeah, I would say generally we came into the quarter our thinking so some more of this was transitory and would ease and against Phil Just said logistics went up.
We thought the pandemic some of the specifics around the pandemic would ease in the plants and during the third quarter, we had a.
Quite a bit of absenteeism in our in our southern U S plants and some other parts of the world that rippled through our productivity. So you know go back four or five months, we thought some things will be better and and that didn't happen. So I would say all of that and then obviously the AR on the demand side as well.
Automotive revenue.
He was was significantly affected by the the chip issues.
Yeah, Okay. Thank you.
Thanks, Rob.
We will now take our next question from Chris Dankert with.
Capital.
Hey morning, guys.
Good morning.
I guess you know.
A move down just a little bit here SG&A pretty impressive execution on the quarter I guess, you know as we move into the new year, given incentive comp just base wage inflation logistics et cetera.
Should we expect to kind of move back into that mid to upper harvest, even a million a quarter type range just any color on how we should think about SG&A I'm kind of as we move out of three Q here.
Yeah, certainly in absolute dollars I think guys. You look next year there'll be some pressure there, but I think from a leverage standpoint.
You know, maybe a touch up but you know we're looking at mix aside I.
I think we can keep it pretty I don't see us going back to where we were a couple of years ago anytime soon as a percentage of sales.
Yeah, I mean again, you touched on it a little bit Hey, we had some temporary cost actions from last year that we're lapping I guess is there any other additional costs, we should keep in mind that you know I mean, teeny, obviously still down but anything else measurable a notable that we should keep in mind as things kind of get back to quote unquote normal.
Well certainly certainly travel remains.
Significantly down from from where it was it certainly a come up a little bit, but you know a lot of the dollars are tend to be in international travel and that's still well below 50% of what it used to be and again I don't know that I would expect it to go to 100, but I do believe certainly there will be.
Some needed increases in that as you look forward again incentive comp in dollars could be a headwind next year, but that's only if we are if we're growing in and it merits being being a headwind so from a leverage standpoint that wouldn't necessarily be the case.
And then I think you know general I think with some of our growth initiatives and whatnot Youll see some head count coming back in to the business probably next year, but again, we'd expect that to leverage in and from a percentage I think we're in pretty good shape, yeah, Chris the only thing I would add.
This is Phil you know for it when we're looking at the rest of the year you know as we said you know we had a little bit of a higher spending in the quarter also favorability a slight favorability in incentive compensation. So as we look ahead to the fourth quarter I think you'll see us probably be more in line with the first half.
Right. If you will as we move into the fourth quarter with some increased spending occurring in and as we revert back to normal incentive comp accruals.
Got it that's very very helpful. Guys. Thank you and then just a follow up if I could on alternative energy, we've talked about it quite a bit in the past, but just any expectations for 'twenty two just given what we can see in the backlog at this point.
Yeah. It certainly we're planning for a more moderate year of growth right now so I mean, we've said.
So this year, we're looking at double digits and we remain on track to be in the double digits and a shot for that next year, but certainly there are.
Pretty well publicized the China wind industry is slowing down here a little bit at the end of the year and going to start off a little slower, but again, we've got some new platforms going there where not just when we're not just China. So I would say no change to our long term bullishness on the forecast.
But would expect a more moderate growth rate next year as we sit here today.
Understood. Thanks, so much guys.
Thanks, Chris.
Well take our next question from David Raso with Evercore.
Hi, Thank you without forney sale having guidance.
Wanted to make sure we have a little sense of parameters here.
When you look at price mix versus material logistics I mean, the cadence of the year. You know first quarter was negative 28, the negative 36 last quarter and now third quarter just came in at negative 47 for.
For the fourth quarter, it's off of a lower sales base. So just from that alone I would think it would be down sequentially can you give us some sense of how you think about price cost in the fourth quarter versus the third quarter and then when would you expect you know sort of how you're thinking about negotiating right now for pricing.
The cadence when would you expect price cost to be neutral.
Hey, David This is Phil maybe I'll start with the with the fourth quarter commentary. So as we said you know we do expect the third quarter to be sort of the largest quarterly year on year headwind. So when you think about last year, we actually did see in the fourth quarter of last year, we did see logistics start to move up it didn't quite get hit by as much by the material in.
The fourth quarter that was more than in in 'twenty. One. So as we look ahead to the fourth quarter I think we'll continue to get price as rich indicated we're going to get more price in the fourth quarter than we did in the third and then we would expect that our year on year headwind from material and logistics to moderate probably more on the logistics side than on the on the materials side, but.
To moderate in total.
Okay didn't come through.
No I said earlier I'm not sure we're ready to say when price cost was positive, but I'd say you know our objective is that that it happens next year, we're not done with our enough for the pricing to say Ah that for sure, but certainly we expect a step up in price realization.
From from Q4 to Q1.
Maybe if I could just a quick follow up on that then.
Percent of your pricing that's been negotiated for next year I'm. Just curious if you had to generally characterize what percent of your pricing for next year has already been negotiated so no sense of your visibility on that side, and then sort of what percent of the cost.
Maybe it's only a six month comment I know, it's hard to know maybe maybe your logistics costs. You know six 812 months from now, but so we're just trying to get a sense of how much do you have visibility on price cost versus it's still mostly in front of us on negotiation. Thank.
Thank you.
Say the half that that we are able to move price at anytime during the year.
I would call that negotiated that we have either implemented or are implementing actions to to make that happen.
And then I'd probably throw in another 25% to 30% that are we have pretty good line of sight too.
Where we're going to land within a reasonable tight range. So I think.
We're two months away from being able to provide I think.
Final specifics on that but it would be a pretty solid number I think on the cost side.
I think that's worth.
More risk is that that we've just got to make sure we don't under shoot it on the price side that the costs continue to escalate.
So you know we've got.
Hmm.
Material, we're generally a pretty good visibility to the materials side three to six months out but things have continued to go up and so I already talked about we were all surprised in the third quarter with some of the.
Rate increases that we've seen on <unk> in particular international freight but freight so.
You know that that curve and how that plays out I think is.
Factor in when that flips to positive.
I appreciate the color. Thank you.
Thanks, Dave Thanks, David.
Yeah.
Our next question will come from Steve Barger.
Keybanc capital markets.
Hey, Thanks, good morning.
Good morning, Steve.
For a year for Q revenue comments do you expect positive year over year organic growth in both segments or could mobile will be down and then same question for segment EBIT do you think that grows year over year and age of some of the headwinds. These.
And we expect both segments to be up within within mobile, though are you know we are looking for automotive to be down.
Year on year, but both process and mobile we're looking to be up.
For the fourth quarter for a year on year, what I'm sorry, what was the second question Steve.
Segment EBIT do you think that can grow year over year as some of the headwinds ease as you get a little bit air crash price realization and specifically in mobile.
Yeah, I would say on the mobile side still will continue to be impacted by.
The supply chain disruptions as I indicated mobile is getting a little bit more on that.
<unk> impacted are the in process from the supply chain disruptions and even some of the some of the cost pressures. So we would expect it to continue to be a little bit more challenging on the mobile side and the process side as we've talked about we expect margins to be down in the fourth quarter from the third just on the lower revenue.
It's kind of a continued a continued headwinds and then for likely mobile to be to be more impacted just like it was in the third quarter.
I think one of the piece of car add to that maybe a little bit of your question, Steve and a little bit of David's question before that as well on the on the price cost bar and looking again at slide 12, I mean, there's also an element both in the manufacturing which is positive five but but you know with this volumes would've certainly.
Drew.
We would have certainly aspire to a larger favorable than five on the manufacturing side at these volume levels and within the 53 here there are parts of that that or self inflicted which you know again, we're not necessarily you're not looking to recover.
Absenteeism in some of our plants, we're not looking to cover maybe some you know there's premium freight in there and some things that that we're pretty confident of our you know we've already improved and are going to improve as we look to.
2022, so as we look at these cost increases there's a.
Inflationary part, there's probably a normal cyclicality part and then there's also been this I'll say heightened inefficiency part and you know we tried to trying to bucket those and make sure as we look next year, we're covering that covering our what we think is going to remain.
Got it and just bigger picture since since 2015, you've spent one 6 billion on acquisitions largely in process to drive better mix and aftermarket and reduced cyclicality and now a couple of quarters into an expansion you had to withdraw guidance due to mobile. So does this require more process M&A or.
More diversification of mobile or just in general what can you do to improve visibility.
Yeah, I mean, Steve I would just say you know obviously, we're really you know we are we like what the M&A is doing for the company and as Rich said you know we've got the balance sheet. We'll look to continue to do M&A that has tended to be more focused on the process side. I mean, you know our mobile business is a is a great business I think as we as we indicated.
With the automotive chip shortages in some of the other issues affecting mobile mobile is a little bit disproportionately impacted but I mean, the you know the challenges we're facing around supply chain inflation or kind of across the enterprise, we're working to get pricing across the enterprise not just not just in processing and you'll see that as it comes through so.
You know I think our strategy will remain the same which is you know leverage the best parts of the enterprise focus the M&A on continuing to diversify the portfolio with an emphasis on the aftermarket and a tilt towards process industries and then in mobile like we have that and be very be very thoughtful about where we.
Paid be very focused on the returns we generate in that business and drive it driving both forward together and now if you go back.
510 years, we were a much larger mobile industry sentiment and process.
A couple of years ago, they kind of neck and neck now processes are slightly larger than that and I think that'll continue but.
I don't think there's any change to the strategy.
But we certainly wanted to know what we'd like to do some more M&A as you know as we move forward.
Got it thank you.
Thanks, Dave.
Well take our next question from Joe Ritchie with Goldman Sachs.
Hi, Thanks, good morning, everybody.
Yeah.
So I know we've talked a lot about pricing I'm just.
Just curious.
With some of the suppliers that we cover and say like the auto industry.
Industry, it's sometimes difficult to really go back to the customers and get price.
And it's really mostly platform driven I'm just wondering if you could just maybe just provide us just a little bit a little bit more color as to those specific customers and your ability to get pricing increases in 2022.
Yes, I think somebody commented earlier are that our customers are not ever really looking for a price increase are welcoming a price increase but also they certainly recognize that what's happened with steel prices.
And I don't have I don't have a lot of concern Joe that we're gonna be able to to be able to get prices through mobile industries and retain share. So I think.
The conversations are progressing there and I think the other thing when you look at it with what's happening with their own supply chain issues and constraints a.
A reasonable price increase on on their bearings spend with Timken company is probably not in the in generally in their top.
100 issues that they're facing on their own supply chain issues. So we will get the pricing next year, yeah. The only I would add to that Joe. This is Phil as you know when you think about some of the Big Oems you know where contracts renew its operating much as rich described but in some of the multi year deals even ones that arent renewing this year. They anytime we have a multi year deal we have a pre.
This adjustment mechanism in there it works both ways, but needless to say in this kind of an environment. It's working in our favor who has those are.
As those mechanisms are adjusting we are getting out of it you know frankly automatically getting some positive price from some of the multi year deals we have that that aren't up for for negotiation. This year. So that's a that's worked in our favor as well and you know that started probably a little bit in the third quarter. We will expect more in the fourth quarter and then that'll continue typically.
Operates on a lag a quarter or so lag from when our costs go up but it is a it is working in our favor as well.
And I guess, one more comment I think you know.
Short term to your point, if he's been platform driven.
You know again it takes a lot of engineering work sourcing work et cetera to respond to resource, our timken or or one of our competitors. If we're trying to win business. You know typically the first action is.
You know you go in the penalty box on on new platforms and that sort of thing and again I think we will I think we'll be fine there are but one of the earlier questions. I mean, we we have to get the price. When you look at what's happening with our cost structure and are and we will get the pricing and you know I don't think we will lose any business over that in fact, I think it will be.
Winter next year.
But if the choice comes down to that we would we would probably stick with we need pricing to two.
To cover what's happened with our cost structure in our in 2020.
2021 sorry.
Got it no. That's helpful. Thank you both I guess the follow on you know kind of understand all fell a little bit more your surcharges and how that actually works because you know obviously, we're in a hyperinflationary environment from a freight perspective, and I'm just trying to understand whether like you end up.
Essentially eating some of those excess costs transport costs that you're experiencing this quarter, whether they actually come through in the following quarters, just any any other color around that would be helpful.
Yes, you know typically where as Phil said four are definitely in a multi year agreement, we do not want to be exposed to variations in steel prices over that time. So we will have a quarterly biannual a pass through mechanism that looks backwards and then.
Adjust going forward. So if costs went up in the first half of.
21, and that gets a true up in July 1st you eat at all in the first part and you start to offset it in the second part I would say they're not.
They're certainly not margin expansive for us it's really a it's a protection and if anything you're probably still get a little compression there because the best you're making up for your cost and not getting cost plus plus margin.
You know, where we don't we don't generally have that and then we have some things like that too with currency in some places and some other exposure to make sure that you know over an extended period. If we get in this environment that are that that we have some protection and coverage there.
And then obviously, we can reprice the base price of that as well when the contract opened up where we have typically not had any protection, which has been a problem. This year is our freight cost and I don't think that that's ever been a problem until this year, but this year it's definitely.
Become a challenge and one that again I think we will get on the right side of within the next couple of months.
Okay, great. Thank you.
Thanks, Joe.
Well take our next question from Ross Gilardi with Bank of America.
Hey, good morning, guys good morning.
Ross.
I just wanted to ask you you had.
Planned a fair amount of reinvestment.
And as a business you know going into this year that the number that I recall was I think $75 million.
Over the next year or two are largely in our knowable side could correct me, if I might Baxter wrong, there, but but where does that stand if you push any of those more growth related investments out at all just given.
A lot of the other things you've got to deal with right now.
Yeah. There's 75 was specifically are the renewable multiyear renewable investment and no. We've not pushed any of that out probably if you go back to when we announced it so that it slipped a little bit just because of the supply chain issues that we're all talking about the machine our build schedules and things.
Probably slipped a little bit, but we completed the big move we made this year we completed the.
Solar facility relocation, we went from three overfilled facilities in and into one larger more modern facility are the dust on that really we finished that really in the second quarter, but the dust on it kind of settled in the in the third quarter and I would say, we're will now start as opposed to incurring the cost.
Cost of moving will now start getting the benefit of.
Having a a a a consolidated and better facility. There. So it's a little bit of a margin expansion for us going forward as well as our capacity expansion and then the other two big ones are underway or whoever facility expansion in China for what we call our ultra large bearings.
Couple of meters in diameter.
That the projects are progressing well and that's both some bricks and mortar or facility expansion as well as equipment coming in and then a couple of expansions of our facilities and more equipment expansions in Romania, China as well as India for the market and all of that's progressing.
Well.
So investment continues.
Again mentioned it earlier, but you know we'll be up double digits again this year in renewables.
And there is some some market pullback in parts of the world, but we're still pretty optimistic on what we can do next year and and certainly long term on the investments.
Got it thanks for that color rich and then.
I'll I'll give this a shot at it and then the last part to speak too much about 'twenty two yet, but just based on everything you've got going on with pricing in the face and you see in your current expectations on.
Supply chain I mean, what what when is the earliest you could realistically see EBITA margins to turn positive again on a year on year basis.
Not until the second half of 'twenty two.
Yeah, Let me, let me actually come back and make one more comment on the renewables investment Ross you know you go back to my comment that the third quarter was a revenue record by 13% over 19 renewables really is the big Delta in that timeframe and some other markets have gotten back above where they were 19 somewhere below automotives obviously below.
But but I do think as we.
Look into next year, and we've just got a much bigger base of our renewable business, which has really given the company a whole another level of.
Scale, if you look back to where we were at in some of the industrial markets are in 18 or 19, so probably not ready to say win and certainly the first quarter comp Ah is a high bar. So I said you know we'd expect to step up meaningfully from the fourth quarter to the first quarter, but I'm not sure I'm ready to say that we would expect it to be above or below.
19.9, but certainly our objective.
<unk> would be for topline growth next year, a full year margin expansion.
And record earnings per share.
And better cash conversion.
Got it thanks, guys. Thanks Krish.
Thanks Ross.
Yeah.
Our next question will come from Timothy <unk> with Citigroup.
Okay.
Oh, Yes, hi, good morning. Thanks.
Maybe just.
Hey, good morning.
And as we think about kind of the various drivers for next year, maybe you could talk about.
Product mix, and then maybe distill that even further into distribution.
Obviously, we do have some data that we can observe from some of your your public customers, there, but probably seeing that it doesn't tell the whole picture. So just curious if you could say a few words in terms of kind of where we are.
<unk> Madsen Theres, a whole lot of restocking that's going on but just what you see on the on the distribution front globally.
Pretty good I would say good recent more recent than yours, we talked for some time now the recovery that really started a 15 months ago coming out of the pandemic. So it's very much mobile OEM lead.
But that has started to flip in the last quarter or so and I think I'm you know the outlook as you referenced a couple of the large U S distributors I think that comment certainly applies to Europe.
Europe as well and some other parts of the World are there is a desire probably for more restocking than the than what Theyre able to do right now in some of our.
Our customers have commented on that that theyre trying to build inventory levels heading into next year or two for their own service and revenue opportunities that they see in front of them. So I certainly don't see mix you know in the short term as we look out to 'twenty two.
Sure I'm ready to call it favorable, but I don't see it being a headwind that it's been for the lot for for some time frame that you won't accept that could be.
If automotive came on significantly stronger if the chips situation improved obviously that mixes us down are down a little bit, but but overall I think it's flipping to where it should be a they are.
A plus for us versus the minus than it's been.
Got it Okay and then maybe just your last comment there on cash conversion.
This whole supply chain issue.
Debatable as to the longevity of it.
When and if this reverses but it does it lead you to think differently in terms of just kind of regional stocking levels.
From a timken standpoint meeting.
Is there you know should we assume maybe inventories are higher structurally or is that just hey don't you know.
Overemphasize it.
This particular period.
It reverses I'm just curious if you've had any thoughts on that in terms of why you think it's certainly being for the current state and certainly for the at least the next couple of quarters. I think the answer is yes, we need to carry more inventory because things that used to take four weeks are taking eight and 10 weeks in and we have more inventory.
In transit AR today than than normal because of that so we're having to.
To stock more either a.
Two point in the warehouse or just in transit itself.
And then also the demand situation as well so I would say I think we're looking at higher inventory levels, although our turns really have been okay.
As the as the revenue has come up they haven't slipped.
Slipped that much theres been some offsets and some other areas, but you know generally and as the market turns we would look to.
Up like this we would look to improve our inventory turns more than than what has happened, but I think.
Certainly the inefficiency that we've experienced this year wouldn't accept expect another step up in that next year, which is whats hurt us this year.
Alright got it thank you.
Thanks, Tim.
Our next question will come from Courtney.
Yeah.
With Morgan Stanley.
Hi, Good morning, guys. Thanks for the question.
Good morning.
And maybe if you guys can just comment a little bit more on the comment about expecting a very strong start to 2022 with the step up in sequential revenue. If you can just help us think a little bit about how we should be thinking about process versus mobile heading into next year, especially after our comments, obviously mobile with any more impacted than the.
Quarter on and then I guess secondly can you just help US disaggregate you know what you're viewing as some of the more structurally higher costs are versus you know you talked about the inefficiencies some of the more premium freight versus you know maybe.
It may be just more structural increases in freight just to help us think about you know what what could eventually come out of the system next year.
Yeah, I think on the first part of the question I think you'd look back last several years, probably not market would be a better example, so maybe in 17 and 18 you know typically we see a pretty good step up in both segments from a revenue and margin standpoint from Q4 to Q1.
And I think this year would be on the higher end of that from a margin standpoint because of the.
A step change in pricing that we would be expecting.
Above what would be normal some normal price realization in that period, but its theres a volume factor there are usually kicks in both both revenue as well as production we have more usually higher production levels, then as well.
And some other factors with our with our seasonality, but but I think if you look back at the history. There. We would expect that we would be on the high end of both of those in this.
In this market and then you know what.
The second part of your question I think there's an element where we're now looking at there is an element of.
Just about everything that we've seen where our costs have gone up there's an element of both inefficiency <unk> transitory and there's an element that's probably here to stay. So you know I think steel cost could come down a little bit next year, but probably you know certainly I wouldn't expect them could go up but I certainly wouldn't expect them to go down to two.
20, or 2019 levels, our labor costs have not.
Not moved up a lot on a unit cost basis, but are you know in labor goes up it typically is only in one direction doesn't go the other way on the flip side in our labor. We've had a lot of we've had a very high amount of unusual amount of labor inefficiency.
Again from the supply chain disruptions are you just don't have good flow going through the plants from the pandemic itself with between still this year, we had a mandatory shutdowns and in some parts of.
Although world currently some power outage issues in China. That's the you know this is causing some productivity issues. So I definitely think that gets better and and is better today than it was in the third quarter.
And then the logistics cost I think is probably the.
The biggest wildcard out there in regards to how that settles out I mean, it's definitely if you look at the charts of ocean container cost et cetera. I mean, it is just a in some cases up 50% in some cases up 200% and again, we're not expecting any relief on that.
This quarter or to start next year, but it it would be hard to imagine those prices sticking at that level in perpetuity I think if that word at stake than you probably would be looking at.
You know some potential changes of both our customers and ourselves in regards to where we produce products et cetera, because it's a it's a pretty significant rate increase so some some stay some improve with efficiency and then obviously price coming in over the top of it.
Thanks, that's helpful.
Thanks Courtney.
And it appears there are no further telephone questions I'd like to turn the conference back over to our presenters for any additional or closing remarks.
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. Thank you and this concludes our call.
Yeah.
Once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
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Yes.
Yeah.