Q1 2022 Timken Co Earnings Call
Good morning, My name is Christina and I will be your conference operator today as a reminder, this call is being recorded at this time I would like to welcome everyone to Timken first quarter earnings release Conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time.
Press Star then the number one on your telephone keypad. If you would like to withdraw your question Press Star then the number two on your telephone keypad.
Mr thrown Apple you may begin your conference.
Thanks, Christina and welcome everyone to our first quarter 2022 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 sulfur 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 the SEC.
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 and without express written consent, we prohibit any use recording or transmission of any portion of the call.
Finally, I would like to announce that we are planning to host an investor day on Wednesday September 28 in New York City. So please stay tuned for more details.
With that I would like to thank you for your interest in the Timken company and I will now turn the call over to rich.
Thanks, Neil Good morning, and thank you for joining us today.
Timken delivered an excellent first quarter with record revenue record earnings per share and 20% EBITDA margins and.
We delivered the results in the face of continued inflationary pressures supply chain challenges and lingering COVID-19 issues.
Our performance demonstrates the resiliency of the company and build on our track record of delivering strong financial results through industrial cycles and dynamic market conditions.
In the quarter demand continued to be very strong across almost all markets and geographies.
Despite the persistent supply chain and Kobe challenges, we increased revenue by 10% over last year's first quarter and by almost 12% compared to the fourth quarter.
Even with the strong revenue incoming orders continued to outpace shipments and backlog grew sequentially.
We achieved neutral price cost in the quarter, which was the primary driver of the improved EBITDA margins.
We reprice many of the annual contracts at the start of the year and we continued to move spot and aftermarket pricing through the quarter, we were on track to achieve greater than 4% price this year.
Earlier in the year, we forecasted a cost would hold at fourth quarter levels and that is largely what happen until late in the quarter. When we saw cost tick higher after the Russia, Ukraine War began.
As a result price realization in the quarter completely offset the significant year on year increases in material and logistics costs and manufacturing costs were essentially flat from prior year.
Sequentially performance strengthened each month through the quarter, both operationally and financially.
Covid and supply chain issues persisted, but improved as the quarter progressed.
However, the Russia, Ukraine War, and the China, Covid disruptions did not become issues until late in the quarter and we are assuming they will both have a bigger impact on the second quarter results more on that in a moment.
In terms of capital allocation, we repurchased one 5 million shares of stock in the quarter or approximately 2% of the outstanding shares in.
And we paid our 399th consecutive dividend.
On Friday, we announced the acquisition of <unk>.
<unk> is a technology leader in serving robotics and automation Oems, particularly in the factory automation sector.
The business is an excellent complement to cone drive and together the businesses will provide customers a package of leading technology solutions for their factory automation systems.
It's been a it comes to Timken has a solid financial performer with pre synergy EBITDA margins of around 20%.
We're excited to soon have it in the portfolio and welcome <unk> employees to Timken.
Overall, it was an excellent start to the year.
Timken has established its ability to deliver results through all sorts of varying economic and geopolitical conditions, including inflation and now Unfortunately, a war in Europe .
Timken will perform well in an inflationary environment.
Rising commodity prices and input costs may pinch our margins in the short term like they did at the end of last year, we will recover those costs in the market with time.
And while the inflation we've experienced in the last year is significantly more pronounced than any we've seen in the last couple of decades, we remain confident that we can recover input costs in the market through pricing in the first quarter demonstrated that ability.
Turning to the outlook uncertainty remains elevated and a range of possibilities for the rest of the year remains wider than normal.
We lowered our revenue outlook slightly for the full year due to the possibility of headwinds from the Russia, Ukraine War currency and a continuation of the supply chain issues.
We suspended rush operations near the end of Q1, and we are assuming in our guide no Russia revenue for the remainder of the year.
Last year, Russia was about 1% of sales.
The change in revenue outlook is not a reflection of current demand for our products or our ability to supply.
Demand for our products continue to grow through the first quarter and remains very strong.
The pricing environment for Timken is also very positive.
Pricing took a step up in Q1 from the fourth quarter and we expect it to continue to increase modestly through the remainder of the year.
We have continued increased production levels through capacity ads increases in staffing and through productivity gains. We are in good position to deliver the 10% organic revenue for the full year and that assumes that we our customers and our suppliers all continue to deal with various supply chain issues at an elevated level for the full year.
Across the company April shipments continued at roughly the March pace.
That is despite a slowdown in China from the Covid restrictions.
Revenue in Russia.
Overall, the demand situation is stronger than our revenue outlook as we continue to assume in the revenue forecast that there will not be any significant improvement and supply chain performance through the course of the year.
As I mentioned, our China revenue was impacted in April from Covid restrictions, our plants are running and have not been significantly impacted but customer shipments as well as exports are both down as customers and logistics networks have been impacted.
We have assumed that this will improve by the end of the second quarter and will not be an issue in the second half, but that remains uncertain.
Okay.
From an earnings perspective, we are holding the prior guidance range of $5 to $5.40, which also reflects the higher level of uncertainty that we're facing.
We are assuming our cost to be higher in the second quarter than they were in the first and to hold at the higher level for the rest of the year.
Saw energy steel and commodity prices increase with the start of the war and other costs, including logistics have not eased.
We don't know if the recent uptick in costs will hold or be transitory.
But I would say that we are being significantly more cautious on our cost outlook than we were at this same point last year.
Last year at this time, we assume that much of the inflation will be transitory. This year, we are assuming that it will stick.
We are of course, working tirelessly to mitigate both the inflation and supply chain costs and there's also the possibility that the costs ease through the balance of the year.
But we're also preparing that we will need to realize more pricing. Both this year and in 'twenty three offset the net impact of these higher costs.
We expect cash flow to seasonally improve the rest of the year, but to remain well below 100% conversion. This is due to increasing working capital to serve the growth and to mitigate supply chain challenges.
Our balance sheet remains strong we remain active in the M&A market and we expect to continue to allocate capital through the remainder of 'twenty two.
In closing I want to reiterate that our performance the last several years, including our first quarter results has really demonstrated the enduring strength of our product portfolio the diversity of our market mix and the capabilities of the timken team.
Timken has been a mid to high teen EBITDA margin business every year for over a decade.
That's through the highs and lows of industrial cycles, falling and rising commodity prices special tariffs currency swings a pandemic.
And now most recently through inflation unprecedented supply chain challenges and the war.
Through all of those conditions, whether positive or negative demand for timken products and technology remains strong and we continue to grow and deliver for our customers investors and employees.
In 2022 Timken is on track to deliver record revenue and earnings per share for the fourth year out of the last five while at the same time continuing to advance our strategy to grow the company's industrial leadership position.
Phil.
Okay.
Okay, Thanks, rich and good morning, everyone.
For the financial review I'm going to start on slide 14 of the presentation materials.
Timken delivered a great start to the year with strong performance across the board in the first quarter.
You can see a summary of our financial results on this slide.
Revenue in the quarter was over $1 1 billion up about 10% from last year and a new record for the company.
We delivered an adjusted EBITDA margin of 20% and we achieved all time record adjusted earnings per share of $1 61.
Turning to slide 15, let's take a closer look at our first quarter sales performance.
Organically sales were up 11% from last year.
Which reflects broad growth across most markets and sectors as well as higher pricing.
On the right hand side of the slide you can see organic growth by region, excluding both currency and acquisitions.
All regions were up in the quarter versus the year ago period led by the Americas.
Let me add a little color on each region.
We were up 22% and Latin America as most sectors were up year on year with industrial distribution and rail posting the strongest gains.
In North America, our largest region, we were up 14% with most sectors up there as well led by distribution off highway and marine.
In Europe , we were up 11% with strong growth in distribution off highway and general industrial.
This was partially offset by lower renewable energy and Russia rail shipments.
And finally in Asia, we were up 3%.
Sales were down in China from the very strong first quarter of last year, but up solidly across the rest of the region.
From a market standpoint rail was notably up well automotive was lower.
Turning to slide 16 adjusted.
Adjusted EBITDA was $225 million or 20% of sales in the first quarter.
Compared to $204 million or 19, 9% of sales last year.
Adjusted EBITDA was up $21 million or 10% with.
With margins up 10 basis points from last year's strong first quarter.
We delivered a sizable step up in margins from the fourth quarter.
Looking at the change in adjusted EBITDA.
Thing that jumps out is that price mix and material and logistics costs fully offset each other in the first quarter.
This allowed us to capture the benefits of our strong organic volume growth.
Which more than offset the impact of higher SG&A expense.
Let me comment a little further on a few of these items.
As I mentioned price mix was positive in the quarter.
Pricing was meaningfully higher in both mobile and process industries, reflecting.
Our recent pricing actions.
Mix was also positive.
Driven by strong distribution sales.
Moving to material and logistics costs.
As expected, we saw significantly higher costs in the first quarter compared to last year.
Driven by inflationary pressures and supply chain challenges.
But I would point out that these costs were largely in line with fourth quarter levels.
On the SG&A line costs in the first quarter were up in dollars supporting the higher revenue and reflecting annual compensation increases.
But SG&A was down as a percentage of sales as we continue to leverage our cost structure very well coming out of Covid.
And finally, I want to touch on manufacturing performance.
In the quarter, we benefited from higher production volume and achieved productivity improvements.
But this was fully offset by the impact of higher energy labor and other costs as.
As well as continued supply chain related inefficiencies.
Yeah.
On slide 17, you'll see that we posted net income of $118 million or $1 56 per diluted share for the quarter on a GAAP basis.
This includes five cents of net expense from special items, driven largely by Russia related charges.
On an adjusted basis, we earned $1 61 per share up 17% from last year.
And our new timken record for any quarter.
You'll note that we have fewer shares outstanding on average in the first quarter compared to last year, reflecting our buyback activity.
And our first quarter adjusted tax rate was 25, 5% inline with last year.
Now, let's move to our business segment results, starting with process industries on slide 18.
For the first quarter process industry sales were $584 million up more than 12% from last year.
Organically sales were up 13%.
By growth across most sectors with distribution and general industrial posting the strongest gains.
Heavy industries Marine and industrial services were also up.
While renewable energy was down modestly as expected.
Pricing was also positive in the quarter.
Process industries adjusted EBITDA in the first quarter was $158 million or 27, 1% of sales.
Compared to $136 million or 26% of sales last year.
The increase in segment margins was mainly attributable to the impact of higher volume and positive price mix, which more than offset higher operating costs in the quarter.
Now, let's turn to mobile industries on slide 19.
In the first quarter mobile industries sales were $540 million up roughly 7% from last year.
Organically sales increased nearly 9%.
With off highway and rail posting the strongest gains.
We were also up slightly in the aerospace and heavy truck.
While automotive was down modestly against the difficult comp last year.
Pricing was also positive in the quarter.
Mobile industries adjusted EBITDA for the first quarter was 79 million or 14, 7% of sales compared to 80 million or 15, 9% of sales last year.
So EBITDA dollars were roughly flat year on year.
The decline in segment margins was driven by the impact of higher operating costs, which more than offset the benefits of higher volume and positive price mix.
While mobile continues to be more negatively impacted by cost headwinds in process I would point out that margins in mobile were up over 600 basis points from the fourth quarter, driven by a meaningful improvement in price cost.
Turning to slide 20, you'll see that operating cash flow was just slightly negative in the first quarter.
Reflecting higher working capital to support our sales growth and customer service.
After capex of $34 million or free cash flow was negative $35 million.
The first quarter is normally the lowest quarter for cash flow given seasonal working capital needs and our annual incentive compensation payouts in March.
We expect a significant step up in cash flow over the course of the rest of the year, but it will be more back half weighted.
Taking a closer look at our capital structure, we ended the quarter with net debt to adjusted EBITDA at one eight times well within our targeted range.
Note that gross debt includes the $350 million 10 year bond issuance, we completed in March.
This provides us with additional financial flexibility at an attractive fixed rate of 480%.
It will also enable us to fund the spin acquisition with cash that's already on hand.
Yeah.
From a capital allocation standpoint during the first quarter Timken returned $124 million to shareholders through the repurchase of one 5 million shares of company stock and the payment of our quarterly dividend.
The step up in share buybacks during the quarter demonstrates our confidence in the long term outlook for the business and our commitment to consistent and accretive capital allocation.
Now, let's turn to the outlook with a summary on slide 21.
Our first quarter performance was a terrific start relative to the full year earnings outlook, we provided three months ago.
However, the level of uncertainty is ribbon risen over the past couple of months with the Russia, Ukraine conflict and ongoing Covid Lockdowns in China.
Given this uncertainty we have decided to hold our full year earnings outlook and continue to evaluate it as we move through the rest of the year.
So our full year earnings guidance is unchanged with adjusted earnings per share in the range of $5 to $5 40 per share.
Which would be up 10% from last year at the midpoint and a new record for timken.
The midpoint of our earnings outlook implies that 2022, adjusted EBITDA margins will be roughly flat with last year, which is modestly better than our prior outlook.
Our outlook assumes a step up in inflationary pressures and supply chain inefficiencies over the remainder of the year compared to our prior guidance.
To the extent these headwinds don't materialize as assumed or transitory or to the extent, we can otherwise mitigate them it would be upside to the guidance.
Turning to the revenue outlook, we're now planning for revenue to be up around 8% in total at the midpoint versus 2021 <unk>.
Compared to 10% in our prior outlook.
The 2% reduction is comprised of 1% organic and 1% currency.
Organically, we now expect revenue to be up 10% compared to the 11% in our prior outlook.
The change reflects the impact from suspending operations in Russia, and the expectation for continued supply chain disruptions.
We continue to see solid demand across most markets and sectors and we also expect to benefit from outgrowth initiatives and positive pricing.
Our demand outlook is supported by our strong backlog as well as incoming order rates and customer sentiment.
With respect to currency, we now expect a 2% headwind on the top line for the full year up from 1% in our prior outlook.
This is based on April spot rates, which reflect the strengthening of the U S dollar versus key currencies since the beginning of the year.
And please note that our outlook does not include any revenue from <unk>, which is expected to close in the June timeframe.
Moving to free cash flow for the full year, we estimate conversion at around 65% of net income.
We expect Capex in the range of four to four 5% of sales, which includes several growth related projects and other initiatives to improve productivity and margins.
For 2022, and we anticipate net interest expense to be roughly $65 million, reflecting the recent bond issuance and our expectation for higher variable interest rates.
And we estimate that our adjusted tax rate will be around 25, 5% in line with the first quarter, but up slightly from our prior guide.
So to summarize timken delivered an excellent start to the year and we remain well positioned to achieve record results for 2022.
Our team remains focused on driving our profitable growth strategy, winning in the marketplace and performing well through this ever changing environment.
This concludes our formal remarks, and we'll now open the line for questions operator.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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Again press Star one to ask a question.
Well pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll take our first question from.
Rob Wertheimer with Melius research.
Hey, good morning.
Hey, good morning.
So actually my first question. Sir My question is really just going to be sort of a strategic one with the <unk> acquisition, which looks pretty interesting I wonder if you could compare the technology spend to add to what you do currently you mentioned tile engineered I don't know if it's a bit more advanced I wonder if you could describe I understand that sits.
Well into kind of automation end markets, which are growing nicely, but does it also represents.
Ah represents a branch into you know a more highly engineered product does it expand your Tam on acquisitions and does that.
Open up new avenues for future growth.
Yeah, Thanks, Rob so.
Cone drive organically has developed what we call the harmonic drive for robotic applications and specialty is a slower cycle it'll drive which.
Differences in torque and wait in the.
A very complicated subject, making it simpler, but generally bigger heavier applications would lean towards the spin.
It's been a solution and a smaller joints are smaller applications lighter duty would lean.
Wayne towards cone. So now we would have a full complement.
Our products I'd say, the precision level and the complexity is similar for both.
But two to fulfill this out into since were organic.
We're working our way into that market in and cones case, and it's taken us some time, but now we just acquired a significant position so our customer access.
And and spray has been at it for 20 or 30 years Cowens banana for a few.
In terms of your follow up question there in terms of other areas. There are actually some other similar adjacent products that we still don't have in this and then also moving.
Moving beyond factory automation into a bigger presence in our guided vehicles and other precision drives well applications and then for spin and specifically European history European focus a huge Asian market in this space and they are a very small.
Presence in Asia, So, we think being a part of the timken family can help them significantly there as well. So I think it's you know it's not a huge acquisition, but it's a very exciting one for us and what's a very exciting growth market and we look forward to get it into the portfolio here in a couple of months.
Okay. Thanks, Rich and then if I can just my last just your general feeling on the acquisition pipeline backlog seller feelings right now in periods of uncertainty and I will stop there.
But I think our activity level is good I would say, it's fully back to where it was pre pandemic and then also as we talked about either the last call or the one before that and we spent a little bit of time on some larger possibilities and I would say, we're back to 100% focused on cultivating and.
Getting active the small to mid size that you've seen US do you know I'll say spin ASI is up to two to three times that size, that's where we're focused.
We've got a lot of the pipeline and I would be hopeful that's been a well now there would not be our only acquisition closed in 2022, but obviously a lot of a lot of factors there.
Thank you.
Thanks, Rob.
Go to our next question from Bryan Blair with Oppenheimer.
Thank you good morning, guys.
Good morning, Brian .
I apologize if I missed this detail.
But can you break out the volume and price contribution.
Now factored into your 10% organic sales outlook I get seven and four.
Last quarter or thereabout and then.
I'm, assuming that we know of no more balanced or perhaps some price weighting to the revised that one.
Yeah, Brian Thanks for the question and welcome welcome to the call. Thanks for picking us up on the on the sales outlook I think you've heard rich in his remarks talk about pricing coming in.
And as we thought we expect to achieve greater than 4% pricing for the full year and then the rest of the rest of that would be would.
It would be a volume if you will so we're not getting more specific on the pricing then that you heard from rich that the the Q1 pricing came in as we expected we continue to move spot pricing through the quarter. We continue to look at our aftermarket pricing and and feel really good that will exceed our 4% target for the year. So you can think of that.
To it being being volume with as we talked about really strong growth across.
Cross sectors, you know the only sector that that'll be flat for the year as we anticipated was renewable energy, where it should be flattish for the year, but the rest of the markets looking across markets looking across geographies.
Strong across the board as you can see on that one slide in the materials and just to be clear, it's 10% organic because we start with a little bit of a headwind from FX right exactly.
Understood I appreciate the color.
No surprise that your cost profile steps up sequentially I was wondering if you could offer a little more detail on that front and how we should think about the impact on a on.
On a segment basis, you'd mentioned that mobile.
Is understandably facing a little more pressure there and how that influences the segment margin outlook in cadence for the year.
Yeah, I would say.
First I would say through the quarter as I mentioned, our operational performance supply chain challenges actually reduced as the quarter progressed you could go back to January .
We were dealing with a significant omicron cases high absenteeism in our plants and still a lot of delays in the supply chain.
Those persistence, so I wouldn't say anything when it went completely away, but I would say we did see for the first time in a while some clear momentum going in a positive direction on that front, but then.
When a when the Russia, Ukraine War.
Broke out energy cost are mostly in Europe on on the energy side.
Globally, we saw scrap prices go up in the U S. Almost you know within a week or two of that happening.
Logistics costs that Guy, we thought those might start coming down they instead.
Instead, instead held so you know whether those are end up being transitory or they're here for the rest of the year again, we've taken what we think is.
A prudent approach to assuming they are here to stay because they've been you know we're now six quarters of <unk>.
Increasing costs or are you know we're taking the approach that are they are here, but certainly it could be more transitory than what we're assuming as well.
Yeah understood. Thanks again.
Thanks, Brad.
So to our next question from David Raso with Evercore ISI.
Hi, Thank you maybe I missed it but the margin cadence for the year can you give us a little help with that just given the fourth quarter you would think.
You know should provide a relatively easy year over year comp.
But it looks like you're implying the rest of the year. The margins are only flat year over year can you help us a bit with the cadence, particularly.
<unk>. Thank.
Thank you.
Yes, Thanks, David I would tell you you know the the guidance would assume that we still would expect some second half improvement in the margins year over year, but as we said you know bye bye.
By holding the earnings guidance, which again as rich said, it's admittedly a prudent approach we think we're being.
Conservative relative to the guide we did we would expect cost to tick up a bit Q or planning for cost it tick up a bit in Q2, and then kind of sustained for the rest of the year. So I think he's still still would expect second half margins to be up up year on year, and then for the full year.
The guidance would imply the full year margins would be roughly flat with 2021.
It's just so we level set though on the on the second quarter year ago EBITDA margins were 18 eight.
Give us some some framework here a little bit I mean is it a 100 150 bps slower year over year, where I think we're all just trying to square up the price cost for one Q how.
How much does it go negative we get into Q to drive the margins down.
And then yeah, David I don't think we want to go into the second quarter specifics in an outlook but.
A little more color to what Phil said.
Uh huh.
Last and maybe I'll switch for margins to earnings per share, but obviously you have a revenue outlook I mean, you know the last four years.
Our EPS I think has ranged from 51% in the first half the 58%.
<unk> of it in the first half and so we do have a seasonal parts of our business. So it's almost always there and then.
Both in 19 and 21 it wasn't in the higher Fifty's.
Last year was the rising cost 19 was a little bit of easing volume.
But I think the the <unk>.
Midpoint of the guide.
Would imply you know little little heavier.
Waiting on that so it's basically a similar performance to what we are what we saw last year for the full year are you know.
After the first quarter weather.
That's very helpful and when it comes to having to price more so than your original thoughts based on the cost outlook have you already seen that cost increase to where you have gone back to the market. Since your original increases or you just have.
That in a ready in case it does go up even further than what you're currently sitting.
But we.
We had the step up from Q4 to Q1.
Some of that some of our global distribution prices went up mid quarter. So not all of that was in the run rate. We have some other contracts that are opening it up mid year. So.
As said I think we would be planning for.
In this or assuming in this guide is probably a similar progression from this point through the end of the year, what we saw last year, which as.
Prices modestly going up.
In a quarter for the rest of the year.
That being said as we've gone through the contracts. This last year. This year I mean, we are increasingly.
I'll say structuring our commercial negotiations to where we will have more flexibility as you know we have a lot of pricing mechanisms a lot of indexes.
Indexes contract spot pricing quotes et cetera.
But as we've gone through that generally I would say, where we have shorter deals than we had before <unk>. We have more coverage, whereas we may have that are scrap index now we're trying to get a material index or a inflationary index and or in some cases, we had a contract in and we don't have a contract anymore and we're just putting pricing through.
So I still think we will have some limits to what you could see this year of course took another step up.
But we are in a better position today. If that's the case then we were a year ago and if we're still in this situation.
It's 4% pricing a year or more as the new norm, we will be in a better position for it are this year and would be even better positioned for it next year.
And just to summarize that you have more flexibility for the next nine months than if we had the same conversation 12 months ago, just so unclear that let's say flexibility for coverage or better flexibility or better coverage of our what the indexes is covering yes.
Perfect. Okay. Thank you so much I appreciate it.
Thanks, Dave and thanks, Dave.
We'll take our next question from Stephen Volkmann with Jefferies.
Hi, good morning, guys.
A couple of domain.
Couple of demand questions if I could.
I know you said, Russia was somewhere around 1% of your sales I think it was actually more if I'm not mistaken for some of your large competitors. So I'm just curious if there's any type of an opportunity there to backfill some of the other short shortfalls based on that.
Yeah, well I think take the Russia business for US a historical rush business into two parts are the rail business produced in Russia are sold in Russia, probably gone are the none of our rail business produced outside of Russia sold into Russia, and certainly with supply.
Strange capacity constraints et cetera.
Possibility that we can make that up and in direct debt capacity and revenue and to other places but.
So the market share itself is is gone at this point that you know that market is getting served by others and maybe the other point, Steve I do I, maybe you might be referencing as some of our competitors may have larger footprints that you heard from rich.
Print and Russia's mainly rail the rest of the rest of the business we serve from outside of Russia. So to the extent folks have larger footprints in there in the region that are impacted it does give us it does give us some ability to continue to serve broadly serve.
The European markets from the from the remainder of our footprint.
Yeah.
Historically, we were in the rail market, and then I'll say metals and commodity markets mining.
I'm not in not in automotive not in truck and I think some of our competitors have our market positions and those those industries as well.
Okay, and then on the flip side, everybody is kind of watching for signs of demand destruction, because obviously youre not the only one seeing cost increases. So I'm curious if there is any of it doesn't look like it based on your end market chart, but is there anything that you're worried about relative to demand.
And and kind of demand destruction on price and so forth.
No. We havent seen anything you could point to I think you know a war certainly makes people a little more nervous ourselves included but theres been nothing that you could point to.
You know the one thing you can point to today is is China with the Lockdowns are theres, a general sentiment there that that that's not affecting in demand and when the lockdowns are restricted that things will like light switch turn right back to where they were and that's largely what happen when they locked down a lot of the country.
Back in early 'twenty.
That's a very plausible, but we could certainly it would truly be a good for us if that happens sooner rather than later and those restrictions were lifted but no we've seen no negative impact.
Impact on demand from pricing no negative impact from demand from the war.
And the demand situation is very strong.
Maybe just a couple a couple of anecdotal points on that to follow that up Steve you know when you look at a couple of markets like an in process heavy industries, which typically which typically moves.
Latest was up significantly year on year up significantly sequentially.
The OEM demand coming out of heavier markets like metals aggregate cement pulp and paper, even oil and gas. So we're seeing good momentum there strong momentum across the rest of the process portfolio, you know with the except with the exception of renewable energy, which we expected would be flat. This year and then in the mobile side, we saw a nice step up in rail sequentially.
Despite despite the Russia impact so despite the Russia impact we were up.
Pretty solidly year on year up sequentially and we're seeing some good momentum outside of outside of Russia for the full year. So I think those are a couple of markets that.
It gives us confidence that we're seeing that the momentum is there and again within mobile a strong momentum continues in off highway and the other in the other sectors. So I think I think all signs are still very positive.
Yeah.
Okay. Thanks I appreciate it.
Thanks, Steve.
Our next question from Chris Dankert with loop capital.
Hey, good morning, guys.
I guess.
First off thinking about the automation portfolio now.
Is that principally serving machine builders more end users is it kind of a healthy mix of both and then just any comments you can kind of give us on our growth rates in that business during the first quarter here.
Yeah. So the biggest part of that market for US is automatic lubrication systems, which would serve you would go into diverse markets, but it's really replacing manual lubrication. So that's the solution itself than when you're moving in the end markets. Our second biggest market would actually be before spanair.
Would be autumn automated warehouse systems.
So roll on has a is a nice position in that market along with a couple of other product lines.
And then I'd say you get into factory automation from there with roll on with cone with Timken housing units and some other products. So.
It's a mix, but again, it's a market that go back five or six years ago would have been sub 1% of the company because we werent in a automatic lubrication systems in these other markets.
To get into the first quarter run rate, but I think the the.
The trend has been positive you know high single digit type of overall growth in this and then I think what we've seen coming out of the pandemic.
If anything is only putting more confidence and belief in that with labor shortages.
The need for the need to reduce labor intensity and the ability to increase output without.
Without that and then also the development of the emerging markets, where you've seen more automation go into countries like China and India than than what were before so its a market solar renewable energy, where we're very bullish on over the long term. It does have a cyclicality to it like like most of our markets because it's tied to capital equipment.
But the current outlook for its quite strong.
Got it that's really really helpful. Thank you.
And then to kind of follow up on another key market driver here I mean, we've talked about renewable energy I think everyone understands you know you've got some pretty massive comps to deal with methods and that's why it's flattish this year, but I guess the order rate in kind of the interest in that business do you feel like you know again 'twenty two 'twenty three we should be able to get back to growth in that market specifically.
Yes, So you know first I.
That specific question you know I really think when you look at our revenue. The last few years, I mean really starting to see the benefit of the diversity of our markets.
<unk> energy carried us in in 2020 during the pandemic, China carried us in the pandemic. This year other parts of the end markets in other parts of the geographies I think are going to carry us.
Now coming specifically to your renewable energy question. We ended we ended the year a little on a lower rate last year. So we expect it to start out down.
In the first quarter.
We needed orders to come in to really support the second cohort in the second half growth that happen and then again I think similar to the automation story.
What's happened in the world are with energy dependence on on other countries et cetera, I think the capital going into those market is is going to be there, whether it's regardless of what geography.
So if anything that's what's transpired in the last three months in last couple of years I think has only increased our.
Belief that this is going to be a growth market and.
And I think what's the risk around it.
Probably this year is that we started slow and then the China situation needs to resolve itself pretty quickly.
But backlog has grown orders are building and I would say customer sentiment for the end of this year and into next year is a is growing.
Got you well thanks, so much for the color there really appreciate it.
Thanks, Thanks, Chris.
We will take our next question from Joe Ritchie with Goldman Sachs.
Hey, good morning, guys.
Good morning, Joe Hi, Joe.
Hey, Hey, rich could you, maybe just elaborate a little bit more on what's happening and what youre seeing on the ground in China I know, it's about mid teens sales for you guys in any environment its been very fluid.
Particularly since the end of the quarter itself.
Any color on like end market, specifically, what you guys are seeing on the ground.
Yeah. So.
Our.
I think its very site it depends on where your factories or whether your factories or your customers' factories. So our factories were have been very minimally impacted.
We're not in Shanghai in Beijing, where the where the lockdown. So we have.
An office in Shanghai, and a lot of our people have not been able to leave their homes or get to the office for some time, but we're able to operate so our factories have.
<unk> not been significantly impacted.
However, ports have been impacted trucking has been impacted and some of our customers depending on where their locations are either impacted or or they're having trouble getting some material. So we did see a a I'll say double digit decline in in China revenue in April from from March would expect.
To be down in may as well.
I think our team generally feels this is going to work its way through the system quite quickly.
And you know the optimistic case is probably by the end of this month.
It's it's it's back to normal, but it's not certainly not normal as we sit here today and I think there's some uncertainty around but we you know we're not looking at 40, 50% drops.
And and industry is still running over there.
But it is it is it has been impacted for sure.
Got it got it that's helpful. And then is that is it impacting your mobile market more so than your proppant market at this point.
No I would say, there's probably no real correlation there. It's a it tends to be more of a process industries market for us, particularly because of renewable energy. So I'd say, it's probably it's.
And even impact between the markets as a percentage wise, but more dollars in probably in process.
Okay got it and then one other follow up I saw that.
Did you guys break out on a dollar basis.
Yes, the materials on logistics impact.
Our over year that seem to decline in the first quarter versus the fourth quarter.
I'm just curious.
Are you seeing any easing on both or either in where where are you seeing kind of like.
Yes, a little bit less pressure.
Yeah, I'm not sure the decline from the fourth quarter to the first you're referencing of dollars I think it was flattish but.
But I would've said material was flattish to down a little bit is on a unit cost basis, but again, we saw it go up.
In April .
After the after the war in commodity cost for alloy costs have gone up et cetera. So that's that's happened globally and then logistics I would say is a little bit off peak, but peak is up dramatically from where it would've been a year ago. So we're still up a lot year over year. There was some forecast that that was going to be easy.
I think that's probably between what's happened with China and.
In Europe , and Russia, I think were taken a little more cautious outlook on that and not assuming that's going to ease.
Okay.
Got it.
In the fourth quarter was at 58 million dollar headwind year over year and 45% Okay.
That's helpful. Thank you.
Well go to our next question from Steve Barger with Keybanc capital markets.
Thanks, Good morning, guys.
Good morning, Steve.
Rich I'm going back to your comments on how strong demand is in most end markets and better than the guide suggests we know orders for a lot of your customers have been pretty good and <unk> backlogs are sizable cost of space what are the real pinch points on production and your ability to supply at higher rates.
Well I think you did the conservatism or the.
Our first step on that I'd say, it's also customers right I mean, I'd say, we need 1000 of those for the next three months and then they have a labor problem. They can't get another part in et cetera, So I would say the demand.
While strong it's still not as it doesn't have a smoother cadences as what you would normally have indoor like so I think there's it's starts upstream and then for US we are definitely we're up.
From where we were a year ago and many of our plants, we have spot issues with.
With where materials, either short or hand to mouth, but for the most part we have enough material, we're still adding a staffing to our plants globally.
On the.
On the specific supply side, we're at certainly having some problems with our electrical components, where we have automatic lubrication systems and some other things like that rubber it's Ben.
Tight commodity.
But I would say it's more just delays are and then and then also you know through the first quarter January and February we started up extremely high absenteeism in the plants now that really started easing in March but now we've got a magnified problem in in in China. So I'd say, it's just a combination.
[noise] of issues, Steve that's keeping a little bit of a lid on the.
The efficiency and throughput that you were able to get through the through the supply chain.
Would you say, it's more your customers' inability to take that next.
Pes or or more internal in terms of your.
Our ability to get the electronic component or whatever.
I would say, it's both and yeah I would just say its both and probably leave it there.
Okay.
And then on industrial automation, we've seen a lot or some of the public Oems and integrators call outgrowth.
In some areas high teens to 30% plus across their portfolios is there anything you can do to position for the higher growth verticals and automation or what is your strategy for accelerating market share there.
But it's a combination of organic product development and inorganic I think the area on the answers certainly is yes, I think you know the.
Move into lubrication systems.
You certainly feel that that is a I don't know a business that we would put on a CAGR like you just threw out there, but certainly one that we would expect to grow significantly faster than the portfolio and simply faster than industrial GDP et cetera.
Just again, because it's addressing labor shortages and its improving equipment uptime and equipment maintenance and deferring capital cycles et cetera. So now when we really we were doing quite well with the business than did the <unk> acquisition and then hit the Pandemics or was it really just bounce back in the last year here, but would expect that.
To have a high growth rate and then on the factory automation, which is.
The gist of the spin a acquisition certainly again would expect that to have a significantly higher growth rate than a lot of our core industrial markets. So.
We have a lot happening both in I would say in product development as well as our M&A pipeline to continue to scale that position and our mix into that and I think all of the.
Global cost and and demographics and labor shortages are all playing squarely into that market.
Yeah.
And the pictures you have on slides eight and nine are of the bigger industrial robots are you also selling into the cobalt space.
Yeah, the as I said, the harmonic drive that we that we already have in the portfolio would tend to be on the smaller side and the cycloid, all which we just acquired was familiar with tend to be on the larger side and quite often the robot has both.
In it depending on which joint and the again the weight torque of joint but.
But yes, our objective is to build a position in both.
Got it thanks.
We will take our next question from Courtney <unk> with <unk>.
Morgan Stanley .
Hi, Good morning, guys. Thanks for the question good morning, Tom recording approximately.
We see that some of the color on the.
The quarterly EPS distribution and can you also just comment a little bit on you know the revenue cadence for the year I think usually you know teekay is pretty similar to <unk>, but given some of the disruption that you had.
You know from Covid and in North America and in January February and then the disruption you kind of called out on the on the China side into Q any thoughts about how the revenue cadence should progress through the year.
Okay.
Yeah, I think typically first quarter or second quarter is our peak revenue and peak earnings per share and typically we'd see a little bit of an uptick from Q1 to Q2, I mean, one of the 3%, but I think this year, we're probably a little more cautious on that given the.
The immediate loss of the Russian revenue the direct Russian revenue as well as the start of April in China.
But still and then typically from Q2 to Q3 and Q4, you know 2% to 3% per quarter decline.
Is pretty normal for us.
And I think those numbers all are within a bandwidth of what we're looking at again this time on the revenue cadence.
Okay.
Okay, Great. That's helpful. And then just on some of the changes that you would called out on end markets.
It sounded like one can you just remind us what percentage of <unk>.
Rail is Russia, and I think you know that was really the only end market that you took out of that.
Higher growth bucket and lowered <unk>.
Assuming that that was all related to Russia.
And can you know I think the comment was that the ex Russia business is actually performing quite well. So just if you can give us a little bit more color on how that would look ex Russia and then similarly, I think industrial services got pulled up so he can add any comments on what youre seeing in that end market.
Yeah, I would say globally rail, excluding Russia is performing well it was a market that was lagging last year I would say the U S was still lagging, but I would say.
The U S rail market is really preparing for a a good run into and well into probably through 'twenty. Three so I would say the rail market globally to you.
Comment is is doing well excluding Russia.
And Russian rail cell sales.
Call. It a half a percent of company revenue, maybe a little worse, so that would come obviously all out of that the rail segment. So it was lowered meaningfully.
But corporation wide not a big deal.
Got it and then industrial services.
Yeah, I would say just to comment on industrial services up and up in the first quarter pretty solidly you know that business tends to be tied to industrial activity, mainly mainly in North America. I mean, it is a it is a global business, but it's mainly in North America. So for the full year, we did see an improvement in the backlog.
That business an improvement in the bookings in that business. So we do expect.
Stronger growth across the services sector for the for the full year than we had coming in because some of the some of the <unk>.
Sectors that our services business is tied to as an example, pretty pretty strong position in oil and gas we saw some improved activity there.
With what's been happening around the world in and just more broadly industrial activity in the Americas, and and even even in Europe to a lesser degree. So just the step up in bookings step up in activity. We saw in Q1 and expect to expect that to sustain itself for the rest of the year.
Great. Thanks.
Our next question from Michael Feniger with Bank of America.
Hey, guys filling in for Ross here I appreciate that you have more flexibility.
Then you were on pricing than a year ago, if pricing, 4% in Q1 and your costs are going up why is that 4% number or not.
Not moving higher on a full year basis is it because of annual contracts.
How does the pricing mechanism work, if you could remind us on the process side, our competitors not raising pricing as aggressively maybe kind of just flesh that out for us.
Yeah, you know our pricing metric is a year over year.
Comparison for exact mix of parts sold so last year at this time, our pricing was probably close to zero and then in the second late in the second quarter. It started.
Ticking up so to get 4%.
In the second half of the year, we have to you know.
We have to have more pricing than we have today, because our comp today, so the pricing comp gets harder.
As the year goes on not so much in the second quarter, but certainly in the third and the fourth so we are expecting more pricing a N.
We said, we'd go into the year getting more than 4% and we are getting more than 4% and we're probably not going to go into too much more detail of how much more.
Fair enough rich in your you made a comment about how inflation is it transitory and indeed for a minute I'm. Just curious if that is that permanent kind of even laugh going forward does it change.
There then pricing does it change the way you operate you run the business outside of just raising prices does it have to change maybe your footprint and where you guys invest capacity. Obviously, there's been comments about re shoring supply chains and you're a critical supplier I'm. Just curious if you can maybe comment on that portion.
If we do see inflation more permanently how it kind of changes.
The business model other than just maybe pricing.
Yeah.
Yeah, I, certainly think on the labor side.
And as we said it would play into our Capex and in automation and certainly a.
A sizable percentage of our annual Capex spend is either four.
Peer automation indoor assets equipment technology that is more efficient and state of the art and improving labor productivity and material conversion efficiency et cetera.
So you I think you could certainly see that step up.
And then I do think the footprints relevant as well because the labor the labor challenges around the world are different depending on where you're at in the country in the United States and and even more so where you're at in the world.
So.
I think historically there would have been too many cases, where we would've been reluctant to make an investment in a facility because we were concerned we couldn't hire the people and I think that is now a real concern.
Particularly when we have some things in smaller communities, where you do have to you have to concern yourself are you going to be able to attract labor into those markets. So I think those would be the two factors I think theres an impact on automation within the footprint and an impact on the capital going to the parts of the footprint where the labor.
Billy to support it is assured.
Okay.
Thank you guys.
Thank you thanks, Michael.
And as there are no questions.
Please go ahead, Mr front of them.
Yeah, Thanks, Kristina and thank you everyone for joining us today, if you have any further questions. After today's call. Please contact me. Thank you and this concludes our call.
This concludes today's call. Thank you for your participation you may now disconnect.
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