Q4 2022 Timken Co Earnings Call
Yeah.
Good morning, My name is Glenn and I'll be your conference operator today at this time I would like to welcome everyone to <unk> fourth quarter earnings release Conference call.
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Is the phone Apple you may begin your conference.
Thanks, Glenn and welcome everyone to our fourth quarter 2022 earnings Conference call. This is Neil for own 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.
Filled 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 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 and good morning, and thank you for joining our call.
Timken delivered another excellent quarter, which concluded an outstanding year.
Organic revenue in the fourth quarter was up 10%.
Demand continued to be strong with North America, and Asia, both up double digits.
Price contributed meaningfully to the fourth quarter revenue game and our outgrowth initiatives also added to the results.
Fourth quarter, EBITDA margins improved 380 basis points from prior year with improved price cost being the largest driver.
Earnings per share of $1 22 was a record for the fourth quarter and was up 56% from prior year.
We also closed on the DGB bearings acquisition in the Aero drive systems divestiture and purchased 250000 shares.
And free cash flow in the quarter was very strong at $186 million.
For the full year, we delivered 9% total growth and around 12% organic growth, which was the second consecutive year of double digit organic growth org.
Organic growth was at least 10% all four quarters of the year.
We start 'twenty three with very good momentum.
EBIT margins of 19% were up 160 basis points from 21 <unk>.
And we're more consistent through the course of the year.
Our price realization exceeded the 4% that we guided to at the beginning of the year and price improved sequentially each quarter for the second straight year.
The rate of cost increases leveled off around mid year, but costs were up over prior year, each quarter and we remain in an inflationary environment.
There've been a lot of moving pieces on costs.
Steel and logistics, where the early inflationary pressures.
They have both beat eased off peak, but labor energy other material and SG&A costs all increased.
Internal inefficiencies from supply chain and labor challenges were better than 'twenty, one it improved through the course of the year, but remained elevated.
Earnings per share of $6, two was 28% over last year's record level.
Free cash flow of $285 million was up from prior year and.
In addition to the M&A, we continue to invest about 4% of sales in capex for growth and cost initiatives.
Advanced our products advanced our footprint improved our productivity invest in our digital platform and expanded our capacity through these investments.
We also purchased about 4% of our outstanding shares during the year and we ended the year with a strong balance sheet.
We were also named one of America's most responsible companies by Newsweek for the third year in a row.
This recognition underscores our commitment to being an excellent corporate citizen.
We are driving sustainability through the products, we make the industries, we serve and across our global operations.
We also invest in the development of our people the diversity of our workforce in safety across the enterprise.
In summary, 2022 was a very good year for industrial demand, but also had a lot of unexpected challenges.
And we once again capitalize on the opportunities while navigating through in responding to the challenges to deliver outstanding results for both our customers and our shareholders.
Before I turn to 'twenty, three I want to highlight slide 12, and our quarterly deck.
This slide is from our recent Investor day, and as updated for R 22 results and our new adjusted EPS definition.
Through the five year period, we delivered an 8% revenue CAGR and 18% earnings per share CAGR and an average EBITDA margin of 18, 5% with only 180 basis points of margin variation through the five years.
When you reflect back on the macroeconomic volatility through that five year period from tariffs pandemics inflation supply chain challenges and more these results demonstrate the resiliency of the demand for our products and technology, the diversity of our business and our commitment and capability to drive value through <unk>.
Economic cycles.
So while uncertainty remains elevated today timken is well positioned to continue to create value in the years to come through industrial cycles in through evolving technologies.
Timken, <unk> 23, a larger and better version of the company that we were in 2018.
We are confident that we will be able to continue the trajectory of this performance in the years to come and we expect that 'twenty three will be a good start to the next five years.
Turning to 2023, I will start with our recently announced acquisitions.
First American roller bearing or IRB <unk>.
<unk> has been family owned and operated in the United States for three generations. They.
We have a long standing position in the U S process industries markets.
And a large installed base of products throughout the U S and sell primarily through bearing distributors too fragmented base of Oems and end users.
These are markets and channels that timken knows very well and we are confident that we can create value for customers and shareholders through integrating Barbie and the timken is engineered bearings portfolio.
ARLP enters the portfolio at modest EBITDA margins, but we expect over time to get it to process industries level margins.
The delo will add a combination of new products to our portfolio and also expand existing product lines and market positions.
The largest product line is linear motion and actuators product complements and scales, our linear motion platform and we will deliver strong synergies with our rollout business.
The Dell also brings industrial needle roller bearings false crews and rod ends to the portfolio.
Timken entered the Rod end market with the 2020 acquisition of Aurora, and adding the Delaware globalize, our rod and market position.
The Delaware further scale our position in several of our targeted markets as they survey fragmented customer base across markets like automation packaging food and beverage logistics and medical.
The Delaware joined Timken with a margin profile slightly above the company average and with synergies, we will both expand margins and accelerate the global growth rate.
We're excited to be adding both <unk> and <unk> to our portfolio. Upon completion, we will remain comfortably within our targeted leverage ratios and with our 23 cash flow. We can continue to be opportunistic with capital allocation opportunities through the year.
Turning to our markets and slide seven in the deck, we are guiding to a 3% organic revenue increase in total.
We expect price to be over 2% for the year. So price comprises over half of the organic revenue outlook.
We are confident in achieving at least the 2% price.
Starting on the right we are expecting a strong full year in renewables driven by Asia win both from the market as well as from our outgrowth tactics.
It's a market where we have good visibility in the demand for several quarters out the order book and backlog are strong and customers are committed to a step up in revenue for the full year.
We're planning for the rest of our markets to range from flattish to up mid single digits.
I'll talk more about the first quarter in a moment, but this guide assumes we will start the year well above the 3% level and then moderate in the second half of the year, partly from tougher comps, but primarily from taking a cautious view of the markets, where we do not have extended visibility.
We're also anticipating some channel inventory pullback in this outlook and supply chain improve and customers return to managing inventory with higher precision.
If our outlook for the second half proves to be low we will be in excellent position to capitalize on the situation.
From a margin standpoint, we are guiding to roughly flat margins for the year as I said in my 22 comments there've been a lot of moving pieces on the cost and margin front and that continues into 'twenty three.
We are expecting price cost to be modestly positive for the full year.
We also expect margin help from better operational execution supply chain improvements are 22, capex and footprint investments and lower steel and logistics costs.
However, we remain in an inflationary environment and we do anticipate further cost increases in SG&A labor and other purchase materials.
Currency and mix are also expected to be margin headwinds for the year.
We have been dealing with a rising and volatile cost situation for a couple of years and I am confident that we will successfully navigate through the price cost dynamics again in 'twenty three.
Earnings per share would be up about 5% at the midpoint.
We expect much stronger cash flow in 'twenty, three primarily from higher earnings and lower working capital requirements due to both moderating growth rates as well as improved supply chain execution.
While we are taking a cautious view on the second half we're starting the year strong.
We have good visibility for the first quarter and well into the second quarter, and we expect organic revenue to be up high single digits in the first quarter.
We have a healthy backlog good order input and the benefit of another sequential price improvement.
We would also expect our normal sequential step up in margins from the fourth quarter to the first.
In summary, we delivered an excellent year in 2022, both strategically and financially and we are off to an excellent start to 'twenty three.
We're in a great position to extend our strong performance. We're excited about the opportunities in front of us and we feel confident in our ability to continue to create shareholder value through our long term as we continue to advance timken has a diversified industrial leader.
Okay.
Okay. Thanks, Rich and good morning, everyone for the financial review.
To start on slide 14 of the presentation materials with a summary of our strong fourth quarter results.
Which capped off a record year for timken.
We posted revenue of close to $1 1 billion in the quarter up over 7% from last year.
We delivered an adjusted EBITDA margin of 17, 2% with strong year over year margin expansion.
And we achieved record fourth quarter adjusted earnings per share of $1 22 up 56% from last year and over 20% higher than our next best fourth quarter.
Turning to slide 15, let's take a closer look at our sales performance.
<unk> fourth quarter sales were up 10, 2% from last year, driven by strong growth across most end markets and sectors.
And with healthy contributions from both volume and pricing.
Looking at the rest of the revenue walk foreign currency translation was a sizable headwind in the quarter driven by a stronger U S dollar against the Euro and other key currencies.
And the impact of acquisitions net of divestitures contributed modestly to the top line.
On the right hand side of the slide you can see organic growth by region, which excludes both currency and acquisitions.
Let me touch briefly on each region.
In Asia Pacific were up 19%.
Driven by strong growth across the region with renewable energy and distribution posting the strongest sector gains.
In North America, our largest region, we were up 13% with most sectors up led by off highway.
Distribution in general and heavy industrial.
In Latin America, we were up 5% driven mainly by year over year growth and distribution.
And finally in EMEA, we were down slightly as lower renewable energy revenue and lost Russia sales were mostly offset by growth in other sectors and notably if you exclude Russia, we would've been up modestly for the region in the region for the quarter.
Okay.
Turning to slide 16.
Adjusted EBITDA in the fourth quarter was $186 million or 17, 2% of sales compared to 135 million or 13, 4% of sales last year.
Looking at the increase in adjusted EBITDA dollars, we benefited from strong price mix and higher volume in the quarter.
Which more than offset the impact of unfavorable net manufacturing performance and higher SG&A other expense.
As you can see on the walk material and logistics costs were relatively flat year on year, a significant improvement from the sizable headwinds we've experienced over the past several quarters.
Overall, we delivered an incremental EBITDA margin of 68% on the higher sales drew.
Driven by a positive price cost performance, which enabled us to expand margins by 380 basis points versus the fourth quarter of last year.
Let me comment a little further on a few of the key drivers in the quarter.
With respect to price mix.
Pricing was meaningfully higher in both mobile and process industries.
Reflecting our significant pricing actions over the past year.
Mix was also positive driven by our strong growth in attractive sectors like industrial distribution.
Moving to material and logistics as I mentioned the year over year impact in the quarter was largely neutral is.
With higher material costs from continued supplier price increases were mostly offset by lower logistics and transportation costs.
I would also point out that material and logistics costs were down sequentially from the third quarter.
Yeah.
Okay.
On the manufacturing line, we were negatively impacted by continued cost inflation, including energy and labor as well as lower production volume.
And we were also impacted by higher costs that had been capitalized to inventory and prior periods.
This will continue to be a headwind in 2023.
On the positive side, we're seeing improved execution from our teams around the world and.
Our supply chain and other constraints continue to ease.
We should also benefit more in 2023 from our manufacturing footprint actions and other self help initiatives.
And finally on the SG&A other line.
Costs were up in the fourth quarter driven.
Driven by higher compensation expense and other spending to support the increased sales levels.
I would point out that SG&A expense was in line with our expectations and up only slightly organically from the third quarter run rate.
On Slide 17, you can see that we posted net income of $97 million or $1 32 per diluted share for the quarter on a GAAP basis, which includes <unk> <unk> of net income from special items.
On an adjusted basis, we earned $1 22 per share.
<unk>, 6% from last year, and a record for the fourth quarter.
You'll note that we benefited from a lower share count in the quarter, reflecting the significant buyback activity, we've completed over the past year.
And lastly, the higher interest expense and 25, 5% adjusted tax rate more in line with our expectations.
Now, let's move to our business segment results, starting with process industries on slide 18.
For the fourth quarter process industry sales were $586 million up 11, 1% from last year.
Organically sales were up 13, 5% driven by growth across all sectors with distribution heavy industries and general industrial posted the strongest gains in the quarter.
Pricing was positive once again and net acquisitions contributed nearly three percentage points of growth to the topline.
But currency translation was a sizable headwind in the quarter reducing growth by over 5%.
Process industries adjusted EBITDA in the fourth quarter was $143 million or 24, 4% of sales compared to $105 million or 20% of sales last year.
The increase in process segment margins reflects the benefit of positive price cost and higher volume, which more than offset the impact of higher manufacturing and SG&A costs in the quarter.
Now, let's turn to mobile industries on slide 19.
In the fourth quarter mobile industries sales were $496 million up three 3% from last year.
Organically sales increased six 4% with the off highway and rail sectors, posting the largest revenue gains.
We were also up in heavy truck, while aerospace and automotive were relatively flat.
Pricing was positive once again, while net acquisitions contributed modestly.
Currency translation was a headwind in the quarter, reducing growth by nearly 4%.
Total industry the adjusted EBITDA in the fourth quarter was $56 million or 11, 3% of sales compared to 41 million or eight 6% of sales last year.
The increase in mobile segment margins was driven by the benefit of positive price cost, which more than offset the impact of higher manufacturing and SG&A costs, and notably mobile margins were up sequentially from the third quarter, which is unusual given our seasonality and reflects a moderation of costs over the past few months.
Turning to slide 20, you can see that we generated operating cash flow of $242 million in the quarter.
And after Capex free cash flow was $186 million or more than triple what we delivered last year.
Looking at the full year free cash free cash flow was $285 million up from $239 million in 2021.
The higher free cash flow was driven mainly by earnings growth, which more than offset the impact of higher working capital to support the record sales levels as well as higher Capex to fund our growth and operational excellence initiatives.
During the year Timken paid 92 million in dividends or $1 31 per share.
Making 2022, the ninth consecutive year of higher annual dividends per share.
In addition, we repurchased over 3 million shares of stock during the year or about 4% of total shares outstanding and we have nearly 6 million shares remaining on our current authorization.
Also completed the acquisitions of GGP and spin out.
And with those acquisitions.
42 marks the 13th straight year, where timken is made at least one acquisition.
When you take into account, our capex dividends net acquisitions and share buybacks.
Timken deployed just over $900 million of capital in 2022 and.
And we did it while maintaining a strong balance sheet.
Turning to the balance sheet, we ended the year with net debt to adjusted EBITDA at one nine times well within our targeted range and.
In addition, we completed several debt financings during the year to provide us with additional financial flexibility, including a $350 million issuance of 10 year bonds back in March at an attractive fixed rate.
We also refinanced and Upsized, both our revolver and U S term loan in December extending their maturities to 2027.
With our strong capital structure and cash flow, we remain in a great position to continue to drive shareholder value creation in 2023, and we're off to a great start with AARP and the Delta.
Now, let's turn to the outlook with a summary on slide 21.
As rich highlighted we expect strong top and bottom line performance again in 2023 with a large step up in free cash flow generation.
Starting on the sales outlook, we're planning for another year of record revenue with sales up 4% to 8% in total were 6% at the midpoint versus 2022.
Organically, we're planning for revenue to be up about 3% at the midpoint driven by positive pricing and modest volume growth with our volume assumptions, reflecting some prudent cautiousness around the second half given our limited visibility.
We expect acquisitions net of divestitures to contribute around three 5% to our revenue for the full year.
This includes the recent <unk> acquisition, but does not include Nadella. We will include in the dollar and our outlook after the deal closes.
Which will be around the end of the first quarter.
And finally, we expect currency translation to be a 50 basis point headwind at the top line for the full year based on December 31 spot rates.
On the bottom line, we expect record adjusted earnings per share in the range of $6 50 to $7 10 per share.
It represents around 5% growth at the midpoint versus last year on a comparable basis.
Note that the guidance range reflects our new definition for adjusted EPS, which excludes acquisition intangible amortization expense of roughly <unk> 50 per share.
I'll come back to this later in my remarks.
The midpoint of our earnings outlook implies at our 2023 consolidated adjusted EBITDA margin will be roughly in line with 2022.
Note that our margin assumption reflects a sizable headwind from currency after positive impact we saw last year.
Organically, we should see strong incrementals.
As favorable price cost momentum and improved operational execution should more than offset headwinds from higher manufacturing and SG&A costs lower production volume and unfavorable mix.
Moving to free cash flow, we expect to generate approximately $400 million for the full year 2023.
Approximately 90% conversion on net income at the midpoint.
This is over $100 million higher than 2022 and reflects the impact of improved earnings and working capital performance.
We're estimating capex at around 4% of sales for the year with the spend continuing to fuel our long term growth and operational excellence initiatives.
And finally, we anticipate higher interest expense and we expect our adjusted tax rate to remain around 25, 5%.
Turning to slide 22, let me comment further on the revision to our adjusted EPS calculation.
As I mentioned, our new definition for adjusted earnings excludes acquisition intangible amortization expense, which has grown in recent years with the cumulative amount of acquisitions we've made.
Overall, we believe this change will provide a better representation of our core operating earnings and improve comparability of our performance versus peers.
So to summarize the company delivered strong results again in the fourth quarter to finish another record year. Our team continues to win in the marketplace and drive our profitable growth strategy.
After a strong start in 2023, and we're well positioned to continue to scale as a diversified industrial leader through any environment.
This concludes our formal remarks, and we'll now open the line for questions operator.
Thank you, ladies and gentlemen, if you would like to ask a question simply press Star then the number one on half on keypad.
With our first question comes from Steve Barger with Keybanc Cm, Steve Your line is now open.
Thanks, Good morning.
Good morning, Good morning, Steve.
Rich.
You said prices, 2% or 3% organic growth if I go back to slide seven you have the worst case for the four sectors is flat and most of the sectors or mid single digit or better.
You talked about which are the end markets. If any you think youre going to have negative volume growth this year.
Yes, I mean, we don't specifically split out the volume versus the.
Price, but certainly if there's middle markets all have price realized over the last.
Year on them. So if they end up at zero, there volume would be would be down a little bit.
But it sounds to me like you're taking a pretty conservative approach just based on on what this slide looks like since you do expect positive price cost I guess I'm trying to get to the idea of whether you really think volume is negative or positive in 2023 for most of your end markets.
Well, it's certainly not negative to start the year.
And if you look at this slide seven.
Have four markets on this slide that we have.
Visibility well into the second half on renewable energy aerospace heavy industries in marine.
The four markets, where we have good visibility into the second half volume as well as price. We're all looking where all four of them projecting to be up mid single digits.
Or more.
For the full year.
And as said we are looking to be up high singles organically in the first quarter. So certainly to get to these numbers for the full year you'd have a moderating yoga from high single digits down to low single digits as the as the year advanced in total.
So as you look at your internal model do you show positive growth in the back half or in <unk>, specifically or do you expect that that goes negative in the back half.
With price and we'd be still modestly positive.
Great. Thanks for the time.
But I'd also want to emphasize again as we.
Is your partner, Steve again, we don't have visibility into that and we're taking we're taking a cautious outlook.
And do it but again, we're starting the year up we just finished the fourth quarter up 10, and starting the year up high single.
Understood. Thanks.
Thank you Steve.
With our next question comes from David Raso from Evercore. Your line is now open.
Hi, thank you've been jumping between calls so sorry, if I missed this but earlier you said mix would be part of why margins only flattish year over year did I Miss some growth guide, particularly the process versus mobile where mobile is up more I'm just trying to figure out why would the mix be down or was there something unique towards.
End of 'twenty, two that really skewed the.
The mix I mean, obviously process in general.
It gives you the better margins, but did I Miss something about the bigger mix commenters or even something within process.
I don't think we made a comment but within process as you look at slide seven with renewable up high singles and distribution flattish.
Negative mix within within process. So.
We were exiting <unk> at distribution.
The play there a little bit.
Yeah, I'd say, a little bit of destock and just moderating.
More of a sell through.
A couple of our U S distributors, who made statements that theyre looking to manage inventory a little tighter this year.
But.
Again within that we would expect within this guide for mobile margins to be up a little bit process margins to be down a little bit and then as Phil said you have the currency impact cross.
Across both yes, I was just going to comment David as Rich said I mean, our mix is really driven by the obviously the mix of OEM not just in process, but across the company the OEM growth versus the distribution of our aftermarket growth. We have both the distribution and services sectors. If you will sort of neutral for the year, but we got renewables up high single digit.
Plus as well as a lot of the other OEM markets up in that dynamic compared to 2022, where distribution was up significantly is producing a little bit of a mixed headwind, which would affect process a little bit more than mobile and then mobile a lot of the self help we have been talking about over the course of the year around footprint and consolidations and the like.
<unk> should help mobile as rich said improved margins year over year with process, feeling a little bit of a headwind, but net net roughly neutral year over year at least as we've assumed that in our guidance.
Okay, no that that adds a little more.
Jim Let's see to the guide just distributions such a powerful force in that business, but the destock. If you can give us a little bit of insight on those conversations you've had I think distributions what I'm not including services just truly distribution was at $40 45 per cent of the division and something like that if remember correctly.
How long is the destock when you speak to them as it sort of a just a slow grind down over the course of the year or is it more I think.
I think it was.
And then they're ready to go I wouldn't overplay. It it's more it's not a increase in inventory, which is what we've had the last two years right. So again as you look at the comps they've been building inventory, so even a leveling off.
And going to the sell through rate is.
It was a reduction.
Or a tougher.
Suffered comp.
And.
I wouldn't say, there's a big destocking, but lead times have improved transit times.
Have come down over ordering is over.
And we're just anticipating a little bit of a headwind from that I think we already had a little bit of a headwind was that in the fourth quarter.
Still grew 10% organically.
We expect a little bit more in the in the next couple of quarters.
That's helpful. So not as much absolute destock just was a little more of a benefit in 'twenty two that we can't quite exactly okay.
Thank you so much and the extended and extended supply chains, I mean, the extended supply chain and add a lot of.
Stranded inventory in the supply chain that I think is coming out okay alright.
Alright terrific. Thank you.
Thank you David.
Okay.
Thank you David.
Our next question comes from Ralph.
Hi, I'm from.
Mainly SME such Ralph your line is now open.
Thank you.
Just to clarify so I guess I went into the call assuming there'll be a channel inventory drawdown, there and the effect on your calling out as more than prior years, and then an inflow from from.
Distributors and others take more inventory, you're not anticipating a large drawdown in that Scott.
A large drawdown now I would not say, there's a lot of large drawdown theres, a drawdown, but not a large one.
Okay.
Just a quick question on pricing then so you've obviously captured a lot and your margins have reflected that in the last couple of quarters, especially.
Are you back to kind of neutral ish with a 2% outlook for next year.
Is there still more catch up to go and Thats embedded in the two or are you still working on getting catch up pricing as contracts or other things roll through and just in general it's been a tumultuous couple of years for pricing I Wonder if you could step back and just comment on your overall structural initiatives COVID-19 inflation out out of the picture for for how Youre capturing.
Thank you.
Okay.
Yes, I think if you look over if you added our two years of <unk>.
Walks, maybe two years and a quarter is really started.
90, 910 quarters ago with the inflation, we would be close to neutral maybe slightly behind.
It was a little bit of offset.
Into our into our volume so we're close to neutral.
2% more than 2% is expected to very modest as the spec.
It would be slightly better than neutral.
But what we're looking at roughly neutral and then to your latter question.
We we feel good about our ability to capture price, we feel good about our ability to respond to.
Volatility and commodity prices and supply chain issues et cetera, I think we've demonstrated that we've got.
<unk>.
<unk> talked before we've got thousands of customers and a lot of complexity in our price, which tends to make it sticky and also tends to make it a little more complicated when these things happen and just pushing a button and raising prices and in a matter of a week or a month or a quarter.
But we're there now we've got good systems and processes and feel good about being able to.
Adjust to whatever comes our way in the course of 'twenty three.
Thank you.
Thank you well thanks.
Thanks, Rob.
We have another question comes from Stephen Volkmann from Jefferies. Steven Your line is now open.
Yeah.
Great. Good morning, guys. Thank you and my question was around pricing as well I guess I'm just surprised at your two points kind of a forecast for for 'twenty, three because obviously you're coming off a.
Fourth quarter, Thats way bigger than that and I think.
Chief competitor sort of said mid single digits. So why wouldnt, we think about sort of follow on pricing for actions done during the year end 'twenty two I wouldn't bet kind of have a stronger effect in 'twenty three and I think rich you even said something about another recent price increases are you seeing declines I guess is the other way to ask this.
Certain parts of your customer base already and is that sort of the us that just help us think through why that wouldn't be higher.
Yeah on the chief competitor comment I'm, not sure where they would stand on going back to pandemic to current if they would be behind that and theyre looking to play catch up on that or not but as I said, we if you go back and add ours up we're pretty close to neutral in the more than 2% would be.
Build on that modestly and again, we'll see how the cost dynamic.
Go through the year just to how.
How much build that is we would expect the greater than 10% under.
Any any normal moderating improving cost scenario and then if costs go up we'll probably expect that to go up a little bit more so I think we've got.
Good coverage there and.
Feel good about 2% there is no where we have indexed.
Pricing to steal our currency there could be some.
Give back there happening, but in total <unk>.
Walks our costs have not gone down in total.
We need that to 2% and we will get the 2% net of.
The any index clauses as the expectation and just maybe a clarification Steve the fourth quarter walk would also include mix was favorable in the fourth quarter. So there would be favorable mix in there as well, but as rich said, where we're targeting to looking to beat the 2% for the year end.
And feel really good about the outlook for both for price cost heading into 'twenty three.
Okay.
And it feels like Youre going to start the year like first quarter is going to be significantly higher I would think just based on sort of what we've seen recently.
And I guess that implies that we exit the year kind of flat or negative on price is that the way to think about it.
Well no I think prices will be up in the fourth quarter, but but we have been improving price sequentially for nine or 10 quarters. So every quarter.
The year over year comp gets harder as you highlight that our fourth quarter number was pretty sizable so that becomes a challenging comp for us.
The fourth quarter, but we'd still expect it to be positive.
To your point, the first quarter would be pretty good because it's on a.
Lower comparable with the fourth quarter, just was and and <unk>.
Rolled some more sequential pricing.
And as we've said we've taken a conservative view on the second half for purposes certain that in the guide. So I mean, if we are in a more robust environment, which translates to a more robust cost environment. We have the ability to continue to to move pricing as needed as we've shown over the last couple of years. So I think we do have those levers.
If we need to pull them. It will all depend on kind of where we're at in time and space as we enter the back half of the year.
Alright, I appreciate it thanks.
Okay.
Thank you Steven.
With our next question comes from Brian <unk>.
<unk>, Brian Your line is now open.
Thank you good morning, guys.
<unk>.
It's encouraging to see renewable energy transitioning back to growth mode.
Yeah, certainly aligns with the market projections, we've seen.
On the wind energy side, and particularly for offshore.
I'm just curious in terms of the high single digit plus growth outlook.
For the sector, how does your team thinking about relative growth rates.
On the wind and solar side and I'm, assuming that your projections are going to be.
Back half weighted for the year.
Again specific to that space and how should we think about that cadence.
On the split between wind and solar for Us wind stronger we've had more.
We have more outgrowth tactics, there without more capital going into that space.
Both markets good.
And then Theres also within solar there's.
Probably a little more well there is a little more split between.
Fixed technology wins out over.
Rotate technology, and in which technology wins as well.
In in the solar channels. So we have a different mix, there and depending on which growth rate is whereas with wind we participate across that a little higher.
In.
And gear drive and direct drive, but we have good content across all of it. So we're more neutral on the technology side and we have more self help. So we would expect the growth rate to be higher on wind for the full year you wanted to talk about the cadence through the year, yes. It was going to say, Brian I think we've seen momentum build in and renewable wind and particularly the last couple of quarter.
So we would expect to be.
<unk> be at or even could even be slightly above that.
Right in the first quarter, just given the comp we'd be working off as well as the momentum we've seen in the last couple of quarters kind of building into the first.
Okay I appreciate the color there.
And then can you provide an update on <unk> and <unk> integration.
An offer.
More detail on sources and potentially the magnitude of synergies it sounds like there could be a little bit of heavy lifting to do there and then if we combine <unk> and <unk>.
Carryover with IRB contribution how much deal accretion.
Baked into the guidance understanding that nadella for the time being is not factored out.
Yes, maybe I'll take them in reverse order so.
Certainly some heavy lifting but also again family owned business for <unk>.
Several generations so.
When you look at our scale, our U S manufacturing presence, our purchasing power et cetera, et cetera, I think we're going to be able to bring.
Pretty quick synergies to that.
That being said going from the modest EBITDA margins. It joins us to process industries type margins will certainly probably be more 25, before we get up to that level, but I would expect improvement significant improvement in the run rate by the second half of this year and then another step up next year, but.
Sure we would before we would get to that.
A lot of.
Our synergies within that business for us DGB.
Similar.
<unk> integrated into our bearing business early priority was standing up some of the car.
Carve out from <unk>, and that's largely done and so we're operating largely without them.
Weaning ourselves off the transition service agreements there so really focused now on integrating that in.
Probably more emphasis so far on sales synergies and then the operational side.
But I think everything looks good there and we have a good plan in place for that this year and then it's been a.
Pretty light synergy case for <unk> that was really about entering a new product technology and a growing market.
So certainly there are some synergies in selling are our existing harmonic product along with their <unk> product, but they are largely different technical solutions for different applications.
And not a not an enormous amount of operational.
Synergies there so all three exciting and particularly since we didn't have in the Delta in the guide at all it I'll, let Phil clarify.
Accretion comment.
Yes, so specifically with <unk> would have been would have been in the guide.
The guide that we provided so that would be very very modestly accretive just given the size that delta will add both to the revenue as well as all the way down after it closes and from an accretion standpoint under the new definition, it would be likely depending on timing likely north of north of a nickel somewhere between sort of five five to 10 somewhere around.
There.
Okay. Appreciate it thanks again guys.
Thanks.
Thank you Brian .
With our next question comes from Michael Feniger from Bank of America. Michael Your line is now open.
Hey, guys.
Recognize you're taking a conservative approach.
The outlook with the lack of visibility.
On the pricing front, how much pricing just rolls into 2023 alone when we think of that 2% increase and can you just remind us in a typical year when do we normally see price increase and I know, it's different between OE and distribution last year was an abnormal year. So when we can.
Economy look like in a normal year.
When we think of when we see these price increases.
On a normal year, we would see our biggest sequential step up from Q4 to Q1.
And we've seen that in the abnormal years last couple of years as well the biggest sequential improvement.
From Q4 to Q1, but then we've had this steady sequential.
Growth from there.
And I would expect.
A modest step up from Q4 to Q1.
And then.
Further sequential pricing gains through the year like we've done the last couple of years I think the difference this year it could be if.
Steel prices moderate.
Then there would be a little more netting which again we factored into.
And of that more than 2% outlook for the year. So I think to the earlier question.
Comp lower because of the sequential in the first quarter. So we would expect a pretty good price realization in the first quarter.
Thank you and there is a fairly big acquisition in the industrial motion space are 13, 14 times EBITDA multiple way above where you're trading today, how big is industrial motion of your portfolio right now and I know, you've just announced a few acquisitions is there any view to slow.
That down integrate it maybe shift more can we purchasing.
Given that valuation discount of what we're seeing out there in the market to where your shares are trading.
Well comment I mean, we did purchase 4% of the outstanding shares last year, and we've been pretty active in the buyback market for the last seven or eight years and.
I don't think the acquisitions that we've done.
Would preclude us from doing that.
But I would I'll say, we don't think I'd say, either or answer and the answer is probably both and we've been and we.
We've been doing both yes, I would just to answer the question, Mike Industrial motion would be roughly $1 4 billion in revenue so well over 1 billion now and we've targeted getting up to $2 billion as rich said I think we are we like what those businesses are doing for our portfolio, which showed the slide of our five year.
Performance that part of our portfolio has contributed significantly to that performance and while there. While there is a big acquisition that's pending there are still.
We believe ample.
Acquisition opportunities out there for us to continue to move the needle. So I think youll see us continue to advance on the M&A front with disproportionate view towards industrial motion.
To build that out but still have the ability to buy back stock and we have systematically done that and as I mentioned we.
We allocated $900 million of capital across the board in 2022 and across all across all fronts buyback M&A dividends and Capex and we're in a great position to continue doing that as we move forward with our balance sheet in such strong condition.
Great and I'll just sneak in one last question.
Might have addressed this already I know theres a lack of visibility right. Now have you observed anything in January or early February that would provide cause of concern or Conversely signs of encouraging given some of the macro high level data points, we've seen out there. Thank you.
Okay.
Yes, I think I commented on this in my statement I mean, we're starting to hear very strong so I think in general the.
The environment that we're operating in here in the first week of February is a very positive one.
Okay.
Thank you.
Thanks, Mike Thank you.
Our next question comes from David Cummings from Goldman Sachs.
Sandy Dana your line is now open.
Great. Good morning, Thanks for the question.
Quickly on the APAC revenue growth in the quarter, another sequential acceleration in the rate of growth.
Probably skews a bit more positive or some of the other industrial rates you've gotten from that.
Channel around China over the last quarter or so so can you talk about how much of the growth. There right now is being driven by renewables versus any other kind of growth you're seeing across the rest of your end market mix.
Yes, certainly our Asia.
Business has become pretty pretty significant mix to renewable energy.
So our outlook there I think would continue to give us higher.
A more positive outlook as well as a more positive results then than peers with a more diversified market mix.
More industrial market mix, yes, I would say John when you look at the quarter I mean, we were up 19%. It was broad I mean, China was up high teens, India up high teens, the rest of Asia up in that in that range as rich said renewable but was by far the largest growth sector, but distribution was right behind it as we continue to see.
Positive.
Performance across distribution as well as other sectors. So it's been broad growth, but theres no question, particularly China is has been very renewables.
At least that's been the biggest driver in the last in the last few quarters.
Okay.
Thank you.
And at the end of the results and outlook the outlook for India is pretty strong in 'twenty three.
Okay. That's helpful. Thank you and maybe just one last one on the housekeeping side with the rest of the currency impact.
Called that out as a headwind I think to your margin, but next year I know it was still negative in the fourth quarter, but you did talk about some more challenging comps.
Prospective as well can you just talk about how impactful trends you might've been either as a tailwind or a headwind to margins in 2022, and then what you're kind of baking into the headwind for 2023.
Yes, I would just say dealing in 2022 with the movements in the currencies and on the transaction side, we had some transaction.
<unk> ability in 2022, which was actually it was a margin tailwind actually helped our margins in 2022 and really the non recurrence of that of those <unk>.
Positive gains in 2022 kind of not repeating in 'twenty three coupled with the.
The continued headwind on the top line is going to produce a year over year pretty significant headwind to margins just by the flip of that if you will from from one year to the next and so that's that's sort of baked into the guide and really just talk and taken a maybe a bigger step back the <unk>.
It sort of implies twentyish percent all in incrementals in that currency being a big headwind and then as you know M&A comes in at really an EBITA margin.
When you back it out or our organic incrementals with the pricing and the operational execution cost moderating I mean, the organic incremental implied in the guide would be much closer to that 30% versus 20, and I think that speaks to a lot of the work we've been doing the last.
Youre, plus and getting the price cost moving in our favor.
Very helpful. Thank you Phil.
Thanks, Tom Thanks.
Thank you Dan.
Our next question comes from Joe Ritchie from Goldman Sachs. Joe Your line is now open.
Thank you good morning, guys.
Good morning, Hey, Joe So.
Hi.
Yes. My first question just a clarification question.
So you're starting off the year with.
<unk> digit growth.
But then how does the midpoint of your guidance at 3% so.
It sounds like Youre expecting the second half to turn negative I just wanted to be clear that that is kind of like the expectation into your guide.
For the second half of the year.
Well I'd say, we're probably starting off the year closer to the high single digits price Theyre not theyre at the higher end of our guide so I'd start there so the year's off to a strong start if you, but yeah do go up high single digits.
And we're not expecting anything that would.
That's coming off of 10, so if you go from 10.
Seven and a half will be higher the low end of high single digits or eight or nine.
To get down in the fourth quarter, you're probably going to be down to a zero to one sort of number two to come to the midpoint of the guidance.
But I would say we're also as I said.
Starting the year pretty strong probably starting more towards the higher end of the guidance.
Yes, I would say Joe we like to think of it as is seen in the back half where sort of the outlook sort of implies a flattening out in the back half of the year as opposed to a decline in as we said we don't have great visibility beyond the second quarter. So we have to.
See how things develop over the next couple of months, how the order book fills in and then we will be able to.
Kind of assess.
Accurate that as we move through the year.
Yes.
That's helpful and I know you guys there.
Fairly short cycle business.
But because of supply chain issues. Some companies have had a little bit more visibility I guess bad debt.
Started the year than they normally would.
I'd love to hear maybe some comments around what your visibility is a little bit higher than normal today, and then also just kind of asking a more broad broader question like what why can't guarantee what's your biggest concern around the year.
But to hear your thoughts on that as well.
Yes.
I wouldn't say, we have significantly greater visibility than what we normally would I think the supply chain issues have reduced significantly there is still there I mean, when everybody had problems is operating in China in the fourth quarter as an example, and there's other issues out there so our backlog organically.
If you adjust for the acquisitions and divestitures is up modestly from where it was a year ago.
And our run rate of shipping is up again.
Again high single digits from where it was a year ago, but our backlog also peaks in around the middle of last year. So we have been liquidating backlog modestly.
So I would say we have very good visibility out for the next three or four months and.
The demand picture.
It looks quite good.
And our geographic walk we show that.
Europe was down modestly as Phil mentioned, if you adjust for Russia was up a little bit but that would include price. So if you <unk>.
Europe from a volume basis in the fourth quarter was down so that would be really the only geographic area.
That's that's soft.
It would come back and answer your last question, we want to feel really good about the position. We're in I think we're going to get off to a really good start.
The midpoint of guidance based again on I think a pretty cautious.
Softening in the second half and even that's a good result, and if we're in an excellent position that if we're being too cautious on it.
We'll capitalize on that.
And predicting.
These industrial AR.
Markets in inflections is not.
An easy task so focus on where we have the visibility and then really focus on.
And the earnings power and the revenue of the company through the cycle and I feel great about that so I think we're in a really good position, yes, maybe one other point Joe when you look at the backlog all in I mean, we're actually higher we ended the year higher than at the end of 2021. So we're sitting here with a stronger backlog than we had a year ago, and I think that that bodes well.
At least for the near term visibility.
Great. Thanks, guys.
Thanks, Joe.
Thank you Joe.
With our next question comes from Chris <unk> from loop capital.
Your line is now open.
Hey, good morning, guys. Thanks for taking the question.
I guess first off.
Phil You had mentioned we were talking about the margins in 'twenty three calling for flattish now I think on the last call, we're kind of hoping to be able to nudge that a bit higher in 'twenty three.
The moving parts there I mean, you called out.
Higher labor and material et cetera.
But really are there any investment costs keep in mind in that margin guide that they're stepping up in the new year, because again I assume for the most part the labor rates and FX was there anything kind of improved versus fourth quarter now.
Yes, I mean, it's a <unk>.
Great question, Chris I mean, as I think about we're always investing but I would say year on year, there's probably not a not a sizable headwind there, but as you think about some of the.
Put the currency aside because that will be a year on year negative I mean, youll see that in the work as we move through the year.
Can we talk about SG&A, we're going to have normal.
Labor increases.
Spending to support the higher levels.
For example, we're going to have higher pension expense just with the with the change in the discount rate and alike. So things like that talked a little bit about the mix with the OEM versus distribution and then on the manufacturing line still seeing still seeing some inflation there whether it's labor.
Should see better operational execution, but the other dynamic that's happening there is around.
A lot of the inflation, we've got hit within 'twenty. Two is working its way through the inventory I think that'll be a cost that is going to come through in 'twenty. Three frankly earlier in the year, we thought we might see some of that come through in 'twenty, two but we're planning on it now to come through in 'twenty three so that'll be on.
Not a permanent headwind, but that will certainly be a temporary headwind while it comes through so those are those are the main drivers kind of offsetting the positive price, we expect to get the material and logistics being down and then the other self help and other initiatives.
In addition to the modest volume kind of proppant is up but as I said organically, we would expect strong incrementals closer to 30% in 'twenty. It's just the combination of the.
Currency and the M&A that are just depressing a little bit.
Got you that's super helpful.
And then just kind of moving to process again, everything kind of outside of a bulk energy flattish, but I guess within that kind of other bucket automation has been kind of a standout or maybe any comments on automation kind of how that fits into process growth in the new year.
Yes automation I mean, I think thats a market, we still we still see good growth rich talked about spin out and talk about some of the other initiatives.
Going on there, but I mean that is a market that we would expect to grow its kind of inside the kind of inside the general industrial category that we have in the chart. There is a lot in general industrial but the automation piece, particularly factory automation, we expect to continue to see strong growth strong trends and that will be both.
And organic and inorganic opportunity for us as we move forward.
Yeah.
Got it thanks, so much and best of luck guys.
Thanks, Chris.
Thank you Chris.
No question at this time, so do you have any final comments or remarks.
Yes, Thanks, Glenn 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.
Thank you for participating in today's <unk> fourth quarter earnings release Conference call you may now disconnect.
Yeah.
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