Q3 2023 The Timken Co Earnings Call
Good morning, and welcome Ken Kenny third quarter earnings release Conference call.
My name is Lydia there'll be your conference operator today.
All lines have been placed on each prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply by Star then the number one on your telephone keypad.
If you'd like to enjoy your question Christa and the number Jay.
Okay.
Mr. <unk> you may begin your conference.
Thanks, Lydia and welcome everyone to our third quarter 2023 earnings Conference call. This is Neil phone Apple director of Investor Relations for the Timken Company. We appreciate you joining us today.
Before we begin our remarks. This morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results.
You can also access this material through the download feature on the earnings call webcast link.
With me today are the Timken company's president and CEO rich Kyle.
And Phil for Casa our Chief Financial Officer.
We will have opening comments this morning from both rich and Phil before we open up the call for your questions.
During the Q&A I would ask that you. Please limit your questions to one question and one follow up at a time to allow everyone a chance to participate.
During today's call you may hear forward looking statements related to our future financial results plans and business operations.
Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with 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 Good morning, and thank you for joining our call.
Timken delivered a solid third quarter and we remain on track to deliver another record year of revenue and earnings per share, while expanding full year margins.
Revenue was a record for the third quarter and was up around 1% from prior year.
EBIT margins were up 10 basis points and adjusted earnings per share were down 5%.
As expected demand soften sequentially as customers continue to reduce inventory levels and respond to an uncertain economic environment.
China in wind energy slowed more than anticipated and we're the leading contributors to the organic revenue decline.
We managed our cost structure, very well delivering 18, 9% EBITDA margins 10 basis point improvement over the prior year.
Inflation has moderated but remains persistent despite the.
Inflation price cost was positive in the quarter as it has been all year.
Free cash flow of $151 million was strong and up significantly from prior year.
We continue to execute our strategic initiatives, which are focused on operational excellence outgrowth and capital allocation.
This includes advancing our global manufacturing footprint in both engineered bearings and industrial motion.
We're on track to complete the consolidation of two facilities into existing operations by the end of the year.
We are also expanding our Mexico operations to begin the production of Timken belts early next year.
Our operational performance has recovered from Covid and supply chain challenges and we have excellent focus on driving improvement initiatives across our global operations.
We continue to invest in and advance our outgrowth initiatives. This includes launching new digital customer solutions and investing in our leadership in application engineering.
Application pipeline, which is the best measure of our future business opportunities continues to expand across the portfolio.
Our balance sheet remains strong and we continue to be very active in allocating capital growth and margin expansion opportunities.
We continue to invest capex into advancing our footprint automating, our operations, increasing efficiencies increasing capacity and expanding our product lines.
We completed the acquisitions of Rosa systemic desk case in the quarter Rosa systemic is our fourth acquisition in linear motion and brings complementary products and market positions to our rollout business.
Desk case expand our filtration offering within our automatic lubrication platform.
We also announced the pending acquisition of imac.
IMAX as a niche product line to our engineered bearings portfolio, specifically designed to serve the needs of energy markets.
Strategically and financially all three acquisitions fit very well within our timken portfolio brings strong cross selling and cost synergies.
These acquisitions bring well known brands with engineered products that enhance equipment reliability and life.
Last week, we announced the divestiture of a small bearing product line that are sold regionally in China.
The combination of these four transactions will strengthen our product portfolio, while adding about $50 million in revenue and will be immediately accretive to margins.
We also purchased about 1% of the outstanding shares in the quarter, bringing our year to date repurchase total to just under 4% of the outstanding shares.
Our balance sheet remains strong we expect excellent free cash flow in the fourth quarter and into 2024, and we expect to continue to add value through our disciplined capital allocation.
Also in the quarter, we published our annual corporate social responsibility report, which details our commitment to environmental sustainability and the products, we make across our global operations and through advancing industries, such as renewable energy.
We're also focused on the development and well being of our employees investing in community partnerships and promoting stem education to help advance the next generation of engineering talent.
Turning to the outlook, we are planning for further sequential slowing in the fourth quarter due to seasonality and from customers continuing to reduce inventory from supply chain stabilizing.
And we are expecting renewable demand in China to remain a headwind for the quarter.
We were planning for inflation to remain at similar levels and for price cost to stay positive.
We will continue to bring both our cost and inventory in line with the reduced volume levels.
We expect to generate both solid margins and strong cash flow in the fourth quarter. Despite the weaker revenue environment.
The midpoint of our guide reflects modest year on year improvement in margins despite lower volumes.
For the full year, we remain on track to deliver another year of record revenue and earnings per share with revenue up 5% and earnings per share up 7%.
Lydia: Good morning and welcome to Timken's third quarter earnings release conference call. My name is Lydia and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise.
While we're not ready to guide to the full year of 2024, we are planning for a sequential step up in demand from the fourth quarter to the first reflecting our normal seasonality as well as stabilizing channel inventory levels.
Lydia: After the speakers remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to enjoy your question, press star then the number two. Thank you.
We do not expect to rebound in the first quarter for China, primarily due to wind energy.
Across our portfolio customers remain generally positive on their 24 outlook, but also acknowledged that economic uncertainty remains elevated globally.
Byron Apple: Mr. Byron Apple, you may begin your conference. Thanks, Lydia and welcome everyone to our third quarter of 2023 earnings conference call.
And finally, I would like to reference slide 12 in the investor deck.
Timken strategy is focused on growing the earnings power and cash generation of the company at attractive and consistent EBIT margins and returns on invested capital.
Neil Frohnapple: This is Neil Frohnapple, 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 remain on track in 'twenty three to deliver another record year, both revenue and earnings and EBITDA margins approaching 20%.
Through both organic growth and consistent M&A, we have steadily grown the business with EBITDA margins that are very just 210 basis points over the last five years.
As we look ahead, we're confident in our long term growth and demand for timken products and technology.
And we are well positioned to continue to grow and perform at a high level through a wide variety of market conditions.
Neil Frohnapple: 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.com website.
I'll now turn it over to Phil to add more detail on the results and the outlook.
Okay, Thanks, rich and good morning, everyone for.
For the financial review I'm going to start on slide 14 of the presentation materials with a summary of our third quarter results.
Timken posted revenue of 1.1 dollars 4 billion in the quarter up almost 1% from last year.
Adjusted EBITDA margins came in at 18, 9% up 10 basis points.
And we delivered adjusted earnings per share of $1 55 in the quarter with adjusted ROIC approaching 15% over the trailing 12 month period.
Neil Frohnapple: We have included reconciliation between non-gap financial information and its gap equivalent and 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.
Turning to slide 15, let's take a closer look at our third quarter sales performance.
Organically sales were down 6% from last year as higher pricing was more than offset by lower volumes across multiple end markets and geographies, including China wind.
Rich Kyle: 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 our call. Timken delivered a solid third quarter and we remain on track to deliver another record year of revenue and earnings per share while expanding full year margins. Revenue was a record for the third quarter and was up around 1% from prior year.
The decline in China wind was larger than we expected and accounts for roughly one third of the total organic revenue decline.
Yeah.
Looking at the rest of the revenue walk the impact from acquisitions, including GGP Nadella therapy, and desk case net of divestitures contributed six percentage points of growth to the topline.
Foreign currency translation was a modest benefit to revenue in the quarter.
Rich Kyle: Even the margins were up 10 basis points and adjusted earnings per share were down 5%. As expected, demands often sequentially as customers continue to reduce inventory levels and respond to an uncertain economic environment. China and wind energy slowed more than anticipated and were the leading contributors to the organic revenue decline. We managed our cost structure very well, delivering 18.9% EBITA margins, a 10 basis point improvement over the prior year. Inflation is moderated but remains persistent.
On the right hand side of this slide you can see organic growth by region, which excludes both currency and the negative net impact of acquisitions and divestitures.
Let me comment briefly on each region.
In the Americas, we were down mid single digits against last year's strong third quarter, driven mainly by lower shipments in the off highway and distribution sectors as we expected.
In Asia Pacific, we were down double digits, driven entirely by lower revenue in China.
Rich Kyle: Despite the inflation, price cost was positive in the quarter as it has been all year. Free cash flow of $151 million was strong and up significantly from prior year. We continue to execute our strategic initiatives which are focused on operational excellence, outgrowth, and capital allocation. This includes advancing our global manufacturing footprint in both engineered bearings and industrial motion. We are on track to complete the consolidation of two facilities into existing operations by the end of the year.
Including the sizable decline in wind energy demand that I mentioned earlier.
And finally, we were close to flat in EMEA as lower general industrial revenue was almost fully offset by growth in other sectors.
Turning to slide 16, adjusted EBITDA in the third quarter was $216 million or 18, 9% of sales compared to $214 million or 18, 8% of sales last year.
Our margin performance reflects the benefit of positive price cost and strong operational execution, which more than offset the impact from lower volume and unfavorable currency.
Rich Kyle: We are also expanding our Mexico operations to begin the production of Timken belts early next year. Our operational performance has recovered from COVID and supply chain challenges and we have excellent focus on driving improvement initiatives across our global operations. We continue to invest in and advance our outgrowth initiatives. This includes launching new digital customer solutions and investing in our leadership and application engineering. Our application pipeline, which is the best measure of our future business opportunities, continues to expand across the portfolio.
Looking at the modest increase in adjusted EBITDA dollars there were several puts and takes.
We continue to benefit from lower material and logistics costs.
<unk> price mix and recent acquisitions.
These positives more than offset the impact of lower volume unfavorable currency and higher manufacturing costs.
Let me comment a little further on some of these key profitability drivers.
Rich Kyle: Our balance sheet remains strong and we continue to be very active in allocating capital growth and margin expansion opportunities. We continue to invest capex into advancing our footprint, automating our operations, increasing efficiencies, increasing capacity, and expanding our product lines. We completed the acquisitions of Rosa Systeme in just case in the quarter. Rosa Systeme is our fourth acquisition and linear motion and brings complementary products and market positions to our roll on business. Does case expands our filtration offering within our automatic lubrication platform?
With respect to price mix price realization was higher in both segments compared to last year, while mix was relatively neutral in the quarter.
Moving to material and logistics, both for lower year over year with logistics the bigger contributor.
Material, which includes both raw material and purchase components was down versus last year, but I would say that costs remain elevated by historical standards.
On the manufacturing line you can see that our year over year headwind continues to shrink as compared to what we've been running the last several quarters in.
Rich Kyle: We also announced the pending acquisition of IMEC. IMEC adds a niche product line to our engineered bearings portfolio specifically designed to serve the needs of energy markets. Strategically and financially, all three acquisitions fit very well within our tempting portfolio and bring strong cross-selling and cost synergies. These acquisitions bring well-known brands with engineered products that enhance equipment reliability and life.
In the third quarter were negatively impacted by lower production volume and ongoing cost inflation.
Partially.
<unk> operational execution and the plants.
Looking at the SG&A other line costs were up only slightly versus last year.
Our costs in the quarter were actually a bit lower than we initially expected driven by lower variable compensation expense and our efforts to reduce discretionary spending to better align with lower demand levels.
Rich Kyle: Last week we announced the divestiture of a small bearing product line that is sold regionally in China. The combination of these four transactions will strengthen our product portfolio while adding about $50 million in revenue and will be immediately accretive to margins. We also purchased about 1% of the outstanding shares in the quarter bringing our year-to-date repurchase total to just under 4% of the outstanding shares. Our balance sheet remains strong. We expect excellent free cash flow in the fourth quarter and in the 2024 and we expect to continue to add value through our discipline capital allocation.
And finally with respect to currency, we saw sizable year on year headwind as we expected driven by the favorable impact from transaction gains last year.
On Slide 17, you can see that we posted net income of $88 million or $1 23 per diluted share for the third quarter on a GAAP basis.
Which includes 32 <unk> of net expense from special items and acquisition amortization.
On an adjusted basis, we earned $1 55 per share compared to $1 63 per share last year.
Depreciation and interest expense were both higher versus last year and contributed to the decline in earnings per share.
Rich Kyle: Also in the quarter we published our annual corporate social responsibility report which details our commitment to environmental sustainability and the products we make across our global operations and through advancing industries such as renewable energy. We're also focused on the development and well-being of our employees investing in community partnerships and promoting STEM education to help advance the next generation of engineering talent. Turning to the outlook we are planning for further sequential slowing in the fourth quarter due to seasonality and from customers continuing to reduce inventory from supply chains stabilizing. And we are expecting renewable demand in China to remain ahead when for the quarter. We are planning for inflation to remain at similar levels and for price costs to stay positive.
While our adjusted tax rate was in line with our prior expectations.
And finally, we benefited from a lower share count in the quarter, reflecting buybacks completed in the past 12 months.
Now, let's move to our business segment results, starting with engineered bearings on slide 18.
For the third quarter engineered bearings sales were $776 million down slightly from last year.
Organically sales were down seven 8%.
Driven by lower volumes across most sectors.
Partially offset by higher pricing.
With respect to performance by sector, the renewable energy distribution and off highway sectors saw the largest declines in the quarter, driven mainly by inventory destock and difficult comps in the year ago period.
Rich Kyle: Joseph. We will continue to bring both our costs and inventory in line with reduced volume levels. We expect to generate both solid margins and strong cash flow in the fourth quarter despite the weaker revenue environment. The midpoint of our guide reflects modest year-on-year improvement in margins despite lower volumes. For the full year, we remain on track to deliver another year of record revenue and earnings per share with revenue up 5% and earnings per share up 7%.
General Industrial was also down while the on highway heavy industries and aerospace sectors were relatively flat.
On the positive side rail was up nicely in the quarter driven by higher shipments in the Americas.
The net effect of acquisitions and divestitures added seven percentage points of growth to the top line, while currency was relatively flat.
Rich Kyle: While we're not ready to guide to the full year of 2024, we are planning for a sequential step-up in demand from the fourth quarter to the first, reflecting our normal seasonality, as well as stabilizing channel inventory levels. We do not expect to rebound in the first quarter for China, primarily due to wind energy. Across our portfolio, customers remain generally positive on their 24 outlook, but also acknowledge that economic uncertainty remains elevated globally.
Engineered bearings adjusted EBITDA in the third quarter was $157 million compared to $154 million last year.
Our segment margin was up 50 basis points year over year as the impact of favorable price mix and lower material and logistics costs more than offset the impact of lower volume higher manufacturing costs and unfavorable currency.
Now, let's turn to industrial motion on slide 19.
In the third quarter industrial motion segment sales were $367 million up about 3% from last year.
Rich Kyle: And finally, I would like to reference slide 12 in the investor deck. Timken's strategy is focused on growing the earnings power and cash generation of the company at attractive and consistent EBITM margins and returns on invested capital. We remain on track in 23 to deliver another record year of both revenue and earnings at EBITM margins, approaching 20%. Through both organic growth and consistent M&A, we have steadily grown the business with EBITM margins that have varied just 210 basis points over the last five years.
Organically sales declined two 2%.
As lower volumes were partially offset by higher pricing.
With respect to performance by platform Belton chain saw the largest decrease in the quarter driven by inventory destock in the off highway and distribution sectors.
Linear motion was also lower reflecting softer industrial demand in Europe.
While couplings was relatively flat.
On the positive side, we saw strong growth and drive systems and services and continued growth in automatic lubrication systems.
Rich Kyle: As we look ahead, we're confident in the long-term growth in demand for Timken products and technology, and we are well-positioned to continue to grow and perform at a high level through a wide variety of market conditions.
The impact of acquisitions net of divestitures contributed just under 4% to the top line.
And currency translation was slightly positive in the quarter.
Phil Fracassa: I will now turn it over to Phil to add more detail on the results and the outlook. Okay, thanks Rich, and good morning everyone.
Industrial motion adjusted EBITDA for the third quarter was $75 million or 25% of sales compared to 68 million or 19, 1% of sales last year.
Phil Fracassa: For the financial review, I'm going to start on slide 14 of the presentation materials with a summary of our third quarter results. Timken posted revenue of 1.14 billion in the quarter up almost 1% from last year. Adjusted EBITM margins came in at 18.9% up 10 basis points, and we delivered adjusted earnings per year of $1.55 in the quarter with adjusted ROIC approaching 15% over the twelfth month period.
The sizable increase in margin was driven by the benefit of positive price cost and improved operational execution, which more than offset the impact of lower volume.
Turning to slide 20, you can see that we generated operating cash flow of $194 million in the quarter.
Free cash flow was $151 million up significantly versus last year as improved working capital performance more than offset higher cash taxes, including a large tax payment in September related to the Timken, India transaction, we completed in June.
Phil Fracassa: Turning to slide 15, let's take a closer look at our third quarter sales performance. Organically sales were down 6% from last year, as higher pricing was more than offset by lower volumes across multiple end markets and geographies, including China Wind. The decline in China Wind was larger than we expected and accounts for roughly one-third of the total organic revenue decline. Looking at the rest of the revenue walk, the impact from acquisitions, including GGB, Nadella, ARB, and desk case, net of investors, contributed 6 percentage points of growth to the top line, and foreign currency translation was a modest benefit to revenue in the quarter.
Looking at the balance sheet, we ended the quarter with net debt to adjusted EBITDA right at two times with leverage well within our targeted range and this includes the impact of the recent desk case and Rosa systemic acquisitions that were completed in September.
Turning to slide 21, you can see a summary of our capital deployment through the first nine months of 2023.
In total we've allocated around $900 billion of capital with roughly two thirds directed towards Capex and acquisitions to drive our profitable growth strategy.
We also returned $300 million of cash to shareholders year to date, including $90 million in the third quarter.
Phil Fracassa: On the right hand side of this slide, you can see organic growth by region, which excludes both currency and the net impact of acquisitions and investments. Richard's. Let me comment briefly on each region. In the Americas, we were down mid-single digits against last year's strong third quarter, driven mainly by lower shipments in the off highway and distribution sectors as we expected. In Asia Pacific, we were down double digits driven entirely by lower revenue in China, including the sizeable decline in wind energy demand that I mentioned earlier. And finally, we were close to flat in EMEA, as a lower general industrial revenue was almost fully offset by growth in other sectors.
We raised our quarterly dividend earlier this year and have bought back over two 7 million shares year to date or nearly 4% of total outstanding.
With the pending <unk> acquisition and other anticipated activity, we're on track to deploy over $1 billion of capital in 2023.
All while maintaining a strong balance sheet and leverage right in the middle of our targeted range.
This sets timken up well for the future.
Keeps us in a great position to continue to execute our strategy through capital allocation.
Now, let's turn to the outlook with a summary on slide 22.
We've updated our outlook for both sales and earnings to reflect softer end market demand, particularly in China as well as our expectation for continued channel inventory reductions in the fourth quarter.
Phil Fracassa: Turning to slide 16, Adjustity Vida in the third quarter was 216 million, or 18.9% of sales compared to 214 million, or 18.8% of sales last year. Our margin performance reflects the benefit of positive price costs and strong operational execution, which more than offset the impact from lower volume and unfavorable currency. Looking at the modest increase in Adjustity Vida dollars, there were several puts and takes. We continued to benefit from lower material and logistics costs, favorable price mix, and recent acquisitions. These positives were more than offset the impact of lower volume, unfavorable currency, and higher manufacturing costs.
With respect to the sales outlook, we're now planning for full year sales to be up five to five 5% in total versus 2022.
Down from our prior guide, reflecting a more modest expectation for organic growth and unfavorable currency impact.
Organically, we now expect revenue will be flat to up one half of 1% for the full year with.
With positive pricing offsetting lower volumes.
We expect acquisitions net of divestitures to contribute around 5% and three quarters percent to our revenue for the year up slightly from our prior guide to reflect the recent desk case, Rosa systemic and acquisitions offset by the TWD divestiture.
Phil Fracassa: Let me count on a little further on some of these key profitability drivers. With respect to price mix, price realization was higher in both segments compared to last year, while a mix was relatively neutral in the quarter. Moving to material and logistics both for lower year over year with logistics the bigger contributor. Material, which includes both raw material and purchase components, was down versus last year, but I would say that costs remain elevated by historical standards.
And we're now planning for currency to be a headwind of around 75 basis points for the full year based on September 30th spot rates.
This compares to a relatively neutral outlook and our prior guide.
On the bottom line, we now expect adjusted earnings per share in the range of $6 85 to $6 95.
This represents about 7% growth versus last year at the midpoint and would mark a new all time record for the company.
On the flip side, we're increasing our full year guidance for both adjusted EBITDA margins and free cash flow.
Phil Fracassa: On the manufacturing line, you could see that our year over year headwind continues to shrink as compared to what we've been running the last several quarters. In the third quarter, we were negatively impacted by lower production volume and ongoing cost inflation, offset partially by improved operational execution in the plants.
The midpoint of our earnings outlook implies at our 2023 consolidated adjusted EBITDA margins will be in the range of $19 five to 19, 6%. This.
This margin level with Mark a new high for the company for a full year.
Our margin expansion reflects our expectation that favorable price cost and improved execution will more than offset the impact of lower production volumes higher operating costs and unfavorable currency.
Phil Fracassa: Looking at the SG&A other line, costs were up only slightly versus last year. Our cost in the quarter were actually a bit lower than we initially expected, driven by lower variable competition expense and our efforts to reduce discretionary spending to better align with lower demand levels. And finally, with respect to currency, we saw a sizeable year on your headwind as we expected, driven by the favorable impact from transaction gains last year.
We will remain focused on controlling costs and driving operational excellence initiatives across the enterprise to drive strong and resilient margins going forward.
Moving to free cash flow, we now expect to generate approximately $425 million for the full year 2023.
Phil Fracassa: On site 17, you can see that we posted net income of $88 million or $1.23 per diluted share for the third quarter on a gap basis, which includes 32 cents of net expense from special items and acquisition amortization. On an adjusted basis, we earned $1.55 per share compared to a $1.63 per share last year. Depreciation and interest expense were both higher versus last year and contributed to the decline in earnings per share, while our adjusted tax rate was in line with our prior expectations. And finally, we benefited from a lower share account in the quarter, reflecting buybacks completed in the past 12.
Which is up from our prior guide and represents over 100% conversion on GAAP net income at the midpoint.
We're still planning for Capex at around 4% of sales and we expect our adjusted tax rate to remain in the range of 25, 5% to 26% for the full year both unchanged.
But we're now anticipating net interest expense of around $100 million for the full year up slightly from our prior guide to reflect our recent acquisitions.
And finally, I would point out that the guide assumes an average diluted share count of roughly 72 million shares for the full year.
So to summarize timken delivered solid results in the third quarter, despite more challenging business conditions and our team is executing well in this environment.
Phil Fracassa: Now let's move to our business segment results, starting with engineered bearings on slide 18. For the third quarter, engineered bearing sales were 776 million, down slightly from last year. Organically sales were down 7.8%, driven by lower volumes across most sectors, partially offset by higher pricing.
We're focused on finishing the year strong and we're confident in our ability to continue advancing our strategy as we head into 2020 for.
This concludes our formal remarks, and we will now open the line for questions operator.
Phil Fracassa: With respect to performance by sector, the renewable energy, distribution, and off highway sectors saw the largest declines in the quarter, driven mainly by inventory destock and difficult comps in the year of a period. General industrial was also down, while the on highway, heavy industries, and aerospace sectors were relatively flat.
Thank you. Please press star followed by the number one if you'd like to ask a question and ensure that your devices on me to likely when it short tend to speak.
Our first question today comes from Steve Volkmann of Jeffries.
Your line is open. Please go ahead.
Yeah.
Great. Good morning, guys. Thanks for taking my good morning, Steve.
Phil Fracassa: On the positive side, rail was up nicely in the quarter, driven by higher shipments in the Americas. The net effective acquisitions in the vestitures added 7 percentage points of growth to the top line, while currency was relatively flat. Engineering bearing adjusted even down the third quarter was 157 million, compared to 154 million last year. Our segment margin was up 50 basis point year over year, as the impact of favorable price mix and lower material and logistics costs more than offset the impact of lower volume, higher manufacturing costs, and unfavorable currency.
I wanted to ask to start with a big picture Big Picture question, Phil I think you or maybe.
Sorry, I don't remember, which one of you talked about around 200 basis points of margin volatility over the last five years is that the way to think about the markets. Obviously worried about a downturn I suppose some of it depends on how big a downturn, but in sort of a normal industrial cycle is that 200 basis points of volatility.
And margin the right way to think about the future as well.
Well I think as you said it depends on the.
Phil Fracassa: Now, let's turn to industrial motion on 519. In the third quarter, industrial motion segment sales were 367 million, up about 3% from last year. Organically sales declined 2.2%, as lower volumes were partially offset by higher pricing.
The speed and magnitude and depth, but yes, I mean, we think we can.
We've reached a new we're going to reach a new high watermark over the last decade.
We would aspire to hit a new low watermark Gwen.
Whenever that time comes so that would certainly.
Phil Fracassa: With respective performance by platform, Shelton chain saw the largest decrease in the quarter, driven by inventory destock in the off highway and distribution sectors. When near motion was also lower, reflecting softer, industrial demand in Europe, while couplings was relatively flat.
17, and a half ish percent would be a good.
Target for us if if we got into a tough market.
Okay, Great and then it feels like the sort of destocking out in the channels. The various channels. This may be a little bit more and maybe a little bit longer I don't want to put words in your mouth, but can you just talk about how much visibility you have there and how long.
Phil Fracassa: On the positive side, we saw strong growth in drive systems and services, and continued growth in automatic lubrication systems. The impact of acquisitions net of divestitures contributed just under 4% to the top line, and currency translation was slightly positive in the quarter. Industrial motion adjusted EBITDA for the third quarter was 75 million, or 20.5% of sales, compared to 68 million, or 19.1% of sales last year. The sizeable increase in margin was driven by the benefit of positive price cost, and improved operational execution, which more than offset the impact of lower volume.
You think this continues.
Yes, I'd say with the exception of wind it was a little bit more but but not any really big surprises in the in the third quarter and we did.
And we did expect it to continue in the fourth quarter, but a little bit more but China wind would be.
The bigger the bigger one we expect that to continue at least through the first quarter of 2004.
Interestingly on on wind.
Phil Fracassa: Turning to slide 20, you can see that we generated operating cash flow of 194 million in the quarter. Free cash flow was 151 million, up significantly versus last year, as improved working capital performance, more than offset higher cash taxes, including a large tax payment in September, related to the Timkin India transaction we completed in June. Looking at the balance sheet, we ended the quarter with net debt to adjust EBITDA right at two times, with leverage well within our targeted range.
We will we will actually with this guide we're still looking to be flat to last year's record level. So for the full year, it's really a.
Very good year for wind.
It was just outstanding first half.
Weak second half.
But the demand is still there the installs are still there, but it's definitely a classic overbilled situation there that we've got to get it through.
On the other the other channels, we don't have.
Great visibility, so certainly it could leak over into 'twenty, four but I think.
Phil Fracassa: And this includes the impact of the recent death case, and rose a systemic acquisition that were completed in September. Turner. Turned inside 21, you can see a summary of our capital deployment through the first nine months of 2023. In total, we've allocated around 900 million of capital, with roughly two-thirds directed toward CapEx and acquisitions to drive our profitable growth strategy. We also return 300 million of cash to shareholders year to date, including 90 million in the third quarter.
We're optimistic that most of that will be.
In a good position by the end of the year.
Certainly when you look at some of our customers that have posted results. Our sales through is doing worse than the numbers that they're putting out and extend there clearly are taking inventory out of the channels and we've seen this before and <unk>.
Most of them as I said remain.
Pretty bullish on the demand situation for next year.
Phil Fracassa: We raised our quarterly dividend earlier this year, and have bought back over 2.7 million shares year to date, or nearly 4% of total outstanding. With the pending IMAC acquisition and other anticipated activity, we are on track to deploy over one billion of capital in 2023, all along maintaining a strong balance sheet and leverage right in the middle of our targeted range. This set to tempt get up well for the future and keeps us in a great position to continue to execute our strategy through capital allocation.
Got it. Thank you guys I'll pass it on.
Thanks, Dave.
Our next question today comes from David Raso Evercore ISI. Please go ahead.
Hi, Thank you for the time I was curious you were giving a little bit of commentary on the first quarter and it looks like the organic negative six this quarter, you're implying a decline in the fourth quarter. Just curious how you are saying given that the last comments you just made about stills.
Phil Fracassa: Now, let's turn to the outlook with a summary on slide 22. We've updated our outlook for both sales and earnings to reflect software and market demand, particularly in China, as well as our expectation for continued channel inventory reductions in the fourth quarter. With respect to the sales outlook, we're now planning for full year sales to be up five to five and a half percent in total versus 2022. Down from our prior guide, reflecting in a more modest expectation for organic growth and unfavorable currency impact.
I am bullish to man or around 24, I'm just trying to get a sense. If you can give us an idea of how youre thinking about the cadence of organic sales decline as we get into 'twenty four.
Again, I'm not trying for a full year guide just your first quarter comments were interesting does the year over year decline in organic in the first quarter.
Les and does it accelerate and then a follow up the idea of pricing what carries over into 'twenty for any new pricing initiatives to start 24 that we should be aware of thank you.
Phil Fracassa: Organically, we now expect revenue will be flat to up one half of one percent for the full year, with positive pricing offsetting lower volumes. We expect acquisitions netted divestitures to contribute around five and three quarters percent to our revenue for the year, up slightly from our prior guide to reflect a recent death case rose a systemic and IMAC acquisitions offset by the TWB divestiture. And we're now planning for currency to be ahead wind of around 75 basis points for the full year based on September 30th spot rates.
Yes in the next year is going to make for some interesting comps and that we went from a if you look at this year. We started the year plus 11 organic in Q1 as you said, we're guiding to around minus eight to minus nine four.
Q4, so the first quarter comp is a challenge, particularly when you look at where we're going to end the year on a run rate level.
But fairly typical for us to jump up.
Phil Fracassa: This compares to a relatively neutral outlook in our prior guide. On the bottom line, we now expect adjusted earnings per share in the range of $6.85 to $6.95. This represents about seven percent growth versus last year at the midpoint and would mark a new all-time record for the company.
10% points percentage points sequentially from Q4 to Q1, and I would say to the more inventory in.
Pushout, we see from the fourth quarter and.
Again as long as underlying demand in the end markets is good it should set up for a better start.
To the first quarter, so how where we land sequentially off the fourth quarter or.
Phil Fracassa: On the flip side, we're increasing our full year guidance for both adjusted EBITDA margins and free cash flow. The midpoint of our earnings outlook implies that our 2023 consolidated adjusted EBITDA margins will be in the range of 19.5 to 19.6 percent. This margin level would mark a new high for the company for a full year. Our margin expansion reflects our expectation and favorable price cost and improved execution will more than offset the impact of lower production volumes, higher operating costs, and unfavorable currency.
We're not ready to call that but I would expect a sizeable step up with the exception again, it's called out we would expect to be down meaningfully in wind energy in China year over year off a very difficult comp in the first quarter.
From a pricing standpoint.
A lot of Thats in discussion right now and where we have annual contracts.
We have announced some end of year price increases in some of our distribution channels.
Phil Fracassa: We will remain focused on controlling costs and driving operational excellence initiatives across the enterprise to drive strong and resilient margins going forward. Moving to free cash flow, we now expect to generate approximately 425 million for the full year 2023, which is up from our prior guide and represents over 100 percent conversion on gap net income at the midpoint. We're still planning for CapEx at around 4% of sales, and we expect our adjusted tax rate to remain in the range of 25.5 to 26% for the full year, both unchanged, but we're now anticipating net interest expense of around 100 million for the full year, absolutely from our prior guide to reflect our recent acquisitions. And finally, I would point out that the guide assumes an average diluted share count of roughly 72 million shares for the full year.
We certainly expect a more modest price.
The level and 24 then.
And what we've had the last couple of years.
So right now, we'll just call it modestly positive and certainly less than what we've had the last couple of years, Yes, David I think to answer your question there will be a small amount of carryover from this year into next year and to Richard's comment depending on what happens relative to 'twenty four would be additive to that so our view would be would be.
Flat to up.
In 2004 at this point.
Thank you.
Yeah.
The next question today comes from.
I know of media research your line is open.
Thank you rich I think you addressed the channel inventory.
<unk> earlier, but I just wanted to come back to it when do you do you have a sense.
Phil Fracassa: So to summarize, Timken delivered solid results in the third quarter despite more challenging business conditions, and our team is executing well in this environment. We're focused on finishing the year strong and we're confident in our ability to continue advancing our strategy as we head into 2024.
As to.
Hi, Bob.
One are you seeing destocking at distributors and Oems. Both do you have a sense if the excess inventory equates to a month of sales or two or three or whatever it does for you guys if things turn south.
Lydia: This concludes our formal remarks, and we will now open the line for questions. Operator? Thank you.
Should we expect it.
That could potentially still be an issue come summer or do you really feel like Youre getting ahead of assuming no major a major downturn the end markets that youre getting to good levels I don't know how much visibility you have to OEM customers and distributors really.
Lydia: Please press star, follow by the number one if you'd like to ask a question, and ensure that your device is unneeded locally when it's your turn to sleep.
Steve Volkmann: Our first question today comes from Steve Valkman of Jeffrey. Your line is open. Please go ahead. Great. Good morning, guys. Thanks for taking my morning. I wanted to ask a start with a big picture question. I think you, or maybe, I don't remember which one of you talked about around 200 basis points of margin volatility over the last five years, is that the way to think about the markets, obviously, worried about a downturn?
Yes, we have we have good visibility there with distributors and.
If the underlying demand is good I think we're not far off there.
We were expecting and guiding to some.
Reductions further reductions in the fourth quarter, but <unk>.
Beyond that it's much more of a.
Steve Volkmann: I suppose some of it depends on how big a downturn, but in sort of a normal industrial cycle, is that 200 basis points of volatility in margin the right way to think about the future as well?
We don't have that level of granularity and.
But again you look in the in the.
In the earlier parts of the market and our sell through is.
As we look at what customers and peers et cetera, selling and where we're typically a few percentage points higher than in the last in this quarter.
And next quarter, we're probably mid mid single digits upper single digits below as I think most a lot of our customers would still be posting positive organic revenue.
Rich Kyle: Well, as you said, it depends on the speed and magnitude in depth, but, yeah, I mean, we think we can, you know, we've reached a new, we're going to reach a new high water mark over the last decade, and certainly would aspire to hit a new low water mark when, whenever that time comes. So, that would certainly, this 17 and a half-ish percent would be a good target for us if we get into a tough market.
Whereas we're down six in.
9% here the last couple of quarters.
So it's a little more speculative and wouldn't really be able to call whether its going to be done.
At the end of the fourth quarter or not.
Okay, perfect that was clear.
Question, just on inflation in the business and pricing.
The only one to have kind of slightly negative volumes and positive price.
A little bit curious into next year.
Rich Kyle: Okay, great. And then it feels like the sort of destocking out in the channels, the various channels is maybe a little bit more and maybe a little bit longer. I don't want to put words in your mouth, but can you just talk about how much visibility you have there and how long you think this continues? Yeah, I'd say with the exception of wind, it was a little bit more, but not any really big surprises in the third quarter, and we did expect it to continue in the fourth quarter, but a little bit more.
For one.
Do you need 2% pricing now are 3% pricing hours you didnt over the past 10 years, and then do you have a sense as to whether.
The cost pressures are enough that we can really expect that to come through from your competitors and I'll stop there. Thanks.
I would say our core input costs of raw materials steel energy really leveled off with.
Logistics have.
After a spike of comeback back down and steel as well spiked earlier than in the Covid supply chain challenges. So we saw some relief there but in total still.
Rich Kyle: But China wind would be the bigger one, we expect that to continue, at least through the quarter of 24. Interestingly on wind, we will actually, or with this guide, we're still looking to be flat to last year's record level. So, for the full year, it's really a very good year for wind. It was just an outstanding first half and a week, second half. But the demand is still there, the installs are still there.
Still see.
Higher than prior to 2020 wage pressures some benefit pressures in the U S.
But certainly moderating from what we saw in in.
In 'twenty, one and 'twenty two from a from a cost standpoint.
So as bill and I, both said I mean, we are expecting that we will need less price, but also don't see pricing going going backwards.
Rich Kyle: But it's definitely a classic over build situation there that we've got to get it through. You know, on the other channels, we don't have great visibility, so certainly it could leak over into 24, but I think we're optimistic that most of it will be, in a good position by the end of the year. And certainly when you look at some of our customers that have posted results, our sail through is generally Western, and then the numbers that they're putting out, and they're clearly taking inventory out of the channels, and we've seen this before. And most of them, as I said, remain pretty bullish on the demand situation for next year.
Do have some material clauses and currency clauses that if things went a different direction. If steel fell significantly you can see has passed some of that on next year that's not.
Not looking particularly are likely at the moment our costs are are basically just leveled off.
So feel pretty good about the.
Price cost dynamic as we head into next year and then the other element that we have and certainly in 'twenty, one and 'twenty two we did not pass pricing through for <unk>.
Inefficiencies that we had from the supply chain challenges from the Covid inefficiencies et cetera, and as I said in my comments I would say, we're now probably the.
Third quarter was.
The closest we've been operating at normal and not just operate in normal but also I think we've got a really good focus again on continuous improvement and driving improvement versus fighting supply chain challenges. So I would expect some self help from.
Steve Volkmann: Thank you, guys, I'll pass it on. Thanks, Steve.
David Raso: And that's questions today comes from David Raso of Evercore ISI. Please go ahead. Hi, thank you for the time. I was curious, you were giving a little bit of commentary on the first quarter, and it looks like the organic negative 6th quarter, you're implying 8-8th to climb in the fourth quarter. Just curious how you're seeing, given that the last comments you just made about, you know, still some bullish demand around 24, I'm just trying to get a sense if you can give us an idea of how you're thinking about the cadence over organic sales to climb as we get into 24.
From a cost standpoint in that regard next year as well, but I would expect to be more productive next year.
Thank you.
Thanks, Ron.
Our next question today comes from Steve Barger of Keybanc capital markets. Please go ahead.
Hi, Good morning. This is Jacob more on once the order thanks for taking the questions.
First I just wanted to talk to you the changes your organic growth slide I think you've already hit on the big mover in renewables.
David Raso: Again, I'm trying to pull your guide, just your first quarter comments are interesting. Does the year-to-year decline in organic in the first quarter lessened? Does it accelerate? And then the follow-up, the idea of pricing, what carries over into 24, any new pricing initiatives to start 24 that we should be aware of. Thank you.
Also looks like automotive and off highway dropped a slot and flat to down mid single digits. So can you talk can you provide some more detail on the factors driving our forecast changes in those other markets are there any UAW impacts and if so how much.
Yeah.
Yes, sure happy to do that I think youre exactly right. Those are the three main sectors that moved in renewable we talked about off highway is really more factoring in what we're expecting in terms of what occurred in Q3 relative to lower demand from inventory destock, and then sort of rolling that head into Q4, So continued inventory reduction softer.
Rich Kyle: Yeah, and the next year is going to make for some interesting comps, in that we went from, if you look at this year, we went, started the year plus 11 organic in Q1, as you said, we're guiding around them minus 8 to minus 9 for Q4. So the first quarter comp is a challenge, particularly when you look at where we're going to end the year on a run-rate level, but fairly typical for us to jump up at 10 plus percent points, percentage points sequentially from Q4 to Q1.
Demand <unk>, probably the biggest sector, but a little bit from some of the other sub sectors as well and then on automotive we did we did factor in any impact relative to the.
UAW strike in terms of our north American exposure being being down for.
For most of October although we do see that coming back online as we moved into November so not a huge impact, but it was enough to to nudge it over one com.
Rich Kyle: And I would say the more inventory and push out we see from the fourth quarter. Again, as long as underlying demand in the end markets is good, it should set up for a better start to the first quarter. So where we land sequentially off the fourth quarter, not ready to call that, but would expect a sizable step up. With the exception, again, it's called out, we would expect to be down, meaningfully, in wind energy in China, year over year, off a very difficult comp in the first quarter.
Yeah.
Great Thats. The only question for me. Thank you very much.
Thank you.
Our next question today comes from Tim Thein of Citi.
Your line is open.
Okay.
Thanks, Good morning, so just.
Rich Kyle: From a pricing standpoint, a lot of that's in discussion right now, and where we have annual contracts, and we have announced some of our individual price increases and some of our distribution channels, would certainly expect a more modest price level in 24 than what we've had the last couple of years. So right now would just call it modestly positive and certainly less than what we've had the last couple of years. David, I think the answer to your question will be a small amount of carry-over from this year into next year, and the richest comment, depending on what happens relative to 24, would be additive to that. So our view would be flat to up in 24 at this point.
Circling back yet again on renewables in China wind.
Clearly that.
Harder than you thought I think Kevin somewhere to one of your European competitors, but maybe.
Rich just talk.
More broadly beyond China, I know that historically has been where a lot of the exposure for.
<unk> has been but it can.
David Raso: Thank you.
Comes on the heels overnight.
Cancellations.
Offshore projects here in the U S and some of them.
The outlooks in some of the solar markets.
Hence turn down and so I'm, just curious I guess more of a bigger picture thought in terms of your.
But how.
How quickly this.
From a growth perspective, and then it.
Just a temporary push out or do you still feel confident in terms of that.
Higher growth rate that we've spoken to in the past.
Robert Wertheimer: The next question today comes from Wertheimer of Media Research. Your line is open. Thank you. Rich, I think you addressed the channel inventory question earlier but I just wanted to come back to it. Do you have a sense as to how high, well for one, are you seeing these stock at distributors in OEMs both? Do you have a sense if the excess inventory equates to a month of sales or two or three or whatever it does for you guys if things turn south?
Yes, I still feel confident about it and as you look over our 15 year history. It's it certainly never been a linear growth path like.
Like most of our markets it has a cyclical element in.
This is not the severity of this and we're bigger now than we used to be and it is a little a little more abrupt.
Not uncommon for us to.
To have a off year every so often and again my earlier comment.
Actually we're going to be for the full year flat.
Robert Wertheimer: Should we expect it, did it potentially still be an issue come summer or do you really feel like you're getting ahead of assuming no major, major downturn in markets so you're getting to good level. I don't know how much visibility you have at OEM customers and distributors really. We have good visibility there with distributors and if the underlying demand is good, I think we're not far off there. We're expecting and guiding to some further reductions in the fourth quarter but beyond that it's much more of a, we don't have that level of granularity.
Flat to possibly slightly up this year in in wind.
Our customer base is largely in Asia, and Europe, even for the U S. Installs are product is usually going through the European and Asian supply chain.
So I would say the global wind market.
Has slowed China, just being the most dramatic part of it.
You know as you look out the I was actually in China in the third quarter met with several of the customers I think they all still they all certainly see it as a pause are all continuing to invest in the space.
Robert Wertheimer: But again, you look in the earlier parts of the market and ourself through as we look at what customers and peers etc are selling and we're typically a few percentage points higher and in the last in this quarter and next quarter we're probably mid single digits, upper single digits below because I think most of our customers would still be posting positive organic revenue whereas we're down six and nine percent here the last couple quarters.
The world is going to need a lot more renewable energy in the coming decade in decades.
So I'm still very optimistic on the market long term not ready to call. When this one pivots, we don't expect that as I said to be in the first quarter, but I believe it will return to.
To grow sooner rather than rather than later and I would only add Tim.
Tim Obviously wind was the area, where we saw softness but now outside of China. When the rest of the world relative to the total renewables business, which would include solar obviously wins the bigger of the two but was relatively stable so to Richard's point the markets.
Rich Kyle: So it's a little more speculative and you know we wouldn't really be able to call whether it's going to be done at the end of the fourth quarter or not.
Holding up reasonably well outside of that.
Dynamic we are experiencing and when right now which was I would say quite unusual.
Rich Kyle: Okay perfect that was clear. The second question is on inflation in the business and pricing. You're not the only one to have kind of slightly negative volumes and positive price. A little bit curious into next year for one you know do you need two percent pricing now or three percent pricing now whereas you didn't have it the past ten years and then do you have a sense as to whether the cost pressure or not that we can really expect that to come through from you and competitors and I'll stop there.
It's not unusual for it to be non linear but it was a pretty unusual build in hindsight in the first in the first half that's now creating this weakness in the second half so I think.
Richard It well the long term demand is going to be there. It's just really working through the inventory thats.
Quite significant in the channel right now.
Yeah, Okay understood and then.
Yesterday's news at this point, but.
Rich Kyle: Thanks. I would say our core input costs of raw material, steel, energy at really leveled off logistics after a spike have come back down and steel as well spiked earlier in the COVID supply chain challenges. So we saw some relief there but in total still see you know higher than prior to 2020 wage pressures some benefit pressures in the U.S. But certainly moderating from what we saw in in 21 and 22 from a from a cost standpoint.
Just looking at the geographic performance.
Good to have EMEA is the best.
The smallest relative <expletive>.
A decline I don't know it stands out to me anyway, what's going on there in terms of why.
Specific.
Your vertical or customer I think starts to comp that.
So some of Thats the comp in Europe.
Was down earlier in the comp is significantly easier from the quarter last year, Yes, I think thats exactly right I mean, when you look at it most of the sectors in Europe, we're sort of relatively flat year over year.
Rich Kyle: So as Phil and I both said and we are expecting that we will need less price but also don't see pricing going going backwards. We do have some material clauses and currency clauses that if things went a different direction it's still fell significantly. You could see us pass some of that on next year that's not not looking particularly likely at the moment the cost are basically just leveled off. So feel pretty good about the price cost dynamic as we head in the next year and then the other element that we have and certainly in 21 and 22 you know we did not pass pricing through for inefficiencies that we had from the supply chain challenges and from the COVID inefficiencies etc and as I said my comments I would say were now probably third quarter was the closest we've been to operating at normal and not just operating at normal but also I think we've got a really good focus again on continuous improvement and drive improvement versus fighting supply chain challenges so I would expect some self help from a cost standpoint in that regard next year as well and I would expect to be more productive next year.
Really sort of stuck out was we were down a little bit.
In linear motion in the industrial sectors in Europe, offset by automatic lubrication systems still continues to do well there. So that those are really the two biggest puts and takes and then relative flatness across the other sectors, which again against last year's easier comp, but it was nice to see stability there.
Rich Kyle: Thank you.
Jacob Moran: Thanks Ram.
And to that point just to add on that.
Last year's third quarter was a was a particularly challenging comp or our organic growth actually accelerated in the third quarter. As you recall that was really when a lot of supply chains flushed out for lack of a better word and we caught up so it was our strongest year over year organic growth quarter.
Last year and it was a challenging comp for us this year and it was and again. It was it was a good comp from a European standpoint, but not as strong as is the rest of the world.
Okay. Thank you.
Thanks, Tim.
Our final question today comes from Michael Feniger of Bank of America. Your line is open.
Okay.
Alright.
Yes, thanks for.
Excuse me in guys. Just you mentioned, obviously theres a lot of confidence about inventory destocking.
<unk> distributors I'm, just curious bill if.
Rich Kyle: And next question today comes from Steve Barger of Keybank Capital Market. Please go ahead.
You can kind of touch on your own inventories.
Do you think they will.
Cleared out by Q4 could that maybe linger a little bit in 'twenty four cost and much of what you are talking about the customer inventory process.
Phil Fracassa: Hi, good morning. This is Jacob Moran, from Steve Arder, thanks for taking the questions. First, I just wanted to talk to the changes you order in organic growth slides. I think you've already hit on the big mover and renewables, but it also looks like automotive and off highway drop to slot and flat to down mid single digits. So can you talk, can you provide some more detail on the factors driving your forecast changes in those other markets?
Yeah sure Mike So we were able to take inventory down in the third quarter and then actually drove a lot of the cash flow benefit we saw year over year was working capital coming down and we would say, we're still probably have a little bit more to do there and we will look to get after it.
Phil Fracassa: Are there any UAW impacts and if so, how much? Yes, sure. Happy to do that. So I think you're exactly right. Those are the three main sectors that moved and renewable we talked about. Off highway is really more factoring in what we're expecting in terms of what occurred in Q3 relative to lower demand from inventory D stock and then sort of rolling that head into Q4. So continued inventory reduction softer demand eggs, probably the biggest sector, but but a little bit from some of the other sub sectors as well.
In the fourth quarter and potentially depending on how things go. The first first part of next year, but we are steadily making really good progress in getting our inventory levels in line, but certainly a little bit more to go and I think that will that will drive another quarter.
Very strong free cash flow performance I mean, you hit the midpoint of that or hit the guide we put out there we will need to do free cash flow in the fourth quarter similar to the third and I think working capital will contribute once again.
Phil Fracassa: And then on automotive, we did we did factor in an impact relative to the UAW strike in terms of our North American exposure being being down for most of October, although we do see that coming back online as we moved into November. So not a huge impact, but it was enough to nudge it over one column.
Great and just.
No youre not giving guidance of 24, but just based on some of the acquisitions you've done how much rollover just on what you guys have completed kind of rolls over into 2024, and I think he might have commented on this earlier, but are those.
Acquisitions are accretive to margin.
Yes, I would say from a from a carryover standpoint, if you think.
Think about it kind of one ish percent carryover when you think of everything we've done during the year full year effect will be about a 1% tailwind. If you will have to the topline thats net of the <unk> divestiture and then I think relative to the margin performance I mean, certainly.
Phil Fracassa: That's the only question for me. Thank you very much.
Phil Fracassa: Thank you.
Michael Feniger: Thanks. Our next question today comes from can find all sticky. The line is open.
<unk> come in at various points and then certainly we have plans for all of them to get to our corporate average margins of the desk case off to a great start but in the quarter. The delta was plagued a little bit by European holidays in August and in GGP. We said it would take a little bit of time to get up to the corporate average so I would say net.
Phil Fracassa: Thanks. Good morning. So what just hit and circling back yet again on renewables and you know, trying to win. Clearly that hit harder than you thought. I think that was similar to one of your big European competitors, but maybe Rich just talked brought you know more broadly beyond China. I know that historically has been where a lot of the exposure for you has been, but you know it comes on that the heels overnight of some cancellations and you know offshore projects here in the US.
If you look at the acquisition bucket running a little bit below but certainly feel good about the M&A. We've done that comes in with very attractive margin profile and I think as we look ahead, we will see margin improvement on the acquisition line next quarter and then into 'twenty four look for it to improve even further.
Phil Fracassa: And some of the outlooks and some of the solar markets have turned down and some just curious, you know, I guess more of a bigger picture thought in terms of your, you know, how quickly this, you know, from a from a growth perspective, is it just a temporary push out or do you still feel confident in terms of the kind of that higher growth rate that we spoke into in the past. Yeah, I still feel confident about it.
And just to follow up with the M&A theme. Just you guys, obviously are generating the cash flow.
You leverage I think it now at two times, you've gotten back down just.
Is the plan to continue to kind of at this pace next year just curious how that pipeline is looking how are you guys kind of thinking about this next year.
I would say the plan is to continue.
Phil Fracassa: And as you look over our 15th year history, it's certainly never been a linear growth path like, like most of our markets, it has a cyclical element and, and this is not the severity of this and we're bigger now than we used to be in it is a little, a little more abrupt. Not uncommon for us to to have a off year every so often. And again, my earlier comment, we're actually looking to be for the full year flat, flat to possibly slightly up this year in, in when, you know, our customer base is as largely in Asia and Europe, even for the US installs.
We had more.
Acquisitions this year tended to be on the smaller side I think the preference would probably be a little fewer and.
A little larger but in terms of total revenue, yes, we would expect to continue to be.
Active next year.
Great. Thank you.
Thanks, Mike.
As a final reminder, if you'd like to ask a question today. Please press star followed by the number one on your telephone keypad.
There are no further questions at this time that you have any final comments or remarks.
Phil Fracassa: Our product is usually going through the European and Asian supply chain. So I would say the global wind market has slowed China just being the most dramatic part of it. As you look out, I was actually in China in the third quarter, met with several of the customers. I think they all certainly see it as a pause. They're all continuing to invest in the space. The world is going to need a lot more renewable energy in the coming decade and decades.
Yes. Thanks, Lydia Thank you for 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 and Timken third quarter earnings release Conference call you may now disconnect.
[music].
Phil Fracassa: So I'm still very optimistic on the market long term, not ready to call, you know, when this one pivots, we don't expect it, as I said, to be in the first quarter, but I believe it will return to grow sooner rather than, rather than later. Yeah, and I would only add, Tim, you know, I was obviously wind was the area where we saw softness, but outside of China, wind, you know, the rest of the world relative to the total renewables business, which would include solar, obviously winds the bigger of the two, but was relatively stable.
Yeah.
Okay.
Phil Fracassa: So to Rich's point, you know, the market's holding up, you know, I would say reasonably well outside of that dynamic we're experiencing and wind right now, which was, you know, I would say quite unusual. As Rich said, it's not unusual for it to be nonlinear, but it was a pretty unusual build in the, in hindsight, in the first, in the first half, that's now creating this, this weakness in the second half.
Phil Fracassa: So I think Rich had it well, the long-term division's going to be there. It's just really working through the inventory that's, you know, quite significant in the channel right now. Yeah, okay, understood. And then this is, you know, yesterday's news at this point, but just looking at the geographic performance, I mean, to have Amia as the best, or that, you know, the smallest relative decline, I don't know, stands out to me anyway.
Phil Fracassa: What's going on there in terms of what, you know, specific, you vertical or customer, what do you mean? I think so, I have the confidence that some of that's the confidence that Europe was down earlier and the confidence significantly easier from the quarter last year. Yeah, I think that's exactly right. When you look at it, most of the sectors in Europe were sort of relatively flat, year over year, and what really sort of stuck out was, we were down a little bit in linear motion in the industrial sectors in Europe, offset by automatic lubrication system still continues to do well there.
Phil Fracassa: So that, those are really the two biggest puts and takes, and then relative flatness across the other sectors, which again, against last year's easier comp, but it was nice to see the stability there. And to that point, just add, on that, last year's third quarter was a particularly challenging comp, our organic growth actually accelerated in the third quarter. As you recall, that was really when a lot of the supply chains flushed out, like we better work, and we caught up.
Phil Fracassa: So it was our strongest year over your organic growth quarter last year, and it was a challenging comp for us this year. And again, it was a good comp from a European standpoint, but not as strong as the rest of the world. Okay, thank you. Thanks Tim.
Phil Fracassa: I find a question today comes from Michael Feniger of Bank of America. Your line is open. Yes, thanks for raising me in, guys. Just, you mentioned obviously there's a lot of conscious about inventory stockings, OEMs, distributors. I'm just curious, Phil, if you can kind of touch on your own inventories. Do you think you'll get that cleared out by Q4? Could that maybe linger a little bit in 24 kind of similar to what you're talking about with the customer inventory process?
Phil Fracassa: Yes, sure, Mike. So we were able to take inventory down in the third quarter, and that actually drove a lot of the cash flow benefit we saw year over year was working capital coming down. And if you know, we would say we're still probably going to have a little bit more to do there, and we'll look to get after it in the fourth quarter, and potentially depending on how things go, the first part of next year.
Phil Fracassa: But we're steadily making really good progress at getting our inventory levels in line, but certainly a little bit more to go. And I think that'll drive another quarter, you know, a very strong free cash flow performance. I mean, hit the midpoint or hit the guide we put out there will need to do free cash flow in the fourth quarter, similar to the third. And I think working capital will contribute once again.
Phil Fracassa: Great, and just I know you're not giving guidance in 24, but just based on some of the acquisitions you've done, how much roll over just what you guys have completed kind of rolls over into 2024. And I think you might have commented on this earlier, but are those acquisitions accreted to margin? Yeah, I would say from from a carryover standpoint, if you think about a kind of 1% carryover, when you think of everything you've done during the year, full your effect will be about a 1% tailwind, if you will, to the top line.
Phil Fracassa: That's net of the TVB divestiture. And then I think you're relative to the margin performance. I mean, certainly a lot of come in at various points. And then certainly we have plans for all of them to get to our corporate average margin. So the death case software, great start. But in the quarter, you know, Nadella was plagued a little bit by European holidays and in August and in GGB, we said we'd take a little bit of time to get up to the corporate average.
Phil Fracassa: So I would say, you know, net net, if you look at the acquisition pocket, running a little bit below, but certainly feel good about the MNA we've done. And I met comes in with very attractive margin profile. And I think as we look ahead, we'll see margin improvement on the acquisition line next quarter and then into 24. Look for it to improve even further. And just to follow up with the MNA being just you guys obviously are generating the cash flow.
Phil Fracassa: You know, your leverage, I think, is now two times you've gotten back down just is a plan to continue kind of at this pace next year, just kind of curious how that pipeline is working. How you guys are kind of thinking about this next year. I would say the plan is to continue. We've had more acquisitions this year tended to be on the smaller side. I think the preference would probably be a little fewer and a little larger, but in terms of total revenue, yeah, we would expect to continue to be. Thank you. As a final reminder, if you'd like to ask a question today, please press star, followed by the number one on your telephone keypad now. There are no further questions at this time.
Lydia: Sir, do you have any final comments or remarks? Yeah, thanks, Lydia. Thank you for 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 Timken's third call to earnings release conference call.
Lydia: You may now disconnect.