Q1 2024 The Timken Co Earnings Call

April 30, 2024

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Lydia: Good morning all, my name is Lydia, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Timken's first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise.

Lydia: Good morning all. My name is Lydia, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Timken's first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise.

Good morning, All my name is Lydia and I'll be your conference operator today.

Lydia: This time I'd like to welcome everyone to 10 pins first quarter earnings release Conference call.

Lydia: All lines have been placed on mute to prevent any background noise.

Lydia: After the speaker's 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 withdraw your question, please press star, then the number two. Thank you. Mr. Almblad, you may begin your comments.

Lydia: After the Speakers' remarks, there'll be a question and answer session.

Almblad: I'd like to ask a question during this time and People's Star then the number one on your telephone keypad.

Almblad: If you'd like to withdraw your question. Please press Star then the number Jay.

Almblad: Mr. I'm glad you may begin your conference.

Megan Elmblad: Thanks, Lydia. And welcome everyone to our first quarter 2024 earnings conference call. This is Megan Elmblad, Interim Manager of Investor Relations for the Timken Company. We appreciate you joining us today.

Meghan Elmblad: Thanks, Lydia. And welcome everyone to our first quarter 2024 earnings conference call. This is Meghan Elmblad, Interim Manager of Investor Relations for the Timken Company. We appreciate you joining us today.

Almblad: Thanks, Lydia and welcome everyone to our first quarter 2024 earnings conference call.

Megan Elmblad: This is Mike Glenn interim manager of Investor Relations for the Timken Company. We appreciate you joining us today.

Meghan Elmblad: 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 Philip Fracassa, 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.

Meghan Elmblad: 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.

Megan Elmblad: Can also access this material through the download feature on the earnings call webcast link.

Meghan Elmblad: With me today are the Timken company's president and CEO, rich, Kyle and silver copper, our Chief Financial Officer.

Megan Elmblad: We will have opening comments this morning from both rich and Phil before we open up the call for your questions.

Meghan Elmblad: During the Q&A, I would ask that you please limit your question 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.

Meghan Elmblad: 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.

Megan Elmblad: During today's call you may hear forward looking statements related to our future financial results plans and business operations.

Megan Elmblad: Our actual results may differ materially from those projected or implied due to a variety of factors.

Megan Elmblad: 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.

Meghan Elmblad: We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by the Timken Company, and without express written consent, we prohibit any use, recording, or transmission of any portion of the call. 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.

Meghan Elmblad: We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials.

Megan Elmblad: 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.

Megan Elmblad: With that I would like to thank you for your interest in the attempt and company and I will now turn the call over to rich.

Richard G. Kyle: Thanks, Meghan. Good morning, and thank you for joining our call. Timken delivered a solid first quarter with organic revenue in line with industrial market conditions and strong margin performance. Our results continue to demonstrate the strength and diversity of our portfolio and the successful execution of our strategy. Revenue was down 9% organically from last year's record first quarter, driven by the significant decline in wind energy in China that began mid last year, excluding the impact of wind. Organic revenue would have been down less than 4% excluding wind. I'll talk more about wind in a moment.

Lydia: Thanks Megan.

Megan Elmblad: And thank you for joining our call.

Meghan Elmblad: Timken delivered a solid first quarter with organic revenue in line with the industrial market conditions and strong margin performance.

Meghan Elmblad: Our results continue to demonstrate the strength and diversity of timken portfolio and the successful execution of our strategy.

Meghan Elmblad: Revenue was down 9% organically from last year's record first quarter driven by the significant decline in wind energy in China that began mid last year.

Meghan Elmblad: To frame up the impact of wind.

Meghan Elmblad: Organic revenue would have been down less than 4%, excluding when I will talk more about when in a moment.

Richard G. Kyle: While organic revenue increased around 8% sequentially from the fourth quarter, we attribute that to normal seasonality. In aggregate, we didn't see any significant strengthening of markets or orders to start the year. Across that 4%, most other markets were down as the softness that started in the second half of last year continued through the first quarter.

Megan Elmblad: While organic revenue increased around 8% sequentially from the fourth quarter, we attribute that to normal seasonality.

Meghan Elmblad: In aggregate, we didnt see any significant strengthening of markets were orders to start the year.

Meghan Elmblad: Cross that 4% most other markets were down as the softness that started in the second half of last year continued through the first quarter.

Richard G. Kyle: Notable exceptions included aerospace, rail, services, and India, all of which were up from the prior year. Including acquisitions and currency, revenue was down less than 6%. First quarter cash flow was seasonably weak, but this will increase through the year, and we remain confident in the cash generation of the business. Even margins of 20.7% were down just 30 basis points from last year despite the organic revenue decline. There were several contributing factors to the margins that I'd like to highlight.

Meghan Elmblad: Notable exceptions included Aerospace rail services in India, all of which were up from prior year.

Meghan Elmblad: Excluding acquisitions and currency revenue was down less than 6%.

Meghan Elmblad: First quarter cash flow was seasonally weak, but this will increase through the year and we remain confident in the cash generation of the business.

Meghan Elmblad: EBITDA margins of 27% were down just 30 basis points from last year, despite the organic revenue decline.

Meghan Elmblad: There were several contributing factors to the margins that I would like to highlight.

Richard G. Kyle: First, we have made significant progress over the last decade to diversify and steadily improve the Timken portfolio, which continues to result in greater performance on both the top and bottom lines. This includes the six acquisitions we completed last year, which contributed positively to the results in the quarter. Second, we are benefiting from our investments in operational excellence and other self-help initiatives. Our Mexico operation is one example.

Meghan Elmblad: First we have made significant progress over the last decade to diversify and steadily improved the timken portfolio, which continues to result in greater performance in both the top and bottom lines.

Meghan Elmblad: This includes the six acquisitions, we completed last year, which contributed positively to the results in the quarter.

Meghan Elmblad: Second we are benefiting from our investments in operational excellence and other self help initiatives, our Mexico operation as one example, the bearing plant ramped up through last year and is now performing well and contributing to year over year results.

Richard G. Kyle: The bearing plant ramped up through last year and is now performing well and contributing to year-over-year results. Acquisition synergies are also helping margins. Margins are up at several of our recent acquisitions, including Spinea, American Rollerbearing, and GGB, as we have successfully delivered cost synergies across the portfolio. Mix in price is also contributing to margins.

Meghan Elmblad: Acquisition synergies are also helping margins.

Meghan Elmblad: <unk> are up at several of our recent acquisitions, including Spinel American roller bearing and GGP as we've successfully delivered cost synergies across the portfolio.

Meghan Elmblad: Mix and price are also contributing the margins we came into the year expecting price to be modestly positive for the full year.

Richard G. Kyle: We came into the year expecting price to be modestly positive for the full year, less than 1%. We started the year well, and we still expect full year price to be positive. We also expect price-cost to be modestly positive for the full year as the pace of inflation, particularly in raw materials and logistics, has eased.

Meghan Elmblad: Less than 1%, we started the year, well and we still expect full year price to be positive.

Megan Elmblad: We also expect price cost to be modestly positive for the full year as the pace of inflation, particularly in raw material and logistics has eased.

Richard G. Kyle: And finally, we've been steadily improving operating performance the last two years as we've come out of COVID, supply chain, and inflation issues. We sequentially improved each quarter last year, and we continue to improve into the start of 2024. We are operating much better today than we were a year ago, and I would say that our supply chains are back to pre-COVID levels.

Meghan Elmblad: And finally, we have been steadily improving operating performance of the last two years as we've come out of Covid supply chain and inflation issues.

Meghan Elmblad: We sequentially improved each quarter last year, and we continued to improve into the start of 2024.

Meghan Elmblad: We were operating much better today than we were a year ago and when I would say that our supply chains are back to pre COVID-19 levels.

Richard G. Kyle: We also have a great focus on continuing this momentum through our CapEx spin and our Operational Excellence Initiative. We are also continuing to adjust our cost levels to the realities of demand. We lowered our headcount by about 8% through the course of last year, and we lowered another 2% during the first quarter. Earnings per share of $1.77 was down 15% from last year's record quarter.

Meghan Elmblad: We also have great focus on continuing this momentum through our capex spend and our operational excellence initiatives.

Meghan Elmblad: We're also continuing to adjust our cost levels to the realities of the demand we lowered our head count by about 8% through the course of last year and we lowered another 2% during the first quarter.

Megan Elmblad: Earnings per share of $1 77 was down 15% from last year's record quarter.

Richard G. Kyle: $1.77 marks the fourth highest quarter in company history. Both the earnings, as well as the 20.7% EBITDA margins in the face of a 9% decline in organic volume, reflect the strength and diversity of the portfolio, excellent execution, and the impact of years of consistent and effective capital allocation. The first quarter was a good start to the year in a challenging market environment. To add more color to the biggest challenge in our markets, I'll expand on our wind energy results. We signaled mid last year that after several years of very strong growth, we saw a significant decline in forward demand.

Meghan Elmblad: $1 77 marks the fourth highest quarter in company history.

Meghan Elmblad: Both the earnings as well as the 27% EBIT margins in the face of a 9% decline in organic volume.

Meghan Elmblad: Reflect the strength and diversity of the portfolio excellent execution and the impact of years of consistent and effective capital allocation.

Meghan Elmblad: First quarter was a good start to the year in a challenging market environment.

Meghan Elmblad: To add more color to the biggest challenge in our markets I'll expand on our wind energy results. We signaled mid last year that after several years of very strong growth. We saw a significant decline in forward demand.

Richard G. Kyle: Well, I won't share the specific figure, but our wind revenue was down over 50% in the quarter from last year's record level. The demand situation has stabilized at this level, but we do not see any imminent catalyst to return to growth, and our full year guidance doesn't reflect any improvement in the market through the course of the year. Again, the market appears to have stabilized. We don't expect further erosion in the market, and the comps get significantly easier in the third quarter, but we do not expect the remainder of the year to sequentially improve.

Meghan Elmblad: While I won't share the specific the specific figure our wind revenue was down over 50% in the quarter from last year's record level.

Meghan Elmblad: The demand situation has stabilized at this level, but we do not see any imminent catalyst to returned to growth in our full year guidance doesn't reflect any improvement in the market through the course of the year.

Meghan Elmblad: Again, the market appears to have stabilized we don't expect further erosion in the market and the comps get significantly easier in the third quarter, but we do not expect the remainder of the year to sequentially improve.

Richard G. Kyle: Longer term, we still believe in the growth of the global wind energy market, the value of our technology in making wind a reliable and cost-effective source of energy, the aftermarket potential of servicing our installed base, and our ability to profitably win in the wind market over the long term. I'd also like to point out that we absorbed the steep decline in wind revenue and the associated cost issues in the first quarter and still delivered 20.7%, even at a margin.

Meghan Elmblad: Longer term, we still believe in the growth of the global wind energy market the.

Megan Elmblad: The value of our technology, and making wind a reliable and cost effective source of energy.

Meghan Elmblad: The aftermarket potential servicing our installed base and our ability to profitably win in the wind market long term.

Meghan Elmblad: I'd also like to point out that we absorbed the steep decline in when revenue and the associated cost issues in the first quarter and still deliver 27% EBITDA margins.

Richard G. Kyle: Turning to the rest of the outlook, we are modestly increasing the outlook for the remainder of the year for revenue, margins, and earnings per share, but we are continuing to take a cautious outlook on second half revenue. Sequentially off the first quarter, we're planning for flattish revenue in Q2, and then seasonal declines in the second half of the year. From a year-over-year perspective, the comps get significantly easier in the third and fourth quarters.

Meghan Elmblad: Turning to the rest of the outlook, we are modestly increasing the outlook for the remainder of the year for revenue margins and earnings per share, but we're continuing to take a cautious outlook on second half revenue.

Meghan Elmblad: Sequentially off the first quarter, we're planning for flattish revenue in Q2, and then seasonal declines in the second half of the year.

Meghan Elmblad: From a year over year perspective, the comps get significantly easier in the third and fourth quarters.

Richard G. Kyle: We'll continue to adjust our operating costs and inventory levels down with revenue. We expect to deliver good margins for the year, despite the general market softness, and we expect to deliver a step-up in cash flow through the rest of the year. If markets are stronger than we were expecting, we will be able to pivot and capitalize as we've done before. Looking at the longer term, we remain confident in the growth potential for our portfolio, and we will continue to invest in our growth and margin initiatives. For example, we are advancing our digital capabilities. We completed two ERP upgrades in the first quarter and introduced new digital selling tools for distributors.

Megan Elmblad: We will continue to adjust our operating cost and inventory levels down with the revenue.

Megan Elmblad: We expect to deliver good margins for the year. Despite the general market softness and we expect to deliver a step up in cash flow through the rest of the year.

Meghan Elmblad: If markets are stronger than we were expecting we will be able to pivot and capitalize as we've done before.

Meghan Elmblad: Looking at the longer term outlook, we remain confident in the growth potential for our portfolio and we will continue to invest in our growth and margin initiatives.

Meghan Elmblad: For example, we are advancing our digital capabilities, we completed two ERP upgrades in the first quarter and introduce new digital selling tools for distributors. We also recently announced the expansion of our Mexico operation and the consolidation of several smaller manufacturing facilities to optimize our footprint.

Richard G. Kyle: We also recently announced the expansion of our Mexico operation and the consolidation of several smaller manufacturing facilities to optimize our footprint. Six acquisitions completed last year are performing well, and we continue to drive both revenue and cost synergies across all of the recent acquisitions. Our application engineering pipeline remains active as customers continue to invest in their next generation of equipment. Customers have turned to Timken as a development partner in advancing and differentiating their equipment designs. And as further support of that, Timken was recently recognized as one of the world's most innovative companies by Fast Company.

Meghan Elmblad: The six acquisitions completed last year are performing well and we continue to drive both revenue and cost synergies across all of the recent acquisitions.

Meghan Elmblad: Our application engineering pipeline remains active as customers continue to invest in their next generation of equipment.

Meghan Elmblad: Customers turned to Timken is a development partner and advancing and differentiating their equipment designs and is further supported that timken was recently recognized as being one of the world's most innovative companies by fast company.

Richard G. Kyle: Additionally, our portfolio is well positioned today to capitalize on several secular growth trends, including infrastructure spend, reshoring, defense, automation, and sustainability. We will also continue to create value through strong cash generation and the disciplined allocation of capital to CapEx, the dividend, M&A, and share repurchase. Our debt levels are about at the midpoint of our targeted leverage range, and when 2024 and 2025 cash flows are factored in, we have ample capacity to continue to add value through capital allocation with a bias to M&A.

Meghan Elmblad: Additionally, our portfolio is well positioned today to capitalize on several secular growth trends, including infrastructure spin reassuring defense automation and sustainability.

Megan Elmblad: We will also continue to create value through strong cash generation and the disciplined allocation of capital to Capex, the dividend M&A and share repurchases or.

Meghan Elmblad: Our debt levels are about at the midpoint of our targeted leverage range and when 'twenty 'twenty four and 'twenty five cash flow are factored in we have ample capacity to continue to add value through capital allocation with a bias to M&A.

Richard G. Kyle: Before I turn it over to Phil, I also want to comment on the upcoming CEO transition. The board is excited to welcome Tarak Mehta as Timken's next CEO in September. Tarak brings significant experience in global industrial markets, strong leadership skills, and a proven track record of creating value for all stakeholders. You will inherit a market-leading franchise that is both delivering results today and is poised for further growth in the future. You will also assume leadership of an executive team with a proven track record that is supported by 19,000 committed Timken employees around the world.

Meghan Elmblad: Before I turn it over to Phil I also want to comment on the upcoming CEO transition. The board is excited to welcome <unk> meta as Tim comes next CEO in September truck brings significant experience in global industrial markets strong leadership skills, and a proven track record of creating value for all stakeholders.

Meghan Elmblad: You will inherit a market leading franchise that has both delivering results today and is poised for further growth in the future.

Meghan Elmblad: You will also assume leadership of an executive team with a proven track record that is supported by 19000 committed timken employees around the world.

Richard G. Kyle: We'll provide more information about Turok and the leadership transition as we near September. Until then, we remain focused on delivering for our shareholders through current market softness while positioning for a return to growth. We remain committed to achieving the company's long-term financial targets and in scaling Timken as a diversified global industrial leader.

Megan Elmblad: We will provide more information about <unk> and the leadership transition as we near September until then we remain focused on delivering for our shareholders through the current market softness while positioning for a return to growth.

Meghan Elmblad: We remain committed to achieving the company's long term financial targets and in scaling Timken is a diversified global industrial leader Phil.

Philip D. Fracassa: Okay, thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on slide 10 of the presentation materials with a summary of our solid first quarter results, which further demonstrate the strength of Timken's business model and earnings power in dynamic environments. We posted revenue of just under $1.2 billion in the quarter, down 5.7% from last year. The first quarter adjusted EBITDA margin came in at 20.7%, down only 30 basis points year over year when we delivered adjusted earnings per share of $1.77 in the quarter. Turn to slide 11.

Rich: Okay, Thanks, rich and good morning, everyone for.

Meghan Elmblad: <unk> for the financial review I'm going to start on slide 10 of the presentation materials with a summary of our solid first quarter results, which further demonstrates the strength of timken business model and earnings power through dynamic environments.

Meghan Elmblad: We posted revenue of just under $1 2 billion in the quarter down five 7% from last year.

Meghan Elmblad: First quarter adjusted EBITDA margin came in at 27% down only 30 basis points year over year.

Meghan Elmblad: And we delivered adjusted earnings per share of $1 77 in the quarter.

Meghan Elmblad: Turning to slide 11.

Philip D. Fracassa: Let's take a closer look at our first quarter sales. Organically, sales were down 9.2% from last as continued positive pricing was more than offset by lower demand across multiple sectors, with wind energy experiencing the most significant decline in the quarter. If we exclude the decline in wind energy, our organic revenue would have been down less than four percent. Looking at the rest of the revenue walk, the impact of the six acquisitions we completed last year, none of which were divested, contributed four percentage points of growth to the top line, while foreign currency translation was a slight negative in the quarter. On the right-hand side of this slide, you can see organic growth by region, which excludes both currency and net acquisition. Let me comment briefly on each region.

Meghan Elmblad: Let's take a closer look at our first quarter sales performance.

Megan Elmblad: Organically sales were down nine 2% from last year.

Megan Elmblad: As continued positive pricing was more than offset by lower demand across multiple sectors.

Megan Elmblad: With wind energy experiencing the most significant decline in the quarter.

Meghan Elmblad: If we exclude the decline in wind energy, our organic revenue would have been down less than 4%.

Megan Elmblad: Yes.

Meghan Elmblad: Looking at the rest of the revenue walk the impact from the six acquisitions, we completed last year net of the one divestiture contributed four percentage points of growth to the top line.

Megan Elmblad: While foreign currency translation was a slight negative in the quarter.

Meghan Elmblad: On the right hand side of this slide you can see organic growth by region, which excludes both currency and net acquisition impact.

Meghan Elmblad: Let me comment briefly on each region.

Philip D. Fracassa: In the Americas, our largest region, we were down 4% against last year's strong first quarter. Most sectors were lower year-over-year, led by off-highway. While services and aerospace were both notably down, in Asia Pacific, we were down 21% driven by China, which saw the significant decline in wind energy that Rich talked about earlier. This was partially offset by double-digit growth in India on strong rail and industrial. And finally, we were down 9% in EMEA, as most sectors were lower, particularly in Western Europe, with Off-Highway and General Industrial posting the largest declines, while services were up. Turning to slide 12.

Meghan Elmblad: In the Americas, our largest region, we were down 4% against last year's strong first quarter.

Megan Elmblad: Most sectors were lower year over year.

Meghan Elmblad: Led by off highway.

Megan Elmblad: While services in aerospace, where both notably up.

Meghan Elmblad: In Asia Pacific were down, 21%, driven by China, which saw the significant decline in wind energy that rich talked about earlier.

Meghan Elmblad: This was partially offset by double digit growth in India on strong rail and industrial demand.

Meghan Elmblad: And finally, we were down 9% in EMEA.

Meghan Elmblad: As most sectors were lower particularly in western Europe with off highway and general industrial are posting the largest declines while services was up.

Meghan Elmblad: Turning to slide 12.

Philip D. Fracassa: Adjusted EBITDA in the first quarter was $246 million, or 20.7% of sales, compared to $266 million, or 21% of sales last year. Our strong margin performance reflects positive price costs and strong execution, which mitigated the impact of lower organic volume in the quarter. Looking at the decrease in adjusted EBITDA dollars, you can see that it was driven by lower volume, offset in large part by favorable price mix, lower material and logistics costs, favorable manufacturing and SG&A, and the Benefit of Acquisition. Let me comment a little further on some of the key profitability drivers in the course. Disrespect the price match.

Meghan Elmblad: Adjusted EBITDA in the first quarter was $246 million or 27% of sales compared to $266 million or 21% of sales last year.

Megan Elmblad: Our strong margin performance reflects positive price cost and strong execution, which mitigated the impact of lower organic volume in the quarter.

Meghan Elmblad: Looking at the decrease in adjusted EBITDA dollars, you can see that it was driven by lower volume.

Meghan Elmblad: Offset in large part by favorable price mix lower material and logistics costs.

Meghan Elmblad: <unk> manufacturing and SG&A.

Megan Elmblad: And the benefit of acquisitions.

Meghan Elmblad: Let me comment a little further on some of the key profitability drivers in the quarter.

Meghan Elmblad: With respect to price mix net pricing exceeded a 100 basis points in the quarter and was positive in both segments.

Philip D. Fracassa: Net pricing exceeded 100 basis points in the quarter and was positive in both segments, which was in line with our expectations. Mix was also positive, as several of our higher margin businesses outperformed others on the top line in the quarter. Moving to material and logistics costs, material was lower year over year, while logistics was slightly higher due in part to the shipping situation in the Suez Canal.

Meghan Elmblad: This was in line with our expectations.

Meghan Elmblad: Mix was also positive as several of our higher margin businesses outperformed others on the topline in the quarter.

Megan Elmblad: Moving to material and logistics costs material was lower year over year, while logistics was slightly higher due in part to the shipping situation in the Suez Canal.

Philip D. Fracassa: In manufacturing, you can see that we delivered a modest year-over-year benefit in a quarter despite continued labor inflation. This was driven by improved productivity, targeted cost actions, lower utility costs, and a favorable inventory change impact. Looking at the SG&A other one.

Meghan Elmblad: In manufacturing you can see that we delivered a modest year over year benefit in the quarter. Despite continued labor inflation.

Meghan Elmblad: This was driven by improved productivity targeted cost actions lower utility costs and a favorable inventory change impact.

Meghan Elmblad: Looking at the SG&A other line costs were down from last year, driven by lower incentive compensation accruals and reduced spending to align with the lower demand.

Philip D. Fracassa: Costs were down from last year, driven by lower incentive compensation accruals and reduced spending to align with the lower demand. This more than offset the impact of continued labor. And finally, on acquisitions, I would point out that acquisition netted divestitures contributed $13 million of adjusted EBITDA in the quarter, or a 26% margin on the net acquisition revenue, as our recent acquisitions performed well on both the top and bottom lines. On slide 13, you can see that we posted net income of $104 million, or $1.46 per diluted share for the first quarter on a gap basis, compared to $1.67 last year

Meghan Elmblad: This more than offset the impact of continued labor inflation.

Meghan Elmblad: And finally on acquisitions I would point out that acquisitions net of divestitures contributed $13 million of adjusted EBITDA in the quarter or 26% margin on the net acquisition revenue as our recent acquisitions performed well on both the top and bottom lines.

Meghan Elmblad: On Slide 13, you can see that we posted net income of $104 million or $1 46 per diluted share for the first quarter on a GAAP basis compared to $1 67 last year.

Philip D. Fracassa: The current period includes 31 cents of net expense from special items, which is comprised mainly of deal amortization. On an adjusted basis, we earned $1.77 per share compared to $2.09 per share last year. Let me touch on some of the below-the-line items. Interest expense in the first quarter was $7 million higher year over year, as we expect.

Meghan Elmblad: The current period includes 31 of net expense from special items, which is comprised mainly of deal amortization expense.

Meghan Elmblad: On an adjusted basis, we earned $1 77 per share compared to $2 <unk> per share last year.

Meghan Elmblad: Let me touch on some of the below the line items, if you will.

Megan Elmblad: Interest expense in the first quarter was 7 million higher year over year as we expected while our diluted share count was over 3% lower reflecting a net buyback activity over the past 12 months.

Philip D. Fracassa: While our dilute share count was over 3% lower, reflecting our net buyback activity over the past 12 months, our adjusted tax rate for the quarter came in at 27%, up from last year, driven by the net unfavorable impact of our geographic mix of earnings and other items. And finally, depreciation expenses were up slightly in the quarter versus last year, as was not controlling. Now let's move to our business segment results, starting with engineered bearings on slide 14.

Megan Elmblad: Our adjusted tax rate for the quarter came in at 27% up from last year, driven by the net unfavorable impact of our geographic mix of earnings and other items.

Meghan Elmblad: And finally depreciation expense was up slightly in the quarter versus last year as well as non controlling interest.

Meghan Elmblad: Now, let's move to our business segment results, starting with engineered bearings on slide 14.

Meghan Elmblad: In the first quarter engineered bearings sales were $803 million down 10, 9% from last year organically.

Philip D. Fracassa: In the first quarter, engineering bearing sales were $803 million, down 10.9% from last year; organically, sales were down 10.3% driven by lower demand across most, offset by higher prices. With respect to performance by sector, renewable energy saw the largest decline in the quarter against a difficult comp last year.

Megan Elmblad: Organically sales were down 10, 3% driven by lower demand across most sectors offset by higher pricing.

Meghan Elmblad: With respect to performance by sector renewable energy saw the largest decline in the quarter against a difficult comp last year.

Megan Elmblad: Other sectors were mixed.

Meghan Elmblad: Highway distribution in general and heavy industrial were lower while on the positive side rail aerospace and on highway auto and truck were all up versus last year.

Philip D. Fracassa: Other sectors were mixed. Off-highway, distribution, and general and heavy industrial were lower, while on the positive side, rail, aerospace, and on-highway auto and truck were all up versus last year. With a headwind of revenue of almost 1%, all acquisitions, net of the TWB divest, was just slightly fair. Engineering Bearings' Adjusted EBITDA in the first quarter was $181 million, compared to $204 million last year, with margins of 22.6% in both periods.

Meghan Elmblad: Currency was a headwind to revenue of almost 1% while acquisitions net of the TWD divestiture was just slightly favorable.

Meghan Elmblad: Engineered bearings adjusted EBITDA in the first quarter was $181 million compared to $204 million last year with margins of 22, 6% in both periods.

Meghan Elmblad: We delivered very strong margin performance in the quarter as favorable price cost and strong execution fully offset the impact of lower organic volume from a margin perspective.

Megan Elmblad: Okay.

Meghan Elmblad: Now, let's turn to industrial motion on slide 15.

Meghan Elmblad: In the first quarter industrial motion segment sales were $388 million.

Megan Elmblad: Up seven 1% from last year.

Philip D. Fracassa: We delivered very strong margin performance in the quarter as favorable price costs and strong execution fully offset the impact of lower organic volume from a margin. Now, let's turn to industrial motion on slide 50. In the first quarter, industrial motion segment sales were $388 million, up 7.1% from last year. However, organically, sales declined 6.5% as lower demand was partially offset by higher prices. Most of our platforms are lower year over year, with Belts and Chains seeing the largest decline given its exposure to the off-highway market.

Meghan Elmblad: <unk> sales declined six 5% as lower demand was partially offset by higher pricing.

Megan Elmblad: Most of our platforms were lower year over year with belts and chain seen the largest decline given its exposure to the off highway market.

Megan Elmblad: While services on the other hand was notably up on higher MRO Aerospace and other project revenue.

Meghan Elmblad: Acquisitions contributed over 13% to the top line, while foreign currency translation was relatively flat.

Meghan Elmblad: Industrial motion adjusted EBITDA in the first quarter was $82 million up from $77 million last year with.

Megan Elmblad: With margins of 21, 2% in both periods.

Meghan Elmblad: Similar to bearings, we delivered flat segment margins in industrial motion as lower organic volume was fully offset by favorable price cost improved execution and the benefit of acquisitions from a margin perspective.

Philip D. Fracassa: While Services, on the other hand, was notably up on higher MRO, aerospace, and other project revenues, acquisitions contributed over 13% to the top. However, our foreign currency translation was relatively flat. Industrial Motion Adjusted EBITDA in the first quarter was $82 million, up from $77 million last year, with margins of 21.2% in both periods. Similar to bearings, we delivered flat segment margins in industrial motion as lower organic volume was fully offset by favorable price costs, improved execution, and the benefit of acquisitions from a margin. Turning to slide 16.

Meghan Elmblad: Turning to slide 16.

Meghan Elmblad: You can see that we generated operating cash flow of $49 million in the quarter and.

Meghan Elmblad: And after Capex free cash flow was $5 million.

Meghan Elmblad: This was below last year due to lower earnings higher working capital a pension contribution and other items offset partially by lower cash taxes.

Meghan Elmblad: The first quarter is typically our seasonally low quarter for free cash flow.

Meghan Elmblad: We expect this we expect cash flow to step up significantly as we move through the rest of the year and as you'll see later, we are maintaining our free cash flow guidance for the full year.

Philip D. Fracassa: You can see that we generated operating cash flow of $49 million in the first quarter, and after CapEx, free cash flow was $5. This was below last year due to lower earnings, higher working capital, a pension contribution, and other items offset partially by lower cash tax. The first quarter is typically our seasonally low quarter for free cash flow.

Meghan Elmblad: Looking at the balance sheet. We ended the first quarter with net debt of just under 2 billion and net debt to adjusted EBITDA at two one times, both relatively unchanged from the end of last year.

Meghan Elmblad: Our net leverage remains well within our one five to two five times targeted range.

Philip D. Fracassa: We expect this, and we expect cash flow to step up significantly as we move through the rest of the year. And as you'll see later, we are maintaining our free cash flow guidance for the full year. Looking at the balance sheet, we ended the first quarter with net debt of just under $2 billion and net debt to adjusted EBITDA at 2.1 times, both relatively unchanged from the end of last year. Our net leverage remains well within our one and a half to two and a half times targeted range.

Meghan Elmblad: Speaking of capital allocation, we spent $44 million in capex in the quarter, which includes significant footprint expansions in Mexico and India.

Meghan Elmblad: We also paid our 407th consecutive quarterly dividend.

Meghan Elmblad: And we continue to integrate the six acquisitions, we completed in 2023.

Meghan Elmblad: All are contributing well, reflecting both operating performance and synergy capture.

Meghan Elmblad: For the rest of 2024, we intend to deploy capital towards acquisitions <unk> share buybacks, depending on the opportunity set.

Philip D. Fracassa: Speaking of capital allocation, we spent $44 million on CapEx in the quarter, which included significant footprint expansions in Mexico and India. We also paid our 407th consecutive quarterly dividend, and we continue to integrate the six acquisitions we completed in 2023. All are contributing well, reflecting both operating performance and synergy.

Meghan Elmblad: With our strong balance sheet and free cash flow timken remains in a great position to continue to execute our profitable growth strategy through smart and disciplined capital allocation.

Meghan Elmblad: Now, let's turn to our updated outlook for the full year with a summary on slide 17.

Meghan Elmblad: Given our first quarter performance and forecast for the rest of the year, we are increasing our outlook for revenue margins and earnings per share as compared to our initial outlook from back in February.

Philip D. Fracassa: For the rest of 2024, we intend to deploy capital towards acquisitions and or share buybacks, depending on the opportunity. With our strong balance sheet and free cash flow, Timken remains in a great position to continue to execute our profitable growth strategy through smart and disciplined capital allocation. Now let's turn to our updated outlook for the full year, with a summary on slide 17. Given our first quarter performance and forecast for the rest of the year, we are increasing our outlook for revenue, margins, and earnings per share as compared to our initial outlook from back in February.

Meghan Elmblad: Starting on the sales outlook, we're now planning for full year revenue to be down in the range of 2% to 4% in total versus 2023.

Megan Elmblad: This is a net improvement of 50 basis points compared to our previous outlook and reflects a positive change to the organic outlook and a negative change related to foreign currency.

Meghan Elmblad: There is no change to the outlook for M&A as we still expect last year's acquisitions net of divestitures to contribute around two 5% to the top line for the year.

Megan Elmblad: With respect to currency, we're now planning on a headwind of headwind to revenue of around 50 basis points for the full year based on current rates, which is down 100 basis points from February.

Philip D. Fracassa: Starting on the sales outlook, we're now planning for full-year revenue to be down in the range of 2 to 4% in total versus 2023. This is a net improvement of 50 basis points compared to our previous outlook and reflects a positive change to the organic outlook and a negative change related to foreign currency. There is no change to the outlook for M&A, as we still expect last year's acquisitions net of divestitures to contribute around two and a half percent to the top line for the year.

Megan Elmblad: So organically, we now expect revenue to be down 5% at the midpoint.

Meghan Elmblad: This is up 150 basis points from our prior guidance, reflecting improvement across several industrial sectors.

Meghan Elmblad: Offset partially by a lower outlook for renewable energy in China, and a slightly lower outlook for automation in Europe.

Megan Elmblad: The organic outlook implies a range of down 4% to 6% for the year.

Megan Elmblad: This assumes no recovery or inflection in the second half as we continue to take a relatively cautious view given macro uncertainty and our limited visibility.

Philip D. Fracassa: With respect to currency, we're now planning on a headwind to revenue of around 50 basis points for the full year based on current rates, which is down 100 basis points from February. So organically, we now expect revenue to be down 5% at the midpoint. This is up 150 basis points from our prior guide, reflecting improvement across several industrial areas offset partially by a lower outlook for renewable energy in China and a slightly lower outlook for automation in Europe.

Meghan Elmblad: On the bottom line, we now expect adjusted earnings per share in the range of $6 to $6 30.

Meghan Elmblad: Up 15% at the midpoint from our previous outlook.

Meghan Elmblad: Our revised outlook implies that our full year 2020 for consolidated adjusted EBITDA margin will be in the high eighteens percent range at the midpoint still.

Meghan Elmblad: Still down from last year, but margins are up from our prior guidance on the improved revenue outlook and related mix and expected strong execution.

Philip D. Fracassa: The Organic Outlook implies a range of down 4 to 6% for the year. This assumes no recovery or inflection in the second half, as we continue to take a relatively cautious view given macro uncertainty and our limited visibility.

Megan Elmblad: Yes.

Meghan Elmblad: Moving to free cash flow, we are reaffirming our full year outlook of approximately $425 million. This represents over 110% conversion on GAAP net income at the midpoint.

Philip D. Fracassa: On the bottom line, we now expect adjusted earnings per share in the range of $6 to $6.30, a $0.15 increase at the midpoint from our previous estimate. Our revised outlook implies that our full year 2024 consolidated adjusted EBITDA margin will be in the high 18% range at the midpoint, still down from last year, but margins are up from our prior guidance on the improved revenue outlook and related NICs and expected strong execution.

Megan Elmblad: And an increase of $70 million versus last year.

Meghan Elmblad: The year over year increase reflects improved working capital performance and lower cash taxes, which should more than offset the impact of lower earnings.

Meghan Elmblad: We are still planning for Capex at around 4% of sales with most of the spend targeted at manufacturing footprint expansions in Mexico, and India as well as other growth and operational excellence initiatives.

Philip D. Fracassa: Moving to pre-cash flow, we are reaffirming our full year outlook of approximately $425 million. This represents over 110% conversion on Gap Net Income at the midpoint and an increase of 70 million versus last year. The year over year increase reflects improved working capital performance and lower cash tax, which should more than offset the impact of lower earnings. We are still planning for CAFX at around 4% of sales, with most of the spend targeted at manufacturing footprint expansions in Mexico and India, as well as other growth and operational excellence initiatives. And finally, we anticipate core net interest expense in the range of $105 million and an adjusted tax rate of 27% for the full year.

Meghan Elmblad: And finally, we anticipate core net interest expense in the range of $105 million and an adjusted tax rate of 27% for the full year.

Meghan Elmblad: To summarize timken delivered solid results in the first quarter with revenues that modestly exceeded our expectations and strong margin performance.

Meghan Elmblad: Team continues to execute well and we remain focused on driving operational excellence to deliver a resilient performance this year, while advancing our profitable growth strategy to benefit 2024 and beyond.

Speaker Change: This concludes our formal remarks, and we'll now open the line for questions operator.

Megan Elmblad: Operator.

Megan Elmblad: Okay.

Speaker Change: Thank you once again, if you'd like to ask a question. Please press star.

Meghan Elmblad: And then the number one thing.

Megan Elmblad: <unk>.

Megan Elmblad: Our first question comes from Bryan Blair of Oppenheimer. Your line is open. Please go ahead.

Meghan Elmblad: Thank you good morning, everyone.

Meghan Elmblad: Good morning, Brian.

Meghan Elmblad: Solid start to the year certainly better than than many feared.

Philip D. Fracassa: To summarize, Timken delivered solid results in the first quarter, with revenues that modestly exceeded our expectations and strong margin performance. The team continues to execute well, and we remain focused on driving operational excellence to deliver resilient performance this year, while advancing our profitable growth strategy to benefit 2024 and beyond. Operator, thank you.

Megan Elmblad: Right.

Meghan Elmblad: I'd like to start off with what we can on industrial distribution trends and outlook.

Speaker Change: The needle moving influences.

Meghan Elmblad: Those exposures.

Megan Elmblad: Orders phase through Q1 versus typical seasonality, what's the current view on channel inventory relative to demand and how does that influence Q2 expectations and the potential range of outcomes in the back half.

Lydia: Thank you. Once again, if you'd like to ask a question, please press star and then the number one on your text phone. Our first question comes from Bryan Blair of Oppenheimer. Your line is open, please go ahead.

Meghan Elmblad: Yes, I think I would say distribution was in the markets that maybe played out slightly stronger than we would've expected, but pretty close to in line a nice step up from Q4 to Q1, which is pretty normal seasonality and down modestly year on year.

Richard G. Kyle: Solid start to the year, certainly better than many feared. I'd like to start off, if we can, on industrial distribution trends and outlook, just given the needle-moving influence of those exposures. How did orders phase through Q1 versus typical seasonality? What's the current view of channel inventory relative to demand? And how does that influence Q2 expectations and the potential range of outcomes in the back half?

Meghan Elmblad: Inventory in the channel, where we have visibility flattish to down a little bit.

Meghan Elmblad: So doing.

Megan Elmblad: What we would hope it generally much less cyclical than.

Meghan Elmblad: Then the OEM side of it and the MRO side.

Megan Elmblad: Todays stay stronger, although we do get hit with inventory, so I think plate.

Richard G. Kyle: Yeah, I think I would say distribution was in the markets that maybe played out slightly stronger than we would have expected, but pretty close to in line, a nice step up from Q4 to Q1, which is, you know, pretty normal seasonality and down modestly year on year. Inventory in the channel where we have visibility was flattish to down a little bit. So, you know, doing what we would hope, generally much less cyclical than the OEM side of it and the MRO side and stays stronger, although we do get hit with inventory. So I think, you know, played out modestly down would be the way to phrase it as you look forward. We're largely looking for that trend to continue through the course of the year.

Speaker Change: <unk> played out.

Meghan Elmblad: Modestly down would be the way to phrase it as your as you look forward, we're largely working for that trend to continue through the course of the year, maybe just a couple of other comments Bryan. So we did on the back of the modest modestly down performance in Q1, we did take up the outlook for distribution as you'll note in the market share to relatively.

Meghan Elmblad: Neutral for the full year now and Thats again after after back to Q1 and the order book as it exists today as well as probably as rich said still expecting a little bit of destock, but less than what we were anticipating back in February. So that was certainly a driver of the improved outlook as well yes.

Meghan Elmblad: First quarter was the toughest comp in Q2 is also a very fairly difficult comp.

Philip D. Fracassa: Yeah, maybe just a couple other comments, Bryan. So we did, on the back of the modestly down performance in Q1, we did take up the outlook for distribution, as you'll note in the market chart, to relatively neutral for the full year now. And that's, again, on the back of Q1 and the order book as it exists today, as well as probably, as Rich said, still expecting a little bit of destock, but less than what we were anticipating back in February. So that was certainly a driver of the improved outlook, as well. Yeah,

Meghan Elmblad: For the full year, the comps get easier in the second half.

Meghan Elmblad: Understood I appreciate the color.

Meghan Elmblad: 2023 was obviously an active year for.

Meghan Elmblad: On your M&A strategy clearly quite successful in.

Megan Elmblad: And the margin performance that was cited as is impressive.

Lydia: Going to ask for an update on not all six deals, but it would be great to hear.

Meghan Elmblad: Quick updates on integration and performance first deal model for <unk>.

Richard G. Kyle: Yeah, the first quarter was the toughest comp, and Q2 is also a fairly difficult comp, and then the four-year comps get easier in the second half.

Meghan Elmblad: Relatively larger bolt ons of Nadella best case, and water Smith and his natural follow up has your team is feeling about the.

Unknown Speaker: understood. I appreciate the car.

Richard G. Kyle: And 2023 was obviously an active year for... Your M&A strategy, and clearly quite successful in the margin performance that was cited, is impressive. I'm not going to ask for an update on all six deals, but it would be great to hear, you know, quick updates on integration and performance, and the first deal model for your relatively larger bolt-ons of Medela, in this case, and Lager Schmidt, and as a natural follow-up, how's your team feeling about the current pipeline and the potential to sustain deal momentum this year?

Meghan Elmblad: Current pipeline and the potential to sustain deal momentum this year.

Meghan Elmblad: Yes, maybe I'll split them into two groups there was the heavier integration, which would be a or b into the bearing business.

Meghan Elmblad: And Rosa systemically into the linear business.

Meghan Elmblad: So a lot of integration there.

Meghan Elmblad: A year later, our sales teams are fully integrated management teams largely integrated.

Meghan Elmblad: Margins up significantly and.

Meghan Elmblad: In RMB.

Meghan Elmblad: Some of that cost a lot of cost improvement with Nadella and little less with frozen was later in the year, but there as well, but be more offset by the.

Richard G. Kyle: Yeah, maybe I'll split them into two groups. There was the heavier integration, which would have been ARB into the bearing business. Nadella, and Rosa Sestemi into the linear business. So a lot of integration there; you look, less than a year later, sales teams are fully integrated, management teams largely integrated, margins up significantly in ARB. Some of the cost, a lot of cost improvement with Nadella and a little less with Rosa, was later in the year, but it was there as well, but it was more offset by the negative impact of volume within that space.

Meghan Elmblad: The negative impact of volume within that space, but those that had a heavy cost element.

Megan Elmblad:

Meghan Elmblad: Have gone very well and I'd say, probably ahead of the curve on cost those who would have more of a revenue play which would be longer Schmid S case.

Meghan Elmblad: Imac and a little lighter on the operational integration some market headwinds, but again.

Meghan Elmblad: Diversification of markets Lager Schmidt very different market mix for us.

Meghan Elmblad: With marine OEM as well as aftermarket and had a had a really good first quarter and desk cases, well on the revenue side held up.

Richard G. Kyle: But those that had a heavy cost element have gone very well, and I'd say they are probably ahead of the curve on cost. Those that had more of a revenue play, which would be Lager-Schmidt, Descase, and IMEC, and a little lighter on the operational integration. Some market headwinds, but again, diversification of markets. Lager-Schmidt, a very different market mix for us with marine OEM as well as aftermarket, and had a really good first quarter, and Descase as well on the revenue side. Again, I'll say better than where we serve the large capital equipment markets that tend to be shorter cycles.

Meghan Elmblad: Again, I'll say better than where we serve.

Meghan Elmblad: Large capital equipment markets that tend to be shorter cycle.

Meghan Elmblad: The second part of your question was outlook and.

Meghan Elmblad: As I said in my comments, we have a <unk>.

Meghan Elmblad: M&A, we certainly have the capacity to do it we still are primarily focused on somewhere between bolt ons and tuck ins.

Richard G. Kyle: The second part of the question was Outlook, and, um... As I said in my comments, we have a bias for M&A. We certainly have the capacity to do it. We still are primarily focused on somewhere between bolt-ons and tuck-ins, and we have nothing to report but an active pipeline. We've completed an acquisition every year, I think for 14 or 15 years, and there is no reason as we sit here in May that we wouldn't be able to extend that streak.

Meghan Elmblad: And nothing to report, but an active pipeline.

Meghan Elmblad: Completed an acquisition every year I think for 14 or 15 years and no reason as we sit here in may that we would think that we wouldn't be able to extend that streak, but nothing to commit to at this point.

Megan Elmblad: Yeah.

Meghan Elmblad: Understood I appreciate the color again.

Megan Elmblad: Thanks.

Megan Elmblad: Brian.

Lydia: Our next.

Unknown Speaker: Understood. I appreciate the cover again. Thanks.

Megan Elmblad: Comes from Steve Barger of Keybanc. Please go ahead.

Unknown Speaker: Our next question comes from Steve Barger of KeyBank.

Rich: Hi, rich congratulations.

Unknown Speaker: I, uh, Rich, congratulations. You'll finally have time to explore all that Northeast Ohio has to offer. Thanks, Steve. I look forward to you hosting me. Anytime.

Megan Elmblad: Finally at a time to explore all of that northeast, Ohio has to offer.

Meghan Elmblad: Thanks, Steve I look forward to you you hosting.

Speaker Change: [laughter] anytime.

Richard G. Kyle: You talked about how the current diversification helped maintain margin despite revenue being down. If we end up in a low-growth environment next year, what percentage of the portfolio is facing secular growth drivers like renewable, automation, reshoring, or however you define secular? I'm just trying to get a sense of Sustainability of Revenue in a

Meghan Elmblad: You talked about how the current diversification helped maintain margin despite revenue being down.

Speaker Change: We ended up in a low growth environment next year, what percentage of the portfolio is facing secular growth drivers like renewable automation re shoring are or however, you define secular I'm just trying to get a sense of.

Megan Elmblad: Sustainability of revenue in a in a low growth environment.

Richard G. Kyle: Yeah, I think I don't have the pie chart in front of me, but obviously, renewable as of last year was still our largest market automation, pretty close, close behind the infrastructure spend, covers a lot of markets and off-highway. And I think our, you know, I wouldn't say there's enough of a secular trend there to offset the cyclicality as you as we've seen from our large global off-highway customers.

Meghan Elmblad: Yes, I think.

Meghan Elmblad: Don't have the Pie chart in front of me, but modest renewable as of last year was still are our largest market automation pretty close close behind it infrastructure spend.

Meghan Elmblad: It covers a lot of markets in off highway and I think.

Meghan Elmblad: I Wouldnt say theres enough of a secular trend there to offset the cyclicality as you as we've seen from our large global off highway customers are there we are experiencing.

Richard G. Kyle: We are experiencing a down market in that space, but I think they're all very confident about the long-term trend there. And then the defense side for us typically is not particularly high growing, but holds up really well. It was a really good contributor in 2020 during COVID when the market was sitting. So one chart we had out on the newer markets was north of 30%, I believe.

Meghan Elmblad: Down market in that space, but I think they are all very confident on the on the long term trend there.

Meghan Elmblad: And then the defense side for US typically is not particularly high growth, but holds up really well it was a it was a.

Meghan Elmblad: A really good contributor in 2020 during Covid, one although amongst ourselves.

Meghan Elmblad: One chart, we head out on the newer markets was north of 30% I believe yeah.

Philip D. Fracassa: Yeah, you have the right. You have it in front of you, Phil.

Megan Elmblad: Yes, you have it in front of me, Phil asked about 29% and 9%.

Philip D. Fracassa: Yeah, I was just going to add, Steve, just the work we've done to diversify the markets across, you know, renewable automation, industrial services, we talked about marine, food, and beverage, passenger rail, the infrastructure activity from a direct and indirect standpoint, quite frankly, green energy, you know, we feel really, and not to mention aerospace, which is in a newer market, but it's certainly a positive momentum market right now. And we think, long term, it will be a really strong market for us. So we do feel like the diversification is improving probably with each deal we do, quite frankly, and it's helping.

Speaker Change: Yes, I mean does that already I think.

Meghan Elmblad: Yes, I was just going to add I would just add Steve just the work we've done to diversify the markets across.

Meghan Elmblad: Renewable automation industrial services, we talked about marine food and beverage passenger rail the infrastructure activity from our direct and indirect standpoint quite frankly.

Megan Elmblad: Green energy.

Meghan Elmblad: We feel really and not to mentioned aerospace, which isn't a newer market, but its certainly positive momentum market right now and we think long term will be a really strong market for us. So we do feel like the diversification is.

Megan Elmblad: Is improving problem with each deal, we do quite frankly and.

Meghan Elmblad: It's helping us this year and I think will help us help us next year as well.

Richard G. Kyle: So just to clarify, if we step back from China Wind and just think about the portfolio going forward without trying to predict industrial production, do you think you're in a position to outgrow IP?

Meghan Elmblad: So just to clarify if we step back from China wind and just think about the portfolio going forward without trying to predict industrial production. You think you are in a position to outgrow IP.

Richard G. Kyle: Yeah, it's certainly been our objective to outgrow by 100 plus basis points, and I think if you look over from 2016 forward and strip it out to organic, I think we've been pretty close to that.

Meghan Elmblad: Yes, that's certainly been our objective would be to outgrow it 100 plus basis points and I think if you look over from 2016 forward and strip it out to organic.

Meghan Elmblad: We've been pretty close to that.

Philip D. Fracassa: And last one, sitting here, basically in May, can you talk about your confidence level that 3Q is up year over year on an organic basis? I mean, is that basically a lock in your mind given the easier comp and what you see in the markets? Or is there risk that we see, you know, flatter down growth for the back half. Yeah, I would say the outlook

Megan Elmblad: And last one sitting here basically in May can you talk about your confidence level that <unk> is up year over year on an organic basis, I mean does that basically a lock in your mind, given the easier comp and how you see end markets or is there a risk that that we see flat or down growth in <unk> or the back half.

Philip D. Fracassa: Yeah I would say that the outlook see would really be for you know if you look at second quarter we're likely to be down high single digits again from an organic perspective and then and then look for revenue to start to flatten out organically in the back half of the year you know just given given the given the easier comps in several sectors so we're not going to probably sit here today and say we're going to be up or still down in Q3 but but I think the general trend would be of our negative five percent organic for the full year kind of very much first half weighted down high single digits in the first half and then flattening out or you know maybe maybe up a little bit overall in the second half but probably won't comment on Q3 specifically at this point but that's kind of what we're planning on

Meghan Elmblad: Yes, I would say the outlook see would really be for.

Meghan Elmblad: Now if you look at second quarter, we're likely to be down.

Meghan Elmblad: High single digits again from an organic perspective, and then look for revenue to start to flatten out organically in the back half of the year.

Meghan Elmblad: Just given given the given the easier comps in several sectors. So we're not going to probably sit here today and say, we're going to be up we're still down in Q3, but I think the general trend would be of our negative 5% organic for the full year kind of very much first half weighted down high single digits in the first half and then flattening.

Meghan Elmblad: Out or maybe up a little bit overall in the second half but.

Meghan Elmblad: I won't comment on Q3, specifically at this point, but that's kind of what we're planning on.

Speaker Change: Got it thank you.

Almblad: Thanks, David.

Unknown Speaker: Our next question comes from Angel Castillo of Morgan Stanley. Please go ahead; your line is open.

Megan Elmblad: Our next question comes from Andrew Costello of Morgan Stanley.

Speaker Change: Please go ahead your line is open.

Unknown Speaker: Hi, this is Grace. I'm from Angel.

Megan Elmblad: Hi, This is Chris on for Andrew. Thank you for your question.

Unknown Speaker: Thank you for the question. I think on slide 6, you changed your outlook for the number of end markets. So heavy industries went from down high single digit to down mid single digit, and automation went from neutral to down mid single digit. So can you help us unpack that a bit more? Like what are the underlying drivers of those things might be?

Meghan Elmblad: I see on slide six you changed your outlook for a number of end markets. So heavy industries have been found.

Meghan Elmblad: High single digit to down mid single digits automation away from neutral to down mid single digits. So can you help us unpack that that more like a what Eric.

Speaker Change: Drivers of those things might be thank you.

Philip D. Fracassa: Thank you.

Philip D. Fracassa: Sure, you know, with respect, thanks for the question. With respect to heavy industries, you know, we were down, you know, just modestly in Q1. And we did continue to see pretty good project spending in Q1 in markets like, you know, metals and oil and gas. And so, given the first quarter performance and probably a slightly improved outlook for the rest of the year, we did move it from down high to down mid.

Meghan Elmblad: Sure with respect thanks for the question with respect to heavy industries were down just modestly in Q1, and we did we did continue continue to see pretty good project spending in Q1 in markets like metals and oil and gas and so given the first quarter performance and probably a slightly improved.

Meghan Elmblad: Outlook for the rest of the year, we did move it from down high two to down mid now keep in mind heavy industry tends to be late cycle. So then as we stand right now we do see backlog coming down there. So we're not anticipating.

Philip D. Fracassa: Keep in mind, heavy industries tend to be late cycle. So, as we stand right now, we do see backlog coming down there. So we're not anticipating an inflection there for the rest of the year. We would still expect it to be down for the full year, kind of more or less in line with how it was down in Q1. Relative to automation, I would say a very slight move there, just, you know, a couple of hundred basis points, just enough for it to move from one column to the other.

Meghan Elmblad: An inflection there for the rest of the year. So we would still expect it to be to be down for the full year kind of more or less in line with what it was down in Q1 relative to automation I would say a very slight move there just a couple a couple of hundred basis points just enough for it to move from one column to the other and that was mainly driven off of.

Philip D. Fracassa: And that was mainly driven by Western Europe. A big chunk of the business that we have in automation is serving Western European OEMs. And, you know, the situation in Western Europe remains pretty soft, pretty weak overall. So we took it down just slightly. But, you know, the main drivers of the 150 basis points of improvement were probably on the positive side. The industrial markets with distribution moving over, aerospace moving over, rail services, and then probably the biggest negative would have been renewable energy. It was on the far left to begin with, but, you know, it moved even further left, if you will, just given the lower outlook we have for wind today versus back in Q1.

Meghan Elmblad: Western Europe.

Megan Elmblad: Big chunk of the business that we have in automation is serving western European Oems.

Meghan Elmblad: The situation in Western Europe remains pretty soft pretty weak overall, so we took it down just slightly but the main drivers to the 150 basis points of improvement, we're probably on the positive side, the industrial markets with distribution moving over aerospace moving over rail services and then probably the biggest negative would have been.

Meghan Elmblad: Renewable energy it was on the far left to begin with.

Meghan Elmblad: It moved even further left if you will just given given the lowered lower outlook, we have for wind today versus back in February.

Meghan Elmblad: Alright, and then industrial distribution moved up a little bit and we talked about that one earlier.

Lydia: Yes, that's very helpful. Thank you and also on our free cash flow.

Philip D. Fracassa: And then industrial distribution moved up a little bit, and we talked about that one earlier.

Megan Elmblad: Can you raise the earnings outlook by why free cash flow is unchanged.

Philip D. Fracassa: Yep, that's very helpful. Thank you. And also on Free Cash Flow, I think you raised the earnings outlook by explaining why Free Cash Flow was kept unchanged.

Meghan Elmblad: Yes, I think it was just really a view on our Parkdale, let's hold the guide you typically when we don't take it.

Meghan Elmblad: It took the outlook up on slightly higher revenue and as you know slightly higher revenue carries with it a little bit.

Philip D. Fracassa: Yeah, I think it was just really a view on our part, though, let's hold the guy do typically when we'll take, we took the outlook up on slightly higher revenue. And as you know, slightly higher revenue carries with it a little bit higher working capital; you may have slightly higher receivables or may need to take out a little less inventory as a result. So it was really more the puts and takes of the sales working capital dynamic.

Meghan Elmblad: Higher working capital you may have slightly higher receivables or may need to take out a little less inventory as a result, so it was really more of the puts and takes of the sales working capital dynamic and sell wallet.

Meghan Elmblad: We talk about roughly $425 range, plus or minus and just felt very confident holding yet like I said, the first quarter was seasonally low but would expect a meaningful step up.

Philip D. Fracassa: And so while it, you know, we talk about roughly 425, a range, plus or minus, and I just felt very confident holding it. Like I said, the first quarter was seasonally low, but I would expect a meaningful step up, Q1 to Q2, frankly, and then a nice improvement even in the back half of the year. And at that level, we're north of 100.

Meghan Elmblad: Q1 to Q2, frankly and then.

Megan Elmblad: A nice improvement even in the back half of the year.

Meghan Elmblad: And at that level down north of North of 100, North of a 100% GAAP net income actually north of a 110% of GAAP net income, which is which is what we would typically target.

Megan Elmblad: This type of market environment.

Meghan Elmblad: Alright, thank you.

Speaker Change: Thank you.

Unknown Speaker: As a reminder, if you'd like to ask a question, it's star followed by 1 on your telephone keypad. Our next question comes from Chris Dankert of Loop Capital. Please go ahead; your line is open.

Megan Elmblad: As a reminder, if you'd like to ask a question. It still followed by one on your telephone keypad.

Megan Elmblad: Our next question comes from Christian that cap.

Megan Elmblad: Joe.

Speaker Change: Please go ahead your line is open.

Unknown Speaker: Hey morning. Thanks for taking the questions.

Megan Elmblad: Yes.

Meghan Elmblad: Hey, good morning, Thanks for taking the questions.

Richard G. Kyle: Good morning, Chris. I guess, you know, really nice start to the year here on the SG&A front. Maybe you could just kind of go into a little bit more detail about what levers you kind of pulled there, what is still available to you, and maybe just any kind of comments on what we should be expecting for SG&A as we go forward on a quarterly basis.

Megan Elmblad: Good morning, Chris I guess really nice really nice start to the year here on the SG&A front.

Megan Elmblad: Maybe you can just kind of go into a little bit more detail what levers you kind of pulled there what is still available to you and maybe just any kind of comment on what we should be expecting for for SG&A. As we go forward here on a quarterly basis.

Meghan Elmblad: Yes, I would say.

Richard G. Kyle: Yeah, I'd say certainly some self-help there from a year ago or so, starting to capture some attrition, and we really, outside of targeted things, haven't done any significant reductions. But then on the targeted areas, again, I would say acquisition, integration, our multi-year digital campaign continues to yield benefits of us getting more efficient, taking out overhead, reducing complexity, reducing the number of systems that we have, et So I would say the combination of those two partially offsets, generally, the industrial motion segment and most of the acquisitions we look at run a higher SG&A level structurally than the bearings business. So we've generally been moving towards a higher SG&A, higher gross margin as well. But we've done a pretty good job in the last year, more than offsetting that.

Meghan Elmblad: Certainly some self help there from.

Meghan Elmblad: A year ago, or so starting to capture some attrition and we really outside of target things Havent done any.

Meghan Elmblad: Significant reductions, but then on the targeted areas again, I would say our acquisition integration.

Meghan Elmblad: <unk> multi year digital campaign continues to yield benefits of us getting more efficient taking out overhead reducing complexity.

Meghan Elmblad: Reducing the number of systems that we have et cetera. So I would say the combination of those two partially offset generally.

Meghan Elmblad: The industrial motion segment and most of the acquisitions, we look at run a higher SG&A level structurally then.

Meghan Elmblad: In the bearings business. So we've generally been mixing.

Meghan Elmblad: Towards the higher SG&A higher gross margin as well structure, but we've we've done a pretty good job last year more than offsetting that.

Richard G. Kyle: Got it, got it. Thank you for that. And then again, similarly, on gross margin, obviously, mix played a pretty huge, pretty huge driver from the outperformance perspective there. But if there's any comments on how to think about gross margin to Q, I assume, given that we're still seeing some volume declines that should be down year over year, just given some of that mix fall off.

Speaker Change: Got it got it thank you for that.

Meghan Elmblad: And then again similarly on gross margin, obviously mix played a pretty huge.

Megan Elmblad: Pretty huge driver from a Pos perspective, there, but just any comments on how to think about gross margin into Q I assume given the we're still seeing some some volume declines that should be down year over year, just given some of that that mix falloff.

Meghan Elmblad: Yes, certainly from a as you said, we're looking for revenue to be flattish Q1 to Q2, and we built a little bit of inventory in Q1, and we'd be looking to hold or lower inventory in Q2, and then lower inventory through certainly certainly through the course of the year. It take some inventory out some so from a <unk>.

Richard G. Kyle: It's certainly from a, you know, as you said, we're looking for revenue to be flattish, Q1 to Q2. And we built a little bit of inventory in Q1. And we'd be looking to hold or lower inventory in Q2 and then lower inventory through, certainly, certainly through the course of the year, take some inventory out some. So from a pure volume standpoint, Q1, and our guide would have been the I think the other thing is you look at the gross margins, I mentioned this in my comments, starting back in early 20 through, you know, at least the first part of 22.

Meghan Elmblad: Your volume standpoint, Q1, and our guide would have been the.

Meghan Elmblad: Peak for the year.

Megan Elmblad: I think the other thing as you look at the gross margins.

Meghan Elmblad: And I mentioned this in my comments.

Meghan Elmblad: Starting back in early 'twenty through at least the first part of 'twenty two.

Meghan Elmblad: I mean very difficult operating conditions from the early days of Covid to a lot of supply chain challenges and a lot of labor challenges both from Covid in tight labor markets, we've been getting steadily better.

Megan Elmblad: Through.

Meghan Elmblad: All of last year, and then into this quarter. The downside of that is our cost comps actually get tougher as the year goes on because we were better in the fourth quarter of last year than we were in the first quarter of last year, but we're still we're still advancing so I think the pace probably levels off a little bit, but we've got really good focus on it. So you've got some of that built in but most of it would be a.

Richard G. Kyle: I mean, very, very difficult operating conditions from the early days of COVID to a lot of supply chain challenges and a lot of labor challenges, both from COVID and tight labor markets. But we've been getting steadily better.

Meghan Elmblad: A volume story, yes.

Meghan Elmblad: Yes, the only seasonality, yes, and the only other thing I had mentioned on gross margins, Chris would be the acquisitions will tend to mix us up from a gross margin standpoint. So we'll have some nice acquisition benefit again in Q2, which typically mixes this up from a gross margin standpoint, those businesses tend to be a little more fragmented. They may run a little higher SG&A because they they are fragmented but still accrue.

Philip D. Fracassa: Yeah, the only other thing I'd mention on gross margins Chris would be

Meghan Elmblad: On the EBITDA line, but everything else.

Meghan Elmblad: I would agree with that.

Megan Elmblad: As he said relative to Q2, we would expect.

Unknown Speaker: Understandable. Well, thank you both so much for the color, and I just echo the congratulations again here, Rich.

Meghan Elmblad: It was flattish sequentially that would imply down all in mid to high single digits organic would be down high single digits on the top line and then margins margins and EPS.

Meghan Elmblad: We expect it to be down year over year, just on on the revenue decline and the other factors, which talked about relative to inventory and other things.

Meghan Elmblad: There are no remaining questions at this time, so I'll turn the call back to Ms. Meghan Elmblad for any closing remarks.

Meghan Elmblad: Understood well. Thank you both so much for the color and I'll just echo the congratulations again here rich.

Meghan Elmblad: All right. Thanks, Lydia. 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.

Speaker Change: Thank you.

Megan Elmblad: Chris.

Lydia: There are no remaining questions at this time, so I'll turn the call back to MS. Meghan I'm glad for any closing remarks.

Speaker Change: Thank you Lydia 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.

Lydia: Thank you for participating in Timken's first Quarter Earnings Release Conference Call. You may now disconnect.

Speaker Change: Thank you for participating and Timken first quarter earnings release Conference call you may now disconnect.

Megan Elmblad: Yeah.

Megan Elmblad: Okay.

Megan Elmblad: Yeah.

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