Q3 2024 The Timken Co Earnings Call
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Emily: Good morning, my name is Emily and I will be your conference operator today. At this time I would like to welcome everyone to Timken's third quarter and its release conference call. All lines have been placed on mute to prevent any background noise.
As to the speakers' remarks, there will be a question and answer session.
If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you. Mr. Funnel Paul, you may begin your conference.
Speaker Change: Thanks, Emily, and welcome everyone to our third quarter 2024 earnings conference call. This is Neil Frohnapple, Vice President of the Investor Relations for the Timking Company. We appreciate you joining us today.
Speaker Change: 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.
Speaker Change: You can also access this material through the download feature on the earnings call Webcast Link.
Speaker Change: With me today are the Timkin Company's President and CEO, Tarak Mata and Phil Fracassa, our Chief Financial Officer.
Speaker Change: We live opening comments this morning from both Tara and Phil before we open up the call for your questions.
Emily: During the Q&A, I would ask that you please limit your questions to one question in one follow-up at a time to allow everyone to chance to participate.
Emily: During today's call you may hear forward-looking statements related to our future financial results, plans, and business operations.
Emily: 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.
Emily: We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials.
Emily: Thank you.
Emily: 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.
Emily: With that, I would like to thank you for your interest in the Timken Company, and I will now turn the call over to Tarek.
Tarek: Thanks Neil and a good morning everyone. Today is my first earnings call as a member of the Timken Company and I thank you for joining us.
Emily: I will begin by discussing our results and then we'll share some personal observations from my first 60 days at Timken.
Emily: Let's start with a look at the quarter and the outlook.
Emily: industrial markets remained soft during third quarter and we saw mixed performance across different sectors and geographies.
Emily: Organically, revenue was down 3% from last year, and geographically, in Europe we saw soft demand for most of the portfolio, and in China, revenue was down mainly due to wind.
Emily: On the positive side, we were up slightly in the Americas and saw continued strength in India. Our overall backlog was stable with the second quarter.
Emily: At 16.9%, the adjusted EBDA margin
Emily: was down 200 basis points.
Emily: and our earnings per share came in at $1.23 compared to $1.55 last year. Both earnings per share and margins fell short of our expectations.
Emily: Lower volumes combined with the higher logistics costs and other headwinds in the quarter were the main reason for the shortfall.
Emily: Phil will go through.
Emily: Pricing remains slightly higher in the quarter.
Emily: On a positive note, we saw continued strong and margin-accurate performance from our acquisitions that we have made recently, in this case, Lager-Schmidt and CGI.
Emily: During the third quarter, we also closed on CGI, which will add presence.
Emily: in High Growth Medical Robotics and Automation Space. CGI also gives us a good position in precision drive systems and will be accretive to the industrial motion business going forward. This quarter
Emily: India as a market, and aero, defense, and marine as sectors also showed both good growth and good performance.
Emily: the third quarter performance as well as a softer than normal fourth quarter.
Emily: We want to align cost and capacity with market demand, both to improve margins and also respond to our customers.
Emily: We will provide more details in early February on specific actions and their impact on 2025. On a personal note, it's an honor to lead Timken at this exciting time in its history.
Speaker Change: I have long admired Timken for its strong brand.
Speaker Change: its reputation for quality, innovation, and excellence.
Speaker Change: During my first 60 days, in order to get an external perspective on Timken, I met with analysts, some of our key investors, and spent time with greater than 60 channel partners and customers.
Speaker Change: I also visited colleagues in 18 production facilities in the United States, Europe and China.
Speaker Change: All of which gives me a good start in understanding the business, our team strengths, and the market segments that we operate in. During the visits, I also saw how we are developing innovative products to address some of the most challenging applications for our customers.
Speaker Change: I was impressed with the talent and the organization as well as the critical role our products play in improving the reliability and efficiency of our customers' applications.
Speaker Change: It's still early.
Speaker Change: But here are a few high-level examples of what we are doing to strengthen the company for 2025 and beyond. First, we're aligning our capacity and cost to the market demand by implementing cost reductions at a product line level, which will improve margins.
Speaker Change: second
Speaker Change: We will take a look at our entire portfolio.
Speaker Change: of Product Lines with an eye towards allocating capital and resources for higher organic growth and better returns.
Speaker Change: We already see some good examples to build on.
Speaker Change: Third, we'll maintain our discipline.
Speaker Change: and deliberate approach to capital allocation.
Speaker Change: We expect M&A to help us further diversify the portfolio.
Speaker Change: and increase of our presence in attractive growth markets.
Speaker Change: The example of that is the CGI acquisition we made this quarter. In addition, we will work to reduce our networking capital, which will improve our free cash flow and returns on invested capital.
Speaker Change: This will require changes in the process and will take a bit of time to implement, but we expect our cache performance to improve over time. Again, it's early.
Speaker Change: And today, we only share some initial reflections, but we will have more to say at a later date.
Speaker Change: Today, I also want to highlight that 2024 is the 125th anniversary of Timkin.
Speaker Change: It has really been the team's commitment to customers, innovation, and excellence.
Speaker Change: that is both reflected in the product quality and the service level over the last 125 years that has resulted in the strong brand of Timken in the industry.
Speaker Change: Timken has built a strong foundation and achieved significant improvements in performance over the last several years. As a team, we will build on this foundation a profitable growth future that delivers better cash flow.
Speaker Change: higher earnings per share and better returns for the invested capital.
Phil: And with that, let me turn the call over to Phil for a more detailed review of the numbers and outlook. Phil.
Phil Fracassa: Okay, thanks, Tarek, and good morning, everyone.
Phil: For the financial review, I'm going to start on slide 12 of the presentation materials with a summary of our third quarter results.
Phil: Revenue for the quarter came in at $1.13 billion, down 1.4% from last year.
Phil: Adjusted EBITDA margins were 16.9%.
Phil: and adjusted earnings per share came in at $1.23.
Phil: Turning to slide 13, let's take a closer look at our third quarter sales performance.
Phil: Organically, sales were down 2.9% as volume was lower while pricing remained positive.
Phil: Thank you for watching!
Phil: Looking at the rest of the revenue walk, you can see that recent acquisitions, none of one divestiture, contributed 1.8% of growth in the quarter, while foreign currency translation was a slight headwind to the top line.
Phil: On the right-hand side of the slide, you can see organic growth by region. This excludes both currency and net acquisition impact.
Phil: Let me comment briefly on each region.
Phil: Bye-bye.
Phil: In the Americas, our largest region, we were up about 2% from last year.
Phil: We saw solid growth across several sectors, including marine, distribution, and aerospace.
Phil: while the off-highway and general and heavy industrial sectors were lower as we expected.
Phil: In Asia-Pacific, we were down 3%, as China was down, while India and the rest of the region were up.
Phil: In China, the sales decline was driven mainly by lower wind energy demand.
Phil: And in India, we saw double-digit growth in the quarter, driven primarily by higher revenue in the rail and distribution sectors.
Phil: And finally, we were down 13% in EMEA.
Phil: as we saw continued broad industrial weakness in Western Europe.
Phil: Most sectors were lower, including renewable energy, automation, general and heavy industrial, and off-highway.
Phil: Turn to slide 14. Adjusted EBITDA in the third quarter was $190 million or 16.9% of sales.
Phil: compared to 216 million or 18.9 percent of sales last year.
Phil: Thank you. Thank you. Thank you.
Phil: Our adjusted EBITDA margin of 16.9% was below company expectations.
Phil: But the vast majority of the shortfall was due to some unanticipated cost headwinds in the quarter, including logistics, currency, and a discrete customer accrual.
Phil: Collectively, these headwinds negatively impacted margins by around 100 basis points.
Phil: I'll talk about these items and the actions we are taking to improve margins moving forward a little later in the call.
Phil: Looking more closely at the change in adjusted EBITDA dollars, you can see that the decrease was driven mainly by the impact of lower sales volume with a relatively neutral price cost in the quarter.
Phil: Let me comment a little further on the individual items in the block.
Phil: With respect to price mix, net pricing was positive once again this quarter in both segments.
Phil: as pricing continues to hold up well, as we expected.
Phil: Mix was also a slight positive, driven largely by industrial distribution, which generally outperformed OE sectors again in the third quarter.
Speaker Change: Thank you.
Speaker Change: On the material and logistics line, we saw a significant spike in logistics costs in the quarter, reflecting higher international freight costs, including some lag effect from the second quarter.
Phil: Thank you very much.
Phil: On the manufacturing line, performance was slightly negative in the quarter as cost reduction initiatives and efficiency gains in our plants.
Phil: were slightly more than offset by the continued year-over-year impact of inflation and costs associated with new footprint investments.
Phil: Thank you.
Phil: Looking at the SG&A Other line.
Phil: costs were up slightly from last year.
Phil: But in the quarter, we had an unfavorable SG&A expense impact from a discrete customer accrual.
Phil: Excluding this impact, structural SG&A would have been down slightly from last year, as cost control measures and lower incentive compensation expense more than offset the impact of continued wage inflation.
Phil: Currency was a sizable negative in the quarter compared to last year and compared to the revenue impact.
Phil: This was driven mainly by the revaluation of cash and other balances outside the United States.
Phil: As these balances get revalued into the local currency, it produces a P&L impact.
Phil: We posted a large negative impact in the quarter of just over $5 million related to this revaluation.
Phil: This is included in unallocated corporate, not in the segments.
Phil: And finally, acquisitions net of divestitures contributed $6 million of adjusted EBITDA in the quarter, which was accretive to overall company margins.
Phil: Our recent acquisitions continue to perform well, and CGI is off to a strong start.
Phil: Thank you. Let's do this. Thank you. Thank you. Thank you.
Phil: On slide 15, you can see that we posted net income of $82 million or $1.16 per diluted share for the third quarter on a gap basis.
Phil: The current period includes 7 cents of net expense from special items.
Phil: including acquisition amortization and other special charges.
Phil: offset partially by a gain on the sale of our recently closed Gaffney Bearing Complex in South Carolina.
Phil: On an adjusted basis, we earned $1.23 per share, down 21% from last year, and below our expectations because of the margin shortfall.
Phil: Thank you for watching!
Phil: with respect to some below-the-line items.
Phil: Interest expense in the third quarter was about 2 million higher year-over-year while diluted shares were down slightly.
Phil: Our adjusted tax rate for the quarter came in at 27% in line with our expectations, but up from last year, due mainly to our geographic mix of earnings.
Phil: And finally, non-controlling interest was up around $3 million from last year.
Phil: while depreciation expense was up slightly in the quarter.
Phil: Thank you.
Phil: Now let's move to our business segment results, starting with engineered bearings on slide 16.
Phil: In the third quarter, engine and bearing sales were $741 million.
Phil: down four and a half percent from last year.
Phil: Organically, sales were down 3.6 percent, driven by lower end market demand in Europe and China.
Phil: Among market sectors, renewable energy saw the most significant decline in the quarter, driven by continued weakness in China.
Phil: In addition, the off-highway, auto truck, and general and heavy industrial sectors were down from last year.
Phil: On the positive side, revenue in the distribution, aerospace, and rail sectors were all up versus the year-over-year period.
Phil: Currency was a headwinder revenue of less than 1% while the net impact of acquisition in the vestitures was slightly unfavorable.
Phil: Engineered bearings adjusted EBITDA in the quarter was $138 million or 18.7% of sales compared to $157 million or 20.2% of sales last year.
Phil: Our margins in the quarter reflect the impact of lower volume, along with higher logistics and manufacturing costs, partially offset by favorable price mix.
Phil: Now let's turn to industrial motion on slide 17.
Phil: In the third quarter, Industrial Motion sales were $386 million, up 5.2% from last year.
Phil: acquisitions contributed just over 6% to the top line while currency was slightly positive as well.
Phil: Organically, sales declined 1.4% as lower demand was partially offset by higher pricing.
Phil: With respect to performance by platform, automatic lubrication systems posted the largest decline, while drive systems was notably up in the quarter.
Phil: Automatic lubrication was impacted by broad weakness in Western Europe and the off-highway sector, while drive systems benefited from significantly higher military marine revenue.
Phil: Belt and Chain was also down modestly on lower ad demand.
Phil: while other platforms are relatively flat compared to last year.
Phil: Industrial Motion adjusted EBITDA for the quarter with $74 million or 19.2% of sales compared to $75 million or 20.5% of sales last year.
Phil: Our margins in the quarter were impacted by lower organic volume and higher operating costs.
Phil: including the customer accrual I mentioned earlier.
Phil: partially offset by strong contribution from our recent acquisitions.
Phil: Manufacturing performance was relatively flat in the quarter with favorable cost performance offsetting ramp costs related to our new capacity investment for belts in Mexico.
Phil: Thank you.
Speaker Change: Turning to slide 18, you can see that we generated operating cash flow of $123 million in the third quarter.
Phil: And after CapEx of $35 million, free cash flow was $88 million.
Phil: We expect stronger cash flow in the fourth quarter, driven by improved working capital performance.
Phil: From a capital allocation standpoint, we deployed nearly $200 million in total during the quarter for the CGI acquisition and the payment of our 409th consecutive quarterly dividend.
Phil: And looking at the balance sheet, we ended the third quarter with net debt to adjust to the EBITDA at 2.1 times, right near the middle of our targeted range.
Phil: and we have no significant debt maturities until 2027.
Phil: Now let's turn to our updated outlook for full year 2024 with a summary on slide 19.
Phil: Overall we reduced our outlook to reflect our third quarter performance and a more cautious view on the rest of the year.
Phil: So let's go through it, starting with the sales outlook.
Phil: We're now planning for full year revenue to be down around 4% in total versus 2023.
Phil: Organically, we now expect sales to be down around 6% at the midpoint.
Phil: one percentage point lower than our prior guide.
Phil: Note that the outlook for renewable energy is relatively unchanged.
Phil: This sector alone accounts for more than half of our expected organic sales decline for the full year.
Phil: And to reiterate, our updated sales outlook assumes a slightly greater than normal seasonal decline in the fourth quarter as we're planning for more pronounced customer slowdowns in December.
Phil: With respect to currency, we're now expecting a headwind of around 25 basis points for the full year, based on quarter-end exchange rates.
Phil: And finally, we expect M&A to contribute 225 basis points to the top line for the year. And this excludes the recent CGI acquisition.
Phil: Thank you.
Phil: On the bottom line, we now expect adjusted earnings per share in the range of $5.55 to $5.65.
Phil: This reflects our third quarter performance and a more cautious outlook for the fourth quarter, offset partially by modest accretion from CGI.
Phil: Our revised outlook implies that our full year 2024 consolidated adjusted EBITDA margin will be in the low 18% range at the midpoint.
Phil: And for the fourth quarter, our guidance implies that adjusted EBITDA margins and earnings per share will be down sequentially and year-over-year on lower production volume and expectations for higher costs heading into the end of the year.
Speaker Change: As Tariq highlighted, we are not satisfied with our second half margins, and we are stepping up our efforts around cost actions to improve margins for 2025 and beyond.
Phil: As we have talked about on prior calls, we've been working to reduce costs all year, including facility rationalizations like the closure and sale of our gaffney plant.
Phil: Reducing operative headcount by over 12% since the beginning of 2023 And controlling salary, hiring, and non-essential spending
Phil: While this has had a positive effect, it has not been enough to fully protect margins at current demand levels.
Phil: So we intend to get more aggressive. Our objective is to bring costs more in line with demand levels and to improve margins and profitability in line with our long-term targets.
Phil: We will not get into specific details today.
Phil: We will outline the actions and expected savings in early February as we finalize our business plan and provide initial guidance for 2025.
Phil: Moving to free cash flow, we've updated our 2024 outlook to approximately $300 million.
Phil: which is down from our prior guide, mostly to reflect the impact of lower expected earnings.
Phil: We expect to generate over $100 million of free cash flow in the fourth quarter, which is a step up both sequentially and year over year.
Phil: To summarize, our third quarter performance was below expectations.
Phil: especially on the bottom line, and we are moving aggressively to reduce costs while advancing our strategic initiatives to strengthen the company for 2025 and beyond.
Phil: This concludes our formal remarks and we'll now open the line for questions. Operator?
Speaker Change: Thank you.
Speaker Change: Thank you. If you would like to ask a question today, please do so now by pressing star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star then 2 to remove yourself from the queue.
Speaker Change: Our first question today comes from the line of Stephen Volkmann with Jeffreys
Phil: Stephen, please go ahead.
Stephen Volkmann: Thank you.
Stephen Volkmann: Great. Good morning. Thank you guys. And welcome, Tareq. I want to maybe just start with with renewables. That seems like a business where you should have maybe a little bit better visibility. I'm curious if you think you're if there's any share shifts happening in that business. And if you think there's
Speaker Change: any chance that that actually starts to recover in 2025.
Speaker Change: So, let me take that and of course...
Speaker Change: Feel free to add a commentary.
Speaker Change: So...
Speaker Change: As you have seen, wind has come down quite a bit.
Speaker Change: from a renewables perspective.
Speaker Change: Solar remains quite strong overall for us and we don't see a big change in the in the solar market but rather we see from a renewable segment more wind being impacted.
Speaker Change: The volumes have come down in line with the orders that we saw from 23 up to 24.
Speaker Change: Over the last few months, we've seen a stabilization of our order integrity at a low level compared to the past, quite a bit lower than we've seen in the past.
Speaker Change: So,
Speaker Change: We expect, and based on the discussions we've had with our customers and partners, we expect that low level to continue for quite some time.
Speaker Change: And there have been pockets in the wind business where...
Speaker Change: The pricing has not been what we consider to be an acceptable level, and as we've discussed in the past, we have decided not to participate in the very, very low price levels. But overall, our wind business, our order intake rate has been stable.
Speaker Change: And we are, you know, it's not the great profit levels of the past, but we are still happy with where we see our wind business from a returns perspective. But we at this point, we don't see a pickup of the wind business, as I can see it from the different visits and the inputs that we've gotten.
Speaker Change: Kim
Kim: Yeah, nothing to add, Steve. I think the key here is the market has stabilized so well, you know, we were certainly down again.
Phil: sizably in the quarter. The rate of decline has gone down as the counts have gotten easier.
Phil: demand is sort of stabilized, as Clark mentioned, the order intake rates are sort of in line.
Phil: so we feel like at this point it's not getting worse and then it's just a question of at what point does it inflect the growth and we at this point would not expect that in 2025.
Speaker Change: Great, and then Tarek, since you've been doing sort of your initial assessment and tour here, I'm curious if...
Speaker Change: there's a chance that we may see any type of a shift and I'm thinking
Phil: maybe there's some businesses that kind of appear non-core to you that that might not be or that could be divested I guess or
Speaker Change: Maybe on capital allocation, one of the questions I always get is why you guys don't buy back more stock relative to your M&A and I'm just curious if any of that has bubbled up as potentially something you might want to shift a little bit.
Speaker Change: Thanks Steve. Look, as I said, we are looking at the entire portfolio very much with the perspective that you just described.
Speaker Change: It's too early to come back with any conclusions or any even first indications. 60 days in, learning about the business and looking at the portfolio is kind of where we are. At the appropriate time, we'll come back with what we think.
Speaker Change: an evolution of Thimken might look like, but that will be at a later date. When it comes to shared buybacks, I mean, look, as we have said, our bias remains discipline, allocation, with a bias towards M&A.
Speaker Change: And we've done quite a few deals in the last, let's say, 18 months.
Phil: We are actively executing and integrating those deals. If something comes along that looks very interesting, on the smaller side, yes. On the medium side, we'll take a hard look, but that's our frame of mind right now when it comes to both the M&A, but also...
Phil: And if nothing comes along, we will continue, as we've always said, with the shared bypass.
Phil: That's our bias
Speaker Change: Yeah, if I could just add, Steve, you know, obviously we've bought a lot of shares back over the last ten years, but we have also done
Phil: quite a bit of M&A, and we do, we've become pretty firm believers in...
Phil: what the M&A can do for us in terms of diversifying the portfolio, making Timken better, you know, being accretive to growth, being accretive to margins, improving the overall package, etc. So I think you'll continue to see...
Phil: a mix of both, obviously this year with EBITDA, with this year being flatter, actually down from an EBITDA standpoint, or managing the balance sheet carefully as well, but I think you'll continue to see both, but with a continued bias for the M&A.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Brian Blair with Oppenheimer. Brian please go ahead.
Speaker Change: Go to Beadaholique.com for all of your beading supplies needs!
Brian Blair: Thank you. Morning, everyone.
Speaker Change: Hey Brian.
Brian Blair: We know the organic revenue trends for the quarter and you just spoke to order rates in terms of wind.
Phil: maybe touch on other large end markets, how orders phased through Q3 into Q4, and you mentioned the anticipation of production rates being pulled back a bit further.
Phil: late in the quarter. That being factored into your guide, any additional detail or color you can offer on that front would be helpful.
Speaker Change: Thanks Brian, I mean as we've said
Speaker Change: We've seen a bit more softness in the general industrial area than we had indicated earlier.
Phil: So that's the more lighter side of the portfolio from products and solutions that we offer to the market.
Phil: So that's where we've seen a bit of a softness. And, I mean, the comment on networking capital and inventory is precisely the area where we are going to focus. So we are running a bit ahead with our production.
Phil: compared to the demand and we are now tacking down the capacity as you mentioned based on what we see as incoming order intake rates plus
Phil: being a bit more cautious when it comes to the fourth quarter. As you know, sequentially, we're always down on the fourth quarter compared to third quarter. And that's the same piece that we see every year. From the inorganic side, I would say...
Phil: Our acquisitions have performed quite well and have been supporting us this quarter.
Phil: I'm not sure I'm answering your question precisely, but that's what I assume you were asking. So we're quite happy with both the growth and the performance and profit contributions, including the accretion that our recent acquisitions.
Phil: specifically Des Cage, Lager-Schmidt, and CGI already in the month of September. Since we closed CGI we almost had the whole month. Those have contributed quite positively to our performance and we expect them to continue based on what we see in their end markets.
Phil: Yeah, maybe if I could just add, Brian. So certainly when we look at revenue trends through the quarter, it did get a little bit better in September off of July and August. But as Tariq mentioned, just given what we're
Phil: are planning for that more pronounced slowdown in December, which was primarily the basis for the lower
Phil: top-line guide, certainly for the rest of the year.
Phil: And then relative to the quarter, I would tell you that some of the one-off costs I talk about really...
Phil: kind of popped up late in the quarter when you think about the currency and...
Phil: and the customer accrual certainly were things that popped late in the quarter.
Phil: but overall that was sort of the sales trends. And then from an order book standpoint, I'd say broadly, you know, the backlog is, or order book is sort of in line, kind of flattish sequentially from the second quarter.
Phil: still down a little bit year over year. I kind of call it mid-single digits, which was kind of what we were last quarter as well. So they were to book stable and, I would say, certainly supportive of the rest of the year, guys.
Speaker Change: Thank you for watching.
Speaker Change: Understood, appreciate the detail. And specific to industrial motion, we know you know, belt and chain, you know, been facing headwinds through the year.
Speaker Change: Are you willing to speak to, on a year-on-year basis, how much the...
Phil: even the compression in that platform will impact the segment and then as we look to 2025 with Mexico capacity being fully ramped at that point, how much of a reset or a good guy that may be in the outlook.
Speaker Change: Yes certainly I mean when you think about industrial motion for the full year and you know margins will be
Speaker Change: We primarily impacted by
Phil: certainly the lower organic volume and belts and chain would certainly be a part of that.
Phil: as well as the expectation for higher manufacturing costs year over year. The new plant ramp is part of that as well, and then we would have some positive pricing offsetting that.
Phil: Fast forward to next year.
Phil: you know that that new plant ramp as we've talked about before you know can it could be a headwind of a
Phil: you know a couple million couple million dollars a quarter you have two plants operating and
Phil: trying to shift.
Phil: production from one to the other. But we get to the end of the year, end of the early part of next year, the U.S. plant should come down. Production will shift fully to Mexico. It will continue to ramp.
Phil: from a productivity standpoint as you move through called the first half of next year. And then that should be...
Phil: a nice improvement for us from a margin standpoint as the cost of operating that Mexico facility will be significantly lower than operating in similar capacity. Right now we have kind of the trifecta, unfortunately. We have lower volumes on the market.
Phil: And we have three plants running.
Phil: for their full overheads versus the two that we expect in the future.
Phil: So when you combine that and a slightly lower ramp up
Phil: on the Mexico, as we've said before, that facility is not ramping up as fast as we'd like. All of those combined result in the headwinds for the industrial motion business when it comes to belts specifically. The chain part has been doing a bit better, is what I can add. Thanks.
Speaker Change: Okay, understood. Appreciate the details.
Phil: Thanks, Brian.
Speaker Change: The next question comes from David Roso with Evercore ISI. David please go ahead.
David Roso: Hi, thank you for the time. I know around the election and so forth, hopefully some of the customers softness for year-end is, you know, hopefully more of a pause and they're waiting for a little more clarity, but
David Roso: Seeing the organic growth in the fourth quarter implied down a little bit more than we saw in the third quarter Even though some of the wind business Stabilizing is a little surprising. You made a comment about the orders I think more broadly if I heard correctly about the company
Speaker Change: When we think of organic growth, we're trying to swing back positive.
Speaker Change: Can you give us any sense of what you're hearing from your customers to start 25?
Speaker Change: some of their commentary around a December slowdown, but what it can mean for next year. I think right now it seems that there's a lot of work you're gonna do on getting costs and really rethinking the company to some degree on the portfolio, whatever it may be. But obviously it's a lot easier when you get the top line working back in your favor.
Speaker Change: not looking for exact guidance here but is there anything you're hearing from your customers that we
Speaker Change: You know, could see positive organic at some point in the first half of next year, or should we assume it's down?
Speaker Change: and it's more of a cost.
Speaker Change: story for right now.
Speaker Change: And then I have a quick follow-up on that. I think, I mean, as you know, David, from quarter 4 to quarter 1, we always see an increase in business because of the nature of Timken's portfolio and our customers' ordering patterns.
Speaker Change: revenue patterns at BC. So we expect that to also be the case this year, meaning.
David Roso: It depends how low we get in the fourth quarter. That's one of the starting points. But we expect the fourth quarter to be a healthy increase, as always, every year, the last very many years. So that is expected to continue.
David Roso: When it comes to forecasting 2025, one of the reasons we have, the outlook we have, is because
Speaker Change: We are at this point focused primarily on 2024 and we get quite a bit of mixed signals on 2025 at this point.
Speaker Change: As we said, some of our businesses have been doing quite well. I think they are a business that looks strong, expected to be strong. But places where we are weak, we haven't seen the signs that provide us with any degree of confidence on 2025 at this point. Thank you.
Speaker Change: I would say from our team's point of view, it's difficult to call 2025, even if we'd love to call it. But even the Q1 looks a bit something that we are not going to do at this point, and we're going to wait until a bit later, and then when we are back with the numbers on 2025.
Speaker Change: Yeah, David, if I could just add, I mean, certainly I think Tarek said it well, you know, we're not going to comment on 25 today. I will tell you one thing from an OEM customer standpoint, I mean, our assumption for the fourth quarter would be that our inventory destock should be largely complete.
Speaker Change: with OEMs by that time. So that would be, you know, certainly one positive factor, but too early to talk about 2025 from a growth standpoint. And then to your question about.
Speaker Change: The fourth quarter implied organic. You're exactly right. It does imply that it would be slightly worse year-over-year Than the third quarter and it and and you're right renewable as we said was was stable We do have a couple of other markets that we're planning for
David Roso: lower year-over-year, or worsening year-over-year performance in the third quarter. One would be aerospace.
David Roso: would be one after several quarters of running really strong. Rail, again, after several quarters of running really strong. And then our services business are hitting some tougher comps. So those would be the main drivers for that.
Speaker Change: Delta, if you will, between the third quarter year over year organic and the implied fourth quarter. One thing I can add to what Phil just said is we do see many of our customers have probably adjusted their inventories down.
David Roso: to the level they feel comfortable. So, with rare exception, we don't see a further destocking on part of the customer. There are, of course, some segments like ag where it continues to be a bit of a challenge even for our customers. But for the most part, we see that reduced.
David Roso: Plus, we have also reduced our lead times quite a bit in the course of this year given the shortfalls that we see in the process improvement. So we are sitting there with short lead times and we believe the customers are
David Roso: For the most part, at the levels of inventory, they feel comfortable with their demand. That would be a conclusion or let's say an observation, if that helps.
Speaker Change: That's very helpful. And just so I understand, on the margins, the follow-up is, the quarter, did I hear correctly that there was about a hundred basis points?
David Roso: of sort of one-time costs. I noted that the streak.
Speaker Change: the discrete cost you mentioned, but in total did you feel there was almost 100 basis points of one time?
David Roso: Because I'm just trying to figure out if that is the case, 17.9
David Roso: the quarter, but then the fourth quarter is implying like 15.4 to 15.9, like somewhere in that range.
David Roso: And I'm just trying to make sure I know the step down and maybe price cost is negative again in the fourth quarter There's a lot in there, but just trying to figure out that Delta
John Troy: and John Troy.
John Troy: No, it's a great question, David. So I would tell you, we would say it was about 100 pips of negative margin relative to our expectations. And I wouldn't call them one, the other, they were sort of a little bit one-offs in the quarter. In particular, we had the big spike in logistics costs. Now, I will tell you.
John Troy: We're not expecting that to recede in the fourth quarter, so we did kind of play that one a little bit conservatively into the fourth quarter, not assuming that's going to come down. But the other two...
John Troy: The currency was really, it was a reval of cash outside the U.S. and other balances, would not expect that to recur. And then the customer accrual was typically an unusual thing, an allowance we took against one of our customer accounts.
John Troy: that would not be expected to recur. So yeah, relative expectations, it was 100 pips.
David Roso: and you fast forward to the fourth quarter.
David Roso: what's behind the margins there. It really is a combination of the
David Roso: lower organic revenue relative to the prior guide and the step down both sequentially.
David Roso: and year-on-year, and then the other half would be just our continued expectations for
David Roso: a higher cost heading into the end of the year, just because when customers slow down and we're trying to take inventory out, we do find ourselves, often in the past, we find ourselves with higher costs coming through as a result. So we decided to be a little cautious on the fourth quarter cost outlook heading into the end of the year.
Speaker Change: very helpful. Maybe in addition to what Phil just said, as you know we have some structural cost adjustments and investments in Mexico and in India.
David Roso: So, those would start to kind of kick in more into 2025 and later into 2025. So, we are carrying
David Roso: in the fourth quarter, where the volumes will not be there but the investments in getting those facilities are quite significant. And those are expected to come online in terms of volume contributions and profitability contributions only into some part in 2025.
David Roso: investments, sizable investments to be made in India for the structural cost adjustments more like second half of next year. So that's also in addition the reason why we are a bit cautious on fourth quarter.
Speaker Change: Thank you for your time.
Speaker Change: Helpful. Thanks David.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Mike Schliske with DA Davidson. Please go ahead Mike.
Mike Schliske: Yes, hi, good morning. Thank you for taking my questions.
Speaker Change: Maybe to follow up on your last answers there, if we can maybe strip out a lot of those one-time discrete costs you saw in the quarter.
Speaker Change: I'm just trying to get a feel, I know you aren't going to give details about the cost reductions you've got planned for 6th of February, but perhaps maybe a two-part question. I know we won't get the actual update until February, but do you plan to start making those cost reductions?
David Roso: this month or within the next few months, then maybe are you targeting any kind of specific incremental or decremental margin range that's been different than the past? Just some broad strokes as to what you're looking to do with these cost reductions.
Speaker Change: Yeah, thanks Mike. Maybe I'll start and then ask Tariq to chime in as well.
David Roso: So, you know, relative to the cost, you know, we've been working on taking costs out all year, as I mentioned, I mean, that will continue, you know, we will, we will target the incremental actions at areas within the business that have seen the kind of the most pronounced declines, if you will, from a demand standpoint, and then, obviously,
David Roso: function supporting those areas, the objective would be to get the cost down more in line with current demand levels. And then obviously, if we if we inflect, we will benefit from that. And then obviously, also,
Speaker Change: bring our margins in line with our long range targets, which which, you know, we put out a couple years ago at our Investor Day and
Speaker Change: we're still working towards hitting those.
Speaker Change: So from the cost standpoint, I wouldn't expect the incremental stuff may maybe get a little bit of a benefit in the fourth quarter.
Speaker Change: It's probably more targeted towards 2025. I mean, I would add that in certain product lines, we are a bit too big in terms of our jacket size or shoe size, you would call it. And there we are trimming. But it's a more...
Speaker Change: very specific to product lines where we see the gap between demand and our own capacity.
Speaker Change: And please remember in the fourth quarter we are also slowing down our operations. I mentioned we have too much inventory.
Speaker Change: So, obviously, when we slow down the operations in order to drive cash, cash flow, that will have a bit of a negative impact because of the under-absorption in those facilities we are idling. So we got a bit ahead on our production this year, and now we are stepping back.
Speaker Change: and that is also a contributing factor in the fourth quarter performance that you see from us in terms of the outlook. And as Phil said, we are being a bit cautious.
Speaker Change: given the market environment that we see in terms of the forecast for 2024. We all hope that after six quarters or more, now almost seven quarters of a
Speaker Change: decline in the market demand. We do see some upsides going into 2025, but it's difficult at this point for us to see that and then call it. And then maybe one more comment, Mike, on decrementals, because I know you referenced decrementals. Certainly the implied guide would have decrementals.
Speaker Change: at higher than what we would typically run. I think the implied guide would be somewhere in the mid-40s organic for the year. But keep in mind, price costs can be lumpy as you move through periods like this. And in 2023, we ran very strong.
Speaker Change: decrementals in 2023, incrementals and decrementals as we move through the year, and if you kind of stack the two years together, you know, the net organic decremental over that two-year period is sub 20, so I think, you know, we have been pulling the levers and executing.
Speaker Change: well across that time frame. It's just, as we said, we sort of got stuck this quarter with lower volume, kind of neutral price cost, and some of these one-offs that I talked about earlier, which combined really put us in a difficult spot from a margin standpoint for the quarter.
Speaker Change: Okay. Okay, great. And just to follow up on the margin story going forward,
Speaker Change: Thank you.
Speaker Change: So you guys mentioned you're looking to maybe pursue a growth more aggressively, so it makes a lot of sense. I'm just wondering if you've got cost reductions taking place in 2025 targeted or kind of broader.
Speaker Change: But you've also got maybe some investments to make in your R&D or engineering. I just want to make sure that you're expecting 2025 to be a year of
Speaker Change: net reductions in the cost structure and not, you know, mostly offset by increased investment elsewhere. I'm just trying to make sure that the cost structure is kind of permanently staying lower than it was in 25 than it was in 24. Any comments there would be appreciated.
Speaker Change: I think maybe I'll take this so you can please add. A lot of what we're doing is to adjust to capacity and demand.
Speaker Change: Within your question, the assumption is there is a demand that's equal to this year, then probably yes. We will try to look at costs that are lower than this year, given both the investments that we have made in the new factories as well as what we see in terms of the demand pattern.
Speaker Change: However, there's a big if.
Speaker Change: And our big if is the demand continues to be around the same levels in 2025 as 2024. So what we're trying to do now is to ensure that we adjust our costs in line with demand.
Speaker Change: But in order to do that, we would have to make some investments in that portfolio. So, Net-Net is difficult for us to talk about 2025 because we don't have a view on what the top line looks like.
Speaker Change: But our going in thinking as a team is we need to address costs where we see the challenges.
Speaker Change: and we need to think about growth where we see the opportunities. And right now that's not where we'd like it to be in terms of the bottom line performance, but this is something we're working on collectively and specifically on the product lines where we see challenges in terms of performance. Right. And if I could just add, Mike, you know, as we invest
Speaker Change: Yeah, obviously we've got targets out there for growth, margins, etc. As we invest, we always look for those investments too.
Speaker Change: M&A, et cetera, all within the confines of the targets we've set and the commitments we've made around margins, et cetera, and I think that would continue.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thanks for your time.
Speaker Change: Thank you, Mike.
Speaker Change: Thank you.
Speaker Change: The next question comes from Steve Barger with KeyBank Capital Markets. Steve, please go ahead.
Speaker Change: Thank you for watching!
Steve Barger: Thanks. Good morning.
Steve Barger: Tarek, you said there was some wind business where pricing is so bad you don't want to participate. Is there one main competitor or multiple competitors out there willing to take business at margins you consider unacceptable? And are you seeing competitive pressures like that in any of your other end markets?
Speaker Change: Thank you.
Speaker Change: Thanks Steve.
Speaker Change: You know, having been to China and spent time with, this is exactly where we see the biggest price pressure is in China.
Speaker Change: It's a few competitors, not many, but it's a few competitors where
Speaker Change: We don't see those price levels as long-term sustainable, they're more capacity-based concepts rather than a more sustained profitability-based thinking. So there we do see, and we've walked away from business, but in the meantime...
Speaker Change: Andres and the team are working on ensuring that our cost structure is in line with both expectations.
Speaker Change: from a performance point of view and also from a customer point of view.
Speaker Change: So everybody's looking to reduce and we're developing new products and new processes to meet
Speaker Change: the specific requirements of wind in order to make sure we can still participate in the market. But it is a difficult market in a very low volume scenario compared to where it was a couple years ago.
Speaker Change: So we do see competitive pressures.
Speaker Change: But I will not say in the segments that we participate in, we see many.
Speaker Change: but we do see a few local competitors who are a bit more aggressive.
Speaker Change: and willing to take business at levels that we don't find particularly interesting or acceptable at this point. Until our own product costs are a bit more in line with our own gross margin requirements. So that is a kind of a continuous process.
Speaker Change: where Andreas and the team are working to make sure we stay both competitive and participate in the market.
Speaker Change: Yeah, and I would say, Steve, that's really isolated to wind from, you know, and China in particular. I mean, we don't see, if anything, we feel like we're gaining shear. We're targeting versus the opposite. And in China, I mean, Tarek summarized it extremely well, but I would tell you it's not...
Speaker Change: unlike what you would see in any market that's down as significantly as China went is down where customers are looking for
Speaker Change: Price concessions and willing to move business to get it at least, you know, at least in the near term So it's not totally unique. Obviously the China dynamic adds a little bit to it, but but overall TARC summarized it. Well, I mean that would be the only spot and it again it was
Speaker Change: By choice as much as anything else and to continue on your question. I mean do we see it in other segments?
Speaker Change: I mean, we're down quite a bit in many other segments, but we don't see the same kind of...
Speaker Change: I'd say both behavior, plus also we don't see the same need for us to walk away, quote unquote, from some business. So I mean, we've seen that from Phil, and then we've talked about it over the course of last year. We don't see the same behavior in other segments.
Speaker Change: Thank you.
Speaker Change: yeah that's good to hear and that's my price is sorry go ahead so go ahead please go ahead
Speaker Change: Oh, sure, sure. Yeah, I understand that you don't want to take a view to 2025, but we are, you know, ultimately, at the end of this year, we'll be six quarters into negative growth. EPS will be down around 20% year over year per year guidance.
Speaker Change: My question is when you think about
Speaker Change: the stocking and inventory trends, the cost actions that you expect to take, and your capital deployment options, do you have enough in your control to drive double-digit EPS growth next year? Or is it even too early to say that based on how you're thinking about the broader environment?
Speaker Change: I would say it's a bit too early based on how we see the broader environment. Certainly our balance sheet says we could do it, but we want to, as we said, we want to make sure, from a share purchase perspective, we want to make sure that we have the adequate funds available for investing in the business. So at this point...
Speaker Change: We are at least being more cautious about 2025.
Speaker Change: And that's what I would say, just being a bit more cautious about 2025 at this point. Yeah, I agree. I mean, I think we really need to see how the market situation develops as we move into 2025. We'll have a better view of that in February because that'll really drive the answer to your question. But to your point,
Speaker Change: You know, we're taking actions on the cost side, including the incremental actions we talked about today.
Speaker Change: customer inventories are at a good level, should remain at a good level heading through the end of the year. As we get to the end of the year, I think we'll be in a good position, but until we really see how the markets develop, too soon to say.
Speaker Change: Thank you. Bye.
Speaker Change: Understood, thank you.
Speaker Change: Thanks Steve.
Speaker Change: I'm sorry. I'm sorry. I'm sorry.
Speaker Change: The next question comes from Joe Ritchie with Goldman Sachs. Joe, please go ahead.
Joe Ritchie: Thank you.
Joe Ritchie: Thank you and welcome Tarek. Yeah, maybe my first question is just on that discreet customer accrual that you mentioned. Yeah, you're welcome. So was that sensibly like bad debt expense? I just want to get some clarification around that item.
Speaker Change: Thank you for watching. Please like, comment, and subscribe.
Speaker Change: Yeah, that's exactly it. It was a collectability across a reserve that we set up for one specific customer in the corridor in the renewable energy sector.
Speaker Change: you know if you look at our history around
Speaker Change: Collectibility, it's quite strong. I mean, I would stack it up against anybody, but occasionally we will have a situation like this where we got to set up a reserve. It's typically very few and far between, and we're watching it closely, obviously, but collections have generally been
Speaker Change: stable and consistent with prior years, this was sort of an outlier that we had to set up a reserve for.
Speaker Change: Thank you.
Speaker Change: Okay, yeah, no, I get it, it happens. I guess the...
Speaker Change: On the logistics side of things, you know, you guys are referencing that as a, you know, it seemed like that was a pretty big impact this quarter to margin. Seems like it's going to impact the fourth quarter.
Speaker Change: I guess, you know, Tariq, as you're thinking about, you know, improving structural costs, is there anything that you guys can do?
Speaker Change: with the way you're set up on the logistics side to maybe kind of offset times when like you see like a big spike in logistics costs?
Speaker Change: Yeah, I mean, one of the...
Tariq: I mean, logistics is something that you know has been quite volatile in the last four years. It has not necessarily followed the normal economic pattern.
Speaker Change: and you combine that with the structural changes we are making in terms of our supply locations to our demand locations.
Speaker Change: It's an area that we will take a look at as we look at the evolution of Timken in terms of how we serve the different markets and from our geographies. So I wouldn't say...
Speaker Change: At this point, I have an answer, or we have an answer, but it's an area where we will examine how we meet the different geographies, whether it's America's...
Speaker Change: Europe, Middle East, Africa and Asia, how do we design our supply chains so we are not as dependent on the logistics, at least at an inter-regional level.
Speaker Change: But at this point, it's a long-term...
Speaker Change: discussion and decision and at this point we're not ready to say we're going to change the way we we operate.
Speaker Change: based on logistics, but it's something to consider as we look into the future.
Speaker Change: as far as supply-demand alignment.
Speaker Change: Yeah, you know, certainly Joe, we've lengthened our supply chains over the last 10 years and some of that's been trying to get to lower cost suppliers, very competitive suppliers across the globe, frankly.
Speaker Change: and that always comes with lower cost.
Speaker Change: you got the extra logistics but net net it's been a benefit to the company and logistics has always been very manageable we've had the last few years where it's been a little bit
Speaker Change: choppy and spiky, including this quarter. It sort of spiked on us.
Speaker Change: and we didn't expect it, we didn't see it coming. We did expect it to be a little bit higher, but not as much as it came through. So it'll normalize as we move forward. We're not planning on it for the fourth quarter. It'll normalize, but net, net, the logistics has kind of come with.
Speaker Change: lower costs on the material side, and those two kind of go hand-in-hand.
Speaker Change: Got it. Okay, great. Thanks, guys. Appreciate it.
Speaker Change: Thank you, Jim.
Speaker Change: The next question comes from Michael Seliger with Banks America. Michael, please go ahead.
Michael Seliger: Great. Thank you, guys.
Speaker Change: Squeezing me in, um
Michael Seliger: Just Phil, just on the, I was surprised a little bit on the inventory build in the quarter.
Michael Seliger: relative to your sales, just, you know, it seems like that's, you guys are gonna be working that down, should be good for free cash flow in the fourth quarter. Do you feel like with where you think demand finishes the year, like, do you feel like your inventories are going to be in line with that demand, or if demand stays where it is at the end of Q4 into 2025, is there still some work to do there?
Speaker Change: I would say in general our networking capital is, I mean if you look at our historical networking capital volumes, we are on the high side compared to the past.
Speaker Change: So we have a homework to do in terms of reducing our networking capital as a percentage of revenue
Speaker Change: in general. It's high today, and we will have to make process changes, Mike, in terms of how we run our supply chains.
Speaker Change: Fill rates and performance for distribution and our customers is lower Going into the future than it has been in the past. So that's something we're working on
Speaker Change: Yeah, hey, Mike, just for clarification, I think in the quarter, you know, we had acquisitions and currency, and when you look at the balance sheet organically, we would say inventory came down right close to $10 million. You see that if you look at the cash flow statement, you know, we'd expect more to come out in the fourth quarter.
Speaker Change: And as Tarek mentioned, even after that, you know, I think there's still opportunity moving ahead for Timken to get more efficient in managing both inventory and working capital more broadly.
Mike Schliske: Okay, that's helpful. Yeah, I didn't think about the acquisition.
Speaker Change: Guys, just curious, just thinking about some of the moving pieces, talking about price versus cost.
Speaker Change: Tim, you've done a great job getting pricing, even this year it's been positive. We're starting to see in the industrial channel pricing really starting to flatten out when we look at some of what the OEMs are thinking for Q4 and going forward. I'm curious, just big picture, how you're kind of thinking.
Speaker Change: 2025, is it price cost neutral? Could it be positive price versus cost? And if that is positive price, is that you guys leaning more on the cost measures, on that cost bucket to drive that? Just any big picture thoughts on that would be helpful. Thanks everyone.
Speaker Change: Thank you very much.
Speaker Change: Yeah, I think on a big picture level, we don't expect pricing to be anything other than flat-ish in 2025.
Speaker Change: So as you can imagine...
Speaker Change: It won't be like it was in 2023, but we expect to continue to see flattish pricing in 2025 from a big-theme perspective. And then, obviously, distribution will be a bit better, and some areas might not be.
Michael Seliger: because costs have gone up and not down and usually the downturn when prices have gone down have been primarily driven by the input cost going down.
Michael Seliger: As you can see from third quarter and also the expectations on fourth quarter plus with labor inflation, so there isn't a natural driver for the price to go down in the overall market.
Michael Seliger: other than trying to fill factories and that's not what we will do. So, that isn't there and if there's some discipline in the market like we've seen this year, I think, at least we think pricing will hold up.
Michael Seliger: Now let's see what actually happens in 2025, but that's how we see it. We don't see any intrinsic driver of significant lower input costs to really drive the price down overall.
Michael Seliger: Thanks, everyone.
Michael Seliger: Next slide.
Speaker Change: We have time for one further question and our next question comes from Tim Fine with Raymond James. Tim, please go ahead.
Tim Fine: I saw one of your peers in Europe announced a pretty sizable restructuring plan this morning and maybe it is more Europe specific, but you can broaden it just in terms of
Tim Fine: given the challenges in the auto industry.
Tim Fine: combined with, you know, industrial production in Germany that's, you know, been down, like, probably three years in a row. How do you think about just the overall...
Michael Seliger: kind of supply-demand balance. And you know, historically I think there's some fluctuation when the auto industry softens up, you see some of that capacity kind of move around. Maybe just can you speak to that?
Michael Seliger: kind of what you're seeing, you know, just in terms of Europe more generally. Thank you.
Speaker Change: Thanks Tim. Yes, it's been soft as Phil mentioned and we've discussed for quite some time and I think you have said almost we are a year up. It almost looks like year three in Europe.
Speaker Change: in terms of the soft demand.
Michael Seliger: Overall, we are making a couple of capacity adjustments based on the portfolio, based on what we see mid to long term as the needs of the business, and those are being managed by Chris when we're talking about...
Michael Seliger: industrial automation motion and then we see the same thing being addressed by Andreas. So those are not necessarily short-term discussion decisions, they are more mid to long term.
Michael Seliger: Those are also being managed at the individual plant level.
Michael Seliger: And not everything is down as we said, you know, we have quite a few of our product lines doing well And that's why we need to make it more targeted more specific
Michael Seliger: and more product line rather than even a location-specific discussions and decisions. But this is something we've been doing for quite some time and we'll continue to do it.
Michael Seliger: There's something sizable. We'll announce it as we are expected to, but that's a homework that the team is engaged on pretty regularly, and now a bit more given the softness that we see.
Michael Seliger: Thank you.
Speaker Change: Okay, we can leave it there. Thank you.
Michael Seliger: Thein, Neil Frohnapple,
Thein: Thank you. Bye.
Speaker Change: There are no remaining questions at this time. Sir, do you have any final comments or remarks?
Michael Seliger: Thank you.
Speaker Change: Yeah, thanks, Emily, 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.
Michael Seliger: Thank you.
Michael Seliger: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.