Q1 2025 The Timken Co Earnings Call
Okay.
Emily: Good morning, My name is Emily and I'll be your conference operator today at.
At this time I would like to welcome everyone to Timken first quarter earnings release Conference call.
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Emily: After the Speakers' remarks, there will be a question and answer session.
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Fred Apple: He Mr. Fred Apple you May begin your conference.
Fred Apple: Thank you operator, and welcome everyone to our first quarter 2025 earnings conference call. This.
Speaker Change: This is Neil thrown Apple Vice President of Investor Relations for the Timken company we.
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 Timken company's president and CEO rich Kyle.
Bill Casa: And bill for Casa our Chief Financial Officer.
We will have opening comments this morning from both rich and Phil before we open up the call for your questions.
Bill Casa: 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.
Bill Casa: During today's call you may hear forward looking statements related to our future financial results plans and business operations are.
Bill Casa: Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken Dot com website.
Bill Casa: We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials today's.
Bill Casa: Today's call is copyrighted by the Timken company and without expressed written consent, we prohibit any use recording or transmission of any portion of the call.
Bill Casa: 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.
Rich Kyle: Thanks, Neil Good morning, everyone and it's good to be with you on the earnings call again through this leadership transition that.
Speaker Change: I'll begin with a pretty fluke at our first quarter results and updated outlook for 2025.
Speaker Change: Sure a bit more about our near term strategic priorities.
Speaker Change: Starting with the first quarter, we delivered solid results as the team executed well on cost actions and other initiatives to help offset challenging operating conditions.
Speaker Change: Overall sales in the quarter were over $1 $1 billion with organic revenue down around 3% from last year.
Speaker Change: We saw lower demand in Europe, and the Americas, while we were up in Asia, driven by growth in wind energy.
Speaker Change: Overall, our total backlog was up low single digits compared to the fourth quarter.
Speaker Change: This is significant since backlog was down sequentially in the first quarter. So it was in 2023 and 24. So it does support that we are seeing stabilization in end market demand.
Speaker Change: Adjusted EBITDA margins came in at 18, 2% and adjusted earnings per share was $1 40.
Speaker Change: Both below prior year, driven primarily by lower volumes higher manufacturing costs and unfavorable mix.
Speaker Change: Our results in the quarter were helped by targeted cost actions and continued strong performance from the CGI acquisition. Finally, we generated higher free cash flow compared to the prior year and ended the quarter with a solid balance sheet.
Speaker Change: Turning to the outlook, we are focused on performing well through this environment, while continuing to advance our strategy.
Speaker Change: So it will take you through the updated outlook and assumptions in detail.
Speaker Change: We expect industrial market conditions to remain challenging over the rest of the year.
Speaker Change: The guide is our current best estimate given the trade situation and the heightened level of uncertainty that we and our customers are facing.
Speaker Change: I would add that we have not seen any significant change in demand orders and shipments in April remain in line with our expectations.
Speaker Change: However, the tariffs and pricing have not yet fully hit the marketplace. So like everybody else. We will continue to closely monitor and react to the situation as it develops.
On tariffs, we are quickly responding and actively passing the cost into the market through repricing the portfolio.
Speaker Change: Long term, we are confident in our ability to mitigate the direct impact from tariffs.
Speaker Change: We expect to fully offset the cost impact on a run rate basis by the end of the year.
Speaker Change: And we would expect to eventually recover margin on the incremental costs as well.
Speaker Change: However, we estimate a net direct impact from tariffs currently in place of around $25 million this year.
Speaker Change: This accounts for the time, it will take to implement pricing and other actions to offset the costs expected from tariffs.
Speaker Change: This is a tariff scenario as of today and as we all know it has been very fluid.
Speaker Change: Finally, we are reaffirming our commitment to deliver $75 million of cost savings in 2025, and we're still planning to generate significant free cash flow this year, providing us with flexibility moving forward.
Speaker Change: While the tariff situation is presenting short term headwinds and distractions, we have successfully navigated many similar macro headwinds while simultaneously advancing the company and that is what we intend to do through the tariffs dynamics as well.
Speaker Change: With respect to the recent CEO transition and the board is continuing a comprehensive search process to identify the best person to lead timken into the future in the meantime, our strategic priorities and financial aspirations remain unchanged.
Speaker Change: We are focused on winning in the marketplace to deliver profitable growth.
Speaker Change: Operating with excellence and creating shareholder value through the disciplined allocation of capital the.
Speaker Change: The board is confident that we have a proven strategy and a strong and tenured management team that is capable of executing that strategy to deliver shareholder value in the coming years.
Speaker Change: Product vitality and customer Centricity are at the heart of our business model and drive our organic growth initiatives.
Speaker Change: How do we differentiate win and compete in the marketplace. We are staying close to our customers to support their short and long term needs and our portfolio of solutions and technical expertise positions us well to grow with them.
Speaker Change: Operational excellence is a core competency our strength in this area is an advantage that will help us operate through this unpredictable environment to deliver a resilient performance in 2025 and to return to growth in 'twenty six.
Speaker Change: Our disciplined approach to capital allocation is at the core of our strategy.
Speaker Change: It has diversified our portfolio and better positioned us to grow during normal times and to deliver more resilient performance through uncertain times.
Speaker Change: The company will continue to generate strong cash flow and we are confident in our ability to create shareholder value.
Speaker Change: We're actively investing in the parts of the portfolio with the highest returns and the best growth potential.
Speaker Change: Likewise, we are working on enhancing the profitability of the company as we have in the past.
Speaker Change: With respect to the portfolio, we are always looking at it from both a strategic and financial standpoint to strengthen the company and enhance our financial performance for the long term.
Speaker Change: Initial output of the portfolio review has us focused on a significant portion of our automotive OE business, which we have recently begun to address.
Speaker Change: We would not expect any material impact to 2025 results, but we do expect our actions to have a positive impact on margins in 2026 and 27.
Speaker Change: And while we are currently navigating and executing for the short term I am confident that timken will come out of this period stronger and move back on track to achieve new levels of financial performance with that let me turn the call over to Phil for a more detailed review of the numbers and outlook Bill.
Bill Casa: Thank you rich welcome back.
Bill Casa: Good morning, everyone.
Bill Casa: For the financial review I'm going to start on slide 11 of the materials.
Bill Casa: A summary of our first quarter results.
Bill Casa: Overall first quarter revenue came in at $1, one 4 billion.
Bill Casa: Around four 2% from last year.
Bill Casa: Adjusted EBITDA margins were 18, 2%.
Bill Casa: And adjusted EPS for the quarter was $1 40.
Turning to slide 12, let's take a closer look at our first quarter sales performance.
Bill Casa: Organically sales were down three 1% from last year.
Bill Casa: With volumes, lower but pricing slightly higher.
Bill Casa: Looking at the rest of the revenue walk the CGI acquisition contributed 1% of growth to the top line, while foreign currency translation was about a two point headwind in the quarter on.
Bill Casa: On the right you can see organic growth by region.
Bill Casa: This excludes both currency and acquisitions.
Bill Casa: Let me provide a little color on each region.
Bill Casa: In Asia Pacific were up 10% led by growth in China with a significant improvement in renewable energy demand.
Bill Casa: India and the rest of the region were also up modestly compared to a year ago.
Bill Casa: In the Americas, our largest region, we were down about 4%.
Bill Casa: Most sectors were lower as we expected with the auto truck and off highway sectors seeing the largest declines.
Bill Casa: Industrial services revenue was also down.
Bill Casa: We posted solid growth in marine during the quarter.
Bill Casa: And finally, we were down 11% in EMEA.
Bill Casa: Due to continued industrial softness in Western Europe.
Bill Casa: Most sectors were lower with the largest declines in general and heavy industrial.
Bill Casa: Automation.
Bill Casa: Auto truck.
Bill Casa: Turning to slide 13, adjusted EBITDA was $208 million were 18, 2% of sales in the first quarter.
Bill Casa: Compared to $246 million or.
Bill Casa: We're 27% of sales last year.
Bill Casa: Looking at the change in adjusted EBITDA dollars, you can see that the decrease versus last year was driven mainly by the impact of lower sales volume higher.
Bill Casa: Higher manufacturing costs and unfavorable mix and currency.
Bill Casa: Partially offset by the benefit of acquisitions.
Bill Casa: Our ongoing cost reduction actions.
Let me comment a little further on these drivers.
Bill Casa: With respect to price mix pricing was up slightly in the quarter, while mix was unfavorable.
Bill Casa: <unk> was also up slightly from the fourth quarter.
Bill Casa: Note that year to date pricing does not include any tariff related pricing that will start in the second quarter booking.
Bill Casa: Looking at material and logistics logistics costs were up versus last year.
Bill Casa: <unk> costs were down slightly.
Bill Casa: On the manufacturing line overall, our performance was in line with our expectations, but let me take you through the various puts and takes.
Bill Casa: The negative 10 million reflects the continued year over year impact of inflation.
Bill Casa: Ramp costs associated with our facility expansions in Mexico and India.
Bill Casa: In addition, we reduced inventory during the quarter, which drove an unfavorable cost absorption impact.
Bill Casa: Collectively these items more than offset the positive impact of savings from cost reduction actions in the quarter.
Bill Casa: Moving to the SG&A other line <unk>.
Bill Casa: Expenses were down from last year with.
Bill Casa: With cost reductions and other tactics more than offsetting the impact of wage inflation.
Bill Casa: Currency was negative $5 million, which corresponds to the negative sales impact and reflects the stronger U S dollar as compared to the same period a year ago.
And finally, our CGI acquisition continues to perform well contributing $4 million of adjusted EBITDA in the quarter.
Bill Casa: Which was accretive to company margins.
Bill Casa: Moving to slide 14, we posted first quarter net income of $78 million or $1 11 per diluted share on a GAAP basis.
Bill Casa: Quarter includes 29 of net expense from special items.
Bill Casa: <unk> is comprised of acquisition amortization and other net charges.
Bill Casa: On an adjusted basis, we earned $1 40 per share.
Bill Casa: One from $1 77 last year, but largely in line with our expectations.
Bill Casa: With respect to some below the line items.
Bill Casa: Interest expense in the first quarter was $5 million lower than last year, reflecting the benefit of debt pay down from free cash flow.
Bill Casa: Alright, just a tax rate for the quarter was 27% in line with our expectations.
Bill Casa: And diluted shares were down slightly reflecting net share buybacks over the past 12 months and.
Bill Casa: And finally, noncontrolling interest or NCI was $6 million higher than last year.
Bill Casa: This was more than we anticipated and was driven by the impact of some tax related benefits at Timken, India.
Bill Casa: Now, let's move to our business segment results, starting with engineered bearings on slide 15.
Bill Casa: As you didn't bearing sales were $761 million in the first quarter down five 2% from last year organically.
Bill Casa: Organically sales were down two 8% driven.
Bill Casa: Driven by lower end market demand in Europe, and the Americas, partially offset by higher sales in Asia.
Bill Casa: Among market sectors heavy industries auto truck and off highway were lower versus last year and.
Bill Casa: And rail was down slightly as well.
Bill Casa: On the positive side renewable energy was up significantly in the quarter off last year's low level.
Bill Casa: While revenue in other sectors was relatively flat.
Bill Casa: And finally currency was a headwind to segment revenue of more than 2% during the quarter.
Bill Casa: Engineered bearings, adjusted EBITDA was $159 million or 29% of sales in the first quarter compared to $181 million or 22, 6% of sales last year.
Bill Casa: The decline in segment margins reflects the impact of lower volume and unfavorable mix and currency.
Bill Casa: Partially offset by the benefit of our cost reduction actions.
Bill Casa: Now, let's turn to industrial motion on slide 16.
Bill Casa: Industrial motion sales were $380 million in the first quarter.
Bill Casa: Down around 2% from last year.
Bill Casa: Organically sales declined three 8%.
Bill Casa: As lower demand was partially offset by higher pricing.
Bill Casa: Most platforms posted lower revenue year over year.
Bill Casa: Lubrication systems and linear motion were down on continued weakness in western Europe.
Bill Casa: Felt some chain continues to be impacted by lower AD demand in North America.
Bill Casa: And industrial services saw less demand, but our backlog in that business remains relatively strong.
Bill Casa: On the positive side, our drive system platform was up significantly on higher military marine revenue in the quarter.
Bill Casa: While couplings clutches and seals revenue was relatively flat.
Bill Casa: The CGI acquisition contributed over 3% to the top line.
Bill Casa: While currency was a headwind of around one 5% industrial motion adjusted EBITDA was $67 million or 17, 7% of sales in the first quarter compared to $82 million or 21, 2% of sales last year, a tough comp.
Bill Casa: Our segment margin was impacted by lower volume unfavorable mix and higher manufacturing costs, including the impact of higher capitalized variances last year.
Bill Casa: And ramp costs related to our new build capacity in Mexico.
Bill Casa: On the positive side SG&A and other costs were lower driven by cost reduction actions in the CGI acquisition was accretive to margins in the quarter.
Bill Casa: Moving to slide 17, we generated operating cash flow of $59 million and free cash flow of $23 million in the first quarter.
Bill Casa: Both higher than last year as improved working capital performance and lower capex spending more than offset the impact of lower earnings from.
Bill Casa: From a capital allocation standpoint, we returned $48 million to shareholders during the quarter through the repurchase of 300000 shares and the payment of 411 consecutive quarterly dividend.
Bill Casa: And I want to point out that we have continued our repurchases in April about 200000 shares at attractive prices.
Bill Casa: And looking at the balance sheet. We ended the first quarter with net debt to adjusted EBITDA at two two times well within our targeted range for net leverage.
Bill Casa: Now, let's turn to the updated outlook for full year 2025, with a summary on slide 18.
Bill Casa: The tariff situation is complicated this so let me take you through it piece by piece.
Bill Casa: On the revenue line overall, you'll see an improvement in the outlook from down two 5% at the midpoint in February to down just over 1% at the midpoint now.
Bill Casa: This improvement can be attributed entirely to currency.
Bill Casa: Our current expectation is for a headwind of 1% for the full year based on March 31 exchange rates.
Bill Casa: This compares to our February expectation for headwind of just over 2%.
Bill Casa: For acquisitions, we expect CGI to contribute just under 1% to our revenue for the year. This is unchanged from February.
Bill Casa: Now moving to organic revenue our current outlook is to be down 1% at the midpoint.
Bill Casa: While this looks unchanged on its face we made two changes here.
Bill Casa: First we added some pricing to pass through the impact of tariffs over the course of the rest of the year.
Bill Casa: And second we lowered our volume outlook by roughly an equal amount to reflect our expectation for slightly softer demand caused by trade related economic uncertainty.
Bill Casa: Year to date, our demand and order intake rates are generally in line with our prior expectations in our backlog is up versus the end of 2024.
Bill Casa: However, given the uncertainty and limited visibility we are taking a cautious view on market demand, but we are not assuming any sort of global recession at this point.
Bill Casa: On the bottom line, we now expect adjusted earnings per share in the range of $5 10 to $5 60 per share.
Bill Casa: Down 20 at the midpoint from our prior guidance.
Bill Casa: Youll see a walk through the various puts and takes on a later slide but the guide assumes a net unfavorable direct impact from tariffs of approximately <unk> 25 per share I'll come back to this in a moment.
Bill Casa: Our revised outlook implies that our full year consolidated adjusted EBITDA margin will be in the mid to high 17% range.
Bill Casa: Note that this includes a net unfavorable direct impact from tariffs of $25 million.
Bill Casa: Our margin outlook would be close to unchanged versus our prior guide if you exclude the tariff impacts.
Rich Kyle: And as Rich mentioned, we are affirming our full year cost savings target of $75 million, which should more than offset continued inflation in labor and other input costs.
Rich Kyle: Moving to acquisitions and currency, we expect CGI to be accretive to margins, while currency is expected to be unfavorable, albeit less than before.
Rich Kyle: And finally, we now anticipate net interest expense to be in the range of $95 million to $100 million for the year, while the outlook for the adjusted tax rate is unchanged at 27% moving.
Rich Kyle: Moving to cash flow were looking for around $375 million of free cash flow at the midpoint, which is just under 130% conversion on GAAP net income.
Rich Kyle: Versus last year free cash flow is expected to benefit from improved working capital performance reduced capex spending and lower taxes, which more than offset the impact of lower earnings move.
Rich Kyle: Moving to slide 19 here, we provide some additional detail on the direct impact on timken from tariffs.
Rich Kyle: As we covered in February.
Rich Kyle: The company imports less than $400 million of goods into the U S from all countries.
Rich Kyle: This includes less than $80 million from China.
Rich Kyle: And keep in mind that timken serves the U S market, primarily from our significant U S manufacturing footprint, which.
Rich Kyle: Which we believe is an advantage for us in this environment.
Rich Kyle: Based on the tariffs currently in place we are estimating a gross unmitigated annualized cost impact of around $150 million.
Rich Kyle: This reflects tariff rates in effect as of today.
Rich Kyle: Note that most of this number is being driven by the escalation that has occurred between the U S and China.
Rich Kyle: Which has produced incremental tariffs of 145% and 125% respectively.
Rich Kyle: Our team is moving with urgency to mitigate this impact through pricing and other actions and.
Rich Kyle: And we expect to fully offset it on a run rate basis by the end of 2025.
Rich Kyle: For the full year, we're assuming a net headwind of $25 million driven by timing with most of this hitting in the second and third quarters on.
Rich Kyle: On slide 20, we provide a bridge of the <unk> 20 per share change in our 2025 adjusted EPS outlook at the midpoint as compared to our prior guidance.
Rich Kyle: Here you can see the 25 negative impact from tariffs that I mentioned earlier.
Rich Kyle: We also show a positive change for currency, which is offsetting a modest change related to organic sales volume.
Rich Kyle: And finally, we're planning for lower interest expense, which is the favorable <unk> <unk> per share that you see in the other bucket.
Rich Kyle: In summary, we're executing well in an unpredictable environment right now.
Rich Kyle: Our team is focused on offsetting the impact of tariffs and delivering resilient performance in 2025.
Rich Kyle: While we remain hopeful that the trade situation will be resolved in the near term we are prepared and confident in our ability to overcome any challenges that lie ahead.
Rich Kyle: This concludes our formal remarks, and we'll now open the line for questions operator.
Thank you.
Speaker Change: As a reminder, if you would like to ask a question today. Please press star and then the number one on your touch on your telephone keypad.
Bryan Blair: Our first question comes from Bryan Blair with Oppenheimer.
Speaker Change: Please go ahead Brian.
Rich Kyle: Thank you for joining us welcome back rich.
Rich Kyle: Hey, Brian Good morning, Brian.
Speaker Change: The guidance update Directionally contemplating higher price lower volume of course makes sense are you willing to speak to the underlying.
Rich Kyle: Assumptions there.
Rich Kyle: And what you are now taking in for volume and price respectively.
Rich Kyle: Netting to the 1% organic sales decline and then within that as a meaningful differences by segment, either with regard to better or worse performance first minus 1% or the splits of volume and price.
Speaker Change: Yeah sure, Brian I'll take that so yes relative to holding the minus one pricing got a little bit better as we said for tariffs I think of that as well.
Rich Kyle: On the order of.
Rich Kyle: Approaching one 5% probably not quite that big but.
Rich Kyle: North of $60 million, if you will and then and then an offsetting decline in volume and if you think about that that was really us trying to be a little cautious on the demand outlook and then relative to the segment just given the first quarter performance. We did we are assuming a little bit.
Rich Kyle: More of that volume change if you will go into industrial motion versus versus bearings again with industrial motion being a little more indexed to Europe and then and then also services was.
Rich Kyle: It was down in the first quarter.
Rich Kyle: And we do expect that to be neutral for the year, but we did move that from up mid single digits to neutral and that also sits in industrial motion and that was a piece of it.
Rich Kyle: As well.
Rich Kyle: That all makes sense and then maybe I'll have more detail on renewable energy trends, particularly in China.
Rich Kyle: I'll have concert are easy there, but it seems like Q1, and it will shake out pretty favorably.
Rich Kyle: Are there any notable pull forwards of <unk>.
Shipments with all of the tailings on.
Rich Kyle: Order rates look now and.
Rich Kyle: What are you contemplating for the full year in terms of renewed.
Rich Kyle: Renewable gas.
Rich Kyle: Yes, Great question I would say, we were pleasantly surprised with the renewable energy demand in the first quarter. We were we were seeing order intake rates pick up as we move through the second half of last year and again, the first quarter is sort of that low base. If you will so we were up pretty significantly off that low base, but.
Rich Kyle: We think we are expecting that momentum to continue in.
Rich Kyle: Coming into the year, we thought we'd be around flat.
Rich Kyle: In renewable energy and now were thinking we should be up mid single digits with the momentum that we've.
Rich Kyle: We saw in the first quarter, which which we're looking to extend that as we move through the year.
Rich Kyle: We've said before you know the outlook on wind remains positive.
Rich Kyle: Should be a growth market for us long term as we said before it will probably be several years before we get back to where we were but it's nice to see the improvement in Q1 and then we also strongly believe in the long term potential for the aftermarket is that continues to grow England.
Rich Kyle: The only thing I would add as well.
Rich Kyle: We've worked our way through what was the.
Rich Kyle: Over inventory situation in that channel and which was affecting the comps last year right.
Speaker Change: Thank you.
Rich Kyle: Okay. That's good thank you guys.
Rich Kyle: Thanks, Brian.
Speaker Change: Thank you. The next question comes from Andrew <unk> with Morgan Stanley.
Speaker Change: Please go ahead.
Stefan: This is actually Stefan sitting in for Angel. Thanks for taking my question.
Speaker Change: Maybe to start.
Speaker Change: Organic sales were down for the quarter.
Speaker Change: Do you have any sense that your customers pulled forward demand trying to get ahead of tariffs at all.
Speaker Change: Yes, I would say nothing that we could point to that.
Speaker Change: That would be material from a from a tariff standpoint, obviously, we sell.
Speaker Change: A lot of different products to our customers, particularly distributors in those products, mainly get produced in the U S. And there is a small minority of imports. So I would say overall when you think of lead times and then the fact, just the breadth of the.
Speaker Change: The mix that we sell to our various customers I would say no nothing nothing notable that we can point to and say yeah that was a that was a buy ahead of tariffs if you will.
Speaker Change: Yeah, and I would add that as I said in my comments April revenue in line with expectations.
Speaker Change: <unk> may backlog is in line, so we're not seeing any.
Speaker Change: A significant move up or down and the and the demand level.
Speaker Change: In aggregate.
Speaker Change: Great. That's that's helpful. And then maybe can you give more details on the actions you are planning on taking in your auto OE business that you mentioned in the prepared remarks.
Speaker Change: For example, Youre planning on implementing a similar strategy for when you left the light vehicle industry in North America, and maybe does your planned actions include trucks or is it more limited to light vehicles. Thank you.
Yes, it's focused on light vehicles, and it's focused on OEM. So it is not affecting our afternoon, we're not targeting aftermarket.
Speaker Change: And to the point you raised of what we did before to go back in history.
Speaker Change: And this in between.
Speaker Change: Between 2008 to 2013 timeframe, we exited over $1 billion of automotive and at that time truck revenue as well.
Speaker Change: OEM space we.
Speaker Change: We sold some of that off we exited some platform restructured.
Speaker Change: Portfolio and manufacturing footprint that supported it.
Speaker Change: And saw a significant uplift in company margins as a result of that from that time, I would say to COVID-19 the <unk>.
Speaker Change: Margins as we've said over the years, we're below company average and they were more in line with our old mobile.
Speaker Change: Business margins.
Speaker Change: But the business did not require much capital.
Speaker Change: Generated good cash flow and was acceptable margins.
Speaker Change: And I wasn't the growth engine of the company, but we continue to stay in it and again met with minimal investment.
Speaker Change: I'd say since Covid and coming out of Covid with inflation, we've been chasing the margin suffered as everything did during COVID-19, but unlike other parts of our business, where we were recovered we've been chasing the margin since that time it has not been acceptable.
Speaker Change: And we're really now targeting what I would say is more than half of the of our automotive OEM business not all of it we still have some very strong technology niches there that.
Speaker Change: Our attractive and we get good returns on.
Speaker Change: It's too early to say what that will how that will play out in regards to that but we expect that by 2027, we will likely be smaller.
Speaker Change: Player in that market and as a result, we would expect.
Speaker Change: A material uplift in corporate margin from it in 2026, and then and then more in 2027.
Rich Kyle: Yes, the only thing I would add as rich said, we're targeting more than half of that auto OE business and we have a pie chart in our investor deck and that would show you that auto OE was around 8% of company sales last year. So that would give you kind of an order of magnitude of what we're looking at and as rich said with the actions were taken.
Speaker Change: Probably not a 25 impact but certainly.
Rich Kyle: It should be accretive to margins in 2006 and beyond.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Thank you so much I'll turn it over.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Kyle <unk> with Citigroup. Please go ahead.
Speaker Change: Thank you.
Kyle: So youre, taking pricing understandably, probably mostly in industrial distribution I would gather to offset some tariff and tax do you have some sense of the pricing that you're passing through just relative to competitors and then also just looking at your supply chain in the U S.
Speaker Change: What sense do you have at least in your core businesses.
Kyle: Just how you're positioned relative to competitors.
Speaker Change: Tariff impacts that you might be seeing relative to your peers.
Kyle: Yes.
Kyle: I'll say that we are seeing competitors raise prices and.
Kyle: Certainly the fastest impact is typically in distribution, but we are raising prices with with through OEM channels as well.
Kyle: And I would say in general bearing prices are going up globally.
Kyle: But certainly more so in the in the U S.
Kyle: I'd say our footprint, we think is at worst neutral and best advantaged and Theres probably longer term some opportunities for us with our heavier concentration of U S footprint.
Kyle: But short term were until there is.
Morris Moore: Morris Moore.
Kyle: Stability in the tariff situation.
Kyle: Our object our short term objective is largely to hold share pass the cost increases through.
Kyle: And get some settling on where the tariffs land and then we will look at is there opportunity for us to to capture some share <unk>.
Kyle: <unk> repositioned some of our footprint.
Speaker Change: Yes, maybe he Kyle maybe if I could just maybe add a little bit more color because I do agree with what rich said, we do believe our U S footprint.
Kyle: Should help us in an environment like this and we think it will.
Kyle: Impact that we've talked about in the slides.
Kyle: $150 million gross annualized impact I mean, let me if I could break that down a little bit.
Kyle: First when you talk about rates in China were assuming rates.
Kyle: In effect as of today and that includes the China related rates of 145, and 125% respectively. So big numbers from China that we would hope those rates would certainly come down at some point.
Kyle: And China is probably north of 80% of the impact for us and obviously given those rates really driving the numbers. So if the even if just the China Deescalate Tibet and gets a cut in half that impact goes down significantly and I think our net $25 million impact large.
Kyle: <unk> goes away not zero, but largely largely goes away that would be one number two rich talked about the lag we've talked about.
Kyle: The time lag for pricing before that with distribution. It can take a couple of months.
Kyle: Typically less than a quarter, we're working to get the pricing in <unk>.
Kyle: Oems are can be a little bit longer because it's kind of one by one customer by customer in many cases and thats ongoing.
Last time in 2018, it was probably two to three quarters before we got it in.
Kyle: And.
Kyle: So the pricing that we put in is kind of what we expect for the rest of the year working on other mitigation tactics as well supply chain and et cetera. Those also take time, but we do think we'll get to $1 on a run rate basis offset it on a dollar basis by the end of the year at those rates and then look to recapture the margin at 26 and the last point.
Kyle: I want to make too is around.
Kyle: Inventory accounting, it's a minor point, but its a big impact most of our U S business is on LIFO inventory accounting under LIFO that tariff cost hit you right away.
Kyle: Compare that to FIFO, where they would kind of work their way through the inventory and typically hit you as the inventory turns which can be a few months down the road and that's kind of exacerbating that timing impacts. So bottom line. It's a fluid situation. We've assumed the current rates, which I think most people would say is probably a worst case scenario for China.
Kyle: And we're pricing for it.
Kyle: And we will keep monitoring as we go.
Speaker Change: Paul Thanks for that LIFO accounting definitely not not helping in the current environment, but.
Speaker Change: I guess just the follow up of that you said you plan to fully offset that $150 million.
Speaker Change: Just can you give us some sense on how much pricing surcharges versus sourcing supply chain initiatives should be about $150 million.
Speaker Change: Yes, I mean, it'll it'll it'll predominantly be pricing and surcharges and as we've talked about both distribution and Oems.
Speaker Change: I think the supply chain mitigation tactics are a little more limited than obviously.
Speaker Change: Some are lower hanging fruit than others, and obviously, we're working on the lower hanging fruit stuff right away, but.
Speaker Change: But I would say the vast majority would be pricing and surcharges and that would be by the end of the year and then that net 25 impact would mainly be.
Speaker Change: In fact in the second and third quarters, and then dropping significantly in the fourth quarter.
Speaker Change: Excellent. Thank you.
Rich Kyle: Thanks, Scott Thanks, Kyle.
Speaker Change: Yeah.
Speaker Change: Thank you. The next question comes from Mike Schnittke with D. A Davidson.
Speaker Change: Please go ahead.
Speaker Change: Yeah.
Speaker Change: Yes, hi, good morning, Thanks for taking my question.
Speaker Change: Just a follow up on that last answer there.
Speaker Change: Well I'm not sure I have this correct, so if theres a 25%.
Speaker Change: Headwind this year on tariffs, but you catch up by the end of the year.
Speaker Change: Again, if everything stay at the exact same as far as costs are concerned.
Speaker Change: I'd say that for 2020, which should be modeling zero impact.
Speaker Change: I just want make sure I have that.
Speaker Change: I have what youre trying to get clear for after 2025.
Speaker Change: No I think Thats I think thats right, Mike So all else equal by the end of the year, we will be offset on a dollar basis. So the.
Speaker Change: The net impact would.
Speaker Change: Would be zero in 2006, and obviously, we'd have the headwind of 25 that would repeat so that would be a year over year.
Speaker Change: Benefit if you will but we should be fully offset by the end of the year.
Speaker Change: Okay, great great on a go forward and then as if otherwise.
Got it. Thank you, yes, I wanted to maybe take a step.
Speaker Change: I'll step back my other question here.
Speaker Change: Rich you and the board I am sure discussed in detail the kinds of things that the.
Speaker Change: Recently, the CEO was looking at or doing or changing of timken.
Speaker Change: What his plans were.
Speaker Change: I guess I am curious was there was there a fully developed plan internally what he wanted to do when he left.
Speaker Change: Are you looking to or what your successor be.
Speaker Change: Implementing all of those plans at this point or do you and the board.
Speaker Change:
Speaker Change: Fully clean slate for the next CEO, who may or may not do what chartless, hoping to do.
Speaker Change: So I'd say a couple of things on the CEO transition first I'd say the team underneath the CEO is unchanged I would say of our top 100 managers I think theres been one departure in the last 12 months and that was that was due to retirement. So obviously theres a lot of continuity there.
Speaker Change: And then I would say during that time. There was there was not a strategy change or a proposed strategy change if anything I would say there was confirmation of the past that we were on.
Speaker Change: I think the new thinking that was brought in was more around could we go faster and bigger than a any sort of pivot from the direction that were going on.
Speaker Change: I think those were good thoughts and and really the biggest piece of that.
Speaker Change: There were certainly some things in the details of how we can execute the company better and things like that that.
Speaker Change: In retaining some of that but on the big picture. It was around the portfolio is.
Speaker Change: Said, we've really always done that portfolio work, but some thoughts where can we go bigger and faster on it.
Speaker Change: And as I said earlier, we are <unk>.
Speaker Change: Accelerating the automotive OEM.
Speaker Change: Work now of what was identified that was probably the what was the biggest piece.
Speaker Change: And other things would be smaller than that so I think.
Speaker Change: I would say it's.
Speaker Change: Then again, it's fairly consistent and nothing dramatic during the time and wouldn't expect anything.
Speaker Change:
Speaker Change: Was that the new person's handled any immediate issues. They have to have to grapple with is the last thing I'd say on the transition period.
Speaker Change: Is we're really focused on maintaining margins and what we expect to be a soft industrial market will generate good strong cash flow and that cash flow.
Speaker Change: It is the primary driver of earnings growth beyond normal growth levels. The compounding of good capital allocation decision. So a lot of focus on that over this interim period.
Speaker Change: And then also continue to advance the company strategically on our path to achieve our financial targets. So we're not standing still during the interim leadership period again, we've got a lot of tenured management.
Speaker Change: So our objective is to come out of this tariff period, a bigger and.
Speaker Change: Better version of ourselves.
Speaker Change: I appreciate that discussion and I'll pass it along thank you.
Speaker Change: Yeah.
Thanks, Mike.
Speaker Change: Thank you.
Speaker Change: Question comes from Chris <unk> with loop capital markets. Chris. Please go ahead.
Speaker Change: Hey, good morning, guys. Thanks for taking the questions.
Speaker Change: Hum.
Speaker Change: I guess first off on the Fort Scott facilities that fully close or are we running duplicative costs. There are there any kind of ability to shift.
Speaker Change: Fourth based on tariffs and then any comments on kind of the manufacturing footprint here.
Speaker Change: The facility is not fully closed and it is a.
Speaker Change: Negative two first quarter industrial motion margins.
Speaker Change: Expecting a little bit of improvement there in the second quarter, but not a step change on that in the third quarter and we are still marching down the path to have that facility closed fully in the third quarter.
Speaker Change: Yeah.
Speaker Change: So there is no data.
Speaker Change: Pointed out.
Speaker Change: On tariffs.
Speaker Change: Say on the point on tariffs and we have both U S and Mexico footprint within our belts business. So we do have some ability to.
Speaker Change: To do some things on both sides of the border, but most of what we do in Mexico.
Speaker Change: Tariff situation today as U S. MCA, yes, exactly I think that's an important point, Chris the belts coming up from Mexico or U S. MCA compliance. So we're not getting hit at present on those and I would say a portion of the bearings.
Speaker Change: Our compliant as well, but not 100%.
Speaker Change: Yeah.
Speaker Change: Understood that's really helpful. Thanks, guys.
Speaker Change: Thank you just following up.
Speaker Change: Really appreciate the color around tariffs and trying to get arms around it here, but.
Speaker Change: When we think about just raw materials SBU pricing steel pricing.
Speaker Change: Outside of tariffs I assume the expectation is when we start renegotiating and fourth quarter those prices are going to go up.
Speaker Change: T really so is it fair to assume that high.
Speaker Change: Higher pricing is here to stay at the 2026 as well.
Speaker Change: I think thats, a fair assumption and where we buy steel in the U S on spot prices. It is higher today than it was a year ago as you said a lot of it's.
Speaker Change: Under contract.
Speaker Change: But I would all say.
Speaker Change: Timken did well with the bout of inflation that we had coming out of Covid and inflation does not necessarily.
Speaker Change: Negative for us anything.
Speaker Change: It gives us more pricing power the unique part about this is compared to other rounds of price or cost increases as the.
Speaker Change: Is the tariff element of it but.
Speaker Change: No. There is not enough generally amount of steel capacity <unk> capacity in the U S to serve the U S market. So there.
Speaker Change: There is pricing there is there has been price increases in that space.
Speaker Change: Understood well, thanks for the color and best of luck going forward guys.
Speaker Change: Thanks, Chris Thanks, Chris.
Speaker Change: Yeah.
Speaker Change: Thank you there are no <unk>.
Speaker Change: Any questions at this time, sorry, do you have any final comments telemark.
Speaker Change: Okay.
Speaker Change: 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.
Speaker Change: Thank you for participating and Timken first quarter earnings release Conference call you may now disconnect.
Speaker Change: [music].
Speaker Change: Yeah.