Good morning. My name is Anna, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I'd like to welcome everyone to Timken's First Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Anna, and welcome, everyone, to our first quarter 2021 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the Company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. [Operator Instructions] During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company. And without expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Thanks, Neil. Good morning, everyone, and thank you for joining us for our first quarter earnings call. I'm very pleased to report that we delivered both record revenue and earnings in the first quarter. The revenue results reflect broad strengthening across most of our end markets, excellent execution by Timken and managing our supply chains and our operations, the diversity and strength of our portfolio and our outgrowth initiatives. Revenue of $1,025 million was up 11% from last year. The strengthening in our markets that began mid-last year accelerated in the quarter and despite a wide variety of supply chain challenges, we responded to the increase and delivered revenue that was up 15% from the fourth quarter. The sequential strengthening from Q4 was broad as most of our end markets were up double digits sequentially. The year-on-year growth was again led by renewable energy as Timken continues to increase penetration in global wind and solar markets. Off-highway, heavy truck, automotive and general industrial markets were also up double digits year-on-year. Geographically, Asia at plus 30% drove much of the year-on-year growth, but more importantly, we are now seeing sequential growth across all major geographies. The sharp increase in demand combined with the lingering impacts from the pandemic stressed many of our supply chains and operations. We experienced labor challenges, freight delays, supplier delays and unanticipated changes in customer demand. We were impacted negatively by both the Suez Canal as well as chip shortages in the quarter. And while these two issues grabbed a lot of the headlines, they were just two of the many issues across our global supply network that we successfully managed our way through. We continue to experience some inflationary pressures, primarily in freight and raw material, but they continue to be very manageable. Pricing was slightly…

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 10 of the presentation materials. Timken delivered strong performance across the Board in the first quarter, and you can see a summary of our results on this slide. Revenue for the first quarter was a record $1.03 billion, up 11% from last year and up 15% sequentially from the fourth quarter. We delivered an adjusted EBITDA margin of 19.9%, up 70 basis points from last year's strong first quarter. We also delivered record adjusted earnings per share of $1.38, up 24% from last year. Turning to Slide 11. Let's take a closer look at our first quarter sales performance. Organically, sales were up 7.5%. Both of our segments saw higher sales volumes versus the year-ago period and pricing was slightly positive as well. Currency added 2.7% to the topline in the quarter, while the Aurora Bearing acquisition contributed just under 1%. On the right-hand side of this slide, we show year-on-year organic growth by region, so excluding both currency and acquisitions. Let me comment briefly on each region. In Asia, we delivered strong growth again in the quarter, up 30%. Our sales were up broadly across most sectors in the region with renewable energy, distribution, off-highway and heavy truck posting the strongest gains. In Latin America, we were up 25%, led by higher revenue and distribution in the on-highway auto and truck sectors. In Europe, we were up 6% as growth returned in several sectors led by off-highway and distribution. And finally, in North America, our largest region, we were down slightly versus last year driven mainly by lower aerospace, rail and marine revenue, which more than offset growth in other sectors like off-highway. However, we were up double digits from the fourth…

Thank you. [Operator Instructions] And we will take our first question from Stephen Volkmann with Jefferies.

Hi. Good morning, guys.

Good morning.

Good morning, Steve.

I wanted to ask a little bit about your distributor network. I think, Rich, you might have said that it was not as robust as the OEM channel this quarter. And so I guess I'm a little surprised by that. You would think that would come back fairly quickly. So what do you think is happening there with distribution and where do you think they are with kind of the restock that might have to happen at some point? And I'll leave it there. Thanks.

So yes, I would say it's a relative situation. Industrial distribution was up double-digit sequentially in the first quarter from the fourth quarter, but not up as much as mobile OEMs and OEMs in general. And then I would also say to your point on inventory, inventory revenue was up double-digit sequentially, where we have visibility to the inventory, the inventory was flat – down a little bit. So I think there's a whole phenomenon there ahead of inventory restocking to take place. And I think that's upside for us as the cycle moves forward on from a mixed perspective because very much the rebound since the pandemic close – it has been a OEM and primarily mobile OEM led rebound, but we are beginning to see other parts of that kick in. And obviously the mobile OEM piece is unfavorable mix for us. And I think that will improve as time goes on, and I believe their optimism within that channel has improved significantly month-to-month to start the year.

Is there any distributor restock in your guidance?

Yes. I would say there would definitely be some in there. I think there is possibly some upside with that though.

Okay. Thank you.

We will take our next question from Rob Wertheimer with Melius Research.

Hey. I just wanted to see if I could ask two questions on growth, if I may. Just on renewables, are you able to outgrow the strong rebound you're seeing in the rest of the business this year? And I'm just curious how far your pipeline kind of continue in that business [indiscernible] with larger projects? And second, Rich, if you'd just be willing, I think I understand what you're talking about with the new opportunities in energy efficiency and your customers are all innovating and so forth. Just wonder if you flushed that out a little bit, whether it's a share gain situation or any more color you want to give. Thank you.

On renewables, so probably for the year now in the guidance, the renewables forecast has stayed roughly where it was to start the year up in the mid-teens and the other parts of the business have come up. So I would say it is growing in line with the company average this year as opposed to leading it. It was still leading in the first quarter, but we do expect the growth in renewable this year to be a little front-end weighted. In terms of the visibility, very good visibility certainly to the current quarter and expect a very strong second quarter in the space and would have some pretty good visibility into the start of the third quarter. So generally out three to four months. We do expect some seasonality usually the fourth quarter even last year, which was a very good year. The fourth quarter was a little softer, so we expect some of that phenomenon to continue and then obviously the comps as we move through the year gets significantly more challenging. So we do expect the growth rate to moderate in the second half of what we delivered in the first quarter and expect to deliver in the second quarter. Still very bullish on the market long-term. And then the other part of the visibility, these are long design cycles. We have a very active pipeline with turbine OEMs, with drive OEMs and feel very good about winning our share of business over the next several years, but a lot of this design work and won't go into production until 2022, 2023, but the pipeline is very strong. On the other piece, I'd say the Timken business model of bearings, belts, couplings et cetera differentiating at the OEM with our technical capabilities of helping them design a better equipment and a more efficient equipment, wider equipment, whatever the need is. And just really wanted to reinforce on the call that we think our engineering pipeline there, but we know our engineering pipeline there is as active as it's ever been. And some of those things are kicking in this year. Some will kick in next year. Some will kick in beyond 2022. But there's a lot of design activity happening from agriculture to construction equipment. Obviously automotive, electric vehicles get a lot of the media attention, but a lot of that is happening across most of the markets we participate in and we think, it's certainly always been a big differentiator for us from the smaller competitors and emerging competitors, but also a differentiator for us for our major competitors. And we like where we sit looking forward.

Great. Thank you.

Thank you.

Thanks, Rob.

Our next question will come from Ross Gilardi with Bank of America.

Hey, Rich. I'm going to piggyback off of that one a little bit. So just on EVs, I mean, I think the common perception is that [bearing intensity] goes down not up. So can you elaborate on that? And can you be any more specific on like what kind of design changes are leading to – are they leading to greater bearing intensity in general? Or is it just an opportunity for you to be in front of your customers and sell other services and that type of thing?

Well, I think your point on EVs is correct. I think in the on-highway vehicle, electrification generally reduces total bearing and really mechanical power transmission content in the vehicle in total, although it also is a new design cycle. And as we look at that, again, it's not affecting where we participate as much as it is the industry in total, but where it is affecting, where we participate. We see a spin of marginal net winner in there. But again, as you certainly know, Ross that also is not where we're targeting to be the growth engine. When you move into more industrial equipment, you're into more hybrid design solutions. In some case, you're increasing the way generally not full electrification, sometimes around emissions. And there I think our content is holding or growing and then our ability to Rob's question really to win more as the design and mix up as we do that is really where we're focused, and I think are really well positioned right now.

Okay. Thanks. That's helpful. And then I just wanted to talk to you a little bit about your raw material costs and steel and just how your procurement process really works. I mean, I remember back in the day when you have the steel business, you used to always talk about how you enter in the negotiations for mostly your FPQ needs in the fourth quarter of the prior year. Is that still the case and what percentage of your steel buy is still procured in that manner? And I guess what I'm getting at, if that's the case, are all the spot movements that we're seeing in commodity grades of steel really more of a 2020 issue at this point when we're thinking about price cost dynamics for this year.

Well, I would say the prices generally have moved globally for the last several years and we joined plan on them moving globally. So globally steel prices increased significantly in the fourth quarter and we got pinched by that a little bit in the fourth quarter. They moved up a little bit more in the first quarter and pinched a little bit, but less because with the quarter lag our pricing and some of our surcharge mechanisms kicked in. So to your question about where – and that's really – the part of that that's moving is to your point, we generally negotiate base prices for the steel and then have a surcharge mechanism that the steel passes through. The surcharge mechanism is typically 20%, 30% of the total steel cost. So even when you talk about a 50% increase or a 30% increase on that smaller element, it's not on the entire unit. So in the U.S., we typically have base prices fixed for a year and that would be the bulk of the U.S. spin, and then the surcharge mechanism would move through the year. So we generally know what our base prices are. The surcharge was in at a pretty high level in the first quarter. We did find whether – we know where it's going to be in the second quarter, feel good about it. And obviously if it moves significantly up or down, it could be a little bit of a small good guy or bad guy for us in the quarter. But really when you look at a full-year there – since we divested the steel business, there is one-off steel business. There has not been a year where we've really talked about steel being a material impact on our margins for the year. And I think we're still in a pretty good position to do that. We get to rest of world, we buy generally in shorter terms usually more like six months. So again, as we sit here today, we have pretty good feel for our pricing for the next several months and again, feel we have that baked into our guidance and feel pretty good that we're in a good position to cover steel costs going forward.

That's helpful, Richard. Could you just repeat – you threw some numbers out there, but you broke up a little bit when you were going over them about 20% of something towards the beginning of your answer. Can you just repeat that?

Yes. Typically, we have a base steel price, and then we pay a surcharge based on an index and usually the surcharge is less than a quarter to a third of the total price that we're paying for the steel. So if that index part moves by a significant percentage, it's moving up by a significant percentage on, again, maybe a fourth of the steel. So it takes a big move on that for our steel prices to go up 10%.

Okay. Got you. All right. I'll follow-up with additional questions later. Thank you.

Thanks, Ross.

Thank you, Ross.

We’ll now take a question from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, everybody.

Good morning.

Good morning, Joe.

Rich, that was good color on just the inflation and how it impacts your business. I guess just a follow-on question for that or maybe two follow-on questions for that. First, is there a portion of your customer contracts that are kind of locked in for this year that ultimately are going to be tougher to maybe get some pricing on until next year? And then secondly, in your slide, Slide 12, when you lay out the price/mix issue and the materials that just [indiscernible] in the first quarter headwind, how does that look like for the rest of the year?

So I'll take that in a couple of different chunks. Certainly, we have a significant amount of our business that is on annual contracts that we would have locked in. And most of those annual contracts are counter, not all of them. And again, had we been in the environment we're in today. And in October, November of last year, we might've been a little bit more aggressive on the price side. But as we sit here today, we do have a fair amount of that locked in. Pricing did go up in the first quarter, much of that again a reflection of steel surcharges. So in the majority of those contracts, whether they're annual or multi-years, we have some mechanism to pass through some part of that steel inflation. And some of that started to happen in the beginning of year, but we are – we certainly in this environment as contracts open, we would expect to begin to move pricing up and we’d see doing that over the next 12 to 18 months, but we're not counting a lot on price this quarter or the next quarter. So that'll be happening over a period of time. I think, as you look at price cost – price material cost in total and on that chart, obviously it's a significant number. But again, typically is a hedge with volume and our material – it's normal for our material costs to go up. As our volume goes up, we fight that, we resist that and negotiate against that. But also there's a natural hedge with volume going up with it, and then we pass it through with time. So I mean, I think with the exception of the speed at which it went up in the fourth quarter, there's really nothing abnormal about what we're dealing with in steel today verses 2017 and 2018 or 2012 and 2011, except maybe the spike that happened again in the fourth quarter. So I think the – feel good about the margins and think the combination of it all is the implied guidance would be around 19% EBITDA margins for the full-year and feel good about that in a rising cost environment.

Yes. The only thing I would maybe add, Joe, and obviously it kind of goes without saying, but I mean, obviously with the complexity of our business with customer contracts, supplier contracts, I think we've shown over the years that we can get pricing to more than offset the impact of material costs quite frankly. But it's not going to – it just doesn't match up perfectly quarter-to-quarter. And I think we're in not an unusual environment. Obviously, the material moving up as it has was quite rapid, but I mean the situation of being at a point where materials moving, price is going to follow. And I think as Rich said, price will follow and as contracts renew, we will get price and then obviously when we put pricing through next year, I think you'll see next year be a year where we will make up for a lot of it and be in a situation where 2022 will be a year where we would generate – we'd expect to generate positive price costs.

That's super helpful. Thank you for that. Maybe my one quick follow-up. Just in thinking about the growth environment, clearly, very encouraging what you guys are seeing across your business. I'm just curious, Rich, as you're thinking through this footprint consolidation and volume inflecting, how are you managing to make sure there are no kind of hiccups along the way as you're consolidating your footprint?

Yes, it's a good question. And I would say, we had a fair amount of hiccups in the first quarter. I don't think they were associated with our consolidation activities. But those add a layer of complexity certainly to it. So I think we're managing that very conservatively. And we're very focused on having fewer hiccups this week than we had last week and continuing to drive that down. But it is an environment where the first quarter was not as efficient as what we would certainly have liked it to be within our plants. And from raw material and parts arriving late higher absenteeism in our operations, our supplier operations and then customer changes it was certainly not as efficient. And again, a part of that would be normal and an upturn for us, and then part of it's compounded by the pandemic. But we think we will definitely get better as the year progresses. And certainly there'll be upside if we can get better sooner because we didn't really factor any improvement for the second quarter.

Got it. That's great to hear. Thank you.

Thanks, Joe.

We’ll now take a question from David Raso with Evercore.

Hi. Thank you for the time. We used to speak to the second quarter margins being above 1Q, but not quite what 2Q a year ago was. I was just curious with the strong first quarter margin, can you reset that for us? I'm just trying to think of the implied second half if you're looking at full-year EBITDA margins than 2019?

Yes. Well, I think certainly looking at the last year's comps started getting a little abnormal even in the first quarter because as you recall by March of last year, we were having a pretty significant impact in Italy and other parts of Europe and it had already gone through in Asia. So we'd already begin to [indiscernible] temporary cost, and then the second quarter comps are also – are going to be really abnormal. So I think definitely the better way to look at 2021 is the margins. And we're pleased with the 19.9%. Normal seasonality would be a little lower in the second half than the first half. So I mean we're basically projecting flattish margins from Q1 to Q2 and then a little bit of decline from the first half to the second half. The other thing, I would say on the margins, there's – the mix as I talked about earlier is quite unfavorable for us and has been for the last couple of quarters in regards to a mobile and OEM led demand. And most of our revenue increase was mobile versus process. I think there are certainly some upside if that mix would improve as the year progresses. And then I think the other upside for our margins I've already mentioned is more operational efficiency sooner than what we have in this guidance.

And that was sort of related to my follow-up about mix. I know its many months away. But when you think of what customers are describing their needs beyond this year be it your assumed inventory levels in the channel by the end of the year. Just your views on the markets or any longer-term maybe projects you have. When we think of the mix for 2022, it’s just base case right now. Should we think of process growing as fast or faster than mobile? Or is the mobile market still giving you some long lead time be it aerospace, be it cat on mining, whatever maybe that we shouldn't necessarily assume process outgrows mobile in 2022?

Yes. I'm probably not ready to call that. But I’ll just go back to my earlier comment that industrial distribution was up nicely sequentially, but half what – off-highway was up sequentially. And as you look, the input we're generally getting today from mobile OEM customers is pretty bullish on 2022 automotive, heavy truck, all of the segments of off-highway, ag, construction, mining and power sports, which is relatively small for us, but extremely bullish on that. So I think both, but I think naturally to your point, it would normalize, and the MRO market will follow this and inventory restocking to some degree will follow it as well. So predicting when that happens and what mix, I don't think we're ready to do yet.

Okay. Thank you for the perspective.

Thanks, David.

Thanks, David.

We’ll move to our next question from Chris Dankert with Longbow Research.

Hey. Good morning, guys. Thanks for taking the question.

Good morning.

Hi, Chris.

I guess it's kind of open the lens a bit, look internationally. I guess, good to see EMEA returning to grow. Just any comments on kind of the key drivers there? What's leading, what's lagging? And then maybe if we just get a quick comment on Timken India as well, given the current situation, that'd be great.

Yes. Let me take Timken India, and then I'll let Phil answer the first one. So I think as an example for the first quarter, we started the year pretty good in Europe and then Europe actually deteriorated for us. We had a lot of plant challenges with staffing and the MAT improved really kind of towards the end of the quarter. And now India has started to surface as more of a problem. I would tell you as we sit here today, our India business both locally is doing quite well, as well as the plants where we export into other parts of the world are fine. That being said, we have seen an uptick in – small uptick in absenteeism hasn’t hit the levels that we saw in Europe in the first quarter yet. But we do have some anticipation that situation is going to deteriorate further in the quarter, and we will have some impact on our production levels out of India. And again, it could be better, it could be worse. And it's one of those unpredictable items that I mentioned. But I would also say again, we've been dealing with those for now five, six quarters in a row and again, to scale India as a market, it’s single-digit percentage of the company. So it's not in a situation where it's going like it did last year from 100% down to zero for a couple of months. I think it could go from a 100% to 95% or 90%, but that's more of what we're looking at versus the cliff that we went down last year. Phil?

Yes. And then on Europe, Chris, I mean, obviously it was great to see Europe get back to growth in the quarter. And it was really several sectors, as I said. Off-highway and distribution led the way, but I think the way to think about it, we’re up 6% in Europe. It was more mobile than process. So on the mobile side, off-highway was positive, we’re up a little bit, heavy truck and a little bit of rail as well. Most of the rail headwinds were in North America and other parts of the world. And on the process side, as I said, distribution was positive, which was nice to see. And we also saw some strengthening in the general industrial sectors as well. So nice to see the region back to growth, obviously still some challenges there with the pandemic. But good momentum building there like in North America and rest of the world and we have a real positive outlook for Europe for the rest of the year.

Got it. Thanks a lot for the context there guys. I guess the quick follow-up. At a high level, can you give us kind of where we are in – you had a lot of digital upgrades at the Analyst Day in the past, it's kind of where are we like innings wise in terms of the upgrade on the shop floor automation, the ERP and CRM upgrades. Just any kind of quick hitters there would be great.

Well, I think on the – what we call our primary digital platform, which is the core of its ERP, but then we have CRM off of it. We have engineering systems off of it, et cetera. That we feel is a best-in-class solution and is in 70-ish percent of our revenue streams. And we have a small part of the business that really our services part and some other element that we don't really look to bring into that. And really most of what we're doing is bringing on acquisitions into that digital platform, which again, we think one brings us cost synergies and the information technology stream alone brings us cost synergies and brings us ability to integrate things better and then it also brings us sales synergies. So that was what I was referring to in the comment. Two of the acquisitions that we did a few years ago, we are bringing into that digital platform. And then we do have other initiatives where we're looking to extend it. So last year we extended it further into our supply base and more digital connectivity with our suppliers. We've got a leading platform already on the distributor side, but always looking to augment that and improve it. And then there are places where we take it down to the factory floor automation. There are other places where we keep it separate. But we feel it's already a – I'd say competitive advantage as well as cost advantage for us that we run such a significant part of the company already on it and the more. And it is something that we really look at from an acquisition standpoint that we know we bring value to these smaller businesses that don't have the ability to have a system with this level of capability and connectivity to customers and suppliers.

Got it. That's really helpful color. Thanks so much for the time guys, and then congrats again on the quarter.

Thanks.

Thanks, Chris.

And we’ll now take our next question from Brett Linzey with Vertical Research Partners.

Hi. Good morning, all.

Good morning.

I appreciate the details. I wanted to come back to Asia Pac. I imagine you're going to begin to see a moderation in the rate of growth. But just in terms of the underlying level of demand in the order tempo there, any sign that pent-up demand post-COVID in that region is beginning to level up or would you characterize activity is still pretty active?

I would say it's still very active. The India situation we already touched on, it's a little tenuous at the moment. I think, I would have – two months ago said that the customers there were very optimistic about the year and next year that's gotten a little more touch and go here today. But again, I think hopefully the pandemic transpired there like it has in another places and peaks quickly and starts to pull back. China, I would say has done very well. Certainly, the year-on-year number was helped a little bit by last year's the impact of China – the pandemic last year. Still looking for a really good year-on-year comps in the second quarter and then they will moderate a little bit in the second half. But again, markets look pretty solid over there and optimism is high. And again, sequentially with the – again, with probably the exception of India's, what's happened with India just in the last few weeks, sequentially, geographically, all major geographies are sequentially improving.

Yes. And maybe Brett, I would just add, it's interesting about Asia as you know last year it was very much a renewable story. And it was really late in the year, we started to see a lot of the other markets improve. But first quarter this year was much broader. So it wasn't just true. Obviously, renewables is still a big contributor, but we saw good growth in distribution, significant growth in off-highway, heavy trucks. So I do think – we certainly believe that can run longer because it really does feel like it can continue for some time.

Got it. Great. And then shifting back to the guide, you did point to outgrowth as being a factor of the increase in the sales outlook. Are you able to parse out or quantify what's market versus outgrowth initiatives, things you've been working on individual idiosyncratic wins for the company?

Well, we target the 100 basis points, 200 basis points a year and it's hard to really come back and hold yourself accountable that until you can look back in the rear view mirror and do a lot of analysis of what competitors report, et cetera. So certainly on the first quarter, it would be hard to pinpoint that. Certainly, we know we're winning in renewable energy both wind and solar. We know we’ve won our share platforms in the off-highway market, et cetera. So feel good over the timeframe that we're on track for that 100-plus basis points. But in any given quarter, it is hard to pinpoint, and a lot of what matters in the quarters, are you in the right markets with the right customers. And certainly I think our mix is showing that that was the case this quarter and this year as well.

Okay. Great. I'll leave it there. Thanks.

Thanks, Brett.

And we’ll now take a question from Steve Barger with KeyBanc Capital Markets.

Good morning, guys.

Good morning.

Hey, Steve.

Rich, you said this has been an OEM-led recovery, and I know this example maybe more industry specific. But railcar OEM, recently you said that higher steel prices could cause some delays in ordering. Now railcars are obviously all steel, but do you have concerns that dynamic could bleed over into other types of capital equipment or is the message from customers just all about availability?

I would say we are not seeing those concerns at all today. And the discussions are about short-term availability and longer-term availability into 2022. Rail is a market for us that was still down pretty significantly year-on-year. But similar to my other comments was up sequentially from the fourth quarter to the first quarter double digits. So again, we see that strengthen in the market, but the depth of where it went last year, we have not clawed back to a positive there yet for a quarter. So that one is a bit of an exception for us within mobile, that in [Aurora] would be the two pieces of mobile that are improving sequentially, but are still not back to prior year and prior peak numbers.

Got it. Thanks. And Phil, spot freight rates are up a lot and I think contract pricing is renewing at high single or low double-digit step ups. Do you have arrangements were freight as a pass-through or how much of your volume is contract versus spot?

– : I think your comment Steve is appropriate for – experienced inflation in a lot of cases was spot buy of freight – spot buy of anything including a bearing right now is going to be pretty expensive. But our suppliers are not running and raising prices right and left. And so if you're looking for something new, looking for something abnormal, the inflationary pressures are there. But I think our suppliers and Timken are playing it through – playing for the long-term and we'll look to – there's certainly a look to get some price over time. But we're not seeing a mass inflow of inflationary pressures.

Yes. Understood. I guess the question is how long can these spot increases persist before that starts to flow through in a more meaningful way to just general operations, right?

Well, and I think it will. And I think certainly if the market stays robust as we think they can for 2022, it will. But Timken will have more pricing by then as well.

Great. Thanks.

Thanks, Steve.

Our next question will come from Justin Bergner with G. Research.

Good morning, Rich. Good morning, Phil.

Hey, Justin.

Good morning.

So first off congratulations on a great start to the year and outlook going forward. My question relates to the increase in guidance, so you increased EPS guidance to the midpoint by $0.40 or 8% on 6% fast organic sales growth. So I mean, normally the organic sales growth would lever-up more in terms of increased your EPS guide. So I assume the increased price cost headwinds, and some of these supply chain issues are the negative factors holding back what could have even been a larger EPS guide increases. Or those sort of the right factors and sort of which of those would be larger from sort of an incremental headwind point of view versus what you anticipate a quarter ago?

I’ll probably start with mix. Again, the race was mobile and OEM revenue dominated. So I think that inherently comes in at a little lower. And then after that, yes, I would go to the ramp cost and the inefficiencies that we experienced in the first quarter and are planning for similar levels in the second quarter and then starting to abate. And I think it is a volume-driven EPS increase versus past years, probably some more price than things. But in this case, it is primarily a volume situation and I noticed partially being mitigated by the inefficiencies. But we feel very good. Those inefficiencies we will – they will smooth out over time. It's a matter of when not if and again, we'll move pricing up over time. And again, that will be more a case of when not if.

Okay. So it seems like there's not much more incremental price cost headwind in the guide than what was envisioned a quarter ago. Is that sort of fair?

Yes, I think so. I think we largely took it up in line with where the incrementals were, so I don't think the incrementals changed much, and it was largely a volume race.

Okay. And then just to sort of finish that chain of questions. I mean, if I look at 2022, I mean, it seems that with better mix and sort of price costs maybe shifting from a negative to breakeven or slight positive even if there was no sales growth. I'm not suggesting there will be no sales growth in 2022. You'd be poised to expand EBITDA and EPS just because some of these margin headwinds will dissipate in 2022. Is that sort of a fair way to look at things and then sort of any sort of further sales growth and volume growth will be incremental on top of what should be margin expansion even in a flat sales environment looking out?

Yes. Certainly, wouldn’t want to call it flat sales environment. But I think your thesis there is accurate. And we believe we'd have a lot of both cost improvement heading into next year as well as some price improvement.

Okay. Thank you.

And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Okay. Thanks, Anna, and thank you, everyone for joining us today. If you have any further questions after today's call, please feel free to contact me. Again, this is Neil Frohnapple. Thank you. And this concludes our call.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.