Good morning. My name is Paula, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's Fourth Quarter Earnings Release Conference Call. [Operator Instructions]. Thank you. Mr. Frohnapple, you may being your conference.

Thanks, Paula, and welcome, everyone, to our fourth 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, and thank you for joining us today. The fourth quarter was consistent with the trend that we saw early in 2021 and that ran through the full year with strong revenue across most end markets and geographies, pricing costs, particularly in steel and logistics, and an abnormally high amount of inefficiencies across our operations from labor and supply chain challenges. The result was revenue of $1.01 billion and earnings per share of $0.78. Revenue was up 13% from 2020 and up 10% from the prior fourth quarter record. We delivered this revenue growth despite continued supply chain and operational challenges. The revenue strength was broad-based and orders were also strong across almost all markets. Backlog grew despite the record level of shipments and is up significantly sequentially and over prior year. Ramping up to meet the demand continue to require a significant cost premium as costs increased further in the quarter and price cost remained negative. Price was up both year-on-year as well as sequentially in the quarter and contributed modestly to the revenue growth but lagged the cost increases. Result was a year-on-year decline in margins of 280 basis points and a decline in earnings per share of 7% for the fourth quarter. For the full year of 2021, Timken delivered record revenue of $4.1 billion, which was an 18% increase over 2020 and a 9% increase over 2019, the prior high mark for revenue. We delivered strong revenue levels despite significant challenges with supply chains, including labor shortages, transportation delays and material shortages. The growth was driven by robust industrial demand across most end markets and was boosted further by our outgrowth activities, including delivering a fourth consecutive year of double-digit growth in renewable energy and a 12th consecutive year of completing at least…

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 12 of the presentation materials, which includes a summary of our results. Revenue in the quarter was just over $1 billion and set a Timken record for the fourth quarter. Sales were up 13% from last year and up more than 10% from the fourth quarter of 2019. We delivered an adjusted EBITDA margin of 13.4% and adjusted earnings per share of $0.78 in the quarter, both down from last year. And as Rich mentioned, Timken delivered record sales of $4.1 billion and record adjusted earnings per share of $4.72 in 2021 in a robust, yet challenging environment. Turning to Slide 13, let's take a closer look at our fourth quarter sales performance. Organically, sales were up nearly 13% from last year as both segments delivered double-digit growth in the quarter. In addition, we saw double-digit growth across both our bearings and power transmission product lines. Pricing was positive, while acquisitions and currency translation combined had a modest impact on the top line in the quarter. On the right-hand side of this slide, you can see our organic growth by region, excluding both currency and acquisitions. All regions were up in the quarter versus the year ago period. Let me make a comment or two on each region. In Latin America, we delivered strong growth in the quarter, up 21%, with most sectors up, led by industrial distribution. In Europe, we were up 17%, with off-highway, general industrial and distribution posting the strongest gains. In Asia, we were up 3%, as most sectors were up modestly, while renewable energy was roughly flat in the quarter as expected against a difficult comp last year. And finally, in North America, our largest region, we were…

[Operator Instructions] We'll take our first question from Rob Wertheimer with Melius Research.

Thank you, good morning everybody. So Rich, you've taken probably a very realistic but maybe more conservative look at supply chain disruption and the outlook in the comments you made. I'm just curious if you spend a lot of time with your customers and partners and what the general sentiment is out there. I think some are still hoping for a 2x improvement. I'm not sure if that's tangibly founded or just not on the generally good management that's out there. That's one question. I'll just do my second one as well. If you could just talk us through any changes in strategically how you're looking at pricing as we walk into an inflationary environment? Thank you.

Yes. Thanks, Rob. Certainly, talking a lot to customers, talking to Board members and talking to how others are dealing with this, and as releases come out, we'll digest some of those as well. I think we do have probably one bit of a uniqueness to our business model in that because over half of our business is bearings and the steel content. And bearings, we probably are a little disproportionately impacted by steel costs, which would be one of the three big buckets of costs that have hit us. If you look at our last four quarterly EBITDA walks, our material logistics costs have gone from negative 11% in the first quarter to negative 27%, to negative 53%, to negative 58%. And so -- from 38% in the first half to 111% in the second half on a little lower volume in the second half. So we are basically assuming that those costs continue. I think for material, there could be some relief there, be surprised if those dropped dramatically in a robust market. I think the logistics one is a little bit more of a wildcard. I mean the price is there. The steel is maybe a little higher than what would be normal in a good industrial market for us, and happened a little faster maybe than normal. But logistics is very unique for us in that things that we were buying a year ago, in some cases, transportation routes are up 200, 300-plus percent. We've assumed, again, that continues. And right now, I would say that is the case. We don't see any relief on that in the first quarter. But certainly, if we were to see some relief on that in the second half of the year, that would be favorable for us. And on…

Thanks so much.

Moving on, we'll go to Steve Barger with KeyBanc Capital.

Hey, good morning guys.

Good morning Steve.

Just, obviously, incremental margins weaker than people expected. You've been clear on the challenges stemming from the inflationary environment. Should we be thinking significantly better incrementals in the back half as you take these mitigation actions and pricing rolls through? And do you expect EPS will be up year-over-year in 1Q?

So -- yes. I think you go back to my material logistics comment looking at last year, roughly $40 million in the first half, $110 million in the second half. So that $110 million. We're planning on that rolling in. So the cost comps in the first half of the year is significantly higher. We expect some improvement in price through the course of the year, but most of it happening today. So yes, I would see year-over-year comp wise, a stronger second half than first half, not based really on cost improving, but more on the cost rolling over in the first half and then price extending. I'm not looking to provide quarterly guidance, certainly would expect revenue to be up, I would expect a sizable step-up in margins and earnings per share from the fourth quarter to the first quarter. We've done that the last couple of years, and that was without significant pricing from Q4 to Q1. And then I think -- so certainly would expect a sizable step up, but I don't want to get into the specifics of higher or lower than last year. Obviously, it was a last year ended up being a high watermark for us for margins in the first quarter. And I'll pause as a follow-up.

All right. You mentioned that both staffing and inventory are up. Just year-over-year growth in inventory outpaced revenue growth in the back half of '21. Is any of the margin pressure you expect this year a function of slowing production to balance inventory? Or will you still grow inventory in excess of sales as the year progresses, given the demand environment?

We would still expect -- so the answer is no, we would still expect to grow inventory more modestly this year than last year. We don't have -- some of this inventory is directly a function of longer supply chains, things that used to take two weeks or taking four weeks. So there is that element. Again, we haven't baked a significant improvement in that in our assumptions. But under the assumption that we're pushing 10% revenue growth and optimistic about next year, which as we sit here today, that's what we're thinking for both of those, we would expect inventory to go up this year.

Got it. Thanks.

Moving on, we'll go to Ross Gilardi with Bank of America.

Hey, good morning guys. Just curious, Rich, how are production rates? How do they feel right now for your customers? I mean, are they starting to improve? And can you just give any color on how -- what kind of variations you might be seeing across some of your key markets?

One, on Slide 7, across our markets, you look, I think we've got everything up mid-single digits or more with the exception of renewable energy. And that we have flat coming off of a very good year. So I think as you look across that, just about everything is really in our favor in terms of overall demand. I think inventory in the channels and restocking is in our favor. I think the capital equipment cycle is in our favor. I think the MRO cycle really started moving more in our favor in the second half of the year. Our distributors have gotten much more bullish are looking to put inventory in and their revenue for the second half of '21 as well as their outlook for '22 improved. And then even when you look in some of the submarkets within -- I mean, even some of the markets that were written off is dead maybe a couple of years ago for capital like oil and gas are showing some signs of life. So the overall demand situation very strong. And I think the -- to your earlier point about their issues are all still dealing with it. Certainly, the erratic demand that we were facing is this time last year and probably really through second or third quarter, I think that has definitely improved. A year ago, we were just scrambling and we had a lot more concerns about over ordering. And I think a lot of that has improved. But everybody is still dealing with issues and it is definitely a more erratic or choppier market environment than would be ideal. And I think that's for us as well as for our customers as well as for our suppliers. But demand is strong.

Yes. The only thing I would add, Ross, this is Phil, just on inventory is when we think about inventory at our customers, both distributors and OEMs. I mean we would look at inventory and say it's still relatively low given the demand levels. So while we've added some inventory in 2021 and expect to do so again in 2022, and we do believe our distributors will add inventory and our OEM, the inventory levels, particularly at OEM dealers and the aftermarket channels are still relatively low. So I think that's a favorable factor as well heading into '22.

I realize order trends are still very strong. Inventories are low. I was curious more production your key customers is actually starting to accelerate to service all this backlog? Or are the...

Yes. And I think the answer to that is definitely yes. There are -- there's the well-publicized issues of chips, which that's made that market choppier. I think our first quarter comp for automotive is tough. But by the second quarter, I think, is when that fell off last year. So some other things out there. There's customers are dealing with some chemical issues, paint issues. But I think in general, their capital equipment builds are up. And then in particular, I think the MRO cycle is also kicking in pretty strong. So I think I'd say to your point of order demand probably be higher than our 7% organic, but I think it is a reality there of what people are going to be able to do to hire people, build, et cetera, and we feel it's a pretty reasonable number.

Yes, when we look at like a market like off-highway, Ross, I mean, off-highway across both '21 and especially as we look at '22 and what our customers are doing, and we think it's going to be the strongest market since 2011. That was a super strong year as everybody remembers, but we think it's going to be probably the strongest year in off-highway, we've seen since that time. So it is -- customers are ramping. As Rich said, it's still a little choppy, particularly in the on-highway markets, our on-highway auto in stores still a little choppy but strong and getting stronger.

Okay, got it. Thanks, I’ll get back in queue. Thanks.

And next, we'll go to Courtney Yakavonis with Morgan Stanley.

Hi, thanks guys for the question. I think you talked a little bit about first half versus second half incrementals, but Rich, I think you made a comment that we will see the evidence of pricing in the first quarter results. So can you just help us pair that comment with how we should be thinking about the sequential step-up in margins? And any differences we should be thinking about -- between process and mobile and how that pricing will flow through to margins?

Yes. So we do expect -- again, we sit here today, we have the vast majority of the 4% in place. It wasn't well January 1, we did some distribution pricing that rolled in February 1. But the pricing would move gradually off of the first quarter number. So the second half -- be clear, the second half response that I made was on incrementals, not margins, right? So we're not really expecting a step-up in margins. So it's really an issue of the comps on costs. That by the time you get to the second half, you had lower margins and all those costs in that we'll -- we're forecasting will still be there. So -- but the incrementals are better. So it's really an incremental. So I think as we're looking at the year, a significant step-up in performance from Q4 to Q1. And I'd say, some normal seasonality. Typically, where our revenue declines, even in a strong year, a little bit from the first half to the second half.

Okay. That's helpful. And then, Phil, I think you had mentioned obviously been fairly conservative with respect to supply chain and wage energy pressures, but you are baking in some improvement in manufacturing performance. Can you just help us think about how to quantify how much of an improvement you're baking in for manufacturing improvement? And is that something other than -- I would have thought that, that was supply chain improvement being reflected in improved manufacturing performance. But is there anything else that would be driving that?

Well, the two are connected, right? I mean when you -- if you don't have parts flowing into your operations smoothly and we ship parts from one plant to another plant as well, right? We have plants. So I mean all of that definitely affects labor productivity. But it was getting on that -- on the plus 11% we had in manufacturing last year on a double-digit up year. I mean that disappointing that, that would not be 2, 3x more favorable than what it was. We have definitely not baked in perfection. And we would expect -- we're still hiring in our plants. So even though we made good progress on the onboarding, we still have some of those costs that were incurring this year and would expect to incur. So -- and I would also say that, that would I believe that will improve through the course of the year. It's been improving gradually. And I think it will continue to be a gradual improvement. It's not a step change through the year.

Okay, got it. Thank you.

And next, we'll go to Chris Dankert with Loop Capital.

Hey, morning guys. Thanks for taking my question. We touched on the -- a little bit earlier, you mentioned strongest year in off-highway in over a decade here. I guess, just any comments in terms of growth by segment here? I mean is it fair to assume kind of a low-teen organic in mobile? Just any kind of triangulation you can give us there would be really appreciated?

Between Mobile and Process, we're expecting pretty close.

Pretty similar.

So I would say within the bandwidth of air, I would call them the same.

Yes. I would say, yes, pretty close organically and actually a Courtney asked the question about pricing across the segments and the 400 basis points of pricing is relative -- I would say, relatively similar across Mobile and Process. So we are -- on the Mobile side, it's a combination of surcharges on some of our multiyear agreements as well as pricing. And obviously, on the Process side, it's more pricing -- pure-based pricing. But expect roughly so similar pricing, roughly similar organic volume across the segments.

Yes, just to add a little color. I think within the segments within Mobile, Phil already mentioned off-highway, drilling rail, which has been a little slower to come up, but we're seeing that come on strong, and we're optimistic about that this year. So I mean those will probably leads within Mobile, but everything up. And then again, in process everything up, general industrial, obviously, with what's happening and distribution will be the two leads and with what's happening with everybody's supply chain manufacturing, et cetera, those would be the two areas that we would expect to be the strongest.

Got it. That's really, really helpful. Glad to hear that, that high-margin rail business is bouncing back nicely here. I guess shifting gears a bit, thinking about SG&A kind of in light of the elevated absenteeism and more generalized wage inflation. When we're thinking about the SG&A growth contemplated in the guide, I mean, how do we think about that as kind of high single digits in the ballpark? Just any comments on how we can think about some of these costs stabilizing a bit and kind of what that means for SG&A for you guys kind of through 2022?

Yes. I would say just a big picture, Chris, I mean, SG&A, we would expect it to be up. I mean really a couple of factors going on. We've got higher wages, as Rich talked about, some wage inflation that's going to be baked in there, higher incentive compensation as we would normally expect when earnings are growing and that sort of thing. And then probably the last element would be just higher spending to support the sales levels. And we do expect as we move through the year, I would maybe call it a gradual start to return to a more normal level of spending as we start to travel again more regularly and that sort of thing. So there's various elements. So certainly a step-up in SG&A. But I think when you look at it as a percentage of revenue because revenue will be up quite a bit as well, I think you will see pretty good consistency across SG&A in terms of as a percentage of sales from '21 to '22. So up, but up more or less in line with the sales.

Got it. Thanks, and best of luck going forward here.

And next, we'll go to Stanley Elliott with Stifel.

Hey, good morning everyone. Thank you all for taking the question. Quick question, in terms of kind of like the order rates and things of yours. Have you all changed how you're processing these orders? Meaning with supply chains being so convoluted and difficult, what's the risk at some point down the road that you're seeing a lot of double ordering? I don't think that's the case now or an issue now just given how lean inventories are. But curious if you've changed the thought process around that for when the environment does fall a little bit?

Yes, I think -- well, certainly something we try to monitor and try to control. And with OEMs, again, I think our digital platform is a big help for this. If -- we've been shipping 1,000 bearings a week to an OEM and also they start ordering 2000. It's hard to imagine that their production rates are going up that level, and we're able to start a dialogue with them. I would tell you, I think that situation today is better than it was a year ago. There's less noise with that. I think when this first took off, there was a bit of a panic and let's just order more. And yes, we're ordering more of this, but then we're running out of that. So things -- inventory imbalances were worse. And then there's certainly risk to it. And I'm sure there's some of it happening. And on a small scale, we wouldn't have the ability to control it on a small scale. But with distributors, we see their inventory levels, the big distributors with OEMs, we have our salespeople in there and know what they're building or the equipment. So I think we've got pretty good line of sight to it. And as Phil said earlier, right now, as far as I can see, it's a favorable trend for us. But in general, I would say they would like more inventory, and they need more inventory. They don't -- so it's a good thing for us right now.

That sounds fair. And then switching gears, Rich, you mentioned the M&A environment expected to be a little more active in the next couple of years. Is this -- are there larger deals still out there? Is it still going to be skewed towards the process side? How quickly do you think you can act on some of these deals as you've obviously been harvesting? Just curious what to expect in the next near term?

I think you slipped 8 questions in on that Stanley.

Sorry, I apologize.

So I think, yes, so definitely slanted the process. Certainly, we're looking to mix Mobile up as well, but -- and the lubrication -- automatic lubrication systems have a big mobile element, and it's a great business. But slant to process. So the answer there is yes. On the big ones, I think the answer is no. And one of the reasons -- two of the reasons why I think I feel better about where we're going to -- that will be more active in '22 and '23 than we were in 2021. In '20, we definitely slowed down from the pandemic, the shock, the travel, concern, et cetera. The pipeline pretty much dried up in the -- through the middle of the year and really don't restart till late in the year. Then I would also lost a little bit of ground. We worked on a couple of potentially larger ones that in the end, we backed out and chose not to pay the prices that they were going at. And no regrets on that at all. And I think as we sit here today, we're back focused on small to midsize, which I think was what we were really building some really strong capabilities on. I think the good niches, good technology, the synergies of the smaller businesses becoming a part of professionally managed corporation with the global scale we have, et cetera, I think, is better than the large, and I think that's where we're focused. We're not opposed to the big, and we looked at a couple of big, but we're focused, I'll say, on a sweet spot of $50 million to $200 million of revenue is where we're focused. And I do believe we'll get back -- you'll see us get back into that this year and next.

Yes. And just maybe just a comment on top of that, Stanley. I think we look at capital allocation really the same way, as Rich said, probably a bias for M&A, but we do have the ability to buy back shares like we did in the fourth quarter. Our full year guide would assume sort of shares at fourth quarter level. So we don't normally include any capital allocation in the guide. So if we were to do M&A or to do any buyback and we would report on it after the fact, and that would be accretive at the time, obviously, buyback more immediate M&A a little bit more longer term. But I think we view both as viable options, again, with the bias towards the M&A.

Perfect guys. Thanks so much and best of luck.

And we do have a follow-up from Ross Gilardi with Bank of America.

Thanks guys for taking it. I was just wondering if you could discuss just the mix impact of renewables undergoing the rest of the portfolio. And just maybe explain a little bit more about what's actually going on there in the wind markets? I mean there's been a lot of developments. It feels like globally with policy in China and subsidies and whatnot. But maybe you can just talk a little bit more about just U.S. versus China onshore versus offshore and just how it impacts your business? Thanks.

Yes. First, on the mix, as we said before, renewable energy does mix down process industries, but doesn't mix the company down. So it's probably some good mix happening within process with the other elements growing more this year while renewable flattens out. But don't look at -- we don't look at renewable as mixing the company down in total on the margin rate. On the revenue again, four straight years of double digits. I think last year our double digit was probably a little more self-help. I think the market, particularly in China, did soften in the second half. We were able to offset that, and we still grew in the second half. That being said, we saw the slowdown in China in the market. And we've got flattish, up a little to down a little forecast right now. And that's really based on -- we expect to start the year down, not a lot, single digits, but start the year down and that's largely from this slowdown in China. But we saw orders pick back up late last year, and that continued into this year. So we're certainly getting the order flow to a minimum, support that, if not beat that as the year goes on, we'll see. I think we're -- offshore probably is a little bit favorable for us, but we're good with wherever it goes between offshore and onshore, we participate in both. I mean, generally, offshore tends to be bigger, more durable and fits our value proposition even better. But our participation is fine in both. China definitely caused the global slowdown, if you will. But I remain very bullish on the China market and global market. When you look at the trends of what's happening with sustainability, what's happening with electrification, which is going to drive not only the need for more power, more electricity, but for truly to be a movement in the sustainable direction needs to come from renewable energy, very much look at the China situation as a pause, and it's a pause in growth, too, right? It's not a pullback. So we're not seeing any real decline in the market. It's a flattening and still pretty bullish about the next 3 or 4 years. And we're a pretty small player in the U.S. market. There isn't -- there isn't much of a supply chain in the U.S. for this market. So our customers are not based in the U.S. or they don't produce in the U.S. So for us, it's definitely Asia and European market and even what ends up in the U.S. generally comes from there. We'll see how that market develops, but it's -- the U.S. has tended to be more stop and start than the rest of the world, which is why we focused on the rest of the world more.

Yes. As I mentioned in my comments, Ross, our CapEx in '21 was up from 20%, and we're going to be higher in '22. And there is a fair amount of spend in that CapEx plan for renewable energy in particular, as we continue to invest for growth, as Rich said, is we're bullish on the markets long term and also put in some pretty exciting manufacturing technologies to help improve manufacturing efficiency across those product lines.

Thanks guys.

I'll make one more comment. I think the flattening of wind for the year, I mean it also I think it shows the strength of our -- the diversity of our portfolio. And wind being up and solar being be up as much as it was in '20, it was great for our portfolio and industrial markets were down. And not that I really want renewable to be flattening, but if it's a good year for that to happen, we can shift labor, we can shift materials capacity, et cetera, into these industrial markets and serve them both. So I think it's a strength of our portfolio. We got a lot of things that move in different directions now.

Okay. Well, I think that's all the questions. Thanks, everyone, for joining us today. If you have any further questions after today's call, please contact me. Again, this is Neil Frohnapple. Thank you, and this concludes our call.

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