Good morning. My name is Jennifer, 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 The Timken Second Quarter Earnings Release Conference Call. [Operator Instructions] Mr. Frohnapple, you may begin your conference.

Thanks, Jennifer, and welcome, everyone, to our second quarter 2022 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. 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. 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. Finally, I would like to remind you that we are planning to host an Investor Day on Wednesday, September 28 in New York City. So we hope that you will join us either virtually or in person. 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. Timken delivered another excellent quarter with record revenue, record earnings per share and 20% EBITDA margins. Our strong results further demonstrate the ability of the business to perform at a high level through a variety of macroeconomic conditions. Demand continues to be very strong across most markets and geographies. Organically, we increased revenue more than 11% over last year and by almost 4% from the first quarter. That was despite significant COVID disruptions in China, continued supply chain challenges and our exit from Russia. Incoming orders also continued at a strong pace and backlog grew slightly in the quarter. Our mix and price costs were favorable in the quarter and were the primary drivers of the year-on-year margin improvement of 120 basis points. Price realization improved sequentially from the first quarter and we expect it to continue to improve modestly through the second half of the year. Costs were up significantly over prior year and up slightly from the first quarter. These include external costs as well as internal inefficiencies. We saw some costs like steel pullback from peak levels, but others such as energy hit new peaks in the quarter. While costs in total did not recede in the quarter, the trend line appears to be leveling off. We are expecting costs to roughly stay at the second quarter levels in the second half and for the year-on-year price cost to get more positive from both easier comps as well as more price realization. We responded to a variety of challenges in the quarter, including the impact from Russia, China COVID shutdowns, elevated absenteeism around the world from COVID and continued supply chain disruptions. We continue to navigate these issues and deliver for our customers while performing well…

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 11 of the presentation materials with a summary of our strong second quarter results. Revenue in the quarter was $1.2 billion, up 8.5% from last year and an all time quarterly record for the company. We delivered an adjusted EBITDA margin of 20% for the second quarter in a row, and we achieved all-time record adjusted earnings per share of $1.67, an outstanding quarter all the way around, especially considering the choppy environment we faced during the quarter. Turning to Slide 12. Let's take a closer look at our second quarter sales performance. Organically, sales were up over 11% from last year, reflecting solid growth across both segments and most end market sectors as well as the impact of net positive pricing. Currency was a notable headwind on the top line in the quarter, all acquisitions, including the Spinea acquisition, which closed at the end of May, contributed modestly. On the right-hand side of the slide, you can see organic growth by region, so excluding both currency and acquisitions. All regions were up in the quarter versus last year, with the Americas leading the way. Let me provide a little color on each region. We were up 29% in Latin America, driven by strong growth broadly across most sectors, led by industrial distribution. In North America, our largest region, we were up 14%, with most sectors up, led by distribution, off-highway and automotive. In EMEA, we were up 8%, as we saw strong growth in distribution, off-highway and general industrial, offset partially by lower renewable energy and rail revenue. And finally, in Asia Pacific, we were up 5% and as sales were down in China due to the impact of COVID lockdowns, but…

[Operator Instructions] We'll go first to Stephen Volkmann with [Jefferies].

Hi, good morning guys. So maybe I'll -- maybe I'll just lead off. Everything seems to be kind of moving in the right direction, but obviously, the market is kind of on pins and needles about the big R word. And the one thing, I guess, that sort of went the other way was your outlook for organic growth is down slightly, and I guess I'm splitting hairs a little bit, but just anything to see there. Is there any sort of demand destruction that's starting to pop up?

Well, I'd say one, it was a pretty small adjustment. Currency played a role in the total number. I would all say China was significantly lower in the second quarter than what we would have hoped, and we're not expecting to be able to make that up as you look at the rest of the year. So I think that's certainly a factor. And then we're getting a little more cautious on Europe in the outlook. I would say our business in Europe, to your point, continues to be quite good. And we're not forecasting the R word to use your term, but we are a little more cautious as the year goes on in Europe. But I would say it's a pretty small adjustment in total.

Okay. Fair enough. And then maybe I can just take you back to your Slide nine since you sort of pointed it out there. And I guess I'm trying to just think through -- I'm guessing you don't want to say much about '23 yet, but if you have anything, I'll take it. But how should we think about the potential if we were to have some sort of a modest slowdown? I can see a scenario where decremental margins might be pretty minimal given what's going on with price cost normalization and so forth. But I don't want to put words in your mouth. Just how should we think about kind of what the risk of some sort of modest R word might look like? Let's not say it that loud?

So well, I think one of the reasons for putting that in and obviously teasing out the Investor Day here in a couple of months. But obviously, we're not hoping for the recession and hoping and really planning for '23 to be up. And as I said in my comments, I think certainly not ready to say directionally but the customer sentiment planning, et cetera, still would be up for and we do a lot of fully engaging of that. And I think whether it's -- whether that happens or the other scenario happens, obviously, we've been pulling for the other one, but we'll do fine in the other scenario as well. And over a two or three year period, it will bounce back, and we'll be able to peak, trough to trough of an industrial cycle, grow the earnings and grow the revenue. I also think as you look at next year, obviously, we've been reasonably active year-to-date in share buyback and modest M&A. And I think that will be an offset contributor or an adder depending on which economic scenario that we're in. And beyond that, probably not ready to -- certainly not ready to talk about decrementals after coming off an 11% organic growth number.

Okay. Fair enough. I'll wait for September, we'll see you there.

Thanks Steve.

We'll go next to Bryan Blair with Oppenheimer.

Thank you. Good morning guys.

Good morning.

Good morning.

Solid quarter all around and obviously encouraging to see the transition to favorable price cost, especially in Mobile. It sounds like you will have some acceleration and contribution in the back half. Just wondering, given your price traction and current visibility on costs, how we should think of the order of magnitude, cadence in terms of Q3 and Q4 impact, certainly on a year-on-year basis, the optics should be quite favorable?

Yes. Certainly, the year-on-year is a much easier comp. We went price/cost negative in the fourth quarter of '20, but it was reasonably modest in first couple of quarters of it and then a little bit bigger in Q2 last year and then Q3 and Q4 are pretty significant. So as you look back a year ago at this time, Q2 was pretty significant price cost -- thought we overestimated the amount of transitory part of that cost and projected at that time that cost would ease in the second half. Not only did they not ease, they went up a lot. So our price cost went pretty negative. I think as you just mentioned, we went positive this quarter in both segments and in total. Also, as I said, we definitely see the costs leveling off. I think in general, the projections will probably be they're going to ease in the second half, but we're projecting they're going to largely hold and there's certainly some puts and takes within that. As I said, we've seen some easing. We've seen some other things go up. And then we will have more price realization sequentially from Q2 to Q3 and Q3 to Q4. It will certainly be more modest than the Q4 to Q1 step up that we had in price realization, but we implemented pricing in the second quarter that really isn't in the second quarter results yet. It will start showing up in the third quarter, and we'll implement some more in the third quarter. So I would expect the price cost to look quite favorable with the price feel very good about and probably the bigger variable is do costs level off. Do they receive or -- is there another tick up in cost.

Okay. Understandable. Appreciate the detail there. I was hoping you could offer a little more color on early-stage Spinea integration. On the risk side, curious whether European macro is meaningful headwind or potential headwind for near term contribution? And then in terms of catalysts and the strategic upside of the deal, how quickly can your team drive geographic expansion? You understandably called out Asia as a major opportunity last quarter.

Well, it's -- the team is already all over it. All the diligence you can in the -- and obviously, you're familiar somewhat with the product and reputation in the marketplace. I would say, again, a couple of months in, very pleased with what we've seen now that we're getting a look under the hood. The reality though is this is sold to OEMs designed in. So the sales synergies take time, but we're already working on who they sold to, who we sold to and making introductions and bringing the technology together as a platform. So and then on the market itself, I think certainly, all the supply chain challenges we're seeing to the degree there's on-shoring, all these things fit very favorably into the warehouse automation, factory automation, markets and long-term trends there. And we're making investments in those. Our customers are making investments in those capabilities and in our own factories, I mean. So I think very confident in the long term outlook of that. Coming back to your short-term question, I think the -- it's a business that's overweighted to Europe, certainly as a customer base. And definitely, there's some risk there depending on how Europe goes in the next 6 to 12 months. And then it's also -- it is -- it's -- again, it's an OEM capital good, so not just Europe but also credit markets tightening and the cost of capital going up but feel very good about the long term growth prospects and the business got off to a great start financially in the first couple of months.

Yes. The one thing I was going to add, Bryan, is to that point, I mean, we've only owned it a month. And typically, month one, you're always keeping your fingers cost because of disruption and things of that nature. But month one was very strong from a financial standpoint ahead of our expectations. And so the team there continues to operate very well and integrating into our results quite nicely.

Helpful color. Thanks guys.

[Operator Instructions] We'll go next to Chris Dankert with Loop Capital.

Hey, good morning guys. Thanks for taking the questions.

Good morning Chris.

I guess, to pull a thread on Europe, just a little bit here. As you're talking with the team in Romania and elsewhere, how are we planning for winter and kind of what's in Timken's control in terms of insulating yourself from energy bottlenecks versus things just -- there's really no control here?

Well, we're working on as I think everybody is contingent to see planned risk profiles, et cetera. We do have probably some better capabilities than some and that we have some redundant capacities around the world that should our Romanian plant or Poland plant get limited on its gas, electric supply, et cetera, that we could do some things in other parts of the world. I think if it is -- if it becomes a worst case type scenario, we're probably going to see it in a demand reduction because our customers in Europe would be facing some of the same issues. It's -- I don't think it's dampening demand today. And I don't think it's going to in the near term, but certainly a lot of uncertainty out there six months from now, nine months from now. And we're actively working those contingency plans, but I'm more concerned about what the risk to the demand profile than I am our ability to supply profile.

Got you. That makes sense. And then switching gears. On the Mobile side, I think stronger than I expected, just kind of given that off-highway strength. Any comment kind of specifically on automotive, I guess, F-150 production was less of a headwind than [indiscernible] just any comments on auto specifically and kind of what you're seeing in that market would be great?

Yes. I think we're still seeing some chip problems, both there and the truck market. I think we're seeing some of the supply chain issues smooth and the planning around chip problems get a little better. But I think it's still -- between that and China, the China COVID situation still constraining our customers' ability to produce as much as they want and therefore, buy as much as they want. With our product mix, I think our customers are generally trying to wait -- push their chip capacity into the places where we are again, are in premium cars and light trucks. So we've got a -- I'd say we've got -- in our [7%] for the second half, it's a little easier comp next year because the chip problems were pretty significant. I'd say it's in line -- roughly in line with that kind of number is what we're looking at for the second half.

Yes. The only thing I would add there, Chris, is really what you're seeing in the automotive is really the choppiness on the customer side relative to the chip situation. So yes, we were up -- we were up double digits in Q2 year-on-year. But if you remember, we were off in the first quarter. So year-to-date, we're up more, kind of, call it, low to mid-single digits. And then but we still feel good about the our full year outlook of mid single digit growth in that market. So we'll do a little bit better than that in the second half on easier comps. But it's really a lot of that's just sort of the choppiness quarter-to-quarter.

Got you. Got you. Thank you both so much to put some color. And [indiscernible] some optimism in the back half here.

Thanks Chris.

Thanks Chris.

And at this time, there are no further questions.

Okay. Thanks, Jennifer, 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.

This does conclude today's conference. We thank you for your participation.