Good morning and welcome to Timken's Third Quarter Earnings Release Conference Call. My name is Lidia and I will be your conference operator today. 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, Lidia, and welcome, everyone to our third quarter 2023 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. 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 our call. Timken delivered a solid third quarter, and we remain on track to deliver another record year of revenue and earnings per share, while expanding full year margins. Revenue was a record for the third quarter and was up around 1% from prior year. EBITDA margins were up 10 basis points and adjusted earnings per share were down 5%. As expected, demand softened sequentially as customers continue to reduce inventory levels and respond to an uncertain economic environment. China and wind energy slowed more than anticipated and were the leading contributors to the organic revenue decline. We managed our cost structure very well, delivering 18.9% EBITDA margins, a 10 basis point improvement over the prior year. Inflation is moderated, but remains persistent. Despite the inflation, price/cost was positive in the quarter as it has been all year. Free cash flow of $151 million was strong and up significantly from prior year. We continue to execute our strategic initiatives, which are focused on optimal excellence, outgrowth and capital allocation. This includes advancing our global manufacturing footprint in both Engineered Bearings and Industrial Motion. We are on track to complete the consolidation of two facilities into existing operations by the end of the year. We are also expanding our Mexico operations to begin the production of Timken Belts early next year. Our operational performance has recovered from COVID and supply chain challenges, and we have excellent focus on driving improvement initiatives across our global operations. We continue to invest in and advance our outgrowth initiatives. This includes launching new digital customer solutions and investing in our leadership in application engineering. Our application pipeline, which is the best measure of our future business opportunities continues to expand across the portfolio. Our balance sheet…

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 14 of the presentation materials with a summary of our third quarter results. Timken posted revenue of $1.14 billion in the quarter, up almost 1% from last year. Adjusted EBITDA margins came in at 18.9%, up 10 basis points, and we delivered adjusted earnings per share of $1.55 in the quarter with adjusted ROIC approaching 15% over the trailing 12-month period. Turning to Slide 15. Let's take a closer look at our third quarter sales performance. Organically, sales were down 6% from last year, as higher pricing was more than offset by lower volumes across multiple end markets and geographies, including China wind. The decline in China wind was larger than we expected and accounts for roughly one-third of the total organic revenue decline. Looking at the rest of the revenue walk, the impact from acquisitions, including GGB, Nadella, ARB and Des-Case, net of divestitures, contributed 6 percentage points of growth to the top line. And foreign currency translation was a modest benefit to revenue in the quarter. On the right hand side of the slide, you can see organic growth by region, which excludes both currency and the net impact of acquisitions and divestitures. Let me comment briefly on each region. In the Americas, we were down mid single digits against last year's strong third quarter, driven mainly by lower shipments in the off-highway and distribution sectors as we expected. In Asia Pacific, we were down double digits driven entirely by lower revenue in China, including the sizable decline in wind energy demand that I mentioned earlier. And finally, we were close to flat in EMEA as lower general industrial revenue was almost fully offset by growth in other sectors. Turning to…

[Operator Instructions] Our first question today comes from Steve Volkmann of Jeffries. Your line is open. Please go ahead.

Great. Good morning, guys. Thanks for taking my questions.

Good morning.

Hey, Steve.

I wanted to ask -- start with a big picture question. Phil, I think you or maybe -- sorry, I don't remember which one of you talked about around 200 basis points of margin volatility over the last 5 years. Is that the way to think about -- the market is obviously worried about in turn, I suppose, some of it depends on how big a downturn. But in sort of a normal industrial cycle, is that 200 basis points of volatility in margin the right way to think about the future as well?

Well, I think as you said, it depends on the speed and magnitude and depth. But yes, I mean, we think we can -- we've reached a new -- we are going to reach a new high watermark over the last decade and certainly would aspire to hit a new low water mark when -- whenever that time comes. So that would certainly, the 17.5%-ish would be a good target for us if we got into a tough market.

Okay, great. And then it feels like the sort of destocking out in the channels, the various channels is maybe a little bit more and maybe a little bit longer. I don't want to put words in your mouth, but can you just talk about how much visibility you have there and how long you think this continues?

Yes. I'd say with the exception of wind, it was a little bit more, but not any really big surprises in the third quarter, and we did expect it to continue in the fourth quarter, but a little bit more. But China wind would be the bigger one. We expect that to continue at least through the first quarter of '24. Interestingly, on wind, we will -- well, actually, with this guide, we are still looking to be flat to last year's record level. So for the full year, it's really a very good year for wind. It was just an outstanding first half in a weak second half. But the demand is still there. The installs are still there, but it's definitely a classic overbuild situation there that we've got to get through. On the other channels, we don't have great visibility. So certainly, it could leak over into '24. But I think we are optimistic that most of it will be in a good position by the end of the year. And certainly, when you look at some of our customers that have posted results, our sell-through is only west than the numbers that they're putting out and they're clearly taking inventory out of the channels, and we've seen this before. And most of them, as I said, remain pretty bullish on the demand situation for next year.

Got it. Thank you, guys. I will pass it on.

Thanks, Steve.

Our next question today comes from David Raso of Evercore ISI. Please go ahead.

Hi. Thank you for the time. I was curious, you were giving a little bit of commentary on the first quarter. And it looks like the organic negative 6% this quarter, you're implying 8.8 decline in the fourth quarter. Just curious how you're seeing, given the last comments you just made about still some bullish demand around '24. I'm just trying to get a sense if you can give us an idea of how you're thinking about the cadence of organic sales decline as we get into '24? Again, I'm not turning for a full year guide, just your first quarter comments were interesting. Does the year-over-year decline in organic in the first quarter lessened? Does it accelerate? And then a follow-up, the idea of pricing, what carries over into '24? Any new pricing initiatives to start '24 that we should be aware of? Thank you.

Yes. On the -- next year is going to make for some interesting comps in that we went from -- if you look at this year, we went -- started the year plus 11organic in Q1. And as you said, we are guiding to around minus 8 to minus 9 for Q4. So the first quarter comp is a challenge, particularly when you look at where we are going to end the year on a run rate level, but fairly typical for us to jump up 10% plus points -- percentage points sequentially from Q4 to Q1. And I would say the more inventory and push out we see from the fourth quarter, again, as long as underlying demand in the end markets is good, it should set up for a better start to the first quarter. So how -- where we land sequentially off the fourth quarter, not ready to call that, but I would expect a sizable step up with the exception again called out, we would expect to be down meaningfully in wind energy in China year-over-year off a very difficult comp in the first quarter. From a pricing standpoint, a lot of that's in discussion right now and where we have annual contracts, and we have announced some end of year price increases in some of our distribution channels. I would certainly expect a more modest price level in '24 than what we've had in the last couple of years. So right now, just call it modestly positive and certainly less than what we've had in the last couple of years.

Yes. And David, I think to answer your question, there would be a small amount of carryover from this year into next year. And then to Rich's comment, depending on what happens relative to '24 would be additive to that. So our view would be flat to up in '24 at this point.

Thank you.

The next question today comes from Rob Wertheimer of Melius Research. Your line is open.

Thank you. Rich, I think you addressed the channel inventory question earlier, but I just wanted to come back to it. Do you have a sense as to how high -- well, for one, are you seeing destock at distributors and OEMs both? Do you have a sense if the excess inventory equates to 1 month of sales or 2 or 3 or whatever it does for you guys if things turn south? And should we expect it -- it could potentially still be an issue come summer? Or do you really feel like you're getting ahead of assuming no major down on the end markets, you're getting to good levels. I don't know how much visibility you have to OEM customers and distributors really?

We have good visibility there with distributors. And if the underlying demand is good, I think we are not far off there. We are expecting and guiding to some reductions -- further reductions in the fourth quarter. But beyond that, it's much more of a -- we don't have that level of granularity. And -- but again, you look in the earlier parts of the market and our sell-through is as we look at what customers and peers, et cetera, are selling, and we are typically a few percentage points higher in the last -- in this quarter and next quarter, we are probably being mid single digits to upper single digits below because I think most -- a lot of our customers would still be posting positive organic revenue whereas we were down 6% and 9% here in the last couple of quarters. So it's a little more speculative, and we wouldn't really be able to call whether it's going to be done at the end of the fourth quarter or not.

Okay, perfect. That was clear. Second question just on inflation in the business and pricing. You're not the only one to have kind of slightly negative volumes and positive price. A little bit curious into next year. For one, do you need 2% pricing now or 3% pricing now or as you didn't over the past 10 years? And then do you have a sense as to whether the cost pressures are enough that we can really expect that to come through from you and competitors? And I'll stop there. Thanks.

I would say our core input cost of raw materials, steel, energy, have really leveled off. Logistics after a spike have come back down and steel as well spiked earlier in the COVID supply chain challenges. So we saw some relief there. But in total, still see higher than prior to 2020 wage pressures, some benefit pressures in the U.S. but certainly moderating from what we saw in '21 and '22 from a cost standpoint. So as Phil and I both said, I mean, we are expecting that we will need less price, but also don't see pricing going backwards. We do have some material clauses and currency clauses that if things went in a different direction -- if steel fell significant, you could see us pass some of that on next year. That's not looking particularly likely. At the moment, the costs are basically just leveled off. So I feel pretty good about the price/cost dynamic as we head into next year. And then the other element that we have and certainly in '21 and '22, we did not pass pricing through for inefficiencies that we had from the supply chain challenges and from the COVID inefficiencies, et cetera. And as I said in my comments, I would say we are now probably the third quarter was the closest we've been to operating at normal. And not just operating normal, but also, I think we've got a really good focus again on continuous improvement and driving improvement versus fighting supply chain challenges. So I would expect some self-help from a cost standpoint in that regard next year as well, and I would expect to be more productive next year.

Thank you.

Thanks, Rob.

Our next question today comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Hi. Good morning. This is Jacob Moore on for Steve.

Good morning, Steve.

Thanks for taking the questions. First, I just wanted to talk to the changes in your organic growth slide. I think you've already hit on the big mover in renewables, but it also looks like automotive and off-highway dropped a slot from flat to down mid single digits. So can you talk -- can you provide some more detail on the factors driving our forecast changes in those other markets? Are there any UAW impacts? And if so, how much?

Yes, sure. Happy to do that. So I think you're exactly right. Those are the three main sectors that moved and renewable we talked about. Off-highway is really more factoring in what we are expecting in terms of what occurred in Q3 relative to lower demand from inventory destock and then sort of rolling that head into Q4. So continued inventory reduction, softer demand. Ag is probably the biggest sector, but a little bit from some of the other subsectors as well. And then on automotive, we did factor in an impact relative to the UAW strike in terms of our North American exposure being down for most of October, although we do see that coming back online as we move into November. So not a huge impact, but it was enough to nudge it over one column.

Great. That’s the only question for me. Thank you very much.

Thank you.

Thanks.

Our next question today comes from Tim Thein of Citi. Your line is open.

Thanks. Good morning. So circling back yet again on renewables and China wind, it clearly -- that it hit harder than you thought. I think that similar to one of your big European competitors. But maybe, Rich, just talk more broadly beyond China. I know that historically has been where a lot of the exposure for you has been, but it comes on the heels overnight of some cancellations [ph] in offshore projects here in the U.S. and some of the outlooks in some of the solar markets have turned down. And so I'm just curious, I guess, more of a bigger picture thought in terms of your -- how quickly this -- from a growth perspective, is it just a temporary push out? Or do you still feel confident in terms of the kind of that higher growth rate that we've spoken to in the past?

Yes. I still feel confident about it. And as you look over our 15-ish year history, it's certainly never been a linear growth path like most of our markets, it has a cyclical element and this is not -- well, the severity of this, and we are bigger now than we used to be in it is a little more abrupt, not uncommon for us to have an off year every so often. And again, in my earlier comment, we are actually looking at being for the full year flat, flat to possibly slightly up this year in wind. Our customer base is largely in Asia and Europe, even for the U.S. installs. Our product is usually going through the European and Asian supply chain. So I would say the global wind market has slowed. China just being the most dramatic part of it. As you look out the -- I was actually in China in the third quarter, met with several of the customers. I think they all still -- they all certainly see it as a pause. They're all continuing to invest in the space. The world is going to need a lot more renewable energy in the coming decades and decades. So I'm still very optimistic on the market long-term, not ready to call when this one pivots. We don't expect, as I said, to be in the first quarter, but I believe it will return to grow sooner rather than later.

Yes. And I would only add, Tim, it was obviously wind was the area where we saw softness. But outside of China wind, the rest of the world relative to the total renewables business, which would include solar, obviously wins the bigger of the [indiscernible], but it was relatively stable. So to Rich's point, the market is holding up, I would say, reasonably well outside of that dynamic we are experiencing and wind right now, which was, I would say, quite unusual. As Rich said, it's not unusual for it to be nonlinear, but it was a pretty unusual build in hindsight in the first half that's now creating this weakness in the second half. So I think Rich hit it well, the long-term demand is going to be there. It's just really working through the inventory that's quite significant in the channel right now.

Yes. Okay. Understood. And then this is kind of yesterday's news at this point, but -- just looking at the geographic performance, I mean to have EMEA as the best or the smallest relative decline, I don't know, stands out to me anyway. What's going on there in terms of a specific vertical or customer? What [indiscernible]?

I think still that's the comp that -- some of that is the comp and that Europe was down earlier and the comp is significantly easier from the quarter last year.

Yes, I think that's exactly right. I mean when you look at it, most of the sectors in Europe were sort of relatively flat year-over-year. And what really sort of stuck out was we were down a little bit in linear motion in the industrial sectors in Europe, offset by automatic lubrication systems still continues to do well there. So that -- those are really the two biggest puts and takes and then relative flatness across the other sectors, which, again, against last year's easier comp, but it was nice to see the stability there.

And to that point, just to add on that, last year's third quarter was a particularly challenging comp. Our organic growth actually accelerated in the third quarter. As you recall, that was really when a lot of the supply chains flushed out [indiscernible] than we caught up. So it was our strongest year-over-year organic growth quarter last year, and it was a challenging comp for us this year. And again, it was a good comp from a European standpoint, but not as strong as the rest of the world.

Okay. Thank you.

Thanks, Tim.

Our final question today comes from Michael Feniger of Bank of America. Your line is open.

Yes, thanks for squeezing me in guys. Just you mentioned, obviously, there's a lot of [indiscernible] about inventory destocking, OEMs, distributors. I'm just curious, Phil, if you could kind of touch on your own inventories. Do you think you'll get cleared out by Q4. Could that maybe linger a little bit in '24 kind of similar to what you're talking about with the customer inventory process?

Yes, sure, Mike. So we were able to take inventory down in the third quarter, it actually drove a lot of the cash flow benefit we saw year-over-year was working capital coming down. And if you -- we would say we are still probably have a little bit more to do there. and we'll look to get after it in the fourth quarter and potentially depending on how things go the first part of next year, but we are steadily making really good progress at getting our inventory levels in line, but certainly a little bit more to go, and I think that will drive another quarter of very strong free cash flow performance. I mean, to hit the midpoint of the -- or hit the guide we put out there, we'll need to do free cash flow in the fourth quarter similar to the third. And I think working capital will contribute once again.

Great. And just I know you're not giving guidance on '24, but just based on some of the acquisitions you've done, how much rollover just on what you guys have completed rolls over into 2024? And I think you might have commented on this earlier, but are those acquisitions accretive to margin?

Yes. I would say from a carryover standpoint, if you think about kind of 1%-ish carryover when you think of everything we've done during the year, full year effect will be about a 1% tailwind, if you will, to the top line. That's net of the TWB divestiture. And then I think relative to the margin performance, I mean, certainly, a lot of them come in at various points. And then certainly, we have planned for all of them to get to our corporate average margin. So Des-Case is off to a great start. But in the quarter, Nadella was played a little bit by European holidays in August. And in GGB, we said it would take a little bit of time to get up to the corporate average. So I would say, net-net, if you look at the acquisition bucket running a little bit below, but certainly feel good about the M&A we've done. iMECH comes in with a very attractive margin profile. And I think as we look ahead, we'll see margin improvement on the acquisition line next quarter and then into '24, look for it to improve even further.

And just a follow-up with the M&A theme, just you guys obviously are generating the cash flow. Your leverage, I think, is now at 2x. You've gotten back down. Just -- is the plan to continue kind of at this pace next year? Just kind of curious how that pipeline is looking, how you guys are kind of thinking about this next year?

I would say the plan is to continue. We had more acquisitions this year tended to be on the smaller side. I think the preference would probably be a little fewer and a little larger. But in terms of total revenue, yes, we would expect to continue to be active next year.

Great. Thank you.

Thanks, Mike.

[Operator Instructions] There are no further questions at this time. Sir, do you have any final comments or remarks?

Yes. Thanks, Lidia. Thank you for 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.

Thank you for participating in Timken's third quarter earnings release conference call. You may now disconnect.