Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to Timken's First Quarter Earnings Release Conference Call. [Operator Instructions] Mr. Frohnapple, you may begin your conference.

Thank you, operator, and welcome, everyone, to our first quarter 2025 earnings conference call. This is Neil Frohnapple, Vice President 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 1 question and 1 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, everyone, and it's good to be with you on the earnings call again through this leadership transition. I'll begin with a brief look at our first quarter results and updated outlook for 2025 and I will share a bit more about our near-term strategic priorities. Starting with the first quarter, we delivered solid results as the team executed well on cost actions and other initiatives to help offset challenging operating conditions. Overall, sales in the quarter were over $1.1 billion, with organic revenue down around 3% from last year. We saw lower demand in Europe and the Americas, while we were up in Asia driven by growth in wind energy. Overall, our total backlog was up low single digits compared to the fourth quarter. This is significant since backlog was down sequentially in the first quarter, both in 2023 and '24 so it does support that we are seeing stabilization in end market demand. Adjusted EBITDA margins came in at 18.2%, and adjusted earnings per share was $1.40, both below prior year, driven primarily by lower volumes, higher manufacturing costs and unfavorable mix. Results in the quarter were helped by targeted cost actions and continued strong performance from the CGI acquisition. Finally, we generated higher free cash flow compared to the prior year and ended the quarter with a solid balance sheet. Turning to the outlook. We are focused on performing well through this environment while continuing to advance our strategy. Phil will take you through the updated outlook and assumptions in detail, but we expect industrial market conditions to remain challenging over the rest of the year. The guide is our current best estimate, given the trade situation and the heightened level of uncertainty that we and our customers are facing. I would add that…

Thank you, Rich. Welcome back, and good morning, everyone. For the financial review, I'm going to start on Slide 11 of the materials with a summary of our first quarter results. Overall, first quarter revenue came in at $1.14 billion, down 4.2% from last year. Adjusted EBITDA margins were 18.2%, and adjusted EPS for the quarter was $1.40. Turning to Slide 12. Let's take a closer look at our first quarter sales performance. Organically, sales were down 3.1% from last year, with volumes lower, but pricing slightly higher. Looking at the rest of the revenue walk, the CGI acquisition contributed 1% of growth to the top line while foreign currency translation was about a 2-point headwind in the quarter. On the right, you can see organic growth by region. This excludes both currency and acquisitions. Let me provide a little color on each region. In Asia Pacific, we were up 10% and led by growth in China with a significant improvement in renewable energy demand. India and the rest of the region were also up modestly compared to a year ago. In the Americas, our largest region, we were down about 4%. Most sectors were lower as we expected, with the auto truck and off-highway sectors seeing the largest declines. Industrial Services revenue was also down, while we posted solid growth in Marine during the quarter. And finally, we were down 11% in EMEA due to continued industrial softness in Western Europe. Most sectors were lower with the largest declines in general and heavy industrial automation and auto truck. Turning to Slide 13. Adjusted EBITDA was $208 million or 18.2% of sales in the first quarter compared to $246 million or 20.7% of sales last year. Looking at the change in adjusted EBITDA dollars, you can see that the decrease…

[Operator Instructions] Our first question comes from Bryan Blair with Oppenheimer.

The guidance update directionally contemplating higher price, lower volume, of course, makes sense. Are you willing to speak to the underlying assumptions there. What you're now baking in for volume and price, respectively, netting to the 1% organic sales decline. And then within that, are there meaningful differences by segment, either with regard to better or worse performance, plus, minus 1% or the split of volume and price?

Yes, sure, Bryan. I'll take that. So relative to holding the minus 1, pricing got a little bit better, as we said, for tariffs. And think of that as on the order of approaching 1.5%, probably not quite that big, but north of $60 million, if you will, and then an offsetting decline in volume. And if you think about that, that was really us trying to be a little cautious on the demand outlook. And then relative to the segment, just given the first quarter performance, we did -- we are assuming a little bit more of that volume change, if you will, going to industrial motion versus bearings, again with Industrial Motion being a little more indexed to Europe. And then also services was down in the first quarter and we do expect that to be neutral for the year, but we did move that from up mid-single digits to neutral, and that also sits in industrial motion, and that was a piece of it as well.

Yes. All makes sense. And then maybe for a little more detail on renewable energy trends, particularly in China. Comps are easy there, but it seems like Q1 shook out pretty favorably. Was there any notable pull forward of shipments with all the goings on, how order rates look now? And what are you now contemplating for the full year in terms of renewable growth.

Yes. Great question. I would say we were pleasantly surprised with the renewable energy demand in the first quarter. We were we were seeing order intake rates pick up as we moved through the second half of last year. And again, the first quarter is sort of that low base, if you will. So we were up pretty significantly off that low base. But we think we are expecting that momentum to continue. And coming into the year, we thought we'd be around flat in renewable energy. And now we're thinking we should be up mid-single digits with some momentum that we've saw in the first quarter, which we're looking to extend that as we move through the year. So as we've said before, the outlook on wind remains positive. It should be a growth market for us long term. As we said before, it will probably be several years before we get back to where we were, but it's nice to see the improvement in Q1. And then we also strongly believe in the long-term potential for the aftermarket as that continues to grow in wind.

The only thing I would add is we've worked our way through what was the over-inventory situation in that channel and which was affecting the comps last year.

The next question comes from Angel Castillo with Morgan Stanley.

This is actually Stefan Diaz sitting in for Angel. Maybe to start, I know organic sales were down for the quarter. But do you have any sense that your customers pulled forward demand trying to get ahead of tariffs at all?

Yes. I would say nothing that we could point to that would be material from a tariff standpoint. Obviously, we sell a lot of different products to our customers, particularly distributors and those products mainly get produced in the U.S., and there's a small minority of imports. So I would say overall, when you think of lead times and then the fact just the breadth of the of the mix that we sell to our various customers. I'd say nothing notable that we can point to and say, yes, that was a buy ahead of tariffs, if you will.

Yes. And I would add that as I said in my comments, April revenue in line with expectations and May backlog is in line. So we're not seeing any significant move up or down in the demand level in aggregate.

Great. That's helpful. And then maybe can you give more details on the actions you're planning on taking in your auto OE business that you mentioned in the prepared remarks? Like, for example, you're planning on implementing a similar strategy for when you left the light vehicle industry in North America? And maybe does your planned actions include trucks? Or is it more limited to light vehicles?

Yes. It's focused on light vehicles, and it's focused on OEM. So it's not affecting our -- we're not targeting aftermarket. And to the point you raised of what we did before to go back in history, on this in -- between the 2008 to 2013 time frame, we exited over $1 billion of automotive and at that time, truck revenue as well in the OEM space. We sold some of that off. We exited some platforms, restructured portfolio and the manufacturing footprint that supported it and saw a significant uplift in company margins as a result of that. From that time, I would say, to COVID, the margins, as we've said over the years were below company average. They were more in line with our old mobile business margins. But the business did not require much capital, generated good cash flow and was acceptable margins. And it wasn't the growth engine of the company, but we continue to stay in it and, again, with minimal investment. I would say, since COVID and coming out of COVID with inflation, we've been chasing the margin suffered as everything did during COVID. But unlike other parts of our business where we were recovering, we've been chasing the margin since that time. It has not been acceptable. And we're really now targeting what I would say is more than half of the -- of our automotive OEM business. Not all of it. We still have some very strong technology niches there that are attractive and we get good returns on. It's too early to say what that will -- how that will play out in regards to that, but we expect that by 2027, we will likely be a smaller player in that market. And as a result, we would expect a material uplift in corporate margins from it in 2026 and then more in 2027.

Yes. The only thing I would add, as Rich said, we're targeting more than half of that auto OE business and from -- we have a pie chart in our investor deck, and that would show you that auto OE was around 8% of company sales last year. So that would give you kind of an order of magnitude of what we're looking at. And as Rich said, with the actions we're taking probably not a '25 impact, but certainly, should be accretive to margins in '26 and beyond.

The next question comes from Kyle Menges with Citi Group.

So you're taking pricing understandably, probably mostly in industrial distribution, I would gather to offset some tariff impacts. Do you have some sense of the pricing that you're passing through just relative to competitors? And then also just looking at your supply chain in the U.S. what sense do you have at least in your core businesses, just how you're positioned relative to competitors from a just tariff impact that you might be seeing relative to your peers?

Yes. I would say that we are seeing competitors raise prices. And certainly, the fastest impact is typically in distribution, but we are raising prices with -- through OEM channels as well. And I would say, in general, bearing prices are going up globally and -- but certainly more so in the U.S. I would say our footprint, we think, is at worst, neutral and at best advantaged and there's probably longer term, some opportunities for us with our heavier concentration of U.S. footprint. But short term, we're -- until there is more stability in the tariff situation, our short-term objective is largely to hold share past the cost increases through and get some settling on where the tariffs land, and then we'll look at -- is there opportunity for us to capture some share and/or reposition some of our footprint.

Yes. And maybe, Kyle, maybe if I could just maybe add a little bit more color because I do agree with what Rich said, we do believe our U.S. footprint should help us in an environment like this, and we think it will. The impact that we've talked about in the slides, $150 million gross annualized impact. I mean, let me -- if I could break that down a little bit. I mean, first, when you talk about rates in China, we're assuming rates in effect as of today, and that includes the China-related rates of 145% and 125%, respectively. So big numbers from China that we would hope those rates would certainly come down at some point. And China is probably north of 80% of the impact for us and obviously, given those rates really driving the numbers. So if -- even if just the China de-escalates a bit and get, say, cut in half, that impact goes down significantly. And I think our net $25 million impact largely goes away, not 0, but largely goes away. That would be one. Number two, Rich talked about the lag we've talked about the time lag for pricing before that with distribution, it can take a couple of months, typically less than 1/4. We're working to get the pricing in. OEMs can be a little bit longer because it's kind of 1 by one, customer by customer in many cases, and that's ongoing. Last time in 2018, it was probably 2, 3 quarters before we got it in. And so the pricing that we put in is kind of what we expect for the rest of the year, working on other mitigation tactics as well, supply chain and et cetera, those also take time, but we do think we'll get to on a run rate basis, offset it on a dollar basis by the end of the year at those rates and then look to recapture the margin in '26. And the last point I want to make, too, is around inventory accounting. It's a minor point, but it's a big impact. Most of our U.S. business is on LIFO inventory accounting under LIFO, the tariff costs hit you right away. Compare that to FIFO, where they would kind of work their way through the inventory and typically hit you as the inventory turns, which can be a few months down the road. And that's kind of exacerbating that timing impact. So bottom line, it's a fluid situation. We've assumed the current rates, which I think most people would say is probably a worst-case scenario for China, and we're pricing for it. And we'll keep monitoring as we go.

Helpful. That LIFO accounting, definitely not helping in the current environment. But yes, I guess just the follow-up of that, you said you plan to fully offset that $150 million, just can you give us some sense on how much pricing surcharges versus sourcing supply chain initiatives should be of that $150 million?

Yes. I mean it will predominantly be pricing in surcharges. And as we talked about, both distribution and OEMs. I think the supply chain mitigation tactics are a little more limited and obviously, some are lower-hanging fruit than others. And obviously, we're working on the lower-hanging fruit stuff right away. But I would say the vast majority would be pricing and surcharges, and that would be by the end of the year. And then that net '25 impact would mainly be affecting the second and third quarters and then dropping significantly in the fourth quarter.

The next question comes from Mike Shlisky with D.A. Davidson.

Just to follow up on that last answer there. I'm not sure if I had this correct. So if there's a $0.25 headwind this year on tariffs, but you catch up by the end of the year, again, if everything stays the exact same as far as tariffs are concerned, would you then say that for 2025, we should be modeling 0 impact. I just want to make sure I have that exact -- I have what you're trying to get clear for after 2025.

No, I think that's right, Mike. So all else equal, by the end of the year, we will be offset on a dollar basis. So the net impact would be 0 in '26. And obviously, we'd have the headwind of '25 that wouldn't repeat. So that would be a year-over-year benefit, if you will. But we should be fully offset by the end of the year on a go forward basis.

And then as a follow-up, I wanted to -- and I wanted to maybe take a step back from my other question here. Rich, you and the Board, I'm sure discussed in detail the kinds of things that the recently departed CEO was looking at or doing or changing at Timken, what his plans were. I guess I'm curious, was there a fully developed plan internally as to what he wanted to do when he left? And are you looking to or will your successor be just implementing all those plants at this point? Or do you and the Board going to have a fully clean slate for the next CEO who may or may not do what Tarak was hoping to do.

So I'd say a couple of things on the I transition. First, I'd say the team underneath the I was unchanged. I'd say of our top 100 managers, I think there's been one departure in the last 12 months, and that was due to retirement. So obviously, there's a lot of continuity there. And then I would say during that time. There was not a strategy change or a proposed strategy change. If anything, I would say there was confirmation of the path that we were on. I think the new thinking that was brought in was more around would we go faster and bigger than any sort of pivot from the direction that we were going on. I think those were good thoughts and really the biggest piece of that. I mean, there were certainly some things in the details of how we can execute the company better and things like that, that in retaining some of that. But on the big picture, it was around the portfolio as said we've really always done that portfolio work, but some of the thoughts were -- could we go bigger and faster on it. And as I said earlier, we are accelerating the automotive OEM work now of what was identified. That was probably the -- well, it was the biggest piece and other things would be smaller than that. So I think I would say it's been -- again, it's fairly consistent and nothing dramatic during the time and I wouldn't expect anything that the new person handled any immediate issues they have to grapple with. I guess the last thing I'd say on the transition period, is we're really focused on maintaining margins and what we expect to be a soft industrial market looking to generate good strong cash flow and that cash flow, it tends -- is the primary driver of earnings growth beyond normal growth levels, the compounding of good capital allocation decisions. So a lot of focus on that over this interim period. And then also continue to advance the company strategically on our path to achieve our financial targets. We're not standing still during the interim leadership period. Again, we've got a lot of tenured management. So our objective is to come out of this tariff period a bigger and a better version of ourselves.

Our next question comes from Chris Dankert with Loop Capital Markets.

I guess first off, on the Fort Scott facility, is that fully closed? Are we running duplicative costs there? Are there any kind of ability to shift back and forth based on tariffs. Just any comments on kind of the manufacturing footprint here?

The facility is not fully closed, and it is a negative to first quarter Industrial Motion margins. Expecting a little bit of improvement there in the second quarter, but then a step change on that in the third quarter, and we are still marching down the path to have that facility closed fully in the third quarter.

So there is no change in the...

To the point on tariffs -- yes, I would just say on the point on tariffs, and we have both U.S. and Mexico footprint within our belts business, so we do have some ability to do some things on both sides of the border. But most of what we do in Mexico as the tariff situation today is USMCA?

Yes, exactly. I think that's an important point, Chris. The belt is coming up from Mexico are USMCA compliant. So we're not getting hit at present on those. And I would say a portion of the bearings are compliant as well, but not 100%.

Understood. That's really helpful. And I think just following up, I really appreciate the color around tariffs and trying to get arms around it here. But when we think about just raw materials, SBQ pricing, steel pricing kind of outside of tariffs. I assume the expectation is when we start renegotiating in fourth quarter, those prices are going to go up materially. So is it fair to assume that higher pricing is here to stay into 2026 as well.

I think that's a fair assumption and where we buy steel in the U.S. on spot prices, it is higher today than it was a year ago. As you said, a lot of it is under contract. But I would also say Timken did well with the bout of inflation that we had coming out of COVID and inflation is not necessarily a negative for us, if anything, that could give us more pricing power. The unique part about this as compared to other rounds of price -- the cost increases is the tariff element of it. But there's not enough -- generally there is not enough steel capacity or SBQ capacity in the U.S. to serve the U.S. market. So there is pricing -- there has been price increases in that space.

There are no remaining questions at this time. Sir, do you have any final comments or remarks.

Thanks, Emily, and thank you, everyone, for joining us today. If you have any further questions after today's call, please contact me. Thank you, and this concludes our call.

Thank you for participating in Timken's First Quarter Earnings Release Conference Call. You may now disconnect.