Yahoo Finance The Timken Company (NYSE:TKR) Q1 2024 Earnings Call Transcript
The Timken Company (NYSE:TKR) Q1 2024 Earnings Call Transcript April 30, 2024
The Timken Company misses on earnings expectations. Reported EPS is $1.37 EPS, expectations were $1.5. The Timken Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, all. My name is Lydia and I'll be your conference operator today. At this time, I'd like to welcome everyone to Timken's First Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Elmblad, you may begin your conference.
Meghan Elmblad: Thanks, Lydia, and welcome everyone to our first quarter 2024 earnings conference call. This is Meghan Elmblad, Interim Manager 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 material 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 question 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.
Richard Kyle: Thanks, Megan. Good morning and thank you for joining our call. Timken delivered a solid first quarter with organic revenue in line with the industrial market conditions and strong margin performance. Our results continue to demonstrate the strength and diversity of Timken's portfolio and the successful execution of our strategy. Revenue was down 9% organically from last year's record first quarter, driven by the significant decline in wind energy in China that began mid last year. To frame up the impact of wind, organic revenue would have been down less than 4% excluding wind. I'll talk more about wind in a moment. Our organic revenue increased around 8% sequentially from the fourth quarter. We attribute that to normal seasonality.
In aggregate, we didn't see any significant strengthening of markets or orders to start the year. Across that 4%, most other markets were down as the softness that started in the second half of last year continued through the first quarter. Notable exceptions included aerospace, rail, services in India, all of which were up from prior year. Including acquisitions and currency, revenue was down less than 6%. First quarter cash flow was seasonably weak, but this will increase through the year and we remain confident in the cash generation of the business. EBITDA margins of 20.7% were down just 30 basis points from last year despite the organic revenue decline. There were several contributing factors to the margins that I'd like to highlight. First, we have made significant progress over the last decade to diversify and steadily improve the Timken portfolio, which continues to result in greater performance in both the top and bottom lines.
This includes the six acquisitions we completed last year, which contributed positively to the results in the quarter. Second, we are benefiting from our investments in operational excellence and other self-help initiatives. Our Mexico operation is one example. The Bearing plant ramped up through last year and is now performing well and contributing to year-over-year results. Acquisition synergies are also helping margins. Margins are up at several of our recent acquisitions including SPINEA, American Roller Bearing and GGB as we have successfully delivered cost synergies across the portfolio. Mix and price are also contributing to margins. We came into the year expecting price to be modestly positive for the full year, less than 1%. We started the year well and we still expect full-year price to be positive.
We also expect price cost to be modestly positive for the full year as the pace of inflation particularly in raw material and logistics has eased. And finally, we've been steadily improving operating performance the last two years as we've come out of COVID, supply chain and inflation issues. We sequentially improved each quarter last year and we continued to improve into the start of 2024. We're operating much better today than we were a year ago and I would say that our supply chains are back to pre-COVID levels. We also have great focus on continuing this momentum through our CapEx spend and our operational excellence initiatives. We're also continuing to adjust our cost levels to the realities of the demand. We lowered our headcount by about 8% through the course of last year and we lowered another 2% during the first quarter.
Earnings per share of $1.77 was down 15% from last year's record quarter. $1.77 marks the fourth highest quarter in company history. Both the earnings, as well as the 20.7% EBITDA margins in the face of a 9% decline in organic volume reflect the strength and diversity of the portfolio, excellent execution and the impact of years of consistent and effective capital allocation. The Q1 was a good start to the year in a challenging market environment. To add more color to the biggest challenge in our markets, I'll expand on our wind energy results. We signaled mid-last year that after several years of very strong growth, we saw a significant decline in forward demand. While I won't share the specific figure, our wind revenue was down over 50% in the quarter from last year's record level.
The demand situation has stabilized at this level, but we do not see any imminent catalyst to return to growth and our full-year guidance doesn't reflect any improvement in the market through the course of the year. Again, the market appears to have stabilized. We don't expect further erosion in the market and the comps get significantly easier in the third quarter, but we do not expect the remainder of the year to sequentially improve. Longer term, we still believe in the growth of the global wind energy market, the value of our technology in making wind a reliable and cost-effective source of energy, the aftermarket potential of servicing our installed base and our ability to profitably win in the wind market long term. I'd also like to point out that we absorbed the steep decline in wind revenue and the associated cost issues in the first quarter and still delivered 20.7% EBITDA margins.
Turning to the rest of the outlook. We are modestly increasing the outlook for the remainder of the year for revenue, margins and earnings per share, but we are continuing to take a cautious outlook on second half revenue. Sequentially, off the first quarter, we're planning for flattish revenue in Q2 and then seasonal declines in the second half of the year. From a year-over-year perspective, the comps get significantly easier in the third and fourth quarters. We'll continue to adjust our operating costs and inventory levels down with the revenue. We expect to deliver good margins for the year despite the general market softness and we expect to deliver a step-up in cash flow through the rest of the year. If markets are stronger than we were expecting, we will be able to pivot and capitalize as we've done before.
Looking at the longer-term outlook, we remain confident in the growth potential for our portfolio, and we will continue to invest in our growth and margin initiatives. For example, we're advancing our digital capabilities. We completed two ERP upgrades in the first quarter and introduced new digital selling tools for distributors. We also recently announced the expansion of our Mexico operation and the consolidation of several smaller manufacturing facilities to optimize our footprint. Six acquisitions completed last year are performing well, and we continue to drive both revenue and cost synergies across all of the recent acquisitions. Our application engineering pipeline remains active as customers continue to invest in their next generation of equipment.
Customers turn to Timken as a development partner in advancing and differentiating their equipment designs. and as further support of that, Timken was recently recognized as being one of the world's most innovative companies by Fast Company. Additionally, our portfolio is well positioned today to capitalize on several secular growth trends including infrastructure spend, reshoring, defense, automation and sustainability. We will also continue to create value through strong cash generation and the disciplined allocation of capital to CapEx, the dividend, M&A and share repurchases. Our debt levels are about at the midpoint of our targeted leverage range, and when 2024 and 2025 cash flow are factored in, we have ample capacity to continue to add value through capital allocation with a bias to M&A.
Before I turn it over to Phil, I also want to comment on the upcoming CEO transition. The Board is excited to welcome Tarak Mehta as Timken's next CEO in September. Tarak brings significant experience in global industrial markets, strong leadership skills and a proven track record of creating value for all stakeholders. You'll inherit a market-leading franchise that is both delivering results today and is poised for further growth in the future. We will also assume leadership of an executive team with a proven track record that is supported by 19,000 committed Timken employees around the world. We'll provide more information about Tarak and the leadership transition as we near September. Until then, we remain focused on delivering for our shareholders through the current market softness, while positioning for a return to growth.
We remain committed to achieving the Company's long-term financial targets and in scaling Timken as a diversified global industrial leader. Phil?
Philip Fracassa: Okay. Thanks, Rich and good morning, everyone. For the financial review, I'm going to start on Slide 10 of the presentation materials with a summary of our solid first quarter results, which further demonstrate the strength of Timken's business model and earnings power through dynamic environments. We posted revenue of just under $1.2 billion in the quarter, down 5.7% from last year. First quarter adjusted EBITDA margin came in at 20.7%, down only 30 basis points year-over-year. And we delivered adjusted earnings per share of $1.77 in the quarter. Turning to slide 11. let's take a closer look at our first quarter sales performance. Organically, sales were down 9.2% from last year, as continued positive pricing was more than offset by lower demand across multiple sectors, with wind energy experiencing the most significant decline in the quarter.
If we exclude the decline in wind energy, our organic revenue would have been down less than 4%. Looking at the rest of the revenue walk, the impact from the six acquisitions we completed last year, net of the one divestiture, contributed four percentage points of growth to the top line while foreign currency translation was a slight negative in the quarter. On the right-hand side of this slide, you can see organic growth by region, which excludes both currency and net acquisition impact. Let me comment briefly on each region. In the Americas, our largest region, we were down 4% against last year's strong first quarter. Most sectors were lower year-over-year, led by Off-Highway, while services and aerospace were both notably up. In Asia-Pacific, we were down 21%, driven by China, which saw the significant decline in wind energy that Rich talked about earlier.
This was partially offset by double-digit growth in India on strong rail and industrial demand. And finally, we were down 9% in EMEA as most sectors were lower, particularly in Western Europe, with Off-Highway and General Industrial posting the largest declines, while Services was up. Turning to slide 12. adjusted EBITDA in the first quarter was $246 million or 20.7% of sales, compared to $266 million or 21% of sales last year. Our strong margin performance reflects positive price cost and strong execution, which mitigated the impact of lower organic volume in the quarter. Looking at the decrease in adjusted EBITDA dollars, you can see that it was driven by lower volume, offset in large part by favorable price mix, lower material and logistics costs, favorable manufacturing and SG&A, and the benefit of acquisitions.
Let me comment a little further on some of the key profitability drivers in the quarter. With respect to price mix, net pricing exceeded 100 basis points in the quarter and was positive in both segments. This was in line with our expectations. Mix was also positive as several of our higher margin businesses outperformed others on the top line in the quarter. Moving to material and logistics costs. Material was lower year-over-year, while logistics was slightly higher due in part to the shipping situation in the Suez Canal. In manufacturing, you can see that we delivered a modest year-over-year benefit in the quarter, despite continued labor inflation. This was driven by improved productivity, targeted cost actions, lower utility costs and a favorable inventory change impact.
Looking at the SG&A other line. costs were down from last year, driven by lower incentive compensation accruals and reduced spending to align with the lower demand. This more than offset the impact of continued labor inflation. And finally, on acquisitions, I would point out that acquisitions contributed $13 million of adjusted EBITDA in the quarter, or a 26% margin on the net acquisition revenue, as our recent acquisitions performed well on both the top and bottom lines. On slide 13, you can see that we posted net income of $104 million or $1.46 per diluted share for the first quarter on a GAAP basis, compared to $1.67 last year. The current period includes $0.31 of net expense from special items, which is comprised mainly of deal amortization expense.
On an adjusted basis, we earned $1.77 per share, compared to $2.09 per share last year. Let me touch on some of the below-the-line items, if you will. Interest expense in the first quarter was $7 million higher year-over-year as we expected, while our diluted share count was over 3% lower, reflecting our net buyback activity over the past 12 months. Our adjusted tax rate for the quarter came in at 27%, up from last year, driven by the net unfavorable impact of our geographic mix of earnings and other items. And finally, depreciation expense was up slightly in the quarter versus last year, as well as not controlling interest. Now, let's move to our business segment results starting with Engineered Bearings on slide 14. In the first quarter, Engineered Bearings sales were $803 million, down 10.9% from the last year.
Organically, sales were down 10.3%, driven by lower demand across most sectors, offset by higher pricing. With respect to performance by sector, renewable energy saw the largest decline in the quarter against a difficult comp last year. Other sectors were mixed: Off-Highway, distribution and general and Heavy Industrial were lower, while on the positive side rail, aerospace and on-highway, auto and truck were all up versus last year. Currency was a headwind to revenue of almost 1%, while acquisitions, net of the TWB divestiture was just slightly favorable. Engineered Bearings adjusted EBITDA in the first quarter was $181 million, compared to $204 million last year, with margins of 22.6% in both periods. We delivered very strong margin performance in the quarter, as favorable price cost and strong execution, fully offset the impact of lower organic volume from a margin perspective.
Now, let's turn to Industrial Motion on Slide 15. In the first quarter, Industrial Motion segment sales were $388 million, up 7.1% from last year. Organically, sales declined 6.5%, as lower demand was partially offset by higher pricing. Most of our platforms were lower year-over-year, with belts and chains seeing the largest decline given its exposure to the Off-Highway market. While services on the other hand was notably up on higher MRO, aerospace and other project revenue. Acquisitions contributed over 13% to the top line, while foreign currency translation was relatively flat. Industrial Motion adjusted EBITDA in the first quarter was $82 million, up from $77 million last year, with margins of 21.2% in both periods. Similar to bearings, we delivered flat segment margins in Industrial Motion, as lower organic volume was fully offset by favorable price cost, improved execution and the benefit of acquisitions from a margin perspective.
Turning to Slide 16. you can see that we generated operating cash flow of $49 million in the quarter and after CapEx, free cash flow was $5 million. This was below last year due to lower earnings, higher working capital, a pension contribution and other items, offset partially by lower cash taxes. The first quarter is typically our seasonally low quarter for free cash flow. We expect cash flow to step up significantly as we move through the rest of the year and as you'll see later, we are maintaining our free cash flow guidance for the full year. Looking at the balance sheet, we ended the first quarter with net debt of just under $2 billion and net debt to adjusted EBITDA at 2.1 times, both relatively unchanged from the end of last year. Our net leverage remains well within our 1.5 times to 2.5 times targeted range.
Speaking of capital allocation, we spent $44 million on CapEx in the quarter, which includes significant footprint expansions in Mexico and India. We also paid our 407th consecutive quarterly dividend. And we continue to integrate the six acquisitions we completed in 2023. All are contributing well, reflecting both operating performance and synergy capture. For the rest of 2024, we intend to deploy capital towards acquisitions and/or share buybacks depending on the opportunity set. With our strong balance sheet and free cash flow, Timken remains in a great position to continue to execute our profitable growth strategy through smart and disciplined capital allocation. Now, let's turn to our updated outlook for the full year with a summary on slide 17.
Given our Q1 performance and forecast for the rest of the year, we are increasing our outlook for revenue margins and earnings per share, as compared to our initial outlook from back in February. Starting on the sales outlook, we are now planning for full-year revenue to be down in the range of 2% to 4% in total versus 2023. This is a net improvement of 50 basis points, compared to our previous outlook and reflects a positive change to the organic outlook and a negative change related to foreign currency. There is no change to the outlook for M&A, as we still expect last year's acquisitions net of divestitures to contribute around 2.5% to the top line for the year. With respect to currency. we're now planning on a headwind to revenue of around 50 basis points for the full year based on current rates, which is down 100 basis points from February.
So, organically, we now expect revenue to be down 5% at the midpoint. This is up 150 basis points from our prior guidance, reflecting improvement across several industrial sectors, offset partially by a lower outlook for renewable energy in China and a slightly lower outlook for automation in Europe. The organic outlook implies a range of down 4% to 6% for the year. This assumes no recovery or inflection in the second half, as we continue to take a relatively cautious view given macro uncertainty and our limited visibility. On the bottom line, we now expect adjusted earnings per share in the range of $6 to $6.30, up $0.15 at the midpoint from our previous outlook. Our revised outlook implies that our full-year 2024 consolidated adjusted EBITDA margin will be in the high-18s percent range at the midpoint, still down from last year.
but margins are up from our prior guidance on the improved revenue outlook and related mix, and expected strong execution. Moving to free cash flow. we are reaffirming our full-year outlook of approximately $425 million. This represents over 110% conversion on GAAP net income at the midpoint and an increase of $70 million versus last year. The year-over-year increase reflects improved working capital performance and lower cash taxes, which had more than offset the impact of lower earnings. We are still planning for CapEx at around 4% of sales, with most of the spend targeted at manufacturing footprint expansions in Mexico and India, as well as other growth and operational excellence initiatives. And finally, we anticipate core net interest expense in the range of $105 million and an adjusted tax rate of 27% for the full year.
To summarize, Timken delivered solid results in the first quarter with revenues that modestly exceeded our expectations and strong margin performance. Our team continues to execute well and we remain focused on driving operational excellence to deliver resilient performance this year, while advancing our profitable growth strategy to benefit 2024 and beyond. This concludes our formal remarks. and we'll now open the line for questions. Operator?
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