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Text: This is Neil Frohnapple, Director of Investor Relations for The Timken Company.
We appreciate you joining us today.
Today's call is copyrighted by The Timken Company.
And without express written consent, we prohibit any use, recording or transmission of any portion of the call.
I'm very pleased to report that we delivered both record revenue and earnings in the first quarter.
The revenue results reflect broad strengthening across most of our end markets, excellent execution by Timken in managing our supply chains and our operations, the diversity and strength of our portfolio, and our outgrowth initiatives.
Revenue of $1.025 billion was up 11% from last year.
The strengthening in our markets that began mid last year accelerated in the quarter, and despite a wide variety of supply chain challenges, we responded to the increase and delivered revenue that was up 15% from the fourth quarter.
The sequential strengthening from Q4 was broad, as most of our end markets were up double digits sequentially.
The year-on-year growth was again led by renewable energy, as Timken continues to increase penetration in global wind and solar markets.
Off-highway, heavy truck, automotive and general industrial markets were also up double digits year-on-year.
Geographically Asia, at plus 30%, drove much of the year-on-year growth.
But more importantly, we are now seeing sequential growth across all major geographies.
The sharp increase in demand, combined with the lingering impacts from the pandemic, stressed many of our supply chains and operations.
We experienced labor challenges, freight delays, supplier delays and unanticipated changes in customer demand.
We were impacted negatively by both the Suez Canal as well as chip shortages in the quarter.
And while these two issues grabbed a lot of the headlines, they were just two of the many issues across our global supply network that we successfully managed our way through.
We continue to experience some inflationary pressures, primarily in freight and raw material, but they continue to be very manageable.
Pricing was slightly positive in the quarter as material surcharges kicked in.
Despite the inefficiencies and cost pressures, we were able to ramp up to meet the increased demand, and in the process of doing so, deliver record earnings per share of $1.38 and EBITDA margins just shy of 20%.
Cash flow was seasonally low and impacted by the significant increase in accounts receivable from the sequential sales growth.
Cash flow the remainder of the year is expected to be strong.
We continue to advance our strategic initiatives in the quarter.
We delivered strong year-on-year growth in renewable energy of over 30%, while continuing to advance our announced $75 million investment plan.
Many of our smaller outgrowth initiatives across multiple end markets also contributed to the record Q1 revenue results.
Aurora Bearing had an excellent first full quarter as part of Timken, and we are rapidly moving to integrate the business.
Our Groeneveld BEKA transformation into an integrated and globally leading automatic lubrication systems business is also on track and is already accretive to company margins.
We continue to advance our footprint.
Our New Mexico plant is in production and will be ramping up through the course of the year, and we are completing several footprint consolidation initiatives, including the relocation of our Diamond Chain plant and the expansion and modernization of our solar operations in China.
We also plan to convert two more operations to our primary ERP and digital platforms in the second half of the year, which will facilitate both revenue and cost synergies.
Overall, an excellent quarter from Timken and delivering results in a dynamic environment while advancing the company for long-term success.
And while the pandemic has improved in many parts of the world, it has hit new peaks in others, and I want to reinforce that we continue to place employee safety at the forefront of all of our operating decisions.
As we look forward to the rest of 2021, market demand remains very strong, and Timken remains in an excellent position to capitalize on the markets.
We are now estimating full year revenue to be up 18% over last year, to a record $4.1 billion.
We're planning for normal seasonality with a slightly weaker second half than first half.
On the bottom line, we are guiding to a record $5.30 of earnings per share at the midpoint, which would be almost 30% higher than last year and 15% higher than 2019's record of $4.60.
In support of our top line and bottom line estimates, orders and customer demand are very strong.
Customer sentiment on the second half of 2021 and into 2022 is bullish.
We continue to win in the marketplace with our outgrowth initiatives, and we are focused on creating shareholder value and driving future growth through capital allocation.
I would like to caution that there is more uncertainty than normal in our estimates.
We are currently facing daily supply chain and cost challenges, which continue to elevate the level of uncertainty in our business.
In both the revenue and earnings estimates, we have assumed continued supply challenges at our customers, our operations and our suppliers' operations.
We expect the issues to continue at roughly the first quarter pace through the second quarter, and then to improve through the second half.
But these issues have not been predictable, and the range of possibilities remains wider than normal.
Over the last several years, including in this first quarter, we have consistently and reliably demonstrated the ability to successfully navigate highly dynamic markets and macroeconomic forces, and we're confident in our ability to continue to do so in today's environment.
We delivered strong EBITDA margins in the first quarter, which we expect to translate to solid margins for the full year.
And we remain committed to our long-term target of 20%.
The price/cost situation remains a modest headwind but a manageable one, and it is being more than offset by volume and other cost improvements.
We expect a good year for cash flow and expect to continue to generate value through capital allocation with a bias to M&A.
The impact of all three of our strategic pillars, of outgrowth, operational excellence and capital allocation are evident in our first quarter results as well as our outlook for the year, and we will continue to build our pipeline and advance our initiatives.
While short-term there remains a high level of anxiety around the pandemic and the associated supply chain challenges, customers and global capital equipment markets are very optimistic about the future.
We are well positioned to continue to grow in renewables, but the Timken story is bigger and broader than just renewables.
Across our markets, there is an enormous amount of new equipment design work taking place at our customers, with a particular emphasis on improving sustainability.
And Timken's value proposition in contributing to the efficiency of future generation equipment designs is a core strength and competitive differentiator for the company.
The renewed interest in increased infrastructure spending will also favorably ripple through many of our markets in the coming years.
Timken is well positioned to continue to grow and win in the marketplace.
In summary, we achieved outstanding results in the quarter and are on track to deliver a record year.
Timken delivered strong performance across the board in the first quarter, and you can see a summary of our results on this slide.
Revenue for the first quarter was a record $1.03 billion, up 11% from last year and up 15% sequentially from the fourth quarter.
We delivered an adjusted EBITDA margin of 19.9%, up 70 basis points from last year's strong first quarter.
We also delivered record adjusted earnings per share of $1.38, up 24% from last year.
Turning to slide 11, let's take a closer look at our first quarter sales performance.
Organically, sales were up 7.5%.
Both of our segments saw higher sales volumes versus the year-ago period, and pricing was slightly positive as well.
Currency added 2.7% to the top line in the quarter, while the Aurora Bearing acquisition contributed just under 1%.
On the right-hand side of the slide, we show year-on-year organic growth by region, so excluding both currency and acquisitions.
Let me comment briefly on each region.
In Asia, we delivered strong growth again in the quarter, up 30%.
Our sales were up broadly across most sectors in the region, with renewable energy, distribution, off-highway and heavy truck posting the strongest gain.
In Latin America, we were up 25%, led by higher revenue in distribution in the on-highway auto and truck sectors.
In Europe, we were up 6% as growth returned in several sectors, led by off-highway and distribution.
And finally, in North America, our largest region, we were down slightly versus last year, driven mainly by lower aerospace, rail and marine revenue, which more than offset growth in other sectors like off-highway.
However, we were up double digits from the fourth quarter, and we were up year-on-year in March.
We expect North America to be up for the full year.
Turning to slide 12.
Adjusted EBITDA was $204 million or 19.9% of sales in the first quarter, compared to $177 million or 19.2% of sales last year.
This represents an incremental margin of roughly 26% all in, or 33% on an organic basis.
The increase in adjusted EBITDA reflects the impact of higher volume, favorable manufacturing performance and lower SG&A expenses, which more than offset higher material and logistics costs and unfavorable mix.
The unfavorable mix was driven by the relatively higher OEM revenue growth in the quarter as compared to distribution.
Currency had a slight positive impact on EBITDA in the quarter, and Aurora Bearing contributed about $1 million, with margins running ahead of our expectations.
Let me comment a little further on our manufacturing and operating expense performance.
On the manufacturing line, our team responded well during the quarter to the significant step-up in customer demand.
We benefited from higher production volume versus last year, which enabled us to more than offset some cost headwinds related to ramping up production.
We also continued to benefit from ongoing cost reduction actions and other productivity initiatives across our footprint.
And as expected, we did experience higher material and logistics costs versus last year, some of which was driven by the higher volumes.
As Rich mentioned, we're in a challenging and volatile supply chain environment right now.
And while our team is managing through it very well, we expect these conditions to persist through at least the second quarter.
And finally, on the SG&A line, we saw a reduction in expense versus last year as we continued to benefit from cost reduction initiatives and lower discretionary spending, which more than offset the impact of higher incentive compensation expense.
So overall, we delivered solid adjusted EBITDA margin expansion in the first quarter, driven by solid execution on higher volumes and despite supply chain and other challenges.
On slide 13, you'll see that we posted net income of $113 million, or $1.47 per diluted share for the quarter on a GAAP basis.
This includes $0.09 of net income from special items, driven by discrete tax benefits in the period.
On an adjusted basis, we earned $1.38 per share, up 24% from last year and a new quarterly record for the company.
Our first quarter adjusted tax rate was 25.5%, in line with our expectations and slightly lower than last year.
The current period rate reflects our geographic mix of earnings and other structural benefits.
Next, let's take a look at our business segment results, starting with Process Industries on slide 14.
For the first quarter, Process Industries sales were $521 million, up 14% from last year.
Organically, sales were up nearly 10%, driven by strong growth in renewable energy, distribution and general industrial sectors, offset partially by lower marine revenue.
The favorable impact of currency translation added roughly 3.5% to the top line in the quarter, while the impact of the Aurora Bearing acquisition added nearly 1%.
Process Industries' adjusted EBITDA in the first quarter was $136 million or 26% of sales, compared to $112 million or 24.4% of sales last year, with margins up 160 basis points.
The increase in adjusted EBITDA reflects the impact of higher volume, favorable manufacturing performance, lower SG&A expenses and the benefit of currency, offset partially by unfavorable mix and higher material and logistics costs.
Now let's turn to Mobile Industries on slide 15.
In the first quarter, Mobile Industries sales were $505 million, up about 8% from last year.
Organically, sales increased 5.2%, reflecting higher revenue in the off-highway, heavy-truck and automotive sectors, offset partially by lower shipments in rail and aerospace.
Currency translation added 2% to the top line in the quarter, while Aurora Bearing contributed nearly 1%.
Mobile Industries' adjusted EBITDA for the first quarter was $80 million or 15.9% of sales compared to $76 million or 16.3% of sales last year.
The increase in adjusted EBITDA versus last year reflects the impact of higher volume and lower SG&A expenses, offset partially by unfavorable mix and higher material and logistics costs.
Turning to slide 16.
You'll see we generated operating cash flow of $32 million in the first quarter.
After capex spending of $29 million, free cash flow was $2 million in the period, which was in line with our expectations.
The drop from last year reflects the impact of higher working capital to support our sales growth, which more than offset the impact of higher earnings in the period.
In particular, we saw a large increase in accounts receivable during the quarter, driven mainly by March sales being significantly higher than December.
Note that the first quarter is normally the lowest quarter for free cash flow generation.
Given seasonal working capital needs and our annual incentive compensation payouts that occur in March, we expect a significant step-up in free cash flow over the remainder of the year, but it will be more back-half loaded.
From a capital allocation standpoint, in the first quarter, we returned $50 million to shareholders, with the payment of our 395th consecutive quarterly dividend and the repurchase of 350,000 shares of company stock.
Taking a closer look at our capital structure, we ended the quarter with a strong balance sheet and strong liquidity.
Our leverage, as measured by net debt to adjusted EBITDA, was 1.9 times at March 31, unchanged from the end of 2020.
This puts us in a great position to continue to drive our growth and capital allocation strategy.
Now let's turn to the outlook on slide 17.
We now expect sales to be up around 18% in total at the midpoint of our guidance versus 2020, which is up from our prior outlook of 12% growth.
Organically, we're now planning for sales to be up around 15% at the midpoint, up from the previous outlook of 9% growth.
The higher outlook reflects our strong first quarter performance and improving market conditions.
We expect both segments to be up double digits organically, but with higher growth in Mobile Industries than Process Industries.
Our assumptions for currency and acquisitions are unchanged from our prior outlook.
Currency is still expected to contribute about 2% to the top line, while Aurora Bearing is expected to contribute close to 1%.
On the bottom line, we now expect adjusted earnings per share in the range of $5.15 to $5.45 per share, which is also up from our prior outlook.
At the midpoint, our current outlook represents nearly 30% earnings growth versus last year.
The midpoint of our earnings outlook implies that consolidated adjusted EBITDA margins will be up slightly from 2020, despite unfavorable mix and the nonrecurrence of the significant temporary cost actions we took last year in response to the pandemic.
For 2021, we now estimate that we'll generate free cash flow in the range of $325 million to $350 million, which represents just over 80% conversion on adjusted net income at the midpoint.
This assumes capex spending at around $150 million, or just over 3.5% of sales, which includes ongoing growth investments in areas like renewable energy.
For the full year, we anticipate net interest expense of around $60 million, and estimate that our adjusted tax rate will be about 25.5%, consistent with the first quarter, and both of which are unchanged from our prior outlook.
So to summarize, we delivered record first quarter performance and are raising the outlook for the rest of the year.
The global Timken team is executing well in this environment, and we're confident in our ability to deliver record performance in 2021 and beyond.

user
q1 adjusted earnings per share $1.38.
q1 gaap earnings per share $1.47.
q1 sales rose 11 percent to $1.03 billion.
sees fy adjusted earnings per share $5.15 to $5.45 excluding items.
sees fy gaap earnings per share $5.00 to $5.30.
sees fy revenue up about 18 percent.

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