TKR - Earnings call transcript Q1 2018

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Operator

Good morning my name is Paula and I will be your conference operator today.

As a reminder, this call is being recorded. At this time, I would 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. you. Thank may you your begin Chadwick, conference. Shelly

Shelly M. Chadwick

the Paula, first quarter you, President this Finance Officer morning further and with to off is am good Timken's to of for Accounting free new our Chief Welcome joining for because everyone. and Jason XXXX us contact us Vice Hershiser If, not morning, after the Thank company. enjoying his earnings who at he's born I you son, some XXX-XXX-XXXX. time feel last thank was you questions, should me directly have call, Dylan, to with week. call. please I wanted today.

Before we as today's review on point posted the to begin company's results. of website the part want of quarterly that our reference this I presentation that will have morning, out we materials remarks we

Fracassa, through and open You webcast call Timken With the also this the can Rich this before We'll access for questions. morning CEO, call download Rich Kyle; Chief Company's feature on and are we your from earnings the Phil Phil have opening me our The President Financial comments today up Officer. link. material and

a an question ask the questions to one During please up and time opportunity everyone at limit one would you allow to to participate. follow your Q&A, that I

During future today's statements financial looking operations. call, our you may related results, business to hear forward plans and

GAAP Rich. included projected the non-GAAP in report due to we Company. timken.com written turn SEC, call. information for With implied and our Today's We've recording, reconciliations factors in presentation copyrighted describe the are your you from call a or and and we now of Timken in in its greater financial detail on to Our which by those actual interest today's that, any consent, The release the Without materially between Timken any the with is like call I'll and may I'd results of thank of which press over website. transmission equivalent or filed press to The differ available in variety use, portion materials. expressed prohibit Company, the release

Richard G. Kyle

Good as and taking join and Thank all acquisitions. quarter an financial execution. from XX% Jason. market and strong demand, Revenue result performance, reported organic good up from X% strategic robust us you, with of excellent initiatives, congratulations, with everyone. time Shelly, a the first Thanks today. to our morning, We XX% very was for

outgrowth of quarter, We The of reflects to capital in goal of XXX first short-term The EPS in quarter we and for from quarter benefits above pleased margins expect to very greater margins getting While margins. Mobile margins year. last are growth the contributor market realized the allocation, and earnings initiatives working. quarter a points points XXX margin for in positive the of We to basis price over full still biggest the above Process full of expect big was and we the We're also XXX be XX% Price was XX% over driver Industries. achieve volume. stay a the year. than expansion growth, provide the demand, XX% basis benefiting quarter in delivered EBIT to XX.X% achieved of improvement from per We the the reform. same point XX% XXXX. results our from evidence margin of increase our an for year. We strong also adjusted $X.XX basis that expansion, our are share achieved tax

ability in material in costs to were We and we year the to over quarter, to time. expect the cost confident up trend our costs into material remain material recover slightly up and Our XXXX. continue through

Our material up last costs margins year. expanded went we and last year,

to year's cost again this and plant demonstrated ramp-ups. recover margins and including Margins excellence expect this will environment, expand further material margins were year, year's operational this a our our helped ongoing ability continue initiatives, we closures to rising in by costs last up plant Our material also so. costs will We've do expand and to year. we be and

All weak we front the and product this inventory XXXX. remain still for in the quarter our inventory are a quarter compounded year. We're seasonally that working XXXX. on and we build, to flow and serving fourth full Bearings year and the strong of to customers more global all leverage flow us achieving our market recent the while report, growth acquisitions the demand our to the effectively. Cash to the we has half XXXX and are off in active in second increase the the in new capital we quarter by have geographies. And built and outgrowth our industrial of to add We're are in performing ABC level We expect M&A have delivering the businesses. for across last close efficiently to synergies the strong generate well. will helped year across acquisition better to and but nothing lines, was and benefiting They're we optimistic from in markets, into excited revenue we and to environment earnings across into inorganic well, across cash and was build planning initiatives. markets, of We're respond

a total, do line are in sales for in XX% first would the of leveling are strong revenue in result than outlook, have we with XXXX planning peak. same top for That We the our and not year, remain organic. that half an second are revenue sequential and in second organically growth see the through weaker but off with XX% seasonality half April prior line years. the trend organically. we planning to markets as we half a had In second that the modestly last improvement at in quarter Turning indication revenue demand seen

up guidance and topic. a an XXXX. currently shy price/mix greater comments our few points primarily from material extract have been up the basis The $X.XX and midpoint, expect year to implies from a and to a XX% stronger to year. levels to over a We business. estimate demand last are of EPS I'll our ability our full at margins tariffs the impact share are on revising XXX upside front, lot EPS market. approximately on activity That exemptions the just QX There's of XXX and Section do in not We make proposed so the questions that on trade expanding the

factored and position not place. proposed We expect are dramatic U.S. next are go we negative significant horizon. increase retaliation on year that a the steel Should to impact our on regards continue the competitive trade in the bearing into at China from that our change envision time, tariffs, expect XXX In outlook. may None We the the our to imports this concerned would in business. to and our and proposal. this of impacts about in But some and do global long-term do we in customers results. to positive impact costs effect, included any we competitive into take a believe or which result these some short-term, financial would tariffs have

over We to into will on continue detail I'll Phil dynamics it quarter. closely. more the monitor now to the go to trade turn

Philip D. Fracassa

everyone. Thanks, and Okay. good Rich, morning,

million on just points expanding came last or XX.X% We EBIT over the quarter diluted of year. in basis slide the XXX with first share, financial And in at summary adjusted $XXX of at from came results a a sales review, revenue delivered slide. performance going of $X.XX our can quarter Timken XX% you on margins start up ago. to XX% XX. year-on-year. in in the this million, from For per posted up strong I'm Adjusted earnings see year and $XXX

across end almost closer markets. the or by a year from sales our look year, distribution quarter completed sales sequential to XX% demand industrial dollar sectors weaker to performance. led up we let's added last $XX fourth of XX% just from at higher Turning or and the our XX, the prior in over our $XX off-highway, strengthening translation Sequentially, as line sales a take market Acquisitions across currency end quarter. plus were in positive the contributed up the Organically, U.S. slide pricing million quarter. saw X%. first impact the of from were most X.X% And reflecting over of quarter around million top revenue most

currency show growth On acquisitions. the organic right, excluding and by both so region, we

up You organically quarter see significant America. that North regions outside in the growth with can all were

America, up tick me through and truck. briefly. sectors heavy and XX%, across in XX%, sectors North Let up in were largest we were we by America, the XX% regions by respectively, And virtually and most market saw gears driven and broad strengthening we serve. Latin Asia, we X% and In industrial region, distribution, with the where industrial Europe services. market were up In off-highway, of up all we our mainly led rail, distribution, growth

up million, $XXX was quarter in was basis partially quarter, higher sales quarter EBIT driven acquisitions, EBIT in volume, by the year. increase logistics up the the in offset The EBIT mainly performance, price/mix $XX Adjusted the XX. XX.X% and slide manufacturing was of costs last to from of points favorable expenses. and by benefit Turning million and SG&A period. the higher year-ago in from XXX Adjusted

of comment me Let these on a items. few

with price/mix was in Mobile. mentioned, Pricing sales. segments, stronger by Process more I Mix also As than positive was positive was distribution coming driven quarter. in positive, both in but the

year-on-year. costs, Looking quarter net cost headwinds at the was this, material as material versus positive slight in relatively too, a price were

dynamic to year, the do we for the for full the continue XXXX over for balance course While the we anticipate the and to material price expect cost of of price year. be positive positive cost inflation

year. a an an $X.XX up XX% in quarter GAAP XX.X% on expectations XX%. we of primarily rate the support $XX from favorable In compensation $X.XX levels. and volume-driven. increase increases in The XX, rate mostly the or per The and On we driven performance Turning adjusted favorable to XX%, was to rate was impact we GAAP manufacturing. share you'll was quarter. share, On net $X.XX looking the basis, last sales earned year. reflects slide our first expense diluted volume at posted tax with was adjusted other the our production down cost from earned quarter, for income diluted basis, that costs higher the quarter and tax see SG&A, absorption our in higher higher the last of tax reform. current U.S. spending The were by logistics there And tax by the was per line driven On basis. million the

We expect XX% rate tax remain to for balance of the our adjusted XXXX.

a and distribution, business or starting general Industries up XX. quarter from first million industrial, year-on-year. across last on let's XX%, almost reflecting sales with look Process our up XX% million, $XXX industrial Process the landscape with at were the all for were segment heavy services results, Organically, demand slide $XX Industries increased take up and sales Now, year.

X% over to and generated Currency top in acquisitions quarter. marine We favorable saw was military line, the also and favorable the in slightly quarter. just higher the pricing well, as were revenue positive adding

a fairly year-on-year. markets an general military at across the Looking heavy growth more by our sectors, other increased both regions and build In the reflects markets. and backlog strength was industrial a and world revenue we quarter with bit sequentially. high-speed reconditioning services. year and industrial up broad closely also in end for driven ended quarter, The We marine distribution the of versus the regions. up revenue and higher up improving activity distribution market gearbox saw with and was higher services broad-based last the all In channel, the gearbox

the XX.X% The $XX of driven partially favorable higher Process basis year. sales quarter, EBIT points adjusted million volume, basis the and For and of EBIT Process EBIT logistics points were quarter. or was compared or offset up and XX.X% SG&A Adjusted Industries earnings also manufacturing year-on-year was fourth was by XXX costs. by $XX XXX from up higher in $XX performance, sequentially to sales increase last price/mix million. million Industries margins

planning outlook increase Our sectors to add industrial, in top serve general the to including be Industries distribution, services. up for XX% around broad And growth by around acquisitions the to currency heavy XXXX we expect we're XX%. collectively for Organically, across all year. energy, driven of sales military industrial for current wind line is X% Process and we marine, and to market approximately the sales for

added as Industries reflecting to the the were of In Acquisitions Now, over quarter XX%, the Organically, slide year. almost sectors, currency and Mobile and on million $XX sales almost X% the $XX or up let's from were XX% $XXX or quarter, line. over in million, turn first translation off-highway, Mobile XX. revenue up to top truck added Industries XX% pricing. million well sales as rail heavy growth in favorable positive last

million we by Latin growth EBIT world. up and be were mainly shipments a of the We a to And rail, in saw the all heavy all Looking the for Asia year. up expect in full at regions the the In $XX in subsectors rail quarter. was Mobile bit by EBIT points In closely X.X% were driven acquisitions or markets. quarter. The in year-on-year million now truck, the $XX impact XX.X% Mobile reflects Industries off-highway, America. and construction, last in margins quarter. solid higher higher $XX our more mining XX agriculture growth the was was from logistics volume points sequentially or of XXX million SG&A year. to Industries partially higher fourth offset increase costs. basis in adjusted Adjusted benefit EBIT earnings of compared and sales of up the up basis and sales the and of

we're led for acquisitions top off-highway, X% Organically, translation. Industries for outlook XX%, heavy currency truck XXXX X% about for coming add by will with rail an Mobile the additional sectors. in increase XX%. We current global estimate and the sales Our be approximately to sales that of about to growth from is line planning up

increase Turning $XX in to After support free coming first And dollars, sales cash the seeing normally negative improved was percentage working to versus slide quarter up was $XX year. compensation levels compared see lower as driven year. quarter. to impact million, occur the working was million XX, the which despite $XX positive working cash operating spending the higher $XX sales increased Much quarter the year-on-year. capital million the in first of and the you'll last free a capital flow of our as payouts we're that period. CapEx as million was year-ago that flow our of planned were this of well flow cash capital by into A incentive negative

We solid and expect point be generate the the the we expect full flow, for to cash low cash flow for first quarter year. free to

some full CapEx year. We spent sales $XX highlights of in quarter, see of allocation on X.X% bottom the regards of capital the You CapEx can million the at to around the and expect we the slide. of for during

progress M&A, of acquisitions We of are the acquisition performing of regards the to dividend and well, now the second in pending Bearings the and also XXXrd the about make our In XXX,XXX shares to which we continue India will of returned our $XX quarter. to end we through million on payment before repurchase consecutive recent expect ABC quarter. close in the quarterly our shareholders

in the ended last for range or million with targeted of middle from net XX% quarter up of $XXX we slightly debt end of leverage. capital, Finally, the of the year but our right

and to Our strong and balance and buybacks. organically acquisitions, through through with us to dividends return invest our sheet the capital ability to both continues to share shareholders growth provide for

acquisitions add and shown expect around X% growth of to And Next, pricing. the impact the let line. as markets positive XX% across well planning should broad approximately revenue We're currency top me end driven to by XXXX XX%, on outlook most as the versus slide globally review of in as XX. our about collectively Organically, up be we to increase total now XXXX. for sales

full-year is guidance, to The bottom net around XXXX of a or targeted expect accomplishment. line, put to with XX% at in per million finally, that we session. for XXX And of of implies adjusted will at for the year, the the roughly EBIT would will share earnings On back turn be estimate adjusted in start flow of special me which $X.XX Excluded $X.XX outlook over basis of we'll above the earnings we that our the the diluted a cash range it items let or in midpoint be us totaling of range $XXX free generate great full XXXX. our on margin EBIT adjusted up than income. a for estimate anticipated $X.XX final high-end diluted Rich expand our now year, before we points Rich? range $X.XX, to the And by $X.XX basis. two XXXX. expense that, GAAP Q&A from share margin comment per more the to share we midpoint in per that of XX% our This

Richard G. Kyle

to Thanks, XXXX. Phil. We're great to start off a

well the followed execution XXXX supports market outgrowth, outlook, working. XXXX full-year Our the quarter as that and excellence deployment to we shareholders. drive of believe markets as and performance, and open the grow are by and and our We need first That formal for remarks, actual products our continue and optimal strategy deliver results operational will our services customers to lines to our that and questions. for Timken will to value the greater will continue concludes capital

Operator

question Steve we'll Thank Jefferies. with first Volkmann you. from And our take

Stephen Edward Volkmann

guys. morning, Good Hi.

Richard G. Kyle

Steve. Morning,

Philip D. Fracassa

Morning, Steve.

Stephen Edward Volkmann

Hey, door I'm say in mean, and that this what was I have your you've like as XXXX the opened you do see do conditions, interested comment peak not I into made Rich, you of since kind you that. feel of here, you sort curious visibility yet?

Richard G. Kyle

customers. a say have No. of would we with I optimism level our

So, me well, back XXXX. talk about and XXXX let first off

top year was you the to typically So, hard line. quarter finishes the the half, on although last will that today believe April, year. the where to predict you because there. be the in big a what it significant were as planning for second last midst depends organic not as how and certainly to little last a ramp-up year, quarter as usually versus saw the seasonality, here with we know, But on first on some year first the we we of sit in revenue line year I similar to that this softening sequentially think we And quarter Mobile our look Process, second back, half the we grow again quarter. if in top will from we the first has normal do second basically

project still optimistic. our obviously, out we're But XXXX. customers you not pretty I XXXX, at think here to As look are

the pretty have in some in where at that these You And and markets past there's reason of XXXX momentum and the XXXX where good to look we're believe where they and been went at today. of finish way the we're planning XXXX. for as roll year well. start the that year year I into strong and will into least that And the would carry we that's what think next at

Stephen Edward Volkmann

Okay. I you the little generally XQ, at maybe like back improvement but do Fair see over margin it XQ a last I'm enough. think several of least Process, we then quarter little And positive, sounds just first years, a us you curious Can bit be also had on extra in bit sense process? of still good maybe will of of year give good as as not of sort the progresses. the the cost price in that a margin quite cadence going but

Richard G. Kyle

Yeah, I'd slightly for the say, the we're on in be looking below cadence, corporation total, level. QX to

at in number look half little not of to variation close Process. through lot I for seasonality than and about right to Mobile, pretty looking you first probably we around the year with just as So stronger the a the half, as a second talked hang We're trying delivered.

Philip D. Fracassa

Right.

Stephen Edward Volkmann

I'll Thanks. pass Great. Okay. on. it

Operator

Moving ISI. Raso on, David Evercore with we'll go to

David Raso

these let seemed high-teen margin, alone could just Hi. appears, it was philosophically to we're number? What changed around type more price may the it Yeah, then of wasn't pretty a you clear for cost? maybe looking the maybe are so be or necessarily question. just XX%. looking the you're past, it would A, there straightforward business And investment to a can in whatever XX%, business be but on about Mobile? year be sort Process that it just the confirm or margins, now achieve Process, were margins you, a if for the more going be, what it grow you like to implying that is it

is going going to XX% So this do the the about implying XX%; first for strong. XX%, you're I'm try organic. quarter demand obviously, was we're just forward how organic and I rest mean, extrapolate to think we of because, Process year curious,

you're So, the and business us, you how XXXX and how to can about looking But margin; the the run help XXXX? strong. is A, business think B, that to in on margin,

Philip D. Fracassa

then strategy. on the terms give a can of on David, guidance, the start, the little color Rich I'll more and Yeah. in

So I you're think right.

consolidated to If first margins of put in we then XXX terms be you is about and out, basis to the at XXX guidance quarter. and imply would points, guidance Process points expanding the over would Mobile probably expansion, XXX landed basis the would of closer in have about where look that that we XX%, midpoint

Richard G. Kyle

run the business outlook the over Process, before over we've On year for a XX%. for

that we as in bit than comfortable well reflection that we have ago, little very that XX% year here above to much We over at does XX%. the come a mix XX.X% of striving range. particular And some and years, and running the as reflect, above margin acquisitions a believe, had higher of a to little business are a some targeted with down below for the over it we've to it, a operate a OEM XX% was, did But what wind at XX% as not level. markets, though, margin We utilization I that we're at EBIT were to we and in in where as lowered we're there, certainly and a level been it well quarter before.

to investment probably So well. it more we would point, capital some as your in see

David Raso

off Well, if just make But, to sure are where that, the been to look, Mobile could be – to just earnings. a of wondering whatever clear people XXXX two-handle I'm a Mobile Mobile can that Process the XX% margin absolute. obviously, upside further it go segment takes clearly, may you incrementally, getting be on or I pressure is, clearly want in has obviously, it, name

the shouldn't out business. you that of clear, think up in the to making the how margins. figure the So demand to in But to still as little profile do for a over just (XX:XX). purposefully bit had think a your this business this year Again, in I'm off backed on about in so we XXXX, is invest sort us business Process your is demand margins said, expect business last to we XXXX? you Just sure if through there where XX%-plus it's and think

Richard G. Kyle

sub-XX% look would sub-XX% encourage margin or No. at as it a business. certainly to I you not

segments, this up on and cycle are moving you environment during of very of that As range. we two demand this at towards high-end good Mobile the focused the look

range Mobile the Mobile and So year, process to this get the we're margins for looking we're the range. targeting and this there during hold into up XX% year, – to not up believe obviously, want we Mobile this number the above working get the certainly to but get cycle to can

David Raso

question, And that call. I sequentially inventory sort one last being right apologize. The up near-term X%, of growth about it's reminiscent year it ended late of the

You built inventory. some

that inventory You're do that end Maybe quarter profitably ready Process? end make Is second maybe and XQ? to more within win XQ, it business X% you sure with that a of Can particularly strong which This again. sort increase we is it is market. question, help business and markets even of reflects it Mobile? some Is this build, that geared that. to – to color a in us get

Philip D. Fracassa

give I'll a then color little and anything bit Maybe see Yeah. you has of add, if David. Rich to

planning guidance probably ago, the Process a Because we'll take XXXX would to from little And in the a in We, is a probably Rich QX. Mobile. guide It bit Rich more was the a we in in sequential Mobile. as said, start organic month than little fourth both. was to took more end think build, I And bit we're Process key I our I bit build not kind quarter. in XXXX And for flat. probably Process as of Mobile look than strong. inventory stay have terms of of the the a expect with the little it say across point important point down than to to inventory said, little think expect and strong a then, is inventory up so obviously, into So, more

going down in we to did necessarily see not of have get year, fourth last the to we'll And so, year, the kind any take to at. we we're where as like much to we're of inventory the And quarter. look end

David Raso

Okay.

on So, your that'll seasonality EPS. shapes up

that. inventory said probably revenue be think Everything should The XQ. would to mix about anything That if solid we to mentioned unique that normal build, positive fair, growth XQ, as – for up jar there Process and say? you see I for being EPS nothing XQ the more You sequentially. is a said you'd

Richard G. Kyle

really start quarterly don't Don't EPS. We want to Yeah. guide to.

If Mobile guidance. expect we'd you little quarter, seasonality half. annualize of up to you second in the a the But up revenue first we than a little again, in do second the of the sequentially come midpoint less have quarter. the go bit But

leave it that. we'll at So,

David Raso

appreciate that. Thank I you.

Richard G. Kyle

Thanks, David.

Philip D. Fracassa

David. Thanks,

Operator

we'll on, Eisner Goldman Sam with Sachs. Moving to go

Samuel H. Eisner

Yeah. Good morning, guys.

Richard G. Kyle

morning, Sam. Good

Samuel H. Eisner

on as Just pricing $XX is walk through contract your where Maybe that points; can you at line, EBIT Kind changes annual the have points. pricing about distribution. to contracts, million basis I quarter, guys happened you now to, basis XXX relates XX this guiding it's the been think, differences just of multi-year coming the the it your on OE the your side, from? is ultimately recognized

Richard G. Kyle

your it. questions little bit even that answer through go and as Yes, let it we broader me take price hopefully a than take and

Process term. in it coming term longer to in coming the Mobile, move very ability more So it and than than specifically, in the is more it's shorter in in the

and some Mobile. And of that Process with goes

you As price want two hit about start. to I'd – say things

mechanisms and customers material short-term, currency. a hundreds et cetera, thousands of surcharges, multi-year, between And you thousands of of parts, a pricing cetera. different and et lot As prices, list then in distribution lot we have we hit, of have sell we

when a lot permutations So the complexity of in those across four, that. take you there's

four are quarters, XXXX strong after and only quarters environment. a point dollar. some into pricing, on a very We five we entered pricing Second weak markets good

that $XX be was basis quarter. price I XXX XX, were the and for $XX more into in referenced the think that the our XXX That basis quarters you slide coming million we're it now company, to than guidance first on a year, points. We So up was million few mix. is points in

was basis XXX than more also positive. mix So the but was points price

$XX the yielded million. combination So the

Samuel H. Eisner

this point of able you're to this channels market nature. things the at guys particular you're in to the you or seeing about actually that Is push to related able that – raw and more function in in material material is move And the you passes this those point tightness a to have actually of time? price

Richard G. Kyle

list It us is is moving they're than both the contractual positive. prices but prices, combination it a base surcharge, material of more prices,

Samuel H. Eisner

as guys distribution That's around Process right. the it segment, Industries then, walked of And industrial All helpful. you the portion to of kind the relates world.

You've it exposure. historically to done this as distribution that relates

your restocking. So in a focusing inventory question, that geographic basis. it curious particular some to on do where industrial kind maybe relates distribution of level as just just of can big you a stand kind customers of on Obviously, again,

Richard G. Kyle

if Not question. the understood of part I first sure the

Richard G. Kyle

(XX:XX)... Yeah. I'll

Samuel H. Eisner

yeah... – guess I

Philip D. Fracassa

on view You're talking of – channel distribution channel our kind and inventory, Sam?

Samuel H. Eisner

Correct.

Philip D. Fracassa

Yeah, Okay. sure.

really We the talked distribution about were of in way all think industrial up So, we regions world. for I led as the process.

be look where we have outside America visibility, America. which inventory, should and channel North areas limited maybe some North at we As

I sales we'd say the we're channel that pretty to inventory light seeing. still levels think relative is

sales in seeing. So looks say from it's the to again we be well. to light a for as have inventory particularly level the bit of year distributors our activity still up to emerging but stable very visibility U.S., compared stay, I we're last there end and of the it's little us the maybe among would was where but relatively – And outside markets, difficult relatively

Samuel H. Eisner

Sorry.

are relative guess any where pricing last index or question, do Ultimately, where to when where the is of off that stands years? sense relative fall? much one we you back curve I Just much how XXXX do the Just look pricing, to last few pricing we stand? how at to levels, of XXXX going bottom? kind we

Richard G. Kyle

about I'd think, bps, down a XXX and that, I we we able that then to down be were bps. Yeah. I it, index XX year before about know don't but were

the down So, back prior and still last years. last the a to few more year looking probably than start carving but bit a little into little over get year,

Samuel H. Eisner

so Thanks it. much. Got

Philip D. Fracassa

Thanks, Sam.

Operator

O'Dea with Joe to Vertical go Research we'll on, Partners. Moving

Joseph John O'Dea

Hi. Good morning.

Philip D. Fracassa

Joe. Hey,

Richard G. Kyle

Morning, Joe.

Joseph John O'Dea

In have been actions forward? the are trying side contemplate those And revised that achieved on might to moving still the to that a higher I'm to guide, additional just things does get guide. of the price need announced customers? what pricing be vis-à-vis sense

Richard G. Kyle

fourth the smaller but or what But happened the and balance the negotiated some the does, it it out and say into be the majority than would further quarter of but is year, through vast I quarter. actions market. pricing would first there they would is in done the of be certainly

Joseph John O'Dea

about the other Okay. the headwind incrementally what in base around even Thanks. what and can your talk about But any when going $X as as at terms how XXXX you any you us significant sense And we're give in you bucket quarter? how up up, materials for then that framework the to XXXX? can when put go hearing you into about that on year pressure actually logistics similar as more progresses that a of you extending you progression is look but at like And all, headwinds material then context you just into you when companies, costs XQ with prices the – million from face? gets then much think going cost that talk

Richard G. Kyle

cycle markets going generally cost of input Let me ore nature in end on back our material to let means and are costs let hard are but equipment that, with, and to our costs start me the and our – building steel making my I'll while recently, we mining we point that material cars Phil is the – and fight answer strong. that, to down, keep historically recover good from able to material to the railcars, that capital cyclical very

us. up well of with supply-demand that the winds So

it higher will timing. obviously, Phil rolls this I'll into So, again, on now steel enormous. upturn continue. growing to seen for will And here, anything And markets up. belief haven't of early again, the a been point. we granularity our at I next we with year let to the believe relatively the five come if, into quarters. color our then, been any year a are believe run gradual cost end, that's that that higher It's add that continue your

Philip D. Fracassa

Sure.

right. think So, you're I Joe,

– negative or slide you million, on the material saw the $X up slightly I up. It quarter. was that would majority think been where was that logistics Price in – the the in the quarter. So of was have

Rich through increase relatively modest. year. said, we say do an As we expect I move would the as But

fuel, seeing would I material, we tell energy, cetera. And of and lot and bulk I the movements in category. of If say inflation a course, Maybe but the modest, We think then that put XXXX would U.S. wages, whole, our on material inside – across material, et would you I relatively the with is get company, as inflation questions – questions relatively of on the we're we suppliers get that about would prices you normal, and, the quarterly I base adjustments for to U.S. negotiated both subject surcharge say. outside domestic a obviously,

expect mix do move year. but expect the But of we it, through continues quarter some a We're again, ramp, to be as strong, so a to inflation remain improve. really expect expect pricing improve, sort increase So the productivity the we from through it increased improve move year. in only steel drives scrap to markets to of prices steady productivity as expect to which and fifth

positive the cost on inflation and So levels year. hold the less at for of some it modest still to or near rest expect year, we first balance, the be for as price despite material really the expect to more margins look quarter

Joseph John O'Dea

And about When That's great. been the balance that structure, price XQ appreciate the with details, but we think you will then and and the through, base materials, XQ if cost year XQ a of about kind the just I price up, be? of think base go and maybe a prior surcharges XXXX about surcharges of have in negotiated would away. base go we clarification. just maybe think, we year, think how flow the so prices when surcharges, that this representative a between

of or representative you meaningful is material step-up at that? that be costs will trying think, into there point, a anticipate this Just to XQ would XXXX pretty

Richard G. Kyle

things. U.S. is discussion Well, global. I'd of much One, more the a it couple than surcharge a base say versus mechanism is

all-in and term. our purchased an steel of on more purchased is was price global shorter So generally

the half moving U.S. So there's and of some half-in. roughly business there the outside dynamics

of indicative to As of would say year, fourth would XXXX I be. it the not good you be what a would likely necessarily we look quarter for feel have would this but XXXX

this think I to way time. probably that best that's at answer the So

Philip D. Fracassa

Joe, it, contracts is call portfolio annual which the of the ability we Rich about, on as Yeah. annual anyway talked in basis. we multi-year majority the reprice about, a other and which think opportunity an the between OE mind, And distribution, is have thing to have keep is to a to do I the of half agreements, – the blend and portfolio

So we do have the ability.

here know While to do as have going standpoint, XXXX like we we And that offset ability. sit today material what from any see Rich increases. is pricing from we time, don't we cost impact over a said, to, look cost might as would expect

Joseph John O'Dea

Got it. helpful. Thank That's you. really

Operator

Research. from with Longbow we'll Chris next, And hear Dankert

Chris Dankert

Hey. questions. Morning, Thanks taking my guys. for

Philip D. Fracassa

Chris. morning, Good

Chris Dankert

here. on great And a quarter congrats

Philip D. Fracassa

Thanks.

Chris Dankert

we more dig services of I just there? on bit a bit guess the little get rail? Just to versus domestic first more what's could outlook in optimistic off, versus an driving and OEMs, update a of global kind

Philip D. Fracassa

Yeah, sure. that, I'm to Chris. happy do

we So QX. up were in

driven and I pretty I'd mostly America, Asia, Mexico. mostly that Asia, was outside And India, America. then in it probably broad As U.S., Latin Latin said, was Australia ASEAN, but say Brazil, some the and

seeing – two I car and rates those coming in the America the rail rest rail would freight traffic of hauled should up held I'd bode and world, actually really over in to were in quarter. So And over are North relatively well which we up miles would obviously, quarters. and improvement say the build the well. and see business I first service with we're starting of Europe has the an for the say regions American year the flat But North say

we outside we be took starting really us relatively year thought from U.S. improving market look as car at an freight So, the environment and stable. improving would rail the

also coming like it's we we is penetrate continuing new and and can to markets actually Eastern the also parts Russia, think Europe, of in Now, back. well. But market Timken other grow as world its

Chris Dankert

then did little highlight That's of the here. helpful. you And investment I quarter growth in it. a Got really bit guess incremental for

kind automation, little digital out Just that break could you comment around that? a Is of bit? just it head count,

Philip D. Fracassa

I – so a referenced, think Yeah. always the chunk and in do of had we year, our of X.X% margin CapEx as we earmarked expansion or we're guiding to the quarter, initiatives. million growth when I good for $XX that mean, Rich for there's CapEx

the X% it, call So, is margin growth rest for and targeted expansion. and maintenance for

would anything sort CapEx, today, capacity capacity don't see our that have inhibit countries, as improve I'd next overall some other down on help look let's support some growth. of thinking our need those. a we plan profile road potential incremental alleviate also and grow through certainly looking So, we always year we're new and the that here making we productivity bottlenecks automation the as identify ability through, higher-cost cost year, plans. our sure say but it's to investing little the this make but of through And would of those to investments more been to And and sit hey, we in and in to higher initiatives profit

Chris Dankert

stuff, color. America And you yet if think guys news that clarification, Is way F-XXX just last right kind of news Got in one then winding the could. the to if the for higher I margin it. on the more really down really about Thanks Ford for of that? The that's again. fore focusing good their North I assume anything to and just because, comes core sedans again,

Richard G. Kyle

I'd say yes.

for cars, trucks I our cars their it larger premium the and and position the pickup is our and think Americans more better like mix.

meaningful not in generally vehicles the any are in on, way, We smaller United States.

Chris Dankert

so much Thanks again, guys. it. Got

Philip D. Fracassa

Thanks, Chris.

Operator

Barger Capital we'll next, KeyBanc with Markets. go And to Steve

Steve Barger

guys. morning, good Hey,

Richard G. Kyle

morning. Good

Philip D. Fracassa

Hi, Steve.

Steve Barger

distribution, lines? non-bearing you terms about through can strong happening Thinking versus of And on volume about trends in just legacy product or from a I'm your some if well-covered your products what's this penetration really of for and a newer comments in talk from cycle? is partner to trying just there's benefiting sense upside further standpoint a get better you're whether from channel the

Richard G. Kyle

Yeah.

initiatives. a environment our my question to excited – as market in I So, said on comments I with and, really we're good a outgrowth be in think that's good

not done share organically line market inorganically four your that bearing where to products, where until environment and think we last last roller been or has try with the improved we've a great we've I developed up five-plus into over It years new and capture the five portfolio. quarters. brought to applies what the spherical products to

in Timken all So, general, as growth are product I is say, said, in than would growing, products traditional in Timken better lines the products. but our it I nontraditional essentially is

Steve Barger

how beyond them? that prices can distributors difference increases in the for terms you're raise are increases you improving, seeing terms to the approaching Okay. And product price obviously you market that the lines of communicating they're any of environment Well, see? and with in

Richard G. Kyle

but I'm they person I customers. best would they the There's agreements comment their Yeah. say well. their taking cases I with pricing, on and where have are working the suppliers their don't as think to one-year pricing,

cases, look absorb they that; with. to, work in some So other in cases

world. So think would are supporting and around generally statement I be that the pricing, they a

Steve Barger

or if you design your that one distributor ways they can increase may I aggressive change with try share them wallet that providing? about some Okay. more these as of with in, communications And Just any R&D potentially services? product is of distributors more win more value-added they're channel and the to sneak in within getting thinking there product new around be what

Richard G. Kyle

of integration R&D Certainly the of the certainly vertical to services manufacturing, point but side. not on

bearing drive reconditioning, So gear do we where reconditioning.

and from customers have some that We them. product compete buy But that. bumping lot with we're to. customers they in from into our that's cases of us We against something that accustomed a buy

that dealing overlap for our years. relatively on say part their small. in or we've on It's that with something significant part we've moves I it's long recent a So been and not would any seen time, in

Steve Barger

Got it.

Okay. Thank you.

Operator

Next, Feniger with America. from of Michael Bank we'll hear

Michael Feniger

Hey, on touched this... know guys. you I

Philip D. Fracassa

Mike. Hey,

Michael Feniger

Hey, I touched this David's question. with know on guys. you

trying more. a Just flesh to it out little bit

it's and range. Process above margin, long quarter first So very the in impressive your term

how mentioned below of peak. revenues are still You kind

since kind in we we guys think hold on range about grow your kind you expansion is and target of Or margin should of the levels – Just of this incremental XXXX date? of it similar with kind that? is the strong of right how really So, in margin and grow that to line rate that should kind with outperforming margin now now? will now a revenues of a assume really do top certain the top expect of the just really at XXXX even out margin we targets type

Philip D. Fracassa

Mike. Yeah, sure,

said, to XX% down, as the set time, the and, above was of of, where now. range we made running Rich good XX%. we we to felt kind like distribution obviously, was range a mix of acquisitions, So the had sort XX% we've At XX% that some

I couple maybe over how it that depends of I in and of the not, lot if several levels if have say do certainly there a years. strong, environment. with expand on think would quarters, the the even to next bit a mix XXXX M&A is in the comes next for today, and, I XXXX right of the them markets hold opportunity we kind the remain that at we the us margins the with think

Michael Feniger

a the as on SBQ price these into locked how of of kind That's portion same like this. guys rise? to basically continue of I long-term way pricing. is and about year your costs helpful. kind of And multi-year much Does helps were Okay. locked-in, contracts certain that it your you or work business may talking business how rise as on the contracts have is missed a for know prices I you – prices it the clearly

Richard G. Kyle

Yes.

annual versus So, Phil's pretty order versus so clarify less – multi-year quickly. half probably move of is can around then priced, purchase et I purchase was Half cetera, on comments than of just order, it spot. to the And other want multiyear. is half

have rare multi-year. sometimes years often quarter to down Very – two we're So, is to and multiyear three. anything

currency of we the portfolio well. we part significant we large generally of for at have So, extended and/or an have if recovery mechanism some an And where if multi-year, material a – have sort you're a exposure, as not time. into we have locked some it's least currency protection

in significant So, not business – of the a huge multi-years. a for locked part not

half for year to And it raw half on on it the a probably have less. rare steel typically a and of would us materials it of on out side, anything be XX-month over specifically, On period.

a experience in through U.S. part can of the than can it. surcharge flow quicker you the quicker. So, flow That It little quarterly. through that can

Michael Feniger

you Okay. guys helpful. building flow, free a cash net mean, lastly guys it on that. just XX% clarifying you that's for No, to stronger be I think thanks And are expecting environment. income. the Obviously, I are

cycle? free managing guys guiding cash there how that through the any you is change are Just, flow kind on of or

Philip D. Fracassa

we of other as near free we same much going that very mean, the – things think we flow legacy plans mean, strong managing kind don't I we're, I by had large, pensions I the consistent, anywhere it are No. cash and of have cash benefit way. generator. and have a and cash We into become nature.

feel to as But we So, free swings cash will flow. continue cash organic variable free biggest strong really the said, do generation. to are the like the generate flow we've we

when we through are think, to a of a – year that free a we moving relative working up level to bit I first inventory capital a So, expect need going we're it drag cycle, expect the of year, it was bit drag cash we the half building – this then last and was bit a to we little – flow. to of off. And are

inventory back half $XXX assuming succeeding high that number. opinion, the bias so, the been year. good I relatively So, being my of a cash has was number, the been the hitting keeping feel capturing to specific service err on in the versus of side But in a share, customer hold has having like overly rightly focused on think million flow our the inventory again, levels stable – we and marketplace, our in

there. So grow and guide. – with to grow comfortable we our put But profitably. we guide very business, we'll share, look continue that is We're expand XX% to do out the

Michael Feniger

of XXXX. terms to – your allocation, maybe if it or capital any and thinking said share process Makes mobile are in add of in valuations inorganic mentioned if more exploring XXXX about changes in certain in sense. And – you lastly, guys you buybacks just ways towards stretched? revenue, guys how leaning always are you evolution even more Any type that's

Richard G. Kyle

– part than the into acquisitions Process your – put first certainly, to more them. cultivating energy Well, question, of we we and target Mobile

the Process but certainly de-lever to year. have creation in are your as the that mix buyback up flow go reason than year. we opposed and look to power However, free generally versus looking we on Process expecting bearings just same question more don't back we do We generate through space opportunities and have then years, been better last over see you cash any Mobile, they Phil the to covered, Mobile within in look there's to value find we're and M&A, transmission not to Mobile and the to so. On strong for the as two are

So, potentially and certainly, would we we'll M&A through year. goes our look either to to see flow or buyback, cash as that deploy the

whichever on impact XXXX. have there than May, here will do XXXX it a As point we in at we bigger on this will sit

Michael Feniger

you. Thank it. Got

Philip D. Fracassa

Thanks, Mike.

Operator

And next & Gabelli we'll go to with Bergner Company. Justin

Justin Laurence Bergner

Phil. Good morning, morning, Rich. Good

Richard G. Kyle

Good morning.

Philip D. Fracassa

Justin. Hey,

Justin Laurence Bergner

I I should other logistics, profit just changed – to those of bridge. similar close that year, terms quarters I guess, price/mix, you operating bridge, I the manufacturing, sort relates expect the sort SG&A, guess expect pretty should and question First guess, material net I were of subsequent combined profit to effect even operating on any of in of the in guys a we came XX bridge meaningfully mean, mean, mean, the the, on out or we laid out in that sort and of quarter. first of I components a basis? slide for

Richard G. Kyle

second quarter starting harder, quarter significantly comps first the point mix inflection and were On Price through negative in our the year. the get was volume because an side, last last really year.

and So be, some would think to I probably year the similar material. for the on, the as upside that goes there answer maybe and even yes,

we have compared on side, negative plus On negative necessarily compared would manufacturing – to prior not the negative as million, said, year the Phil inventory. from some the impact $X to

plan there. of quarter. to with end off And have in the fall have then, second level quarter, by the the inventory stay acquisitions the the half, do of current second we we'd our current off we end some this Assuming negativity obviously,

Philip D. Fracassa

Yeah. Justin. And bit, if I could maybe just complement that a little

a think questions – about have an standpoint from – incrementals you were around we we've incremental would quarter, first know of if lot got So, the it XX%. – the incrementals on I

the from was levels. that, fall-off quarter slight ever-so-slight first the quarter margin fall-off lowest you the the first math, really if of comps the year year the do the the tougher the the very would company. first it, think look of for frankly, the from close and incrementals is at as last And in range, very, be year-on-year so full-year call I guide XX% quarter XX%, to

still we'd incremental really the and to still move takes kind of as the puts we despite strong expect So, through year. margin year-on-year generate

Justin Laurence Bergner

negative of and should at levels $XX first or that million the persist And quarter? of SG&A Great. other, Okay. near that the

Philip D. Fracassa

nature. of a the first Yeah. of employment quarter SG&A And elevated sometimes say with taxes bit can resets I that would things be certain little and

leverage see we bit a as think not the the as coming fixed more on little would line more I move So, probably cost we probably in the and expect it through quarters. quite SG&A – year negative

Justin Laurence Bergner

maybe tariff side, Okay. of of And materiality then mentioned define steel you impact? you think steel the the their how tariffs and be helpful. Great. That's in you tariffs material. expect to on you impact about don't sort the threshold that terms Could for of

Richard G. Kyle

I'm were Well, our already year-on-year steel probably But as sure not year-on-year up I'll that precise. up be they into costs up well. year and outlook have through and this year we certainly, continuing to trend factored last globally

have environment in we outlook. our So inflationary already an

our steel the of lot foreign operation. tariffs don't buy themselves, On U.S. a we for

all cetera? So in that does The bottom where the U.S. continue ripple small. cetera, buy and say to adjust will – very, product – day obviously, issue, we that. you et it, it is, U.S., of sure – produce product to will cetera, very the line would et bigger customers time and I'm that export they et is one could over impact capacity if move your then do the But the not impact can Do that go? be is it'd –

the it that's U.S. all to concern the our will is be producers, over we the first think to U.S., really believe there that enough when But with the certainly in now, would U.S. be it price steel us competitive not came have have an competitive I and out the rest where opened South I the prices, will what world we for and Brazil, more as that there for steel other concerning. we we're Korea, capacity right be customers settles all was down. seeing was high been need of there's that short-term, in and it be which believe when places artificially up, competitive

Justin Laurence Bergner

That's lastly, category Okay. the then is helpful. shifted markets. And very What now XXXX guess, positive in for wind, there? I end

Philip D. Fracassa

Yeah.

I think great question.

is wind bit little a deserves I discussion. that of something think So

think start thinking we So and flat, be margin the up. be would thought did we'd expect we I down, now we it year be to

soft, pretty win to to Europe call world. parts other still is the flat in market we but down the think of business, continue gain I share to continue it, and

to mid call mid-singles, in XXXX. first quarter, high-singles mid XXXX, So – growth not the we huge and but, relatively expect We were to inflect – flat. it, do in wind in that

share gains more than coming really better market into probably the slightly So, a and thought year. environment we

Justin Laurence Bergner

Thanks taking Great. for all questions. my

Richard G. Kyle

Thanks, Justin.

Philip D. Fracassa

Thanks, Justin.

Shelly M. Chadwick

Okay. joining This Thank today. call. our concludes you for us

you If Shelly Chadwick, me, questions, again. further Thanks call please have XXX-XXX-XXXX. at

The Timken Company (TKR) 1 May 182018 Q1 Earnings call transcript