TKR - NYSE

Good morning. My name is Emily, and I'll be your conference operator today. 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. [Operator Instructions] Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Emily, and welcome, everyone, to our first quarter 2023 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the Company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company, and without expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Thanks, Neil. Good morning, and thank you for joining our call. Timken delivered an excellent first quarter, which puts us on track for another record year of performance. We maintained our strong momentum and achieved record revenue and earnings per share in the quarter while expanding our operating margins. Organic revenue was up 11% in the quarter. This is a slight acceleration from the fourth quarter rate of 10%, and it is our eighth consecutive quarter of double-digit organic growth. While demand strength remained broad-based, drivers of the organic growth included price realization, strong growth in renewable energy and strong sales in China and India. In total, revenue was up over 12%, with the benefit of acquisitions more than offsetting the impact from divestitures and currency. EBITDA margins of 21% were up 100 basis points from last year. Margin improvement was driven by the benefits of price, mix, volume, improved manufacturing efficiencies and lower logistics costs, which more than offset the headwinds of inflation, currency and SG&A. While some costs have declined from peak levels and we are operating more efficiently as supply chain challenges have eased, we remain in an inflationary environment with cost up over last year. But as we've demonstrated over the last several years, we can operate effectively and advance the company in either a low or a high inflationary environment and through a wide variety of macroeconomic conditions. Earnings per share of $2.09 was up 22% from last year and was a new record for Timken. In addition to the benefit of growth and margin expansion, both share buyback and acquisitions contributed to the record level of earnings. Free cash flow in the quarter was $72 million better than last year, primarily as a result of greater EBITDA and improved working capital management. The working capital improvements are a result of both supply chain stabilizing as well as our improved execution. We continue to invest in expanding and improving our manufacturing footprint and capabilities. The benefits of these actions were evident in the first quarter and will ramp up through the year. We completed the previously announced closure of our Indianapolis Industrial Motion manufacturing facility in the quarter, and we announced the end of year closure of an Engineered Bearings facility in South Carolina. Our Mexico bearings facility continues to ramp up each quarter and will contribute positively to results this year, and our renewable energy investments are continuing to come online to support our continued growth in this sector. Additionally, in the quarter, we paid our 403rd consecutive quarterly dividend, closed on the acquisition of American Roller Bearing and purchased just under 1% of the outstanding shares. We also continue to be recognized for our outstanding corporate citizenship and innovative products and culture. In the quarter, Timken was named one of America's Most Innovative Companies by Fortune, one of America's Best Large Employers by Forbes and one of the World's Most Ethical Companies by Ethisphere. Our Timken team is committed to advancing our corporate social responsibility programming as we give back to our communities and drive sustainability in our products and global operations and across the industries we serve. And finally, we completed the previously-communicated resegmentation of the company to Engineered Bearings and Industrial Motion, reflecting Timken's advancement as a global diversified industrial leader. Slide 7 in the IR deck breaks down the 2022 market mix for each of the two segments and highlights how far the company has evolved its market mix over the last decade with automation, renewable energy and industrial distribution being the largest end markets for the two segments. It was an excellent quarter and 2023 is on track to be another excellent year. Turning to the outlook. We are increasing our outlook for the full-year for revenue, margin, earnings per share and free cash flow. For revenue, we've increased the revenue outlook from 6% to 9.5% at the midpoint of the guide. Market demand, outgrowth, price and our most recent acquisition of Nadella are all contributing. While growth across markets is moderating, backlog and demand are strong, as evidenced by the first quarter's 11% organic growth. As you see on Slide 8, we are forecasting all end markets to be flat to positive for the full-year. There are no significant areas of weakness across our portfolio and demand in total is strong. We have factored into our outlook continued channel inventory reduction from supply chain normalization through the course of the year. Additionally, we still have limited visibility into the second half of the year and we are, therefore, maintaining a relatively cautious outlook for the second half due to macroeconomic concerns that exist. The midpoint of the guide implies flattish organic revenue sequentials for the second quarter and then slightly greater than normal seasonal declines for the third and fourth quarters. If the revenue expectation proves to be too low, we will be in excellent position to capitalize on the situation. We have also modestly increased our expectation for price for the full-year primarily due to the persistence of inflation. The majority of the price is in the first quarter actuals, and we do not expect much further sequential price improvement as we move through 2023. Our outgrowth and market diversification efforts continue to show results. We expect a strong year in Renewables, Marine and Automation in addition to traditional Timken markets, such as Heavy Industries and Rail. We closed on the Nadella acquisition in early April, and that is also now included in the full-year outlook. Nadella furthers our market diversification with positions in automation, medical and material handling. The midpoint of the revenue outlook is to be up just under 10% and would mark the fifth year out of the last six for a new revenue high for Timken. We are now forecasting a margin improvement for the full-year with margins of around 19.5%. Price mix, volume and improved operational performance are all contributing and more than offsetting headwinds from inflation, SG&A and currency. Earnings per share of $7.25 at the midpoint would be up 12% from last year and again, will mark five of the last six years setting new levels. In addition to the contribution from growth in margin, capital allocation to both M&A and buyback is also contributing to the results. And finally, we are expecting free cash flow conversion of around 100% from improved working capital management and moderating growth in the second half. After accounting for Nadella and CapEx, we forecast to end the year below the midpoint of our leverage range, which puts us in an excellent position to continue to create value through disciplined capital allocation through the remainder of this year and into 2024. In summary, the first quarter was a strong start to what we anticipate will be another excellent year for Timken. We continue to demonstrate the strength of our improved portfolio and our ability to execute at a high level through a wide variety of macroeconomic conditions as we continue to advance the company as a diversified industrial leader. I'll now turn it over to Phil to go into more detail on the results and the outlook.

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 13 of the presentation materials. Timken followed up its record performance last year with record performance once again in the first quarter, and you can see a summary of the results on this slide. We posted revenue of $1.26 billion in the quarter, up over 12% from last year and an all-time record for the company. We delivered an adjusted EBITDA margin of 21%, up 100 basis points from last year, and we achieved all-time record adjusted earnings per share of $2.09. Note that our adjusted EPS now excludes acquisition amortization expense. And finally, we delivered an adjusted return on invested capital of almost 15% over the past 12 months, well above our cost of capital. Turning to Slide 14. Let's take a closer look at our first quarter sales performance. Organically, sales were up nearly 11% from last year, driven by strong growth in both the Engineered Bearings and Industrial Motion segments. Organic growth continued to benefit from strong gains in both volume and pricing across most sectors and platforms during the quarter. Looking at the rest of the revenue lock, the impact of acquisitions, including GGB net of divestitures, contributed 4 percentage points of growth to the topline, while foreign currency translation was a headwind to revenue as expected. On the right-hand side of this slide, you can see organic growth by region, which excludes both currency and net acquisition impact. Most regions were up in the quarter versus last year, with Asia Pacific leading the way. Let me touch briefly on a few regions. We were up 23% in Asia Pacific, driven by broad-based growth across the region, with Renewable Energy, Rail and Distribution posting the strongest sector gains. In North America, our largest region, we were up 9%, with both the Engineered Bearings and Industrial Motion segments posting solid growth versus last year. Most sectors were also up in the quarter, led by Distribution and Rail. And in EMEA, we were up 6%, with our Industrial Motion segment leading the way driven by double-digit growth in the automatic lubrication systems and linear motion platforms. With respect to performance by sector, industrial distribution posted the strongest gain in the quarter. Turning to Slide 15. Adjusted EBITDA in the first quarter was $266 million or 21% of sales compared to $225 million or 20% of sales last year. Looking at the change in adjusted EBITDA dollars, we benefited from favorable price/mix, higher volume and lower material and logistics costs. These positives more than offset the impact of unfavorable manufacturing performance, higher SG&A other costs and a sizable headwind from currency. Overall, we delivered an incremental margin of just under 30%, driven by our positive price/cost performance and solid execution on the higher sales. With organic incremental margins, that is excluding currency and acquisitions, coming in closer to 40%. Let me comment a little further on a few of the key profitability drivers in the quarter. With respect to price/mix, pricing was meaningfully higher in both Engineered Bearings and Industrial Motion compared to last year, and both segments saw pricing step up from the fourth quarter. Mix was also positive, driven by strong growth again in attractive sectors like industrial distribution. Moving to material and logistics. The year-over-year change in the quarter was a net positive as lower logistics and transportation costs more than offset slightly higher material costs. I'd also note that material and logistics costs were down sequentially from the fourth quarter. On the manufacturing line, we were negatively impacted by continued inflation in labor and other input costs like energy as well as lower production volume as we built a sizable amount of inventory in the first quarter of last year. On the positive side, we delivered solid operational execution across the enterprise. In addition to the footprint actions Rich talked about, we are seeing benefits from improved supply chain dynamics and other efficiency gains in our plants. And finally, on the SG&A other line, costs were up in the first quarter as we expected, driven by higher compensation expense and other spending to support the increased sales and business activity levels. On Slide 16, you can see that we posted net income of $122 million or $1.67 per diluted share for the first quarter on a GAAP basis. This includes $0.42 of net expense from special items driven primarily by a goodwill impairment charge related to the resegmentation. On an adjusted basis, we earned $2.09 per share, up 22% from last year and a new record for any quarter. You'll note that we benefited from a lower share count in the first quarter versus last year, reflecting the significant amount of share buybacks we've completed in the past 12 months. Interest expense was higher as expected, driven primarily by higher debt levels resulting from our capital allocation initiatives. And finally, our adjusted tax rate of 25.5% was flat versus last year and in line with our expectations. Now let's move to our business segment results, reflecting our new reporting structure, starting with Engineered Bearings on Slide 17. For the first quarter, Engineered Bearing sales were $901 million, up 16.6% from last year. Organically, sales were up nearly 13%, driven by growth across most sectors with Renewable Energy, Distribution, Rail and Heavy Industries posting the strongest gains. Pricing was positive, and the impact of acquisitions net of divestitures added nearly 7 percentage points of growth to the topline, while currency translation reduced growth by about 3% in the quarter. Engineered Bearings adjusted EBITDA in the first quarter was $204 million or 22.6% of sales compared to $174 million or 22.5% of sales last year, with margins up slightly. Engineered Bearings segment margins reflect favorable price/mix, the impact of higher sales volumes and lower material and logistics costs, offset partially by higher manufacturing and SG&A costs and a sizable headwind from currency. Excluding the impact of currency and acquisitions, organic incremental margins in Engineered Bearings were above 30%. Now let's turn to Industrial Motion on Slide 18. For the first quarter, Industrial Motion segment sales were $362 million, up 2.8% from last year. Organically, sales increased 7% as all platforms were up in the quarter, with automatic lubrication systems posting the largest revenue gain and pricing was positive. The impact of divestitures net of acquisitions was a headwind in the quarter of around 2%, as was foreign currency translation. Industrial Motion adjusted EBITDA in the first quarter was $77 million or 21.2% of sales compared to $63 million or 18% of sales last year. A sizable increase in Industrial Motion segment margins was driven by the benefit of positive price/cost and improved operational execution, which more than offset the impact of higher SG&A and manufacturing costs. Turning to Slide 19, you can see that we generated operating cash flow of $79 million in the quarter. And after CapEx, free cash flow was $37 million, a significant improvement compared to last year driven mainly by higher earnings and better working capital performance. From a capital allocation standpoint, we returned $78 million of cash to shareholders during the first quarter through dividends and the repurchase of 670,000 shares. We also completed the ARB acquisition at the end of January. Looking at the balance sheet, we ended the quarter with net debt to adjusted EBITDA at 1.9x, unchanged from year-end and well within our targeted range. With our strong balance sheet and increased cash flow outlook, we remain in a great position to grow the earnings power of the company moving forward, both organically and through M&A, all while continuing to return cash to shareholders. In early April, we closed on the Nadella acquisition and the integration with our Rollon business is well underway. Now let's turn to the outlook, with a summary on Slide 20. As Rich highlighted, we are raising our 2023 outlook for both the top and bottom lines as well as our outlook for free cash flow. Starting on the sales outlook, we are now planning for sales to be up 8% to 11% in total or 9.5% at the midpoint versus 2022. Our prior guide was 6% at the midpoint. The increase reflects the impact of the Nadella acquisition as well as a slightly higher organic growth outlook. Organically, we now expect revenue will be up 4% at the midpoint versus 3% in our prior guide. Note that our volume assumptions continue to reflect some prudent cautiousness around the second half, given all the market uncertainty still out there. We expect acquisitions net of divestitures to contribute around 5.5% to revenue for the full-year, up from 3.5% in our prior guide. This includes roughly nine months of Nadella results. And finally, we now expect currency translation to be neutral to the topline for the full-year based on current spot rates. On the bottom line, we are raising our 2023 outlook and now expect record adjusted earnings per share in the range of $7 to $7.50, which represents around 12% growth at the midpoint versus 2022. The midpoint of our earnings outlook implies that our 2023 consolidated adjusted EBITDA margin will now be about 19.5%, which is 50 basis points up from both our prior guide and last year. It would also mark a new high for the company, and note that we expect both the Engineered Bearings and Industrial Motion segments to expand margins for the full-year. Our margin assumption reflects favorable price/cost, the impact of higher organic sales volumes and improved operational execution, which would more than offset higher manufacturing and SG&A costs, as well as the impact of lower production volume in terms of less inventory build. Note that our margin assumption also reflects a sizable bottom line headwind from currency off the favorable impact we saw last year. Moving to free cash flow, we now expect to generate over $450 million for the full-year 2023 or around 100% conversion on our reported net income. This would be over $160 million above last year, reflecting the impact of higher earnings and improved working capital performance, offset partially by higher CapEx spending. We continue to estimate CapEx at around 4% of sales. And finally, we now anticipate net interest expense of roughly $95 million for the full-year, which reflects higher debt associated with the Nadella acquisition, and we expect our adjusted tax rate to remain around 25.5%. So to summarize, the company delivered record results at the start of the year, and we are raising our 2023 outlook across the board. Our team is working hard to advance Timken as a global industrial leader, and we are confident in our ability to deliver higher levels of performance through dynamic economic environments. This concludes our formal remarks, and we'll now open the line for questions. Operator?

Thank you. [Operator Instructions] The first question today comes from Steve Volkmann with Jefferies. Please go ahead, Steve. Your line is open.

Great. Thank you. Good morning, everybody.

Good morning.

I think both of you guys characterize your revenue forecast as sort of potentially conservative, which makes sense given sort of all the uncertainties out there. But I was actually sort of surprised that you didn't raise your margin guidance a little bit more given the performance of the first quarter. So I guess I just want to see whether you think the margin performance is also – could be characterized as conservative? And more directly, what would be the kind of headwinds, Phil, that would limit the incrementals going forward relative to what we saw in the first quarter?

Yes. It's a great question, Steve. I think as we look at the outlook, we took the margins up to 19.5% at the midpoint, which does reflect improved incrementals in what we would have talked about a quarter ago. That would imply, call it, a mid-20s all-in incremental margin for the year. The biggest thing that's in there that's a little bit unusual would be the currency situation. We had a large benefit last year that's not repeating, so it is affecting the year-on-year comps for currency. And I think we talked about it last year. But I mean if we strip that out, strip out the acquisitions, we're actually – our guidance would imply organic incrementals of north of 40%, so I do think we're generating the positive price cost. We're seeing the improved execution. I think there's opportunities to continue to improve there, but we do feel like we have a fair amount of improvement baked in. Certainly, if volumes are better, that will give us an opportunity to take advantage of the volume and generate some potentially higher margins. And obviously, the input cost situation will be – we'll have the ability to weigh on it as well. But I do feel like we have a good – pretty solid improvement baked in, especially when you strip out that unusual currency headwind that we've got in the current year.

Yes, I would just add to the seasonal element as well that I think last year, Q1 to Q4 was about 300 basis points of margin difference, and we still expect that seasonality impact. So certainly, we expect the first half margins to be higher than the second half.

Understood. Thanks. And then, Rich, you mentioned that your forecast factors in some destocking at some customers or distributors or something. Has that – has your view of that changed? Is that more now than it was three months ago? Any color there would be great.

Yes. I think destocking – maybe normalization of supply chains would be a better term than destocking, and I think we did talk about that in the last quarterly call that we thought that was – inventory was a bit of a headwind for us as much the fourth quarter and then again in the first quarter. I would use us as the example. We would usually build inventory in the first quarter on modest revenue and we were up 11% and didn't build much inventory. And that, I think, is an indication of a lot of the inefficiencies that we had in our own inventory from the supply chain challenges over the last couple of years. And I think that is happening up the chain from us in the supply chain as well, and we're seeing that come out. So we're not seeing necessarily distributor destocking. We're not seeing a reduction from demand. I would say it's much more of the supply chains coming in and normal lead times coming back down, particularly logistics lead times are fairly normal. And that alone is a pretty significant amount of inventory out for us.

Great. Thank you, guys.

Thanks, Steve.

Thanks, Steve.

Our next question comes from Robert Wertheimer with Melius Research. Please go ahead, Rob.

Thank you, and good morning, everybody.

Good morning.

So my question – my first one is just going to be on M&A. Wonder if you would characterize the overall environment, whether it's changing as interest rates have risen, whether the number of buyers is diminishing or otherwise changing, whether sellers are more active? Just your general thoughts on the market and then your pipeline within it.

I'd say M&A markets remain slow. I think they've been slow for some time. I think it's pretty well publicized out there, the deal activity has been down. Cost of capital, certainly a factor in that, the uncertainty and then maybe potentially buyer-seller value expectation gaps as well. That being said, it was slow over the last year. And during that slow time, we acquired four businesses, so because it's slow doesn't mean it can't be done. But when you look at those four, only one of those four was a traditional seller process. The other three were us pursuing the businesses, which I think is an indication of slow. So I do think the inbound has been and remains slow, but that doesn't mean that we can't get it done. I'd also say the Industrial Motion and Engineered Bearings reorganization, which is what was behind the resegmentation, was done with the intent to both improve our management of the businesses that we've acquired over the last decade as well as be in a position to do more, and I think that that is a couple of quarters in. That's been highly effective, and we are in position to do more. I think we have the bandwidth both from a management perspective as well as from a financial capital standpoint to be more active. We're working our pipeline, and again, we've managed to overcome the slowness and we'll have to see as we look forward.

Okay. Perfect. Thank you. And if I may, just a couple of quick end market ones. Rail, you called out as being strong. Is that just railcar build? Or is there any other dynamic we should be aware of? And then in general, as we move into project starts, the IRA funding, et cetera, could you talk about the multiyear outlook for renewables? Is it any better than it has been? I know there's ebb and flow on wind and so forth, but just how does your multiyear outlook look there? And I will stop there. Thank you.

Rail, I would say the answer is yes. It's primarily railcar build. And a reminder that that's a global railcar build as we have strong market positions in the OEM space around the world. And it's a market for us that's been down for a few years and didn't hit a new peak as many of our other markets did in the last couple of years, so a little later build on that. But it's also one that we have relatively good – a little longer lead time than some of our other markets. So I think we look really good in that space, at least through the third quarter and into the fourth quarter, with our orders and backlog. On the renewable energy, I would say for us, that market tends to be more Asian and European. I do believe – and it was not a huge for us. We are largely for when we're mostly in the drive system of the turbine and then secondarily in the turbine itself. Those supply chains tend to be in Asia and Europe regardless of where the install is going, so that's where our revenue generally takes place and our manufacturing. We continue to be very bullish on the multiyear outlook globally for that market, our ability to win and participate, our ability to grow in it. I mentioned in my comments that we have more investments coming online, making more investments in the space, and we remain very bullish on the five-plus year outlook, and again, our ability to profitably participate in that. The U.S. part of that with the taxes and infrastructure build would certainly be additive to that. But I think even without that, we're in a pretty good spot.

Our next question comes from Bryan Blair with Oppenheimer. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Bryan.

I was hoping you can offer a little more color on integration efforts across Spinea, GGB, ARB earlier stage. And with Q1 in the books and Nadella now closed, how should we think about net accretion for the year?

Yes. Let me talk about the integration. I'll let Phil talk about the accretion piece, and I'll maybe go in backwards order. So Nadella, a little over a month under our ownership, no surprises. There are some parts of that business that overlap pretty significantly with our Rollon business. We are integrating those parts into Rollon. From some things like sales forces, et cetera, there will be some fairly heavy integration in that in the coming months. No surprises with the business, and it comes to us with good day one profitability, so there's no burning platform on the integration. But certainly, to capture the synergies long-term, we'll be moving forward there. American Roller Bearing, more of a fixer upper, but a market that we know very well and one that has a lot of overlap with our Engineered Bearings business. So very heavy integration there. We've integrated the sales force, and we're really in the process of converting that from a stand-alone private business into more of a product line within our U.S. North American bearing infrastructure and operations. See significant margin improvement potential in that business, but again, it came to us at a very modest profitability and will take us some time. But I would expect quarter-to-quarter, we'll see sequential improvement in that as we move that up to the profitability levels that we achieve in similar markets, similar products, similar spaces. GGB, now about two quarters of ownership, and I would say kind of between those two of a – more of a synergistic approach to the – where we're focused as a business and looking more at cross-selling opportunities than integration, but it is integrated into our bearing business. And most of the work there in the first couple of quarters, that was a carve-out from EnPro and that work and the Transition Services Agreement just expired at the end of April. So we've finished the standup work, and we're now focused more on the outgrowth synergies going forward in the business. It's pretty much exactly what we expected like the product line, like the applications and a lot of good both cost and market synergies for us within the bearings business. And then Spinea, much more of a stand-alone business, which was a step-out product for us. So there's some – we're really looking more to leverage our North American and Asian sales organizations, and really accelerate the globalization of what was really a small European business. The technology is great. The product position is great. It's going to do really well from a growth standpoint. But it's also – it's in the capital of goods sector. So when you're – you grow the business there by winning the next evolution of design and the next design, so it's not something that you just turn a switch on, but feel very, very bullish about the long-term potential of that. And I'll flip to Neil to talk about the financial aspect.

Yes. Sure. Bryan, this is Phil. On the accretion, as Rich said, Nadella, coming in very attractive. EBITDA margins kind of near the company average, 20-ish percent. And we would expect what's in our guide would be, call it, in the $0.05 to $0.10 range accretion for 2023 with great opportunity to expand that in 2024 and beyond.

Okay. All helpful color there. And with regard to the opportunity to increase accretion going forward, you're kind of integrating alongside Rollon, which is uniquely profitable. As your integration efforts continue and that business has grown, are Rollon-type margins achievable over time? Are there structural limitations that would prevent you from getting to quite that level?

I would say there's some mix limitations probably within that that we would – our case would be to probably get the margins somewhere halfway between where Nadella enters and where Rollon sits today.

That’s fair. Thank you again.

Thanks, Bryan.

Our next question comes from David Raso with Evercore ISI. Please go ahead, David.

Hi. Thank you. I apologize if I missed this, but did you give the organic sales expectation for the second quarter?

So it'd be sequentially flattish.

Yes, which would imply year-over-year, David, I'll call it, mid-singles year-on-year organic.

Okay. So if we use five or six for the second quarter, it's basically the idea of the second half. You're just assuming it's flat year-over-year? That's the general cadence.

Correct, organically. That would be the midpoint of the guide. Obviously, the high end would be growth off that, and obviously, the low end of the conservatism we've built in.

Yes. Expand on that a little bit. Our normal seasonality off of the first quarter to the second would be, call it, flat to up 1% or 2%. And then from Q2 to Q3, down 2% or 3%, and then for Q4, down another 2% or 3%. And I think if you look at the high end of the guide, it would be pretty close to that. We certainly do better than that. I think we did better than that in last year. We did better than that, I think, in 2018, and we could do better than that. But I think that's fairly normal-ish. And then in a softening market, a little lower than that and you go down to the low end. It would be probably a little lower than what we did in the 2019 timeframe sequentially, which is when we saw heavy truck market softening and some inventory destocking in the second half, et cetera. So those are kind of the two fence posts, I think, of the top end of the revenue guide. And the lower end would be a fairly significant softening on the low end and a normal-ish on the high end.

And I know by no means are you a long-cycle business. I appreciate that. But given it's already the first week in May, the idea of the second half being flat, is that still at the moment a bit theoretical? Or are you starting to see order patterns 60 days out that would suggest that level of slowdown? I think you have some July, August [indiscernible].

To that, I would say no. We are not seeing that level of slowdown. April, on a daily basis, was right in line with the first quarter. If you look at slide – the market slide, which I don't have a number on. Slide 8. The three most bullish markets there, heavy industries, rail and renewable energy, those would – those, along with aerospace and marine, would be the five markets on this chart that we have the most visibility to, the long – the biggest order books, the longest lead times. So all – and two of those, we moved from up mid-singles to positive. So orders in those space were strong in the first quarter, first four months of the year. You move to the far left, those would be the markets. Automotive, we probably have eight, 10 weeks on the OEM side and in the aftermarket, most of the orders that come in, go out in the same week. Same thing for heavy truck. Distribution, we have a little bit of backlog, but a lot of that is the same thing, that the orders are coming in and out. So it's that middle that I think if we get the orders to stay at the pace they have been through April, there'd be more upside to that. And again, the number you just quoted is the midpoint of the guide. If you go up to the higher end of the guide, I think it'd be a little more optimistic than the numbers you just put out there.

That's great. And a clarification, when you said April in line with the first quarter, that's a sequential comment, I assume, or year-over-year? I mean, that 10%, 11% organic year-over-year or sequential flat?

Sequentially in line, no softening. So it's sequentially in line with our outlook to be flattish on a daily basis.

A quick follow-up. The pricing comment, if I heard correctly, we're not expecting any further year-over-year pricing after the first quarter or no further price hikes?

No, no. Sequential. So unlike the last two years, where we got our biggest step up from Q4 to Q1, it's fairly typical. But then we had a fair amount of more sequential pricing that we were putting in every quarter, so I think the first quarter just marked our tenth consecutive quarter of sequential pricing. We are not expecting much sequential pricing from the first quarter rate on. It had been said, it probably will still be positive, but it's going to be a nominal positive. And then the comps get harder because of the phenomenon that we were raising them through the course of last year. So the year-over-year number would come down just from a comp perspective, but sequentially, it will be flat to up very modestly.

Yes. What I would say, David…

Those carryover, right. Year-over-year…

It was positive in Q1. It will be positive year-over-year all year, it will just moderate as we move through the year just on the difficult comps. But pricing should be positive every quarter year-on-year through the year.

And the 4% organic for the year then, so price is 2.5% of it, something like that? Just to get a sense of is it too still…

Yes, it'd be more of a contribution from price and volume. We're not getting too specific on it anymore, but more of – definitely more of a contribution from price and volume.

So yes, more than 2%, less than 4%. We do expect volume to still be positive as well.

Terrific. Thank you. Appreciate it.

Thanks, Dave.

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead, Steve.

Thanks. With your previous segments, the M&A focus was on process. So with this new reporting structure, do you lean in one direction or the other in terms of building out the portfolio? Or will the focus be more on specific targets – specific verticals that you might target?

Well, I would certainly say that the end market focus would remain on process. So Nadella and American Roller Bearing would be almost – certainly be 80-plus percent process industries markets, maybe more than 90%. GGB a little more mobile, but still the exciting part of it is probably more the process industries markets, but they have some really good positions in aerospace. And so I think – and then Spinea would also be process for us. So the focus would remain on Process Industries and then within that, some of the markets that we've talked about, automation, food and beverage remains a focus. Marine has been a focus for us. And that being said, certainly something that comes with a mobile mix of rail off-highway. What you haven't seen us do much of is truck and automotive, and I think that will continue to be the case.

Yes. I would only add, Steve, just wanting to grow in the most attractive sectors as Rich said. And then on the Industrial Motion side, you're going to hear us talk a lot about the platforms that lie beneath the segment, which would be automatic lubrication systems, linear motion, drive systems, conservative and services, belt chain, et cetera. And I think we'll look to continue to scale those platforms as we move forward. So Spinea was an opportunity to scale in the robotic drives area, and obviously, Nadella in the linear motion area. So continuing to really scale those platforms as we move forward and then – while we're targeting the most attractive sectors.

So resegmentation doesn't really change how you think about how you'll approach the M&A market?

Yes. Really, no.

Those process-oriented businesses, okay.

Right, correct.

And Engineered has higher margins and better incrementals last year. Is that what you expect with respect to operating leverage going forward just based on mix, ability to price, how you see the manufacturing footprint? And more broadly, does one have more margin expansion potential than the other?

Yes. I would say when we look at our long-range margin targets of 200 basis points of expansion over the multiyears of the target range, we would look at most of that margin expansion coming through Industrial Motion as opposed to Bearings. So not that we don't have potential, and we're always working to expand the margins in Bearings, but we definitely see more potential in Industrial Motion. On the flip side of that, some of these businesses come to us at relatively modest margins to start, so it does take some time to get them up there so you have some time mixing yourself down. But definitely see more potential there on the expansion.

Got it. And if I could ask 1 more quick one. Does this new structure require you to realign or retrain the sales force to better sell the product line? Or I guess, are there any benefits or headwinds to this change organizationally?

At the higher level, there's big benefits, and then we've got one big bearing business that's largely being run globally. And there's some pockets of it like GGB and specialty areas like aerospace that are sub businesses down beneath that. But one big global business there, and then we're on the Industrial Motion side, set up more as a combination of businesses that, in some cases, share some sales forces and certainly other synergy possibilities like our digital platform, et cetera. But we do have a dedicated management over that group. I think we're much better positioned from a management bandwidth standpoint to scale it and to drive the synergies across the platforms. I would say the sales force change has already been happening. We continue to go – it's a combination. We go to market by end market, geography and product, essentially some combination of those. In some cases and some relatively small geographies, we have salespeople that are covering a wide range of products. In some cases, we have salespeople that cover one customer. So it's an ever-evolving situation on the sales side and I think we're good at it, and we definitely have a lot of cross-selling opportunities from the portfolio that we've put together.

Great. Thank you.

Thanks, Steve.

Thanks Steve.

Our next question comes from Tim Thein with Citigroup. Please go ahead.

Thanks. Good morning.

Hi, Tim.

So, we talked through the pricing. Hey, good morning. We discussed pricing earlier. But I'm just curious on how to think about mix as we go through the year. So if distribution was obviously a good guy here in the first quarter, probably, I would assume still a tailwind in the second. But how does that behave is if we switch to the markets like rail, I don't think renewables historically is the best from a – from kind of a contribution standpoint. But just kind of the trade-off, first half to second, does mix end up being enough to offset the pricing tailwind you have? Or is it not that pronounced? Any help on that would be great.

I'm going to let Phil take that one. I did want to make one comment. On the renewable energy, we just talked about renewable mix down process industries segment, but it's fine from a company perspective. It's not far off our company. So I would not say that's a big negative from a company perspective.

Yes, Tim. But I think on overall on mix, I do think you're thinking about it right. So if you look at our market chart, we have industrial distribution sort of in the middle for the year. It was quite strong in the first quarter, and again, we've got conservatism baked into the second half. But as that were to moderate, I do think you would see mix sort of moderate along with it. Our mix was very strong in Q1. I would expect, again, what would be implied in the guide would be some moderation of mix. I mean, still strong margin performance for the year, still positive price cost for the year, et cetera. But mix would tend to track some of the more attractive markets, with the biggest one being industrial distribution.

Yes. I think going back to our opening question from Steve on conservative outlook on the margins, I do think mix is one of the areas where we are expecting probably the first quarter to be as good as it gets from a mix standpoint.

Yes. Okay. I mean – and obviously, they're a small piece of your overall distribution. But the commentary from the handful of public industrial distributors, that doesn't sound like they're expecting a material fall off, so.

No. Not at all.

Yes. And then – sorry. Just on the manufacturing piece, and maybe for you, Phil. Just on the – so you've got these inflationary impacts still coming and the absorption headwind that we've – that you've been telegraphing for some time. Do these – some of the footprint realignment, as those come through, are those enough to kind of, is it a push? Or do you expect that effectively, that manufacturing headwind you had in the first quarter, does that – based on what you see today, does that get better or worse as we go through the year?

Yes. I would say that net-net, would sort of get better just on the – as the comps get a little bit easier as we move through the year. But in terms of the components, I think you're thinking about the components the right way, which would be obviously continued inflation, a delta in terms of significant inventory build last year. Obviously, our free cash flow guide actually implies inventories that slightly are actually down for the year, so a big delta there which creates some headwinds on the manufacturing side as well as some of the costs. The inflation we got hit with last year, they got capitalized inventory kind of working its way through. Offsetting that is we continue to improve the operational execution of the business with the Mexico plant ramping, the consolidation of the chain plants and the other actions we're taking is going to be an offset to that. And then as I said, the comps will get sort of easier as we move through the year. So to Rich's earlier comment about first quarter maybe being the best for mix, I think the first quarter is probably close to the worst that we'll see on the manufacturing line.

And to that point, I'd also add that costs are definitely leveling off sequentially. Again, we've seen some things decline. Logistics costs are back to close to where they were pre-pandemic. But labor markets remain tight and don't see those costs certainly going back, so it's really a comp issue. And we've been in this sequential increasing cost environment for nine, ten quarters, but it's definitely leveled off. And then the other thing that that's leveled off as our own internal efficiencies from the supply chain challenges. So year-over-year, I would expect some nice improvement embedded in those manufacturing numbers from that. Although I'd also say there were some nice improvements in the first quarter, but it was overwhelmed by the inflationary pressures. But I wouldn't say we have step changes now in productivity from the supply chain issues. The step changes would be more of some of the footprint, things that you mentioned and I highlighted in my comments.

Great.

Very good. Okay. Thanks a lot.

Thanks Tim.

Our next question comes from Michael Feniger with Bank of America. Please go ahead.

Hey guys. Thanks for squeezing me in. Just on the margin trajectory and talking about production. Interesting, you said your inventories are going to end the year slightly down on a year basis. The slowing production, is that going to accelerate in the second half? Do you take more out in maybe Q3, Q4? I recognize you're kind of building that into the guidance. Just curious how that kind of plays out through the year?

Yes. First, I would say, in the first quarter, it's a – if you look year-over-year, pretty big delta in inventory. We built a lot last year in the first quarter, did not in the first quarter of this year, so there was a large absorption cost issue in the first quarter when you look at the year-over-year. And some of Phil's comments, some of that will moderate because the inventory growth moderated. But we'd expect inventory to be flattish probably in the second quarter and then down a little bit in the second half, but I think we've got that fully baked into our financial models. And again, it was the first quarter, when you look at year-over-year numbers, probably as bad as it gets.

Great. And do you feel like that's representative of the distribution channel that, by the end of the year, inventories will be potentially down slightly versus a year-ago? And just help us understand with all the concern on inventories, like, how do inventories look to you in the distribution channel relative to where you were pre-pandemic?

I would say they're actually probably a little low, so as you put it, as a percentage of sales or turns, so I think they're improving the – in the turns where we have visibility to it. So inventories, distribution is only one small piece of the total inventory so I would not say we're looking at a big change there. But I mean, everybody now is managing inventory. We're managing inventory and things are happening on time and to a cadence and a schedule now, so just the inefficiencies and the waste are naturally coming out. But again, I think really good that we grew 11% organically in the quarter when we had that phenomenon happening really for the last couple of quarters.

Yes, right. And Mike, our efforts around inventory, two more comments really. One is obviously, it aligns with the midpoint of our guide, which would have volume sort of slightly down in the second half. But more importantly, what we're trying to do with inventory is get our days, as we manage our days, kind of back where they were because they were elevated as we moved through last year. So it's really more about trying to get our days aligned with where we need to be moving forward in a healthy environment versus anything else.

Typically, our inventory turns would improve in a year where we're delivering double-digit organic and they declined last year. So we've got a – we just got a good opportunity, as do many of our customers, just to get their turns back in line with where they were.

Great. I'll just sneak one last in there. Like obviously, China is in focus. I know that's a little bit – you're a little bit more exposed, it seems like on the wind to renewable side to China. But just curious how you're seeing this China recovery starting to play out for your specific verticals as we've kind of moved through Q1 or the first four months of the year? Thanks.

Well, I think it's a real positive when you look at both from a cost standpoint of us running our plants over there. The plants are running the best they have since early 2020. And then from a revenue standpoint, there's – you see now some periods in our – in the first four months of the year where you look and say, China was almost shut down for that two week period last year, and now they're clipping along. So in our deck, it was a big part of the driver of the 11% organic. And market is very bullish on renewables, I mentioned we've got good backlog through the third quarter there. We're looking at double-digit growth for the full-year. And then I think the – and the other industrial markets have been a little more mixed, but some pretty low comps. I think generally pretty bullish about that market in 2023.

Our final question today comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Hey, thanks. Good morning guys. Just real quickly…

Hey, Joe.

On the resegmentation – hey, guys. I'm curious like there's a lot of questions around like M&A. Do you look at the opposite way too? Is there an opportunity potentially for some addition by subtraction and divesting some of the businesses within the two segments?

I would not say we have anything of size in either segment that we would be looking to divest. We did divest the Aero Drives business, so $35 million, $40 million of revenue. I'm always looking at the portfolio and certainly that could change, but we – if we did anything in the next 12 to 18 months, I would expect it to be somewhere between nothing and of a similar size to ADS, a relatively small piece of the portfolio.

Okay. Cool. And then last one for me. Just China, it seems like Asia was really strong this quarter. I'm curious, what was China specifically? And it seems like there's a bit of a disconnect going on across the coverage where kind of reopening a little bit slower for some folks, it seems like it was probably pretty positive for you guys. So where are you guys kind of seeing strength in your business in China?

Definitely in the renewable space. So for us, it was – the strong numbers were driven by renewable energy. And for the year, they are going to be driven by renewable energy. And I would say we're seeing the same thing. But put in the renewable energy side, we're seeing some mixed results in China with the reopening, but overall positive. And then I would add India was up significantly and quite bullish on the India market for not just 2023, but the several years following that as well.

Yes. What was great about Asia, Joe, is we were up 23% in the region. But we sort of split it, China, India and then sort of the rest of the region. And all three of those, China, India and the rest of Asia were all up solidly double-digit in that range. So it was broad-based. And as Rich said, renewables in China was the big driver, but momentum is clearly building there across the industrial landscape.

Okay. Great. Thanks, guys.

Thanks, Joe.

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

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