Good morning. My name is Catherine, 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 Third Quarter Earnings Release Conference Call. [Operator Instructions] Thank you. Mr. Frohnapple, you may begin your conference..

Thanks, Catherine, and welcome, everyone, to our third quarter 2020 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.

[Operator Instructions] 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 all for joining us for our third quarter call. Timken delivered a solid third quarter as we experienced sequential strengthening of the second quarter above our expectations across most end markets and geographies.

Strengthening markets combined with strong growth in renewable energy and the BEKA acquisition resulted in sales up 11% from the second quarter and down just 2% from the third quarter of last year.

We delivered solid EBITDA margins of over 19% with good operating performance, positive price, and benefits cost reduction initiatives all contributing to the results. Earnings per share of $1.13 were down just $0.01 from last year. We reduced inventory in the quarter and generated over $120 million in free cash flow.

Overall, given where we and our customers were early in the second quarter, the third quarter was a solid rebound and strong performance by Timken. To expand further on revenue, the trend of sequential strengthening that we began to experience in May continued through the third quarter.

The general statement the markets that were the most depressed in the second quarter was the strongest in the recovery. Automotive, truck, India, and highway equipment are all examples of markets that were extremely depressed in early Q2 and have been improving sequentially since then.

Our strategy to increase our presence in renewable energy markets continue to pay off with very strong year-on-year growth in both wind and solar again this quarter. China also remained a bright spot as the country continues to be significantly less impacted by the Coronavirus than most of the rest of the world.

India, defense, marine and Ag were also solid in the quarter. The BEKA acquisition contributed about 3% to the top line. Outside the markets just mentioned most other markets were down year-on-year from mid single to high teen percentages. Total revenue was down a little over 5% organically and strengthened sequentially through the quarter.

This is a solid step up from the second quarter. It is indicative of the strength and diversity of Timken's product portfolio and market mix. We have a few slides in the deck on renewable energy which provides some industry forecasts on the global shift renewables as well as illustrate where we participate in the market.

2020 has been an excellent year for our renewable energy business with strong growth in both wind and solar. Market outlook for 2021 has continued to improve and combined with our penetration initiatives we're planning for another year of positive organic revenue both wind and solar to 2021 on top of 2020 record year.

We recently announced our new military marine contract and we expect year-on-year growth in marine in 2021 as well. In other markets, customer engineering activity and new product platforms remains robust, with a lot of emphasis on energy efficiency and miniaturization, continues well positioned to win more than our share of new platforms in 2021.

Despite organic revenue being down EBITDA margins were within 40 basis points of last year, and earnings per share was only down $0.01, had a modest impact in the quarter of temporary costs and compensation actions and we believe the quarter is largely indicative of our ongoing cost structure.

Pricing remained modestly positive year-on-year and flat sequentially. We expect price in 202 to be flattish. From a cost perspective, the temporary cost actions related specifically to compensation reductions and furloughs were relatively modest in the third quarter, roughly $0.03 and are not expected to extend into the fourth quarter or 2021.

However, there are other and larger temporary and volume related cost reductions such as travel and reduced plant head counts that contributed to results and will continue for at least the next several quarters.

From structural cost perspective, we come into every year with a plan to reduce costs from acquisition integrations, or digital investments or footprint transformation or CapEx projects and our ongoing drive for productivity and efficiency improvements.

With the onset of the Coronavirus, we [Indiscernible] various initiatives and added an SG&A right sizing initiative in the third quarter, we continue to have a healthy level of activities around reducing structural costs in manufacturing and SG&A.

The bottom line is that we are confident that the reduced cost structure in the third quarter results is sustainable for the next several quarters, and we will continue to launch digital initiatives in 2021.

While we are not providing a specific revenue outlook for the fourth quarter due to the elevated uncertainty levels, we're planning for normal seasonality to end the year and to start 2021.

A few more details on that outlook; first as reminder, that our normal seasonality will be a modest sequential decline from the third quarter to the fourth in the 2% range; and then typically a larger sequential increase from the fourth quarter to the first quarter.

Despite the strong October that is what we're planning for this year, as well as to start 2021. With the level of uncertainty we're facing, the possibilities around that as a midpoint are wider than normal, but we believe normal seasonality is a good middle of the road for us to plan around and then move up or down as the situation develops.

Second point, we have not seen any change in demand from the recent uptick in Coronavirus cases around the world. Customers continue to operate and demand has not been impacted. Certainly there are risks that are beyond our control.

The government is appeared to be more focused on social restrictions than industrial restrictions, and we continue to take extra precautions to keep our operations safe and running. As I said my comments revenue improved sequentially through the third quarter, and that trend is on track to continue in October.

We expect October to be slightly stronger than September and our strongest month since January. However, November and December are typically among our weakest months of the year. So sequential strengthening off of October would be a challenge.

My final count on the revenue outlook is a reminder that we were a few quarters into cyclical decline when Coronavirus hit. So now after the third quarter we're at five quarters cyclical decline in many industrial markets, which include a lot of inventory destocking across multiple channels. All of which bodes well for a rebound at some point soon.

We expect cash flow to be solid in the fourth quarter and end the year with a solid balance sheet which brings me to capital allocation. Capital allocation remains a critical element of our value proposal and we remain committed to our framework with CapEx and the dividends as the top priorities.

We're on track to be back in position to shift from debt reduction, greater value creation opportunities in 2021. And we will have a bias M&A with share buybacks as a viable option. M&A activity did return in the third quarter. Our most recent acquisitions BEKA will hit its one-year anniversary at the end of this month.

Despite Coronavirus, we've managed to improve margins several hundred basis points this year through the consolidation with Groeneveld with more margin expansion expected in 2021. And we are doing so while building a global leader in automatic lubrication technology. In summary, Timken continues to perform well through a very challenging year.

We are keeping Operations safe serving, our customers, delivering solid financial results including strong free cash flow, and advancing our strategy to build a high performing industrial leader.

Phil?.

Okay. Thanks Rich. And good morning, everyone. For the financial review, I'm going to start on slide 14 of the materials. Timken delivered solid performance across the board in the third quarter. And you can see a summary of our results on this slide.

Revenue for the third quarter was $895 million, down 2% from last year, and up 11% sequentially from the second quarter. We delivered an adjusted EBITDA margin of 19.4% and adjusted earnings of $1.13 per share, just shy of last year's record third quarter earnings. Turning to slide 15, let's take a closer look at our third quarter sales performance.

Organically sales were down about 5% with most of the year-on-year declines coming in mobile industries. While pricing was positive in both segments, the BEKA acquisition added approximately 3% to the top line and the quarter while currency was roughly neutral. On the right-hand side of the slide, we outline organic growth by region.

So excluding both currency and acquisitions. Let me comment briefly on a few regions. In Asia, we were up 29% in the quarter. Our sales in China increased significantly versus the prior year, due mainly to strong growth in renewable energy.

Sales were also up year-on-year in India, as the country continues to recover from the COVID related shutdowns impacted in the second quarter. In both North America and Europe, most factors were still down versus the prior year. But the rate of decline improved meaningfully compared to the second quarter.

Sequentially, we saw solid improvement from the April lows, and we benefited from strong recovery in sectors like automotive and heavy truck, which were hit especially hard during the second quarter. Turning to slide 16 adjusted EBITDA was $174 million, or 19.4% of sales in the third quarter, compared to $181 million, or 19.8% of sales last year.

The modest decline in adjusted EBITDA reflects the impact of lower volume and unfavorable price mix, as negative mix more than offset positive pricing in the quarter. Note that the negative mix reflects a significant growth we saw in OE sales than in process industries, coupled with lower aftermarket and distribution revenue.

Currently also had a negative impact in EBITDA as we experienced transactional losses this year, versus gains in the year ago period. And I would point out that this FX headwind more than accounts for the year-on-year decline and adjusted EBITDA margins.

On the positive side, we benefited from significantly lower SG&A expenses, favorable manufacturing performance, and modestly lower material and logistics costs. In addition, BEKA contributed roughly $4 million to EBITDA in the quarter with margins around 13%.

Excluding currency and acquisitions, our organic decremental margin in the quarter was only 6%. Now let me comment a little further on manufacturing and SG&A. On the manufacturing line, we executed well in the quarter, as our team responded to rapidly changing customer demand and delivered improved operating performance.

We had slightly higher production volume in the third quarter versus the year ago period, which gave us better fixed cost absorption. And we also benefited from ongoing cost reduction actions and other productivity initiatives in our plans.

A significant reduction in SG&A expense reflects the ramp up of structural cost reduction initiatives, lower controllable and discretionary spending and the benefit of some temporary cost actions that occurred early in the quarter.

On slide 17, you'll see that we posted net income of $89 million or $1.16 per diluted share for the quarter on a GAAP basis. This includes $0.03 of net income from special items driven mainly by pension mark-to-market income, which more than offset restructuring charges and other items.

On an adjusted basis, we earned a $1.13 per diluted share in the quarter, down $0.01 from last year. Our third quarter adjusted tax rate was 24% as our geographic mix of earnings produced a favorable change in our forecasted full year effective tax rate to 26% from the previous projection of 27%.

We expect the cash rate to remain 26% in the fourth quarter. Now let's take a look at our business segment results starting with process industries on slide 18. For the third quarter, process industries sales were $466 million, up 1.5% from last year.

Organically sales were down 0.6% as strong growth in renewable energy and positive pricing largely offset declines across other sectors, including industrial distribution. The favorable impact of acquisitions added almost 2% of the top line in the quarter.

Process industries' adjusted EBITDA in the third quarter was $115 million, or 24.7% of sales, compared to $119 million, or 26% of sales last year.

A slight decline in adjusted EBITDA reflects modestly lower organic volume, and the unfavorable impact of Mexican currency mostly offset by the favorable impact of cost reductions, manufacturing performance and positive pricing.

The decline in adjusted EBITDA margin in the third quarter versus last year can be attributed entirely to the sizable currency headwinds in the quarter. Now, let's turn to Mobile Industries on slide 19. In the third quarter, mobile industries sales were $429 million, down 5.8% from last year.

Organically sales declined close to 10%, reflecting lower shipments across most sectors partially offset by positive pricing. Acquisitions added 4.4% to the top line in the quarter, while currency translation was slightly unfavorable.

Mobile Industries sales were up 25% from the second quarter, we saw strong sequential demand in automotive, on highway, heavy truck and even rail, as customers ramped up production following COVID related interruptions in the second quarter.

Mobile Industries' adjusted EBITDA for the third quarter was $68 million, or 16% of sales compared to $72 million, or 15.8% of sales last year. Adjusted EBITDA margins were up 20 basis points compared to last year on lower revenue.

Improvement in margins reflects the favorable impact of cost reduction and strong execution in the quarter, which more than offset the impact of lower volume. This represents a year-on-your decrement margin of only around 9% on an organic basis, very strong performance in mobile industries this quarter.

Turning to slide 20, you'll see that our strong cash flow performance continues. We generated operating cash flow of $154 million in the third quarter and after CapEx free cash flow was $124 million. CapEx in the quarter was $29 million and include spending to support the growth opportunities, which highlighted earlier.

Our year-to-date free cash flow of $372 million represents 150% conversion and adjusted net income. It's also $100 million better than last year, despite lower earnings as we're benefiting from improved working capital performance, lower cash taxes, and lower cash use for medical expenses in 2020.

Also, in the third quarter, we paid our 393rd consecutive quarterly dividend and reduced net debt by roughly $80 million. Taking a closer look at our capital structure, we ended September with a strong balance sheet.

We have liquidity of greater than $900 million, which includes $313 million of cash on hand plus over $600 million of availability under committed credit lines. Our net debt to adjusted EBITDA ratio improved to 2x at September 30th, which puts us squarely in the middle of our 1.5x to 2.5x target range.

Overall, our balance sheet, liquidity and expected strong cash flow put us in a great position to navigate the still uncertain environment while continuing to drive our strategic imperatives. Now let's turn to slide 21 for additional commentary on the outlook.

Rich provided some color and expectations for revenue and his remarks; let me touch on some of the other items. In the fourth quarter, we expect to generate strong free cash flow and to further reduce net debt.

For the full year 2020, we expect CapEx of around $125 million, or just over 3.5% of sales and net interest expense of around $65 million, both roughly in line with the prior outlook. As Rich discussed, we continue to execute on initiatives to improve our cost structure and support our operating margins.

We now expect to generate $55 million to $60 million of year-on-year cost savings in the second half of 2020 which is essentially the high end of the range we provided in early August, as we have better visibility now with just two months left in the year.

Finally for the fourth quarter, we expect EBITDA margin to be modestly lower than the third quarter, reflecting the seasonally lower volume that Rich discussed. On the positive side, we expect margins to be quite a bit higher than last year's fourth quarter due to better cost performance.

This include the benefit of current year cost reduction actions, and also reflects the fact that last year, we have been higher than normal operating expenses in the fourth quarter, which should not repeat. In addition, WE expect BEKA's margins to be up in the fourth quarter versus last year.

So to summarize, the Timken delivered strong performance in the third quarter, as we capitalize on better than expected revenue, and we executed very well to deliver strong margins and earnings. We are demonstrating our ability to generate higher margins and returns through the cycle while continuing to drive our strategy.

And we're in great position as we look ahead to 2021. This concludes our formal remarks, and will not open for questions.

Operator?.

[Operator Instructions] We'll go first to Robert Wertheimer of Melius Research..

So I've seen some good and steady results. Really the renewable side is becoming more material is pretty exciting.

And I wondered if you could just give a little bit of commentary breaking down the growth either as whether you're expanding in new geographies or new customers, new sources of growth, and how that continue to expand? And then Rich for my other question would just be, as you look to next year, now if you're going to deploy capital, given what you've proven out this year, how much do you factor in your own stock price when you sort of think about the tradeoffs on acquisition? Thanks..

Yes. So on the renewable side; really break out year for us for probably about a decade of activity in the space on wind and a couple of years on solar. And clearly helping to mitigate weakness in other markets, it would have been great if, it would have additive to other strong markets.

As you know, we've really built what I would say is a full bearing portfolio, if you look back 10 years ago, we really weren't in the turbine, then we really started into gear drives, which was our wholesale technology, sweet spot.

And then we've really expanded across the entire platform with rated bearings now up to several meters in diameter, I would say our pipeline of, this is mostly OEM revenue for us and it's engineered or product, it's not something that's substituted, it's not something if you're in the design, you're going to be in the design for some period of time.

I would say our forward-looking platform wins over the next couple of years is stronger than it's been at any point in time. So I think our penetration in the growing market is going to continue to improve. And then we knew this year was set up to be a big year, particularly in China and Asia.

That's happening and a little concerned about Asia, leveling off or declining a little for next year that situation is improved through the first three quarters of the year, our backlog is strong to start the next year and really out probably through the middle of next year.

We continue to be, I'd say disproportionately weighted towards Asia, from end market mix with China being the predominance of that. China's been very consistent in their commitment to moving more to renewable energy, and it's been less sporadic I'll say than the US, followed by Europe and then followed by the US but we have presence everywhere.

I think we've really done in the last couple of years. And it's going to be even better in the coming years. We used to be pretty concentrated. With a couple gear drive manufacturers and couple turbines, we really have some level of content across a much wider swath of OEMs and platforms in the coming in the coming year.

So I think it's going to continue to be a higher and higher percentage of the Timken Company's revenue, and it's a really good secular growth story. And then longer term, we are seeing an aftermarket that that aftermarket is probably 10 plus years out, but there will be a significant aftermarket revenue stream that starts to kick in.

Probably more so for placements at some point. So I'm going to start because it's a ways out there but it's it started and will continue to trickle up with the OEM is going to dominate that.

On the solar side we really moved into that market first with the acquisition of Lovejoy several years ago in a small way and then moved in a blest it and we go back to win the other piece of wind, the BEKA acquisition moved us into to a leadership position in Asia, in lubrication systems, the difference with lubrication systems versus bearings.

There's not an enormous amount of dollar content on a lubrication system than a wind turbine as compared to a variance of the upside is certainly not there. But it's still an attractive growing part of the business.

And then organically, we're working on some of the other product platforms that we have with Lovejoy and PT Tech to expand our presence there as well. And then come back to the solar side, we've been doing a small way with Lovejoy; we've been doing much bigger with PT Tech with Cone Drive acquisition.

And we are a leader in those precision drive systems. There's not a lot of moving parts on solar, but where there are, we have a significant amount of content.

Again, some more comments that probably a little less visible, it's a little shorter sales cycle than wind, little shorter technology cycles than wind, but feel very good about 2021; we will have an increased presence there. And again, the market outlook is pretty solid. That business is very global.

We have installations that the direct customers are heavily in Europe, but the installations are very global, very project oriented. And again, the outlook for 2021 stays very strong. And Rob, I didn't catch the last part of your questions about that versus M&A..

Yes, thanks, rich. So that was a very comprehensive answer. And it's pretty exciting what you've done. Question was just I mean, you've accomplished a lot this year; your stock price is not super high. And I wonder just philosophically how you weigh buybacks versus M&A. You mentioned the preference for M&A.

I don't know whether the valuation comes into play or not..

Well, valuation definitely comes into play and certainly agrees with your comments on our stock price and certainly believes that share buyback is, well, share buybacks is very accretive and makes the bar for M&A high.

That being said, I think the results that we are delivering this year would not be what they are, had we not, had we sat out completely in the M&A market the last few years. So we always look at the epic comparison, we have the bar established for that.

And I think the likely answer going forward is going to be sum of both like it has been looking backwards..

We will now take our next question from Stephen Volkmann of Jefferies..

Hi, good morning, guys. Thank you. Can we, I think you mentioned, Rich, a couple of times in your comments about distribution, industrial distribution.

Can you just dive into that a little bit more for us? Are you seeing that business improving as well? How do you think the inventory situation is there? And do you think 2020, your comments about five, six quarters into a downturn is 2021 potentially setting up for more of a restock year and distribution?.

Yes. So I would say distribution was among our weaker sequentially performing parts of the business from Q2 to Q3. Part of that was it declined later, it held on well into April and the declines a little later. So the second quarter was not as weak as automotive and truck and some other markets.

But we really didn't see globally net any strong improvement I think for us, much of that is due to destocking.

So as you look at our US distributors that are publicly as a benchmark of that they both lowered inventory in the quarter and their sales were down low double digits; so when you compound low double digits with some inventory reduction year-on-year for us, it's pretty weak. We had - we expect further inventory reductions in the fourth quarter.

We don't think inventories way off and they made those comments as well publicly that but they continue to see some slight greater sell-through than then purchases, some inventory reduction. So we see that likely for the fourth quarter as well. And I think it depends on demand.

But certainly, the opportunity is I think is greater for restocking than destocking as you get past the first quarter of next year in those channels..

Okay, thanks. And does this sort of surprise you at all? Because you've seen other cycles but the kind of consensus around all these end markets as things are improving kind of quarter-over-quarter, month-over-month. And we've heard a fair amount about some tight levels of inventory and some of the end products through this.

And yet we seem to be destocking in the channel. It just seems like there's disconnect there..

Certainly one of the things that's different this time is the disparity where if you really look for the full channel, we have restocking happening and I think in automotive, we have restocking happening in truck, believe we start to see some - saw some restocking in third quarter in Ag.

But then we have destocking in probably general industrial, distribution, and rail. So I think we have more haves and have not within that.

But I don't think so, Steve, because I think the decline that we saw in revenue in use of end use of products and the idling of factories around the world, and reduction, I think that was a real reduction in demand for period. And inventory generally asked to come out for that.

I think it's bit extended much beyond early into next year or really even much beyond the end of this year, then I think it would start to be unusual in its duration..

Hey, Steve, this is Phil. The only thing I would add to what Rich said, we did see and recording a globally our order book and distribution was up slightly year-on-year, obviously up a lot of sequentially.

But so we know, to Rich's point we do feel like, and while there may be some further destocking here through the end of the year, we do think inventory should be hopefully in decent shape and set us up reasonably long for 2021..

Our next question will be from Joseph O'Dea of Vertical Research Partners..

Hi, good morning, everyone. I want to ask about the setup over the next couple of quarters and talking about more or less normal seasonality and sort of some stabilization after Q2 decline, Q3 bounce back and what you think we need to see in order to trigger the next wave of recovery costs of these levels.

I would think from an end market puts and takes perspective that you're looking at more tailwind than headwinds here. I'm not sure if any end markets that stand out as ones that you would see a little bit of pressure next year. But really what we need to see in terms of getting that next stage of recovery growth underway..

Well, I think we clearly have net momentum and the sequential strengthening has been there since May, continuing through October and I would not consider a slight decline in November, December is a slowdown of that. So I think I can start the year would really would be the determinant of that.

Certainly, as all of you know these are a - lot of these markets truck and are highly markets, they are momentum markets, once they start moving sequentially in the right direction, they tend to move in that direction for multiple quarters and or years, not a quarter or two.

To Steve's point could this be different with Coronavirus? It could be but you know, I think as we sit here today in our world is set up that we think we're going to grow sequentially from the fourth quarter to the first quarter and if this momentum will continue.

It's a little more tepid than probably what would be given the depth of where we went in the second quarter.

Largely due to some pretty weak consumer economy, unemployment and all the things obviously that are out there plus the risk around coronavirus is resurging here in the winter months, but I think in general as you look across our market still the momentum has been favorable for five, six months and is largely set up to start 2021 favorably..

Got it. And then I wanted to ask one on the cost side of things, it sounds like in terms of the temporary costs that are out that those would be managed out over the next couple of quarters or so. As we think about the kinds of scenarios in which those costs start to come back.

But do you anticipate bringing them back in a way that normal incrementals are still achievable? Or is it a matter of some of these cost cuts will make normal incremental in a recovery scenario a little bit harder to achieve?.

Well, let me probably give a longer answer to that than what you asked me. As you break down our costs into various buckets; first, we do a lot of work every year to increase the variability of our cost structure. And this works been ongoing for well over a decade. I think we're better at it today than we were in the 2015 -16 period.

And we were better at it in 2015-16, than we were and 2008-09. And it's everything from de-vertical integration, flexing the labor costs, and the plans or incentive compensation systems design, the cyclicality of our material cost structure, and just a relentless focus on moving more fixed costs to where there's some level of variability in them.

So that's the biggest part. That's the most important part, if you look at our cost to good decrementals. And again, I think we're better at, that being said, there's definitely some compression there things that we can't flex, and those costs largely all come back when volume comes back. And then as we talk about temporary cost reductions.

I break that down into two pieces. There's what really be the extraordinary things we did that the depths of the Coronavirus situation around compensation and furloughs. Those are over and would not be expected to repeat at all. And that is what I was referring to was really a fairly small impact even in the third quarter.

So I largely say they were over in the second quarter. They were big in the second quarter, small in the third quarter and largely over.

There's this other part of temporary Coronavirus costs, which I think is really where you are getting at travel, controllable expenses, some part of our headcount that we've gotten tighter on just as we and more cautious on as we've gone through this period. That's why I really don't see any of that coming back in the next couple of quarters.

Travel is a big part of that as an example. And our travels probably going to remain closer to zero through the next two quarters than it was prior to the Coronavirus. So the point of how that comes back. I think there's, some of that remains to be seen. But certainly we will have control of that.

And we'll make sure we have some volume coverage for that as that happens. Using this meeting as an example, I probably used to do 80% of my IR work, face to face; I'm doing zero percent of it face to face now. Where will I be a year from now? Probably not 80%? Probably not zero. So there'll be some probably permanent savings of that.

And that permeates I think a lot of these things. So we're really dissecting a lot of that to figure out how much that we can capture permanently. But I would also tell you in the next couple of quarters, it's not coming back.

So that's even I think volume continues to improve in and then there's the piece that I talked about structural cost savings, which I think we went into, so I think we're going to control any cost coming back in and I think it's probably two or three quarters away before that's a material amount off of the third quarter. So that was a long answer..

And our next question will come from a Steve Barger of KeyBanc Capital Markets..

Thanks. Good morning.

Just going back to the renewables, do you build your own industry forecasts or using a service? And can you tell us what either you or they expect for kind of three- or five-year growth rates for renewable installations?.

I would say we certainly use external but we really use more customers because it really matters much more what content we have in which customers around and which geographies around. So these are - this is probably one of our longest lead time firm order book items that we have.

So when we typically have quarters of have firm backlog and visibility to business that we don't have today that we may not start commercializing for 12 months, 18 months. So definitely our internal data is more relevant. But then we use a variety of external benchmarks to spot that.

And I think the numbers that we showed you there of the 8-ish percent, I think is pretty good benchmark for us over time. But it is not been a linear progression for us as we move into the market. And what expected not to be linear going forward, there hasn't been any major pull backs.

But there's been some pauses as we've been in the market now for a decade plus, but next year again with where we participate pretty bullish. I don't think it certainly won't be the same level of percentage that we did this year; this year was, we had some significant capacity come online, some new platforms come online.

And then also a good market next year, we have the same but not at that same level magnitude, but we will have another round of both CapEx plus plan for next year that'll put us in position for the next couple of years..

Okay, can you tell us what your average one time per turbine is or what - and what it can be if you're selling the whole bearing and lubrication product suite?.

No, well, one it varies quite a bit, depending on the size of the turbine and then how much we participate in that turbine. And I would say it'd be rare for us to have every application across the turbine typically it's split amongst us and some competition. But it's tens of thousands of dollars to six figures..

Got it. And, and similar question for solar. I know there's less content there.

But is it content per panel or content per megawatt? How do you even think about or how should we think about measuring content relative to growth rate?.

Yes. It's dramatically smaller on solar. And in one, it's not in every solar application. Some solar applications are fixed, although the premium commercial ones generally have precision motion control device. So now you're talking thousands to $10,000.

And it would be more per panel as the graphic that we have in the deck illustrates and then there'll be some conversion.

So I think, Steve, I think our intent in our next investor time is to give you a lot more information on both those questions wanted to dip into it today and from our confidence, but I think both your questions are fair in terms of relating our revenue back to actual units of energy.

And we'll come back to you in the next couple of quarters with more information on that..

We will now go to Joseph Ritchie of Goldman Sachs..

Thanks. Good morning, everyone. Guys, I just wanted to try to understand the trends a little bit better. I know that you talked about sequentially revenues being down a little bit in the fourth quarter versus third quarter. But you also stated that October was I think, the best month since January. And I know there's three less selling days also in 4Q.

So is there any color you can give us around like kind of like the magnitude per round? How trends have ever have gone across your business? And particularly in October?.

Yes, again, I would say it varies, but net we have positive momentum. We've had positive momentum since the May timeframe. And I think when you factor in holidays and shipping days as of November and December a flat down a couple percent from Q3 to Q4 would actually still be positive momentum. Just the shipping days alone are close to 5%.

So but that being said, it's not equal. We're not expecting sequential strength in distribution from Q3 to Q4 as an example, because we think we'll see some destocking there. And we didn't see really just the sequential strength from September to October there.

But in particular, automotive, particularly, I'd say more than mobile markets are continuing to strengthen. And then we've got some secular growth stories in there as well in regards to renewables. So I would say it is positive market momentum being mitigated by fewer shipping days, year-end holidays and normal seasonality..

Yes, that's s helpful, Rich. I guess maybe just following up on that one comment. And I know we've talked about it a little bit here on the destocking trends in the fourth quarter. I guess, just given that we have been in a period of destocking for quite some time and seeing negative growth for several quarters now.

It's curious to me that we're still in this destocking mode with the distributors.

So what is going on with them specifically, any other color that you can provide there on distributor destocking trends in the 4Q?.

No, I don't think so. And I think I guess we'd say it's modest; these aren't, these are - they are sales year-on-year down 10%, our sales to them are down 11%, or 12%. These are not huge swings in their inventory.

One of our customers made some comments on their call this week as well about that they invested a lot in information technology and improved digital connectivity with their suppliers, one of which would be us, and they and us manage inventory better. So I think it's largely if sales are 10% lower, you need less inventory to support that.

And therefore that inventory has to come out and our sales have to be a little lower. So I think it's just a normal thing. On the flip side, you were talking about the distribution side, but there's also, it's pretty heavy destocking and in some of our off-highway channels.

For us, we really started experiencing that last year significantly in the fourth quarter. Our customers are talking about it more impacting them now in the third quarter and fourth quarter.

But for us, we're actually on the other end of that where we're starting to see our sell-through to them be at their sales level or a little greater, because we took a lot of that hit last year and then in the early parts of Coronavirus. So it varies into the earlier comments.

I wouldn't say that there's anything abnormal happening except for the three- or four-month period that was extremely abnormal in the earlier part of this year..

Got it. And maybe one real quick one for Phil.

The $55 million to $60 million in savings in the second half; how much came through in the third quarter? And how much is expected in 4Q?.

Yes, great question. I think of it as pretty close, maybe slightly below half in the third quarter and maybe slightly above half in the fourth quarter but reasonably close.

And as we talked about before we think the full year effect of those savings next year will that plus some other initiatives, we're working on should essentially mitigate the absence of the temporary actions next year. So while year-on-year comps will be a little bit messy, just given everything that went on in the second quarter.

But we do think for the full year would not expect, the temporary cost of actions that we did this year to be a headwind per se we think we would to be able to fully offset it..

We will now go to Ross Gilardi of Bank of America..

Thanks, guys. Good morning. More renewables questions. And I'm guessing you guys are happy to talk about this business for all day right now. You gave that a couple of those great slides. And you showed 12% of sales in 2020. I mean, it's a $400 million business right now.

It looks like I didn't quite break out the ruler, but it looks like it's more than doubled in the last two years. Tell me if I'm wrong.

And that's what I'm wondering is can this be a billion dollar business and, I don't know, five, eight years and is the manufacturing capacity distinct from it and can you present it to as a separate sort of standalone business and any thought being given to breaking it out as a segment at some point because clearly this is a business that's growing way faster than anything else in the bearings industry right now, that probably warrants a much higher multiple..

Well, a lot of interesting thoughts within that, I would say, first on your breaking out the ruler, directionally yes. And that was what the slide was intended to be, directional. We've made some significant investments and they're delivering this year and we expect them to for years to come. And I think directionally, yes.

I think well this as a business, we think we can keep a double digit type cater on for some time, we chopped the numbers that you just rattled off there, when we get to be a pretty sizable part of the company in the next five years. I would say we have really even contemplated the segmentation questions.

And it would probably have to get quite a bit bigger before that would be a valid discussion. But certainly, I think, to the questions, you just raised questions from Steve earlier, et cetera.

We need to provide more color on what we're thinking about it, what we're going to be investing in it, and what the growth of the industry is going to mean to the Timken Company in the coming years. And we do plan; we certainly do plan to do that was the baby in a small step in that direction. I think I answered all your questions.

Did I leave any there, Ross?.

No, that's great, Rich.

I mean, can you comment on like, what do you think your share has gone over the last three to five years for - was it particularly and when?.

Well, it varies in the gear drives; I would say it's quite high. But certainly, we still have a couple of large competitors out there. But we, I would say are one or two in the gear drive space on the main shaft, which tends to be the two-meter, three meter, very large bearings, we're still actually very small.

We were zero not very long ago, and we broke it into double digits, but we're still third, or where we participate, we're third, we're not really in Japan. So I think there's still a lot of upside there. A lot of the CapEx that we put in this year, and let's plan for next year is in that space.

And I think there's room for us both from a share perspective and in a market perspective..

Ross, this is Phil. I would just add to Rich's comments; the vast majority of our growth this year in wind would have been more on the gear drives than the main shaft.

But I think with the tech, with the investments we are making in technology and in footprint, I think we're in a great position to, for that to be the next, the next really good story for us.

And wind is increasing our penetration and share on the main shaft, which is the longer cycle, quite frankly, the longer cycle of the two portions of business on the bearing side. I'd also say it's a concentrated industry, right there. It's not the longest list of customers.

And the same thing with competitors; so we have competitors and they're formal competitors. But it's not a long list of companies that have the technology to do what we're doing..

I would just say - the only thing I'd ask is do you have separate capacity for the wind business? And in particular or is it commingled with the rest of your footprint?.

Well, it's largely a size issue. So certainly when you get up two bearings, two meters and above, there's not much of a market, particularly precision bearings. Typically when you'd be up to that size, you might get something in a marine application or something but they would typically be lower precision bearings.

So when you get to precision bearings of that size, it is largely dedicated manufacturing technology. You get to the gear dry sizes. Phil's alluding to is big power growth; those are size bearings, that would be in steel mills would be in other large industrial, some mining equipment, applications, et cetera.

So they're not unique, but it has become such a sizable part of the bearing industry that it's also - it's - the growth - and it is made at the largest part of that industry, whereas 10 or 20 years ago would not have been..

And now we'll move to Justin Bergner of G research..

Good morning, Rich. Good morning, Phil. Just on the renewables quickly, a lot been hashed out. When I do the math and look at the bars. It looks like there's about 50% growth in 2020. I guess there's some contribution in organically from BEKA, just it sort of in the right ballpark there.

And you did say that you're expecting further growth in 2021?.

In the right ballpark and, yes, further growth in 2021. Not at that same percentage, it would be a lower percentage..

Okay, great.

Switching to the price cost side, you mentioned, I think you expect flat price in 2021? Or was it flat sort of price cost?.

My comment was flat price. And obviously, we've got a lot of self-help on the cost side not ready to call the, I'll say the more variable part of the cost side of the cyclical costs of steel cost.

But with flat price, I think price cost could be positive with the exception what Phil said we've got the one-time benefit of the second quarter could be a little bit messy, but for the year, we think we could eke out a little bit of price, positive price costs..

Okay, and then lastly, just on the destock restock dynamic, it seems like you still expect across the system sort of slight destocking in 4Q.

But if the destocking is coming down in 4Q and sort of call it flat in 1Q and shifting to a restock thereafter, it would seem like normal seasonality would actually be equivalent to a very weak recovery because the destocking stocking trend is starting to shift even if it's still negative.

Is that accurate?.

No, I don't think so. Because I think if you look back at, particularly the end of 2016, which was when our markets inflected off of a tough 2015 and beginning of 2016. And then you look at 2017, where we have broad based market strength. A really strong Q3 to Q4 for us would be flat to up 1% or 2%.

And so, again, just this seasonality impact of is pretty hard to overcome. So but then you look at what we did from the first quarter of those. If you're say down to flat Q3 toQ4, you look at Q4 to Q1, the last four years has been plus two, which was not a strong market front going from 2019 to 2020 plus 7 plus 12 and plus 7.

So I think the Q4 to Q1 is more indicative of the strength of the markets..

We will now take our last question from Christopher Dankert of Longbow Research..

Hey, morning, guys.

Just kind of want to dig in here again, I know it was a difficult question, but is there any way to kind of quantify the crosslink benefit we've been seeing from including Diamond and Lovejoy and kind of expanding further into power transmission over time, or perhaps another way, just how these path [Indiscernible] been performing versus expectations maybe?.

Well I think, Chris, it's a great question. And it's really one where obviously, one of the big challenges we look for and adding products to the portfolio is the opportunity to cross-sell.

So, Rich, mentioned the ability - the relationships we have with the wind turbine manufacturers and the gearbox manufacturers puts us in a position to bring the lubrication systems that goes so known for into that space, which then gives us obviously, more revenue opportunity.

With Chain, we've talked about the opportunity to take Diamond which is a premier brand in North American distribution, combine it with our drives business and really take it to the next level with both distributors and even receiving some of the installed base with Carlisle.

Belts was a great story where we were able to take what was a predominantly OE business with our industrial power transmission belts take it into distribution where every time every sale, we make in distribution is a really nice mix up opportunity.

I think the list goes on and on and it varies by product, I think you've hit the nail on the head, I think the couplings, the chain, the belts probably provide the closest lubrication obviously the closest synergies with our bearing product portfolio. The linear motion is a little bit different, but still some nice opportunities there as well.

And then obviously on the gear side now we've got not only the premier gear services business in what we think in the world in Philadelphia gear, we've also got Cone Drive in its product portfolio, as well as the Marine business we've been building and continue to add on to. So it is clearly part of the value proposition.

We're seeing that it's one where it's not a lot of home runs. It's a lot of singles and doubles, but our teams around the world when they go to visit customers; they're bringing the entire Timken portfolio with them, making joint sales calls wherever they need to.

And we're really excited about what we see, we think we're probably still in the early to mid-innings of this opportunity. And I think there'll be a lot to look forward to over the coming quarters and years..

I think I'd just add it's been a pretty powerful combination. It's not, again, with our business model of the opportunities we're seeking to fill sports analogy, it's singles and doubles, not home runs.

It also takes a little time and a lot of it's, again, over time when you get the digital connectivity done, where - you're on the same CRM system can consolidate shipments, et cetera. Yes, I would say it's pretty powerful..

Got it. And thanks so much for the details, guys. And again, I guess last one for me, renewables in China obviously an incredible story for you. But you mentioned the China was up year-over-year, or excuse me, India was up year-over-year as well. And if I remembering correctly, that's more heavy truck off highway focus.

So is that the demand that's returning in India?.

It is, I would say the third quarter of last year was an easier comp than the first half we had that. And then also India has become a renewable energy market for us as well. So I would say the Indian market was solid year-on-year, but probably the growth was renewable driven..

And with that, ladies and gentlemen, that does conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Frohnapple for any additional or closing comments..

Okay, thanks, Catherine. And thank you everyone for joining us today. If you have any questions after today's call, please contact me again. My name is Neil Frohnapple and my number is 234-262-2310. Thank you. And this concludes our call..

And again, ladies and gentlemen, that does conclude today's call. We like to thank you again for your participation. You may now disconnect..