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Operator: Good morning. My name is Glen, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Timken’s Fourth 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. Thank you. Mr. Frohnapple, you may begin your conference.

Neil Frohnapple: Thanks, Glen, and welcome everyone to our fourth quarter 2022 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 Web site 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 Web site. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today’s call is copyrighted by The Timken Company, and without expressed written consent, we prohibit any use, recording or transmission of any portion of the call.

With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Richard Kyle: Thanks, Neil. Good morning and thank you for joining our call. Timken delivered another excellent quarter which concluded an outstanding year. Organic revenue in the fourth quarter was up 10%, demand continued to be strong, with North America and Asia both up double-digits. Price contributed meaningfully to the fourth quarter revenue gain, and our outgrowth initiatives also added to the results. Fourth quarter EBITDA margins improved 380 basis points from prior year, with improved price-cost being the largest driver. Earnings per share of $1.22 was a record for the fourth quarter, and was up 56% from prior year. We also closed on the GGB Bearings acquisition and the Aero Drives Systems divestiture, and purchased 250,000 shares.

And free cash flow in the quarter was very strong at $186 million. For the full-year, we delivered 9% total growth, and around 12% organic growth, which was the second consecutive year of double-digit organic growth. Organic growth was at least 10% all four quarters of the year, and we start ’23 with very good momentum. EBITDA margins, of 19%, were up 160 basis points from ’21, and were more consistent through the course of the year. Our price realization exceeded the 4% that we guided to at the beginning of the year, and price improved sequentially each quarter for the second straight year. The rate of cost increases leveled off around mid-year, but costs were up over prior year each quarter, and we remain in an inflationary environment. There have been a lot of moving pieces on costs.

Steel and logistics were the early inflationary pressures. They have both eased off peak, but labor, energy, other material, and SG&A costs all increased. Internal inefficiencies from supply chain and labor challenges were better than ’21, and improved through the course of the year but remained elevated. Earnings per share, of $6.02, we 28% over last year’s record level. Free cash flow, of $285 million, was up from prior year. In addition to the M&A, we continue to invest about 4% of sales in CapEx for growth and cost initiatives. We advanced our products, advanced our footprint, improved our productivity, invested in our digital platform, and expanded our capacity through these investments. We also purchased about 4% of our outstanding shares during the year, and we ended the year with a strong balance sheet.

We were also named one of America’s Most Responsible Companies, by Newsweek, for the third year in a row. This recognition underscores our commitment to being an excellent corporate citizen. We’re driving sustainability through the products we make, the industries we serve, and across our global operations. We also invest in the development of our people, the diversity of our workforce and safety across the enterprise. In summary, 2022 was a very good year for industrial demand, but also had a lot of unexpected challenges. And we once again capitalized on the opportunities while navigating through and responding to the challenges to deliver outstanding results for both our customers and our shareholders. Before I turn to ’23, I want to highlight slide 12 in our quarterly deck.

This slide is from our recent Investor Day, and is updated for our ’22 results, and our new adjusted EPS definition. Through the five-year period, we delivered an 8% revenue CAGR, an 18% earnings per share CAGR, and an average EBITDA margin of 18.5% with only 180 basis points of margin variation through the five years. When you reflect back on the macroeconomic volatility through that five-year period, from tariffs, pandemics, inflation, supply chain challenges and more, these results demonstrate the resiliency of the demand for our products and technology, the diversity of our business, and our commitment and capability to drive value through economic cycles. So, while uncertainty remains elevated today, Timken is well-positioned to continue to create value in the years to come through industrial cycles, and through evolving technologies.

Timken enters ’23 a larger and better version of the company that we were in 2018, and we are confident that we will be able to continue the trajectory of this performance in the years to come. And we expect that ’23 will be a good start to the next five years. Turning to 2023, I will start with our recently announced acquisitions. First, American Roller Bearing, or ARB; ARB has been family-owned and operated in the United States for three generations, they have a long-standing position in the U.S. process industries markets; they have a large install base of products throughout the U.S. and sell primarily through bearing distributors through a fragmented base of OEMs and end users. These are markets and channels that Timken knows very well, and we are confident that we can create value for customers and shareholders through integrating ARB in the Timken’s engineered bearings portfolio.

ARB enters the portfolio at modest EBITDA margins, but we expect, over time, to get it to Process Industries’ level margins. Nadella will add a combination of new products to our portfolio, and also expand existing product lines and market positions. The largest product line is linear motion actuators. The product compliments and scales our linear motion platform, and we will deliver strong synergies with our Rollon business. Nadella also brings industrial needle roller bearings, ball screws, and rod ends to the portfolio. Timken entered the rod end market with the 2020 acquisition of Aurora, and adding Nadella will globalize our rod end market position. Nadella will further scale our position in several of our targeted markets as they serve a fragmented customer base across markets like automation, packaging, food and beverage, logistics, and medical.

Nadella will join Timken with a margin profile slightly above the company average. And with synergies, we will both expand margins and accelerate the global growth rate. We’re excited to be adding both ARB and Nadella to our portfolio. Upon completion, we will remain comfortably within our targeted leverage ratios. And with our ’23 cash flow, we can continue to be opportunistic with capital allocation opportunities through the year. Turning to our markets, in slide seven in the deck, we are guiding to a 3% organic revenue increase in total. We expect price to be over 2% for the year, so price comprises over half of the organic revenue outlook. We are confident in achieving at least the 2% price. Starting on the right, we’re expecting a strong full-year in renewals, driven by Asia wind, both from the market as well as from our outgrowth tactics.

This is a market where we have good visibility into demand for several quarters out. The order book and backlog are strong, and customers are committed to a step up in revenue for the full-year. We’re planning for the rest of our markets to range from flattish to up mid-single digits. I’ll talk more about the first quarter in a moment, but this guide assumes we will start the year well above the 3% level, and then moderate the second-half of the year partly from tougher comps, but primarily from taking a cautious view of the markets where we do not have extended visibility. We are also anticipating some channel inventory pullback in this outlook as supply chains improve and customers return managing inventory with higher precision. If our outlook for the second-half proves to be low, we will be in excellent position to capitalize on the situation.

From a margin standpoint, we are guiding to roughly flat margins for the year. As I said in my ’22 comments, there have been a lot of moving pieces on the cost and margin front and that continues into ’23. We are expecting price cost to be modestly positive for the full year. We also expect margin help from better operational execution, supply chain improvements, our ’22 CapEx and footprint investments, and lower steel and logistics cost. However, we remain in an inflationary environment. And we do anticipate further cost increases in SG&A, labor, and other purchase materials. Currency and mix are also expected to be margin headwinds for the year. We have been dealing with a rising and volatile cost situation for a couple of years. And I am confident that we will successful navigate through the price cost dynamics again in ’23.

Earnings per share would be up about 5% at the mid-point. We expect much stronger cash flow in ’23 primarily from higher earnings and lower working capital requirements due to both moderating growth rate as well as improved supply chain execution. While we are taking a cautious view on the second-half, we are starting the year strong. We have good visibility for the first quarter and well into the second quarter. And we expect organic revenue to be up high single digits in the first quarter. We have a healthy backlog, good order input, and the benefit of another sequential price improvement. We would also expect our normal sequential step-up in margins from the fourth quarter to the first. In summary, we delivered an excellent year in 2022 both strategically and financially, and we are off to an excellent start to ’23.

We are in a great position to extend our strong performance. We are excited about the opportunities in front of us, and we feel confident in our ability to continue to create shareholder value for a long-term as we continue advance Timken as a diversified industrial leader.

Philip Fracassa: Okay, thanks, Rich, and good morning, everyone. For the financial review, I am going to start on slide 14 in the presentation material with a summary of our strong fourth quarter results which capped off a record year for Timken. We posted revenue of close to $1.1 billion in the quarter, up over 7% from last year. We delivered an adjusted EBITDA margin of 17.2% with strong year-over-year margin expansion. And we achieved record fourth quarter adjusted earnings per share of $1.22, up 56% from last year and over 20% than our next best fourth quarter. Turning to slide 15, let’s take a closer look at our sales performance. Organically, fourth quarter sales were up 10.2% from last year driven by strong growth across most end markets and sectors, and with healthy contributions from both volume and pricing.

Looking at the rest of the revenue block, foreign currency translation was a sizeable headwind in the quarter driven by a stronger U.S. dollar against the euro and other key currencies. And the impact of acquisitions net of divestitures contributed modestly to the top line. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and acquisitions. Let me touch briefly on each region. In Asia-Pacific, we were up 10% driven by strong growth across the region with renewable energy and distribution posting the strongest sector gains. In North America, our largest region, we were up 13% with most sectors up led by off-highway, distribution, and general and heavy industrial. In Latin America, we were up 5% driven mainly by year-over-year growth in distribution.

And finally, in EMEA, we were down slightly as lower renewable energy revenue and lost Russia sales were mostly offset by growth in other sectors. And notably if you exclude Russia, we would have been up modestly in the region for the quarter. Turning to slide 16, adjusted EBITDA in the fourth quarter was $186 million or 17.2% of sales compared to $135 million or 13.4% of sales last year. Looking at the increase in adjusted EBITDA dollars, we benefited from strong price mix and higher volume in the quarter, which more than offset the impact of unfavorable net manufacturing performance and higher SG&A other expense. As you can see on the walk, material and logistics costs were relatively flat year-on-year, a significant improvement from the sizeable headwinds we’ve experienced over the past several quarters.

Overall, we delivered an incremental EBITDA margin of 68% on the higher sales driven by our positive price cost performance, which enabled us to expand margins by 380 basis points, versus the fourth quarter of last year. Let me comment a little further on a few of the key drivers in the quarter. With respect to price mix, pricing was meaningfully higher in both mobile and process industries reflecting our significant pricing actions over the past year. Mix was also positive, driven by our strong growth in attractive sectors like industrial distribution. Moving to material and logistics, as I mentioned, the year-over-year impact in the quarter was largely neutral as higher material costs from continued supplier price increases are mostly offset by lower logistics and transportation costs.

I would also point out that material and logistics costs were down sequentially from the third quarter. On the manufacturing line, we were negatively impacted by continued cost inflation, including energy and labor, as well as lower production volume. And we were also impacted by higher costs that had been capitalized to inventory in prior periods. This will continue to be a headwind in 2023. On the positive side, we’re seeing improved execution from our teams around the world as supply chain and other constraints continue to ease. We should also benefit more in 2023 from our manufacturing footprint actions, and other self-help initiatives. And finally, on the SG&A other line, costs were up in the fourth quarter driven by higher compensation expense, and other spending to support the increased sales levels.

But I would point out that SG&A expense was in line with our expectations, and up only slightly organically from the third quarter run rate. On slide 17, you can see that we posted net income of $97 million or $1.32 per diluted share for the quarter on a GAAP basis, which includes $0.10 of net income from special items. On an adjusted basis, we earned $1.22 per share up 56% from last year, and a record for the fourth quarter. You’ll note that we benefited from a lower share count in the quarter, reflecting the significant buyback activity we’ve completed over the past year. And lastly, the higher interest expense and 25.5% adjusted tax rate are in line with our expectations. Now let’s move to our business segment results starting with Process Industries on slide 18.

For the fourth quarter, Process Industries sales were $586 million, up 11.1% from last year. Organically, sales were up 13.5% driven by growth across all sectors, with distribution, heavy industries and general industrial, posting the strongest gains in the quarter. Pricing was positive once again and that acquisition contributed nearly three percentage points of growth to the top line. But currency translation was a sizable headwind in the quarter, reducing growth by over 5%. Process Industries adjusted EBITDA in the fourth quarter was $143 million, or 24.4% of sales compared to $105 million, or 20% of sales last year. The increase in Process segment margins reflects the benefit of positive price costs and higher volume, which more than offset the impact of higher manufacturing and SG&A costs in the quarter.

Now let’s turn to Mobile Industries on slide 19. In the fourth quarter, Mobile Industries sales were $496 million up 3.3% from last year, organically sales increased 6.4% with the off highway and rail sectors posting the largest revenue gains. We were also up in heavy truck while aerospace and automotive are relatively flat. Pricing was positive once again, our net acquisitions contributed modestly. Currency translation was a headwind in the quarter, reducing growth by nearly 4%. Mobile Industries adjusted EBITDA in the fourth quarter was $56 million or 11.3% of sales compared to $41 million or 8.6% of sales last year. The increase in Mobile segment margins was driven by the benefit of positive price costs which more than offset the impact of higher manufacturing and SG&A costs.

And notably, mobile margins were up sequentially from the third quarter, which is unusual given our seasonality and reflects a moderation of costs over the past few months. Turning to slide 20, you can see that we generated operating cash flow of $242 million in the quarter. And after CapEx, free cash flow was $186 million, or more than tripled what we delivered last year. Looking at the full-year, free cash flow was $285 million, up from $239 million in 2021. The higher free cash flow was driven mainly by earnings growth, which more than offset the impact of higher working capital to support the record sales levels, as well as higher CapEx to fund our growth and operational excellence initiatives. During the year, Timken paid $92 million in dividends, or $1.31 per share, making 2022 the ninth consecutive year of higher annual dividends per share.

In addition, we repurchased over 3 million shares of stock during the year or about 4% of total shares outstanding, and we have nearly 6 million shares remaining on our current authorization. We also completed the acquisitions of GGB and Spinea and with those acquisitions, 2022 marks the 13th straight year where Timken has made at least one acquisition. When you take into account our CapEx, dividends, net acquisitions and share buybacks, Timken deployed just over $900 million of capital in 2022. And we did it while maintaining a strong balance sheet. Turning to the balance sheet, we ended the year with net debt-to-adjusted EBITDA at 1.9 times while within our targeted range. In addition, we completed several debt financings during the year to provide us with additional financial flexibility, including the $350 million issuance of 10 year bonds back in March at an attractive fixed rate.

We also refinanced and upsized both our revolver and U.S. term loan in December, extending their maturities to 2027. With our strong capital structure and cash flow, we remain in a great position to continue to drive shareholder value creation in 2023 and we’re off to a great start with ARB and Nadella. Now let’s turn to the outlook with a summary on slide 21. As Rich highlighted, we expect strong top and bottom line performance again in 2023 with a large step up in free cash flow generation. Starting on the sales outlook, we’re planning for another year of record revenue, with sales up 4% to 8% in total or 6% at the midpoint versus 2022. Organically, we’re planning for revenue to be up above 3% at the midpoint, driven by positive pricing and modest volume growth, with our volume assumptions, reflecting some prudent cautiousness around the second-half, given our limited visibility.

We expect the acquisitions net of divestitures to contribute around 3.5% to our revenue for the full-year. This includes the recent ARB acquisition, but does not include Nadella. We will include Nadella in our outlook after the deal closes, which will be around the end of the first quarter. And finally, we expect currency translation to be a 50 basis point headwind to the top line for the full-year based on December 31st spot rates. On the bottom line, we expect record adjusted earnings per share in the range of $6.50 to $7.10 per share, which represents around 5% growth at the midpoint versus last year on a comparable basis. Note that the guidance range reflects our new definition for adjusted EPS, which excludes acquisition intangible amortization expense of roughly $0.50 per share.

I’ll come back to this later in my remarks. The midpoint of our earnings outlook implies that our 2023 consolidated adjusted EBITDA margin will be roughly in line with 2022. Note that our margin assumption reflects a sizeable headwind from currency off the positive impact we saw last year. Organically, we should see strong incrementals as favorable price costs momentum, and improved operational execution should more than offset headwinds from higher manufacturing, and SG&A costs, lower production volume and unfavorable mix. Moving to free cash flow, we expect to generate approximately $400 million for the full-year 2023 of approximately 90% conversion on net income at the midpoint. This is over $100 million higher than 2022 and reflects the impact of improved earnings and working capital performance.

We’re estimating CapEx at around 4% of sales for the year, with the spend continuing to fuel our long-term growth and operational excellence initiatives. And finally, we anticipate higher interest expense, and we expect our adjusted tax rate to remain around 25.5%. Turning to slide 22, let me comment further on the revision to our adjusted EPS calculation. As I mentioned, our new definition for adjusted earnings excludes acquisition intangible amortization expense, which has grown in recent years with the cumulative amount of acquisitions we’ve made. Overall, we believe this change will provide a better representation of our core operating earnings and improved comparability of our performance versus peers. So, to summarize, the company delivered strong results again in the fourth quarter to finish another record year.

Our team continues to win in the marketplace, and drive our profitable growth strategy. We’re off to a strong start in 2023, and we’re well-positioned to continue to scale as a diversified industrial leader through any environment. This concludes our formal remarks. And we’ll now open the line for questions. Operator?

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Operator: Thank you. With our first question, comes from Steve Barger from KeyBanc CM. Steve, your line is now open.

Steve Barger: Thanks. Good morning.

Richard Kyle: Good morning.

Philip Fracassa: Morning, Steve.

Steve Barger: Rich, you said price is 2% of the 3% organic growth. If I go back to slide seven, you have the worst case for the four sectors as flat, and most of the sectors are mid single-digit or better. Can you talk about which of the end markets, if any, you think are going to have negative volume growth this year?

Richard Kyle: Yes, and we don’t specifically split out the volume versus the price. But certainly if those middle markets all have price realized over the last year on them, so if they end up at zero their volume would be down a little bit.

Steve Barger: But it sounds to me like you’re taking a pretty conservative approach just based on what this slide looks like, since you do expect positive price-cost. I guess I’m trying to get to the idea of whether you really think volume is negative or positive in 2023 for most of your end markets?

Richard Kyle: Well, it’s certainly not negative to start the year. And if you look at this, slide seven, we have four markets on this slide that we have visibility well into the second-half on, renewable energy, aerospace, heavy industries, and marine. So, the four markets where we have good visibility into the second-half volume as well as price were all looking, overall, for them projecting to be up mid single digits or more for the full-year. And as I said, we’re looking to be up high singles organically in the first quarter. So, certainly to get to these numbers for the full-year, you’d have a moderating, from high single digits down to low single digits as the year advanced, in total.

Steve Barger: So, as you look at your internal model, do you show positive growth in the back-half or in 4Q specifically or do you expect that that goes negative in the back-half?

Richard Kyle: With price, we’d be still modestly positive.

Steve Barger: Great, thanks for the time.

Richard Kyle: And — but I’d also want to emphasize again as we — as you part there, Steve, again, we don’t have visibility into that. We’re taking a cautious outlook into it. But again, we’re starting the year up. We just finished the fourth quarter up 10, and starting the year up high single.

Steve Barger: Understood. Thanks.

Operator: Thank you, Steve. With our next question, comes from David Raso from Evercore. David, your line is now open.

David Raso: Hi, thank you. I have been jumping between calls, so sort of if I missed this, but earlier, you said mix would be part of why margin is only flattish year-over-year. Did I miss some growth guide particular to Process versus Mobile, where Mobile is up more? I’m just trying to figure out why would the mix be down? And was there something unique toward the end of ’22 that really skewed the mix? I mean, obviously, process in general, right, gives you the better margins. But did I miss something about the bigger mix comment or is there already been something within Process?

Richard Kyle: I don’t think we made a comment. But within Process, if you look at slide seven, with renewable up high singles and distribution flattish, that’s negative mix within Process. So, we actually expect —

David Raso: That’s a little destock and distribution, that that’s sort of a — the deflator a little bit?

Richard Kyle: Yes, I’d say a little bit of destock and just moderating more of a sell-through. And a couple of our U.S. distributors have made statements that they’re looking to manage inventory a little tighter this year. But again, within that, we would expect, within this guide, for Mobile margins to be up a little bit, Process margins to be down a little bit. And then, as Phil also said, you have the currency impact across both —

Philip Fracassa: Yes, I was just going to comment, David, as Rich said, I mean our mix is really driven by the — obviously, the mix of OEM, not just in process but across the company, the OEM growth versus the distribution or aftermarket growth. And we have both the distribution and services sectors, if you will, sort of neutral for the year. But we got renewables up high single digits-plus, as well as a lot of the other OEM markets up. And that dynamic, compared to 2022, where distribution was up significantly, is producing a little bit of a mix headwind which would affect process a little bit more than Mobile. And then Mobile, a lot of the self-help we’ve been talking about over the course of the year around footprint and consolidations, and the like, should help Mobile, as Rich said, improve margins year-over-year with Process feeling a little bit of a headwind. But net-net, roughly neutral year-over-year, at least as we’ve assumed it in the guide.

David Raso: Okay. No, that adds a little more legitimacy to the guide. Just distribution is such a powerful force in that business, but the destock, if you can give us a little bit of insight on those conversations you’ve had? I think distribution is, what, I’m not including the services, just really distribution, was it 40%-45% of the division, something like that, if I remember correctly? How long is the destock when you speak to them? Is it just a slow grind down over the course of the year or is it more of a — you know, in the first quarters, and then they’re ready to go.

Richard Kyle: I wouldn’t overplay it. It’s more — it’s not an increase in inventory, which is what we’ve had the last two years, right? So, again, as you look at the comps, they’ve building inventory, so even a leveling off in going to the sell-through rate is a reduction or a tougher comp. And I wouldn’t say there is a big destocking, but lead times have improved, transit times have come down, over-ordering is over. And we’re just anticipating a little bit of headwind from that. I think we already had a little bit of a headwind with that in the fourth quarter, still grew 10% organically. And we expect a little bit more in the next couple quarters.

David Raso: All right, that’s helpful. So, not as much an absolute destock, just was a little more of a benefit in ’22, that we can’t quite ?

Philip Fracassa: Exactly.

David Raso: Okay. That’s really helpful. Thank you so much.

Philip Fracassa: Yes, and the extended supply chains. I mean, the extended supply chains have had a lot of stranded inventory in the supply chain that I think is coming out.

David Raso: All right, terrific. Thank you.

Richard Kyle: Thank you, David.

Operator: Thank you, David. We have our next question, comes from Rob Wertheimer from Melius Research. Rob, your line is now open.

Rob Wertheimer: Thank you. And just to clarify. So, I guess I went into the call assuming there would be a channel inventory drawdown there, and the fact that you’re calling out as more the prior years had an inflow from distributors and others taking more inventory, you’re not and just getting a large drawdown in this guide?

Richard Kyle: A large drawdown, no, I would not say there’s a large drawdown. There’s a drawdown, but not a large one.

Rob Wertheimer: Okay, just a quick question on pricing then. So, you’ve obviously captured a lot. Your margins have reflected that in the last couple quarters especially. Are you back to kind of neutral-ish with the 2% outlook for next year? Is there still more catch-up to go and that’s embedded in the two or are you still working on getting catch-up pricing as contracts or other things roll though? And just in general, it’s been a tumultuous couple years for pricing, I wonder if you could step back and just comment on your overall structural initiatives, COVID and inflation out of the picture for how you’re capturing price? Thank you.

Richard Kyle: Yes, I think if you look over — if you added our two years of walks, maybe two years in a quarter because we really started in — 9-10 quarters ago, inflation, we would be close to neutral, maybe slightly behind, with a little bit of offset into our volume. So, we’re close to neutral. The 2% — more than 2% is expected the very modest — is just expected to be slightly better than neutral. But we’re looking at roughly neutral. And then, to your latter question, we feel good about our ability to capture price. We feel good about your ability to respond to volatility in commodity prices and supply chain issues, et cetera, I think we’ve demonstrated that. We’ve got — as talked before, we’ve got thousands of customers and a lot of complexity in our price, which tends to make it sticky and also tends to make it a little more complicated when these things happen than just pushing a button and raising and in a matter of a week or a month or a quarter.

But we’re there now. We’ve got good systems and processes. And feel good about being able to adjust to whatever comes our way in the course of ’23.

Rob Wertheimer: Thank you.

Operator: Thank you, Rob.

Philip Fracassa: Thanks, Rob.

Operator: We have another question, comes from Stephen Volkmann from Jefferies. Stephen, your line is now open.

Stephen Volkmann: Great. Good morning, guys. Thank you.

Richard Kyle: Morning.

Stephen Volkmann: And my question was around pricing as well. I guess I’m just surprised at your two-points kind of a forecast for ’23 because, obviously, you’re coming off a fourth quarter that’s way bigger than that. And I think your chief competitor sort of said mid single-digit. So, why wouldn’t we think about follow-on pricing for actions done during the year in ’22? Why wouldn’t that kind of have a stronger effect in ’23? And I think, Rich, you even said something about another recent price increase. So, are you seeing declines, I guess, is the other way to ask this, in certain parts of your customer base already and is that sort of the offset? Just help us think through why that wouldn’t be higher?

Richard Kyle: Yes, on the chief competitor comment, I’m not sure where they would stand on going back to pandemic to current, if they would be behind that or looking to play catch-up on that or not. But as I said, we, as you go back and add ours up, we’re pretty close to neutral, and the more than 2% would build on that modestly. And again, we’ll see how the cost dynamic goes through the year just to how much of build that is. We would expect the greater than 2% under any normal moderating improving cost scenario. And then, if costs go up we’d probably expect that to go up a little bit more. So, I think we’ve got good coverage there. And we feel good about the 2%. There’s no — where we have indexed pricing to steel or currency, there could be some give-back there happening. But, in total, as we show our walks, our costs have not gone down in total. We need the 2%, and we’ll get to 2% net of the — any index clauses is the expectation.

Philip Fracassa: Yes, and just maybe a clarification, Steve, the fourth quarter walk would also include — mix was favorable in the fourth quarter. So, there would be favorable mix in there as well. But as Rich said, we’re targeting the two, looking to beat the 2% for the year, and feel really good about the outlook for both — for price-cost heading into ’23.

Stephen Volkmann: Okay. And it feels like you’re going to start the year, like first quarter is going to be significantly higher, I would think, just based on what we’ve seen recently. And I guess that implies that we exit the year flat or negative on price. Is that the way to think about it?

Richard Kyle: Well, no. I think price will still be up in the fourth quarter. But we have been improving price sequentially for nine are 10 quarters. So, every quarter the year-over-year comp gets harder. And as you highlight, that our fourth quarter number was pretty sizable, so that becomes a challenging comp for us in the fourth quarter, but would still expect it to be positive. But to your point, the first quarter would be pretty good because it’s on a lower comp than what the fourth quarter just was. And we just rolled some more sequential pricing in.

Philip Fracassa: And as we said, we’ve taken a conservative view on the second-half for purposes of setting the guide. So, I mean, if we are in a more robust environment, which translates to a more robust cost environment, we have the ability to continue to move price as needed, as we’ve shown over the last couple of years. So, I think we do have those levers if we need to pull them; it’ll all depend on where we’re at in time and space as we enter the back-half of the year.

Stephen Volkmann: All right, I appreciate it, thanks.

Philip Fracassa: Thank you, Stephen.

Operator: Thank you, Stephen. We have our next question, comes from Bryan Blair from Oppenheimer. Bryan, your line is now open.

Bryan Blair: Thank you. Good morning, guys.

Richard Kyle: Morning.

Philip Fracassa: Hi, Bryan.

Bryan Blair: It’s encouraging to see renewable energy transitioning back to growth mode, and it certainly aligns with the market projections we’ve seen on the wind energy side, and particularly for offshore. And just curious, in terms of the high single-digit-plus growth outlook for the sector, how is your team thinking about relative growth rates on the wind and solar side? And I’m assuming that your projections are going to be back-half weighted for the year? Again, specific to that space, and how should we think that about that cadence?

Richard Kyle: On the split between wind and solar, for us, wind stronger. We’ve had more — we have more outgrowth tactics there, we’d have more capital going into that space; both markets, good. And then, there’s also — within solar, there’s probably a little more — well, there is a little more split between if fixed technology wins out over rotating technology, and then which technology wins as well in the solar channel. So, we have a different mix there, and depending on which growth rate is, whereas with wind, we participate across that, a little higher in gear drive than direct drive, but we have good content across all of it. So, we’re more neutral on the technology side, and we have more self-help. So, I would expect the growth rate to be higher on winds, the full-year. You want to talk about the cadence for the year?

Philip Fracassa: Yes, I was going to say, Bryan, I think the — we’ve seen momentum build in renewable and wind, in particular, the last couple quarters. So, we would expect to be at or even — could even be slightly above that rate in the first quarter just given the comp we’d be working off of, as well as the momentum we’ve seen in the last couple quarters, kind of building into the first.

Bryan Blair: Yes, appreciate the color there. And can you provide an update on Spinea and GGB integration, and offer a little more detail on the sources and potentially the magnitude of the ARB synergies? Sounds like there could be a little bit of heavy lifting to do there? And then if we combine Spinea and GGB carryover with ARB contribution, how much deal accretion you have baked into the guide, so understanding that Nadella, for the time being, is not factored in?

Richard Kyle: Yes, maybe I’ll take them in reverse order. So, ARB is certainly some heavy lifting, but also, again, family-owned business for several generations. So, when you look at our scale, our U.S. manufacturing presence, our purchasing power, et cetera, I think we’re going to be able to bring pretty quick synergies to that. That being said, going from the modest EBITDA margins that joins us to Process Industries’-type margins will certainly probably be more ’25 before we get up to that level. But I would expect improvement — significant improvement in the run rate by the second-half of this year, and then another step up in next year before we would get to that; a lot of synergies within that business for us. GGB, similar, it’s been integrated into our bearing business.

The early priority was standing up some of the carve out from EnPro, and that’s largely done. And so, we’re operating largely without them and weaning ourselves off the transition service agreements there. So, really focused now on integrating that, and a lot — probably more emphasis so far on sales synergies than the operational side, but I think everything looks good there. And we have a good plan in place for that this year. And then Spinea, pretty light synergy case for Spinea, that was really about entering a new product technology in a growing market. So, certainly there are some synergies in selling our existing harmonic product along with their cycloidal product. But they are largely different technical solutions for different applications, and not an enormous amount of operational synergies there.

So, all three, exciting, and particularly since we didn’t have Nadella in the guide at all, I’ll let Phil clarify the accretion comment.

Philip Fracassa: Yes, so specifically with ARB, it would have been in the guide — the guide that we provided, so that would be very, very modestly accretive just given the size. Nadella will add both to the revenue as well as all the way down after it closes. And from an accretion standpoint, under the new definition, it would be likely — depending on timing, likely north of a nickel, somewhere between sort of $0.05 to $0.10, somewhere around there.

Bryan Blair: Okay, appreciate it. Thanks again guys.

Richard Kyle: Thanks.

Operator: Thank you, Brian. With our next question comes from Michael Feniger from Bank of America. Michael, your line is now open.

Michael Feniger: Hey, guys, I recognize you’re taking a conservative approach to the outlook with a lack of visibility just on the pricing front, how much pricing just rolls into 2023 alone when we think of that 2% increase? And can you just remind us in a typical year, when do we normally see price increases? I know it’s different between the OE and the distribution, last year was an abnormal year, so, where we kind of look like in a normal year, when we think of, when we see these price increases?

Richard Kyle: In a normal year, we would see our biggest sequential step up from Q4 to Q1. And we’ve seen that in the abnormal years last couple of years as well, the biggest sequential improvement from Q4 to Q1, but then we’ve had this steady sequential growth from there. And I would expect a modest step up from Q4 to Q1, and then further sequential pricing and gains through the year like we’ve done the last couple years, I think the difference this year could be if steel prices moderate, then there would be a little more netting, which again, we factored into that more than 2% outlook for the year. So, I think to the earlier question, comp lower because of the sequential in the first quarter. So, we did expect pretty good price realization in the first quarter.

Michael Feniger: Thank you. And there’s a fairly big acquisition in the industrial motion space for 13, 14 times EBITDA multiple, way above where you’re trading today. How big is industrial motion of your portfolio right now? And I know you just announced a few acquisitions. Is there any view to slow that down, integrate and maybe shift more to repurchasing given that valuation discount of what we’re seeing out there in the market to where your stick shares are trading?

Richard Kyle: I mean, we did purchased 4% of the outstanding shares last year, and we’ve been pretty active in the buyback market for the last seven or eight years. And I don’t think the acquisitions that we’ve done would preclude us from doing that. But I will all say we don’t think it’s either or answer. And the answer is probably both. And we’ve been, and we’ve been doing both.

Philip Fracassa: Yes, I would just answer the question, Mike. Industrial motion would be roughly $1.4 billion in revenues. So, well over a $1 billion now, and we’ve targeted getting that to $2 billion, as Rich said, I think with our and we like what those businesses are doing for our portfolio, Rich showed the slide of our five year performance, that part of our portfolios contributed significantly to that performance. And while there’s a big acquisition and spending, there are still, we believe ample acquisition opportunities out there for us to continue to move the needle. So, I think you’ll see us continue to advance on the M&A front, with a disproportionate view toward industrial motion to continue to build that out, but still have the ability to buy back stock.

And we’ve systematically done that. And as I mentioned, we allocated $900 million of capital across the board in 2022, and across all across all fronts, buyback, M&A, dividends and CapEx. And we’re in a great position to continue doing that as we move forward with our balance sheet in such strong condition.

Michael Feniger: Great, and I’ll just sneak in one last question I wrote — you might have addressed this already. I know there’s a lack of visibility right now. Have you observed anything in January or early February, that would provide cause of concern, or conversely signs of encouragement, given some of that macro high level data points we’ve seen out there. Thank you.

Philip Fracassa: Yes, I think I commented on this in my statement. I mean, we’re starting the year very strong. So, I think in general, the environment that we’re operating in here in the first week of February is a very positive one.

Michael Feniger: Thank you.

Richard Kyle: Thanks, Mike.

Operator: Thank you. Our next question comes from Dillon Cumming from Morgan Stanley. Dillon, your line is now open.

Dillon Cumming: Great, good morning. Thanks for the question. Sort of as quickly on the APAC revenue growth in the quarter, another sequential acceleration in the rate of growth probably skews a bit, I think more positive versus some of the other industrial reads have gotten from the channel around China over the last quarter or so. So, could you just talk about how much of the growth there right now is being driven by renewables versus any other kind of growth that we’re seeing across the rest of your end market mix?

Richard Kyle: Yes, certainly our Asia business has become pretty, pretty significant mix to renewable energy. So, our outlook there, I think would continue to give us higher, a more positive outlook as well as more positive results than peers with a more diversified market mix for more industrial market mix.

Philip Fracassa: Yes, I would say Dillon, when you look at the quarter, I mean, it was — we were up 19%, it was broad. I mean, China was up high teens, India, up high teens, the Rest of Asia up in that range. As Rich said, renewable was by far the largest growth sector, but distribution was right behind it, as we continue to see positive performance across distribution as well as other sectors. So, it’s been broad growth, but there’s no question particularly China has been very renewables, at least that’s been the biggest driver in the last few quarters.

Dillon Cumming: Okay, got it, great color. Thank you.

Richard Kyle: And at the results and outlook, the outlook for India is pretty strong in ’23.

Dillon Cumming: Okay, that’s helpful. Thank you. And maybe just one last one on the housekeeping side with regards to the currency impacts, you called that out as a headwind and into your margin bridge for next year. I know, it was still negative in the fourth quarter. But you did talk about some more challenging comps from that perspective as well. Could you just talk about how impactful expense might have been either as a tailwind or a headwind to margins in 2022? And then what you are kind of baking into the headwind for 2023?

Philip Fracassa: Yes, I would just say Dillon, in 2022 with some movements in the currencies, and on the transaction side, we had some transaction favorability in 2022, which was actually, it was a margin tailwind actually helped our margins in 2022 and really, the non-recurrence of that — of those positive gains in 2022 kind of not repeating in ’23, coupled with the continued headwind on the top line, is going to produce year-over-year, pretty significant headwind to margins, just by the flip of that, if you will, from one year to the next. And so, that’s sort of baked into the guide, and really just talking — taking a maybe a bigger step back. And the guide sort of implies 20-ish percent all in incrementals, in that currency being a big headwind.

And then, as you know, M&A comes in at really an EBITDA margin, when you back it out, our organic incrementals with the pricing and operational execution cost moderating I mean, the organic incremental implied in the guide would be much closer to 30% versus 20% and I think that speaks to a lot of the work we’ve been doing the last year, year plus in getting the price cost move in our favor.

Dillon Cumming: Very helpful. Thank you, Phil.

Philip Fracassa: Thanks, Dillon.

Richard Kyle: Thanks.

Operator: Thank you, Dillon. Our next question comes from Joe Ritchie from Goldman Sachs. Joe, your line is now open.

Joe Ritchie: Thank you. Good morning, guys.

Richard Kyle: Good morning.

Joe Ritchie: So, guess my first question, just a clarification question. So, you’re starting off the year with high-single-digit growth. But then kind of the midpoint of your guidance is at 3%. So, I mean it sounds like you’re expecting the second-half to turn negative, I just want to be clear that that is kind of like the expectation into your guide for the second-half of the year?

Richard Kyle: Let’s say we’re probably starting off the year closer to the, the highest single-digit price at the higher end of our guide. So, I’d start there. So, the year is off to a strong start, if you but yes, to go up high-single-digits we’re not expecting anything that would that’s coming off of 10. So, if you go from 10 to 7.5 would be high, the low end of high single-digits, or 8 or 9. To get down to the fourth quarter, you probably got to be down to a 0 to 1 sort of number to come to the midpoint of the guidance. But I would say we’re also as I said, we’re starting the year pretty strong, probably starting more towards the higher end of the guidance.

Philip Fracassa: Yes, I would say, Joe, we like to think of it as, as seen in the back half, we’re sort of the outlook sort of implies a flattening out in the back half of the year as opposed to a decline and as we said, we don’t have great visibility beyond the second quarter. So, we will have to see how things develop over the next couple of months, how the order book fills in. And then, we’ll be able to kind of assess how accurate that is as we moved through the year.

Joe Ritchie: Yes, that’s helpful. And I know you guys are a fairly short cycle business, but because of supply chain issues, some companies have had a little bit more visibility I guess at the start of the year than they normally would. So, I want to hear maybe some comment around whether your visibility is little bit higher than normal today? And then also, Rich, if I just could ask you more broader question like what concerns you — what’s your biggest concern around the year? I want to hear your thoughts on that as well.

Richard Kyle: Well, I would say we have significantly greater visibility than what we normally would. I think the supply chain issues have reduced significantly. They are still there. Everybody had problems operating in China in the fourth quarter as an example. And there is other issues out there. So, our backlog organically if you adjust for the acquisitions and divestures, is up modestly from where it was a year ago. And our run rate of shipping is up again high single digits from where it was a year ago. But, our backlog also peaks around the middle of last year. So, we have been liquidating backlog modestly. So, I would say we have very good visibility out for the next 3 to 4 months. And the demand picture looks quite good.

In our geographic walk, we show that Europe was down modestly as Phil mentioned. If you adjust for Russia, it was up a little bit. But that would include price. So, if you — Europe from a volume in the fourth quarter was down. So, that would be really the only geographic area that’s soft. And to come back and answer your last question, we want to feel really good about the position we are in. I think we are going to get off to a really good start. The midpoint of our guide is based again on I think a pretty cautious softening in the second-half. And even that’s a good result. And we are in an excellent position. But, we are being too cautious on it, we will capitalize on that. And predicting these industrial markets and inflections is not an easy task.

So, focus on where we have the visibility. And then, really focus on growing the earnings power and the revenue of the company through the cycle. And I feel great about that. So, I think we are in a really good position.

Philip Fracassa: One other point, Joe, when you look at the backlog all-in, I mean we are actually higher. We ended the year higher than the end of 2021. So, we are sitting here with a stronger backlog than we had a year ago. And I think that bodes well at least for the near-term visibility.

Joe Ritchie: Great. Thanks, guys.

Richard Kyle: Thanks, Joe.

Operator: Thank you, Joe. Our next question comes from Chris Dankert from Loop Capital. Chris, your line is now open.

Chris Dankert: Hey, good morning, guys. Thanks for taking the questions. I guess first off, Phil you had mentioned when we were talking about the margins in ’23 flattish now. I think on the last call, we were kind of hoping to be able to nudge that a bit higher in ’23. The moving parts there I mean you called out higher labor and material et cetera. But really are there any investment cost keep in mind in that margin guide they are stepping up in the New Year because I assume for the most part, the labor rates and FX was if anything kind of improved versus fourth quarter, no?

Philip Fracassa: Yes, I mean it’s a great question, Chris. I mean as I think about overall with investing, but I would say year-on-year, there’s probably not a sizable headwind there, but as you think about some of the — put the currency aside because that will be a year-on-year negative. And you will see that on the walks as we move through the year. When we talk about SG&A, we are going to have normal labor increases and spending to support the higher levels. We actually, for example, we are going to have higher pension expense just with the change in the discount rate and the like. So, things like that, talked a little bit about the mix with the OEM versus the distribution. You know, the manufacturing line still seeing some inflation there whether it’s labor.

Should see better operational execution, but the other dynamic that happened there is around — lot of the inflation we got hit within ’22 is working its way through the inventory. I think that will be a cost that’s going to come through in ’23. Frankly earlier in the year, we thought we might see some of the come through in ’22. But we are planning at it now to come through in ’23. So, that will be a not a permanent headwind. But, that’ll certainly be just a temporary headwind while it comes through. So, those are the main drivers kind of offsetting the positive price we expect to get, the material and logistics being down, and other self-help and other initiates in addition to the modest volume kind of propping this up. As I said, organically, we would expect strong incrementals closer to the 30 than 20.

It’s just a combination of the currency and the M&A that are just depressing it a little bit.

Chris Dankert: Got you. That’s super helpful. And then, just kind of moving to process, again, when we think kind of outside of energy flattish, but I guess within that that kind of other bucket, automation has been kind of standout. Do you have any comments on automation? Kind of how that fits into process growth in the New Year?

Philip Fracassa: Yes, automation I mean that’s a market we still see good growth. Rich talked about the Spinea and talked about some of the other initiatives going on there. But, I mean that is a market that we would expect to grow. It’s kind of inside the general industrial category that we have in . There is a lot in general industrial, but the automation piece particularly factory automation, we expect to continue to see strong growth, strong trends. And that will be both organic and inorganic opportunity for us as we move forward.

Chris Dankert: Got you. Well, thanks so much. And best of luck for the year guys.

Richard Kyle: Thanks, Chris.

Operator: Thank you, Chris. There are no remaining questions at this time. So, do you have any final comments or remarks?

Neil Frohnapple: Yes. Thanks, Glen, 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.

Operator: Thank you for participating in today’s Timken’s fourth quarter earnings release conference call. You may now disconnect.