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.

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

Thanks, Neil. Good morning and thank you for joining our call. Timken delivered 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 the 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 the prior year. We also closed on the GGB Bearings acquisition and the Aero Drives Systems divestiture, and purchased 250,000 shares. 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% in 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 the prior year in 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 was 28% over last year's record level. Free cash flow of $285 million was up from the 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. We 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. 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. 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, and 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 into 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 complements 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. 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. 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; 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 in 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 an 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 costs. 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 successfully 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. 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 the long-term as we continue to advance Timken as a diversified industrial leader.

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. 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, 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. 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. Finally, in EMEA, we were down slightly as lower renewable energy revenue and lost Russia sales were mostly offset by growth in other sectors. 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. 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. 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. 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. 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 the acquisition contributed nearly three percentage points of growth to the top line. However, currency translation was a sizeable 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 were relatively flat. Pricing was positive once again, and 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. 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. 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, marking 2022 as 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. 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. 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. 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, 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, or 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. 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.

Thank you. With our first question, we have Steve Barger from KeyBanc CM. Steve, your line is now open.

Thanks. Good morning.

Good morning.

Morning, Steve.

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?

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

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?

Well, it's certainly not negative to start the year. 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. The four markets where we have good visibility into the second half volume as well as price are all looking, overall, for them projecting to be up mid-single digits or more for the full year. As I said, we're looking to be up high singles organically in the first quarter. To get 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.

So, as you look at your internal model, do you show positive growth in the back half or in Q4 specifically or do you expect that that goes negative in the back half?

With price, we'd still be modestly positive.

Great, thanks for the time.

I want to emphasize that we don't have clear visibility into that. We're approaching it with caution. However, we are starting the year on a positive note, having finished the fourth quarter with a 10% increase, and we're beginning the year with high single-digit growth.

Understood. Thanks.

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

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 guidance 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 has there already been something within Process?

I don't think we commented specifically on that. However, if you refer to slide seven, you'll notice that renewable growth is in the high singles while distribution is relatively stable, which indicates a negative mix within Process. Therefore, we actually anticipate a decline in that area.

There is a bit of destocking in distribution, which is affecting the overall performance.

Yes, there has been some destocking and a slight moderation in sell-through. Some of our U.S. distributors have indicated that they plan to manage their inventory more closely this year. However, within our guidance, we anticipate Mobile margins will increase slightly while Process margins will decrease a bit. Additionally, as Phil mentioned, there is a currency impact affecting both areas.

Yes, I wanted to add that our mix is primarily influenced by the growth of OEM compared to distribution or aftermarket growth. Both distribution and services are expected to remain stable this year. Renewables are projected to grow in the high single digits, along with several other OEM markets. This shift, compared to last year when distribution saw significant growth, is creating a slight mix challenge that may impact Process more than Mobile. Efforts to improve Mobile's operations, including footprint and consolidations, should contribute to year-over-year margin improvements, while Process may experience a slight headwind. Overall, we expect it to be roughly neutral year-over-year in our guidance.

Okay. That adds more legitimacy to the guidance. Distribution plays a significant role in that business, but regarding destocking, can you provide some insight into the discussions you've had? I believe distribution, excluding services, constitutes about 40% to 45% of the division, if I recall correctly. How long does the destocking process take when you talk to them? Is it a gradual decline throughout the year, or does it happen more rapidly in the first quarter, followed by a readiness to move forward?

I wouldn't overemphasize it. It's not an increase in inventory, which is what we've experienced over the past two years. When you consider the comparisons, they've been increasing their inventory, so even a leveling off and returning to the sell-through rate represents a reduction or a more challenging comparison. I wouldn't characterize it as significant destocking, but lead times have improved, transit times have decreased, and over-ordering has ended. We are just anticipating a bit of headwind from that. I believe we already faced some headwind in the fourth quarter and still grew 10% organically. We expect a little more in the upcoming quarters.

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

Exactly.

Thank you, David.

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

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?

A large drawdown, no, I would not say there's a large drawdown. There's a drawdown, but not a large one.

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 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 through? 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.

Yes, I believe if you consider our performance over the past two years, particularly the last nine to ten quarters focused on inflation, we are nearing a neutral position, perhaps slightly behind, with some impact on our volume. We are approximately at neutral. The expectation for slightly more than 2% growth is to be just marginally better than neutral. Regarding your latter question, we are confident in our capacity to adjust pricing. We are equipped to handle fluctuations in commodity prices and supply chain challenges, which we've shown in the past. With thousands of customers and a complex pricing structure, pricing adjustments can be intricate, rather than simply a matter of implementing quick changes. However, we are well-prepared with robust systems and processes, and we feel optimistic about our ability to adapt to whatever challenges arise throughout 2023.

Thank you.

Thank you, Rob.

Thanks, Rob.

Great. Good morning, guys. Thank you.

Morning.

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. 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?

Regarding the comment about our chief competitor, I am uncertain whether they will be recovering from the pandemic or trying to catch up. However, when we assess our situation, we are nearly neutral, and any increase beyond 2% would build on that slightly. We'll monitor the cost dynamics throughout the year to see how much that increase materializes. We anticipate a rise greater than 2% under typical cost improvement conditions. If costs increase, we expect that rise to be slightly higher. Overall, we believe we have sufficient coverage for the 2%. In cases where we have indexed pricing tied to steel or currency, there might be some adjustments. Nonetheless, our overall costs have not decreased, and we are focused on reaching the 2% target, net of any index clauses.

Yes, just to clarify, Steve, the fourth quarter results will also reflect a favorable mix. As Rich mentioned, we are aiming to exceed the 2% target for the year and are optimistic about the outlook for both price and cost as we move into 2023.

Okay. 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?

Well, no. I think price will still be up in the fourth quarter. But we have been improving price sequentially for nine or ten quarters. Every quarter, the year-over-year comp gets harder. As you highlight, our fourth quarter number was pretty sizable, so that becomes a challenging comp for us in the fourth quarter, but I would still expect it to be positive. To your point, the first quarter would be good because it's on a lower comp than what the fourth quarter just was, and we just rolled some more sequential pricing in.

As we said, we've taken a conservative view on the second half for purposes of setting the guide. If we're 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. 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.

All right, I appreciate it, thanks.

Thank you, Stephen.

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

Thank you. Good morning, guys.

Morning.

Hi, Bryan.

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, particularly for offshore. 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? 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 about that cadence?

On the split between wind and solar, we find wind to be stronger. We have more growth strategies and capital dedicated to that area, although both markets are performing well. In solar, there is a bit more division regarding whether fixed technology prevails over rotating technology, and which specific technology leads in the solar sector. Our involvement varies based on the growth rates, but with wind, we are engaged across all segments. We are slightly more invested in gear drive compared to direct drive, but we have a solid presence across the board. I expect the growth rate for wind to be higher for the entire year. Would you like to discuss the annual cadence?

Yes, we've noticed a build-up of momentum in renewable energy, particularly in wind, over the last few quarters. We anticipate that we will reach or possibly exceed that momentum in the first quarter, based on the comparison we'll be working from and the positive trends we've observed recently.

Yes, appreciate the color there. 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?

Yes, I’ll address them in reverse order. ARB involves substantial work, but it’s a family-owned business that has been around for several generations. Considering our scale, U.S. manufacturing presence, and purchasing power, I believe we can achieve significant synergies quickly. However, transitioning from the modest EBITDA margins we currently have to those similar to Process Industries will likely take until 2025 to reach that level. I expect noticeable improvement in the run rate by the second half of this year, followed by another increase next year, with many synergies to be realized in this process. For GGB, it has been integrated into our bearing business, and our initial focus was on completing the carve-out from EnPro, which is largely finished. We are now operating mostly independently and are moving away from the transition service agreements. Our current emphasis is on integrating GGB, particularly looking at sales synergies more than operational ones, and everything appears to be on track. As for Spinea, the synergy potential is quite limited; our focus there is primarily on introducing a new product technology in a growing market. While there are some opportunities to sell our existing harmonic products alongside their cycloidal products, they cater to different applications and do not yield a significant amount of operational synergies. Overall, all three areas are promising, and since we didn’t include Nadella in our guidance, I’ll let Phil elaborate on the accretion aspect.

Yes, specifically regarding ARB, it would have been included in the guidance we provided, and it would be a modest contributor given its size. Nadella will contribute to revenue and will have a positive impact after it closes. From an accretion perspective, based on the new definition, it could likely be above five cents, in the range of five to ten cents.

Okay, appreciate it. Thanks again, guys.

Thanks.

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

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? 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 do we kind of look like in a normal year, when we think of when we see these price increases?

In a normal year, we would see our biggest sequential step up from Q4 to Q1. We've seen that in the abnormal years the last couple of years as well, the biggest sequential improvement from Q4 to Q1. We've had this steady sequential growth from there. 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 of 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. To the earlier question, comp lower because of the sequential in the first quarter. We did expect pretty good price realization in the first quarter.

Thank you. 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? 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?

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

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. We like what those businesses are doing for our portfolio; Rich showed the slide of our five-year performance, that part of our portfolio has contributed significantly to that performance. 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. 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. We've systematically done that. As I mentioned, we allocated $900 million of capital across the board in 2022, across all fronts, buyback, M&A, dividends, and CapEx. We're in a great position to continue doing that as we move forward with our balance sheet in such strong condition.

Great, and I'll just sneak in one last question. 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.

Yes, I think I commented on this in my statement. We're starting the year very strong. The environment that we're operating in here in the first week of February is a very positive one.

Thanks, Mike.

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

Great, good morning. Thanks for the question. I guess first off, 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. 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?

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

Yes, I would say Dillon, when you look at the quarter, we were up 19%, and it was broad-based. China saw growth in the high teens, India also in the high teens, and the Rest of Asia in that range. As Rich mentioned, renewables were by far the largest growth sector, but distribution followed closely as we continue to see strong performance across distribution and other sectors. It's been widespread growth, but there's no doubt that particularly in China, renewables have been the biggest driver over the past few quarters.

Okay, got it, great color. 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? What you are kind of baking into the headwind for 2023?

In 2022, we experienced favorable movements in currencies that positively impacted our transactions, providing a margin boost. However, the absence of those gains in 2023, combined with ongoing challenges on the top line, will create a notable year-over-year headwind for margins. This is reflected in our guidance, which suggests approximately 20 percent overall incremental margins, although currency effects will significantly weigh against that. When we factor in M&A, our organic incremental margins, adjusted for pricing and moderated operational costs, would actually be closer to 30 percent rather than 20 percent. This illustrates the efforts we've put in over the past year to improve the price-cost relationship in our favor.

Very helpful. Thank you, Phil.

Thanks, Dillon.

Thanks.

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

Thank you. Good morning, guys.

Good morning.

So, guess my first question is 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%. I mean it sounds like you're expecting the second half to turn negative. I want to be clear that that is kind of like the expectation into your guide for the second half of the year?

Let's say we're probably starting off the year closer to the highest single-digit price at the higher end of our guide. I would start there. 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. If you go from 10 to 7.5, that 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. I'd say we're also as I said, we're starting the year pretty strong, probably starting more towards the higher end of the guidance.

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. We don't have great visibility beyond the second quarter. We'll have to see how things develop over the next couple of months and how the order book fills in. We'll be able to assess how accurate that is as we move through the year.

Yes, that's helpful. I understand that you operate on a relatively short cycle, but due to supply chain challenges, some companies have experienced increased visibility at the beginning of the year compared to what is typical. I would like to know if your visibility is currently somewhat elevated. Additionally, what concerns you the most about the upcoming year? I would like to hear your insights on that as well.

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. There are other issues out there. Our backlog organically, if you adjust for the acquisitions and divestitures, 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. Our backlog also peaked around the middle of last year, so we have been liquidating backlog modestly. I would say we have very good visibility out for the next three to four months. 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. Europe from a volume in the fourth quarter was down. That would be really the only geographic area that's soft. To come back and answer your last question, we want to feel really good about the position we are in. We're 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. If that's a good result, we're in an excellent position. But, we are being too cautious on it, we will capitalize on that. Predicting these industrial markets and inflections is not an easy task. Focus on where we have the visibility. Really focus on growing the earnings power and the revenue of the company through the cycle. I feel great about that. We're in a really good position.

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

Great. Thanks, guys.

Thanks, Joe.

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

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, kind of 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 costs keep in mind in that margin guide they are stepping up in the New Year? I assume for the most part, the labor rates and FX was if anything kind of improved versus fourth quarter, no?

It's a great question, Chris. When considering overall investment, there may not be a significant year-on-year headwind. However, excluding currency effects, we expect a negative impact this year. Regarding SG&A, we anticipate typical labor increases and spending to support higher levels. Pension expenses will also rise due to changes in the discount rate. We previously discussed the mix between OEM and distribution, while manufacturing continues to experience some inflation, especially in labor. We should achieve better operational execution, though we are still dealing with inflation that affected us in 2022, which will now impact inventory costs in 2023. Initially, we thought some of this would affect us in 2022, but we now expect it to carry into 2023. This is a temporary headwind that will not last permanently. These factors are the main elements offsetting the positive pricing we anticipate from lower material and logistics costs, as well as other efficiency initiatives, in addition to modest volume supporting this. Organically, we expect strong incrementals closer to 30 than 20, but currency and M&A are slightly dampening that outlook.

Got you. That's super helpful. And then, just kind of moving to process; again, when we think kind of outside of bulk 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?

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. That is a market that we would expect to grow. It's kind of inside the general industrial category that we have in industrials. There is a lot in general industrial, but the automation piece, particularly factory automation, we expect to continue to see strong growth, strong trends. That will be both organic and inorganic opportunity for us as we move forward.

Got you. Well, thanks so much. Best of luck for the year, guys.

Thanks, Chris.

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

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.

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