Good morning, everyone. My name is Bruno and I'll be your conference operator today. I would like to welcome everyone to Timken's Fourth Quarter Earnings Release Conference Call. Mr. Frohnapple, you may begin your conference.

Thanks, Bruno, and welcome, everyone, to our fourth quarter 2023 earnings conference call. This is Neil Frohnapple, Head 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 a record fourth quarter, which concluded an excellent year. Revenue was up 1% for the quarter with the benefit of acquisitions and currency slightly more than offsetting a 5% organic decline in revenue. As expected, wind energy in China were the largest headwinds in organic revenue, with wind revenue down more than 30% from the prior year. Given the significant decline in wind and softening demand across many other industrial markets, we responded well to the situation and delivered a very solid quarter. We expanded margins 70 basis points versus last year, despite the lower volume levels. Price-cost remained positive and sequential cost increases continued to moderate. We continued to adjust our inventory and production levels down to both normalized supply chain performance as well as softer demand. Earnings per share of $1.37 was a record for the fourth quarter and was up $0.03 over last year. We closed on two acquisitions and one divestiture in the quarter, and we also purchased 450,000 shares. Despite a very active year for capital allocation, we ended the year near the middle of our targeted debt-to-EBITDA range. Before I turn to the full year, let me comment on the two acquisitions completed in the quarter. iMECH expands our industry-leading Engineered Bearing product portfolio with a niche product line of bearings that are focused on operating in extreme conditions in process industries. The business sells almost exclusively in the United States, and we will leverage Timken's global channels to expand their position beyond the U.S. We acquired Lagersmit near the end of the year, Lagersmit is a leader in sealing systems in the European marine market. Synergies here are in cross-selling our other bearing and Industrial Motion products in the Lagersmit channels and expanding their global position outside of Europe. Both iMECH and Lagersmit will be accretive to earnings and margins in '24. For the full year, we delivered record revenue, record earnings per share and our highest operating margins in recent times. Revenue was up 6% for the year, earnings per share were up 9%, and margins were up 70 basis points. This was achieved despite a sudden and deep decline in demand in our largest market, renewable energy, continued inflationary pressures, and a general softening industrial demand through the year as supply chains returned to normal. Timken continued to demonstrate the strength and diversity of its portfolio and our ability to profitably grow and perform through a wide variety of market conditions. We achieved positive price-cost for the full year and have demonstrated over the last several years that we can perform through declining, flat, or inflationary cost environments. We advanced our strategic initiatives, both organically and inorganically. Organically, we continue to drive outgrowth through our focus on innovative product solutions, leadership in customer engineering, channel excellence and outstanding service. Inorganically, we completed six acquisitions during the year. Our inorganic growth continues to scale us in existing products and markets like the acquisitions of American Roller Bearing and Rosa Sistemi, and expands us into new products and markets like the acquisitions of Des-Case and Lagersmit. Our focus on operational excellence and the subsequent results have returned to pre-COVID levels as we drive safety, quality, productivity, and capital efficiency across our operations and supply chains. We ramped down our production costs through the course of the year. And by the end of '23, we have lowered the staffing levels in our plants by over 8% from the start of the year, with most of that taking place in the second half. We continue to advance our manufacturing footprint with the investment of over $180 million in capital projects and the consolidation of three manufacturing facilities into existing plants. Additionally, we purchased over 4% of the outstanding shares during the year, and we increased the annual dividend payout for the tenth consecutive year. The full year once again demonstrated our ability to respond to and perform at a high level through a variety of macroeconomic conditions. And in addition to our strong financial performance, our Timken team was recognized by several third parties for our leadership as a responsible corporate citizen, as an employer of choice, and as an innovator. Turning to 2024. We are planning for revenue to be down over 3% for the full year and over 6% organically at the midpoint. Let me separate our wind energy outlook from the rest of the markets. We had a very strong first half of '23 in wind and then faced a steep decline for the rest of the year. We expect the first half of '24 to be down slightly more sequentially from the fourth quarter and then to level off in the second half. We do not have firm visibility demand in the second half, but at this point, we are not seeing any imminent catalysts for a rebound in demand in China. If it plays out as we're planning, wind demand will be down year-over-year over 40% in the first half, and then be flat in the second half on the much lower comps. So we expect to start '24 with a sizable renewable energy headwind, but we also expect that headwind to moderate significantly in the second half of the year. Longer term, we believe this is just a cyclical decline and we remain bullish on the long-term outlook for growth in wind energy. Beyond wind, we are currently experiencing a relatively normal softening of demand across a broad range of industrial markets. The outlook for the rest of our markets ranges from up slightly to down roughly 10%. This includes the expectation that inventory will continue to be reduced across many of our channels. In most of our markets, we only have a few months of firm visibility to demand. While we are not forecasting a strengthening in the second half of the year, it is certainly possible. And if so, we will be ready to capitalize on it. We're guiding to margins of over 18% for the full year and a decline in earnings per share in the mid-teens, with lower volumes being the primary driver. We're planning for modest inflationary pressures through the course of the year and price to be modestly positive, less than 1%. We expect to generate a step-up in free cash flow from '23 with conversion of over 100%. We have a good pipeline of self-help initiatives intended to mitigate the revenue and margin impact. The six acquisitions and one divestiture we completed in '23 are expected to add over 2% to the top line and be accretive to both margins and earnings. We also have a good pipeline of new business activities and cross-selling opportunities that will support our long-term outgrowth objectives. From a cost perspective, we have excellent focus and good momentum on our operational excellence initiatives. We will benefit from the CapEx and plant closures completed last year and the additional planned actions for this year. We have four more plant consolidations currently underway for '24 and our productivity is the best it has been in several years. We will also benefit from integration synergies. As an example of this, we took further steps in the second half of '23 to integrate both GGB and American Roller Bearing further into our global bearing organization. These actions will deliver improved business results and do so at lower cost levels. We expect the first quarter to be the toughest revenue comp. In the last few years, our first quarter was up sequentially over 10% on the top line. We expect that to be in the mid- to high single digits this year, primarily due to wind and China headwinds. We still expect a sequential step up in margins and earnings per share in the first quarter, but not enough to get us back to '23 levels. Before I turn it over to Phil, I want to reference Slide 11, which highlights our financial results for revenue, margins, and earnings per share over the last five years. We've set new revenue and earnings per share records in five of the last six years and new margin highs in two of the last five years. Since 2016, we've been demonstrating our ability to perform and profitably grow the business through a wide variety of market conditions. And while we're starting '24 in a challenging demand environment, the Timken portfolio is strong, resilient, and diverse. We're confident that our strategy and our execution have put us in a position to quickly return to setting new levels of performance. The cash flow of the business is solid, and we have proven to be excellent allocators of that capital. Our acquisitions have made the portfolio more diverse, less cyclical, higher margin, and higher growth. We are well positioned to continue to grow the earnings power of the company and to advance and scale Timken as a diversified industrial leader. Phil?

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 13 of the presentation material with a summary of our strong fourth quarter results which capped off another record year for Timken. We posted revenue of just under $1.1 billion in the quarter, up about 1% from last year. Our fourth quarter adjusted EBITDA margin came in at 17.9%, up 70 basis points, and we delivered adjusted earnings per share of $1.37, up about 2% from last year. Turning to Slide 14. Let's take a closer look at our fourth quarter sales performance. Organically, sales were down around 5% from last year as continued positive pricing was more than offset by lower volumes across several industrial sectors. As expected, we saw the largest declines in wind energy and off-highway during the quarter. Looking at the rest of the revenue block, the impact from acquisitions, net of divestitures added 5 percentage points of growth to the top line. And foreign currency translation contributed roughly another point to revenue in the quarter. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and the net impact of acquisitions and divestitures. Let me comment briefly on each region. In the Americas, we were down modestly against last year's very strong fourth quarter, driven mainly by lower shipments in the off-highway and general industrial sectors, partially offset by growth in rail and industrial services. In Asia Pacific, we were down double digits, driven almost entirely by China, including the sizable decline in wind energy shipments. On the positive side, we continue to see strong growth in India. And finally, we were close to flat in EMEA as lower renewable energy and industrial demand was almost fully offset by growth in other sectors, including heavy industries. Turning to Slide 15. Adjusted EBITDA in the fourth quarter was $195 million 17.9% of sales, compared to $186 million or 17.2% of sales last year. Our margin improvement was driven by positive price-cost, which more than offset the impact from lower volume and unfavorable currency in the quarter. Adjusted EBITDA was up $9 million or about 5% in the quarter, and that's on a sales increase of only around 1%, so, strong operating leverage. Looking at the increase in dollars. You can see that we continue to benefit from favorable price mix, lower material and logistics costs, and recent acquisitions. Manufacturing performance was also slightly favorable in the quarter for the first time in quite a while. These positives more than offset the impact of lower volume, unfavorable currency, and higher SG&A other costs. Let me comment a little further on some of the key profitability drivers in the quarter. With respect to price mix, price realization was higher again in both segments compared to last year as we continued to secure additional pricing with our customers. Mix was also a slight positive in the quarter. Moving to material and logistics costs. Both were lower off last year's levels and largely in line with our expectations as costs continue to moderate globally. On the manufacturing line, the modest year-over-year benefit was driven by improved operational execution by our team, targeted cost reduction actions, and supplier recoveries, which more than offset the impact of lower production volume and ongoing cost inflation. Looking at the SG&A other line. Costs were up versus last year, but lower than we expected, driven by our efforts to reduce discretionary spending to better align with demand levels. And finally, with respect to currency, we saw a sizable year-on-year headwind in the quarter, driven mainly by the unfavorable impact of transaction gains and losses in the respective periods. On Slide 16, you can see that we posted net income of $59 million or $0.83 per diluted share for the fourth quarter on a GAAP basis. The current period includes $0.54 of net expense from special items, including pension mark-to-market charges, acquisition-related charges, and deal amortization expense, offset partially by some net discrete tax benefits. On an adjusted basis, we earned $1.37 per share, up from $1.34 per share last year. Our adjusted tax rate for the year came in at 25.5% or the low end of our prior guidance, which resulted in a fourth quarter tax rate of 24.4%. Depreciation and interest expense were both higher versus last year, as we expected. And finally, we benefited from a lower share count in the quarter, reflecting buybacks completed during 2023. Now let's move to our business segment results, starting with Engineered Bearings on Slide 17. For the fourth quarter, Engineered Bearings sales were $724 million, down 2.4% from last year. Acquisitions net of divestitures and currency were both positive in the quarter. Organically, sales were down 6.4%, driven by lower volumes across several sectors, partially offset by higher pricing. With respect to organic revenue performance by sector, the renewable energy and off-highway sector saw the largest declines in the quarter. In addition, distribution and general industrial were down slightly, while the on-highway and heavy industry sectors were relatively flat. On the positive side, we saw growth in aerospace during the quarter, and rail was up as well driven by higher shipments in the Americas. Engineered Bearings adjusted EBITDA in the fourth quarter was $133 million, down slightly from last year, with margins coming in at 18.3%, up 20 basis points. The improvement in segment margin reflects the favorable impact of price mix and lower material and logistics costs, which more than offset the impact of lower organic volume, higher operating costs and unfavorable currency. Now let's turn to Industrial Motion on Slide 18. In the fourth quarter, Industrial Motion segment sales were $367 million, up 8% from last year. Acquisitions net of divestitures contributed just under 10% to the top line and currency translation added over 1%. Organically, sales declined about 3% as lower volumes were partially offset by higher pricing. With respect to organic revenue performance by platform, belts and chain, drive systems and linear motion were lower in the quarter driven by softer general industrial and off-highway demand. On the positive side, we saw significant growth from our service business driven by strong MRO activity, while automatic lubrication systems and couplings were relatively flat. Industrial Motion adjusted EBITDA for the fourth quarter was $82 million or 22.2% of sales, compared to $65 million or 19.1% of sales last year. We expanded margins 310 basis points in the quarter, driven by positive price-cost, the benefit of ongoing cost improvement initiatives, and higher capitalized variances, which more than offset the impact of lower organic volume. Turning to Slide 19. You can see that we generated operating cash flow of $128 million in the quarter, and after CapEx, free cash flow was $75 million. Looking at the full year, free cash flow was $357 million, up from $285 million last year. The increase in free cash flow was driven mainly by improved working capital and higher adjusted earnings, which more than offset the impact of higher cash taxes including $55 million of tax paid related to the sell-down of Timken India. Looking at the balance sheet, we ended the year with net debt to adjusted EBITDA at 2.1x. This includes the impact of the recent acquisitions completed during the fourth quarter. Turning to Slide 20, you can see a summary of our capital deployment in 2023. In total, we allocated more than $1.1 billion of capital during the year, with over 70% directed towards CapEx and acquisitions to advance our profitable growth strategy. We also completed six acquisitions that collectively add more than $250 million of pro forma annual revenue at attractive margins. And we returned $345 million of cash to shareholders during the year, including $56 million in the fourth quarter. In total, we bought back more than 3.1 million shares or over 4% of total outstanding, and raised our quarterly dividend by 6%, achieving 10 straight years of higher annual dividends. And we deployed this record amount of capital while maintaining a strong balance sheet and leverage near the middle of our targeted range. This sets Timken up well for 2024 and keeps us in a great position to continue to execute our strategy through capital allocation. Now let's turn to our initial outlook for 2024 with a summary on Slide 21. We're taking a cautious view on the outlook given the current demand environment, limited visibility, and overall level of uncertainty, especially in sectors like wind and geographies like China. Starting on the sales outlook. We're planning for full-year revenue to be down in the range of 2.5% to 4.5% in total versus 2023. Organically, we're planning for revenue to be down 6.5% at the midpoint, reflecting lower volumes, partially offset by slightly higher pricing versus last year. We expect net acquisitions to contribute around 2.5% to our revenue for the year, which includes the net impact of 2023 acquisitions and divestitures. And we're planning for currency to be a tailwind of around 50 basis points for the full year based on current spot rates. Now let me comment a little more on the organic sales guidance. The midpoint of our range essentially implies that we see no acceleration or recovery of current demand levels through the year other than some seasonality. Note that we would expect the first half year-on-year organic sales declines to be more pronounced and then flatten out in the second half as comps get easier, especially in wind energy. On the bottom line, we expect adjusted earnings per share in the range of $5.80 to $6.20. This earnings outlook implies that our 2024 consolidated adjusted EBITDA margin will be in the low to mid-18% range. Our margin outlook reflects the unfavorable impact from lower volumes and continued inflation in labor and other input costs. On the positive side, the net impact from acquisitions should be accretive to margins, and we expect price-cost to be largely neutral for the year. We've stepped up our efforts around operational excellence and cost reduction initiatives, which should mitigate the headwinds and help us deliver resilient margin performance in 2024. Moving to free cash flow. We expect to generate approximately $425 million for the full year or over 110% conversion on GAAP net income. This is around $70 million or 25% better than 2023 and reflects favorable working capital performance and lower cash taxes, which are expected to more than offset the impact from lower earnings. We're planning for CapEx of around 4% of sales, with the spend continuing to optimize our manufacturing footprint and support our growth and margin objectives. Our CapEx spend for 2024 includes some big projects, including the completion of our plant expansions in India for bearings and in Mexico for belts. And finally, we anticipate full-year net interest expense to be roughly flat with 2023 and for the adjusted tax rate to be approximately 26%. So to summarize, Timken delivered strong results in the fourth quarter to cap off a third straight year of record sales and adjusted EPS. Our team is executing well in this environment, and we're focused on delivering resilient performance and advancing our strategy in 2024. This concludes our formal remarks, and we'll now open the line for questions.

Thank you. We have our first question from Steve Volkmann at Jefferies. Steve, your line is now open.

Great. Good morning, guys. Thank you so much for taking the question. I guess the key sort of feedback I'm getting here is that people are trying to figure out sort of how conservative this guide is, and I recognize you don't have a ton of visibility into the second half. But you have, on Slide 8, changed your outlook for a number of these end-markets pretty significantly. And I think I understand what's happening in wind, but things like heavy industries and industrial services and rail, sort of went from positive high single digits to negative high single digits. So I guess I'm just trying to sort of tease out how much visibility you have there and how much this is maybe destocking, and what sort of the underlying drivers of those things might be? Thanks.

Thanks for the question, Steve. Certainly, as you look at the chart from 2023 compared to 2024, most of these didn't move and quite a few of them would have had stronger first halves than second halves. So I think as we - as you look at the end of the year, this is more reflective of where we finished with our fourth quarter 5-ish percent decline in organic revenue and what made that up. And then some extrapolation of that and again, no assumption of any strengthening. So as an example, we have heavy industries here down high single digits. We actually grew heavy industries in the fourth quarter last year. We grew it every quarter last year. But we have been consuming backlog for the last three quarters, and we're assuming that trend will continue, and the second half of the year would be negative. And then also, as we've seen from really since the late second quarter of last year, we went from - we inverted from probably overshipping our customers' demand and stocking inventory to a destocking situation, so we're in at least quarter three, maybe quarter four or five of that phenomenon. So we are and have been underselling most of these markets to what our customers are selling. And it's - they're not huge numbers, but you see our off-highway customer was down 3% or 4% organically, maybe our sales to them were down 5% or 6% organically. So I'd say a reflection of the fourth quarter with really no improvement on it, and then seasonality laid on top of it. Phil, anything you would want to add to that?

No, I think you captured it, Rich.

Okay. And then just for the follow-up, Rich, this probably isn't quite fair. But do you still think the ISM index is a reasonable way to forecast your business? And if so, if it were to turn positive here at some point, what type of lag might you expect relative to your business?

I think it's a reasonable one. I wouldn't say the timing is exactly right, and accuracy is not real high. But certainly, directionally, when it's moving favorably, is a positive for us. But again, the timing of that, predicting the lag, I wouldn't want to put too much into that.

Thank you, guys.

Our next question comes from Stanley Elliott from Stifel. Stanley, your line is now open.

Hi, good morning, everyone. Thanks for the question. Just to clarify, on the last question in terms of destocking versus end-markets, you mentioned kind of destocking being three, four, five quarters out. So you're saying that this move in a lot of these end-markets really kind of - you're saying that's end-market demand as opposed to destocking? Just to clarify. Thanks.

I would say, yes, we've seen some of our customers go to - especially if you take price out, negative organic revenue in the third and fourth quarters of last year. Now again, they may be saying that's their destocking in their distributor inventory, and other things. But we've seen our customer revenue probably flatten out to go slightly negative, and then throw us a little more negative due to the inventory destocking.

Yes. I think, Stanley, if I could just add I think it really is a combination of both from our perspective. I mean we do feel like customers started destocking last year. And obviously, different quarter-by-quarter, some would be flat, some would be down. But net-net, we did see - we did sense that inventories were coming down a little bit, and we would expect that to continue into 2024, at least through the first half, I would say. And as Rich commented on the last question, I really think the outlook really is more a function of what the industrial markets and the demand environment was pretty - it's pretty soft right now. It was soft in the fourth quarter with our organic sales performance. As we sit here today, we don't really see a catalyst for an acceleration, certainly in the first half, limited visibility in the second half. So in - said in the outlook, we thought it was prudent to kind of assume the current demand environment, with pluses and minuses, as Rich said, wind maybe getting a little bit weaker, maybe some markets get a little bit better. But net-net, no recovery of the current demand environment, other than maybe some seasonality and if markets were to accelerate in the second half or at some other point, we'll certainly be ready to jump on it.

And then I guess, second question on the Industrial Motion margins, you called out MRO activity. I mean, is that just strictly a function of mix? Are you all able to offer more services now that you have a much broader portfolio in that part of the market? Any color there would be helpful. Thanks.

Yes. I would say a couple of things. Certainly, the services business is - it's an aftermarket business, so it tends to be, relatively speaking, better from a mix standpoint. I would say that's one. We would say the margins last year were reflecting some activities that were going on, the consolidation of our chain facilities and some structural improvement work we were doing that we're starting to kind of see the benefits of as we move forward to this year. And then probably the last point would be Industrial Motion did perform a little bit better from an organic volume standpoint. So obviously, they had a little bit more volume to work with or less of a decline to deal with, if you will. And as we move forward to next year, we'll probably see relatively more resiliency in Industrial Motion margins versus bearings, is because we do expect bearings to be down a little bit more organically because of the wind situation year-on-year. And then obviously, we do have a bit of a higher fixed-cost base in the bearing business, so it's a little more sensitive to volume there than in the Industrial Motion business. But it's been a lot of initiatives we've been working on to get those margins up. We do view both segments as north of 20% EBITDA margin businesses, and we were just happy to see the nice step-up in Q4.

Perfect guys. Thanks so much.

Our next question comes from David Raso from Evercore. David, your line is now open.

Thank you for taking the question. When I look at the margins that are being given, if you had told me organic down 6.5%, obviously a drag, but price-cost neutral while it's happening, and then acquisitions come in relatively favorable on margins, I probably would have thought maybe decremental margins 40% or so. But I see the implied guidance is nearly 60% decrementals. And if you told me 60%, I would have figured there must be some negative price-cost, but you're saying there isn't. Can you help us understand why the decremental would be that large if price-cost is neutral? And I assume it's something with mix, maybe renewables a little more profitable than we think. And then the follow-up, the cadence, the cadence of that, for the year. Like if I think about how low the margins are in the first half of the year versus second half, I'm thinking more year-over-year when I think about decrementals. So I'm just trying to get a sense, how much is it front half loaded, the weakness year-over-year, on the decrementals? And again, why would the decrementals be that weak with price-cost neutral? Thank you.

Yes, sure, David. This is Phil. I'll take at least the first part there. So on the decrementals, I mean, first of all, great observation in terms of what the guidance implies. But we've got acquisitions and currency contributing positively, and then obviously, the volume declines are negative. So if you sort of assign margins to each of the components, actually, the organic decrementals are closer to 40%. So kind of closer to what you'd expect in, call it, a year or two of a slowdown, if you will. But it was just sort of - the acquisitions will come in, positively speaking, net higher than our adjusted EBITDA margins. Currency will be probably a little bit more modest, but the net organic incremental or decremental should be right around - closer to 40%, as you pointed out, and that's sort of what's embedded in it. And it's really a combination of lower organic volumes. You've got to overcome that. We talked about slightly positive pricing for the year, cost moderating, but still seeing labor inflation, still seeing some inflation in other input costs that we'll have to overcome as well. But net-net, with the volume and the kind of neutral price-cost outlook, we'll see organic decrementals kind of around that 40% range, kind of plus or minus. And then as far as sort of progression for the year, as we talked about, low to mid 18% margins for the year, which would be sort of 120 or 130, 140 lower than 2023, and I think we probably see, I would say, some similar margin performance as we move through the year. I mean, I would say we wouldn't expect any of the quarters - certainly, in the first quarter, I think, will be down on an order of magnitude of what we'd expect the full year to be down by, and probably do a little bit better in the fourth quarter, but be pretty close across the board.

That's interesting. You would think as the renewables in the guide flatten out, and the revenues in the back half of the year, that would take a little of pressure off the margin decline. But you're saying that's not the case. It's a common similar year-over-year margin drag throughout the year.

Well, I think it - I think in the fourth quarter, yes, I think it should be a little bit better as we move into the back half and certainly in the fourth quarter. And so as you look at that full year implied guide, probably in line with it kind of Q, maybe a little more in the first half than that and then a little less in the second half, is probably a good way to look at it.

Okay, helpful. I appreciate the time. Thank you.

Thanks, David.

Our next question comes from Steve Barger from KeyBanc Capital Markets. Steve, your line is now open.

Thanks. Good morning.

Good morning.

Thanks. The EPS guide of down 15% is worse than the pandemic and kind of in line with the industrial recession in 2015. So my question is, how confident are you in modeling the first half 40% decline in wind relative to profitability? And understanding that you don't have great back half visibility, what's your confidence level that this guidance covers worst-case scenarios?

I think on wind, we were down in the same ballpark in the fourth quarter. It's in our margin results, and then obviously got the seasonal impact of the rest of the company being somewhat depressed in the fourth quarter, which we would expect to step up there in the first quarter. So I think for where revenue was in the fourth quarter and a slight decline in the first half of this year, which we feel pretty good about, and again, we have - it's one of the markets where we have more backlog visibility than average, I think we have that modeled pretty accurately. And maybe we have some upside if we can get some more cost out perform better, but not an enormous amount of upside there. I would say the second half - the second half on that would largely depend on where the volume lands out. And again, since we've got it modeled flattish, we don't really have any improvement or deterioration in margins and EPS contribution from that in the first half to the second half. And sorry, I cut you off on your follow-up.

I was just going to - what I'm trying to get to, I guess, is what surprised you as 4Q or early part of this year progressed, how are you handicapping a more broad-based slowdown? Or do you really view this as the concentration in both wind and China as being the primary driver of how you're guiding?

No, I think to the earlier - the first question from Steve, we were down 5% organically in the fourth quarter. That had a pretty negative wind sentiment - wind actual in it. We've got that same negative wind actual in the first half, and we've got a 6.5% in for the full year organically. So slightly worse all in versus where we've been the last quarter and the trend line we've been on. Probably even a little more worse than that outlook when you factor in the wind comps get a lot easier in the second half. So that's what it's based on, is really the fourth quarter actual.

Okay. Just a quick one. Part of the mitigation strategy is outgrowth. What specific end markets are you targeting? Or where do you see opportunity to help mitigate this?

Yes. Certainly, I think the same ones you've heard us talking about, general industrial, a lot of smaller things in there, food and beverage, automation, et cetera, the marine business. We had a good fourth quarter in Aerospace, as you know, historically, we're heavily weighted to defense, which tends to mute our swings. But we're - we've been moving for some time more into the commercial side and looking to outgrow that passenger rail off-highway markets we do well in. We like off-highway markets, but obviously, cyclical on that side. So - and again, I repeat, we're still believers long term in renewable energy, and actually renewable energy, including solar, grew in '23, slightly. And all that growth was in the first half and the second half was down significantly. But you'll continue to see us be ready for the bottoming and return of that market as well.

Yes. Maybe the other point I'd make, Steve, would be around the segments, too. We've been building the Industrial Motion business for some time, and as we look ahead to 2024, as we talked about the organic guide being down 6.5% at the midpoint would expect Industrial Motion to do better than that, Bearings to do a little bit worse, Bearings being impacted by wind in China in particular. But the Industrial Motion doing a little bit better, it's really a reflection of the diversity of that business, the portfolio, the automation business we have in there, linear motion business we have in there, the services business. So I think the evolution of the portfolio, if you will, has been beneficial to us as well as we move forward.

As you look across our market chart there, I think with the exception of on-highway, which, as you know, we've been looking more to hold our position and on-highway markets and outgrow the others organically and inorganically, so shrinking it as a part of the portfolio. There's elements of the other ones that have been a part of our targeted growth and outgrowth. And two of our - two of the ones that have contributed significantly for the last 10 years, renewable energy in China, both hit a significant pause in the middle of last year. But we've got good momentum in quite a few of the other markets, Don't see any market share issues as you look across our portfolio, and it's pretty normal for these markets to grow when you look over three, four time frames. But they usually don't grow linearly, and there's usually some ups and downs. And right now, we're in this mid-single digit down all in with China and renewable leading the way on it.

Appreciate all the detail. Thanks.

Thanks Steve.

Our next question comes from Bryan Blair from Oppenheimer. Bryan, your line is now open.

Thank you. Good morning, everyone.

Hi Bryan.

Good morning.

I appreciate all the color on end-market dynamics and some of the volatility there. You noted consistently there's underlying demand pressure and destocking that, I guess, continues to linger. And I'm sorry to belabor the point on destock, but can you remind us how long on average how many quarters you typically have to navigate destocking in your major markets and where we are right now relative to that norm?

I think I'd put it in both the demand and the destocking typically six to eight quarters. And if you take price out, we're fourth quarter, probably would have been three quarters in. So probably - and again, we're not seeing anything imminent in the first half, but most likely you'd be forecasting something either in the second half or the start of 2025 to invert and go back to the positive versus the negative on the restocking.

Okay. That's fair. Appreciate that. Obviously, very active 2023 in terms of your M&A strategy. And we're particularly intrigued by Des-Case and Lagersmit, I apologize if I'm mispronouncing either of those. But maybe touch on the synergies that those new solutions or platforms offer with your portfolio and how they influence organic and inorganic growth potential going forward.

Your pronunciation was fine. It's probably at least as good as mine. So you did well there. On Des-Case, a U.S.-centric business, goes through primarily in the U.S. bearing distributors. So the share in the U.S., much of the same customer base. I think there's certainly some things that we can do there to increase the pull-through from distributors, but not really a channel play so much as it would be - it's an upsell. And we have people in all of their end markets, and we have hundreds of them and they had more like 20. And so the ability to cross-sell in the U.S., pull that through our distribution, I think, is significant. And then the bigger play is taking them into our global distribution channels, and I think a lot of early enthusiasm from that from our global distributor partners. Lagersmit, very focused on the European, Nordic marine industry, and very focused on the OEM side of that, have not put as much energy and emphasis historically in capturing the aftermarket around the world. So the two opportunities there are very much for us to sell more bearings into that Nordic marine market and other Industrial Motion products, but then also to do a better job of capturing their aftermarket around the world as well as penetrating some of the OEM base around the world as well. So different synergy cases in both, but both very revenue base pretty light on the operational side in the case of those 2. I'd add before we go to the next question, too, both really fit our portfolio well. Product innovation, product leadership positions, strong brand names within their niche markets, and a really good technical fit with the Timken portfolio.

Our next question comes from Mike Shlisky from D.A. Davidson. Mike, your line is now open.

Yes, hi, good morning. Thanks for taking my questions. Thank you. It's good to be here. I think you had mentioned in your remarks some headcount reductions that have already taken place or about to take place. Just give a little bit more detail there. Are those permanent or just trying to flex with the current environment? And were they - are they hourly or salaried people? I'm just kind of curious if you could give us some more color around that.

It would be - so our demand started leveling off into the first quarter last year after 2.5, three years of hiring and then the market is difficult to hire, et cetera. So while the turnover had been running a higher, turnover had been a challenge for us for those couple of years. It was - it enabled us to attrit our workforce and reduce our workforce without forced reductions quicker last year. So largely in a lot of cases, we stopped hiring in the second quarter of last year and started capturing attrition. The answer to your question is what I quoted was operative factory hourly workers down 8%. We have captured some attrition in the salaried ranks as well, and we've done some restructuring on the salaried side as well, as I mentioned, the integration of some of the businesses. But the 8% is factory workers. The predominance of that would be flex that we brought the head count down as wind demand and other things have softened. And then there is a piece of it that is structural. I talked about the plant consolidations that we had happening last year as well as those that we have planned for this year. But the predominance of it would be flexing our workforce and head count through the demand. And most of that would have been second half weighted. So a little bit in the second - really none in the first quarter, probably flat or maybe up headcount in the first quarter, down a little in the second, down pretty significantly in the third and fourth, and I expect we'll be down a little bit more at the end of the first quarter.

Great. And then for my follow-up, and you just touched on the four plant consolidations you've got in the pipeline, I think, for this year. Can you maybe kind of bucket for us, the maybe once it's all said and done, the annualized EBITDA potential impact that you might save perhaps for the full year '25 and beyond? And also, are there any one-time cash needs or need in '24 to make these consolidation taxes?

Was that in regards to the plant consolidations?

Correct.

Okay. Nothing significant on the cash or restructuring side. We generally are doing a little bit of this every year. We had some in last year a little bit more this year. So there is some but nothing out of the line of what we've done the last few years. And I would say we don't generally talk about exact cost-out targets with those. We have them, but we embed it more in our margin target, and it's all part of our objective to get margins up to 20% through cycle. And certainly, what we did the last few years was a contributor to our margins last year of 19.7%, and it would contribute to margins in 2025, but wouldn't give us an exact number on it.

And the only thing I would add, Mike, is on our guide, the delta between GAAP and adjusted for the year is around $0.90. $0.75 of that is roughly the deal amortization and the other $0.15 would be kind of normal restructuring type expenses we would need to incur to do the plant rationalizations that Rich talked about. And that's already in line with what we would typically do in a given year.

Great. Fair enough. Thanks very much, guys.

Thanks Mike.

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

Thanks. Good morning, guys.

Hi Joe.

I just want to make sure I heard the organic growth cadence for the year. So I think you guys said flattish in the second half, but maybe I misheard that. And I'm just curious, as it relates to renewables, I think of that business as being a little bit longer cycle for you. When do you think you have visibility on that business as the year progresses?

Yes, I'll take the second part first. We would usually have close to six months of order visibility within wind, and to our outlook for the first half of the year, certainly, you can do a little bit better, but it's not going to be double digits better. But the second half remains pretty open and that to go favorably, certainly.

Yes. And I would say on the organic progression, Joe, quarterly, so midpoint of the guide is down 6.5% for the year. Think of the first half as being down double digits, both in the first quarter and the second quarter, probably a little worse in the first quarter just with the comps. And then we would flatten out as we move into the back half of the year.

Okay. Got it. That's clear. And then Phil, maybe just a follow-up on just the price-cost commentary. Is there anything we need to be aware of from a cadence standpoint as the year progresses? Like you have started to see some commodities play, but that usually takes a little bit of time before you see it in your P&L. So any commentary on just price cost as the year progresses?

No. I would say we finished a really strong pricing year in '23, north of 3% for the year. We were north of 2% in the fourth quarter. We do have slight positive pricing in for 2024, and that would be net of any anticipated index or pass-through givebacks we may have to give. We still think we'll net slightly positive pricing. So that would be slightly positive, think north of 50 bps, probably more in Industrial Motion - a little bit more Industrial Motion than Bearings just because of the way the pricing dynamics are working in the two segments. But I feel pretty good about some of the pricing already in, for example, in the first quarter that we've put in through some of our markets and channels. And obviously, if commodity prices were to decline significantly, there would be a little bit of risk there, but the benefit on the cost side would typically outweigh that to us and probably be a net positive to us just where our pricing mechanisms work now. So it's a good story. It's a more flat price-cost environment, '24 than '23. We did see significant positivity in '23 with material and logistics favorable pricing up, cost moderating. I think we'll see a flatter price-cost curve in '24, but not negative. I mean, we do - we would expect it to be flat to slightly positive, helping us to offset some of the volume declines we're anticipating.

Very helpful. Thank you both.

Our next question comes from Angel Castillo from Morgan Stanley. Angel, your line is now open.

Hi, good morning. Thanks for taking my question. I just wanted to go back to the commentary - just maybe on the first half, I just wanted to unpack that a little bit more. I think earlier you talked about not seeing any catalyst to suggest kind of an improvement here in your guidance. And I totally understand that maybe there's limited visibility. But as you think about some of your customers maybe focusing on heavy industries and off-highway given I think you've unpacked wind pretty well. Just in those segments, to the extent that your customers have been doing some of their own destocking here in the 3Q, 4Q time frame, what - are you not - I guess, what are you seeing from your customers? And why is there not kind of a step-up maybe in the first half versus kind of the second half dynamic as they're kind of done destocking and maybe moving to just underlying demand that's maybe a little bit weak but not to the same degree?

Yes. I would - I think it's a good question that I would say our customer sentiment is probably in total a little more bullish than what our 6.5% would be, and again, put wind aside as you did, I would say there's probably a little heavier optimism there. But we were just down 5% in the fourth quarter, a tougher comp in the first quarter. And looking at order flow, we're not seeing where that is reversed in the next couple of months. So we aren't baking that optimism in until we start to see it.

And I'd say, historically, in off-highway in particular, I would say it's, historically, Angel in off-highway in particular, as you know, in the second half, it's not typically - it'd be a little unusual to see a big acceleration in the second half, that it would normally be kind of early in the year as opposed to in the third or fourth quarter. But - and that would have entered into it as well.

That's very helpful. And then maybe switching to capital allocation. Could you just talk a little bit about your M&A pipeline and maybe how that's shaping out for 2024 and how you maybe kind of see that impacting your ability to do more repurchases with your higher free cash flow?

A few comments there. I'd say, first, our focus is really on executing and delivering on what we've done the last couple of years. That being said, we still have the balance sheet and the cash flow and the management bandwidth to continue in '24. And our bias still remains to M&A over buyback. We're looking at a better cash flow year this year, as I said, a step up there. The M&A market has been relatively slow the last 1.5 years to two years. We have managed probably even a little longer than that, going back to COVID. We've managed to do well through that time. I would say there's a level of optimism that it's going to pick up as a market, not Timken. So - but I would still say we have not seen an increase in inbound activity. It's been more us on the outbound side. So we've done at least one acquisition every year for 14 years. And while we're here in February, I would say there's no reason to believe we would not be able to continue that even if the market remains relatively slow, and that we should be able to get something both strategic and financially attractive done this year.

Yes. And on the buyback, we have about 2.7 million shares remaining on our authorization. So we have the ability to continue to buy back shares if the M&A is not there. Obviously, we have a bias for the M&A, just with what it can do for us from a portfolio standpoint, from a diversification standpoint. But the buyback remains an option, and we've bought back over 4% of our outstanding each of the last two years. And we'll see how the year plays out, but it certainly continues to be an option for us.

Very helpful. Thank you.

Thanks, Angel.

The next question comes from Chris Dankert from Loop Capital. Chris, your line is now open.

Hi, morning, guys. Thanks for taking the question. Just a quick clarification, I suppose. The impact of facility consolidations, that is assumed in kind of the base 40% organic decremental, correct?

Yes. Correct.

Just real quick, Chris, that would be a combination of the savings that we would achieve from the consolidation. And then with some of the new facilities that we talked about, the expansion, there is some ramp associated with those. It can be a bit of a headwind as well. So you'll have them going a little bit both ways, through a good part of 2024, and probably full run rate benefit as we get into '25.

Got it. That makes sense. And then I guess just quickly on SG&A. I know there's efforts to kind of tamp some of that down, but is it fair to kind of assume the starting point for the year in 1Q, is over $200 million? Or maybe just any comments on how to think about SG&A through the year here?

Yes. I mean, I would say, generally speaking, for SG&A, probably a good way to look at it, I mean, it's - we've been impacted by the acquisition. So you've seen SG&A absolute dollars go up just as we brought more businesses into the portfolio. But as we move into '24, I mean, I think we'll be jumping off from the '23 level. Get to the second quarter is typically one of our annual pay increases kick in, so you'll probably have a little bit of a headwind there. But staying pretty constant off that level.

Got it. Super helpful. Well, thanks so much, guys. Really appreciate it.

Thanks, Chris.

Our next question comes from Michael Feniger from Bank of America. Michael, your line is now open.

Yes, thanks for squeezing in. I appreciate it. I know this was covered a lot with the inventories. I'm just curious on your own inventories, sale was up 2% quarter-over-quarter. Revenue was down a little bit sequentially. I know there's a lot of folks on the inventories of the channel. Just curious how you're feeling about your growing inventories in 2024. And I know you have a big cash flow year, maybe that's tied to it. Just how we should think about that as you kind of work through that through 2024?

Yes. First, I would say, a couple of quarters now, a few quarters, our supply chains are pretty close to normal. We have problems here and there, but nothing beyond the normal. So deliveries, response time, et cetera, all good. So we've got - and as I said in my comments, we've got a really good focus on this and have for a couple of quarters. So we are planning to underproduce to revenue through the course of the year, and that is factored into our decremental outlook that we would have a little lower production levels than the revenue and continue to see some positive cash generation from inventory.

Great. And sorry if this was covered. But EMEA, Europe only down 1% organically. It was the second quarter where you guys kind of report on a year-over-year basis just down 1%. Just curious if Europe feels more stable when we look at this organic growth that you're reporting relative to some of the economic data there, kind of what you're seeing over there with the end-markets in Europe?

Yes, I would say stable is a good word for it. It went down a little faster or softer a little faster than our other markets, but bounced back a little faster as well and has been - it's been more stable, to your point, probably than the headlines. And certainly, Germany is probably a little softer for us than some other countries, but still pretty good. Now again, a little lower comp than what some of our other geographies, particularly Asia is dealing with some very sizable growth comps in the last couple of years.

Thanks everyone.

Thanks Mike.

We currently have no further questions. So I'd like to hand the call back to Mr. Neil Frohnapple for closing remarks. Over to you.

Thanks, Bruno. 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.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.