Timken Co (TKR) 2021 Q3 法說會逐字稿

Good morning. My name is Anna, and I will be your conference operator today. As a reminder, this call is being recorded.

At this time, I would like to welcome everyone to Timken's Third Quarter Earnings Release Conference Call. (Operator Instructions)

Mr. Frohnapple, you may begin your conference.

Thanks, Anna, and welcome, everyone, to our third quarter 2021 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. I appreciate you joining us today.

Before we begin our remarks this morning, I want to point out that we have presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link.

With me today are: the Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. (Operator Instructions)

During today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release, and in our reports filed with the SEC, which are available on the timken.com website.

We have included reconciliations between non-GAAP financial information and its GAAP equivalent, in the press release and in 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, everyone, and thank you for joining Timken's third quarter earnings call. Our third quarter results reflect what is a very strong but also unpredictable industrial market. Results also demonstrate the resiliency of our business to respond to a wide variety of market conditions as well as the strength of our team, and their ability to successfully navigate through the issues as they arise.

Our revenue of $1.037 billion was up 16% from last year. The revenue set a new third quarter record and was 13% higher than the previous record set in the third quarter of 2019. Additionally, order input continued at a strong pace, and we ended the quarter with a very healthy backlog. Our demand continued to be more erratic than normal due to customers battling through multiple supply chain issues, such as the global chip shortage, and international freight delays, but demand remains a very positive situation and 1 that we expect to continue through next year.

Given our own supply chain challenges, we are pleased with a 16% revenue gain, but it did come at a significant cost premium. Earnings per share of $1.18 was also a record for the third quarter, was $0.04 over the prior record. EBITDA margins declined 220 basis points from last year to a still very respectable 17.2%. I want to remind everyone that our year-over-year comps for the quarter and year-to-date include the temporary cost actions we took last year at the hike of pandemic. 2020, temporary cost comps normalize in the fourth quarter of this year.

From a cost perspective, steel, freight, and other purchase material were all up significantly from prior year and up sequentially from the second quarter. Labor efficiency in our plants also continue to suffer from a variety of issues that included volatile plant schedules due to demand and supply changes, pandemic-related absenteeism, and the onboarding of new hires to meet the increased demand.

Pricing was up over 100 basis points year-on-year, but continues to lag cost increases by a significant margin. Sequentially, price realization increased from Q2 to Q3, and is sequentially each month from June through September. Our cash flow performance reflects continued inventory build to serve increased customer demand and to account for the extended lead times within the supply chains.

We are not providing specific revenues or earning guidance due to the supply chain uncertainties, but I will provide additional color on what we are seeing. Demand remains strong in total across markets and geographies. Channel inventories are also favorable to provide support for the demand strength to continue well into next year.

Timken has steadily ramped up our ability to supply the market through the course of the year, but the uncertainty around supply and cost remains elevated. Some of the issues that impacted us in the third quarter have improved, some have gotten worse, and some new ones have arisen.

The chip shortage is not forecasted to stabilize anytime in the near future, logistics delays are not expected to improve until after the holiday shipping season at the soonest, and logistics cost continue to rise. Steel cost appear to have leveled off, but remained much higher than they were a year ago and are not moving down.

We are doing very well addressing our internal labor inefficiencies, but new issues continue to surface such as the intermittent power outages at our plants in China, and a recent resurgence of the virus in Romania. We expect pricing to increase sequentially from Q3 to Q4, but we still expect price cost to be negative in Q4.

Our revenue typically declines modestly from the third quarter to fourth, call it, low to mid-single digits, and we expect a sequential decline this year to be slightly greater than recent history. This would still result in a solid year-on-year revenue growth in the mid- to high single-digit range.

We expect EBITDA margins to decline sequentially in the fourth quarter as they normally do. And I again caution that the supply chain situation remains very dynamic so the range of possible outcomes is wider than normal.

As we look out to '22, we are planning for the demand situation to remain strong. Comparing the start of '22, to the start of '21, we will enter next year with a much higher backlog, higher order input levels, and higher production levels. We also expect more self-help in '22, both from pricing as well as operational initiatives.

We predominantly price at the time of shipment, and we expect a step-up in price at the start of the year from the fourth quarter. Keep in mind, many annual price agreements will open for repricing at year-end, and we will benefit from other pricing actions, which continue to gain traction, including our material recovery mechanisms.

We also expect to operate more efficiently in '22, as we get deeper into our production ramp, and the labor issue specific to the pandemic ease. We no longer expect near-term cost relief of material, logistics or labor, but we do expect price to be a much larger contributor to margins, and we also expect to improve our internal labor efficiencies.

We're planning for a very strong start to '22 with a step up in sequential revenue and margins in the first quarter from the fourth. We also expect contribution to our full year '22 results from capital allocation. We continue to have a bias to M&A, with a share buyback as an attractive option.

I want to take a moment to highlight 2 of our acquisitions, Rollon and iMS. Rollon was our first step in the linear motion. Rollon is a leader in the engineered linear space, developing unique customer applications for a wide range of markets and applications. The business has a strong management team, a strong technical value proposition, and has been an excellent addition to the Timken portfolio. Rollon has a small but growing position in linear systems for factory automation.

To expand their product offering, last quarter, we acquired Intelligent Machine Solutions or iMS. This bolt-on acquisition gives us a full size range of linear systems for the factory robotics space, and gives us greater in the U.S. market. And we will continue to drive financial and strategic value for the corporation through the acquisition of businesses like Rollon and iMS.

I also want to highlight that we recently released our 2020 corporate social responsibility report. Sustainability has been core to our products for more than 120 years, and being an excellent corporate citizen is a priority for all of us at Timken. We're proud of our work in developing renewable energy sources, and the actions we are taking to reduce our own environmental impact. We're also committed to being a top global employer with a diverse workforce, giving back to our communities, and leading the corporation, ethically and with strong governance practices.

Before I turn it over to Phil, let me close with saying that while the last couple of years have been filled with unplanned events. Our response to those events has really demonstrated the strength and resiliency of the company for all stakeholders.

After delivering record revenue and record earnings per share in 2019, our world was turned upside down in early '20 with the onset of the pandemic. As the year progressed, we've managed the downturn well with strong cash flow and earnings, excellent decremental margins, and an increase in the dividend. And while we delivered good financial results, we also continue to advance the company's strategy, including delivering a breakout year for our renewables business, and completing the acquisition of Aurora Bearing. In 2021, we've been dealt with a surge in inflation across many of our key input cost as well as unexpected supply chain and labor market challenges.

Despite these challenges, we are once again on track to deliver another year of record revenue and earnings per share as we continue to advance the company's strategy with our outgrowth, operational excellence, and capital allocation initiatives.

Looking at '22, we are confident that the company can and will perform well if the inflationary environment persists. We're in a great position to deliver new record levels of revenue and earnings again in 2022, all while continuing to advance the company's long-term strategy to grow as a diversified industrial leader.

Phil?

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 11 of the presentation materials with a summary of our results.

Revenue in the third quarter was $1.037 billion, up 16% from last year, and up more than 13% from the third quarter of 2019. We delivered an adjusted EBITDA margin of 17.2% and adjusted earnings per share of $1.18, up 4% from last year. Both revenue and adjusted earnings per share were Timken records from the third quarter.

Turning to Slide 12. Let's take a closer look at our third quarter sales performance. Organically, sales were up 13% versus last year as both segments delivered double-digit growth led by Process Industries. We also a saw double-digit growth across both our bearings and power transmission product lines.

Pricing was positive in the quarter as we continue to implement price increases across the portfolio. In addition, currency added almost 2% of the top line, while acquisitions, including Aurora Bearing from last year and the recent iMS acquisition contributed close to 1%.

On the right-hand side of this slide, you can see organic growth by region. This excludes both currency and acquisitions. All regions were up in the quarter versus the year ago period, led by Latin America and Europe with broad-based growth across most sectors.

Let me comment a bit further on each region. In Latin America, we delivered strong growth in the quarter, up 27% with distribution and off-highway posting the strongest gains. In Europe, we were up 22%, with broad growth across most sectors led by off-highway, distribution and general industrial. In North America our largest region, we were up 10%, driven mainly by strong gains in the distribution off-highway, marine and general industrial sectors, which were partially offset by lower automotive shipments. And finally, in Asia, we were up 7%, driven by growth in the off-highway, distribution and general industrial sectors, while automotive was down.

Turning to Slide 13. Adjusted EBITDA was $179 million or 17.2% of sales in the third quarter compared to $174 million or 19.4% of sales last year. The increase in adjusted EBITDA dollars compared to the prior year reflects the favorable impact of higher volume and related manufacturing utilization with positive price mix and favorable currency. But as you can see, these items were almost fully offset by significantly higher material, logistics, and other costs.

Let me comment a little further on our manufacturing and operating expense performance in the quarter. On the manufacturing line, we benefited from higher production volume in the quarter, but this was mostly offset by higher labor and other costs to serve the increased demand. From a footprint standpoint, our new bearing plant in Mexico continues to ramp, and we are in the process of closing our bearing plant in Italy.

Moving to material and logistics. We saw a significant increase in costs compared to last year in the quarter. Reflecting inflationary pressures and higher international freight costs. Looking at the year-on-year change, we believe this will be the largest quarterly headwind of the year.

And finally, on the SG&A/other line, costs were up slightly year-on-year as we had higher spending to support the higher sales levels, offset partially by lower incentive compensation expense in the period. And recall that we had a small amount of temporary cost actions in the third quarter of last year that did not repeat.

On Slide 14, you'll see that we posted net income of $88 million or $1.14 per diluted share for the quarter on a GAAP basis, which includes $0.04 of net charges from special items. On an adjusted basis, we earned $1.18 per share, up 4% from last year. Our third quarter adjusted tax rate was 23.3%, bringing our year-to-date adjusted tax rate to 24.5%. This reflects our geographic mix of earnings and the impact of tax planning initiatives.

Next, let's take a look at our business segments, starting with Process Industries on Slide 15. For the third quarter, Process Industries sales were $550 million, up 18% from last year. Organically, sales were up roughly 14.5%, driven by growth across most sectors, with distribution and general industrial posting the strongest gains. Marine was also driven by increased activity and new business wins.

We also benefited from higher pricing in the quarter. In addition, the favorable impact of currency translation added about 2.5% line while acquisitions added nearly 1%. Process Industries adjusted EBITDA in the third quarter was $131 million or 23.8% of sales, compared to $115 million or 24.7% of sales last year. The increase in adjusted EBITDA reflects the impact of higher volume, related manufacturing utilization, positive price/mix, and the benefit of currency partially offset by higher material and logistics costs.

Now let's turn to Mobile Industries on Slide 16. In the third quarter, Mobile Industries sales were $487 million, up 13.7% from last year. Organically, sales increased nearly 12%, with off-highway and heavy truck posting the strongest gains, while automotive was down. And while aerospace was relatively flat in total, we did see higher commercial revenue in the quarter versus the year ago period. We also benefited from positive pricing in the quarter, and currency translation, and acquisitions each added about 1% to the top line.

Mobile Industries adjusted EBITDA for the third quarter was $58 million or 11.9% of sales compared to $68 million or 16% of sales last year. The decrease in adjusted EBITDA versus last year reflects the impact of higher material, logistics, and other operating costs, offset partially by higher volume and related manufacturing utilization, and positive price mix.

Looking at our 2 operating segments. Mobile Industries was more negatively impacted by the customer and supply chain disruptions during the quarter. These temporary disruptions resulted in relatively higher operating costs and greater manufacturing efficiencies in Mobile Industries versus Process.

Turning to Slide 17. You'll see we generated operating cash flow of $106 million in the third quarter. And after CapEx, free cash flow was $63 million in the period. The decline in free cash flow effect of higher working capital to support our sales growth, compensate for supply chain disruptions, and serve customer demand. We also had higher CapEx to fuel our growth initiatives.

From a capital allocation standpoint, Timken paid its 397th consecutive quarterly dividend, and repurchased 400,000 shares during the third quarter. Taking a closer look at our capital structure. We ended the quarter with a strong balance sheet. Our leverage, as measured by net debt to adjusted EBITDA was 1.6x at September 30, which is near the low end of our targeted range. This puts us in action to continue to drive our growth and capital allocation strategies moving forward, including M&A and share buyback.

Now let's turn to Slide 18 for additional commentary on the outlook. Rich provided color on the outlook in his remarks. So I'll just touch on a few other items. For the full year, we continue to expect CapEx spending of around $150 million, which includes ongoing growth investments in areas like renewable energy and marine. We anticipate net interest expense of around $58 million for the full year, and we currently expect the tax rate to equal the year-to-date rate of 24.5%.

Finally, for the fourth quarter, as Rich indicated, we are expecting adjusted EBITDA margins to be lower than the third quarter, driven by the lower anticipated revenue, and persistent cost and supply chain headwinds.

Note that we continue to implement price increases and other operational excellence initiatives across the enterprise to offset the headwinds. We expect significant price realization next year, and we also expect a positive impact from our ongoing manufacturing footprint initiatives.

So to summarize, we delivered strong revenue and solid operating performance in the quarter despite a very challenging environment. We'll continue to focus on serving customers and mitigating the cost headwinds, while advancing our strategy, and we're confident in our ability to generate higher levels of performance in 2022.

This concludes our formal remarks, and we'll now open the line for questions.

Operator?

(Operator Instructions) We'll now take our first question from Stephen Volkmann with Jefferies.

I guess the only thing that sort of surprises me is the surprise situation. And I guess I'm a little surprised that you only had 1% or so. I think you said in the quarter. It just feels like more of your revenue base should be sort of adjustable more quickly, but maybe I'm wrong about that.

But I guess the key question is when you talk about significant price in '22, I think most industrial companies we follow are talking kind of mid-single digits. I don't know if you can just sort of dive into that a little bit more. And I guess what's keeping you from sort of pushing this more aggressively?

Well, maybe hit the last 1. I don't think there's anything keeping us from pushing it more aggressively with the exception of -- in hindsight, we certainly started late and started a little too small, but I think we're certainly looking to make up for that in the coming months. So maybe going back to your comment on the 1%, the comp was greater than 1%.

And where to your point where we can move price, which is roughly half the portfolio, we started that late in the second quarter. As I said, our pricing improved from May to June, June to July, and improved each month through September, and improve again in October. So that is happening.

I think as you look to next year, it's probably a little early for us to get very specific on where we would expect to land is quite a bit of that is in discussion today. But I think if you look at our objective certainly would be to cover our cost increases that we've had to date with our price and get to positive price/cost in '22.

And if you look at the financial walk on Slide 12 and see the negative $53 million of material logistics that we have in the third quarter, certainly, 1% to 2% wouldn't make that happen. So while not getting too specific, the numbers need to be certainly above the low single-digit range to make that happen.

I think the other comment I would make on being a little late a tick had anticipated that more of these logistics costs, and things will be a little more transitory than what they have been. So we're moving to catch up with that now.

Okay. That's great color. And just a quick follow-up on that is I know you have some big contracts with big customers, and I'm guessing they're probably not excited about price increases but in the past you have actually been willing in enable to accept some nonprofitable type contracts. Should we be thinking along those lines again in '22 as we try to write this?

No, I don't think so. I think the risk of us losing business from pricing in '22 is very slim. And if anything, we will net, I think, positive on the share side next year. To your point of what keeps you from going farther than that short term, your first question. Short term, there's very little. I think our customers would generally have a tough time moving anything that they produce -- that they buy from us in a time frame and at a cost position with available capacity, et cetera in a time frame, so we have a lot of short-term price power up. But as you know, we also look to price when we look to move pricing up, we don't intend to move it back with the exception of the material flow-throughs that we have.

So we're looking to find that right spot that covers the cost, gets us positive price costs, but also isn't something that when markets level off that we're having to walk back in any ways. And I think, as I said, there's a quite a bit of room for us to move in that direction to start the year.

We'll now take a question from Rob Wertheimer with Melius Research.

Sorry to have the next 1 about price also, and that was helpful. Just curious, Rich, if the pace at which you look at pricing is changing right now. You mentioned you were a little bit behind. I don't know if that's just structurally how your agreements work or whether you felt like the organization could have responded faster. And if you've changed things to make on a new inflationary environment, swifter decisions.

And then out of curiosity, was the surprise in the quarter, and I assume it was on cost, was it almost entirely transit? Or it was a kind of more balanced in or that contributed to or behind the curve?

Yes. On the price, I would say a big part of us being behind on prices, it is by design that we pass through material price increases typically at least a quarter late, sometimes 2 quarters late. And then we also have a fair amount of our business tied up on 12-month pricing agreements. So as material costs and is probably only the second time in 20 years of material costs have gone up this quickly. The only other time would have been in the ['08] time frame.

So typically, it's not a real big deal to have that lag, but it's definitely caught us in the first couple of quarters, this will actually beginning in the fourth quarter of last year, it started to catch us. But we -- again, we make that up. So that happens by design.

When the costs go the other way, it happens the opposite way, and there's a lag where we hold that material that elevated material costs for a extended time before it comes back down. And then the other part is where we have pricing contracts. And again, I think it's generally the nature of the business. And as a general rule right now, shorter is better, because it gives you better time to do that, but our customers generally expect us to commit to 1 year.

So I think as you look forward, where we're in a position right now is, again, we've got a fair amount of pricing power, and we just got to make sure with where we land to start the year that we've got enough price to cover the cost.

So I think in the last part, certainly would probably move a little bit faster, where we had the opportunity, but the cost curve is pretty unique cost curve, and how quickly this came [adds on] from 1 quarter to the next international freight cost, price of a container from India to Europe, doubling and things like that.

So I wouldn't be too critical of where we landed. And again, there's usually a little bit of a lag there. So I think we'll be okay there.

Yes, Rob, and this is Phil. Regarding the second part of your question in terms of what changed relative to expectations in the quarter. I mean, certainly, logistics was a big shocker in terms of some of the ocean freight rates and the international freight rates. But I would say across the board, the supply chain disruption beyond that broadly got a little bit worse, the inflation, and then the -- some of the inefficiencies that sort of emanate from that. It was probably across the board, but no question, the logistics would have been the would have been the big 1 in the core.

I would say generally, we came into the quarter thinking some more of this was transitory and would ease. And again, as Phil just said, logistics went up. We thought the pandemic -- some of the specifics around the pandemic would ease in the plants. And during the third quarter, we had a quite a bit of absenteeism in our Southern U.S. plants, and some other parts of the world, that were put through our productivity.

So go back 4 or 5 months, we thought some things will be better and that didn't happen. So I would say all of that. And then obviously, the -- on the demand side as well, automotive revenue was significantly affected by the chip issues.

We'll now take our next question from Chris Dankert with Loop Capital.

I guess, to move down just a little bit here, SG&A, pretty impressive execution in the quarter. As we move into the new year, given incentive comp, just base wage inflation, logistics, et cetera.

Should we expect to kind of move back into that mid- to upper $150 million a quarter type range? Just any color on how we should think about SG&A, a kind with the move out of 3Q here?

Certainly, in absolute dollars. I think as you look next year, there will be some pressure there. But I think from a leverage standpoint, maybe a touch up. But we're looking mix aside, I think we can keep it pretty -- I don't see us going back to where we were a couple of years ago, anytime soon as a percentage of sales.

I mean, again, you have touched on it a little bit, hey, we had some temporary cost actions from last year that were lapping, I guess. Is there any other additional costs we should keep in mind that, I mean, T&E obviously is still down, but anything else measurable or notable that we should keep in mind as things kind of get back to "normal".

Certainly, travel remains significantly down from where it was. It certainly come up a little bit, but a lot of the dollars are tend to be in international travel, and that's still well below 50% of what it used to be. And again, I don't know that I would expect it to go to 100%, but I do believe, certainly, there will be some needed increases in that as you look forward.

Again, incentive comp in dollars could be a headwind next year, but that's only if we if we're growing, and it merits mean a headwind. So from a leverage standpoint, that wouldn't necessarily be the case. And then I think in general, I think with some of our growth initiatives and whatnot, you'll see some head count coming back in to the business probably next year.

But again, we'd expect that to leverage. And from a percentage, I think we're in pretty good shape.

Yes. And Chris, the only thing I would add, this is Phil. When we're looking at the rest of the year, as we said, we had a little bit of higher spending in the quarter also favorability, slight favorability in incentive compensation. So as we look ahead to the fourth quarter, I think you'll see us probably be more in line with the first half rate, if you will, as we move into the fourth quarter with some increased spending occurring, and as we revert back to normal incentive comp accruals.

Got it. That's very, very helpful, guys. And then just a follow-up, if I could, on alternative energy, we talked about it quite a bit in the past, but just any expectations for '22, just given what we can see in the backlog at this point?

Yes. Certainly, we're planning for a more moderate year of growth right now. So I mean we said this year, we're looking at double digits and remain on track to be in the double digits, have a shot for that next year, but certainly, they're -- I think it's pretty well publicized.

The China wind industries is slowing down here a little bit at the end of the year. I'm going to start off a little slower. But again, we've got some new platforms going there. We're not just wind. We're not just China.

So I would say no change to our long-term bullishness on the forecast, but would expect a more moderate growth rate next year as we see it through today.

We'll take our next question from David Raso with Evercore.

Having guidance. I just wanted to make sure we have a little sense of parameters here. When you look at price mix versus material logistics, I mean, the cadence of the year, first quarter was negative [$28 million], then negative [$36 million] last quarter, and now third quarter just came in at negative [$47 million].

For the fourth quarter, it's off of a lower sales base. So just from that alone, I would think it would be down sequentially. Can you give us some sense of how you think about price cost in the fourth quarter versus the third quarter? And then when would you expect sort of how you're thinking about negotiating right now for pricing? For the cadence, when would you expect price cost to be neutral?

David, it's Phil. Maybe I'll start with the fourth quarter commentary. So as we've said, we do expect the third quarter to be sort of the largest quarterly year-on-year headwind. So when you think about last year, actually in the fourth quarter of last year, we did see logistics start to move up. I didn't quite get hit as much by as much by the material in the fourth quarter. That was more in '21. So as we look ahead to the fourth quarter continue to get price.

As Rich indicated, we're going to get more price in the fourth quarter than we did in the third. And then we would expect that year-on-year headwind from material and logistics to moderate, probably more on the logistics side than on the material side, but to moderate in total.

No. I said earlier, I'm not sure we're ready to say when price cost goes positive, but our objective is that it happens next year. We're not done with enough of the pricing to say that for sure. But certainly, we expect a step up in price realization from Q4 to Q1.

Well, maybe if I could, just a quick follow-up on that then. The percent of your pricing that's been negotiated for next year, I'm just curious if you had to generally characterize what percent of your pricing for next year has already been negotiated. So sense or your visibility on that side?

And then sort of what percent of the cost maybe it's only a 6-month comment, maybe your logistics cost 6, 8, 12 months from now. But we're just trying to get a sense of how much do you have visibility on price cost versus it's still mostly in front of us on negotiation?

I'd say the half that we are able to move price at any time during the year. I would call that negotiated that we have either implemented or are implementing actions to make that happen. And then I'd probably throw in another 25% to 30%, that we have pretty good line of sight to where we're going to land within a reasonable tight range. So I think we're 2 months away from being able to provide, I think, final specifics on that, but it would be a pretty solid number.

I think on the cost side, I think that's where more risk is that we've just got to make sure we don't undershoot it on the price side, that the costs continue to escalate. So we've got material, we're generally have pretty good visibility to the material side, 3 to 6 months out but things have continue to go up. And Phil already talked about, we were a little surprised in the third quarter with some of the rate increases that we've seen on -- in particular, international freight.

So that curve and how that plays out, I think, is a big factor in when that flips to positive.

Our next question will come from Steve Barger with KeyBanc Capital Markets.

For your 4Q revenue comments, do you expect positive year-over-year organic growth in both segments? Or could mobile be down? And then same question for segment [EBIT]. Do you think that grows year-over-year in each of some of the headwinds you use?

We expect both segments to be up. Within mobile, though, we are looking for automotive to be down year-on-year, but both process and mobile were looking to be up for the fourth quarter for year-on-year.

Well, I'm sorry, what was the second question, Steve?

Segment EBIT, do you think that can grow year-over-year as some of the headwinds ease as you get a little better price realization and specifically, in mobile?

Yes. I would say on the mobile side, Steve, we will continue to be impacted by supply chain disruptions, as I indicated, Mobile is getting a little bit more negatively impacted by the process from the supply chain disruptions, and even some of the cost pressures. So I would expect it to continue to be a little bit more challenging on the Mobile side than the process side.

As we talked about, we expect margins to be down in the fourth quarter from the third, just on the lower revenue, and a kind of the continued headwinds and then for likely Mobile to be more impacted just like it was in the third quarter.

I think 1 other piece of color to add to that maybe a little bit of your question, Steve, and a little bit of David's question before that as well on the price cost par and looking again on Slide 12.

I mean, there's also an element both in the manufacturing which is positive [$5 million] but with this volumes would have certainly -- we would have certainly aspire to a larger favorable than $5 million on the manufacturing side of these volume levels and within the [$53 million].

There are parts of that, that are self-inflicted, which again, we're not necessarily -- not looking to recover absenteeism in some of our plants. We're not looking to cover maybe some -- there's premium freight in there, and some things that we're pretty confident of have already improved and are going to improve as we look to 2022.

So there's really these cost increases, there's a inflationary part, there's probably a normal cyclicality part, and there's also been this, I'll say, heightened inefficiency part. And we try to trying to bucket those and make sure, as we look at next year, we're covering what we think is going to remain.

Got it. And just bigger picture. Since 2015, you spent $1.6 billion on acquisitions, largely in Process to drive better mix in aftermarket and reduce cyclicality. And now a couple of quarters into an expansion, you had to withdraw guidance due to Mobile.

So this require more process M&A or more diversification on Mobile? Or just in general, what can you do to improve visibility?

Yes. I mean, Steve, I would just say, obviously, we really -- we like what the M&A is doing for the company. And as Rich said, we've got the balance sheet. We'll look to continue to do M&A. That has tended to be more focused on the Process side. I mean, our Mobile business is a great business. I think as we indicated, with the automotive chip shortages, and some of the other issues affecting Mobile.

Mobile is a little bit disproportionately impacted. But I mean, the challenges we're facing around supply chain, inflation, are kind of across the enterprise. We're working to get pricing across the enterprise, not just in Process, and you'll see that as it comes through.

So I think our strategy will remain the same, which is leverage the best part to the enterprise, focus the M&A on continuing to diversify the portfolio, with an emphasis on the aftermarket, and a tilt toward process industries. And then in Mobile, like we have been, be very thoughtful about where we participate, be very focused on the returns we generate in that business and drive them both forward together.

And if you go back 5, 10 years, we were a much larger mobile industry segment and process. A couple of years ago, they kind of went neck and neck now processes, slightly larger, and I think that will continue. But I think -- I don't think there's any change to the strategy, but we certainly want to be -- would like to do some more M&A as we move forward.

We'll take our next question from Joe Ritchie with Goldman Sachs.

So I know we've talked a lot about pricing. I'm just curious with some of the suppliers that we cover into like the auto industry, and the truck industry, and sometimes difficult to really go back to the customers and get price, and it's really mostly platform driven.

I'm just wondering if you could just maybe just provide us just a little bit more color as to those specific customers, and your ability to get price increases in 2022.

So I think somebody commented earlier that our customers are not ever really looking for a price increase or welcoming a price increase, but also they certainly recognize that what's happened with steel prices. And I don't have a lot of concern, Joe, that we're going to be able to, to be able to get prices through mobile industries and retain share.

So I think the conversations are progressing there. And I think the other thing when you look at it with what's happening with their own supply chain issues and constraints, a reasonable price increase on the bearing spend with The Timken Company is probably not generally in their top 100 issues that they're facing on their own supply chain issue. So we will get the pricing next year.

Yes. The only thing I would add to that, Joe, this is Phil. As when you think about some of the big OEMs, where contracts renew, it's operating much as Rich described. But in some of the multiyear deals, even ones that aren't renewing this year they anytime we have a multiyear deal, we have a price adjustment mechanism in there. It works both ways, but needless to say, in this kind of an environment, it's working in our favor.

So as those, as those mechanisms are adjusting, we are getting, frankly, automatically getting some positive price from some of the multiyear deals we have that aren't up for negotiation this year. So that's worked in our favor as well.

And that started probably a little bit in the third quarter. We'll expect more in the fourth quarter, and then that will continue. Typically operates on a lag, a quarter or so lag, from when our costs go up, but it is working in our favor as well.

And I guess 1 more comment. I think in the short term, to your point, of these being platform driven. It takes a lot of engineering work, sourcing work, et cetera, to respond to resource Timken or 1 of our competitors if we're trying to win business. And typically, the first action is you go in the penalty box on new platforms and that sort of thing. And again, I think we'll be fine there. But to 1 of the earlier questions, I mean, we have to get the price when you look at what's happened with our cost structure. And we will get the price, and I don't think we will lose any business over that.

In fact, I think we'll be a net winner next year. But if the choice comes down to that, we would probably stick with. We need pricing to cover what's happened with our cost structure in 2020 -- 2021, sorry.

No, that's helpful. And I guess the follow on, I'm trying to understand also a little bit more of your surcharges, and how that actually works? Because, obviously, we're in a hyper inflationary environment from a freight perspective. And I'm just trying to understand whether it's like you end up potentially eating some of those excess costs, transport costs, that you're experiencing this quarter, whether that actually comes through in the following quarters?

Just any other color around that would be helpful.

Yes. Typically, we're -- as Phil said, we're definitely in a multiyear agreement, we do not want to be exposed to variation in steel prices over that time. So we will have a quarterly, biannual, pass-through mechanism that looks backwards and then adjust going forward.

So if costs went up in the first half of '21, and that gets trued up in July 1. You eat it all in the first part, and you start to offset it in the second part.

I would say they're not -- they're certainly not margin expansive for us. It's really a it's a protection. And if you think you probably still get a little compression there, because the best you're making up for your cost and not getting cost plus margin. Where we don't generally have that.

And then we have some things like that, too, with currency in some places and some other exposure to make sure that over an extended period, and we get in this environment that we have some protection and coverage there. And then obviously, we can reprice the base price of that as well when the contract opened up.

Where we have typically not had any protection, which has been a problem this year is freight cost. And I don't think that -- that's ever been a problem until this year. But this year, it's definitely become a challenge and 1 that, again, I think we will get on the right side of it within the next couple of months.

We'll take our next question from Ross Gilardi with Bank of America.

I just want to ask, I mean, you had planned a fair amount of reinvestment into the business, going into this year. The number that I recall was, I think, $75 million over the next year or 2, largely in the renewable side, you can correct me if my facts are wrong there. But where does that stand? Have you pushed any of those more growth-related investments out at all just given a lot of the other things you've got to deal with right now?

The $75 million was specifically the renewable, multiyear renewable investment. And no, we've not pushed any of that out, probably if you go back to when we announced it, so has slipped a little bit just because of the supply chain issues that we're all talking about, that machine build schedules, and things have probably slipped a little bit.

But we completed the big move that we've made this year. We completed the solar facility relocation. We went from 3 overfilled facilities into 1 larger, more modern facility. The dust on that really -- we finished that really in the second quarter, but that kind of settled in the third quarter. And I would say we're -- we'll now start suppose to incurring the cost of moving. We'll now start getting the benefit of having a consolidated and better facility there. So it's a little bit of a margin expansion for us going forward as well as capacity expansion.

And then the other 2 big ones underway are we have a facility expansion in China for what we call our ultra-large bearings, a couple of meters in diameter. That project is progressing well, and that's both, some brick-and-mortar facility expansion as well as equipment coming in. And then a couple of expansions of facilities, and more equipment expansions in Romania, China as well as India for the market and all of that is progressing well.

So investment continues. Again, I mentioned it earlier, it will be up double digits again this year in renewables. And there is some market pullback in parts of the world, but we're still pretty optimistic of what we can do next year, and certainly long term on the investments.

Got it. Rich, and then I'll give this 1 a shot, and I don't want to speak too much about '22 yet. But just based on everything you've got going on with pricing in the phase and that you've see, and just your current expectations on supply chain.

I mean when is the earliest you could realistically see EBITDA margins turn positive again on a year-on-year basis? Is it not until the second half of '22?

Yes. Let me actually come back and make 1 more comment on the renewables investment, Ross.

You go back to my comment that the third quarter was a revenue record by 13% over [19%], renewables really is the big delta in that time frame. Some other markets have gotten back above where they were in [19], some are below. Automotive is obviously below. But I do think as we look into next year, and we've just got a much bigger base of renewable business, which is really giving the company a whole another level of scale, if you look back to where we were at in some of the industrial markets, in '18 or '19.

So probably not ready to say when, and certainly, the first quarter comp is a high bar. So I said I would expect to step up meaningfully from the fourth quarter to the first quarter, but I'm not sure I'm ready to say that we would expect it to be above or below 19.9%. But certainly, our objective would be for top line growth next year full year margin expansion and record earnings per share and better cash conversion.

Next question will come from Tim Thein with Citi Group.

Yes. Maybe just as we think about kind of the various drivers for next year, maybe you could talk about product mix, and maybe distill that even further into distribution. Obviously, we do have some data that we can observe from some of your public customers there, but obviously, that doesn't tell the whole picture.

So just curious if you could say a few words of kind of where we are. I wouldn't mention there's a whole lot of restocking there is going on, but just what you see on the distribution front globally.

Pretty good. I would say good. Recent -- more recent than as we talk for sometime now, the recovery that really started 15 months ago coming out of pandemic. So it was very much mobile OEM-led but that has started to flip in the last quarter or so. And I think the outlook, as you referenced a couple of the large U.S. distributors, I think that comment certainly applies to Europe as well in some other parts of the world.

There is a desire probably for more restocking than what they're able to do right now, and some of our customers have commented on that, that they're trying to build inventory levels heading into next year to -- for their own service and revenue opportunities that they see in front of them.

So I certainly don't see mix in the short term as we look out to '22. I'm not sure I'm ready to call it favorable, but I don't see it being the headwind that it's been for the lot for some time frame.

1 of the exception that could be -- if automotive came on significantly stronger, if the chip situation improved, obviously, that mixes us down a little bit. But overall, I think it's flipping to where it should be a plus for us versus the minus that it's been.

Got it. Okay. And then maybe just to your last comment there on cash conversion. This whole supply chain issue is debatable as to the longevity of it, and when and if this reverses. But does it lead you to think differently in terms of just kind of regional stocking levels?

From a Timken standpoint, meaning, is there -- should we assume maybe inventories are higher structurally? Or is that just they don't, overemphasize this particular period, and it reverses? I'm just curious if you've had any thoughts on that in terms of how you are thinking.

It's early bit before -- the current state and certainly for the at least the next couple of quarters, I think the answer is yes, we need to carry more inventory because things that used to take 4 weeks are taking 8 and 10 weeks, and we have more inventory in transit today than normal because of that. So we're having to stock more either to your point in the warehouse or just in transit itself. And then also the demand situation as well.

So I would say I think we're looking at higher inventory levels, although our turns really have been okay as the revenue has come up. They haven't slipped that much. There's been some offsets in some other areas. But generally, as the market turns, we would look to up like this, we would look to improve our inventory turns more than what has happened.

But I think certainly, the inefficiency there in this year wouldn't expect another step-up in that next year, which is what's hurdle us this year.

Our next question will come from Courtney Yakavonis with Morgan Stanley.

Maybe if you guys can just comment a little bit more on the comment about expecting a very strong start to 2022, with the step up in sequential revenue. If you could just help us think a little bit about how we should be thinking about Process versus Mobile heading into next year, especially after your comments, obviously, Mobile is going to be more impacted in the fourth quarter.

And then I guess secondly, can you just help us disaggregate, what you're viewing is for structurally higher costs are versus -- you talked about the inefficiencies, some of the more premium freight versus maybe just more structural increases in freight.

Just to help us think about what could eventually come out of the system next year.

Yes. I think on the first part of the question, I think if you look back last several years, probably an upmarket would be a better example. So maybe in '17, '18. Typically, we see a pretty good step up in both segments from a revenue and margin standpoint from Q4 to Q1. And I think this year would be on the higher end of that from a margin standpoint because of the step change in pricing that we would be expecting above what would be normal, some normal price realization that appear. But there's a volume factor there that usually kicks in both revenue as well as production.

We have more usually higher production levels than as well. And some other factors with our seasonality. But I think if you look back at the history there, we would expect that we would be on the high end of both, those in this market.

And then on the second part of your question, I think there's an element -- we're now looking at that and there's an element of just about everything that we've seen where our costs have gone up. There's an element of both inefficiency and/or transitory, and there's an element that's probably here to stay.

So I think steel costs could come down a little bit next year, but probably -- we'd certainly -- I wouldn't expect them it could go up, but I certainly wouldn't expect them to go down to 2020 or 2019 levels. Our labor costs have not moved up a lot on a unit cost basis. But when labor goes up, it typically is only in 1 direction. It doesn't go the other way.

On the flip side, in the labor, we've had a lot of -- we've had a very high amount of unusual amount of labor inefficiency, again, from the supply chain disruptions. You just don't have a good flow going through the plants from the pandemic itself with between still this year, we had mandatory shutdowns in some part of the world currently some power outage issues in China that's causing some productivity issues. So I definitely think that gets better and is better today than it was in the third quarter.

And then the logistics cost, I think, is probably the biggest wildcard out there in regards to how that settles out. I mean it's definitely -- If you look at the charts of ocean container cost, et cetera, I mean it is just, in some cases, up 50%, in some cases, up 200%. And again, we're not expecting any relief on that this quarter or to start next year, but it'd be hard to imagine those prices sticking at that level in perpetuity.

I think if that were to stick, then you probably would be looking at potential changes of both our customers and ourselves in regards to where we produce products, et cetera, because it's a pretty significant rate increase. So some stay, some improve with efficiency -- And then obviously, price coming in over the top of it.

It appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

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

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.