The Timken Company (TKR) Q1 2025 Earnings Call April 30, 2025 11:00 AM ET Company Participants Neil Frohnapple - Vice President - IRRichard Kyle - Interim President & CEOPhilip Fracassa - EVP and CFOStefan Diaz - Vice President, Equity ResearchChristopher Dankert - SVP - Equity Research Conference Call Participants Bryan Blair - Managing Director & Senior Research AnalystKyle Menges - Vice President - Equity Research AnalystMichael Shlisky - Managing Director & Senior Equity Research Analyst Operator Good m ...

Financial Data and Key Metrics Changes - The company reported FFO per share for Q1 2025 at $1.64, in line with forecasts [39] - The first quarter leasing volume was over 1,100,000 square feet, which is 25% higher than Q1 2024 and 33% higher than the previous four quarters [6][7] - The company narrowed its 2025 FFO guidance range to $6.80 to $6.92 per share, reflecting increased confidence in leasing activity [43][44] Business Line Data and Key Metrics Changes - The leasing activity included 467,000 square feet on vacant space and 561,000 square feet related to known expirations in 2025, indicating a focus on near-term exposure [20] - The development pipeline saw a significant increase in pre-leasing, with a jump from 50% to 62% pre-leased on the development pipeline [24] - The company signed a 160,000 square foot lease at 1050 Winter Street, contributing to the repositioning of the building [42] Market Data and Key Metrics Changes - The office sales volume in Q1 was $7.6 billion, down approximately 14% from the previous year, indicating market volatility [11] - Direct vacancy for premier workplaces is just over 13%, compared to 19% for the broader market, highlighting the strength of high-quality assets [11] - The overall mark to market on cash basis was up about 5%, with increases in Boston and flat conditions in New York [27] Company Strategy and Development Direction - The company is focusing on high-quality assets, with a strategy to pivot from life science development to office use in response to market demand [17][22] - New developments include a 70-unit multifamily project in Jersey City and a 930,000 square foot office project at 343 Madison, with significant interest from potential tenants [13][15] - The company is evaluating additional asset monetization opportunities, including the sale of land sites expected to generate approximately $250 million [15] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about potential impacts from tariffs and federal funding cuts, but noted that client demand has remained stable [7][10] - The company anticipates that leasing demand may slow if a recession occurs, but expects interest rates to decrease, which could benefit occupancy [10] - Management remains optimistic about future occupancy growth, with only 3.9% portfolio lease rollover in 2026 and 5.1% in 2027 [18] Other Important Information - The company completed over $4.2 billion in financing activity, demonstrating strong access to capital [7] - The company is actively engaged in the debt capital markets, with significant refinancing and new loans completed in Q1 [38][39] - The company is experiencing increased foot traffic and retail activity in certain areas, indicating a positive trend in local markets [10] Q&A Session Summary Question: Regarding 343 Madison, how is the company sizing up the start and pre-lease? - The company aims to pre-lease the building, targeting a yield of 8% and will make a decision on moving forward by July [46][50] Question: How confident is the company in the 4 million square feet leasing plan for 2025? - The company is more than halfway to its leasing goal and is confident in occupancy growth as many leases will commence in 2025 and 2026 [54][57] Question: What are the trends in the life science market? - The company has seen little new demand for lab space but is experiencing interest from life science organizations seeking office space [70][71] Question: What is the outlook for West Coast leasing activity? - The company notes strong activity from law firms and financial services, with smaller AI companies also looking for space [78][80] Question: How is the company addressing leverage and funding? - The company acknowledges a slight increase in leverage but expects it to moderate as developments come online and income increases [82][85]

Financial Data and Key Metrics Changes - The company recorded revenue of $1.4 billion for the first quarter, representing a 4% increase year-over-year, primarily driven by a 30% increase in used unit sales [13] - Adjusted EBITDA rose to $31.1 million compared to $8.2 million in the previous year, indicating significant operational improvement [14] - The company ended the quarter with approximately $179 million in cash, including about $158 million in the floorplan offset account [15] Business Line Data and Key Metrics Changes - Used vehicle gross margins improved to 18.6%, reflecting year-over-year growth as fresh inventory was aggressively brought back into the system [13] - The company opened nine new dealerships during the quarter, with five Lazydays locations becoming profitable in March, contrasting with previous cumulative EBITDA losses [11][12] Market Data and Key Metrics Changes - The company achieved a combined new and used unit market share of over 14% through February, indicating strong competitive positioning [10] - Used same-store unit sales were up in the high teens in April, while new unit sales increased in the high single digits [10] Company Strategy and Development Direction - The company aims to improve SG&A as a percentage of gross profit by 600 to 700 basis points, focusing on cost reduction and operational efficiency [5][14] - The management emphasized a commitment to selling more RVs, improving margins, and reducing costs, with a focus on profitability and market share growth [5][9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving growth in excess of low double digits in used units and low single digits in new units, despite some pressure on average selling prices (ASP) [9] - The company does not foresee significant fallout from tariff impacts on the RV industry, maintaining a positive outlook for demand and pricing stability [28][29] Other Important Information - The company has made strategic investments in its roadside assistance business to stabilize margins and drive earnings growth later in 2025 [13] - Management highlighted the importance of understanding consumer affordability and the potential for RV ownership as a cost-effective alternative for family vacations [41] Q&A Session Summary Question: ASP softness and promotional support from OEM partners - Management noted that ASP softness was not driven by excessive promotions and emphasized responsible inventory planning and collaboration with manufacturers [18][19] Question: Acceleration in same-store sales in April - Management attributed the acceleration to improved weather conditions and easier comparisons from the previous year, with confidence in maintaining low single-digit growth for the year [23][24] Question: Impact of tariffs on pricing - Management does not anticipate significant price increases before the model year changeover and believes any increases will benefit the used business [28][29] Question: Durability of balance sheet amid economic slowdown - Management reassured investors of a healthy balance sheet with significant cash reserves and plans to continue paying down debt [34][36] Question: Strength in business despite consumer confidence softness - Management highlighted the stable foundation of the RV market and the appeal of RV ownership as an affordable alternative for families [41] Question: Used business outperformance - Management credited effective sourcing strategies and record procurement efforts for the strong performance in the used segment [46] Question: Cost reduction actions and their impact - Management detailed the $35 million annualized cost reduction plan, emphasizing that most of the cuts have been implemented and will positively impact the bottom line [52][54] Question: Market consolidation and M&A outlook - Management indicated that consolidations are accretive to the bottom line and expressed a willingness to pursue opportunistic acquisitions while focusing on cash generation and deleveraging [72][78]

Second Quarter FY 2025 Earnings Call Presentation April 30, 2025 Disclosure Regarding Forward-Looking Statements Throughout this earnings presentation, we make a number of "forward-looking statements," including statements that are within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and that are intended to be covered by the safe harbor provided under these secti ...

Financial Performance - Sales and Revenues decreased by $1550 million, a 10% decrease, from $15799 million in 1Q 2024 to $14249 million in 1Q 2025[23, 24] - Operating Profit decreased by $940 million, a 27% decrease, from $3519 million in 1Q 2024 to $2579 million in 1Q 2025[27, 28, 29] - Adjusted Profit per Share decreased from $560 in 1Q 2024 to $425 in 1Q 2025[10, 19] - ME&T Free Cash Flow for 1Q 2025 was $02 billion, a decrease compared to 1Q 2024, primarily driven by lower profit[13, 14, 47, 48] Segment Performance - Construction Industries total sales decreased by $1240 million, a 19% decrease, and segment profit decreased by $740 million, a 42% decrease[32, 33] - Resource Industries total sales decreased by $309 million, a 10% decrease, and segment profit decreased by $131 million, an 18% decrease[35, 36] - Energy & Transportation total sales decreased by $113 million, a 2% decrease, while segment profit increased by $13 million, a 1% increase[38, 39, 40] - Financial Products total revenues increased by $16 million, a 2% increase, while segment profit decreased by $78 million, a 27% decrease[42, 43, 44] Future Outlook - The company expects 2025 full-year sales and revenues to be about flat compared to 2024, an improvement from previous expectations of a slight decrease[51] - The company expects 2Q 2025 sales and revenues to be similar to 2Q 2024[52]

Financial Data and Key Metrics Changes - The company reported GAAP net income per share of $0.56 for Q1 2025, down from $0.76 in Q1 2024 and $0.55 in the previous quarter [19] - Core earnings per share were $0.50, compared to $0.59 a year ago and $0.55 in the prior quarter, primarily due to a decline in portfolio yields [19][20] - The total portfolio at fair value increased to $27.1 billion from $26.7 billion in the previous quarter and $23.1 billion a year ago [21] Business Line Data and Key Metrics Changes - The company originated $3.5 billion in new investment commitments during Q1 2025, with approximately 60% coming from existing borrowers [26] - The weighted average yield on debt and other income-producing securities at amortized cost was 11.1% at the end of Q4 2024, down to 10.1% by the end of Q1 2025 [20] - The average debt to EBITDA ratio for portfolio companies was 5.7 times, the lowest since Q1 2020, indicating improved leverage [29] Market Data and Key Metrics Changes - New transaction activity in the liquid loan market dropped significantly as banks became more cautious, while the direct lending market remained stable [10][11] - The company noted increased volatility and widening spreads in secondary loan markets, with banks transitioning to a risk-off position [10][11] - The company has a significant amount of available capital totaling nearly $6.8 billion, positioning it well for new investments [14] Company Strategy and Development Direction - The company aims to capitalize on opportunities arising from market volatility, leveraging long-standing relationships to source deals [12][13] - The focus remains on service-oriented businesses that are more insulated from tariff impacts, with proactive engagement with portfolio companies to mitigate risks [15][17] - The company declared a quarterly dividend of $0.48 per share, marking the 63rd consecutive quarter of stable or increasing dividends [17][24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating future market conditions, citing a strong investment team and a healthy portfolio [12][13] - The company anticipates a slower M&A environment but believes long-term drivers for M&A remain intact [11] - Management highlighted the importance of proactive communication with market participants to ensure readiness for new opportunities [12] Other Important Information - The company has a low non-accrual rate of 1.5% at cost, down from 1.7% in the previous quarter, indicating strong credit quality [29] - The company has a significant taxable income spillover estimated at $883 million or $1.29 per share available for distribution in 2025 [24] Q&A Session Summary Question: Impact of private BDCs on pricing and competitive position - Management noted that spreads have already begun to widen, indicating a shift in the market dynamics, and expressed confidence in outperforming competitors [35][36] Question: Analysis of tariff exposure - Management conducted a thorough analysis of portfolio companies' exposure to tariffs, finding a mid-single-digit percentage of companies potentially impacted [39][41] Question: Outlook on M&A deal volume - Management acknowledged the slowdown in M&A activity but emphasized their ability to capture market share in the current environment [45][47] Question: Strategies for managing rising costs of liabilities - Management highlighted their historical ability to maintain consistent ROE and mentioned potential strategies such as leveraging and utilizing spillover income [51][54] Question: Backlog and deal closure uncertainty - Management indicated that while there may be some uncertainty regarding the backlog due to market volatility, they remain optimistic about closing existing deals [75][77]

Financial Data and Key Metrics Changes - The company reported sales of $964 million in Q1 2025, a decrease of 2% year-over-year, and earnings of $0.95 per share, down 5% compared to the prior period [11][12] - North America segment sales were $749 million, also a 2% decrease, with segment earnings of $185 million, down 7% year-over-year [11][12] - The overall segment margin was 24.7%, a decrease of 120 basis points year-over-year, primarily due to lower water heater volumes and continued strategic investments [11][12] Business Line Data and Key Metrics Changes - North America water heater sales declined by 4% in Q1 2025, driven by lower volumes, while boiler sales increased by 10% compared to Q1 2024 [7][9] - North America water treatment sales saw slight growth, offsetting retail declines as the company shifted focus away from that channel [9] - Rest of the world segment sales were essentially flat at $227 million, with earnings increasing by 15% due to expense management [12][13] Market Data and Key Metrics Changes - In China, third-party sales decreased by 4% in local currency, reflecting ongoing economic weakness and soft consumer demand [7][10] - The company anticipates a 5% to 8% decrease in sales in China for 2025, with a focus on maintaining premium brand positioning despite market challenges [24][25] Company Strategy and Development Direction - The company is focused on managing costs and optimizing production schedules to ensure efficiency, particularly in response to tariff-related cost increases [8][21] - A significant initiative for 2025 includes leveling production across the year to enhance plant efficiencies [8] - The company is actively pursuing acquisitions and has a robust pipeline, with a planned share repurchase of $400 million for the full year [14][15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the volatile macro environment, emphasizing the stability provided by core water heater and boiler businesses [30][31] - The company is cautious about the near-term market outlook, particularly in China, where consumer confidence remains low [25][71] - The guidance for 2025 EPS remains unchanged at $3.60 to $3.90 per share, despite uncertainties related to tariffs and input costs [15][16] Other Important Information - The company repurchased approximately $121 million worth of shares in Q1 2025, front-loading part of its annual repurchase outlook [14] - The company opened a new commercial R&D testing lab in Lebanon, Tennessee, aimed at enhancing product development and engineering capabilities [29] - A. O. Smith was recognized as one of the world's most ethical companies for the second consecutive year, highlighting its commitment to ethical business practices [30] Q&A Session Summary Question: Demand destruction around pricing actions - Management indicated that pricing actions are expected to cover costs, with a stable replacement business providing some insulation against demand destruction [35][36] Question: Clarification on tariff exposure - The 6% to 8% tariff exposure includes costs related to imports, particularly from China, and is expected to impact the cost of goods sold [38][40] Question: Sequential demand expectations - Management expects a relatively normal seasonal demand pattern, with no significant changes anticipated in order rates [45][46] Question: Pricing actions and market dynamics - Pricing actions have been communicated to customers, and the company is working closely with them to manage the implications of tariffs and pricing changes [92][93] Question: China market outlook - The company is cautious about the Chinese market, focusing on consumer confidence as a key driver for recovery, rather than solely on the housing market [71][77]

Financial Data and Key Metrics Changes - Transocean reported an adjusted EBITDA of $244 million on contract drilling revenues of $906 million, resulting in an adjusted EBITDA margin of approximately 27% [9][23] - The company experienced a net loss attributable to controlling interest of $79 million, equating to a net loss of $0.11 per diluted share [23] - Cash flow from operating activities was $26 million, while free cash flow was negative $34 million due to $60 million in capital expenditures [23][24] - Total liquidity at the end of the first quarter was approximately $1.3 billion, including $263 million in unrestricted cash [25] Business Line Data and Key Metrics Changes - Contract drilling revenues exceeded guidance primarily due to higher utilization on the Transocean Spitzbergen and Transocean Endurance [23] - Average daily revenue was approximately $444,000, with operating and maintenance expenses at $618 million, which was within guidance [23][24] Market Data and Key Metrics Changes - The U.S. Gulf is expected to see up to six programs commence in the second and third quarters of 2026, with three expected to come from public tenders [15] - In Brazil, Petrobras is increasing its rig count and has released tenders for upcoming projects, indicating a strong market outlook [16] - The company anticipates growth in West Africa, with multi-year opportunities expected to arise in 2026 [60] Company Strategy and Development Direction - Transocean is focused on converting its $7.9 billion backlog into revenue and cash to create sustainable value for shareholders [22] - The company is committed to delivering safe, reliable, and efficient operations while optimizing performance and maximizing shareholder returns [6][22] - Management emphasized the importance of deepwater drilling and the strategic shift among European majors towards oil and gas investments [11][14] Management Comments on Operating Environment and Future Outlook - Management noted that market volatility has not materially impacted business operations, with no planned programs delayed or canceled [13] - The outlook for deepwater drilling remains positive, with projections indicating a 40% increase in deepwater investment by 2029 [14][86] - Management expressed confidence in the future of offshore drilling, citing strong fundamentals and increasing offshore drilling activity [21][88] Other Important Information - The company has identified approximately $100 million in cash cost savings for 2025, with a similar amount expected for 2026 [34][70] - There are no significant costs associated with achieving these savings, which primarily come from renegotiating contracts and utilizing local crews [72] Q&A Session Summary Question: Timing of contract announcements - Management expects several contract announcements throughout the year, particularly in the second half, with a focus on long-term awards [44] Question: Day rates for upcoming contracts - There may be near-term pressure on day rates for short-term work, but long-term contracts are expected to remain stable [46][47] Question: Implications of Shell awards from Noble - Management believes there are still opportunities with Shell, as they anticipate additional demand in the Gulf of Mexico [54] Question: Activity assumptions for West Africa - Management sees potential growth in West Africa, with expectations for multi-year opportunities starting in 2026 [60] Question: Cost savings details - Management confirmed $100 million in identified savings for 2025, with a similar expectation for 2026, primarily from operational efficiencies [70] Question: Status of idle and cold stacked vessels - The company is actively looking for opportunities for its idle vessels and continues to assess its cold stacked fleet [76][78]

Financial Data and Key Metrics Changes - The company reported GAAP net income per share of $0.60 for Q1 2025, down from $0.76 in Q1 2024 and $0.55 in the previous quarter [19] - Core earnings per share were $0.50, compared to $0.59 a year ago and $0.55 in the prior quarter, primarily due to a decline in portfolio yields [19][20] - The total portfolio at fair value increased to $27.1 billion from $26.7 billion in the previous quarter and $23.1 billion a year ago [21] Business Line Data and Key Metrics Changes - The company committed $3.5 billion in gross commitments during the first quarter, a 54% increase compared to the same period last year [9][10] - The weighted average yield on debt and other income-producing securities at amortized cost was 11.1% at the end of Q4 2024, down to 10.1% by the end of Q1 2025 [20] - The portfolio companies reported a 12% weighted average LTM EBITDA growth, up from 11% in the prior quarter [28] Market Data and Key Metrics Changes - New transaction activity in the liquid loan market dropped significantly as banks became more cautious, leading to increased volatility and widening spreads in secondary loan markets [10][11] - The direct lending market remained stable, with certain transactions shifting from the syndicated loan market to private credit solutions [11] Company Strategy and Development Direction - The company aims to leverage its strong liquidity and conservative balance sheet leverage to capitalize on potential investment opportunities in a potentially improving spread environment [10][14] - The focus remains on domestic service-oriented businesses, which are believed to be more insulated from the impacts of higher tariffs [15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate future market conditions, citing a seasoned investment team and strong relationships in the market [12][13] - The company declared a quarterly dividend of $0.48 per share, marking the 63rd consecutive quarter of stable or increasing dividends [17][24] Other Important Information - The company has nearly $6.8 billion in total available liquidity, positioning it well for future investments [22] - The non-accrual rate at cost ended the quarter at 1.5%, down from the previous quarter, indicating strong portfolio health [29] Q&A Session Summary Question: Will private credit provide similar or lower pricing than banks? - Management noted that spreads have already started to widen, indicating a shift in the market dynamics [35][36] Question: What is the exposure to tariffs for portfolio companies? - The company conducted a thorough analysis and found a mid-single-digit exposure to companies importing from high-tariff countries, emphasizing that this is an exposure analysis, not an impact analysis [39][41] Question: How does the company plan to manage earnings against rising costs of liabilities? - Management highlighted the ability to adjust leverage and utilize spillover income to manage costs effectively [50][54] Question: Is there a trend in portfolio stress or sectors experiencing issues? - Management indicated that there are no significant trends observed in portfolio stress at this time [102] Question: What is the outlook for new investment opportunities? - Management expressed optimism about the potential for larger deals in the private credit market, indicating a readiness to pivot as market conditions change [84][85]

Financial Data and Key Metrics Changes - The company reported first quarter sales of $964 million, a decrease of 2% year over year, with earnings per share at $0.95, down 5% compared to the prior period [14][19] - North America segment sales were $749 million, also a 2% decrease, with segment earnings of $185 million, down 7% year over year [14][15] - The overall segment margin was 24.7%, a decrease of 120 basis points year over year, primarily due to lower water heater volumes and strategic investments [14][15] Business Line Data and Key Metrics Changes - North America water heater sales declined by 4% in the first quarter, driven by lower volumes, while boiler sales increased by 10% [9][11] - North America water treatment sales increased slightly, with growth in e-commerce and direct-to-consumer channels offsetting retail declines [11] - Rest of the world segment sales were essentially flat at $227 million, with earnings increasing by 15% due to expense management [15][16] Market Data and Key Metrics Changes - In China, third-party sales decreased by 4% in local currency, reflecting ongoing economic weakness and soft consumer demand [9][12] - The company expects sales in China to decrease by 5% to 8% in local currency for the full year [28] - The North American boiler sales are projected to increase by 35% in 2025, following a strong first quarter growth of 10% [30] Company Strategy and Development Direction - The company is focused on managing costs and optimizing production schedules to ensure efficiency, particularly in response to tariff-related cost increases [10][20] - A key initiative for 2025 is to level production across the year to enhance plant efficiencies [10] - The company is actively pursuing acquisitions and has a robust pipeline for potential opportunities [19] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the volatile macro environment and emphasized the importance of maintaining a strong balance sheet [34][35] - The company is cautious about the near-term market outlook, particularly in China, where consumer confidence remains low [28][83] - Management reiterated the commitment to strategic investments and cost management to maximize profitability during periods of cost volatility [35] Other Important Information - The company repurchased $121 million of its shares in the first quarter, front-loading a portion of its full-year repurchase outlook of $400 million [9][18] - The board approved a quarterly dividend of $0.34 per share [18] - The company opened a new commercial R&D testing lab in Lebanon, Tennessee, aimed at enhancing product development capabilities [33] Q&A Session Summary Question: Demand destruction around pricing actions - Management indicated that pricing actions are expected to cover costs, with a stable replacement business providing some stability [39] Question: Tariff exposure and cost components - The company clarified that the 6% to 8% tariff exposure includes direct impacts from imports, particularly from China, and is separate from steel inflation [42][44] Question: Pricing actions and market dynamics - Pricing actions have been announced and are already in the marketplace, with management working closely with customers to manage the implications of these changes [98] Question: Capacity and manufacturing in the U.S. - The company has sufficient capacity in its U.S. plants and is well-positioned to navigate the current market conditions without significant challenges [90] Question: Regulatory changes and their impact - Management is proceeding with preparations for upcoming regulatory changes, as they are currently law, and does not anticipate delays [94][95]