The Timken Company (TKR) Earnings Call Transcript & Summary

Got their coffee, get a little buzz to finish up the day. I'm Michael Feniger on the U.S. side, the machinery, engineering and construction analyst. Today, we have Timken, which has attended the BofA Global Industrial Conference for a couple of years now.

From the beginning, I think.

From the beginning, from the beginning. So it's grown quite a bit. So, I'm just going to pass it over to Phil, Andreas to introduce themselves. We'll jump into some Q&A.

Andreas, if you will.

I'm Andreas Roellgen. I'm originally from Germany, a mechanical engineer, in company as consulting, then started with Timken in France, spent a couple of years in the U.S. and I'm working there for now 25 years, heading up the bearings business of the company. So that's about 2/3 of the company.

Great. And I'm Phil Fracassa, Chief Financial Officer. I've been with Timken 17 years been CFO about half that time. So in my 9 years as CFO, I think, I've been to this conference every single year. So I'm glad to be here again, Mike. Thanks for having us.

Of course, Phil. So, maybe just to kick this off for those a little less familiar with the Timken story, can you provide some commentary on Timken's portfolio evolution, over the last 10-plus years, where the key high-level points to keep in mind regarding Timken today versus maybe where Timken was in 2014, '15?

Yes, I think that's a great place to start. So the Timken, the story and the transformation, if you will, has really been quite remarkable. And I'd break it down into a few key buckets. First bucket was we strengthened the core business. And the strengthening in the core business meant deemphasizing automotive and on-highway markets and shifting those resources that capital to more fragmented industrial markets. The second was the spinoff of our steel business in 2014, which we were able to spin off a more cyclical part of our portfolio, once again become more focused on broader diversified industrial markets. Third, would be around legacy liabilities like pensions. We took steps to fund, reduce and derisk our exposure to pension and other legacy liabilities. And in fact, reduced our gross exposure to pension and OPEB by 90% since 2012 to a point now, where it's requiring a pretty predictable stream of about $20 million, $25 million of cash a year down from several hundred 10 years ago. And then the last point, I would say is around operational excellence and footprint initiatives. We are -- it's part of our culture, continuous improvement is part of our culture, and we took steps to improve the performance of the base business. So that was really all around strengthening the core, which back 10 years ago, was predominantly bearings. The next step in the evolution of the business was, what I would call scaling and diversifying, and that was really through our approach to capital allocation. Started first with driving organic growth, product vitality and outgrowth through targeted investments in CapEx and R&D, again, focused on broader industrial markets. And then certainly, the M&A strategy. And the M&A strategy was all about identifying very close adjacencies to bearings, that sit in the same system, get pulled through the same channels in the aftermarket, gets sold to the same customers in the first fit and really broaden our presence, broaden our relevance to customers across it, once again, across those industrial markets, to where the Industrial Motion business, as we'll talk about it, is about 1/3 of our revenue today, up from about 5%, say, 15 years ago. And then finally, I would say capital returns, another element which is really rewarding our shareholders regularly, consistently through a steady dividend. We've paid 100 years of continuous dividends, 9 straight years of higher annual dividends. And during the last, call it, 8 to 10 years, have bought back over 20% of our stock. So share repurchase continues to be a big element of our strategy. And what has it produced? And Neil pulled up to Slide 22 in the book, the result has been a more diversified company, a stronger portfolio, higher growth, higher margins, less cyclical, more resilient. And you can see the last 5 years depicted on this slide, which, over this period, Timken generated top quartile financial performance kind of versus our peer group across the 2017 to 2021 period. So looking ahead, I think the strategy is working. We want to do more of the same. We've put out some robust 5-year targets at our Investor Day last year, which calls for 6% to 8% top line growth over the next 5 years, double-digit EPS growth. And then EBITDA margins, which would be structurally 200 basis points above the last 5 years, which will really be accomplished mainly through continued working on improving the mix of our portfolio. And continuing to operate the business with excellence. So the Timken story has been a series of systematic moves, incremental moves. We haven't done a big M&A deal during that time, but we have done over 20 deals in the last 10 years with over $2 billion of capital allocated, and we now believe we have one of the most attractive portfolios, not just within the bearings space but within the broader industrial space.

Thanks, Phil. And before we kind of dive into those 5-year targets, I'd just love to get a sense of your 2023. Last month, you kind of provided your initial outlook for revenue and earnings. What are the drivers kind of underpinning your outlook? What are you seeing right now from the demand standpoint given the visibility?

Yes. Yes, maybe I'll start first with the second part of the question around kind of what we're seeing presently, because I do want to provide an update on, how the quarter is progressing and what we're seeing out there in the marketplace. So, back in February when we released our earnings and provided our initial outlook, we said the year we'll get off to a good start. I would say it's been even stronger than we anticipated. When we talked about what was behind our assumptions related to the first quarter, we expected revenue to be up mid- to high-single digits organically. Right now, we're looking like we'll be up at least high single digits organically. I would tell you price cost and operational execution, which would include efficiencies in our plants, as well as supply chain, are both trending better than expected, which is driving better bottom line performance, I would say. And our backlog remains healthy across most of the sectors we serve. So right now, I would say we expect the first quarter earnings to exceed our expectations and likely place us on a trajectory that would be towards the high end of our guide, if not higher, when we add in Nadella, come May after that deal closes. So still a lot of uncertainty out there, actually elevated uncertainty with the banking situation. Visibility still remains limited across many markets, especially in the back half of the year. So, we're not updating guidance today. I think, we want to see how March closes out, how April develops. But we're off to a great start, as I said, and we'll update our guidance in early May, when we release first quarter results. And as far as what was sort of behind the guide, it was continued growth across most industrial markets, continued pricing and -- but we did bake in some conservatism in the back half of the year when we set the original guide. And again, as I said, as we're sitting here today, we're trending towards the high end of that number.

Phil, I appreciate that -- those comments. Maybe just to drill in a little further, are there any end-markets, verticals that you would highlight that maybe are coming in higher than your expectations in February so far?

Yes. I would say it's been very broad. So when we set our guidance in February, we had most markets positive. We had a few markets in the neutral column, plus or minus. And I would say, as we're sitting here today, markets have been broadly, slightly better than anticipated. So nothing that would stand out. We still expect renewable to be the biggest driver to top line growth this year, up double digits. But, I would see everything sort of trending slightly positive. And then, as I mentioned on the bottom line, operational execution as well as price/cost are both trending positive as well.

Thank you, Phil. And you recently announced in the beginning of the first quarter, you're going to operate under two new reportable segments. So it's going to be Engineered Bearings, Industrial Motion. I think that's an interesting decision based on the growth you've seen in Industrial Motion. Can you kind of speak more to why you decided to go away from your old segments?

Yes, I'll kick it off and then I'll ask Andreas to comment, since he leads the Engineered Bearings business today. So really, I would say the re-segmentation emanated from just a series of an evolution, if you will, over the last several years, around the acquisition strategy and the growth of the Industrial Motion portfolio. And it really culminated in at the -- in the second half of last year, we appointed new presidents of Engineered Bearings, Andreas; and the President of Industrial Motion; Chris Coughlin, who many of you know, he's been with Timken for many years to lead both of those businesses. And at that time, it really made sense, when we thought about how we run the business. And as you know, accounting really needs to follow, how you run the business, that it was a good time to change the segmentation. There's obviously a lot of work involved, so we will do that effective with the first quarter results, and we do intend to file an 8-K with some historic information just to get everybody ready. And with that, maybe I'll have Andreas talk about the evolution and the two businesses in a little bit more detail. Andreas?

Yes. The change is really the -- I would say, almost a natural consequence of how much the company has changed over the last 10, 12 years, which at the time was a bearings company after we had spun off the steel business, right, bearings only. Today, 1/3 of the company, though, consists of what we call Industrial Motion products, systems and products and components, largely added through acquisitions. So they were simply not there 12 years ago. Today, it's 1/3 and 2/3 is bearings. So somewhere in the second half of last year, we adapted the internal organizational structure to basically these product lines, 2/3 bearings, 1/3 Industrial Motion, in order to certainly also align between the internal structure and the products, that we are putting out there into the markets between those 2 business groups, we call them.

Yes. And the last comment I would make is, when we haven't provided bottom line financial information. As we said, last year, bearings was about close to just under 70% of revenue. Industrial Motion was just over 30%. But I think, when we follow the historic results and come out with the first quarter, you will see two very attractive, high-performing segments with margins that are much tighter than our former Mobile Industries and Process Industries. And I think more importantly, two segments that will compare very favorably against peers and competitors across both.

That's helpful. And I definitely want to touch on, on your comment about peers with Industrial Motion. But just going back to the prior comments on the outlook. It's great that the year is starting in stronger than expected. As you alluded to, there's obvious concerns, particularly in the financial markets right now, concerns on tightening lending standards. Phil, how should we think about the potential impact for Timken, its customers, the distribution channel? What are you looking out for, given the recent events?

Yes. So clearly, the last week has been pretty tumultuous for the financial markets. We're obviously monitoring it very closely. We don't have any direct exposure to any of the institutions that have been affected or in the news, as of late. But we're obviously -- and we haven't seen any -- I would say, I haven't seen any material impact on our business. I think it's still early, but we're monitoring it very closely, but have not seen really any material impact on our business. But it's just -- I would just say it's just another element of uncertainty out there, that we're going to deal with that makes the outlook a little bit cloudier than normal. And again, when we set our guidance, we were a little conservative on the back half because of some of that uncertainty. And unfortunately, I think we're probably in a more uncertain environment today, if I could use that terminology, than we were even a couple of months ago.

And there are investor concerns around inventories just for all industrials right now, the OEM to distribution channel. How does Timken feel about its own inventories? Where is the distribution channel today, relative to history? How should we kind of look at that, as we go into 2023?

Yes. Maybe I'll start. And if Andreas has any color -- any additional color, he can add it. So I would tell you clearly, in '22 and '21 everybody, not just Timken, but customers, distributors, were trying to build inventory or were carrying extra inventory to compensate for supply chain challenges, to compensate for delays in shipment or ports that were closed. So, we were not dissimilar to a lot of other folks that built up inventory over the course of the last couple of years. And in the fourth quarter, started to take steps to, as supply chain challenges, we're starting to alleviate, as the situation is getting better on that front, take steps to optimize our inventory. I wouldn't say we've -- we feel the need to de-stock significantly given the demand environment out there, but take steps to optimize our inventory. We took some inventory out in the fourth quarter. We would expect to continue to take a little bit of inventory out in 2023, which is part of our cash flow forecast. Actually be a little bit of a headwind on the bottom line just because it will be lower production volume than last year, when we were building inventory, but contemplated in my earlier comments. And with respect to customers, we'd say, look, distributors, from what we can see, certainly added inventory in 2022. We don't expect them to continue to add inventory in 2023. So we do think '23 will be more of a sell-through type of a demand environment versus '22, which was sell-through demand, as well as some inventory stocking. So, we do think that will be a little bit of a difficult comp from that perspective year-over-year. But not -- we don't see a major de-stock on the horizon. Frankly, inventories from what we can see are actually lower than what they were in 2019 across distribution. Again, where we can see it. And then OEMs have said, a lot of our customers are doing the same thing Timken is doing, which is, hey, we were carrying extra inventory to compensate for bottlenecks and supply chain challenges. As that's going away, we're going to take steps to optimize the inventory, if you will. So, I do think that's going to be a recurring theme likely in the first half of 2023, but not -- we don't see a material de-stock or we don't see inventory anywhere in the channel that would be bloated, if you will. I don't know, Andreas, if you have anything to add.

Yes. I mean it really depends on -- if these turbulences in the financial industry would now have an impact on the industrial space out there. But at least to this point, we have been -- with our customers, very bullish on the capital goods sectors, right? The electrification of the world, drives mining, drives rail, drives heavy industries, drives renewables and wind and so on, and the order books are all there. We have seen a little bit as Phil alluded to it, a little bit of what I call optimization, a little bit of rightsizing by far, but not any sort of inventory burn down. So actually, to some extent, the opposite distributors keep ordering, as they want to be able to serve the market and also make up for the service issues, that we had in the past with the supply chain disruptions and so on. So, so far, things have continued pretty well.

Yes. And in markets like renewable, we're actually seeing restocking, because that was a market that was down the last year and now is accelerating and actually seeing inventory building in that sector. So, I mean there's pluses and minuses, but it's -- I think it's in a pretty good spot.

And Phil, just to hammer the point home, did you say inventory and the distribution channel is below to 2019 levels?

Yes, where we can see it, while it's up -- it was up during '22. It's higher today than it was 12 months ago, but it's still not as high as it was in 2019, which again tells us, we're not in a situation where we need any major destocking going on out there.

It's a good data point. And, I know, we just spoke a lot about the quarter but beyond '23, based on what you can see here, what are some of the growth potentials just beyond maybe PMIs, industrial production, trends that you're seeing and conversations you have with customers, just beyond maybe the next 3 months?

Yes, great question. Andreas, do you want to grab, do you want to take that one?

Yes. So as mentioned before, I mean, we -- first of all, we believe in the secular growth trends of the markets, we are focusing on. And then, we are focusing on markets with those growth trends, again, right? So driven by again the infrastructure investment needs out there, rebuilding of infrastructure, reshoring, near-shoring is part of the trend out there. Population growth, urbanization different food habits in Asia and so on, driving more food and beverage growth out there. The whole renewable sector, the whole electrification that we see out there is driving, a number of markets that we are engaged in. And the beauty of the business is, we are engaged in very fragmented markets, depending on the definition, it's like between 50 and 80 different markets. And we try to focus on those that come with these higher-than-average growth trends out there, and those are the ones I mentioned before that we think are going to midterm -- not short-term financial issue, but midterm, will continue to drive because the world needs to invest and needs to renew basically.

Yes, I agree. I mean, I think when you look at -- again, put what might happen in the second half aside, I think, when you look at the next 10 years, for industrials compared to the last 10 years, and you layer in energy conversion, as Andreas said, reshoring, near shoring, automation. So the substitution of capital for labor where you can't find labor, the age of the equipment, the need for more fuel efficient, sustainable solutions broadly across markets. I think, the next 10 years will be a better environment for industrials in the last 10. And when you layer on the mix shift that's going on at Timken as we're mixing ourselves towards higher-growth markets, we clearly see, a better next 10 years than even the prior 10. And the prior 10 wasn't all that bad. But I think the next 10 can even be better.

And one part of that story is actually renewables. And you alluded to it earlier with your comments. I think, it's now around 10% of the business overall. It's been a fascinating story based not just on the macro, but actually specific product offerings from Timken. So, can you kind of explain to us what is in the renewables segment? What's driving it? How does that kind of backdrop you're seeing right now favor that vertical in your business? .

Yes. So multiple trends out there. I mean, first of all, Timken was not the first in the -- particularly the wind sector out there. But, as we have been able to influence technologies to solutions that would be lasting better and longer, notably [indiscernible] the bearing solutions, we have been growing that segment enormously over the last 10 to 15 years. It's about technology. It's about providing power-dense designs, it's providing cost-effective designs. The turbines have become larger, both onshore and offshore. We are in there with our technologies. Obviously, there's outgrowth there driven by the market requirements for renewable energy out there. And then, there's also an aftermarket opportunity out there that we are expecting to come. We have been feeding the installed base over the last 15 years. And as these turbines are getting to age and there may be certain elements of replacement out there, we're also expecting an aftermarket business to grow out of -- particularly wind turbines. And then the other part of that is, so here we talked about bearings. On the other side, we also see lots of Industrial Motion opportunities out there. Every wind turbine has multiple lubrication systems. There's couplings in there. There are linear systems in there. And again, we are using the customer entries and context we have to also leverage them to bring in these other product lines into the same customer base. So it's a multiple facets, a strong growth market for us.

And that's wind. So when you think about 10% of the portfolio being renewables, we've said roughly 80% of that 10%, if you will, is wind. The other 20% is solar. We make a tracking drive that would go into movable solar applications, both photovoltaic as well as CSP for utility scale solar installations. And we have a great position in that market. That's a very global business for us as well. And that's another one where we do expect above GDP-type growth, and our ability to participate. Our content is stronger in wind. Obviously, a lot more moving parts in a wind turbine than solar, but we are participating in both, and feel really good about our technology and our opportunities to grow there as well.

And Phil, maybe just to continue on the renewables theme. Just -- the geographical exposure of that business, what are you seeing? We're seeing some initiatives out of China. Obviously, the IRA in the U.S., Europe, are you seeing actual catalysts that are driving your order rates in that business?

Andreas?

Yes. So some of the catalysts that I mentioned already before, right now, we see the stronger growth rate certainly in China, again. I would assume that is also related to the time it takes to get new wind parks and installations approved and financed, right? Particularly on the offshore side. This is a very long cycle, 3 to 5 years. In Europe, certainly, a lot of things were triggered by the Russia/Ukraine crisis, a year ago, but it just takes a little bit of time for projects to come through, right? So the customer base in Europe is expecting that the demand for wind is growing a lot again from '24 onwards. Whereas we see that same trend very strongly already in China today. And then the Americas would be on the same pace as Europe with projects being projected right now, and they're coming through and then we would participate.

Yes. I think what we've seen in China there has been a market where it started with the government support for the industry. And then, as costs came down, the industry is now more -- the cost of wind is now more competitive with fossil fuels. So then, the market now is creating its own momentum. And we -- over half of our business is on the wind side is in China. But it's not Chinese customers, if you will. It's really serving our multinational customers that are just operating in China. We're selling into China. So we sort of track that as a China sales. So we -- and that's been true in Europe, as well. There's been momentum in that market. The U.S. market has really never seen the same sort of momentum, but I think that's where the opportunity lies. And if we can see renewable really start to take hold in the U.S. through some of the incentives that are out there in the IRA, Timken is extremely well positioned. And particularly, our technology translates very well to large offshore wind installations. So, if we see an acceleration of growth in the United States in that area, I think Timken is well positioned, not just from a technology standpoint but from a manufacturing, just the fact that we're a large North American player to capitalize on it. So I think that -- we haven't seen it in the U.S. to the same degree. So you can't count your chickens before they hatch there. But, I do believe there's certainly opportunity there.

Great. And just to ask about another vertical for Timken, that seems new, that I don't remember Timken really talking about a couple of years ago is automation. It feels like you guys have done some acquisitions there. I'm just curious if you can kind of talk about the automation side. What's the opportunity that Timken's kind of identified? What kind of growth are you seeing there, in terms of just cyclical, but also long term that you're kind of keeping your eyes on?

Yes. So for Timken, and Neil pulled the slide up with Slide 19, I think for Timken, we sort of break automation down into a few different categories. But, the big piece of it is automatic lubrication systems, which we built that through acquisitions, over the last several years. That is a business that actually provides a system to automatically lubricate machinery and equipment, essentially substituting capital in the form of the system for manual greasing of equipment. So it's capitalized on that trend toward automation, as well as with labor issues can help alleviate that as well. So that's one part of it. And we're #2 in the world now, with the acquisitions we've done over the years and the organic growth we've generated there, now #2 in the world. More recently, some of our products are now found in industrial robots on the left. That would be precision drives that would sit in robotic arms, robotic shoulders, elbows, hips even. We make seventh axis linear motion products to allow the robots to move up and down the assembly lines. We're in automated warehouses with some of our Industrial Motion products as well as autonomous vehicles, both bearings and motion products and certainly surgical robots as well. So it's a growing trend. It's a place where our technology translates very well. It's more precision product, it's more highly engineered product. And, I think, that's another one where it's gone from essentially 0% to roughly 8% of the portfolio today, including automatic lubrication systems. And it is a broad sector, if you will, that we expect to grow above GDP, obviously, for the next several years.

And maybe just to piggyback of a comment you made about doing some acquisitions there. You've been fairly active in M&A. I think, you're completing 3 acquisitions over the last 12 months, closing another one in the coming months. Can you just talk about what these recent acquisitions provide both strategically, and how we should think about that financially for 2023?

Sure. I'll start first with maybe, more broadly, the capital allocation philosophy at Timken, and then we'll get into the acquisitions over the last 12 months, and I'll ask Andreas to comment on some of those. But broadly, when we talk about differentiating, as I think about high-performing industrial companies, we should differentiate on our technology, on our customer service, on our operational execution and on our capital allocation. And, I think that's one area where Timken has performed very well. This slide sort of depicts the different priorities for capital allocation. Starts first with generating strong free cash flow, having a strong balance sheet. So we've guided to around $400 million of free cash flow for 2023. We ended 2022 with net leverage below the midpoint of our targeted range. So lots of opportunity to continue to deploy capital. And as we think about deploying, it starts first with organic growth, operational execution, R&D, et cetera. Then our dividend, which I talked about earlier. And then M&A is kind of the third prong, followed by share buybacks. And M&A has been an integral part of the transformation of the Timken Company. And it started first with focusing on industrial bearing markets, and then accenting those or augmenting that with attractive Industrial Motion, nonbearing power transmission products, whatever term you want to use that, essentially sit in the same systems, strong strategic fit, close adjacencies and enable us to create a lot of value. So I think, we'll continue doing it. We built the Industrial Motion business essentially through acquisition, followed by obviously some strong organic growth afterwards. As you said, Mike, the last 12 months. Fast forward a couple of weeks, we will have done, hopefully done, 4 acquisitions. Spinea about 1 year ago, which was a precision robotics, drive manufacturer, complementing an existing business we have within Cone Drive, which we acquired in 2018. So really scaling our Cone Drive business with Spinea. Very attractive technology, very attractive market presence, et cetera. We followed that up with GGB, which I'll ask Andreas to comment on a moment. And ARB, both bearing acquisitions. So, we're not opposed to doing a bearing acquisition where it makes sense. And then in a couple of weeks, we should close on Nadella, which will take our linear motion business, which was an acquisition we made in 2018 with Rollon and adds significant scale and synergy opportunity, with Nadella, now making us an even bigger player in that market with significant synergy and growth opportunities. Maybe Andreas talk about some of the bearing stuff?

Yes. If you want to go to page -- what was it, 12 again, the picture that tells more than a thousand words here. It's quite fascinating to see how the space is coming together. And the revenue synergies between these businesses is really playing out nicely for the long run. So we are focused on components and systems between the driving element and the driven element in the industries that we are participating in that is typically an electric motor. Then the other end, you may have a generator or a pump, the compressor, ventilator. So -- and in between, you find bearings, you find housed units, housed bearings, you find lubrication systems, you find belts, chains, couplings, brakes, gear drives, position drives and so on. And then two things in here, maybe just adding to Phil's. One is the revenue synergies with OEM customers. Look, the hardest thing for a start-up company or a small company is to find new customers out there, right? Well, we come up here with tens of thousands of customers in the world, and we open up Australia and countries to those businesses, right? And then on the distribution side, it takes quite a bit of upfront investments to be a player in the distribution business, e-shops and logistics capabilities and so on. And typically, what we do as we open up our distribution channels, which is close to 1,000 authorized distributors in the world, to those businesses. And that is an additional revenue synergy for them, typically coming at higher price and higher margins. And put this all together, these businesses are basically cross-pollinating each other. When you think about -- you mentioned warehousing automation systems, you find bearings in there, you find housed units in there, you find lubrications, you find linear, you find lots of these components in there. The same in food and beverage, the same in wind, the same in certain off-highway equipment, stationary equipment. So, as these platforms are coming together, we're having more and more of those revenue synergy opportunities left and right. And since customers are trusting us, and they're trusting our technologies and our brand and our service and so on, we're having good opportunities to also expand these other product lines into basically the same customer base, which is all about, again, the power transmission industry.

That's helpful. And just to follow up with Nadella closing, how should we look at the rest of 2023? Is it more of digesting these 4 acquisitions? Will you still be active? How should we kind of look at the rest of the year, when it comes to the M&A profile?

Yes. So I think, the right way to look at it is we will continue to work the pipeline. We will continue to be active. But to your point, as I said, in the coming weeks, we would expect to close on Nadella. So that would, when we issued our guidance in early February, we did not include Nadella in that. And we did that -- at that time said we thought M&A would add around 3.5 points of growth on the top line. Think of Nadella, if it closes, early second quarter, let's say, could add another couple of percentage points, if you will. So we'll have a lot we'll be digesting. But we certainly have the bandwidth and capabilities to continue working the pipeline. And obviously, with M&A, you can't predict when it's going to hit, timing, et cetera. So you got to just keep working it, and systematically attacking it. And I would expect, over the course of the rest of the year, it's highly likely we'll do at least one more. Maybe not in the second quarter, but certainly over the course of the rest of the year.

And Phil, as the CFO, how do you balance the pipeline and the opportunity to do the strategic M&A with the idea of doing share repurchases? And the reason, why I bring that up is because you're now breaking out Industrial Motion, which I think investors will applaud. The reason is there was a big transaction, a few months ago for a very high multiple for a business that is in the Industrial Motion space. So I guess the counterpoint, Phil, is -- well, if there's multiples for Industrial Motion at much higher levels than where Timken is trading, how do you value doing these acquisitions? Or just saying our multiple is actually at a discount relative to these public transactions, we should just be buying back our shares?

Yes. No, it's a great question. Look, I mean, the M&A for us is all about making Timken a better company. And as I said, we believe we can continue to do M&A. We can continue to buy back stock, and we can lean in one direction or the other as the opportunities are there, as the attractive opportunities present themselves. But I would tell you, we'd expect to continue to do both. I look at M&A and say, for the long term, makes Timken better. We're buying companies that are enhancing our growth profile, that are dampening our cyclicality, that are enhancing our margin profile, generating really strong returns on invested capital, making Timken better for the long term. Share buyback can certainly provide some short-term benefit, take advantage of opportunities. And if the M&A is not there, you can lean into buyback. Last year, we -- I'd say we leaned into buyback, bought over 3 million shares, about 4% of our float, which was the most that we had done, in a couple of years. We saw a good opportunity, and we leaned in a little bit. With GGB and now Nadella, we've leaned in more on the M&A, in the last 6 months. So I think, we have the opportunity to continue to do both. And it's really all about generating strong performance through cycles. And when you talk about multiples, our view remains that if we continue to perform consistently, continue to work to make the portfolio better every day, perform better every day, that -- continue to post performance like this, coupled with a strong return on invested capital, our view is the multiple will take care of itself over time.

Fair enough. And not every public bearings operator and supplier are the same. There are some well-known companies out there, one that's going to be attending the conference. One of the key differences is, I think, the auto exposure. It feels like Timken over time has really lessened and found ways to kind of narrow that auto exposure. Can you talk about the process there? Where do you see that auto business going? And what's the potential impact as that industry kind of transitions more from ICE to EV?

Yes, maybe I'll take the first part around the transformation of the auto exposure, and then I'll ask Andreas to talk about where the business is going from here, because it is mainly -- our on-highway exposure is mainly bearings. So virtually none of our Industrial Motion product targets the automotive market. So, that was a deliberate decision we made 10-plus years ago, almost 15 years ago now to say, look, it's a very difficult market to play. If you try to be everything to the industry, if you want to be in every position on a car or a truck, it's going to be a very difficult place to play. You've got a finite number of customers with enormous purchasing power. And we had gotten to a point, technologically speaking, where most bearings that go into an automobile outlast the automobile. I mean, that's just a fact. So for us, we made a decision to say, look, we're going to get more focused in automotive, participate where we see that we can bring value to the customer, where the customer sees the value, so it can make sense for us. And let's take those resources and energy and people and allocate those more towards the industrial market. So we weren't -- the intention was not to shrink the company, it was to lessen our auto exposure and then reallocate that to Industrial Motion or industrial bearings, as the case may be. So it's been a success. It's enabled us to -- it's really accelerated the growth for Timken in the industrial markets. And I think it was -- but back 10 years ago, those were tough decisions we had to make, 10, 12 years ago. And what you see today is a company that's a multibillion-dollar bearing business, where the OE exposure to auto and truck is only 10%. And many of our competitors that are larger, would have exposures of 30%, 40%, 50%, even more than that. So it is a differentiator for Timken. It's part of the reason why our financial performance is above many of our competitors, and I'll ask Andreas to may be talk about where he sees the business going from here.

Yes. And indeed, first of all, let me repeat a little bit. I mean, this is, in our view, one of the major differentiators to the other 5 large global players there, right? Our automotive exposure here is down to 7%, and we like that. We are in the premium space here. This is where not only we can add value to the premium builders of automotives and so on, but also we can extract some value back to Timken, right? We basically went over the last, I think dozen years, through a huge strategic transformation, right? We converted $1.5 billion of automotive business to $1.5 billion of Industrial Motion business at significantly higher margins. And that is a very big differentiator from the space there. We are only 2/3 of bearings company anyway. But to your second question, in terms of EV, so that automotive business that we have is not an engine at all. It's not in transmissions almost at all. So those parts that are going to get replaced by the electrification of the vehicle is not a Timken matter at all, basically. And then where we are is, for example, the U.S. in our light truck wheel ends and so on. And interestingly, they are -- the technology changes to an extent that the vehicles, first of all, become a bit heavier again because of the battery, right? The [indiscernible] lighting, for example, and there is even more Timken technology in there again. And then there is still a certain [ reduction ] ratios in the drives of electric vehicles, right? And that is where we have good opportunities and good projects out there because that is high tech, and we are engaged with the industry in those applications again. So bottom line for us, the electrification is almost a non-event from an overall sort of business content perspective. And at the same time, we are participating with technologies, which is a good thing for us because we can -- we have a chance to reengineer ourselves in, again, whereas in the past, certain parts of it were more commoditized.

Perfect. And I'm just going to sneak one more in, Phil, on something that separates Timken from the pack. Last year, Timken actually priced above inflationary costs. You've got your margins up. It was able to outpace inflationary costs. Some suppliers were just trying to keep up with cost. Just, how should we think of Timken's pricing, as we kind of roll through 2023 with that price versus cost relationship?

Yes, I would expect -- I mean, I think the short answer is I'd expect -- I mean, thanks for the compliment, first of all, but we -- a lot of that was catching up for '21, where we were a little bit behind. But -- so I appreciate we did get caught up to a large degree in '22 through the pricing that we did. And I think, we would expect to continue to price as needed to maintain our margin profile, offset our cost increases. And we do expect inflation to remain higher than historic levels. So, it's going to require more pricing than historic levels. And we're going to -- we'll continue to get it. We talked about at least 2% positive -- net positive price in the guide. We're obviously trying to do better than that, if we can. But, I feel very confident that we'll be able to do at least 2%.

Perfect. We'll leave it there. Thanks, everyone, and thank you, Timken.

Thanks, Mike. Appreciate it.