Timken Company (The)

My name is Emily and I'll be your conference operator today. At this time, I would like to welcome everyone to Timken's second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you. Mr. Frontapple, you may begin your conference.

Thanks, Emily, and welcome everyone to our second quarter 2024 earnings conference call. This is Neil Frontapple, Vice President of Investor Relations for the Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the Earnings Call webcast link. With me today are the Timken Company's President and CEO, Rich Kyle, and Phil Fricasa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time, to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the Timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by the Timken Company, and without express written consent, we prohibit any use, recording, or transmission of any portion of the call. With that, I would like to thank you for your interest in the Timken Company, and I will now turn the call over to Rich.

Thanks, Neil. Good morning, and thank you for joining our call. Timken delivered a solid second quarter with revenue and profits in line with expectations. Our results continue to demonstrate the strength and diversity of our portfolio and the successful execution of our strategy to build Timken into a diversified industrial leader. Revenue was down 7% from last year's record second quarter and roughly flat sequentially from the first quarter. Renewable energy drove the decline and was down over 40% from last year. China wind, which is the driver of the renewable decline, did stabilize sequentially in the second quarter for both revenue and orders. Rail, aerospace, and industrial distribution crawl up organically over prior year, which helped mitigate the impact from renewable energy. The diversity and the strength of the portfolio are helping us navigate through a weak market environment. Margins of 19.5% were strong. Earnings per share of $1.63 were negatively impacted by the revenue, as well as a modestly higher tax rate and higher interest costs. Price remained modestly positive, and costs continued to improve year over year. We have ramped down variable costs with the softening demand, and we continue to improve our cost structure through our footprint, integration, and productivity initiatives. The Mexico Bearing Plant is contributing favorably to our year over year results. The plant also recently began production of belts and will be ramping up volume into next year. The belt expansion is currently a headwind in the results, but will inflect to a positive in 2025 as we scale the operation and consolidate facilities. The Nadella integration and the roll-on continued in the quarter, and we continue to see good margin performance in the business despite a relatively soft market environment. We also took further steps to integrate American Roller Bearings and GGB into the Timken Bearing and both product lines are contributing favorably to results. Our operations are running very well, and we have excellent focus on both delivering short-term results in our operating metrics, as well as investing in long-term improvement initiatives that will yield results in 2025. From a capital allocation standpoint, we purchased nearly 400,000 shares in the quarter and completed the final sell-down of our position in Timken India Limited. Our net debt position stands slightly below the midpoint of our targeted leverage range. When combined with strong second half cash flow, we would expect capital allocation to be a meaningful contributor to results over the next 18 months. After CapEx and the dividend, our bias remains weighted to bolt on M&A to continue to strengthen the portfolio, advance the strategy to scale as an industrial leader, and to achieve our long-term financial targets. Turning to the forecast, We are continuing to plan for seasonal sequential revenue declines in the third and fourth quarters. We expect our year-over-year revenue results to improve significantly in the second half, but that is primarily due to easing comps, particularly in renewable energy. China wind has been the primary drag on our revenue for the last four quarters. As I said earlier, China wind orders and revenue have stabilized, and we have the backlog to support the second half guide. Nothing changed materially in the second quarter to alter our full year revenue outlook. Most customers and markets now share our view that a broad second half strengthening in industrial markets is unlikely. The July revenue results and trends support our guidance assumptions. On the bottom line, the midpoint of our guide is for $6.10 and just under 19% EBITDA margins. We are guiding to a second half decline in EBITDA margins to account for normal seasonality structurally we're in good position for margins to step up in the first quarter of 2025 as they typically do as we look to 2025 and beyond we're confident that our markets will rebound and that we will return to growth we also remain committed to achieving our long-term financial targets and finally the ceo transit transition remains on track for early september targ meta is looking forward to joining timkins soon and we are committed to a smooth transition supported by 19,000 talented employees and a proven and tenured leadership team. Timken is well positioned for future growth and success under Tarek's leadership. I'll now turn it over to Phil.

Okay, thank you, 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 solid second quarter results. Revenue for the quarter came in at just under $1.2 billion. in line with our expectations and down about 7% from last year's all-time record revenue. We delivered adjusted EBITDA margins of 19.5% with adjusted earnings per share coming in at $1.63. Turning to slide 12, let's take a closer look at our second quarter sales performance. Organically, sales were down 7.7% from last year. with most of the decline driven by significantly lower wind energy demand in China as we expected. If we exclude wind energy, our organic revenue would have been down less than 3% from last year. Looking at the rest of the revenue walk, you can see that the acquisitions we closed last year, net of the one divestiture, contributed 1.7% of growth to the top line in the quarter, while foreign currency translation was a headwind of roughly 1%. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and net acquisition impact. Let me comment briefly on each region. In the Americas, our largest region, we were down about 1% against last year's strong second quarter. We saw solid growth across several sectors, including distribution, on-highway auto and truck, and aerospace, while the marine, off-highway, and heavy industry sectors were lower. Marine was impacted by the timing of military marine programs under long-term contracts. We expect to grow in the marine sector for the full year, but military programs can be lumpy at times, and the second quarter of last year was a difficult comp. Excluding marine, the Americas region would have been up slightly year over year in the quarter. In Asia Pacific, we were down 18%, driven by the lower wind energy demand in China. This was partially offset by double-digit growth in India on higher rail and industrial revenue. Note that China was roughly flat in the quarter, excluding wind energy. And finally, we were down 12% in EMEA as we saw continued industrial weakness in the region, mainly in Western Europe. Most sectors were lower, with general industrial, off-highway, and distribution posting the largest declines. Turning to slide 13, adjusted EBITDA in the second quarter was 230 million, or 19.5% of sales, compared to 263 million, or 20.7% of sales, last year. Our solid margins in the quarter reflect the impact of positive price cost, strong operational execution, and net acquisition accretion, which helped offset the impact of lower organic sales volume an unfavorable currency. Looking at the decrease in adjusted EBITDA dollars, you can see that it was driven mainly by lower volume, along with unfavorable currency impact. This was partially offset by favorable price mix, improved operating cost performance, and the benefit of acquisitions. Let me comment a little further on some of the drivers in the quarter. With respect to price mix, net pricing was positive once again this quarter, with relatively more pricing in industrial motion. Mix was also positive, driven largely by industrial distribution, which generally outperformed OE sectors in the quarter. On the manufacturing line, you can see that we delivered modest year-over-year improvement in the quarter, driven by better productivity, targeted cost actions, and a favorable inventory change impact, which more than offset the impact of continued inflation and expenses related to ongoing footprint initiatives, including our plant expansion for belts in Mexico. Looking at the SG&A other line, costs were down from last year as targeted initiatives and lower discretionary spending more than offset the impact of higher compensation expense. And finally, acquisitions net of divestitures contributed $8 million of adjusted EBITDA on the quarter, which was accretive to overall company margins. as our recent acquisitions are integrating and performing very well. On slide 14, you can see that we posted net income of $96 million, or $1.36 per diluted share for the second quarter on a GAAP basis, compared to $1.73 last year. The current period includes 27 cents of net expense from special items, mainly acquisition amortization. On an adjusted basis, we earned $1.63 per share, compared to $2.01 per share last year. With respect to some of the below the line items, interest expense in the second quarter was about $3 million higher year over year, while diluted shares were more than 2% lower, reflecting our net buyback activity over the past 12 months. Our adjusted tax rate in the quarter came in at 27%, in line with our expectations, but up from last year, driven mostly by the net unfavorable impact of our geographic mix of earnings. And finally, depreciation expense was up slightly in the quarter, as was non-controlling interest. Note that we are expecting a slightly higher NCI deduct this year due to the Timken India sell-down. Now let's move to our business segment results, starting with engineered bearings on slide 15. In the second quarter, engineered bearing sales were $783 million, down 8.6% from last year. Organically, sales were down 7%, driven by a significant decline in China wind energy. Excluding wind, organic revenue would have been roughly flat compared to last year, as the rest of the segment showed resilient performance in the quarter. Specifically, revenue in the distribution, aerospace, and rail sectors were all up versus last year, while the off-highway, and general and heavy industrial sectors were lower as we anticipated. Currency was a headwind of revenue of just over 1%, while the TWB divestiture netted the IMEC acquisition was slightly unfavorable. Engineering bearings adjusted EBITDA in the quarter was 166 million or 21.2% of sales compared to 190 million or 22.1% of sales last year. Our solid margins in the quarter reflect the impact of favorable price mix and improved operating cost performance, which helped mitigate the impact of lower volume, higher logistics costs, and unfavorable currency. Now let's turn to industrial motion on slide 16. In the second quarter, industrial motion sales were $399 million, down 3.9% from last year. Organically, sales declined 9.2%. as lower demand was partially offset by higher pricing. Most of our platforms saw lower revenue year over year, with drive systems and linear motion posting the largest declines. Drive systems was impacted by timing on military and marine programs, which I noted earlier, while linear motion was impacted by broad weakness in Western Europe. Lubrication was also done modestly, while our services, couplings, and belts and chain platforms were relatively flat. Acquisition contributed 6% to the top line, while currency was a headwind of just under 1%. Industrial motion adjusted EBITDA for the quarter was 80 million, or 20% of sales, compared to 86 million, or 20.7% of sales last year. Our solid margins in the quarter reflect net acquisition accretion and favorable SG&A performance, which largely offset the impact of lower organic volume. Manufacturing performance was relatively flat in the quarter, as increased productivity and favorable cost performance was offset by ramp costs related to our plant expansion for belts in Mexico. Turning to slide 17, you can see that we generated operating cash flow of $125 million in the second quarter. And after CapEx, free cash flow was $87 million. which was slightly below last year's level. We expect cash flow to step up in the second half of the year, driven by seasonality and improved working capital performance. From a capital allocation standpoint, we returned $54 million of cash to shareholders through dividends and share repurchases during the quarter. We raised our quarterly dividend by 3% in May, setting 2024 up to be the 11th straight year of annual dividend increases. and we bought back 360,000 shares of company stock. Looking at the balance sheet, we ended the second quarter with net debt to adjusted EBITDA at 1.9 times, well within our targeted range. Our reduced net debt level of around 1.7 billion reflects the pre-tax proceeds from the sell-down of Timken India completed during the quarter. Looking at our debt, we issued 600 million Euro-denominated 10-year bonds in May at an attractive interest rate. The proceeds were used to repay near-term maturities and other debt. Timken now has no significant debt maturities until 2027. With our strong balance sheet and cash flow outlook, we have the ability to continue to grow the earnings power of the company moving forward, both organically and through M&A, all while continuing to return cash to shareholders. Now let's turn to our updated outlook for full year 2024 with a summary on slide 18. Overall, our outlook for organic sales and adjusted EBITDA margins are both relatively unchanged versus the prior guide. But we have slightly reduced our top line outlook to reflect updated foreign currency and M&A revenue projections. So let's go through it, starting with the sales outlook. We're now planning for full year revenue to be down in the range of 3% to 4% in total versus 2023. This is a net change of 50 basis points at the midpoint and a tighter range versus our prior outlook. Organically, there are a few pluses and minuses among the sectors, but we are maintaining our outlook for organic sales to be down around 5% at the midpoint, with renewable energy still driving most of the decline. and the outlook continues to assume no recovery or inflection in the second half. With respect to currency, we're now planning on a headwind of around 75 basis points for the full year based on current exchange rates, which is about 25 basis points more than our prior estimate. And finally, we lowered our outlook for M&A slightly by 25 basis points compared to our prior guidance to reflect our current forecast for our 2023 acquisitions. On the bottom line, we've narrowed our outlook and now expect adjusted earnings per share in the range of $6 to $6.20, which is down 5 cents at the midpoint from our prior guide. This reflects our updated revenue estimate offset partially by modest net accretion from the TIL transaction. Our outlook implies that our full year 2024 consolidated adjusted EBITDA margin will be in the high 18% range at the midpoint, essentially unchanged from our prior outlook. For the third quarter, we expect organic sales to decline in the low single digits range compared to last year. We also expect adjusted EBITDA margins and earnings per share to be down sequentially and year on year on the lower volume and moderating price cost environment. Moving to free cash flow, we've updated our full year outlook to greater than $350 million. Our update reflects $45 million of taxes to be paid in the second half related to the Timken India transaction. This accounts for most of the change from our prior outlook. Note that the pre-tax proceeds we received in the second quarter are reflected in net cash from financing activities. In other words, outside of free cash flow. Excluding the incremental taxes, our free cash flow outlook for 24 reflects over 100% conversion on estimated total gap net income at the midpoint. We're still planning for CapEx of around 4% of sales, with most of the spend targeted at manufacturing footprint expansions in Mexico and India, as well as other growth and operational excellence initiatives. And finally, we expect an adjusted tax rate of 27% for the full year and net interest expense in the range of $105 million, both unchanged from our prior guide. With respect to interest expense, the unchanged outlook reflects a benefit from the TIL sell-down, along with other forecast adjustments for cash and debt, which essentially offset one another for the year. To summarize, Timken delivered solid results in the second quarter with strong margin performance in both segments and revenues that were in line with our expectations, which further demonstrates the resiliency of our differentiated portfolio. We remain focused on delivering solid performance over the remainder of the year while advancing our strategic initiative to strengthen the company for the future. This concludes our formal remarks. And we'll now open the line for questions. Operator?

Thank you. As a reminder, if you would like to ask a question today, please do so now by pressing start, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press start, followed by two. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from the line of Stephen Volkman with Jefferies. Please go ahead.

Great. Good morning, guys. Can you just remind me what you do? My head's kind of spinning today, so I got to make sure I got the right company. I'm kidding. So I have one question for each of you. Rich, you said in your prepared comments that it feels like China wind is sort of flattening out. I don't want to put words in your mouth, but I'm going to ask you to pull on that a little bit. Do you think we've sort of reached the bottom for renewables? Can that business be up next year?

Yeah, it could definitely be up. We were flattish, slightly up in wind from Q1 to Q2, so we think we've certainly bottomed. There's usually a little seasonality from first half to second half, but we have the backlog to stay flattish for the rest of this year. I'd say it's too early to call next year. Tends to be a longer lead time item, so as we get to next quarter's call, I think we should have a good feel how we're going to at least start the year, but definitely could be up. It's probably impossible to be up back to peak levels, just because of the level we're operating at. It would take us a while to ramp back up to those levels, so probably the fastest for that would be 26 or 27, but yes, we could be up next year.

Okay, good, good color. And then, Phil, I'm trying to think about, there's a bunch of stuff going on there. You're doing some things on the cost side. You have the new facility in Mexico. You have SG&A kind of coming out. There's some synergies, I think, on some of the M&A. Just irrespective of volume, which will be whatever it is next year, but what are the sort of buckets of, you know, potential EBIT goodness in 2025 that are not related to volume?

Yeah, it's a good question, Steve. So I think, obviously, the footprint actions would be one I point to in terms of the new plants in Mexico. Mexico will probably continue to ramp for belts At the early part of the year, India will be ramping during the year, but footprint action should continue to be a benefit as we look ahead. Obviously, just continuing to execute our strategy around capital allocation, whether that's M&A or buyback, ought to create accretion for us. And we'll continue to focus on targeted cost initiatives through operational excellence, targeted cost actions, keeping controls on costs while still looking to serve our customers in this environment. And obviously pricing will be, you know, kind of highly dependent on where we are from a market standpoint. But we're generating positive price this year. Really no change to the pricing outlook from what we talked about last quarter. Still expected to be north of 50 bps for the year. Again, probably not 100. Somewhere in between and with positive pricing in both segments. And as we move ahead to next year, it's always our predisposition to keep, you know, to move prices in line with cost inflation. So that would be... Something else I'd point to, and then obviously our strategy around both on the organic side with the product vitality initiative we've been focused on, as well as the M&A, as I mentioned earlier.

Great. Thank you, guys. I'll pass it on.

Thanks, Steve.

Our next question comes from David Raso with Evercore ISI. David, please go ahead.

Hi, thank you. Just sort of a broad question. You seem to really emphasize the point we expect capital allocation to be a meaningful contributor to results over the next 18 months. I mean, is that a function of the core businesses, obviously a little sluggish right now given the end markets, or were you trying to signal something more significant about utilizing your cash flow and balance sheet?

No, I'd say not signaling anything significant. I would say reinforcing that we've been a strong generator of cash for multiple years. And we've moved from the low end of our leverage range to the high end. And after a very active year last year, we've already moved back to below the midpoint with quite a bit of cash coming in the next 18 months. So not signaling anything except probably more of the same. And that is either accretive M&A And if that M&A isn't there or doesn't meet our financial hurdles, then share buyback. And in either case, I think we continue to be a meaningful contributor.

All right. Thank you. And a follow-up on the comment about we expect the first quarter of 25 to provide the normal sequential seasonal benefit you get from 4Q to 1Q, if I heard that correctly. Obviously, right now, the earnings year over year have been down. When you think of that sequential bounce into the first quarter, I mean, could we getting, do you envision it as getting close to being back to flattening out earnings? I'm just trying to get a sense of the bounce you're referencing. Obviously, I can look at historicals, but I just want to make sure I understood what you were signaling about what the first quarter feels like after the work done, the back half of the year.

Yeah, I would say, first, it's certainly too early for us to call 2025. I think there's reasons to be optimistic about it, but what I was really saying there is even in a weak year, we have a nice bump typically from Q4 to Q1 on both revenue and margins and earnings per share. To your specific question about getting earnings back to flat, I believe with our guide, assuming we hit the guide, we'd have to be around 8% up from Q4 to Q1, and that's not a precise number, plus or minus there, but high single digits up from Q4 to Q1 organically to get back to flat. And if you look at the last four years, our Q4 to Q1 sequential I've got here in front of me, this year, which was obviously weak, was 9%. The prior three years were plus 17, plus 12, and plus 15. So certainly, as we see today, getting back to top-line growth in the first quarter of next year is attainable, and so also would be earnings per share.

That's helpful. Thank you. Thanks, David.

The next question comes from Rob Wertheimer with Milius Research. Please go ahead.

Hi, thanks, and good morning, everybody. Just to kind of continue on that theme, I think you said, morning, X when you were kind of just down three core, which is fairly muted. If you look at those businesses and leave out distribution for the moment, are orders and indications from customers, you know, flattish or Phil Kleisler- You know, following arising and any sense of orders there, and then I think he moved rail up a little bit in the mix there is, I wonder if you give context around that is that real cars local what went on there, thank you.

Phil Kleisler- yeah sure rob thanks, this is phil so on the on the orders, I would say that you know the way we're seeing the orders right now if I if we pull the wind energy, I mean orders. Phil Kleisler- Certainly down year on year but sort of flattish sequentially Q1 to Q2 so. As we said, nothing that would indicate we're going to inflect in the second half, but certainly supportive of the overall outlook. And you got it right. I mean, in the quarter, if we pulled a renewable out, we would have been down less than three. If you look at the full year guide of our minus five organic, if you take the renewable out of there, it's actually down a little bit less than two. So it is driving the bulk of our guide, not just in the quarter, but for the full year. And then in terms of the buckets, you got it right. We did move rail and marine over to the right. Marine was really just current expectations for military marine program activity over the course of the rest of the year. And then rail, you know, the rail business is doing very well. It's a global business. We're up outside the U.S. India has been a real strong performer for us. You know, Europe's been relatively flat, I would say, overall. And then we've been up in the Americas. And I would tell you in the Americas, it's been both. TAB, Mark McIntyre, MRO service activity, but also you know outgrowing I would say outgrowing the only built. TAB, Mark McIntyre, freight car built in North America and that's and that was certainly a pleasant surprise as we move through the quarter and was was one of the reasons we moved it over to the right. TAB, Mark McIntyre, And then you know just to kind of kind of fully close the loop, I would say on on on sectors that kind of move to the left or leaned left we did move heavy industries over. just given the order book activity that we saw in Q2. That's late cycle, that's project spend in big sectors like oil and gas and metals, OE activity. Moved that over to the left just given the order activity we saw. And then probably leaned left a little in off highway. It stayed in the far left column, but we did adjust that a little bit for ag. But those would really be the only sectors that we would have moved either physically or kind of intellectually as we updated the outlook.

The only add I'd have to that is the first part of your question on orders. Our sequential guide off Q2 was minus three, minus four-ish percent per quarter, which is significantly better than last year's sequential. But again, there we saw coming out of the supply chain issues and the significant slowdown. But it'd be a little... Pretty similar, a little softer than what we had in 21-22. So I'd say, again, we're looking at normal seasonality, as Phil highlighted, some strength in some pockets, some winds in there, and then some areas that are softer and some offsetting. So fairly normal, and that's what I would say the order pattern is supporting. Then the other part I would throw in, Phil hit marine, which is something we put out some press releases on the last several years that we've had some really good platform winds there over the years. We don't talk a lot about our platform ones because most of them come in the form of $10,000 here, $100,000 there, occasionally get up to a million. But we've got a really good application engineering pipeline and some really good self-help coming that, again, is in line with our outgrowth initiatives as well. So feel good about that as well.

Thank you.

The next question comes from Brian Blair with Oppenheimer. Brian, please go ahead.

Thank you. Morning, guys. Hey, Brian. I was hoping I could drill down a little bit more on industrial distribution trends. Sounds like relatively supportive within a very choppy and fluid demand backdrop. What was the monthly order cadence through Q2 and into early Q3? How does that progression compare to typical seasonality?

Yeah, thanks, Brian. I would say overall relatively stable and pretty much in line with normal seasonality, I would say, in terms of progression through the quarter and then looking at the full year. But you're right in the quarter. I would say once again, we talked about this last quarter, but industrial distribution was, I would say, a little bit of a pleasant surprise in terms of the performance we saw. It was up in the quarter, probably in a little bit, call it mid-single digits-ish range, and that would be pretty much globally everywhere but Europe. We were up in the Americas, up in Asia, up in both North and Latin America. So it's been pretty broad support, and that's kind of driven by you know, continued industrial activity, continued MRO activity. You know, I talked about heavy industries being down, which is kind of the OEM, the OE side of, you know, metals, oil and gas, other big markets. But the MRO side, which generally gets served through distribution, you know, continues to roll along. So, you know, we do. And then relative to inventory, we do believe inventories appear to be at good levels for this market. for this level of demand. So we've talked about inventory for the last several quarters, but it does feel like inventories are in relatively good shape for this level of demand moving through the rest of the year.

That's good to hear and very helpful, Keller. And then somewhat of a follow up to Steve's question. Obviously, through recent demand pressure, your team's been pretty active in managing run rate costs as well as some streamlining of your manufacturing footprint um how should we think about the you know cost savings achieved to date what's incremental in the back half and is there a level of structural uh cost out that we should keep in mind for 2025. yeah i think the right way to think about it is i mean obviously for us um operational excellence particularly in an environment like this is is a lot of small and you know we talk about the big initiatives the plant expansions which enable us to

take out other, in most cases, higher-cost facilities and replace with more cost-effective, more efficient facilities, in some cases in low-cost countries or best-cost countries. So, I mean, that continues, but it's also a lot of smaller initiatives as well. So, for example, we've been really focused on hiring, and I would say in our operative footprint, we continue to be down over 10%. from you know call it a year ago as we in pockets of the business where it's been weaker we've been adjusting our headcount levels you know with an eye towards hey these markets are going to recover so let's make sure we keep you know we keep critical folks and that kind of thing but aligning with lower demands we've been accelerating you know the acquisition integration to drive synergies especially considering we didn't we haven't done a deal so far this year that's given us an opportunity to really step on the gas, if you will, around acquisition integration, which I think you're starting to see that come through, not only in the acquisition performance that we specifically isolate, but also even on the Timken side as well. And then I would say, you know, when we talk about the big facilities, we've consolidated, you know, a number of, I would say a number of smaller facilities, a good half a dozen smaller facilities over the last 12 to 18 months, which are all incremental, you know, benefits, if you will. So we tend to not provide dollar amounts because you know you need that you need those savings to offset inflation, offset volume declines, offset some of the other headwinds you have. But there's no question, you know, when you look at the the manufacturing bucket, if you will, and even the material bucket, we've done a lot of work on material savings tactics. You know you're seeing really good benefit, which has been margin supportive in 2024, and I think as we move into next year, you know, you know, could be margin accretive in 2025 or should be margin accretive.

I would just add, as Phil said, we don't necessarily say it's $30 or $40 million, but we do have a lot of activity there. It's probably a little more weighted to industrial motion right now. Again, as Phil said, we've been consolidating quite a few smaller facilities there, and it's really embedded into our margin targets. I think when you look at the first half of the year, north of 20% EBITDA margins in a Brian Kenney. Pretty significantly down start to the year from a revenue standpoint it wasn't long ago that 20% margins, we were shooting for at a peak revenue so it's indicative of its key to our margin expansion goals and our long term financial targets and it's embedded in those targets.

Brian Kenney. understood and again very helpful color Thank you.

Thanks Brian.

Our next question comes from Steve Barger with KeyBank Capital Markets. Please go ahead, Steve.

Hey, good morning, guys. I think this segment reclassification five or six quarters ago was meant to show industrial motion as maybe the growthier side of the business, basically the old process control stuff. But the organic decline has kind of tracked the bearings over the past three or four quarters. Has the industrial motion revenue trend surprised you, and how do you expect those segments will track in a recovery?

Yeah, maybe I'd start, Steve. I would tell you it was a larger organic decline than probably, you know, you expected, and certainly we would have expected ordinarily. But the marine item, I think, was significant. It's kind of why we called it out. Marine was down really significantly. And again, we expect to be up for the full year. But that marine business sits in industrial motion, and that decline was a significant contributor of the minus nine-ish organic for the quarter. If you take the marine out, you're probably closer to five or six down organic, more in line with maybe what you're seeing across the rest of the industrial landscape. The other point is we do have some of the businesses that we own that are running extremely well. Linear motion in particular does have a large European exposure. It's hard to overcome the headwinds in Europe. But overall, I would say the mix of business we have is really good, as you know. And I think over time, you'll see it should, with the markets that the industrial motion business is indexed to, we do believe probably has the ability to grow a little bit faster than, say, where the markets that the bearing business is indexed to. And then from a margin standpoint, know we've got the mexico plant ramp going on we had the large volume decline military marine mixes industrial motion up i would say so when that's when that's down it can have an impact but i do think over time industrial motion is indexed to you know relatively higher growth markets with the ability to generate you know relatively uh higher margins as well yeah uh we certainly are slightly slightly higher growth rate in in industrial motion than bearings but but looking to you know certainly uh

looking to achieve growth in both. In addition to the mix issue that Phil highlighted, industrial motion is a little more weighted to Europe and tends to be at the moment a tougher geography for us, so that's a little bit of a temporary headway. And then I'd also put in we continue to diversify the organic mix of the bearing business as well and certainly still Off-highway capital equipment is a critical market for the bearing business and is cyclical, but we've diversified more into the aftermarket. GGB was a significant diversification for us. ARB revenue has been strong. So, you know, some positives there within the bearing side to point to as well.

Yeah, and to the long-term margin commentary, In the first half, engineer bearings EBITDA margin averaged about 130 basis points above industrial motion. Given how you view revenue and expected mix in the back half, does that relationship hold or does IM have higher margin in the back half?

Yeah, I think for the full year certainly would be a little, we would expect both segments to be at or above 20% for the year with call it a tighter delta. than what you would have seen in Q1 or Q2. But I would think this year, given what's happening in IM with the belt expansion, et cetera, probably industrial motion may be a little bit lower, but they'd be very close to one another.

Understood. Thanks.

Thanks, Steve.

Our next question comes from Tim Stein with Raymond James. Please go ahead.

Hi. Yeah, good morning. Phil, maybe just on the EBITDA bridge, as we think about the back half of the year, just directionally, I believe I heard earlier the comments on pricing for the full year. I think you said you maintained the 50 to 100 basis points of price. I'm just trying to think how to think through that and then kind of the interplay with what you guys are seeing on the manufacturing cost side. And, you know, the comps have gotten all screwy just given what's transpired over the past couple of quarters. So just how to think about kind of the relationship between the two in the back half of the year.

Sure, Tim and welcome back. I should say I should start with, um, uh, sure on the margins, you know, our margins would typically be a little lower in the second half from the first half, just with normal seasonality. And as we're, and I would say this, this year will be sort of, sort of no different, but as we look at the back half, I think a couple of things I keep in mind is, you know, when you, we are going to continue to see, um, a little bit, you know, lower sequential volume. So you go first half, second half, you got lower volume sequentially. You know, we did, um, We were flat to up a little bit on inventory as we move through the first half of the year. We're going to look to take a little bit of inventory out in the second half, which can which can be a headwind on the on the manufacturing line. You know, still still seeing, you know, we'll have the, you know, ramp costs as the belts expansion continues to ramp. We continue to try to get India launched, you know, probably by the beginning of early next year. We'll continue to have some ramp costs there. And then I would say, you know, the overall pricing, TAB, Mark McIntyre:" You know, we held the guy for pricing but that's kind of more more first half weighted it's in the run rate. TAB, Mark McIntyre:" But I, but I would really say a couple things to point out, as you look first half second half would be kind of lower sequential sales. TAB, Mark McIntyre:" Lower production volume logistics kind of started to hit us in the second quarter will probably have a little bit of a headwind there too. TAB, Mark McIntyre:" And then the ongoing operational excellence initiatives that we're going to continue to execute Sean offset as much of that as we can, but but do expect margins to be down. you know, as we look in the third quarter in particular, I talked about the third quarter revenue, but, you know, for EBITDA margins will be down year on year and sequentially. And I think as you look to the fourth quarter, you'll see a similar situation as well.

Okay. That's helpful. Thank you, Phil. And then just thinking about the impact on the bearing segment as you hopefully kind of bottom out on China wind and just thinking about what What potential recovery looks like there should, you know, just given the volatility in that business and some, I think, a little bit more challenging from a pricing standpoint, will that impact at all kind of as we come out of it, just in terms of kind of the incrementals in that business scenario? I'm just thinking, is that, you know, has there been kind of like a structural reset of the margins of that business, just given the amplitude of the decline, or is that, should we not expect that?

Well, I'd say there's certainly been a reset of the volume, right? And I think, like I said in the last call as well, we're also looking, this is an opportunity to come out of this with a better geographic mix and a better mix between OEM and the aftermarket. Because we haven't been in the market for that long, we're disproportionately weighted to the OEM side. And then we really chose to participate primarily in the China market a decade ago because it was open up versus the other markets were served by existing players. But we've penetrated those markets as well. So we expect to put more emphasis into a better geographic mix coming out of it and still remain optimistic that the China market will rebound as well. As we said before, the wind margins were kind of in line with the company average and could still, you know, would still expect good incrementals coming out of that, have a fair amount of fixed costs associated with that. We've done a good job getting after the variable costs, but no reason to think we TAB, Mark McIntyre, wouldn't drop the incremental through with normalish levels.

TAB, Mark McIntyre, yeah I would I would only add to him that you know when you look at the the bearing business we've talked about this before, is it is, it is. TAB, Mark McIntyre, More capital intensive, so it does tend to see it can see show a little bit stronger incremental on the way up and can kind of have to fight. TAB, Mark McIntyre, A little bit little bit steeper decrementals on the way down and we've managed through it very well, but I do think. Tom Frantz, You know, for if we're back up next year on the on the bearing side of the House that. Tom Frantz, That we should generate really, really good incremental and then last point, maybe on China, as we have. Tom Frantz, You know, we did make some investments in China to improve our manufacturing footprint, I think, while while the. Tom Frantz, While volumes are down on the wind side, I think the manufacturing investment has has helped us lower costs, which has helped mitigate some of that impact, as has the maturity of the.

the products, the technology, the volume. As you mentioned, prices have come down in wind, but they've largely been on a gradual downward trajectory since we've been in the market, but so have costs as we and others get better at producing the product and its relatively new technology. So, again, come back and say we'd be optimistic that we would be able to leverage the incremental volume well.

Tim Stenzel- got it Thank you all right and rich best of luck and enjoy whatever whatever's next for you, thank you.

Rich Kedzior- Thanks appreciate that.

Leigh Anne Touzeau, Next question comes from Mike schlitzky with da Davidson and co please go ahead Mike.

Mike Schlitzky, Good morning and thanks for taking my question. Mike Schlitzky, i'm wanting to quickly. Mike Schlitzky, touch on off highway for either. Just to touch on off-highway for a moment, I've been hearing a lot of the OEMs are looking to focus on inventories in the back half of the year, trying to bring them down through the fourth quarter. What do you think, what have they told you about their ability to get to where they want to be by the fourth quarter? Or do you think that folks still have some more inventory to take out in the first part of 2025?

It varies beyond market, but certainly the one that's got more press here lately would be AG and has been down. For us, AG went down last year, so we started feeling that earlier with inventory correction for our part of the channel. So our comps as we head into the second half of the year are probably better than what theirs are. So some of the headline numbers that the AG industries dealing with is probably a little worse than the parts suppliers to it. But certainly there's a level of caution in ag going across the rest of the year. Mining and construction probably a little bit better and maybe for us a little more global presence in those two markets as well versus ag a little heavier weighted to the United States. So I'd say overall, you know, it's down. We have it in the high single digits. It's down for the full year that way as well. Too early to say where we'll be at for next year.

Okay. Got it. And then I wanted to ask about the M&A pipeline. Obviously, it seems like it's always good for a couple of deals a year. Give us some thoughts as to are you in any late-stage conversations with any companies decent-sized targets here or just some broad view as to what valuations look like and the amount of targets that are out there today?

Yeah, so we had a very active year last year, six deals in and one out. We also made a divestiture last year, so a pretty active year. Last year came into the year with, again, a little higher debt level, but certainly nothing that would prohibit us from doing something. It's been two quarters since we've closed anything. It would certainly be optimistic that in the next 12 to 18 months, you would see us again, as you said, bring in one, two, three small to medium-sized deals, very consistent with the strategy, and business leaders remain very engaged in that, so don't see any reason to pause that with the CEO transition. would expect to continue to be active over the next, either the rest of this year or certainly in the next year.

Okay, thank you. Thanks, Mike.

The next question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Hi, thanks for taking my question. Just wanted to go back to a comment earlier about logistics costs. So there's been a lot of great discussion on the self-help side, but maybe if you could just talk about your cost basket and generally what you're kind of expecting here in the second half on those costs kind of evolution.

Yeah, sure. Thanks, Angel. I would say, yeah, that was the one cost that we have seen inflate, you know, quite a bit, certainly starting in the second quarter. uh we do expect that to continue for the rest of the year and quite frankly you know when we talk about material and logistics we sort of entered the year expecting you know material logistics to be kind of favorable for the year and at this point i would say it's probably more flattish with material favorable but you know logistics uh likely unfavorable for the year just given where container rates are presently especially coming out of um coming out of china but again that's where you know, in the second quarter and for the rest of the year, some of the self-help operational excellence initiatives are going to come into play because we do believe, you know, while versus April, the outlook for logistics has gotten worse, we do believe, you know, we'll be able to offset that through, you know, the targeted cost actions, the acquisition integration, and all the things that we've been working on.

Very helpful. And then back to maybe cash flow. So very strong kind of cash flow generation here in the second half. And you talked about inventories maybe needing to work down a little bit. Can you just maybe help quantify that? And then as you think about a year next year where you're seeing renewable energy potentially recover and just a little bit of a turning point, could you just talk about kind of the free cash flow generation and working capital? Just a little bit more color on all that would be helpful.

Let me start with just a little bit on the inventory and I'll let Phil take it to the full cash flow level. As mentioned, we're certainly looking at a step up from Q4 to Q1 in revenue. So right now we're targeting a fairly modest inventory reduction between now and the end of the year. You need the inventory more for the start to next year. As the year progresses, if we feel a little more bullish on the start of the year as we get to November, December, you might see us a little more cautious on the inventory. And if we get a little more pessimistic on the start of next year, you might see us get a little more aggressive this year on the cash flow. But it really is more about the start to next year, which, again, right now we would be expecting to see a significant step up from Q4.

Yeah, I think Rich hit it. I would just add, you know, normally we'll see that seasonal working capital liquidation, if you will, given that the fourth quarter tends to be the lowest year quarter from a revenue standpoint. From a seasonality standpoint, we'll typically see receivables come down seasonally in the second half. We're expecting that. We probably ended the second quarter with a little bit higher from a day standpoint, so we should make that up and see that come back in line in the second half, I should say. Rich talked about the inventory. A lot of that does hinge on the fourth quarter and what's happening. The fourth quarter is always a little bit of an unknown, particularly in the shorter cycle. part of our business. But, you know, we'll typically see some inventory come out in the fourth quarter and would not expect anything differently, I would say, this year. So that's really the main drivers. The offset to that would be we will have those taxes that we'll have to pay in the second half related to the India transaction, which will offset that a little bit. But net-net, you know, we'll see cash flow step up significantly, you know, in the second half and very supportive of our guide of greater than $350 million for the full year.

Very helpful. Thank you.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks. Good morning, everybody. And Rich, wish you the best in whatever's next.

Thanks, Joe.

My first question, and I apologize if you touched on this already, I did go dark for a couple minutes. I'm curious, heavy industries, right? You guys have experienced several cycles in the past. Obviously, some of your biggest customers have announced production cuts. How do you see this playing out from a timing standpoint? I know you don't have a crystal ball, but just utilizing your prior experience and how long it could take to get to normal demand patterns for that business going forward?

Yeah, sure, Joe. Maybe I'll hit them both. I'll hit heavy industries and then also hit off-highway because they're similar in many respects. When we talk about heavy industries, it's typically the big markets like oil and gas, metals, aggregate cement, pulp and paper, OE activity. into those markets. And we did typically the late cycle, usually the last sector that slows for us. And we did see some debt. We were down in Q2, did see some softening in the order intake rate, which is why we moved it over to the left. That one's always a little bit hard to predict because it's more project spend than it is kind of recurring revenue. But I would tell you the MRO side of all that, which generally gets served through distribution, you know, continues to roll along. We are seeing James Rattling Leafs, continued good activity in the on the mro side and markets like metals oil and gas pulp and paper aggregate cement. James Rattling Leafs, Now on off highway, which is more of the recurring revenue, you know you know as as rich said we started to decline and off highway you know kind of the middle of last year so we're sort of one year into. James Rattling Leafs, D stockings you know slash slash lower demand levels we're expecting it to continue, you know into the second half. And then by the end of the year, you know, we will have been down in those markets in particular, probably seven quarters, which, you know, which is would be pretty normal, maybe arguably on the long end of normal. So it's hard to predict. It's very dependent on interest rates and the overall, you know, economic situation, if you will. But we do feel like these markets have been depressed for, you know, quite some time. And we're in a good position, I think, to step up next year.

Chris Winslow, M.D.: : guys that's helpful phil and I guess look we've danced around the margin question a little bit. Chris Winslow, M.D.: : For next year at this point, just because there are a lot of moving pieces that are impacting margins this year. Chris Winslow, M.D.: : So let's say we get back to a more normal environment where it's more like three four or 5% type growth for your businesses. Chris Winslow, M.D.: : Should your you know, based on everything that's transpired this year, would you expect incremental margins be above normal like, how do we think about. Tom Frantz, You know the right jumping off point from this year into next year on the on the incremental.

Mike Wilberg , The Capacity Collective, yeah it's probably a little bit early, but again, I think you know we're still committed to long term targets, so I think if we're. Mike Wilberg , The Capacity Collective, If we're up next year, we would expect to make to take another step on that margin path to get us to to average 20 over a cycle not not just at the top of the cycle, which would say you know we've got a. And we've got to be above that at peak and hold on at the trough. So I would expect to take another step up, but probably too early to talk specifically about it.

Okay, great. Thanks, guys.

Thanks, Joe.

We have time for one more question. And so our final question today comes from Chris Danker with Loop Capital. Chris, please go ahead.

Hey, thanks for squeezing me in, guys. I guess I'll just keep it to one here. Again, India has been really impressive this year in terms of growth. I guess maybe just conceptually, as you kind of look at the markets inside of India, would you expect there's some durability of their legs there into 25 and beyond? Or is there some risk that, you know, India risk looking kind of like China wind as we move into 25, 26 and beyond there?

I think there's reason for both short and long-term optimism there. Short-term, there's good momentum. Longer-term, I think India is a beneficiary of some of the diversification that companies are looking with their global supply chains not to have overweighted to China or any other geography, and India is a beneficiary of that. fairly broad-based across industrial markets. So I think there's reason for optimism and for the foreseeable future.

Yeah. Well, thanks for the call there, Richard, and congratulations again.

Thank you.

Those are all the questions we have time for today. Sir, do you have any final comments or remarks?

Yes, thank you, Emily. This is my last quarterly call as CEO. I wanted to thank the investment community for the support over the last decade, and in particular, those of you that have invested in the company over that time. Those of you that have followed Timken for a couple of decades have witnessed a dramatic transformation in this 125-year-old industrial company. It was a privilege for me to be a part of it for the last 19 years. I'm both very proud of what we've achieved during my tenure, and also very confident that the company will continue to prosper after I transition out of my leadership role. We have a great group of employees around the world. The company has been performing at both a high and consistent level for many years. Our portfolio is strong, and I look forward to supporting Tarek and the 19,000 employees at Timken to achieve new heights for shareholders, customers, and employees in the years to come. Thanks, and back to you, Neil.

Yeah, thanks, Rich, and thank you, everyone, for joining us today. If you have any further questions after today's call, please contact me. Thank you, and this concludes our call.

Thank you for participating in today's Timpkins Second Quarter Earnings Release Conference Call. You may now disconnect.