Timken Co Q2 FY2020 Earnings Call

Good morning. My name is Anna, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's Second quarter Earnings Release Conference Call. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Anna, and welcome, everyone, to our second quarter 2020 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening remarks this morning from both Rich and Phil before we open up the call for your questions. During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company and without expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Thanks, Neil. Good morning, everyone, and thanks for joining us today. Given the environment, I'm very pleased with how Timken has responded to the global pandemic this year and how we delivered in the second quarter. We have kept our facilities safe places to work, we've responded quickly to the restrictions and guidelines set by government and health authorities, served our global customers with a reliable supply of products and we've kept the company financially strong through the pandemic. Our revenue in the quarter was 20% down from 2019's record quarter of $1 billion. This is better than we anticipated when we held up our last call on May 1 as our business bottomed in April and improved sequentially through the quarter. On that call, we projected that April would be down about 30% from the prior year. We did it slightly better than that projection. Our business improved in May and then again further in June. By the end of the quarter, we and our customers faced minimal government restrictions. Within the decline of 20%, there are a lot of moving pieces, so let me provide some perspective on our markets. The three lowest performing parts of our business were OEMs in the automotive and heavy truck sectors and the entire country of India. All three were down over 40% in the quarter and idled much of April and May. The two bright spots for revenue were China and renewable energy. Renewables were up globally and also the driver of our strong China results. Our position in the renewable space has been built organically over the last decade and recently complemented through acquisitions. This market expansion made a material difference in our revenue results for the quarter as well as year-to-date, demonstrating a more diverse mix than prior cycles. Defense also performed solidly for us in the quarter. But from there, essentially, all of our other markets and geographies were down more than 10% from the prior year. June sequential strengthening was led by the markets that were hardest hit in April and May, like automotive in India. There were some exceptions like commercial aerospace, which weakened for us as the quarter progressed, but the sequential strengthening through the quarter held for most markets. Moving from revenue to profits, we made $1.02 per share in the quarter and over 20% EBITDA margins. Through the course of the quarter, we took a variety of significant cost reduction measures to react to the decline in customer demand. The majority of the cost reductions in the quarter were temporary, including cuts in discretionary spending, furloughs and reductions in compensation. We also accelerated efforts to reduce structural costs going forward, which I will talk more about in a moment. We focused heavily on cash generation and took significant actions in the quarter to produce less than demand, which resulted in an inventory reduction of more than $40 million in the quarter. Receivables came down with revenue. And when combined with inventory reduction and EBITDA, we generated over $220 million in free cash flow for the quarter. It was a very strong quarter on cash flow with the expectation that we will continue to generate strong cash through the second half. We also took steps to bolster our liquidity and balance sheet, which I will let Phil elaborate on later. The results from the BEKA acquisition also contributed to the quarter, helping the top line by about 3% at EBITDA margins, below the company average but above the pre-acquisition levels despite the impact from COVID-19. The BEKA integration has continued through COVID, and we expect further margin expansion again next year as we target to be at 20% by the end of 2021. While stability in our markets has improved significantly since our call on May 1, uncertainty remains elevated, and we are not providing revenue or earnings guidance for the second half of the year. I will provide some color on July and what we are seeing short term. First, just a reminder of our normal seasonality. In the last 5 years, we have averaged a 4% organic sequential decline in revenue from the second quarter to the third and then another 2% from the third quarter to the fourth. So even though the second quarter of '20 was particularly weak, many of our normal seasonality headwinds still exist as we look at the second half. At this point, we do not see a snapback scenario in the third quarter or the second half. We are planning for revenue to be below 2019 levels for the rest of the year. July revenue is holding at roughly June levels, which is better than normal seasonality, but is also not another step change in the sequential growth like we saw in June. As we look at demand in August and September, our best estimate for third quarter revenues is to be between flat and up mid-single digits from the second quarter, which when seasonality is factored in, would be a solid sequential revenue result and imply that our markets are continuing to recover, but would remain well below 2019. And I would add, there remains more variability in that projection than normal as customers continue to adjust their operating plans and inventories. From a specific market standpoint, I would say we are not seeing any major changes in end markets in July or the third quarter from June, except for U.S. automotive, which is expected to be stronger as the channel restocks after an extended shutdown. From a profitability standpoint, we expect second half EBITDA margins to be solid, but to be down from first half margins. There are several factors in this projection, the first, again, being the normal seasonality, including this year's first quarter only being modestly impacted by COVID-19. Mix will have an impact; company EBITDA margins in the second quarter were helped by Process revenue being down much less than Mobile revenue, and that gap narrows in the second half as Mobile markets recover. Temporary cost reductions in the form of furloughs and pay cuts will decline significantly in the second half from the second quarter. We are still managing discretionary spending tightly, and we took further temporary actions in July, but those actions are smaller and more targeted than they were in the second quarter. Moderation of temporary cost actions will be partially offset by the ramp-up of structural cost actions. Late in the second quarter, we began moving from furloughs to workforce reductions to reflect the new realities of demand. Our company-wide employment has been reduced by over 1,000 since the first of the year, with a reduction of about 300 more expected this quarter. We are also accelerating footprint initiatives, rightsizing plant staffing levels and accelerating other cost and productivity measures. These measures are expected to generate $50 million to $60 million in year-over-year benefits in the second half of this year. A few examples of our many cost actions include 2 large plant rationalizations already underway, along with the consolidation of several smaller operations across our footprint. Acquisition synergies, including sales force and geographic consolidation between BEKA and Groeneveld lubrication, and business consolidation between Drives and Diamond Chain. We continue to leverage our digital platforms for improved productivity. This quarter, we are adding our ABC Bearing acquisition to our ERP system, which will further simplify our business systems across the enterprise. Within the $50 million to $60 million in cost reduction actions, some of these initiatives were already in process, some are being pulled ahead, and some have been launched directly in response to the new realities of demand. Finally, impacting second half margins, we plan to continue to reduce inventory through the remainder of the year. The magnitude depends on how revenue develops, but we plan to underproduce relative to actual demand through the balance of the year. Again, we will deliver solid margins in the second half, but below the first half. From a cash flow standpoint, we expect cash flow from operations for the rest of the year to be strong under a wide range of demand scenarios. Our capital allocation priority for the remainder of the year after CapEx and the dividend will be to reduce debt. One final comment for the outlook. While the virus and government reactions could go many different directions in the coming quarters, it could continue to be a drag on global industrial demand. We think the risk of repeating widespread shutdowns across our markets is relatively low. The current focus of governments on travel, hospitality, entertainment, and large gatherings has minimal short-term impact on us and our customer base. Regarding the longer-term outlook for Timken products, we continue to believe that the long-term changes that arise from the post-pandemic world will have a relatively small impact on our value proposition, and the demand for what we do will endure and grow. In summary, the second quarter was extremely dynamic and challenging, but Timken employees responded. We kept our operations safe, we took care of customers and we kept the company financially strong with solid earnings and strong cash flow. Relative to the environment, we executed extremely well. And while uncertainty remains elevated, Timken will continue to deliver results through the pandemic while advancing the company for the better times that will inevitably come. And with that, I will turn it over to Phil.

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 13 of the materials. Timken delivered strong results for the second quarter despite the broad economic slowdown caused by COVID-19. You can see a summary of our results for the quarter on this slide. Revenue for the second quarter was $804 million, down just under 20% from last year. We delivered an adjusted EBITDA margin of 20.4%, up 70 basis points from last year, with strong decremental margin performance. Margins were also up sequentially, and adjusted earnings per share came in at $1.02, down about 20% from last year's record second quarter. Turning to Slide 14. Let's take a closer look at our second quarter sales performance. Organically, sales were down about 20% in the quarter. Both segments saw lower sales volume versus the year-ago period, while price realization was positive. As Rich highlighted, revenue improved in the months of May and June compared to the April low point. As COVID-19 interruption subsided, we began to see underlying demand improve in some sectors like automotive. Acquisitions added approximately 3% of the top line in the quarter as we benefited from the BEKA acquisition completed last year, while currency was a sizable headwind, negatively impacting revenue by almost 3%. On the right-hand side of the slide, we outlined organic growth by region, so excluding both currency and acquisitions. Let me briefly comment on a few regions. In Asia, we're up 8%. Our sales in China increased significantly in the quarter from last year due mainly to strong growth in renewable energy, which more than offset the negative impact from India being virtually shut down for most of April and May. In both North America and Europe, we were down in the mid-20 percentage points, as most sectors were down across those 2 regions in the quarter. Our operations in North America and Europe were severely impacted by COVID-19, especially in April and most of May, which had a negative impact on end-market demand, especially in sectors like automotive and heavy truck. Turning to Slide 15. Adjusted EBITDA was $164 million or 20.4% of sales in the second quarter compared to $197 million or 19.7% of sales last year. This represents a decremental margin of around 17% all in or 13% on an organic basis. The decline in adjusted EBITDA reflects the impact of lower volume and related manufacturing performance, including the effect of inventory reduction. Currency also had a negative impact on EBITDA in the quarter. On the positive side, these headwinds were partially offset by a significant reduction in SG&A expenses. We also had favorable price/mix and lower material and logistics costs. In addition, BEKA contributed nearly $4 million to EBITDA in the quarter as our team continues to integrate this acquisition and drive synergies. Let me comment a little further on SG&A and manufacturing in the quarter. The significant reduction in SG&A expense was driven mainly by cost reduction actions, including salary reductions and work furloughs along with lower incentive compensation expense. These actions, while mainly temporary in nature, had an immediate and positive impact on our results in the quarter as we took swift action to reduce cost in response to COVID-19. On the manufacturing line, we delivered strong execution in the quarter despite lower production volume due to lower demand and our efforts to reduce inventory. Unabsorbed fixed costs, net of cost reduction actions, drove most of the negative variance in the quarter. Our teams around the world acted quickly to flex down labor and variable costs and reduce inventory in response to COVID-19. On Slide 16, you'll see that we posted net income of $62 million or $0.82 per diluted share for the quarter on a GAAP basis. This includes $0.20 of net special charges for pension mark-to-market, restructuring, and discrete tax items. On an adjusted basis, we earned $1.02 per diluted share in the quarter, down 20% from last year. Our adjusted tax rate was 27% in the second quarter, reflecting our geographic mix of earnings and in line with our prior expectations. Right now, we expect the tax rate to remain in this range as we move through the year. Now let's take a look at our business segment results, starting with Process Industries on Slide 17. For the second quarter, Process Industries' sales were $461 million, down 9% from last year. Organically, sales were down 8.4% driven by double-digit declines in most sectors, including industrial distribution, offset partially by strong growth in renewable energy and positive pricing. Currency translation was unfavorable by 2.5%, while acquisitions added almost 2% to the top line in the quarter. Process Industries' adjusted EBITDA in the second quarter was $129 million or 27.9% of sales compared to $130 million or 25.6% of sales last year. We were able to hold adjusted EBITDA relatively flat despite lower sales as the favorable impact of cost reductions, including lower compensation expense, and lower material and logistics costs, almost fully offset the impact of lower volume and unfavorable currency. Now let's turn to Mobile Industries on Slide 18. In the second quarter, Mobile Industries' sales were $343 million, down 30.6% from last year. Organically, sales were down roughly 32%, reflecting significantly lower shipments in automotive and heavy truck, as Rich commented on earlier. Off-highway and rail were also down double digits, while pricing was positive. Note that aerospace was roughly flat as higher defense revenue offset lower commercial sales. Acquisitions added 4.3% to the top line in the quarter, while currency translation was unfavorable by 2.8%. Mobile Industries' adjusted EBITDA for the second quarter was $42 million or 12.3% of sales compared to $79 million or 15.9% of sales last year. The decrease in adjusted EBITDA reflects the impact of lower volume and related manufacturing performance and unfavorable currency, offset partially by the favorable impact of cost reductions, including lower compensation expense, lower material and logistics costs, positive price/mix, and the benefit of acquisitions. This represents a decremental margin of around 22% on an organic basis. So very good operating performance in Mobile Industries, all things considered. Turning to Slide 19. You'll see we generated strong operating cash flow of $247 million in the quarter as improved working capital performance, the impact of cost reduction actions, and lower cash taxes more than offset the impact of lower volume. We generated free cash flow of $223 million in the second quarter, up almost $90 million from last year on lower earnings. We spent $25 million on CapEx in the quarter to support long-term growth and operational excellence initiatives. We also paid our 392nd consecutive quarterly dividend and reduced net debt by nearly $200 million. Note that we did not buy back any shares in the second quarter. Taking a closer look at our capital structure, we ended June with a strong investment-grade balance sheet. We have liquidity of greater than $800 million, which includes $416 million of cash on hand plus over $400 million of availability under committed credit lines. Our net debt to adjusted EBITDA ratio improved to 2.1x at June 30 compared to 2.2x at the end of March. We also proactively amended certain bank agreements during the quarter to provide additional covenant headroom, which enhances our financial flexibility during this period of uncertainty. And keep in mind that we don't have any significant long-term debt maturities before 2023. Overall, our balance sheet, liquidity, and expected strong cash flow put us in a great position to navigate the current environment. Now let's turn to Slide 20 for additional commentary on the outlook. Rich provided some color on revenue in his remarks. So let me touch on the other items and provide a little more color on our outlook for margins. Over the rest of 2020, we expect to generate strong free cash flow, which will reflect favorable working capital performance and the impact of cost and other spending reduction initiatives. While we expect free cash flow conversion to exceed 100% of adjusted net income in the second half, it will likely be lower than first half conversion. And we plan to continue to deploy our free cash flow after dividends to reduce debt. We expect to end 2020 in a strong position to go back on the offensive next year with share buyback or M&A as conditions warrant. We expect CapEx of around $125 million, which supports our long-term growth plans and is consistent with the outlook we provided last quarter. We expect net interest expense of around $65 million and an adjusted tax rate of approximately 27% for the full year, both roughly in line with our prior outlook. As Rich discussed, we are accelerating and expanding our structural cost reduction initiatives, which are expected to help drive $50 million to $60 million of total year-over-year savings in the second half. This includes the impact of actions that were previously underway. Collectively, these initiatives are intended to align our cost structure with near-term demand and improve operating margins longer term. However, we do expect EBITDA margins in the second half of 2020 to be below the first half. EBIT timing as temporary cost actions from the second quarter subside and the more permanent cost reductions ramp up, normal second-half seasonality, unfavorable mix, and our continued efforts to manage inventory will be continued factors as well. On the positive side, we expect very good decremental margin performance for the full year. We believe that our margin level in 2020 will be significantly higher than past years where we experienced similar demand declines. So to summarize, we delivered strong performance in the second quarter as we acted swiftly to flex down and reduce costs. We're now accelerating and expanding our structural cost reduction initiatives as we continue to focus on generating higher margins and returns through the cycle, all while continuing to execute our growth strategy. In closing, I'd like to commend our global Timken team for delivering strong second quarter results. It is their efforts and dedication that will enable Timken to advance as a global industrial leader through this unique environment. And with that, I'll end our formal remarks and open the line for questions. Anna, back to you.

And we take our first question from Stephen Volkmann from Jefferies.

Let's start by discussing the decremental margins, which appear to be significantly lower than anticipated. I'm interested in how this turned out better than expected. Were there more short-term, cost-effective measures implemented than you had anticipated, or was there another factor that influenced this outcome? Additionally, I'm curious about the implications for the second half of the year. I'll have a follow-up question after this.

Well, for the quarter, we didn't guide the decrementals, but I think your question is pertinent still. If you look at the first half and for the year, I would say, we believe we can deliver good decrementals. Certainly, when we were on the last call, looking at 30% down and not sure at that point that we had bottomed, our good decrementals would have less confidence in that with that sort of magnitude. So first, I would say, the revenue sequentially improving off the bottom was the first factor. And then I would say, the second factor was, yes, more temporary cost actions. And I think we look for the full year. Obviously, the revenue and the volume will play a significant part in it, but we look for the full year to be pretty close to what we would have said we have been in an objective for decremental margins.

Okay. So I guess as we think about the second half, will all these temporary things theoretically be done by the end of this year? And is it sort of 2/3, 3Q; 1/3, 4Q; I don't know, just any kind of way to think about that trajectory?

I think that's probably more specific than what we would intend to be. As I mentioned in my notes, we continued with significant temporary actions in July. We are definitely easing throughout the quarter, and the actions extending to the end of the year will be focused on areas where volume remains severely depressed. However, we are also looking at other cost actions that are beginning to offset that. Therefore, as you analyze the second half's decrementals overall, we expect to perform well, and while full year decrementals should also be good, they may not match the performance of the second quarter.

We take our next question from David Raso from Evercore.

The question relates to Process. Obviously, very strong margins in 2Q. But in your comment about 3Q that total company sales sequentially flat to up mid-single digit, how would you perceive Process to be in that? I assume Mobile is up more sequentially, but do you think Process can stay flat sequential or even up or should we think that's down? And the margin obviously was very strong in 2Q. Can you give us some guide? I would think the margin sequentially maybe comes down off that high level. Just some idea of the sequential bump process.

Yes, David, this is Phil. I'll start, and then Rich can add in. Right now, we believe that sequentially, as Rich mentioned, the best estimate would be flat to up in single digits for the third quarter compared to the second. We expect more growth from Mobile as those markets improve, leading to a greater contribution from that segment. Process may be more affected by the usual seasonal trends, especially since it experienced less impact in the second quarter. So, the most accurate expectation I can provide is that Mobile is likely to see an increase, while Process will probably follow the typical seasonal patterns.

And how to digest the margin was another related question. Just given the EBITDA margin, obviously, is huge and I'm not sure how much the renewable business helped it versus savings that maybe don't repeat. I'm just trying to get a sense for that; it's almost 28% EBITDA margin in 2Q for Process.

Well, I think the Process margins would have been very good without the temporary actions. The renewables business would have contributed to a well manufacturing performance, was strong and at a high single-digit type of revenue decline, we would have delivered good decrementals. But it was aided further by temporary cost actions that we would not look to continue. So I think given Phil's comment on the revenue sequentially being impacted by seasonality, take out the temporary cost actions, we would look at that second quarter Process EBITDA margin as a peak.

Okay. And the ability to keep margins up year-over-year, should we be more consistent with if organics down for 3Q process? It would be difficult to match the EBITDA from a year ago? Because obviously, this quarter was down in comparison with the down inventory with the margins up.

Yes, I think really, all we're really saying at this point, David, is EBITDA margins in the second half will be below first half. That's really all we're seeing at this point.

The next question comes from Stanley Elliott from Stifel.

Can you discuss the fact that your inventory is down? I assume it's also down in distribution. How do you expect your portfolio to perform moving forward? I imagine you're aiming to secure some shelf space with the expanded portfolio, but I’m curious about your thoughts on that.

Well, I think I would have said coming into the year that inventory was about the right levels for where the revenue was. As you look at The Timken Company, our second quarter revenue declined quite a bit more than the inventory. And given the flattish to up slightly outlook, we'd still say our inventory needs to come down. Therefore, our comments that we expect to underproduce, and I would say that's generally true of most of our customers as well. If they do not see demand coming back stronger, I would say, inventory levels are a little bit high. So in our short-term outlook for revenue, we are expecting inventory to generally come out of our customers' channels.

And interesting commentary on kind of going back on the offensive on the M&A environment, what are you seeing out there? I mean, how quickly can my guess is that a lot of the conversations got shelved? But I would love to hear what you're thinking about in terms of kind of opportunity set to expand kind of what you guys have going on.

Yes. The inbound market has certainly slowed down and has not returned to the levels we saw last year or earlier this year. Nevertheless, our communication with targets remains very active. As we aim to significantly enhance our business performance through cycles, a key goal is to reduce the time it takes to shift from a defensive stance during a downturn to offensive growth compared to past experiences where we faced prolonged downturns. Our previous downturns were severe, with less robust cash flow due to steel pensions and higher fixed costs. While we are not fully out of the challenging period yet, our net debt to EBITDA is just over 2%, and we are generating solid cash flow. We took a defensive approach in the second quarter and expect to continue that in the third quarter, possibly into the fourth. This seems to be the sensible course of action right now, but we also aim to utilize our long-term cash flow more effectively and reduce debt at a 3% rate. We believe we are in a strong position to achieve this, which will set us apart in terms of performance through different cycles compared to our past.

The next question comes from Joe Ritchie from Goldman Sachs.

I'd like to maybe go back to the cost out to see if I can make sure I'm triangulating all this correctly. So you guys talked about $50 million to $60 million in the second half of the year. And also the second half cost benefits stepping down. So is it fair to assume that in the second quarter you had, I don't know, $30 million, $35 million of cost benefits at least? And then how do I think about this as we kind of think through 2021 on what comes back in '21?

I believe it's reasonable to say that the second quarter results would have exceeded simply taking the second half number and dividing it by two. So yes, your assessment is generally accurate regarding the temporary factors, as we would have anticipated higher figures. Looking ahead to 2021, it's still too early to make definitive statements. In Q1, we expect revenue and EPS comparisons to be challenging from our current perspective. Q2 is likely to present a lower revenue comparison but a tougher margin comparison. What happens in the second half is still uncertain. However, I would like to highlight comments regarding margins in the first half as well as our focus on the second half, along with our quicker return to proactive cash flow and capital allocation. This is an opportunity that Timken has prepared for over the years. While we didn’t anticipate a pandemic bringing about a 20% decline in revenue due to significant government shutdowns, we have developed strategies to perform better during double-digit declines in revenue. Although the cause is unusual and the impact severe, we are ready to perform and committed to doing so. We believe this begins with achieving a stronger top line, which we’re already seeing, even with a 20% decline. The automotive sector impacted us more negatively compared to many industrial peers in Q2, but we expect it to benefit us in Q3. We've mentioned the positive trends in renewables. I can confidently say that The Timken Company has the most diverse revenue stream in our 100-year history, which should be advantageous moving forward. Improved cash flow is another aspect of our proactive approach; we achieved it last year in a solid market and have continued to do so in the first half of this year despite adverse conditions. We aim to maintain this in the second half, regardless of varying scenarios. The third key point is better margin performance. We’re making a promising start but aren't out of challenges yet. To address your question, we have several strategies at our disposal to achieve our goals, and we are very determined to execute across various scenarios. Additionally, we aim to return to a proactive stance sooner than in previous times. In summary, we have been preparing for stronger performance in a challenging market over the years. We’re off to a strong start and are focused on achieving our long-term objectives. Whether we reach these targets in 2021 or 2022 remains to be seen, but we are actively working towards all aspects.

That's certainly helpful color. I guess my one follow-up since you did touch on growth, your clearly renewables have been a bright spot for you this year. I know it might be a little too early to talk about 2021, but it would be helpful to have some context for how to think about that end market for you over the next 12, call it, 18 months? And then conversely, aerospace was also a surprise this quarter as flat. How are you thinking about that end market over the next, again, kind of like 12 to 18 months?

So on wind, the second half of the year is expected to continue to be up double digits. Long term, we expect it to continue to become a bigger part of the portfolio and expect this to have a broader product offering and the secular growth trend of that, I think, remains very strong. That being said, there will be some level of cyclicality and pauses and booms in that market. So not ready to call '21 on that. But '20, including the second half, is going to be an excellent year of top-line growth. On the aerospace side, as I mentioned, commercial aerospace, which was a few percent of last year, it was a few percent of the company's revenue that softened for us sequentially through the quarter. It is a headwind for us still going forward, probably some further declines coming there. Again, it started at 3% of sales and is already below that. So pretty cautious outlook there. On the commercial side, we are slightly bigger on the defense side and remain bullish on that, not a high-growth market for us, but a stable one, and expect to have a good year mid-second half and a good outlook there as well.

Next question comes from Joe O'Dea from Vertical Research.

First, I just wanted to touch on the $50 million to $60 million of back half savings. It sounds like some of those actions were underway already in the quarter. And could you talk at all about if it's $12 million to $15 million quarterly run rate, how much contribution you got from that in the second quarter?

We typically aim for around 1% of our revenue in cost savings each year. For this year, that translated to a target of approximately $35 million in cost reductions. We have already achieved that in the first half and have a similar amount anticipated for the second half. The $50 million to $60 million figure reflects an adjustment of $15 million to $20 million that was already in progress, as well as additional initiatives we implemented in response to demand, significantly raising the target to this new range.

Got it. And then can you give any context on distribution experienced through the quarter and July? I'm just trying to understand how far you saw that come down and where that may be running right now.

First, I would say, to the earlier question on inventory, we did see a reduction in inventory in the quarter and another reduction in inventory in July within that channel. And I would say, that is a market that was a little later to be impacted as we talk about U.S. distribution, a little later to be impacted and probably weakened, is still at a level of greater than 10% down. That would not be the case in other parts of the world. In China, the distribution business is pretty strong. In Europe, it was down significantly back in the March, April timeframe and has rebounded off that. But I would throw it in with the group of markets that remains in a greater than 10% down level.

I wanted to discuss the renewables sector and the strength we are experiencing this year. I'm curious about how much you view this as being a challenging comparison for next year or whether we are seeing a significant shift similar to what occurred in 2020, suggesting that this could be a more sustainable baseline. There may be some cyclical factors, but I believe a lot transpired this year that reflects the true revenue-generating potential.

No, I think it is a recognition of the underlying revenue capability, and I certainly do not see 2020 being the peak. And again, that said, I'm not calling whether 2021 will be up or down off that number. And it certainly is a tough comp to sustain and grow off of back to back to back. But you believe it is a long-term sustainable number that we can continue to build off of.

The next question comes from Robert Wertheimer from Melius Research.

So I have two questions. One is a real small one, but are you seeing any differential trends in Europe versus North America, just given the different progression of the virus? Or are things relatively stable between the two?

The U.S. automotive market is definitely performing better than the European automotive market, which experienced a decline in April and May. That situation can be seen as somewhat of an anomaly. Currently, the two markets have more or less leveled out, though there was a period where Europe experienced a decline earlier and more significantly before recovering. Overall, I would say that they are currently at similar levels.

That's helpful. And then Richard, I just really wanted to ask a question about Process and acquisition. You've obviously done good things with the mix and some steady deal flow, and things are pretty disruptive right now. I'm curious about whether the virus is a hindrance to getting aggressive next year, whether it's due diligence or otherwise, whether you're keeping active with sellers and people talking and so forth. Just questions on the pipeline, the Process and whether that continues to be robust or whether we have to wait for a real clear out of the virus before you can really execute?

No, I think if the virus situation stabilizes, we could become active again. We aren't traveling as much as we used to, but we certainly have the capability to travel and conduct due diligence. There is a risk that this could be paused if government restrictions increase, but I believe we can manage that. Our comments today reflect a cautious approach to ensure we have a stable market environment and stable EBITDA before we take more aggressive actions. Another challenge when we resume is ensuring both buyers and sellers feel comfortable with the trailing revenue and EBITDA compared to the future, considering the significant disruptions that have occurred in many of our markets over the past 5 or 6 months.

The next question comes from Ross Gilardi from Bank of America.

Just another question on renewables. Where do we finish the year given what's going on with the different end markets? I mean can renewables be 10% of total sales, 20% of Process for all of 2020, when all is said and done, given what you're seeing now?

I think slightly over 10% is within range, which would put it close to 20% for Process.

Yes. Ross, through the first half, obviously, selling markets in Mobile being down. But to the first half, renewables would have grown around 12% of sales for the company. And as you know, you've covered us for a long time, and that's up from 0, 10, 15 years ago, so quite a remarkable growth trajectory for us.

Okay, we will talk more about wind because it's been a part of our portfolio longer and is bigger. But the solar side of the business that really came with Cone Drive acquisition has really performed very strong as well.

So when you talk about product diversification opportunities, I think you mentioned that in your comments. Can you elaborate a little bit further? And are those organic opportunities or just things that you see that could be acquired?

The recent acquisition of Cone Drive has significantly expanded our presence in the solar market, while the BEKA acquisition brought us into automatic lubrication systems in renewable energy, a segment we previously weren't involved in. These are valuable additions. We also have a few organic projects beyond our bearings that are in development, although they may take some time to materialize. We are continuously enhancing our product range and capabilities within the bearing sector. So, all of these factors combined contribute to our progress.

So just when you add in your other less cyclical end markets, I mean you guys have got some, I think, some food and beverage exposure. And maybe you could just elaborate on that, too. I'm just trying to get a sense of the end market mix has obviously changed very dramatically over time in terms of less cyclical and, I mean, certainly, renewables would have cyclicality to them. And so with all of your end markets. But what else would you put in that less cyclical category? And what portion of Process will that account for by the end of the year, given what you're seeing now?

Yes. Phil mentioned that renewables have already reached double digits for the first half. Marine is essentially defensive for us and has a very different cycle. We have been growing in that area at a slower but steady pace compared to renewables, and we feel positive about its prospects for the coming years. The defense segment of bearings, although it is only a small percentage, also follows a different cycle. Beyond that, we have created several sub-3% aspects of the portfolio that cycle differently and together could approach double digits, but they aren’t yet at a scale that would have a significant impact on offsetting the softness in the construction and mining equipment markets. However, there is definitely an impact. Looking at the numbers from the second quarter, a 20% decline in automotive, truck, and India indicates the improved strength of our portfolio.

The next question comes from Steve Barger from KeyBanc.

The company is obviously operating really well right now. So as you look across product lines or geographies, are there any unusual opportunities for growth or share gains, whether it's competitors struggling with the service levels or customers accelerating design changes to take share?

We're primarily focused on the OEM side, and I would say that the response to that is mostly no, as these changes happen over extended periods and are typically not driven by specific events. However, the positive aspect is that we and our customers have all managed to navigate through the slowdown without significant issues. We've transitioned to virtual operations, and our application platform is performing as well as it ever has. So, the encouraging news is that the pandemic hasn't really hindered progress. That said, it seems there is less motivation for OEMs to switch suppliers in the current environment, particularly without the ability to travel and engage in person. In the aftermarket, there are minor product availability issues and some small disruptions in logistics globally, but I think these are too insignificant to influence our results or outlook. Overall, we are continuing with business as usual, focusing on securing platforms and gaining a larger share in the aftermarket as well as in the fragmented parts of the market.

Understood. Can you talk about global rail and, specifically, North America? Are you seeing activity pick up at all given some sequential increases in rail traffic?

No, I would say that's one of the markets we have a fairly rough outlook for, particularly North American rail, which is expected to decline more than 10% in the second half. However, there are other regions, like India, where we experienced a significant drop in the second quarter, but we anticipate improvement in the second half. So there are some offsets.

The next question comes from Courtney Yakavonis from Morgan Stanley.

Just on the comment for second half EBITDA margins to be down, could you give us any color just on third quarter versus fourth quarter? Because I think historically, third quarter tends to be in line with the second quarter margins, given those sales typically sequentially do fall in that third quarter? And then conversely, should we expect fourth quarter to maybe be a little bit stronger than seasonality would imply because more of those permanent cost cuts will be rolling through, but any guidance you can give us there would be helpful.

Yes, Courtney, this is Phil. I mean all I would say is I think we're going to have to limit it, too, again, expect second half EBITDA to be lower than the first half. But as you think about third and fourth, I think what I would tell you is you've got the phenomenon of the seasonality from third to fourth, as Rich talked about. Then you've also got the offsetting impact, if you will, of the cost reduction actions, which as they ramp in, may be a little bit more back half weighted than fourth quarter weighted than third quarter. So you have a little bit of a put and a take there. But that's probably about as far as we'll be able to go on that.

Okay. Understood. And then just on APAC, I think that was kind of obviously improved from the first quarter, but up pretty constant high single digits, even though it's being dragged down by India. So could you just comment on that region? Is that an area where we could see growth up double digits in the second half? Or are we seeing any plateauing in China after, obviously, renewable growth there?

Yes. To frame Asia, China and India are our largest markets, along with Australia and other regions. China showed significant growth, mainly driven by renewable energy. Our business is primarily global, but focused in China more than any other country, so that market benefits from this. However, the other markets in China were generally stable as the economy adjusts from COVID, with China recovering quicker than others. India, on the other hand, was heavily affected, especially with the country being shut down for most of April and May, which had a substantial impact on us. Looking ahead to the second half, we anticipate some recovery in India, contributing to our expected sequential revenue improvement from the second to third quarter. Overall, Asia has the potential to remain a strong area for growth for Timken.

And our last question comes from Chris Dankert from Longbow Research.

I guess, first off, more of a clarification, and sorry if I missed it. But are the permanent savings targeted more at Mobile, I'd assume? And then I assume it's also more Americas and EU. Just any details you're able to discuss at this point?

More Mobile and Process, and I wouldn't probably want to comment on the geographic part of it.

Fair. Fair. And sorry to ask another one on wind. But I guess, since it's such a big piece of the growth here, how often are these things serviced? I mean what I'm thinking about the big main rotor bearing, is it a kind of a 5- to 6-year time frame, 10, 15? I know it varies a lot, but just to give us a sense for what the repetition is on some of these earnings. And then is it still more bearings content versus lubrication? Any kind of details there would be great.

Yes, very heavy bearings; still small than the other product categories, but opportunity for us there. Definitely, hopefully not 5 years because the warranty periods are typically 3 to 5 years. I would say more like double digits, so get out 10. So for us, it's very, very heavy OEM mix because we haven't been in the market that long, but expect that over the next decade to 2 decades to become a better mix of aftermarket and OEM, but it's probably still 5 years from now before we're talking about the aftermarket in a sizable way.

Got it. Got it. That's extremely helpful. If I could just sneak one last one in. When we're thinking about India, obviously, April, May, really, really tough, but just exiting the quarter maybe or early July, I guess, what kind of a run rate were we seeing in growth for India, specifically?

I would say still down double digits year-on-year in the June, July timeframe. So some upside for that to continue to improve sequentially, but per the earlier comments, would not expect India to be an outlier in the comments of being down year-on-year for the rest of the year.

Thank you. I would like to turn the call back for any additional or closing remarks.

Okay. Thanks, Anna, and thank you, everyone, for joining us today. If you have any further questions after today's call, please contact me. Again, my name is Neil Frohnapple, and my number is 234-262-2310. Thank you, and this concludes our call.

Ladies and gentlemen, thank you for your participation. You may now disconnect.