Timken Co Q2 FY2023 Earnings Call

Good morning. My name is Brika, and I will be your conference operator for today. I would like to welcome everyone to Timken's Second Quarter Earnings Release Conference Call. All lines have been muted to minimize background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Brika, and welcome, everyone to our second quarter 2023 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 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 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, and thank you for joining our call. Timken delivered an excellent second quarter and we remain on track to deliver another record year of performance. We achieved record revenue and record second quarter earnings per share. We expanded operating margins over last year and we delivered significantly higher free cash flow. Organic revenue was up nearly 5% in the quarter. Acquisitions contributed close to 7% on the top line and in total, revenue was up more than 10% over prior year despite continued currency headwinds. EBITDA margins of 20.7% were up 70 basis points from last year. While inflation has moderated, costs were up over prior year and inflation remains persistent. Productivity continued to improve and supply chain performance has essentially returned to normal. Despite the persistence of inflation, price/cost remained positive and will for the remainder of the year. Earnings of $2.01 were up 13% from prior year and were a record for the second quarter. In addition to the organic growth, acquisitions and share buyback contributed to the growth in earnings. And cash flow stepped up significantly both sequentially and year-over-year. During the quarter, we completed the acquisition of Nadella, expanding our linear motion portfolio and we purchased just under 2% of the outstanding shares of the company. The Nadella acquisition is off to a good start and we've already integrated several areas of the management team and organization within our Rollon Group. Linear motion has been a key contributor to our market diversification initiatives and continues to improve our organic growth profile. We also reduced our ownership position in our listed entity in India, which Phil will expand on in a moment, and we continue to invest CapEx into the business as we advance our footprint and manufacturing technologies. We are now two quarters into operating under our new segmentation of engineered bearings and industrial motion and the reorganization is already yielding results. We have two market-leading segments with ample headroom to continue to expand both organically and inorganically. Before I turn to the outlook, I want to reference Slide 10 in the investor deck, which highlights our five-year performance for revenue, earnings, and margins. Timken continues to perform at a high level through a wide variety of macroeconomic conditions. We have strong market positions in both Industrial Motion and Engineered Bearings. Both businesses are strong generators of cash and we have proven over time the ability to create value through a balanced and disciplined approach to capital allocation, and that includes our steadily growing dividend, CapEx back into the business, share buyback, and M&A that has created both strategic and financial value. The result has been record revenue and earnings per share performance each year except for the COVID year of 2020, and our margins have varied only a couple of hundred basis points during what has been a particularly volatile economic cycle. We are confident in our ability to continue to perform at a high level moving forward and to continue to grow the revenue and earnings of the company. Turning to the outlook. We are now forecasting full-year revenue growth of 8% at the midpoint. As a reminder, our normal seasonality is to decline from first half to second half, both for revenue and earnings. We are continuing to forecast a greater than normal decline this year on very strong 2022 comps. During the second quarter, we continued to see customers reducing inventory levels and orders to adjust to supply chains that are now operating at normal lead times and reliability levels. We expect that to continue through the end of the year. While we are forecasting sequential softening for the rest of the year, the macro drivers remain constructive and customers across most sectors and geographies remain bullish on their demand into 2024. You can see on Slide 6 in the IR deck that there have been some movements in our full-year outlook for markets, some up, some down, with our updated guide reflecting recent order activity and backlog. As has been well publicized, China's rebound coming out of COVID this year has been less than expected. Our Asia results are up double-digits year-to-date, but we have factored in a less bullish outlook for Asia and specifically China in the second half. This would include renewable energy. From a bottom-line perspective, we are forecasting earnings per share in the range of $6.90 to $7.30, which would be up 10% at the midpoint. That guidance includes the impact of all capital allocation actions taken through the second quarter of '23. The midpoint of the revenue and earnings guide would imply margins to be up slightly from last year. While we expect better manufacturing performance from improved supply chain dynamics, we are factoring in volume headwinds as we continue to get our own inventory levels in line with improved lead times and on-time deliveries. We expect costs to remain elevated, although for the pace of further increases to continue to moderate. Similarly, we expect price realization to remain positive versus the prior year, but to continue to moderate partially due to tougher comps. We also plan for price/cost to remain positive through the year. We assume cash flow will be strong in the second half of the year, and with net debt at 1.9 times EBITDA at the end of June and strong second-half cash flow, we expect to continue to be active from a capital allocation standpoint in the second half of the year with a continued bias towards M&A. We are operating more efficiently today and we are very focused on driving our operational excellence initiatives across the portfolio, from inventory management and productivity initiatives to our CapEx investments in automation, capacity, and plant consolidation. We would expect these actions, along with capital allocation and our outgrowth initiatives, to provide significant self-help heading into 2024. We will also be publishing our annual corporate social responsibility report in the upcoming quarter. Our Timken team is committed to advancing our corporate social responsibility programming as we give back to our communities and drive sustainability in our products and global operations and across the industries we serve. Examples of our progress will be evident in the report. It was an excellent first half of 2023. We remain on track for another year of record revenue and earnings, and we are well-positioned to continue to drive value for all of our stakeholders in 2024 and beyond as we continue to advance Timken as a global, diversified industrial leader. And with that, I will turn it over to Phil to go into more detail on the results and outlook.

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 12 of the presentation materials with a summary of our strong second quarter results. Timken posted revenue of almost $1.3 billion in the quarter, up just over 10% from last year and a new all-time record for the company. Adjusted EBITDA margins came in at 20.7%, up 70 basis points from last year. And we achieved adjusted earnings per share of $2.01, a record for the second quarter, along with an attractive return on invested capital. Turning to Slide 13. Let's take a closer look at our second quarter sales performance. Organically, sales were up 4.6% from last year, driven by continued growth in both segments, led by Industrial Motion. Organic growth benefited from higher pricing across both segments, with unit volumes up modestly from the strong levels we saw last year. Looking at the rest of the revenue walk. Recent acquisitions, including GGB, Nadella, and ARB, net of divestitures, contributed nearly 7 percentage points of growth to the top line while foreign currency translation was a 1 point headwind in the quarter. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and acquisitions. We saw mixed performance across our regions in the quarter. Notably, Asia-Pacific was up double-digits, driven by strong growth in both China and India. We were also up in North America, our largest region, against last year's strong second quarter. EMEA was roughly flat, while Latin America, our smallest region, was lower versus last year. Turning to Slide 14. Adjusted EBITDA in the second quarter was $263 million, or 20.7% of sales compared to $231 million, or 20% of sales last year. Looking at the change in adjusted EBITDA dollars. We benefited from favorable price mix, lower material and logistics costs, and the net impact of acquisitions. These positives more than offset the impact of unfavorable manufacturing and higher SG&A other costs in the quarter. Overall, we delivered a year-over-year incremental margin of around 27%, driven by positive price costs and solid operational execution. Excluding currency and acquisitions, our organic incremental, if you will, was just under 50%. Let me comment a little further on a few of the key profitability drivers in the quarter. Looking at price mix. Pricing was meaningfully higher in both segments compared to last year, while mix was relatively neutral in the quarter. Moving to material and logistics. Both were lower year-over-year, with logistics the bigger contributor as freight rates have more or less returned to pre-COVID levels. On the manufacturing line, we were negatively impacted by lower production volumes as we built a sizable amount of inventory in the second quarter of last year. We also saw continued inflation across our input costs, including labor. On the positive side, we delivered solid operational execution as we benefited from higher productivity and improved supply chain dynamics. And finally, on the SG&A other line, costs were up from last year as we expected, driven by the impact of inflation and higher spending to support our increased sales and business activity levels. On Slide 15, you can see that we posted net income of $125 million or $1.73 per diluted share for the quarter on a GAAP basis. This includes $0.28 of net expense from special items and deal amortization. On an adjusted basis, we earned $2.01 per share, up 13% from last year. Note that we benefited from a lower share count in the quarter, reflecting the share buybacks we've completed in the past 12 months. Our adjusted tax rate was up slightly, driven by our geographic mix of earnings and interest expense was higher versus last year, as we anticipated. Now let's move to our business segment results, starting with Engineered Bearings on Slide 16. For the second quarter, Engineered Bearings segment sales were $857 million, up 7.4% from last year. Organically, sales were up 1.6%, as higher pricing across all sectors more than offset lower volumes on a net basis. Renewable Energy and Rail posted the strongest sector gains in the quarter, while distribution declined against a difficult comp last year. The net effect of acquisitions and divestitures added 7 percentage points of growth to the top line, while foreign currency translation reduced growth by 1.2 percentage points in the quarter. Engineered Bearings adjusted EBITDA in the second quarter was $190 million or 22.1% of sales, compared to $177 million last year. Segment margins were flat year-over-year as favorable price/mix and lower material and logistics costs were offset by higher manufacturing costs, the impact of lower volume, and unfavorable currency. If you exclude the impact of currency and acquisitions, on an organic basis, our year-over-year incremental margin in Engineered Bearings was over 50%. Now let's turn to Industrial Motion on Slide 17. In the second quarter, Industrial Motion segment sales were $415 million, up 16.8% from last year. Organically, sales increased to 11.2%, led by strong growth in Drive Systems and Services and growth in Automatic Lubrication Systems, partially offset by lower shipments in Belts and Chain. We also realized positive pricing across all platforms in the quarter and the impact of acquisitions, net of the ADS divestiture, contributed around 6 percentage points to the top line. Industrial Motion adjusted EBITDA for the second quarter was $86 million or 20.7% of sales compared to $67 million or 19% of sales last year. The sizable increase in segment margins was driven by the benefit of positive price cost and improved operational execution on the higher volumes, which more than offset the impact of higher operating costs. Turning to Slide 18. You can see that we generated operating cash flow of $144 million in the quarter. Free cash flow was $94 million, up significantly versus last year, as earnings growth and improved working capital performance more than offset higher cash taxes and CapEx spending. From a capital allocation standpoint, it was a big quarter, as we returned $124 million of cash to shareholders through dividends and share repurchases. We raised our quarterly dividend by 6% and repurchased around 1.3 million shares, or about 2% of shares outstanding. This brings our year-to-date buybacks to over 1.9 million shares and we continue to be active thus far in the third quarter. We completed the Nadella acquisition at the beginning of April, which Rich has already covered. And at the end of June, we reduced our ownership stake in Timken India Limited at an attractive value, generating pretax proceeds of around $285 million and reducing our controlling stake to just under 60%. We expect to use the proceeds to support our capital allocation initiatives during 2023, which is expected to be accretive to earnings per share on a net basis. We remain bullish on the India market and intend to maintain a controlling stake in Timken India going forward. Looking at the balance sheet. We ended the quarter with net debt to adjusted EBITDA at 1.9 times, which includes the net impact of the Nadella acquisition and Timken India transaction I just mentioned. Note that our leverage ratio was unchanged from the end of last year and remained well within our targeted investment-grade range. With our strong balance sheet and the significant free cash flow we expect to generate in the second half, we remain in a great position to continue advancing our capital allocation priorities. Now let's turn to the outlook with a summary on Slide 19. As Rich indicated, we've updated our outlook for both sales and earnings to reflect current order trends and continued near-term economic uncertainty. Starting on the sales outlook. We're now planning for sales to be up 7% to 9% in total, or 8% at the midpoint versus 2022, which is down slightly from our prior guide, reflecting more modest expectations for organic growth. We now expect organic revenue to be up 2.5% at the midpoint, which includes positive price realization and slightly lower volumes for the year, off our strong performance last year. Our guidance assumes customers in certain sectors, including distribution and off-highway, will be reducing inventory in the second half. And we're also planning for slower growth in China, which would include renewable energy. Acquisitions, net of divestitures, should contribute around 5.5% to our growth and we're planning for currency to be relatively neutral to the top line for the full year. Both assumptions essentially unchanged from our prior guide. On the bottom line, we now expect adjusted earnings per share in the range of $6.90 to $7.30. This represents about 10% growth versus last year at the midpoint and would mark a new all-time record for the company. Note that this includes some modest net accretion from the Timken India transaction. The midpoint of our earnings outlook implies that our 2023 consolidated adjusted EBITDA margins will be in the range of 19.3% to 19.4% at the midpoint, which reflects our updated organic revenue assumption. This margin level would mark a new high for the company. Our margin expansion reflects our expectation for favorable price cost and improved operational execution, which should more than offset the impact of lower production volume and higher operating costs. In addition, our margin assumption continues to reflect a sizable headwind from currency off the favorable impact we saw last year. Moving to free cash flow, we now expect to generate over $400 million for the full year, which is up over $100 million from last year and reflects the impact of higher earnings and improved working capital performance. Note that our structural free cash flow outlook is essentially unchanged from our prior guide, as our updated guide includes around $55 million of taxes to be paid in the second half related to the Timken India transaction. Note that the gross proceeds we received in June were reflected in net cash from financing activities. In other words, outside of free cash flow. Excluding the India taxes, our free cash flow outlook for 2023 would represent over 100% conversion on GAAP net income at the midpoint. We continue to anticipate net interest expense of around $95 million for the year, plus or minus, and CapEx of around 4% of sales. And we now expect our adjusted tax rate to be in the range of 25.5% to 26%, up slightly from our prior guide. So to summarize, Timken delivered strong results in the second quarter, and we continue to advance our strategic and capital allocation priorities. We're on track for another record year and we're confident in our ability to drive our strategy and grow the earnings power of the company over time. This concludes our formal remarks and we'll now open the line for questions.

Thank you. We have the first question from Steve Volkmann of Jefferies. Please go ahead.

Great. Thank you. Good morning, guys. Good stuff going on here. Rich, I'm sure it's frustrating to see the stock reaction. But since that is what it is, I have to poke at trying to get to sort of what you're seeing in terms of sort of slower end-market activity. So maybe the way to do that is kind of relative to Slide 6. I know you downgraded several of the end markets. I know you upgraded a couple of others. But maybe you could just talk about what you're seeing, because the end markets that you downgraded appear to be pretty strong, I think, to those of us on the outside when we look at your customers' production and forecasts and so forth. And so is this all just inventory reduction? And if it is, how long does it last, or do you think there's actually some demand destruction here?

I don't believe there is any destruction of demand. Regarding inventory, it is quite typical for us to oversell to our customers while they are experiencing varying sell rates. The crucial factor is the underlying demand, which we are hearing appears to be strong according to customer feedback and industry data. In recent updates, we adjusted three markets positively, increasing automation, industrial services, and marine from mid-single digits to high-single digits, reflecting slight improvements over our earlier expectations. Conversely, we made downward adjustments to industrial distribution and off-highway. Although we've had a promising start in China, we have noticed a softening of orders there, leading us to be somewhat less optimistic about the second half of the year in that market. Specifically, off-highway has shown a significant discrepancy between our outlook and what others are reporting, with some large OEMs seeing organic growth in the mid-teens to over 20%, although this includes some inflation. Despite reducing their inventory in the latter half of the year, they remain optimistic about underlying demand. Similarly, in industrial distribution, large distributors in the U.S. and Europe are showing improved numbers compared to prior declines, although they aren't reaching the higher growth rates seen in off-highway. We anticipate that our orders for the second half of the year will likely be lower than their sell-through rates.

Got it. Okay. That's helpful. And then maybe just briefly on renewable energy and maybe wind specifically, I'm not an expert on wind. My head spins, no pun intended, when I try to look at that sector. But it looks like at least one of the major global suppliers has run into a big issue with some quality control and they may be not producing anything for a little while. I'm not in the weeds on this, but does that impact you? How should we think about sort of wind, specifically?

I don't want to comment on specific customers, but to answer your question, we are not facing any particular issues regarding demand or revenue, except for our situation in China. We have had a very strong start to the year, and we expect the full year to show growth. However, we do anticipate a typical seasonal slowdown in the wind market during the fourth quarter, which tends to be quite significant. This year, we expect an even greater slowdown due to factors we've mentioned before, including some overbuilding and a slowdown in China's growth rate. It's not a contraction in China, just a cooling of the growth rate. Regarding wind energy, our long-term optimism for the market remains unchanged. The world will require much more renewable energy. Although the market does experience pauses and contractions from time to time, we believe there is still significant potential for growth in that sector, and we feel optimistic about its long-term prospects.

Great. Thank you. I’ll pass it on.

Thanks, Steve.

Thank you. We now have Bryan Blair of Oppenheimer.

Thank you. Good morning, guys.

Good morning.

I was hoping you could offer a little more detail on off-highway and industrial distribution order trends, cadence through Q2, exactly what you're seeing in Q3. And perhaps quantify how much channel dynamics in those markets influenced the reset to the full-year guide. I assume that it's both volume and mix impact through the second half?

Yeah. On the industrial distribution side, there is an element of that that's backlog, that's made to order, but the vast majority of that is orders in and out within days. So what you really have to look at much more there is the trend line that you're on and the sales rate of your customers where we have that information of what they're selling into their channels, the inventory levels, et cetera. And I'd say we just saw some sequential softening through the quarter, and we're getting direct input from the customers that they're looking to reduce some inventory in the second half. Off-highway is one more where we would have pretty good visibility to three, four months of demand generally. And the second quarter didn't come in dramatically differently than what we expected from a revenue standpoint, but orders were softer, setting up for a softer second half. And again, generally, customers telling us, be ready for a good 2024, but they're looking to adjust. And most of this is a reflection of the improved supply chains when lead times go from eight weeks to four weeks, you need less orders, you need less inventory. And we're seeing that in a lot of places, and we're doing that ourselves. We're working to get our own inventories in line with better supply chain execution.

Understood. That recalibration makes sense. And a high-level one. Any color you can offer on the deal environment? Your balance sheet is obviously in solid shape, but you're throwing off quite a bit of cash. So capacity is there. You've been on your front foot for a while in terms of M&A. Just curious what you're seeing, confidence you have in the deal pipeline, and perhaps getting another one across the line by the end of this year?

The inbound activity has been relatively slow. It hasn't come to a complete standstill, but it's not as strong as it was prior to the rise in interest rates and the impact of COVID. This slowdown is well-known. However, our outbound efforts, including the initiatives we're pursuing and the connections we're making, have not diminished at all. I see no reason why we wouldn't be able to finalize a deal within the next 12 months. While I wouldn't commit to this year, our pipeline remains active. Historically, we have been able to achieve this within the next 12 months. As mentioned, we are inclined towards mergers and acquisitions with the cash we expect to generate in the latter half of the year, in addition to the funds raised from the TIL sale. We are well-positioned to allocate capital towards one of these opportunities in the coming six to twelve months, and we anticipate it will make a significant contribution to our earnings in 2024.

Understood. Appreciate the color. Thanks, again.

Thanks.

Thanks, Bryan.

We now have Rob Wertheimer of Melius Research.

Good morning, everyone. I get the same perspective, but I agree with Steve that the reaction seems a bit unclear. Given that the destocking of channel inventory or OEM has been expected, I have a few questions. First, to clarify your comments about China, Rich, is that indicative of a destock? It appears that renewables are performing well. Could it be that the OEMs are overstocked? Is there any shift in market share or other factors contributing to a decline in orders in China?

It has certainly been a couple of years focused on growth and increasing capacity, which is now coming online. We have reached a point of balance and don’t want to be overly ahead. Rather than a destock, I would describe it as a deceleration, and it still fits into our projections. We expect growth to be in the high single digits or more, just not as high as we originally predicted. It's too soon to make definitive statements about 2024, but we expect it to remain a growth sector. There will be growth this year, although not as much as we had initially anticipated for the second half.

Perfect. It seems like there are elevated raw material costs, which is expected. Do you have any insight on whether the destocking will take one or two quarters, how much it boosted sales in the past, and how much it might drag on sales moving forward? This would help us understand the timing and extent of the impact.

We believe it's been a drag for three quarters now. We mentioned in the first quarter that we saw it as a drag in the fourth quarter and expected it to continue. We've raised our expectations slightly. Typically, with larger OEMs, there's a significant focus on year-end cash flow and getting everything in order. We anticipate a sequential improvement, and there's also the usual seasonality to consider. It's typical for us to generate around 51% or 52% of our revenue in the first half of the year, with 48% or 49% in the second half. Usually, we rebound in the first quarter, and we expect that to happen again this year. However, we're not anticipating a surge in shipments at the end of the year as we have seen in previous years. We do expect to see a sequential increase at the beginning of the year, and the main question is how much we will rise from the fourth quarter to the first.

I would like to point out that while we've made progress in industrial distribution, off-highway, and renewables, we've also seen some markets improve, showcasing the diversity of our portfolio. We started strong in marine and launched new business initiatives throughout the year, contributing to this growth. Industrial services ended the second quarter with a solid backlog and performed exceptionally well during that quarter. Automation also delivered a strong first half and we anticipate continued strength in the second half. While industrial distribution, renewable energy, and off-highway remain significant sectors for us, we are also witnessing substantial growth and improved conditions in other sectors, underlining the diverse capabilities of our company.

Got it. Thank you.

Thanks, Rob.

Your next question comes from Steve Barger of KeyBanc Capital Markets. Please go ahead, when you are ready.

Good morning. How quickly did the view on the weakness of organic growth become apparent in the quarter? I ask because your inventory increased sequentially. How many quarters of reduced production are needed to align your inventory with your targets?

Hi, Steve. This is Phil. Regarding the inventory, it seems to have increased sequentially. However, we must consider the Nadella acquisition in that context. Organically, we experienced a slight decline when excluding acquisitions and currency effects, but it was relatively flat overall, probably down about $10 million. In terms of order intake trends, a quarter ago, we mentioned that April aligned with Q1 performance. It was really in May and June that we observed a shift, or as Rich noted, a bit of a deceleration in order intake in certain sectors. This led to slightly lower sales for the quarter, although those sales were quite close to our internal expectations. Nonetheless, we did notice a slight deceleration, prompting us to reevaluate our outlook for the rest of the year and adjust our full-year forecast down in anticipation of inventory reductions in off-highway and distribution, as well as the overall slower growth in China, which is affecting the renewable energy sector too.

The second quarter was relatively stable, with expectations of being flat to up 1%. However, we experienced a 1% organic decline sequentially, primarily due to orders in May, June, and July. Feedback from customers suggests they are cautious about the second half. Overall, we anticipate the second quarter to be close to flat.

Yeah. And as it relates to the guidance, the $0.10 cut at the low end is pretty small. I'm curious, with two quarters left, why not just qualitatively push people towards the low end or do you see enough headwinds that there's a real chance that $7 is off the table?

I would say, Steve, that we were just trying to reflect our outlook as accurately as we could. A range of $0.40 at this point in the year is arguably a bit wide, taking into account the economic uncertainty. We're also expecting inventory reductions in the second half of the year, although we don't know exactly what that will look like. The range allows us to estimate organic growth for the remainder of the year, which translates to our expectations for the bottom line in the second half. The midpoint of $6.90 to $7.30 was our best estimate, and we decided to set a $0.20 range on either side of that, considering the uncertainty.

I want to make another point regarding organic growth. In the short term, we must adapt to market conditions, and we believe that the higher end of our range is achievable. Looking back at our five-year performance, and even further back to seven and eight years, the results are impressive. We're not just depending on market fluctuations. If we experience an inventory correction for a few quarters, it's a normal situation, and we've been generating consistent organic revenue through our growth initiatives and acquisitions. We will keep pursuing this path, and I believe that in the long run, the outlook will be very positive.

Appreciate the context. Thanks.

Thanks, Steve.

Thank you. We have our next question from Michael Feniger from Bank of America.

Hi. Thanks for taking my questions. I realized price first cost is going to stay positive. Just help us understand that price versus cost spread, does that stay consistent in the second half? Or does that begin to narrow? and I realize that Q3 last year was a really strong quarter for pricing, so a tough comp. Just help us understand that price growth figure as we exit the year. Is that still positive? Thanks.

I expect it to be positive every quarter and every month of the year. However, it does moderate as we face more challenging comparisons. We entered this year with some carryover and new pricing, though less than in the previous year. As the year progresses, that carryover will decrease, but we will also have some carryforward for the beginning of next year. On the cost side, we are seeing improvements in logistics and raw materials, but we are also facing a volume headwind that diminishes some of those benefits. Nonetheless, we still anticipate that the price over cost relationship will remain positive, with costs not decreasing but rather stabilizing. They have generally been stabilizing over the last several months.

I think the challenge with pricing is that the year-over-year comparisons become more difficult. As a result, the benefits we see from pricing will moderate as the year progresses. However, the benefits from cost should remain strong, contributing positively in the second half. Initially, we anticipated pricing to be between 2% and 4% for the year. We are currently holding our pricing steady, and we now expect it to exceed 3% by year-end. Customers are still raising prices, and while input costs remain high, they are no longer at peak levels. Therefore, we do not foresee any significant risk of price reductions this year. Pricing remains stable, and we continue to achieve good pricing in the market.

We are improving our cost management. I believe we are currently operating more efficiently than we have since the pandemic began, following the initial shutdowns and the subsequent supply chain challenges. Our operations are functioning more effectively now. More importantly, we've returned to a strong emphasis on operational excellence rather than just addressing supply chain issues. I feel positive about our current operational status, which I haven't been able to say for quite some time.

Thank you. And just on renewables, I realize China is still positive for the year, up high-single-digits. You made some comments on orders. Are orders starting to turn negative in the back half? And just broadly on renewables. Obviously, as Steve referred to earlier, there's this high publicized issue with wind. I'm just curious if you're seeing or hearing any impact that that could have on future investments as we're going out for the next 12 months.

On wind, it's an area where we typically have at least three and generally six good months of backlog. So again, what we saw really more was the fourth quarter not filling in to the degree that we would have liked in the second. Again, normal seasonal decline, but we were expecting the strength to continue, and we're seeing some softening there. So not looking to call positive or negative, but sequential softening from the second quarter to the third and the third and the fourth is what we would expect. I do not expect any long-term changes in the wind outlook or the solar outlook as we sit here today. The industry has had its share of warranty issues. It's relatively new technology. That's one of the reasons why Timken is very valued in there. That's one of the things that we do very well. When you think about the loads and the operating conditions this technology is exposed to, it's very demanding and requires companies like Timken that can solve highly technical problems. So we remain committed to it, believers in it. And it's going to grow long term.

I would like to mention that Timken's warranty expense was actually lower this quarter compared to last year. So far, the warranty situation at the company continues to be quite favorable.

Great. Thank you for that. And if I could just squeeze one more in. I know it got asked about the off-highway comment, you touched on this. I believe off-highway includes ag, mining, construction. Is there a particular vertical within off-highway that you would cite here that you noticed any step function change this quarter? Thank you.

In the quarter, we discussed the off-highway sectors, including agriculture, mining, construction, and others like hydraulic equipment. Year-over-year, agriculture was likely a bit lower, while mining and construction both saw increases. Looking ahead, we anticipate broader inventory reductions from our customers, impacting us more widely. We haven't identified any specific areas of inventory; instead, the trend is generally towards reducing inventory levels to align with current market conditions.

And I would add, we moved it from up mid-single digits to neutral. It was not a huge move. And as I said, it's common for us to be selling more or less to our customers depending on what they're doing with inventory and what they're looking at forward. So for us to be neutral in off-highway, it would not be abnormal for the customer base to be up 5 or 10 if they're looking to take inventory out. On a unit volume basis, up 5 or 10.

Thanks, Mike.

There are no remaining questions at this time. Sir, do you have any final remarks?

Yeah. Thanks, Brika, 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 Timken second quarter earnings release conference call. You may now disconnect.