Good morning. My name is Emily, and I will be your conference operator today. At this time, I’d 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 speakers’ remarks, there will be a question-and-answer session. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Emily, and welcome, everyone, to our Second Quarter 2024 Earnings Conference Call. This is Neil Frohnapple, 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 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’d 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’d 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 picked up organically over the 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 reflect positively 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 organization, 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 and 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. But structurally, we’re in a 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 are 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 transition remains on track for early September. Tarak Mehta is looking forward to joining Timken soon, and we’re 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 Tarak'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 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 to offset the impact of lower organic sales volume and 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 in 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 $0.27 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 bearings 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, net of the iMECH acquisition was slightly unfavorable. Engineered 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 marine programs. While linear motion was impacted by broad weakness in Western Europe. Lubrication was also down modestly while our services, couplings, and belts and chain platforms were relatively flat. Acquisitions 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 pretax 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 us 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 us go through it, starting with the sales outlook. We are 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 $0.05 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 pretax 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 2024 reflects over 100% conversion on estimated total GAAP net income at the midpoint. We are 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 initiatives to strengthen the company for the future. This concludes our formal remarks, and we'll now open the line for questions.

Our first question comes from Stephen Volkmann with Jefferies. Please go ahead.

Great. Good morning, guys. Can you just remind me what you do in my head is kind of spending today. So we got to make sure you get 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 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 sort of reached the bottom for renewables? Can that business be up next year?

Yes, it could definitely be up. We were flattish, slightly up in wind from Q1 to Q2. So we think we've certainly bottomed. There is usually a little seasonality from the first half to second half, but we have the backlog to stay flattish for the rest of this year. I'd say, it is too early to call next year; it 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 for how we are 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 2026 or 2027, but yes, we could be up next year.

Okay. Good. Good color. And then, Phil, I'm trying to think about – there is 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 are 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 potential EBITDA goodness in 2025 that are not related to volume?

Yes, that's a great question. I would highlight the actions related to our footprint, particularly the new plants in Mexico. We expect Mexico to continue ramping up in terms of production early in the year, and India will follow suit throughout the year. These footprint initiatives should provide ongoing benefits as we look forward. We're also committed to executing our strategy regarding capital allocation, whether it's through mergers and acquisitions or buybacks, which we anticipate will enhance our earnings. We will maintain our focus on targeted cost initiatives, operational excellence, and controlling costs while ensuring we serve our customers effectively. As for pricing, it will largely depend on market conditions, but we are experiencing positive pricing this year. We do not anticipate any changes to our pricing outlook from last quarter, with expectations still above 50 basis points for the year, likely not reaching 100, but somewhere in between, with positive pricing in both segments. As we plan for next year, we prefer to align price adjustments with cost inflation. Additionally, our strategy continues to emphasize organic growth through product vitality initiatives and ongoing M&A efforts.

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

Thanks, Steve.

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?

I would say that we're not indicating anything significant. We have consistently generated strong cash flow over the years and have moved from the lower end to the higher end of our leverage range. Following a busy year last year, we've already returned to below the midpoint, with substantial cash inflows expected in the next 18 months. Therefore, we are not signaling anything new, just likely continuing with our usual activities, which include either accretive mergers and acquisitions or, if those do not meet our financial criteria, share buybacks. In any case, I believe we will remain a significant contributor.

Thank you. I wanted to follow up on the expectation for the first quarter of '25 to show the typical seasonal improvement from the fourth quarter to the first quarter, if I understood correctly. Currently, year-over-year earnings have declined. As we consider that sequential change into the first quarter, do you foresee it approaching a stabilization in earnings? I'm looking for clarity on the bounce you mentioned. While I can review historical data, I want to ensure I grasp what you are indicating about the first quarter after the adjustments made in the second half of the year.

Yes, it's definitely too early to predict 2025. There are reasons to be optimistic, but typically even in a challenging year, we see a positive shift from Q4 to Q1 in revenue, margins, and earnings per share. To address your question about stabilizing earnings, based on our guidance, we would need approximately an 8% increase from Q4 to Q1 to achieve that, though this is not an exact figure. We would need a high single-digit organic growth from Q4 to Q1 to return to flat earnings. Looking back at the last four years, this year was weak with a 9% increase, while the previous three years saw increases of 17%, 12%, and 15%. Therefore, at this point, achieving top-line growth in the first quarter of next year seems possible, and that includes earnings per share as well.

That’s helpful. Thank you.

Thanks, David.

Hi, thanks, good morning, everybody. Just to kind of continue on that theme. I think you said ex wind, 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 flattish or falling or rising any sense of orders there? And then I think you moved rail up a little bit in the mix there. I wonder if you could give context around that. Is that railcar local? What went on there? Thank you.

Yes, this is Phil. Regarding the orders, if we exclude wind energy, orders are down year-on-year but have remained relatively stable from Q1 to Q2. As we mentioned, there’s nothing suggesting a significant change in the second half, though it supports our overall outlook. If we look at the quarterly numbers without renewables, we would have seen a decline of less than 3 percent. Our full-year forecast indicates a 5 percent organic decline, but without renewables, it's actually a bit less than 2 percent. Renewables are significantly influencing our guidance for both the quarter and the year. As for the adjustments, we moved rail and marine to the right, with the marine adjustment reflecting expectations for military program activity for the rest of the year. The rail business is performing well globally, with strong results outside the U.S.; India has been particularly strong, while Europe has been relatively flat, and we’ve seen growth in the Americas. In the Americas, we're experiencing increases in both MRO service activity and in exceeding the OEM freight car build expectations in North America, which was a pleasant surprise influencing our decision to move rail. On the other hand, we moved heavy industries to the left due to order book activity we observed in Q2, particularly in sectors like oil and gas and metals due to project spending. We adjusted slightly for off-highway sectors as well, particularly in agriculture, but those were the main sectors we modified in our outlook.

I would like to add to the first part of your question regarding orders. Our guidance off Q2 showed a decrease of about 3% to 4% per quarter, which is a notable improvement compared to last year's sequential figures. This was primarily due to the resolution of supply chain issues and a significant slowdown. However, the outlook is expected to be slightly softer than what we experienced in 2021 and 2022. We are anticipating normal seasonal trends. As Phil mentioned, there is some strength in certain areas and some successes, but also some softness and offsetting factors. Overall, this aligns with the typical order pattern we are seeing. Additionally, Phil discussed our Marine segment, which we have announced significant platform successes in over the years. While we don't often highlight these wins because they usually involve smaller amounts, we have a strong pipeline in application engineering and some promising self-help initiatives that are in line with our growth strategies. I'm feeling positive about that as well.

Thank you.

Thank you, good morning, guys.

Hi, Bryan.

I was hoping we could drill down a little bit more on industrial distribution trends. It sounds like relatively supportive within a very choppy and fluid demand backdrop. What was the monthly order cadence through Q2 and into early Q3? And how does that progression compare to typical seasonality?

Overall, the situation is relatively stable and aligns with typical seasonality as we progress through the quarter and look ahead to the full year. I want to highlight that industrial distribution has been somewhat of a positive surprise in terms of performance this quarter. It experienced a mid-single digit increase across most regions, except for Europe. We saw growth in the Americas and Asia, including both North and Latin America. This broad support is driven by ongoing industrial and MRO activities. While heavy industries are down—particularly in the OEM side of metals, oil and gas, and other major markets—the MRO side, which primarily goes through distribution, continues to perform well. Regarding inventory, we believe it is at appropriate levels for the current demand. We've discussed inventory in previous quarters, and it appears to be in good shape as we move through the rest of the year.

That's good to hear and very helpful. Following up on Steve's question, the team has been actively managing run-rate costs and streamlining the manufacturing footprint due to recent demand pressures. How should we assess the cost savings achieved so far, what additional savings can we expect in the second half, and should we consider any structural cost reductions for 2025?

Yes, the best way to approach this is to recognize that for us, operational excellence involves many small efforts. While we discuss major initiatives like plant expansions that allow us to replace older, higher-cost facilities with more efficient ones, often in low-cost countries, there are also numerous smaller efforts underway. For instance, we've been concentrating on hiring, and our operational footprint shows that we are still down over 10% compared to a year ago in certain areas of the business where demand has been weaker. We are adjusting our headcount strategically to retain critical roles in anticipation of market recovery. To align with lower demand, we've been fast-tracking the integration of acquisitions to realize synergies, particularly since we haven't completed a deal this year. This has allowed us to focus intensively on acquisition integration, which is starting to yield positive results, not only in the performance of the acquisitions themselves but also on the Timken side. Additionally, we've consolidated several smaller facilities over the past 12 to 18 months, which provides incremental benefits. We generally avoid specifying dollar amounts for savings, as those are needed to counteract inflation, declines in volume, and various other challenges. However, it's clear that in the manufacturing and materials sectors, we've implemented effective tactics for material savings that have supported margins in 2024. As we look ahead to next year, we anticipate these efforts could contribute positively to margins in 2025.

Yes. I’d just add as Phil said, we don't necessarily say it's $30 million or $40 million. We do have a lot of activity there. It is 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 is really embedded into our margin targets. So I think when you look at the first half of the year, north of 20% EBITDA margins in a 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 is indicative of – it is key to our margin expansion goals and our long-term financial targets, and it is embedded in those targets.

Understood. And again very helpful color. Thank you.

Thanks, Bryan.

Hi, good morning guys.

Good morning, Steve.

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 to bearings over the past three quarters or four quarters. Has the industrial motion revenue trends surprised you? And how do you expect those segments will track in a recovery?

Yes. Maybe I would start, Steve. I’d tell you, it was a larger organic decline than probably you expected. And certainly, we would have expected ordinarily. But that marine item, I think, was significant. It is 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 the 5 or 6 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. So it is 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, we've got the Mexico plant ramp going on. We had the large volume decline. Military Marine mix is industrial motion up, I’d say. So when that is down, it can have an impact. But I do think over time, Industrial Motion is indexed to relatively higher growth markets with the ability to generate relatively higher margins as well.

Yes, we are aiming for a somewhat higher growth rate in Industrial Motion and Bearings, but we are looking to grow in both areas. Additionally, as Phil mentioned, Industrial Motion is somewhat more concentrated in Europe, which is currently a more challenging market for us, presenting a temporary headwind. We are also working to diversify the organic mix of our bearing business. The off-highway capital equipment market remains critical for bearings and is cyclical, but we have made strides in diversifying towards the aftermarket. GGB has been a significant addition for us, and ARB revenue has been strong, highlighting some positive aspects in the bearing sector.

Yes. And to the long-term margin commentary. In the first half, Engineered 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?

Yes. For the full year, we expect both segments to be at or above 20%, with a smaller difference compared to what we observed in the first or second quarters. However, considering the developments in Industrial Motion with the belt expansion and other factors, it's likely that Industrial Motion may be slightly lower, but they will be quite similar.

Understood, thanks.

Thanks, Steve.

Hi, good morning. Phil, regarding the EBITDA bridge as we consider the second half of the year, I think I heard earlier that you maintained the pricing for the full year between 50 to 100 basis points. I'm trying to understand how that interacts with what you're observing on the manufacturing cost side, as the comparisons have been affected by recent developments over the past couple of quarters. I'm interested in how to view the relationship between these two factors for the second half of the year.

Sure, Tim, and welcome back. I should start by saying that our margins are typically a bit lower in the second half compared to the first half due to normal seasonality, and this year will be no different. Looking at the second half, we expect to see somewhat lower sequential volume. So, from the first half to the second half, we anticipate a decrease in volume. We were flat or slightly up on inventory in the first half, but we aim to reduce inventory in the second half, which could impact manufacturing. We will still incur ramp costs as we continue our expansion efforts. We hope to launch in India by early next year, which will also bring additional ramp costs. While we have maintained our pricing guidance, it is mostly weighted toward the first half. As you compare the first and second halves, you'll notice lower sequential sales and lower production volume. Logistics challenges began affecting us in the second quarter, which will likely present additional headwinds. We will continue to execute our operational excellence initiatives to mitigate these challenges as much as possible. However, we do expect margins to decline in the third quarter, and I mentioned earlier that third quarter revenue would reflect this trend. For EBITDA margins, we foresee a year-on-year and sequential decrease, and a similar situation is expected in the fourth quarter as well.

Thank you, Phil. I'm considering the impact on the bearings segment as we anticipate a potential recovery in China wind. Given the volatility in this business and the pricing challenges, will this affect the increments in that sector as we emerge from this situation? I'm curious if there has been a structural reset in the margins due to the significant decline, or if we should not expect that.

I would say there has definitely been a reset in volume. As I mentioned in the last call, we see this as a chance to emerge with a better geographic distribution and an improved balance between OEM and aftermarket. Since we are relatively new to the market, we are currently more weighted towards the OEM side. We initially focused on the China market a decade ago because it was more accessible compared to other markets that had established players, but we've also made headway in those other markets. We plan to emphasize a better geographic mix moving forward and remain hopeful that the China market will recover as well. Previously, we noted that wind margins were generally in line with the company's average, and we expect to see good incremental gains from that, despite having a substantial amount of fixed costs. We have effectively managed variable costs, and there is no reason to anticipate that we wouldn't achieve normal incremental levels.

Yes. I would add that the bearing business is more capital intensive, which means it can experience stronger growth when things improve and steeper declines when facing challenges. We've managed this well, and I believe that if we see a rebound next year in the bearing sector, we should achieve strong growth. Additionally, regarding China, we've made investments to enhance our manufacturing capabilities. Although volumes have decreased in the wind sector, these investments have allowed us to reduce costs and mitigate some of the negative effects.

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

Got it. Thank you. And Rich, best of luck, enjoy whatever is next for you. Thank you.

Thanks, Tim. Appreciate that.

Good morning, and thank you for taking my questions. I wanted to briefly discuss off-highway. I've heard that many OEMs are focusing on reducing their inventories in the second half of the year, particularly aiming to lower them by the fourth quarter. What insights have they shared regarding their ability to achieve this by the fourth quarter? Do you believe there will still be excess inventory that needs to be addressed in the early part of 2025?

Yes, it varies by market, but the agricultural sector has received more attention lately and has been declining. For us, agriculture saw a downturn last year, so we began noticing that earlier due to inventory corrections on our end. As we move into the second half of the year, our comparisons may be better than those of others in the industry. Some of the headline figures affecting the agricultural sector appear to be slightly worse than those impacting the suppliers. However, there remains a degree of caution in agriculture for the remainder of the year. The mining and construction sectors are likely performing somewhat better, and for us, there may be a greater global presence in those two markets compared to agriculture, which is more heavily focused on the United States. Overall, agriculture is down, and we anticipate a high single-digit decline for the full year, but it's too soon to predict our position for next year.

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

Yes. So we had a very active year last year, six deals 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 in two quarters since we've closed anything. It certainly be optimistic that in the next 12 months 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 I don't see any reason to pause that with the CEO transition, and we expect to continue to be active over the next either the rest of this year or certainly in the next year.

Okay. Thank you.

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?

Yes, certainly. Thank you, Angel. I would mention that we have observed one cost remaining relatively stable, particularly starting in the second quarter, and we anticipate that trend will persist for the remainder of the year. Initially, we expected material and logistics costs to be favorable, but now it appears to be more balanced, with material costs being advantageous while logistics are likely to be a disadvantage this year, especially considering the current container rates out of China. However, during the second quarter and moving forward, we plan to implement some operational excellence initiatives that we believe will help us manage this situation. Although the logistics outlook has worsened since April, we are confident that we can counteract this through targeted cost measures, integration of acquisitions, and other ongoing efforts.

Very helpful. Regarding cash flow, there has been strong cash flow generation in the second half. However, you mentioned that inventories may need some reduction. Can you provide a bit more detail on that? Also, as you anticipate a potential recovery in renewable energy and a possible turning point next year, could you elaborate on the free cash flow generation and working capital? Any additional insights on those aspects would be appreciated.

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 are certainly looking at a step-up from Q4 to Q1 in revenue. So right now, we are 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 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.

Yes. I think Rich hit it. I’d just add, Normally, we'll see that seasonal working capital liquidation, if you will, given that the fourth quarter tends to be the lowest 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 days 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 on the fourth quarter is always a little bit of an unknown, particularly in the shorter cycle part of our business, but we will typically see some inventory come out in the fourth quarter and would not expect anything differently, I would say, this year. So that is really the main drivers of 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, we'll see cash flow step up significantly in the second half and very supportive of our guide of greater than $350 million for the full year.

Very helpful. Thank you.

Thanks. Good morning, everybody. And Rich, wish you the best in whatever is there.

Thanks, Joe.

My first question is regarding heavy industries. I apologize if you've already covered this, as I missed a few minutes. You've experienced several cycles in the past, and some of your largest customers have announced production cuts. How do you anticipate this will unfold in terms of timing? I understand you can't predict the future, but based on your past experiences, what is your outlook on how long it might take to return to normal demand patterns for that business going forward?

Yes, sure, Joe. I can address both heavy industries and off-highway as they are similar in many ways. When we discuss heavy industries, we refer to major markets such as oil and gas, metals, aggregates, cement, and pulp and paper, along with original equipment activity in these areas. Typically, this sector is the last to slow down during a cycle, but we did see a decline in Q2 with some softening in the order intake rate, which prompted us to adjust our forecasts. This sector can be unpredictable as it relies more on project spending rather than recurring revenue. However, the MRO segment, which is generally supported through distribution, remains active, particularly in markets like metals, oil and gas, pulp and paper, aggregates, and cement. Regarding off-highway, which has more recurring revenue, we began to see a decline around the middle of last year, and we are now about a year into destocking and lower demand levels. We expect this trend to continue into the second half of the year. By the end of the year, we might have seen a decline in these markets for about seven quarters, which could be on the longer side of normal. It’s challenging to predict as it largely depends on interest rates and the overall economic situation. However, we believe these markets have been struggling for quite some time, and we are positioned well to make improvements next year.

That's helpful, Phil. We've touched on the margin question for next year, but there are many factors affecting margins this year. If we return to a more typical environment with growth around 3%, 4%, or 5% for your businesses, would you expect incremental margins to be above normal based on what has happened this year? How should we approach the transition from this year's performance to next year's incrementals?

It's probably a bit early to provide specifics, but we remain committed to our long-term goals. If we see improvement next year, we anticipate making progress on our margin path to achieve an average of 20 over a business cycle, not just at the peak. This means we would need to exceed that margin during peak times and maintain it at lower points. While I expect we will make some progress, it's likely too soon to discuss the details.

Okay, great. Thanks guys.

Thanks, Joe.

Hi, thanks for squeezing me in guys. I guess I will 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 India risk looking kind of like China wind as we move into '25, '26 and beyond there?

I believe there are reasons for both short-term and long-term optimism. In the short term, we are experiencing good momentum. Looking further ahead, India is likely to benefit from the diversification that companies are pursuing in their global supply chains to reduce reliance on China or any other region, and India is positioned well in this regard. This trend appears to be fairly widespread across industrial markets. Therefore, I believe there is cause for optimism for the foreseeable future.

Yes. 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.

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