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Edited Transcript of TKR earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Timken Co Earnings Call

CANTON May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Timken Co earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Hershiser

The Timken Company - Manager of IR

* Philip D. Fracassa

The Timken Company - Executive VP & CFO

* Richard G. Kyle

The Timken Company - President, CEO & Director

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Conference Call Participants

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* Christopher M. Dankert

Longbow Research LLC - Research Analyst

* Joseph O'Dea

Vertical Research Partners, LLC - Principal

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Michael J. Feniger

BofA Merrill Lynch, Research Division - VP

* Robert Stephen Barger

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Stephen Edward Volkmann

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Allison. I'll be your conference operator today. As a reminder, this call is being recorded. At this time, I'd like to welcome everyone to Timken's First Quarter Earnings Release Conference Call. (Operator Instructions) Thank you.

Mr. Hershiser, you may begin your conference.

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Jason Hershiser, The Timken Company - Manager of IR [2]

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Thanks, Allison, and welcome, everyone, to our first quarter 2019 earnings conference call. This is Jason Hershiser, Manager of Investor Relations for The Timken Company. We appreciate you joining us today. If after our call you should have further questions, please feel free to contact me directly at (234) 262-7101.

Before we begin our remarks this morning, I want to point out that we've posted on the company's website presentation materials 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. (Operator Instructions)

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. 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.

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Richard G. Kyle, The Timken Company - President, CEO & Director [3]

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Thanks, Jason. Good morning, everyone, and thanks for joining us today. We delivered an excellent quarter start 2019, with revenue up 11% and margins up over 300 basis points and record earnings per share of $1.35. .

We organically grew more than 6% over prior year, which was in line with our expectations. We were up 8% inorganically, driven by our 2018 acquisitions of Cone Drive, Rollon and ABC Bearings. All 3 acquisitions are off to excellent starts, and we remain excited about the future of these businesses within Timken.

Our bottom line performance was even stronger. We expanded operating margins to 16.6%, 310 basis points over the first quarter of 2018. Mobile margins of 13.2% were up 260 basis points from prior year and put us ahead of our plan to exceed 12% margins for the full year. Process margins of 22.9% remained very strong.

We faced several margin headwinds in the quarter and these included tariffs, a flood, material inflation, currency and lower production levels due to reduced inventory build from the prior year. The margin improvement in the face of these headwinds is indicative of the strength of our portfolio as well as our ability to operate and deliver through a variety of market scenarios.

The margin expansion was achieved through mix with strong organic sales in Process Industries, positive price/cost across the company, cost reductions in both cost of goods sold and SG&A, excellent operating performance, volume and acquisitions. We increased earnings per share by 34% for a record $1.35 in the quarter. Free cash flow of $36 million was seasonally strong, as we held working capital levels tighter than prior year on the strong EBITDA growth.

In regards to capital allocation, we paid our 387th consecutive dividend; purchased 210,000 shares; and at the beginning of April, completed the acquisition of Diamond Chain.

Overall, it was another excellent quarter for Timken, which positions us for another record year in 2019. We continue to drive profitable growth through our strategy, our operating performance and our diverse product and market mix.

I'll expand on the quarter and our outlook for the year through our 3 strategic categories of outgrowth, operational excellence and capital allocation.

The first quarter, from an organic revenue and pricing standpoint, played out about as we expected. While growth has moderated and we are planning for further moderation in the second half, we realized over 6% organic growth year-on-year as well as 7% organic growth sequentially. After 2 years of nearly all end markets and geographies expanding together, we have moved into a market environment that has some flat and down segments, but remain strong and provides opportunities for Timken to profitably grow.

From a pricing perspective, we do expect to realize over 150 basis points of price, and most of our price for 2019 is in our run rate at the end of the first quarter. From an outgrowth perspective, we know that our final organic growth rate of 13% in 2018 stacked up well to peers and customers. We believe when we look back on 2019's first quarter rate of 6%, it will also stack up well. We are winning in the marketplace with our differentiated products, our engineering, our innovation, industry-leading service and our people. And our focus on expanding in profitable and growing markets like wind, solar and food and beverage as well as in places like India and China is delivering results.

As we look at the balance of 2019, we're planning for slightly weaker sequential demand off of the first quarter than what we experienced last year. That would result in a slight uptick in the second quarter and then modest sequential declines in the third and fourth quarters. As we've demonstrated in the last few years, the anticipated sequential decline in the second half does not imply that we will not grow again in 2020.

While we have taken a slightly more conservative view of the second half than what we had 2 months ago, that view remains speculative and is based on forecast more than any firm trends that we have experienced. I would say that customers remain cautiously optimistic, but they will grow their businesses this year and that demand remains solid.

We are well positioned to respond if our second half market outlook proves to be too conservative. 1 month into the second quarter, we have the backlog and incoming orders to grow slightly from the first quarter, excluding our Diamond acquisition and before any impact from currency.

Additionally, we will continue to drive market outgrowth initiatives throughout the year as we apply and extend our value proposition to new and existing markets. Repeating the point I made on the last call, our mix is setting us up well for both revenue and margins in 2019.

Our focus on operational excellence is also yielding strong results. In the quarter, we delivered improved working capital performance and contributed to margin expansion with improved productivity and our structural cost-reduction initiatives. We are leveraging the investments we've made in our digital platforms, our footprint, our supply chains and our people, and it is showing.

Despite acquisitions coming in at higher SG&A levels, we have continued to reduce SG&A as a percentage of sales as we have grown. Our footprint and capital investment initiatives continue to advance and deliver value. Tariff and material costs were up in the quarter, but price/cost remained mostly positive, and we expect it to continue to remain positive through the full year.

We experienced a significant flood during the quarter that disrupted our global rail operations, but our teams responded quickly to mitigate the customer and operational impact. We expect that we will approximately hold the first quarter margins in the second quarter and then see some normal seasonal softening in the second half. That would bring us to about 16% margin for the company and above the 12% target we set for the full year for Mobile.

Moving to capital allocation. We're increasing our free cash flow outlook for the full year. With the increase in EBITDA as well as moderating growth, expanded margins and increased focus on working capital, we expect better cash conversion this year as we consume less cash for working capital.

The 2018 acquisitions are all performing very well. The management teams are in place, and I am just as positive on these businesses today as when we purchased them. As you can see from the revenue and EBIT walks, we're delivering on the integration and synergy plans and the businesses are performing at high levels. In aggregate, they're running above the company average for EBIT margins, above the company average for 6.4% organic growth in the first quarter, much above the company average for EBITDA margins, and they will be EPS-accretive this year.

We are pleased to have recently added Diamond Chain to the Timken portfolio. The combination of Diamond and Drives chain combines 2 North American chain leaders, greatly strengthens our position in the critical North American distribution channel, expands our power transmission portfolio in the higher-growth Asia market and provides significant cost synergy opportunities. Diamond's fit within Timken is strong, and we're moving quickly to integrate management teams and sales forces between the 2 chain businesses.

As we look forward, we remain committed to our dividend and our internal CapEx initiatives as our top capital allocation priorities. After that, we will look to M&A, debt reduction or buyback to deploy our excess free cash flow. The bias will be for bolt-on M&A, and we believe our pipeline is active enough to support further activity this year. However, I would continue to expect that activity to be less in magnitude than what we completed last year and likely lower than our full year cash flow, providing the opportunity to also reduce debt or buy back shares. We expect buyback to remain modest in the second quarter.

And finally, on the outlook. It was a great start to the year, and we are increasing our outlook for the full year at the midpoint to be up 9% revenue, 26% in earnings per share and over 200 basis points in margins, while we generate $360 million in free cash flow.

Phil will now go into further detail.

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [4]

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Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 12 in the materials. .

Timken delivered a great first quarter, and you can see a summary of our results on this slide. Revenue came in at $980 million, up about 11% from last year. Adjusted EBIT was $163 million or 16.6% of sales, with margins expanding 310 basis points year-on-year. And adjusted earnings came in at $1.35 per share, a new record for the company for any quarter and up about 34% from last year. .

Turning to Slide 13. Let's take a closer look at our first quarter sales performance. We delivered organic growth of around 6.5%, reflecting continued strength across several end markets and sectors, most notably in our Process Industries segment, plus the ongoing benefits of outgrowth initiatives and positive pricing. Acquisitions from 2018 added about 8% net to the top line in the quarter. And currency translation was a fairly sizable headwind, negatively impacting revenue by about 3.5% due to a stronger U.S. dollar. Sequentially, sales were up over 7% from the fourth quarter of last year.

On the right-hand side of this slide, we outline organic growth by region, so excluding both currency and acquisitions. You can see that most regions were up in the quarter organically. Let me touch on each region briefly.

In North America, our largest region, we were up 6%, led by broad growth in Process Industries as well as strength in aerospace, offset partially by lower shipments in off-highway. In Asia, we were up 12% as we saw continued growth in wind energy, distribution, heavy industries and rail, offset partially by lower demand in heavy truck. China and India, our 2 largest markets in Asia, were each up double digits in the quarter. In Europe, we were up 8%, with notable gains in wind energy, rail and distribution. And finally, in Latin America, we were down 11%, as we saw declines across most sectors in the quarter.

Turning to Slide 14. Adjusted EBIT was $163 million or 16.6% of sales, with margins up 310 basis points from last year. Before I move to the EBIT walk, I would point out that adjusted EBITDA margins were over 20% in the quarter, a nice milestone for us.

Moving to the EBIT walk. As you can see, in the first quarter, we benefited from higher volume, price/mix, improved manufacturing performance, lower SG&A costs and the benefit of acquisitions, which were offset partially by higher material costs and the impact of currency.

Let me comment further on a few of these items. As I mentioned, price/mix was positive in the quarter. Pricing was positive in both segments, but with more coming in Process Industries. Price/cost was also positive for the first quarter despite material cost inflation and the impact of tariffs. On tariffs, as planned, we are more than offsetting the negative impact through mitigating tactics and pricing. Our favorable manufacturing performance in the quarter was driven by improved productivity and the benefit of our operational excellence initiatives, which more than offset the impact of moderating growth and cost inflation.

With respect to SG&A, we continue to leverage our cost structure extremely well as we grow. As a percentage of sales, SG&A expense improved 120 basis points year-on-year.

And finally, our acquisitions from last year are contributing positively to our results, adding $13 million of EBIT on a net basis in the quarter. That represents an adjusted EBIT margin of roughly 18% on the acquisition revenue and that's after purchase accounting amortization.

On Slide 15, you'll see that we posted net income of $92 million or $1.19 per diluted share for the quarter on a GAAP basis. Among the special items in the quarter was a $6 million pretax charge for a property loss from storm-related flood damage that impacted one of our U.S. rail facilities. On an adjusted basis, we earned $1.35 per share, a new record for the company for any quarter and up 34% from last year. In the first quarter, our GAAP tax rate was around 30%. The higher tax rate was driven by a discrete tax expense in the period, the bulk of which related to U.S. tax reform. Our adjusted tax rate in the quarter was 26.5%, down from 27% last year and in line with our expectations. We expect to maintain an adjusted tax rate of 26.5% for the rest of the year.

Now let's take a look at our business segment results, starting with Process Industries on Slide 16. Process Industries sales for the first quarter were $480 million, up over 21% from last year. Organically, sales were up $47 million or about 12%, with growth across virtually all sectors, led by wind energy, industrial distribution and heavy industries. We also saw positive pricing in the quarter. Acquisitions added over 13% to the top line, while currency translation was unfavorable by almost 4%.

Looking a bit more closely at some of the markets. In the distribution channel, we saw growth in all regions except Latin America, with the largest gains in Asia. Wind energy was also up in the quarter with strong growth in both Asia and Europe. In heavy industries, we saw growth in North America and Asia with notable increases in metals, oil and gas and aggregate and cement.

For the quarter, Process Industries EBIT was $106 million. Adjusted EBIT was $110 million or 22.9% of sales compared to $82 million or 20.7% of sales last year. The increase in EBIT was driven by higher volume, favorable price/mix and the benefit of acquisitions, offset partially by higher material costs. Process Industries adjusted EBIT margins expanded 220 basis points year-on-year.

Our outlook for Process Industries is for 2019 sales to be up 16% to 18%. Organically, we're planning for sales to increase 6% to 8%, unchanged from our prior guidance, with the growth across most sectors, led by industrial distribution and wind energy. We expect price/cost to be positive for the year and for Process Industries adjusted EBIT margins to expand by around 200 basis points from 2018.

Now let's turn to Mobile Industries on Slide 17. In the first quarter, Mobile Industries sales were $500 million, up over 2% from last year. Organically, sales were up $9 million or just under 2%, reflecting growth in the aerospace sector as well as the impact of positive pricing. Rail was up slightly in the quarter, while off-highway and heavy truck were each down slightly. Acquisitions added almost 4% to the top line in the quarter, while currency translation was unfavorable by over 3%.

Looking a bit more closely at some of the markets. Our growth in aerospace was in North America and mainly defense-related. In rail, we were up in Asia and Europe, but down slightly in the Americas. Heavy truck was down slightly in the quarter, driven by slight declines in Europe and Asia, offset by some growth in North America. And in off-highway, we were down slightly in mining and agriculture and up slightly in construction, but note that we had a relatively tough comp in North America in off-highway in the year-ago period.

Mobile Industries EBIT was $61 million in the quarter. Adjusted EBIT was $66 million or 13.2% of sales compared to $52 million or 10.6% of sales last year. The increase in EBIT reflects the impact of favorable price/mix, improved manufacturing performance, lower logistics and SG&A costs and the benefit of acquisitions, offset partially by higher material costs. Mobile Industries adjusted EBIT margins were up 260 basis points year-on-year.

Our outlook for Mobile Industries is for 2019 sales to be up 1% to 3%. Organically, we're planning for sales to be flat to up 2% compared to last year. This is below our prior guidance and takes into account a more moderate outlook for the rail and off-highway sectors. For the year, we expect aerospace to be up, offset by flattish revenue across the other Mobile sectors on a net basis. We expect price -- positive price/cost for the year. And we expect Mobile Industries adjusted EBIT margins to exceed 12% with margins expanding over 150 basis points from 2018.

Turning to Slide 18. You'll see that we generated seasonally strong operating cash flow of $52 million during the quarter. After CapEx spending, our first quarter free cash flow was around $36 million, which was up $98 million from last year. The increase in free cash flow reflects higher earnings and improved working capital management versus the year-ago period. We ended the quarter with a strong balance sheet. Net debt was around $1.5 billion at quarter-end or 47.5% of capital, down slightly from the end of last year. Net debt to pro forma adjusted EBITDA was around 2.1x at March 31, also down slightly from year-end.

You can see some of the highlights in regards to capital allocation at the bottom of the slide. Rich covered most of the items already, so let me just make a few comments on the outlook. We expect to spend roughly $150 million or less than 4% of sales on CapEx, with most of the spend in driving growth and margin expansion. We'll continue to pay an attractive dividend. With respect to M&A, we're focused on integrating our recent acquisitions and looking for additional bolt-ons.

And finally, we have the ability to repurchase stock, but we expect more modest buyback in 2019 than prior years. In all cases, we intend to maintain a strong balance sheet. Our cash flow and earnings growth should provide the opportunity for us to delever below 2x net debt-to-adjusted EBITDA by year-end.

I'll now review our outlook with a summary on Slide 19. We're planning for 2019 revenue to be up 8% to 10% in total versus last year. Organically, we expect sales to increase 3% to 5%. We see positive momentum and strong fundamentals in several end markets and sectors, including industrial distribution, wind energy and aerospace. And we expect positive pricing for the year. Our backlog supports our revenue guidance. Acquisitions should add 6.5% to 7% to the top line. This includes the acquisitions we closed last year as well as the recently announced Diamond Chain acquisition. And we expect currency translation to be negative 1.5% based on March 31 exchange rates.

On the bottom line, based on our year-to-date performance and outlook for the rest of the year, we now estimate that earnings will be in the range of $4.95 to $5.15 per diluted share on a GAAP basis. Excluding anticipated net special charges totaling roughly $0.20 per share, we expect record adjusted earnings per share in the range of $5.15 to $5.35, which at the midpoint is $0.45 above our prior guidance and up 26% from last year.

The midpoint of our 2019 outlook implies adjusted EBIT margin expansion of over 200 basis points at the corporate level or just above 16% for the year, and that's after incremental amortization from the acquisitions. And finally, we estimate that we'll generate very strong free cash flow of around $360 million in 2019.

So in summary, it was a great first quarter, and the year is off to a great start. As Rich said, our strategy is working, and we'll continue to focus on driving profitable growth, operational excellence and optimal capital deployment.

This concludes our formal remarks. And we'll now open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take the first question from Steve Volkmann from Jefferies.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [2]

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So maybe just a couple things. You threw a lot out there. But can you just give a little bit more color -- I guess, it's probably rail and maybe off-highway that was marginally lower when -- Rich, when you said that the outlook was slightly lower in the second half. Can you just provide a little color around what you guys are seeing in those markets?

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Richard G. Kyle, The Timken Company - President, CEO & Director [3]

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Yes. One, that is correct. It would be off-highway and rail. And everything else -- largely some puts and takes, but largely in line with where we were looking a couple of months ago. On the rail side, a little more complicated story there. Rail was up in the first quarter, but it is looking a little softer for the second quarter. As I mentioned, we had a significant flood. We lost a facility in Tennessee or a part of the facility in Tennessee was under water for about a week. No production equipment was damaged. But a warehouse, which holds primarily raw material and (inaudible) for our global, although mostly U.S., but global rail operations was under water and we weren't able to get into the facility for over a week. So that caused some scrambling and some effects on production as well as modest effects on sales, we think, in the quarter -- the first quarter. It was a relatively modest impact. But as we look at the second quarter, we're a little lower than what we had anticipated in the second quarter as well. And as we look -- since the quarter has been over, as we look at what's been happening in the rail industry, it looks like our numbers might be a little softer through the first half than the industry. But we reflected that for the full year. If it is, I am very confident we will not lose any share long term in that market. But our customers may have taken some actions, and we're still sorting through some of that. So I think we'll probably need a little more time on the rail side. If we're being a little too pessimistic there -- and more of it was onetime stuff and the market is stronger, that will obviously bode well for us in the second half. And as you know, rail mix is up -- Mobile, and we were counting on rail to be a little bit stronger this year. So that one, I think we need a little more time, because again, the U.S. market looks pretty good and we're doing well outside the market. And the first quarter, as I said, was up slightly. Off-highway OEMs still growing, moderating growth, probably working on inventory more just like we are. No share issues for us. I would say mining and construction, a little bit better than ag for us. Second quarter looks good sequentially, but a little weaker than last year, and that's how we ended up choosing to forecast that we would take that slightly weaker outlook into the rest of the year. So I'd say the demand for both those markets remain strong. We're just being a little more conservative on the second half with some of the uncertainty out there.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. Super. And then just on the plus side, I mean, what's the outlook for Asia? Those are some very strong numbers.

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Richard G. Kyle, The Timken Company - President, CEO & Director [5]

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Very good. I would say, again, big wind market for us. Wind was very strong in the quarter. Wind is one of our markets where we have good visibility to demand quarters out. And I would say, wind looks very strong for the full year, which will drive a lot of the China numbers. And then beyond that, I would say more bullish on wind -- or I'm sorry, on China. Maybe when we were getting a little more nervous at the end of last year and the start of the year, I think we're seeing what you generally read about the China is coming back from that a little bit, and the outlook looks pretty good in China. And the other thing I would say about China is not just wind, it is an area where we generally have longer lead time items and more order book visibility, and it looks very good for the second quarter as well as the third quarter.

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Operator [6]

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Next question comes from Michael Feniger from Bank of America.

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Michael J. Feniger, BofA Merrill Lynch, Research Division - VP [7]

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Yes. I'm just -- I'm curious, can you guys -- you talked about how in the first quarter you guys took out a little inventory. I think we see that in the cash flow. And you still put up good margin. Can you just walk us through how you plan inventory in Q2 and maybe in the second half and how that usually compares to how you guys seasonally ramp up or kind of take out towards the end of the year?

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Richard G. Kyle, The Timken Company - President, CEO & Director [8]

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Yes. I would say, with the moderating growth that we're expecting for the full year, we would expect good year-on-year comps for inventory build in each of the following quarters. Obviously, that has the opposite impact from a production volume manufacturing cost standpoint, but we've got that factored in. So I would say seasonally this year, with also the moderating growth, we would expect to reduce inventory in the second half of the year, so flat to slightly up in the second quarter and then slightly down in the second half and generating very strong cash. And with the sequential revenue that we see in the second half too, that's one of the reasons why seasonally we liquidate receivables typically in the second half as well and why our cash flow is weighted to the second half. So a very good start to the year, feel very good about the cash outlook. And really probably the biggest risk to the cash outlook would be second half sales being stronger than what we have modeled. And that would probably be a good problem for us to have.

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [9]

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Yes, I can just maybe add, Mike. This is Phil. To your point, I mean, obviously with controlling inventory much better, we built a lot of inventory last year. We talked about it throughout the year. It put us in a really good position at the end of the year. We're leveraging that now, if I can use that terminology. And you're right, when we're building less inventory and we're taking inventory out, it does result in less cost absorption. But that's where we are seeing really terrific productivity in our facilities right now. So in a moderate growth environment, we generally see step-ups in productivity, which help a lot. We're continuing to pursue operational excellence initiatives in our plants, which are contributing. And then finally, we had a couple of new plants last year on the Mobile side of the house in Romania and Russia, which are up the curve now and were kind of through the initial growing pains, if you will, in those plants. And that's benefiting us as well. So it's -- while we are seeing less -- naturally less fixed cost absorption with the production volumes, we're more than offsetting it with productivity and other cost reduction initiatives.

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Richard G. Kyle, The Timken Company - President, CEO & Director [10]

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I would add to that, that another reason for confidence on the working capital side, when you look at the last 3 years, '17 an inflection year, strong organic growth; '18 very strong organic growth, 2 years where I would say our operational focus was in the plants. It's always balanced, always focused on safety, quality, service cost, inventory, et cetera, but skewed towards the service and capacity side to capture the market opportunity that we have in front of us. And so in that event, we're doing more training, more hiring, adding of shifts. And again, we leveraged that well with the volume. But as you look at where we're at today, we're in a much more balanced standpoint, much better focus on productivity and inventory in addition to service. And we're going to see the benefit of that through the course of this year.

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Michael J. Feniger, BofA Merrill Lynch, Research Division - VP [11]

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That's helpful. And on the last question, just you guys kind of provided some granularity with mining and construction being a bit better than ag. Could you -- you said the change in the outlook is more based on forecast. But did you see anything within March or April that kind of made you -- that kind of prompted this -- the slight tweak in the outlook and anything particularly in March and April when you look at mining, construction and ag?

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Richard G. Kyle, The Timken Company - President, CEO & Director [12]

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I would say mining has been about where we would have expected, so I would say nothing there, and I would say, as you look at the first half, a little bit lighter than what we would have anticipated back in February. And then we're just extrapolating that out into the second half. So nothing in March, April necessarily per se. But as you look at -- what we shipped in the first quarter are what we believe we'll ship in the second quarter definitely in the other 2 segments of off-highway, but a little bit lighter than what we would have anticipated.

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Michael J. Feniger, BofA Merrill Lynch, Research Division - VP [13]

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Just lastly, I mean, I think with the acquisition, I think you said $60 million sales for the full year. Could you just help us how much that's up versus 2018? And just help us understand like management's logic. I think you mentioned you have a bias to more of the bolt-on M&A. I understand it should be probably smaller scale than what we've seen in the past. But with where your stock is kind of trading, I'm just curious how you guys are gauging that type of dynamic between having that bias more to the bolt-ons rather than your own shares where you guys are clearly operating well, margins are going up, cash flow generation is better. Just help us understand that dynamic.

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Richard G. Kyle, The Timken Company - President, CEO & Director [14]

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Okay. I think there are a few questions in there. On the Diamond piece, I think the question was '19 sales versus '18 sales. I would say the Diamond business in North America, which is mostly what it is, is not as high growth as the acquisitions that we did last year. And it's 2 years into an industrial expansion. So I would say they're looking at growth rates that would be in line with what we would see in the company as a whole. And their higher growth happened in prior years similar to what we have seen. So not a big delta in forward revenue and -- versus backward revenue or EBITDA that we saw in the '17 and '18 acquisitions, although the forward EBITDA will really come much more from what will be a pretty good synergy case between 2 businesses with a fair amount of redundancy that we can get at. And the second part of the question, I'm sorry? Oh, on the buyback, I would say that, one, we do agree with your point that our shares are attractively priced. However, I would also say part of the reason the shares are attractively priced is because we have been doing the acquisitions, which is making our bearing package stronger and is mixing us up in regards to both growth as well as margins and also changing our -- modestly, but also changing our cyclicality. So we're looking at all those. And then also I think as you look at the acquisitions to the point about Diamond's trailing versus forward EBITDA, most of the businesses we look at have some element of industrial cyclicality. And just like buying our stock, that has to be taken into account. And so I don't think if we were looking at buying Groeneveld today, we would probably have quite the same revenue outlook that we had on it in the forward 24 months that we've experienced and the 24 months that we bought it, still positive, but slightly more moderate. And all those factor in. So we still like the share buyback, and I think we -- our -- the EBITDA multiples that we paid for these businesses, both through organic growth as well as synergies, have come down quickly. So I think the headline multiple versus what's embedded in our results today are 2 very different numbers.

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Operator [15]

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The next question comes from Chris Dankert from Longbow Research.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [16]

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I guess, first off, congratulations on the EBIT margin, really impressive across both businesses. I guess, you commented a bit in the prepared remarks, just saying you're looking for, call it, more flattish sequential trends into 2Q and then a bit of a taper into the back half of the year. And I just want to put kind of a point on it. 3Q typically sees a fairly similar EBIT margin to 2Q, and you kind of called for some softening in that number. Is that just conservatism or there's something discrete that we should be keeping in mind as we're modeling that out?

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Richard G. Kyle, The Timken Company - President, CEO & Director [17]

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I would say, typically, they're close. You're right. It's not a big drop-off. But typically, the second quarter is our peak margin and peak EPS for the year. You get into the third quarter, you typically get into some OEM shutdowns in the U.S. You get into some European holidays and shutdowns. And then, obviously, that expanding a little bit further into the fourth quarter. So I don't think we have anything there that would be too unlike what we've seen on average over the last few years.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [18]

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Got it. Got it. That helps. And then I know you guys are still kind of plotting out an Investor Day here, and we'll probably get some more color then. But just any comments on where SG&A as a percent of sales does kind of eventually level out or kind of what you're targeting internally? Because at this point -- I mean, it's come down quite a bit. Just not sure kind of where things are targeted. So any help there.

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [19]

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Yes, Chris, I would say we're continuing to focus on leveraging our SG&A structure as we grow. And as you mentioned, in the quarter, our SG&A was around 15.5% of sales, which is down significantly from where it was a couple of years ago. And so we're focused really hard on controlling SG&A in Mobile Industries, because it's very important to get those margins up. We're continuing to invest for growth in Process Industries. So SG&A is actually going up marginally in Process Industries. But from a target standpoint, it's probably something we'll give a little bit more color on in terms of long-term targeted range, but we feel like we're going to continue to leverage the SG&A cost structure. And I would tell you, as we're making the acquisitions, Rich alluded to it earlier, most of the acquisitions are coming in with higher gross margins, but also higher SG&A., and we're still able to bring that SG&A as a percentage of sales down. So if you look at in the quarter, I mean, obviously, most of the growth in SG&A in absolute dollars basis was driven by the acquisitions. Excluding the acquisitions, we were down. And it was both controlling costs as well as lower compensation or incentive compensation expense as well. But we'd continue to look to leverage it as we grow.

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Richard G. Kyle, The Timken Company - President, CEO & Director [20]

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Maybe playing off that and going back to the share buyback versus acquisitions. And the acquisitions are a part of that story, not only the leverage, but there's an operational piece of that where every acquisition we've done for the last several years has a SG&A synergy piece to it where we look to improve the productivity of what may have been a $50 million or $70 million family-owned stand-alone business and operate it more efficiently with improved digital platforms. And we're doing that, and we're seeing that. So -- and that's -- a big part of the SG&A is in the core. And as Phil said, we've done well with that as well. But I think we still have a pretty active pipeline on -- of things to come that will improve our productivity, if you will, across SG&A.

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Operator [21]

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The next question comes from Joe Ritchie from Goldman Sachs.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [22]

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So maybe just touching base on the margins for just a second here. Obviously, great performance this quarter. You guys raised guidance already by at least 200 basis points of EBIT margin expansion in '19. You guys are only one quarter in. I guess, maybe just kind of parse out some of the puts and takes there. Is freight cost expected to get better as the year progresses? So any other color you can give around that would be helpful.

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Richard G. Kyle, The Timken Company - President, CEO & Director [23]

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Yes. So if you look at the drivers of margin improvement in the first quarter, maybe make some comments about the sustainability of it going forward. Price is largely done. Certainly, there will be some more movements through the year. And there's also some possibility of that coming down a little bit with material surcharges. That's been a little less up than what we would have anticipated. But as you know, we have a natural hedge for that on our costs and pass-through. So I would expect that to hold certainly for the full year and not to see dramatic changes on that through the balance of the year. From a cost standpoint, I would say on the, what I'll call, the cyclical side of cost, meaning steel costs going up, general inflationary costs, those have come in better than what we would have planned on prior to the start of the year. And as we look out with moderating growth and our mitigation tactics, we feel good that, that will continue to be the case. On the structural cost side, Phil and I both talked about some various things that we've done there to deliver on that. Our pipeline on that remains active. So I think that all looks very good. Mix has been a big driver of that. And I believe as you look at the strength that we see in Process Industries, the backlog there, the visibility that we have, that looks positive certainly through the third quarter. The acquisitions have had some benefit on it, on the EBIT margins, and again, see that as solid for the full year and then volume. And I think -- again, we've already hit on that, that we feel the process side is lower risk and there's certainly some upside and downside, I think, scenarios where you could play out on the Mobile volumes. But overall, and obviously we guided to it, we feel the margin attainment that we're looking at is sustainable. And we've obviously already completed April and have May and June in front of us. And with that, we've already got -- with May, we've got 5 months behind us of pretty firm orders and look at the volume side. So I think it looks pretty good.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [24]

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Super. My one follow-on question is just around Mobile growth. And so clearly, it has started off a little bit slower than expected, took the guide down for the year. I know you guys don't typically like to talk about quarters specifically. But to the extent that you can give any color around cadence, because it looks like your comp in 2Q gets significantly harder, and so any commentary around cadence for Mobile growth as the year progresses.

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Richard G. Kyle, The Timken Company - President, CEO & Director [25]

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I would play it off of first quarter versus prior year. And if you look at last year's sequentials off first quarter, we're looking at slightly weaker than last year sequentials, which again declined from Q2 to Q3 and then again from Q3 to Q4. And we're planning for a little bit greater decline than what we saw last year.

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Operator [26]

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The next question comes from Joe O'Dea from Vertical Research Partners.

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Joseph O'Dea, Vertical Research Partners, LLC - Principal [27]

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You touched on it a little bit and just the outgrowth that you demonstrated, I think, particularly notable in Process. But could you talk a little bit more to some of the successes behind that, the ability to maintain some of those gains and then the outlook for continuing to see some outgrowth relative to the industry?

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Richard G. Kyle, The Timken Company - President, CEO & Director [28]

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Yes. Well, I'd say a couple of things there. One, wind has been certainly been -- continues to be a good story and going to be a good story in 2019. We've talked with you, Joe, as well as others about behind that. And while it's not a factor in 2019, certainly longer term, we are looking to become more than just a bearing supplier into the wind industry as well. And staying on wind, the other one that is newer to us, but has been extremely strong since we completed the acquisition of Cone Drive is solar. And the outlook -- it's a shorter lead-time market, a little more project-based than what we have with wind. But through 7, 8 months of having Cone in the portfolio, well over double-digit revenue rose there and growth levels there and a market that is projected to sustain that longer term. Looking at the sheet, marine is another area where obviously not a high growth. We've got it in a neutral category, but has been an area where we saw some significant growth and have a really nice market position. And as you look over multi years, it's been part of the growth story. Aerospace is a segment for us that has been, I would say, from the '12 to '15, '16 time frame, a bit of an underperformer for us. We did the restructuring end of '14, beginning of '15. It's a long sales cycle. I think we're beginning to see the benefits of that today. I believe we're outperforming the market in the aerospace sector. And if you go back to '14, '15, that would have been an area where we were underperforming. So that's a -- that's even a bigger swing. Distribution in total, and again, both bearing business, acquisitions, geographic expansion, a lot of things there. They're small wins and they're incremental, but a big focus for us as a company to have more than our share of aftermarket demand for bearings, couplings, chain, belt, et cetera, and take that story around the world. We've been adding some people in -- salespeople and inventory for some new geographical work in Africa. It's a very small base. So it's a -- these aren't big numbers, but it's a good growth outlook for us as well. So that's a sampling of them, and there'll be a lot of others in -- that are $500,000 here and $1 million there. But I think as you add it all together, if you look over the last few years, we're doing pretty well.

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [29]

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Yes. Maybe if I could just add too. I mean, when -- and Rich talked about the markets, but really the efforts that we've been undertaking in regards to new product development over the last several years are really starting to pay dividends, I guess, for lack of a better word. We now have a complete full line of industrial bearings across all roller bearing types. And these are products that we -- you start out with a relatively small share. So we're picking up share gains in products such as spherical roller bearings, cylindrical roller bearings, serving general industrial markets as well as markets like wind. The -- we talked about the metric tapered bearing plant that we built a couple of years ago. We're now seeing some share gains on the metric side of the house, where we have -- we're the world leader in tapered bearings. We have a relatively modest share in metric size tapered bearings. And this new facility is giving us the ability to outgrow there. So as Rich said, in those products, it tends to be small wins, but they definitely add up, and you do see it more on the Process Industries side of the house certainly.

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Richard G. Kyle, The Timken Company - President, CEO & Director [30]

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And other one, I'll go back to markets with feeding off what Phil said, food and beverage. Not a high-growth market necessarily, but a much different cyclicality and a good growth market. We've done a lot there organically in our bearing portfolio. As Phil talked about, we've, also with the acquisition of Cone and Diamond, have built out -- and EDT on the bearing side, complementing with our bearing package, have put a complete portfolio together. And I think we'll be in the lubrication space in short order and food and beverage as well. So could go on more on that, but I guess, you've a good feel for the types of things we're doing.

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Joseph O'Dea, Vertical Research Partners, LLC - Principal [31]

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I appreciate all those details. When you think about what you've done to broaden out the Process portfolio as well, I think one of the things we've seen in the past and maybe we don't have a really long history to go on, but we've seen these really good incrementals now. Process, arguably, the decrementals might be a little bit higher than we would anticipate also, and I'm not sure how much of that is just pricing variation into distribution. But when you think about what you've done to broaden out Process, how do you feel about your ability to also kind of manage decrementals better through cycles?

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Richard G. Kyle, The Timken Company - President, CEO & Director [32]

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I don't know that I want to go too further on that, Joe, because we're really not on the decremental train right now. We're on the incremental outlook. I would say everything that we're doing and the things I just talked about with growth, cyclicality, we are still in a lot of heavy cyclical markets. I mean, we don't -- there'll certainly be a day when off-highway and rail are contracting again. But we are changing the portfolio. And in food and beverage, we'll not cycle with those markets. Solar, still tied to capital goods. So it's still -- it'll grow, but it'll have some level of cyclicality, but that cycle is not tied to that. From a cost standpoint, we continue to take a lot of actions to variabilize our cost structure. So I guess, the only thing I would say on that the last '14 to '16 contraction, we went down 20% to 25% in earnings per share. No 2 cycles are the same. We've taken a lot of actions organically and inorganically to be better the next time around. And we'll get more specific when we get to that point, but we're fresh off a quarter of 7% sequential growth.

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Operator [33]

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The next question comes from Steve Barger from KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [34]

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Just to wrap up the comments on growth and cost leverage as the year progresses, should we be thinking 2Q contribution margin looks more like 1Q and then that steps down in 2 half? Or should we be thinking you can run a more stable incremental for the rest of the year in that plus or minus 30% range we saw last year?

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [35]

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Yes. I mean, I would say, Steve, if you look at the -- I think our -- in the first quarter, we did roughly a full year -- or year-on-year incremental of around, I think, 45% at the corporate level. I think our full year guide would imply probably something closer to 40%. So I mean, we'd expect the incremental to probably moderate a bit as we move through the year, but just slightly. And then so the rest of the year may be in that 40%, maybe slightly below 40% range, but still quite good. And then sequentially, as you walk first to second and then into the second half of the year, I mean, we would expect relatively -- I would say relatively normal or consistent incremental/decrementals as the volume moves. I mean, obviously, there's a little bit of mix differential quarter-to-quarter, but putting that aside, relatively consistent.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [36]

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And can you just talk about the progression of distribution sales through the quarter for both North America and China, given that you're seeing some rebound there? Did things follow normal seasonal pattern? And what are you seeing in April so far?

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Richard G. Kyle, The Timken Company - President, CEO & Director [37]

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I would say April was good and May is going to be good. The only thing -- in the first quarter, January -- maybe the first week of January got off to a little better start than what we would historically see, but also December was a little weaker, and we're talking millions of dollars revenue. It's nothing material on the quarter. So when you look from -- if you adjust for that, and again, I think that gets fairly typical for us in a market that's not quite as hot as it was in between '17 and '18 that we get a little more inventory management at the end of the year from our customers. If you adjust for that, I'd say the rest of the quarter was normal and backlog in global distribution remains strong.

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [38]

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Yes. Just to add Rich's comments. I think versus last year, our global distribution backlog is up, call it, mid-singles. And actually the order book is probably flattish from the end of the year. So still quite strong and well supportive of our full year outlook.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [39]

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Got it. And one more if I can slide it in. For North American rail, I understand you lagged the market due to the flood, but can you talk to the trend you're seeing in the aftermarket domestically?

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [40]

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Yes. I would say, by and large, the aftermarket in terms of traffic, in terms of miles hauled, et cetera, has been -- remains good. And I -- we're still seeing, I'd say, consistent stable penetration across that part of the market. And then -- and obviously, the flood impacted us to a slight degree, but I would say that part of the North American market has been pretty stable.

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Operator [41]

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(Operator Instructions) And our next question comes from Justin Bergner from G Research.

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Justin Laurence Bergner, G. Research, LLC - VP [42]

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I guess, to start, has your view of wind improved from the prior quarter versus sort of the high single-digit prior view? And maybe just talk about some of the tailwinds that are helping you mix-wise in Process?

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Richard G. Kyle, The Timken Company - President, CEO & Director [43]

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So I would say wind has solidified for sure, that -- when we delivered a really good first quarter, and the order book has continued to be strong. Two, I would say from an outgrowth standpoint, we continue to build confidence of -- that this is going to be a multiyear phenomenon, not a 2019 phenomenon that we continue to make traction on platforms that we'll be in production a year from now, 2 years from now. So -- and then yes, I would say it's probably up a little bit, but it's more -- we had it up. So that's all good. On the mix side, I would say, first, the fact that Process Industries was running 800, 900 basis points higher than Mobile Industries and is the current growth engine of the company and the fact that we've done more M&A work in that space clearly mixes up the corporation. And then I think the other fact within the corporation really as you look at the global bearing industry, the fact that we're niche in automotive is a good thing and the fact that we are -- our niche is in U.S. light pickup trucks is even a better thing. So there's that one as well. Coming back to your question on Process Industries. I think our, again, outside of wind, solar is another part within that space. I think our heavier mix to North America and China and lighter in Europe is generally a positive for us when you look at peers. And then from an end market standpoint, it's all just, I would say, pretty solid where we participate.

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Justin Laurence Bergner, G. Research, LLC - VP [44]

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Switching gears to the margin trajectory and the improved outlook for 200 basis points of margin expansion versus 100 basis points prior. It seems like there are sort of 5 buckets that the improvement is falling under. It may be price, mix, SG&A, sort of manufacturing productivity, and I guess, external costs like raw materials and logistics. I mean, if -- I don't know if that's the right framework. But if it's a reasonable framework, could you sort of maybe rank order which of those factors are more meaningful in your improved margin outlook?

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Richard G. Kyle, The Timken Company - President, CEO & Director [45]

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Yes. I would throw in 2 others, acquisitions and volume. And I would say mix and volume are the 2 biggest drivers, but they're all positive and they're all contributing in some way, and I think that's a positive. And the other one that I would highlight, we overcame a 3.5% headwind on currency in the quarter, which is a pretty sizable one, and it didn't drop through quite as negatively maybe as it has sometimes in the past. But that's -- if that inverts on us, that actually has the potential to be a favorable as well. So for us to overcome that and bump the outlook shows you that quite a few of these others are gaining. So I'd say there's no one driver, with the exception of every dollar of revenue in Process Industries, 22% margin versus Mobile at 13% makes a fairly sizable difference in the company's mix.

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Philip D. Fracassa, The Timken Company - Executive VP & CFO [46]

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Yes. I would maybe add -- just to add, Justin, I would say pricing versus our prior guidance is more or less in line. I think you outlined the items Rich commented on. I think -- as I think about it, clearly mix has been good, the operating performance and the manufacturing productivity has been very good. And I think inflation, while it's there, I think it's safe to say it's been a little bit more modest, certainly on a full year outlook, than we anticipated. And I would say those would be the bigger items at least as we think about them.

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Justin Laurence Bergner, G. Research, LLC - VP [47]

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Okay. I'll sneak one more in which is, are the EBITDA margins growing for your 2018 acquisitions? And is that part of your improved margin outlook and improved margin outlook for the acquisitions versus maybe what you had assumed 3 months ago?

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Richard G. Kyle, The Timken Company - President, CEO & Director [48]

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I would say for Cone and Rollon, the margins are up modestly, and the story there is organic growth. And as I said, the 3 acquisitions in aggregate are well above the 6.5% -- 6.4% organic growth for the company. So similar to our focus in Process Industries, they're at very good EBIT and EBITDA margins, and our focus is on growing them at those margins. And certainly, we get some leverage there, but that's not really what the focus of them is about. ABC is definitely going to be a margin expansion story. But I would say it -- 6 months in, we've still got more work to do there to make that happen. It all looks very encouraging and positive, but it will come in. And it's -- frankly, it's too small to move the needle on the corporate number anyway.

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Operator [49]

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That concludes today's question-and-answer session. Mr. Hershiser, at this time, I'll turn the conference back to you for any additional or closing remarks.

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Jason Hershiser, The Timken Company - Manager of IR [50]

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Thanks, Allison, and thank you, everyone, for joining us today. If you have further questions after today's call, please contact me. Again, my name is Jason Hershiser, and my number is (234) 262-7101. Thank you, and this concludes our call.

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Operator [51]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation, you may now disconnect.