Q2 2020 Timken Co Earnings Call
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Thanks, Dan and welcome everyone to our second quarter 2020 earnings Conference call.
Neil Frohnapple director of Investor Relations for the Tim can probably you appreciate you joining us.
Before we begin my 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 accesses material through the Donald feature on the earnings call One, California.
With me today are attempting companies, president and CEO, rich, Kyle and silver copper, our chief Financial Officer.
A lot of opening remarks. This morning from both rich and so before we open up the call for your questions. During the culinary I would ask that you. Please limit your questions to one question and one follow up at a time, so while everyone an opportunity to participate.
During today's call you may hear forward looking statements related to our future financial results plans and business operationally.
Our actual results may differ materially from those projected or implied due to a variety of factors, which we described in greater detail in today's press release.
Reports filed with the FCC, which are available on it jumped in dot 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 time can company and without expressed written consent, we bring it out to use recording or transmission of any portion of the call.
With that I would like to thank you for your interest in the Timken company and I will now turn the call over to rich.
Thanks, Neil Good morning, everyone and thanks for joining us today.
Given the environment very pleased with how Timken has responded in the global pandemic this year and how we delivered in the second core.
We've kept our facilities safe places to work.
Responded quickly to the restrictions and guidelines set by government health authorities.
He served our global customers with a reliable supply products.
We kept the company financially strong through the pandemic.
Our revenue in the quarter was 20% down from 2019 is record quarter of $1 billion.
It's better than we anticipated when we held our last call on me first.
It's bottomed in April.
Sequentially through the core.
And then call we projected that April would be down about 3% from prior year.
We did slightly better than that projection.
From their business improved at night, and then again further in June.
Well it ended the quarter when our customers thinks minimal government restrictions.
In the decline of 20% there were a lot of moving pieces. So let me provide some perspective our markets.
The three what was performing parts smart business were Oems in the automotive heavy truck sectors.
Our country, India <unk>.
All three were down over 40% in the quarter idle much April and Mary.
The two bright spots for revenue were China in renewable energy.
Renewables were up globally and also the driver course wrong China results.
Position in renewable space has been built organically over the last decade in recently complemented through acquisitions.
This market expansion, maybe material difference our revenue results for the quarter as well here to date, demonstrating a more diverse mix in prior cycles.
Since also performed solidly force in the quarter.
From there essentially all of our other markets and geographies were down more than 10% from prior year.
June sequential strengthening was led by the markets that were hardest hit in April and May like automotive in India.
There were some exceptions like commercial aerospace, which we can for us as the quarter progressed.
Sequential strengthening through the quarter held for most markets.
Moving from revenue profits when they went dark two cents per share in the quarter over 20% EBITDA margins.
During the course of the quarter, we took a variety of significant cost reduction measures to react to the decline in customer demand.
The majority of the cost reductions in the core were temporary including cuts and discretionary spending furloughs and reductions in compensation.
We also accelerate efforts to reduce structural costs going forward, which I will talk more about a moment.
Focused heavily on cash generation it took significant actions in the core to produce less than demand, which resulted in inventory reduction more than $40 million in the quarter.
Receivables came down with revenue when combined with inventory reduction and EBITDA generated over $220 million and free cash flow for the quarter.
It is very strong core on cash flow with the expectation that we will continue to generate strong cash through the second half.
We also took steps to bolster our liquidity and balance sheet, which I will let Phil elaborate on rare.
The results from the Bank acquisition also contributed to the quarter, hoping the topline by about 3% in EBITDA margins below company average.
The pre acquisition levels, despite the impact from Kogan 19.
The Becky integration has continued through Covidien, we expect further margin expansion again next year, because we target to be at 20% by the end of 2021.
Well stability in our markets has improved significantly since our call on me first uncertainty remains elevated.
Providing revenue earnings guidance for the second half of the year.
I will provide some color on July what we're seeing short term.
First just a reminder of our normal seasonality.
The last five years, we've averaged 84% organic sequential decline in revenue from the second quarter to the third.
And then another 2% from the third quarter to the force.
So even though the second quarter 20 was particularly weak many of our normal seasonality headwind still exist because we look at the second half.
At this point, we do not see a snap back scenario and the third quarter or the second half we're planning for revenue to be below 2019 levels for the rest of year.
So why revenue is holding at roughly even levels, which is better than normal seasonality, but it's also not another step change in sequential growth like we saw in June.
As we look at demand in August and September.
Best estimate for third quarter revenues to be between flat and up mid single digits second quarter.
Which when seasonality is factored in.
Solid sequential revenue result, imply that our markets are continuing to recover but would remain well below 2019.
And I would add there remains more variability in that projection than normal as customers continue to adjust their operating plans and inventories.
I'm a specific market standpoint, I would say, we're not seeing any major changes in markets in July or the third quarter from June except for U.S. automotive, which is expected to be stronger in the channel Restocks after an extended shutdown.
From a profitability standpoint, we expect second half EBITDA margins to be solid.
But to be down from first half margins for several factors in this projection. The first you mean, the normal seasonality, including this years first quarter only be modestly impacted by covert 19.
Next we'll be an impact company EBIT margins in the second quarter.
Were helped by process revenue being down much less than mobile revenue.
Narrows and the second half as mobile markets recover.
Temporary cost reductions in the form of furloughs and pay cuts will decline significantly in the second half from the second quarter.
They are still managing discretionary spending tightly we get further temporary actions in July but the actions are smaller and more targeted than they were in the second quarter.
Moderating temporary cost actions will be partially offset by the ramp up structural cost actions late in the second quarter, we began moving from furloughs to workforce reductions, reflecting <unk> realities of demand.
Companywide employment has been reduced by over 1000 since the first of year reductions of about 300 more expected this quarter.
We're also accelerating footprint initiatives rightsizing plant staffing levels and accelerating other cost and productivity measures.
Measures are expected to generate $50 million to $60 million year over year benefit in the second half of this year.
A few examples of our many cost actions include two large plant rationalization is already underway.
Along with the consolidation of several smaller operations across our footprint.
Acquisition synergies, including Salesforce and geographic consolidation between Becca grown about lubrication business consolidation between drives and diamond chain.
And we continue to leverage our digital platforms for improved productivity. This quarter, we are adding our 80 see very acquisition to our ERP system, which will further simplifying our business systems across the enterprise.
Within the $50 million to $60 million and cost reduction actions somebody's initiatives Roaring process. Some are being pulled ahead and some have been launched directly in response to new realities of demand.
Finally in package second half margins, we plan to continued reduced inventory through the remainder of the year.
Magnitude depends on how revenue develops but we plan to under produced actual demand through the balance of the year.
Again, we will deliver solid margins in the second half below the first half.
From a cash flow standpoint, we expect cash flow from operations for the rest of the year to be strong under a wide range of demand scenarios.
Our capital allocation priorities for the remainder of the year after capex and the dividend will be to reduce pad.
One final comment for the outlook, while the virus and government reactions could go many different directions in coming quarters. It could continue to be a drag on global industrial demand, we think the risk of repeating widespread shutdowns across our markets is relatively low.
The current focus of governments on travel hospitality Entertainment remarks gatherings has minimal short term impact on us and our customer base.
In regards to longer term outlook for ticket products. We continue believed that the long term changes that arise from the post pandemic world.
Relatively small impact on our value proposition in the demand for what we do will endure and grow.
Certainly the second quarter was extremely dynamic and challenging timken employees responded.
We kept our operation safe took care of customers become kept the company financially strong with solid earnings and strong cash flow.
Relative to the environment, we executed extremely well.
Well uncertainty remains elevated something we'll continue to deliver results through the pandemic, while advancing the company better times the will inevitably come.
With that I will turn it over to Phil.
Okay, Thanks, rich and good morning, everyone.
For the financial review I'm going to start on slide 13 of materials.
And can delivered strong results for the second quarter. Despite the broad economic slowdown caused by cobot 19.
And you can see a summary of our results for the quarter on this line.
Revenue for the second quarter was 804 million down just under 20% from last year.
We delivered an adjusted EBITDA margin of 20.4%.
Up 70 basis points from last year with strong decremental margin performance margins were also up sequentially.
And adjusted earnings per share came in at a dollar to down about 20% from last year's record second quarter.
Turning to slide 14, let's take a closer look at our second quarter sales performance.
Organically sales were down about 20% in the quarter.
Well segment saw lower sales volume versus a year ago period, while price realization was positive.
As rich highlighted revenue improved in the months it may and June compared to the need for local.
Scope of 19 interruption subsided.
And to see underlying demand improves in some sectors like automotive.
Acquisitions added approximately 3% to the topline in the quarter.
We benefited from the tuck in acquisition completed last year.
While currency was a sizable had.
Negatively impacting revenue by almost 3%.
On the right hand side of the slide we outlined organic growth by region.
So excluding both currency and acquisitions.
Let me briefly comment on a few reasons.
In Asia grew up 8%.
Sales in China increased significantly in the quarter from last year due mainly to strong growth in renewable energy, which more than offset the negative impact from India virtually shut down for most of April and May.
In both North America in Europe, we were down in the mid Twentys percentage points.
As most sectors were down across those two regions in the quarter.
Our operations in North America in Europe were severely impacted by Cobot 90.
Especially in April and most of thing, which had a negative impact on end market demand.
Especially in sectors like automotive and heavy truck.
Turning to slide 15.
Adjusted EBITDA was 164 million or 20.4% of sales in the second quarter.
Compared to 197 million or 19.7% of sales last year.
This represents a decremental margin of around 17% all in.
Or 13% on an organic basis.
The decline in adjusted EBITDA reflects the impact of lower volume and related manufacturing performance, including the effect of inventory reduction.
Currency also had a negative impact on EBITDA in the quarter.
On the positive side. These headwinds were partially offset by a significant reduction in assuming expenses.
We also had favorable price mix.
Lower material and logistics costs in addition.
Perfect contributed nearly 4 million to EBITDA in the quarter as our team continues to integrate this acquisition and drive synergies.
Let me comment a little further in his tonight and manufacturing in the quarter.
The significant reduction in SGN expense was driven mainly by cost reduction actions.
Including salary reductions and worked for most along with lower incentive compensation expense.
These actions will mainly temporary in nature.
An immediate positive impact on our results in the quarter.
As we took swift action to reduce costs in response to cold in 19.
On the manufacturing line, we delivered strong execution in the quarter.
Despite lower production volume due lower demand in our efforts to reduce inventory.
Unabsorbed fixed costs net of cost reduction actions.
Most of the negative variance in the quarter.
Our teams around the world acted quickly to flex down labor and variable costs and reduce inventory in response to cold in 19.
On slide 16, you'll see that we posted net income of 62 million 82 cents per diluted share for the quarter on a GAAP basis.
This includes 20 cents of net special charges.
Got you mark to market restructuring and discrete tax items.
On an adjusted basis, we earned a dollar to per diluted share in the quarter down 20% from last year.
Our adjusted tax rate was 27% in the second quarter, reflecting or geographic mix of earnings and in line with our prior expectations.
Right now we expect the tax rate to remain in this range as we move through the year.
Now, let's take a look at our business segment results starting with process industries on slide 17.
For the second quarter process industry sales were 461 million down 9% from last year.
Organically sales were down 8.4%.
Driven by double digit declines in most sectors, including industrial distribution.
Offset partially by strong growth in renewable energy and positive pricing.
Currency translation was unfavorable by 2.5% all acquisitions added almost 2% to the top line in the quarter.
Process industries adjusted EBITDA on the second quarter was 129 million or 27.9% of sales compared to 130 million or 25.6% of sales last year.
We were able to hold adjusted EBITDA relatively flat, despite lower sales as a favorable impact of cost reductions.
Including lower compensation expense.
Lower material and logistics costs, almost fully offset the impact of lower volume and unfavorable currency.
Now, let's turn to mobile industries and slide 18.
Second quarter mobile industry sales were 343 million down 30.6% from last year.
A quick sales were down roughly 32%.
Reflecting significantly lower shipments in automotive and heavy truck as rich commented on earlier.
These factors were the most adversely impacted by government restrictions and customer shutdowns in the second quarter.
Off highway in rail were also down double digits.
Pricing was positive.
Looked at aerospace was roughly flat as higher defense revenue offset lower commercial sales.
Acquisitions added 4.3% to the topline in the quarter.
Currency translation was unfavorable by 2.8%.
Mobile industries adjusted EBITDA for the second quarter was 42 million.
Were 12.3% of sales compared to 79 million or 15.9% of sales last year.
The decrease in adjusted EBITDA reflects the impact of lower volume and related manufacturing performance and favorable currency.
Offset partially by the favorable impact of cost reductions, including lower compensation expense.
Lower material on logistics costs.
Your price mix.
Instead of acquisitions.
This represents a decremental margin of around 22% on an organic basis.
So very good operating performance and mobile industries, all things considered.
Turning to slide 19, you'll see we generated strong operating cash flow of 247 million in the quarter.
Improved working capital performance.
The impact of cost reduction actions and lower cash taxes.
More than offset the impact of liver bone.
We generated free cash flow of 223 known in the second quarter up almost 90 million from last year on lower earnings.
We spent 25 million on capex in the quarter to support long term growth and operational excellence initiatives.
We also paid or 392nd consecutive quarterly dividend.
And reduced net debt by nearly 200 million.
Note that we did not buyback any shares in the second quarter.
You can closer look at our capital structure. We ended June was strong investment grade balance sheet.
You have liquidity of greater than 800 million.
This includes 460 million of cash on hand, plus over 400 million availability under committed credit lines.
Our net debt to adjusted EBITDA ratio improved to 2.1 times at June Thirtyth compared to 2.2 times at the end of March.
We also proactively amended certain bank agreement during the quarter to provide additional covenant headroom, which enhances our financial flexibility during this period of uncertainty.
And keep in mind that we don't have any significant long term debt maturities before 2023.
Overall, our balance sheet liquidity and expected strong cash flow.
Great position and navigating the current environment.
Now, let's turn to slide 20 for additional commentary on the outlook.
Which provided some color on revenue in his remarks, so let me touch on the other items and provide a little more color on our outlook for margins.
Over the rest of 2020, we expect to generate strong free cash flow.
Reflect favorable working capital performance and the impact cost and other spending reduction initiatives.
We expect free cash flow conversion to exceed 100% of adjusted net income in the second half it will likely be lower than first half conversion.
And we plan to continue to deploy our free cash flow after dividends to reduce debt.
We expect we expect in 2020 and strong position to go back any of the offensive next year would share buyback or M&A as conditions warrant.
We expect capex of around 125 million.
Supports our long term growth plans and is consistent with the outlook, we provided last quarter.
We expect net interest net interest expense around 65 million.
Just a captured approximately 27% for the full year.
Both roughly in line with their prior outlook.
I switched discussed we are accelerating and expanding our structural cost reduction initiatives.
You are expected to help drive 50 to 60 million total hearing the savings in the second half.
This includes the impact of actions that were previously underway.
Collectively these initiatives are intended to align our cost structure with near term demand.
Prove operating margins longer term.
However, we do expect EBITDA margins in the second half of 2020 to be below the first gas.
Due to timing that's temporary cost actions from the second quarter subside and the more permanent cost reductions ramp up.
Normal second half seasonality unfavorable mix.
Continued efforts to manage inventory will be continue factors as well.
On the positive side, we expect very good decremental margin performance for the full year, we believe it or margin level, our margin level in 2020 will be significantly higher than past years, where we experienced similar demand declines.
To summarize we delivered strong performance in the second quarter as we acted swiftly to flex down and reduce costs.
And we're now accelerating and expanding our structural cost reduction initiatives as we continue to focus on generating higher margins and returns through the cycle, all while continuing to execute our growth strategy.
In closing.
Lets commend our global Timken team for delivering strong second quarter results. It is their efforts and dedication that will enable timken to advance the global industrial leader to this unique environment.
And with that lender formal remarks and open the lines for questions.
Becky.
Thank you I say reminder, ladies and gentlemen.
So I wanted to ask a question.
We take our first question from Stephen Walker from Jefferies. Please go ahead.
Hi, good morning, guys.
Thank you.
Let's see why don't we start it's I guess, the decremental margins seem to be sort of the most eye catching to me in there I think there about half of what you thought they might be so I guess I'm curious how that turned out so much better was or just more short term cost effective action than you had.
Dr was there something else you think that that drove that and then obviously the question is showing how about in pack for second half off I'll follow up and then second.
Well so the for the quarter, we didnt guided decrementals, but I think two questions permanent stores, you look at the first half and and and for the year I would say.
We believe we can deliver decrementals certainly when we were on the last call when looking at 30% downtime.
Not sure.
Sure at that point than we had bottomed or our Detrimentals would would we'd have a little less confidence about what that sort of magnitude. So first I would say the revenue sequentially improving off the bottom or was the first factor and then I would say the second factor.
Ah was yes, more temporary cost actions.
Yeah, I think we we look for the full year, obviously, the revenue and the volume will play a significant part in it but we look for full year to be pretty close to what we said we'd better to.
Yeah, So objective for decremental margins.
Okay. So I guess, that's we think about the second half's, we'll all these temporary things theoretically be done by the end of this year and and is it sort of two thirds threeq you answered for Q I was just any kind of way to think about that trajectory.
I think that's probably more specific than what we would intend to tend to be we as I said in that in my notes, we continued with temporary actions in July.
Significant size.
Definitely easing, though in the in the quarter and the ones that will stretch out to be linear will be pretty targeted and in places where the volume is a remains.
Severely depressed.
But we are looking at the other cost actions starting to offset that so again I think as you look at a second half Decrementals and told you would expect to be good and full year decrementals to be good but not as good as the second quarter.
Okay, Alright, Thank you I'll pass the.
Thanks, Steve Thanks.
Thank you we take our next question some baby traffic from Evercore. Please go ahead.
Hi, Good morning, My question relates to process honestly very strong margins into Q, but your comment about three Q that total company sales sequentially flat to up mid single digits.
How would you perceive process to be in that some mobiles up more sequentially, but seeking process can stay flat sequential or even up where should we think that's down and the margin obviously was very strong into Q.
Can you give us some guy that I would think the margin sequentially, maybe come down off at a high level just some somebody had a sequential bump process. Thank you.
Okay, but this is Phil I'll take a crack and rich can jump in so I think sequentially you know as rich said best estimate right now would be.
Flat to up single digits sequentially in the third quarter from the second more that in mobile as those markets improve so we'd expect to.
Greater contribution from mobile I think process is probably more you know susceptible to that normal seasonality that we might expect to see given the fact that process was you know was certainly a less impacted in the second quarter. So probably the best color I can give you would be.
You know more in process more up in process I'm, sorry, more up in mobile and then process would be.
More some more subjected to the you know the normal one type seasonality.
And how to Digest the margin was my mother related question, just given that EBITDA margin office was huge and I'm not sure how much the renewable business helped it versus savings that maybe.
Don't repeat I'm, just trying to get a sense for that.
So whether it's almost 20% EBITDA margin into Q for process.
Why did the process margins are would've been very good without the temporary actions are the renewables business would have contributed to a well manufacturing performance was strong at eight.
High single digit type of Ah revenue decline with delivered the decrementals, but it was.
Eight and further by temporary cost actions.
That that we would not look to to continue so are they giving phil's comments on.
Revenues sequentially being impacted by seasonality take out the temporary cost actions, we would look at that second quarter process EBITDA margin as a peak.
Okay, and the ability to keep margins up year over year, she would be more.
Consistent with its organics down for three to process would be difficult to match the EBITDA for many years ago.
It's up this quarter was he has got some with the downturn.
But.
Yeah, I think really all the rules at this point, David as you become merchant in second half will be below first half and income.
That's really overseen at this point.
Terrific. Thank you very much appreciate it.
It's Dave.
Your next question comes from Stanley Elliott from Stifel. Please go ahead.
Hey, good morning, everyone. Thank you all for [noise].
Taking the questions.
Can you talk a little bit about I mean inventories obviously helped to you all I'm, assuming it's data distribution as well.
How would you expect your portfolio to perform on the way out I'm, assuming you're looking at getting some shelf space for the expanded portfolio, but just I'm just curious how you're thinking about that.
I think you would have said coming into the year that inventory whats the right levels for where the revenue was ER as you look at attempted company, our second quarter revenue decline quite a bit more than the inventory and given the flattish stuff.
Slightly outlook, we'd still say, our inventory come down and therefore our.
Ah comments that we expect under produce and I would say that's generally true up most of our customers as well if if they do not see.
Demand coming back stronger I would say inventory levels are a little bit high so in our.
Short term outlook for revenue, we are expecting inventory you generally come out of our customers channels.
[noise] and interesting commentary on all the kind of go back on the I'll pass it on the M&A environment. What are you seeing out there and how quickly can my guess is that a lot of the conversation, it's got shelved, but would love to hear what's your thinking about in terms of it's kinda opportunity set to expire.
Vanda kind of what you guys have pulled up.
Yeah, I think the market certainly the inbound market certainly slowed down I would say has not returned to a two prior year and early year levels.
That being said our communications with our targets.
Remains very active.
And.
You know as we work to improve the performance of the business significantly through cycles are one of the objectives, we have established.
Significantly shorter period between.
When we.
Her down if you will in a in a down cycle and get back on me a sensitive in in the past we had anchor for a long period, our troughs were deep or cash flow was not as robust mid steel pensions higher fixed costs.
And again, we're not out of the would just as we sit here today, but with net debt to EBITDA a little over two good cash flow coming we hunker down in the second quarter expect to do that again in the third quarter, possibly the fourth.
I think that's the prudent thing to do right now, but we want to get back out there and do more with our cash flow long term and pay down debt at 3%.
And and we shouldn't good position to do so and think that that will be a differentiator of how we perform through this cycle, then and how we have in past cycles.
Thanks, guys appreciate it.
The next question comes from Chile team from Goldman Sachs. Please go ahead.
Thank you good morning, everybody, Hey, Jeff warning.
I'd like to maybe go back to the cost out to see if I can make sure I'm, saying uniting all this correctly that you guys talked about $50 million to $60 million into second half of a year and also the second half a cost benefits stepping down. So is it fair to assume then the second quarter had I don't know 30.
$35 million that cost benefit that we and then and then how do I think about that as we kind of think very 2021 on what comes back and 21.
Well I think it's it's.
Fair to say that the second quarter would've been more than the second half number divided by two so yes I think your your number is directionally there that the in regards to temporary because we would expect it to the had been more.
Bob.
So I think the answer that is yes.
Directionally and.
On 21, I guess, you look out at 21.
It's really too early to certainly good.
To say much about 21 as you look out Q1 will be are still relatively Rob tough revenue company. He has come from where we said.
To be below revenue comp, but it's a tough margin comp.
And you know the second half is to be determined based on what happens in the second half here, but I think.
Yes, let me comment that add on the on the margins.
Through the first half as well as what we're looking to second half as well as it can make us made on on the a shorter period between.
Getting back on the offensive with our cash flow and capital allocation you I think.
This is a moment.
That Tim can have spent years preparing for and I don't mean by that that we spent years preparing for a pandemic kept because we had a that we have spent years preparing for our cyclicality and working to both dampen that.
As well as perform through it so.
So while we were not planning on a 20% pandemic induced decline in revenue with a significant government shutdowns in the quarter we have spent.
Years preparing for performing better through a double digit decline in revenue.
All the causes unique.
And the depth was maybe severe we're re performing we remain focused on performing I think that starts for us with a better relative topline.
We're off to a good start Oh I met with through.
Even being down 20% auto hurt us as compared to a lot of industrial peers.
Second quarter, but that's going to help us again in the third quarter, we talked about the strengthen renewables and I can say with confidence that the timken company. They asked most diverse revenue stream in our 100 year history, and I think that's going to.
Play very well for us as we go forward.
Better cash flow is second part of how we perform through that and we did that last year and a good market. We did in the first half of this year in a terrible market, we're going to do it in the second half under a wide range of scenarios.
Third element would be better trough margins were off to a good start we're not out of the words, but coming back to your question. I mean, we have a variety of different levers, we can pull to Ah to make that happen, but we're very focused on executing.
Through a variety of scenarios and then the other one already hit on and that is getting back on the offensive sooner than what we've done in the past I'd say we had spent.
Hey years preparing to perform better through through a tough market and we're off to a good start on that we're very focused on doing it and.
Feel good about still our long term targets and whether that that comes to fruition and 21 or 22, we will see but we're working on all those elements.
So that's certainly helpful color I guess my one by one follow up since you did touch on growth.
Clearly renewables has been up it's been a bright spot for you.
Here I know might be a little too early to talk about 2020 wine, but would be helpful.
So some contacts for how to think about that end market for you. It over next 12 call 18 month and then Conversely, you know Arrow was also you know I surprised this quarter.
At flat how are you thinking about that end market over the next again kind of like 12 18 months.
So on wind second half of the year expected to continue to be up double digits.
Long term are expected to continue to become a bigger part of the portfolio and I expect us to add a broader product offering and or the.
The secular growth trend is that I think remains very strong that being said there will be some level of cyclicality and pauses and booms in that a in that market, so not ready to call.
Ah 21 on that but 20.
During the second half is going to be an excellent year.
Of topline growth on the aerospace side or just mentioned commercial aerospace, which is a which was a few percent of last year was a few percent of the company's revenue that soften for sequentially through the core.
And as a headwind for us still going forward, probably some further declines coming there, but again it started to 3% of sales and as a already below that so I'm pretty cautious outlook. There on the commercial side we are.
Slightly bigger on the defense side and remain.
Bullish on that not a high growth market for us, but a stable one and I expect to have a good year that second half and and.
Good out there as well.
Thank you.
Yes.
Next question comes from Joe with data from back to kind of research. Please go ahead.
Hi, good morning, everyone.
First I just wanted to touch on 50 to 60 million of Fat cats savings.
Sounds like some of those actions underway already in the quarter, because you talked at all about it.
12 to 15 million quarterly run rate.
Much contribution you got from that in the second quarter.
Let's say, we come into most years targeting a you know roughly 1% of revenues. So we came into this year.
Ill call. It a 35 million dollar cost out targets. So.
We would have.
Delivered that in the in the first half an have roughly that left in the second half so.
You know the 50 to 60 million.
Probably pick off 15 to 20 million that was kind of probably in the hopper and things that that we're going to happen in unrest.
And things that we have done.
Either accelerated.
Expanded and or a initiated as a result to a of the demand situation to increase the number significantly up from 50 to 60 million.
But there certainly would have been in out there some of that someone right, but the 50 to 60 is new.
As you look at year over year numbers.
Got it.
And then give any context on distribution experience through the colder and July just trying to understand.
How far you saw that come down and where that may be run rating right now.
First I would say to the earlier question on inventory, we did see a reduction in inventory.
In the quarter and another reduction in inventory in July within that channel.
And I would say that that as a market.
That was a little later to be impacted you talked about U.S. distribution little later to be impacted.
And probably you know weekend.
Still at a level of greater than 10% down.
That would not be the case and other parts of world and China the distribution businesses.
Is pretty strong in Europe. It was down significantly back in the March April timeframe as rebounded off that.
But I would throw it in with the group of markets that remains in a greater than 10% down level.
Perfect and then just wanted to ask the Newbuilds and strength that you've seen this year the degree to which.
You think about that being a tough comp next year or the degree to which you saw this step function moved in 2020 on the horizon, but that's more of a sustainable base you know.
Some cyclicality comments, but that it's not so much but a lot happened in the year that.
And then it's not a reflection of the underlying revenue generation capability.
No I think it's I think it is a recognition the underlying revenue capability I, certainly do not see 2020 being.
The peak and again that said I'm, calling weather 2021 will be up or down off that number. It certainly is a tough comp to.
To sustain and grow off of a back to back to back but you believe it is a a long term sustainable number that we can continue to to build off of.
Perfect. Thanks, so much.
Thanks, Joe.
Next question comes from Robert Wertheimer from me and easily search Pease go ahead.
Thank you good morning, everybody.
One of my [noise].
Two questions one real small and but are you seeing any differential trends in Europe versus North America, just given the different progression of the virus or things relatively stable between the two.
Uh huh.
U.S. automotive is definitely stronger than European automotive and was a it was weaker in April and May So I think a that would be.
One outlier then I would say after that they have a.
Sit here today, they space they caught each other and somewhat normalized whereas there was a timing element as the virus and government issues worked their way through the world.
Europe went down earlier and came back and went down more and came back but I would say there at a.
A relatively close levels today.
That's helpful. Thank you and then make sure. It's really wanted to ask a question about process and acquisition, you've obviously done good things with the mix and and consider deal flow and things are pretty disrupting the right now I'm curious about you know whether the virus is a hindrance to getting aggressive next year, you know what to do does.
Surgeons or otherwise you know, whether whether you're keeping active sellers and people talking and so forth interesting questions on the.
Pipeline the process and whether that continues to be robots or whether we have to wait for real clear out of the virus before you can really execute thanks.
No I think.
The virus.
Situation stabilized, where we're at we could get back active with Adam We Oh, we are traveling anywhere near the degree that we used to but certainly have the ability to to travel and due diligence so I.
Clearly the rest of that that could pausing and if a don't restrictions came up more on those sorts of things, but I think we could do that I'd card.
Our comments today are one more of a cautious approach to and making sure. We have a stable market environment stable EBITDA before we go back on the offensive I think the other challenge when.
When we do get back into that is is this a boat buyer and seller feeling comfortable with Oh.
What the.
Trailing revenue and EBITDA looks like versus the forward because of the magnitude of disruption that's happened in ER and in many of our markets over the last five or six months.
Okay. That's helpful. Thanks.
Thanks.
Next question comes from Ross Konarski from Bank of America. Please go ahead.
Yeah, Good morning, guys.
Ross.
Just another question on renewables, what do we finished the year given what's going on with three different end markets and you can renewable be.
10% of total sales, 20% of process for all of 2020, when all said and done if you're seeing now.
Well I think over over 10 slightly over 10 is a is within range, which would put her to close to 20 for process right.
Yeah.
Ross through the first half, obviously, a southern markets in mobile being down, but you're the first half renewables would have were around 12% on sales for the company and as you know you covered a for a long time and that's up from you know zero 10, 15 years ago, So quite a remarkable growth trajectory force.
Okay, well talk more about when 'cause it's been part of our portfolio longer a and is bigger but the solar.
Side of business, but Oh, it came at the cone drive acquisition.
Has really performed very strong as well.
But when you talk about product diversification opportunities I think you mentioned that in your your comments can you elaborate a little bit further and are those organic opportunities or just things that you see that could be a acquired.
Oh.
Certainly with with I mentioned to come drive acquisition really put a send us solar mentioned at the time, the Bakken acquisition I put us an automatic lubrication systems in renewable energy, which we which we were not in such a Nice addition, and then we do have a couple of organic.
Initiatives beyond Barents or that that we are working on obviously those take a little bit longer and then we continue to.
Build out I'll say, a the range of products that we have the capabilities that we have within the within the variance pay so combination of all the above.
So just wanted to you when you add in other less cyclical end markets and you guys had got some I think some food and beverage exposure and maybe you could just elaborate on that too I'm just trying to get a sense of the end market mix is obviously changed very dramatically.
You know over time in terms of like less cyclical and we certainly renewables would have cyclicality to them and so with all these end markets but.
What else would you put in that less cyclical category and forcing a process will.
That accounted for by the end the year, given what you're seeing now.
Oh, Yeah, Phil mentioned, the renewables being already double digits for the first half Marine definitely has a a for us it's essentially defense for us and has a very different cycle and is one that we have been growing and a at.
Hey, slower steadier cadence, then then renewables, but a good cadence and one that we feel good about for.
The for several years forward, let's say the defense side of Ah.
Ah bearings, which again, a small few percent, but a that definitely.
It has a different cycle and then.
After those I think we have bill.
Several.
Sub 3% parts of the portfolio that that cycle very differently.
It probably collectively get your close to double digits, but they're not of scale, yet or that there was other three would be that would really be something that you could point to had a meaningful impact on offsetting.
Construction equipment, or my and equipment market a softening but.
But it definitely is having an impact and again when you look at how rough numbers were in the second quarter for automotive truck and in India to be down 20% is Attica pretty good indication of a.
The improved strength of the portfolio.
Thank you.
Thanks Ross Thanks.
Next question comes from Steve Biker from Keybanc. Please go ahead.
Thanks, Good morning.
Well, if they take the comp yeah. The company's obviously operating really well right now so as you look across product lines or geography is are there any unusual opportunities for growth or share gains whether its competitors struggling with the service levels are customers seller design changes and take share.
I'd say, we're focused on the OEM side I would say to answer Matt is largely know that that these are things that are happening over a long period of time and enter usually not event driven I would say the positive side of that though is.
When our customers of all continued on with that.
Some slowdown, but not a lot of slow down a and has gone from doing it virtually and our application platform.
Side. There is is is as active as it's because it's been so I think the good news is it's not that slowed really by the pandemic, but I wouldn't say.
Oh, we insist anything I think there's there's probably less sensitive to change suppliers in today's environment without being able to travel and and.
Interact in person with with a with folks I think that's.
I would say probably answer on that side is now in the aftermarket.
There's always some with product availability and there's certainly been some minor product disruptions of being able to get things around the world and into regions, but I think it's probably too small for us 2.2.
In our results were looking forward, so I would say.
Much more business as usual focused on winning platforms and winning our disproportionate share.
In the aftermarket and the fragmented parts of the market.
Understood. Thanks.
Can you talk a global rail and and specifically North America are you seeing activity pick up at all given some sequential increases in rail traffic.
No I would say that's one of the markets we have a.
Fairly rough outline North American rail, specifically have a fairly rough outlook on for the second half that being said, there's some other parts of or like India rail, which was it was a good market for us and one that was way down in the second quarter that we would expect to be better on the second half. So there's some offsets.
But I know North American rail.
The for us in that greater than 10% down category.
Gotcha. Thanks.
Thanks.
Next question comes from Courtney Yeah, <unk> from Morgan Stanley. Please go ahead.
Hi, Good morning, I can answer the question.
<unk>.
Just on the comment for the second half EBITDA margin to be town and could you give us any color that's on third quarter versus fourth quarter, I think frankly, that's a quarter tends to be inline with the second quarter margin came in as health typically sequentially to all and not third quarter.
And then Conversationally <unk> fourth quarter to maybe a little bit stronger than and seasonality would imply that Martha permanent cost cuts.
Well there been any guidance you can get everything.
Yeah I agree. This is Phil I mean Hollywood says I think we're gonna have to limited to again expect second half EBITDA to be load in the first step, but if you think about third fourth I think what I would tell you is you've got the phenomenon of dug into the seasonality from third to fourth is rich talked about then you've also got the offsetting impact if you will.
The cost reduction actions, which as big as a ramping it maybe a little bit more back half weighted and fourth quarter, where they've been third quarter see I'm, a little bit of putting it take there, but and that's it that's probably about as far as we will be able to go on them.
Okay that and and then just on a pack on yet and that was.
These improved from the first quarter, but up pretty constant high single digit even though it's being dragged down by Indiana. So could you just comment on that region, if I'm an area, where we could see growth up double digits in the second half or.
Are we seeing any hot telling it kinda after you know obviously renewable growth path.
Yeah. The way I think I think the way to frame up Asia would be you know if you take obviously for us to China and India are the biggest geography, but we also have on Australia housing in other parts of the region, but China was was up significantly and it was led by renewable energy. So a lot of the commentary around renewable energy keep in mind that our businesses Princeton.
Play its global but its but it's principally in Asia.
And any run China, I'm more than anywhere else in the world. So I try and benefited from that I see the rest of the markets in China were buying leverage and collectively you know kind of flattish as as that economy.
As which was talking about the timing of recovering from code that China is clearly ahead of everybody else with the rest of the markets, where you know you know plus or minus kind of in that sort of flattish range, which help and that India was you know absolutely on.
Very severely impacted obviously the country being shut down for most of April and May I really impacted us significantly. So as we look at moving out to the second half rich talked about renewables I think we will see some murky improvement in India as we move from second quarter into the rest of either that's part of the commentary around.
Second to third sequential revenue improvement if you will be part of that certainly and so I do think Asia Asia can or can't continue to be a bright spot among the regions for timken.
Okay. Thank you.
Thank you know last question comes from Chris Dankert from.
A couple research. Please go ahead.
Hey, good morning, guys.
Thanks for squeezing me in here I guess, a first off more of a clarification and sorry, if I missed it but or the permanent savings target more at mobile I'd assume and then it's I assume it's also more Americas and you just just any details you're able to discuss at this point.
A more mobile and process and.
Probably want to comment on the geographic part of it.
Fair fair, Thanks, I'm, sorry to ask another one win but yeah I guess since it's such a big piece of the growth here up how off of these things service I mean, when thinking about the big main rotor bearings visit a kind of five to six your timeframe 10, 15, I didn't know it varies a lot, but just to give us a sense for.
What the repetition is out some of these earnings and then if it's still more bearings content versus lubrication any kind of details there would be would be great.
Yeah, very very heavy bearings.
I'm still small and the other product categories, but the opportunity for US there are definitely hopefully not five years because.
Warranty periods are typically a three to five years I would say more like double digits. So a good out 10, so I mean for us it's very very heavy.
Oh in mix, because we haven't been in the market that long, but expect that over the next decade to two decades to to become a better mix of aftermarket and.
Well again, but probably still.
Five years from now before we're talking about the aftermarket interest in a sizeable right.
Got it got it extremely helpful. If I could just sneak one last one and when we're thinking about India. Obviously April may really really tough, but just exiting the quarter, maybe or early July I guess, what kind of a run rate, where we see an agent growth for India specifically.
I'd say still down double digits year on year.
In the June July timeframe. So just some upside for that to continue to improve sequentially, but a pretty earlier comments would not expect India it'd be an outlier and the comments of being down year on year for the rest of the for the rest of the year.
Understood. Thanks, so much guys.
Thanks, Chris.
Thank you I will never be trying to call it back for any additional closing remarks.
Okay. Thanks, Anna and thank you everyone for joining us today, if you have any further questions. After today's call. Please contact me again my name is Neil Frohnapple and my number is 234 to six two to three ones. There. Thank you in this concludes our call.
Ladies and gentlemen, thank you feel participation you may now disconnect.
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