Shelly M. Chadwick - Treasury & Vice President-Investor Relations Richard G. Kyle - President and Chief Executive Officer Philip D. Fracassa - Executive Vice President and Chief Financial Officer.

David Raso - Evercore ISI Stanley Elliott - Stifel, Nicolaus & Co., Inc. Ross P. Gilardi - Bank of America Merrill Lynch Eli Lustgarten - Longbow Research LLC Samuel H. Eisner - Goldman Sachs & Co. Steve Barger - KeyBanc Capital Markets, Inc. Justin Laurence Bergner - Gabelli & Company Lawrence R. Pfeffer - Avondale Partners LLC.

Good morning. My name is Mia, and I'll be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's Second Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. Thank you. Ms. Chadwick, you may begin your conference..

Thank you, Mia, and welcome to our second quarter 2016 earnings conference call. This is Shelly Chadwick, Vice President of Treasury and 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 234-262-3223.

Before we begin our remarks this morning, I want to point out that we have 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 Rich and Phil before we open up the call for your questions.

During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone an opportunity to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations.

Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website.

We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company. Without expressed written consent, we prohibit any use, recording, or transmission of any portion of the call.

With that, I'd like to thank you for your interest in The Timken Company and I will now turn the call over to Rich..

Thanks, Shelly, and good morning, everyone. We appreciate all of you joining us today. I'll provide some overall color on the quarter and how we see the balance of the year, and then we'll have Phil get further into the detailed numbers.

Given the difficult global conditions of most of our end markets, we are very pleased with the results that we reported today, and the progress that we made on our initiatives during the second quarter.

Revenue for the quarter was down 7.5%, coming in lower than we expected, with rail, general industrial, North America and wind all a little softer than we anticipated.

Despite the markets, our operational excellence, outgrowth and capital allocation initiatives offset the majority of the revenue impact and we showed good improvement sequentially on margins. Let me hit on several of our accomplishments from the quarter. Our operational excellence initiative, our customer service and product delivery remained strong.

Our working capital management is good, which is contributing to our strong cash flow. And we continue to advance our manufacturing footprint. We completed the closure of a bearing plant in England in the second quarter, and we have two additional plant closures in progress.

Our new Romania plant is on track to be in production in the first half of 2017, and when complete, will provide an expanded metric product offering with new process capabilities and a very competitive cost structure.

Additionally, our multi-year initiative to drive efficiency across our enterprise, while at the same time we are increasing our engineering and sales resources, continues to net reduce our SG&A costs. In regards to outgrowth, organically, we are navigating these depressed markets very well. Our application pipeline is strong.

We are managing price well. We're winning new customer applications. And we continue to invest in differentiating our products and service. Inorganically, our Belts acquisition is dealing with a challenging ag market, but we are delivering cost and channel synergies in the business, and we expect to expand margins as markets stabilize and improve.

Inorganically, we're very excited to have closed on the acquisition of Lovejoy earlier this month. Lovejoy is a North American leader in couplings. Lovejoy has a full industrial coupling product offering, and we are particularly strong in jaw couplings.

Jaw couplings are used across many industrial markets and applications and are a critical component to power transmission system performance. Over half of Lovejoy's revenue goes through bearing and power transmission distributors, so there's significant channel and customer overlap between our businesses.

The business will become part of the Process Industries segment. Short term, the business will mix us up at the gross margin line, but will mix us down at the EBIT line. The difference is due to SG&A, as the business comes to us with a significantly higher SG&A level than what we run across the corporation or Process Industries.

We will work to systematically improve that as we've been doing across our entire enterprise with the expectation that over time Lovejoy will contribute at or above our targeted Process Industry margin levels. We will also work to expand Lovejoy's penetration in heavy industry applications where Timken has a strong presence.

And we will continue Lovejoy's tradition of technical and product leadership in the coupling space. As I started the opening, we're excited to have completed this acquisition and we're confident in our ability to both grow the business and expand margins. In regards to capital allocation, our balance sheet and cash flow remained strong.

Our credit rating was upgraded by S&P in the quarter. We paid our 376th consecutive quarterly dividend and at today's stock price, we're yielding over 3%. We purchased over 1% of the outstanding shares of the company in the quarter and are close to 3% for the year.

And after the Lovejoy acquisition and the CDSOA receipts, we're at the low end of our debt-to-capital range, giving us the flexibility to continue to pursue attractive opportunities. All that resulted in $0.55 of adjusted earnings per share in the quarter, down $0.02 from prior year.

We sequentially improved our EBIT margins to 10.6%, primarily from improved cost and mix. And we continued to strategically and operationally improve our company for the long term, positioning us for better market and financial performance.

In regards to the outlook, we did not see any sequential improvement in the quarter in our markets to build our confidence in revenue for the second half. There remains a great deal of uncertainty in many of our end markets, and we are taking a more cautious outlook for the second half of 2016.

We are now forecasting a 6% decline in revenue for the full year, inclusive of the six months of Lovejoy revenue. We are holding earnings per share guidance – adjusted earnings per share guidance for the year at $1.90 to $2.00, primarily as a result of our operational performance, as well as our first-half share buyback options.

With that, I'll ask Phil to take you through more detail on the quarter and the outlook..

Okay. Thanks, Rich, and good morning, everyone. I'm going to start on slide 10. For the second quarter, Timken posted sales of $674 million, down 7.5% from last year. Currency was negative 1.7% in the quarter, while acquisitions net of divestitures added 3.2%. Organically, sales were down 9%.

As Rich indicated, we saw a further deceleration in the quarter across most of the industrial end markets we serve. This was offset partially by continued growth in automotive. On the bottom right-hand side of this slide, you'll see our geographic performance.

Sales in North America were down 6% from last year, but this includes the recent Belts acquisition. When you take out the net impact of acquisitions, sales in North America were down roughly 12% organically, driven by broad weakness across most mobile and process end markets.

The biggest exception was automotive, where we continued to see year-on-year growth from net new business launched last year. Excluding currency, sales were down 6% in Europe, 4% in Asia, and 9% in Latin America. Let me touch on each of these briefly.

In Europe, results were driven mainly by lower demand in aerospace, automotive and heavy industries, which were somewhat offset by growth in share gains in wind energy. In Asia, we saw declines in wind energy, as well as industrial distribution, while rail was up in the quarter.

And Latin America's results reflect continued broad weakness across that region. On slide 11, you can see that our gross profit in the second quarter was $182 million, or 27.1% of sales, off 110 basis points from last year, as lower volume and price/mix were only partially offset by favorable material and operating costs.

SG&A expense in the quarter was $110 million, down $16 million from last year. The decrease reflects our ongoing cost reduction initiatives, lower discretionary spending and the favorable impact of currency, offset partially by SG&A that came with the Belts acquisition.

In the quarter, SG&A was 16.4% of sales, down 90 basis points both sequentially and year-on-year, despite the lower revenue. Below the SG&A line, you can see that we had restructuring charges of around $3 million in the quarter related to our ongoing cost reduction initiatives. We also recorded $6 million of income from CDSOA.

This distribution from the U.S. government relates to bearing anti-dumping cases from prior years and is in addition to the amount we posted in the first quarter. Our second quarter EBIT was $73 million on a GAAP basis.

When you back out the adjustments shown on this slide, adjusted EBIT in the quarter was $72 million or 10.6% of sales, compared to $80 million or 11% of sales last year.

On slide 12, you can see that the decline in adjusted EBIT was driven by lower volume, price/mix and currency, offset partially by favorable material and operating costs, as well as lower SG&A expense. On slide 13, you'll see that we posted net income of $45 million or $0.57 per share for the quarter on a GAAP basis.

On an adjusted basis our EPS came in at $0.55 per share, down $0.02 from last year. Note that earnings per share benefited from share repurchases over the last 12 months, including 1 million shares repurchased during the second quarter. Our GAAP tax rate in the quarter was 31% compared to 43% a year ago.

On an adjusted basis, our tax rate was also 31%, which was essentially flat with last year. We expect our adjusted tax rate to remain at this level for the rest of 2016. Now turning to slide 14; let's take a look at our business segments starting with Mobile Industries.

In the second quarter, Mobile Industries' sales were $368 million, down 5.4% from last year. Currency was negative 1.5% in the quarter, while the net benefit of acquisitions and investitures added 3%.

Organically, sales were down 6.9%, driven by sizeable market-related declines in rail, off-highway and heavy truck and lower aerospace shipments, offset partially by strong growth in automotive. In rail, the decline was driven by North American freight, and in off highway we saw declines across mining, ag and construction.

For the second quarter, Mobile Industries' EBIT was $35 million. Adjusted EBIT was $38 million or 10.2% of sales compared to $37 million or 9.5% of sales last year. The slight increase in adjusted earnings was driven by lower material and operating costs and SG&A expense, mostly offset by lower volume, price/mix and currency.

Our outlook for Mobile Industries is for 2016 sales to be down 6% to 7% in aggregate. Currency is expected to be negative 1.5%, while the net impact of acquisitions should add roughly 2%. So organically, we're expecting sales to decline roughly 7%, driven by lower off-highway, rail and aerospace demand, offset partially by growth in automotive.

Now let's turn to Process Industries, slide 15 shows that Process Industries' sales for the second quarter were $306 million, a decrease of 9.9% from last year. Currency was negative 1.9% in the quarter, while the benefit of the Belts acquisition added 3.4%.

Organically, sales were down 11.4%, reflecting declines in the industrial aftermarket and heavy industries, which was driven primarily by oil and gas, metals and power generation. This was offset partially by higher military and marine revenue in the quarter. For the quarter, Process Industries' EBIT was $47 million.

Adjusted EBIT was $48 million or 15.6% of sales compared to $58 million or 16.9% of sales last year. The decrease in earnings resulted from lower volume and price/mix, partially offset by lower SG&A expense and the benefit of acquisitions. Our 2016 outlook for Process Industries is for sales to be down 5% to 6% in aggregate.

We expect acquisitions to add around 4%, which includes Lovejoy, and for currency to be negative 2%. Organically, we're planning for sales to be down 7% to 8%, driven by declines in the industrial aftermarket and heavy industries. Turning to slide 16, you'll see that net cash from operations was $156 million during the quarter.

After CapEx of $26 million, free cash flow for the quarter was $129 million, roughly double the amount we generated last year. This was largely the result of $48 million of CDSOA distributions received during the quarter, as well as lower tax payments and good working capital performance.

Looking at our balance sheet and capital allocation, we ended the quarter with net debt of $476 million or 26% of capital. Note that the Lovejoy acquisition was announced on July 8. If we pro forma the acquisition at June 30, we would have been just under 30%, the low end of our targeted range.

During the quarter, we returned $54 million to shareholders through the repurchase of nearly 1 million shares and the payment of our quarterly dividend. Turning to the outlook on slide 17, as Rich mentioned, we're lowering our revenue outlook to reflect the current environment we're seeing across the industrial end markets.

We're now planning for sales to be down roughly 6% in aggregate in 2016. Organically, we expect sales to be down 7% to 8% with currency negatively impacting us by 1.5% and acquisitions adding roughly 3% at the corporate level.

On the bottom line, we now expect GAAP earnings per diluted share to be in the range of $1.70 to $1.80 per share, reflecting the additional CDSOA income received since our last update.

Despite further softening in our end markets, we're holding our adjusted earnings per share guidance of $1.90 to $2.00 per share, driven largely by our operational excellence initiatives. We expect to generate free cash flow of around $230 million for the year, which is roughly 1.5 times adjusted net income.

This includes cash received from CDSOA, but also includes cash paid for restructuring. We expect CapEx for the year to come in around 5% of sales, which includes spending for a new bearing plant in Romania as part of our strategic footprint initiatives.

So in summary, we executed well during the quarter, protecting margins in a tough environment and generating strong free cash flow. Our cost-reduction initiatives continue to gain momentum, and we're succeeding in the marketplace and smartly deploying our capital, as evidenced by the Lovejoy acquisition.

We continue to demonstrate the capabilities of the Timken team and will continue to position the company for long-term earnings growth. With that, we'll conclude our formal remarks and we'll now open the line for questions.

Operator?.

Thank you, sir. And we'll go to our first question from David Raso with Evercore ISI..

Hi. Just really a big picture question, I mean, looking at the back half implied sales guide, it actually suggests no improvement year-over-year, if not even a little weaker year-over-year sales growth. And I'm just trying to think about the cadence of your end markets. You already said you didn't see any improvement sequentially.

But are there some things happening in the second half that may be justifies sort of trying to get ahead of 2017 a bit and taking inventories down further? Or just so we're not sort of going into 2017 with these little kind of paper cuts on the revenue guide as we go along during the year..

David, I'm not sure – my answer to the question would be no, I don't think that – that said, I think it's – we're just taking the run rate and the seasonality of the business and customer input and putting our best estimate out there.

Typically, look, organically, our business would incrementally improve a little bit sequentially from the first quarter to the second quarter, and it did not. And typically, we would step down a little bit from the second quarter to the third and the third to the fourth, and that's what we believe is going to happen.

And then you lay Lovejoy on that and we still, year-over-year, still have a couple of months left of the Belts acquisition as well.

So, outside of probably rail, which might be decelerating a little bit faster on a – is decelerating faster than what we anticipated, I would say it's just overall general weakness and normal seasonality and then our inorganic and penetration laid on top of it..

Okay, I'm just trying to think through the rest of the year in the sense of, is there a decision that need to be made over the next few months about 2017 in the sense of taking inventory down, maybe not being as exposed to disappointment on the distribution side of process? Just given the comps essentially get a little easier in the second half and you're looking at sales growth in the second half no better year-over-year, if not even a little weaker.

It feels like things are slipping when some folks would have thought, well, the comps get a little easier in the second half. And I was just curious to your thought process on the rest of the year.

Do we get more aggressive with taking inventories down or something that sort of fortifies the view on the 2017 more than just kind of plan it as it goes along, so to speak?.

I would say our assumption on inventory for our customers and our channel in this guidance is that they have been and will continue to ratchet inventory down proportionally with volume, but not do anything beyond that and not build anything and that we would do the same. So, in this – in our revenue guidance is no major destocking.

There is destocking because our organics were down 9% year-on-year, and we're forecasting it'll be down year-on-year against weaker comps. So we've got some inventory coming out, we'd expect our customers to take some inventory out, but that it would be roughly proportionate with normal seasonality and their revenue numbers – and our revenue numbers.

Does that make sense?.

It does. I guess I wasn't certain at the last couple quarters of some optimism a lot of folks had, including yourselves, maybe the second half could get a little better, or whatever it may be; that it's not transpiring.

Does it take a more proactive approach then to set up 2017 a little bit easier? Because obviously, you're doing a great job on the margins, and I think people are just trying to figure out what if sales are down next year? How can we think about growing earnings? What are the carryover savings from the restructuring? It's nice that you have a little more flexibility now in your balance sheet.

But, again, just trying to think about up earnings versus down earnings next year. In a way, a little more pain you take in the fourth quarter this year could set up 2017 a little bit easier. So I just wanted to have a – kind of a broader conversation on it. But it sounds like you're sort of playing it as you see it.

And inventory, probably come down a bit in the channel in the back half but there's no significant proactive let's get ahead of this into 2017.

Is that a fair assumption?.

Yes..

And hopefully the markets just pick up as 2017 begins..

Yes. And I would say in your comment about optimism maybe some we're seeing a couple quarters ago, I mean we've obviously gotten – we came into the year with a forecast of being down and have taken it down a little bit further. So I don't think we were coming into the year optimistic..

Yeah. You were on the lower end of the scale, I would say. You – there are other folks who had a little more second half improvement baked in than you, so I'll give you credit on that. But I was just curious if – just trying to make sure it doesn't start the year on the same way next year, start a little leaner. So, okay, I really appreciate it.

Thanks for the time..

Thanks, David..

Thank you..

We'll go next to Stanley Elliott with Stifel..

Hey, guys. Thank you for taking the question. Could you all talk a little bit about the structural costs that have come out of the business? You have kind of the bearings plant that you shutdown in the U.K., a couple more on the way, and then transitioning to the lower cost Romania operation next year.

What's that going to do from a structural cost savings perspective, if you'd care to elaborate on that?.

Yeah. We – obviously as you look across both the SG&A and on the manufacturing side, we've had a lot of cost reduction. Our cost of production is down a lot. Our SG&A is down a lot. Unfortunately, it's still lagging the impact of volume and currency from last year, and then also a little bit of mix. Feel very good about, though, our cost reduction.

And, obviously, with our ability to hold the guidance based on a lower revenue number, that's largely based on that confidence in our cost reduction. And as you look at next year, we'll have some carryover of the actions that we're doing this year, and we have a pipeline that's pretty full, so I would expect more next year.

If – and I would say if volumes just stabilize, I think you'll see us catch what we've been chasing down here pretty quickly. And I think you just see that just from the first quarter to second quarter with the 150 basis points, 160 basis points of margin improvement from the first quarter to second quarter without any help really from volume.

And then if we could get some – as these markets recover, which will happen at some point, if we see some volume recovery, I think you'd see some really strong operating leverage and the results of what we've been doing on the cost side, both in SG&A and operations, for some time.

But don't really want to get into the specifics on timing of Romania and all that, but just to say we've got a – we're delivering a lot on costs, we've got more coming, and we've got a good pipeline of conceptual ideas to continue to drive forward on it..

Yeah. Absolutely. And speaking to leverage, even on a pro forma basis, still kind of at the low-end of the range.

What are your thoughts with strong free cash flow this year, good free cash flow probably next year as well? Any more thoughts on how to think about that from a leverage perspective, be it additional acquisitions that you guys might pursue or repurchase or anything along those lines? Thanks..

Yeah. On the repurchase, Stanley, we'll probably – we'll continue to talk about that after the fact, so we'll update you on that quarterly. Phil stepped through the slide on our capital allocation framework and we're committed to our credit rating, committed to investing in the business.

We do have a relatively heavy year this year for both CapEx and restructuring which is our priority. We're also very committed to the dividend, and then after that, looking at both M&A and buyback.

And we do have some other things in the pipeline in regards – again nothing big, but from an M&A perspective, still optimistic that there could be some other Lovejoy or smaller type, but in that range or smaller type deals yet this year. And we'll update you on where we're at, at the end of the third quarter.

Phil, anything you'd want to add there?.

No. I think what we're probably obviously most proud of is that we've been very balanced in our approach, over the last couple of years, with acquisitions, organic investments, our dividend and the share buyback. And we ended the quarter with near the low-end of the range after Lovejoy and that gives us a lot of flexibility going forward.

And, as Rich said, we have a lot of alternatives and a lot of options to look at and we'll continue to evaluate them, make the best decision we can for the company and our shareholders and keep moving forward..

Perfect. Well, nice work on the margins guys and best of luck..

Hey, Stanley, I guess I would want to come back to your cost point one more time again. I've said now, for the third time, we have lot in process. A lot of what we're working on today we had in the plans for, even in what we expected to be better markets and expected to be margin expansion initiatives.

And with the volume erosion, obviously they've become more of margin preservation and recovery initiatives. But we do believe we've got long-term margin expansion opportunities with our cost reduction initiatives..

Absolutely. Thanks..

Thanks, Stanley..

We'll go next to Ross Gilardi with Bank of America Merrill Lynch..

Yeah. Good morning. Thanks, guys..

Hey, Ross..

I just wanted to get a better sense for what's going on in the industrial distribution channel. The customers you serve are different than some of the publicly-traded industrial distributors. But some of those guys seem to indicate that trends got weaker as the quarter unfolded.

And I'm curious if your experience was the same in that channel in particular, which of course is very important to Timken?.

Yeah, I would say, wouldn't say that it necessarily got weaker as the quarter went on, but the quarter itself was weaker than what we said. So as I talked about in the opening comments where some things came in a little bit weaker, my comment around general industrial really would have been in that space.

And then I also mentioned North America, I would say, was a little weaker in general than what we would have expected in the quarter. But I wouldn't say there was anything that June was materially weaker than May. There was a general softness across the quarter..

And if I could just add to that, Ross. The one place, too, that we're obviously looking at is Asia and China in particular.

That is an area where industrial distribution again, which is much more fragmented than North America or even Europe, we have seen that down pretty significantly this year and we are still seeing inventory come out of that channel. I think, as Rich said, inventory in North America has been relative stable, puts and takes but relatively stable.

But in Asia, where the heavy industrial economy is very depressed right now, we are seeing some inventory still coming out of that channel..

And what about auto? You guys ran through some of the puts and takes and how you're thinking about the second half of this year? I mean obviously you've diversified away from auto over the years, but you still have a fair amount of exposure.

Are you assuming auto kind of in the steady state for the balance of 2016 or are you factoring in some incremental weakness there?.

Our comps get a little bit tougher year-on-year as you go into the second half in automotive because we picked up some business the second half of last year, but we're basing that pretty much on the industry forecast which is pretty much steady through the second half, although also there's some seasonality there with July is usually a weaker month in automotive and December is usually a weaker month in automotive for part suppliers, certainly.

So industry forecast, which is pretty strong numbers and, but not a significant uptake either..

Yeah, I would just say, remember, Ross, that we did launch a new business which ramped in the second half of last year, so it was a little bit of unusual favorable demand last year just with the launch. So I think that's right, normal seasonality this year, what you would normally expect from North American light truck..

Okay. Got it.

And apologies if you said this in the beginning of the call, but are you assuming any accretion from Lovejoy in your guide now for the back half or is it more or less just neutral in the first six months?.

Yeah, I think neutral is probably the best way to look at it. I mean, obviously, it runs good margins, but with integration, which we don't normally adjust for in the first six months, it's usually very challenged. It will be accretive year one, but first six months I think neutral is the best way to play it..

Okay. So it's not like Lovejoy is what is enabling you guys to hold to guide? It's just....

No, it's more cost reduction than anything else..

Got it. Thanks very much..

Thanks..

Thanks, Ross..

And we'll go next to Eli Lustgarten with Longbow Securities..

Good morning, everyone..

Good morning, Eli..

Hey, Eli..

Just one clarification.

Lovejoy will all be reported in Process? Or are you going to split a little bit out?.

Yeah. I think it's going to be – substantially all is going to go through Process. I mean as you know, we segment by customer. They do have a few customers that we would view as mobile customers, but I would look at it as a 95/5 kind of split probably the best way to look at it..

Now, in the guidance, you changed obviously some of the volume numbers, particularly in Process was a big drop from minus 4% to – minus 5% organic to minus 7% to 8%, while being offset by some of the acquisitions and currency.

And when you talk about the profitability expectations you have for Process now that you have the lower volume, can you hold the second quarter or do we expect it to trail down a little bit? And can you maybe give us some color on what's exactly causing because that's a pretty big organic drop in the second half? It's just no (32:58) expected pickup of what's causing in the process market that big of an incremental change..

Sure. I'll start and then obviously Rich can jump in.

So when we look at April to July in terms of our estimates relative to process, I mean it was really predominantly – I think the predominant change was in distribution, again where we're just not seeing what we had expected back in April, and then couple that with some of the declines we're seeing in Asia and the destock we're seeing in Asia.

That was obviously – we took that down. And then also wind. I think we came into the year expecting wind to be up. Really as we sit here today, the markets I would say in China softened a little bit; we're still gaining share in Europe, but I think as we sit here today we'd expect wind to be more flat than up.

So those would probably be the two primary drivers in terms of change in the guide. From a margin standpoint, would not expect to hold the margins where they're at in the second half.

I think our full year guidance would imply that process margins would probably end the year in that 14% range, so in the second half we would see a step-down with a lower organic volume because, as you know, Lovejoy will come in with really no EBIT along with it.

So we'll have a – we will see a step-down in our margins in the second half of the year..

Okay. And can we get to do a little bit of that in Mobile also? I guess the organic is down 1%, but what can we expect profitability-wise? And was it just basically the weakness in industrial and rail falling more faster (34:33) that's causing the organic drop..

Yeah. In Mobile, I would say the top-line was really – the biggest contributor of the change from April to July would have been rail. And again, as you know, with North American freight markets down 30%, we're feeling the effect of that. We obviously have some growth initiatives outside the U.S.

We were up slightly in Asia in the quarter, but with the economic situation both in Asia and in Eastern Europe we're not seeing – we're not getting as much traction as we anticipated. So really rail was the biggest contributor to the change in the guide.

And then from a margin standpoint, I'd say, our full year guidance would imply – Mobile would be somewhere in that kind of 9% for the year. So again, with the organic decline, rail tends to mix us up in mobile. So with rail continuing to decline, we would expect Mobile margins to come down in the second half from the first half.

And we'll have lower production volume with our normal seasonality in Mobile and then again with rail coming down, those would be the two biggest contributing factors, again offset by the cost reductions..

And I can't resist to have to ask the question; can you talk about steel, and your buying of steel in your relationship and what you're getting from your old spin-off or what have you, and how that's affecting you? I mean steel costs are going up.

We've heard a little bit this morning that it is going up and sort of rolling back a little bit from what people have it.

Give us some idea what we can expect to be material costs? Can you offset it? And is it as big a change as people worry about or is it moderating at this point?.

Well, scrap prices for us have definitely gone up. And as you know, Eli, we've got a mechanism there with a lot of our OEMs that that gets passed through both favorable and unfavorable for us. And we do get some timing benefit – or not timing coming (36:24) from that, but would not see the increase that we've seen year-to-date.

We've got that factored into the guidance and don't see it as a major issue. Steel prices going up has generally been a U.S. phenomenon. A lot of our steel and revenue was outside the U.S. And I think we've got it covered in the guidance, and it's – obviously it was a big favorable year-over-year for us in the first part.

We had that moderating – first part of the year, we had that moderating. In the second half, it'll probably moderate a little bit more. But I think we've got it covered..

So – but are prices going up just a little or a lot? Or how much do you have to pass through? And is distribution just taking it or are they able to pass it through?.

Well, they – I mean our prices on the surcharge mechanism would have been down in the fourth quarter, down again further in the first quarter, kind of moderating in the second quarter; will probably start to go up a little bit in the second half.

On the distribution side, I'd say, we didn't move the price really on the way down and probably would – just as we sit here today, wouldn't expect much on the way back up, either. It – so, I mean, we obviously always look at that. We've got a lot of the business that is priced at time of order.

And again, if we saw something more dramatic, we could make some moves there, but it hasn't been material enough..

And just a quick kind of question. The tax rate this year is at 31%.

Does it change much next year? And what happens to interest charges through the rest of this year and into next?.

I'm sorry.

The question was on interest?.

Interest charges, yeah.

And the tax rate for next year, would it be similar to this year?.

Yeah, I mean, we'll guide to next year as we get closer to it, but I wouldn't expect a material change in the tax rate next year. We'll be 31% for the remainder of the year. I think interest will run at about $8 million a quarter of interest expense, and I would expect it to be in that range for the rest of the year.

Again, it may be up slightly, but keep in mind, a lot of the Lovejoy running real strong free cash flow for the year. And then with the CDSOA receipts we received, obviously, keeping the leverage pretty close to where it was at the end of last year, so I wouldn't expect interest to go up materially.

And I think the second quarter is probably a pretty good run rate for the rest of the year, plus or minus $100,000 – a few hundred thousand..

Okay. Great. Thank you very much..

Thanks, Eli..

And we'll go next to Sam Eisner with Goldman Sachs..

Yeah. Good morning, everyone..

Good morning, Sam..

Hey, Sam..

So just on the cost, I know that you guys started out the year talking about I think around $30 million of raw material tailwinds on a year-over-year basis and $30 million of cost-out, so a combined $60 million.

Can you give us an update of, one, does that number still hold? And two, where you stand on that particular take-out?.

Sure, Sam. Yeah, when we came into the year, we talked about $60 million year-on-year, and some of that was carryover from last year and there were some new cost reductions. And I'd say as we sit here today, obviously, our ability to hold the guidance for the full year, we're generating cost reductions in excess of that.

And I'd say – and material's still a positive, obviously, despite the comments Rich made relative to scrap prices. I mean, material, we are still generating material favorability and still expect to generate material favorability for the year. As we sit here today, I'd say the total – the total cost reduction target was $60 million.

It's probably closer to $90 million as we sit here today. And, frankly, that's how we're able to hold the guidance for the year. We initially talked about that $60 million being split between kind of one-third, one-third, one-third material, manufacturing, and SG&A.

And it's probably holding to that same split, maybe a little bit more SG&A relative to offset some of the material, but kind of in the same ballpark..

That's super helpful. And so then you guys commented before a little bit about pricing. I may have missed the comment. I think in your prior guidance, you had included about 50 bps of pricing headwind.

Can you give an update of where pricing stands today? I think with FX moving around a little bit, you had commented that competitors were being a little bit more aggressive on price.

So where does the pricing environment stand currently?.

I'll make a couple of comments before I get real specific, but that – one, I'd say, we're managing it well. Price cost is definitely favorable for us. And then if you look at the last 18 months to 24 months in our margins, there's been four challenges with our margins, volume, currency, mix, and price.

And as you look across that, I would certainly rank price as the smallest of the four. Last year was a lot of challenge with currency, a little bit of volume. This year is a lot of volume challenge and then mix has been working against us a little bit over that whole time.

All that being said, it is a – price has not been a lever we've been able to pull to make up for any of the other three. It's a tough market out there. All of our customers businesses – for the most part, automotive and a few pockets aside, most of our customers' businesses are down.

So, it is a tough pricing market and I'd say we're probably going to be closer to 100 bps on price than 50 bps, but I think we're managing it well. And our focus is to continue to manage it well and drive the cost reduction and we've got to claw back the margin that's been hitting us from all four factors..

Got it. Also very helpful there. On manufacturing levels, inventories are relatively flat on a sequential basis. I think last quarter you had commented that there was roughly 100 basis point headwind to your Process margins because of under-absorption.

Can you maybe comment on where manufacturing levels were in the second quarter and how you're thinking about manufacturing kind of phasing between third quarter and fourth quarter..

Yeah, I'd say production levels were probably up a little bit in the second quarter. A couple drivers there was obviously to meet seasonal needs. We also built back some safety stock levels in certain parts of the business and building some inventory to support the closure of the bearing plant in Virginia we announced earlier in the year.

So I'd say production levels were up slightly from the first quarter and obviously year-on-year as well. But I wouldn't say, it didn't have a material impact on margins in the quarter..

Well, maybe just to sneak one more in here. How is July trending? (43:18) telling us before that no major changes from June or May to June, curious with four days left in the quarter. So, July is trending. Sorry, four days left in the month, thanks..

Obviously, we take every data point we can before we provide the guidance for the year, and I'd say up through yesterday morning, everything's trending for us to be down slightly organically, sequentially, which again would be our normal second quarter to third quarter trend..

Got it. Thanks so much..

Thanks, Sam.

Next question?.

We'll go next to Steve Barger with KeyBanc Capital Markets..

Hi. Good morning, guys..

Good morning, Steve..

Hey, Steve..

When you add in Lovejoy to how the older acquisitions have evolved, how big is the Mechanical Power Transmission portfolio at this point from a revenue standpoint?.

It would be over 10% of the revenue of the company after you put Lovejoy in..

If you think about that as a separate segment, does margin look more like Mobile or Process?.

Well, I don't really think about it as a segment. And there's some variation in there. And I would say, overall, if you look at the EBITDA since more of it's been acquired, it would be – it would – there's parts of it that are mixing us up, there's parts of it that are mixing it down, and it would be about in line with the corporate averages.

And obviously there's Mobile parts to that business and there's process parts. So most....

Sure..

...of what we've bought at this point, if it had a – we have felt would run largely within the margin profile that we guide. So with the Belts acquisition, there's a big chunk of that that's mobile that we would expect to be in that 10% to 13% range. There's a chunk of that that's Process that we'd expect to be closer to 20%.

And as I said earlier, with Lovejoy, with the vast majority of that being Process, we do expect that to mix the company up in time; certainly not in the first 12 months but in time..

Got it.

And I understand you don't think about those businesses as a unit, but in general, do they grow faster or slower than the legacy businesses in this environment?.

I would say they are – probably have some of the same end market growth fundamentals, but would have different cyclicality. And certainly if you look at our revenue performance, they are performing generally better today than what the tapered roller bearing business, or product line I should say, would be.

Going back to the first part of your question as well, I would also say a big part of our – there's a cost play on the synergy case of the mechanical power transmission acquisitions, but the other big part of this – of all the recent acquisitions is mixing them up by increasing their penetration through the industrial distribution.

Very similar to our bearing product line, these product lines have significant margin differences between what they sell through to large OEMs and what they sell through to small OEMs and to end users and the aftermarket through the distribution channel.

So a big part of that is putting a bigger package together, increasing the sales, converting more end users to replace whoever's product with our product.

And it's not a fast process, but we started – it's something we started several years ago and we're very optimistic that we're making inroads on that and, with time, we'll be able to mix the margin profiles of these businesses up very similar to what we did with the bearing business over the last 10 years..

Right..

Hey, Steve, this is Phil. I just wanted to jump in with a data point just that clarify. So when we talk about Mechanical Power Transmission, which would include our chain business, the belts business, the gear – the OE gear business, if you will, with Lovejoy it's probably closer to – with Lovejoy, I would say, closer to 15% than 10%..

So becoming a pretty significant part of the portfolio.

Is that, when you look at the deals on your desk, are they designed to build out the portfolio and just continue this process?.

I would say that and expand the portfolio we have as well.

So, obviously, while we do have a very small coupling line, we sell a few million dollars of couplings under the Timken brand today, but we'd certainly be interested in some market positions with couplings that are either have some geographic diversity to what Lovejoy brought us or some product diversity as well.

So, both incremental products as well as expanding within the product groups as well..

And last question on this, as the industrial malaise that we've been living through has continued, are you seeing multiples come down in general or can you talk about what you're seeing both, whether it's U.S.

or Europe?.

We'd say we've generally seen more reluctant sellers to move in a market that's well off peak EBITDA margins. So would not say we've seen any reduction in multiples. But what the multiple is? The multiple I buy (49:14) is well off peak and that's probably creating some difficulty and slowdown of transactions in general..

Got it. And last question, Phil. You guys have been restructuring to good effect for quite a while now. I'm sorry if I missed this.

How did you drive the big reduction in SG&A in the quarter? Where did you find those savings?.

Well, it primarily – was a variety of cost reduction initiatives across the organization. We had multiple things in the pipeline that we're working. But it was head count related, a lot of – a pretty sizable reduction in salary and head count in the quarter.

We also had some lower discretionary spending as we kind of look to manage our spending as we go through the year. And then obviously there's always – currency was favorable too. And then there's always puts and takes every quarter. There was probably a couple million dollars of various true-ups that came through in the quarter.

I wouldn't expect them to repeat in the third quarter. But again, would expect to – Rich had, in one of the slides, I mean, would love (50:23) to continue to generate really good cost performance as we go through the year..

Very good. Thanks for the time, gentlemen..

Thanks, Steve..

We'll go to Justin Bergner with Gabelli & Co..

Good morning, Rich. Good morning, Phil..

Morning..

Morning, Justin..

A couple of questions here, I guess for starters, the organic guidance came down more on the Process side than it did on the Mobile side. That's a little surprising just given that the Process side is more aftermarket-driven.

So I was just curious if you could give us any more clarity on why such an aftermarket heavy segment is sort of seeing a more material guide down relative to where you sit coming out of the first quarter?.

Yeah. Justin, this is Phil. Again, as I mentioned earlier, it was – there was a big chunk coming out of distribution. And as we got through the first quarter, we saw a little bit of – I would say, a little bit of inventory restock in North America, kind of factored that into our expectations for the year.

We did expect heavy industries to be down for the year. That's still going to be the case. As I mentioned, we expected wind to be up for the year. And again, a combination of soft markets and execution issues are really getting us more to flat in wind. And then in distribution, it's really softer industrial demand.

And keep in mind, while it is aftermarket, a lot of the products that we have going through distribution are serving those heavier capital markets so they would be bearings going into a steel mill, bearings going into power generation, oil and gas, even some mining markets would go through distribution and some Ag markets would go through distribution.

Those markets are under pressure. We're just – frankly, just not seeing the pull-through for the product in distribution globally. And then, the one thing I pointed out relative to Asia and China in particular, seeing some destock. Actually India's performing pretty well as an overall market. But in China, seeing some destock. So a combination of things.

But within the – when we think about distribution as being aftermarket, you always got to kind of go one layer beneath and really look at the markets that are served through that channel. And, for us, we do have quite a bit of heavy capital goods product going through that channel..

Okay. Thanks for the clarity. With respect to your growth and outgrowth versus markets and peers, I mean you mentioned that were some execution issues on wind.

I mean do you still see the sort of similar level of outgrowth granted against tough end markets that you saw earlier in the year?.

I think – as we're talking about, we use a lot of different data to triangulate how we're doing with that, as we – the best – there's a – generally the best is the lagging indicators of publicly-reported other bearing companies and what they report by segment and geography.

As we looked at the first quarter, we feel we stacked up very well, and our organic numbers stacked up very well to the bearing and MPT industry in general. As we look at the second quarter, internally, we're confident that we're doing well as well.

I think when you stack us up externally though, our mix is going to work against us a little bit more due to our North America position as well as our rail position.

So our 9% down may be not as – not quite as good as what we were looking at in the first quarter because North America and rail are definitely, in these industrial markets, down a little bit more than some other parts of the world and other markets. But nothing that gives us any concern about our market share position..

Okay.

And those wind execution issues, are those sort of minor and behind you?.

No, I would not say they're behind us. And we're working on them and focused on resolving them as quickly as possible..

Okay. One more question on my end, which is I guess a lot of this cost take-out seems to be linked to a higher restructuring expense; if I sort of have my numbers correct, now it's $0.45 in 2016 per your outlook. I guess that's up from $0.30.

Should we think about restructuring continuing at a high level? Or will it sort of, based from where you stand now, sort of come off significantly as we look beyond 2016?.

Yeah, actually, Justin, no real change in the outlook for restructuring. What you're seeing is when we're expressing it in terms of EPS impact, there was some guidance from the SEC on how to portray that. So that $0.47 is actually a pre-tax number versus the $0.30 would be an after-tax number.

So I think still roughly the same and would expect it to be the same. So about $35 million or roughly $0.30 after-tax, $0.45, $0.47 pre-tax..

It didn't come out maybe quite as clear on the walk because there's a tax favorable item, but certainly Shelly after the call can take you through that. And as Phil said, we haven't increased the restructuring spend for the year..

Okay, great. You're actually holding guidance without increasing the restructuring spend. That's definitely helpful clarity.

And then the CDSOA proceeds, that's $48 million for the year or will there be a little bit more coming in?.

Well, it's $48 million we received in April, another $6 million we received at the end of June. So the total for the year will be around $54 million or so, and that's kind of why we took the GAAP guidance up $0.05 was really to reflect that extra $6 million that came in in June..

Great. Thanks for taking all my questions..

Thanks..

We'll go next to Larry Pfeffer with Avondale Partners..

Good morning, guys. Thanks for squeezing me in..

Thanks, Larry..

Good morning, Larry..

So on the SG&A reductions, obviously $60 million last year turning towards $90 million this year.

How do that timeout across maybe looking at Q2 versus second half and then what the carryover into 2017 would be?.

Yeah, I mean, I'd say, Larry, in terms of the playing out throughout the year, I mean we knew of that $60 million, there was some carryover from 2015. So obviously, that's all there day one. So it was going to be more first half loaded versus second half. And I think that's playing out as expected.

Relative to 2017, I think we'll wait and provide more color on how that's going to impact 2017 and including anything additional we might decide to do probably at a later date..

Okay.

But there is some incremental SG&A cost-out coming in the second half of this year, correct?.

Yes..

Okay. And then, Rich, you made a comment on the step-down in revenues from 3Q to 4Q.

Would you expect EPS to be down sequentially as well?.

No, actually the third quarter to fourth quarter usually mixes us up a little bit, so....

Okay..

And Mobile is usually down a little bit in the fourth quarter. Process is usually a little stronger from third quarter to fourth quarter, so we get a little bit of mix help with the revenue, even though the revenue steps down a little..

Got you. Thanks for taking my questions, guys..

Thanks, Larry..

Thanks, Larry..

With no additional questions, I'll turn the call back to Ms. Chadwick for any additional or closing comments..

Thanks, Mia. Thanks for joining us today. If you have further questions, please call me. Again, my name is Shelly Chadwick, and my number is 234-262-3223. This concludes our call. Thank you..

And again, it does conclude today's conference. Thank you for your participation. You may disconnect at this time..