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

After speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. Mr. Hershiser, you may begin your conference..

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

Before we begin our remarks this morning, I want to point out that we have posted on the company's Web site presentation materials that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link.

With me today are the Timken Company's President and CEO, Rich Kyle and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions.

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 described in greater detail in today's press release and in our report 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 express written consent we prohibit any use recording or transmission of any portion of the call.

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

Thanks Jason. Good morning everyone and thanks for joining us today. We delivered an excellent quarter start 2019 with revenue up 11% margins up over 300 basis points and record earnings per share of $1.35. We organically grew more than 6% over prior year which was in line with our expectations.

We were up 8% inorganically driven by our 2018 acquisitions of Cone Drive, Rollon and ABC Bearings. All three acquisitions are off to excellent starts and we remain excited about the future of these businesses within Timken. Our bottom line performance was even stronger.

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

We saved several margin headwinds in the quarter and these included tariffs, a flood, material inflation, currency, and lower production levels due to reduced inventory billed from the prior year.

Margin improvement in the face of these headwinds is indicative of the strength of our portfolio as well as our ability to operate and deliver through a variety of market scenarios.

Emerge and expansion was achieved through mix with strong organic sales and process industries, positive price-cost across the company, cost reductions in both costs of goods sold and SG&A, excellent operating performance, volume, and acquisitions. We increased earnings per share by 34% for a record $1.35 in the quarter.

Free cash flow of $36 million was seasonally strong as we held working capital levels tighter than prior year on the strong EBITDA growth. In regards to capital allocation, we paid our 387th dividend purchased 210,000 shares and at the beginning of April completed the acquisitions of diamond chain.

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

I'll expand on the quarter and our outlook for the year through our three strategic categories of outgrowth, operational excellence, and capital allocation. First quarter from an organic revenue and pricing standpoint played out about as we expected.

While growth has moderated and we are planning for further moderation in the second half we realized over 6% organic growth year-on-year as well as 7% organic growth sequentially.

After two years of nearly all in markets and geographies expanding together we have moved into a market environment that has some flattened down segments but remain strong and provides opportunities for Timken to profitably grow.

From a pricing perspective we do expect to realize over 150 basis points of price and most of our price for 2019 is in our run rate at the end of the first quarter. From an outgrowth perspective we know that our final organic growth rate of 13% in 2018 stacked up well to peers and customers.

We believe when we look back on 2019's first quarter rate of 6% it will also stack up well. We are winning in the marketplace with our differentiated products, our engineering, our innovation industry-leading service and our people.

And our focus on expanding and profitable and growing markets like wind, solar, and food and beverage, as well as in places like India and China is delivering results. As we look at the balance of 2019, we're planning for slightly weaker sequential demand off of the first quarter than what we experienced last year.

That would result in a slight uptick in the second quarter and then modest sequential declines in the third and fourth quarters. As we have demonstrated the last few years the anticipated sequential decline in the second half does not imply that we will not grow again in 2020.

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

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

Additionally we will continue to drive market out growth initiatives throughout the year as we apply and extend our value proposition to new and existing markets. Repeating a point I made on the last call our mixes setting us up well for both revenue and margins in 2019. Our focus on operational excellence is also yielding strong results.

In the quarter we delivered improved working capital performance and contributed to margin expansion with improved productivity and our structural cost reduction initiatives. We are leveraging the investments we've made in our digital platforms. Our footprint, our supply chains, and our people and it’s showing.

Despite acquisitions coming in at higher SG&A levels we have continued to reduce SG&A as a percentage of sales as we have grown. Our footprint and capital investment initiatives continue to advance and deliver value.

Tariffs of material costs were up in the quarter but price cost remained modestly positive and we expect it to continue to remain positive through the full year. We experienced a significant flood during the quarter that disrupted our global rail operations. But our teams responded quickly to mitigate the customer and operational impact.

We expect that we will approximately hold the first quarter margins in the second quarter and then see some normal seasonal softening in the second half. That would bring us to about 16% margin for the company and above the 12% target we set for the full year for mobile.

Moving the capital allocation we are increasing our free cash flow outlook to the full year with the increase in EBITDA as well as moderating growth expanded margins and increased focus on working capital we expect better cash conversion this year as we consume less cash for working capital. 2018, acquisitions are all performing very well.

The management teams are in place and I am just as positive on these businesses today as when we purchase them. As you can see from the revenue and EBIT walks we are delivering on the integration and synergy plans and the businesses are performing at high levels.

In aggregate they are running above the company average for EBIT margins, above the company average for 6.4% organic growth in the first quarter much above the company average for EBITDA margins and they will be EPS accretive this year. We are pleased to have recently added diamond chain to the Timken portfolio.

The combination of Diamond and Drives Chain combines two North American chain leaders, greatly strengthens our position in the critical North American distribution channel, expands our power transmission portfolio and the higher growth Asia market, and provides significant costs energy opportunities.

Diamonds fit within Timken is strong and we are moving quickly to integrate management teams and sales forces between the two chain businesses. As we look forward we remain committed to our dividend and our internal CapEx initiatives as our top capital allocation priorities.

After that we will look to M&A, debt reduction or buyback to deploy our excess free cash flow. The bias will be for both M&A and we believe our pipeline is active enough to support further activity this year.

However, I would continue to expect that activity to be less in magnitude than what we completed last year and likely lower than our full year of cash flow providing the opportunity to also reduce debt or buy back shares. We expect buyback to remain modest in the second quarter.

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

Thanks Rich and good morning everyone. For the financial review I am going to start on slide 12 in the materials. Timken delivered a great first quarter and you can see a summary of our results on the slide. Revenue came in at 980 million up about 11% from last year. Adjusted EBITDA was $163 million or 16.6% of sales.

This margin is expanding 310 basis points year-on-year and adjusted earnings came in at $1.35 per share a new record for the company for any quarter and up about 34% from last year. Turning to slide 13, let's take a closer look at our first quarter sales performance.

We delivered organic growth of around 6.5% reflecting continued strength across several end markets and sectors most notably in our process industry segment plus the ongoing benefits of outgrowth initiatives and positive pricing.

Acquisitions from 2018 added about 8% net to the top line in the quarter and currency translation with the fairly sizable headwind negatively impacting revenue by about 3.5% due to the stronger U.S. dollar. Sequentially, sales were up over 7% from the fourth quarter of last year.

On the right hand side of this slide we outlined organic growth by region. So we are excluding both currency and acquisitions. You can see that most regions are up in the quarter organically. Let me touch on reach region briefly.

In North America our largest region we were up 6% led by broad growth and process industries as well as strength in aerospace offset partially by lower shipments and up highway. In Asia we were up 12%, as we saw continued growth in wind energy, distribution, heavy industries and rail offset partially by lower demand and heavy truck.

China and India are two largest markets in Asia were each up double-digits in the quarter. In Europe we were up 8% with notable gains in wind energy, rail and distribution and finally in Latin America we were down 11% as we saw declines across most sectors in the quarter.

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

As you can see in the first quarter we benefited from higher volume, price mix, improved manufacturing performance, lower SG&A cost and the benefit of acquisitions which were offset partially by higher material costs and the impact of currency. Let me comment further on a few of these items. As I mentioned price mix was positive in the quarter.

Pricing was positive in both segments but with more coming in process industries. Price cost was also positive for the first quarter despite material cost inflation and the impact of tariffs. On tariffs as planned we are more than offsetting the negative impact through mitigating tactics and pricing.

Our favorable manufacturing performance in the quarter was driven by improved productivity and the benefit of our operational excellence initiatives which more than offset the impact of moderating growth and cost inflation. With respect to SG&A, we continue to leverage our cost structure extremely well as we grow.

As a percentage of sales SG&A expense improved 120 basis points year-on-year. And finally our acquisitions from last year are contributing positively to our results adding 13 million of EBIT on a net basis in the quarter.

That represents an adjusted EBIT margin of roughly 18% on the acquisition revenue and that's after purchase accounting amortization. On slide 15, you'll see that we posted net income of $92 million or $1.19 per diluted share for the quarter on a GAAP basis.

Among the special items in the quarter was a $6 million six pre-tax charge for a property loss from storm related flood damage that impacted one of our U.S. rail facilities. On an adjusted basis we earned a $1.35 per share a new record for the company for any quarter and up 34% from last year. In the first quarter our GAAP tax rate was around 30%.

The higher tax rate was driven by a discrete tax expense in the period the bulk of which related to U.S. tax reform. Our adjusted tax rate in the quarter was 26.5% down from 27% last year and in line with our expectations. We expect to maintain an adjusted tax rate of 26.5% for the rest of the year.

Now let's take a look at our business segment results starting with process industries on slide 16. Process industry sales for the first quarter were 480 million up over 21% from last year. Organically, sales were up 47 million or about 12% with growth across virtually all sectors led by wind energy, industrial distribution and heavy industries.

We also saw positive pricing in the quarter. Acquisitions added over 13% of the top line while currency translation was unfavorable by almost 4%. Looking a bit more closely at some of the markets, in the distribution channel we saw growth in all regions except Latin America with the largest gains in Asia.

Wind energy was also up in the quarter with strong growth in both Asia and Europe and in heavy industries we saw a growth in North America and Asia with notable increases in metals, oil and gas, aggregate cement. For the quarter process industries EBIT was 106 million.

Adjusted EBIT was 110 million or 22.9% of sales compared to 82 million or 20.7% of sales last year. The increase in EBIT was driven by higher volume, favorable price mix and the benefit of acquisition offset partially by higher material cost. Process industry adjusted EBIT margin expanded 220 basis points year-on-year.

Our outlook for process industry for 2019 sales to be up 16% to 18% organically we are planning for sales to increase 6% to 8% unchanged from our prior guidance with the growth across most sectors led by industrial distribution and wind energy.

We expect price cost to be positive for the year and for process industry to adjusted EBIT margin to expand by around 200 basis points from 2018. Now let's turn to mobile industry on slide 17, in the first quarter mobile industry sales were 500 million up over 2% from last year.

Organically sales were up 9 million or just under 2% reflecting growth in the aerospace sector as well as the impact of positive pricing. Rail was up slightly in the quarter while off highway and heavy trucks were each down slightly. Acquisitions added almost 4% of the top-line in the quarter. Our currency translation was unfavorable by over 3%.

Looking a bit more closely at some of the markets, our growth in aerospace was in North America and mainly defense related. In rail we were up in Asia and Europe but down slightly in the Americas.

Heavy truck was down slight in the quarter driven by slight declines in Europe and Asia offset by some growth in North America and in highway we were down slightly in mining and agriculture and up slightly in construction but note that we had a relatively tough comp in North America highway in the year ago period.

Mobile industry EBIT was 61 million in the quarter. Adjusted EBIT was 66 million or 13.2% of sales compared to 52 million or 10.6% of sales last year.

The increase in EBIT reflects the impact of favorable price mix, improved manufacturing performance, lower logistics and SG&A cost and the benefit of acquisitions offset partially by higher material costs, mobile industry with adjusted EBIT margins were up 260 basis points year-on-year.

Our outlook for mobile industry as for 2019 sales to be up 1% to 3%. Organically we are planning for sales to be flat to up 2% compared to last year. This is below our prior guidance and takes into account a more moderate outlook for the rail and off highway sectors.

For the year we expect aerospace to be up, offset by flattish revenue across the other mobile sectors on a net basis. We expect positive price cost for the year and we expect mobile industry adjusted EBIT margins to exceed 12% with margins expanding over 150 basis points from 2018.

Turning to slide 18, you will see that we generated seasonally strong operating cash flow at 52 million during the quarter. After CapEx spending our first quarter free cash flow was around 36 million which was up 98 million from last year.

The increase in free cash flow reflects higher earnings and improved working capital management versus the year ago period. We ended the quarter with a strong balance sheet. Net debt was around $1.5 billion at quarter end or 47.5% of capital down slightly from the end of last year.

Net debt the pro forma adjusted EBITDA was around 2.1 times at March 31st also down slightly from year-end. You can see some of the highlights in regards to capital allocation at the bottom of this slide. Rich covered most of the items already so let me just make a few comments on the outlook.

We expect to spend roughly 150 million or less than 4% of sales on CapEx with most of spend aimed at driving growth and margin expansion. We will continue to pay an attractive dividend with respect to M&A. We're focused on integrating our recent acquisitions and looking for additional times.

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

I will now look at outlook with a summary on slide 19. We're planning for 2019 revenue to be up 8% to 10% in total versus last year. Organically we expect sales to increase 3% to 5%.

We see positive momentum and strong fundamentals in several end markets and sectors including industrial distribution, wind energy and aerospace and we expect positive pricing for the year. Our backlog supports our revenue guidance. Acquisition should add 6.5% to 7% to the top line.

This includes the acquisitions we closed last year as well as the recently announced diamond chain acquisition. And we expect currency translation to be negative 1.5% based on March 31 exchange rates.

On the bottom line based on our year-to-date performance and outlook for the rest of the year we now estimate that earnings will be in the range of $4.95 to $5.15 per diluted share gap basis excluding anticipated next special charges totaling roughly $0.20 per share we expect a record adjusted earnings per share in the range of $5.15 to $5.35 which at the midpoint is $0.445 above our prior guidance and up 26% from last year.

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

So in summary it was a great first quarter and year off to a great start. As Rich said our strategy is working and we will continue to focus on driving profitable growth, operational excellence, and optimal capital deployment. This concludes our formal remarks. And we will now open the line for questions.

operator?.

Thank you, sir. [Operator Instructions] We will take the first question from Stephen Volkmann from Jefferies. Please go ahead..

Hi, good morning guys..

Morning Steve. .

So maybe just a couple of things you threw a lot out there. But can you give a little bit more color I guess it's probably rail and maybe highway that was marginally lower when Rich when you said that the outlook was slightly lower in the second half.

Can you just provide a little color around what you guys are seeing in those markets?.

Yes, one that is correct. It would be off highway and rail and everything else largely some puts and takes but largely in line with where we are looking in a couple of months ago. On the rail side, little more complicated story there. Rail was up in the first quarter but it is looking a little softer for the second quarter.

As I mentioned we had a significant flood. We lost a facility in Tennessee or part of the facility in Tennessee was under water for about a week. No production equipment was damaged, but a warehouse which was primarily raw material on a global although mostly U.S.

but global rail operations was under water and we weren't able to get into the facility for over a week.

So that caused some scrambling and some effects on production as well as modest effects on sales we think in the quarter, the first quarter was a relatively modest impact but as we look at the second quarter we are a little lower than what we had anticipated in the second quarter as well and as we look since the quarter has been over we look at what's been happening in the rail industry, it looks like our numbers might be a little softer through the first half than the industry.

But we reflected that for the full year. If it is then I am very confident we will not lose any share long term in that market but our customers may have taken some actions and we are still sorting through some of that.

So I think we probably need a little more time on the rail side if we are being a little too pessimistic there and more of it was one time stuff and the market is stronger that we will obviously bode well for us in the second half as you know rail mixes up mobile and we were counting on rail to be a little bit stronger this year.

So that way I think we did a little more time because again the U.S. market looks pretty good and we're doing well outside the market in the first quarter as I said was up slightly. Off highway OEMs still growing moderating growth probably working on inventory more just like we are. No share issues for us.

I would say mining and construction a little bit better than AG for us. Second quarter looks good sequentially but a little weaker than last year and that's how we ended up choosing to forecast it that we would take that slightly weaker outlook into the rest of the year. So I'd say the demand for both those markets remain strong.

We're just being a little more conservative on the second half with some of the uncertainty out there. .

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

Very good. I would say again big wind market for us.

Wind was very strong and a quarter wind is one of our markets where we have good visibility to demand quarters out and I would say wind looks very strong for the full year which will drive a lot of the China numbers and then beyond that I would say more bullish on wind or I'm sorry on China maybe when we were getting a little nervous at the end of last year and to start the year.

I think we're seeing what you generally read about that China is coming back from that a little bit and the outlook looks pretty good in China. And the other thing I would say about China not just wind it is an area where we generally have longer lead time items and more order book visibility.

And it looks very good for the second quarter as well the third quarter..

Good color. I appreciate it..

Thanks Steve..

Next question comes from [Indiscernible] from Bank of America. Please go ahead..

Hey guys thanks for taking my actually my question..

Sure Mike..

Yes. I'm just curious can you guys you talked about how in the first quarter you guys took out a little inventory. We did see that in the cash flow you still put up good margin.

Can you just walk us through how you plan inventory in Q2 and maybe in the second half and how that usually compares to how you guys seasonally ramp up or kind of take out towards the end of the year?.

Yes. I would say with the moderating growth that we're expecting for the full year we would expect good year-on-year comps for inventory build in each of the following quarters. Obviously, that has the opposite impact from a production volume manufacturing cost standpoint but we've got that factored in.

So, I would say seasonally this year with also moderating growth we would expect to reduce inventory in the second half of the year. So, flat slightly up in the second quarter and then slightly down in the second half and generating very strong cash.

And with the sequential revenue that we see in the second half too, that's one of the reasons why seasonally we liquidate receivables typically in the second half as well and why our cash flow is weighted into the second half. So, very good start to the year. I feel very good about the cash outlook and really the probably the biggest risk.

The cash outlook would be second half sales being stronger than what we have modelled and that would probably be a good problem for us now..

And I could just maybe add, Mike, this is Phil. The deployment obviously with controlling inventory much but we dealt a lot of inventory last year. We talked about it throughout the year that put us in a really good position at the end of the year.

We're leveraging that now, if I can use that terminology and you're right when we're building less inventory or taking inventory out, it does result less cost absorption. But that's where we are seeing really terrific productivity in our facilities right now.

So, in a moderate growth environment, we generally see step-ups in productivity which help a lot. We're continuing to pursue operational excellence initiatives in our plans which are contributing.

And then finally, we had a couple of new clients last year on the mobile side of the house in Romania and Russia which are up the curve now and we're kind of through the initial growing change if you will in those plans and that's benefitting us as well.

So, it's while we are seeing less naturally less fixed cost absorption with the production volumes, we're up -- we're more than our setting, it was with productivity and other cost reduction initiatives..

I would add to that that the reason for confidence in the working capital side, when you look at the last three years, '17 an inflection year, strong organic growth, '18 very strong organic growth, two years where I would say our operational focus within the plans.

It's always balanced, always focused on safety quality, service cost, inventory, etcetera but skewed towards the service and capacity side to capture the market opportunity that we have in front of us.

And so, in that event you're doing more training, more hiring, adding of shifts but again we leveraged that well with the volume but as you look where we are today, we're in a much more balanced standpoint, much better focus on productivity and in inventory in addition to service and we're going to see the benefit of that through the course of this year..

Yes, that's helpful. And on the last question, just you guys kind of brought in some granularity with mining and construction being a bit better than Ag. Could you, you said the change in the outlooks more based on forecast but did you see anything within March or April that kind of made you that kind of prompted this slight tweak in the outlook.

And anything particular in March and April when you look at mining construction and Ag?.

I would say mining has been about where we would have expected, so I would say nothing there. And I would say as you look at the first half, a little bit lighter than what we would have anticipated back in February and then we're just extrapolating that out into the second half.

So, nothing in March/April necessarily per se but as you look what we shipped in the first quarter are what we believe we'll ship in the second quarter definitely in the other two segments of our highway but a little bit lighter than what we would have anticipated..

Thanks. So just lastly, I mean I think with the acquisition, I think you said $60 million sales for the full-year. Could you just help up how much that's up first 2018 and just how was to understand like the measures large. I think you mentioned you have the bias to more of a bolt-on M&A.

I understand it to be probably smaller scale of what we’ve seen in the past but where your stocks kind of trade in, I'm just curious how you guys are gauging that that's how the dynamic between having that bias more to the bolt-ons rather than your own shares where you guys are clearly operating well.

Margins are going up, cash flow is appearing better. Just help us understand that dynamic, thanks..

Okay. I think there are few questions in there on the diamond piece, I think the question was '19 sales versus '18 sales. I would say the diamond business in North America which is mostly what it is is not as high growth as the acquisitions that we did last year and it's two years into an industrial expansion.

So, I would say they're looking at growth rates that would be in line with what we would see in the company as a whole. And their higher growth happened in prior years similar to what we have seen. So, not a big delta in forward revenue and versus backward revenue or EBITDA that we saw in the '17 and '18 acquisitions.

Although the forward EBITDA will really come much more from what will be a pretty good synergy case between two businesses with a fair amount of redundancy that we can get at.

And the second part of the question?.

I'm sorry?.

On the buyback I would say that 1) we do agreed with your point that our shares are attractively priced, however I would say a part of the reason the shares are attractively priced is because we have been doing the acquisitions which is making our bearing package strong and is mixing this up in to regards to both growth as well as margins and also changing modestly but also changing our cyclicality.

So, we are looking at all those. And then, also I think if you look at the acquisitions to the point about diamonds trailing versus forward EBITDA, most of the business we look at have some element of industrial cyclicality and just like buying our stock that has to be taken into account.

And so I don’t think if we were looking at buying Groeneveld today, we would probably have quite the same revenue outlook that we had on in the forward 24 months that we've experienced in the 24 months that we bought it, still positive but slightly more moderate. And all those factor in.

So, we still like the share buyback and I think we -- our EBITDA multiples that we paid for these business both through organic growth as well as synergies have come down quickly. So, I think the headline multiple versus what's embedded in our results today are two very different numbers..

Thank you..

Thanks, Mike..

The next question comes from Chris Dankert from Longbow Research..

Hey, good morning guys, thanks for taking my questions..

Hey, Chris..

Good morning..

I guess first off, congratulations on the EBIT margin, really impressed of across both premises. I guess you counted a bit in the prepared remarks just saying you're looking forward call it more flattish sequential trends in the 2Q and then a bit of a taper into the back half of the year.

And I just want to put a kind of point on 3Q typically see the fairly similar EBIT margin to 2Q and you kind of called for some softening in that number.

Is that just conservatism or there's something discrete that we should be keeping in mind as we're modeling that out?.

I would say typically they're close, you're right it's not a big drop off but typically second quarter is our peak margin and peak EPS for the year.

You get into the third quarter you typically get into some OEM shutdowns in the U.S., you get into some European holidays and shutdowns and then obviously that's expanding a little bit further in the fourth quarter. So, I don’t think we have anything there that would be too unlike what we've seen on average over the last few years..

Got it, that helps.

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

So, any help there?.

Yes, Chris. I would say we're continuing to focus on leveraging our SG&A structure as we grow. And as we mentioned on the quarter, our SG&A was around 50.5% of sales which is down significantly from where it was a couple of years ago.

And so, we're focused really hard on controlling SG&A and mobile industries because it's really important to get those margins up, we're continuing to invest for growth and process industries. So, our SG&A is actually going up marginally and processed industries.

But from a target standpoint, it's probably something what will give a little bit more color on in terms of a long-term targeted range. But we feel like we're going to continue to leverage the SG&A cost structure.

And I would tell you as we're making the acquisitions rich alluded to an earlier most of the acquisitions are coming in with higher gross margins but also higher SG&A. And we're still able to bring that SG&A as a percentage of the sales down.

So, if you look in the quarter, I mean obviously most of the growth in SG&A absolute dollars basis was driven by the acquisition. Excluding the acquisitions, we were down and it was both controlling cost as well as lower compensation or incentive compensation expenses, well but we continue to look to leverage it as we grow..

Maybe playing outside and going back to the share buyback versus acquisitions in even the acquisitions are a part of that story not only the leverage but there is an operational piece of that where every acquisition we've done for last several years has a SG&A synergy piece to it where we look to improve the productivity of what may have been a $50 million or $70 million family-owned standalone business and operated more efficiently with improved digital platforms and we're doing that and we're seeing that.

So, now for the big part of the SG&A in the core and it's said we've done well with that as well but I think we still have a pretty active pipeline on of things to come that will improve our productivity if you will across SG&A..

Got it. Thanks so much for the color guys and congrats again on the quarter..

Thanks..

Thanks, Chris..

The next question comes from Joe Ritchie from Goldman Sachs..

Hi, good morning everyone..

Good morning, Joe..

Hi, Joe..

Hey, so maybe this touching base on the margins for just a second here. Obviously, great performance this quarter, you guys raised the guidance already by for at least 200 basis points of EBIT margin expansion in '19. One quarter in. I guess maybe just kind of parse out some of the puts and takes there.

Price cost expected to get better as the year progresses. Is there any other color you can give around there would be helpful..

Yes, if you look at the drivers at the margin improving the first quarter, maybe make some comments about the sustainability of it going forward. Prices largely done. Certainly there will be some more movements through the year.

And there is also some possibility of that coming down a little bit with material sur charges, that's been a little less up than what we would have anticipated. But we have a natural hedge for that; our cost and pass through.

So, I would expect that to hold certainly for the full-year and not to see dramatic changes on that through the balance of the year.

Or from a cost standpoint, I would say on the what I call the cyclical side of cost meaning steel cost going up, general inflationary cost, those have coming better, then what we would have planned on prior to the start of the year. And as we look at with moderating growth on our mitigating tactics, feel good that that will continue to be the case.

On restrucutal cost side, so when I both talked about some various things that we've done there to deliver in that or pipeline on that remains active. So, I think that all looks very good. Mix has been a big driver of that. And I believe as you look at the strength we see in process industries, the back log there, the visibility that we have.

That looks positive, certainly though the third quarter. The acquisitions have had some benefit on it on the EBIT margins and again see that as solid for the full-year. And then volume.

And I think again we've already hit on that that feel the process side is lower risk and there's certainly some upside and downside I think scenarios where you could play out on the mobile volumes.

But overall, and I assume guided to we feel the margin attainment that we're looking at is sustainable and we've obviously already completed April and have May and June in front of us and with that we've already got with May we got five months behind us a pretty firm orders and we look at the volume sides. So, I think it looks pretty good..

Super. My one follow-on question is just around mobile growth. And so, clearly turned up a little bit slower than expected, took the guard down for the year.

I know you guys don't typically like to talk about quarters specifically but to the extent that you can give any color around cadence because it looks like you're comp in 2Q gets significantly harder and so any commentary around cadence for mobile growth as the year progresses?.

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

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

Hi good morning..

Morning Joe..

You touched a little bit just the outgrowth that you've demonstrated I think particularly notable in process but could you talk a little bit more to some of the successes behind that the ability to maintain some of those gains and then the outlook for continuing to see some out growth relative to the industry?.

Yes. Well I'd say a couple things. One wind is certainly then continues to be a good story and going to be a very good story in 2019. We've talked with you Joe as well as others about behind that and well it's not factored in 2019. Certainly longer-term we are looking to become more than just a bearing supplier into the wind industry as well.

Staying on wind the other one that is newer to us but is been extremely strong since we completed the acquisition of Cone Drive is solar and the outlook it's a shorter lead time market a little more project-based than what we have with wind but through 7-8 months of [indiscernible] in the portfolio well over double-digit revenue growth levels there and a market that is projected to sustain that longer term.

Looking at the sheet marine is another area where I've seen not a high growth and we've got it in the neutral category but has been an area where we saw some significant growth and have a really nice market position and as you look over multi years it's been part of the growth story.

Aerospace is a segment for us that have been I would say from the 12 to 15-16 timeframe bit of an underperformer for us. We did the restructuring end of 14 beginning of 15. It's a long sales cycle. I think we are beginning to see the benefits of that today.

I believe we are outperforming the market in the aerospace sector and if you go back to 14-15 that would have been an area where we were underperforming. So that's even a bigger swing. Distribution in total and again both bearing business, acquisitions, geographic expansion, lot of things there. There is small wins and they are incremental.

But a big focus for us as a company to have more than our share of aftermarket demand for bearings coupling, chain, belt etc. and take that story around the world. We have been adding some people in sales people in inventory for some new geographical work in Africa.

It's very small base so it's – these aren't big numbers but it's a good growth outlook for us as well. So that's the sample and there will be a lot of others in that are $500,000 year to million dollars there but I think as you add all it together if you go into last few years we are doing pretty well..

Yes, maybe if I could just add Joe I mean and Rick talked about the markets but really efforts that we have been undertaking in regard to new product development over the last several years are really starting to pay dividends I guess for lack of better word.

We now have a complete full line of industrial bearings across all roller bearing types and these are products that you start out with relatively small shares we are picking up share gains in product for spherical roller bearing.

So, bearings serving general industrial markets as well as markets like [indiscernible] we talked about the metric taper bearing plant that we built a couple of years ago.

We are now seeing some shared gains on the metric side of house where we have the world leader in tapered bearings we have a relatively modest share in metric size tapered bearings and this new facility has given us the ability to outgrow there.

So as Rich said and known products that tends to be small wins but they definitely add up and you do see it more on the process industry side of the house certainly..

Another one I will go back to markets but feeding off of what Phil said food and beverage not a high growth market necessarily but a much different cyclicality and a good growth market.

We have done a lot there organically and our bearing portfolio as Phil talked about we have also with the acquisition of Cone and Diamond have built out an EDT on the bearing side complementing with our bearing package have put a complete portfolio together. I think it will be in the lubrication space in short order in food and beverage as well.

So you could go on more on that but that gives you a good feel for the types of things we're doing..

No I appreciate all those details.

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

I don't know that I want to go too far into that Joe because we're really not on the detrimental train right now. We are on the incremental outlook. So I would say everything that we're doing and the things I just talked about with gross cyclicality we are still in a lot of heavy cyclical markets.

So I mean we don't – there certainly be a day when off highway and rail are contracting again but we are changing the portfolio and in food and beverage we will not cycle with those markets. Solar still tied to capital goods. So it's still it'll grow but it still has some level cyclicality but that cycle is not tied to that.

From a cost standpoint we continue to take a lot of actions the variable [indiscernible] are our cost structure so I guess the only thing I would say on that the last 14 to 16 contraction we went down 20% to 25% in earnings per share. No two cycles are the same.

We've taken a lot of actions organically, inorganically to be better the next time around and we'll get more specific when we get to that point but we're fresh off a quarter of 7% sequential growth. .

Very good. Thanks very much. I appreciate it..

Your next question comes from [indiscernible] from KeyBanc Capital Market. .

Hey good morning guys.

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

Yes I mean I would say Steve if you look at the I think in the first quarter we did roughly a full year or year-on-year incremental of around I think 45% at the corporate level. I think our full-year guide would imply probably something closer to 40.

So I mean we would expect the incremental probably moderate a bit as we move through the year but just slightly and then so the rest of year maybe in that 40 maybe slightly below 40 range.

But still quite good and then sequentially as you walk first to second and then into the second half of the year I mean we would expect relatively I would say a relatively normal or consistent incremental decrement as the volume moves.

I mean obviously there's a little bit of mixed differential quarter-to-quarter but putting that aside relatively consistent. .

Thanks.

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

I would say April was good and May is going to be good. The only thing in the first quarter January maybe the first week of January got off to a little better start than what we would historically see but also December was a little weaker and we're talking millions of dollars of revenue. It's nothing material on the quarter.

So when you look from if you just for that and again I think that it's fairly typical for us in a market that's not quite as hot as it was in between 17 and 18 that we get a little more inventory management at the end of the year from our customers.

Just for that I'd say the rest of the quarter was normal and backlog in global distribution remains strong..

Yes I would just add the Rich's comments I think versus last year our global distribution backlog is up call it singles and actually the order books probably flattish from the end of the year. So still it's still quite strong and well supportive of our full year outlook..

Got it and one more if I can slide it in for North American rail I understand you lag the market due to the flood but can you talk through the trend you're seeing in the aftermarket domestically?.

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

[Operator Instructions] Our next question comes from Justin Bergner from G.B Research..

Good morning Rich, good morning Phil..

Morning Justin..

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

So, I would say wind has solidified for sure that wind delivered really good first quarter and the order book is continued to be strong.

Two, I would say from an outgrow standpoint we continue to build confidence of that this is going to be a multi-year phenomena not a 2019 phenomena that we continue to make traction on platforms that will be in production a year from now, two years from now. So and then yes I would say it's probably up a little bit but it's more we had it up.

So that's all good.

On the mix side I would say first the fact that process industries it was running 800-900 basis points higher the mobile industries and is the current growth engine of the company, and the fact that we have done more M&A work in that space clearly mixes up the corporation and then I think the other fact than the corporation really is look at the global bearing industry the fact that we are niche on automotive is a good thing and the fact that we are niche is in U.S.

pickup trucks is even a better thing. So there is that one.

Coming back to question on process industries I think are again outside of wind, solar is another part within that space I think are heavier mix to North America and China and wider in Europe is generally a positive for us when you look at peers and then from an end market standpoint it's all just I would say a pretty solid where we participate..

Thank you. Switching gears to the margin trajectory and the improved outlook for 200 basis points of margin expansion versus 100 basis points prior it seems like there is sort of five buckets that the improvements is falling under. I mean probably mix SG&A sort of manufacturing productivity and I guess external cost like raw materials and logistics.

I mean if I don't know if that's the right framework but if it's a regional framework could you sort of maybe rank orders which are those factors are more meaningful in your improved margin outlook?.

Yes I would throw in two orders. Acquisitions and volume.

And I would say mix and volume are the two biggest drivers but they are all positive and they're all contributing in some way and I think that's a positive and the other one that I would highlight we overcame a 3.5% headwind on currency in the quarter which is a pretty sizable one and it didn't drop through quite as negatively maybe as it has sometimes in the past but that's that inverts on a steps actually has the potential to be a favorable as well.

So for us to overcome that and bump the outlook shows you that quite a few of these others are [indiscernible]. So I'd say there's no one driver with the exception of every dollar of revenue in process industries at 22% margin versus mobile at 13 makes a fairly sizable difference in the companies mix..

Yes I would maybe add, just add Justin I would say pricing versus our prior guidance it's more or less in line.

I think you've outlined the items in Rich's comment I think as I think about it clearly mix has been good, the operating performance and the manufacturing productivity has been very good and I think inflation while it's there I think it's safe to say it's been a little bit more modest certainly on the full-year outlook than we anticipated and I would say those would be the bigger items at least as we think about them.

.

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

I would say for Cone and Rollon the margins are up modestly and the story there is organic growth and as I said the three acquisitions in aggregate are well above the 6.5%, 6.4% organic growth for the company.

So similar to our focus and process industries they're at very good EBIT and EBITDA margins and our focuses on growing them at those margins and certainly we get some leverage there but that's not really what the focus of them is about.

ABC is definitely going to be a margin expansion story but I would say six months in we've still got more work to do there to make that happen. It all looks very encouraging and positive but it'll come in and really frankly it's too small to move the needle on the corporate number anyway. .

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

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

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