Good morning. My name is Brian, 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 Second 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. It's now my pleasure to hand you over to Mr. Jason Hershiser. You may begin.

Thanks, Brian. And welcome everyone, to our second 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 website presentation materials that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are the Timken Company's President and CEO, Rich Kyle and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. 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 thank you for joining us today. Second quarter was another record quarter for Timken and I will start with some of the highlights before I talk about the revised outlook. We achieved $1 billion in revenue in the quarter up over 10% from the prior year despite the negative impact of currency. We'd strong organic growth in Process industries of 6% and slightly negative organic growth in Mobile industries. Wind, solar, aerospace, industrial distribution, marine and heavy industries all delivered solid year-on-year organic growth. We delivered record second quarter earnings per share of $1.27, up 14% from 2018. We achieved 15.5% EBIT margins in the quarter up 110 basis points from last year. And our trailing return on invested capital is up to 13.8%. Our incremental margins from last year were 26% despite unfavorable currency tariffs and most of the growth being in organic. In total, the four acquisitions we've completed in the last 12 months contributed slightly ahead of expectations for revenue and margins led by a very strong year-on-year growth and solar markets for Cone Drive. Our free cash flow of $135 million was excellent and year-to-date our cash flow is up $153 million from last year. All in all particularly given the challenging record comp from last year Q2 was a very good quarter for Timken. Quarter did however, coming lighter than we expected and we are reducing our outlook for the full year. So I'll break down the sequential decline in earnings and margins from the first quarter and then comment on the outlook. The first quarter set a very challenging comp at 16.6% EBIT margins and $1.35 per share. At the time we updated the full year guidance, we expected that the favorable factors from the first quarter would…

Thanks, Richard. Good morning, everyone. For the Financial Review I'm going to start on slide nine of the materials. Timken delivered a strong second quarter. And you can see a summary of our results on this slide. Revenue came in at $1 billion, up about 10% from last year. Adjusted EBIT was 155 million or 15.5% of sales, with margins expanding 110 basis points year-on-year. And adjusted earnings came in at $1.27 per share a new record for the company for the second quarter and up about 14% from last year. Turning the slide 10, let's take a closer look at our second quarter sales performance. We delivered organic growth of 2% reflecting strength across several markets and sectors, most notably in our Process industry segment, plus the ongoing benefits of our growth initiatives and positive pricing. Acquisitions added about 11% net to the top line in the quarter and currency translation with a headwind negatively affecting revenue by about 2.5% due to the stronger US down. On the right hand side of the slide, we outline organic growth by region, so excluding both currency and acquisitions. You can see that all regions were up in the quarter organically. Let me touch on each briefly. In North America, our largest region, we were up 1% led by broad growth in Process industries, as well as higher shipments in aerospace and automotive offset mostly by lower shipments in our highway. In Asia, we were up 5% as we saw continued growth in wind energy, distribution and rail offset partially by lower demand in heavy truck. In Europe, we were up 2% with modest growth across several sectors, the biggest contributor being heavy industries, partially offset by lower shipments in distribution. And in Latin America, we were up 1% as we saw…

Thank you. [Operator Instructions] We'll now take our first question from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.

Great. Hi. Good morning, everybody.

Good morning Steve.

Maybe we can start talking just a little bit. I think the reason the stock is down is it appears that there's a lot of leverage in your lower guidance. And the numbers you're given and I appreciate there's of lots of moving parts here. But numbers you're giving is 30 million less in terms of revenue and $0.35 less in terms of EPS. And I guess that people are trying to figure out sort of what negative leverage should look like at Timken at the new Timken and is there something sort of special going on here that makes this look maybe worse than it should be going forward? Any thoughts in that regard would be great.

Yeah, I'll start and let Phil come and after me. I'd say our – if you look our guide, our leverage to the old guide is poor, as you said, but the leverage to prior year remains quite good. And I think as we look at that we think it was it was a good quarter in the second quarter. It was a – it's a good outlook. It was a bad guide after the first quarter. And I think the margin expansion in the first quarter over the prior year was 310 basis points, the margin expansion in the second quarter was 110. And we think the 110 is more indicative of who we are heading into the second half. And we probably got a little ahead of ourselves on the first quarter guide. So Phil you want to comment?

Yeah, yeah, the only thing I would add, Steve is I think there are a couple of pieces in there as Rich indicated. So you're right, we took the sales guide down around 1%. So call it 35 million-ish in the midpoint of the EPS guide down would imply any bit reduction of roughly the same amount, really two pieces in there. Probably as probably two thirds of that is really just adjusting the margins for the base business or the guide, we provided a quarter ago. And then probably a third of that is the decremental if you will on the revenue guide down if you want to look at it that way. And as Rich said I mean, I think as we move first quarter to second quarter, we had a slightly different mix. As you saw on our outlook, we moved distribution a little bit to the left, we moved off highway a little bit to the left, we moved to the other services business a little bit to the left, from a market adjustment standpoint, no negative next from that standpoint. Obviously, we continue to take inventory out. And that's probably was a little bit more of a drag than maybe we anticipated. As we got through the second quarter, we looked at the second quarter and said, the mix, the margins are probably a little more reflective of the run rate going forward. And we sort of base the guide off that. And as Rich indicated, I mean, if you look at year-on-year and even first a second half I mean, the incremental is are our normal and actually year-and-year, they're quite good, particularly organically with the pricing we're getting, but I think off from an exceptionally strong first quarter. I think we had baked in a little bit too much margin a quarter ago.

Okay, all right, I can appreciate that. Thanks. And maybe the quick follow up then, just what are you seeing in terms of your distribution business? Because at least in the past and in some other industries we've seen things get weaker, distributors start destocking, they start pushing back on pricing. I think you might have mentioned both of those things in your prepared remarks. But is that part of what's hitting us kind of near term here or is that not really an issue?

No, I would say we saw a weaker sequential Q1 to Q2 in global distribution than what we would have liked to have seen. And that is definitely a factor in the reduction of the outlook for the second half. And it's also a factor in the margin. And in the deleverage from obviously, as you know that part of the business mixes up. Through the second quarter where we have visibility to it in North America and Western Europe, I would not say there has been significant destocking, we do have some significant destocking factored into the second half, where we have taken the outlook down more on a revenue basis which of off highway be the most. Certainly we are expecting for us to be hit from destocking activity in that channel for the second half the year.

Okay, great. And then just Phil, I think you said this, but I want to make sure I get it right. The base decremental, we should assume sort of 25%, 30% as a kind of a normal decremental?

No, I think what I was sort of – I think what I was implying was when you look at the guide down, we had about a third of that. Implied EBIT guide down was pushed probably in the revenue and the other two thirds on the base business. But looking year-on-year, I mean, the incrementals are quite good. So not really guiding to normal decrementals or anything like that, I just think just trying to point out that what, the guide down implied and then also for the year, and we look at the full year, the incrementals their implied in the guide as Rich indicated are quite good. Not only all in, but if you take the acquisitions out, which come in much lower the organic, incrementals are exceptionally strong.

Okay. Alright, thanks. I'll pass it on. Appreciate it.

Thank you.

Thank you, Steve.

We will now take our next question from Joe O'Dea from Vertical Research Partners. Please go ahead. Your line is open.

Hi, good morning. Sticking on industrial distribution, I think you said it was up slightly in the quarter, you've got the full year up mid-single digits. And so just any context around that and perhaps a better back half than what we saw in the second quarter, whether that was what you view is a little bit of contained destocking or any other color there.

Yeah, I think you have a right to we were up about low single digits in the second quarter. And again, that was Asia and North America, Europe a little bit offset by weakness in Europe, for the first half industrial distribution was up, mid-single digits. We do have it up again in the second half. But sequentially, we do expect distribution to be down slightly by second half versus first half, but still be up year-on-year off the comps we had this second half of last year.

Okay. And then you made a comment about when the marine and solar and aerospace still strong growth through the end of the year and then into 2020, could you talk about just a little bit of the backlog attached to that, the visibility in that in sort of comfort level with – we don't see much of a step down from to 2Q Process organic into the back half of the year. And so just what looks like a pretty decent setup for growth over the near term.

Yeah, most of those markets I rattled off are definitely are markets that have larger and longer backlog. So when the backlog is certainly strong through the first quarter of next year, at this point, I would say the same for aerospace and the same from rain. As you look at solar, that's not the case. It's a much shorter, lead time visibility, but the trend lines are good, and the confidence is good. And then as you get into some other, I'd say smaller parts of our market that we've been working to scale. There's some similar dynamics in there. As you look at the position we've been trying to build in the food and beverage industry and in robotics again small and don't have the order backlog that we would have in the ones that I rattled off. But trend lines are good. And we think we've got some nice market tailwinds on some of those that will certainly help offset what we're seeing an off highway and heavy truck.

Got it, thank you.

Thanks, Joe.

Thanks, Joe

We will now take our next question from David Raso from Evercore. Please go ahead. Your line is open.

Hi, good morning. One quick clarification if I missed it. The margin guidance for Process what's the update of margin gardens?

Yeah, I think for the full year, we would expect Process budget to be up about 100 basis points from 2018.

Okay, great. Thank you. Just trying to understand that the leverage question a little bit more, the second quarter the revenues – as much as you said things decelerate, it seemed like the revenues came in roughly where you thought is that a fair description? Not orders, but the revenues.

No, I would say from the first quarter a little lighter. Again, we don't guide to – we don't give quarterly guidance. But I think typically we would see a little more of a step up from the first quarter to the second quarter. And if you strip the Diamond revenue out, there wasn't a whole lot of movement from Q1 to Q2. So I'd say slightly less than what you would see with our normal seasonality.

Okay, so what I'm trying to figure is, we used to think of the second quarter margins were supposed to be similar to the first quarter, I think that was kind of baseline. That means the second quarter was like call it 12 million to 15 million of EBIT on this revenue number. And when I think it was a full year guide, it seems like the – if some of the revenue hit was in 2Q, two and the full year guide cut was only 35 million, it seems like you only took, I don't know 25 million, 30 million, maybe out of the second half of the year. But there's another 20 million to 20 million plus at least of EBIT taken out of the second half. So again, the decremental margin on the second half revenue take out is significant enough. I apologize. I'm still trying to understand the inherent leverage here. And I do appreciate the year-over-year incrementals look reasonable, but just on a – what you took out of the second half seems severe on EBIT for the revenue degradation.

Yeah, I would say to the guide, that is absolutely the case, but from the second quarter or the prior year. So if you look up off the sequential from the second quarter, it looks pretty similar to last year. Last year's performance was up the second quarter. And again, it looks as Phil said, pretty good incrementals off of prior year. So that is correct off the prior guide, but not necessarily off of history or the second quarter.

Yeah, maybe if I could maybe try and help on that David a little bit as well. So if you look first to second quarter, I think you're right, we normally do expect margins to the upper or flat out from the first quarter. And what we had as Rich indicated in his remarks, first to second quarter while revenue was up probably up a little less than what we had anticipated. And then on the EBIT line a couple factors at play, we did have a higher amount of distributor price adjustments, which again, we got it to 150 bps of pricing, still expect that, but some of the adjustments can vary quarter to quarter and they're a little more than normal. In the second quarter, which was a factor, particularly in Process, that's all Process, we took a lot of inventory out sequentially, as I mentioned, 20 million sequentially, from first to second, that was an impact on margin sequentially, as well and then obviously with Diamond Chain coming in a little bit slow on it. Again, I think that had a little bit of a negative impact as well. And a lot of that did hit on the Process side of the house. And as Rich said, as we looked at the mix in the second quarter and then the run rates et cetera, we felt the second quarter was a good base to carry into the rest of the year. And then again, on the guide, it really was two components, it was adjusting the margins, if you will, from what we guided a quarter ago on the total company and then layering in a normal decremental if you will on the revenue guy down, which would be if he had to split it probably in the two thirds to one third split you look at that full year EBIT change at the midpoint.

Did your margin guidance change on Mobile, though? And was kind of a vague guide before like higher than 12, I mean, first up essentially most of the margin cut was at Process. Did the Mobile margin, did it change?

It came down to slightly. We were guiding to above – we thought above 12 a quarter ago, now we expect it to be around 12 and again with the volume coming down and that sort of thing. It's I think we're margins are holding up pretty well prices coming in very, very strong, probably a little bit stronger in Mobile than we anticipated that helping as well. And then you're right we did, we did see a lot of margin changes, probably more on the Process side. But again, with the acquisitions hitting more in Process and Diamond Chain in particular, as well as some of the things I talked about relative to the distributor price adjustments and whatnot, all played into it.

And when I think of the inventory – sorry, the revenue reduction, the inventory reduction, I mean, again, it's only 35 million, 36 million revenue cut. I mean, would you describe most all that related to inventory adjustment your customers or any degradation there in business? It just doesn't seem like that big a revenue cuts. I'm just trying to understand what your customers are telling you for such a modest revenue cut. Any color from them on inventory, it's just a relatively small revenue number. And if it's accurate, that's great. I'm just making sure we don't walk into that's just a modest inventory reduction, there's no retail degradation at your customers in that kind of tweak.

I would say that tweak is our normal true up of our best estimate of the pluses and minuses that we see in our market. So there's some ups in there. So we have a higher outlook for rail within that 35 million. IRL look for win in much lower outlook for off highway certainly than where we started the year all of 35 million was off the second quarter. But we moved rail from up to down or I'm sorry, highway from up to a down seismically. So off highway we've been the most, but there's a variety of ups and downs within that including some mild destocking with the exception of off highway where we think the destocking is going to be a little bit more on off highway.

Okay, in the end of the day it sounds like if you add up your rail, wind and aerospace business, you're at least looking at 600 million plus of business that actually maybe had even a little better outlook than three months ago that would be offset for the other businesses to avoid a bigger revenue decline, 20% of the company almost or that? Not quite, but almost dashes a better outlook. Okay. I appreciate it. Thank you.

Thanks, David.

Thanks, David.

We'll now take our next question from Courtney Yakavonis - Morgan Stanley. Please go ahead. Your line is open.

Hi, thanks for the question. Just going back to the Process margin guidance to up about 100 bps for the year, given that margins were down in this quarter and sales are expected to be at a lower cadence on an organic basis for remainder of the year. Just wanted to understand what the puts and takes work to get you back to that 100 bps to the year. I think it's still implying some margin expansion in the back half. And I think had also call it out last quarter some increased SG&A in Process. So just wanted to understand, I think – you did talk about the overall business SG&A being flat, offset with some lower incentive comp. So just wanted to understand the differences between how that's in Process margin [ph].

Yeah. No, thanks. Courtney, great question. So yeah, on Process, we do expect margin to be up roughly 100 basis points for the year, which does imply that margins will stay sort of in the range of what we did in the second quarter, maybe slightly below that but it's kind of in that range. And that's really – again based on the mix we have and based on the run rate from here, I said, some of the items that hit us in the second quarter were timing, in particular, the distributor price adjustments, we don't expect that to recur, that will help us move into the back half of the year. And then obviously, we do expect good year-on-year growth in Process, as we move through the back half of the year. We would expect to be obviously up mid-single digits organically second half to second half. And that obviously helps from an incremental standpoint, all of which should – we believe will put us in a position to generate comparable margins as we move through the rest of the year and 100 basis points of expansion for the full year.

But given some of the headwinds that you'd seen from Diamond in the second quarter, is it fairly equal between the two quarters, how you'll see margins respond? Or is there anything you can help us to understand the sequential cadence?

Well, certainly we're expecting better performance than the second quarter for Diamond, which obviously, would help us and then as Phil said, we had some other things and in Process we like will also help us, but I think it's, I think it's roughly flat from first half to second half. So again, there's some puts and takes in there, but to get to 100 basis points for the full year you need flattish from first half to second half.

Okay, got you. And then, just on the comments on SG&A, I think last quarter you were talking about being down in Mobile and still continuing to have higher SG&A in Process, so just wanted to make sure that was still the expectation.

Yeah, so we're obviously working very hard to control SG&A, but Process is the part of the business where we are still seeing solid organic growth in several sectors, we're still trying to– most of our growth initiatives are targeted at that part of the business. So we did have some higher spend there, we're working hard to kind of control it on the Mobile side, just given where we're at, in that segment. So that that sort of offset Mobile. Process is a up a little bit. Mobile was down a little bit, corporate was down a little bit and the combination of the two got us to – if you take currency and acquisitions out in the mix we were roughly flat, but being up a little bit Process, not unusual, just given the emphasis on growing in some of those attractive sectors like wind and obviously, distribution globally.

And while your question was around the splits and as Phil indicated, I mean, we are basically holding the line reducing the Mobile and Process is coming up a little bit with the revenue. Companywide, we're leveraging SG&A very well. The acquisitions are largely – if largely come into Process, largely come in with higher SG&A levels than the company average. And we have been driving synergies and reductions across that bringing that back down, so leverage is both in Mobile, Process and the company remains pretty good.

Okay, thanks. And then just lastly on rail, I think that's one of the places where you raised industry finance. So just want to understand – probably you've talked about some softness in the second quarter, at least the second quarter was flat. So what your expectations are for the balk half and whether it's all related to the facility that was flooded last quarter.

Yeah, I think the way to look at rail is it continues to be sort of a tale of two cities, if you will. I'm in the North America – the North American business is kind of flattish, I mean, it's obviously doing okay, but more flattish. And we're seeing more growth in the Asia Pacific region. India in particularly was very strong in this past quarter. We're also seeing continued growth in Eastern Europe as we push our efforts there to enter new markets with our products. So I think as we move through the quarter, I think everything got a little bit better. I think North America, we were looking at it being soft a quarter ago, it's kind of flattish now. And then Europe and Asia continue to advance. So as we look at the business globally, we're sort of at a mid-single digit point now for the full year,

I would say the net of all of those that Phil about to, it's really driven, the positive is really driven by our self-help and our penetration of the Russian and Eastern European market, which we've been working on for several years, and is just performing year-on-year very nicely, again this year.

Thanks.

Thanks, Courtney.

We'll now take our next question from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.

Thank you. Good morning, guys.

Hey, Joe. Good morning.

So maybe just touching on Process margins again for the quarter and you've given a few reasons for why there were some headwinds this quarter. I was just wondering if you could quantify some of those things. So you talked a little bit about distributor price adjustments, Diamond Chain and then again just the confidence in how those things will then change in 3Q, 4Q to drive that 100 basis points in margin expansion.

Well, I'll comment on one of them and probably won't be as specific as what you'd like. But I would tell you that Diamond came in at closer to zero then Process is 20. So as you look at that, I mean, it's sequential it's significant. And again, that was really from the first two months of the year and we saw significant improvement and some of that would have been planned, we would have expected to come in at 20. I mean, we're doing a lot of things of pulling people off the floor for 401 K education, healthcare switchover and all sorts of things that happened in the first few months, so we didn't expect to be knocking it out of the park, but it certainly came in lower than what we anticipated, it was better in June and we expect a step up in the third quarter and I'll see Phil wants to qualify any of the others.

No, I think – some of that stuff, we don't we don't typically go into a ton of detail, but what I would say on the Process margin, so we were down 70 basis points year-on-year and which implied a call an 18% kind of all in incremental year-on-year and Process. Looking organically, we would have been north of 30%. And frankly, if I excluded currency and acquisitions, Process margins would have been up in the quarter. And then the organic volume was modest around 24 million, we've got a good growth, but – so these are, the margins would have been up. The organic incrementals were solid, maybe not quite a size we've been running. In that distributor price adjustment, coming into the year, we got into 150 bps of positive pricing across the company. And we did say, more in Process and Mobile is what we typically do. But in Processes it's typically two components, it's the base pricing coming in and then the various rebates and other adjustment mechanisms, which tend to be kind of smooth throughout the year, but they can vary. And the second quarter was a quarter where they were a little bit higher than normal, but no reason that we expect them to kind of normalize in the back half of the year. So we still believe the – we anticipated those adjustments coming through, quite frankly, they just came in, in a different time than we anticipated. So that was a meaningful headwind in the quarter. Again, as was Diamond, which we expect to improve and then the inventory delta year-on-year was quite sizable as well.

Again, I don't make excuses for the reduction in the outlook, but we grew Process industries with 21% margin, so to the degree it's pretty good. And we did that with acquisitions, we did that with organic, we did that with capital investment going in, we did that with tariffs, we did that with the stocking and we're talking about 70 basis points of margin.

Yeah, no question, I mean tariffs year-on-year were definite headwind. We're significantly more impacted on the Process side of the house with tariffs than we are in Mobile.

Got it, now, that's helpful. I guess, maybe just to follow on if going back to how you guys thought about the outlook reduction particularly on the Mobile growth side, I think that some of the things that we've heard from investors today is it perhaps the cut on the Mobile, organic wasn't enough? And so I'd love to just kind of get some thoughts on how you feel about this – again, inventory in the channel, what do you feel like the negative one is enough into the back half of the year just based on what your customers are saying?

Yeah, I think as we looked at Mobile outlook, we kind of go market by market. If you look at the automotive market is you know we're a little bit more focused there on North American light truck and global premium cars. So we feel very good about the demand situation in terms of that being flat for Timken. The aerospace tends to be longer cycle, it tends to be more solid order book a little bit more visibility into the back half of the year. And we feel really good about the outlook there. Heavy truck, as we talked about is – we did move that from flattish to down on mid-single digits. But given where the Class 8 builds are and our exposure across the world, I mean, that's one where we felt moving it made sense, but didn't feel like we need to move it anymore. And then with rail, we talked about rail, I think in the earlier question that being a global business and if anything the North American market there may be a little bit of upside there. But I think the wild card though, is the one that's most difficult to predict because it's very fragmented for Timken is off highway. And we did move it to the down high single digits. And again, that's mainly agriculture and construction driven move and at high single digits, at least, the customers of ours that have come out to date they would be quite a bit more than what they've got it down to from their end market standpoint. So we do feel like we've got some inventory adjustments built in. It's always difficult to predict with certainty, as you know, but we feel like, that's realistic guide. We look at our order book, we look at what our sales guys are telling us, what our customers are telling us and what they're saying publicly. And we feel it, at least at this point, triangulate reasonably well.

Great, thank you.

Thanks.

We will now take our next question from Ross Gilardi from Bank of America. Please go ahead. Your line is open.

Yeah, thanks, guys.

Good morning Ross.

Good morning, Phil, I heard your comments just on auto, but I mean, that's kind of the obvious question. I mean there's been a ton of questions on Process margins and so forth, and the drivers and applied outlook, but you made some adjustments. You didn't cut auto there. I mean, I appreciate that you have different customer mix. But can you give us a little bit more color on how you think you're performing relative to your kind of addressable market of North America light truck and global premium cars. And I think global auto production is down at least low to mid-single digits year to date. And is it just inevitable that that market eventually is going to roll over on you? So just trying to understand how you're really thinking about that and if that's just kind of represents downside next quarter?

So, let me take that one. You're absolutely right, Ross, the global automotive market is very weak. And you see that in all of our competitors' results significantly. And for us it certainly hasn't been a growth engine, we've got it there in the middle and we do have maybe a slightly more negative sequential decline from the first half to the second half baked in. And it is a market where we do not have long visibility, we've got commitments to the degree they build those trucks, we will be on those trucks, but those schedules can alter fairly quickly. But it's been solid – I mean, our numbers are much better than the global numbers. Our numbers are much better than what we see coming out of our peers that serve that market. And we're in as Phil said, the right mix, we've got a little bit of negativity baked into the second half. Could it trickle into our applications and our markets more so? Yeah, I mean, there's always risk on that. But these are – I would say they're the industry numbers baked in for specifically where we're at with a little bit of negativity that we threw on top of it.

I mean, are you growing content for vehicle or you want some new platforms or just why – I get that you're in niches that are performing better, but why not just assume that in the second half of the year, that that inevitably has got to be weaker with the rest of the market? Or do you have visibility just because you know you're on some other platform that nobody else is on.

We do have some – we have had some platforms come on this year that are new. So there is an element of self-help in there. I would say is more – again going back to sales point, the market mix that we are in. Again, it was not a growth engine for us year-on-year in the first half, despite some of the self-help. But it also wasn't a big headwind like it was for better. So I think, again, we've got an appropriate level of conservatism in there.

Okay, and is Diamond Chain, I mean – it sounds like last couple of weeks were a little bit better. But it sounds like you were also caught off guard initially out of the gate here, I mean, how comfortable are you that you bought what you thought you bought and you referenced some transitional issues, if you can give a little bit more detail on that. That'd be helpful.

Ross, I think we bought what we thought we bought and again this was not like most of the other acquisitions we've done over the last couple of years, where we did not think we bought a high margin growth machine, we bought a good brand with a really good channel position, market position in the North American distribution market, with a lot of cost reduction opportunities between their operations and our operations that are going to take a little bit of time to get after. And we also bought a business in addition that has some exposure to the agricultural market and as some exposure to tariffs. So certainly by the time we close it on the deal, we knew those two things, were there, and they're going to continue to be headwinds. But no, I mean, a year from now, I think will feel good about where this acquisition was. And again, we have fairly low expectations in regards to and we've already integrated the management teams. So they had a management team, we had one we've integrated, that there's going be cost reduction from that in the quarter. And obviously, there's some churn as you go through that and do that. We've integrated sales forces. And obviously, there's some churn in that. And there's also going to be some cost savings coming from that in the third quarter. And we're now looking at products and other cost reduction opportunities.

Got it, thanks Rich.

Thank you, Ross.

We will now take our next question from Steve Barger from KeyBanc Capital Markets. Please go ahead. Your line is open.

Thanks. Good morning.

Good morning, Steve.

Rich, in your comments you said that this guide down reflects normal seasonality to some degree and doesn't imply that you won't grow next year. I know it's early to talk about 2020. But since you open that door, how are you thinking about sort of next year based on what you've said about the second half today?

Well, I wasn't really intending to open that door with that comment Steve, but I would say, I think we are – one, we saw some pretty tough markets in '15 and '16 that I think typically with that and then you toss on the tax reform. I would have thought that this market would have run at least through this year plus at least another year. I think the tariff situation has everybody dealt with it's getting a year old now. Everybody's been dealing with it. That to me is the risk. I think if we don't get some sort of easing, calming of that so that people get on with firm plans longer term, there's risk the next year. I think in the next few months, if we could move forward with that. You can make a case for a pretty optimistic next year. So I'm not ready to go there.

Go you, if revenue were flattish ex any future acquisitions next year, is there still enough line of sight to cost take out from completed deals and the base business that you could maintain or grow margins you think?

We have a lot of self-help happening in cost and we've got a lot of things happening with our footprint, the ABC Bearing acquisition is done very well and brought on a lot of low cost capacity for us to serve the world. And I mentioned the Russian rail operation is doing well. The Romanian operation is doing much better this year than last year, a little less than what we would have hoped with some pause and in Europe, but that facility is far from optimized. We spend a fair amount of CapEx in expansions in China, India, Romania, Poland and all these have had cost elements to them as well. We've got the integration of Diamond and Drive, we got all of our day to day productivity activities, we got automation, we've got digital, we've got a lot.

Understood you said you factored in a significant destock to the forecast. But did you say you're reducing production levels in some facilities to reflect that conservatism? Or does the change in mix on slide six mean no major step down across the platform?

It definitely made some step downs. We don't generally have plants in most cases that are completely aligned with an end market. But certainly where we have plants that have a heavy off highway and heavy truck content, which a lot of cases those are the same plants with a lot of the same size ranges, we are seeing some right sizing and shifting of our cost structure in those operations. And we've gotten much better at variablizing our cost structure and responding to those variable costs. And we're doing that and we'll do more of that in the second half. And to your comment on destocking, I just think it's the significant destocking we're really playing for us and off highway whereas Phil said our numbers are well below what we believe our customers numbers are for their sales for rate it with distribution, I'd say we got a little bit of destocking in there, not a lot of destocking.

Okay and just one last one. Did you say how big the distribution pricing adjustment was? And can you tell us again, why that doesn't repeat?

Yeah, Steve, we did not give it specifically. We typically don't give that level of detail. But it really is, as we came into the year, we anticipated that we would give, as we said, we anticipated we put pricing in distribution, which we did. We anticipated that there would be some adjustments to that as there normally are in rebates in the like. And then those get processed kind of on their own schedule, if you will. And there were just a disproportionate amount in the second quarter. So as we looked at the outlook for the full year, vis-a-vis those adjustments, we still feel like we had them forecasted properly just had them been around quarter, if you will. And so we came in thinking we'll get 150 bps, still believe we'll get that more in Process and Mobile. And then these distributor price adjusted since we had more in the second quarter, we'll have relatively less in the third and the fourth as we move through the rest of the year.

Got it, thank you for the time.

Thanks, Steve.

We will take our next question from Chris Dankert from Longbow Research. Please go ahead. Your line is open.

Hey, morning, guys. Thanks for us sneaking me in here.

Hi, Chris.

I just want a quick touch on China. I mean, obviously, the growth rate in Asia overall, organically was still quite good. But I know last quarter we are still seeing double digit growth in China on some of the longer cycle industrial stuff. Is there any comments or color on how the longer cycle stuff has trended and then kind of what you're looking for in the back half on China specifically?

We feel very good about China for wind, which is where the majority of our wind business is or at least where it ends up getting installed. And you would get very good backlog on that. And I would say customers are extremely bullish about that continuing for the full year next year. I'd say that the 5% ish organic number from where we were, we've seen some easing of some of the other markets over there, like heavy industries, heavy truck and we do a little bit of automotive. So we've seen some offsets to that and I think there's obviously some level concern about the China economy in total in the same impact there on some of the trade discussions we talked about earlier in the US. I think the wind industry there will forge on through with that. But certainly some of the other markets like heavy industries, there's risk around that causing some turmoil there.

Got it and just last one for me, you hadn't really talked much about tariffs in the past. You called it out this quarter. I guess it's just more customer pushback on the tariff price passed through or just any comments on the tariffs would be helpful from that perspective?

No. Sure Chris and a great question. So we did see I think with tariffs are coming in, kind of as we expect the obviously there was an increase in the rate of tariffs on goods coming into China and then actually coming into the US from China. So as we looked at tariffs in the quarter, it was a headwind as we expected, I think for the full year. Right now we're expecting about 20 million in total. And that's a little bit of kind of what we expected. In the beginning, we talked about a $25 million number in the past maybe a little bit more. We got the mitigating tactics kind of taken that down a little bit as we planned, so it'll be 20 million for the full year, about 10 million year-on-year. So it's about 10 million higher than what we would have incurred last year, roughly speaking. And then obviously the pricing, we are pricing for it as we said, so we still feel like we're offsetting it, but there's no doubt there was a step up in the quarter and it was – in terms of Q2 year-on-year and it was felt more in Process and Mobile.

Got it, that's really helpful. Thanks so much, guys.

Thanks, Chris.

We'll now take our next question from Justin Bergner from G. Research. Please go ahead. Your line is open.

Good morning, Rich. Good morning, Phil.

Hi, Justin.

And thanks again for fitting me in. I'll be quick. First off, you talked about and perhaps too aggressive of margin guy coming out of the first quarter. But outside of looking at the first quarter margin expansion and maybe thinking that would extend into the rest of the year, were there certain categories of costs that came in higher – coming in higher than you expected a quarter ago? I know that you refer to Diamond Chain as maybe a small source of weakness. But are there other areas on a category basis that sort of go against your first quarter guide?

No, I would say the elements that rattled through mix. Again, if you look at the chart on slide six generally are better mix items moved left and there are some exceptions, rail moved right. But in wind mix is – its good margins for the company and mixes Process industries down though and it is our fastest growing market at the moment. So I would say mix inventory and getting a little more conservative on the impact of inventory for the rest of the year. Some of the distribution stuff that that Phil talked about. And I would say that, again, as we just look at the first quarter and second quarter, we think the second quarter is more indicative of what we should be basing the second half.

Great details really helpful and then lastly, on capital allocation, where do you stand versus considering further acquisitions? And what was the thought process beyond doing a very modest amount of repurchases in the quarter versus doing none or doing more?

Well, I'd say, as I mentioned in my comments and my script, the first half, obviously we levered up a little more in the third, fourth quarter of last year. Generated good cash flow in the first quarter, generally don't generate a lot of cash in the first half although, this year we did reasonably well. We paid completely for the Diamonds acquisition with that cash. As we look at our leverage, very comfortable with it, as we look at our cash flow in the second half, that's going to be very good. If we look at our cash flow next year also, I think it's going to be very good. And we're going to deploy it and I think that either through a combination of M&A and share buyback. So we generally talked about that more in the rearview mirror than going forward. But certainly we've been very active in buying back shares for several years and see it as a good return of capital to shareholders.

Okay, thank you.

Thanks, Justin.

Thanks, Justin.

It appears no further questions at this time Mr. Hershiser. I'd like to turn the conference back to you for any additional or closing remarks.

Thanks, Brian. 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.

Thank you for your participation. You may now disconnect.