Good morning. My name is Emily, and I will be your conference operator today. 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 the speakers’ remarks there will be a question-and-answer session [Operator Instructions]. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks Emily, and welcome, everyone, to our Second Quarter 2024 Earnings Conference Call. This is Neil Frohnapple, Vice President of Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also 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’d ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company and without expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I’d like to thank you for your interest in The Timken Company. And I will now turn the call over to Rich.

Thanks, Neil. Good morning, and thank you for joining our call. Timken delivered a solid second quarter with revenue and profits in-line with expectations. Our results continue to demonstrate the strength and diversity of our portfolio and the successful execution of our strategy to build Timken into a diversified industrial leader. Revenue was down 7% from last year's record second quarter and roughly flat sequentially from the first quarter. Renewable energy drove the decline and was down over 40% from last year. China wind which is the driver of the renewable decline, did stabilize sequentially in the second quarter for both revenue and orders. Rail, aerospace and industrial distribution call up organically over prior year which helped mitigate the impact from renewable energy. The diversity and the strength of the portfolio are helping us navigate through a weak market environment. Margins of 19.5% were strong. Earnings per share of $1.63 were negatively impacted by the revenue, as well as a modestly higher tax rate and higher interest costs. Price remained modestly positive and costs continued to improve year-over-year. We have ramped down variable costs with the softening demand, and we continue to improve our cost structure through our footprint, integration and productivity initiatives. The Mexico bearing plant is contributing favorably to our year-over-year results. The plant also recently began production of belts and will be ramping up volume into next year. The belt expansion is currently a headwind in the results, but will reflect to a positive in 2025 as we scale the operation and consolidate facilities. The Nadella integration and the roll-on continued in the quarter, and we continue to see good margin performance in the business despite a relatively soft market environment. We also took further steps to integrate American roller bearings and GGB into the Timken bearing…

Okay. Thank you, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 11 of the presentation materials with a summary of our solid second quarter results. Revenue for the quarter came in at just under $1.2 billion, in-line with our expectations and down about 7% from last year's all-time record revenue. We delivered adjusted EBITDA margins of 19.5%, with adjusted earnings per share coming in at $1.63. Turning to Slide 12. Let's take a closer look at our second quarter sales performance. Organically, sales were down 7.7% from last year. with most of the decline driven by significantly lower wind energy demand in China as we expected. If we exclude wind energy, our organic revenue would have been down less than 3% from last year. Looking at the rest of the revenue walk. You can see that the acquisitions we closed last year, net of the 1 divestiture contributed 1.7% of growth to the top line in the quarter, while foreign currency translation was a headwind of roughly 1%. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and net acquisition impact. Let me comment briefly on each region. In the Americas, our largest region, we were down about 1% against last year's strong second quarter. We saw solid growth across several sectors, including distribution, on-highway auto and truck and aerospace, while the marine, off-highway and heavy industry sectors were lower. Marine was impacted by the timing of military marine programs under long-term contracts. We expect to grow in the marine sector for the full year, but military programs can be lumpy at times, and the second quarter of last year was a difficult comp. Excluding Marine, the Americas region would have been up slightly…

[Operator Instructions] Our first question comes from the line of Stephen Volkmann with Jefferies. Please go ahead.

Great. Good morning guys. Can you just remind me what you do in my head is kind of spending today. So we got to make sure you get the right company. I'm kidding. So I have one question for each of you. Rich, you said in your prepared comments that it feels like China wind sort of flattening out. I don't want to put words in your mouth. But I'm going to ask you to pull on that a little bit. Do you think we sort of reached the bottom for renewables? Can that business be up next year?

Yes, it could definitely be up. We were -- we were flattish, slightly up and win from Q1 to Q2. So we think we've certainly bottomed. There is usually a little seasonality from first half to second half, but we have the backlog to stay flattish for the rest of this year. I'd say, it is too early to call next year, tends to be a longer lead time item. So as we get to next quarter's call, I think we should have a good feel how we are going to at least start the year. But definitely could be up. It's probably impossible to be up back to peak levels just because of the level we're operating at. It would take us a while to ramp back up to those levels. So probably the fastest for that would be '26 or '27, but yes we could be up next year.

Okay. Good. Good color. And then, Phil, I'm trying to think about – there is a bunch of stuff going on there. You're doing some things on the cost side, you have the new facility in Mexico. You have SG&A kind of coming out, there is some synergies, I think, on some of the M&A. Just irrespective of volume, which will be whatever it is next year, but what are the sort of buckets of potential EBITDA goodness in 2025 that are not related to volume?

Yes. It is a good question, Steve. So I think obviously, the footprint actions would be one I'd point to in terms of the new plants in Mexico. Mexico will probably continue to ramp for belts at the early part of the year. India will be ramping during the year, but those will be footprint actions should continue to be a benefit as we look ahead. Obviously just continuing to execute our strategy around capital allocation, whether that is M&A or buyback ought to create accretion for us. And we'll continue to focus on targeted cost initiatives through operational excellence, targeted cost actions, keeping controls on costs while still looking to serve our customers in this environment. And obviously, pricing will be kind of highly dependent on where we are from a market standpoint, but we are generating positive price this year, really no change to the pricing outlook from what we talked about last quarter, still expected to be north of 50 bps for the year, again, probably not a 100, somewhere in between and with positive pricing in both segments. And as we move ahead to next year, it is always our predisposition to keep -- to move prices in-line with cost inflation. So that would be something else I would point to. And then obviously, our strategy around both on the organic side with the product vitality initiatives we've been focused on as well as the M&A, as I mentioned earlier.

Great. Thank you guys. I’ll pass it on.

Thanks Steve.

Our next question comes from David Raso with Evercore ISI. David please go ahead.

Hi, thank you. Just sort of a broad question. You seem to really emphasize the point we expect capital allocation to be a meaningful contributor to results over the next 18 months. I mean is that a function of the core businesses, obviously a little sluggish right now, given the end markets? Or were you trying to signal something more significant about utilizing your cash flow and balance sheet?

No, I would say, not signaling anything significant, I would say, reinforcing that we've been strong generator of cash for multiple years and we have moved from the low end of our leverage range to the high end. And we are -- after a very active year last year, we have already moved back to below the midpoint with quite a bit of cash coming in the next 18 months. So not signaling anything except probably more of the same, and that is either accretive M&A. And if that M&A isn't there or doesn't meet our financial hurdles than share buyback. And in either case, I think we continue to be a meaningful contributor.

All right. Thank you. And a follow-up on the comment about we expect the first quarter of '25 to provide the normal sequential seasonal benefit you get from 4Q to 1Q, if I heard that correctly. Obviously right now, the earnings year-over-year have been down. When you think of that sequential balance into the first quarter, I mean could we get in -- do you envision it as getting close to being back to flattening out earnings? I'm just trying to get a sense of the bounce you are referencing. Obviously, I can look at historicals, but just want to make sure I understood what you were signaling about what the first quarter feels like after the work on the back half of the year.

Yes. I would say, first, it's certainly too early for us to call 2025. I think there is reasons to be optimistic about it. But what's really saying there is even in a weak year, we have a nice bump typically from Q4 to Q1 on both revenue and margins and earnings per share. To your specific question about getting earnings back to flat, I believe with our guide, assuming we hit the guide, we'd have to be around 8% up from Q4 to Q1, and that is not a precise number, plus or minus there. But high single digits up from Q4 to Q1 organically to get back to flat. And if you look at the last four years, our Q4 to Q1 sequential I've got in front of me this year which was obviously weak was 9, the prior three years were plus [17, plus 12 and plus 15] (ph). So certainly, as we sit here today, getting back to top-line growth in the first quarter of next year is attainable. And so also it would be earnings per share.

That’s helpful. Thank you.

Thanks David.

The next question comes from Robert Wertheimer with Melius Research. Please go ahead.

Hi, thanks good morning everybody. Just to kind of continue on that theme. I think you said ex wind, you were kind of just down three core, which is fairly muted. If you look at those businesses and leave out distribution for the moment, are orders and indications from customers flattish or falling or rising any sense of orders there. And then I think you moved rail up a little bit in the mix there. I wonder if you could give context around that. Is that railcar local? What went on there? Thank you.

Yes. Sure, Rob. Thanks. This is Phil. So on the orders, I would say the way we're seeing the orders right now, if we pull the wind energy out, I mean orders certainly down year-on-year, but sort of flattish sequentially Q1 to Q2. So as we said, nothing that would indicate we are going to inflect in the second half, but certainly supportive of the overall outlook. And you got it right. I mean, in the quarter if we pulled renewable out, we would have been down less than 3. if you look at the full year guide of our minus 5 organic, if you take the renewable out of there, it's actually down a little bit less than 2. So it is driving the bulk of the bulk of our guide, not just in the quarter, but for the full year. And then in terms of the bucket, you got it right, we did move rail and marine over to the right. Marine was really just current expectations for military marine program activity over the course of the rest of the year. And then rail, the rail business is doing very well. It is a global business. It's -- we're up outside the US India has been a real strong performer for us. Europe has been relatively flat, I’d say, overall. And then we've been up in the Americas. And I would tell you, in the Americas, it is been both MRO service activity, but also outgrowing I’d say, outgrowing the OE builds freight car build in North America, and that was certainly a pleasant surprise as we moved through the quarter and was one of the reasons we moved it over to the right. And then just to kind of fully close the loop, I’d say, sectors that kind of moved to the left or lean left, we did move heavy industries over just given the order book activity that we saw in Q2, that's late cycle -- that's project spend, in big sectors like oil and gas and metals, OE activity, move that over to the left just given the order activity we saw. And then probably the lean the left a little in off-highway, it stayed in the far left column, but we did adjust that a little bit for ag, but those would really be the only sectors that we would have moved either physically or kind of intellectually as we updated the outlook.

The only add – I would add to that -- first part of your question on orders. Our sequential guide off Q2 was minus 3%, minus 4-ish percent per quarter, which is significantly better than last year's sequential. But again there we saw coming out of the supply chain issues and the significant slowdown. But it would be a little pretty similar, a little softer than what we had in '21, '22. So I'd say, again, we are looking at normal seasonality. As Phil highlighted some strength in some pockets, some wins in there. And then some areas that are softer and some offsetting. So fairly normal, and that's what I would say the order pattern is supporting. And then the other part I’d throw in. Phil hit Marine, which is something we put out some press releases on the last several years that we've had some really good platform wins there over the years. We don't talk a lot about our platform wins because most of them come in the form of $10,000 here -- $100,000 there, occasionally get up to $1 million. But we've got a really good application engineering pipeline and some really good self-help coming that, again is in-line with our outgrowth initiatives as well. So feel good about that as well.

Thank you.

The next question comes from Bryan Blair with Oppenheimer. Bryan please go ahead.

Thank you good morning guys.

Hi Bryan.

I was hoping we could drill down a little bit more on industrial distribution trends. It sounds like relatively supportive within a very choppy and fluid demand backdrop. What was the monthly order cadence through Q2 and into early Q3? And how does that progression compared to typical seasonality?

Yes. Thanks Bryan. I’d say overall, relatively stable and pretty much in-line with normal seasonality, I’d say, in terms of progression through the quarter and then looking at the full year. But you are right in the quarter. I would say, once again, we talked about this last quarter, but industrial distribution was I would say, a little bit of a pleasant surprise in terms of the performance we saw. It was up in the quarter probably a little bit, call it, mid-single digit-ish range, and that would be pretty much globally everywhere but Europe. We were up in the Americas, up in Asia, up in both North and Latin America. So it is been pretty broad support, and that's kind of driven by continued industrial activity, continued MRO activity. I talked about heavy industries being down, which is kind of the OEM -- the OE side of all metals, oil and gas, other big markets. But the MRO side, generally get served through distribution continues to roll along. So we do -- and then relative to inventory, we do believe inventories appear to be at good levels for this level of demand. So we've talked about inventory for the last several quarters, but it does feel like inventories are in relatively good shape for this level of demand moving through the rest of the year.

That's good to hear and very helpful color. And then -- so a follow-up to Steve's question. Obviously, through recent demand pressure the team has been pretty active in managing run rate costs, as well as some streamlining of your manufacturing footprint. How should we think about the cost savings achieved to-date, what's incremental in the back half, and is there a level of structural cost out that we should keep in mind for 2025?

Yes, I think the right way to think about it is, I mean, obviously for us, operational excellence, particularly in an environment like this is -- is a lot of small – and we talk about the big initiatives, the plant expansions which enable us to take out other in most cases, higher cost facilities and replaced with more cost effective, more efficient facilities in some cases, in low-cost countries or best-cost countries. So I mean, that continues, but it is also a lot of smaller initiatives as well. So for example, we have been really focused on hiring, and I would say in our operative footprint, we continue we are down -- continue to be down over 10% from, call it a year ago as we -- in pockets of the business where it is been weaker. We've been adjusting our head count levels with an eye towards, hey these markets are going to recover. So let us make sure we keep critical folks and that kind of thing. But aligning with lower demand, we've been accelerating the acquisition integration to drive synergies, especially considering we didn't -- we haven't done a deal so far this year. That's given us an opportunity to really step on the gas, if you live around acquisition integration, which I think you are starting to see that come through. Not only in the acquisition performance that we specifically isolate, but also even on the Timken side as well. And then I’d say, when we talk about the big facilities, we have consolidated a number of I would say, a number of smaller facilities. We've got half a dozen smaller facilities over the last 12 months to 18 months, which are all incremental benefits if you will. So we tend to not provide dollar amounts because you need that -- you need those savings to offset inflation, offset volume declines offset some of the other headwinds you have. But there is no question when you look at the manufacturing bucket, if you will and even the material bucket, we've done a lot of work on material savings tactics. You're seeing really good benefit, which has been margin supportive in 2024. And I think, as we move into next year, it could be margin accretive in 2025 or should be margin accretive 2025.

Yes. I’d just add as Phil said, we don't necessarily say it's $30 million or $40 million. We do have a lot of activity there. It is probably a little more weighted to industrial motion right now. Again, as Phil said, we've been consolidating quite a few smaller facilities there, and it is really embedded into our margin targets. So I think when you look at the first half of the year, north of 20% EBITDA margins in a pretty significantly down start to the year from a revenue standpoint. It wasn't long ago that 20% margins we were shooting for at a peak revenue. So it is indicative of – it is key to our margin expansion goals and our long-term financial targets, and it is embedded in those targets.

Understood. And again very helpful color. Thank you.

Thanks Bryan.

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead Steve.

Hi, good morning guys.

Good morning Steve.

I think this segment reclassification five or six quarters ago was meant to show Industrial Motion as maybe the growthier side of the business, basically the old process control stuff but the organic decline is kind of tracked to bearings over the past three quarters or four quarters. Has the industrial motion revenue trends surprised you? And how do you expect those segments will track in a recovery?

Yes. Maybe I would start, Steve. I’d tell you, it was a larger organic decline than probably you expected. And certainly we would have expected ordinarily. But that marine the marine item, I think was significant. It is kind of why we called it out Marine was down really significantly. And again, we expect to be up for the full year, but that Marine business sits in industrial motion, and that decline was a significant contributor of the minus nine-ish organic for the quarter. If you take the marine out, you are probably closer to the 5 or 6 down organic, more in line with maybe what you're seeing across the rest of the industrial landscape. The other point is we do have some of the businesses that we own that are running extremely well. Linear motion in particular, does have a large European exposure. So it is hard to overcome the headwinds in Europe. But overall, I would say the mix of business we have is really good, as you know. And I think over time, you'll see it should with the markets that the Industrial Motion business is indexed to, we do believe probably has the ability to grow a little bit faster than, say where the markets that the bearing business is indexed to. And then from a margin standpoint, we've got the Mexico plant ramp going on. We had the large volume decline. Military Marine mix is industrial motion up, I’d say. So when that is down, it can have an impact. But I do think over time, Industrial Motion is indexed to relatively higher growth markets with the ability to generate relatively higher margins as well.

Yes. We certainly are targeting it slightly higher growth rate in Industrial Motion and Bearings, but looking to certainly looking to achieve growth in both -- and in addition to the mix issue that Phil highlighted, Industrial Motion is a little more weighted to Europe and tends to be, at the moment, a tougher geography for us. So that is a little bit of a temporary headwind. Then I'd also put in -- we continue to diversify the organic mix of the bearing business as well and certainly still off-highway capital equipment is a critical market for the bearing business and is cyclical, but we've diversified more into the aftermarket. GGB was a significant diversification for us. ARB revenue has been strong. So some positives there within the bearing side to point to as well.

Yes. And to the long-term margin commentary. In the first half, Engineered Bearings EBITDA margin averaged about 130 basis points above Industrial Motion. Given how you view revenue and expected mix in the back half, does that relationship hold? Or does IM have higher margin in the back half?

Yes. I think for the full year, certainly would be a little -- we would expect both segments to be at or above 20% for the year with call it, a tighter delta than what you would have seen in Q1 or Q2. But I would think this year given what's happening in IM with the belt expansion, et cetera, probably Industrial Motion may be a little bit lower, but they'd be very close to one another.

Understood, thanks.

Thanks Steve.

Our next question comes from Tim Thein with Raymond James. Please go ahead.

Hi, good morning. Phil, maybe just on the EBITDA bridge as we think about the back half of the year. Just directionally, I think -- I believe I heard earlier in the comments on pricing for the full year. I think you said you maintained the 50 to 100 basis points of price. I'm just trying to think how to think through that and then kind of the interplay with what you guys are seeing on the manufacturing cost side, the comps have gotten all of screwy just given what's transpired in the past couple of quarters. So just how to think about kind of the relationship between the two and the back half of the year.

Sure, Tim and welcome back. I should start with. Sure. On the margins our margins would typically be a little lower in the second half from the first half, just with normal seasonality. And I would say this year, we will be sort of no different. But as we look at the back half, I think a couple of things I keep in mind is, we are going to continue to see a little bit lower sequential volume. So you go first half, second half, you got lower volume sequentially. We did -- we were flat to up a little bit on inventory as we move through the first half of the year. We're going to look to take a little bit of inventory out in the second half, which can be a headwind on the manufacturing line. Still seeing – we will have the ramp costs as the belts expansion continues to ramp. We continue to try to get India launched probably by the beginning of early next year. We will continue to have some ramp costs there. And then I’d say, the overall pricing, we held the guide for pricing, but that's kind of more first half weighted. It is in the run rate. But I would really say that a couple of things to point on as you look first half, second half would be kind of lower sequential sales, lower production volume, logistics kind of started to hit us in the second quarter. We will probably have a little bit of a headwind there, too. And then the ongoing operational excellence initiatives that we're going to continue to execute trend offset as much of that as we can. But do expect margins to be down as we look in the third quarter, in particular I talked about the third quarter revenue. But for EBITDA margins will be down year-on-year and sequentially. And I think as you look to the fourth quarter, you'll see a similar situation as well.

Okay. That's helpful. Thank you Phil. And then just thinking about the impact on the bearings segment, as you hopefully kind of bottom out on China wind and just thinking about what -- what potential recovery looks like there. Should -- just given the volatility in that business and some, I think a little bit more challenging from a pricing standpoint -- will that impact at all kind of the -- as we come out of it just in terms of kind of the incrementals in that business. I'm just thinking is that -- has there been kind of like a structural reset of the margins of that business, just given the amplitude of the decline? Or is that -- should we not expect that?

Well, I would say, there is certainly been a reset of the volume right? And I think -- I said this in the last call as well, we are also looking at this as an opportunity to come out of this with a better geographic mix and a better mix between OEM and the aftermarket because we haven't been in the market for that long, we are disproportionately weighted to the OEM side. And then we really chose to participate primarily in the China market a decade ago, because it was open up versus the other markets were served by existing players, but we penetrated those markets as well. So we expect to put more emphasis into a better geographic mix coming out of it and still remain optimistic that the China market will rebound as well. As we said before, the wind margins were kind of in-line with the company average and it is still -- we still expect good incrementals coming out of that, have a fair amount of fixed costs associated with that. We've done a good job getting after the variable cost, but no reason to think we wouldn't drop the incrementals through at normal-ish levels.

Yes. And I would only add, Tim that when you look at the bearing business, we've talked about this before, it is -- it is more capital intensive. So it does tend to see -- it can see a little bit stronger incrementals on the way up and can kind of have to fight a little bit steeper decrementals on the way down, and we've managed through it very well. But I do think if we are back up next year on the bearing side of the house that we should generate really good incrementals. And then last point maybe on China as we have. We did make some investments in China to improve our manufacturing footprint. And I think while volumes are down on the wind side, I think the manufacturing investment has helped us lower cost, which has helped mitigate some of that impact.

Has the maturity of the products, the technology, the volume as you mentioned, prices have come down in wind, but they have largely been on a gradual downward trajectory since we've been in the market. But so at cost as we and others get better at producing the product and it is relatively new technology. So come back and say we would be optimistic that we would be able to leverage the incremental volume well.

Got it. Thank you. And Rich, best of luck, enjoy whatever is next for you. Thank you.

Thanks Tim. Appreciate that.

The next question comes from Mike Shlisky with D.A. Davidson & Co. Please go ahead Mike.

Good morning. And thank you for taking my questions. I wanted to quickly touch on off-highway for -- further. Just to touch on off-highway for a moment. I've been hearing a lot of the OEMs are looking to focus on inventories in the back half of the year, trying to bring them down through the fourth quarter. What do you think -- what have they told you about their ability to get to where they want to be by the fourth quarter? What do you think that folks still have some more inventory to take out in the first part of 2025?

Yes. It varies but on market -- but certainly the one that's got more press here lately would be ag and has been down. For us ag went down last year. So we started feeling that earlier with inventory correction for our part of the game. So our comps as we head into the second half of the year are probably better than what theirs are. So some of the headline numbers that the ag industry is dealing with is probably a little worse than the parts suppliers to it. But certainly, there is a level of caution in ag going across the rest of the year. Mining and Construction, probably a little bit better and maybe for us a little more global presence in those two markets as well versus ag a little heavier weighted to the United States. So I'd say overall, it is down. We have it in the high single digits down for the full year that way as well, too early to say where we'll be at for next year.

Okay. Got it. And then I wanted to ask about the M&A pipeline. Obviously, it seems – [always] (ph) good for a couple of deals a year. Give us some thoughts just are you in any late-stage come with any decent size targets here or just some broad view as to what valuations look like and the targets that are out there today.

Yes. So we had a very active year last year, six deals and one out. We also made a divestiture last year, so a pretty active year last year came into the year with a again, a little higher debt level, but certainly nothing that would prohibit us from doing something in two quarters since we've closed anything. It certainly be optimistic that in the next 12 months to 18 months, you would see us, again, as you said, bring in one, two, three small to medium-sized deals, very consistent with the strategy and business leaders remain very engaged in that. So I don't see any reason to pause that with the CEO transition, and we expect to continue to be active over the next either the rest of this year or certainly in the next year.

Okay. Thank you.

Thanks Mike.

The Next question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. Just wanted to go back to a comment earlier about logistics costs. So there's been a lot of great discussion on the self-help side, but maybe if you could just talk about your cost basket and generally what you're kind of expecting here in the second half on those costs kind of evolution?

Yes, sure. Thanks, Angel. I would say, yes, that was the one cost that we have seen in flat quite a bit, certainly in the -- starting in the second quarter. and we do expect that to continue for the rest of the year. And quite frankly, when we talk about material and logistics, we sort of entered the year expecting material logistics to be kind of favorable for the year. And at this point, I would say it is probably more flattish with material favorable, but logistics likely unfavorable for the year, just given where container rates are presently especially coming out of China. But again, that is where in the second quarter and for the rest of the year, some of the self-help operational excellence initiatives are going to come into play because we do believe while versus April, the outlook for logistics has gotten worse, we do believe we'll be able to offset that through the targeted cost actions, the acquisition integration and all the things that we've been working on.

Very helpful. And then back to maybe cash flow, so a very strong kind of cash flow generation here in the second half. And -- but you talked about inventories maybe need work down a little bit. Can you just maybe help quantify that? And then as you think about a year next year where you're seeing renewable energy potentially recover and just a little bit of a turning point. Could you just talk about kind of the free cash flow generation and working capital just a little bit more color on all that would be helpful?

Let me start with just a little bit on the inventory, and I'll let Phil take it to the full cash flow level. As mentioned, we are certainly looking at a step-up from Q4 to Q1 in revenue. So right now, we are targeting a fairly modest inventory reduction between now and the end of the year. You need the inventory more for the start to next year as the year as the year progresses, if we feel a little more bullish on the start of the year as we get to November, December, you might see us a little more cautious on the inventory. And if we get a little more pessimistic on the start of next year, you might see us get a little more aggressive this year on the cash flow. But it really is more about the start to next year, which again right now, we would be expecting to see a significant step-up from Q4.

Yes. I think Rich hit it. I’d just add, Normally, we'll see that seasonal working capital liquidation, if you will, given that the fourth quarter tends to be the lowest quarter from a revenue standpoint. From a seasonality standpoint, we'll typically see receivables come down seasonally in the second half. We're expecting that. We probably ended the second quarter with a little bit higher from a days standpoint, so we should make that up and see that come back in line in the second half, I should say, Rich talked about the inventory. A lot of that does hinge on the fourth quarter and what's happening on the fourth quarter is always a little bit of an unknown, particularly in the shorter cycle part of our business, but we will typically see some inventory come out in the fourth quarter and would not expect anything differently, I would say, this year. So that is really the main drivers of the offset to that would be we will have those taxes that we'll have to pay in the second half related to the India transaction which will offset that a little bit. But net-net, we'll see cash flow step up significantly in the second half and very supportive of our guide of greater than $350 million for the full year.

Very helpful. Thank you.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks. Good morning everybody. And Rich, wish you the best in whatever is there.

Thanks Joe.

My first question, so -- and I apologize if you touched on this already. I did go dark for a couple of minutes. The -- I'm curious heavy industries right? You guys have experienced several cycles in the past. Obviously, some of your biggest customers have announced production cuts. How do you see this playing out from a timing standpoint? I know you don't have a crystal ball, but just utilizing your prior experience and how long it could take to get to normal demand patterns for that business going forward?

Yes. Sure, Joe. Maybe I will hit them both. I'll hit heavy industries and then also hit off-highway because they are similar in many respects. When we talk about heavy industries, it's typically the big markets like oil and gas, metals, aggregates, cement, pulp and paper, OE activity into those markets. And we did -- that's typically the late cycle, usually the last sector that slows for us, and we did see some debt we were down in Q2, did see some softening in the order intake rate, which is why we moved it over to the left. That one is always a little bit hard to predict. It's more project spend than it is kind of recurring revenue. But I would tell you, the MRO side of all that, which generally gets served through distribution continues to roll along. We are seeing continued good activity on the MRO side in markets like metals, oil and gas, pulp and paper, aggregates, cement. Now on off-highway, which is more of the recurring revenue -- as Rich said, we started to decline in off-highway kind of the middle of last year. So we're sort of 1 year into destockings/lower demand levels. We are expecting that to continue into the second half. And then by the end of the year, we will have been down in those markets, in particular, probably seven quarters, which is -- would be pretty normal, maybe arguably on the long end of normal. So it is hard to predict. It's very dependent on interest rates and the overall economic situation, if you will, but we do feel like these markets have been depressed for quite some time, and we are in a good position, I think, to step up next year.

Got it. That's helpful, Phil. And I guess, look, we've danced around the margin question a little bit for next year at this point, just because there are a lot of moving pieces that are impacting margins this year. So let's say we get back to a more normal environment where it's more like 3%, 4%, 5% type growth for your businesses. Should you -- based on everything that's transpired this year, would you expect incremental margins to be above normal? Like how do we think about the right jumping off point from this year into next year on the incrementals?

Yes. It's probably a little bit early. But again, I think we're still committed to the long-term targets. So I think if we're or up next year, we would expect to make -- to take another step on that margin path to get us to average 20 over a cycle, not just at the top of the cycle, which would say we've got a we've got to be above that at peak and hold on at the trough. So I’d expect to take another step up, but probably too early to talk specifically about it.

Okay, great. Thanks guys.

Thanks Joe.

We have time for one more question. And so a final question today comes from Chris Dankert with Loop Capital. Chris please go ahead.

Hi, thanks for squeezing me in guys. I guess I will just keep it to one here. Again India has been really impressive this year in terms of growth. I guess, maybe just conceptually, as you kind of look at the markets inside of India, would you expect there's some durability of their legs there into '25 and beyond? Or is there some risk that India risk looking kind of like China wind as we move into '25, '26 and beyond there?

I think there is reason for both short and long-term optimism there. Short term, there’s good momentum longer term. I think India is a beneficiary of some of the diversification that companies are looking with their global supply chains not to have overweighted to China or any other geography and India is a beneficiary of that. And I think it is fairly broad based in -- across industrial markets. So I think there is reason for optimism and for the foreseeable future.

Those are all the questions we have time for today. Sir, do you have any final comments or remarks?

Yes. Thank you, Emily. As this is my last quarterly call as CEO, I wanted to thank the Investment Community for their support over the last decade. And in particular, those of you that have invested in the company over that time. Those of you that have followed Timken for a couple of decades have witnessed a dramatic transformation in this 125-year-old industrial company. It was a privilege for me to be a part of it for the last 19 years and both very proud of what we've achieved during my tenure and also very confident that the company will continue to prosper after I transition out of my leadership role. We have a great group of employees around the world. The company has been performing at both a high and consistent level for many years. Our portfolio is strong, and I look forward to supporting Tarak and the 19,000 employees at Timken achieve new heights for shareholders, customers and employees in the years to come. Thanks, and back to you, Neil.

Yes. Thanks, Rich, and thank you, everyone, for joining us today. If you have any further questions after today's call, please contact me. Thank you, and this concludes our call.

Thank you for participating in today's Timken's second quarter earnings release conference call. You may now disconnect.