Timken Co (TKR) 2014 Q2 法說會逐字稿

Good morning. My name is Tony, and I'll be your conference operator today. As a reminder this call is being recorded. At this time I would like to welcome everyone to Timken's second-quarter earnings release conference call.

(Operator Instructions)

Mr. Tschiegg, you may begin your conference.

Thank you, and welcome to our second-quarter 2014 earnings conference call. I'm Steve Tschiegg, the Company's Director of Capital Markets and Investor Relations. We appreciate you joining us today. If after our call you have further questions, please feel free to contact me at 234-262-7446.

Before we begin our remarks this morning, I want to point out that we 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 have opening comments this morning from Rich and Phil before we open the call up for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow up at a time to allow everyone an opportunity to participate.

During today's call you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the Timken.com website.

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

With that, I will turn the call over to Rich.

Thanks, Steve. Good morning, everybody. I'll start this morning by sharing a few comments about our business and then Phil will provide more detail on the second-quarter results and outlook.

First, just a couple of comments about the spinoff of TimkenSteel Corporation. On July 1, TimkenSteel Corporation was launched as a publicly traded company. We completed the spinoff on time and under budget.

All of my comments today, as well as Phil's, exclude TimkenSteel unless specifically called out. We do not plan to discuss TimkenSteel's results or outlook. TimkenSteel issued their own press release this morning, and they will provide details to any questions you may have.

Let me start with what we are seeing in the market. Then, I'll comment on the second quarter and wrap up on our strategic initiatives.

We came in to 2014 planning on a slow to moderate growth environment, and that is close to what we are seeing. While the picture varies by region and end market, in total we are seeing mostly stable to low growth end-market demand.

We do not expect to see a significant improvement in our markets in the second half. We do, however, expect our revenue in the second half to be up from the first half and up year over year. This expectation is based on stable market demand, the declining impact of the exited business in mobile and net penetration gains.

To the degree that we can, we would assess inventory in our channels to be at appropriate levels for the market activity, so we do not foresee significant stocking or destocking activity in the second half. That stability, however, will provide year over year growth because of the destocking that took place in the second half of last year. As compared to last year we see support of these assumptions in our order backlog patterns.

We expect to leverage the incremental volume well the remainder of the year, as we continue to lower our post-spin cost structure and focus heavily on manufacturing and supply-chain performance. We also expect to benefit from the share buyback plan.

As to the second quarter results came in very close to our expectations. Revenue was up 7% sequentially. Year-on-year, revenue was down slightly as the growth in process was offset by the decline in mobile.

The revenue improvement versus first quarter reflects normal seasonality, penetration gains and the end of the sequential negative impacts in mobile that we have been incurring for the last several years. The margin improvement from the first quarter reflects the volume increase as well as our cost reduction efforts.

Process industries performed well with sales up 6% year over year and up 9% over first quarter. The revenue gains reflect normal seasonality, the impact of acquisitions, reduced year-on-year impact of destocking and penetration gains, particularly in wind energy. Margins were on the high end of our targeted range, back above 20%.

In mobile, we expected the segment would be down because of plant program exits, and it was down 5%. But, mobile was up 8% sequentially, and we're confident that this result is more indicative of our business going forward, since the mobile exits are not in the sequential results, but will continue to affect the year-on-year results through the end of this year. Margins were within our guidance range of 10% to 13%, reflecting our significant focus on mix and cost control at the lower volume levels.

Aerospace performance was well under expectations. The primary driver of the margin miss was due to a one-time $3.8 million inventory valuation charge.

Charge aside, the business unit continues to fall short of our expectations at both the top and bottom lines. I mentioned in last quarter's call that we are working on additional measures to improve the performance of the segment. That work is progressing. We are not in a position to share specifics at this time, but we anticipate completing the analysis and sharing the plans yet this quarter.

Moving to our strategic initiatives, I want to touch base on four specific initiatives. First, our initiative to win in the marketplace and grow our business. Excluding the impact of mobile exits, the result from the second quarter and our outlook for the second half are indicative our efforts to deploy our disciplined model for profitable growth.

We completed the Schulz acquisition, further strengthening our process industry services business. Through our focus on challenging applications, we secured several programs within our mobile business that will begin shipping in 2015. The combined impact of these wins will ramp to over $100 million by 2016.

We are now seeing the benefit of past investments made in new products for the wind energy market in our process segment, and we are continuing to invest in similar opportunities through our DeltaX initiative. Our DeltaX initiative will accelerate our product development pace, which advances our goal of providing a complete offering of industrial bearings.

On our margin enhancement initiative, we lowered our SG&A rate from the first quarter and are committed to lower our rate as a percentage of sales from the first half of the year to the second. Our manufacturing cost initiative delivered results in the second quarter and is building momentum. We continue to use a disciplined approach to pursue market opportunities to ensure our mix remains attractive.

On capital allocation, we bought back 600,000 shares during the quarter. This relatively light buyback pace does not reflect our current commitment to deploy our balance sheet. Since the spin was announced, the Board indicated that we would remain lightly levered to allow the two company's perspective boards and management teams to deploy independent capital allocation plans post the spin.

We ended the second quarter with a net debt to capital level of 9% with a 2015 target of 30% minimum. That remains our target and was the driver of the additional authorization to buy up to 10 million shares.

We also indicated the intent to hold the dividend at $0.25 per share despite the reduction in earnings from the steel spin. This immediately moves us to the high end of our targeted dividend range.

Finally, on our pensions, we remain committed to fulfilling our legacy obligations to our retirees and associates. At the same time, we want to capitalize on our fully funded positions by stepping up our pursuit of options to reduce our future cash funding obligations as well as reduce the earnings volatility that these plans generate. Phil will share more color on pension activities momentarily.

I will now turn it over to Phil to run through the results and the outlook.

Thanks, Rich. Good morning, everyone. Let's take a closer look at the financials.

Before we get started, I want to comment on our steel business. With the spinoff of TimkenSteel occurring on June 30, we've reclassified steel business results as well as one-time separation costs to discontinued operations. So unless otherwise indicated, my comments today will focus on Timken's results from continuing operations.

As I go through my remarks this morning, I'll reference various slides from the presentation we posted in advance of the call. Let's start on slide 10.

For the second quarter, Timken posted sales of $789 million, which were essentially flat with the prior year. Stronger organic growth, most notably in the wind energy and rail sectors, as well as the benefit of acquisitions in process industries were offset by lower shipments in mobile industries.

The lower shipments in mobile are from planned exits in the light-vehicle sector that concluded at the end of 2013 and which will impact our year-on-year comparisons at a decreasing rate throughout this year. If you exclude the impact of these planned exits, our consolidated sales for the quarter were up close to 4%.

From a geographic standpoint, as shown on slide 11, excluding the impact of currency, sales were up 16% in Asia and up 9% in Latin America. In both Europe and North America, sales were down 4% year on year, with our US sales adversely impacted by the exited business in mobile industries.

Gross profit in the second quarter was $234 million, or 29.6% of sales, down $6 million, or 70 basis points, from a year ago. Our strong manufacturing performance in the quarter was more than offset by unfavorable mix and the negative impact of two discrete items in the current period, an accrual for value-added tax in Brazil of $4 million, and an inventory valuation adjustment, also $4 million.

For the quarter SG&A expense was $137 million, down $3 million from last year. The improvement reflects savings from our cost reduction initiatives and from the elimination of costs in connection with the TimkenSteel spinoff. However, this was partially offset by higher variable compensation expense and the impact of acquisitions and inflation.

SG&A expense was 17.3% of sales in the second quarter, down 30 basis points from last year. For the first half our SG&A expense was 18.3% of sales. We expect our structural SG&A performance to improve from the first half to the second half as we continue to focus on hitting our SG&A targets.

Turning to slide 12, EBIT for the second quarter came in at $90 million. Adjusted EBIT was $96 million, down from $100 million a year ago. Our adjusted EBIT margin of 12.2% for the second quarter compares to 12.7% last year.

The decline was more than accounted for by the value-added tax accrual and inventory valuation adjustment I mentioned earlier. These two items negatively impact our adjusted EBIT margin in the quarter by roughly 100 basis points.

Our tax rate for the quarter was 32.4% compared to 36% a year ago. The decline reflects a more favorable mix of foreign earnings as well as lower US taxes.

Our adjusted tax rate for the quarter was 34% compared to 35% a year ago. For the balance of 2014, we expect our adjusted tax rate to remain 34%.

As outlined on slide 13, we posted quarterly net income from continuing operations of $57 million, or $0.61 per diluted share, compared to $0.57 per diluted share last year. Our adjusted EPS was $0.65 compared to $0.63 a year ago, an increase of approximately 3% benefiting from lower shares outstanding as a result of our share repurchase program. The value-added tax and inventory valuation charges reduced our adjusted EPS in the quarter by approximately $0.06.

With regard to the TimkenSteel spinoff, we incurred roughly $70 million of costs through June 30. We expect about $5 million of additional costs to be incurred in the second half, bringing our total one-time separation costs to roughly $75 million. The additional $5 million will be recorded to discontinued operations when incurred.

Now, I'll review our business segment performance. Turning to slide 14, mobile industries' second-quarter sales were $371 million, down 5% from a year ago. The decrease was driven by approximately $30 million in lower sales from planned exits in the light-vehicle sector, which concluded at the end of last year.

Excluding these planned exits, sales in mobile were up roughly 2%. Within mobile, we're seeing strength in our rail business driven by solid market demand and our ongoing business development initiatives.

For the quarter, mobile industries EBIT was $40 million. Adjusted EBIT was $44 million, or 11.8% of sales, compared to $60 million, or 15.3% of sales for the same period a year ago.

The decline in earnings was driven by lower light-vehicle volume, unfavorable mix, higher logistics costs as well as the impact of a $3.8 million value-added tax accrual in the quarter. This tax expense, which relates to prior periods, reduced mobile industries adjusted EBIT margins by about 100 basis points in the quarter. Note that mobile sales and adjusted EBIT both improved sequentially. With adjusted EBIT margin up 70 basis points from the first quarter.

For 2014 we expect mobile industry sales to be down to 2% to 4% driven by the year-on-year impact of light-vehicle program exits of approximately $110 million, which represents a 7.5% decline by itself. Of the $110 million, $75 million impacted our first-half results. The other $35 million will impact us in the second half. However, we expect organic growth, primarily in rail, to offset this decline.

Turning to process industries on slide 15. Sales for the second quarter were $337 million, up 6% from a year ago. The increase was driven primarily by higher demand and improved penetration in the OE sector led by wind energy and also from the benefit of acquisitions.

For the quarter, process industries EBIT was $68 million. Adjusted EBIT was $70 million, or 20.7% of sales, compared to $55 million, or 17.3% of sales, for the same period a year ago. The increase in adjusted EBIT was driven by higher volume and strong manufacturing performance.

Our process industries' plants are running well. We're seeing the benefit of investments we've made over the past several years and the positive impact from our ongoing lean and continuous improvement initiatives.

Turning to our outlook we expect process industry sales in 2014 to be up 10% to 12%. This will be driven by organic growth in the OE sector, led by our efforts in wind energy, modestly improving industrial after market demand and the benefit of acquisitions. Our current backlog supports our second-half sales assumption.

Moving on to aerospace on slide 16, first-quarter sales of $82 million were essentially unchanged from a year ago. EBIT for the quarter was $2.8 million. Adjusted EBIT was $3.2 million, or 3.9% of sales, compared to $7.9 million, or 9.6% of sales, a year ago.

The decline in earnings reflects an unfavorable inventory valuation adjustment of $3.8 million in the current quarter. For 2014, we expect aerospace sales to be relatively flat compared to last year, reflecting weak demand across all of the end markets we serve.

As Rich indicated in his remarks, we're focused on getting aerospace to an appropriate level of performance. Because our analysis is still in process, it's premature at this time for us to provide any estimate of the potential restructuring or impairment charges that may result from actions we might take.

However, certain actions could result in significant non-cash asset impairment charges, but we expect that any cash restructuring charges will be nominal. We'll provide a more detailed update in the third quarter as we complete our work and plans are approved.

Looking at our balance sheet on slide 17, we ended the quarter with net debt of $181 million, or 9.1% of capital. This compares to net debt of $46 million, or 1.7% of capital, at the end of last year. The increase was largely the result of the repurchase of 2.6 million shares for roughly $150 million during the first half.

During the quarter, we returned $56 million of capital to our shareholders through the payment of $23 million in dividends and the repurchase of 560,000 shares for $34 million. As of the end of June, we have roughly 11.5 million shares authorized for repurchase through the end of 2015. Moving forward, we will track our progress with regard to capital allocation and our targeted leverage up 30% to 40% net debt to capital on a quarterly basis.

Turning to slide 18, operating cash flow from continuing operations was $70 million in the second quarter. CapEx in the quarter was $30 million or 3.7% of sales. After CapEx, free cash flow from continuing operations was $41 million.

As we have discussed previously, our defined-benefit pension plans are essentially fully funded. Our strategy from here is to protect our funded status and reduce our gross liability exposure over time. We currently offer a lump-sum option to US employees upon retirement. In the second half, we'll expand this to include deferred vested participants. Based on projected take rates, we expect the trigger a non-cash settlement charge of approximately $35 million, pretax, in the second half. This charge has been included in the earnings estimates release today.

Shifting to our outlook, on slide 19, our estimates for the year reflect Timken on a continuing operations basis. We expect the top line to be up 3% due to stronger demand and improved penetration in key industrial end markets, including wind energy and rail, a modestly improving industrial aftermarket and the benefit of acquisitions. Partially offsetting this will be approximately $110 million of lower revenue related to light-vehicle program exits.

We expect earnings per diluted share to range from $2.20 to $2.40 per share. Included in our earnings outlook are net charges totaling $0.20 per share for the following items: non-cash charges of $0.25 related to pension settlement, which I discussed earlier, and charges related to cost-reduction and plant rationalization initiatives of $0.15. Partially offsetting these costs is the gain from the sale of land in Brazil of $0.20 that we booked in the first quarter.

Excluding these items, we expect adjusted earnings per share to range from $2.40 to $2.60 per share, which is unchanged from the estimate we provided in June. This reflects an adjusted EBIT margin of roughly 12% on a consolidated basis for the year. Note that our EPS estimates exclude the impact of any potential charges that may result from the ongoing analysis in the aerospace segment.

For 2014, we expect cash from operating activities to be approximately $370 million. Free cash flow is expected to be $250 million after CapEx of $120 million. This is unchanged from our prior estimates.

All in all, results in the quarter were in line with our expectations. We're making progress in the market, performing well operationally and delivering value to our shareholders.

Let's open the line now so we can answer questions. Operator?

(Operator Instructions)

Steve Volkmann, Jefferies.

Good morning. First, I apologize, my head is spinning a little bit about what's adjusted and what's not. I'm curious, the $0.65 that you're saying is your adjusted number, are you saying that included $8 million of one-time items from the Brazil tax and the inventory adjustment?

Yes, Steve, that's correct. We typically, because those are really operational in nature, we would include those in the adjusted results. The $0.65 has been burdened by the $8 million, and the $8 million roughly translates to $0.06 on an adjusted basis

Okay, so maybe $0.71 if I adjust your adjusted numbers?

Yes.

Okay, but those are basically one-time in nature right?

Yes, correct.

Are there any other similar things that you might think of as operating, but are really one time in nature that are in that full-year adjusted guidance of $2.40 to $2.60?

In the full year, I'd say, no, not big enough. There's puts and takes quarter to quarter, but for the full year, no, not really anything significant enough to call out.

Okay, good that's helpful. Thank you. Rich, I think you mentioned one of the things that was going to help you going forward were penetration gains. I'm wondering if you can just expand on that a little bit, however you see fit, and give us some color there?

Yes, as I said, we are anticipating in our guidance relatively stable to modest growth margins. There's some ups and downs in that. I'll hit on a few that we have publicly announced. We announced a few months back that we landed some work with the Navy through our Philadelphia Gear business. We expect releases of that to start hitting in the second half of this year and carry on through next year. That's all incremental and penetration gains. Also, in Philadelphia Gear, it's an area where we've been acquisitive in the services business in the combination of Philly as the anchor as well as Wazee-Smith. That's coming together well, and we expect record shipments in the second half of this year, acquisition year over year aside, just through penetration.

We've announced a couple over the last 12 to 15 months, organic and inorganic moves in rail, which are also, we're seeing the benefit of those in the second half as well. Then, if you look at the geographic slide that we had for the second quarter, shows nice year-over-year growth in Asia. Most of that would be in China. We have a lot of penetration tactics there, none really big enough to call out, necessarily, at this point. Also coming off relatively low stocking levels, so probably some help there. Our order backlog patterns there are pretty good as well.

To sum it up, and again different than maybe where we would've been at this time last year where we still need a little more help on the order input side, our order backlog patterns would generally support our assumptions, and there's some concrete things behind it.

Okay, great. Then just following on, it seems like some of your bigger customers in construction, mining, maybe not so much mining, but ag are in the process of lowering production rates pretty markedly in the second half of the year. Are you seeing that? Is that factored into your numbers, and just any comment?

To the degree we have it, it's factored in. Certainly, at this point ag, normal seasonality would be down in the second half, it looks like that will be a little more so. That is an important market for us. Construction, would say, -- it's not a huge market for us, but haven't seen that softening. Mining for us, where we sit in the supply chain and again with the impact of inventory year over year, we would say is flattish, but we're certainly not expecting any strong recovery there. Again, because of inventory depletion, we're not seeing a continuing decline in that market. So, I think our market assumptions would be in line with the -- if you run through the heavy truck build around the world and the automotive build would generally be in line with what you're seeing from our OEM customer base.

Thanks, I'll pass it on.

Eli Lustgarten, Longbow Securities.

Good morning, everyone. I'm glad Steve asked the question for trying to figure out exactly what the numbers were. Can we talk about the second half outlook by sector? You gave us guidance with volume, but can you talk a bit about how profitability will look? Process is going to be up. You actually strengthened the outlook for process. How much of that is acquisition? Is it 20% plus operating margin sustainable? Are we expecting margins to improve in mobile? Your flat forecast for aerospace for the year, does that include the Philadelphia Gear, some stuff in there? What about profitability, which was obviously disappointing in the quarter?

Let me hit each of those for you. I'll start with aerospace as the smaller segment. Again, flattish volume for that year over year, which does imply a little bit of improvement for the second half. We do have a slight margin improvement there to get up to the low end of our targeted range. Obviously, we've struggling to do that. This quarter, even without the one-time charge, we would've come up a little bit short in that. We do have some improvement there baked in to get close to the 10% margin level, but doesn't move the needle that significantly in the big picture.

On mobile, up in typical seasonality in mobile be second and third quarter, our stronger fourth quarter tends to be the lighter of the four quarters. We expect the margins to stay within the targeted range of 10% to 13%, so pretty close to what you just saw in the second quarter. Then on process industries, is where most of the second-half improvement in revenue comes from. Again, the Philly Gear end-services businesses, and the comments that I put there on the defense Navy business, all that is actually segmented in process industries. We do expect to roughly hold the 20% EBIT margins. We guide that to 17% to 20%. Depending on where, -- even though we can operate about that 20% and would expect to do sue through most of the first half of the year, a lot of our growth initiatives tend to be short-term dilutive to that, whether it be the purchasing account in M&A or new investments in capacity. Where we sit right now, the 20% number looks pretty solid for the rest of the half

In your commentary you talked about some wins in the mobile business plus the acquisitions you put out. The wins in the mobile business that you have, you said it would get you to $100 million run rate in a year or so. Give me some idea of what you won, with the magnitude of it? The big concern, rail is very important this year, but we know the locomotive business and these rail company are talking about buying a lot less next year. Will those wins, if I look out to 2015, offset maybe some softness in the rail business as you look out next year?

I think we have that factored in. The rail has been some global penetration, and we certainly participate on the locomotive side, but more on the freight-car side. There's some good dynamics there in some emerging markets for us, so we do have some penetration gains there. Some of it is back into automotive and heavy truck, and it's much more now that we feel we're in a -- where we shrunk the business down in those two segments, we're in a situation where we should be able to capture at least an equivalent amount of the platforms that we're losing because were in an attractive niche demanding applications. We've got some new business coming out in both of those segments, which is something we haven't seen for several years.

Then there's some, also, some areas within the off-highway segment scattered across a variety of markets. There's one or two of the larger ones in their, which we highlighted. We're not in a position and we really don't want to get into specifics on customers and applications at this point in time, but more so, and, again, with our business model, you're more so going to see $5 million, $10 million type platforms are large for us. We did secure one or two large ones in the second quarter, which is why we rolled it all up and released that.

Will we see some benefit? What kind of max do we see benefit in the second half of this year? What kind of benefit in 2015 might we get from these wins?

None this year. All of it, of that $100 million would all be next year and something less than half of it would be in next year, mostly rear-end loaded as again these are engineered applications where we've been awarded the business and are now in the development and ramp-up stage with the customers.

This $15 million that we're going to get next year, is all in mobile or it's a little bit in process, also?

Those comments were all specifically around mobile.

Mobile. Thank you very much.

(Operator Instructions)

David Raso, ISI Group.

Good morning. The inventory swings in process have proven to be difficult sometimes to forecast, so I was happy to hear you say you feel your back in line production with retail and you don't feel there's any more change coming in the channel inventory. Can you just elaborate a little bit on where that confidence is coming from with an understanding it was getting away from us a little bit last year to the downside? Can you just make us feel a little more comfortable that is now the case, you're confident there's no more destock?

We see it in our order-book patterns, so obviously, that's the best barometer that we have. The caution on that, though, is that's also a short-cycle quarter book, so some of that comes in the same day it goes out. Others have a month or two lead time, but it's not something that we have five, six months worth of visibility. Our order rates versus shipping rates have been improving through the first half of the year. We certainly have that as a fact. Then, we also have, more so in Europe and the US, but we have visibility to large distributor's inventory levels and of our product and what they are selling of our product, so we see the changes in that inventory. Those statistics would also generally support that. Then, the actual pattern that we saw in the second quarter, that's reflected in our revenue in Asia, would also support that. Several things pointing to it, obviously, as I said, it's a short cycle, so it's not something that we can say is locked in, but several good indicators.

The margins look strong for process in the second half. Can you elaborate a little bit on the -- is it the mix you see in the order book? Is it simply just better overhead absorption? Because you're obviously targeting some growth in the back half. If you just can elaborate a little bit? At least for a while there, I think, the thought was process is a 20% margin business and then obviously it went through the destock and disappointed, I'd say, for a few quarters. Can you elaborate a little bit on the 20%? How much is that backlog, whether you're showing it's obvious or is it just a better overhead absorption?

It's a combination of probably everything you've said. Our plants are certainly better loaded today than what they would have been a year ago. Mix is better as well. With my comments around the aftermarket side, we've taken actions to reduce costs. Again, we've been guiding for some time to 17% to 20%. We have run for extended periods above 20%. We've also not grown the business as significantly as what we would like to at that level as well. Growing the business at 17% to 18% also generates good ROICs, which is why we've continued to guide it at. For the second half, if our expectations on penetration come through, the 20% number looks good for the second half.

That's great. Tank you very much.

(Operator Instructions)

Steve Barger, KeyBanc Capital Markets.

Hello, good morning. I apologize. I missed the opening comments because of another call, so just direct me to the transcript if this has been covered. I wanted to ask about the DeltaX slide. The first bullet talks about the plan to accelerate product development and line expansion. The question is, is this really a greenfield approach that's going to require a lot of R&D on the front end and you have to figure out where you need to be? Or is this more, you already understand the market opportunities and the holes in your product line and you just have to bring the stuff to market, essentially?

We have a good understanding of opportunities that we have organically, greenfield, to go after. The DeltaX initiative is specifically organic, increasing our resources as well as improving our processes to increase the throughput of our product development. This is not new. The wind business that we're experiencing today on the ultra-large bore side, we didn't even have that product in our product offering a year ago. The product's significantly larger than anything we would've made several years ago. We've also significantly revamped our spherical roller bearing line.

This is just the continuing evolution of that. What we've been doing has been working and it's adding value with the customers. It's been profitable. It's increasing our penetration in the aftermarket. This effort is around accelerating that initiative that's been in process for some time.

So even though it's multi year, it's something where you should start to see a benefit from it in the next quarter or two, and that will extend through the years versus starting the process and seeing benefit in the back half of next year or something?

Absolutely.

Okay. For the increase in the buyback authorization. Given your free cash flow guidance, is buyback something you're going to pursue on a quarterly basis as part of regular capital allocation, or is the thought process that it will be more sporadic or opportunistic based on the opportunities you see in any given quarter?

We pulled off in the May/June timeframe, again, mostly because we wanted to go in and allow the two independent boards and companies to develop their own strategies. We announced our strategy at the June investor day, to get to our targeted debt levels by the end of next year. Depending on where M&A would shake out, we need to buy in north of 600,000 shares a month on average over an 18-month period to get to the bottom end of that threshold. We're not going to unveil how we intend to do that. We will provide regular quarterly progress on how we're doing. Certainly, we recognize that 600,000 a quarter isn't going to get us there, so we need to step that up in relatively short order.

Understood. Sorry for keeping that short. Thanks.

(Operator Instructions)

With that, it sounds like there's no more questions, we will wrap it up. I want to thank everybody for their participation in the call today. Thank you for your interest in The Timken Company, and we look forward to updating you again soon. Thank you.

Thank you, this does conclude today's conference call. You may disconnect at any time and have a great day.