Timken (TKR) Q3 2025 Earnings Call Transcript

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Date

Oct. 29, 2025, 11:00 a.m. ET

Call participants

Chief Executive Officer — Lucian Baldeya

Chief Financial Officer — Mike Dicenza

Director of Investor Relations — Neil Andrew Frohnapple

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Risks

CFO Dicenza noted a "full-year net negative impact from tariffs of approximately $15,000,000, or $0.15 per share," up from prior guidance due to expanded tariffs. He stated, "significant step up in the China tariffs is not in our guide. So if that does occur, it would be an incremental headwind to where we are."

Fourth-quarter adjusted EBITDA margins are expected to be "down around 100 basis points from last year," according to Mike Dicenza. This is attributed to higher corporate expenses, the dilutive effect from tariffs, and lower profitability in the Industrial Motion segment.

Dicenza said, "The implied outlook for Q4 is for a 2% year-over-year decline." This is due to a greater-than-normal seasonal decline and a tougher comparison due to last year’s military marine project.

Takeaways

Total revenue -- including 0.6% organic growth, 1% from the CGI acquisition, and 1% from currency, with growth in Engineered Bearings offsetting lower Industrial Motion demand.

Adjusted EBITDA margin -- 17.4%, up 50 basis points year-over-year, achieving nearly 40% incremental margins, despite a $20,000,000 year-over-year tariff headwind.

Adjusted earnings per share -- $1.37 adjusted earnings per share, a rise of 11% year-over-year due to higher pricing, modest volume gains, and disciplined cost control.

Operating cash flow -- $201,000,000 operating cash flow, with free cash flow of $164,000,000 after $37,000,000 in capital expenditures, and net debt reduced by $115,000,000.

Engineered Bearings segment revenue -- with 2.7% organic growth, led by renewable energy, aerospace, and general industrial sectors.

Engineered Bearings adjusted EBITDA -- $144,000,000 or 18.8% of sales, an increase over last year, with margins above expectations due to higher volumes and strong operations.

Industrial Motion segment revenue -- with a 3.5% organic decline offset by 2.9% CGI acquisition impact and 1.9% currency benefit.

Industrial Motion adjusted EBITDA -- $75,000,000 or 19% of sales, with margins affected by lower volumes and tariffs, but aided by pricing and SG&A reductions.

Full-year outlook -- Net sales expected to decline about 0.5% at the midpoint, and consolidated adjusted EBITDA margins projected in the low to mid-seventeen percent range for the full year (adjusted, non-GAAP).

Free cash flow guidance -- equating to more than 130% conversion on net income for the full year.

EMEA organic growth -- Up 2% in EMEA, the first increase in more than two years, driven by off-highway, rail, and heavy industry gains.

Tariff impact -- Full-year headwind revised to $15,000,000 or $0.15 per share, above prior estimates due to higher India tariffs and Section 232 expansion.

Cost-saving initiatives -- On track for $75,000,000 in annualized savings, with incremental benefits expected in the first half of next year, particularly from the Engineered Bearings segment.

Strategic focus -- Management outlined an 80/20 approach to structurally improve margins, emphasize high-profit verticals, and consider reducing exposure to select automotive business lines.

Cash flow and balance sheet -- Net debt to adjusted EBITDA at 2.1 times, improved sequentially, positioning Timken near the midpoint of its targeted leverage range.

Summary

Timken (NYSE:TKR) reported stronger-than-anticipated third-quarter results, supported by top-line growth, margin expansion, and robust cash generation. Management reaffirmed full-year earnings guidance at the midpoint of $5.25, but raised the net sales outlook by 50 basis points for the full year due to better-than-expected third-quarter volumes and pricing momentum. An updated tariff forecast now projects a $15,000,000 negative impact for the full year. Strategic priorities highlighted include the implementation of an 80/20 portfolio review, targeted cost savings, and enhanced integration of acquired businesses to support future profitability.

CEO Baldeya confirmed the team is "moving with urgency to position the company for earnings growth in 2026" and announced plans for an Investor Day in the second quarter to "outline our strategic vision and priorities in more detail."

Dicenza stated, "we are reaffirming the midpoint of our earnings guidance range of $5.25" despite an incremental $0.05 per share tariff headwind and a lower fourth-quarter outlook.

Order books were sequentially lower in line with typical seasonal trends, but Dicenza emphasized "year-over-year order book was up," offering management cautious optimism heading into 2026.

Timken expects to "fully offset the tariff impact exiting this year" according to Dicenza, based on ongoing pricing actions and cost-reduction efforts.

Discussion of the 80/20 strategy indicated ongoing efforts to rationalize the automotive segment and maximize profitable growth opportunities across acquired and legacy businesses worldwide.

Industry glossary

80/20 approach: Portfolio management strategy focused on prioritizing the most profitable businesses (the "20%") that drive the majority of returns while de-emphasizing or exiting less profitable segments.

Incremental margin: The extra margin earned for each additional unit of sales, often referenced to assess operational leverage and cost discipline.

Section 232 tariffs: U.S. trade duties imposed on certain imported metals and components under Section 232 of the Trade Expansion Act of 1962, impacting costs for affected manufacturers.

EBITDA: Earnings before interest, taxes, depreciation, and amortization; a key operating performance metric.

Full Conference Call Transcript

Lucian Baldeya, and Mike Dicenza, our Chief Financial Officer. We will have opening comments this morning from both Lucian and Mike 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 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 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 Lucian.

Lucian Baldeya: Thanks, Neil, and good morning, everyone. Thank you for your interest in Timken and for joining our call today. I'm excited to lead Timken into the future and I strongly believe there is opportunity here to create significant value for shareholders. Since this is my first earnings call, I would like to thank Rich Kyle for his leadership as CEO along with members of the Timken Board for their support. I've also enjoyed meeting many of our employees and I'm impressed with their clear sense of purpose and commitment to our customers.

I have covered a lot of ground during my first sixty days on the job, and today, I'll share with you some of my early observations and the potential I see going forward. But first, let me emphasize that our management team's top priority is finishing the year strong. Mike will cover the details, but in the third quarter, we increased revenue, expanded operating margins, and grew adjusted earnings per share double-digit versus last year. We also generated significant cash flow and we strengthened the balance sheet. We are moving with urgency to position the company for earnings growth in 2026.

The Timken franchise is very strong, having been built over one hundred and twenty-five years, and is recognized in global industrial markets for our technical leadership, robust product portfolio, and deep customer commitment. From this foundation, I believe we have tremendous potential to expand positions in key markets, drive profitable growth, and create significant value. This is what attracted me to Timken. Prior to joining, I was impressed with the company's focus on innovation and how well Timken collaborates with customers. Now from the inside, I can see the team's unwavering integrity and commitment to quality, excellent process, and world-class engineering talent that makes it all possible.

A significant part of my time has been spent reviewing the portfolio, the operating model, our products and services, and also collaborating with our leadership team to better understand our customers' needs. It's clear that the company is successful at adding value for customers in engineered-to-order, mission-critical applications where quality, performance, and reliability matter. This is true across our portfolio of closely adjacent products within engineering bearings and also industrial motion solutions. Our complementary product portfolio serves common customers and applications through similar sales channels. We also have strong positions in essential industries such as rail, aerospace and defense, heavy industries, and wind energy.

And we're targeting further growth in newer end markets to Timken, like automation and food and beverage. The company has operating discipline across its manufacturing footprint, generates significant cash flow, and has a solid balance sheet. With a strong foundation, I see many opportunities to improve top-line and also bottom-line performance. To start, we intend to approach the portfolio with an 80/20 mindset, structurally improve margins, grow faster in the most profitable verticals, and create significant value for shareholders by focusing on the actions that will have the most impact. Margin expansion is a key focus for our team and we will leave no stone unturned as we review the business for margin potential.

I also believe there's an opportunity to raise Timken's organic growth algorithm by expanding our market focus in fast-growing regions and verticals and launching new products and services. Capitalizing on the strength of the Timken brand and utilizing our global footprint can help us further grow revenue at many of our acquired businesses, taking them into new regions of the world. In addition, I see how continued integration of our acquisitions can deliver synergy across the entire portfolio. A greater focus on leveraging our strong market positions and aftermarket presence will drive increased cross-selling of our broad product offering.

By leveraging strengths across our portfolio more holistically, innovating new products, and delivering best-in-class service, we believe we can outgrow our underlying markets. These are a few of the opportunities that I believe will increase Timken's earnings power based on my review over the past two months. But there is much more work to be done. Our team is focused on operating with urgency and rigor as we work to position Timken for stronger growth and higher margins. With that, let me turn over the call to Mike for a more detailed review of the results and outlook. Mike?

Mike Dicenza: Thanks, Lucian. And good morning, everyone. I'm excited to be here on my first call as CFO and for the opportunity to partner with Lucian and the rest of the Timken team to accelerate value creation for our stakeholders. For the financial review, I'm going to start on slide six of the materials with a summary of third-quarter results. Overall, revenue for the quarter was $1,160,000,000, which is up 2.7% from last year. Adjusted EBITDA margins came in at 17.4%, a 50 basis point increase. And adjusted earnings per share for the quarter was $1.37, up 11% from last year. Turning to slide seven, let's take a closer look at our third-quarter sales.

Organically, sales were up 0.6% from last year. The increase was driven by higher pricing across both segments and modest volume growth in Engineered Bearings, which more than offset lower demand in the Industrial Motion segment. Looking at the rest of the revenue walk, the CGI acquisition and foreign currency translation each contributed approximately 1% of growth to the top line. On the right, you can see third-quarter performance in terms of organic growth by region. This excludes both currency and acquisitions. Let me give you some color on each region. In The Americas, our largest region, we were down 1% with growth in North America slightly more than offset by lower revenue in Latin America.

By sector, revenue was higher in general industrial and aerospace, while we had lower shipments in the rail, renewable energy, and on-highway markets. In Asia Pacific, we were up 2% from last year, led by growth in China, with a significant increase again in wind energy shipments. India was up slightly in the quarter, while the rest of the region was lower. And finally, we were up 2% in EMEA, led by growth across the off-highway, rail, and heavy industry sectors, partially offset by lower on-highway revenue. Note that this is the first time the region posted growth in more than two years, which is great to see.

Turning to slide eight, adjusted EBITDA was $202,000,000 or 17.4% of sales in the third quarter, compared to $190,000,000 or 16.9% of sales last year. We achieved nearly 40% incremental margins in the quarter, driven by improved operating performance more than offsetting the dilutive impact of tariffs. Looking at the year-over-year change in adjusted EBITDA dollars, you can see the increase was driven collectively by several factors, which more than offset the impact of lower volume and incremental gross tariff costs. Let me comment a little further on the different drivers. On price/mix, pricing was positive in the quarter, while mix was negative.

Pricing was also up sequentially from the second quarter as we continue to put through pricing actions to mitigate the impact from tariffs. And as you can see on the slide, tariffs were a $20,000,000 headwind versus last year, and costs were also higher sequentially. Looking at Material and Logistics, costs were notably lower versus last year, driven mostly by savings tactics in the Engineered Bearings segment. Moving to the SG&A other line, expenses were down from last year, driven by cost reduction initiatives and lower accruals for bad debt. Currency added $4,000,000 to adjusted EBITDA, while our CGI acquisition contributed $3,000,000 and was accretive to company margins again in the third quarter.

Keep in mind that CGI was included in the acquisitions line for only about two months this quarter, as we passed the one-year ownership mark in early September. Now let's move to our business segment results starting with Engineered Bearings on slide nine. Engineered Bearings sales were $766,000,000 in the quarter, up 3.4% from last year. Organically, sales were up 2.7%, driven by higher pricing and higher volumes with growth across all geographic regions during the quarter. Among market sectors, renewable energy, aerospace, and general industrial achieved the strongest gains versus last year. We also posted growth in off-highway and rail, while auto truck declined from last year.

Engineered Bearings adjusted EBITDA was $144,000,000 or 18.8% of sales in the third quarter, compared to $138,000,000 or 18.7% of sales last year. Margins came in above expectations as higher than anticipated sales volumes and strong operating performance by our team more than offset the unfavorable margin impact from tariffs. And note that currency was a headwind to margins in the quarter, and excluding FX, organic incremental margins were nearly 40%. Now let's turn to Industrial Motion on slide 10. Industrial Motion sales were $391,000,000 in the quarter, up 1.3% from last year. The CGI acquisition contributed 2.9% to the top line, while currency translation was a benefit of 1.9%.

Organically, sales declined 3.5% as lower demand was partially offset by higher pricing. The organic volume decline was mostly driven by lower solar demand and a decrease in services revenue. Our services business was down against a tough comp last year, and we continue to see some customers delaying maintenance spend. And as expected, the belt and chain platform was down from last year, as it continues to be impacted by lower agriculture demand in North America. On the positive side, our couplings platform was up in the quarter, while lubrication systems and linear motion were relatively flat.

Industrial Motion adjusted EBITDA was $75,000,000 or 19% of sales in the third quarter, compared to $74,000,000 or 19.2% of sales last year. A slight decline in segment margins primarily reflects the impact of lower volume and incremental gross tariff costs offset by favorable pricing, lower SG&A expense, and the benefit of the CGI acquisition to margins in the quarter. Moving to slide 11, you can see that we generated operating cash flow of $201,000,000 in the third quarter, and after CapEx of $37,000,000, free cash flow was $164,000,000, up significantly from last year. And we expect to generate more than $100,000,000 of free cash flow in the fourth quarter.

Looking at the balance sheet, we ended the third quarter with net debt to adjusted EBITDA at 2.1 times, which is near the middle of our targeted range. Note that we strengthened the balance sheet from last quarter, as we reduced net debt by $115,000,000, and you can see that our net leverage improved compared to June 30. Now let's turn to the updated outlook for full year 2025, with a summary on slide 13. Overall, we are reaffirming the midpoint of our earnings guidance range of $5.25 as the better-than-expected third-quarter results are offsetting an incremental $0.05 per share headwind from tariffs and a lower outlook for the fourth quarter.

With respect to net sales, we raised the full-year outlook by 50 basis points versus the midpoint of the prior guide. Specifically, we are now planning for 2025 sales to be down approximately 0.5% in total at the midpoint. Organically, we expect sales to be down around 1.75%, which is slightly better than our prior guide, driven by the stronger-than-expected volumes in the third quarter. Currency is now expected to be slightly positive to the top line for the full year versus flat in the prior outlook, while there is no change to our M&A assumption. Now let me provide a little more color on the updated organic revenue outlook.

The implied outlook for the fourth quarter is for a 2% year-over-year decline. Note that this factors in a greater-than-normal seasonal sequential decline. The evolving trade situation continues to weigh on industrial market activity, and we are planning for customers to be cautious through year-end. And recall that last year's fourth quarter benefited from a sizable military marine project, which is impacting the Industrial Motion segment organic sales comparison. Moving to margins, our full-year consolidated adjusted EBITDA margins are now expected to be in the low to mid-seventeen percent range.

This implies that fourth-quarter margins will be down around 100 basis points from last year, driven by higher corporate expense, the dilutive impact from tariffs, and lower profitability in the Industrial Motion segment driven by the absence of last year's favorable military marine project. With respect to cash flow, we are reaffirming our outlook to generate $375,000,000 of free cash flow at the midpoint, which would be more than 130% conversion on GAAP net income. On Slide 14, we provide an updated view on our 2025 organic sales by market and sector. Relative to the prior guide, we increased the outlook for renewable energy, driven by higher wind shipments.

Overall, the net change among all the market sectors you see in the chart supports the slightly improved full-year organic sales outlook. Moving to Slide 15, here we provide an overview and update on the direct impact of tariffs on Timken. We covered most of this on previous earnings calls, so let me just hit the changes. We're currently estimating a full-year net negative impact from tariffs of approximately $15,000,000 or $0.15 per share. This is more of a headwind than our prior estimate of $10,000,000 or $0.10 per share, driven by the increase in the tariff rate on India and the expansion of Section 232 tariffs.

The situation continues to evolve, but we still expect that our mitigation tactics enable us to recapture the margin in 2026. In summary, the company delivered better-than-expected third-quarter results, and the team is focused on finishing the year strong. While still early, we are cautiously optimistic about the outlook as we head into next year based on some encouraging order trends in a few of our markets and considering how long our industrial markets have been down. Timken remains well-positioned to leverage a recovery in market volumes into higher profitability, and we expect to benefit from the strategic priorities that Lucian highlighted.

Let me turn it back over to Lucian for some final remarks before we open the line for questions. Lucian?

Lucian Baldeya: Thank you, Mike. I hope you come away from today's call with a sense that the Timken team is focused on taking the company's financial performance to the next level. We are approaching things with an open mind, and I look forward to continuing to hear your thoughts and ideas. Your perspective is critical as we work to position the company for the future. We will have much more to share in the coming months. To that end, we plan to host an Investor Day in the second quarter of next year where we will outline our strategic vision and priorities in more detail.

Neil Andrew Frohnapple: Thanks, Lucian. This concludes our formal remarks. We'll now open up the line for questions. Operator?

Emily: Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now. The first question today comes from Bryan Blair with Oppenheimer. Bryan, please go ahead.

Bryan Francis Blair: Thank you. Good morning, guys.

Mike Dicenza: Morning, Bryan. Morning.

Bryan Francis Blair: Wish and luck you and gentlemen are one for one thus far. So that's good to see. Two to level set on the near-term outlook, are you already seeing the kind of sequential weakness or incremental weakness that you've baked into the guide? Or is it that you know, simply the assumption of your team given the backdrop, the mosaic as it is, that a sequential decline in order rates is going to occur as Q4 moves forward?

Mike Dicenza: Yes. So thanks for the question, Bryan. Let me just say that our outlook includes the latest order trends. And we did see in the third quarter some seasonally declining order book, but yet year-over-year order book was up. So as I think about it, overall, the patterns we're seeing are supportive of the fourth-quarter guide. I wouldn't say that we're losing share or anything, nothing notable like that. So really more, I would say, cautious given the tariff situation, the uncertain trade environment, but the guide incorporates kind of our latest thinking and what we've seen.

Bryan Francis Blair: Okay. Understood. And, Mike, you stressed cautious optimism on 2026 in prepared remarks. I realize that we're not going to have 2026 guidance for a bit, but at a higher level, maybe offer what your team sees as the puts and takes, given current visibility looking to the New Year and if we are in a healthier demand environment. Given the carryover of restructuring savings, other work that the team has done through 2025. Kind of incremental should we anticipate next year?

Mike Dicenza: Yes, right. So as you say, a little early on 2026, but what I can say is we're moving with urgency. You heard Lucian say that, we're moving with urgency really to position the company for earnings growth next year. We're focused on executing what we can control and looking to accelerate value creation for shareholders. So as we sit here today, we're cautiously optimistic on next year. Based on some of the encouraging order trends that I've referenced really across a few of our key markets. And I think as we've said on prior earnings calls, we are at the we've been an extended or year-over-year decline for quite some time.

We'd like to think we're approaching the end of that. So when we combine all that, we remain cautiously optimistic for next year. We're well-positioned to leverage recovery and volumes when they come. We'll leverage those into higher profitability. And then we do also expect to benefit from the strategic priorities that Lucian highlighted. So as we sit here today, early to call, but feeling cautiously optimistic and we do have a few tailwinds that would be behind us relative profitability. So looking to take margins up next year and off of that higher volume if or when it comes through.

Bryan Francis Blair: Understood. Appreciate the color. Thank you.

Mike Dicenza: Thanks, Bryan. You're welcome. Thank you.

Emily: Thank you. Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Angel Castillo: Good morning. Lucian, Michael, congrats on the quarter and I look forward to working with both of you. Maybe just to go back on the you're welcome. Just wanted to go back on the organic growth implication for the fourth quarter here. Do you think that there was, I guess, a pull forward in the third quarter? Or could you just kind of expand a little bit more maybe what you see or what you kind of saw inflect toward the kind of cadence you're guiding to in the fourth quarter by end market?

You could talk about it on a monthly basis too, I guess, what's the magnitude of declines that you've maybe seen in October and what end markets is that maybe more pronounced then?

Mike Dicenza: Yeah. So let me, let me answer maybe first part of that question. There's nothing we can point to say that we saw pull forward into the third quarter. So nothing there that would give us indication. Again, probably cautious on the fourth quarter. Nothing clearly in order patterns, customer behavior that says we would see a deceleration, just cautious as we have been on that outlook given the trade uncertainty. So yeah, really nothing specific to speak of and nothing indicative of a pull forward in the third quarter.

Angel Castillo: That's helpful. And then I guess just in terms of as we think about the headwind from tariffs here, I assume with things kind of kicking in for some of these kind of November 1, maybe a still a little bit of an incremental impact in 1Q. But can you talk about just your ability to recapture or start to really offset tariffs? Should we assume that 1Q would be of incrementally worse? Or do your mitigation strategies really start to kick in, whether it's price or cost? Therefore, we should assume that this is probably, more of a trough all else equal. A volume standpoint.

Mike Dicenza: Yeah. So a couple of things. Obviously, we can we're focused on controlling what we can control around tariffs. As you said, November 1 is a stated deadline and you know, I can't control that. Just to be clear though that significant step up in the China tariffs is not in our guide. So if that does occur, it would be an incremental headwind to where we are. As far as mitigation and recovery, we continue to push put pricing through in the markets. We put more pricing through in the third quarter. Other actions at our disposal around supply chain changes, etcetera.

So we do expect to fully offset the tariff impact exiting this year and look to recapture those margins next year. So thinking about the first quarter next year, and tariff offset, we are exiting the year at a higher pricing rate than the full year average. If you think 1.5% pricing for the year, exiting the second half at greater than 2%. So think about that incremental as benefiting us in the first half of next year. So we do have some headwinds related to pricing to help offset that tariff impact and then other actions as well. So look to recapture those margins in 2026.

Angel Castillo: Very helpful. Thank you.

Emily: Our next question comes from David Raso with Evercore. Please go ahead.

David Raso: Hi, thank you. Thank you. I'll be quick. And if I missed it, I apologize. A lot of companies this morning. The fourth quarter organic decline, could you give some color the mix of that between the divisions? And particularly, I also wanted to see how trends are going with the Industrial Distribution business. I noticed you maintain that guide for the end market. Only one you bumped up was renewable. I'm just trying to get a sense of the mix in the 26%. I think renewables as a pretty solid incremental margin business. So that picking up is interesting. But the Industrial Distribution IC did not pick that up.

So again, splits on the segment for the fourth quarter and then color on those markets. Thank you.

Mike Dicenza: Sure. Thank you, David. So thinking about the segment split for the fourth quarter, we are expecting organic sales to be down in both segments. I would say maybe a little more in industrial motion. We called out particularly in year on year, had a sizable marine military marine project last year. That doesn't repeat. So, but we are looking for organic revenue to be down in both segments. As far as distribution goes, yes, we did not move it. I would say it's moving inside of the range, if you will. Not enough to move us to move anything up or down. So nothing changing there. We are encouraged as we look forward.

Obviously, that is a channel that we're ready to serve and if there's a market recovery one that we would prioritize to serve. So we're well positioned for that to continue or to go up. But relative to the fourth quarter, we're kind of keeping it where it was as we're not seeing anything that would indicate otherwise.

David Raso: And on the renewable side?

Mike Dicenza: Yeah. I'm sorry. Renewables, right. So we continue to see strength and really driven by China wind and renewables, as you know, but for us between wind and solar, the strength really is on wind. Solar continues to be challenged for us. But on the renewables, we saw strength in the second quarter and you know, we know there were some legislation incentives that in China that went away at the end of the second quarter. So we were maybe expecting more of a step down than we saw. So the strength there really was a bit of a happy surprise for us.

But in terms of growth, I would still expect that to continue to be a growth opportunity for us, but nothing in terms of significant trends. We moved it we did move it to the right on that strength that we saw in the third quarter. So I'd expect renewables to continue to be part of our growth story and really driven by wind.

David Raso: And lastly, I'll be quick. The organic growth turning back positive. As we think about it going into 2026. Of your two businesses, which segment would you expect to see it first?

Mike Dicenza: Yeah. I don't know if that's really, really hard to pinpoint that. Obviously, the markets are going to drive that goes. As we're sitting here today, really hard to call next year's markets. So can't say for sure where that would come from. So probably too early to call. We'll have a lot more information on that obviously, in our next quarterly call.

David Raso: I appreciate that. I'm just trying to back into the industrial So obviously, big slug of engineered bearings, and it's pretty profitable. I was just trying to get a sense, is that where we feel a little bit better about going to 26% to turn EB positive before maybe the automation side of Industrial Motion? Just trying to fill you out on is there any hint of a restock on the distribution piece for EB, some of the off-highway businesses that were obviously significant drag, so they're starting to turn a little bit year over year. It sounds like you're not willing to say EB is the first one up compared to I'm Is that fair?

Lucian Baldeya: Yeah. And, Rob, this is Lucian. So, you know, we're trying to use all the data at our disposal to try to sense this. So short answer is I don't think we know yet, as Mike said. But one of the things we do look at is distribution inventory. So you look at sales in, you look at sales out. And you try to see a disconnect to predict an upturn or a downturn and I would say, there is no data that points in either direction. Inventories are not elevated, so that's the good news. They're kind of stable. And then sales in and sales out are still reasonably matched.

So there is nothing in there that says that a big change is imminent. But that's the type of sensing we're doing to prepare for an upturn.

David Raso: I appreciate the time.

Emily: Thank you. Our next question comes from Stephen Volkmann with Jefferies. Please go ahead.

Stephen Edward Volkmann: Good morning, guys. Lucian and Mike, welcome. Maybe I'll switch to some kind of a longer-term bigger picture questions. First and foremost, I guess, listening to your comments around 80/20 being a big focus for you. Always curious to see if companies are willing to do the PLS portion of 80/20. So I know you guys have talked about maybe deemphasizing some auto business next year. Any update on that? And any other areas where you think there's an opportunity to exit less profitable, whatever businesses, processes, customers any of that?

Lucian Baldeya: Yeah. I mean, we appreciate the question. And we announced on purpose an 80/20 approach to the portfolio and really narrowed it down to looking at the portfolio. And the reason is I think it's essential to unlocking value in the company. So if you think about what the outcomes would be, obviously structurally improve margins and then grow faster in the most profitable verticals. So we want to approach this portfolio with a completely open mind and really come back to we did announce in the prepared remarks that we're going to have an Investor Day in Q2. So by that time, really have a lot of clarity.

But to step back and maybe share some of the thinking and some of the framework, we do want every business in that portfolio to be contributing to the 20% EBITDA margin target. So that's kind of table stakes. And then once you do that analysis, you very quickly come out with the great businesses that we have and there's plenty of them. And then making choices in there to say where do we double down, where do we invest to grow faster. There are fixed opportunities and there I think we're going to be very disciplined to not start long-term projects. And really look at what are those businesses that can be turned around.

And then there's the third category and you alluded to some of that in your question, which is there a business that's just not us? And in the end, what is not us? It might be a numerical number that it doesn't fit a margin target, but frankly, it might be something different. It might be a good business where we are just not the natural owner. It just doesn't fit who we want to be. We are an engineer-to-engineer product development kind of work. We're not an RF to procurement type of business. We're not a high volume business with a very low mix that's not what's good for us.

So what fits us best is those type of highly engineered solutions. And so we'll look at the portfolio with that angle. To get to your question about automotive, we have to put this in context and recognize we've gone from $1,000,000,000 of automotive business to now we're talking about 8% of the portfolio to thing we're going to deal with half of the 8%, which is now a little over $100,000,000 of the $1,000,000,000 that we once had. That activity is underway. Those conversations are underway in the marketplace. That's not an internal Timken paper exercise. And we are moving in that direction. We've communicated with our customers. We've communicated with partners. And so we're very clear about that.

The marketplace. Having said that, these are customers with multi-decade relationships that have platforms depending on us. So we also have to work with them on the timing. However, any arrangement has to be good for both parties. And so, in the end, I think it's reasonable for you to expect that we will improve even that business going into 2026. In terms of what timing we have to make an announcement, on that remaining 4%, we'll we can't commit to that today. We'll come to you when we have it. But the commitment that you do have is that is a business we are going to deal with as part of this 80/20 effort.

Stephen Edward Volkmann: Great. That's very helpful. And then maybe just some semi-related, you guys have done quite a bit on the M&A front prior to your arrival. And now you talked about your leverage being about where you want it. You have a good cash flow year here. Just any change listening in your view of the right way to allocate capital?

Lucian Baldeya: Yeah. No immediate changes. Obviously, we'll provide you more color when we talk about our strategy and the complete context of this, but no immediate change. It's really continuing that balanced capital allocation and continue to be disciplined is what you should expect to see from us. But I do want to say that to your point that we've made acquisitions in the past. We have a tremendous portfolio of acquired businesses and that's what I'm excited about when we do this 80/20 is really finding those opportunities and frankly, we have some pretty good ideas of what they are. Where are the growth opportunities where we can double down? And I'll give you a couple of just teasers.

Right now, we have several of the acquired businesses that are really almost single region business. And there's no reason they should be that way. We're a global company with one hundred and twenty-five year history. And so taking those businesses globally is easier growth factor than entering a new market, a new application. And so that's one we plan to plan to do. If you look at margin opportunities, the businesses that we've acquired and the legacy businesses serve the same end markets, the same end customers. So we can bring better solutions, more engineered solutions to our customers and at the same time reduce our cost to serve.

The I'm businesses do have, at least today, as evidenced in the P&L, a slightly higher cost to serve. The good news is it's the same cost to serve that we are already spending on the EB side. Now how can we continue that integration? The integration has been done in some of the businesses that we've acquired a while back and we have efforts there, but the businesses that are newly acquired, they're not in the same place. And so we'll continue that integration. We'll accelerate it. We'll be more deliberate. And then really targeting those end markets that go across EB and I'm where one plus one is more than two.

That's what the portfolio is going to drive. And that's one of the portfolio that we have. Obviously, to the extent that there are gaps, then that's what more M&A is going to do. So we expect that, that effort will continue in a very targeted way, but we also expect to be able to at Investor Day, give you a lot more clarity to where any future M&A will be relatively straightforward to explain because we will have explained the strategy.

Stephen Edward Volkmann: Understood. Okay. Thanks so much. Good luck.

Lucian Baldeya: Sure. Thank you. Thank you. Thank you.

Emily: Our next question comes from Rob Wertheimer with Melius Research. Please go ahead.

Rob Wertheimer: Not hearing you, Rob.

Mike Dicenza: Beg your pardon. Thank you. Good morning. Your comments around 2020 have been I wanted to just a little bit more. I mean, when you came in and you were able to get a deeper look at the portfolio, I mean, is the idea that there was a wider dispersion in margin and growth than you might have expected? Or is it, you know, some of it's maybe obvious when you talk about engineer to engineer and not wanting to be an RFP business on volume scale. I'm just curious, when you glance the portfolio, did 80/20 leap out because there was a bigger spread than you would expected? And what were your other impressions? Thank you.

Lucian Baldeya: Yes. No, thank you for the question. And I'd say the bigger thing that leads out is the degree of opportunity that exists in different regions, markets, business combinations. And so you have to you have to get a little deeper to spot this. But as I said, one of the opportunities that most obvious is just regional penetration for some of these businesses. And so there's is a lot of growth opportunity. I mean, there are a lot of jewels in that portfolio. And so 80/20 sometimes we focus on what are we going to stop, and we definitely will do that, rest assured. But I'm equally excited about what are we going to double down on.

Actually, more excited on what we're going to double down on. And that's that's what really got me going on 80/20 when I look at the portfolio because there's there's several businesses out there that are doing very well. And we can double down and do even better. And when you have businesses like that, you win twice, you accelerate your top line, but you also mix up. So that was more of the drivers to the extent that there are businesses in that portfolio that don't meet margin targets. Then that's another lever that we definitely intend to exercise.

Rob Wertheimer: All right. Thank you. That was a great answer. And then maybe this is one level too deep, and you can tell me if so. But when you look at those opportunities to go global that hadn't been taken, was it your impression that there was a block, know, that there you know, a study was done, there's competitive threat was deemed too big or whatever? Or is it more Timken's been a successful acquirer and has not a chance to fully lever it? And I'll stop there. Thank you.

Lucian Baldeya: Yeah. You have to recognize that this is with two months in there also. It's easy for me to, to maybe make assumptions. But at least my hypothesis, just in the spirit of transparency, it's prioritization. It's just how many things can it do at once, and that's why really, another reason for 80/20 because, this is all about Pareto-ing and saying where are where are the largest opportunities. And so that was part of the reason. The other part is historical. These businesses are entrenched and this is not is not necessarily a new discovery. That we're going to take a business that's regional into a new region. This was already underway.

But really, choosing a few of them where you say, okay. We're gonna actually double down. Do it in a more deliberate market back way versus product forward. And so that's really more of a change in the approach but I don't want you to walk away with this is a brand new idea that was not considered or not underway. It's just really accelerating it, doubling down on it in a few of the businesses that matter.

Rob Wertheimer: Thank you.

Lucian Baldeya: Sure.

Emily: Thank you. Our next question comes from Carl Menzies with Citigroup. Please go ahead.

Kyle David Menges: Great. Thank you. It sounded like EMEA up 2%. First time, it saw growth in two years. So love to hear a little bit more about what drove the return to growth in EMEA and just your level of confidence in growth sustaining in that region.

Mike Dicenza: Yeah. Thanks for the question, Kyle. Yes, so just maybe the first thing about EMEA is it's been down so long that the comps continue to get easier. So I do think that there's an element of just reaching the bottom. So that would be part of it. We do have a strong European presence in some of our Industrial Motion businesses and we pointed to those as having good quarters as well. And then it's really three markets, if I can highlight those, drove that growth. Off-highway, was up. Rail, where we're winning particularly in new platforms outside of freight rail, which has been our typical stronghold. We're winning in new applications there.

And then heavy industry would be the third market. So really a combination of finally maybe reaching the bottom, a little early to call again, but being down for so long and then strength in some of these markets and new business wins.

Kyle David Menges: Got it. And then margins, just how should we maybe be thinking about the fourth-quarter exit rate on margins? And it sounds like there could be some good momentum into 2026. With pricing, and then maybe you see some of these auto OE actions start to come through. In the '26. And I know you're not to give 2026 guidance, but I mean you do normally see a step up in margins from the fourth quarter to the first quarter. Into the next year. Fair to assume that we have maybe see a bigger sequential step up in margins into the first quarter of next year?

Mike Dicenza: Yes. Well, again, great question and good point. And yeah, to highlight first of all that fourth quarter for us is typically our seasonally low quarter and we do see a significant step up from fourth quarter to first quarter. So you can expect that to happen. With that volume uplift is generally margin uplift. And then the self-help we've done this year between pricing actions, which again, I mentioned earlier, we're exiting the year at a higher run rate than the full year. So you'd expect that to be some uplift in the first half.

And then our cost savings tactics, which we've talked about on prior calls and would be second-half weighted, that would also be a help to the first-quarter margins as well. So as you said, too early to comment, really not going to get into numbers at this point, but I think safe to assume that a significant step up in both top and bottom line going from fourth to first quarter.

Kyle David Menges: Makes sense. Thank you.

Mike Dicenza: You bet.

Emily: Thank you. Our next question comes from Ethan Coyle with JPMorgan. Please go ahead.

Ethan Coyle: Hi, everyone. This is Ethan on for Tomo. Thank you for taking my question today. For on pricing, how successful have you been through passing pricing to offset tariffs? And then on the increase in tariffs, do you expect further pricing in Q4 or maybe Q1 in 2026?

Mike Dicenza: Yes. Thanks for the question. So we've talked about pricing this year and I've said it a couple of times, we're looking at pricing above 1.5% for the full year. So I'd say we've been largely successful passing through pricing. Just a reminder about how our pricing works. We have good pricing in the industrial distribution channel where we can get through pricing call it with sixty days notice, a little bit longer in our OEM businesses, depending on where they sit that can be you know, a couple months to a couple quarter lag.

So I would expect that we will continue to push pricing and then too early to comment on what additional pricing we will do next year. But know that we're ending the year with positive pricing momentum and are committed to recapturing the margins on that tariff impact next year through all of our mitigation tactics, including pricing.

Ethan Coyle: Thank you. And then on Industrial Motion with organic in this quarter and then difficult comps in Q4, do you see that inflecting positively anytime in the 2026?

Mike Dicenza: Yeah. Again, really early to be commenting on 2026. The only thing I'd reiterate is that fourth quarter to first quarter is a significant step up. So you can expect Industrial Motion to step up from the fourth to first quarter. But again, really early to be commenting on anything specific for 2026.

Ethan Coyle: Thank you.

Lucian Baldeya: Thank you.

Emily: Thank you. Our next question comes from Tim Fain with Raymond James. Please go ahead.

Timothy W. Thein: Great. Thank you. Good morning. Just on the margin drive good morning. One of the margin drivers we've talked about for '26, specifically on the cost save and all that and the footprint realignments that have been made over the last, you know, year plus. Can you just maybe help us quantify that? I think that from memory, the number coming into this year was like, circa 75 or $80,000,000. Is there a way to kinda help us as to and frame that as to what that could mean in '26.

Mike Dicenza: Yes, sure. Thanks for the question, Tim. Yes, you're right. Referencing back to the $75,000,000 of savings, we did announce that. And I would just reiterate, we're on track to deliver that $75,000,000 of savings. Maybe just one thing to point out on that, probably a little more a little ahead of plan in engineer bearings will behind playing in industrial motion. That's part of the margin story in Industrial Motion. But the way to think about that, think said it would be roughly it would be second-half weighted call it sixty-forty second half, first half.

So if you do the math on that, sixty-forty, 75,000,000, you should get the somewhere around $15,000,000 of incremental cost saves in the first half next year.

Timothy W. Thein: Got it. Got it. Okay. And again, I get it. Limited as to what we wanna talk about for '26. But just thinking you know, about the quarter 01/01 beyond where we are today and that as you know, normally, I think that you see about a call it, 10 ish percent organic step up 4Q to 1Q. But just based on what you're hearing from the channel and customers, I mean, you think the pieces are in place for that kind of normal sequential step up? As we sit here today in the first quarter.

Mike Dicenza: Yes. Again, I appreciate the acknowledging that we're not going to talk much about next year. But I don't think there's any reason to believe differently than a typical step up from fourth quarter to first quarter. Again, we'll have a lot more information next time, but there's nothing in what we're seeing in current order patterns or otherwise that would indicate we'd expect anything other than a typical seasonal step up.

Timothy W. Thein: Got it. All right. Thank you, Mike. Appreciate it.

Mike Dicenza: Yeah. Thank you, Tim.

Emily: There are no remaining questions at this time. Sir, do you have any final comments or remarks?

Neil Andrew Frohnapple: Yes. Thanks, Emily, 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.

Emily: Thank you for participating in The Timken Company's third quarter earnings release conference call. You may now disconnect.

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