Image source: The Motley Fool.

DATE

  • Wednesday, July 30, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

  • President and Chief Executive Officer — Rich Kyle
  • Chief Financial Officer — Philip Fracassa
  • Vice President, Investor Relations — Neil Frohnapple

Need a quote from one of our analysts? Email [email protected]

RISKS

  • Management reduced the upper end of full-year 2025 adjusted EPS guidance by $0.20, citing a "more cautious outlook for the second half, primarily due to the volatile trade situation."
  • Chief Financial Officer Fracassa said, "the drop in the margins for the full year" is driven by "the volume outlook down a point," more unfavorable mix, and "incremental cost headwinds with the belt ramp taking a little bit longer than we anticipated."
  • Softness persists in EMEA and Industrial Motion segments, with "lower demand" observed, especially impacted by North American agriculture and softer European retrofit lubrication sales.
  • Incremental gross tariff costs, unfavorable manufacturing mix, and currency negatively affected adjusted EBITDA and margins. Tariffs resulted in a net $10 million negative impact on full-year 2025 earnings, an improvement over prior estimates.

TAKEAWAYS

  • Total Revenue: $1.17 billion, down less than 1% with organic sales down 2.5% due to lower demand in both segments, partially offset by higher pricing.
  • Adjusted EBITDA Margin: 17.7%, compared to 19.5% last year, reflecting lower volumes, incremental tariff costs, unfavorable mix, and negative currency translation.
  • Adjusted EPS: $1.42, down from $1.63, reflecting volume and margin pressures but in line with internal expectations.
  • Free Cash Flow: $78 million, with stronger cash flow forecasted in the second half due to seasonality and lower cash taxes.
  • Dividend & Share Repurchases: Quarterly dividend increased by 3%, and 340,000 shares repurchased, reflecting ongoing capital return actions.
  • Backlog: Up mid-single digits sequentially from Q1, with broad improvements across industrial sectors.
  • Engineered Bearings Segment: Sales of $777 million, down 0.8%; adjusted EBITDA at $153 million, or 19.7% of sales. Growth in renewable energy and general industrial offset declines in auto truck, off-highway, and heavy industries.
  • Industrial Motion Segment: Sales of $396 million, down 0.7%; organic sales down 5.9%. Adjusted EBITDA was $73 million, or 18.3% of sales, influenced by North American ag demand and ramp costs at the Mexico belts plant.
  • Regional Organic Growth: Asia Pacific up 2%, led by China wind energy; India flat; Americas down 3%; EMEA down 5% but showed sequential improvement.
  • Pricing: Price increases contributed to sequential revenue gains and are expected to accelerate in the second half as tariff-related actions take effect. Base pricing before tariffs is under 0.5% for the full year.
  • CGI Acquisition: Contributed just over 1% to revenue and $4 million to adjusted EBITDA, with an accretive segment margin impact. Expected to add nearly 1% to full-year revenue, with revenue up over 10% since purchase.
  • Net Debt/EBITDA: Net debt to adjusted EBITDA was 2.3x at quarter end, within the targeted range and supporting continued capital allocation flexibility.
  • Full-Year 2025 Guidance: Adjusted EPS range is now $5.10–$5.40, with consolidated adjusted EBITDA margin expected in the mid-17% range. Adjusted tax rate remains at 27%, and net interest expense is $95–$100 million, both unchanged.
  • Tariffs: Net negative impact now estimated at $10 million, or $0.10 per share, for the year—a $15 million improvement from the previous estimate. Pricing actions are expected to fully offset this by year-end on a run-rate basis.
  • Plant Closures: Three facility closures set for the second half, expected to support margin expansion and mitigate volume declines heading into 2026.
  • Automation & Robotics Sector: Focus on industrial and medical robotics, factory automation, and humanoids; "We have a small amount of revenue" in humanoids with expectations for future CAGR but near-term revenue impact under $10 million.

SUMMARY

Timken (TKR 1.39%) maintained its revenue midpoint for the year but reduced the upper bound of adjusted EPS guidance due to ongoing trade uncertainty and volume concerns. Management highlighted a mid-single-digit sequential increase in backlog, attributed to order improvements across most industrial segments, with renewable energy and general industrial sectors as key drivers. Cost-saving initiatives, including three impending plant closures and productivity improvements in Mexico, are expected to support margin recovery by 2026. The CGI acquisition delivered immediate revenue and adjusted EBITDA accretion, strengthening the company’s position in automation and medical robotics. Capital allocation actions, such as increased dividends and share buybacks, continued, underpinned by manageable leverage.

  • Chief Financial Officer Fracassa said, "order intake rates have been improving as we move through the year," and backlog was up sequentially, supporting optimism for industrial expansion in 2026.
  • Chief Executive Officer Kyle described ongoing negotiations with auto OEM customers that could result in portfolio exits or repricing, with the expectation of a "margin uplift" becoming evident in the second half of 2026.
  • Adjusted EPS guidance for 2025 assumes year-over-year organic revenue will be down in the second half; achieving more positive results would require an acceleration in demand.
  • Pricing actions are expected to be more heavily weighted toward the second half, particularly as new tariff-related increases are implemented in Q3.
  • Management indicated that backlog strength is not concentrated but "pretty broad" across industrial markets, with heavy industry yet to materially recover.

INDUSTRY GLOSSARY

  • Backlog: The total value of unfulfilled customer orders at quarter end, indicating future revenue visibility.
  • CGI: A precision motion control products company acquired by The Timken Company, contributing to growth in automation and robotics.
  • Tariff-Related Pricing: Price increases passed to customers specifically to offset costs incurred from import tariffs.
  • Belt Ramp: The process and associated costs of scaling up production at the new belts manufacturing facility in Mexico.

Full Conference Call Transcript

Emily: My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to The Timken Company'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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two. Thank you. Mr. Frohnapple, you may begin your conference.

Neil Frohnapple: Thank you, operator. And welcome, everyone, to our second quarter 2025 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 Bill Forcasa, our Chief Financial Officer.

We will have opening comments this morning from both Rich and Phil, before we open up the call for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results. Our actual results may differ materially from those projected or implied due to a variety of factors. We have included reconciliations between non-GAAP financial information and its GAAP equivalent. Today's call is copyrighted by The Timken Company and without express written consent. I will now turn the call over to Rich.

Rich Kyle: Thanks, Neil. Good morning, and thank you for joining our call. Overall, second quarter results were in line with our expectations as the team is managing well through this period of uncertainty and continued soft market environment. Total sales in the quarter were down less than 1% from last year, and organic sales were down 2.5% driven by lower demand in both segments partially offset by higher pricing. Our total backlog at the end of June was up mid-single digits compared to the first quarter, which is a positive indicator for 2026. Adjusted EBITDA margins came in at 17.7%, and adjusted EPS was $1.42, both below prior year driven by lower volumes, higher tariff costs, and unfavorable currency.

In the quarter, we generated $78 million free cash flow, raised our quarterly dividend by 3%, and purchased 340,000 shares of stock. The Timken Company continues to create shareholder value through the compounding impact of our disciplined capital allocation actions. Turning to the outlook, we are focused on finishing the year strong while positioning the company for industrial expansion in 2026. Bill will take you through the updated 2025 outlook and assumptions in detail, but we expect the operating environment to remain challenging over the rest of the year primarily due to the uncertainty surrounding trade, its impact on costs, demand, and other macros.

However, we are reducing the high end of our full-year earnings outlook to reflect a more cautious view of the second half, primarily due to the volatile trade situation. The team remains focused on managing our cost to the current market demand, as well as driving structural cost actions that will contribute to margin expansion over time. The Mexico plant will continue to ramp up and productivity will improve through the end of the year. We are also on track to complete three plant closures in the second half of the year. These actions will mitigate the planned volume declines in the second half and positively impact margins in 2026.

The tariff situation remains volatile, but our large U.S. manufacturing footprint will serve us well to adapt to the changes, and we remain confident in our ability to mitigate the direct impact from tariffs. We continue to actively pass the cost into the market through repricing the portfolio, albeit with some expected lag in timing. Pricing was up sequentially compared to the first quarter, and we expect further price realization as we move through the second half. While still early, we are optimistic about the outlook for 2026. Backlog is inflected despite the trade situation, and as trade stabilizes and end-user confidence improves, we expect industrial markets to expand.

Additionally, The Timken Company will benefit next year from wins in the marketplace, as well as the carryover of pricing and cost savings. Both our portfolio and our operating capabilities are better positioned to capitalize on industrial strength. We also expect a positive impact in 2026 from portfolio moves, including the automotive OE business we highlighted last quarter. Discussions with affected customers are ongoing, and we expect the outcome to have a positive impact on our margins in 2026 and beyond. We also continue to invest in the parts of our portfolio with the highest returns and best growth potential. An example of this is The Timken Company's position in the automation sector.

We are focused on scaling and high-growth applications including industrial robotics, factory automation, medical robotics, and humanoids. We have built a broad product offering to serve these applications. The company's customer-focused innovation, application engineering expertise, and advanced manufacturing capabilities are our competitive strengths as the automation megatrend accelerates. With respect to the CEO search, the board is working diligently to advance the process and bring it to a successful closure. Interest in the role is strong, and members of the search committee are confident that we will soon identify the next leader to take The Timken Company to new levels of performance. In the meantime, we continue to advance the company along the same strategic path.

The Timken management team is strong, experienced, and focused on executing our strategy. We are confident in the company's ability to deliver higher levels of performance and create shareholder value as we advance The Timken Company as a global technology leader across diverse industrial markets. With that, let me turn over the call to Phil for a more detailed review of the numbers and outlook.

Philip Fracassa: Okay. Thanks, Rich. And good morning, everyone. For the financial review, I'm going to start on Slide 12 of the materials, with a summary of our second quarter results. Overall, revenue for the quarter was $1.17 billion, down less than 1% from last year. Adjusted EBITDA margins were 17.7%, and adjusted EPS for the quarter was $1.42. Turning to Slide 13. Let's take a closer look at our second-quarter sales. Organically, sales were down 2.5% from last year, with volumes lower but pricing higher across both segments. And the rate of organic decline improved modestly, as compared to the first quarter.

Looking at the rest of the revenue walk, the CGI acquisition contributed just over 1% of growth to the top line, and foreign currency translation contributed modestly as well. On the right, you can see how the second quarter fared in terms of organic growth by region. This excludes both currency and acquisitions. Let me provide a little color on each region. In Asia Pacific, we were up 2% from last year, led by growth in China, with a significant improvement in wind energy shipments. India was flat in the quarter at a good run rate, while the rest of the region was lower. In The Americas, our largest region, we were down 3%.

While the region continues to be relatively stable overall, we did see lower revenue in the distribution off-highway and auto truck sectors. On the positive side, revenue in the general industrial sector was up. And finally, we were down 5% in EMEA, on continued industrial softness in that region. But I would point out that the year-on-year rate of decline has improved considerably as compared to the last several quarters, and we saw revenue growth in distribution during the quarter, both of which are good signs. Turning to Slide 14. Adjusted EBITDA was $208 million or 17.7% of sales in the second quarter, compared to $230 million or 19.5% of sales last year.

Looking at the year-over-year change in adjusted EBITDA dollars, the decrease was driven by the impact of lower volume, incremental gross tariff costs, I'll come back to tariffs in a moment, unfavorable manufacturing mix, and currency. These headwinds were partially offset by higher pricing, including tariff-related pricing, lower material and logistics costs, and the benefit of the CGI acquisition. Let me comment a little further on these drivers. On price mix, pricing was positive in the quarter, while mix was negative. And pricing was also up sequentially from the first quarter, due to the initial tariff-related pricing actions we've put through.

So the net impact from tariffs was just slightly unfavorable in the quarter, as pricing actions almost fully offset the incremental tariff costs. Looking at material and logistics, material was notably lower versus last year, due in part to cost savings tactics. And logistics was also slightly down. On the manufacturing line, performance was negatively impacted by a reduction in inventory levels versus last year, which drove unfavorable cost absorption. In addition, we continue to experience high ramp costs associated with our new Belts facility in Mexico. Collectively, these items, plus normal inflation, currency was negative $5 million driven by the weaker U.S. Dollar, which caused some transactional losses in the period.

And finally, our CGI acquisition continues to perform well, contributing $4 million of adjusted EBITDA which was accretive to company margins in the quarter. Moving to Slide 15, we posted second quarter net income of $79 million or $1.12 per diluted share on a GAAP basis. The quarter includes $0.03 of net expense from special items, which is comprised of acquisition amortization, restructuring, and other charges. On an adjusted basis, we earned $1.42 per share, down from $1.63 last year but largely in line with our expectations. Interest expense in the second quarter was about $3 million lower than last year, while our adjusted tax rate was 27% as expected.

And diluted shares were down slightly, reflecting net share buybacks over the past twelve months. Now let's move to our business segment results starting with engineered bearings on Slide 16. Engineered bearing sales were $777 million in the quarter, down 0.8% from last year. With the change essentially all organic as the business continues to stabilize. Across regions, we saw lower end market demand in Europe and The Americas, mostly offset by higher revenue in Asia. Among market sectors, auto truck, off-highway, and heavy industries were down from last year as we expected. On the positive side, renewable energy and general industrial were both solidly higher versus last year.

Engineered bearings adjusted EBITDA was $153 million or 19.7% of sales in the quarter, compared to $166 million or 21.2% of sales last year. The decline in segment margins reflects the impact of lower production volume, incremental gross tariff costs, unfavorable mix and currency, partially offset by higher pricing, and the benefit of cost reduction actions, along with lower material logistics costs. Now let's turn to Industrial Motion on Slide 17. Industrial Motion sales were $396 million in the quarter, down 0.7% from last year. Organically, sales declined 5.9%, as lower demand was partially offset by higher pricing. Most platforms posted lower revenue year over year.

Elton Shane saw the largest decline, as it continues to be impacted by lower ag demand in North America. Lubrication systems were lower on softer demand in Europe, including our end-user retrofit business. And the drive systems and services platform was also down. Drive systems were impacted by lower solar demand and marine timing, while services were impacted by tough comps last year and some project pushouts. Our backlog in services remains relatively strong. On the positive side, our linear motion platform was up in the quarter, driven by higher sales in North America, including the benefit of some new business wins in the warehousing logistics sector.

And finally, the CGI acquisition contributed 3.6% to the top line, while currency translation was a benefit of 1.6%. Industrial Motion adjusted EBITDA was $73 million, or 18.3% of sales in the quarter, compared to $80 million or 20% of sales last year. The decline in segment margins reflects the impact of lower volume, incremental gross tariff costs, Belts plant ramp inefficiencies, and higher SG&A expense in the quarter driven by discrete accrual potential bad debt. On the positive side, pricing was favorable, and the CGI acquisition was accretive to margins in the quarter. Moving to Slide 18. You can see that we generated operating cash flow of $111 million in the second quarter.

And after CapEx of $33 million, free cash flow was $78 million. We expect stronger cash flow in the back half of the year, driven by normal seasonality and lower cash taxes. From a capital allocation standpoint, we returned $47 million to shareholders through dividends and share repurchases during the quarter. And we bought back more than 340,000 shares of Timken stock. Looking at the balance sheet, we ended the second quarter with net debt to adjusted EBITDA at 2.3 times, which is within our targeted range. With expected free cash flow in the second half, and our longer-term outlook for EBITDA growth, we remain in great position to deploy capital to create value for shareholders.

Now let's turn to the updated outlook for full year 2025 with a summary on Slide 19. You'll note that we reduced the top end of our prior earnings guidance range, as we are taking a cautious view on the second half. So let's go through it in detail, starting with sales. Overall, we are maintaining the midpoint of our revenue guide at down just over 1%. But the components have changed. Organically, we now expect sales to be down around 2% at the midpoint, which is one percentage point lower than our prior guide. This is being offset by a one-point improvement from currency, which takes currency to neutral to the top line for the full year.

Acquisitions are unchanged, as we still expect CGI to contribute just under 1% to our revenue for the year. And note that revenue in that business is up over 10% since we bought it. Now let me provide a little more color on the updated organic revenue outlook. First, there is no change to our pricing assumption for the full year. We are successfully passing through higher tariff costs into the marketplace through pricing. So the change is entirely volume, which reflects a cautious view on second half demand, given the continued trade-related economic uncertainty.

Year to date, our order intake rates have been improving and our backlog is up versus the end of the first quarter, both of which are good signs as we begin to look ahead to 2026. On the bottom line, we now expect adjusted earnings per share in the range of $5.10 to $5.40 per share. Note that we held the low end of our prior outlook but reduced the top end by $0.20. You'll see a walk of the various puts and takes on a later slide which I'll hit in a moment. Our revised outlook implies that our full-year consolidated adjusted EBITDA margin will be in the mid-seventeen percent range.

And finally, we anticipate an adjusted tax rate of 27% and net interest expense of $95 to $100 million for the year, both unchanged from our prior guide. Moving to cash flow. We're affirming our prior outlook to generate $375 million of free cash flow at the midpoint, which is more than 130% conversion on GAAP net income. Moving to Slide 20. Here, we provide an overview and update on the direct impact of tariffs on The Timken Company. We covered most of this on last quarter's call, so let me just hit the changes. We're currently estimating a full-year net negative impact from tariffs of approximately $10 million or $0.10 per share.

This is an improvement from our prior estimate of $25 million or $0.25 per share, driven by the reduction in tariff rates between the U.S. and China, partially offset by higher assumed rates for other countries. The situation remains fluid, but our team is on track to fully mitigate this impact through pricing and other actions on a run-rate basis by the end of the year and recapture margins in 2026. On Slide 21, we provide a bridge of the $0.10 per share reduction in our 2025 adjusted EPS outlook at the midpoint. Here, you can see the positive $0.15 change related to tariffs, which I just covered. And you'll also see a net favorable $0.10 impact from currency.

These items are more than offset by a negative change of $0.35 from organic, which reflects the lower volume assumption as well as unfavorable mix and our expectation for lower margins in the back half of the year due to the belt ramp and other incremental cost headwinds. With that said, we are still targeting significant cost savings for the full year which will offset inflation in labor and other input costs. In summary, The Timken Company is managing well through this period of elevated uncertainty, and remains focused on finishing the year strong while positioning the company to capitalize on an industrial market recovery.

We are increasingly optimistic about 2026 and are confident in the company's ability to deliver higher levels of performance next year and beyond. This concludes our formal remarks. And we'll now open the line for questions. Operator?

Emily: Thank you. As a reminder, if you would like to ask a question today, please press star followed by the number one on your telephone keypad now. If you change your mind or you feel like your question has already been answered, please press star followed by 2 to withdraw yourself from the queue. Our first question today comes from Kyle Menges with Citigroup. Please go ahead, Kyle.

Kyle Menges: Morning, guys. I was hoping if you could just unpack the trend to the organic volume guide a little bit more. I mean, it sounds like based on your prepared remarks, trends in the quarter have been pretty stable, really, year to date, and then you've seen backlog growth in both the first quarter and second quarter. So you just help me understand what you're seeing and hearing in the markets and from customers that's leading you to take down the second half organic growth guide? Or is it just you guys being cautious on tariff uncertainty?

Philip Fracassa: Yeah. Hey, Kyle. It's Phil. Thanks for the question. So I would put it more in the category of, you know, just wanting to be cautious on the second half of the year. We're not seeing acceleration per se. We're certainly not seeing any deceleration. Markets remain stable. So we wanted to be a little cautious on back half demand just given the uncertainty around trade. Which, you know, filters into the markets, as you know. And we do believe that as we get more certainty around trade, you couple that with a tax bill, you couple that with, you know, maybe a rate cut as we move through the year.

Do think all those things likely impact 2026 in a positive way, but it's usually atypical for our markets to accelerate in the second half. So we just at this point in the year, given where we're at, we just thought it was prudent to be a little bit more cautious on the outlook.

Kyle Menges: Got you. Helpful color. And then starting to get more questions on humanoid robots from investors. Would love to hear from you guys just your thoughts on The Timken Company's position in humanoid robots and just in general, you know, the size and potential that you see in robotics, I guess, for The Timken Company?

Rich Kyle: Yes. So I'll take that. The last part, robotics, if you open it up to automation, obviously, already a sizable market for us. And one that I think we're well positioned to grow in significantly. The CGI acquisition, which Phil talked about, is off to a good start, is almost predominantly focused on medical robotics but has an industrial play as well. Cone and Spanea and The Timken Company have significant plays in factory automation and roll on with some specialty in warehouse automation, but also some of the other parts of factory automation. Humanoid market itself, we are working on applications today. We have a small amount of revenue.

We'd expect a good CAGR off that small amount of revenue, but it takes a few years of a good CAGR to even get up to $10 million. So I think it's gonna be a relatively small number the next couple of years. We're working with multiple OEMs on future designs. But I think it's a longer-term play for sure still on the humanoid side. The other parts of the automation market are here today and growing.

Kyle Menges: Helpful. Thank you.

Emily: Thank you. Our next question comes from Bryan Blair with Oppenheimer. Please go ahead, Bryan.

Bryan Blair: Thank you. Good morning, guys.

Philip Fracassa: Morning, Bryan.

Bryan Blair: Two follow-up on a question on the relative conservatism of the revised guidance or to ask in a different way. What were month-by-month orders through Q2? And how does July look relative to the second quarter level?

Philip Fracassa: Yes. I would say on the second part, on the second part of the question around July, look. We'll close the books on July next week, but, you know, the sales rates we're running would be in line to maybe slightly ahead of the midpoint of our guide. I think July, we're off to a pretty good start relative to July. As far as the order intake rates go, I mean, we don't typically comment on the month-by-month, but suffice it to say, I think your, you know, the order intake rates have been improving as we move through the year.

The order book was up or the backlog was up sequentially from the first quarter, kind of still sort of, I think, flattish year on year. But what we're seeing from an order intake standpoint backlog standpoint, obviously, gives us confidence. But, you know, I think the word on the second half would be more cautiousness than conservatism. And, obviously, you know, we moved some markets to the left on our market chart, heavy industries just because the, you know, the projects project spend was coming a little bit lower than we anticipated. Services is one where, you know, it's generally it can be a discretionary spend. So that's one where we've been seeing some pushouts there. Backlog remains high.

And I think that revenue will come at some point. We wanted to be a little bit more cautious there. And then with distribution, you know, distribution can kind of bounce month to month. It's been relatively stable. We're relatively flat in the quarter. North America was down a little bit. Europe was up a little bit. But we did kind of move distribution to the neutral column as well. The as sort of the basis for the more cautious guide, if you will. And then rail, on the flip side, rail continues to perform well. We moved it over to be neutral despite freight car builds expected to be down significantly in North America this year.

We're seeing some new some good business, activity in winds outside The United States, and really protecting or expanding share even in our core market as well. So just to give you a little bit of extra color, but we do feel confident that as we look ahead to 2026, you know, we do feel that with some help on the trade front and some reasonable resolution there, in the remaining countries that are sort of up for debate. I do think we'll we should we should be pretty good heading into 2026.

Bryan Blair: Okay. Makes sense. I appreciate the color. And maybe offer a little more of an update on your discussions with auto OEMs. What's a realistic time frame to, you know, to finalize those discussions, negotiations? Is the expectation that you'll still impact a little more than half of auto OE revenue? And when you get to that point, are you willing to quantify or otherwise frame the margin lift as mixed reset?

Rich Kyle: Yes. On the little more than half. I'd say that's still what we're focusing on right now. Too early to say how the discussions are going to play out. They're active. I would expect the 2026 guidance, we would be able to estimate what the impact will be through the course of the year. Really don't expect much impact at all through the first quarter of next year. But certainly would expect some positive uplift by the time you get to the second half of next year. And, you know, the outcome is uncertain. I would expect some combination of exiting some parts of the portfolio and repricing some parts of the portfolio.

And then in the repricing, some of it temporary between now when we exit, and some of it that would extend into multiple years. So TBD, but would definitely expect some margin uplift from it in the second half of 2026.

Bryan Blair: Okay. Understood. Thanks again.

Philip Fracassa: Thanks, Bryan.

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

Rob Wertheimer: Thanks. Thank you. Good morning, guys.

Rich Kyle: Hey, Rob.

Rob Wertheimer: My question, Bill, you just kinda walked through some of those markets that changed. I guess when I looked at it, I was slightly surprised not shocked on any of it, but slightly surprised just on distribution. I wonder if you could characterize where inventory levels are or whether there's anything that drove that. Maybe it's just hesitancy around tariff. Wonder if you could describe in a little bit more detail the services what that constitutes and what the decision making around that is. And I'll ask my last one here. It's nice to see the recovery in renewables and wind, I suppose, I wonder if you could just give some sort of description of the strength there.

Threat from Chinese OEMs and just where you stand in that market? Thank you.

Philip Fracassa: Sure, Rob. Thanks for the question. So relative to distribution, obviously, it's a short cycle part of our business. It you know, we were we had we had moved it to be up kinda mid singles, call it, you know, three to four, and then we moved it back to neutral. Sort of leaning right, so I wouldn't have I wouldn't call it a five-point change. It was more of a kind of a low single-digit point change in the outlook. And, you know, from a and, again, that was just really being cautious. Just given the short cycle nature of that market.

Inventories where we see, where we have visibility would suggest that inventories are at good levels for this level of demand. But, you know, that can, you know, that can obviously change quickly if the market weakens. But where we see inventory, which is mainly North America and then maybe to a lesser degree, in Europe would suggest inventories are in a pretty good spot. And I would say that's even true if we go move into the OEM part of our business.

You know, there is always it can vary by market, by customer around the world, but the larger markets that we serve, you know, off-highway, and, you know, industrial markets, suggest a lot of the destock that we had been anticipating is kinda behind us now. So we feel inventories are at good levels. We're gonna we're gonna take a little bit of our own inventory out in the second half just with normal seasonality. And then think it sets us up pretty well. Heading into next year. On the services, if you think of The Timken Company's service business, it's mainly industrial services. So think high-speed gearbox reconditioning, bearing reconditioning.

We also do motor repair and typically tied to a gearbox repair, if you will. And that can be, you know, if you think some customers will have spares. And oftentimes, you know, if you have a if something's broken on a line, gotta be fixed immediately. That obviously gets done. Sometimes there's a spare, so you put the spare in. Then it becomes a question of when you recondition the spare. And you can push that out for a little bit of time.

And we do believe with the tariff uncertainty, it is causing some of that discretionary spend, whether it's in services, whether it's in automatic lubrication in the retrofit business, which is where we can retrofit older equipment with our automatic lubrication systems to eliminate the need for manual regreasing. You know, that type of spend can get pushed out in an uncertain environment like this, which is kinda what we're seeing. But overall, the backlog remains, and that business has been very consistent, very consistent, high margin, business for us over time. So no concerns there other than, you know, we gotta get a little bit of this uncertainty behind us.

And then last point on wind energy, we did see a really nice step up in demand, in wind energy in the first half. And that was mainly driven by Asia or China more specifically. So it's nice to see off of last year's soft market conditions. I would tell you as we looked at the numbers coming in, there was probably a little bit of pull ahead from second half to first half because there were some regulatory changes in China that went into effect June 1 that did provide a little bit of incentive to pull ahead some spend where that was possible. But we do think the market continues to improve.

We think the growth will be a little more muted in the second half given that pull ahead. But we do believe the market's, you know, on its way to recovery. Obviously, it'll be several years before we get back to where we were, but we're confident with what we see. And then, obviously, we did see some share shifts last year with the market being down so much as you typically might see in that kind of situation. But we did get some of that business back.

And where we're focused, in terms of, you know, the gearbox and then being very thoughtful about where we play on the main shaft applications, we feel there's enough market there for us to compete, win, and achieve our growth objectives.

Rich Kyle: Rob, the only point I'd add is going back to the distribution comment. When we experience unexpected cost pressures back when inflation was hitting a few years back. And now with tariffs, we do realize price faster in distribution than we do in OEM. So that is positively impacting the revenue numbers. And OEM pricing will catch up to that in time.

Rob Wertheimer: Perfect. Thanks, Rich. Thanks, guys.

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

Angel Castillo: Hi, good morning. Thanks for taking my question. To beat a dead horse here, but I just wanted to clarify kind of understanding everything or interpreting it correctly. But sounds like your orders are at this point are suggesting kind of end of the year results would be above the midpoint or at the top end of your guide. So if we do get an atypical recovery, whether it's because of the one big beautiful bill or some other factor, factors. Am I understanding that correctly that would put results then above the $5.40 and it's just something that given the kind of abnormal nature of that, you're just not underwriting at this point.

But if and if so, if that's correct, I guess anything to consider in terms of potential pull forward of demand or push outs? I think you mentioned some in services that.

Philip Fracassa: Yeah. So thanks for the question, Angel. I would say for us to exceed the high end of the guide would really require an acceleration in demand in the back half of the year. And right now, our guidance would assume that year-over-year organic revenue is down year on year in the second half. Headline will look a little better than the first half. When you take pricing out, it's probably very consistent, you know, period to period. If we were to see actually, revenue growth in the second half, that would be what we would need to see in order to move to the high end above the high end of the guide.

But, I mean, we put the range out there because we feel that it's a range that we're confident in, we're comfortable with, and the high end of the guide would assume, you know, kind of flattish, you know, organic in the second half there roughly with pricing positive. And then just a slight negative on the volume. So that would give you some sense. And that was one of the reasons, frankly, we trimmed it is we didn't want to assume an acceleration in demand in the second half.

Just given where we're at, we felt it was just more prudent to frame the guide around, you know, flat organic second half would get you sort of at the high end. And then a little bit lower than where we than the midpoint would get you to the low end.

Angel Castillo: That's very helpful. Thank you. Then maybe just on, back to some of the commentary around automation or robotics. One, any particular aspects of your portfolio that you think you still need in terms of going out there and getting potential bolt-ons to be able to participate in that world kind of in the future? It pertains to, again, robotics or humanoids. And as we think about the CEO ongoing transition, is what's kind of the appetite to potentially do M&A while that's ongoing? Or should we assume that's kind and A is on pause until we get a CEO announcement?

Rich Kyle: I'll take the second one first. I would say we continue to pursue M&A. We haven't done any since the CGI acquisition, but I think if we were to do something while with the CEO search is going on, we're in the early days of a new close and similar to what we've CEO. It's gonna be something that's probably bolt-on and very we've been doing. And that's the pipeline that we've been working when we'll continue to work. So I would certainly not say that an acquisition is out of the question during the CEO transition.

Philip Fracassa: And then the only thing I would add on the first part, Angel, on the robotics. I mean, certainly, you know, I would tell you we're approaching it much like we do other high-growth markets is, you know, let's form a, you know, cross-functional team within the company. Let's look at technology we have in the portfolio. What we think it's gonna take to compete and win and then whether we're gonna do that organically. If there's gaps in the portfolio certainly, and A would come into play along the lines of what Rich talked about. I'd tell you, in the area of robotics, again, you know, humanoids very early innings.

In the broad area of robotics, we've got very good capabilities and drive systems. Certainly, our precision bearings, if you will, as well as some other products. And I do think as we move forward, you'll see us continue to improve the portfolio and our capabilities to be able to compete and win as that market grows.

Rich Kyle: Yeah. And I'd say that we don't need anything else in our portfolio today to win with the portfolio we have. So we don't have to have something to bundle with it, but there are certainly other technologies that could supplement what we have today and some potential things that we could do both organically and inorganic. But, it's not a necessity for what we for the portfolio we have to win in the coming years.

Angel Castillo: Very helpful. Thank you.

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

Stephen Volkmann: Excellent. Good morning, everybody. I wanted to go back to the kind of auto contract project, whichever we're calling that. I remember the last time you guys went through this, I think you ended up sort of exiting about a third and repricing maybe two-thirds. Is that a reasonable way to think about this exercise? Or is there something different about it this time?

Rich Kyle: Well, I think it is a little different this time. I mean, that time we went in with a slightly different approach, and we had automotive plants back then, etcetera. That required a lot of restructuring. We do not have an automotive plant in our portfolio today. We make automotive products in mixed industrial plants. So I'd say it's fairly different both in scale and complexity. And I would say it's too early to know what the mix is going to be. Probably also different than then. I mean, where we're at today has been, you know, it's a niche for us that we've narrowed down to over the last ten years that we're pretty sizable in.

We're pretty good at. We have a sizable US footprint. So there's, you know, there's some value there in what we do that, you know, it's again but, again, it's too early to see if we're gonna be able to successfully improve what we get paid for that value that we bring.

Stephen Volkmann: Okay. Alright. Good. That's a good color. And then I just wanted to think a little bit about 2026 and who knows where the markets will be, for God's sake. But it seems like you'll have some tailwinds. You'll have something from this auto project, and then I guess you have some plant closures as well. You'll probably have a little bit of price cost as you get that fully implemented. Is it possible to kind of first of all, is that, like, is that a good list? Is there anything I'm missing? And then second of all, any can any of that, have numbers put around it yet?

Rich Kyle: It's too early to put numbers. I think it's a good list. I wouldn't say it's a conclusive list, but to your point, I think there's a lot of factors pointing to and first to your point of who knows. And certainly, we don't know. We don't have that level of visibility, as you know, to most of our portfolio out past six months. Right? There's a lot of factors pointing to that it could be an upturn next year, and then there's a lot of factors that we have a lot of self-help. So a few comments on your list. First, I mean, the duration of the downturn that we've been in. It's been quite a few quarters.

Short cycle, usually, eight quarters, 10 quarters is pretty long for us. As you know, we would because of the multiple points of our inventory in our own facilities, and our OEMs and their dealers, our distributors, and then end users we swing more in both directions. And then I think the trend line you're looking at, as Phil said, I mean, even with the outlook we have today, we're approaching zero sales with that outlook in the second half. And which typically means you're gonna be heading to positive, shortly thereafter versus I mean, we typically once we start in a direction, we go that way for several quarters.

So I think there's a lot of factors pointing to that needs to be happening sooner rather than later, whether it's the third quarter of this year or the first or second of next year. But at some point, that should invert. And also some trends within our orders as we implied. Phil talked about moving from a more uncertain environment to a more certain environment. We took some steps with that recently with the chip Japanese and European Union trade agreements. There's the tax certainty environment that we're in now, which is also a positive. So I think those certainly are pointing to that as well.

And then from a self-help perspective, I think we've got self-help on the put the auto OEM aside, which, you know, could be a negative on the top line that year, but I think either way, would be a positive on the bottom line. But we've got some positives from a mix perspective. Our portfolio is better than the last upmarket that we went into. Our mix is better. And then we also have we will have a fair amount of carryover price next year as well as new price and some of the things that we have not been able to pass pricing through yet because of agreements as of the tariffs a bit.

So we'll have some positive price heading into next year. And then also a really good self-help story from a cost perspective. The three plants you talked about, some of the other productivity tools productivity measures that we've implemented both from an SG&A standpoint as well as from a manufacturing standpoint, I would expect to leverage those as volume improves. So I think we've got a good self-help story and with some market help could be could be a good year next year.

Philip Fracassa: Yeah. No. I think Rich hit it all, Steve. The only thing I would add is, you know, certainly with the cost savings actions being second half weighted and our belt our plant ramps, would be belts is in the thick of it now, but we've also got the India plant ramping as those plants ramp. I think that helps 2026. So I think we're gonna start the year in a pretty good spot from a price cost standpoint.

Too early to talk about incrementals as Rich said, but I do think it will put us in a good position that if we've got some we've got some volume to work with, we got some demand to work with to print, you know, real good incrementals relative to what we would what would historically do at that point in the cycle. So I do think we're in a pretty good spot there. And finally, did throw in that another year of capital allocation, and we will have we bought a few shares of this year, not a lot, but we'll have reduced debt through the course of the year if we do not do another acquisition.

And then throw in next year's cash flow as well. We'd expect some benefit next year from capital allocation as well.

Stephen Volkmann: Super. Alright. That's a lot there. I appreciate it, but you forgot the humanoid robot inflection.

Rich Kyle: We'll that in the 2027 bucket. Yeah. Yeah.

Stephen Volkmann: Thank you.

Emily: Thank you. Our next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Steve Barger: Hey, Steve. We can't hear you.

Steve Barger: Oh, sorry about that. Oh, we can hear you now. You address Rich addressed some of the Timken-specific dynamics around the back half guide. But we have seen a couple of other short cycle bearing companies return to modest but still positive organic growth. I just want to ask about market share issues anywhere in the portfolio or any areas where pricing is getting more competitive and disadvantaging you. Anything like that going on?

Rich Kyle: No. I don't think you know, if we're not comparing well to a peer right now, I would say it's a mix issue. We don't think we're losing well, we know we're not losing any share anywhere except with the automotive actions, and that hasn't kicked in yet. But we that's likely for next year that we will lose some concede some share there by design, but we're definitely not losing any share. And pricing's going up. It's been going up, and I think it'll go up again next year. At least as much or more than what cost do. Which, again, we've got a little bit of lag.

But both during the inflationary time as well as tariff time, the bearing industry has shown that we will recover those costs and, and I'm confident that The Timken Company will do so.

Philip Fracassa: Yeah. And maybe, I would add Steve to that would be on the tariffs. You know, while we do import product from several countries around the world, obviously, our US, you know, local for local content. Is pretty high relative to the main folks that we compete with. So I do think as these trade deals get concluded and that we end up with, you know, maybe a smaller tariff regime around the world. Do think that'll naturally benefit us here in The United States just given our relatively higher local for local content.

Steve Barger: Understood. And for automation, how integrated are the sales teams across lubrication, drive systems and linear motion? Are you optimized for selling the entire product line with one voice so you're making sure you can kind of take share in what should be an expanding market?

Rich Kyle: I would say we do both today. We have special product specialists. We have market specialists. And that's fairly common for us, but we're definitely getting cross-selling benefits, you know, as an example, with the CGI acquisition, that was our really, our first step into medical robotics. They sell more into that space. And Cone and Spanea did a little bit in there, but we have not we don't do a full integration there. We take the best of all parts and most of our sales mix typically is a little bit of market some geography, and some product.

And, again, it's a most of what we do is a very technical sales, so you need a lot of product expertise within linear. Within our harmonic drive, within a cycloidal drive, within a bearing, etcetera.

Steve Barger: Understood. And just as a follow-on, if I look at your automation sector sales on Slide eight, it's obviously been flat to a little down for a couple of years. Do you have enough visibility to assume that outgrows whatever the portfolio does in 2026?

Rich Kyle: Yeah. I'd say the decline has been really in the factory automation space, and that market has certainly been down. It's too early to call whether that's gonna be up next year, but our order trend and backlog and customer sentiment, I would say, would indicate that better times are ahead.

Philip Fracassa: Yeah. And the only thing there, Steve, to keep in mind automatic lubrication systems business that we have, which is an automation play if you will, not robotics, but an automation play is heavily exposed to the off-highway market. So that market's come down. It's been impacted as well. So I think we're in a good I think in a good spot there to return to growth next year, but I just wanted to point out as well.

Steve Barger: Nope. Thanks. Appreciate it.

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

Tim Theine: Thank you, guys. Good morning. I apologies in advance. If these were asked. I was just bouncing calls here, and I'll package them together. The first is on the China wind business. I'm curious if you saw or perceived there to be any sort of pull forward or, I guess, prebuy in the first half. That was something that one of your peers had called out. That potentially the first quarter was flattered by some pull forward ahead of some policy catalysts. So that's question one. And then on the second, I'm curious with respect to the distribution segment in that kind of tweaked down.

And maybe, Rich, just from your historical lens, you know, how do how is that business historically or, you know, what has it told you about you know, in around cycle inflections? I'm just curious if that business directionally is lower, is that, you know, been active as sort of a lead indicator in inflection points historically? Or not? I'm just curious what you would make, if anything, of that. So thank you.

Philip Fracassa: Yeah. Hey, Tim. This is Phil. I'll take the first part. On the wind, we did as we look at the results coming in Q2 and then, obviously, Q1 as well, we do believe there's been some pull ahead of the regulatory change that went into effect June 1. So it will cause, I think, a more muted growth profile in the second half. So we still expect to be up for the year. Certainly in wind, but it will be a little bit more muted in the second half because of that pull.

Rich Kyle: Yeah. And, you know, on the second question, Tim, our distribution partners, when you look globally, both sell to smaller OEMs as well as the maintenance. So, I mean, we would tend to see more of an inventory impact through that channel if the end user reduces inventory when the distributor does, but less of a peak to peak, trough to trough decline or increase as well because the maintenance cycle as equipment's run longer, etcetera, is significantly less cyclical than the new equipment capital part of it. So, you know, I wouldn't read too much into what we're seeing. It's pretty small number overall at this point. Small change.

Tim Theine: Alright. That makes sense. Thank you, guys.

Philip Fracassa: Thanks, Tim.

Emily: Thank you. Our next question comes from Mike Shlisky with D. A. Davidson Companies. Please go ahead.

Mike Shlisky: Hi. Good morning. You had mentioned backlog is being up sequentially. Any idea which end markets or groups were driving that? Sounds like they're more positive on 2026. There's some long cycle stuff in there, but just curious as to what the kind of hitting edge here of the operator question.

Philip Fracassa: Yeah. Hey. Thanks, Mike. This is Phil. So, you know, you're right. Backlog was up sequentially. And I would say pretty broad, and we're seeing it in where we needed to see it in terms of the industrial sectors. Whether it be off-highway. We've seen renewable go. We, you know, a lot of general industrial probably not so much in heavy industries quite yet because that tends to be later cycle. But it's been pretty broad across the portfolio. We don't typically go into too much detail kind of market by market, but it wasn't it certainly wasn't, like, you know, idiosyncratic, the one market or anything like that.

Mike Shlisky: Okay. Great. And then I also wanted to ask about just a two most recent kind of broad policy initiatives that came out. The big beautiful bill and then the agreement with Europe on the tariffs, just curious, you know, in the days following both of those announcements, and I think one was just the last couple of days, have you gotten any new quote requests or calls from customers that were kind of on the sidelines waiting to get this kind of news? Did you get a kind of sudden influx of some interest, that you were kind of hoping for or waiting on just the last couple of weeks here?

Rich Kyle: Alright. So I'd take the last part, and I would say no. There's nothing that sudden. And then I'll take the generally, and then what Phil maybe comment on some of the specifics if he wants to go there. But I think in both cases, again, coming back to just certainty, and knowing where the tariffs are gonna be for a period with Europe we can all put between customers, etcetera, now all start operating to that. Gives you more confidence to invest, which, again, drives a lot of our demand is when investment is made. You know, net weather, you know, how successful, impactful it is in increasing capital investment in The United States.

To the degree you believe that is going to happen, then I think The Timken Company is gonna be a significant beneficiary of that. That'll be, you know, relatively, I think, I wouldn't say slow to play out, but it's not a sudden thing that's gonna happen in the next or month.

Philip Fracassa: Yeah. Maybe one thing to add there, Mike. This is Phil. So Rich is right. I mean, typically, we would see it would take at least a couple quarters for things like that to work its way into, you know, some escalation of tariff rates as we move forward. So I do you know, certainly, if China goes back to a 145, that would probably require a relook at that number.

But, you know, the movement in Europe up 5%, if there's movements like that in other countries, you know, we have tried to contemplate that in the guide where I feel like we would have it covered provided it's not a, you know, like what we had in China at the beginning of all this.

Mike Shlisky: Thanks very much.

Emily: Thank you. Our next question comes from Chris Dankert with Loop Capital Markets. Please go ahead, Chris.

Chris Dankert: I guess just on pricing. Wanna make sure I'm understanding things correctly there. Phil, I think you said pricing in the quarter slightly less than the tariff impact. So maybe a little bit more than one point benefit in 2Q here. It sounded the full year guidance unchanged, so less than 2% price for the full year. Things are stepping up sequentially, correct? But just it sounds like they're fairly de minimis in terms of what we're getting from the first quarter to the second and then second into the back half year. Is that the right way to think about it?

Philip Fracassa: Yes. So we certainly had positive price in the quarter, Chris. We came into the year talking about pre-tariffs. You know, less than we said less than 50 bps of base pricing pre-tariffs, and then we did talk about specifically, you know, $60 million of pricing that we're contemplating so far. So all in, we will be, you know, well above one and a half, you know, one and a half, 150 bps for the year. And I do think that'll be more back half weighted because we did do some mid Q2 pricing and then we've got some mid Q3 pricing coming in as well.

So would expect pricing to step up year over year as we move through the back half of the year. And then for the full year, to be in that, you know, it'd be sort of in that $1.50 to 200 range for the full year.

Chris Dankert: Got it. That's helpful. Thanks, Phil. And then I guess just on, you know, the factory loading for the belts and Mexico, I guess, if belt and ag are so weak right now, is that causing the factory loading to be a little bit weaker and then the margin to be lower than you would have expected there? I mean, is $4 million EBITDA headwind you call out the deck, is the majority of that tied to the belt plant less than the belts plant? Just any color you can give on that. Kind of getting that program up and running.

Rich Kyle: Our belt business is down. It plays it's a significant ag is a significant market for us, and that market is down. So it's that's contributing, but it's also, you know, factor of we still have the plant in The US that'll be closed at the August. We still have that. We still have training costs, ramp-up costs. And some inefficiencies in the Mexico facility. But, again, should see you know, we'll see certainly the three plant costs that we have within the operation come out within the next couple of months. And, you know, nothing we're seeing is all that atypical. It takes a little time to replicate the capabilities in the other facility.

Philip Fracassa: Yeah. I mean, you know, big picture, Chris, that negative $4 million in the walk. It's the inventory change is a big piece because we liquidated some inventory this quarter. We actually built some last quarter. That had a cost absorption impact. The belts would be negative as well, and then offsetting that would be the cost savings actions that we're implementing. So those would be sort of the three big buckets in there that are all, you know, that are all in that single-digit millions that would get us to that number.

Chris Dankert: Got it. But that's helpful. Thanks so much, guys.

Emily: Thank you. Our final question today comes from Michael Feniger with Bank of America. Please go ahead, Michael.

Michael Feniger: Thank you. Hey, guys. Thanks for squeezing me in. I promise I'll keep it short. Just on the margin guidance, the mid 17 versus I think prior was mid to high-seventeen percent. I might have missed this. Is it sounds like it's purely just your organic growth coming down a little bit. And is it the decremental you're kind of assuming on that? Is that similar? Has your view on that decremental changed a little bit as I know you're trying to take some inventory out. Just kind of trying to understand just the change in the margin guide, if and around that decremental in the back half. Thanks, guys.

Philip Fracassa: Yes. Got it. No. Thanks, Mike. And we always have time for you. But on the decremental, so you're right. The drop in the margins for the full year really three things. Tariffs would have gotten better. That would have been a favorable item in that walk. And then the two unfavorables would be the volume taking the volume outlook down a point, you know, at the volume leverage, if you will, would have been quite high. And then we are planning on mix to be, call it, more unfavorable than we had been previously contemplating. Which, again, is additive to that.

And then we also did assume some cost incremental cost headwinds with the belt ramp taking a little bit longer than we anticipated as well as, you know, some of the other impacts we were seeing. So it's sort of a variety of things, but then driving a higher overall decremental slightly higher overall decremental, which kind of pushed the pushed the margins down that 50 bps or close to 50 bps from where we were before.

Michael Feniger: Thanks, guys.

Philip Fracassa: Thanks, Mike.

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

Neil 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 Second Quarter Earnings Release Conference Call. You may now disconnect.