Good morning and welcome to Timken's Third Quarter Earnings Release Conference Call. My name is Lidia and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks, Lidia, and welcome, everyone to our third quarter 2023 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. During the Q&A, I 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 expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in The Timken Company and I will now turn the call over to Rich.

Thanks, Neil. Good morning, and thank you for joining our call. Timken delivered a solid third quarter, and we remain on track to deliver another record year of revenue and earnings per share, while expanding full year margins. Revenue was a record for the third quarter and was up around 1% from the prior year. EBITDA margins were up 10 basis points and adjusted earnings per share were down 5%. As expected, demand softened sequentially as customers continue to reduce inventory levels and respond to an uncertain economic environment. China and wind energy slowed more than anticipated and were the leading contributors to the organic revenue decline. We managed our cost structure very well, delivering 18.9% EBITDA margins, a 10 basis point improvement over the prior year. Inflation has moderated but remains persistent. Despite the inflation, price/cost was positive in the quarter as it has been all year. Free cash flow of $151 million was strong and up significantly from the prior year. We continue to execute our strategic initiatives, which are focused on operational excellence, outgrowth, and capital allocation. This includes advancing our global manufacturing footprint in both Engineered Bearings and Industrial Motion. We are on track to complete the consolidation of two facilities into existing operations by the end of the year. We are also expanding our Mexico operations to begin the production of Timken Belts early next year. Our operational performance has recovered from COVID and supply chain challenges, and we have excellent focus on driving improvement initiatives across our global operations. We continue to invest in and advance our outgrowth initiatives. This includes launching new digital customer solutions and investing in our leadership in application engineering. Our application pipeline, which is the best measure of our future business opportunities, continues to expand across the portfolio. Our balance sheet remains strong, and we continue to be very active in allocating capital for growth and margin expansion opportunities. We continue to invest CapEx into advancing our footprint, automating our operations, increasing efficiencies, increasing capacity and expanding our product lines. We completed the acquisitions of Rosa Sistemi and Des-Case in the quarter. Rosa Sistemi is our fourth acquisition in linear motion and brings complementary products and market positions to our Rollon business. Des-Case expands our filtration offering within our automatic lubrication platform. We also announced the pending acquisition of iMECH. iMECH adds a niche product line to our Engineered Bearings portfolio specifically designed to serve the needs of energy markets. Strategically and financially, all three acquisitions fit very well within our Timken portfolio and bring strong cross-selling and cost synergies. These acquisitions bring well-known brands with Engineered products that enhance equipment reliability and life. Last week, we announced the divestiture of a small bearing product line that is sold regionally in China. The combination of these four transactions will strengthen our product portfolio while adding about $50 million in revenue and will be immediately accretive to margins. We also purchased about 1% of the outstanding shares in the quarter, bringing our year-to-date repurchase total to just under 4% of the outstanding shares. Our balance sheet remains strong. We expect excellent free cash flow in the fourth quarter and into 2024, and we expect to continue to add value through our disciplined capital allocation. Also in the quarter, we published our annual corporate social responsibility report, which details our commitment to environmental sustainability and the products we make across our global operations and through advancing industries such as renewable energy. We are also focused on the development and well-being of our employees, investing in community partnerships and promoting STEM education to help advance the next generation of engineering talent. Turning to the outlook, we are planning for further sequential slowing in the fourth quarter due to seasonality and from customers continuing to reduce inventory as supply chains stabilize. We are expecting renewable demand in China to remain a headwind for the quarter. We are planning for inflation to remain at similar levels and for price/cost to stay positive. We will continue to align both our cost and inventory with reduced volume levels. We expect to generate both solid margins and strong cash flow in the fourth quarter despite the weaker revenue environment. The midpoint of our guide reflects modest year-on-year improvement in margins despite lower volumes. For the full year, we remain on track to deliver another year of record revenue and earnings per share with revenue up 5% and earnings per share up 7%. While we are not ready to guide for the full year of 2024, we are planning for a sequential step-up in demand from the fourth quarter to the first, reflecting our normal seasonality as well as stabilizing channel inventory levels. We do not expect a rebound in the first quarter for China primarily due to wind energy. Across our portfolio, customers remain generally positive on their '24 outlook, but also acknowledge that economic uncertainty remains elevated globally. And finally, I would like to reference Slide 12 in the investor deck. Timken's strategy is focused on growing the earnings power and cash generation of the company at attractive and consistent EBITDA margins and returns on invested capital. We remain on track in '23 to deliver another record year of both revenue and earnings and EBITDA margins approaching 20%. Through both organic growth and consistent M&A, we have steadily grown the business with EBITDA margins that have varied just 210 basis points over the last 5 years. As we look ahead, we are confident in the long-term growth in demand for Timken products and technology, and we are well-positioned to continue to grow and perform at a high level through a wide variety of market conditions. I will now turn it over to Phil to add more detail on the results and the outlook.

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 14 of the presentation materials with a summary of our third quarter results. Timken posted revenue of $1.14 billion in the quarter, up almost 1% from last year. Adjusted EBITDA margins came in at 18.9%, up 10 basis points, and we delivered adjusted earnings per share of $1.55 in the quarter, with adjusted ROIC approaching 15% over the trailing 12-month period. Turning to Slide 15, let's take a closer look at our third quarter sales performance. Organically, sales were down 6% from last year, as higher pricing was more than offset by lower volumes across multiple end markets and geographies, including China wind. The decline in China wind was larger than we expected and accounts for roughly one-third of the total organic revenue decline. Looking at the rest of the revenue walk, the impact from acquisitions, including GGB, Nadella, ARB, and Des-Case, net of divestitures, contributed 6 percentage points of growth to the top line. And foreign currency translation was a modest benefit to revenue in the quarter. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and the net impact of acquisitions and divestitures. Let me comment briefly on each region. In the Americas, we were down mid-single digits against last year's strong third quarter, driven mainly by lower shipments in the off-highway and distribution sectors, as we expected. In Asia Pacific, we were down double digits, driven entirely by lower revenue in China, including the sizable decline in wind energy demand that I mentioned earlier. And finally, we were close to flat in EMEA, as lower general industrial revenue was almost fully offset by growth in other sectors. Turning to Slide 16, adjusted EBITDA in the third quarter was $216 million or 18.9% of sales compared to $214 million or 18.8% of sales last year. Our margin performance reflects the benefit of positive price/cost and strong operational execution, which more than offset the impact from lower volume and unfavorable currency. Looking at the modest increase in adjusted EBITDA dollars, there were several puts and takes. We continue to benefit from lower material and logistics costs, favorable price/mix, and recent acquisitions. These positives more than offset the impact of lower volume, unfavorable currency, and higher manufacturing costs. Let me comment a little further on some of these key profitability drivers. With respect to price/mix, price realization was higher in both segments compared to last year, while mix was relatively neutral in the quarter. Moving to material & logistics, both were lower year-over-year, with logistics being the bigger contributor. Material, which includes both raw material and purchased components, was down versus last year, but I would say that costs remain elevated by historical standards. On the manufacturing line, you could see that our year-over-year headwind continues to shrink as compared to what we've been running the last several quarters. In the third quarter, we were negatively impacted by lower production volume and ongoing cost inflation, offset partially by improved operational execution in the plants. Looking at the SG&A other line, costs were up only slightly versus last year. Our costs in the quarter were actually a bit lower than we initially expected, driven by lower variable compensation expense and our efforts to reduce discretionary spending to better align with lower demand levels. And finally, with respect to currency, we saw a sizable year-on-year headwind as we expected, driven by the favorable impact from transaction gains last year. On Slide 17, you can see that we posted net income of $88 million or $1.23 per diluted share for the third quarter on a GAAP basis, which includes $0.32 of net expense from special items and acquisition amortization. On an adjusted basis, we earned $1.55 per share compared to $1.63 per share last year. Depreciation and interest expense were both higher versus last year and contributed to the decline in earnings per share, while our adjusted tax rate was in line with our prior expectations. And finally, we benefited from a lower share count in the quarter, reflecting buybacks completed in the past 12 months. Now let's move to our business segment results, starting with Engineered Bearings on Slide 18. For the third quarter, Engineered Bearings sales were $776 million, down slightly from last year. Organically, sales were down 7.8%, driven by lower volumes across most sectors, partially offset by higher pricing. With respect to performance by sector, the renewable energy, distribution, and off-highway sectors saw the largest declines in the quarter, driven mainly by inventory destock and difficult comps in the year-ago period. General industrial was also down, while the on-highway, heavy industries, and aerospace sectors were relatively flat. On the positive side, Rail was up nicely in the quarter, driven by higher shipments in the Americas. The net effect of acquisitions and divestitures added 7 percentage points of growth to the top line, while currency was relatively flat. Engineered Bearings adjusted EBITDA in the third quarter was $157 million compared to $154 million last year. Our segment margin was up 50 basis points year-over-year, as the impact of favorable price/mix and lower material and logistics costs more than offset the impact of lower volume, higher manufacturing costs, and unfavorable currency. Now let's turn to Industrial Motion on Slide 19. In the third quarter, Industrial Motion segment sales were $367 million, up about 3% from last year. Organically, sales declined 2.2% as lower volumes were partially offset by higher pricing. With respect to performance by platform, belts and chains saw the largest decrease in the quarter, driven by inventory destock in the off-highway and distribution sectors. Linear Motion was also lower, reflecting softer industrial demand in Europe, while couplings were relatively flat. On the positive side, we saw strong growth in Drive Systems and Services and continued growth in automatic lubrication systems. The impact of acquisitions, net of divestitures contributed just under 4% to the top line and currency translation was slightly positive in the quarter. Industrial Motion adjusted EBITDA for the third quarter was $75 million, or 20.5% of sales, compared to $68 million or 19.1% of sales last year. The sizable increase in margin was driven by the benefit of positive price/cost and improved operational execution, which more than offset the impact of lower volume. Turning to Slide 20, you can see that we generated operating cash flow of $194 million in the quarter. Free cash flow was $151 million, up significantly versus last year as improved working capital performance more than offset higher cash taxes, including a large tax payment in September related to the Timken India transaction we completed in June. Looking at the balance sheet, we ended the quarter with net debt to adjusted EBITDA right at 2x with leverage well within our targeted range. This includes the impact of the recent Des-Case and Rosa Sistemi acquisitions that were completed in September. Turning to Slide 21, you can see a summary of our capital deployment through the first 9 months of 2023. In total, we've allocated around $900 million of capital with roughly two-thirds directed toward CapEx and acquisitions to drive our profitable growth strategy. We also returned $300 million of cash to shareholders year-to-date, including $90 million in the third quarter. We raised our quarterly dividend earlier this year and have bought back over 2.7 million shares year-to-date or nearly 4% of total outstanding. With the pending iMECH acquisition and other anticipated activity, we are on track to deploy over $1 billion of capital in 2023, all while maintaining a strong balance sheet and leverage right in the middle of our targeted range. This sets Timken up well for the future and keeps us in a great position to continue to execute our strategy through capital allocation. Now let's turn to the outlook with a summary on Slide 22. We've updated our outlook for both sales and earnings to reflect softer end market demand, particularly in China, as well as our expectation for continued channel inventory reductions in the fourth quarter. With respect to the sales outlook, we're now planning for full-year sales to be up 5% to 5.5% in total versus 2022, down from our prior guide, reflecting a more modest expectation for organic growth and unfavorable currency impact. Organically, we now expect revenue will be flat to up 0.5% to 1% for the full year, with positive pricing offsetting lower volumes. We expect acquisitions net of divestitures to attribute around 5.75% to our revenue for the year, up slightly from our prior guide to reflect the recent Des-Case, Rosa Sistemi, and iMECH acquisitions, offset by the TWB divestiture. And we are now planning for currency to be a headwind of around 75 basis points for the full year based on September 30 spot rates. This compares to a relatively neutral outlook in our prior guide. On the bottom line, we now expect adjusted earnings per share in the range of $6.85 to $6.95. This represents about 7% growth versus last year at the midpoint and would mark a new all-time record for the company. On the flip side, we are increasing our full-year guidance for both adjusted EBITDA margins and free cash flow. The midpoint of our earnings outlook implies that our 2023 consolidated adjusted EBITDA margins will be in the range of 19.5% to 19.6%. This margin level would mark a new high for the company for a full year. Our margin expansion reflects our expectation that favorable price/cost and improved execution will more than offset the impact of lower production volumes, higher operating costs, and unfavorable currency. We will remain focused on controlling costs and driving operational excellence initiatives across the enterprise to drive strong and resilient margins going forward. Moving to free cash flow, we now expect to generate approximately $425 million for the full year 2023, which is up from our prior guide and represents over 100% conversion on GAAP net income at the midpoint. We are still planning for CapEx at around 4% of sales, and we expect our adjusted tax rate to remain in the range of 25.5% to 26% for the full year, both unchanged. But we are now anticipating net interest expense of around $100 million for the full year, up slightly from our prior guide to reflect our recent acquisitions. And finally, I would point out that the guide assumes an average diluted share count of roughly 72 million shares for the full year. So to summarize, Timken delivered solid results in the third quarter despite more challenging business conditions, and our team is executing well in this environment. We are focused on finishing the year strong, and we're confident in our ability to continue advancing our strategy as we head into 2024. This concludes our formal remarks, and we will now open the line for questions.

Our first question today comes from Steve Volkmann of Jeffries. Your line is open. Please go ahead.

Great. Good morning, guys. Thanks for taking my questions.

Good morning.

Hey, Steve.

I wanted to ask a broad question. Phil, I believe you mentioned there has been around 200 basis points of margin volatility over the last five years. Should we consider that the right perspective moving forward, especially since the market is clearly concerned? Some of it likely depends on the severity of any downturn. In a typical industrial cycle, is it accurate to view the future with that 200 basis points of margin volatility in mind?

I believe it depends on the speed, magnitude, and depth of the situation. However, we think we can reach a new high watermark compared to the last decade and would certainly aim for a new low watermark when the time is right. Therefore, a target around 17.5% would be reasonable for us if we face a challenging market.

Okay, great. And then it feels like the sort of destocking out in the channels, the various channels is maybe a little bit more and maybe a little bit longer. I don't want to put words in your mouth, but can you just talk about how much visibility you have there and how long you think this continues?

Yes. I would say that aside from wind, results were somewhat better, but there weren't any significant surprises in the third quarter. We anticipated this trend to carry into the fourth quarter, albeit with a slightly higher impact. The larger factor will be wind in China, which we expect to persist at least through the first quarter of 2024. Interestingly, despite this guidance, we are still aiming to match last year's record levels. Overall, it has been a strong year for wind, with an excellent first half balanced by a weaker second half. Demand and installations are still strong, but we are facing a classic overbuild situation that we need to navigate. In other channels, visibility is not great, so there could be spillover into 2024. However, we remain optimistic that most situations will improve by the year's end. Additionally, many of our customers' reported results indicate our sell-through rates are only slightly below their figures, and they are clearly working to reduce inventory levels, as we have seen in the past. Most seem quite positive about the demand outlook for next year.

Got it. Thank you, guys. I will pass it on.

Thanks, Steve.

Our next question today comes from David Raso of Evercore ISI. Please go ahead.

Hi. Thank you for the time. I was curious, you were giving a little bit of commentary on the first quarter. And it looks like the organic negative 6% this quarter, you're implying an 8.8% decline in the fourth quarter. Just curious how you're seeing, given the last comments you just made about still some bullish demand around '24. I'm just trying to get a sense if you can give us an idea of how you're thinking about the cadence of organic sales decline as we get into '24? Again, I'm not turning for a full year guide, just your first quarter comments were interesting. Does the year-over-year decline in organic in the first quarter lessen? Does it accelerate? And then a follow-up, the idea of pricing, what carries over into '24? Any new pricing initiatives to start '24 that we should be aware of? Thank you.

Next year will present some interesting comparisons since we started this year with an 11% organic growth in Q1. For Q4, however, we are guiding to a decline of about 8% to 9%. The challenge lies in the first quarter comparison, especially considering where we expect to finish the year. It is typical for us to experience a sequential increase of over 10 percentage points from Q4 to Q1. If we see more inventory and push-out from Q4, and assuming underlying demand in the end markets remains strong, it should help us start the first quarter on a better note. I am not ready to predict exactly where we will land sequentially from Q4, but I do anticipate a significant increase. However, we do expect to see a notable year-over-year decline in wind energy in China, which presents a tough comparison for Q1. Regarding pricing, we are currently in discussions, and we have announced some end-of-year price increases in certain distribution channels. I expect a more modest price level in 2024 compared to the last couple of years, so for now, I would consider it to be modestly positive and certainly lower than we have seen recently.

Yes. And David, I think to answer your question, there would be a small amount of carryover from this year into next year. And then to Rich's comment, depending on what happens relative to '24 would be additive to that. So our view would be flat to up in '24 at this point.

The next question today comes from Rob Wertheimer of Melius Research. Your line is open.

Thank you. Rich, I believe you addressed the channel inventory question earlier, but I'd like to revisit it. Are you observing de-stocking at distributors and OEMs? Do you have an estimate of whether the excess inventory represents one month, two months, or three months of sales, especially if the market conditions shift negatively? Should we anticipate that inventory could still be an issue by summer, or do you feel confident that you're managing it well, assuming no significant downturn in the end markets? How much visibility do you actually have regarding your OEM customers and distributors?

We have good visibility with distributors, and if the underlying demand remains strong, I believe we are making progress. We anticipate further reductions in the fourth quarter, but beyond that, we lack detailed insight. However, looking at earlier market trends, our sell-through rates indicate that we are typically a few percentage points higher than what our customers and peers are reporting for this quarter and the next. We are likely experiencing mid-single to upper-single digit declines because many of our customers are still seeing positive organic revenue while we have faced declines of 6% and 9% in the past couple of quarters. Therefore, it's somewhat uncertain whether we will reach the desired levels by the end of the fourth quarter.

Okay, perfect. That was clear. Second question just on inflation in the business and pricing. You're not the only one to have kind of slightly negative volumes and positive price. A little bit curious into next year. For one, do you need 2% pricing now or 3% pricing now or as you didn't over the past 10 years? And then do you have a sense as to whether the cost pressures are enough that we can really expect that to come through from you and competitors? And I'll stop there. Thanks.

I would say our core input costs for raw materials like steel and energy have really stabilized. After a spike, logistics costs have come down, and steel prices, which rose earlier due to COVID-related supply chain challenges, have also eased. However, we are still experiencing wage pressures and some benefit costs in the U.S. that are higher than before 2020, although they are moderating compared to 2021 and 2022. As Phil and I mentioned, we expect that we won't need to increase prices as much, but we don’t anticipate prices decreasing. We have material and currency clauses in place, which means if steel prices were to drop significantly, we might be able to pass some savings onto customers next year, although that doesn’t seem likely at the moment. Overall, costs have stabilized, so I feel optimistic about the price-to-cost relationship as we move into next year. Additionally, in 2021 and 2022, we didn't pass through pricing for the inefficiencies caused by supply chain issues and COVID. As I mentioned earlier, I believe the third quarter reflected our closest approach to normal operations. We are not only operating normally but also focusing on continuous improvement and enhancing efficiency instead of battling supply chain problems. I anticipate that we will achieve some cost improvements on our own next year and expect to be more productive.

Thank you.

Thanks, Rob.

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

Hi. Good morning. This is Jacob Moore on for Steve.

Good morning, Steve.

Thank you for the questions. I want to discuss the changes in your organic growth slide. It seems you've mentioned the significant impact from renewables, but I also noticed that automotive and off-highway have declined from flat to a decrease in mid single digits. Could you provide more details on the factors influencing the forecast changes in those other markets? Are there any impacts from the UAW, and if so, to what extent?

Yes, sure. Happy to do that. So I think you're exactly right. Those are the three main sectors that moved and renewable we talked about. Off-highway is really more factoring in what we are expecting in terms of what occurred in Q3 relative to lower demand from inventory destock and then sort of rolling that head into Q4. So continued inventory reduction, softer demand. Ag is probably the biggest sector, but a little bit from some of the other subsectors as well. And then on automotive, we did factor in an impact relative to the UAW strike in terms of our North American exposure being down for most of October, although we do see that coming back online as we move into November. So not a huge impact, but it was enough to nudge it over one column.

Great. That’s the only question for me. Thank you very much.

Thank you.

Thanks.

Our next question today comes from Tim Thein of Citi. Your line is open.

Thanks. Good morning. So looking back at renewables and the situation with wind in China, it has clearly had a greater impact than expected, similar to one of your major European competitors. Rich, could you discuss the broader context beyond China? I know that historically you've had significant exposure there, but this comes after recent cancellations of offshore projects in the U.S. and a downturn in some solar market outlooks. I'm curious about your overall perspective on this. From a growth standpoint, is this just a temporary setback, or do you still feel confident about achieving the higher growth rates we've discussed in the past?

Yes, I still feel confident about it. Looking over our 15-year history, it has certainly not been a linear growth path like many markets; it has a cyclical nature. The current situation, which is a bit more abrupt as we are larger now, is not uncommon for us to experience an off year occasionally. In fact, we are projecting that for the full year, wind will be flat to possibly slightly up. Our customer base is largely in Asia and Europe, even for installations in the U.S., as our product typically goes through the European and Asian supply chains. Thus, the global wind market has slowed, with China being the most significant example. During my visit to China in the third quarter, I met with several customers, and they all see this as a pause while continuing to invest in the sector. The world will require significantly more renewable energy in the coming decades. Therefore, I remain very optimistic about the long-term market; I'm just not prepared to specify when it will pivot. We do not expect to see this change in the first quarter, but I believe growth will resume sooner rather than later.

Yes. I would only add that the wind sector was where we noticed some softness. However, outside of China, the rest of the world related to our total renewables business, which includes solar, remained relatively stable. To Rich's point, the market is holding up reasonably well aside from the current dynamics we are facing in wind, which is quite unusual. As Rich mentioned, while nonlinearity is not uncommon, the significant buildup we saw in the first half is now causing this weakness in the second half. Rich articulated it well; the long-term demand will be there, but we need to work through the considerable inventory present in the channel at the moment.

Yes, understood. This may seem a bit dated, but in terms of geographic performance, it's interesting that EMEA has either performed the best or had the smallest relative decline. I'm curious about what's happening there with specific verticals or customers.

I think the comparison is influenced by the earlier decline in Europe, and the comparison is significantly easier than it was in the same quarter last year.

Yes, I think that's exactly right. I mean when you look at it, most of the sectors in Europe were sort of relatively flat year-over-year. And what really sort of stuck out was we were down a little bit in linear motion in the industrial sectors in Europe, offset by automatic lubrication systems still continues to do well there. So those are really the two biggest puts and takes and then relative flatness across the other sectors, which, again, against last year's easier comp, but it was nice to see the stability there.

And to that point, just to add on that, last year's third quarter was a particularly challenging comp. Our organic growth actually accelerated in the third quarter. As you recall, that was really when a lot of the supply chains flushed out and we caught up. So it was our strongest year-over-year organic growth quarter last year, and it was a challenging comp for us this year. And again, it was a good comp from a European standpoint, but not as strong as the rest of the world.

Okay. Thank you.

Thanks, Tim.

Our final question today comes from Michael Feniger of Bank of America. Your line is open.

Yes, thanks for squeezing me in guys. Just you mentioned, obviously, there's a lot of talk about inventory destocking, OEMs, distributors. I'm just curious, Phil, if you could kind of touch on your own inventories. Do you think you'll get cleared out by Q4? Could that maybe linger a little bit in '24 kind of similar to what you're talking about with the customer inventory process?

Yes, Mike. We successfully reduced our inventory in the third quarter, which significantly contributed to our year-over-year cash flow improvement through a decrease in working capital. We believe we still have some work to do in this area and plan to focus on it in the fourth quarter and possibly early next year. We're making steady progress toward aligning our inventory levels, but there’s still more to accomplish. This should lead to another strong quarter of free cash flow. To meet our guidance, we need to achieve free cash flow in the fourth quarter similar to what we achieved in the third quarter, and once again, working capital will play a significant role.

Great. And just I know you're not giving guidance on '24, but just based on some of the acquisitions you've done, how much rollover just on what you guys have completed rolls over into 2024? And I think you might have commented on this earlier, but are those acquisitions accretive to margin?

Yes. I would say from a carryover standpoint, if you think about kind of 1%-ish carryover when you think of everything we've done during the year, the full year effect will be about a 1% tailwind, if you will, to the top line. That's net of the TWB divestiture. And then I think relative to the margin performance, I mean, certainly, a lot of them come in at various points. And then certainly, we have planned for all of them to get to our corporate average margin. So Des-Case is off to a great start. But in the quarter, Nadella was played a little bit by European holidays in August, and in GGB, we said it would take a little bit of time to get up to the corporate average. So I would say, net-net, if you look at the acquisition bucket running a little bit below, but certainly feel good about the M&A we've done. iMECH comes in with a very attractive margin profile. And I think as we look ahead, we'll see margin improvement on the acquisition line next quarter and then into '24, look for it to improve even further.

I wanted to follow up on the M&A topic. You are generating cash flow, and your leverage is now at 2x, which is a good position to be in. Are you planning to maintain this pace next year? I'm interested to know how your pipeline is shaping up and what your thoughts are for the upcoming year.

I would say the plan is to continue. We had more acquisitions this year that tended to be on the smaller side. I think the preference would probably be a little fewer and a little larger. But in terms of total revenue, yes, we would expect to continue to be active next year.

Great. Thank you.

Thanks, Mike.

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

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

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