Good morning. My name is Emily and I'll be your conference operator today. At this time, I would like to welcome everyone to Timken's Third 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. Thank you. Mr. Frohnapple, you may begin your conference.

Thanks Emily and welcome everyone to our third quarter 2024 earnings conference call. This is Neil Frohnapple, Vice President of Investor Relations for the Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are the Timken Company's President and CEO, Tarak Mehta; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Tarak 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 Tarak.

Thanks Neil and good morning everyone. Today is my first earnings call as a member of The Timken Company and I thank you for joining us. I will begin by discussing our results and then we'll share some personal observations from my first 60 days at Timken. Let's start with a look at the quarter and the outlook. Industrial markets remained soft during the third quarter and we saw mixed performance across different sectors and geographies. Organically, revenue was down 3% from last year and geographically, in Europe, we saw soft demand for most of the portfolio. And in China, revenue was down mainly due to wind. On the positive side, we were up slightly in the Americas and saw continued strength in India. Our order backlog was stable compared to the second quarter. At 16.9%, the adjusted EBITDA margin was down 200 basis points, and our earnings per share came in at $1.23 compared to $1.55 last year. Both earnings per share and margins fell short of our expectations. Lower volumes, combined with higher logistics costs and other headwinds in the quarter were the main reason for the shortfall. Phil will go through these items in more detail a little bit later on. Pricing remained slightly higher in the quarter. On a positive note, we saw continued strong and margin-accretive performance from our recent acquisitions: Des-Case, Lagersmit, and CGI. During the third quarter, we also closed on CGI, which will add presence in the high-growth medical robotics and automation space. CGI also gives us a good position in precision drive systems and will be accretive to the Industrial Motion business going forward. This quarter, India as a market and aero, defense, and marine as sectors also showed both good growth and good performance. The second half of this year is proving to be more challenging than expected across several sectors and geographies. Our updated 2024 outlook reflects the third quarter performance as well as a softer-than-normal fourth quarter. We want to align cost and capacity with market demand, both to improve margins and also respond to our customers. We will provide more details in early February on specific actions and their impact on 2025. On a personal note, it is an honor to lead Timken at this exciting time in its history. I have long admired Timken for its strong brands, its reputation for quality, innovation, and excellence. During my first 60 days, in order to get an external perspective on Timken, I met with analysts, some of our key investors, and spent time with over 60 channel partners and customers. I also visited colleagues in 18 production facilities in the United States, Europe, and China, all of which give me a good start in understanding the business and our team's strength in the market segments that we operate in. During the visits, I also saw how we are developing innovative products to address some of the most challenging applications for our customers. I was impressed with the talent in the organization as well as the critical role our products play in improving reliability and efficiency of our customers' applications. It's still early, but here are a few high-level examples of what we are doing to strengthen the company for 2025 and beyond. First, we are aligning our capacity and cost to market demand by implementing cost reductions at a product line level, which will improve margins. Second, we will take a look at our entire portfolio of product lines with an eye towards allocating capital and resources for higher organic growth and better returns. We already see some good examples to build on. Third, we will maintain our disciplined and deliberate approach to capital allocation. We expect M&A to help us further diversify the portfolio and increase our presence in attractive growth markets. An example of that is the CGI acquisition we made this quarter. In addition, we will work to reduce our net working capital, which will improve our free cash flow and returns on invested capital. This will require changes in the process and will take a bit of time to implement, but we expect our cash performance to improve over time. Again, it's early, and today, we only share some initial reflections, but we will have more to say at a later date. Today, I also want to highlight that 2024 is the 125th anniversary of Timken. It has really been the team's commitment to customers, innovation, and excellence, that is both reflected in the product quality and the service level over the last 125 years, resulting in the strong brand of Timken in the industry. Timken has built a strong foundation and achieved significant improvements in performance over the last several years. As a team, we will build on this foundation, a profitable growth future that delivers better cash flow, higher earnings per share, and better returns for the invested capital. With that, let me turn the call over to Phil for a more detailed review of the numbers and outlook.

Okay. Thanks Tarak and good morning everyone. For the financial review, I'm going to start on Slide 12 of the presentation materials with a summary of our third quarter results. Revenue for the quarter came in at $1.13 billion, down 1.4% from last year. Adjusted EBITDA margins were 16.9%, and adjusted earnings per share came in at $1.23. Turning to Slide 13. Let's take a closer look at our third quarter sales performance. Organically, sales were down 2.9% as volume was lower, while pricing remained positive. Looking at the rest of the revenue walk, you can see that recent acquisitions, net of one divestiture, contributed 1.8% of growth in the quarter, while foreign currency translation was a slight headwind to the top line. On the right-hand side of the slide, you can see organic growth by region. This excludes both currency and net acquisition impact. Let me comment briefly on each region. In the Americas, our largest region, we were up about 2% from last year. We saw solid growth across several sectors, including marine, distribution, and aerospace, while the off-highway and general and heavy industrial sectors were lower as we expected. In Asia-Pacific, we were down 3% as China was down, while India and the rest of the region were up. In China, the sales decline was driven mainly by lower wind energy demand. In India, we saw double-digit growth in the quarter, driven primarily by higher revenue in the rail and distribution sectors. Finally, we were down 13% in EMEA, as we saw continued broad industrial weakness in Western Europe. Most sectors were lower, including renewable energy, automation, general and heavy industrial, and off-highway. Turning to Slide 14. Adjusted EBITDA in the third quarter was $190 million or 16.9% of sales compared to $216 million or 18.9% of sales last year. Our adjusted EBITDA margin of 16.9% was below company expectations, but the vast majority of the shortfall was due to some unanticipated cost headwinds in the quarter, including logistics, currency, and a discrete customer accrual. Collectively, these headwinds negatively impacted margins by around 100 basis points. I'll talk about these items and the actions we are taking to improve margins moving forward a little later in the call. Looking more closely at the change in adjusted EBITDA dollars, you can see that the decrease was driven mainly by the impact of lower sales volume with relatively neutral price/cost in the quarter. Let me comment a little further on the individual items in the walk. With respect to price/mix, net pricing was positive once again this quarter in both segments, as pricing continues to hold up well as we expected. Mix was also a slight positive, driven largely by industrial distribution, which generally outperformed OE sectors again in the third quarter. On the material and logistics line, we saw a significant spike in logistics costs in the quarter, reflecting higher international freight costs, including some lag effect from the second quarter. This was partially offset by modestly lower material costs. On the manufacturing line, performance was slightly negative in the quarter as cost reduction initiatives and efficiency gains in our plants were slightly more than offset by the continued year-over-year impact of inflation and costs associated with new footprint investments. Looking at the SG&A other line, costs were up slightly from last year. But in the quarter, we had an unfavorable SG&A expense impact from a discrete customer accrual. Excluding this impact, structural SG&A would have been down slightly from last year, as cost control measures and lower incentive compensation expense more than offset the impact of continued wage inflation. Currency was a sizable negative in the quarter compared to last year and compared to the revenue impact. This was driven mainly by the revaluation of cash and other balances outside the United States. We posted a large negative impact in the quarter of just over $5 million related to this revaluation. This is included in unallocated corporate, not in the segments. Finally, acquisitions net of divestitures contributed $6 million of adjusted EBITDA in the quarter, which was accretive to overall company margins. Our recent acquisitions continue to perform well, and CGI is off to a strong start. On Slide 15, you can see that we posted net income of $82 million or $1.16 per diluted share for the third quarter on a GAAP basis. The current period includes $0.07 of net expense from special items, including acquisition, amortization, and other special charges, offset partially by a gain on the sale of our recently closed GAAP new bearing complex in South Carolina. On an adjusted basis, we earned $1.23 per share, down 21% from last year and below our expectations because of the margin shortfall. With respect to some below-the-line items, interest expense in the third quarter was about $2 million higher year-over-year, while diluted shares were down slightly. Our adjusted tax rate for the quarter came in at 27%, in line with our expectations, but up from last year due mainly to our geographic mix of earnings. Finally, non-controlling interest was up around $3 million from last year, while depreciation expense was up slightly in the quarter. Now, let's move to our business segment results, starting with Engineered Bearings on Slide 16. In the third quarter, Engineered Bearing sales were $741 million, down 4.5% from last year. Organically, sales were down 3.6%, driven by lower end market demand in Europe and China. Among market sectors, renewable energy saw the most significant decline in the quarter, driven by continued weakness in China. In addition, the off-highway, auto/truck, and general and heavy industrial sectors were down from last year. On the positive side, revenue in the distribution, aerospace, and rail sectors were all up versus the year-ago period. Currency was a headwind to revenue of less than 1% and while the net impact of acquisition and divestitures was slightly unfavorable. Engineered Bearings adjusted EBITDA in the quarter was $138 million or 18.7% of sales compared to $157 million or 20.2% of sales last year. Our margins in the quarter reflect the impact of lower volume, along with higher logistics and manufacturing costs, partially offset by favorable price/mix. Now, let's turn to Industrial Motion on Slide 17. In the third quarter, Industrial Motion sales were $386 million, up 5.2% from last year. Acquisitions contributed just over 6% to the top line, while currency was slightly positive as well. Organically, sales declined 1.4%, as lower demand was partially offset by higher pricing. With respect to performance by platform, Automatic Lubrication Systems posted the largest decline, while Drive Systems was notably up in the quarter. Automatic Lubrication was impacted by broad weakness in Western Europe and the off-highway sector, while Drive Systems benefited from significantly higher military marine revenue. Belts and chains were also down modestly on lower ag demand, while other platforms were relatively flat compared to last year. Industrial Motion adjusted EBITDA for the quarter was $74 million, or 19.2% of sales compared to $75 million or 20.5% of sales last year. Our margins in the quarter were impacted by lower organic volume and higher operating costs, including the customer accrual I mentioned earlier, partially offset by strong contribution from our recent acquisitions. Manufacturing performance was relatively flat in the quarter with favorable cost performance offsetting ramp costs related to our new capacity investment for Belts in Mexico. Turning to Slide 18. You can see that we generated operating cash flow of $123 million in the third quarter. And after CapEx of $35 million, free cash flow was $88 million. We expect stronger cash flow in the fourth quarter, driven by improved working capital performance. From a capital allocation standpoint, we deployed nearly $200 million in total during the quarter for the CGI acquisition and the payment of our 409th consecutive quarterly dividend. Looking at the balance sheet, we ended the third quarter with net debt to adjusted EBITDA at 2.1 times, right near the middle of our targeted range, and we have no significant debt maturities until 2027. Now, let's turn to our updated outlook for full year 2024 with a summary on Slide 19. Overall, we reduced our outlook to reflect our third quarter performance and a more cautious view on the rest of the year. So, let's go through it, starting with the sales outlook. We're now planning for full year revenue to be down around 4% in total versus 2023. Organically, we now expect sales to be down around 6% at the midpoint, 1 percentage point lower than our prior guidance. Note that the outlook for renewable energy is relatively unchanged. This sector alone accounts for more than half of our expected organic sales decline for the full year. As we have discussed, our updated sales outlook assumes a slightly greater than normal seasonal decline in the fourth quarter as we're planning for more pronounced customer slowdowns in December. With respect to currency, we're now expecting a headwind of around 25 basis points for the full year based on quarter-end exchange rates. Finally, we expect M&A to contribute 225 basis points to the top line for the year. This excludes the recent CGI acquisition. On the bottom line, we now expect adjusted earnings per share in the range of $5.55 to $5.65. This reflects our third quarter performance and a more cautious outlook for the fourth quarter, offset partially by modest accretion from CGI. Our revised outlook implies that our full year 2024 consolidated adjusted EBITDA margin will be in the low 18% range at the midpoint. For the fourth quarter, our guidance implies that adjusted EBITDA margins and earnings per share will be down sequentially and year-over-year on lower production volume and expectations for higher costs heading into the end of the year. As Tarak highlighted, we are not satisfied with our second half margins, and we are stepping up our efforts around cost actions to improve margins for 2025 and beyond. As we have talked about on prior calls, we've been working to reduce costs all year, including facility rationalizations like the closure and sale of our Gaffney plant, reducing operative headcount by over 12% since the beginning of 2023, and controlling salary hiring and nonessential spending. While this has had a positive effect, it has not been enough to fully protect margins at current demand levels. We intend to get more aggressive. Our objective is to bring costs more in line with demand levels and to improve margins and profitability in line with our long-term targets. We will not get into specific details today. We will outline the actions on expected savings in early February as we finalize our business plan and provide initial guidance for 2025. Moving to free cash flow. We've updated our 2024 outlook to approximately $300 million, which is down from our prior guide, mostly to reflect the impact of lower expected earnings. We expect to generate over $100 million of free cash flow in the fourth quarter, which is a step-up both sequentially and year-over-year. To summarize, our third quarter performance was below expectations, especially on the bottom line, and we are moving aggressively to reduce costs while advancing our strategic initiatives to strengthen the company for 2025 and beyond. This concludes our formal remarks, and we'll now open the line for questions.

Thank you. Our first question today comes from the line of Stephen Volkmann with Jefferies. Stephen, please go ahead.

Good morning. Thank you, Tarak, for joining us. Let's start by discussing renewables, which appears to be a sector where you might have better visibility. I'm interested to know if there are any shifts in market share in that area and whether you believe there is a possibility for recovery in 2025.

So, let me take that. Of course, Phil feel free to add commentary. So, as you have seen, wind has come down quite a bit from a renewables perspective. Solar remains quite strong overall for us, and we don't see a big change in the solar market, but rather we see from a renewable segment more wind being impacted. The volumes have come down in line with the orders that we saw from 2023 up to 2024. Over the last few months, we've seen a stabilization of our order intake rate at a low level compared to the past, quite a bit lower than we've seen in the past. We expect, based on the discussions we've had with our customers and partners, that low level to continue for quite some time. There have been pockets in the wind business where the pricing has not been what we consider to be an acceptable level. As we discussed in the past, we have decided not to participate in the very low price levels. Overall, our wind business from the order intake rate has been stable, and it's not the great profit levels of the past, but we are still happy with where we see our wind business from a returns perspective. We do not see a pickup of the wind business as I can see it from the different visits and the inputs that we've gotten.

Yes, I have nothing to add, Stephen. The key point is that the market has stabilized. Although we experienced a significant decline in the quarter, the rate of decline has slowed down as the comparisons have become easier. Demand has also stabilized. As Tarak mentioned, the order intake rates are somewhat consistent. We believe that things are not getting worse at this point. The question now is when growth will resume, but I would not anticipate that happening in 2025.

Great. Tarak, as you've been assessing things, I'm interested to know if there's a possibility of any shifts in focus. I'm wondering if there are some businesses that might seem noncore and could potentially be divested. Also, regarding capital allocation, I often receive questions about why there's not more stock buyback in comparison to your M&A activities. Have any of these considerations come up as areas where you might want to make some adjustments?

Thanks Steve. Look, as I said, we are looking at the entire portfolio very much with the perspective that you just described. It's too early to come back with any conclusions or any even first indications. 60 days in, learning about the business and looking at the portfolio is kind of where we are. At the appropriate time, we'll come back with what we think the evolution of Timken might look like, but that would be at a later date. When it comes to share buybacks, I mean, look, as we have said, our bias remains a disciplined allocation, with a bias towards M&A. We've done quite a few deals in the last, let's say, 18 months. We are actively executing and integrating those deals. If something comes along that looks very interesting on the smaller side, yes, on the medium side, we'll take a hard look. But that's our frame of mind right now when it comes to both the M&A, but also if nothing comes along, we will continue, as we've always said, with the share buyback. That's how we're biased.

Yes. And if I could just add, Stephen. Obviously, we bought a lot of shares back over the last 10 years, but we have also done quite a bit of M&A. We've become pretty firm believers in what the M&A can do for us in terms of diversifying the portfolio, making Timken better, being accretive to growth, being accretive to margins, improving the overall package, et cetera. So, I think you'll continue to see a mix of both. Obviously, this year with EBITDA, being flat or actually down from an EBITDA standpoint, we're managing the balance sheet carefully as well. But I think you'll continue to see both, but with a continued bias for the M&A.

Thank you.

Thanks Steve.

Thank you.

Hey Bryan.

We know the organic revenue trends for the quarter, and you just spoke to order rates in terms of wins. Maybe touch on other large end markets how orders stayed through Q3 into Q4. And you mentioned the anticipation of production rates being pulled back a bit further late in the quarter, that being factored into your guide. Any additional detail or color you can offer on that front would be helpful.

Thanks Bryan. I mean, as we've said, we've seen a bit more softness in the general industrial area than we had indicated earlier. So, that's the more lighter side of the portfolio from products and solutions that we offer to the market. So, that's where we've seen a bit of a softness. The comment on net working capital and inventory is precisely the area where we are going to focus. We are running a bit ahead with our production compared to the demand, and we are now tracking down the capacity, as you mentioned, based on what we see as incoming order intake rates, plus being a bit more cautious when it comes to the fourth quarter. As you know, sequentially, we're always down in the fourth quarter compared to the third quarter, and that's the same piece that we see every year. From the inorganic side, I would say, our acquisitions have performed quite well and have been supporting us this quarter. I'm not sure I'm answering your question precisely, but that's what I assume you were asking. So, we're quite happy with both the growth and the performance and the profit contributions, including the accretion that our recent acquisitions, specifically Des-Case, Lagersmit, and CGI have already contributed since the month of September. Since we closed CGI, we almost had the whole month. Those have contributed quite positively to our performance. We expect them to continue based on what we see in their end markets.

Yes, I can add that when we examine revenue trends throughout the quarter, there was a slight improvement in September compared to July and August. However, as Tarak mentioned, our discussions with customers indicate that we should expect a more significant slowdown in December, which is mainly why we lowered our top line guidance for the remainder of the year. Additionally, during the quarter, some unexpected costs, such as those related to currency and customer accrual, emerged late in the period. Overall, this reflects the sales trend. In terms of our order book, it is relatively stable, remaining flat sequentially from the second quarter, although still down a bit year-over-year, by about mid-single digits, consistent with last quarter. Therefore, the order book remains stable and supportive of our guidance for the year ahead.

Understood. Appreciate the detail. And specific to Industrial Motion, we know Belts and Chains have been facing headwinds for the year, are you willing to speak to on a year-on-year basis, how much the EBITDA compression in that platform will impact the segment? And then as we look to 2025 with Mexico capacity being fully ramped at that point, how much is a reset or a guidance that might be in the outlook?

Yes. Certainly. I mean, when you think about Industrial Motion for the full year, margins will be primarily impacted by certainly the lower organic volume and Belts and Chains certainly be a part of that, as well as the expectation for higher costs, higher manufacturing costs year-over-year. The new plant ramp is part of that as well, and then we would have some positive pricing offsetting that. So, as you fast forward to next year, that new plant ramp, as we've talked about before, it could be a headwind of a couple of million dollars of quarters. You have two plants operating and trying to shift production from one to the other. But we get to the end of the year into the early part of next year, the U.S. plant should come down, production will shift fully to Mexico, it will continue to ramp. From a productivity standpoint as you move through, call it, the first half of next year, that should be a nice improvement for us from a margin standpoint as the cost of operating that Mexico facility will be significantly lower than operating similar capacity.

Right now, we have the kind of the trifecta. Unfortunately, we have lower volumes in the market. And we have three plants running at their full overheads versus the two that we expect in the future. So, when you combine that with a slightly lower ramp-up on Mexico, as we've said before, that facility is not ramping up as fast as we'd like. All of those combined result in the headwinds for the Industrial Motion business when it comes to Belts specifically, the Chain part has been doing a bit better, is what I can add. Thanks.

Okay, understood. Appreciate the detail.

Thanks Bryan.

Thanks Bryan.

Hi, thank you for your time. I understand that around the election, some customer softness at year-end may just be a pause as they seek more clarity. However, the organic growth in the fourth quarter appears to be a bit lower compared to the third quarter, even with the stabilization in the wind business being somewhat unexpected. You mentioned the orders, and more broadly, if I heard correctly about the company, as we consider the potential for positive organic growth, can you share what you're hearing from your customers as we enter 2025? There has been some feedback regarding the December slowdown, but what does that indicate for the next year? It seems there will be significant efforts to manage costs and reassess the company's portfolio. Of course, it would be easier to turn things around if the top line improves. I'm not looking for precise guidance, but is there anything from your customers suggesting potential positive organic growth in the first half of next year, or should we anticipate it remaining down and focus primarily on cost management for now? I also have a quick follow-up on.

I think as you know, David, we usually see an increase in business from the fourth quarter to the first quarter due to Timken's portfolio and our customers' ordering and revenue patterns at PC. We expect this trend to continue this year, depending on how low we finish in the fourth quarter. Historically, there has always been a healthy increase from the fourth to the first quarter, and we anticipate this to hold true. Regarding our outlook for 2025, we're primarily focused on 2024 at this stage. We are receiving mixed signals about 2025 right now. While some of our businesses are performing well and we expect them to remain strong, there are areas where we are weak and we haven't seen any signs that give us confidence for 2025 at this time. From our perspective, it's challenging to predict 2025 accurately, and even for the first quarter, we prefer to wait until we have more concrete numbers before making any assessments.

Yes, if I could just add, I think Tarak expressed it well; we're not going to discuss 2025 today. From an OEM customer perspective, our expectations for the fourth quarter are that inventory destocking should largely be finished with OEMs by that time. This is certainly a positive factor, but it's too early to discuss 2025 in terms of growth. Regarding your question about the implied organic performance in the fourth quarter, you are correct that it suggests a slight decline year-over-year compared to the third quarter. As we mentioned, the renewable segment has remained stable. However, we anticipate lower year-over-year performance in other markets, such as aerospace after several strong quarters, and rail also following a period of strong performance. Additionally, our services business is facing tougher comparisons. These factors will primarily drive the differences between year-over-year organic performance in the third quarter and the implied fourth quarter.

One thing I can add to what Phil just said is we do see many of our customers have probably adjusted their inventories down to the level they feel comfortable. So, with rare exception, we do not see a further destocking on part of the customer that are, of course, some segments like ag, where it continues to be a bit of a challenge even for our customers. But for the most part, we see that reduced. Plus we have also reduced our lead-times quite a bit in the course of this year given the shortfalls that we see and the process improvement. So, we are sitting there with short lead-times, and we believe the customers are, for the most part, at the levels of inventory if you're comfortable with their demand. That would be a conclusion or let's say, an observation, if that helps.

That's very helpful. Just to clarify about the margins, did I hear right that there were about 100 basis points of one-time costs for the quarter? I noted the specific costs you mentioned, but overall, did you feel there was nearly 100 basis points of one-time costs? I'm trying to understand if that’s correct, considering it was 17.9% for the quarter, while the fourth quarter is suggesting around 15.4% to 15.9%. I'm just trying to ensure I grasp the decrease and whether pricing or costs could be negative again in the fourth quarter. There's a lot to unpack here, but I'm trying to figure out that sequential change.

Yes, that's a great question, David. I would say it was about 100 basis points of negative margin compared to our expectations. I wouldn't necessarily link them directly; it was more of a mix of one-time factors in the quarter, particularly a significant increase in logistics costs. However, we are not anticipating that trend to continue into the fourth quarter, so we approached that outlook with some caution, not assuming that those costs will decrease. Regarding the other two factors, the currency impact stemmed from a revaluation of cash held outside the U.S., which we do not expect to happen again. Additionally, we took an unusual allowance against one of our customer accounts that is not likely to recur. So, in relation to our expectations, it was indeed about 100 basis points. Looking ahead to the fourth quarter, the margin will be influenced by a combination of lower organic revenue compared to our previous guidance and a decline both sequentially and year-over-year. The remaining factor is our projections for higher costs as we move towards the end of the year, especially since when customer demand slows and we are working on reducing inventory levels, we often incur higher costs as a consequence. Thus, we opted to be somewhat conservative regarding our cost outlook for the fourth quarter as we approach year-end.

Very helpful. Thanks so much.

In addition to what Phil mentioned, we are implementing some structural cost adjustments and investments in Mexico and India, which will start to take effect more in 2025. In the fourth quarter, we are incurring significant costs due to duplication and factory ramp-ups, even though the volumes won't be there. The investments in these facilities are substantial, and we expect them to start contributing to volume and profitability in part by 2025. The Belts investment will likely generate returns in early 2025, while the significant investments we've made in India for structural cost adjustments will be more apparent in the second half of next year. This is also why we are being a bit cautious about our fourth quarter outlook.

Helpful.

Thanks David.

Good morning, and thank you for addressing my questions. To follow up on your previous response, if we exclude many of the one-time costs that are still present this quarter, I’m trying to understand how you plan to approach cost reductions. While I realize you won't provide specifics until February, can you confirm if you intend to start implementing these cost reductions this month or in the upcoming months? Additionally, are you aiming for a particular margin range that differs from what you've targeted in the past? I'm looking for some general insight regarding your plans for these cost reductions.

Yes. Thanks Mike. Maybe I'll start and then ask Tarak to chime in as well. So, relative to the cost, we've been working on taking costs out all year, as I mentioned. That will continue. We will target the incremental actions at areas within the business that have seen the most pronounced declines if you will, from a demand standpoint and then, obviously, functions supporting those areas. The objective would be to get the cost down more in line with current demand levels. Obviously, if we inflect, we'll benefit from that. Then obviously, also bring our margins in line with our long-range targets, which we put out a couple of years ago at our Investor Day, and we're still working towards hitting those. From the cost standpoint, I wouldn't expect the incremental stuff, maybe get a little bit of a benefit in the fourth quarter. It's probably more targeted towards 2025.

I would add that in certain product lines, we are a bit too big in terms of our jacket size or shoe size, you would call it. There, we are trimming. But it's a very specific to product lines where we see the gap between demand and our own capacity. Please remember, in the fourth quarter, we are also slowing down our operations. I mentioned we have too much inventory. Obviously, when we slow down the operations in order to drive cash flow, that will have a bit of a negative impact because of the under absorption in those facilities we are idling. We got a bit ahead on our production this year, and now we are stepping back, and that is also a contributing factor in the fourth quarter performance that you see from us in terms of the outlook. As Phil said, we are being a bit cautious given the market environment that we see in terms of the forecast for 2024. We hope that after six quarters or more, now almost seven quarters of a decline in the market demand, we do see some upside going into 2025, but it's difficult at this point for us to see that, and we'll call it.

And maybe one more comment, Mike, on decrementals. The implied guide indicates that decrementals will be higher than our typical range, likely in the mid-40s organic for the year. However, it's important to remember that price and cost can fluctuate throughout periods like this. In 2023, we experienced strong decrementals, both increments and decrements, as we progressed through the year. When comparing the two years, the net organic decremental over that period is below 20. We have been active and executing effectively during this time. This quarter, however, we faced challenges with lower volume, neutral price and cost, and some specific one-offs I mentioned earlier, which together created a tough situation for our margins this quarter.

Okay. Okay, great. And just to follow up on the margin story going forward. So, you guys have mentioned you're looking to maybe pursue growth more aggressively, certainly makes a lot of sense. I'm just wondering if you've got cost reductions taking place in 2025 targeted or kind of broader, but you've also got maybe some investments to make in your R&D or engineering. I just want to make sure that you're expecting 2025 to be a year of net reductions in the cost structure and not mostly offset by increased investments elsewhere. Any comments there would be appreciated.

I think maybe I'll take this and then, Phil, you can please add. A lot of what we're doing is to adjust to capacity and demand. The assumption is there is a demand that's equal to this year, then probably, yes, we will look at costs that are lower than this year, given both the investments that we have made in the new batteries as well as what we see in terms of the demand pattern. However, there's a big gift and a big gift is the demand continues to be around the same level in 2025 as 2024. What we're trying to do now is to ensure that we adjust our costs in line with demand, and that's going to be the main driver. Yes, we are going to take a look at what product lines and portfolios we see profitable growth opportunities and we're going to invest in them. But, to do that, we would have to make some investments in that portfolio. So, net-net, it's difficult for us to talk about 2025 because we don't have a view on what the top line looks like. Our going-in thinking as a team is we need to address costs where we see the challenges and we need to think about growth where we see the opportunities. Right now, that's not where we'd like it to be in terms of bottom-line performance, but this is something we are working on collectively and specifically, on the product lines where we see challenges in terms of performance.

Right. If I could just add, Mike, as we invest, obviously, we've got targets out there for growth, margins, et cetera. As we invest, we always look for those investments to be funded within the confines of the commitments we make around margins, the commitments we make around cash flow, et cetera. I think over the years, we've done a very good job of making investments in the business to grow and improve margins and competitiveness, M&A, et cetera, all within the confines of the targets we've set and the commitments we've made around margins, et cetera, and I think that would continue.

Fair enough. Thanks for the time.

Thanks Mike.

Thank you, Mike.

Thanks. Good morning. Tarak, you said there were some wind business where pricing is so bad, you don't want to participate. Is there one main competitor or multiple competitors out there willing to take business at margins you consider unacceptable? And are you seeing competitive pressures like that in any of your other end markets?

Thanks, Steve. After visiting China, we've identified that the most significant price pressure is coming from a small number of competitors. We believe these pricing levels are not sustainable long-term, as they are based more on capacity than on profitability. As a result, we've opted to walk away from certain business opportunities. Meanwhile, Andreas and the team are focused on aligning our cost structure with performance and customer expectations. There's a strong push for everyone to reduce costs. We're also developing new products and processes tailored to the wind sector to ensure our continued participation in the market. It is challenging right now due to low volumes compared to a couple of years ago. While we do face competitive pressures, they mainly come from a few local competitors who are more aggressive and willing to accept terms that we find less attractive. This is until our product costs are better aligned with our gross margin requirements. Andrea and the team are consistently working to keep us competitive and active in the market.

Yes. I would say, Steve, that this issue is really specific to the wind market in China. We don’t see a broader downturn; if anything, we feel like we’re gaining market share where we are focusing our efforts. In China, as Tarak described, the situation is reflective of what occurs in any market experiencing a significant decline, where customers are seeking price reductions and are willing to shift their business in the short term to obtain them. This isn't entirely unique to us, though the circumstances in China do add some complexity. Overall, Tarak addressed it very well. This is the only area we are seeing this happen, and it was largely a decision on our part.

To continue on your question, we do see declines in many other segments, but we don't observe the same behavior or feel the need to abandon certain business. That's why prices are affected.

Yes. That's good to hear. And I don't want to.

Go ahead, please.

Go ahead, Steve.

Sure. Sure. Yes, I understand that you don't want to take a view to 2025. But we are ultimately, at the end of this year, we'll be six quarters into negative growth. EPS will be down around 20% year-over-year per your guidance. My question is when you think about destocking and inventory trends, the cost actions that you expect to take and your capital deployment options, do you have enough in your control to drive double-digit EPS growth next year? Or is it even too early to say that based on how you're thinking about the broader environment?

I think it's a bit too early to make a definitive statement given the broader environment. While our balance sheet indicates we have the capacity to proceed, we want to ensure that we have sufficient funds for investing in the business before considering share purchases. At this moment, we are exercising more caution regarding 2025, and I would emphasize our cautious stance for that year.

Yes, I agree. I think we really need to see how the market situation develops as we move into 2025. We'll have a better view of that in February because it will really drive the discussion. Regarding your point, we're taking actions on the cost side, including the additional measures we mentioned today. Customer inventories are at a good level and should remain stable through the end of the year. As we approach year-end, I believe we'll be in a strong position. However, until we observe how the markets develop, it's too early to make any definitive statements.

Understood. Thank you.

Thanks Steve.

Thank you, and welcome, Tarak. Maybe my first question is just on that discrete customer accrual that you mentioned. Yes, you're welcome. Was that essentially, like bad debt expense? Just wanted to get some clarification around that item.

Yes, that's exactly. It was a collectibility accrual reserve that we set up for one specific customer in the quarter in the renewable energy sector. If you look at our history around collectibility, it's quite strong. I mean I would stack it up against anybody. Occasionally, we will have a situation like this where we got to set up a reserve, it's typically very few and far between, and we're watching it closely, obviously, but collections have generally been stable and consistent with prior years this was sort of an outlier that we had to set up a reserve for.

I understand the situation. It appears that the logistics issues have significantly affected margins this quarter and may continue to do so in the fourth quarter. Tarak, as you consider ways to lower structural costs, is there anything you can implement in your logistics operations to help mitigate the effects of sudden spikes in logistics costs?

Logistics has been quite volatile over the last four years and hasn't followed the usual economic trends. The main reason for the increased logistics costs is likely the challenges in the Red Sea. Additionally, we are making structural changes regarding our supply locations in relation to our demand locations. We will assess how we can serve different markets from our various geographies. At this moment, we don't have a definitive answer, but we will consider how to meet the needs of the Americas, Europe, the Middle East, Africa, and Asia. Our goal is to design our supply chains to reduce dependence on logistics, especially at an interregional level. However, this is a long-term discussion, and we are not prepared to change our operations based on logistics alone, but it is certainly something we will keep in mind for future supply and demand alignment.

Yes. Certainly, Joe, we've lengthened our supply chains over the last 10 years. Some of that's been trying to get to lower-cost suppliers, very competitive suppliers across the globe, frankly, and that always comes with lower costs. You got the extra logistics. Net-net, it's been a benefit to the company. Logistics has always been very manageable. We have had the last few years where it's been a little bit choppy and spiking including this quarter, it sort of spiked on us. We didn't expect it. We didn't see it come. We expected it to be a little bit higher, but not as much as it came through. It will normalize as we move forward. We're not planning on it for the fourth quarter. It will normalize. Net-net, logistics has kind of come with lower cost on the material side, and those two kind of go hand-in-hand.

Got it. Okay, great. Thanks guys. Appreciate it.

Thank you, Joe.

Thank you for having me. I was a bit surprised by the inventory increase this quarter compared to sales. It seems that you'll need to work on reducing it, which should be beneficial for free cash flow in the fourth quarter. Considering your expectations for demand by the end of the year, do you think your inventory levels will align with that demand? If demand remains steady at the end of Q4 and carries into 2025, do you anticipate needing to make additional adjustments?

In general, our net working capital is higher compared to previous levels. We need to focus on reducing our net working capital as a percentage of revenue. It's currently elevated, and we will need to implement process changes in how we operate our supply chains to better serve our customers and lower this figure. We plan to collaborate on this over the next few quarters, aiming to redesign our approach so that our net working capital is more efficient concerning inventory levels, fill rates, and distribution performance moving forward, compared to the past. This is an ongoing effort we're committed to.

Yes. Mike, just for clarification, I think in the quarter, we had acquisitions and currency. When you look at the balance sheet, organically, we'd say inventory came down right close to $10 million. You see that if you look at the cash flow statement, we'd expect more to come out in the fourth quarter. And as Tarak mentioned, even after that, I think there's still opportunity moving ahead for Timken to get more efficient in managing both inventory and working capital more broadly.

Okay, that's helpful. I didn't think about the acquisition. And guys, just curious, just thinking about some of the moving pieces, talking about price versus cost. Timken has done a great job getting pricing even this year. It's been positive. We're starting to see in the industrial channel pricing really starting to flatten out. When we look at some of the OEMs are thinking for Q4 and going forward. I'm curious, just big picture, how you're kind of thinking 2025. Is it price/cost neutral? Could it be positive price versus cost? If that is positive price, is that you guys leaning more on the cost measures on that cost bucket to drive that? Just any big picture thoughts on that would be helpful. Thanks everyone.

On a broad level, we anticipate that pricing in 2025 will remain relatively flat. It won’t match the conditions of 2023, but we foresee continued stability in pricing for 2025 as a general trend. Distribution patterns may improve in certain areas while potentially declining in others. Overall, we expect flat pricing based on our observations, particularly because input costs have increased rather than decreased. Traditionally, downturns leading to lower prices have been largely influenced by reductions in input costs, as indicated by our third-quarter results and our expectations for the fourth quarter, along with the impact of labor inflation. There isn’t a natural factor encouraging overall price reductions, aside from attempts to fill factory capacities, which we don’t intend to pursue. If market discipline continues as we’ve seen this year, we believe pricing will remain steady, and we will see what unfolds in 2025. We don’t identify any inherent reasons for a decrease in input costs that would lead to a general drop in prices.

Thanks everyone.

Thanks Mike.

Thank you. I have a quick question regarding the balance between supply and demand. I noticed that one of your competitors in Europe announced a significant restructuring plan this morning. While this may be more specific to Europe, it raises a broader question about the challenges in the auto industry, especially given that industrial production in Germany has been declining for the past three years. How do you view the overall supply and demand balance? Historically, when the auto industry experiences a downturn, there tends to be some fluctuation, and capacity may shift accordingly. Could you share your insights on what you're observing in Europe? Thank you.

Thank you, Tim. Yes, the demand has been soft, as Phil pointed out, and we've been discussing this for quite some time—it feels like we are in year three of soft demand in Europe. We are making capacity adjustments based on our portfolio and what we foresee as the business needs in the mid to long term. Chris is managing these adjustments in industrial automation, and Andreas is addressing similar issues. These are not just short-term discussions; they are more focused on the mid to long term. The actions being taken are being overseen, including short-term capacity adjustments, such as furloughs or minor changes in specific factories, which are managed at the plant level. Not all operations are down, as several of our product lines are performing well. Therefore, we need to adopt a more targeted approach, focusing on specific products rather than just location-based decisions. This has been an ongoing process for us, and we will continue with it. If any significant changes occur, we will announce them as expected. The team is regularly engaged in this monitoring, and even more so now given the current softness we are observing.

Thanks Tim.

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.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.