Timken Co Q2 FY2025 Earnings Call

Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to Timken's Second Quarter Earnings Release Conference Call. Thank you. Mr. Frohnapple, you may begin your conference.

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 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 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 a 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. 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 of free cash flow, raised our quarterly dividend by 3%, and purchased 340,000 shares of stock. Timken 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 '26. Phil 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 and its impact on costs, demand and other macros. Customer demand has been relatively stable year-to-date at low levels. However, we are reducing the high end of our full year earnings outlook to reflect a more cautious view second half, primarily due to the volatile trade situation. The team remains focused on managing our costs 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 3 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 '26. 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 on the outlook for '26, backlog is inflected despite the trade situation and as trade stabilizes and end-user confidence improves, we expect industrial markets to expand. Additionally, Timken 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 '26 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 '26 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 Timken's position in the automation sector. We are focused on scaling in high-growth applications that include industrial robotics, factory automation, medical robotics, and humanoids. With Rollon, Cone Drive, Spinea, and CGI added to the Timken branded products, we have built a broad product offering to serve these applications, and we will continue to invest to support future growth. The company's customer-focused innovation, application engineering expertise, and advanced manufacturing capabilities are 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 Timken 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're confident in the company's ability to deliver higher levels of performance and create shareholder value as we advance Timken 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.

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. 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. In Asia Pacific, we were up 2% from last year, led by growth in China with 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, 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. On price/mix, pricing was positive in the quarter, while the 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 static, 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 belt facility in Mexico. Collectively, these items plus normal inflation more than offset the positive impact of savings from cost reduction actions in the quarter. 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 $0.30 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. Our adjusted tax rate was 27% as expected. And diluted shares were down slightly, reflecting net share buybacks over the past 12 months. Now let's move to our business segment results, starting with Engineered Bearings on Slide 16. Engineered Bearings 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 and 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. Belts & chain saw the largest decline as it continues to be impacted by lower ag demand in North America. Lubrication Systems was lower on softer demand in Europe, including our end-user retrofit business. The Drive Systems and Services platform was also down. Drive Systems was impacted by lower solar demand and marine timing, while services were impacted by tough comps last year and some project pushouts. Our backlog and services remain 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, belt plant ramp inefficiencies and higher SG&A expense in the quarter, driven by a discrete accrual for 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. We raised our dividend in May, setting 2025 up to be the 12th straight year of annual dividend increases, 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 2.3x, 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 a 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 1 percentage point lower than our prior guide. This is being offset by a 1 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 cost 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-17% range. And finally, we anticipate an adjusted tax rate of 27% and net interest expense of $95 million 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 Timken. 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 and 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, Timken 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.

Our first question today comes from Kyle Menges with Citigroup.

I was hoping if you could just unpack the trim 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 could you just help me understand what you're seeing and hearing in the markets and customers that's leading you to take down on the second half organic growth guide? Or is it just you guys being cautious on tariff uncertainty?

Kyle, it's Phil. Thanks for your question. I would categorize our approach as cautious for the second half of the year. We're not experiencing acceleration, but there is also no deceleration; the markets are stable. We want to be a bit careful regarding demand for the latter half of the year, especially considering the uncertainty surrounding trade, which affects the markets. We believe that as trade uncertainty decreases, along with potential tax changes and possibly a rate cut later this year, these factors could positively influence 2026. However, it's usually uncommon for our markets to accelerate in the second half of the year. Given our current position, we felt it was wise to adopt a more cautious outlook.

Got you. Helpful color. And then starting to get more questions on humanoid robots from investors. I would love to hear from you guys, just your thoughts on Timken's applications for humanoid robots and just in general, the size and potential that you see in robotics, I guess, for Timken.

I’ll take that question. Regarding robotics, if we include automation, it's already a significant market for us, and I believe we're well positioned for substantial growth. The CGI acquisition, which Phil mentioned, is making good progress, primarily focused on medical robotics but also has an industrial aspect. Companies like Cone, Spinea, and Timken have strong positions in factory automation, while Rollon specializes in warehouse automation, along with other areas of factory automation. As for the humanoid market, we are currently developing applications and have generated a small amount of revenue. We anticipate a good compound annual growth rate from this revenue, but it may take a few years to reach even $10 million. Therefore, I expect it will remain relatively small over the next couple of years. We're collaborating with multiple OEMs on future designs, but it’s definitely a long-term opportunity on the humanoid side. The automation market we are currently involved in is also growing.

Our next question comes from Bryan Blair with Oppenheimer.

To follow up on the question on the relative conservatism of the revised guide 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?

Yes. Regarding the second part of your question about July, we will finalize our July numbers next week, but the sales rates we are experiencing are likely at or slightly above the midpoint of our guidance. July has had a good start in comparison to previous months. Although we usually do not discuss monthly order intake, I can say that those rates have been improving as the year progresses. Our backlog has increased sequentially since the first quarter, showing a flat year-on-year comparison, but the positive trend in order intake gives us confidence. However, for the second half, we plan to approach things with more caution than conservatism. We have adjusted some market expectations downward due to lower-than-anticipated project spending in heavy industries. The services sector, which often involves discretionary spending, has also seen some delays. While our backlog remains high and we expect revenue to materialize eventually, we prefer to be cautious. In terms of distribution, it can vary from month to month, but it has been fairly stable overall, with North America seeing a slight decline and Europe a slight increase. We have categorized distribution as neutral, which informs our more cautious outlook. On a positive note, rail continues to perform well. We have categorized it as neutral, even though we expect a significant decrease in freight car construction in North America this year. We're experiencing positive business activity and gaining market share both domestically and internationally. Looking forward to 2026, we feel optimistic, especially if there is progress on trade issues and reasonable resolutions with the countries currently in discussions.

Okay. Makes sense. I appreciate the color. Maybe offer a little more of an update on your discussions with auto OEMs. What's the realistic time frame to finalize those discussions and 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 lifts as mix...

Yes, a little more than half is still our focus right now. It's too early to determine how the discussions will unfold, but they are ongoing. I expect that when we provide guidance for 2026, we will have a clearer estimate of the year's impact. I don't anticipate much effect during the first quarter of next year, but I do expect some positive improvement by the second half of next year. The outcome remains uncertain. We foresee a combination of exiting certain parts of the portfolio and repricing others. Some of the repricing will be temporary until we exit, while some may extend over multiple years. It’s to be determined, but we certainly expect some margin improvement in the second half of 2026.

Our next question comes from Rob Wertheimer with Melius Research.

My question, Phil, you just kind of 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 just hesitancy around tariff. I 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?

Sure, Rob. Thank you for the question. Regarding distribution, it's a short cycle part of our business. We initially projected mid-single digits, around 3 to 4, but have adjusted it back to a neutral stance with a slight lean to the right. This adjustment wasn't a significant five-point shift but rather a low single-digit change in our outlook, driven by cautiousness due to the short cycle nature of this market. The inventories we can see indicate good levels for the current demand, though this can change quickly if the market weakens. Currently, particularly in North America and to a lesser extent in Europe, our inventory levels appear solid. This assessment also holds true for the OEM part of our business. While conditions may vary across different markets and customers globally, the major markets we serve in off-highway and industrial sectors suggest that much of the anticipated destocking is now behind us. Therefore, we believe our inventories are well-positioned. We plan to reduce some of our own inventory in the second half due to normal seasonal patterns, which we believe sets us up favorably for next year. On the services side, focusing on Timken's service business, primarily involving industrial services like high-speed gearbox reconditioning and bearing reconditioning, we also provide motor repair associated with gearbox repair. Some customers keep spares on hand, and when an issue arises on the production line, repairs need to happen immediately. In those cases, a spare may be used, which leads to questions about the timing of reconditioning the spare. The uncertainty around tariffs is affecting discretionary spending across services and our automatic lubrication retrofit business, where we upgrade older equipment to eliminate the need for manual re-greasing. This environment is leading to delays in such expenditures, which we’ve observed. However, the backlog in that sector remains consistent and high-margin, so we have no concerns aside from the need to clear up some of the uncertainty. Regarding wind energy, we experienced a notable increase in demand during the first half, primarily driven by developments in Asia, especially China. This uptick was welcomed after last year's weak market. Analyzing the incoming numbers, it appears there was some pull-ahead from the second half into the first, influenced by regulatory changes in China that took effect on June 1, encouraging some spending to be advanced where feasible. While we expect the market to continue improving, we anticipate slower growth in the second half due to this pull-ahead effect. We believe recovery will take several years, but we're optimistic about what we see. We also experienced shifts in market share last year due to the downturn, which is expected, but we've regained some of that business. We are strategically focusing on gearboxes and are being deliberate about our approach to main shaft applications, feeling confident there is enough market space for us to compete and achieve our growth objectives.

Rob, the only point I'd add is going back to the distribution comment. When we experienced 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. We'll catch up to that in time.

Our next question comes from Angel Castillo with Morgan Stanley.

Sorry to beat a dead horse here, but I just wanted to clarify kind of understanding everything we're interpreting it correctly, but it sounds like your orders 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 factors, am I understanding that correctly that that would put results then above the 540 and it's just something that given the kind of abnormal nature of that, you're just not underwriting at this point? But 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 maybe impacts your ability to see that if you do see any typical recovery?

Thank you for the question, Angel. To exceed the high end of our guidance, we would really need to see an increase in demand in the latter half of the year. Currently, our guidance suggests that organic revenue will decline year-over-year in the second half. While the overall figures may appear slightly better than the first half, when adjusted for pricing, the performance is likely to be consistent across both periods. For us to achieve revenue growth in the second half, that would be essential to reach beyond the high end of our guidance. We established this range because we are confident and comfortable with it. The high end of our guidance assumes that organic revenue will be relatively flat in the second half, with positive pricing and a slight decrease in volume. This gives you an idea of our thinking, and it's one reason we adjusted our estimates; we preferred not to assume an increase in demand in the second half, considering our current situation. It felt more realistic to base our guidance on flat organic revenue for the latter half, which would align us at the high end, while a bit lower than the midpoint would represent the low end, which is our current assessment.

That's very helpful. I have a couple of questions regarding automation and robotics. First, are there specific areas of your portfolio where you believe you still need to seek out potential acquisitions to participate in the robotics or humanoid space in the future? Additionally, considering the ongoing CEO transition, what is the company's appetite for pursuing mergers and acquisitions during this period? Should we assume that M&A activities are on hold until a CEO is announced?

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 the CEO search is going on, we're in the early days of a new CEO, it's going to be something that's probably bolt-on and very close and similar to what we've been doing, and that's the pipeline that we've been working, and we'll continue to work. So I would certainly not say that an acquisition is out of the question during the CEO transition.

Yes. And then the only thing I would add on the first part, Angel, on the robotics, I mean, certainly, I would tell you, we're approaching it much like we do other high-growth markets, is let's form a cross-functional team within the company, let's look at technology we have in the portfolio and what we think it's going to take to compete and win, and then whether we're going to do that organically or if there's gaps in the portfolio, certainly, M&A would come into play along the lines of what Rich talked about. But I'd tell you, in the area of robotics, again, humanoids very early innings. But in the broad area of robotics, we've got very good capabilities in 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 in our capabilities to be able to compete and win as that market grows.

Yes, I believe we don't need to add anything else to our portfolio to succeed with what we currently have. We are not required to bundle anything, but there are additional technologies that could enhance our current offerings, and we have potential opportunities for both organic and inorganic growth. However, it is not essential for our existing portfolio to perform well in the upcoming years.

Our next question comes from Stephen Volkmann with Jefferies.

Excellent. I wanted to go back to the kind of auto contract project, whatever we're calling that. I remember the last time you guys went through this, I think you ended up sort of exiting about 1/3 and repricing maybe 2/3. Is that a reasonable way to think about this exercise? Or is there something different about it this time?

I think the situation is a bit different this time. Previously, we had a different strategy and owned automotive plants that needed significant restructuring. Currently, we do not have an automotive plant in our portfolio; instead, we produce automotive products in mixed industrial plants. Therefore, this scenario is quite different in terms of scale and complexity. It's also too early to determine the mix, which is likely to vary from before. Over the past decade, we’ve focused on a niche market where we have established a strong presence in the U.S. This creates value in what we do, but it's still unclear whether we can successfully enhance our compensation for the value we provide.

Okay. That's helpful information. I want to think ahead to 2026, and it’s hard to predict the market conditions. However, it seems like there will be some advantages, including contributions from your auto project and potential plant closures. You might also see some pricing adjustments as you fully implement your strategies. Can you confirm if this is an accurate assessment, or is there something I might be overlooking? Additionally, is there any way to put some numbers around these projections yet?

It's too early to provide specific numbers. I believe it's a solid list, although not definitive. However, there are many factors suggesting that an upturn could occur next year. We haven't had visibility into most of our portfolio over the past six months, but several indicators point towards a potential recovery. The duration of the downturn we've experienced has been longer than usual, lasting several quarters, which typically ranges from 8 to 10 quarters for us. Due to various aspects of our inventory management, we tend to see more fluctuation in both directions. Even with our current outlook, we are nearing zero sales in the latter half of the year, which generally leads to a positive trend afterward. Usually, once we begin to trend in one direction, we continue along that path for several quarters. Many factors suggest improvements will happen soon, whether in the third quarter of this year or in the early quarters of next year. Additionally, Phil mentioned our shift from uncertainty to certainty, supported by recent trade agreements with the Japanese and European Union, along with a more stable tax environment, which are all encouraging signs. From a self-help perspective, we are focusing on the auto OEM side, which may negatively impact our top line next year but should benefit the bottom line. Our portfolio is stronger than it was during the last market upswing, and we will have some carryover price increases next year, alongside new pricing strategies that we haven't implemented yet due to previous agreements related to tariffs. We expect positive pricing as we move into the next year. Furthermore, we have a compelling self-help narrative in terms of cost reductions, particularly with the three plants mentioned and various productivity measures we’ve applied in both SG&A and manufacturing. I anticipate leveraging these improvements as volume increases. Therefore, with favorable market conditions, next year could be promising.

Yes, I believe Rich covered everything, Steve. The only additional point I would make is that our cost-saving measures are more focused on the second half of the year, and as we ramp up our plants, including the one in India, I think this will positively impact 2026. We are set to start the year in a strong position regarding price and costs. While it's too early to discuss specific increments, as Rich mentioned, I believe we'll be well-positioned to achieve solid incremental gains if we have sufficient volume and demand to support it. Overall, I see us in a favorable situation.

And finally, I'd like to mention that after another year of capital allocation, we have purchased a few shares this year, not many, but we will have reduced our debt over the course of the year if we do not make another acquisition. Additionally, considering next year's cash flow, we expect to see some benefits from our capital allocation next year as well.

Super. All right. There's a lot there. I appreciate it, but you forgot the humanoid robot inflection.

We'll put that into the '27 bucket.

Our final question today comes from Michael Feniger with Bank of America.

I promise I'll keep it brief. Regarding the margin guidance, the mid-17 seems to have shifted from mid- to high 17%. I may have missed something, but it appears that your organic growth is decreasing slightly. Are you assuming a similar decremental change? Has your perspective on that decremental adjustment changed at all, considering you're looking to reduce some inventory? I'm trying to grasp the reason behind the change in margin guidance and the decremental aspect for the latter half of the year.

Yes, I understand. Thank you, Mike. We always appreciate your questions. Regarding the decrease in margins for the full year, there are really three factors to note. First, tariffs could have improved, which would have been a positive influence. The two negative factors are the reduced volume outlook, which affects our volume leverage significantly, and we also expect next year to be more challenging than we previously thought, adding to those concerns. Additionally, we faced some cost headwinds with longer than anticipated ramp-ups for certain operations, along with other impacts we've observed. This combination of factors has resulted in a slightly higher overall decremental effect, leading to a decrease in margins by about 50 basis points compared to where we were earlier.

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

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 for participating in Timken's Second Quarter Earnings Release Conference Call. You may now disconnect.