The Timken Company - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 sales were $1.17B, down 0.8% YoY; adjusted EPS was $1.42 and GAAP diluted EPS was $1.12, with adjusted EBITDA margin at 17.7%. Versus consensus, TKR delivered a revenue and adjusted EPS beat for the quarter (see Estimates Context).*
• Guidance trimmed: the high end of FY25 GAAP EPS lowered to $4.20 (from $4.40) and adjusted EPS to $5.40 (from $5.60); revenue now expected -2.0% to -0.5% vs 2024 (from -2.5% to 0%). Management also guided full-year adjusted EBITDA margin to the mid-17% range.
• Cash generation solid: cash from operations $111M and free cash flow $78M; dividend increased 3% and ~340K shares repurchased, returning $47M to shareholders.
• Tariff headwind improving: FY25 net tariff impact reduced to ~$10M (from ~$25M) with price actions offsetting most of the Q2 impact; full mitigation targeted by year-end on a run-rate basis. Backlog rose mid single digits sequentially, supporting 2026 optimism.

What Went Well and What Went Wrong

What Went Well

• Revenue and adjusted EPS beat consensus; adjusted EPS $1.42 and net sales $1.173B with price/mix and CGI acquisition contributing positively.*
• Solid cash generation and shareholder returns: CFO highlighted $111M operating cash, $78M FCF, and raised dividend by 3% with 340K shares repurchased ($47M returned).
• Strategic positioning and backlog: CEO emphasized backlog up mid-single digits QoQ and confidence in mitigating tariffs via pricing and cost initiatives; optimistic about industrial expansion in 2026.

Management quotes:

• “We have implemented pricing and other actions to mitigate the impact of tariffs… driving cost initiatives to deliver resilient financial performance in 2025.”
• “We expect the operating environment to remain challenging in the second half… Looking further ahead, we are optimistic about 2026.”

What Went Wrong

• Margin compression: adjusted EBITDA margin fell to 17.7% (from 19.5% YoY) and net income margin to 6.7% (from 8.1%) on lower volume and incremental tariff costs.
• Segment pressures: Engineered Bearings adj. EBITDA margin declined to 19.7% (from 21.2%) and Industrial Motion to 18.3% (from 20.0%) due to tariffs, lower volumes, and higher SG&A.
• Guidance trimmed: high end of FY25 EPS ranges lowered; management now plans FY25 revenue -2.0% to -0.5% vs 2024 (from -2.5% to 0%) reflecting cautious H2 demand and trade uncertainty.

Transcript

Operator (participant)

Good morning, my name is Emily and I will be your conference operator today. At this time I would like to welcome everyone to The Timken Company’s second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you, Mr. Frohnapple. You may begin your conference.

Neil Andrew Frohnapple (VP of Investor Relations)

Thank you, Operator, and welcome everyone to our second quarter 2025 earnings conference call. This is Neil Andrew 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 Richard G. Kyle and Philip D. Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Richard and Philip before we open up the call for your questions.

During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today’s call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today’s press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today’s call is copyrighted by The Timken Company, and without express written consent, we prohibit any use, recording, or transmission of any portion of the call.

With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Richard.

Richard G. Kyle (President and CEO)

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 margin 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 2026. 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 for the 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 three plant closures in the second half of the year. These actions will mitigate the planned volume declines in the second half and positively impact margins in 2026. The tariff situation remains volatile, but our large U.S. manufacturing footprint will serve us well to adapt to the changes, and we remain confident in our ability to mitigate the direct impact from tariffs. We continue to actively pass the costs into the market through repricing the portfolio, albeit with some expected lag in timing. Pricing was up sequentially compared to the first quarter, and we expect further price realization as we move through the second half. While still early, we are optimistic about the outlook for 2026.

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

We’re focused on scaling in high-growth applications that include industrial robotics, Factory automation, Medical robotics, and Humanoid robotics, 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.

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 the call over to Phil for a more detailed review of the numbers and outlook.

Philip D. Fracassa (CFO)

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.

This excludes both currency and acquisitions. Let me provide a little color on each region. In Asia Pacific, we were up 2% from last year, led by growth in China with a significant improvement in wind energy shipments. India was flat in the quarter at a good run rate, while the rest of the region was lower. In the Americas, our largest region, we were down 3%. While the region continues to be relatively stable overall, we did see lower revenue in the distribution, off-highway, and auto truck sectors. On the positive side, revenue in the general industrial sector was up. Finally, we were down 5% in EMEA on continued industrial softness in that region.

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.

Mix and pricing were positive in the quarter, while mix was negative, and pricing was also up sequentially from the first quarter due to the initial tariff-related pricing actions we’ve put through. The net impact from tariffs was just slightly unfavorable in the quarter, as pricing actions almost fully offset the incremental tariff costs.

The weaker U.S. dollar caused some transactional losses in the period. Finally, our CGI acquisition continues to perform well, contributing $4 million of adjusted EBITDA, which was accretive to company margins in the quarter.

Engineered Bearing sales were $777 million in the quarter, down 0.8% from last year, with the change essentially all organic as the business continues to stabilize across regions. We saw lower end-market demand in Europe and the Americas, mostly offset by higher revenue in Asia. Among market sectors, auto, truck, off-highway, and heavy industries were down from last year as we expected. On the positive side, renewable energy and general industrial were both solidly higher versus last year.

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.

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. Finally, the CGI acquisition contributed 3.6% to the top line, while currency translation was a benefit of 1.6%.

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.

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.

Acquisitions are unchanged, as we still expect CGI to contribute just under 1% to our revenue for the year. Note that revenue in that business is up over 10% since we bought it.

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 cover in a moment. Our revised outlook implies that our full-year consolidated adjusted EBITDA margin will be in the mid-17% range.

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.

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.

Operator (participant)

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

Kyle David Menges (Analyst)

Morning guys. 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 year to date, and you’ve seen backlog growth in both the first quarter and the second quarter. Could you just help me understand what you’re seeing and hearing in the markets and from customers that’s leading you to take down the second-half organic growth guide? Is it just you guys being cautious on tariff uncertainty?

Philip D. Fracassa (CFO)

Yeah, hey Kyle, it’s Phil. Thanks for the question. I would put it more in the category of just wanting to be cautious on the second half of the year. We’re not seeing acceleration per se; we’re certainly not seeing any deceleration. The markets remain stable. We wanted to be a little cautious on back-half demand just given the uncertainty around trade, which filters into the markets, as you know. We do believe as we get more certainty around trade — you couple that with a tax bill, you couple that with maybe a rate cut as we move through the year — we do think all those things likely impact 2026 in a positive way. But it’s usually atypical for our markets to accelerate in the second half. At this point in the year, given where we’re at, we just thought it was prudent to be a little bit more cautious on the outlook.

Kyle David Menges (Analyst)

Gotcha. Helpful color. Starting to get more questions on Humanoid robotics from investors. Would love to hear from you guys. Just your thoughts on Timken’s applications for Humanoid robotics and, in general, the size and potential that you see in robotics, I guess, for Timken.

Richard G. Kyle (President and CEO)

Yes, I’ll take that last part. Robotics, if you open it up to automation, is already a sizable market for us and one that I think we’re well positioned to grow in significantly. The CGI acquisition, which Phil talked about, is off to a good start and is almost predominantly focused on Medical robotics but has an industrial play as well. Cone Drive and Spinea, along with Timken, have significant plays in Factory automation, and Rollon has some specialty in warehouse automation as well as other parts of Factory automation.

I think it’s going to be a relatively small number over the next couple of years. We’re working with multiple OEMs on future designs, but I think it’s a longer-term play for sure. Still, on the humanoid side, the other parts of the automation market are here today and growing.

Kyle David Menges (Analyst)

Helpful. Thank you.

Philip D. Fracassa (CFO)

Thanks, Kyle.

Operator (participant)

Thank you. Our next question comes from Bryan Francis Blair with Oppenheimer & Co. Inc. Please go ahead, Bryan.

Baryan Francis Blair (Analyst)

Thank you. Morning, guys.

Philip D. Fracassa (CFO)

Morning, Brian.

Baryan Francis Blair (Analyst)

To follow up on a question on the relative conservatism of the revised guidance to ask in a different way. What were month-by-month orders through Q2, and how does July look relative to the second-quarter level?

Philip D. Fracassa (CFO)

Yeah, I would say on the second part of the question around July — look, we’ll close the books on July next week. The sales rates we’re running would be in line with, or maybe slightly ahead of, the midpoint of our guide. I think July is off to a pretty good start relative to expectations as far as order intake rates go.

Obviously, we moved some markets to the left on our market chart — heavy industries, just because project spend was coming in a little bit lower than we anticipated. Services is one where it can be a discretionary spend, and that’s one where we’ve been seeing some pushouts. Backlog remains high, and I think that revenue will come at some point, but we wanted to be a little bit more cautious there.

Despite freight car builds expected to be down significantly in North America this year, we’re seeing some good business activity and wins outside the U.S., and we’re really protecting or expanding share even in our core market as well. Just to give you a little bit of extra color, we do feel confident that as we look ahead to 2026, with some help on the trade front and a reasonable resolution in the remaining countries that are still under debate, we should be in a pretty good position heading into 2026.

Baryan Francis Blair (Analyst)

Okay, makes sense.

I appreciate the color. Maybe offer a little more of an update on your discussions with auto OEMs. What’s a 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? When you get to that point, are you willing to quantify or otherwise frame the margin lift as an extra step?

Richard G. Kyle (President and CEO)

Yes, on the “little more than half,” I would say that’s still what we’re focusing on right now. It’s too early to say how the discussions are going to play out — they’re active. I would expect that when we get to the 2026 guidance, we’ll be able to estimate what the impact will be through the course of the year.

We really don’t expect much impact at all through the first quarter of next year, but we certainly would expect some positive uplift by the time we get to the second half of next year. The outcome is uncertain. We expect some combination of exiting certain parts of the portfolio and repricing other parts of the portfolio. Within the repricing, some of it will be temporary between now and when we exit, and some will extend into multiple years. TBD, but we definitely expect some margin uplift from it in the second half of 2026.

Baryan Francis Blair (Analyst)

Okay, understood.

Thanks again.

Philip D. Fracassa (CFO)

Thanks, Brian.

Operator (participant)

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

Richard G. Kyle (President and CEO)

Thanks.

Robert Cameron Wertheimer (Analyst)

Thank you. Good morning, guys. Hey Rob, my question, Phil, you just.

Kind of walk through some of those markets that changed. I guess when I looked at it, I was slightly surprised — not shocked by any of it — just slightly surprised on distribution. I wonder if you could characterize where inventory levels are, whether there was anything that drove that. Maybe it’s just hesitancy around tariffs. I also wonder if you could describe in a little bit more detail the Services business — 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 give some description of the strength, the threat from Chinese OEMs, and just where you stand in that market. Thank you.

Philip D. Fracassa (CFO)

Sure, Rob, thanks for the question. Relative to distribution — obviously, you know it’s a short-cycle part of our business. We had moved it to be up kind of mid-singles, call it 3% to 4%, and then we moved it back to neutral, sort of leaning right. I wouldn’t call it a five-point change; it was more of a low single-digit point change in the outlook. Again, that was really just being cautious given the short-cycle nature of that market.

I would say that’s even true if we move into the OEM part of our business. It can vary by market and by customer around the world, but the larger markets that we serve — off-highway and industrial markets — would suggest that a lot of the destocking we had been anticipating is kind of behind us now. We feel inventories are at good levels.

If you think about it, some customers will have spares, and oftentimes, if something breaks on a line, it has to be fixed immediately — that obviously gets done. Sometimes there’s a spare available, so you put the spare in, and then it becomes a question of when you recondition that spare. You can push that out for a little bit of time.

Overall, the backlog remains solid, and that business has been very consistent — a high-margin business for us over time. No concerns there, other than that we need to get a little bit of this uncertainty behind us.

We think the growth will be a little more muted in the second half given that Pull-ahead, but we do believe the market is on its way to recovery. Obviously, it’ll be several years before we get back to where we were, but we’re confident with what we see. We did see some share shifts last year with the market being down so much, as you might typically expect in that kind of situation. We’ve regained some of that business, and where we’re focused — in terms of the gearbox — we’re being very thoughtful about where we play on the main shaft applications. We feel there’s enough market there for us to compete, win, and achieve our growth objectives.

Richard G. Kyle (President and CEO)

Rob, the only point I’d add — 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 realized price faster in distribution than we did in OEM. That is positively impacting the revenue numbers. OEM pricing will catch up to that in time.

Robert Cameron Wertheimer (Analyst)

Perfect, thanks.

Thanks, guys.

Operator (participant)

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

Angel Castillo (Analyst)

Hi, good morning, and thanks for taking my question. Sorry to beat a dead horse here — I just wanted to clarify to make sure I’m understanding everything correctly. It sounds like your orders at this point are suggesting that end-of-year results would be above the midpoint or at the top end of your guide. If we do get an atypical recovery — whether it’s because of the one big infrastructure bill or some other factors — am I understanding correctly that would put results above the $5.40, and it’s just something that, given the abnormal nature of that, you’re not underwriting at this point?

Philip D. Fracassa (CFO)

Yeah, thanks for the question, Angel. I would say for us to exceed the high end of the guide would really require an acceleration in demand in the back half of the year. Right now, our guidance assumes that year-over-year organic revenue is down in the second half. The headline will look a little better than the first half, but when you take pricing out, it’s probably very consistent period to period.

The high end of the guide would assume kind of flattish organic performance in the second half, with pricing positive and just a slight negative on volume. That would give you some sense. That was one of the reasons, frankly, we trimmed it — we didn’t want to assume an acceleration in demand in the second half. Given where we’re at, we felt it was more prudent to frame the guide around flat organic. The second half would get you to the high end, and a little bit lower than the midpoint would get you to the low end. That’s just where we pegged it.

Angel Castillo (Analyst)

That’s very helpful, thank you. Maybe just back to some of the commentary around automation or robotics. Two questions on that — first, are there any particular aspects of your portfolio that you think you still need in terms of going out there and getting some potential bolt-ons to participate in that world in the future as it pertains to robotics or humanoids? And second, as we think about the ongoing CEO transition, what’s the appetite to potentially do M&A while that’s ongoing, or should we assume that M&A is on pause until we get a CEO announcement?

Richard G. Kyle (President and CEO)

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. I think if we were to do something while the CEO search is going on or 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. That’s the pipeline that we’ve been working and will continue to work. I would certainly not say that an acquisition is out of the question during the CEO transition.

Philip D. Fracassa (CFO)

Yeah, the only thing I would add on the first part, Angel, regarding robotics — I would tell you we’re approaching it much like we do other high-growth markets. Let’s form a cross-functional team within the company, look at the technology we already have in the portfolio and what we think it’s going to take to compete and win, and then determine whether we’re going to do that organically or if there are gaps in the portfolio. Certainly, M&A would come into play along the lines of what Rich talked about.

I do think as we move forward you'll see us continue to improve the portfolio and our capabilities to be able to compete and win at that market growth.

Richard G. Kyle (President and CEO)

Yeah, I’d say we don’t need anything else in our portfolio today to win with the portfolio we have, so we don’t have to have something to bundle with it. There are certainly other technologies that could supplement what we have today and some potential things that we could do both organically and inorganically, but it’s not a necessity for the portfolio we have to win in the coming years.

Angel Castillo (Analyst)

Very helpful. Thank you.

Operator (participant)

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

Stephen Edward (Analyst)

Excellent. Good morning, everybody. I wanted to go back to the auto contract project — whatever we’re calling that. I remember the last time you guys went through this, I think you ended up exiting about a third and repricing maybe two-thirds. Is that a reasonable way to think about this exercise, or is there something different about it this time?

Richard G. Kyle (President and CEO)

I think it is, but it’s a little different this time. That time, we went in with a slightly different approach, and we had automotive plants back then that required a lot of restructuring. We do not have an automotive plant in our portfolio today — we make automotive products in mixed industrial plants. I’d say it’s fairly different, both in scale and complexity.

Again, it's too early to see if we're going to be able to successfully improve what we get paid for that value that we bring.

Stephen Edward (Analyst)

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

Richard G. Kyle (President and CEO)

It’s too early to put numbers around it. I think it’s a good list, though I wouldn’t say it’s a conclusive one. To your point — and really, who knows — we certainly don’t have that level of visibility. As you know, we typically only have visibility out about six months for most of our portfolio.

Because of the multiple points of our inventory — in our own facilities, in our OEMs and their dealers, our distributors, and then end users — we tend to swing more in both directions. I think the trend line you’re looking at, as Phil said, even with the outlook we have today, we’re approaching zero sales growth in the second half, which typically means you’re going to be heading to positive shortly thereafter.

Phil talked about moving from a more uncertain environment to a more certain environment. We’ve taken some steps in that direction recently with the Japanese and European Union trade agreements. There’s also the tax certainty environment we’re in now, which is a positive. I think those factors are certainly pointing in the right direction as well.

We will have a fair amount of carryover price next year as well as new price and some of the things that we have not been able to pass pricing through yet because of agreements as the tariffs have hit. We’ll have some positive price heading in next year. There is also a really good self-help story from a cost perspective. The three plants you talked about, some of the other productivity tools, productivity measures that we’ve implemented both from an SG&A standpoint as well as from a manufacturing standpoint, I would expect to leverage those as volume improves. I think we’ve got a good self-help story, and with some market help, could be a good year next year.

Philip D. Fracassa (CFO)

I think Rich hit it all. Steve, the only thing I would add is, certainly with the cost-savings actions being second-half-weighted and our belts, our plant ramps, which would be belts, is in the thick of it now. We’ve also got the India plant ramping. As those plants ramp, I think that helps 2026. I think we’re going to start the year in a pretty good spot from a price-cost standpoint. It’s too early to talk about incrementals, as Rich said, but I do think it will put us in a good position that if we’ve got some volume to work with, we got some demand to work with to print, you know, really good incrementals relative to what we would historically do at that point in the cycle. I do think we’re in a pretty good spot there.

Richard G. Kyle (President and CEO)

Finally, I throw in that another year of capital allocation and we will have. We bought a few shares this year, not a lot, but we'll reduce debt through the course of the year if we do not do another acquisition, and then throw in next year's cash flow as well. Would expect some benefit next year from capital allocation as well.

Stephen Edward (Analyst)

Super. All right, there's a lot there. I appreciate it. You forgot the Humanoid robotics inflection.

Richard G. Kyle (President and CEO)

We'll put that in the $27 bucket.

Philip D. Fracassa (CFO)

Steve.

Neil Andrew Frohnapple (VP of Investor Relations)

Thank you.

Operator (participant)

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

Philip D. Fracassa (CFO)

Hey Steve, we can't hear you.

Steve Burger (Analyst)

Oh, sorry about that.

Philip D. Fracassa (CFO)

We can hear you now.

Steve Burger (Analyst)

Okay, great. Rich addressed some of the Timken-specific dynamics around the back-half guide, but we have seen a couple of other short-cycle bearing companies return to modest but still positive organic growth. I just want to ask about market-share issues anywhere in the portfolio or any areas where pricing is getting more competitive and disadvantaging you — anything like that going on?

Richard G. Kyle (President and CEO)

No, I don’t think if we’re not comparing well to a peer right now, I would say it’s a mix issue. We don’t think we’re losing — we know we’re not losing — any share anywhere except with the automotive actions, and that hasn’t kicked in yet. That’s likely for next year that we will lose some, concede some share there by design. We’re definitely not losing any share. Pricing’s going up. It’s been going up, and I think it’ll go up again next year. It just needs to go up at least as much or more than what costs do, which again, we’ve got a little bit of lag. I would say both during the inflationary time as well as tariff time, the bearing industry has shown that we will recover those costs, and I’m confident that Timken will do so.

Philip D. Fracassa (CFO)

Yeah, maybe I would add, Steve, to that on the tariffs. You know, while we do import product from several countries around the world, obviously our U.S. Local-for-local content is pretty high relative to the main folks that we compete with. I do think as these trade deals get concluded and we end up with maybe a smaller tariff regime around the world, that’ll naturally benefit us here in the United States just given our relatively higher local-for-local content.

Steve Burger (Analyst)

Understood.

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

Richard G. Kyle (President and CEO)

I would say we do both today. We have product specialists; we have market specialists, and that’s fairly common for us. We’re definitely getting cross-selling benefits. As an example, with the CGI acquisition — that was really our first step into Medical robotics — they sell more into that space. We actually sold them bearings, so we were in that space as well from a bearing perspective. Cone Drive and Spinea did a little bit in there, but we don’t do a full integration there.

We take the best of all parts, and most of our sales major typically is a little bit of market, some geography, and some product. Most of what we do is a very technical sale, so you need a lot of product expertise within linear, within Harmonic drive, within a Cycloidal drive, within a bearing, et cetera.

Steve Burger (Analyst)

Understood. Just as a follow on, if I look at your automation sector sales on Slide 8, it's obviously been flat to a little down for a couple of years. Do you have enough visibility to assume that outgrows whatever the portfolio does in 2026?

Richard G. Kyle (President and CEO)

I'd say the decline there's been really in the Factory automation, and that market has certainly been down. It's tough to call whether that's going to be up next year, but our order trend and backlog and customer sentiment would indicate that better times are ahead.

Philip D. Fracassa (CFO)

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

Steve Burger (Analyst)

Thanks, appreciate it.

Operator (participant)

Thank you. Our next question comes from Tim Thyne with Raymond James. Please go ahead.

Tim Thyne (Analyst)

Thank you, guys. Good morning.

Apologies in advance if these were asked. I was just bouncing between calls here and I’ll package them together. The first is on the China wind business. I’m curious if you saw or perceived there to be any sort of pull-forward — or I guess pre-buy — in the first half. That was something that one of your peers had called out, that potentially the first quarter was flattered by some pull-forward ahead of some policy catalysts. That’s question one.

Philip D. Fracassa (CFO)

Yeah. Hey Tim, this is Phil. I’ll take the first part on the wind. As we look at the results coming in in Q2 and then obviously Q1 as well, we do believe there’s been some Pull-ahead, ahead of the regulatory change that went into effect June 1st. It will cause, I think, a more muted growth profile in the second half. We still expect to be up for the year certainly in wind, but it will be a little bit more muted in the second half because of that Pull-ahead.

Richard G. Kyle (President and CEO)

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

Tim Thyne (Analyst)

All right, that makes sense. Thank you, guys.

Philip D. Fracassa (CFO)

Thanks, Tim.

Operator (participant)

Thank you. Our next question comes from Michael Shlisky with D.A. Davidson & Co. Please go ahead.

Michael Shlisky (Analyst)

Hi, good morning. You had mentioned backlog being up sequentially. Any idea which end markets or groups were driving that? Sounds like it’s going to be more positive on 2026. There’s some long-cycle stuff in there, but just curious as to what the kind of leading edge here of the order collection is.

Philip D. Fracassa (CFO)

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

Michael Shlisky (Analyst)

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

Richard G. Kyle (President and CEO)

I'll take the last part and I would say no, there's nothing that sudden. I'll take the generally and then let Phil maybe comment on some of the specifics if he wants to go there. I think in both cases, again, coming back to just certainty and knowing where the tariffs are going to be for a period with Europe, we can all, between customers, et cetera, now all start operating to that. It gives you more confidence to invest, which again drives a lot of our demand. When investment is made, net whether how successful or impactful it is in increasing capital investment in the U.S. to the degree you believe that is going to happen, then I think The Timken Company is going to be a significant beneficiary of that. That'll be relatively, I think I would say, slow to play out.

It's not a sudden thing that's going to happen in the next week or month.

Philip D. Fracassa (CFO)

Yeah, maybe one thing to add there, Mike. This is Phil, so Rich is right. I mean, typically we would see it would take at least a couple quarters for things like that to work its way into the top line, if you will. On tariffs, just one point. The $0.10 headwind we have in the guide, in that guide, we have contemplated some escalation of tariff rates as we move forward. I do, certainly if China goes back to 145, that would probably require a relook at that number. The movement in Europe up 5%, if there's movements like that in other countries, we have tried to contemplate that in the guide where I feel like we would have it covered provided it's not, it's not like what we had in China at the beginning of all this.

Michael Shlisky (Analyst)

Thanks very much.

Operator (participant)

Thank you. Our next question comes from Christopher M. Dankert with Loop Capital Markets LLC. Please go ahead. Chris.

Christopher M. Dankert (Analyst)

Hey, good morning.

Thanks for taking the question.

Philip D. Fracassa (CFO)

Hey, Chris,

Christopher M. Dankert (Analyst)

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

Philip D. Fracassa (CFO)

Yeah. We certainly had positive price in the quarter, Chris. We came into the year talking about, pre-tariffs, less than 50 bps of base pricing, pre-tariffs. We did talk about specifically $60 million of pricing that we’re contemplating so far. All in, we will be well above 1.5%, 150 bps for the year. I do think that’ll be more back-half-weighted because we did do some mid-Q2 pricing and then we’ve got some mid-Q3 pricing coming in as well. Would expect pricing to step up year over year as we move through the back half of the year and for the full year to be in that 150 to 200 bps range for the full year.

Christopher M. Dankert (Analyst)

That's helpful. Thanks, Phil. Just on the factory loading for the belts in Mexico, if belts and AG are so weak right now, is that causing the factory loading to be a little bit weaker and the margin to be lower than you would have expected there? Is that $4 million EBITDA headwind you call out in the deck, is the majority of that tied to the belts plant? Just any color you can give on that, kind of getting that program up and running.

Richard G. Kyle (President and CEO)

Our belts business is down. It's a significant ag, is a significant market for us and that market is down. That's contributing. It's also a factor of we still have the plant in the U.S. that will be closed at the end of August, but we still have that. We still have training costs, ramp up costs, and some inefficiencies in the Mexico facility. Again, should see, you know, we'll see certainly the three plant costs that we have within the operation come out within the next couple of months and nothing we're seeing is all that atypical. It takes a little time to replicate the capabilities in the other facility.

Philip D. Fracassa (CFO)

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

Christopher M. Dankert (Analyst)

That's helpful. Thanks so much, guys.

Operator (participant)

Thank you. Our final question today comes from Michael J. Feniger with BofA Securities. Please go ahead, Michael.

Michael J. Feniger (Analyst)

Thank you.

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

Philip D. Fracassa (CFO)

Yeah, Yeah, got it. No — thanks, Mike. We always have time for you. On the decremental, you’re right. The drop in the margins for the full year — really three things: tariffs would have gotten better; that would have been a favorable item in that walk. The two unfavorables would be the volume — taking the volume outlook down a point, at the volume leverage, if you will, would have been quite high. We are planning on mix to be, call it, more unfavorable than we had been previously contemplating, which again is additive to that. We also did assume some incremental cost headwinds with the belt ramp taking a little bit longer than we anticipated, as well as some of the other impacts we were seeing.

It was sort of a variety of things driving a slightly higher overall decremental, which kind of pushed the margins down that 50 bps or close to 50 bps from where we were before.

Michael J. Feniger (Analyst)

Thank you.

Philip D. Fracassa (CFO)

Thanks Mike.

Operator (participant)

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

Neil Andrew Frohnapple (VP of Investor Relations)

Yeah. 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. This concludes our call.

Operator (participant)

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