Timken Company - Q3 2023
November 1, 2023
Transcript
Operator (participant)
Good morning, and welcome to Timken's Q3 earnings release conference call. My name is Lydia, and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you'd like to withdraw your question, press star, then the number 2. Thank you. Mr. Frohnapple, you may begin your conference.
Neil Frohnapple (Director of Investor Relations)
Thanks, Lydia, and welcome everyone to our Q3 2023 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle, and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions.
During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company, and without 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 Rich.
Rich Kyle (President and CEO)
Thanks, Neil. Good morning, and thank you for joining our call. Timken delivered a solid Q3, and we remain on track to deliver another record year of revenue and earnings per share while expanding full-year margins. Revenue was a record for the Q3 and was up around 1% from prior year. EBITDA margins were up 10 basis points, and adjusted earnings per share were down 5%. As expected, demand softened sequentially as customers continued to reduce inventory levels and respond to an uncertain economic environment. China and wind energy slowed more than anticipated and were the leading contributors to the organic revenue decline. We managed our cost structure very well, delivering 18.9% EBITDA margins, a 10 basis point improvement over the prior year. Inflation has moderated but remains persistent.
Despite the inflation, Price Cost was positive in the quarter, as it has been all year. Free Cash Flow of $151 million was strong and up significantly from prior year. We continue to execute our strategic initiatives, which are focused on operational excellence, outgrowth, and capital allocation. This includes advancing our global manufacturing footprint in both Engineered Bearings and Industrial Motion. We are on track to complete the consolidation of two facilities into existing operations by the end of the year. We are also expanding our Mexico operations to begin the production of Timken Belts early next year. Our operational performance has recovered from COVID and supply chain challenges, and we have excellent focus on driving improvement initiatives across our global operations. We continue to invest in and advance our outgrowth initiatives.
This includes launching new digital customer solutions and investing in our leadership in application engineering. Our application pipeline, which is the best measure of our future business opportunities, continues to expand across the portfolio. Our balance sheet remains strong, and we continue to be very active in allocating capital growth and margin expansion opportunities. We continue to invest CapEx into advancing our footprint, automating our operations, increasing efficiencies, increasing capacity, and expanding our product lines. We completed the acquisitions of Rosa Sistemi and Des-Case in the quarter. Rosa Sistemi is our fourth acquisition in linear motion and brings complementary products and market positions to our Rollon business. Des-Case expands our filtration offering within our automatic lubrication platform. We also announced the pending acquisition of iMECH. iMECH adds a niche product line to our engineered bearings portfolio, specifically designed to serve the needs of energy markets.
Strategically and financially, all three acquisitions fit very well within our Timken portfolio and bring strong cross-selling and cost synergies. These acquisitions bring well-known brands with engineered products that enhance equipment reliability and life. Last week, we announced the divestiture of a small bearing product line that is sold regionally in China. The combination of these four transactions will strengthen our product portfolio while adding about $50 million in revenue and will be immediately accretive to margins. We also purchased about 1% of the outstanding shares in the quarter, bringing our year-to-date repurchase total to just under 4% of the outstanding shares. Our balance sheet remains strong. We expect excellent free cash flow in the Q4 and into 2024, and we expect to continue to add value through our disciplined capital allocation....
Also in the quarter, we published our annual corporate social responsibility report, which details our commitment to environmental sustainability in the products we make across our global operations and through advancing industries such as renewable energy. We are also focused on the development and well-being of our employees, investing in community partnerships, and promoting STEM education to help advance the next generation of engineering talent. Turning to the outlook, we are planning for further sequential slowing in the Q4 due to seasonality and from customers continuing to reduce inventory from supply chains stabilizing. We are expecting renewable demand in China to remain a headwind for the quarter. We are planning for inflation to remain at similar levels and for Price/Cost to stay positive. We will continue to bring both our costs and inventory in line with reduced volume levels.
We expect to generate both solid margins and strong cash flow in the Q4, despite the weaker revenue environment. The midpoint of our guide reflects modest year-on-year improvement in margins despite lower volumes. For the full year, we remain on track to deliver another year of record revenue and earnings per share, with revenue up 5% and earnings per share up 7%. While we're not ready to guide to the full year of 2024, we are planning for a sequential step-up in demand from the Q4 to the first, reflecting our normal seasonality, as well as stabilizing channel inventory levels. We do not expect a rebound in the Q1 for China, primarily due to wind energy. Across our portfolio, customers remain generally positive on their 2024 outlook, but also acknowledge that economic uncertainty remains elevated globally.
Finally, I would like to reference slide 12 in the investor deck. Timken's strategy is focused on growing the earnings power and cash generation of the company at attractive and consistent EBITDA margins and returns on invested capital. We remain on track in 2023 to deliver another record year of both revenue and earnings at EBITDA margins approaching 20%. Through both organic growth and consistent M&A, we have steadily grown the business with EBITDA margins that have varied just 210 basis points over the last five years. And as we look ahead, we're confident in the long-term growth and demand for Timken products and technology, and we are well positioned to continue to grow and perform at a high level through a wide variety of market conditions.
I will now turn it over to Phil to add more detail on the results and the outlook.
Phil Fracassa (CFO)
Okay, thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on slide 14 of the presentation materials with a summary of our Q3 results. Timken posted revenue of $1.14 billion in the quarter, up almost 1% from last year. Adjusted EBITDA margins came in at 18.9%, up 10 basis points, and we delivered adjusted earnings per share of $1.55 in the quarter, with adjusted ROIC approaching 15% over the trailing twelve-month period. Turning to slide 15, let's take a closer look at our Q3 sales performance. Organically, sales were down 6% from last year, as higher pricing was more than offset by lower volumes across multiple end markets and geographies, including China wind.
The decline in China wind was larger than we expected and accounts for roughly one-third of the total organic revenue decline. Looking at the rest of the revenue walk, the impact from acquisitions, including GGB, Nadella, ARB, and Des-Case, net of divestitures, contributed 6 percentage points of growth to the top line. Foreign currency translation was a modest benefit to revenue in the quarter. On the right-hand side of this slide, you can see organic growth by region, which excludes both currency and the net impact of acquisitions and divestitures. Let me comment briefly on each region. In the Americas, we were down mid-single digits against last year's strong Q3, driven mainly by lower shipments in the off-highway and distribution sectors, as we expected.
In Asia Pacific, we were down double digits, driven entirely by lower revenue in China, including the sizable decline in wind energy demand that I mentioned earlier. Finally, we were close to flat in EMEA, as lower general industrial revenue was almost fully offset by growth in other sectors. Turning to slide 16, Adjusted EBITDA in the Q3 was $216 million or 18.9% of sales, compared to $214 million or 18.8% of sales last year. Our margin performance reflects the benefit of positive price cost and strong operational execution, which more than offset the impact from lower volume and unfavorable currency. Looking at the modest increase in Adjusted EBITDA dollars, there were several puts and takes. We continued to benefit from lower material and logistics costs, favorable price mix, and recent acquisitions.
These positives more than offset the impact of lower volume, unfavorable currency, and higher manufacturing costs. Let me comment a little further on some of these key profitability drivers. With respect to price mix, price realization was higher in both segments compared to last year, while mix was relatively neutral in the quarter. Moving to material and logistics, both were lower year-over-year, with logistics the bigger contributor. Material, which includes both raw material and purchase components, was down versus last year, but I would say that costs remain elevated by historical standards. On the manufacturing line, you can see that our year-over-year headwind continues to shrink as compared to what we've been running the last several quarters. In the Q3, we were negatively impacted by lower production volume and ongoing cost inflation, offset partially by improved operational execution in the plants.
Looking at the SG&A other line, costs were up only slightly versus last year. Our costs in the quarter were actually a bit lower than we initially expected, driven by lower variable compensation expense and our efforts to reduce discretionary spending to better align with lower demand levels. Finally, with respect to currency, we saw a sizable year-on-year headwind, as we expected, driven by the favorable impact from transaction gains last year. On slide 17, you can see that we posted net income of $88 million or $1.23 per diluted share for the Q3 on a GAAP basis, which includes $0.32 of net expense from special items and acquisition amortization. On an adjusted basis, we earned $1.55 per share compared to $1.63 per share last year.
Depreciation and interest expense were both higher versus last year and contributed to the decline in earnings per share, while our adjusted tax rate was in line with our prior expectations. Finally, we benefited from a lower share count in the quarter, reflecting buybacks completed in the past 12 months. Now let's move to our business segment results, starting with Engineered Bearings on Slide 18. For the Q3, Engineered Bearings sales were $776 million, down slightly from last year. Organically, sales were down 7.8%, driven by lower volumes across most sectors, partially offset by higher pricing. With respect to performance by sector, the renewable energy, distribution, and off-highway sectors saw the largest declines in the quarter, driven mainly by inventory destock and difficult comps in the year ago period.
General Industrial was also down, while the on-highway, heavy industries, and aerospace sectors were relatively flat. On the positive side, rail was up nicely in the quarter, driven by higher shipments in the Americas. The net effect of acquisitions and divestitures added 7 percentage points of growth to the top line, while currency was relatively flat. Engineered Bearings adjusted EBITDA in the Q3 was $157 million, compared to $154 million last year. Our segment margin was up 50 basis points year-over-year, as the impact of favorable price mix and lower material and logistics costs more than offset the impact of lower volume, higher manufacturing costs, and unfavorable currency. Now let's turn to Industrial Motion on Slide 19. In the Q3, Industrial Motion segment sales were $367 million, up about 3% from last year.
Organically, sales declined 2.2%, as lower volumes were partially offset by higher pricing. With respect to performance by platform, Belts and Chains saw the largest decrease in the quarter, driven by inventory destock in the off-highway and distribution sectors. Linear motion was also lower, reflecting softer industrial demand in Europe, while couplings was relatively flat. On the positive side, we saw strong growth in drive systems and services, and continued growth in automatic lubrication systems. The impact of acquisitions, net of divestitures, contributed just under 4% to the top line, and currency translation was slightly positive in the quarter. Industrial Motion Adjusted EBITDA for the Q3 was $75 million, or 20.5% of sales, compared to $68 million or 19.1% of sales last year.
The sizable increase in margin was driven by the benefit of positive price cost and improved operational execution, which more than offset the impact of lower volume. Turning to Slide 20, you can see that we generated operating cash flow of $194 million in the quarter. Free cash flow is $151 million, up significantly versus last year, as improved working capital performance more than offset higher cash taxes, including a large tax payment in September related to the Timken India transaction we completed in June. Looking at the balance sheet, we ended the quarter with net debt to Adjusted EBITDA right at 2 times, with leverage well within our targeted range. This includes the impact of the recent Des-Case and Rosa Sistemi acquisitions that were completed in September.
Turning to Slide 21, you can see a summary of our capital deployment through the first 9 months of 2023. In total, we've allocated around $900 million of capital, with roughly two-thirds directed toward CapEx and acquisitions to drive our profitable growth strategy. We also returned $300 million of cash to shareholders year to date, including $90 million in the Q3. We raised our quarterly dividend earlier this year and have bought back over 2.7 million shares year to date, or nearly 4% of total outstanding. With the pending iMECH acquisition and other anticipated activity, we are on track to deploy over $1 billion of capital in 2023, all while maintaining a strong balance sheet and leverage right in the middle of our targeted range.
This sets Timken up well for the future and keeps us in a great position to continue to execute our strategy through capital allocation. Now let's turn to the outlook with a summary on Slide 22. We've updated our outlook for both sales and earnings to reflect softer end market demand, particularly in China, as well as our expectation for continued channel inventory reductions in the Q4.... With respect to the sales outlook, we're now planning for full year sales to be up 5%-5.5% in total versus 2022, down from our prior guide, reflecting a more modest expectation for organic growth and unfavorable currency impact. Organically, we now expect revenue will be flat to +0.5% for the full year, with positive pricing offsetting lower volumes.
We expect acquisitions net of divestitures to contribute around 5.75% to our revenue for the year, up slightly from our prior guide to reflect the recent Des-Case, Rosa Sistemi, and iMECH acquisitions, offset by the TWB divestiture. We're now planning for currency to be a headwind of around 75 basis points for the full year, based on September thirtieth spot rates. This compares to a relatively neutral outlook in our prior guide. On the bottom line, we now expect adjusted earnings per share in the range of $6.85-$6.95. This represents about 7% growth versus last year at the midpoint and would mark a new all-time record for the company. On the flip side, we're increasing our full year guidance for both adjusted EBITDA margins and free cash flow.
The midpoint of our earnings outlook implies that our 2023 consolidated Adjusted EBITDA margins will be in the range of 19.5%-19.6%. This margin level would mark a new high for the company for a full year. Our margin expansion reflects our expectation that favorable price cost and improved execution will more than offset the impact of lower production volumes, higher operating costs, and unfavorable currency. We will remain focused on controlling costs and driving operational excellence initiatives across the enterprise to drive strong and resilient margins going forward. Moving to Free Cash Flow, we now expect to generate approximately $425 million for the full year of 2023, which is up from our prior guide and represents over 100% conversion on GAAP net income at the midpoint.
We're still planning for CapEx at around 4% of sales, and we expect our adjusted tax rate to remain in the range of 25.5%-26% for the full year, both unchanged. But we're now anticipating net interest expense of around $100 million for the full year, up slightly from our prior guide to reflect our recent acquisitions. And finally, I would point out that the guide assumes an average diluted share count of roughly 72 million shares for the full year. So to summarize, Timken delivered solid results in the Q3, despite more challenging business conditions, and our team is executing well in this environment. We're focused on finishing the year strong, and we're confident in our ability to continue advancing our strategy as we head into 2024.
This concludes our formal remarks, and we will now open the line for questions. Operator?
Operator (participant)
Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure that your device is unmuted locally when it's your turn to speak. Our first question today comes from Steve Volkmann of Jefferies. Your line is open. Please go ahead.
Steve Volkmann (Analyst)
Great. Good morning, guys. Thanks for taking my question.
Phil Fracassa (CFO)
Morning, Steve.
Steve Volkmann (Analyst)
I wanted to ask a—start with a big picture question. Phil, I think you or maybe, sorry, I don't remember which one of you talked about around 200 basis points of margin volatility over the last five years. Is that the way to think about, you know, the market's obviously worried about a downturn. I suppose some of it depends on how big a downturn, but in sort of a normal industrial cycle, is that 200 basis points of volatility in margin, the right way to think about the future as well?
Rich Kyle (President and CEO)
Well, I think as you said, it depends on the speed and magnitude and depth, but, yeah, I mean, we think we can, you know, we've reached a new-- we're going to reach a new high water mark over the last decade, and certainly would aspire to hit a new low water mark when, whenever that time comes. So, that would certainly, this 17.5%-ish would be a good target for us if we got into a tough market.
Steve Volkmann (Analyst)
Okay, great. And then, it feels like the sort of destocking out in the channels, the various channels, is maybe a little bit more and, and maybe a little bit longer. I don't want to put words in your mouth, but can you just talk about how much visibility you have there and, and how long you think this continues?
Rich Kyle (President and CEO)
Yeah, I'd say with the exception of wind, it was a little bit more, but not any really big surprises in the Q3. And we did, you know, we did expect it to continue in the Q4, but a little bit more. But China wind would be the bigger one. We expect that to continue at least through the Q1 of 2024. You know, interestingly, on wind, we'll actually, or with this guide, we're still looking to be flat to last year's record level. So for the full year, it's really a very good year for wind.
It was just a outstanding H1 and a weak H2, but the demand is still there, the installs are still there, but it's definitely a classic overbuild situation there that we've got to get it through. You know, on the other, the other channels, we don't have great visibility, so certainly it could leak over into 2024, but I think, you know, we're optimistic that most of it will be in a good position by the end of the year.
... And certainly when you look at some of our customers that have posted results, our sell-through is generally less than the numbers that they're putting out. It's, and they're clearly taking inventory out of the channels, and we've seen this before, and most of them, as I said, remain pretty bullish on the demand situation for next year.
Steve Volkmann (Analyst)
Got it. Thank you, guys. I'll pass it on.
Rich Kyle (President and CEO)
Thanks, Nate.
Operator (participant)
Our next question today comes from David Raso of Evercore ISI. Please go ahead.
David Raso (Senior Managing Director)
Hi, thank you for the time. I was curious, you were giving a little bit of commentary on the Q1, and it looks like the organic -6 this quarter, you're implying 8 decline in the Q4. Just curious how you're seeing, given that the last comments you just made about, you know, still some bullish demand around 2024. I'm just trying to get a sense if you can give us an idea of how you're thinking about the cadence of organic sales decline as we get into 2024. Again, I'm not trying for a full year guide, just your Q1 comments were interesting. Does the year-over-year decline in organic in the Q1 lessen? Does it accelerate?
And then to follow up, the idea of pricing, what carries over into 2024, any new pricing initiatives to start 2024 that we should be aware of? Thank you.
Rich Kyle (President and CEO)
Yeah, and the next year is gonna make for some interesting comps, in that, you know, we went from, if you look at this year, we went-- started the year, +11 organic in Q1, and as you said, we're guiding to, around, -8 to -9 for Q4. So the Q1 comp is a challenge, particularly when you look at where we're gonna end the year, on a run rate level. But fairly typical for us to jump up at 10+ percentage points sequentially from Q4 to Q1.
I would say the more inventory and push-out we see from the Q4, again, as long as underlying demand in the end markets is good, it should set up for a better start to the Q1. So you know, how, where we land sequentially off the Q4, we're not ready to call that, but would expect a sizable step up. With the exception, again, it's called out, we would expect to be down meaningfully in wind energy in China year-over-year off a very difficult comp in the Q1. From a pricing standpoint, a lot of that's in discussion right now and where we have annual contracts, and we have announced some end-of-year price increases in some of our distribution channels.
Would certainly expect a more modest price level in 2024 than what we've had the last couple of years. So you know, right now, we just call it modestly positive, and certainly less than what we've had the last couple of years.
Phil Fracassa (CFO)
Yeah, and David, I think to answer your question, there'd be a small amount of carryover from this year into next year. And then to Rich's comment, depending on what happens relative to 2024, would be, you know, additive to that. So our view would be flat to up in 2024 at this point.
David Raso (Senior Managing Director)
Thank you.
Operator (participant)
The next question today comes from Rob Wertheimer of Melius Research. Your line is open.
Rob Wertheimer (Director of Research)
Thank you. Rich, I think you addressed the channel inventory question earlier, but I just wanted to come back to it. I mean, do you have a sense as to. Well, for one, are you seeing destock at distributors and OEMs both? Do you have a sense if the excess inventory equates to a month of sales or two or three, or whatever it does for you guys, if things turn south? And, you know, should we expect it... You know, do they could potentially still be an issue come summer, or do you really feel like you're getting ahead of, you know, assuming no major downturn in the end markets, you're getting to good levels? I don't know how much visibility you have to OEM customers and distributors, really.
Rich Kyle (President and CEO)
You know, we have good visibility there with distributors, and if the underlying demand is good, I think we're not far off there. We're expecting and guiding to some reductions, further reductions in the Q4. But beyond that, you know, it's much more of a, we don't have that level of granularity. But again, you look in the earlier parts of the market, and our sell-through is too, as we look at what customers and peers, et cetera, are selling, and you know, we're typically a few percentage points higher.
And in this quarter and next quarter, we're probably mid-single digits to upper single digits below, because I think most a lot of our customers would still be posting positive organic revenue, whereas, you know, we're down 6 and 9% here the last couple of quarters. So it's a little more speculative and, you know, we wouldn't really be able to call whether it's gonna be done at the end of the Q4 or not.
Rob Wertheimer (Director of Research)
Okay, perfect. That was, that was clear. Second question, just on inflation in the business and pricing. You're not the only one to have kind of slightly negative volumes and positive price. A little bit curious into next year, for one, you know, do you need 2% pricing now or 3% pricing now, whereas you didn't over the past 10 years? And then do you have a sense as to whether, you know, the cost pressures are enough that we can really expect that to come through from you and competitors? And I'll stop there. Thanks.
Rich Kyle (President and CEO)
There are, I would say, our core input costs of raw materials, steel, energy have really leveled off. Logistics have, after a spike, come back down, and steel as well spiked earlier in the COVID supply chain challenges. So we saw some relief there, but in total, still see, you know, higher than prior to 2020, wage pressures, some benefit pressures in the U.S. But certainly moderating from what we saw in 2021 and 2022 from a cost standpoint. So as Phil and I both said, I mean, we are expecting that we will need less price, but also don't see pricing going backwards.
We do have some material clauses and currency clauses that, if things went a different direction, if steel fell significantly, you could see us pass some of that on next year. That's not not looking particularly likely at the moment. The costs are basically just leveled off. So feel pretty good about the price cost dynamic as we head into next year. And then the other element that we have, and certainly in 2021 and 2022, you know, we did not pass pricing through for inefficiencies that we had from the supply chain challenges and from the COVID inefficiencies, et cetera.
And as I said in my comments, I would say we're now probably Q3 was the closest we've been to operating at normal, and not just operating normal, but also I think we've got a really good focus again on continuous improvement and drive improvement versus fighting supply chain challenges. So I would expect some self-help from a cost standpoint in that regard next year as well, that I would expect to be more productive next year.
Rob Wertheimer (Director of Research)
Thank you.
Rich Kyle (President and CEO)
Thanks, Rob.
Operator (participant)
Our next question today comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.
Jacob Moore (Equity Research Associate)
Hi, good morning. This is Jacob Moore.
Rich Kyle (President and CEO)
Morning, Steve.
Jacob Moore (Equity Research Associate)
For Steve Barger. Thanks for taking the questions. First, I just wanted to talk through the changes to your organic growth slide. I think you've already hit on the big mover in renewables, but it also looks like automotive and off-highway dropped a slot from flat to down mid-single digits. So can you provide some more detail on the factors driving your forecast changes in those other markets? Are there any UAW impacts, and if so, how much?
Rich Kyle (President and CEO)
Yeah, sure. Happy to do that. So I think you're exactly right. Those are the three main sectors that moved, and renewable, we talked about. Off-highway is really more factoring in what we're expecting in terms of what occurred in Q3 relative to lower demand from inventory destock, and then sort of rolling that ahead into Q4. So continued inventory reduction, softer demand. Ag, ag is probably the biggest sector, but, but a little bit from some of the other subsectors as well. And then on automotive, we did, we did factor in an impact relative to the UAW strike in terms of our North American exposure being, being down for most of October, although we do see that coming back online as we move into November.
So not a huge impact, but it was enough to nudge it over one column.
Jacob Moore (Equity Research Associate)
Great. That's the only question for me. Thank you very much.
Rich Kyle (President and CEO)
Thank you.
Jacob Moore (Equity Research Associate)
Thanks.
Operator (participant)
Our next question today comes from Tim Thein of Citi. Your line is open.
Tim Thein (Analyst)
Thanks. Good morning. So, circling back yet again on renewables and, you know, China wind, you know, it clearly hit you harder than you thought. I think that was similar to one of your big European competitors. But maybe, Rich, just talk broad, you know, more broadly beyond China. I know that historically has been where a lot of the exposure for you has been, but, you know, it comes on the heels overnight of some cancellations and, you know, offshore projects here in the U.S., and some of the outlooks in some of the solar markets have turned down.
I'm just curious, you know, I guess more of a bigger picture thought in terms of your, you know, how quickly this, you know, from a growth perspective, does it, is it just a temporary pushout, or do you still feel confident in terms of the, kind of that higher growth rate that we've spoken to in the past?
Rich Kyle (President and CEO)
Yeah, I still feel confident about it. And as you look over our 15-ish year history, it's certainly never been a linear growth path like most of our markets. It has a cyclical element, and this is not—well, the severity of this, and we're bigger now than we used to be in it, is a little more abrupt. Not uncommon for us to have an off year every so often. And again, my earlier comment, we're actually looking at being, for the full year, flat to possibly slightly up this year in wind. You know, our customer base is largely in Asia and Europe, even for the U.S. installs. Our product is usually going through the European and Asian supply chain.
So I would say the global wind market has slowed, China just being the most dramatic part of it. You know, as you look out the, I was actually in China in the Q3, met with several of the customers. I think they all still, they all certainly see it as a pause. They're all continuing to invest in the space... the world is going to need a lot more renewable energy in the coming decade and decades. So I'm still very optimistic on the market long term. Not ready to call, you know, when this one pivots. We don't expect it, as I said, to be in the Q1, but I believe it will return to growth sooner rather than later.
Phil Fracassa (CFO)
Yeah, and I would only add, Tim, you know, obviously, wind was the area where we saw softness. But, you know, outside of China wind, you know, the rest of the world relative to the total renewables business, which would include solar. Obviously, wind's the bigger of the two, but was relatively stable. So to Rich's point, you know, the market's holding up, you know, I would say reasonably well outside of the dynamic we're experiencing in wind right now, which was, you know, I would say quite unusual. As Rich said, it's not unusual for it to be nonlinear, but it was a pretty unusual build in hindsight, in the H1 that's now creating this weakness in the H2.
I think Rich hit it well, that the long-term demand is gonna be there. It's just really working through the inventory that's, you know, quite significant in the channel right now.
Tim Thein (Analyst)
Yeah. Okay. Understood. And then this is, kind of, yesterday's news at this point, but just looking at the geographic performance, I mean, to have EMEA as the best or the, you know, the smallest relative decline, I don't know, stands out to me anyway. What’s going on there in terms of why, you know, specific vertical or customer? What-
Rich Kyle (President and CEO)
I think still that's the comp and that.
Tim Thein (Analyst)
Got it.
Rich Kyle (President and CEO)
Some of that's the comp, and that Europe was down earlier and, and the comp is significantly easier from the quarter last year.
Phil Fracassa (CFO)
Yeah, I think that's exactly right. I mean, when you look at it, most of the sectors in Europe were sort of relatively flat year-over-year. And what really sort of stuck out was we were down a little bit in Linear Motion in the industrial sectors in Europe, offset by Automatic Lubrication Systems still continues to do well there. So that those are really the two biggest puts and takes, and then relative flatness across the other sectors, which again, against last year's easier comp, but it was nice to see the stability there.
Rich Kyle (President and CEO)
To that point, just to add on that, last year's Q3 was a particularly challenging comp. Our organic growth actually accelerated in the Q3. As you'll recall, that was really when a lot of the supply chains flushed out, for lack of a better word, and we caught up. So it was our strongest year-over-year organic growth quarter last year. And it was a challenging comp for us this year. And again, it was a good comp from a European standpoint, but not as strong as the rest of the world.
Tim Thein (Analyst)
Okay, thank you.
Phil Fracassa (CFO)
Thanks, Tim.
Operator (participant)
Our final question today comes from Michael Feniger of Bank of America. Your line is open.
Mike Feniger (Equity Research Analyst)
Yes, thanks for squeezing me in, guys. Just, you mentioned obviously, there's a lot of conversation about inventory restocking, OEMs, distributors. I'm just curious, Phil, if you kind of touch on your own inventories, do you think you'll get that cleared out by Q4? Could that maybe linger a little bit in 2024, kind of, similar to what you're talking about with the customer inventory process?
Phil Fracassa (CFO)
Yeah, sure, Mike. So we were able to take inventory down in the Q3, and that actually drove a lot of the cash flow benefit we saw year-over-year, was, you know, working capital coming down. And if you know, we would say we still probably have a little bit more to do there, and we'll look to get after it in the Q4 and, you know, potentially depending on how things go the first part of next year. But we're, you know, we're steadily making really good progress at getting our inventory levels in line. But certainly, a little bit more to go, and I think that'll drive another quarter, you know, a very strong free cash flow performance. I mean, to hit the midpoint of the...
or hit the guide we put out there, we'll need to do Free Cash Flow in the Q4, similar to the third, and, and I think, you know, working capital will contribute, once again.
Mike Feniger (Equity Research Analyst)
Great. And just, I know you're not giving guidance in 2024, but just based on some of the acquisitions you've done, how much rollover, just on what you guys have completed, kind of, rolls over into 2024? And I think you might have commented on this earlier, but are those acquisitions accretive to margin?
Phil Fracassa (CFO)
Yeah, I would say from a, from a carryover standpoint, if you think about it, kind of, 1-ish% carryover, when you think of everything we've done during the year, full-year effect will be about a 1% tailwind, if you will, to the top line. That's net of the TWB divestiture. And then, and then I think, you know, relative to the margin performance, I mean, certainly, a lot of them come in at various points. And then, certainly, we have plans for all of them to get to our corporate average margin. So Des-Case is off to a great start. But in the quarter, you know, Nadella was plagued a little bit by European holidays in August. And GGB, we said, it would take a little bit of time to get up to the corporate average.
So I would say, you know, net-net, if you look at the acquisition bucket, running a little bit below, but, but certainly feel good about the M&A we've done. iMECH comes in with very attractive margin profile. And, and I think as we look ahead, we'll see margin improvement on the acquisition line next quarter, and then into 2024, look for it to improve even further.
Mike Feniger (Equity Research Analyst)
Just to follow up with the M&A theme, just you guys obviously are generating the cash flow. You know, your leverage, I think, is now two times you've gotten back down. Just, is the plan to continue kind of at this pace next year? Just, kind of curious how that pipeline is looking, how you guys are kind of thinking about this next year.
Rich Kyle (President and CEO)
I would say the plan is to continue. We've had more acquisitions this year, tended to be on the smaller side. I think the preference would probably be a little fewer and a little larger. But in terms of total revenue, yeah, we would expect to continue to be active next year.
Mike Feniger (Equity Research Analyst)
Great. Thank you.
Phil Fracassa (CFO)
Thanks, Mike.
Operator (participant)
As a final reminder, if you'd like to ask a question today, please press Star followed by the number 1 on your telephone keypad now. There are no further questions at this time. Sir, do you have any final comments or remarks?
Neil Frohnapple (Director of Investor Relations)
Yeah, thanks, Lydia. Thank you for 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.
Operator (participant)
Thank you for participating in Timken's Q3 earnings release conference call. You may now disconnect.