The Timken Company - Earnings Call - Q3 2025
October 29, 2025
Executive Summary
- Q3 revenue of $1.16B and adjusted EPS of $1.37 both beat consensus; GAAP diluted EPS was $0.99. The company expanded adjusted EBITDA margin 50 bps YoY to 17.4% and generated strong cash from operations ($201M) and free cash flow ($164M). Versus S&P Global consensus, adjusted EPS beat by $0.13 and revenue beat by ~$37M*.
- Guidance was updated: FY25 GAAP EPS narrowed to $3.90–$4.00 (from $3.90–$4.20), adjusted EPS narrowed to $5.20–$5.30 (from $5.10–$5.40), and revenue now expected down ~0.75% vs prior guide of -2.0% to -0.5%.
- CEO Lucian Boldea outlined an 80/20 portfolio approach to structurally improve margins and prioritize the most profitable verticals, with investor day planned in Q2 2026.
- Tariffs remain a headwind: FY25 net negative impact now ~$15M (was ~$10M), but management expects pricing and other tactics to recapture margin in 2026.
What Went Well and What Went Wrong
What Went Well
- Both revenue ($1,157.1M) and adjusted EPS ($1.37) exceeded Street estimates; adjusted EBITDA margin rose to 17.4% (+50 bps YoY) as operating performance and pricing offset tariffs. Versus S&P Global consensus, adjusted EPS +$0.13 and revenue +$37M*.
- Engineered Bearings grew sales 3.4% YoY to $765.8M with adjusted EBITDA margin of 18.8%; drivers included renewables, pricing, and lower material/logistics costs.
- Cash generation was strong: operating cash flow $201.1M (+63% YoY) and free cash flow $163.8M (+86% YoY), strengthening leverage to 2.1x net debt/adjusted EBITDA.
Management quotes:
- “We intend to approach our portfolio with an 80/20 mindset to structurally improve margins, grow faster in the most profitable verticals, and create significant value for shareholders.” — CEO Lucian Boldea.
- “We achieved nearly 40% incremental margins in the quarter, driven by improved operating performance, more than offsetting the dilutive impact of tariffs.” — CFO Mike DiSenza.
What Went Wrong
- GAAP diluted EPS fell to $0.99 (from $1.16), and net income margin compressed to 6.0% (-130 bps YoY), reflecting absence of last year’s real estate gain and tariff costs.
- Industrial Motion organic sales declined 3.5% despite CGI acquisition and pricing; segment margin dipped to 19.0% (from 19.2%) on lower volume and tariffs.
- Tariff headwind increased to ~$15M for FY25; Q4 margins expected down ~100 bps YoY due to higher corporate expense, tariffs, and absence of last year’s military marine project.
Transcript
Speaker 7
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 third quarter earnings release conference call. 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 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.
Speaker 0
Thank you, operator, and welcome everyone to our third 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, Lucian Baldia, and Mike DiSenza, our Chief Financial Officer. We will have opening comments this morning from both Lucian and Mike 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 Lucian.
Speaker 4
Thanks, Neil, and good morning, everyone. Thank you for your interest in Timken and for joining our call today. I'm excited to lead Timken into the future, and I strongly believe there is opportunity here to create significant value for shareholders. Since this is my first earnings call, I would like to thank Rich Kyle for his leadership as CEO, along with members of the Timken board for their support. I've also enjoyed meeting many of our employees, and I'm impressed with their clear sense of purpose and commitment to our customers. I have covered a lot of ground during my first 60 days on the job, and today I'll share with you some of my early observations where I see potential going forward. First, let me emphasize that our management team's top priority is finishing the year strong.
Mike will cover the details, but in the third quarter, we increased revenue, expanded operating margins, and grew adjusted EPS double digits versus last year. We also generated significant cash flow, and we strengthened the balance sheet. We are moving with urgency to position the company for earnings growth in 2026. The Timken franchise is very strong, been built over 125 years, and recognized in global industrial markets for our technical leadership, robust product portfolio, and deep customer commitment. From this foundation, I believe we have tremendous potential to expand positions in key markets, drive profitable growth, and create significant value. This is what attracted me to Timken. Prior to joining, I was impressed with the company's focus on innovation and how well Timken collaborates with customers.
Now, from the inside, I can see the team's unwavering integrity and commitment to quality, excellent process, and world-class engineering talent that makes it all possible. A significant part of my time has been spent reviewing the portfolio, the operating model, our products and services, and also collaborating with our leadership team to better understand our customers' needs. It's clear that the company is successful at adding value for customers in engineered to order, mission-critical applications where quality, performance, and reliability matter. This is true across our portfolio of closely adjacent products within engineered bearings and also industrial motion solutions. Our complementary product portfolio serves common customers and applications through similar sales channels. We also have strong positions in essential industries such as rail, aerospace, and defense, heavy industries, and wind energy. We are targeting further growth in newer end markets to Timken, like automation and food and beverage.
The company has operating discipline across its manufacturing footprint, generates significant cash flow, and has a solid balance sheet. With a strong foundation, I see many opportunities to improve top line and also bottom line performance. To start, we intend to approach the portfolio with an 80/20 mindset to structurally improve margins, grow faster in the most profitable verticals, and create significant value for shareholders by focusing on the actions that will have the most impact. Margin expansion is a key focus for our team, and we'll leave no stone unturned as we review the business for margin potential. I also believe there's opportunity to raise Timken's organic growth algorithm by expanding our market focus in fast-growing regions and verticals and launching new products and services.
Capitalizing on the strength of the Timken brand and utilizing our global footprint can help us further grow revenue at many of our acquired businesses, taking them into new regions of the world. In addition, I see how continued integration of our acquisitions can deliver synergy across the entire portfolio. A greater focus on leveraging our strong market positions and aftermarket presence will drive increased cross-selling of our broad product offering. By leveraging strengths across our portfolio more holistically, innovating new products, and delivering best-in-class service, we believe we can outgrow our underlying markets. These are a few of the opportunities that I believe will increase Timken's earnings power based on my review over the past two months. There is much more work to be done. Our team is focused on operating with urgency and rigor as we work to position Timken for stronger growth and higher margins.
With that, let me turn over the call to Mike for a more detailed review of the results and outlook. Mike.
Speaker 6
Thanks, Lucian, and good morning, everyone. I'm excited to be here on my first call as CFO and for the opportunity to partner with Lucian and the rest of the Timken team to accelerate value creation for our stakeholders. For the financial review, I'm going to start on slide six of the materials with a summary of third quarter results. Overall, revenue for the quarter was $1.16 billion, which is up 2.7% from last year. Adjusted EBITDA margins came in at 17.4%, a 50 basis point increase, and adjusted earnings per share for the quarter was $1.37, up 11% from last year. Turning to slide seven, let's take a closer look at our third quarter sales. Organically, sales were up 0.6% from last year.
The increase was driven by higher pricing across both segments and modest volume growth in engineered bearings, which more than offset lower demand in the industrial motion segment. Looking at the rest of the revenue walk, the CGI acquisition and foreign currency translation each contributed approximately 1% of growth to the top line. On the right, you can see third quarter performance in terms of organic growth by region. This excludes both currency and acquisitions. Let me give you some color on each region. In the Americas, our largest region, we were down 1% with growth in North America slightly more than offset by lower revenue in Latin America. By sector, revenue was higher in general industrial and aerospace, while we had lower shipments in the rail, renewable energy, and on-highway markets.
In Asia Pacific, we were up 2% from last year, led by growth in China, with a significant increase again in wind energy shipments. India was up slightly in the quarter, while the rest of the region was lower. Finally, we were up 2% in EMEA, led by growth across the off-highway, rail, and heavy industry sectors, partially offset by lower on-highway revenue. Note that this is the first time the region posted growth in more than two years, which is great to see. Turning to slide eight, adjusted EBITDA was $202 million, or 17.4% of sales in the third quarter, compared to $190 million, or 16.9% of sales last year. We achieved nearly 40% incremental margins in the quarter, driven by improved operating performance, more than offsetting the dilutive impact of tariffs.
Looking at the year-over-year change in adjusted EBITDA dollars, you can see the increase was driven collectively by several factors, which more than offset the impact of lower volume and incremental gross tariff costs. Let me comment a little further on the different drivers. On price mix, pricing was positive in the quarter, while mix was negative. Pricing was also up sequentially from the second quarter as we continued to put through pricing actions to mitigate the impact from tariffs. As you can see on the slide, tariffs were a $20 million headwind versus last year, and costs were also higher sequentially. Looking at material and logistics, costs were notably lower versus last year, driven mostly by savings tactics in the engineered bearings segment. Moving to the SG&A other line, expenses were down from last year, driven by cost reduction initiatives and lower accruals for bad debt.
Currency added $4 million to adjusted EBITDA, while our CGI acquisition contributed $3 million and was accretive to company margins again in the third quarter. Keep in mind that CGI was included in the acquisitions line for only about two months this quarter as we passed the one-year ownership mark in early September. Now let's move to our business segment results, starting with engineered bearings on slide nine. Engineered bearings sales were $766 million in the quarter, up 3.4% from last year. Organically, sales were up 2.7%, driven by higher pricing and higher volumes, with growth across all geographic regions during the quarter. Among market sectors, renewable energy, aerospace, and general industrial achieved the strongest gains versus last year. We also posted growth in off-highway and rail, while auto truck declined from last year.
Engineered bearings adjusted EBITDA was $144 million, or 18.8% of sales in the third quarter, compared to $138 million, or 18.7% of sales last year. Margins came in above expectations as higher than anticipated sales volumes and strong operating performance by our team more than offset the unfavorable margin impact from tariffs. Note that currency was a headwind to margins in the quarter, and excluding FX, organic incremental margins were nearly 40%. Now let's turn to industrial motion on slide 10. Industrial motion sales were $391 million in the quarter, up 1.3% from last year. The CGI acquisition contributed 2.9% to the top line, while currency translation was a benefit of 1.9%. Organically, sales declined 3.5% as lower demand was partially offset by higher pricing. The organic volume decline was mostly driven by lower solar demand and a decrease in services revenue.
Our services business was down against a tough comp last year, and we continue to see some customers delaying maintenance spend. As expected, the belts and chain platform was down from last year as it continues to be impacted by lower agriculture demand in North America. On the positive side, our couplings platform was up in the quarter, while lubrication systems and linear motion were relatively flat. Industrial motion adjusted EBITDA was $75 million, or 19% of sales in the third quarter, compared to $74 million, or 19.2% of sales last year. The slight decline in segment margins primarily reflects the impact of lower volume and incremental gross tariff costs offset by favorable pricing, lower SG&A expense, and the benefit of the CGI acquisition to margins in the quarter.
Moving to slide 11, you can see that we generated operating cash flow of $201 million in the third quarter, and after a CapEx of $37 million, free cash flow was $164 million, up significantly from last year. We expect to generate more than $100 million of free cash flow in the fourth quarter. Looking at the balance sheet, we ended the third quarter with net debt to adjusted EBITDA at 2.1 times, which is near the middle of our targeted range. Note that we strengthened the balance sheet from last quarter as we reduced net debt by $115 million, and you can see that our net leverage improved compared to June 30th. Now let's turn to the updated outlook for full year 2025 with a summary on slide 13.
Overall, we are reaffirming the midpoint of our earnings guidance range of $5.25 as the better than expected third quarter results are offsetting an incremental $0.05 per share headwind from tariffs and a lower outlook for the fourth quarter. With respect to net sales, we raised the full year outlook by 50 basis points versus the midpoint of the prior guide. Specifically, we are now planning for 2025 sales to be down approximately 0.75% in total at the midpoint. Organically, we expect sales to be down around 1.75%, which is slightly better than our prior guide, driven by the stronger than expected volumes in the third quarter. Currency is now expected to be slightly positive to the top line for the full year versus flat in the prior outlook, while there is no change to our M&A assumption.
Now let me provide a little more color on the updated organic revenue outlook. The implied outlook for the fourth quarter is for a 2% year-over-year decline. Note that this factors in a greater than normal seasonal sequential decline. The evolving trade situation continues to weigh on industrial market activity, and we are planning for customers to be cautious through year-end. Recall that last year's fourth quarter benefited from a sizable military marine project, which is impacting the industrial motion segment organic sales comparison. Moving to margins, our full year consolidated adjusted EBITDA margins are now expected to be in the low to mid-17% range. This implies that fourth quarter margins will be down around 100 basis points from last year, driven by higher corporate expense, a dilutive impact from tariffs, and lower profitability in the industrial motion segment, driven by the absence of last year's favorable military marine project.
With respect to cash flow, we're reaffirming our outlook to generate $375 million of free cash flow at the midpoint, which would be more than 130% conversion on GAAP net income. On slide 14, we provide an updated view on our 2025 organic sales by market and sector. Relative to the prior guide, we increased the outlook for renewable energy, driven by higher wind shipments. Overall, the net change among all the market sectors you see in the chart supports the slightly improved full year organic sales outlook. Moving to slide 15, here we provide an overview and update on the direct impact of tariffs on Timken. We covered most of this on previous earnings calls, so let me just hit the changes. We're currently estimating a full year net negative impact from tariffs of approximately $15 million, or $0.15 per share.
This is more of a headwind than our prior estimate of $10 million, or $0.10 per share, driven by the increase in the tariff rate on India and the expansion of Section 232 tariffs. The situation continues to evolve, but we still expect that our mitigation tactics will enable us to recapture the margin in 2026. In summary, the company delivered better than expected third quarter results, and the team is focused on finishing the year strong. While still early, we are cautiously optimistic on the outlook as we head into next year based on some encouraging order trends in a few of our markets and considering how long our industrial markets have been down. Timken remains well-positioned to leverage a recovery in market volumes into higher profitability, and we expect to benefit from the strategic priorities that Lucian highlighted.
Let me turn it back over to Lucian for some final remarks before we open the line for questions. Lucian?
Speaker 4
Thank you, Mike. I hope you come away from today's call with a sense that the Timken team is focused on taking the company's financial performance to the next level. We're approaching things with an open mind, and I look forward to continuing to hear your thoughts and ideas. Your perspective is critical as we work to position the company for the future. We will have much more to share in the coming months. To that end, we plan to host an investor day in the second quarter of next year, where we will outline our strategic vision and priorities in more detail.
Speaker 6
Thanks, Lucian. This concludes our formal remarks, and we'll now open up the line for questions. Operator?
Speaker 7
Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star, followed by two. Our first question today comes from Bryan Francis Blair with Oppenheimer & Co. Inc. Bryan, please go ahead.
Speaker 3
Thank you. Good morning, guys.
Speaker 6
Morning, Brian.
Speaker 3
Morning.
Speaker 6
Morning.
Speaker 3
Lucian, you and gentlemen are one for one thus far, so that's good to see. To level set on the near-term outlook, are you already seeing the kind of sequential weakness or incremental weakness that you've baked into the guide, or is that simply the assumption of your team, given the backdrop, the mosaic as it is, that a sequential decline in order rates is going to occur as Q4 moves forward?
Speaker 6
Yeah. Thanks for the question, Brian. Let me just say that our outlook includes the latest order trends, and we did see in the third quarter a seasonally declining order book, yet year-over-year order book was up. As I think about it, overall, the patterns we're seeing are supportive of the fourth quarter guide. I wouldn't say that we're losing share or anything, nothing notable like that. Really more, I would say, cautious given the tariff situation, the uncertain trade environment, but the guide incorporates kind of our latest thinking and what we've seen.
Speaker 3
Okay. Understood. Mike, you stressed cautious optimism on 2026 in prepared remarks. I realize that we're not going to have 2026 guidance for a bit, but at a higher level, maybe offer what your team sees as the puts and takes given current visibility, looking to the new year. If we are in a healthier demand environment, given the carryover of restructuring savings and other work that the team has done through 2025, what kind of incrementals should we anticipate next year?
Speaker 6
Right. As you say, a little early on 2026, but what I can say is we're moving with urgency. You heard Lucian say that we're moving with urgency really to position the company for earnings growth next year. We're focused on executing what we can control and looking to accelerate value creation for shareholders. As we sit here today, we're cautiously optimistic on next year based on some of the encouraging order trends that I've referenced really across a few of our key markets. I think as we've said on prior earnings calls, we've been in an extended or year-over-year decline for quite some time. We'd like to think we're approaching the end of that. When we combine all that, we remain cautiously optimistic for next year. We're well-positioned to leverage recovery in volumes when they come, and we'll leverage those into higher profitability.
We do also expect to benefit from the strategic priorities that Lucian highlighted. As we sit here today, early to call, but feeling cautiously optimistic, and we do have a few tailwinds that would be behind us relative to profitability. Looking to take the margins up next year and off of that higher volume if or when it comes through.
Speaker 3
Understood. Appreciate the color. Thank you.
Speaker 6
Thanks, Brian.
Speaker 3
You're welcome. Thank you.
Speaker 7
Thank you. Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
Speaker 8
Good morning, Lucian, Michael. Congrats on the strong quarter, and I look forward to working with both of you. Maybe just to go back on the organic growth implication for the fourth quarter here. Do you think that there was a pull forward in the third quarter, or could you just kind of expand a little bit more, you know, maybe what you see or what you kind of saw inflect toward the kind of cadence you're guiding to in the fourth quarter by end market? If you could talk about it on a monthly basis too, what's the magnitude of declines that you've maybe seen in October, and what end markets is that maybe more pronounced in?
Speaker 6
Yeah. Let me answer maybe the first part of that question. There's nothing we can point to to say that we saw a pull forward into the third quarter. Nothing there that would give us indication. Again, probably cautious on the fourth quarter. Nothing clearly in order patterns or customer behavior that says we would see a deceleration. Just cautious as we have been on that outlook given the trade uncertainty. Really nothing specific to speak of and nothing indicative of a pull forward into the third quarter.
Speaker 8
That's helpful. I guess just in terms of, you know, as we think about the headwind from tariffs here, I assume with things kind of kicking in for some of these on kind of November 1, there's maybe still a little bit of an incremental impact in Q1. Can you talk about just your ability to recapture or start to really offset tariffs? Should we assume that Q1 would be kind of incrementally worse, or do your mitigation strategies really start to kick in, whether it's price or cost, and therefore we should assume that this is probably more of a trough, all else equal, from a volume standpoint?
Speaker 6
Yeah. A couple of things. Obviously, we're focused on controlling what we can control around tariffs. As you said, November 1 is a stated deadline, and you know, can't control that. Just to be clear, though, that significant step up in the China tariffs is not in our guide. If that does occur, it would be an incremental headwind to where we are. As far as mitigation and recovery, we continue to push pricing through in the markets. We put more pricing through in the third quarter, other actions at our disposal around supply chain changes, etc. We do expect to fully offset the tariff impact exiting this year and look to recapture those margins next year. Thinking about the first quarter next year and tariff offset, we are exiting the year at a higher pricing rate than the full year average.
If you think 1.5% pricing for the year, exiting the second half at greater than 2%. Think about that incremental as benefiting us in the first half of next year. We do have some headwinds related to pricing to help offset that tariff impact and then other actions as well. Look to recapture those margins in 2026.
Speaker 3
Very helpful. Thank you.
Speaker 7
Thank you. Our next question comes from David Raiffe with Evercore. Please go ahead.
Speaker 2
Hi. Thank you. Thank you. I'll be quick, and if I missed it, I apologize. A lot of companies this morning. The fourth quarter organic decline, could you give some color on the mix of that between the divisions? Particularly, I also wanted to see how trends are going with the industrial distribution business. I noticed you maintain that guide for the end market. The only one you bumped up was renewable. I'm just trying to get a sense of the mix into 2026. I think of renewables as a pretty solid incremental margin business. That picking up is interesting. The industrial distribution, I see you did not pick that up. Again, organic splits on the segment for the fourth quarter and then color on those markets. Thank you.
Speaker 6
Sure. Thank you, David. Thinking about the segment split for the fourth quarter, we are expecting organic sales to be down in both segments. I would say maybe a little more in industrial motion. We called out, particularly year on year, we had a sizable military marine project last year that doesn't repeat. We are looking for organic revenue to be down in both segments. As far as distribution goes, we did not move it. I would say it's moving inside of the range, if you will, so not enough to move us to move anything up or down. Nothing changing there. We are encouraged as we look forward. Obviously, that is a channel that we're ready to serve, and if there's a market recovery, one that we would prioritize to serve. We are well-positioned for that to continue to go up.
Relative to the fourth quarter, we're kind of keeping it where it was as we're not seeing anything that would indicate otherwise.
Speaker 3
On the renewable side?
Speaker 6
Yeah. Renewables, right. We continue to see strength and really driven by China wind and renewables, as you know, split for us between wind and solar. The strength really is on wind. Solar continues to be challenged for us. On the renewables, we saw strength in the second quarter, and we know there was some legislation incentive in China that went away at the end of the second quarter. We were maybe expecting more of a step down than we saw. The strength there really was a bit of a happy surprise for us. In terms of growth, I would still expect that to continue to be a growth opportunity for us, but nothing in terms of significant trends. We did move it to the right on that strength that we saw in the third quarter.
I'd expect the renewables to continue to be part of our growth story and really driven by wind.
Speaker 2
Lastly, I'll be quick. The organic growth turning back positive, as we think about it going into 2026, of your two businesses, which segment would you expect to see it first?
Speaker 6
I don't know if it's really hard to pinpoint that. Obviously, the markets are going to drive where that goes. As we're sitting here today, it's really hard to call next year's markets. Can't say for sure where that would come from. Probably too early to call. We'll have a lot more information on that in our next quarterly call.
Speaker 2
I appreciate that. I'm just trying to back into the industrial distributions. Obviously, a big slug of engineered bearings, and it's pretty profitable. I was just trying to get a sense, is that where we feel a little bit better about going to 2026 to turn EB positive before maybe, you know, the automation side of industrial motion? I'm just trying to feel you out on, you know, is there any hint of a restock on the distribution piece for EB, some of the off-highway businesses that were obviously significant drags? They're starting to turn a little bit year over year. It sounds like you're not willing to say EB is the first one up compared to IM. Is that fair?
Speaker 4
Yeah, Andrew. This is Lucian. We're trying to use all the data at our disposal to try to sense this. The short answer is I don't think we know yet, as Mike said. One of the things we do look at is distribution inventory. You look at sales in, you look at sales out, and you try to see a disconnect to predict an upturn or a downturn. I would say there's no data that points in either direction. Inventories are not elevated, so that's the good news. They're kind of stable. Sales in and sales out are still reasonably matched. There's nothing in there that says that a big change is imminent. That's the type of sensing we're doing to prepare for an upturn.
Speaker 2
I appreciate the time. Thank you so much.
Speaker 6
Sure. Thanks, David.
Speaker 7
Thank you. Our next question comes from Stephen Volkmann with Jefferies LLC. Please go ahead.
Speaker 0
Great. Good morning, guys. Lucian and Mike, welcome. Maybe I'll switch to some kind of longer-term, bigger-picture questions. First and foremost, I guess, Lucian, your comments around 80/20 being a big focus for you. I'm always curious to see if companies are willing to do the PLS portion of 80/20. I know you guys have talked about maybe de-emphasizing some auto business next year. Any update on that? Any other areas where you think there's an opportunity to exit less profitable, whatever, businesses, processes, customers, any of that?
Speaker 4
Yeah. I mean, we appreciate the question. We announced on purpose this 80/20 portfolio approach and really narrowed it down to looking at the portfolio. The reason is we think it's essential to unlocking value in the company. If you think about what the outcomes would be, obviously, structurally improve margins and then grow faster in the most profitable verticals. We want to approach this portfolio with a completely open mind and really come back to we did announce in the prepared remarks that we're going to have an investor day in Q2. By that time, really have a lot of clarity. To step back and maybe share some of the thinking and some of the framework, you know, we do want every business in the portfolio to be contributing to the 20% EBITDA margin target. That's kind of table stakes.
Once you do that analysis, you very quickly come out with the great businesses that we have, and there's plenty of them, and then making choices in there to say, where do we double down? Where do we invest to grow faster? There are fix-it opportunities. There, I think we're going to be very disciplined to not start long-term projects and really look at what are those businesses that can be turned around. Then there's a third category, and you alluded to some of that in your question, which is, is there a business that's just not us? In the end, what is not us? It might be a numerical number that it doesn't fit a margin target, but frankly, it might be something different. It might be a good business where we are just not the natural owner. It just doesn't fit who we want to be.
We are an engineer-to-engineer product development kind of work. We're not an RFQ-to-procurement type of business. We're not a high-volume business with a very low mix. That's not what's good for us. What fits us best is those types of highly engineered solutions. We'll look at the portfolio with that angle. To get to your question about automotive, you know, we have to put this in context and recognize we've gone from $1 billion of automotive business to now we're talking about 8% of the portfolio to saying we're going to deal with half of the 8%, which is now a little over $100 million of the $1 billion that we once had. That activity is underway. Those conversations are underway in the marketplace. That's not an internal Timken paper exercise. We are moving in that direction. We've communicated with our customers.
We've communicated with partners, and we're very, very clear about that in the marketplace. Having said that, these are customers with multi-decades relationships that have platforms depending on us. We also have to work with them on the timing. However, any arrangement has to be good for both parties. In the end, I think it's reasonable for you to expect that we will improve even that business going into 2026. In terms of what timing we have to make an announcement on that remaining 4%, we can't commit to that today. We'll come to you when we have it. The commitment that you do have is that is a business we are going to deal with as part of this 80/20 effort.
Speaker 0
Great. That's very helpful. Maybe just some semi-related, you guys have done quite a bit on the M&A front prior to your arrival. Now you talked about your leverage being about where you want it. You have a good cash flow year here. Just any change, Lucian, in your view of the right way to allocate capital?
Speaker 4
Yeah. No immediate changes, obviously. We will provide you more color when we talk about our strategy and the complete context of this. No immediate changes. Really continuing that balanced capital allocation and continuing to be disciplined is what you should expect to see from us. I do want to say that to your point that we've made acquisitions in the past, we have a tremendous portfolio of acquired businesses. That's what I'm excited about when we do this 80/20 is really finding those opportunities. Frankly, we have some pretty good ideas of what they are. Where are the growth opportunities where we can double down? I'll give you a couple of just teasers right now. We have several of the acquired businesses that are really almost single-region business, and there's no reason they should be that way.
We're a global company with a 125-year history, and taking those businesses globally is an easier growth factor than entering a new market, a new application. That's one we plan to do. If you look at the margin opportunities, the businesses that we've acquired and the legacy businesses serve the same end markets, the same end customers. We can bring better solutions, more engineered solutions to our customers, and at the same time, reduce our cost to serve. The IM businesses do have, at least today, as evidenced in the P&L, a slightly higher cost to serve. The good news is it's the same cost to serve that we are already spending on the EB side. Now how can we continue that integration? The integration has been done in some of the businesses that we've acquired a while back, and we have efforts there.
The businesses that are newly acquired, they're not in the same place. We will continue that integration. We'll accelerate it. We'll be more deliberate and then really targeting those end markets that go across EB and IM where one plus one is more than two. That's what this portfolio is going to drive. That's from the portfolio that we have. Obviously, to the extent that there are gaps, that's what more M&A is going to do. We expect that effort will continue in a very targeted way. We also expect to be able to add investors. They give you a lot more clarity to where any future M&A will be relatively straightforward to explain because we will have explained the strategy.
Speaker 3
Understood. Okay, thanks so much. Good luck.
Speaker 4
Sure, thank you.
Speaker 3
Thank you.
Speaker 7
Thank you. Our next question comes from Rob Wertheimer with Melius Research. Please go ahead.
Speaker 6
Not hearing you, Rob.
Speaker 3
I beg your pardon. Thank you. Good morning. Lucian, your comments around 80/20 have been interesting. I wanted to follow up. Good morning. Just a little bit more. I mean, when you came in and you were able to get a deeper look at the portfolio, is the idea that there was a wider dispersion in margin and growth than you might have expected? Is it, you know, some of it's maybe obvious when you talked about engineer to engineer and not wanting to be an RFP business on volume scale? I'm just curious, when you glanced at the portfolio, did 80/20 leap out because there was a bigger spread than you would have expected? What were your other impressions? Thank you.
Speaker 4
Thank you for the question. I'd say the bigger thing that leaped out is the degree of opportunity that exists in different regions, markets, business combinations. You have to get a little deeper to spot these. As I said, one of the opportunities that's most obvious is just regional penetration for some of these businesses. There's a lot of growth opportunity. I mean, there are a lot of jewels in that portfolio. 80/20, sometimes we focus on what are we going to stop, and we definitely will do that, rest assured. I'm equally excited about what are we going to double down on, actually more excited on what we're going to double down on. That's what really got me going on 80/20 when I looked at the portfolio because there are several businesses out there that are doing very well. We can double down and do even better.
When you have businesses like that, you win twice. You accelerate your top line, but you also mix up. That was more of the drivers. To the extent that there are businesses in that portfolio that don't meet margin targets, then that's another lever that we definitely intend to exercise.
Speaker 3
All right. Thank you. That was a great answer. Maybe this is one level too deep, and you can tell me if so, but when you looked at those opportunities to go global that hadn't been taken, was it your impression that there was a block? You know, a study was done, there was a competitive threat that was deemed too big or whatever. Is it more just Timken's been a successful acquirer and hasn't had a chance to fully lever it? I'll stop there. Thank you.
Speaker 4
Yeah. You have to recognize that this is with two months in the role, so it's easy for me to maybe make assumptions. At least my hypothesis, just in the spirit of transparency, its prioritization is just how many things can you do at once. That's why really another reason for 80/20 because this is all about parading and saying where are the largest opportunities. That was part of the reason. The other part is historical. You know, these businesses are entrenched. This is not necessarily a new discovery that we're going to take a business that's regional into a new region. This was already underway. Really choosing a few of them where you say, "Okay, we're going to actually double down, do it in a more deliberate market-back way versus product forward." That's really more of a change in the approach.
I don't want you to walk away with this as a brand new idea that was not considered or not underway. It's just really accelerating it, doubling down on it in a few of the businesses that matter.
Speaker 3
Thank you.
Speaker 6
Sure. Thanks, Rob.
Speaker 7
Thank you. Our next question comes from Kyle David Menges with Citigroup Inc. Please go ahead.
Speaker 5
Great. Thank you. It sounded like EMEA up 2%. First time it saw growth in two years. I would love to hear a little bit more about what drove the return to growth in EMEA and just your level of confidence in growth sustaining in that region.
Speaker 6
Yeah. Thanks for the question, Kyle. Just maybe the first thing about EMEA is it's been down so long that the comps continue to get easier. I do think that there's an element of just reaching the bottom. That would be part of it. We do have a strong European presence, excuse me, in some of our industrial motion businesses. We pointed to those as having good quarters as well. It's really three markets, if I can highlight those, that drove that growth. Off-highway was up, rail, where we're winning, particularly in new platforms outside of freight rail, which has been our typical stronghold. We're winning in new applications there. Heavy industries would be the third market. Really, a combination of finally maybe reaching the bottom, a little early to call again, but being down for so long and then strengthened some of these markets and new business wins.
Speaker 5
Got it. On margins, how should we maybe be thinking about the fourth quarter exit rate on margins? It sounds like there could be some good momentum into 2026 with pricing. Maybe you see some of these auto OE actions start to come through in the first quarter of 2026. I know you're not wanting to give 2026 guidance, but you do normally see a step up in margins from the fourth quarter to the first quarter into the next year. Is it fair to assume that we would maybe see a bigger sequential step up in margins into the first quarter of next year?
Speaker 6
Yeah. Great question and good point. I want to highlight, first of all, that fourth quarter for us is typically our seasonally low quarter, and we do see a significant step up from fourth quarter to first quarter. You can expect that to happen. With that volume uplift is generally margin uplift. The self-help we've done this year between pricing actions, which I mentioned earlier, we're exiting the year at a higher run rate than the full year, so you'd expect that to be some uplift in the first half. Our cost savings tactics, which we've talked about on prior calls and said would be second half weighted, would also be a help to the first quarter margins as well. As you said, too early to comment.
I'm really not going to get into numbers at this point, but I think safe to assume that a significant step up in both top and bottom line going from fourth to first quarter.
Speaker 5
Makes sense. Thank you.
Speaker 6
You bet.
Speaker 7
Thank you. Our next question comes from Ethan Coyle with JP Morgan. Please go ahead.
Speaker 1
Hi, everyone. This is Ethan on Fertomo. Thank you for taking my question today. For on pricing, how successful have you been through passing pricing to offset tariffs? On the increase in tariffs, do you expect further pricing in Q4 or maybe Q1 in 2026?
Speaker 6
Yeah. Thanks for the question. You know, we've talked about pricing this year, and I've said it a couple of times. We're looking at pricing above 1.5% for the full year. I would say we've been largely successful passing through pricing. Just a reminder about how our pricing works. We have good pricing in the industrial distribution channel where we can get through pricing with 60 days' notice. A little bit longer in our OEM businesses, depending on where they sit, that can be a couple of months to a couple of quarter lag. I would expect that we will continue to push pricing. It's too early to comment on what additional pricing we will do next year, but know that we're ending the year with positive pricing momentum and are committed to recapturing the margins on that tariff impact next year through all of our mitigation tactics, including pricing.
Speaker 1
Thank you. On industrial motion with organic declines in this quarter and difficult comps in Q4, do you see that inflecting positively anytime in the first half of 2026?
Speaker 6
Yeah. Again, really early to be commenting on 2026. The only thing I'd reiterate is that fourth quarter to first quarter is a significant step up. You can expect industrial motion to step up from the fourth to first quarter. Again, really early to be commenting on anything specific for 2026.
Speaker 1
Thank you.
Speaker 6
Thank you.
Speaker 7
Thank you. Our next question comes from Tim Fain with Raymond James. Please go ahead.
Speaker 3
Great. Thank you. Good morning. Just on the margin driver.
Speaker 6
Morning.
Speaker 3
Good morning. One of the margin drivers we've talked about for 2026, specifically on the cost savings and all the kind of the footprint and realignments that have been made over the last year plus. Can you just maybe help us quantify that? I think from memory, the number coming into this year was like circa $75 million or $80 million. Is there a way to kind of help us as to frame that as to what that could mean in 2026?
Speaker 6
Yeah, sure. Thanks for the question, Tim. Yeah, you're right. Referencing back to the $75 million of savings, we did announce that. I would just reiterate we're on track to deliver that $75 million of savings. Maybe just one thing to point out on that, probably a little more, a little ahead of plan in engineered bearings, will be behind plan in industrial motion. That's part of the margin story in industrial motion. The way to think about that, I think you said it would be roughly, it would be second half weighted, call it 60/40 second half, first half. If you do the math on that, 60/40, $75 million, you should get to somewhere around $15 million of incremental cost save in the first half next year.
Speaker 3
Got it. Okay. We're limited as to what we want to talk about for 2026, but just thinking about the quarter one beyond where we are today. Normally, I think that you see about a, you call it, 10% organic step up for Q4 to Q1. Based on what you're hearing from the channel and customers, do you think the pieces are in place for that kind of normal sequential step up as we sit here today in the first quarter?
Speaker 6
Yeah, again, I appreciate the acknowledging that we're not going to talk much about next year. I don't think there's any reason to believe differently than a typical step up from fourth quarter to first quarter. Again, we'll have a lot more information next time, but there's nothing in what we're seeing in current order patterns or otherwise that would indicate we'd expect anything other than a typical seasonal step up.
Speaker 3
Got it. All right. Thank you, Mike. Appreciate it.
Speaker 6
Yeah, thank you, Tim.
Speaker 7
There are no remaining questions at this time. Sir, do you have any final comments or remarks?
Speaker 6
Thank you, Emily. 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.
Speaker 7
Thank you for participating in Timken's third quarter earnings release conference call. You may now disconnect.