The Timken Company ($TKR)

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

Thank you, operator, and welcome, everyone, to our first quarter 2026 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 Boldea; and Mike Discenza, 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 expressed written consent, we prohibit any use, recording or transmission of any portion of the call. Finally, just a reminder that we are hosting an Investor Day on Wednesday, May 20 in New York City so we hope that you will join us either virtually or in person. 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.

Thanks, Neil, and good morning, everyone. We appreciate your interest in Timken and for joining us today. I would like to start by thanking our Timken team for their hard work to deliver an excellent start to 2026. We're gaining momentum and making great progress executing our strategic priorities, including 2 recent actions to advance our 80/20 portfolio work. Our financial performance is strong, and we are pleased to have achieved double-digit earnings growth and margin expansion in the first quarter. Turning to our results for the quarter. Total sales were up 8% from last year and organic revenue grew more than 4%, driven by higher pricing and volume growth in the Industrial Motion segment. We expanded EBITDA margins to 18.8% in the quarter and adjusted earnings per share increased nearly 20% year-over-year to $1.67. With respect to capital allocation, we repurchased approximately 280,000 shares and acquired Bijur Delimon, which I'll talk about more in a moment. We ended the quarter with a strong balance sheet and net leverage of only 2.1x and giving us continued flexibility to pursue our balanced approach to capital allocation. While Mike will take you through the details of our 2026 outlook, we are raising our guidance for organic revenue, margins and earnings. Our outlook now implies 13% adjusted EPS growth at the midpoint of our range compared to the 8% we previously guided and includes a more positive price/cost impact related to tariffs. We saw improved customer demand across most end markets, which was reflected in our recent order activity. Our backlog at the end of the quarter was up both sequentially and year-on-year continuing the positive momentum we experienced in the back half of last year. These trends support the increase in organic sales outlook for the year to 3% growth. Despite continued volatility around trade and geopolitics, our team is operating with urgency to execute our strategic priorities and deliver stronger performance in 2026. As I mentioned earlier, we are deeply engaged in advancing our 80/20 strategic initiatives, including optimizing our portfolio as we are prioritizing actions that will have the greatest impact to company margins and growth. Last quarter, we announced that we are extending the 80/20 discipline across our entire enterprise to reduce complexity and streamline operations. While still early in the process, we are moving quickly. We have established a transformation office with dedicated 80/20 teams responsible for leading the execution of major work streams. We have completed comprehensive training across many areas of the business. And as of today, nearly 300 Timken leaders are fully trained and putting 80/20 principles into action. Our focus on these initiatives have driven 2 recent actions. On May 1, we announced the sale of our belts business to Gates, this divestiture is expected to simplify our portfolio, free up resources to redeploy to our growth initiatives and structurally improve margins for the Industrial Motion segment. We expect to complete that transaction in the third quarter. Secondly, we acquired Bijur Delimon, which strengthens Sinking Industrial Motion portfolio in key markets and is expected to be accretive to Industrial Motion segment margins after synergies. Timken is the natural owner of this business, and it scales our automated lubrication systems platform to nearly $400 million in total revenue. These 2 portfolio moves are aligned with 80/20 and that result is a higher-margin, faster-growing Industrial Motion segment. Our teams around the world are energized by the benefits of 80/20, and we are confident it will be a major driver of value creation over time. I remain confident about the opportunity to raise Timken's organic growth trajectory by focusing on the fastest-growing verticals and regions. This includes driving synergies through the global expansion of our acquired businesses, and we are gaining traction. For example, we saw double-digit organic growth during the first quarter in our linear motion platform in the Americas, driven by new business wins within factory automation. We're excited about the many opportunities like this ahead to leverage Timken's strength and create new ways to drive higher performance. Before I turn over the call to Mike, I want to touch on the leadership transition we initiated for our Engineered Bearings segment and thank Andreas Regan for his many years of service to Timken. An external search is underway for a permanent successor. During this time, Tim Graham, our President of Industrial Motion will serve as Interim President of Engineered Bearings. Tim spent decades leading teams within engineered bearings, including most recently as Vice President of Operations. His deep knowledge of our operations and customers across Engineered Bearings will ensure a seamless transition. Our Bearings business set the foundation for Timken more than 125 years ago and remains critical to our future. Together with industrial motion, we have a very compelling customer value proposition. I am focused on building the right leadership structure to best position our teams around the world for even greater success. With that, let me turn the call over to Mike for a more detailed review of the results and outlook. Mike?

Thanks, Lucian, and good morning, everyone. For the financial review, I'm going to start on Slide 8 of the materials with a summary of our strong first quarter results. Overall, total revenue for the quarter was $1.23 billion, which was up 8% from last year. Adjusted EBITDA margins increased to 18.8% and adjusted earnings per share for the quarter was $1.67, up significantly versus last year. Turning to Slide 9. Let's take a closer look at our first quarter sales. Organically, sales were up 4.3% from last year. The increase was driven by higher pricing across both segments and higher demand in the Industrial Motion segment, while volumes were relatively flat in Engineered Bearings. Looking at the rest of the revenue lock, foreign currency translation contributed 3.4% growth to the top line. The acquisition of Bijur Delimon, which closed in mid-March added a small amount of sales to the quarter. On the right, you can see first quarter performance in terms of organic growth by region. In the Americas, our largest region, we were up 6% and driven by growth across both segments in North America, while Latin America was relatively flat. In EMEA, we were up 5% from last year, driven by solid growth across both segments. And finally, we were down 1% in Asia Pacific as growth in India was slightly more than offset by lower demand in China. Turning to Slide 10. Adjusted EBITDA was $231 million or 18.8% of sales in the first quarter compared to 18.2% of sales last year. Organically, Incremental margins were approximately 35%. So solid operating performance from the team during the quarter. Let me comment a little further on a few of the different drivers on the EBITDA bridge you can see on this slide. Starting with the impact from mix, it was a notable year-on-year benefit driven by relatively stronger performance by several of our most profitable platforms within Industrial Motion. With respect to pricing in the quarter, it was positive $32 million and added nearly 3% to the top line as we continue to put through pricing actions to recover the margin impact from tariffs. And as you can see on the slide, tariffs were a $20 million headwind versus last year. Looking at material and logistics, costs were lower versus last year, driven mostly by savings tactics in the Engineered Bearings segment and material cost deflation in Asia Pacific. With respect to the manufacturing cost line, the increase from last year reflects labor and other cost inflation as well as a timing impact related to inventory accounting. Moving to the SG&A and other line. Expenses were up from last year, driven by higher incentive comp and spending on strategic initiatives. Now let's move to our business segment results. Starting with Engineered Bearings on Slide 11. Engineered Bearing sales were $806 million in the quarter, up 6% from last year. Organic sales were up 3%, driven by higher pricing while currency translation added another 3%. Among market sectors, Aerospace and Heavy Industries achieved the strongest gains versus last year. We also posted growth in general industrial, off-highway and renewable energy. Revenue was relatively flat across the distribution and on-highway sectors, while rail shipments were down from last year. Engineered Bearings adjusted EBITDA was $159 million or 19.7% of sales in the first quarter compared to 20.9% of sales last year. Margins in the quarter were negatively impacted by higher operating costs compared to last year. Now let's turn to Industrial Motion on Slide 12. Industrial Motion sales were $425 million in the quarter, an all-time quarterly record for the segment and up 12% from last year. Organically, sales increased 7%, driven by higher demand across most sectors and higher pricing. Currency translation was a benefit of 4.2%, while the Bijur Delimon acquisition added 0.8%. The segment saw growth in the quarter across all product platforms and was led by double-digit gains in the Americas. Among market sectors, automation, distribution and heavy industries achieved the strongest gains versus the prior year. We also generated growth in the off-highway and aerospace sectors, while solar sales were down. Industrial Motion's adjusted EBITDA margins came in at 21.5% of sales in the first quarter, up significantly from last year. The increase in segment margins reflect strong operational execution by the team, as well as the impact of higher volumes and favorable price mix. Moving to Slide 13. You can see that we generated operating cash flow of $39 million in the first quarter. And after CapEx free cash flow was slightly positive. Keep in mind that the first quarter is typically our seasonally low quarter for free cash flow, and we expect cash flow to step up significantly as we move through the rest of the year. From a capital allocation standpoint, we returned $53 million of cash to shareholders through share buybacks and dividends in the first quarter. Note that the Board recently approved a new 5-year share repurchase authorization for 10 million shares. Looking at the balance sheet, we ended the first quarter with net debt to adjusted EBITDA at 2.1x, which is near the middle of our targeted range. Now let's turn to the current outlook for full year 2026 with a summary on Slide 15. We are increasing our outlook across the board. Starting with net sales, we are raising our full year outlook to an increase of 4% to 6% in total, up from the prior range of 2% to 4%. Organically, we now expect revenue to be up 3% at the midpoint, a 1 point increase from the initial guide. The current outlook also adds 1% for M&A to include the expected revenue for the Bijur Delimon acquisition. We are still planning for currency to contribute around 1% to our revenue for the year, unchanged from our prior outlook. On the bottom line, we expect adjusted earnings per share in the range of $5.75 to $6.25, up $0.25 at the midpoint versus the prior outlook. Note that the outlook assumes year-over-year earnings growth every quarter this year. The current earnings outlook implies that our 2026 consolidated adjusted EBITDA margin will be approximately 18% at the midpoint, up from 17.4% in 2025 and slightly higher than the prior guidance. Note that the midpoint of the ranges implies an incremental margin of approximately 30% for the full year. For the second quarter, we expect organic revenue, adjusted EBITDA margins and adjusted EPS to all be higher than last year. However, we expect adjusted EPS to be modestly lower sequentially compared to the first quarter to reflect incremental inflation and some customer activity we saw pulled forward from Q2 related to the uncertainty around the situation in the Middle East. Moving to free cash flow, we expect to generate $350 million to $375 million for the full year or approximately 105% conversion on GAAP net income at the midpoint. On Slide 16, we provide an updated view on our 2026 organic sales outlook by market sector, which includes the impact of both volumes and pricing. Note that we are raising our outlook for the heavy industries and off-highway sectors based on stronger-than-expected year-to-date performance and the positive trends we see in the order book. Moving to Slide 17. Here, we provide a bridge of the $0.25 per share increase in our 2026 adjusted EPS outlook at the midpoint. First, you can see a $0.20 positive impact from the organic sales change. Next, we're estimating an incremental $0.15 per share tailwind from tariffs versus our prior guide. This primarily reflects the lower tariff rate on India and a modest net positive impact from the changes to Section 232 on April 6. And finally, we're factoring a $0.10 headwind into guidance to account for potential incremental cost inflation over the rest of the year. In summary, the company delivered better-than-expected first quarter results, and the team is committed to delivering the increased outlook for 2026. Let me turn it back over to Lucian for some final remarks before we open the line for questions. Lucian?

Thanks, Mike. We entered 2026 with momentum, and this quarter reinforces our confidence in the path ahead. Our portfolio is becoming sharper. Our 80/20 initiatives are accelerating and we're executing with urgency to position Timken for stronger growth and higher margins in 2026. I look forward to sharing more details with you soon at our Investor Day on May 20 in New York City.

Thanks, Lucian. This concludes our formal remarks, and we'll now open up the line for questions. Operator.

[Operator Instructions] Your first question comes from the line of Steve Volkmann with Jefferies.

I'm going to dive in on the changed guidance, Mike, your Slide 17, I guess. And I'm curious about the tariffs, the $0.15 benefit. I assume that's mostly IEEPA and India. Is there any scenario where you get rebates on what you've paid? And how are you thinking about that? And then is there also some potential for additional tariffs as we go through these 301 kind of studies through the summer? .

Great. Well, Steve, thank you for the questions. You sized it up right on the India part. We previously had talked about that. And so the change in IEEPA and because India represents a large part of our imports into the U.S., that was one of the bigger impacts and then the small net impact from the Section 232 change. So those are the big drivers on tariffs. As it relates to IEEPA, the process is unfolding. We're following the process. And if and when we have something to communicate on that, we'll relay that later. But nothing is assumed in our guidance for anything related to IEEPA refunds. As far as additional tariffs, it's a fluid situation related to 232, we think we've sized it up as best as possible, so I don't anticipate anything further. But of course, as the administration announces further changes that could impact us, and again, we communicate that if and when that was appropriate.

Okay. Fair enough. And then you also talked about the $0.10 sort of cost inflation, and I don't want to put words in your mouth, but that sounded more like a placeholder rather than you see more costs. Is that like cushion? Or do you actually see that kind of cost inflation?

Yes. Steve, this is Lucian. Let me take that. So it is somewhat of a player, but I'll tell you the degrees of what we're seeing today. So it's -- it depends by region. So if you're sitting, for example, in India, you're already experiencing an inflationary environment as we said today. In China, not really almost somewhat in the opposite direction. If you look in Europe, you're starting to see signs of it and in the U.S. not as much. And so where we're already seeing the increases were already underway with price increases, in some cases, first round, in some cases, second round. But this is now for us, not a new muscle. It's a well exercised muscle. It's one that's in place, the customers understand there's something about when you drive home even as a customer to the gas pump and the price of gasoline is higher. You understand that everything else is going up. So there is a level of understanding and appreciation that we are in this environment. So we'll continue to work with customers closely. But yes, I mean, it's our best guess of what it can be at this point. We are seeing parts of it already, and we're taking action. But we're prepared, and we're obviously in communications with our customers to be sure that we overcome this headwind.

Your next question comes from the line of David Raso with Evercore.

I was just curious, with the rest of the year guide implying somewhat notably slower organic, right, about 2.5% after the 4.3% in the first quarter. Given a lot of the positive commentary around the end market, can you maybe help us a little bit how much business do you think pulled from 2Q to 1Q? Or should we look at the organic guide maybe some level of conservatism. And I just wanted to also ask, just given the meeting coming up in 2 weeks, anything you want to put out there is what we should expect at the meeting, especially given that it was interesting, the 80/20 rollout now being a little broader in the recent M&A in the last week or so. Just curious if things have changed a little bit how you're thinking about timing of actions and so forth since when you first joined Timken.

Yes. So let me take the first part of that, at least on the lower organic. So a couple of things. Hard to say exactly how much was pulled from second quarter to first quarter, but we think that from an EPS standpoint or from a top line standpoint, maybe a 1% top line. So you think normally seasonally, we would step up from the first quarter to the second quarter, a couple of percent. We're now seeing that more flat. So we think that was about 1% pulled forward. So as it relates to the rest of the year, there's still a lot of uncertainty. Certainly, the Iran conflict creates further uncertainty. We don't have a lot of sales in the Middle East. So it's not necessarily a direct impact, but the impact around the world on the macro economies could certainly be -- could pull down that organic growth. So we are still expecting growth year-over-year for the rest of the year, but just being maybe a little bit trying to take into account a little bit that Iran conflict impact. Lucian, anything to add?

Yes. No. So if you look at normal seasonality, as you had from Q1 to Q2, you would normally expect a couple of percent step-up, I think in this case, as Mike said, we've pulled maybe 1% out of Q2 into Q1. So then something more flattish is probably more consistent with historic seasonality by the time you account for that pull forward. But that's the extent to which we can see. As Mike said, the good news is we don't yet see demand distraction from the conflict. We see inflationary pressure, but we don't see demand distraction. So the pipeline still remains robust, order book still remains very robust. The order book was up year-over-year also grew sequentially, which is very encouraging. And so I think all in all, we still remain cautiously optimistic, I would say. But to the extent that the conflict gets resolved and then obviously provide some upside. But where we sit, it does not yet seem to affect demand. And then to your second question on Investor Day. Obviously, we'll have a lot more detail on these topics. But basically, the main objective is really to detail our strategy and the long-term vision. And then really from that, give you the double click on how are we doing on our transformation, what does that look like? And also more importantly, give you a bit of a flavor on what is the execution discipline behind it. As you alluded to it, we'll talk about 80/20. So we'll provide way more detail on the actions we've already taken, try to quantify those on the portfolio for you and then also provide a bit of a road map on where we're headed. And then obviously, the financial targets on what all this sums up so we'll give you a multiyear projection as well. But certainly very excited to share all that with you. I think the story is coming together very nicely, and the team is very excited to be in front of you on May 20.

Your next question comes from the line of Rob Wertheimer with Melius Research.

You had a few things go right to help raise the full year outlook. And I wonder if you could attribute that to end market strength or some of the 80/20 and other initiatives are already paying off. That's the first question. .

Yes. We outlined a few things and no doubt market demand helped, no doubt we communicated in Q3 and Q4 that we're starting to see positive momentum on the book-to-bill side, on building pipeline, building the order book. So I think that definitely has helped. But we have done quite a bit of self-help as well. So one of the growth factors that I was most bullish about from the first day I got in this job and with every day that goes by, I'm more excited about it is regional growth. We have an entire portfolio in the Industrial Motion acquired businesses that are businesses that are more regional in nature, single region businesses. So taking those businesses into new regions, is an important vector. So we talked last year about prioritizing that. And for example, the linear motion business, that business is primarily a European business, and it's not even a European business. It's a German and Italian business. So taking that to the rest of Europe and taking that into the Americas just provides a pretty significant growth vector. And that's true for other businesses in that portfolio. But that linear motion business alone is growing double digit in the Americas, and it's a significant number. It's not a teens kind of number. It's a significant growth number. It's off of a lower base to start with. But we're winning in warehouse automation and other applications that are rapidly growing. So it's an exciting growth vector for us. So it's a combination of self-help and also the market. It's also 80/20, you alluded to it. The impact of 80/20, I would say right now is less so on a quantitative kind of simplification, but it is on a mindset. We have very early on in the process adopted the mindset of let's double down in the markets and industries where we're winning and invest less where we're not, that's already paying off. We have reorganized our commercial teams. We've verticalized them to where we're more in a one Timken phase to the industry. We've built regional teams that each region has the autonomy to operate and make decisions locally under a global framework. And so those things are already showing. And if you look at our regional results, where in some regions defined gravity a little bit compared to our competitors. So we had a nice run here in Europe, for example, continuing our good run in places like India and the U.S., but that -- some of that is self-help and us being a little more focused.

Your next question comes from the line of Angel Castillo with Morgan Stanley.

I was just hoping we could earn back a little bit more of the backlog. You said it's up sequentially and year-over-year. I guess just any way to kind of quantify that for us? And just any particular pockets around markets where you're seeing, I guess, more of a boost in kind of the backlog right now. And I just would love -- I guess, if you could share also any color on kind of order activity in April versus March. I think you mentioned that you're seeing activity still -- or I guess, in your guidance, activity more kind of flattish in 2Q versus 1Q due to some of that pull forward. But I guess curious if you're seeing that also reflected in your orders or how that kind of compares as we think about maybe that degree of conservatism on how much was maybe pull forward versus just underlying demand?

Yes. I think if you look at the order book, both year-over-year and it was up significantly year-over-year, and really the leaders are off-highway, aerospace, rail and wind. Those are the 4 verticals that are mostly contributing to that. I think the significant momentum in the Americas, Europe doing pretty well, as I added to China -- I'm sorry, India doing quite well. China is still a little bit soft. We're very encouraged by the fact that the order book was still up sequentially versus Q4. The challenge to translate order book math into precise quarterly revenue math, obviously, in the long run, it works out, but you have shorter cycle businesses, longer cycles. So that's where it doesn't quite translate one to one, but over time, when the order book is up significantly at some point, that flows through the revenue. So that's why we're encouraged. I think if you look at markets in general and you look at Q1 kind of as a guide, we saw strong activity across both segments. Americas was a big region for that. Power gen for pretty strong on the demand, metals was pretty strong. And so you saw activity related to kind of general economic activity picking up that was quite helpful. General Industrial was another one. So I think it's pretty broad across the sectors. We've been cautious to really not hang our hats on this too early because I think part of it is the market is still somewhat not taking into account the Middle East disruption maybe sufficiently because the order books are certainly not reflecting that and the demand is not reflecting it. We see the inflationary pressure, as I mentioned earlier, but we don't see it having any impact on the demand. So that history would say that there might be some impact at some point. But at this point, we're not seeing that, but that also gives us a little bit of reason for caution. As for April, April is off to a good start, I would say. If you compare to where we thought we would be, we're about where we thought we would be. The part to keep in mind is whatever dynamic drove March being a little stronger because April got pulled into March because customers realize they're in an inflationary environment, there's an environment of supply chain uncertainties. So more products sooner in hand is better. that same dynamic persist in April. So I don't think this would have been the typical that if you had accelerated orders from April to March that you would see a slow first week in April because conflict is still there. The uncertainty is still there. So there's still a bit of pulling on that demand. Again, it was modest, it is about 1%. So it's not a big number, but that's April is consistent with what we expected April to be so far, both in terms of revenue and just in terms of continued strength on building order book.

That's very helpful. And then I just wanted to -- I guess, if we could -- if we were to take all this together and think about kind of the segments and the cadence you ultimately expect for kind of sales and margins 2Q through 4Q, I was hoping you could kind of help at the segment level kind of unpack that. And then just to clarify on the price cost, you indicated that the $0.10 is kind of baking in some of the potential risk for inflation, but curious if the price increases you said you're starting to action if you've also assumed that in the guidance or if you're waiting to see how those kind of go through to -- before you kind of embedding that?

Yes. I mean we've only embedded prices that we already see in the guide. So I think to the extent that we have something from us, so part of that $0.10 is probably embedded with the corresponding price but not all of it yet. There's a timing there of when do you get the inflationary increase and when do the prices actually flow through the P&L. So that's why we thought it's a little more prudent to at this point, not have all that perfectly matched yet. I think if you look at the 2 segments, what I would say for the rest of the year is we do expect the trend to continue where you see a little more growth in Industrial Motion than you see in Engineered Bearings and so that will continue throughout 2026. I think if you look at first half of '26, being up at 3% to 4% and second half being up 2% to 3% is kind of what we expect right now when we look at what the drivers are and how those are reflected in the 2 segments.

Your next question comes from the line of Kyle Menges with Citigroup.

I was hoping if we could talk a little bit more about the portfolio transformation and maybe the M&A pipeline. I know we'll hear more about this at the Investor Day, but Lucian, I am curious do we already have a pretty good idea of the focus areas for M&A. And I'm just curious how that pipeline is building now that I'm assuming you already have a pretty good idea of where you want to expand inorganically?

Yes. Thank you for the question. And I would say it's still work in progress. I think there's different phases to portfolio transformation. The first thing we said is, okay, let's look with an 80/20 lens and say, what is the portion of the portfolio where you have some noted moves where those portfolios don't naturally belong to us, we're not the natural owner, let's take those actions. And we committed about a quarter ago that we would take action on up to a single-digit percent of the portfolio. So this is not a big portion of the company but a single-digit percentage. And I think if you look at the actions we have already communicated, whether that's around auto OEM or whether that's around the divestiture of the belts business, that's now the majority of that single-digit percent. So from a divestiture standpoint, I think we're -- we've tackled the majority of what needs to be tackled. And then from an acquisition standpoint, what we've also said is in the short term until we have our strategy fully defined and laid out, we will be a little more fair way, a little more opportunistic in terms of what's available. I think Bijur Delimon was a great example that sometime mid- to late Q4, it became actionable, and I can tell you it couldn't be more grateful to the team. I think from the time we started talking about it at the time we were done was somewhere around a 90-day time range. So I think a level of speed was demonstrated that's to be commended and we ended up with a really good acquisition that fits naturally in our portfolio very nicely. I can tell you, it's only been a couple of months, and it's hard to find who are the Bijur people and who are the Timken people because they're in the same industry, they have complementary market coverage. They have complementary product lines, complementary regional coverage. So there -- it's a win-win. They're helping each other be successful. So that's -- we want more of those. So to the extent that those that we have on our -- we have our list. And as they become available, we're prepared to act quickly. So opportunistic ones, I think you're going to see us act very quickly. More transformational in nature, obviously, those will be a little post communicating our strategy really outlining what the growth verticals are and what positions we're trying to build. We'll also highlight at Investor Day a bit of a time horizon approach of what do we try to do in terms of transformation by time horizon. And so that will provide you a little more clarity to the question. But in terms of opportunistic M&A, I think you can look at be sure as a nice example of what we would like to do more of that builds out these platforms, our lubrication platforms, we've not talked a lot about it, but it's now $400-plus million, and it's got a nice runway to get to $500 million. Our Linear Motion platform is comparable in size and so you can start thinking about building these $0.5 billion platforms across the enterprise that start to be very interesting and start to be market-leading positions. And so that's the kind of M&A playbook that we're looking at least in the short to medium term.

That's helpful. And then it would be great to get a little bit more color on the belts divestiture. Maybe just how it came together? Anything you're willing to share on the financial profile of that business as well? And then after this gets sold, does that also reduce the tariff impact for Timken? .

Yes. So Belts was really one of those. It's very consistent with our near-term strategic priorities, very consistent with 80/20. And even more importantly, it's the best example I can come up with of a business ending up with a natural owner. So I'm actually happy for our Timken team members that are in the belt business being a part of Gates, I think they'll be able to continue to be successful in the business and Gates will do a nice job with the business. So that -- it's really a win-win from that standpoint. For us, we'll quantify it more exactly at Investor Day, but what I would tell you is it will structurally increase the profitability 2 ways. One is it does make us up, but then it also allows us to redeploy resources to faster-growing areas in the portfolio. So that simplification further increases it. It will structurally increase the adjusted EBITDA margins of Industrial Motions business. Again, we'll quantify that for you exactly at Investor Day, but there is a structural step-up in IM.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

First one for Mike. Just going back to the cadence for the quarters and the sequential decline in 2Q EPS. Will 2Q still be the high point for the next 3 quarters? Or will 2Q and 3Q be relatively even before the normal kind of seasonal step down in 4Q? .

Steve, thanks for the question. Yes, we would expect a normal seasonal step down from 2Q to 3Q and then 3Q to 4Q. So we do have some seasonality built in, typical seasonality. So I guess this would be the high point. Relative to your question, you asked that was a high point since EPS is coming down, then first quarter would be the high point. Second quarter would be a little bit lower than normal seasonal step down.

Got it. And then for volution, it's kind of a 2-speed industrial world with aerospace and defense, data center grid infrastructure, all showing great demand. And there's just a more restrained general industrial. Are there any real standout opportunities you see where Timken currently doesn't participate. And can you specifically talk about humanoids just given increasing news flow and investor interest there? .

Yes. So look, I think we do participate in some of the verticals that you mentioned, but we have upside in participating in those. I've been bullish about power generation utilities from the day I got here, and I continue to be bullish about that. We have a better footprint, frankly, in it than we've talked about. And so that's one that's quite exciting. And then obviously, what all the verticals that you mentioned have in common is they do drive the need for infrastructure. And so I should drive the need for infrastructure, then heavy equipment, off-highway all that gets pulled through. The new one that, of course, gets a lot of press these days is humanoids. But what I want to start with is what problem are humanoids solving and the problem they're solving is the skill gap that we have today, both in quantity and quality in terms of labor because of demographics, because of how people want to live and work. And so automation, in general, fills that need and humanoids is a subset. And I think if you look at just the industrial automation alone, the portfolio that we've built through the acquisitions is remarkable. And if you look at our CAGR internally, we've grown double digit in that market since 2018. So this is not one that we decided last quarter to start focusing on, we did decide to double down on it. So that's accelerating that growth rate. But how we participate, think about our Cone Drive and our Spin AI business that offer Harmonic solutions, they offer cycloidal drives, our roll-on acquisition offering linear actuators that really create that seventh axis for industrial robots, medical robots, servicing through our CGI precision gearing, our Timken bearings or our Cone Drive Harmonic solutions, autonomous guided vehicles also Cone Drive and Rollon and then humanoids and exoskeletons. This is one where Cone Drive, Timken Bearings are also already present. So that's just from what we have today. And then obviously, humanoids offers an additional vector again. I know wait for Investor Day seems to be a very common answer. But I'll give you a little teaser that will have our newly appointed Chief Technology Officer, talk to you about that in a little more detail on how we see the opportunity and how we plan to go after it. But this is certainly a vector that we are nicely positioned as a company to be able to benefit from.

That's really good color. Just 1 quick follow-up. Are you seeing the secondary infrastructure play come through an off-highway specifically? Or is that more just cyclical recovery there?

Yes, I don't know that I'm smart enough to fully separate that. I think if you look at it regionally, there's certainly an uptick, and I think the net growth is certainly driven by those by those macro trends. If you look at the amount of construction that's required for data centers, the amount of infrastructure that's required to do that, the amount of infrastructure for utilities that all requires a lot of heavy equipment. And if you look at the performance of some of our customers, they certainly highlight that being as a big driver. But what I would tell you is from our chair, what we said, we see order book beefing up, we see the pipeline getting stronger from those customers. And obviously, it's a combination of recovery and some of those macro trends.

And maybe if I could just add some color because in addition to the infrastructure that Lucian highlighted, we are seeing some green shoots in ag. So part of that off-highway, the ag business, which we've talked about as being down. We're starting to see some green shoots there. So that's also in that. So not just the infrastructure piece, but ag as well. .

Your next question comes from the line of Tomo Sano with JPMorgan.

Good morning, everyone. Slide 16 shows improved outlooks across nearly all end markets, but your full year organic growth guidance was raised to 3%. So in Q1, most of the organic growth appear to be price driven rather than volumes. So given the broader-based end market improvement and PMI about 50, should we expect a greater contribution from volume in the coming quarters? Or will organic growth remain primary price led? .

Yes. Look, you've got 2 factors going on. So one is, of course, the year-over-year pricing comparison. We big price during the year last year. So that year-over-year comparison is going to dampen so you're going to get less contributions for that. You're also going to get less contribution from FX. And so the proportion of the growth in the revenue overall that comes from volume is going to be a little bit higher for the reasons that you just mentioned, and that's true for organic growth as well.

And just a follow-up on like ongoing 80/20 initiatives and portfolio rationalization, is there any intentional short-term restraint on the volume growth as you focus on the higher-margin products and customers. Could you talk about that for 80/20 for the volume growth, please?

Yes. And thank you for the question because it's a great question. It's one we get internally as well. And I can tell you, the intent of 80/20 is to grow. The intent is not to prune and shrink to perfection. The good news, and we will share the more specific data with you during Investor Day is if you look at our mix, very little pruning of revenue is required to dramatically affect complexity. And so what that means is really the price of simplicity is a lot lower than you would expect in our portfolio from where we sit. So that's very exciting. But I can tell you that already with the 300 people that we have trained and with the focus that we have there's way more energy, passion and focus on the 80s than there is on the 20s. And what I mean by that is we'll take care of the simplification. We'll take care of dealing with the tail products or what we need to do in -- with certain customers. But in the end, what it comes down to is what happens when you double down when you focus a very high percentage of our revenue is concentrated with a very small number of customers. So how do you serve those customers differently. And sometimes, timing in life is everything. And we're doing 80/20 at the perfect time because when order books are up, when customers are motivated to find product, even frankly, when we have a little bit of geopolitical uncertainty and supply chain uncertainty, customers are receptive to really being treated differentially by their suppliers and committing more of their volume to us as we commit a better service to them. So this is the perfect time to have those discussions with our large customers. So no, I do not expect to see volume declines that are related to 80/20. But I do expect to see dramatic simplification and possibly volume increases. And the reason volume increases is when you simplify your product slate in a factory, we spend so much time on changeovers in our factories, making a short run of product for a customer that maybe doesn't order as often, and we could run so much more efficiently for some of these larger customers that have more consistent demand. And so there is a fine line, obviously, not going all the way to high volume, low complexity. That's what we're trying to get away from. But even with our existing mix of customers, just getting a little more of that share of wallet is going to make a big difference. So the whole motivation of 80/20 is growth. It's not shrinking.

Your next question comes from the line of Tim Thein with Raymond James.

I just wanted -- I touched on price a couple of times, but I just wanted to make sure I got the right kind of takeaway here. And the question just relates to price versus variable costs as we go through the year. Just how you're thinking about that? And I asking that there's -- historically, there have been times when markets inflect that tends to be in more inflationary environment, which is good, but there's some contractual constraints that have limited that kind of the timing and your ability to push price. So I don't know if that's an analogous period of where we are now, but just kind of curious how that -- how you expect those 2 to behave, again, price versus variable cost for the balance of the year?

Yes. Tim, I appreciate the question. And it is, as I said earlier, this is a well-exercised muscle in terms of getting prices up. At the same time, the situation we're in today is slightly different from where we've been before. So when we started from no tariff to tariffs, basically, there was only one move on price, and that was up for everybody everywhere, whereas now you have multiple dimensions that smooth out the curve a little bit. So you've got, in some cases, tariffs going away where you might still have some prices that are a little more sticky. And then you have other cases where inflation is coming in where you have to price up. So you have both areas under the curve on the way up or on the way down that are offsetting each other. So a little bit of margin expansion in some cases and some you might have a little short-term margin compression as you get the prices up. So that's why -- and plus, it's a pretty modest number when you look in comparison to what we've dealt with before. We put $10 million as a placeholder, but we're not at least as of today, looking at that full amount. And so a little smaller amount, more dynamics in both directions, which will allow us to do a lot better job than we were able to do when it was just a onetime big hit of tens of millions of dollars.

Okay. All right. Understood. And then maybe just, close, just on Industrial Motion and the growth outlook there, that historically, I think of that as being a lot more European exposed, which is where one could potentially be maybe a little bit more concerned or cautious just given the current conflict and how that second derivative of higher oil prices, et cetera, impacts the outlook. So maybe if you spend just a second there. I know it's not all Europe, but I don't know, just maybe what kind of helps to underpin that outlook for Industrial Motion.

Yes. No, I appreciate it. So Industrial Motion, I think if you look at the segments of Industrial Motion so the linear business and the lubrication business are certainly majority European businesses and together their, call it, half of industrial motion. But then you've got Cone, you've got Philadelphia Gear, you've got CGI that are primarily U.S. businesses. And so by the time you average it all out, it's not as heavy European as you might think. And then obviously, the Philadelphia Gear business is heavily exposed to defense to marine and that business is growing strongly as well. More importantly, I think Linear Motion, if you look even in Q1, we were up substantially and the growth was driven by the Americas. Although the business is the majority European business, automation projects in the U.S. is what drove it. And then for our Lubrication business, which also historically was a European business, one of the big value propositions of Bijur Delimon was their heavy Asia, a lot of India footprint in rail in places where we didn't have a stronger footprint with our automated lubrication systems. So that provides a growth vector as well and then being up in off-highway, being up in general industrial helps lubrication. I think ag picking up helps Industrial Motion, whether that's chain, whether that's other places, coupling clutches seals for off-highway and industrial distribution also helps on the industrial motion side. And those businesses, again, the coupling clutches and seals, that's also more of a U.S. business with the PT Tech and other elements of the business. So we feel good about the position that Industrial Motion is in and more importantly, we feel good about how Industrial Motion and EB are coming together, and that's one of the things we'll spend a lot of time on at Investor Day to explain how the that combined sales motion really creates a unique value proposition for customers.

Your next question comes from the line of Mike Shlisky with D.A. Davidson. .

Wanted to ask about your comments on ag and some of the green shoots you're seeing there. I guess I want to just a couple more details there. I guess, is it replacement demand and parts versus OEM. And also, are you getting any commentary from the OEMs to some of your upside here, looking to increase production in the fourth quarter of this year in advance of their making 2027 models or their better outlook for 2027.

Yes. Mike here. Thanks for the question. Answering the last part first, yes, we don't can't really comment on that in terms of how fourth quarter is shaping up, we don't give that specific guidance. And certainly as it gets closer to 2017, we'll be able to give you some outlook on what that is. as it relates specifically to ag, we're seeing increasing order books. It's hard to know if it's restocking, I think, is what you're getting to. Is it OEM driven? Again, I would say it's just general green shoots in that space that we're seeing. So I would assume it's a little bit of both. But it's just now turning from what has been a pretty long down cycle there. So -- so we'll see what that turns into. But right now, just beginnings of green shoots for us there. .

Yes. And the year-over-year math looks compelling. But then if you take a long enough time horizon, you realize that it's -- part of it is the comp. It's just off of a very low base. And so that's why it's hard to draw too many long-term conclusions based on that, but it's certainly no longer a year-over-year headwind, it's now more of a tailwind.

Sure. I can appreciate that. And just secondly, just a quick housekeeping question, really. What you sold to Gates the Belt business hasn't typically closed yet. So is that still part of the guidance? And is that I guess it's currently a headwind to EBITDA margins, but once that is officially closed, like you increase your margin outflow again?

Yes. So that's correct. It is until it's -- until the transaction closes, it will be part of our guidance. So it is included in our guidance today. And as we said, we expect that to be a structural improvement to Industrial Motion margins. So post closing, then yes, we would give -- we'd expect that to be an improvement to Industrial Motion margins. Again, back to Investor Day, we'll lay this out more clearly for you at Investor Day. And so you can see that exact margin impact.

Yes. But keep in mind just the practicality of it. So we said it's as you look at 2026. So we said we're going to expect close sometime in Q3 and then obviously, there is an element of stranded cost that has to be dealt with to get the full benefit that we're going to outline for you. Obviously, we'll work on that expeditiously, but don't think of it as a one-day event where all that happens at the same time. There will be a mixing up, no doubt, the first day. But then to get the full lift, we also have a little bit of self-help to do that, obviously, we'll be prepared to do quickly.

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

Yes. Thank you, operator, and thank you, everyone, for joining us today. If you have any further questions after today's call, please contact me. Thank you, and this concludes our call. .

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