Q3 2024 Timken Co Earnings Call

Phillip Fracassa

Okay. Thanks, Tarak, and good morning, everyone. For the financial review, I’m going to start on slide 12 of the presentation materials with a summary of our third quarter results.
Revenue for the quarter came in at $1.13 billion, down 1.4% from last year. Adjusted EBITDA margins were 16.9% and adjusted earnings per share came in at $1.23.
Turning to slide 13, let’s take a closer look at our third quarter sales performance. Organically, sales were down 2.9%, as volume was lower while pricing remained positive. Looking at the rest of the revenue walk, you can see that recent acquisitions, net of one divestiture, contributed 1.8% of growth in the quarter. While foreign currency translation was a slight headwind to the top line.
On the right-hand side of this slide, you can see organic growth by region, this excludes both currency and net acquisition impact. Let me comment briefly on each region.
In the Americas, our largest region, we were up about 2% from last year. We saw solid growth across several sectors, including marine, distribution, and aerospace. While the off highway in general and heavy industrial sectors were lower as we expected.
In Asia Pacific, we were down 3%. as China was down, while India and the rest of the region were up. In China, the sales decline was driven mainly by lower wind energy demand. An in India, we saw double digit growth in the quarter, driven primarily by higher revenue in the rail and distribution sectors. And finally, we were down 13% in EMEA as we saw continued broad industrial weakness in Western Europe. Most sectors were lower, including renewable energy, automation, general and heavy industrial, and off-highway. \
Turning to Slide 14. Adjusted EBITDA in the third quarter was 190 million or 16.9% of sales compared to $216 million or 18.9% of sales last year. Our adjusted EBITDA margin of 16.9% was below company expectations, but the vast majority of the shortfall was due to some unanticipated cost headwinds in the quarter, including logistics, currency and the discrete customer accrual. Collectively, these headwinds negatively impacted margins by around 100 basis points. I’ll talk about these items and the actions we are taking to improve margins moving forward a little later in the call.
Looking more closely at the change in adjusted EBITDA dollars, you can see that the decrease was driven mainly by the impact of lower sales volume was relatively neutral price cost in the quarter. Let me comment a little further on the individual items in the block.
With respect to price mix, net pricing was positive once again this quarter in both segments as pricing continues to hold up well as we expected. Mix was also a slight positive, driven largely by industrial distribution, which generally outperformed OE sectors again in the third quarter.
On the material and logistics line, we saw a significant spike in logistics costs in the quarter. Reflecting higher international freight costs, including some lag effect from the second quarter is partially offset by modestly lower material costs.
On the manufacturing line, performance was slightly negative in the quarter as cost reduction initiatives and efficiency gains in our plants were slightly more than offset by the continued year-over-year impact of inflation and costs associated with new footprint investments.
Looking at the SG&A other line, costs were up slightly from last year. But in the quarter, we had an unfavorable SG&A expense impact from a discrete customer accrual. Excluding this impact, structural SG&A would have been down slightly from last year as cost control measures and lower incentive compensation expense more than offset the impact of continued wage inflation.
Currency was slightly negative in the quarter compared to last year and compared to the revenue impact. This was driven mainly by the revaluation of cash and other balances outside the United States. As these balances get revalued into the local currency, it produces a P&L impact. We posted a large negative impact in the quarter of just over $5 million related to this revaluation. This is included in unallocated corporate, not in the segments.
And finally, acquisitions net of divestitures contributed $6 million of adjusted EBITDA in the quarter, which was accretive to overall company margins. Our recent acquisitions continue to perform well and CGI is off to a strong start.
On slide 15, you can see that we posted net income of $82 million or $1.16 per diluted share for the third quarter on a GAAP basis. The current period included $0.07 of net expense from special items, including acquisition amortization and other special charges, offset partially by again on the sale of our recently closed Gaffney bearing complex in South Carolina.
On an adjusted basis, we earned $1.23 per share, down 21% from last year and below our expectations because of the margin shortfall. With respect to some below-the-line items, interest expense in the third quarter was about $2 million higher year over year, while diluted shares were down slightly.
Our adjusted tax rate for the quarter came in at 20%, in line with our expectations, but up from last year due mainly to our geographic mix of earnings.
And finally, non-controlling interest was up around $3 million from last year. While Depreciation expense was up slightly in the quarter.
Now let’s move to our business segment results, starting with engineered bearings on slide 16. In the third quarter, engineered bearings sales were $741 million, down 4.5% from last year. Organically, sales were down 3.6%, driven by lower end market demand in Europe and China. Among market sectors, renewable energy saw the most significant decline in the quarter driven by continued weakness in China. In addition, the off-highway auto truck and general and heavy industrial sectors were down from last year.
On the positive side, revenue in the distribution, aerospace and rail sectors were all up versus the year-ago period. Currency was a headwind to revenue of less than 1%, while the net impact of acquisitions and divestitures was slightly unfavorable. Engineered bearings’ adjusted EBITDA in the quarter was $138 million or 18.7% of sales compared to $157 million or 20.2% of sales last year. Our margins in the quarter reflect the impact of lower volume, along with higher logistics and manufacturing costs, partially offset by favorable price mix.
Now let’s turn to industrial motion on slide 17. In the third quarter, industrial motion sales were $386 million, up 5.2% from last year. Acquisitions contributed just over 6% to the top line, while currency was slightly positive as well. Organically, sales declined 1.4% as lower demand was partially offset by higher pricing.
With respect to performance by platform, automatic lubrication systems posted the largest decline while drive systems was notably up in the quarter. Our medical lubrication was impacted by broad weakness in Western Europe and the off-highway sector. While drive systems benefited from significantly higher military marine revenue. Belt and chain was also down modestly on lower ad demand, while other platforms are relatively flat compared to last year.
Industrial motion adjusted EBITDA for the quarter was $74 million or 19.2% of sales compared to 75 million or 20.5% of sales last year. Our margins in the quarter were impacted by lower organic volume and higher operating costs, including the customer accrual I mentioned earlier, partially offset by strong contribution from our recent acquisitions. Manufacturing performance was relatively flat in the quarter with favorable cost performance offsetting ramp costs related to our new capacity investment for belts in Mexico.
Turning to slide 18, you can see that we generated operating cash flow of $123 million in the third quarter. And after CapEx of $35 million, free cash flow was &88 million. We expect stronger cash flow in the fourth quarter, driven by improved working capital performance.
From a capital allocation standpoint, we deployed nearly $200 million in total during the quarter for the CGI acquisition and the payment of our 409th consecutive quarterly dividend. And looking at the balance sheet, we ended the third quarter with net debt to adjusted EBITDA at 2.1 times right near the middle of our targeted range. And we have no significant debt maturities until 2027.
Now let’s turn to our updated outlook for full year 2024, with a summary on slide 19. Overall, we reduced our outlook to reflect our third quarter performance and a more cautious view on the rest of the year. So let’s go through it, starting with the sales outlook.
We’re now planning for full year revenue to be down around 4% in total versus 2023. Organically, we now expect sales to be down around 6% at the midpoint, one percentage point lower than our prior guidance. Note that the outlook for renewable energy is relatively unchanged. This sector alone accounts for more than half of our expected organic sales decline for the full year. And to reiterate, our updated sales outlook assumes a slightly greater than normal seasonal decline in the fourth quarter as we’re planning for more pronounced customer slowdowns in December. With respect to currency, we’re now expecting a headwind of around 25 basis points for the full year, based on quarter-end exchange rates.
And finally, we expect M&A to contribute 225 basis points to the top line for the year, this excludes the recent CGI acquisition. On the bottom line, we now expect adjusted earnings per share in the range of $5.55 to $5.65. This reflects our third quarter performance and a more cautious outlook for the fourth quarter, offset partially by modest accretion from CGI.
Our revised outlook implies that our full year 2024 consolidated adjusted EBITDA margin will be in the low 18s percent range at the midpoint. For the fourth quarter, our guidance implies an adjusted EBITDA margins and earnings per share will be down sequentially and year over year on lower production volume and expectations for higher costs heading into the end of the year.
As Tarak highlighted, we are not satisfied with our second-half margins, and we are stepping up our efforts around cost actions to improve margins for 2025 and beyond. As we have talked about on prior calls, we’ve been working to reduce costs all year, including facility rationalizations like the closure and sale of our Gaffney plant, reducing operative head count by over 12% since the beginning of 2023, and controlling salary, hiring and nonessential spending. While this has had a positive effect, it has not been enough to fully protect margins at current demand levels so we intend to get more aggressive.
Our objective is to bring cost more in line with demand levels and to improve margins and profitability in line with our long-term targets. We will not get into specific details today, we will outline the actions and expected savings in early February as we finalize our business plan and provide initial guidance for 2025.
Moving to free cash flow, we’ve updated our 2024 outlook to approximately $300 million, which is down from our prior guide, mostly to reflect the impact of lower expected earnings. We expect to generate over $100 million of free cash flow in the fourth quarter, which is a step up both sequentially and year over year.
To summarize, our third quarter performance was below expectations, especially on the bottom line. And we are moving aggressively to reduce costs on advancing our strategic initiatives to strengthen the company for 2025 and beyond. This concludes our formal remarks. And we’ll now open the line for questions. Operator?

Operator

Thank you. (Operator Instructions) Stephen Volkmann, Jefferies.

Stephen Volkmann

Great. Good morning and thank you, guys. And welcome, Tarak.
I want to maybe just start with the with renewable goals. It seems like a business where you should have maybe a little bit better visibility. I’m curious if you think your — if there’s any share shifts happening in that business and if you think there’s any chance that actually starts to recover in 2025?

Phillip Fracassa

So let me take that. And of course, feel free to add comment, Tarak.
So as you have seen now in our wind has come down quite a bit from a renewables perspective. Sonar remains quite strong overall for us, and we don’t see a big change in the sonar market. But rather we see from renewable view following renewables site as segment more a wind being impacted up.
The volumes have come down in line with the orders that we saw from ’23 up to ’24. Over the last few months, we’ve seen a stabilization of our order intake rate at a low level compared to the past, quite a bit lower than we have seen in the past. So we expect them based on the discussions we’ve had with our customers and partners, we expect that low level to continue for quite some time.
And there have been pockets in the wind business where the pricing has not been what we consider to be an acceptable level. And as we’ve discussed in the past, we have decided not to participate in the very, very low price levels. But all in all, our wind business on the order intake rate has been stable. And we are in — it’s not the great profitables of the past, but we are still happy with where we see our wind business from a returns perspective. Are we at this point, we don’t see a pickup of the wind business as I can see it from the different visits and the inputs of the department.
And I think if you ask me, but I think the key here is in the market has stabilized, fell below. We were certainly down again, sizably in the quarter. The rate of decline has gone down as we’ve accounts have gotten easier demand into sort of stabilized. As Tarak mentioned, the order intake rates are sort of in line. So we feel like at this point, it’s not getting worse. And then it’s just a question of at what point does it reflect the growth? And at this point, I would not expect that in 2025.

Stephen Volkmann

And then Tarak, since you’ve been doing sort of your initial assessment and tour here, I’m curious if there’s a chance that we may see any type of a shift. And I’m thinking maybe there’s some businesses that kind of appear noncore to you that might not be current. It could be divested, I guess or maybe on capital allocation, one of the questions I always get is why you guys don’t buy back more stock relative to your M&A. And I’m just curious if any of that has bubbled up as potentially something you might want to shift a little bit.

Tarak Mehta

Thanks, Stephen.
Okay. As I said, we are looking at the entire portfolio value very much with the perspective that you just described. It’s too early to come back with any conclusions or even first indications, 60 days in learning about the business and looking at the portfolio is kind of where we are. At the appropriate time, we’ll come back with what we think about the evolution of Timken might look like, but that will be at a later date.
When it comes to share buybacks, as we have said, our bias remains disciplined, allocation with a bias towards M&A and we have done quite a few deals in the last 18 months. We are actively executing and integrating those deals if something comes along that looks very interesting. On the smaller side, yes; on the medium-sized, we’ll take our look, but that’s our frame of mind right now when it comes to both on M&A. But also if nothing comes along, we will continue. as we’ve always said, with the share buyback. And that’s our bias.

Phillip Fracassa

If I could just add, Steve, obviously, we bought a lot of shares back over the last 10 years, but we have also done quite a bit of M&A. And we do — we become pretty firm believers in what the M&A can do for us in terms of diversifying the portfolio, making Timken better, being accretive to growth, being accretive to margins, improving the overall package, et cetera.
So I think you’ll continue to see a mix of both, obviously, this year with EBITDA, this should be in flat or actually down from an EBITDA standpoint. We’re managing the balance sheet carefully as well, but I think you’ll continue to see both, but with the continued bias for the M&A.

Stephen Volkmann

Thank you.

Tarak Mehta

Thanks, Stephen.

Operator

Bryan Blair, Oppenheimer.

Bryan Blair

Thank you. Morning, everyone.
We know the organic revenue trends for the quarter and you just spoke to order rates in terms of wins, maybe touch on those other other large end markets, how are sales through Q3 into Q4? And you mentioned the anticipation of production rates being pulled back a bit further late in the quarter that been factored into your guide. Any additional detail or color you can offer on that front would be helpful.

Tarak Mehta

Thanks, Brian.
And I mean, as we’ve said, we’ve seen a bit more softness in the general industrial area than you had indicated earlier. So that’s the more lighter side of the portfolio from products and solutions that we offer to the market. So that’s the way we’ve seen a bit of softness.
And the comment on net working capital and inventory is precisely the area where we are going to focus. So we are running a bit ahead with our production compared to the demand that we are now tracking down the capacity, as you mentioned. Based on what we see as incoming order intake rates plus being a bit more cautious when it comes to the fourth quarter, as you know, sequentially with all of its down on the fourth quarter compared to third quarter. And that’s the same piece that we see every every year.
From the inorganic side, I would say our acquisitions have performed quite well and have been supporting us this quarter. I’m not sure I’m answering your question precisely, but that’s what I assume you’re asking. So we’re quite happy with both the growth and the performance and profit contributions, including the accretion that our recent acquisitions, specifically Des-Case Luggage, but then CGI. already in the month of September since we’re closed, we almost had the whole month. Those have contributed quite positively to our performance, and we expect them to continue based on what we see in the end markets.

Phillip Fracassa

And maybe if I could just add, Brian. So certainly when we look at revenue trends through the quarter, did get a little bit better in September off of July and August. But as Tarak mentioned, I’ve just given what we’re seeing, hearing from our customers are planning for that more pronounced slowdown in December, which was primarily the basis for the lower top line guide certainly for the rest of the year.
And then relative to the quarter, I would tell you that the some of the the one-off costs I talk about really kind of popped up late in the quarter when you think about the currency and the customer accrual certainly were things that popped late in the quarter. But overall, that was sort of the sales trends.
And then from an order book standpoint, I’d say broadly, the backlog is or order book is in line flattish sequentially from the second quarter, still down a little bit year over year, kind of call it mid single digits, which was kind of what we were last quarter as well. So the order book stable and and I would say certainly supportive of the rest of the year guide.

Bryan Blair

Understand and appreciate the detail.
And specific to industrial motion. You know, belts and chain, interfacing headwinds to the year. Are you willing to speak to on a year-on-year basis, how much the EBITDA compression in that platform will impact the segment? And then as we look to 2025, with Mexico capacity being added fully ramped at that point, how much of a reset or a good guide that may be an outlook?

Phillip Fracassa

Yes. Certainly. I mean, when you think about them, industrial motion for the full year and margins will be primarily impacted by some certainly the lower organic volume and belts and change certainly be a part of that, as well as the expectation for for higher cost — higher manufacturing costs year over year, the new plant ramp is part of that as well. And then we would have some positive pricing offset in that. So fast forward to next year, that new plant ramp, as we’ve talked about before, it can be a headwind of a couple of million, of course. You have two plants operating in trying to shift production from one to the other, but we get to the end of the year, into the early part of next year, the US plant should come down and production will shift fully to Mexico.
It will continue to ramp up and from a productivity standpoint, as you move to call it the first half of next year, and then that should be a nice improvement for us from a margin standpoint at the cost of operating that Mexico facility will be significantly lower than operating similar capacity.

Tarak Mehta

Right now, we have the (inaudible) factor. Unfortunately, we have lower volumes from the market and we have three plants running for their full overheads versus the two that we expect in the future. So when you combine that and a slightly lower ramp up on the Mexico, as we’ve said before. That facility is not ramping up as fast as we’d like up and all of those combined results in the headwinds for the industrial motion business. When it comes to belts, specifically, the chain part has been doing a bit better, but I can recall what I can add. Thanks.

Bryan Blair

Okay, understood. Appreciate the details.

Phillip Fracassa

Thanks, Bryan.

Tarak Mehta

Thanks, Bryan.

Operator

David Raso, Evercore ISI.

David Raso

Hi. Thank you for the time. I know around the election and so forth. Hopefully, some of the customers’ softness for year-end is, hopefully, more of a pause and they’re waiting for a little more clarity. But seeing the organic growth in the fourth quarter implied down a little bit more than we saw in the third quarter. Even though side of the wind business stabilizing as a little surprising.
You made a comment about the orders. I think more importantly, if I heard correctly about the company. When we think of organic growth trying to swing back positive, can you give us any sense of what you’re hearing from your customers to start ’25, some of their commentary around December slowdown, but what it can mean for next year?
I think I read out that there’s a lot of work you’re going to do on getting costs and really rethinking the company to some degree on the portfolio, whatever may be. But obviously, it’s a lot easier when you get the top line working back in your favor. Not looking for exact guidance here, but is there anything you’re hearing from your customers that we could see positive organic at some point in the first half of next year? Or should we assume it’s down and it’s more of a cost story for right now? And then I have a quick follow up on, I think.

Tarak Mehta

I think, as you know, David, that from Q4 to Q1, we always see an increase in business because of the nature of Timken’s portfolio and our customers’ ordering patterns and revenue patterns of PCs or we expect that to also be the case this year? I mean, depends, I know we’ve had in the fourth quarter, that’s one of the starting point. But we expect Q4 to Q1 to be a healthy increase, as always as every year, the last many, many years, so that is expected to continue.
When it comes to forecasting 2025. one of the reasons we have — the outlook we have is because we are at this point focused primarily on 2024, and we get quite a bit of mixed signals on 2025 this point. As we said, some of our businesses have been doing quite well. I think the only business that looks strong, expected to be strong. But places where we are weak, we haven’t seen the signs that provide us with any degree of confidence on 2025 at this point. So I would say from our our team’s point of view, it’s difficult to call it 2025, even if it we’d love to call it. But even the Q1 looks something that we are not going to do at this point. And would you wait until a bit later and then go back with the numbers on 2025.

Phillip Fracassa

David, if I could just add. I mean certainly, I think Tarak said it well, we’re not going to comment on ’25 today. I will tell you one thing from an OEM customer standpoint, our assumptions for the fourth quarter would be that they — our inventory destock should be largely complete with OEMs by that time. So that would be certainly one positive factor, but too early to talk about 2025 from a growth standpoint.
And then to your question about the fourth quarter implied organic, you’re exactly right. It does imply that it would be slightly worse year over year. Then the third quarter and you’re right, renewable, as we said, was stable. We do have a couple of other markets that we’re planning for lower year over year or worsening year-over-year performance in the third quarter. One would be aerospace would be after several quarters of running really strong. Rail, again, after seven quarters, run a really strong.
And then our services business are hitting some tougher comps. So that would be the — those would be the main drivers for the delta, if you will, between the third quarter year over year, organic and the implied fourth quarter one.

Tarak Mehta

The one thing I can add to what Bill just said is we do see many of our customers. We probably adjusted their inventories down from a level that you’re comfortable. So with rare exception, we don’t see it further destocking on part of the customer that, of course, some segments like with it continues to be up a bit of a challenge even for our customers. But for the most part, we see that with reduce, plus we have also reduced our lead times quite a bit in the course of this year, given the shortfalls that we see in the buses improvement. So we are sitting there with short lead times and we believe the customers are for the most part at the levels of inventory if you’re comfortable with their demand. That would be a conclusion or let’s say an observation if that helps.

David Raso

That’s very helpful. And just so I understand on the micro tends to follow up is that for the quarter, did I hear correctly that there was about 100 basis points of one-time costs? I noticed that the discrete costs you mentioned. But in total, did you feel there was almost 100 basis points of one time? Because I’m just trying to figure out if that is the case. (inaudible) 0.9 for the quarter, but then the fourth quarter implying like 15.4 to 15.9, somewhere in that range.
And I’m just trying to make sure I know the step down and maybe price cost gap was negative again in the fourth quarter. There’s a lot in there, but trying to figure out that delta sequentially again.

Phillip Fracassa

No, it’s a great question, David. So I would tell you we would say it was about 100 bps of negative margin relative to our expectations and I wouldn’t call them the other. It was sort of a little bit one-offs in the quarter. In particular, we had the big spike in logistics cost. And I will tell you we’re not expecting that to recede in the fourth quarter. So we did kind of play that one a little bit conservatively into the fourth quarter, not assuming that’s going to come down.
But the other two, the currency was really — it was a revamp of cash outside the US and other balances would not expect that to recur. And then the customer accrual was typically an unusual thing. A knowledge we took against one of our customer accounts that would that would not be expected to recur still. So yes, relative to expectations, it was 100 bps a fast-forward to the fourth quarter onwards, behind the margins there. It really is a combination of the lower organic revenue relative to the prior guide in the step down, both sequentially and year on year.
And then the other half would be just our continued expectations for higher costs heading into the end of the year just because when customer slow down and we’re trying to take inventory out, we do find ourselves often in the past, we find ourselves with a higher cost coming through. As a result, we decided to be a little cautious on the fourth quarter cost outlook heading into the end of the year.

David Raso

Very helpful.

Tarak Mehta

Maybe an addition to what Phil just said. As you know, we have some structural cost adjustments and investments in Mexico and in India. So those would start to kick in more into 2025 and later into 2025. So we are carrying a significant amount of costs in terms of duplication and factory ramp ups in the fourth quarter where the volumes will not be there, but the investments in getting those facilities are quite significant. And those are expected to come online in terms of volume contributions and profitability contributions only into some part in ’25.
For the belts investment, probably early ’25. Sizable investments we made in India for the structural cost adjustments more like second half of next year. So that’s also in addition, the reason why we are a bit cautious on fourth quarter.

David Raso

Helpful.

Tarak Mehta

Thanks, David.

Operator

Mike Shlisky. DA Davidson.

Michael Shlisky

Yes ,hi, good morning. Thanks for taking my questions.
Maybe to follow-up on your left answers there. If we can maybe strip out a lot of those one-time discrete costs still in the quarter. I’m just trying to appeal, you aren’t going to give details about the cost reductions you’ve got specifically until February, but perhaps maybe a two-part question. I know we don’t get the actual update until February, but you’re saying that’s not making those cost reductions this month or for the next few months that maybe — are you targeting any kind of specific incremental or decremental margin range that’s different than the past. Just some broad shows us that what you’re looking to do with these cost reduction?

Phillip Fracassa

Yes, yes. Thanks, Mike. Maybe I’ll start and then ask Tarak to chime in as well. So you know, well relative to the costs, we’ve been working on taking costs out all year, as I mentioned, that will continue. We will target the incremental actions at areas within the business that I’ve seen, the kind of the most pronounced declines, if you will, from a demand standpoint, and then obviously on functions supporting those areas.
The objective would be to get the cost down more in line with current demand levels. And then obviously, if we inflect, we hope, will benefit from that. And then obviously also bring our margins in line with our long-range targets, which we put out a couple of years ago at our Investor Day. And we’re still working towards towards (inaudible). So from a cost standpoint, I wouldn’t expect incremental stuff maybe going a little bit of a benefit in fourth quarter, probably more targeted towards 2025.

Tarak Mehta

I would add that in certain product lines, we had a bit too big in terms of our jack-up size, issue size, you would call it, and there we are trimming. But it’s a more very specific two product lines where we see the gap between demand and our own capacity. And please remember in the fourth quarter, we had also slowing down our operations, I mentioned we have too much inventory. So obviously, when we slow down the operations in order to drive cash flow, that will have a bit of a negative impact because of the under-absorption in those facilities that idling. So we’ve got a bit ahead on on our production this year and now we are stepping back and that is also a contributing factor in in the fourth quarter of performance that you see from us in terms of the outlook.
And as Phil said, we are being a bit cautious. And given the market environment that we see in terms of the forecast for 2024. We all hope that after six quarters or more at all with seven quarters of a decline in the market demand, we do see some upside going into 2025. But it’s difficult at this point for us to see that the end of call.

Phillip Fracassa

And then maybe one more comment, Mike, on decrementals, because I know you referenced decremental. Certainly the the implied guide would have decrementals at higher than what we would typically run. I think the implied guide would be somewhere in the mid 40s to organic for the year. But keep in mind, price cost is — can be lumpy as you move through periods like this. And in 2023, we ran very strong decrementals in 2023 incrementals and decrementals as we move through the year. And if you can stack the two years together, the net organic decremental over that two-year period is sub 20. So I think we have been pulling the levers and executing well across that timeframe. It’s just as we said, we sort of got stuck this quarter with lower volume, kind of neutral price cost. And some of these one-offs that I talked about earlier, which combined really put us in a difficult spot from a margin standpoint for the quarter.

Michael Shlisky

Okay. Okay, great. And just to follow-up on the on the margin story going forward. So I heard that you mentioned you’re looking to maybe pursue a growth more aggressively, certainly makes a lot of sense. I’m just wondering if you’ve got cost reduction taking place in ’25 targeted or broader.
But you’ve also got maybe some investments to make in your R&D or engineering. I want to make sure that we are setting 2025 to be a year of net reductions the cost structure and not mostly offset by increased investments elsewhere. I just want make sure that the cost structure is kind of permanently staying lower than it was ’25, though, than it was ’24. Any comments there would be appreciated.

Tarak Mehta

I think maybe I’ll take this. And then Phil, can you please add?
A lot of what we’re doing is to adjust to capacity and demand. And within your question, the assumption is that as the demand that’s equal to this year then probably yes, we were quite low cash costs that are lower than this year, given both the investments that we have made in the new factories, as well as what we see in terms of the demand better.
However, that the big dip is the demand continues to be around the same levels in ’25 as ’24. So what we’re trying to do now is to ensure that we adjust our costs in line with demand, and that’s going to be the main driver. And yes, we are going to take a look and see which product lines and portfolio where we see profitable growth opportunities and we’re going to invest in them. But in order to do that, we would have to make some investments in that portfolio.
So net, it’s difficult for us to talk about 2025 because we don’t have a view on what the top line looks like. But our going in thinking, as a team, we need to address costs where we see the challenges. And we need to think about growth where we see the opportunities. And right now, that’s not where we’d like it to be in terms of the bottom line performance. But this is something we’re working on now collectively and specifically on the product lines where we see challenges in terms of performance.

Phillip Fracassa

Right, if I could just add, Mike. As we invest, obviously, we’ve got targets out there for growth, margins, et cetera. As we invest, we always look for those investments to be funded in within the confines of the commitments we make around margins, the commitments we make around cash flow, et cetera. So I think over the years, we’ve done a very good job of making investments in the business to grow and improve margins and improve competitiveness, M&A, et cetera, all within the confines of the of the targets we’ve set and the commitments we made around them, around margin, et cetera. I think that would continue.

Michael Shlisky

Fair enough. Thanks for the time.

Tarak Mehta

Thanks, Mike.

Phillip Fracassa

Thank you, Mike.

Operator

Steve Barger, KeyBanc Capital Markets.

Steve Barger

Thanks. Good morning. Tarek, you said there were some wind business where pricing is so bad you don’t want to participate. Is there one main competitor or multiple competitors out there willing to take business at margins you consider unacceptable? And are you seeing competitive pressures like that in any of your other end markets?

Tarak Mehta

Thanks, Steve.
Now having been to China and got to spend time with — this is exactly where we see the biggest price pressure is in China. A few competitors, not many, but there’s a few competitors where we don’t see those price levels as long term sustainable. They are more capacity based concepts rather than a more sustained profitability based thinking. So there, we do see and we have walked away from business.
But in the meantime, Andreas and the team are working on ensuring that our cost structure is in line with both expectations from a performance point of view and also from a customer point of view. So everybody is looking to reduce. We’re developing new products and new processes to meet the specific requirements of wind in order to make sure we can still participate in the market.
But it is a difficult market in a very low volume scenario compared to where it was a couple of years ago. So we do see competitive pressures, but I will not say in the segments that we participate in we see many. But we do see a few local competitors who are a bit more aggressive and willing to take business at the levels that we don’t find particularly interesting or acceptable at this point. Until our own product costs are a bit more in line with our own gross margin requirements. So that is a kind of a continuous process of that. Andreas and the team are working to make sure we stay both competitive and participate in the market.

Phillip Fracassa

Yes, I would say, Steve, that’s really isolated to wind from U.S. and China, in particular. I mean, we don’t see if anything, we feel like we’re gaining share where we’re targeting versus the opposite. And in China, I mean, Tarak summarized it extremely well.
But I would tell you it’s not unlike what you would see in any market that’s down as significantly as China wind is down, where customers are looking for price concessions and willing to move business to get at it, at least in or at least in the near term. So it’s not totally unique, obviously, the China dynamic adds a little bit to it.
But overall, Tarak summarized it well. That would be the only spot. And again, it was by choice as much as anything else.

Tarak Mehta

And to continue on your other question. Do we see it in other segments or we’re down quite a bit in many other segments, but we don’t see the same, let’s say, both behavior. Plus also, we don’t see the same need for us to walk away, quote unquote, from some business. So I mean, you’ve seen that from Phil and then we’ve talked about it over the course of last year. We don’t see the same behavior in other segments.

Steve Barger

Yes, that’s good to hear.

Tarak Mehta

That’s why prices don’t (multiple speakers)

Steve Barger

Sorry, go ahead.

Tarak Mehta

Go ahead, please.

Steve Barger

Sure. Sure. Yes, I understand that you don’t want to take a view to 2025, but we are ultimately at the end of this year, will be six quarters in the negative growth. EPS will be down around 20% year over year per your guidance. My question is when you think about destocking in inventory trends, the cost actions that you expect to take and your capital deployment options, do you have enough in your control to drive double digit EPS growth next year? Or is it even too early to say that based on how you’re thinking about the broader environment?

Tarak Mehta

I would say it’s a bit too early based on how you see the broader environment. Certainly, our balance sheet says we could do it. But we want to, as we said, we want to make sure from a share purchase perspective, you want to make sure that we have the adequate funds available for investing in the business. So at this point, we are at least being more cautious about 2025. And that’s what I would say, just being a bit more cautious about 2025 at this point.

Phillip Fracassa

Yes, I agree. I mean, I think we really need to see how the market situation develops as we move into ’25, with a better view of that in February because that will really drive that, really, the answer to your question. But to your point, we’re taking actions on the cost side, including the incremental actions we talked about today. Customers, the customer inventories are at a good level, should remain at a good level head into the end of the year. So as you get to the end of the year, I think we’ll be in a good position. But until we really see how the markets develop, too soon to say.

Steve Barger

Understood. Thank you.

Tarak Mehta

Thanks, Steve.

Operator

Joe Ritchie, Goldman Sachs.

Joe Ritchie

Thank you and welcome, Tarek.
Maybe my first question just on that discrete customer grow that you mentioned. Was there was that sensibly like bad debt expense? I just wanted to get some clarification around that item.

Phillip Fracassa

Yes, that’s exactly, it was a it was a collectability accruals or reserve that we set up for one specific customer in the quarter in the renewable energy sector. If you look at our history around collectibility, it’s quite strong. I mean, I would stack up against anybody, but occasionally, we will have a situation like this where we got to set up a reserve. It’s typically very few and far between and we’re watching it closely, obviously, but collections have generally been stable and consistent with prior years. This was sort of an outlier that we ended and do we set up a reserve for.

Joe Ritchie

Okay. Again, I get it happens, I guess on the logistics side of things you guys are referencing that — it seemed like that was a pretty big impact this quarter to margin. Seems like it’s going to impact the fourth quarter. I guess, you know, Tarak, as you’re thinking about improving structural costs, is there anything that you guys can do with the way you’re set up on the logistics side to maybe a kind of offset at times when you feel a big spike in logistics costs?

Tarak Mehta

Yes. I mean, one of the — logistics is something that has been quite volatile in the last four years. It has not necessarily follow the normal economic pattern. So I would say the Red Sea and our challenges are perhaps the main reason why we see the bigger logistics costs. And you combine that with the structural changes we are making in terms of our supply locations, two of our demand locations, it’s an area that we will take a look at as we look at the evolution of Timken in terms of how we serve the different markets and from what geographies. So I would say at this point, I have an answer or we have an answer, but it’s an area where we will examine how we meet the different geographies, whether it’s Americas, Europe, Middle East, Africa and Asia. How do we design our supply chains, we are not as dependent on the logistics at least said that in the regional level.
But at this point it’s a long-term discussion and decision. And at this point, we’re not ready to say we’re going to change the way we operate based on logistics. But it’s something to consider as we look into the future, as far as the supply demand, the alignment.

Phillip Fracassa

Yes. You know, certainly, Joe, we’ve lengthened our supply chains over the last ten years. And some of that’s been trying to get to a lower cost suppliers, very competitive suppliers appeal across the globe, frankly. And that always comes with lower cost. You’ve got the extra logistics, but net, it’s been a benefit to the company and logistics has always been very manageable. We’ve had the last few years worth of spend a little bit choppy and spiky, including this quarter, it sort of spike on us and we didn’t expect it, we didn’t see it coming. We did expect it to be a little bit higher, but not as much as it came through. So it will normalize as we as we move forward. We’re not we’re not planning on it for the fourth quarter. It will normalize. And but net, the logistics has kind of come with lower cost and the material side. And those two kind of go hand-in-hand.

Joe Ritchie

Got it. Okay, great. Thanks, guys. Appreciate it.

Phillip Fracassa

Thank you, Joe.

Operator

Michael Feniger, Bank of America.

Michael Feniger

Great. Thank you, guys, for just squeezing me in.
Just builds on the spreads a little bit on inventory builds in the quarter on relative to your sales. It seems like that’s going to be working that down to get for free cash flow in the fourth quarter. Do you feel like of where you think demand finish as the year? Do you feel like your inventories are going to be in line with that demand or if demand stays where it is at the end of Q4 into 2025? Is there still some work to do there?

Tarak Mehta

I would say in general, our net working capital is, I mean, if you look over historical net working capital volume, we are on the high side compared to the past, so we have a homework to do in terms of reducing our net working capital as a percentage of revenue in general. It’s high today and we will have to make process changes. And Mike, in terms of how we run our supply chains to serve the customers to drive dropped it down. And we will work on that together over the course of the next quarters to redesign and ensure that our net working capital for a certain level of inventory at this level of fill rates and performance while our distribution and our customers lower going into the future than it has been in the past. So that’s something we’re working on.

Phillip Fracassa

Yes. Hey, Mike, just for clarification. I think in the quarter, we had acquisitions and currency. And when you look at the balance sheet organically, we would say inventory came down by close to $10 million, you see that. And if you look at the cash flow statement, we’d expect more to come out in the fourth quarter. And as Tarak mentioned, even after that, there’s still opportunity move an ad for Timken to get more efficient in managing them, both inventory and working capital more broadly.

Michael Feniger

Okay. That’s helpful.
I didn’t think about the — you’re right about the acquisition. And guys, just curious, just thinking about some moving pieces talking about price versus cost. And Timken has done a great job in pricing even in this year. It’s been positive for starting to see an industrial channel pricing really starting to flatten out when we look at some somewhat and our thinking for Q4 and going forward. I’m curious, just big picture, how you’re thinking 2025, is it price cost neutral. Could it be positive price risk costs? And if that is positive pressure, is that you guys leaning more on the cost measures on that cost bucket to drive that? Just any big picture? Thoughts on that would be helpful. Thanks, everyone.

Tarak Mehta

Yes, I think a big picture level, we don’t expect pricing to be anything other than flattish in 2025. And as you can imagine, it won’t be like it was in 2023, but we expect to continue to see flattish pricing in 2025 from a midstream perspective.
And then obviously, distribution will be a bit better and some areas might not be. But overall we expect to see flat pricing based on what we see and based on what the — because costs have gone up, not down. And usually the downturn when prices have gone down have been primarily driven by the input cost going down, as you can see from third quarter and also the expectations on fourth quarter busted labor inflation. So there isn’t a natural driver for the price to go down in the overall market, other than trying to fill factories of investment that we will do. So that isn’t there an investment discipline and a market like we’ve seen this year I think, at least we think pricing will hold up. Let’s see what actually happens in 2025, but that’s how we see it. We don’t see any intrinsic driver of lower significant lower input costs to really drive the price down overall.

Michael Feniger

Thanks, everyone.

Tarak Mehta

Thanks, Mike.

Operator

Tim Thein, Raymond James.

Tim Thein

All right. Thank you.
Just a quick one. A lot of discussion here in terms of matching supply and demand. And I saw one of your peers in Europe announced it pretty sizable restructuring plan this morning, and maybe it is more Europe specifically. You can broaden it just in terms of — given the challenges in the in the auto industry, combined with industrial production in Germany that’s been down by three years in a row. I think about the overall kind of supply demand balance. And what historically there are some fluctuation when the auto industry softens up, you see some of that capacity kind of move around. Maybe just can you speak to that — what you’re seeing now just in terms of Europe more generally. Thank you.

Tarak Mehta

Thanks, Tim. Yes, it has been soft, as Phil mentioned, as we’ve discussed for quite some time. And I think you’ve said almost a year of it almost looks like year three in Europe, in terms of the soft demand. Overall, we are making couple of capacity adjustments based on the portfolio, based on what we see mid to long term as as the needs of the business. And those are being managed by Chris, when we’re talking about industrial, automation and motion, and then obviously the same thing addressed by Andreas. So those are not necessarily short-term discussion — decisions, they are more mid to long-term.
So those actions are being taken and short-term actions to adjust capacity, whether it’s our furloughs or small adjustments in individual factories. And those are also being managed at the individual plant level and not everything is down. As we said, we have quite a few of our product lines doing well, and that’s why we need to make it more targeted, more specific and more product line rather than even a location specific discussions and decisions. But this is something we’ve been doing for quite some time and we’ll continue to do it. There’s something sizable, we’ll announce it as we are expected to. But that’s a homework that the team is engaged on now, pretty regularly, and now a bit more given the softness that we see.

Tim Thein

Okay. Let me leave it there. Thank you.

Tarak Mehta

Thanks, Tim.

Operator

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

Neil Frohnapple

Yes. Thanks, Emily. And thank you, everyone, for joining us today. And if you have any further questions after today’s call, please contact me. Thank you. And this concludes our call.

Operator

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.