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Good morning, and welcome to Timken's Second Quarter Earnings Release Conference Call. Operator provided instructions to callers. Please note, this event is being recorded. I would now like to turn the conference over to Neil Frohnapple. Please go ahead.
Thank you, operator, and welcome, everyone, to our second 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 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. 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 you joining us today to discuss our second quarter results. It was great seeing many of you at our recent Investor Day where we launched our new Elevate to Outperform strategy as well as our 2028 financial targets. We're making good progress on our plans for creating value as an advanced motion technology leader and leveraging megatrends in strategic verticals. Work is well underway in advancing our strategic priorities as we deploy 80/20 in our disciplined execution framework across the entire enterprise. Our focus on Elevate to Outperform is reflected in our second quarter results, and I would like to thank our Timken team for delivering another strong quarter. Our performance during the first half of the year and continued momentum gives us the confidence to raise our full year guidance again. Our outlook now implies 16% adjusted EPS growth at the midpoint of our range, up from 13% we previously guided.
Mike will take you through the details of our outlook later in the call. This morning, I'll discuss the key elements of our second quarter performance and provide more specifics on how we are executing our strategy. In the quarter, total sales were up 7.5% from last year, and organic revenue grew more than 4%, driven by higher pricing and volume growth across both segments as we capitalized on improving customer demand. We expanded EBITDA margins to 19.6% in the quarter, and adjusted earnings per share increased nearly 30% year-over-year to $1.83 while also generating solid cash flow. With respect to capital allocation, we raised our quarterly dividend by 3% and repurchased approximately 155,000 shares. We ended the quarter with a strong balance sheet and net leverage of 2x, giving us continued flexibility to pursue our balanced approach to capital allocation. The company is successfully navigating continued geopolitical volatility, and we're operating with urgency to finish the year strong and execute against our Elevate to Outperform strategy.
As we discussed at Investor Day, Elevate to Outperform is focused on 3 pillars: optimizing our portfolio, investing decisively in our strategic verticals and customers and better leveraging our multinational footprint as we operate as One Timken. In the second quarter, we made progress against all 3 of our strategic pillars. Within Pillar 1, optimizing the portfolio, we remain on track to complete the belts divestiture in the third quarter. This divestiture is expected to structurally improve Industrial Motion EBITDA margins by more than 200 basis points on a pro forma basis. The automotive OE exit is also progressing as planned and is expected to start benefiting Engineered Bearings margins in 2027. Another example of portfolio shaping is our recent Bijur Delimon acquisition. The integration of this business as part of our lubrication systems platform is going very well and ahead of schedule.
It is clear that Bijur Delimon is a natural fit and scales our lubrication systems platforms to about $400 million in revenue. Turning to Pillar 2: it's easier to win where we are already winning and have positive market momentum. So we're allocating more resources to drive growth within the key strategic verticals we revealed during Investor Day. The impact of increased organizational focus and investment is already delivering, with high single-digit organic growth in these verticals in the second quarter. Automation and robotics is worthy of a callout, which increased mid-teens versus last year. We're also making strategic investments to improve our aerospace and defense operations and drive future profitable growth. As part of our transformation, our teams implemented 80/20 actions during the quarter across regions and across businesses. Through training and active project work streams, 60% of our enterprise is now engaged in an 80/20 program when you look at it by total company revenue.
By the third quarter, we're on target to achieve 75%. We still expect 80/20 to benefit the bottom line in 2027, and we're confident in the growth opportunities ahead as we redeploy resources to better serve our strategic customers. To further support the acceleration of technology-led growth in our strategic verticals, our R&D teams across businesses are partnering more closely. We look forward to hosting our first annual One Timken Technology Summit this fall, where we will gather technology leaders across the entire company, along with customers and external partners, to further accelerate our innovation pipeline. For Pillar 3, we're more effectively taking advantage of our multinational footprint to leverage technology and better serve our customers by operating as One Timken. We're also generating synergies through the global expansion of our acquired regional businesses. Our expansion of Rollon is a good example of what this looks like in practice.
Carrying Rollon's strong European position into the U.S. contributed to a second consecutive quarter of double-digit organic growth in our linear motion platform. Rollon's expansion is driving outperformance in the rapidly developing factory automation end market, demonstrating the potential in taking our current portfolio into underpenetrated regions. To further advance One Timken across our businesses and regions, we recently announced 2 leadership appointments. We're pleased to name Tim Graham to the new position of Chief Commercial Officer and to have Steve Ribaudo join Timken as our new Chief Operating Officer. As Chief Commercial Officer, Tim will lead our enterprise-wide commercial strategy, marketing, sales excellence and our regional leaders. Tim has a proven track record with more than 20 years at Timken across both of our segments. As Chief Operating Officer, Steve will oversee enterprise-wide operations, supply chain and procurement as well as our P&L leaders.
Steve has an impressive background with deep global operations and industrial leadership experience, most recently at Carrier, having also spent time at Collins Aerospace and United Technologies. These appointments have no impact to our financial reporting segments and build on our organizational announcement from earlier this year where we elevated technology, marketing and regional leadership. We're excited for this new structure, which is designed to enhance execution, speed and accountability across the enterprise. In summary, our Elevate to Outperform strategy was a positive contributor to our results and gives us confidence to raise our 2026 outlook again. We're operating with discipline and moving with urgency to accelerate growth, structurally increase margins and drive shareholder value. 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 7 of the materials with a summary of our strong second quarter results. Overall, total revenue for the quarter was $1.26 billion, which was up 7.5% from last year. Adjusted EBITDA margins increased to 19.6% and adjusted earnings per share for the quarter was $1.83, up significantly versus last year. Note that our adjusted results include a net benefit for IEEPA tariff refunds of $8 million or $0.08 per share. Turning to Slide 8. Let's take a closer look at our second quarter sales. Organically, sales were up 4.4% from last year. The increase was driven by higher volumes and pricing across both segments. Looking at the rest of the revenue walk, the acquisition of Bijur Delimon added 1.8% to sales in the quarter and foreign currency translation contributed 1.3% growth to the top line. On the right, you can see second quarter performance in terms of organic growth by region.
In the Americas, our largest region, we were up 3%, driven by growth across both segments in North America, while Latin America was modestly lower. In EMEA, we were up 5% from last year, driven by solid gains across both segments. And finally, we were up 6% in Asia Pacific, driven primarily by strong growth in India. Turning to Slide 9. Adjusted EBITDA was $247 million or 19.6% of sales in the second quarter compared to 17.7% of sales last year. Organically, incremental margins were more than 40% even without the benefit of the tariff refund. So strong execution from the team again 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 $14 million and added more than 1% to the top line as we continue to benefit from pricing actions over the last year. And as you can see on the slide, tariffs had a $6 million net favorable impact versus last year as the benefit of refunds more than offset higher tariff costs compared to the prior year. Looking at material and logistics, costs were modestly higher versus last year, driven by logistics. In addition, costs were increased sequentially. With respect to the manufacturing cost line, the increase from last year primarily reflects labor and other cost inflation. Moving to the SG&A and other line. Expenses were up from last year, as expected, driven primarily by higher incentive compensation and spending on strategic initiatives. And finally, our Bijur Delimon acquisition contributed $4 million to adjusted EBITDA in the quarter with a high teens margin.
Now let's move to our business segment results, starting with Engineered Bearings on Slide 10. Engineered Bearings sales were $807 million in the quarter, up nearly 4% from last year. Organic sales were up 2.5%, driven by higher volumes and pricing, while currency translation added a little more than 1%. Among market sectors, aerospace and defense and infrastructure achieved the strongest gains versus last year. We also posted growth across the power and electrification and automation and industrial solutions sectors, while revenue in industrial transportation and mobility was relatively flat versus last year. Engineered Bearings adjusted EBITDA was $161 million or 20% of sales in the second quarter compared to 19.7% of sales last year. Margins in the quarter benefited from favorable price mix, tariff refunds and the impact from higher volumes. However, margins were negatively impacted by higher operating costs compared to last year, including higher labor costs as we have been selectively adding operative headcount to support additional growth.
Now let's turn to Industrial Motion on Slide 11. Industrial Motion sales were $454 million in the quarter, an all-time quarterly record for the segment and up 14.6% from last year. Organically, sales increased 8%, driven by higher demand across all regions and higher pricing. The Bijur Delimon acquisition added approximately 5%, while currency translation was a benefit of more than 1% to the top line. Among market sectors, automation and industrial solutions, infrastructure and industrial transportation and mobility were all up double digits versus the prior year. We also generated growth in the aerospace and defense sector, while power and electrification was lower, driven by a sizable decline in solar sales. The segment saw growth in the quarter across most product platforms and was led by double-digit gains in linear motion systems and lubrication systems. Industrial Motion adjusted EBITDA margins came in at 23.3% of sales in the second quarter, up 500 basis points from last year.
The increase in segment margins reflect strong operational execution by the team as well as the impact of higher volumes, favorable price mix and the net benefit of tariff refunds. Moving to Slide 12. You can see that we generated operating cash flow of $107 million in the second quarter. And after CapEx, free cash flow was more than $80 million, up slightly from the prior year. From a capital allocation standpoint, we returned $45 million of cash to shareholders through share buybacks and dividends in the second quarter. Looking at the balance sheet, we ended the second quarter with net debt to adjusted EBITDA at 2x, which is in the middle of our targeted range. Now let's turn to the current outlook for full year 2026, with a summary on Slide 14. We are increasing our outlook again across the board. Starting with net sales, we are raising our full year outlook to an increase of 5% to 6% in total, up from the prior range of 4% to 6%.
Organically, we now expect revenue to be up 3.5% at the midpoint, a 0.5% increase from the prior guide. The Bijur Delimon acquisition is expected to add 1% to our revenue for the year, and currency is estimated to contribute around 1%, both unchanged from our prior outlook. Note that our guidance still includes the company's belts business. On the bottom line, we expect adjusted earnings per share in the range of $6.05 to $6.35, up $0.20 at the midpoint versus the prior outlook. We expect adjusted earnings per share to increase year-on-year in both the third and fourth quarters with the growth rate relatively higher in the fourth quarter. The current earnings outlook implies that our 2026 consolidated adjusted EBITDA margin will be in the low 18% range 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 more than 30% for the full year.
Moving to free cash flow. We expect to generate $375 million to $400 million in 2026, up $25 million from the prior outlook to mostly reflect the higher adjusted earnings expected for the full year. On Slide 15, we provide a view on our 2026 organic sales outlook by end market sector, which includes the impact of both volumes and pricing. Note that these are the new end market sectors we provided at our recent Investor Day. And we include a slide in the appendix that maps the previous end market sectors to the 5 you see here. Other, which is not included on this slide, is expected to be flat to slightly down for the full year. Moving to Slide 16. Here we provide a bridge of the $0.20 per share increase in our 2026 adjusted EPS outlook at the midpoint. First, you can see a $0.20 to $0.25 positive impact from the organic sales change and our outperformance in the second quarter. Next, we're adding the $0.08 per share tailwind we realized in the second quarter for tariff refunds.
Note that the second half outlook does not include any additional benefits for IEEPA tariff refunds as the timing and amounts, if any, are difficult to predict. And finally, we're factoring a $0.10 headwind into guidance to account for incremental cost inflation over the rest of the year, which includes higher logistics costs as well as strategic investments we are making that are expected to impact margins in the second half. More specifically, we're making investments to strengthen our aerospace and defense operations. We have identified how we can drive faster growth and better performance in this strategic vertical. As a result, we are taking action, and this includes efforts to increase our operative headcount and improve employee retention to support future growth and deliver better performance. In summary, Timken delivered above expectations again in the second quarter, and the team is committed to making progress on our strategy while finishing the year strong. Let me turn it back over to Lucian for some final remarks before we open the line for questions.
Thanks, Mike. Our results this quarter demonstrate our team's strong execution, strategic focus and ability to capitalize on improving customer demand. We're excited about the earnings power of Timken and the significant value we can create with our Elevate to Outperform strategy.
This concludes our formal remarks and we'll now open up the line for questions. Operator?
分析師問答
Operator provided instructions to callers. Your first question comes from Bryan Blair with Oppenheimer.
To start with your top line guidance and what's now contemplated in the back half. We know that 2H organic growth has now implied 2.5%, give or take, a step down from the first half. I was hoping you could offer a little more detail on that growth moderation amid what seems to be a pretty healthy demand backdrop. Have you seen any slowdown in your order book? Is the sequential change impact primarily by accelerating 80/20 rationalization? Or are you simply leaning conservative given geopolitical or other uncertainties?
Bryan, thanks for the question. Look, I think it's a little bit of both, frankly. Let me answer the first part of your question definitively: we don't see any signs today of a slowdown. We continue to see a robust order pattern. I would call it robust, not a bounce back like in prior cycles; it's still a steady increase. Our order book in Q2 performed pretty well; I think we covered it in the prepared remarks on the segments. To remind you, aerospace and defense was a very good performer. Automation and industrial solutions did very well, and infrastructure rounded out the top three, with construction and heavy industries really driving infrastructure. That pulled results in the right direction across all three. We saw continued order book growth as well, which bodes well for the back half. But there are a couple of factors to consider for the back half. One you already referred to is uncertainty from the geopolitical situation in the Middle East. The second is the normal seasonality we've seen historically when comparing the front half to the back half of the year. With July now behind us, we feel like that's an appropriate guide for the back half of the year, but it remains to be seen whether there is upside to that or not.
Understood. I appreciate the color. Would like to, I guess, little said a bit on Industrial Motion margin. Now that was again a highlight of the quarter, kudos to your team on the execution. If we look at the first half margin for Industrial Motion and accept that there's relatively limited first versus second half seasonality with the recast of the segment, is it fair at this point to assume the 22.4% layer on the 200 basis points or so an improvement from the belts divestiture and that you're jumping off point for 2027 margin is 24.5% or maybe a little bit higher? Or am I overlooking something in that bridge?
Yes. Look, I'll let Mike answer that specific question on 2027, but let me give you a little color on Industrial Motion and why we're so excited about what's happening there, and I appreciate you recognizing that as the highlight. The business, first of all, is, as a segment overall, margin-accretive to the company. So as we grow Industrial Motion more than bearings, it changes the company's mix. What you don't see as well is that there is margin accretion inside Industrial Motion. Several of the platforms there are driven by automation, medical, surgical, robotics and other areas that feed into Industrial Motion. And then, furthermore, these regional translations of the businesses—we highlighted Rollon, but lubrication is another one—also offer growth above market. So you've got a segment that changes the company mix, an internal mix within the segment, and some self-help available. That's why we're so bullish about it and why we're excited to continue to add to that portfolio via M&A as opportunities become available. So let me pass it to Mike to talk about 2027 specifically.
Yes. Thanks, Bryan. As you know, we don't comment this early on specifically on '27. But I would say that relative to margins, particularly in Industrial Motion, so we expect to complete the belts divestiture in the third quarter. And as we outlined at Investor Day, that's a pro forma 200 basis point improvement in Industrial Motion margins. So you can look for that certainly as accretive to those margins for next year. And then as our other strategic initiatives kick in, 80/20 improvements, strategic growth in the portfolio that Lucian outlined, where we're growing in the higher-margin platforms, you could expect those margins to continue to mix up progressing towards our '28 targets that we laid out.
Operator provided instructions to callers. Your next question comes from Angel Castillo with Morgan Stanley.
Congrats on the strong results. Lucian, I wanted to ask if you can provide a little more color. You mentioned robust order books and order intake so far in 3Q. Could you put a finer point on that or quantify it in any way, particularly for the Industrial Motion business? You talked about double-digit growth in several key end markets. Are you seeing those trends persist, especially in power and electrification? You mentioned solar as a bit of a headwind. Is that persisting or starting to turn?
Yes. Thank you, Angel. So let me maybe take you back a little bit to Q2, and then we'll project that into Q3. I think if you look at Q2, as I mentioned earlier, aerospace and defense was a market that's up high single digits. When you look at commercial and defense/aero, both were up. On the marine and defense side, it's a little more lumpy. It was flat in the quarter, but I don't know that you can call that down to a quarter that's just inherently a little more lumpy. Automation was again high single digit up. That was really an Industrial Motion story. Robotics and automation, which Mike highlighted in the prepared remarks, was up mid-teens. Other markets like food and beverage automation also did quite well. Infrastructure carried us forward, so all of that had good momentum. On the other side of the ledger, solar really ended up impacting the power and electrification market, where the growth in power generation was offset by solar, and wind was modestly up, higher than before but more modest.
And as we said, automotive OE was a negative overall. That's the mix we exited Q2 with. If you look at order rates and the order book, it was mostly stable sequentially, and given seasonality that's not a bad position historically to be in. As we look at Q3, we expect sales to be up in both segments year-over-year, a little more in Industrial Motion than in Engineered Bearings. From a market standpoint, infrastructure, automation and industrial solutions will lead growth overall. That's where we sit and what we see out in front of us. On orders, we continue to see strength not only in aerospace revenue but also in building more backlog. Our book-to-bill there remains solidly well north of 1, so very strong growth, up significantly year-over-year from an order book standpoint in aerospace. That's why Mike mentioned investing in additional resources, additional labor, and retaining people, really taking advantage of that market opportunity and the customer demand that exists.
Very helpful. I was hoping you could unpack the aerospace and defense strategic decision to invest more a bit further. Is this driven by market share gains, a specific customer, or something else? What exactly are you seeing that is driving the decision to double down on that growth? And how should we think about the size of the investment relative to the potential incremental upside in both margins and the top line?
Yes. Let me team up with Mike here. I'll give you a bit of the strategic rationale, and then I'll let Mike walk you through some of what we've done and what the plans are. If you step back, the entire supply chain in aerospace, and now in defense as well given the conflicts, is sitting on a significant backlog that we have to catch up on. We have a lot of self-help that depends on us and our suppliers producing more and our customers being able to consume more. It’s an entire supply chain with end demand that has to gear up, and I think anyone you talk to in the aerospace supply chain is experiencing the same thing. Production capacity for commercial aerospace and defense is very intertwined, and defense requirements are increasing as we speak. You hear numbers that are multiples of what was needed historically being demanded in the future, so everyone is trying to gear up for that increased demand while also trying to deplete the backlog. As I said, book-to-bill remains above one, so we’re still building. I wouldn’t call this share gain; I’d call it pent-up demand that we’re all catching up on. Frankly, the industry may have gone too far during the pandemic, and it takes a long time to ramp a supply chain that is so specialized and so regulated. I think we’re still collectively working through that period. Let me turn it over to Mike to talk about the actual investments.
Yes. Thanks, Lucian. So when we talk about aerospace, and I'll speak in general, when we've talked in the past, we say it can take 6 to 9 months to ramp up additional capacity as we bring people online. We've been making capital investments to increase capacity in aerospace. And now as those investments come online, we're hiring to staff those up. As you can imagine, it could take 6 to 9 months on average. Some of these products are our most difficult products, so that training curve is on the longer end. That's an investment we've decided to make. And of course, with the increasing order book and the pent-up demand, we see it as a long-term opportunity with some short-term cost. If you think about the bridge that we provided, the $0.10 headwind on the bridge, most of that really is related to the strategic investment. We do have some other inflation going on there, logistics in particular. But most of what you're seeing on that bridge is related to this aero investment.
Operator provided instructions to callers. Your next question comes from Joe Ritchie with Goldman Sachs.
Can you maybe unpack that, like what you're expecting for pricing for the rest of the year? I know it added a little more than one point this quarter. And also, regarding the tariff refunds, how much of the $8 million came in each segment?
Yes. I can answer the second part first, and I can let Lucian comment a little bit more on pricing and what we're seeing in the market. So from a tariff refund standpoint, it was roughly 50-50 split between the 2 segments. We did have, in that number, some contractual givebacks, and those affected the bearing business. But on a net basis, the split was roughly half and half. So I would not expect that same split going forward. It probably tilts a little more towards Engineered Bearings as that's where we saw more of the tariffs come in. So I'd expect that to be a little tilted towards bearings going forward. But in the quarter, it was roughly half and half. Lucian?
Yes. Absolutely. So I think when we look at price, we still continue to expect price to be up more than 1% in 2026 and really exceed the tariff cost year-over-year for the full year. We don't really expect a material impact from the recent announcement to replace this tariff, the 10% global tariffs with Section 301. In the end, it's kind of a wash. And then the question is, is this the beginning? Is this the end? Is this it? We, of course, don't know that. But here's what we do know. What we know is we've had a lot of inflationary shocks. We've had tariffs. We've had other things. And we've done a good job as a company. We've done a good job, frankly, as an industry working collaboratively with our customers to be able to pass these increases through. So at this point for the year, we still expect pricing to be up more than 1%, and that includes the carryover pricing for 2025 and also the additional price for 2026. Obviously, because of the comps, pricing year-over-year will be a little higher in the first half versus the second half, but that's more of a comp issue than anything else. Then obviously, as you look at 80/20, that also starts creating some pricing opportunities as well. So we'll pursue those as necessary.
That's helpful. And then just my quick follow-up, maybe a higher level question. It's interesting to me that you're adding operating headcount to support future growth at a time that you're also embarking on your 80/20 initiatives. Help me just kind of square those 2 aspects.
Yes, absolutely. Look, when you look at aerospace, as Mike said, this is, first of all, isolated to a couple of facilities and involves a very specialized workforce. These are operations where it takes a while to train; the labor isn't easily fungible from one part of the company to another, it's very skilled work. So that's the investment. But I don't want to overlook the point that it sounds like we're betting on the come. We're not. It's actually quite the opposite. We're betting on backlog that's sitting in our hands. Number one, and number two, I also don't want to overlook that we're up high single digits in aerospace and defense in the second quarter of 2026. This is not because we won additional business; it's because we are able to produce more. So today we are already generating a return from past investments in additional capacity and additional labor. It will be no different going forward from the investments we make now. You do have to invest, and there's really no way around the six to nine months of training to onboard somebody before they contribute. But the probability that they will contribute is as good as it gets because it is not only backlog that's in hand, but backlog that's growing as we're adding the resources.
Operator provided instructions to callers. Your next question comes from Kyle Menges with Citigroup.
I wanted to follow up on some of your earlier comments about the demand backdrop across your end markets. I think you said you're seeing a gradual improvement in demand, but not necessarily the kind of bounce back seen in previous cycles. What do you think you need to see to get more of a snapback in demand, and why might you not be seeing that yet given some fairly healthy PMI readings recently? Also, it doesn't seem like we've seen any destocking, or sorry, restocking, within industrial distribution. What needs to happen to start driving that?
Yes. I mean, when I said what I said, that's accurate. If you look across the entire enterprise, I think we're starting to see—if you look at construction and heavy industries—those are the types of markets where you see numbers you could call more like a snapback. But if you look across the company's entire revenue base on average, you don't see those kinds of numbers. Part of it was just this geopolitical situation with tariffs and everything else. The system equilibrated a little more slowly than it normally does, so you didn't really have a snapback but rather a gradual increase. We saw that with our distribution, which did a very nice job of keeping inventory in line with demand. They didn't let levels get too low when depleted, and they didn't speculate by building a lot on the other side. It wasn't the typical volatility. OEMs did the same. The good news now is the channel in general is at a reasonable inventory level.
There might be pockets where, if there is a slowdown, you could see some destocking in the back half, but generally the channel is set up with an appropriate amount of inventory, whether distribution or OEMs. So as some of this uncertainty is resolved, you'll start to see continued increased demand. Overall, the tone is caution. It's hard to say what will happen three months from now, and that's reflected in the inventory positions customers and channel partners are willing to take.
Got it. That's helpful. And then you also highlighted some early wins from regional expansion initiatives. It sounds like particularly in Industrial Motion. So would just love to hear more about what you're seeing with those early wins and across which end markets and potential benefits going forward and what more you think you could do there?
Yes. Look, I think when you pull on the thread of automation in general and the skill shortage that we see in our workforce, that aligns pretty nicely with a number of markets in our Industrial Motion business. So you start with Rollon, that business, linear motion, the portfolio in general, very applicable to areas like factory automation, warehouse automation, places like that. And so what we found is that bringing that entire solution ecosystem to a new region is the key ultimately to success. You can't just bring the product catalog, you can't bring a couple of salespeople. You have to bring the prototyping, you have to bring the engineering and you have to, at a minimum, day 1, have the final assembly on the ground. You can still, for a period of time, operate in a less-than-efficient economic way and import some parts over time. You want to do it all as much as possible locally as we do with most of our business.
But I think that approach of bringing the ecosystem, you bring the engineers first, you bring the applications development first that is near the customer, and then you fix your most efficient and lowest cost possible supply chain later, that's been the approach. Automation has been a big one. If you look at other markets like heavy industries, construction, our lubrication platform has really been in the right place, right time here because if you think about the factory that has fewer workers, maybe even the dark factory, the factory, the autonomous, the lubrication program that used to be a person with doing the inspection now can be an automated lubrication system that's monitored, that's controlled, that self-diagnosis, that is intelligent. And so those kind of solutions really resonate and allow us to create market because on lubrication, what's also very attractive is that there is a retrofit business there that you can add the lubrication system to an existing installed base.
So you're not just waiting for new builds on OEMs, you can generate your own growth. So that's another exciting factor for us. So there's a number of those. And then not to mention our platform on precision drives that has a lot of application in robotics. And that happens to be a European and U.S. platform kind of by coincidence. So you have Cone that's a U.S. business. You have CGI that's the U.S. business. And then you have Spinea that's a European business. But some of these parts serve ultimately the same purpose. They're somewhat interchangeable in the right circumstances. They offer different value propositions in terms of weight and torque and precision and so on. So offering that complement of solutions and really allowing the customer to select the best tool for the job has also given each one of those businesses growth in the opposite region. So bringing Spinea to the U.S., bringing Cone to Europe has also made a difference.
Again, these are early innings. There's more to come here, but I am absolutely convinced that we're chasing something that's real here and that we would like what we will continue to find. We already like what we're finding as we speak. We already have results from this in Q2, but there is more to come here.
Operator provided instructions to callers. Our next question comes from Tomo Sano with JPMorgan.
Could you talk about the new CCO, COO roles? If you could give us like more color, like what specific bottlenecks in the prior structures led to create the new structures? And what are you the most focused on changing first?
Yes. Thank you, Tomo. Absolutely. I think this continues the execution of the Elevate to Outperform strategy, and it was based on advancing the One Timken model of going to market and operating. When you think about the COO and CCO roles, you basically have one Timken storefront managed by a Chief Commercial Officer. This person leads commercial strategy, marketing, commercial sales excellence, and sales execution, and all the regions report to them. That empowers the regional teams. What are we solving for? We are creating an internal marketplace for the regional P&Ls. Regions want to outperform, so they will promote the most compelling value proposition to customers where they can grow fastest. That puts pressure on the P&L to get costs in line and to align the R&D pipeline, because they are competing for the attention of the sales team. That's the Chief Commercial Officer role. The Chief Operating Officer leads all the P&Ls.
We have 120 factories. Should we have 120, 140, 100, or 80? That question needs a single company lens. The operating model defines and instruments that so when you move from a smaller P&L to a larger one, think of it as an airplane: the cockpit is the same; only the number of seats behind you changes. It allows us to set appropriate metrics and optimize for what creates value for the customer. Ultimately, you can run a business optimized for many things—cash, working capital, EBITDA, or growth—but what creates value for customers and shareholders is the key, and the COO role enables that. The COO will be responsible for the multinational footprint and operations, including procurement, supply chain, and operational excellence, in addition to the P&L. Coupled with the Chief Technology Officer and the Head of Marketing we announced previously, you can see how we've operationalized the three pillars: who directs resources to the most productive markets and how we deploy technologies across regions. This structure is not revolutionary; it is tried and true and has worked in other companies that have outperformed, so we are adopting something that works here.
And if I may follow up on automation and the commentary and strategies. So compared to the past few years for your automation customers, are you seeing increased urgency from customers to implement physical AI? If so, like what is the most pronounced? And what is accelerating decision-making environment?
Yes. Thank you. So absolutely, we're seeing that. I think what we're seeing is the comment I made earlier on aerospace. This is something we are seeing globally. There is a skill gap and a workforce shortage that is global in nature. The short, quick answer and the only obvious answer is automation, with the next phase of automation being robotics. Companies are realizing that as you onshore more capacity, especially in a world of greater geopolitical tariff barriers, onshoring creates more need for specialized, skilled labor. You address that through automation. What we're seeing now is that we have a pretty broad solution offering, whether robots, humanoids, robot transfer units, medical robots, or general factory automation; it's a robust portfolio. For us, this demand is not new, but implementation at scale is certainly ramping up. You hear other companies on the electron side of automation talking about the same phenomenon. For us, it's no different because we operate in what you call physical AI, where eventually, even though AI can do a lot of things, something has to move: a good has to be moved from point A to point B, an action has to be performed, something has to be picked up, something has to be assembled, and that's where we come in.
Operator provided instructions to callers. Your next question comes from Steve Barger with KeyBanc Capital Markets.
Lucian, the stock has been selling off on a guidance increase. And as some of the questions have alluded to, maybe the back half guide looks conservative for conditions. But I'm going to frame this in a longer-term question. How much of the 500 basis points EBITDA margin expansion you talked about at Analyst Day is already visible through actions you've taken versus things that still require substantial execution?
Yes. Thank you, Steve. So start with the part that we have already announced. We've announced the belts divestiture and the automotive OE exit. I think those two are 200 basis points on belts on IM margins; multiply that by 1/3 and you've got about 70, give or take, and then a similar amount on automotive on 2/3 of the revenues, so take 2/3 of that number. So you've got better than 1/3 of the 500 basis points already addressed through actions that are not fully behind us yet, but are well underway with reasonably low execution risk. Then you have the rest of it, and the rest of it comes in two different environments. First, you do have some impact from 80/20 simplification, which, again, we're making great progress on. I would put that in the more moderate, if any, execution risk category because it's not new territory to do 80/20 and improve your margins. And then there's volume. I think you're already seeing the volume growth.
If you look at where we were in 2025 on our EPS, where we're landing in 2026 and then where we said we're going to be in 2028, you certainly could not use the word hockey stick to describe that trajectory. It's a pretty nice linear trajectory that has very credible anchor points along the way. So volume shows progress. And last but not least is mixing up. I mentioned this earlier: IM is growing faster than EB, and that's a mix up. Inside IM, precision drives, automation and robotics are growing faster than the segment, and that's a mix up. So IM growing faster than EB mixes up the company, which helps as well. Those are the points in front of us. Beyond that is investing in these verticals and growing with them. Will humanoids happen in a big way or not? I would remind you that what we put out at Investor Day was net of investment in growth, so that's also in our control. We will not invest to the same extent if we do not see the same growth opportunities, so there is a bit of a self-help internal hedge if we need it.
From where I sit right now, I don't think we need it. If you look at the quarter and the organic growth, and you alluded to this for the back half, the only question we're being asked is, are we being too conservative or too aggressive? We do feel good about what's ahead of us, but we also don't want to completely ignore the geopolitical reality and the market uncertainty around us. It's a balance of maintaining credibility and giving a forecast based on what we see today, but absolutely nothing I see makes me think back at Investor Day with anything other than conviction about what we signed up to.
Understood. So if end market conditions continue to inflect in a generally positive way, and we don't have geopolitical things that slow it down, nothing truly heroic to get you to those targets, and then there's upside to that most likely.
Yes. I would say they are all actions that are in our control. They're all, as I said at Investor Day, and if we don't do that, we have only ourselves to blame. So there is a lot of self-help in those numbers. We see the volume growth obviously has some relation to the market, but I would emphasize that it's only somewhat related because these regional translations are available somewhat independent of market conditions. So yes, you're correct.
Great. And one quick follow-up. Slide 10 for EB calls out power and electrification, industrial solutions and infrastructure. How much of that is directly tied to data center? And across the enterprise, is data center getting big enough to move the needle?
Yes. So let me try and answer that. We don't quantify how much of that is directly tied to data centers. It's obviously hard for us. We have some content directly in data centers, but where data centers are really driving our growth is some of the construction, et cetera. So it's harder to tie that directly to data centers. But clearly, as the economy strengthens, as reshoring continues, et cetera, and it's powered by the AI, the data economy, we're benefiting from that. But as far as direct data center impact, we don't quantify that specifically.
Operator provided instructions to callers. Your next question comes from Chris Dankert with D.A. Davidson.
Going back to strategy, is there anything additional to point to in regard to facility consolidation at this point?
Yes, nothing to point at this time. What I would say is we've had a track record over many years of rightsizing our footprint with market demand, and that's not going to be different going forward. If anything, with the establishment of the Chief Operating Officer, I think we'll have a more holistic look across all of the IM business and EB businesses with one single lens: things like regional centers of excellence, where do you put those? Where do you put that center of gravity? If you have one face to the market, what factories have similar unit operations, similar operating models where they can synergistically benefit from being colocated? The beauty of our industry is equipment is reasonably mobile and you can make changes to your footprint with a more sensible cost structure than a heavy industry that has a harder time moving. So I think that approach will always continue, but it's also recognizing that the factory footprint of the past, building the biggest, lowest-cost factory somewhere in the world and then supplying everybody else, that's not the future.
We have been very fortunate to manufacture the majority of what we sell in the region in that region, and we don't want to change that because that allows you to navigate all these tariffs and geopolitical uncertainties that are here and probably here to stay. So it'll be a balance. But I think the key will be how you serve your customers most efficiently and how you leverage that footprint. But the short answer to your question is absolutely the footprint, whether it's R&D center footprint, whether it's factory footprint, whether it's sales offices, that will continue to be looked at. And this One Timken lens will only enhance the synergies and the value we can get from that.
Operator provided instructions to callers. Your next question comes from David Raso with Evercore.
Apologies. Coming in a little late on this call, but I'm trying to understand the guide, the 3.5% organic. Have you discussed by business segment, the composition of that 3.5% for the full year?
Yes, David. Absolutely. When we look at the guide for the year, organic sales are 3.5%, which is a 0.5 point increase. It’s across both segments. I would describe that as cautious optimism, mainly because of uncertainty in the Middle East and because Industrial Motion is expected to grow slightly faster than Engineered Bearings. Seasonally and on a year‑over‑year basis, we expect the second half to be a bit more modest compared with the first half, which is implied in the math and the guide. Part of this reflects a difference in year‑over‑year pricing, since you had stronger year‑over‑year in the first half than the second half. That alone explains much of the difference between first‑half and second‑half overall growth rates.
Yes. I'm just trying to make sure: is it EB 3% and IM 5% that gets you to 3.5%? In the channel we heard you had a 3.5% price increase for shipments after July 1. I know that isn't to OEMs, and not everything gets to 3.5%. I'm just surprised by the 50 basis point improvement in organic, given it seems like pricing is going up more than that year over year from the first half. You had a February price increase and the July 1 price increase. I'm just trying to understand: are you assuming volumes fall or notably slow, or is it just comp changes?
Yes. I think maybe a couple of things. We do expect slightly higher growth in Industrial Motion in the second half, and this is organic. Overall, Industrial Motion is growing much faster; you also have the benefit of the acquisition, but on an organic basis it is accelerating. As far as pricing goes, we have not announced a price increase for July 1 this year. We did last year, so you have a year-over-year comp where, while pricing is higher, the comp gets a little tougher in the second half. We haven't said this yet, but in our guide we've assumed that the belts business is in. As the transaction gets closer, that business is ramping down, so a bit of the headwind in the guide relates to lower belt sales. We will talk more after the transaction is complete about what the impact was. For now we had to consider it in the guide because we are seeing a bit of slower sales in the third quarter related to that ramp. There is nothing structural here, and it's not a 5-2 split between Industrial Motion and bearings — it's much closer than that. But Industrial Motion is certainly growing at a faster rate.
This concludes our question-and-answer session. I would like to turn the conference back over to Neil Frohnapple for any closing remarks.
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.
This concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.