Timken Co

NYSE:TKR

Earnings Call Analysis

Timken Q3 Earnings: Mixed Results and Outlook

Timken's third-quarter performance reflected a slight decrease in sales to $776 million with organic sales down 7.8%. Adjusted EPS saw a decline to $1.55 from $1.63 last year, affected by higher depreciation and interest expenses. However, free cash flow improved significantly, reaching $151 million. Looking ahead, the company adjusted its full-year outlook for softer demand and inventory reductions, expecting sales growth of 5-5.5%, reduced from prior estimates. Organically, revenue growth is now projected to be flat to slightly up. Adjusted EPS guidance stands at $6.85 to $6.95, signaling around a 7% growth and setting a possible new record. The margins are projected to reach record levels as well, with expectations for adjusted EBITDA margins around 19.5-19.6%. Free cash flow forecast has been increased to approximately $425 million, demonstrating over 100% conversion on GAAP net income. Despite challenges like a tougher Q1 comp and expected inventory reductions into Q4 and potentially the following year, management maintains a cautiously optimistic outlook for 2024.

Timken's Persistent Growth Amidst Market Challenges

Timken Company has established its resilience through another quarter of record-breaking achievements. Despite a complex economic environment and a softening demand, the company secured a 1% increase in quarterly revenue compared to the previous year, maintaining a trajectory towards its ambitious annual targets. The steady control over costs, coupled with a persistently positive price-to-cost ratio, culminated in robust EBITDA margins of 18.9%, a slight but noteworthy enhancement from the prior year.

Strategic Acquisitions and Divestitures to Enhance Portfolio

Timken has shown a proactive approach to growth and efficiency, particularly through its targeted acquisitions and divestitures. The recent additions of Rosa Sistemi and Des-Case, alongside the pending acquisition of iMECH, reflect a strategic choice to diversify and strengthen the company's offerings, especially in linear motion and energy market services. These M&A activities are set to contribute an estimated $50 million in revenue while being immediately margin-accretive. Furthermore, the offboarding of a smaller bearing product line in China aligns the portfolio more closely with the company's broader market ambitions.

Operational Excellence and Capital Allocation

Timken continues to polish its operational excellence by advancing global manufacturing and launching initiatives like new digital customer solutions. The company also displays commitment to capital allocation aimed at growth and margin expansion. Notably, this includes enhancing operational efficiency, expanding product lines, and executing share repurchase programs. The latter has seen the company buy just under 4% of its shares year-to-date, reflecting confidence in its financial strategy and value creation.

Consistent Cash Flow Generation

A particularly strong aspect of Timken's financial health is its free cash flow, which has soared to $151 million, surpassing last year's achievements significantly. The company eyes an equally promising cash flow scenario for the upcoming fourth quarter and the onset of 2024. This fiscal potency is essential for sustaining strategic investments and shareholder returns during periods of heightened global economic uncertainty.

Guidance Suggesting Modest Margin Improvements

Looking ahead, Timken anticipates a sequential increase in demand from the fourth quarter to the next, although it's bracing for a slowdown due to typical seasonality and sustained inventory reduction by customers. The company is also forecasting inflation to persist at current rates but expects to maintain a favorable price-cost dynamic. These factors are all integral to Timken's guidance, which hints at modest margin improvements despite anticipated lower volumes.

A Forward-Looking Outlook Focused on Growth and Stability

Incorporating a forward-looking perspective, Timken has crafted a strategy oriented towards augmenting earnings power alongside cash generation, with a keen focus on achieving stable and attractive EBITDA margins. The firm is poised to conclude another record year, setting the scene for continued expansion and enduring performance across various market conditions. However, it recognizes that headwinds, particularly within the China renewable sector, may impact near-term demand patterns, although the general sentiment for 2024 remains guardedly optimistic among its clients.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to Timken's third quarter earnings release conference call. My name is Lydia, and I will be your conference operator today. [Operator Instructions] Thank you.

Mr. Frohnapple, you may begin your conference.

[Neil Frohnapple, executive]

Thanks, Lydia, and welcome, everyone, to our third quarter 2023 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today.

Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link.

With me today are: The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. [Operator Instructions]

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 verily 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 Rich.

[Richard Kyle, executive]

Thanks, Neil. Good morning, and thank you for joining our call. Timken delivered a solid third quarter, and we remain on track to deliver another record year of revenue and earnings per share, while expanding full year margins. Revenue was a record for the third quarter and was up around 1% from prior year. EBITDA margins were up 10 basis points and adjusted earnings per share were down 5%. As expected, demand softened sequentially as customers continue to reduce inventory levels and respond to an uncertain economic environment.

China and wind energy slowed more than anticipated and were the leading contributors to the organic revenue decline. We managed our cost structure very well, delivering 18.9% EBITDA margins, a 10 basis point improvement over the prior year. Inflation is moderated, but remains persistent. Despite the inflation, price/cost was positive in the quarter as it has been all year. Free cash flow of $151 million was strong and up significantly from prior year.

We continue to execute our strategic initiatives, which are focused on optimal excellence, outgrowth and capital allocation. This includes advancing our global manufacturing footprint in both Engineered Bearings and Industrial Motion. We are on track to complete the consolidation of 2 facilities into existing operations by the end of the year. We are also expanding our Mexico operations to begin the production of Timken Belts early next year. Our operational performance has recovered from COVID and supply chain challenges, and we have excellent focus on driving improvement initiatives across our global operations.

We continue to invest in and advance our outgrowth initiatives. This includes launching new digital customer solutions and investing in our leadership in application engineering. Our application pipeline, which is the best measure of our future business opportunities continues to expand across the portfolio.

Our balance sheet remains strong, and we continue to be very active in allocating capital growth and margin expansion opportunities. We continue to invest CapEx into advancing our footprint, automating our operations, increasing efficiencies, increasing capacity and expanding our product lines. We cleaned the acquisitions of Rosa Sistemi and Des-Case in the quarter. Rosa Sistemi is our fourth acquisition in linear motion and brings complementary products and market positions to our Rollon business. Des-Case expands our filtration offering within our automatic lubrication platform. We also announced the pending acquisition of iMECH. iMECH as a niche product line to our Engineered Bearings portfolio specifically designed to serve the needs of energy markets.

Strategically and financially, all 3 acquisitions fit very well within our Timken portfolio and bring strong cross-selling and cost synergies. These acquisitions bring well-known brands with Engineered products that enhance equipment reliability and life. Last week, we announced the divestiture of a small bearing product line that is sold regionally in China. The combination of these 4 transactions will strengthen our product portfolio while adding about $50 million in revenue and will be immediately accretive to margins.

We also purchased about 1% of the outstanding shares in the quarter, bringing our year-to-date repurchase total to just under 4% of the outstanding shares. Our balance sheet remains strong. We expect excellent free cash flow in the fourth quarter and into 2024, and we expect to continue to add value through our disciplined capital allocation.

Also in the quarter, we published our annual corporate social responsibility report, which details our commitment to environmental sustainability and the products we make across our global operations and through advancing industries such as renewable energy. We are also focused on the development and well-being of our employees, investing in community partnerships and promoting STEM education to help advance the next generation of engineering talent.

Turning to the outlook. We are planning for further sequential slowing in the fourth quarter due to seasonality and from customers continuing to reduce inventory from supply chain stabilizing. And we are expecting renewable demand in China to remain a headwind for the quarter. We are planning for inflation to remain at similar levels and for price cost to stay positive. We will continue to bring both our cost and inventory in line with reduced volume levels. We expect to generate both solid margins and strong cash flow in the fourth quarter despite the weaker revenue environment.

The midpoint of our guide reflects modest year-on-year improvement in margins despite lower volumes. For the full year, we remain on track to deliver another year of record revenue and earnings per share with revenue up 5% and earnings per share, up 7%. While we're not ready to guide to the full year of 2024, we are planning for a sequential step-up in demand from the fourth quarter to the first, reflecting our normal seasonality as well as stabilizing channel inventory levels. We do not expect a rebound in the first quarter for China, primarily due to wind energy.

Across our portfolio, customers remain generally positive on their '24 outlook but also acknowledge that economic uncertainty remains elevated globally. And finally, I would like to reference Slide 12 in the investor deck. Timken's strategy is focused on growing the earnings power and cash generation of the company at attractive and consistent EBITDA margins and returns on invested capital. We remain on track in '23 to deliver another record year of both revenue and earnings and EBITDA margins approaching 20%.

Through both organic growth and consistent M&A, we have steadily grown the business with EBITDA margins that have varied just 210 basis points over the last 5 years. As we look ahead, we're confident in the long-term growth in demand for Timken product and technology, and we are well positioned to continue to grow and perform at a high level through a wide variety of market conditions.

I will now turn it over to Phil to add more detail on the results and the outlook.

[Philip Fracassa, executive]

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 14 of the presentation materials with a summary of our third quarter results. Timken posted revenue of $1.14 billion in the quarter, up almost 1% from last year. Adjusted EBITDA margins came in at 18.9%, up 10 basis points, and we delivered adjusted earnings per share of $1.55 in the quarter with adjusted ROIC approaching 15% over the trailing 12-month period.

Turning to Slide 15. Let's take a closer look at our third quarter sales performance. Organically, sales were down 6% from last year, as higher pricing was more than offset by lower volumes across multiple end markets and geographies, including China wind. The decline in China wind was larger than we expected and accounts for roughly 1/3 of of the total organic revenue decline.

Looking at the rest of the revenue walk, the impact from acquisitions, including GGB, Nadella, ARB and Des-Case, net of divestitures, contributed 6 percentage points of growth to the top line. And foreign currency translation was a modest benefit to revenue in the quarter. On the right-hand side of the slide, you can see organic growth by region, which excludes both currency and the net impact of acquisitions and divestitures.

Let me comment briefly on each region. In the Americas, we were down mid-single digits against last year's strong third quarter, driven mainly by lower shipments in the off-highway and distribution sectors as we expected. In Asia Pacific, we were down double digits driven entirely by lower revenue in China, including the sizable decline in wind energy demand that I mentioned earlier. And finally, we were close to flat in EMEA as lower general industrial revenue was almost fully offset by growth in other sectors.

Turning to Slide 6. Adjusted EBITDA in the third quarter was $216 million or 18.9% of sales compared to $214 million or 18.8% of sales last year. Our margin performance reflects the benefit of positive price/cost and strong operational execution, which more than offset the impact from lower volume and unfavorable currency. Looking at the modest increase in adjusted EBITDA dollars, there were several puts and takes. We continue to benefit from lower material and logistics costs, favorable price/mix and recent acquisitions. These positives more than offset the impact of lower volume, unfavorable currency and higher manufacturing costs.

Let me comment a little further on some of these key profitability drivers. With respect to price/mix, price realization was higher in both segments compared to last year, while mix was relatively neutral in the quarter.

Moving to Materials & Logistics, both were lower year-over-year, with logistics the bigger contributor. Material, which includes both raw material and purchase components, was down versus last year, but I would say that costs remain elevated by historical standards.

On the manufacturing line, you could see that our year-over-year headwind continues to shrink as compared to what we've been running the last several quarters. In the third quarter, we were negatively impacted by lower production volume and ongoing cost inflation, offset partially by improved operational execution in the plants.

Looking at the SG&A other line, costs were up only slightly versus last year. Our costs in the quarter were actually a bit lower than we initially expected, driven by lower variable compensation expense and our efforts to reduce discretionary spending to better align with lower demand levels. And finally, with respect to currency, we saw a sizable year-on-year headwind as we expected, driven by the favorable impact from transaction gains last year.

On Slide 17, you can see that we posted net income of $88 million or $1.23 per diluted share for the third quarter on a GAAP basis, which includes $0.32 of net expense from special items and acquisition amortization. On an adjusted basis, we earned $1.55 per share compared to $1.63 per share last year.

Depreciation and interest expense were both higher versus last year and contributed to the decline in earnings per share, while our adjusted tax rate was in line with our prior expectations. And finally, we benefited from a lower share count in the quarter, reflecting buybacks completed in the past 12 months.

Now let's move to our business segment results, starting with Engineered Bearings on Slide 18. For the third quarter, Engineered Bearings sales were $776 million, down slightly from last year. Organically, sales were down 7.8%, driven by lower volumes across most sectors, partially offset by higher pricing. With respect to performance by sector, the renewable energy, distribution and off-highway sectors saw the largest declines in the quarter, driven mainly by inventory destock and difficult comps in the year ago period. General industrial was also down, while the on-highway, heavy industries and aerospace sectors were relatively flat. On the positive side, Rail was up nicely in the quarter, driven by higher shipments in the Americas.

The net effect of acquisitions and divestitures added 7 percentage points of growth to the top line, while currency was relatively flat. Engineered Bearings adjusted EBITDA in the third quarter was $157 million compared to $154 million last year. Our segment margin was up 50 basis points year-over-year, as the impact of favorable price/mix and lower material and logistics costs more than offset the impact of lower volume, higher manufacturing costs and unfavorable currency.

Now let's turn to Industrial Motion on Slide 19. In the third quarter, Industrial Motion segment sales were $367 million, up about 3% from last year. Organically, sales declined 2.2% as lower volumes were partially offset by higher pricing. With respect to performance by platform, belts and chain saw the largest decrease in the quarter, driven by inventory destock in the off-highway and distribution sectors. Linear Motion was also lower reflecting softer industrial demand in Europe, while couplings was relatively flat. On the positive side, we saw strong growth in Drive Systems and Services and continued growth in automatic lubrication systems.

The impact of acquisitions, net of divestitures contributed just under 4% to the top line and currency translation was slightly positive in the quarter. Industrial Motion adjusted EBITDA for the third quarter was $75 million, or 20.5% of sales, compared to $68 million or 19.1% of sales last year. The sizable increase in margin was driven by the benefit of positive price cost and improved operational execution, which more than offset the impact of lower volume.

Turning to Slide 20. You can see that we generated operating cash flow of $194 million in the quarter. Free cash flow was $151 million, up significantly versus last year as improved working capital performance more than offset higher cash taxes, including a large tax payment in September related to the Timken India transaction we completed in June.

Looking at the balance sheet. We ended the quarter with net debt to adjusted EBITDA right at 2x with leverage well within our targeted range. And this includes the impact of the recent Des-Case and Rosa Sistemi acquisitions that were completed in September.

Turning to Slide 21. You can see a summary of our capital deployment through the first 9 months of 2023. In total, we've allocated around $900 million of capital with roughly 2/3 directed toward CapEx and acquisitions to drive our profitable growth strategy. We also returned $300 million of cash to shareholders year-to-date, including $90 million in the third quarter. We raised our quarterly dividend earlier this year and have bought back over 2.7 million shares year-to-date or nearly 4% of total outstanding.

With the pending iMECH acquisition and other anticipated activity, we are on track to deploy over $1 billion of capital in 2023, all while maintaining a strong balance sheet and leverage right in the middle of our targeted range. This sets Timken up well for the future, and keeps us in a great position to continue to execute our strategy through capital allocation.

Now let's turn to the outlook with a summary on Slide 22. We've updated our outlook for both sales and earnings to reflect softer end market demand, particularly in China as well as our expectation for continued channel inventory reductions in the fourth quarter. With respect to the sales outlook, we're now planning for full year sales to be up 5% to 5.5% in total versus 2022, down from our prior guide, reflecting a more modest expectation for organic growth and unfavorable currency impact.

Organically, we now expect revenue will be flat to up [ 0.5% ] for the full year, with positive pricing offsetting lower volumes. We expect acquisitions net of divestitures to attribute around 5.75% to our revenue for the year, up slightly from our prior guide to reflect the recent Des-Case, Rosa Sistemi and iMECH acquisitions, offset by the TWB divestiture. And we're now planning for currency to be a headwind of around 75 basis points for the full year based on September 30 spot rates. This compares to a relatively neutral outlook in our prior guide.

On the bottom line, we now expect adjusted earnings per share in the range of $6.85 to $6.95. This represents about 7% growth versus last year at the midpoint and would mark a new all-time record for the company. On the flip side, we're increasing our full year guidance for both adjusted EBITDA margins and free cash flow. The midpoint of our earnings outlook implies that our 2023 consolidated adjusted EBITDA margins will be in the range of 19.5% to 19.6%. This margin level would mark a new high for the company for a full year.

Our margin expansion reflects our expectation that favorable price/cost and improved execution will more than offset the impact of lower production volumes, higher operating costs and unfavorable currency. We will remain focused on controlling costs and driving operational excellence initiatives across the enterprise to drive strong and resilient margins going forward.

Moving to free cash flow, we now expect to generate approximately $425 million for the full year 2023, which is up from our prior guide and represents over 100% conversion on GAAP net income at the midpoint. We're still planning for CapEx at around 4% of sales, and we expect our adjusted tax rate to remain in the range of 25.5% to 26% for the full year, both unchanged. But we're now anticipating net interest expense of around $100 million for the full year, up slightly from our prior guide to reflect our recent acquisitions. And finally, I would point out that the guide assumes an average diluted share count of roughly 72 million shares for the full year.

So to summarize, Timken delivered solid results in the third quarter despite more challenging business conditions, and our team is executing well in this environment. We're focused on finishing the year strong, and we're confident in our ability to continue advancing our strategy as we head into 2024.

This concludes our formal remarks, and we will now open the line for questions. Operator?

[Operator]

[Operator Instructions] Our first question today comes from Steve Volkmann of Jeffries.

[Stephen Volkmann, analyst]

I wanted to ask -- start with a big picture question. Phil, I think you or maybe -- sorry, I don't remember which one of you talked about around 200 basis points of margin volatility over the last 5 years. Is that the way to think about -- the market is obviously worried about in turn, I suppose, some of it depends on how big a downturn. But in sort of a normal industrial cycle, is that 200 basis points of volatility in margin the right way to think about the future as well?

[Richard Kyle, executive]

Well, I think as you said, it depends on the speed and magnitude and depth. But yes, I mean, we think we can -- we've reached a new -- we're going to reach a new high watermark over the last decade and certainly would aspire to hit a new low water mark when -- whenever that time comes. So that would certainly, the 17.5-ish percent would be a good target for us if we got into a tough market.

[Stephen Volkmann, analyst]

Okay. Great. And then it feels like the sort of destocking out in the channels, the various channels is maybe a little bit more and maybe a little bit longer. I don't want to put words in your mouth, but can you just talk about how much visibility you have there and how long you think this continues?

[Richard Kyle, executive]

Yes. I'd say with the exception of wind, it was a little bit more, but not any really big surprises in the third quarter, and we did expect it to continue in the fourth quarter, but a little bit more. But China wind would be the bigger one. We expect that to continue at least through the first quarter of '24. Interestingly, on wind, we will -- well, actually, with this guide, we're still looking to be flat to last year's record level. So for the full year, it's really a very good year for wind. It was just an outstanding first half in a weak second half. But the demand is still there. The installs are still there, but it's definitely a classic overbuild situation there that we've got to get through. On the other channels, we don't have great visibility. So certainly, it could leak over into '24. But I think we're optimistic that most of it will be in a good position by the end of the year. And certainly, when you look at some of our customers that have posted results, our sell-through is only west than the numbers that they're putting out and they're clearly taking inventory out of the channels, and we've seen this before. And most of them, as I said, remain pretty bullish on the demand situation for next year.

[Operator]

Our next question today comes from David Raso of Evercore ISI.

[David Raso, analyst]

I was curious, you were giving a little bit of commentary on the first quarter. And it looks like the organic negative 6% this quarter, you're implying [ 8.8% ] decline in the fourth quarter. Just curious how you're seeing, given the last comments you just made about still some bullish demand around '24. I'm just trying to get a sense if you can give us an idea of how you're thinking about the cadence of organic sales decline as we get into '24? Again, I'm not turning for a full year guide, just your first quarter comments were interesting. Does the year-over-year decline in organic in the first quarter lessened? Does it accelerate? And then a follow-up, the idea of pricing, what carries over into '24? Any new pricing initiatives to start '24 that we should be aware of?

[Richard Kyle, executive]

Yes. On the -- next year is going to make for some interesting comps in that we went from -- if you look at this year, we went -- started the year plus 11% organic in Q1. And as you said, we're guiding to around minus 8% to minus 9% for Q4. So the first quarter comp is a challenge, particularly when you look at where we're going to end the year on a run rate level, but fairly typical for us to jump up 10-plus percent points -- percentage points sequentially from Q4 to Q1. And I would say the more inventory and push out we see from the fourth quarter, again, as long as underlying demand in the end markets is good, it should set up for a better start to the first quarter. So how -- where we land sell off the fourth quarter, not ready to call that, but I would expect a sizable step-up with the exception again called out, we would expect to be down meaningfully in wind energy in China year-over-year off a very difficult comp in the first quarter.

From a pricing standpoint, a lot of that's in discussion right now and where we have annual contracts, and we have announced some end of year price increases in some of our distribution channels. I would certainly expect a more modest price level in '24 than what we've had the last couple of years. So right now, just call it modestly positive and certainly less than what we've had in the last couple of years.

[Philip Fracassa, executive]

Yes. And David, I think to answer your question, there would be a small amount of carryover from this year into next year. And then to Rich's comment, depending on what happens relative to '24 would be additive to that. So our view would be flat to up in '24 at this point.

[Operator]

the next question today comes from Rob Wertheimer of Medias Research.

[Robert Wertheimer, analyst]

Rich, I think you addressed the channel inventory question earlier, but I just wanted to come back to it. Do you have a sense as to how high -- well, for one, are you seeing destock at distributors and OEMs both? Do you have a sense if the excess inventory equates to 1 month of sales or 2 or 3 or whatever it does for you guys if things turn south? And should we expect it -- it could potentially still be an issue come summer? Or do you really feel like you're getting ahead of assuming no major, major down on the end markets, you're getting to good levels. I don't know how much visibility you have to OEM customers distributors really?

[Richard Kyle, executive]

We have good visibility there with distributors. And if the underlying demand is good, I think we're not far off there. We're expecting and guiding to some reductions -- further reductions in the fourth quarter. But beyond that, it's much more of a -- we don't have that level of granularity. And -- but again, you look in the earlier parts of the market and our sell-through is as we look at what customers and peers, et cetera, are selling, and we're typically a few percentage points higher in the last -- in this quarter and next quarter, we're probably being mid-single digits to upper single digits below because I think most -- a lot of our customers would still be posting positive organic revenue whereas we were down 6% and 9% here in the last couple of quarters. So it's a little more speculative, and we wouldn't really be able to call whether it's going to be done at the end of the fourth quarter or not.

[Robert Wertheimer, analyst]

Okay. Perfect. That was clear. Second question just on inflation in the business and pricing. You're not the only one to have kind of slightly negative volumes and positive price. A little bit curious into next year. For one, do you need 2% pricing now or 3% pricing now or as you didn't over the past 10 years? And then do you have a sense as to whether the cost pressures are enough that we can really expect that to come through from you and competitors? And I'll stop there.

[Richard Kyle, executive]

I would say our core input cost of raw materials, steel, energy, have really leveled off. Logistics after a spike have come back down and steel as well spiked earlier in the COVID supply chain challenges. So we saw some relief there. But in total, still see higher than prior to 2020 wage pressures, some benefit pressures in the U.S. but certainly moderating from what we saw in '21 and '22 from a cost standpoint. So as Phil and I both said, I mean, we are expecting that we will need less price, but also don't see pricing going backwards. We do have some material clauses and currency clauses that if things went in a different direction -- if steel fell significant, you could see us pass some of that on next year. That's not looking particularly likely. At the moment, the costs are basically just leveled off. So I feel pretty good about the price/cost dynamic as we head into next year. And then the other element that we have simply in '21 and '22, we did not pass pricing through for inefficiencies that we had from the supply chain challenges and from the COVID inefficiencies, et cetera. And as I said in my comments, I would say we're now probably the third quarter was the closest we've been to operating at normal. And not just operating and normal, but also, I think we've got a really good focus again on continuous improvement and driving improvement versus fighting supply chain challenges. So I would expect some self-help from a cost standpoint in that regard next year as well, and I would expect to be more productive next year.

[Operator]

Our next question today comes from Steve Barger of KeyBanc Capital Markets.

[Unknown Analyst]

This is Jacob on for Steve. First, I just wanted to talk to the changes in your organic growth slide. I think you've already hit on the big mover in renewables, but it also looks like automotive and off-highway dropped a slot from flat to down mid-single digits. So can you talk -- can you provide some more detail on the factors driving our forecast changes in those other markets? Are there any UAW impacts? And if so, how much?

[Philip Fracassa, executive]

Yes, sure. Happy to do that. So I think you're exactly right. Those are the 3 main sectors that moved and renewable we talked about. Off-highway is really more factoring in what we're expecting in terms of what Q3 relative to lower demand from inventory destock and then sort of rolling that head into Q4. So continued inventory reduction, softer demand. Ag probably the biggest sector, but a little bit from some of the other subsectors as well. And then on automotive, we did factor in an impact relative to the UAW strike in terms of our North American exposure being down for most of October, although we do see that coming back online as we move into November. So not a huge impact, but it was enough to nudge it over one column.

[Operator]

Our next question today comes from Tim Thein of Citi.

[Timothy Thein, analyst]

So just circling back yet again on renewables and China wind, clearly that it hit harder than you thought. I think that similar to one of your big European competitors. But maybe, Rich, just talk more broadly beyond China. I know that historically has been where a lot of the exposure for you has been, but it comes on the heels overnight of some in offshore projects here in the U.S. and some of the outlooks in some of the solar markets have turned down. And so I'm just curious, I guess, more of a bigger picture thought in terms of your -- how quickly this -- from a growth perspective, is it just a temporary push out? Or do you still feel confident in terms of the kind of that higher growth rate that we've spoken to in the past?

[Richard Kyle, executive]

Yes. I still feel confident about it. And as you look over our 15-ish year history, it's certainly never been a linear growth path like, like most of our markets, it has a cyclical element and this is not -- well, the severity of this, and we're bigger now than we used to be in it is a little more abrupt, not uncommon for us to have an off year every so often. And again, in my earlier comment, we're actually looking at being for the full year flat, flat to possibly slightly up this year in wind. Our customer base is largely in Asia and Europe, even for the U.S. installs. Our product is usually going through the European and Asian supply chain. So I would say the global wind market has slowed. China just being the most dramatic part of it. As you look out the -- I was actually in China in the third quarter, met with several of the customers. I think they all certainly see it as a pause. They're all continuing to invest in the space. The world is going to need a lot more renewable energy in the coming decades and decades. So I'm still very optimistic on the market long term, not ready to call when this one pivots. We don't expect, as I said, to be in the first quarter, but I believe it will return to grow sooner rather than rather than later.

[Philip Fracassa, executive]

Yes. And I would only add, Tim, it was obviously wind was the area where we saw softness. But outside of China wind, the rest of the world relative to the total renewables business, which would include solar, obviously wins the bigger of the two, but it was relatively stable. So to Rich's point, the market is holding up, I would say, reasonably well outside of that dynamic we're experiencing and wind right now, which was, I would say, quite unusual. As Rich said, it's not unusual for it to be nonlinear, but it was a pretty unusual build in hindsight in the first half that's now creating this weakness in the second half. So I think Rich hit it well, the long-term demand is going to be there. It's just really working through the inventory that's quite significant in the channel right now.

[Timothy Thein, analyst]

Yes. Okay. Understood. And then this is kind of yesterday's news at this point, but -- just looking at the geographic performance. I mean to have EMEA as the best or the smallest relative decline, I don't know, stands out to me anyway. What's going on there in terms of a specific vertical or customer? What...

[Richard Kyle, executive]

I think still that's the comp that -- some of that is the comp and that Europe was down earlier and the comp is significantly easier from the quarter last year.

[Philip Fracassa, executive]

Yes, I think that's exactly right. I mean when you look at it, most of the sectors in Europe were sort of relatively flat year-over-year. And what really sort of stuck out was we were down a little bit in linear motion in the industrial sector in Europe, offset by automatic lubrication systems still continues to do well there. So that -- those are really the 2 biggest puts and takes and then relative flatness across the other sectors, which, again, against last year's easier comp, but it was nice to see the stability there.

[Richard Kyle, executive]

And to that point, just to add on that, last year's third quarter was a particularly challenging comp. Our organic growth actually accelerated in the third quarter. And as you recall, that was really when a lot of the supply chains flushed out for lack of better than we caught up. So it was our strongest year-over-year organic growth quarter last year, and it was a challenging comp for us this year. And again, it was a good comp from a European standpoint, but not as strong as the rest of the world.

[Operator]

Our final question today comes from Michael Feniger of Bank of America.

[Michael Feniger, analyst]

Just you mentioned, obviously, there's a lot of companies about inventory destocking, OEMs, distributors. I'm just curious, Phil, if you could kind of touch on your own inventories. Do you think you'll get cleared out by Q4. Could that maybe linger a little bit in '24 kind of similar to what you're talking about with the customer inventory process?

[Philip Fracassa, executive]

Yes, sure, Mike. So we were able to take inventory down in the third quarter, it actually drove a lot of the cash flow benefit we saw year-over-year was working capital coming down. And if you -- we would say we're still probably have a little bit more to do there. and we'll look to get after it in the fourth quarter and potentially depending on how things go the first part of next year, but we're steadily making really good progress at getting our inventory levels in line, but certainly a little bit more to go, and I think that will drive another quarter of very strong free cash flow performance. I mean, to hit the midpoint of the -- or hit the guide we put out there, we'll need to do free cash flow in the fourth quarter similar to the third. And I think working capital will contribute once again.

[Michael Feniger, analyst]

Great. And just I know you're not giving guidance on '24. But just based on some of the acquisitions you've done, how much rollover just on what you guys have completed rolls over into 2024? And I think you might have commented on this earlier, but are those acquisitions accretive to margin?

[Philip Fracassa, executive]

Yes. I would say from a carryover standpoint, if you think about kind of 1-ish percent carryover when you think of everything we've done during the year, full year effect will be about a 1% tailwind, if you will, to the top line. That's net of the TWB divestiture. And then I think relative to the margin performance, I mean, certainly, a lot of them come in at various points. And then certainly, we have planned for all of them to get to our corporate average margin. So this case is off to a great start. But in the quarter, Nadella was played a little bit by European holidays in August. And in GGB, we said it would take a little bit of time to get up to the corporate average. So I would say, net-net, if you look at the acquisition bucket running a little bit below, but certainly feel good about the M&A we've done. iMECH comes in with a very attractive margin profile. And I think as we look ahead, we'll see margin improvement on the acquisition line next quarter and then into '24, look for it to improve even further.

[Michael Feniger, analyst]

And just a follow-up with the M&A theme, just obviously, you're generating the cash flow. Your leverage, I think, is now at 2x. You've gotten back down. Just -- is the plan to continue kind of at this pace next year? Just kind of curious how that pipeline is looking, how you guys are kind of thinking about this next year?

[Richard Kyle, executive]

I would say the plan is to continue. We had more acquisitions this year tended to be on the smaller side. I think the preference would probably be a little fewer and a little larger. But in terms of total revenue, yes, we would expect to continue to be active next year.

[Operator]

[Operator Instructions] There are no further questions at this time. Sir, do you have any final comments or remarks?

[Neil Frohnapple, executive]

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

[Operator]

Thank you for participating in Timken's Third Quarter Earnings Release Conference Call. You may now disconnect.