The Timken Company Morgan Stanley's 14th Annual Laguna Conference

Thank you. Thanks for having us.

Absolutely. First of all, thank you for having us. It is really great to be here. When we look at Elevate to Outperform and why we launched the strategy and what we are trying to accomplish with it really deploys this 80/20 mindset as a foundational way of approaching and solving the problem. The problem that we are trying to solve is really to accelerate profitable growth, expand margins, and then drive value to shareholders as a result. We do this by really focusing on three different pillars. First of all, our portfolio. Really holding ourselves accountable to be a disciplined and active portfolio manager of our own portfolio. Making sure we analyze that portfolio on a frequent basis and we ask ourselves what belongs. We apply an 80/20 mindset to that. What do we need more of, what do we need less of, and really manage that actively.

We then look at the markets that we focus on and make sure that we have appropriate revenue exposure to high-growth markets so that we can really outperform by having the market tailwind help us outperform. Last but not least, there is a third pillar that involves regional penetration. Our business is unique from the standpoint that our Industrial Motion portfolio of businesses that represents over a third of the company is really mostly constituted of regional businesses. Really being able to expand these businesses from one region to another affords kind of, I call it a bucket of self-help, but really revenue that we can generate growth from, that we can then help ourselves outperform above the market.

Yeah. I will ask Mike also to offer his view here, but I think if I step back from overall the goal that we have laid out at Investor Day just a few months ago, we said we are going to structurally improve margins by 500 basis points. That is a significant number because it is not by sometime out there, it is by 2028. The clock starts pretty soon on 2028, so we are not that far away. We understand the timing. But we laid out a very credible roadmap on how we get there, and it is really across the three pillars. It is really looking at structurally improving margins from belts, then it is looking at the markets and outperforming with the markets, and then finally, the regional penetration.

Underpinning all that, which is what I'd like Mike to comment on, is your 80/20 question of what we can do to really support the cost structure to be able to do that.

Yeah. Thanks, Lucian. A couple of things on that. First of all, we're well underway. As you said, we've launched 80/20. By the end of this quarter, we'll have more than 75% of our organization trained and initiatives underway. Some of those initiatives that started earlier are going to start producing results. You'll see that show up in margin uplift as early as the first half of next year. Certainly our own help on 80/20, just from the initiatives that are underway, pricing, et cetera. Secondly, we're getting to the point now where we're looking at our cost structures and going through the Zero Up process. Anyone familiar with 80/20, we're now looking at our cost structures, identifying where simplification creates capacity, if you will, and it frees up resources. Part of our growth strategy is around redeploying those resources into the growth areas.

Of course, it provides an opportunity for margin uplift as well. Next year, we'll be looking at how to carry those simplification savings into the business, reinvest where it makes sense, and then look to expand margins as well. Then you mentioned the last thing, working capital. We do believe there's a working capital unlock through simplification. In our 2028 targets, we communicated we thought there was about 1% of sales per year kind of unlock on working capital to sales. We do think there's an opportunity to generate cash as part of this 80/20 initiative as well.

Yeah, look, I appreciate that question. I think often when people hear 80/20, it is called 80/20 and not 20/80 for a reason because the 80s is why you do it. That is where you want to focus, and the 20s is where the resources come from so that you can afford to take better care of the 80s. Pricing is one of those avenues. If you think about the world of 80s customers and 20s customers and 80s products and 20s products, we have been very transparent to share that in our Engineered Bearings business. Our half of our customers, our bottom half of our customers account for less than 1% of the revenue, and half of our products account for less than 1%, about 1% of the revenue. Now you might say, "Well, that is easy.

Why do not you take action immediately?" Because you have to look at it by quadrant, and your large customers buying your fast-moving product, you want more of that. You want to delight those customers. You want to have better delivery terms. You want to really take care of and grow that business. Your small customers buying the one-off products, that is not business we will ever be able to be profitable with. That is business that you have to, over time, shed in an appropriate way. Your small customers buying fast-moving products, that is why you have channel partners. That is why you have e-commerce. That is why you have distributors. You ask them to consolidate purchases, and so on. You manage them that way.

Your large customers buying your one-off products, that is where you have to have that conversation very carefully because some of those small products may be very valuable to your large customers. You have to have a logical transition. Treating these quadrants differently is key. But then inside those quadrants, you have certain places where price increases are absolutely one way to do that, one way to, I would not say test for the value, but to make sure you are appropriately getting paid for the service that you are offering. Because one of the things, just fact of life, your accounting systems will never be able to keep up appropriately with allocating sufficient cost to the customer that literally places a $100 or $200 order versus a customer that is a $20 million customer.