Timken Co (TKR) 2002 Q2 法說會逐字稿

Good afternoon. My name is (inaudible) and I will be your conference facilitator. I would like to welcome everyone to the Timken conference call. All lines have been placed on mute to prevent background noise. There will be a question-and-answer session. If you would like to ask a question, simply press * and the 1 on your telephone keypad. If you would like to withdraw press the pound key. (inaudible) begin your conference.

Thank you much. Good afternoon, everyone. With me today are Jim Griffith, Bill Bowling our executive VP, COO and president of the steel business; Bill Eisenberg and Sally Bailey, corporate controller. We all thank you for the interest you are showing in TKR. The agenda today is that the call will be led off by Glen, who will address second quarter results, followed by Jim, who will address the bearing business and corporate issues. Followed by Bill, who will handle the steel business. We will then have time to answer all of your questions and before closing, Jim will have a closing remark. Before we go any further, we want to take advantage of the Safe Harbor provisions offered to us under the Private Securities Litigation Reform Act of 1995. Certain statements made during the teleconference that are not based on historical facts may be forward-looking, in particular statements regarding expected future sales and earnings performance of the company, as well as the amount and timing of savings and charges the company expects to realize in conjunction with our strategic refocusing of the company's manufacturing operations are forward-looking. As you know, several factors could cause actual results to differ materially from those that are projected or implied, including general economic conditions, customer demand, the company's ability to achieve the benefits of ongoing restructuring programs. Information concerning these and additional factors is contained in the company's annual report as of the end of last year, as well as the 10-Q for the first and second quarters. The second quarter will be issued in about 30 days. Please refer to these Safe Harbor provisions within these documents for further details. Also, please note the webcast contain time sensitive information that is accurate only as of the date of this live broadcast, which is obviously today, July 18th, 2002. This call is the property of the Timken Company and any redistribution of the call in any way, shape or form, without written consent of the company is strictly prohibited. Formalities out of the way. Glen, start off.

Thank you. Good afternoon, everybody. As you have seen from the press release this morning, the company had a good second quarter versus a year ago. It was driven by higher sales and improved operating margins. Our comments focus on the adjusted numbers that take out of the impact of the reorganization charges. Sales for the quarter of 660 million were up 4% over last year, as the company benefits from strong automotive markets. Sales for the automotive bearing business rose 12%, compared to industrial bearings up 3% and steel, which was essentially flat. Jim and Bill will review the results in more detail in a moment. EBIT was up to 35 million dollars, as margins improved 140 basis points to 5.2%. Both growth profit and SG and A improved as a result of manufacturing strategy and cost containment initiatives. Gross profit margin improved 140 basis points to 19.2%. SG and A improved 80 points to 13.8%. The company's tax rate for the quarter was 38%, which resulted in net income of $17 million, compared to tax rate last year of 70% and net income of $3 million. The high tax rate last year result Friday lower earnings and foreign losses. EPS for the quarter was 28 cents per share in line with consensus estimates of 27 cents. From a cash flow perspective, operating cash flow for the quarter was $45 million, driven by improved earnings. As a result, we ended the quarter with net debt at $486 million or 38.1% of capital. As we look forward, we continue to be optimistic for the remainder of the year. We see automotive markets in north America continuing to perform well and are seeing signs of improvement in the industrial markets. The weakening of the dollar should help global competitiveness. This, coupled with the impact of restructuring initiatives makes us comfortable with the EPS guidance we provided to you in June of 75 to 85 cents per share for the year and in line with consensus estimates currently at 79 cents per share. With that, Jim, would you care to go into the operating results?

Good afternoon. Performance for bearing businesses continues on the upswing in the second quarter. Sales were up 7% over the second quarter of last year and higher than this year's first quarter. Second quarter sales are the highest since the second quarter of 2000. EBIT excluding special charges, is up 75% for the bearing businesses in total over the second quarter of 2001 and also up from first quarter of this year. In the first half of this year, we have earnings that are already 25% greater than we made in the entire year of 2001. This is on an annualized first half sales volume up 6% from last year. Moderately improving volumes, couple wide manufacturing strategy initiative and administrative cost reductions are the drivers of this profit improvement. Before focusing on the bearing markets and individual business results, I will update the current status of that restructuring initiative. Our savings target for the end of 2002 is to be generating savings at 80 million dollar annual rate. We are still on target to achieve that level of savings. Our savings rate at the end of the second quarter is 58 million dollars. We have reduced headcount by 1100 associates through the end of the second quarter by these initiatives. Since the beginning of 2001, total associate headcount is down by 2000, 1100 due to restructuring and administrative cost reduction and about 900 due to market weakness. Total program cost is estimated to be 95% of the original budgeted cost of 105 million dollars. Late in the quarter, we made two significant announcements regarding our manufacturing restructure. The sale of our Ashland plant reducing fixed cost and the initiation with Samuel Sale and Seiko, targeted as supplying turned ringing with minimal investment. Now, let's briefly review key markets. North American Light truck production, our sweet spot in the automotive market continues to be strong. Our projection is the total north American production will be 8% stronger in 2002 than it was in 2001. Recently introduced incentives will keep demand strong. New platform launches are Timken bearing equipped and will balance the leverage. North American heavy truck continues to be strong, but expected to slow in the fourth quarter as new engine emission regulations come into effect. European automotive markets are stable. Markets continue to be a big question mark. North American industrial Macro economic indicators continue to improve. Our five-month forward order book as shown on the website has been edging higher, but still as low levels. Our leading indicator for industrial after-markets sales has begun moving. Exchange rates are moving in the direction of improved competitiveness both for us and for our domestic customers. We are cautiously optimistic we have seen the bottom of the industrial recession and industrial markets will improve over the coming quarters. Contrasting that, rail markets and aerospace markets remain weak. There are no near-term signs of improvement in either of the two markets. Now, let me shift to the individual bearing businesses results. As I do so, let me impress two key messages. Our automotive bearings business continues to operate at sales and profit levels significantly above 2001. Secondly, our industrial business is achieving significant profit rebound before the markets we serve begin their impending resurgence. Let's look at the segments individually. Sales continue strong in the automotive business. Sales were 219 million dollars, up 12% over last year and up 8% over this year's first quarter. North American markets are driving the sales. EBIT in the first half and in the second quarter was up significantly from last year. Operating issues, inefficiencies in constraints related to restructure program and the cost of taking on new business, plus the booking of one-time costs, artificially depressed second quarter results. Underlying this are continuing strong improvements in structural performance. We continue to - we continued strength in the automotive market through the rest of the year, with exception of heavy truck, which I mentioned we expect to see down in the fourth quarter. In the third quarter, we expect to see sales dip seasonally, but anticipate earnings above those achieved in the second quarter of this year. Sales in our industrial business continue to improve. At 228 million dollars in the second quarter, sales are up 3% over last year and 7% from this year's first quarter. This is the highest sales level since the first quarter of 2001. We are also seeing signs of gradual improvement in the after-market business. Profitability in the first half was about even with last year. Second quarter profitability, however, more than doubled from the first quarter of this year, showing impact of our restructuring efforts and the impact of moderate sales gain. We are gaining confidence that our markets will strengthen in the second half of 2002, but expect recovery to be slow and gradual. Now, let me turn to Bill Bowling to talk about the steel business.

Thank you. Steel business net sales finished the second quarter of 2002 at $255 million. Up slightly from the second quarter of last year and up 7% from first quarter of this year. Our markets continue to be sluggish, other than strong shipments to automotive companies. Our second quarter sales to automotive industry were up 24% from last year and 12% f the first quarter of this year. Sales to the bearing industry, other than automotive suppliers were weak. Our industrial segment sales were up 16%, as we gained penetration from weak competition. Well, country sales were 60% below last year. Oil country sales are a small percent of total sales mix. Steel service center shipments continue to be weak, about 16% below last year. Tool distribution business was down 15% from last year, reflecting weak industrial production. The aerospace business has weakened shipments were 20% lower than the second quarter of last year and 24% lower than the first quarter of this year. We believe the aerospace sales will drop further as Boeing cuts production of passenger planes. Our capacity utilization in the second quarter was 70 to 80% varying by business and product. Capacity utilization was equal to the second quarter of last year and a bit better than the first quarter of this year. Scrap and alloy cost were considerably higher than the second quarter of last year and the second quarter of this year due to increased level in demand industry and near-term shortages in alloy supply. Electricity and natural gas costs were lower than last year. We do not expect significant changes for the remainder of this year. Steel business efforts at cost reduction and continuous improvement continue to pay off. In the second quarter we achieved 14.6 million in earnings before interest of taxes excluding restructuring and reorganization charges. Sales equal to last year, we doubled earnings. This is the result of very tight cost control. Our second quarter labor productivity was record-high levels. We reduced costs through combination of price reductions, substitute products and reduced consumption. The tariffs announced by President Bush is levied on sales dollars. Customers continue to request exclusions, to date none have been granted in our product line. Enforce (inaudible) foreign countries are retaliating with terrorism products imported from the U.S. and tariffs from steel (inaudible). While we have increased prices two time this is year, there is little bottom line impact as of yet. Most of the business is on annual contracts. Prices will be increased as contracts come up for renewal over the balance of the year. Some competitive capacity has been shuddered. Other capacity will be shuttered (inaudible). Unfortunately new capacity will come on line, but on balance, we are increasing penetration at the expense of weak competitors. At this point, we will entertain questions that you all might have.

Thank you. At this time, I would like to remind everyone in order to ask a question press * 1 on your telephone keypad. We will pause for a moment to compile the roster. Your first question comes Stephen Volkmann of Morgan Stanley.

Good afternoon. Sorry about that. Can you hear me? Question on fourth quarter of last year. You had benefits from demand dumping payments, if I recall correctly.

That is correct, 30 plus million dollars.

I think there was something recently someone told me in the federal register that has to do with what that might look like for this year. Do you have guidance?

I would say at this stage, we don't put guidance on that. We don't know where ultimately it would stand. Obviously to the extent that there is funds that do come out, obviously we feel we could be beneficiary of them as we experienced last year.

That would be incremental to your current view of the world?

Again, you broke up a little bit. We will say the income that we recognize from that last year, we viewed as one time income, if you will, out of the normal course. When we share results and say excluding unusual items, we do not count that in that. To the extent we receive any in the future, we will notify you of the amount we would have received, but still wouldn't call our results and call that unusual one-time item.

Fair enough. In terms of your working capital outlook this year, how should we think about that?

We continue to focus on improving our working capital to enhance our cash flows. We are at an improved level of working capital in the second quarter versus the first half of this year and the first quarter of last year. We continue to strive to focus on inventory reduction. We feel we have the most opportunity to do so. As we look to the second half, we expect to see inventory levels reduced to soft additional cash flow.

Steve, this is Jim Griffith. Our inventories are a bit high on the bearing side. Steel is about where we expect them to be. It relates primarily from the closure of our plant in Dustin. We built inventories around that. That closure is almost complete and so there is a natural process that will work that off over the balance of the year.

Okay. The balance of the year working capital a source of cash for us?

That is correct.

Thank you.

Your next question is from Chris Olin of Midwest Research.

Good afternoon. Glen, regarding the pension expense, update the cash contribution requirements specifically with the '03 requirement be higher (inaudible)?

I am sorry, could you repeat that? Make sure I got it correct?

Yeah. Can you hear me? It was regarding the pension expense. I was looking for an update on the accelerated cash contribution status. Will the '03 requirement be higher due to markets of late?

I will take a first cut at that, Chris. Obviously relative to any pension fund, we have a significant one, our returns that are expected are outlined in the financial notes we provide you and to the extent we are unable to realize those returns. Obviously we fall into a deficit relative to liabilities. However, over the long-term, we experienced return at or in excess of the return requirements, but needless to say over the past couple of years, we have not. To the extent we don't realize the returns coming in for this year, we will have an issue of banking up the deficit. We can't predict what that will be, but prudencey would say based upon the (inaudible) we have to meet long-term liabilities, we feel we will ultimately return the adequate returns to the extent we don't in the short term, we have to make up for that with additional cash contributions.

Thanks.

Your next question comes out of the group of Capital Management.

Follow-up to the pension question. Can you just review the administration statement so I understand it? The 3 million in common stock, is that essentially 3 million shares to fund the pension gap for this year or am I misreading that?

No, we set aside that we have as an option to use the shares for future pension contributions.

They haven't been (inaudible), but could be?

That is correct.

Our next question comes from David (inaudible) of Clover.

Hi, guys. How you doing? I would like to see if you can comment on just another pension question? We have accelerated payments coming up. It seems like you know maybe dumping payments will disappear. I am wondering if free cash flow isn't able to cover these, will you take on the debt to fund these or what?

Again, we feel that our free cash flow within the business can meet all the cash requirements we have including our pension obligations.

(talking over each other).

Again, we view the dumping payment as a one-time item, that is the ongoing cash flow of the business would support pension obligations, capex, working capital needs and provide for dividends in the normal course of time.

Okay. What are the accelerated cash contributions? About 100 million?

I don't think we quote the exact amount, but give or take, you are in the range of what our commitments have been in the past. Depending on the outlook and performance of the market would dictate that number.

You all need to remember when doing modeling, 100% of our pension contributions are tax deductible. So, as you are thinking about it, looking at our estimated contributions and based on past contributions, you should make sure you tax effective.

Can I ask a few questions on the pensions. How many working lines to you have versus retired lines?

I don't think at this time we will go ahead and provide any of the detailed information. We obviously have a lot of that information put forth in the footnotes of public financial statements you can find.

I don't think that -

We will tell you that is the amount of information we are provided to give you in a public forum of that information. So, again, we are adequately funding our pension obligations. We continue to administer the investment of our portfolio and the notes of the financials should give you sufficient information to know the basic assumptions that we use as far as rates of return and discounts and various other assumptions.

If the economy stays in the current trend where it is, we don't see an upturn in the markets over the next couple of years, could you see pension expense being in earnings expectations?

Again, it would impact the economy on business and every other variable you can throw out. If you paint the scenario, we can let you know how it will impact us. What we can tell you is current expectations for the economic environment are actually fairly good. Obviously, as it affects our business in the automotive with the industrial improving with steel performance doing well, we feel frankly the tougher times are behind us and that our expectations are that we will see improved performance. Obviously if the economy changes and that does not live up to it, there will be a lot of different impacts on business and we will manage through those.

Thank you for your time.

Your next question comes from Robert Schenosky of CIBC World Markets.

Good afternoon. Bill, could you break out the strength in the steel at all relative to the component business for us?

The component business is heavily in the automotive sector. So, it is - sales are up relative to the steel business.

Can you give us a sense of the percentage of sales for the quarter?

The parts business is a small portion of the steel business. We don't separate specifically the amount of volume.

The growth rate that have been there in the past, pretty similar to the current quarter?

Yes.

Okay. Question for Glen. Can you break out the charges for the third and fourth quarter?

Again, the charges that we will go through the rest of the year should wrap up our program on restructuring. If you look at the first half of the year, we had around I believe 27 million dollars of those restructuring and reorganization charges. I believe we said that we would have around $50 million, give or take, for the additional for the year to get us to this total amount of charges.

Okay. Are you willing to break those out in the third quarter versus the fourth?

I would say for right now, it is a good assumption to break them out evenly between the last two quarters. Again, as we would report we will exclude those from (inaudible), but for now, again I am just saying a fair assumption is equal.

Okay.

I think we were fairly - little bit more in the second quarter than the first quarter. So, err more toward accelerating by the end of the year.

Okay. Great. Final question for Jim. Jim, can you give us any time of sense in terms of the improvement you are seeing in the industrial space? ITW noted the same thing, even ManPower is putting more people into the industrial space. I wonder if you can give us flavor where you might see those pockets of strife?

Pockets is probably the right description. When I look forward and try to assess what is going on in the industrial market, I add up a combination of looking at the economic numbers. Look at the industrial production index, you have seen it shift from negative territory to positive territory, about the first of the year. That is a leading indicator. The second and probably most significant for us is simply the number of inquiries we get. Industrial distribution, the nature of our business changes as you go through that shift from a down cycle to an upcycle. The first thing you see is more inquiries and more emergency orders. We are seeing that going on, at this point. We are not seeing it significantly in terms of total volume of sales. That is a real big leading indicator for us that it will continue to go up. The only specific place that we are seeing strong order growth is in the mining segment, particularly internationally. Look at our sale necessary Australia and southeast Asia, there are big mining operations. That is talking about an early indicator because it means you are beginning to see commodity prices starting to move. That becomes early indicator that the industrial markets are starting to move. Does that help?

That is helpful. To tack on to that, then, are you still seeing continued further weakness in the (inaudible) specifically in light construction?

I can't say that I am seeing a trend that is significantly discernable at this point. If I go across the world in both of those, I can't see that as a tremendously discernable trend.

Okay. Then, not worsening to a great degree?

No, that is not my sense. Generally the lighter end of mobile industrial crosses from ag into the light construction of highways and that sort of thing, has been one of the few bright spots in the industrial market through this recession and so, unlike all the rest of them, when you say is this improving? It hasn't been down in the dumps like the worst of our segment.

Okay. Finally, how bad of a turndown are you anticipating in heavy truck segment post-October?

Good question. I probably can't give you any numbers. Obviously the issue is there is a lot of people pulling stuff forward. Through that segment, in terms of the emission requirements, if you look Bob, on the website, there is a number that would say it will drop (inaudible). My sense it will drop more than that.

Around 40%? you wouldn't raise your eyebrow at a number like that?

I wouldn't.

You have a follow-up question from (inaudible) of (inaudible).

Hi. (inaudible).

I am sorry. I heard the end of the question.

The (inaudible) deal, what does that mean in terms of (inaudible)? Do you have a number for the end of the quarter?

That is primarily a re-melt furnace, not a significant increase in capacity?

(inaudible) do you provide that?

We don't break that out.

Thanks.

Follow-up question from Chris Olin of Midwest Research.

Has the strategy changed with this plant? At one time it wasn't generating earnings and the thought of selling it was around. Is this investment recommitment?

This was a maintenance item to preserve the capital structure of the facility. Their business is at this point, depressed primarily because of the value of the dollar and also as you know, the 200 tariffs do not cover tool sales, but the aerospace steels (inaudible). Our fundamental belief has not changed. We will run (inaudible) but on the other hand, if the right venture would come along, we would look at it.

Thanks.

Again, I would like to remind everyone in order to ask a question press * 1 on your keypad. at this time, there are no further questions.

Well, thank you for your participation today. Any follow-up questions should be directed to myself, (inaudible)330-471-4096. Our next teleconference is tentatively scheduled for 10 a.m. on Thursday, October 17th. Please take a moment to jot that on your calendar. The call-in number will remain the same as the one you used today, which is 706-634-(inaudible). Please refer to our website or streetevents.com, for confirmation of this call. Before we conclude today, Jim would have some final remarks.

I would like to thank everybody for tuning in to this teleconference and your interest in the Timken Company. Those who asked questions, I would like to thank you for good questions. They indicate there are a lot of wildcards out there, the direction of the stock markets and impact on pension plan, what our customers will do in terms of capital spending, consumer confidence and most recently, the swings in the exchange rate. As we look through all of those factors, we see now perhaps more than we have in the last 6 or 9 months, more pluses than minuses. One of the biggest pluses and you see it in the performance of the company in the first half is one under our control. The manner and pace we continue to implement our restructuring programs and drive our Sigma initiatives. They have been bearing fruit. You are seeing it in the earnings and they will continue to do so. Thanks for joining us this afternoon. Talk to you next quarter.

This concludes our teleconference. Have a great day.

This concludes today's second quarter earnings conference call. You may all disconnect.