Timken Co (TKR) 2002 Q4 法說會逐字稿

Good morning. My name is Wes, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Timken Fourth Quarter Year-end Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one, on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Mertes, you may begin your conf.

OK, thank you, Wes, and good morning, and thank you for your interest in our company. With me today is Jim Griffith, our President and CEO, Bill Bowling, our Executive VP and Chief Operating Officer, President of our steel business, Glenn Eisenberg, our Executive VP of Finance and Administration, and Sallie Bailey, our Senior Vice President of Finance and Controller, and also Kevin Beck, who will be assuming the Investor Relations functions over the next several months, as I assume other responsibilities in the Finance group.

Before we proceed any further, I want to make the following statement concerning our safe harbor protection, provided under the Securities Litigation Act of 1995. Certain statements made in this teleconference, including statements regarding the company's forecasts, beliefs, and expectations that are not historical in nature are forward-looking within the meaning of the Act. The company cautions that actual results may differ materially from those projected or implied in forward-looking statements, due to a variety of important factors, including financing and other closing risks associated with the acquisition of Torrington, the uncertainties in both time and amount, if any, of actual benefits realized through economies of scale, elimination of duplicated cost, operating efficiency, and enhanced productivity through the integration of Torrington with Timken operations. Risks associated with diversion of management's attention from routine operations during the integration process, risks associated with the greater level of debt associated with the combined companies, the impact on operations of general economic conditions, the cyclicality of the company's business, customer demands and the customer's ability to achieve the benefits of its ongoing restructuring, and cost reduction programs. These and additional factors are described in greater detail in the company's 2001 annual report, our 10K for the year-end December 31st, 2001, and the 10Qs for the period of March 31st, June 30th, and September 30th of 2002. The company undertakes no obligation to update or revise any forward-looking statements. Also, please note that this web cast contains time-sensitive information that is accurate only as of the day of this live broadcast, which is today, January 22nd, 2003. This call is the property of the Timken Company, and should not be redistributed or rebroadcast in any form without the written consent of the company.

Finally, and of great importance, we want to remind all participants that we have previously announced our intent to issue both debt and equity in conjunction with our Torrington acquisition. SEC rules forbid the exchange of information surrounding many topics that may be of interest to you. Therefore, we will refrain from answering questions if we feel they are not appropriate, considering these rules. I'm sure you appreciate our position. And with this all in mind, I'm going to turn the call over to Jim.

Well, good morning, everyone. We're pleased to see the kind of interest in the Timken Company, evidenced by your participation this morning. For today's teleconference, I will lead off with some general comments, and then review the performance of our bearing businesses. Bill Bowling will follow with comments regarding the performance of the steel business, and the Glenn will wrap it up with a review of our consolidated financial performance.

As you've seen in our release, 2002 was a strong performance year for the Timken Company. Sales for the company were up just over 4% versus last year, but EBIT, excluding special items, was up over 140%. We continued the transformation of our company to a more globally focused, high-performance organization. Slightly improved volume, strongly leveraged by the impact of our transformation initiatives, drove this dramatic improvement in profitability. The company's announced plan to acquire Torrington is proceeding well. This strategic acquisition is a key element in growing our business and significantly improving our profitability. We are proceeding on schedule towards a first quarter closing.

Now let's review the bearing markets. The North American automotive markets remain strong. Some of the fall-off we'd expected in the heavy truck market due to changing environmental regulations has not materialized, however, European automotive markets are not showing signs of improvement. Industrial markets around the world are not recovering, and have remained essentially flat over the year. For the quarter, sales and profitability levels in our bearing businesses were up significantly over last year's depressed levels. As we review our performance, we will refer to profitability levels, excluding special items.

Automotive sales of $211m for the fourth quarter were up 14% over the same period last year. For the year, sales of $841m were up over 12% over 2001. Strong North American vehicle markets, coupled with sales to new vehicle platforms, were the continued drivers of strong automotive sales performance for the quarter and year. Globally, the automotive industry is going to soften -- or we are forecasting it will soften in 2003. However, this will not be uniform in all areas of the world. In North American light truck production, we project it to be flat from 2002's strong levels, and medium-heavy trucks are projected to be up over 10%. In Europe, passenger cars and trucks are projected to weaken slightly from 2002's weak levels.

EBIT for the quarter of $12m compares favorably to a loss of $2m last year. Earnings in the automotive business were favorably impacted in the fourth quarter by a LIFO adjustment. Largely offsetting the LIFO impact were added freight costs and manufacturing costs associated with meeting strong customer demand while in the process of transforming our manufacturing operations. This is specifically related to the closure of our factory in Dustin, England. For the year, EBIT was $32.6m versus a loss of $11.4m for 2001. Improved volumes, strong manufacturing performance, the impact of manufacturing strategy and salary workforce reduction initiatives, and the LIFO adjustment, were the drivers of this dramatic profitability improvement.

Industrial sales of $225m were up 10% over last year's weak fourth quarter sales of $204m. I think it's important to recognize that the fourth quarter of last year was depressed by the post 9/11 market. For the year, sales of $884m are essentially equal to last year's sales. Industrial markets around the world have been flat for the year, and we see little evidence of near-term improvement. Industrial EBIT in the fourth quarter was $13.8m, up significantly from last year's $5.7m.. EBIT for the year of $51.5m was up over 19% on last year's $43m on equal volumes. Improved volume, strong plant performance, and the impact of our transformation initiatives drove the improvements in the year and the quarter.

As we look forward to 2003, our bearing businesses are positioned to continue their improvement in financial performance. We do not see bearing markets strengthening significantly in 2003, and we'll rely on the continuing impact of our transformation to leverage the bottom line. The Torrington acquisition, when completed, will provide additional opportunities to leverage our financial performance over the course of the year. Bill?

Thank you, Jim. Steel business net sales, including inner-segment sales, finished the fourth quarter at $240.7m, up 11% from the very weak fourth quarter of 2001. For the year, net sales increased 2% to $981.3m, compared to $960.4m in 2001. Our markets continue to be sluggish, other that strong shipments to the automotive industry. Sales to the bearing industry, other than automotive suppliers, continued weak. We continue to gain penetration from weak competition in our industrial sales segment. Oil country sales were a bit strong in the fourth quarter, from a very weak base. We expect oil country sales to strengthen in 2003. Oil country sales, however, are a small percentage of our total sales mix. Steel service center shipments and the tool steel distribution business continued weak, with weak overall industrial production. The aerospace business continues to be weak.

In addition to our holiday shutdowns, we had a one-week vacation shutdown for most of our operations during the fourth quarter. Our capacity utilization in the fourth quarter was 65% to 75%, varying by business and product. Capacity utilization was higher than the fourth quarter of 2001, but lower than the third quarter of 2002, as we took additional time out from our production schedules during the holidays.

In the fourth quarter, we achieve $ 0.2m in earnings before interest and taxes, excluding restructuring and reorganizational charges, up from a $6.3m in the fourth quarter of 2001. Earnings were hurt by higher raw material costs, holiday shutdowns, and a year-end LIFO expense adjustment in our specialty steel business.

EBIT in 2002 was $32.5m , up from $13.4m in 2001. Despite the modest increase in sales in 2002, the steel business was able to more than double EBIT, with tight cost control and improved productivity.

We expect raw materials and energy costs to be high in 2003.

The 201 tariffs announced by President Bush in March are levied on approximately 30% of our sales dollars. While customers are continuing to request exclusions, to date, none of significance has been granted in our product line.

Some competitive capacity has been shuttered during this manufacturing recession. Some new capacity will come on line as well. On balance, though, we are increasing penetration at the expense of our weak competitors.

Thanks, Bill. As you've heard from Jim and Bill this morning, our businesses have performed well in the fourth quarter and for the full year, and as they did, my comments will focus on our adjusted numbers to take out the impact of any special items. Sales for the quarter of $645m were up 12% over last year, driven by strong automotive sales. In a weak economic environment, we accomplished annual top-line growth of 4% over 2001, with sales of $2.6b. EBIT for the quarter was $26m compared to a loss of $2m last year. Improved volume, good manufacturing performance, and the leveraging effect of our transformation initiatives drove the turn-around. Gross margin of 18.1% was 330 basis points better than last year, and SG&A, at 13.9%, improved 90 basis points. EBIT for the year of $116m improved by $68m over last year. EBIT margin of 4.5% improved 250 basis points. As with the fourth quarter, both gross profit and S&A margins improved, due to high volume, the manufacturing strategy and salary workforce initiatives, and improved manufacturing performance.

The company's effective tax rate for the quarter and year was 38%. Net income was $12m for the quarter and $53m for the year, which was up dramatically from last year's results. This resulted in EPS for the quarter of $0.19 and $0.87 for the year.

Similar to other companies, continuing weak equity markets, combined with lower interest rates, impacted pension amounts on our ending 2002 balance sheet. Now as part of our long-term pension funding strategy, in 2002, we contributed $106m to our domestic pension plans, $55m of which was with Timken's common stock. This compares to $79m of cash that was contributed in 2001. We recorded a $402m minimum pension liability increase, which reduced shareholder's equity by $254m and increased deferred tax assets by $147m. This liability was driven by a negative 6% investment return on our domestic pension plans, and a reduction in our discount rate to 6.6%, from 7.5% in 2001. Going forward in 2003, we are changing our assumption for long-term return on plan assets from the current 9.5% to 8.75%. This change, along with a lower discount rate, will result in an increase in 2003 pre-tax pension expense of approximately $25m.

Net debt ended the year at $379m, down $85m from 2001, with our leverage ending at around 38% net debt to capital. Free cash flow, or cash from operating activities after capital expenditures and dividends, was $102m in 2002 versus $53m in 2001. This $49m improvement in free cash flow was driven by improved profitability, prudent capital spending, and the Continued Dumping and Subsidy Offset Act payment, and that was partially offset by higher working capital requirements due to increased sales, as well as our pension contributions.

With those remarks, we'll wrap up and turn it back to Dick.

Again, this concludes our formal remarks. We will entertain questions at this time. Again, I want to remind all participants of our limitations imposed by the SEC rules on answering certain topics, so please consider your questions appropriately. Thanks. At this time, we will entertain questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone key pad. We'll pause for a moment to compile the Q&A roster.

Your first question comes from Paul Jacoby of Banc of America Securities.

Hello and good morning.

Good morning.

Question is, trying to get a feel for what a good start-off point would be for FY '03 EPS? Would you be able to give some kind of a range that you would be comfortable with, because what we are coming up with would be slightly less than EPS of this year, and basically our thinking goes, if there's $0.87 this year, and the pension, the expense would go up $25m pre-tax, which equates to around 25 cents, that gets us down to $0.62, and then the extra savings from transformation would go from-- would be another additional 20 cents up, which brings us to $0.82. Is this a comparable amount for what you think the stand-alone Timken would be, or can you give input there?

Well, obviously, I guess, we're starting off with the first question on a question we're obviously not in a position to talk about, which is our projected earnings for the year 2003. I guess the only thing that I would say-- I mean, you raised issues of plusses and minuses that are out there, but we're just not in a position to talk to the future earnings at this time.

OK. Then can we get the amounts of what the LIFO adjustments were in both auto and in steel?

Again, maybe it's worth even stepping back for just a moment and just with the sensitivity that Dick alluded to on our statements, and again, I think we've come out with a press release that was pretty thorough on the results that we've had for the fourth quarter and for the full year. We do have a registration pending with the SEC, we are in a quiet period, so any of the specifics or the details that obviously are not written in the press release, we're not going to be in a position to go into. I think we can provide you a lot of good color into the business, a lot of good color into what the positives and negatives that impacted our results. Obviously we feel very good about the results that we had this year. I think we do feel good about the opportunities that we expect to see in 2003 as a general comment. I think, you know, we're obviously trying to say that. But getting into the specific details, I don't think is appropriate for us during this quiet period.

Paul, if I can talk not about 2003, but about your analysis of 2002, if you do your analysis, it seems that you're missing some issues that are driving the performance of the company, have driven it this year, both positives and negatives. For example, we have talked regularly about the fact that closure of plants and the shifting of capacity has impacted our performance this year from the point of view of logistics costs, movement of product, et cetera, and in fact, I think in the last quarterly conference, we talked about that as being a fairly significant impact.

Secondly, assuming that MSI, our Manufacturing Strategy Initiative, is the only thing that's driving the performance improvement in our businesses, misses some of the other things that we've talked about. I've used as an example, the Manufacturing Strategy Initiative had no impact on our steel business, or if it did, it was actually a negative impact because we reduced some of the inner-company sales. But in fact, between 2001 and 2002, we had quite a significant improvement in performance of the steel business.

Secondly, we've talked about new product launches that have happened in 2002 and the bookings that we have for future new product launches, so I think it's just important that as you do your analysis, you look holistically at the Timken Company, that it's not simply a company being driven by our Manufacturing Strategy Initiative and then negatively impacted by our pension.

OK, great. Thank you, there, and just to clarify -- the question about the LIFO was really about the detail of what the LIFO plus and minus was for Q4, '02. Is that allowed to be discussed, or no?

I think it's fair to- obviously, when we looked at our results and what improved, let's say, on the automotive side, we listed a lot of positives that occurred to show the improved earnings at which the LIFO was one of those, and obviously identified other areas that negatively impacted the business. I think what we're seeing today especially is that we're not looking to identify any one particular item, other than suffice it to say that LIFO, as well as the other issues, whether it be cost reductions or volume improvements, all contributed in a positive way to the automotive, in the same respect that when we talked about our steel business, there was a negative impact from the LIFO. So other than giving the general reasons for the improvements or the offsets, we're not at liberty today to give the specific information.

Got it.

Paul, I guess one other thing I guess I'd share, just given the comments on the pension side. Obviously, we've put out what we believe will be higher pension expenses next year. I think it's important to reflect that this should not be new news, per se, given that the-- what impacts our pension expense. You'll notice in our release that we have a reduced discount rate and a reduced assumption on our return on assets. We update the discount rate every year in determining what our pension expense is, and because we've had declining interest rates over the last several years, that discount rate has lowered, which has caused higher pension expense. In fact, I think the last four years, we've lowered that discount rate, so isolating on that one issue, obviously, pension expense would go up. So, while it's the end of the year and we're now showing you what that amount is, that should not be a surprise to anyone that would be following our company and looking at our pension issues. Similarly, when you look at the change on the return on assets of the pension plan, while it is uncommon to change it every year, and we haven't, given the several-year performance of the equity markets, clearly, you know, all companies, including ourselves, reassess every year what is the long-term return that we should be using for our accounting purposes, and this year, we did lower it to 8.75, and I think you'll see that's also consistent with what a lot of other companies are doing, given the continued deterioration in the equity markets. So net-net, our view is clearly something that this has been expected, that we've talked a lot about over the years, and we'll continue to be, as long as we're in this environment of lower interest rates and low stock market returns.

Great. Last thing, is there an associated cash flow impact number that you can give us for '03, related to the $25m in extra expense for pension?

On the-- that's just a pension expense and not a cash item. We will say, though, that at least from our pension contribution, again, as part of our strategy to continue to bridge the under-funded pension plan, we continue to make contributions to our pension plans in excess of the minimums that are required for this, and that's all factored in and achieved through the free cash flow of our business.

Great. OK, thanks.

Your next question comes from Holden Lewis of BB&T.

Good morning. Thank you. Sort of touching again on the LIFO issue, and I guess the reason is, because in the last couple of quarters, particularly in our automotive bearings business, you had much lower levels of profitability, even though many of the positive things that you're talking about, you know, were in force there, and the volumes haven't changed materially in Q4 over Q3, either, and so I guess the question is, is that LIFO revaluation responsible for the lion's share of the sequential improvement in the automotive-- in the automotive profitability, or was there some other incremental benefit, you know, from Q2, Q3, over to Q4, that really drove some pretty dramatic improvements there?

I'll speak, I guess, to the first issue, and then have Jim really speak to, you know, how the automotive business has performed. Holden, I think, as you know, at the end of each year, we do go and assess the LIFO and make an adjustment, both positives and negatives, and we've put that in the release, where it's been positive and where it's been negative. It has been a help to the automotive business in the fourth quarter, similar to, again, it had been a negative to the steel business during the quarter. I think the fact that you can see that we announced several reasons why the automotive business performed well, from cost reductions to improved volumes to the benefits of the manufacturing restructuring initiatives, those were all net-net positives to automotive performance, as was this LIFO adjustment. Again, offsetting that, or at least partially offsetting that, were inefficiencies in our business because of capacity issues, the closing of our Dustin plant, and so forth. So again, I think it's important not to isolate on one issue, but the broader perspective that they all contributed to what was a good quarter and a good year for auto. But I'll defer to Jim to embellish.

Holden, let me come and talk a little bit about this logistics problem that we talk about. We made the-- our Manufacturing Strategy Initiative decisions in 2001, based on a forecast of the automotive industry that was less than what happened. I think we were all pleased to see the strength of the automotive industry in 2002. The downside was we took a significant amount of capacity out temporarily during 2002 to be able to close our plant in Dustin, and actually we did some other adjustments at some other plants, and then repositioned that into lower-cost markets. And we flat got caught in 2002, and so we were in a lower market overall, but with some pretty severe capacity problems, that in the third quarter and early fourth quarter were costing us upwards of $2m a month. I mean, they were significant in terms of the earnings of the automotive business.

One of the positive signs you see looking at 2002, and this is probably the first time you've a president of the Timken Company say ``growing bearing inventories was positive,'' was that we were able to work through the Thanksgiving and Christmas holidays and put some inventories in place, and we saw, particularly in December, a dramatic change in the cost of that, so that is a second factor that is quite significant in the swing of dollars, and again, that's a bit, that I was cautioning Paul, of missing, of just looking at the structural factors as we look at 2003.

Right. I mean, basically you had a big incremental improvement from Q2 to Q3, and I'm just saying that none of the positives or negatives are any different from what you spoke about in Q2 and Q3, with the exception of the LIFO piece, and so I think we're trying to get a feel for, you know, the profitability that you put on the books in Q4, is that something that acts as a decent base looking ahead, or is it mostly LIFO-driven? You can address further if you choose to. And the other question I had was just with regards to the increased raw material prices in steel -- can you give us a little history as to what exactly has caused those to spike of late? Is it simply because of the automotive piece, is it something related to the tariff situation? And why, given your outlook for maybe a little bit weaker automotive and no real recovery in industrial, do you expect those raw material costs in steel to remain high in '03?

Let me take the first one, in terms of trying to help you get a sense on the automotive business of what's sort of the structural level of profitability that we achieved, you know, taking out all of the plusses and minuses. Our assessment is that if you looked at Q1 and Q2, of 2002, and averaged them -- you know, there is quite a significant difference between the two of those, and averaged them, you would see the structural level of profitability in 2002 of our auto business. The third and the fourth quarter, then, have all of the aberrations of the logistics problem and this LIFO thing. But if you're looking for how to build a model on what was sort of the structural level, if you averaged the first couple of quarters, that would give you our view of what that number is. With that, let me pass it to Bill to talk about raw material costs.

OK, scrap is normally seasonally cyclical anyway, and we normally experience elevated costs of scrap in the first quarter. This year, it seems to be even more so, primarily because of scrap moving internationally. Because of the value of the dollar, the United States is becoming a net exporter of scrap in significant quantities. At the same point of time, scrap flowing out of the Ukraine and out of Russia has dried up, and so there's been quite a little bit of pressure on scrap prices on the West Coast and on the East Coast, as far as exporting, and that's what driving it, primarily, in the first and second quarter.

OK, thank you.

Your next question comes from Bob Schenosky of CIBC.

Good morning.

Hi, Bob.

A couple of questions, first one for Bill. With prices as high as what I'm hearing as $175 off the West Coast for scrap, do you think that's a sustainable level, or do you think it'll start coming down, because also the concerns with the lack of availability out of HBI, down in Venezuela. What's your view for the entire year? You think it'll start to settle down somewhat?

Well, I think it'll-- definitely. The $175 you're referring to, I believe, was one scrap buy by the Koreans.

Right.

That's not sustainable. Short-term, that causes some disruption of scrap supply domestically, but that'll go away. If nothing else, the integrated producers will start converting more of their tonnage over to iron ore.

Yeah. OK. And then the second part of that, last conference call you talked about the potential of some increases in your contract prices for 2003. As you look at the business plan now, do you think it's enough to offset the scrap cost increases for the year?

Well, as we've talked about before, many of our contracts have scrap surcharges in them.

OK, then let me put it this way -- is it enough to offset also the additional increases that you're going to realize in energy, so it is net-net a positive for 2003 versus '02?

We also have contracts that have energy surcharges in 'em.

Great. OK, OK, so I'll take that to be ``yes.'' Second question, for Jim -- you talked about the cost savings targets, you've reached $80m -- congratulations, by the way. And then shooting for the $120m by the end of '04. What would be a good way to break out that remaining component between '03 and '04?

Bob, I don't have those numbers at my fingertips. I don't have those numbers at my fingertips. I guess if I were sitting and trying to figure out how to do it, I'd straight-line it over that period of time, but I honestly don't have those numbers here.

OK. And then going, I guess, just the last question, which, you know, not to beat a dead horse, but relative to the first two questions that you had today, I guess what we're having a hard time in terms of the LIFO adjustment is simply with it being an accounting issue, and many of the steel-related companies that are doing LIFO accounting will actually break it out as a separate line item, and if you're not willing to talk about it in specifics, is it fair to assume that that one item is relative size to how you list those in your press release?

No, and again, I think obviously we appreciate the sensitivity on wanting to know and break out all the components of why each of the businesses did what they did. I think our sensitivity, especially now, is that we have a lot of reasons why the businesses have either performed well or not so well during the quarter, and we've listed them. I wouldn't necessarily say we've quantified each of the individual pieces that well, where we've prioritized from the highest to the lowest, other than to say that, in our judgment, as we've looked at all the reasons to most, I guess, be the least misleading and to show the best understanding of what happened in the business, we listed them, so I think it's fair to say that because we listed a lot of-- you know, if you're focusing, let's say, on the automotive side, we listed several of the reasons why the businesses did well, all that had a magnitude that where the reasons why it did well and similarly, that were offset, because of issues that were detrimental, we've listed as well. Again, I think the irony here is that on the flip side, we had the same issue on the steel, but in the other direction. There, we were constrained because of a LIFO adjustment, but we go through this every year, and I think it's just been our view that we want to put the weighting to where-- where the real answer is, which is that there were multiple reasons, as opposed to just one reason why the business performed the way it did.

No, no, I recognize that and I appreciate that, but given that it's, you know, an ongoing component of business, on an annual basis, that's where I'm having a hard time not understanding why you're unwilling to release the number, given it's simply an accounting function?

Right, and again, I think what we're trying to do, as best as we can, is really not to put anything that would be misleading, or if we're going to put in, you know, ``this was one issue that caused a result and here's the amount,'' that then we should be putting in, ``well, here are all the other issues,'' and quantifying those amounts, which arguably are a little bit more subjective than an accounting LIFO adjustment. You know, I think we've-- as fairly and openly have communicated what were the reasons, the magnitudes, again, by listing them all there, you should feel all contributed to the benefit of the performance in auto or to the detriment that would have had in the steel business. I think, you know, we will have detailed public filings that go into more details when we can, and we'll share that with you when we make those filings.

OK, and if I can, one final one for Bill. In terms of the steel business, given the strength in automotive, can you talk about it-- maybe if you're not willing to give specifics in a more general sense, but what percent of the steel business in the fourth quarter was actually the component business?

Let me try to mentally-- probably in the magnitude of 15 percent.

Your next question comes from Mark Parr of McDonald Investments.

Yeah, good morning, guys.

Good morning.

Good morning.

First, I just want to congratulate you on a good quarter, and look forward to continued progress. I had, like Bob, I had some-- a lot of my questions related to the steel side. I just-- if I could follow-up on that, Bill, could you help us to understand where you expect new steel capacity to emerge in '03 for, you know, for engineered bar steel projects?

Well, the one that's already been announced is Qualitech. Now, whether or not, you know, whether or not they in fact get into SBQ products in '03 I think is anyone's guess.

Because my understanding of that, you know, the company who bought that is very emphatically indicated a desire to manufacture commodity products and not move into the SBQ market.

But they always put one sentence at the end of that, and we are also interested in SBQ, but I agree, it sounds to me like they're probably not all that concerned about in '03.

OK, but other than Qualitech, is there anything else that you're aware of?

That's the only one that's of any significance.

OK, all right, terrific. That helps a lot. Secondly, I had-- Jim, I had a question on the automotive market, where you had indicated, you know, the benefits accruing to Timken Company of new product rollouts and you know, some of your value-enhancing and you know, higher engineering content product solutions. Could you give us some indication of the impact of that ongoing rollout in '03 versus '02? You know, how far of the way up the learning-curve are we, or how far we along the way up the product ramp-up?

Mark, the-- in 2002, I think the number that we had, of new product launches, was on the order of $70m. Just give me a second. I've got to make sure the answer I'm going to give you is not forecasting. Just one second. For-- OK, as we look forward, and we look at the commitments we have in the automotive industry, we would anticipate for the next three or four years, we would have numbers in the same ballpark.

OK, so incrementally speaking, on top of the $70m, or just another $70m, so no change from '02? Or is it additional incremental to the $70m that you achieved in '02?

The statement that I was making was that each year, for the next four or five years, we would launch new products, with a sales value in sort of the same ballpark.

OK, all right. OK, that's-- that is helpful. And I had-- wait a minute, I had another question. I'll come back later. This last question I had just totally slipped my mind, but I'll be back. Thank you.

Your next question comes from Andreas Wiley with JP Morgan.

Good morning. Just have two simple questions, please. First, if you could, please, break down your 12% growth you had in Q4 into the components -- structural, organic growth, and contributions from currency, and second question, if you could also comment on market share changes you have observed in Q4, whether you have-- do you feel you have gained some market share from your competitors?

Andreas, the first question, I think, again, I don't have a detailed breakdown here, so this isn't going to be detailed, but I think if you look at the fact that the fourth quarter of 2001 was post-9/11 and the fourth quarter of 2002 was normal business in a relatively depressed economy, the difference between those two account for the vast majority of the sales growth across the business. Clearly, there is a bit of currency impact in Europe, but I think it would be-- it would be minimal compared with the impact of the overall change in the economy, and the actions of our customers in that period of time.

In terms of penetration, there are specific markets where we believe we've achieved penetration. I think probably the one that is most significant, and I think we've been very public about, is our steel bar business, simply because of the exiting of the market by a number of our competitors. If you summed up across the rest of the company, I don't think you'd say there was a significant change.

Were there any large acquisitions that contributed to the 12%, or is that--

--no.

Basically on a comparable basis?

It's on a comparable basis.

OK, thank you.

Your next question comes from Aaron Cohen of Karsch Capital.

Hi, gentlemen, I have a couple of questions. One is, you guys said in your press release, in the outlook, you said global automotive would be softer. I wonder if you could elaborate on that a little bit more. And then second question is, a little more on the mechanics of closing the Torrington transaction, in terms of when the- have you picked a manager for the offering, when does the offering come, when does the deal close? And then third, will you need any contributions into the pension fund next year?

OK, I'll-- this is Jim Griffith. I'll take the market question, and Bill, if you could help me on this, because I'm not sure I can always rattle the numbers off. We went into 2002 anticipating the North American vehicle market would be sort of in the $16m range. Obviously, it's outperformed that significantly and yet as we look at 2003, we don't anticipate it staying at the very high level. You know, the December numbers were, if I remember, were like $18.4m, and the overall market was $17m-something for the year. We're forecasting something in the $16M to $16.2m range. That's just pure and simple, and then the comments about Europe are pretty straightforward. We're not anticipating a major change, but we're certainly not anticipating any strengthening from where it's at. Glenn, I'll throw the rest to you.

Sure. On the acquisition, as Jim mentioned earlier, we still are on target for our first quarter closing. Relative to managers that we will be working with on the financing, we have not publicly disclosed that, but we should be doing that very shortly in advance of going out and raising our debt and equity capital, but that, again, should be shortly. I believe the third question was just contributions to the pension plan. I wasn't exactly sure if it was in relationship to how we were funding our pension plans, but--

Yeah, last year, you put in some equity, and if you just put in equity and cash, I'm just curious what are the needs for '03 and maybe '04, if you have any thoughts on that?

Sure. No, it's-- when we did, as you said, in '02, make that a part of our pension plan contribution in Timken stock, we do not envision using Timken stock to fund our pension plans in '03.

Thank you.

You have a follow-up question from Mark Parr of Mcdonald Investments.

Yeah, thank you very much, my question related to the cost reduction initiative, and I was trying to remember if during the third quarter call you had indicated the annualized rate, you know, that you had achieved against the $120m goal, but what I'm really interested in is, you know, what were the realized savings on the cost reduction plan during the fourth quarter?

Mark, we'd have to get back on that as well. I don't think we have the specifics of what the amount was. I think what we know and what we track is what's the annual run rate that we're getting for that, which again, we've put out in our report, but not the specifics of the incremental amount for just the fourth quarter.

OK, do you have a sense of how much the annualized rate changed between the end of September and the end of December?

No, I don't. Obviously, as Jim pointed out, too, what we set as targets were kind of the $80m and then the $120m going out. We have, obviously, supported and come out with the annualized rate at the end of the fourth quarter, and we have not, and I guess we'll continue, I guess, on an annual basis, you know, continue to reflect where we are in achieving our targets over the next two years, but not on a quarter to quarter basis.

OK, all right, terrific. And again, congratulations on a solid performance.

Thank you.

You have a follow-up question from Holden Lewis of BB&T.

Thank you. I assume by the fact that this was never listed in any of your pros and cons for the segments, but can you comment on pricing in the quarter, but then more importantly, give us a little color about how negotiations went, I guess, specifically the automotives you know, to try to get pricing going into 2003, and whether that, you know, is likely to go into contracts and whether you're sort of seeing any visibility in pricing for 2003 at this time anywhere?

Well, on the steel side of the business, we have announced three price increases on long product, for bar product, over the last 12 months. And those have been in the public record.

And I believe you were-- those-- you had contract business that it did not apply to, that you were trying to negotiate in, going into 2003, as contracts came up. Can you give some progress as to how those negotiations have gone?

Are negotiations are fundamentally complete with the automotive companies, and that's the majority of our contract business.

Right. Is there any pricing component that'll kick into those contracts as they come up?

We were very aggressive in both price and increased volume, depending upon the customer and depending upon the product.

OK.

Holden, on the bearings side, I think you just simply look at the trend that's gone on in the auto business for the last three or four years. We don't see any significant change on that going into 2003. It's tough negotiations, but if you look at the trend for the last few years, just don't anticipate any significant change.

Certainly. But on the steel side, you know, you were telling that you were aggressive on volumes and price. I mean, we can infer, then, that you did get some of your price increases pushed into those contracts for '03, you're just not giving the details?

Correct.

OK.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone key pad. We'll pause for a moment to compile the Q&A roster. At this time, I'm showing no further questions.

OK, thank you. Any follow-up questions that you may have, you can direct either to myself, again, Dick Mertes, at 330-471-3924, or to Kevin Beck, at 330-471-7181. Our next teleconference has not been scheduled. However it will be shortly after our annual meeting, which is April 16th. Please refer to our website or StreetEvents.com for further details. This concludes our teleconference, and thank you for your participation.

That concludes the Timken Fourth Quarter Year-end Earnings Conference Call. You may now disconnect.