Timken Co (TKR) 2003 Q1 法說會逐字稿

Good morning my name is and I will be your conference facilitator today. At this time I would like to welcome everyone to the Timken First Quarter 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, please press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Beck, you may begin your conference.

Thank you, Rebecca, and welcome to our first quarter conference call. I'm Kevin Beck, Manager of Investor Relations. With me today is Jim Griffith, President and CEO; Bill Bowling, Executive Vice President, Chief Operating Officer, and President of our Group; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO and Sallie Bailey, Senior Vice President of Finance and Controller.

Before we go 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 forecast beliefs and expectations that are not historical in nature are forward-looking statements within the meaning of the act. Timken cautions that actual results may differ materially from those projected or implied in forward-looking statements due to a variety of important factors. These factors are described in detail in the company's prospectus supplement dated February 11th 2003 for the offering of the company's common stock, also in the company's annual report on form 10-K for the year ended December 31 2002, and in the company's 2002 annual report, page 47.

The company undertakes no obligation to update or revise any forward-looking statement. Our press release announcing results for the first quarter is available on our Web site, www.timken.com. Following recent SEC guidelines, reconciliation of non-GAAP financial information is included as part of the press release. Also please not that this Webcast contains time sensitive information that is accurate only as of April 29th 2003, the day of the live broadcast. 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.

With that, I'll turn the call over to Jim.

Good morning, everybody. For today's teleconference I am going to lead off with some general comments about the company and review the performance of our automotive and industrial groups. Bill Bowling will follow with a performance review on our Steel Group, Glenn Eisenberg then will wrap up the session with a review of our consolidated financial performance, and then we'll open up for questions.

In the first quarter, we created a major strategic step in the continuing transformation of the company to a higher growth, more profitable enterprise. With the completion of the Torrington acquisition in mid-February, we have grown the company by almost 50 percent, significantly broadened our product line, enhanced the value proposition that we bring to our customers, and establish the base for increased profitability of the company, thereby creating more value for shareholders. The successful integration of the two companies is proceeding according to plan. Our earnings release outlines a number of actions that we have already launched, and some that we have already completed. We are on track to capture $20 million in synergies this year and achieve an annual rate of savings of at least $80 million by the end of 2005. Overall, as we've communicated earlier, we expect the acquisition to be at least 10 percent accretive to our earnings this year.

On a separate subject, our manufacturing strategy initiative which we announced in April of 2001 continues. We accomplished our $80 million annual rate of savings by the end of 2002 and are on schedule to deliver the total of $120 million of savings by the end of 2004. The savings generated by this strategic initiative have contributed to our improved profitability over 2001 levels and have gone a long way to offset the continuing inflationary pressure, increasing pension and benefit costs and ongoing price pressures in our highly competitive markets.

Before we look at the results of our individual businesses, there are several changes in the way we report that I would like to highlight. First, our results include for the six weeks after the February 18th acquisition date, so we have about a half quarter included in this quarter's results. Secondly, we've made some changes in the way we run the business and have changed our reporting appropriately. The automotive aftermarket segment has been taken out of the automotive group and combined with the distribution business that's managed by our industrial group. We have shifted its sales and profits to reflect this change. We have also split the emerging market business into its automotive and industrial components and are now reporting these results within the appropriate group.

Previously, these results were included entirely within industrial. We have adjusted the current and historical results presented to reflect these changes. In total for 2002, the net impact of these changes was to increase the net sales of the industrial group by $90 million and its EBIT by $22 million, with an equivalent reduction in the automotive group.

Now let's turn our attention to the automotive industrial results for the first quarter. The results are presented in the release for the business groups and Bill and I will discuss this morning--and what Bill and I will discuss this morning will exclude all impact of special items to be consistent with the way we manage the groups internally.

The North American automotive demand remained strong in the first quarter. In the passenger car and like truck arena, expanded incentives have supported relatively robust vehicle sales levels. Europe automotive markets have softened as overall economic activity there remains stagnant. We foresee continued strength in the North American automotive market and some modest improvements in Europe as the year unfolds. Our sales of $298 million for the quarter were up more than 60 percent over last year. The acquisition accounts for most of this increase, but we also experienced increased volumes from our traditional tapered business with sales up about 15 percent. EBIT for the quarter was $8.9 million, up 1.4 million from last year. Declining profitability in our traditional tapered business was more than offset by the added profitability generated by . We are disappointed in this result. With the restructuring of our base tapered business--excuse me.

While the restructuring of our base tapered business is achieving the results we're expecting, the temporary inefficiencies associated with its implementation are dragging on longer than expected. In addition, within the former automotive business, much of the restructuring undertaken by Ingersoll Rand was delayed during the final negotiations and is underway as we speak. These items are temporarily depressing the performance of this group. Continuing customer price pressures, escalating pension benefit costs and costs associated with developing new products have also contributed to the profit erosion. The completion of the restructuring programs in both the traditional Timken and the Torrington businesses and the capture of integration synergies will lead to significantly improved profitability in the second half.

Now let's shift to the industrial. North American industrial markets can be characterized as flat to declining in the first quarter. Overall industrial production declined in February and March and capacity utilization fell below 75 percent. European industrial markets are also depressed. The long awaited industrial recovery is still not visible in the near future. Sales in the first quarter were $305 million, up 31 percent over last year. As with the automotive group, the addition of Torrington was the largest driver of sales increase. It should be noted, however, that sales in our base Timken business also were up slightly during the quarter.

Sales for the traditional - up about four percent - sorry. The bulk of this increase was attributable to the beneficial impact of exchange or exchange rates, but we also have penetration increases in some selected parts of our business. EBIT of $17.8 million was up 6.7 million over last year. A relatively small portion of this increase was attributable to Torrington with the bulk of the increase coming from our traditional tapered business. The impact of our manufacturing strategy initiative on operations and some increasing volumes in our distribution segment were the main drivers of the improvement.

Looking forward, we are anticipating some strengthening in industrial markets. We expect the improved volume, coupled with the capture of integration synergies and the continuing benefits of our manufacturing strategy initiative will result in improved profitability as the year progresses. We see our three-year-old transformation continuing to deliver positive results. And now, let's turn to Steel.

Thank you, Jim. Steel Group results for the first quarter were mixed. Sales were strong, but soaring costs for raw materials and energy lowered earnings. Steel Group net sales, including intersegment sales finished the first quarter at $275.8 million, up near 16 percent from the first quarter of 2002. All of our market segments, except aerospace, were stronger than the weak first quarter of a year ago. Sales to automotive customers were up over last year by nearly nine percent. Our automotive shipments and will continue to be strong. Sales to the bearing industry, other than automotive suppliers continue to be weak.

In the first quarter, we continued to gain penetration from weak competition in our industrial sales segment. sales were over double the sales of a year ago and we expect further strengthening for the rest of the year. sales, however, are a small percentage of our total sales mix. Shipments to Steel service centers and our tool-to-steel distribution business were better than last year, but continue to be weak as a result of low overall industrial production. The aerospace business continues to be weak as the majority of our business is for commercial airline applications.

Our capacity utilization in the first quarter was 75 to 85 percent, varying by business and product. In general, our capacity utilization was higher than any quarter of last year. In the first quarter, EBIT was $6.5 million, down from $12.1 million in the first quarter of 2002. Additional sales volume, modest price increases and approved labor productivity during the quarter were more than offset by extremely high raw material and energy costs, and cost increases for pension and medical benefits. We expect raw material and energy costs to continue to be high compared to last year, but a decrease from current levels in the second half of the year.

Some competitive capacity has been shuttered during the manufacturing session, and we continue to increase penetration at the expense of our weak competition. We will start to recover a portion of our increase in scrap and alloy costs in the second quarter, with raw material surcharges that are included in the supply agreement that we have with customers on contract for the rest of this year. In addition, we have announced price increases to recover a portion of these higher costs for customers with whom we do not have contracts. Unfortunately, since these surcharges and price increases lag behind raw material price increases, we will continue to have pressure on margins for some period of time.

We have also announced price increases for products requiring higher levels of natural gas in their processing.

201 tariffs announced by President Bush in March of last year are levied on approximately 30 percent of our sales dollar, and while customers are continuing to request exclusions, to date, none of significance has been granted in our product line. We continue to advocate that the 201 remedies must stay in place through their full term in March of 2005 to properly contribute to a healthy U.S. steel industry.

Glenn?

Thanks Bill. As Jim mentioned, we closed our acquisition of Torrington from Ingersoll Rand on February 18th and our results include Torrington from that time forward. I'll first discuss our results followed by our new capital structure, which is significantly changed with our 840 million dollar purchase of Torrington. My comments, consistent with those by Jim and Bill, will exclude the impact of special items. These amounts are reconciled to our GAAP income statement in our earnings release. In the first quarter of 2002, these special items were restructuring and reorganization expenses relating to our manufacturing strategy initiative that Jim mentioned earlier and the impact of our FAS 132 goodwill writedown. In the first quarter of 2003 special items included expenses related to the integration of Torrington. They do not include any costs related to our manufacturing strategy initiative.

The integration expenses are partially offset by a gain on a sale of property at our Daventry distribution center, which has been consolidated with the other facility. Sales fro the quarter were 838 million dollars, 36 percent above last year. Excluding the partial period of Torrington, sales were up 12 percent. Approximately 3 percent of this change was the impact of currency. Sales were higher in all segments but driven predominantly by our automotive markets.

EBIT was 32 million dollars, or 4 percent of sales, and this was approximately 100 basis points below last year. Decreases in gross margins were partially offset in our SG&A. Gross profit was negatively impacted by rising scrap and energy costs, primarily in our Steel Group, as well as continued operation inefficiencies in our Automotive Group. Pension and benefit costs were also higher than the prior period as announced in our guidance earlier this year, with reductions in SG&A driven by the company's cost containment programs. Interest for the quarter was 10 million dollars, or 2 million dollars over what we had last year, due to the higher debt levels associated with the Torrington acquisition.

With the 38 percent tax rate, net income for the quarter was 14 million dollars, unchanged from last year. Our average shares outstanding, assuming dilution, increased to 74.6 million for the quarter, with the issuance of 22 million shares to finance the Torrington acquisition. Adjusted EPS for the quarter was 19 cents, vs. 23 cents last year. Excluding , our adjusted EPS was also 19 cents for the quarter, in line with guidance of between 17 cents and 21 cents. We still anticipate that will be accretive by at least 10 percent for the full year.

From a cash flow perspective, net cash provided by operating activities was $10 million this quarter, an improvement of $30 million from last year. This is primarily driven by the timing of contributions to our pension plan. We still anticipate pension contributions for the full year to be substantially higher than last year. Capital expenditures were $23 million, up six million from last year, and we anticipate capital expenditures to continue to be higher this year than we did last year with the addition of now with us, as well as new product development and introductions.

The Company's $840 million purchase of , excluding acquisition costs, was financed with $520 million of debt and $320 million of equity. Total debt ended the quarter at $997 million, resulting in the Company's debt to capital ratio increasing to 51 percent from 43 percent at the end of 2002. The $520 million of debt as a result of the acquisition was comprised of $250 million of seven-year public bonds that we issued, a $125 million asset securitization that we put in place which is now included in short term debt on our balance sheet, and the remaining $145 million is now drawn from our new $500 million five-year credit facility. The $320 million of equity is comprised of 12.7 million shares that was issued to the public at $14.90 per share, 9.4 million shares that was issued to Ingersoll Rand at the same price but with a lock-up period that will expire in August, and this brings the total shares outstanding at the end of the quarter to 85.5 million.

At the end of the quarter our total assets were $3.9 billion, a $1.2 billion increase from year end as a result of the acquisition. Included in the increase is $190 million in goodwill. This is based on a preliminary purchase price allocation that we finalize over the coming year. Our guidance for earnings per share for the year is consistent with our outlook announced earlier this year and now includes the impact of the acquisition. We expect earnings per share for the year to be between $1.20 to $1.40, excluding special items. For the second quarter, we expect EPS to be between 20 cents to 28 cents, also excluding special items. This guidance assumes continued strength in automotive markets, some improvement in industrial markets, as well as some reduction in scrap and energy costs.

That concludes our formal remarks and we'll now be pleased to answer any question that you have. Operator?

Yes, sir. At this time I would like to remind everyone, in order to ask a question, please press star, then the number 1, on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Gary McManus with J.P. Morgan.

Good morning, everybody. Hey, how much, if any, was accretive in the first quarter and how much accretion do you expect in the second quarter?

The first quarter, you'll see on the release that we had sent out, we actually do have a reconciliation that shows the performance that the Company has on a consolidated basis with , as well as excluding the impact of . And interestingly enough, in the first quarter, we reported on an adjusted basis, 19 cents a share and that's what we would have reported had we not done the Torrington acquisition. So obviously, neither accretive nor dilutive in the first quarter. What we do expect is that Torrington, for a full year, will be accretive by at least 10 percent to our results, benefiting from the earnings level that provide as well as the synergies that we'll capture by integrating the two companies together.

But in the 20 to 28 cents, is there any accretion of Torrington in that - in that forecast?

Well, obviously, we'll have the full quarter's results of Torrington at that time. We're hesitant other than giving the broad statement for the full year of giving it on a quarter breakdown. And one other thing I think that's worth mentioning - we've broken out the impact of Torrington and the results in the first quarter. As we go forward in the year and as we truly integrate the businesses, that will become more difficult to do. And, as a result, at some point in time, we will not truly be able to break out Torrington as a special line item.

Now, again, we're making the assumption that it will be accretive to 10 percent for the full year, which will make it difficult, if you will, to precisely work paper that with the integration. But we are comfortable, as a general statement, with what Torrington brings as far as the earnings power that they have and what we would expect them to achieve this year on top of the synergies that we've identified, which account, as Jim mentioned earlier, for 20 million this year - that we're comfortable with that 10 percent kind of guidance.

OK. And just looking at your guidance, it's obviously back-end loaded. If I take the midpoint of your second quarter, you're roughly saying around 45 cents or so for the first half and to get to the low-end of your $1.20 forecast for the full year requires a substantial improvement in second-half profits. Can you just kind of describe what's, you know, what's going to allow such strong earnings growth in the second half versus the first half. I know Jim was talking about a lot inefficiencies in auto and disappointing margins there. Is that - is auto a big factor? Improved auto margins a big factor in how we're going to get a substantial pickup in earnings in the second half?

Gary, this is Jim. It comes out of both the auto and the industrial business and it comes, really, from two primary contributions. One is the implementation of synergies and just by the nature of the way they happened, they're back-end loaded. They are - we are actually putting them on the bottom line now, but they ramp up strongly over the second quarter and the majority of the $20 million we'll actually see in the last half of the year.

The other piece is, in fact, the benefit of the restructuring going on at both Timken and within Torrington. Within Timken, we're continuing to get the benefit that has been offset by some inefficiencies. Actually, March was a good month in those and so I'm pretty confident that those will - in fact, peter out - the inefficiencies will peeter out over the course of the second quarter and so we'll see those benefits in the last half.

Within Torrington, the issue is a little bit different. IR, pretty naturally, in the fourth quarter put a number of the restructuring tactics on hold. We had expected, when we did our due diligence, we would see those in the second quarter, assuming they would go forth. They didn't go forth. They're going on now and we're banking on the results of a lot of that restructuring to hit and hit pretty hard in the last half of the year.

OK. Thank you very much.

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

Thank you very much. Can you delve a little bit deeper here into the industrial side? You know, the Torrington margin in industrial was pretty weak. And I guess, you know, part of that has to do with the inefficiencies that you're talking about. You can confirm that or not. I - because I assume that also the inefficiencies relate to automotive. As least it has in Timken.

But, you know, we've also spoken to several distributors that are in the business, and they've talked about seeing a lot of product hit the market near the end of the year and crossing over into the year pretty good discounts, and they did a lot of pre-buying as a result. Supposedly a lot of that came from Torrington. Can you give a sense to whether or not Torrington did a lot of figuring out the inventory and trying to convert inventory to cash ahead of the deal, and wound up giving a lot of product away at low margins which might be impacting this number?

Holden, you obviously are doing a good job of getting industry intelligence. Let me tell you first off, as we looked at the industrial business, the industrial business of Torrington, more than the automotive business, needed some work and in fact, they had a fixed-cost problem. They have gone down through the industrial decline that we've all suffered without taking out -- without doing any plant closings as we've done, without rationalizing their manufacturing, without looking at their overhead, and the fact that in our first six weeks of announcements, we announced an industrial plant closure, we announced the consolidation of distribution centers in the U.K. They're all issues that deal with getting that fixed cost out. So, in terms of the early synergies, they will be disproportionately in the industrial -- coming out of the industrial business.

Secondly, yes, Torrington did participate in a number of advanced purchased programs with our distributors. We've had good discussions with our distributors on them, we have good arrangements with them to allow us to work through those situations, and that's really not a contributor to the first quarter profitability. If you were to look at their business over time, their industrial business tends to go through this on a seasonality point of view, and their first quarter tends to not be a good quarter from a seasonality point of view.

And it may be that this is historically been their pattern, but the industrial numbers were not a big surprise to us.

OK. Can you comment also about -- in your release you talk about the guidance that you provide in some way relies on continued strength in the automotive business. Just paint that out a little bit more because obviously, most indicators make it pretty clear that you should see production coming off in the second quarter pretty well. There's some question about the second half but that looks like it's going to be down as well. You know, it looks like you're not going to see Q1 type of strength going forward. Yet the tax seems to suggest that that's what you're embedding into your guidance.

Well, this time you failed on your industrial intelligence. Remember that all during the acquisition -- and in fact, last quarter, when we talked we told you that we were forecasting the year well below first quarter rates, and in fact, were counting on it to get rid of some of the inefficiencies in our automotive segment that we've been forecasting a year in the 16.2 to 16.4 range, that's what our business plan was built on and I think this is what,. and our current forecast is in the lower end of that range.

Now I was just referring to the language in your release that says that this guidance assumes continued strength in automotive markets. I wanted to get a sense of what you were defining as strengths.

It's a good market from my perspective, that's all it says Holden, and I think that's the distinction that Jim's saying, that if you look at a lot of the consensus out there, we are a little more bullish on where the automotive production will be this year, albeit we do envision it to be lower than it was this prior year.

OK. And then just last, very quickly...

... we do expect it to be a little stronger.

OK. And then last, just very quickly, do you guys plan on doing your monthly releases any time in the future again?

We are currently looking at what we're going to provide. Now that we have the company on board, the level of information that we're getting from them and what's currently out there by other companies, so we're reassessing it and we'll hope to have a decision on what we'll provide on a monthly basis, hopefully over the next month.

OK, thank you.

Your next question comes from with CIBC World Markets.

Thank you. Can you please quantify the positive impact from currency in the first quarter on revenues and operating income?

On the revenue side, we talked at least about the increase in our sales, without the benefit of , was up around 12 percent and identified around three percent relative to our sales. We have not on the earnings other than to say that it did contribute to some extent, not that significantly, to our European earnings that would be translated back into U.S. dollars.

OK. Some of our other companies have given specific revenue numbers, but is that...

Yes, and I think we wanted to highlight at least the revenue side of it, which we have done, but with the earnings, like I said, it was a positive contributor to earnings as well, but we've not quantified that contribution. But it's not significant as is implied by the top line growth, the sales impact.

Yes, Glenn, if I could add to that. I don't know who you're talking about as terms of other companies, but it's generally more significant for someone who is manufacturing in the United States and is exporting. Our manufacturing base is relatively balanced and therefore it, you know it helps, it always helps, but it's not that significant. The more important piece is the long term change in the economy and the boost it will give, particularly to our industrial customers as they compete with their competitors from those markets., And my belief is that is the trend that will pull us out of the industrial recession that we've been in.

Great, thank you. Bill, you mentioned soaring prices for scrap and natural gas. Can you quantify the impact in the quarter and also the expected impact for both in 2Q?

Well, we buy somewhere between 80,000 and 100,000 ton of scrap a month and we saw prices go from roughly $90 a ton right before the end of the year up to 130, $135 a ton by the end of the quarter. So scrap was by far the most significant hit. Energy is probably about a third of the hit that we had from scrap.

OK, thank you. One final question, can you offer some comments on what customers have been saying about the acquisition? Have you lost any business given the greater concentration within specific customers or have you generally been able to gain business given the ease of single sourcing?

Well, it's premature. We've been together for all of six weeks and so the--I can't give you an actual metric of what we've lost and what we've gained. But let me give you some signs. First of all, when we made the announcement, we shared with the - we shared publicly the fact that in both the FTC and the European competitive and the European competitive authority went out to our customers and asked for comment. And we did not get a single negative comment in either market.

Secondly, I personally went to the Hanover Fair in Hanover, Germany, which for those who don't know, is the largest industrial fair in the world two weeks ago. And the general sense I got from customers is this move had established Timken as a legitimate player in Europe and a legitimate alternative to the - to the German and Swedish companies who are our primary competitors there. And it was opening a lot of doors for us. So, at this point, my full expectation is that we will gain more business as a result of the acquisition than we will lose because of concentration.

OK. Thank you.

Your next question comes from Steve Haggerty with Merrill Lynch.

Good morning, everyone. I had a question, Jim, for you on the inefficiencies you talked about in the automotive business. Can you just describe what these inefficiencies are? Are - is it moving people and machines around or what are, specifically, are the inefficiencies that are taking a little longer to remedy than you had hoped?

Well, they're different within Timken and within Torrington. On the Timken side, probably the biggest number continues to be premium freight and logistics costs. We're just having to move more product from places that we wouldn't have expected to be shipping it than we are. And part of that comes from a decision we made early in 2002. We delayed the reinstallation of some of the capacity we took out, particularly in Poland because we didn't expect the demand to be as strong as it is. And so now, we've spent a lot of money air freighting product from the United States and from South America into the European market.

Secondly, we have seen additional tooling costs that we thought would be behind us at this point. The pace of retooling parts in new factories - tool engineering costs have continued to drag on longer than we thought. We thought we would be done with them at this point. They've just taken longer than expected. And then, finally, on the - on the Torrington side, it tends to be the actual physical move of the equipment cost of training and that sort of thing.

And if you'll recall, part of the reason for that is that we had committed to the - to the financial markets. I'd committed to the board that at - by the end of 2002, we would stop taking restructuring charges for that manufacturing strategy stuff. And so any of those costs we're eating in the regular P&L so that it's, you know, when you see the restructuring that's there now or the extraordinary costs, they are all synergy related, integration related. Does that help, Steve?

Yes. That's - that is, actually, that's extremely helpful, Jim. Let me just follow up. If I look at the EBIT for automotive, year over year, on a standalone basis, including TKR, is that change in the EBIT margin - is that all due to the inefficiencies or does some of that reflect the way you're reporting now. I guess I'm saying is it an apples to apples comparison as far as reporting and the difference is strictly to the inefficiencies? Or is the reporting also part of that change?

No, Steve, it's due to the inefficiencies. The - all the - we've reclassed all the changes in the automotive after market, the emerging market and so forth so that the numbers that you're looking at for both periods would be comparable.

And then, just one last question. In terms of Steel, I know you guys experienced higher energy and scrap metal prices. You raised your prices where you could, but some of those have contracts that mean that the escalator of the price increases don't occur immediately. But what about for your internal sales? Were you able to pass those costs directly to your Automotive Group and your Bearing Group, and so some of the margins we're looking at for those two groups reflect higher raw material costs from you own Steel sales? I'm just trying to figure out where it may appear internally.

Well, if you come back to the comments, I emphasized a lot the restructuring nature of the expenses, but I talked about two other categories of expenses that help you explain the first quarter numbers being not as positive as we'd like them to be. As you'll recall, in 2002 we launched a number of new platforms, exciting new platforms, particularly light truck wheel ends in our Lincoln, North Carolina plant, and we've had a lot of hiccups bringing that -- it's completely new-to-the-world technology. We've had some hiccups bring it up, that has an impact on the first quarter numbers. And then, secondly, we have in some parts of the business, because we do market-based transfer prices, where we have been able to push the steel prices up in the market, we pushed them up on an internal transfer price. It doesn't apply across the board, but in some parts of the transfer price we have moved them.

It is not -- it's there, that particular one, if I remember, Bill, is not a particularly material number.

It is not material at this time.

A quarter of a million dollars or something like that for the quarter.

OK, thanks guys.

Your next question comes from Mark Parr with McDonald Investments.

Good morning, guys.

Good morning.

First of all, I'd just like to congratulate you for making the number. It's a really tough market out there. And, secondly, I'd also like to congratulate you for raising 840 million dollars of new capital in the depths of a recession. So, now that I've got that off my chest...

I thought that was going to be a plug for

I'm just a research analyst here, I don't have clients. The second quarter outlook, I'm just curious what the assumptions are that you're using. If you can -- Bill, if you want to quantify any of the assumptions that you're using for scrap and natural gas, 2Q vs. 1Q? And also, if you want to comment on what impact you might get on average selling prices for steel 2Q vs. 1Q?

On scrap we're assuming that we're not going to see any significant reduction in scrap prices until the summer, so I basically am holding those constant. Clearly on gas that peaked out somewhere around 10-11 dollars, it's down now to around 6, I think it will continue to slowly go downward. As far as prices I guess I'd rather not comment on that. We're definitely pushing very hard on price increases with some mixed results.

OK, I noticed at least on the lower end that some of the consolidation that's occurred is resulting in some fairly solid upward momentum on bar prices. This would not be direct competitors to you, has achieved over 30 dollars of price increases since the beginning of the year, which is almost close to 10 percent on their base.

And that's the magnitude that we're also going after on our non-contract business. Appreciate the fact, though, that our average selling price was higher than theirs.

Right, yes. So that could be good. Is there--do you--I just had another question on . I know this is a small piece, but the higher recovery on natural gas inventories in the last couple of weeks, could that put any kind of slowing impact on the recovery of the drilling market, do you think, over the next couple of months?

Most of our--as you know, most of our applications are deep well drilling. I don't think it's going to have any direct impact on us.

OK, terrific. And I had one other question, Jim, related--you know you really gave I think, at least you're giving an indication here that there's really been a lot of aggressive activity going on the--on the integration of and you talk about $20 million. Is the $20 million a run rate number at the end of the year or is it $20 million is what you expect to bring down to the bottom line?

That's a $20 million pre-tax impact on 2003 earnings.

OK. Alright, terrific. And again, congratulations on making the number in a really touch environment.

Thanks.

Your next question comes from with Morgan Stanley.

Good morning. It's actually for . My question is in regards to the pension fund. I was wondering if you could give us an update on the funding status, maybe a return on assets, and if you are going to make any kind of contribution this year or next year.

Yes, I'd say we've commented on the performance that we had in the fund last year, which was a minus six percent overall in the assets in the fund. Obviously, the year's early this year, although some encouraging signs in the market as of late, but we're really not in a position to comment on returns until we have it for the full year.

OK.

As far as the contributions that we'll make this year in the pension area, we've commented that it will be significantly above the contributions that we had put in last year, which you may recall was give or take I think a little over $100 million, of which we contributed both stock and cash, and we envision this year to put that in in the cash from the operating cash flows of the business.

OK. Thank you.

Your next question comes from with Asset Management.

Good morning, gentlemen. It's with Sage. On the auto, could you just help me understand or give me some color, I mean it sounds like you guys are doing pretty well in a tough auto environment. Could you just give me some color on how, in the second quarter and the rest of the year for example, you are keeping a flat or a relatively robust outlook given the announced second quarter cuts?

Well, I have to stop and start with your first comment. If you recall, I'm not real happy with the performance of our automotive business. Now that doesn't necessarily mean that's a market related issue, although certainly there's a lot of pressure on prices out there in the market. The answer is that we have, and we've talked consistently about this, is the key to that is new products. And as we sat and looked at 2003 versus 2002 and when--I'm going back to the first quarter earnings teleconference, we talked about the fact that we were forecasting the auto market at 16.2 to 16.4, significantly down in 2003 from 2004, but that our business plan was for higher sales. And that is new products hitting the market. And it is true both on the Timken side and, actually, even more so on the Torrington side. And that is the key difference in that market. Now, we're paying some of the price for that in the first quarter as we're trying to swallow the launching and the restructuring to be able to launch those new products. But that's - that is the key issue.

I mean, again, just to put it into perspective. When we - the kind of new products that we're launching tend to be those that are integrative, I guess you want to say. They integrate more of the vehicle into the bearing or the component. So that instead of selling a wheel bearing, we're selling a two-and-a-half or a hub assembly. And each time we sell one, we have significantly higher cost, higher sales per unit. And so we're - when I talk about new products, it's giving us more dollars per vehicle and that's offsetting the slowdown in the marketplace.

Do you have a - can you quantify the dollar per vehicle delta that you see '03 to '02.

No. There's not a real good easy way to relate it because it varies - first of all, it varies so much by vehicle and, secondly, the Torrington-Timken combination have thrown those numbers up in the air that I - literally, I don't have them at my fingertips anymore.

OK. Thank you very much.

We have a follow-up question from Gary McManus with J.P. Morgan.

OK. Two real quick questions. I think you were assuming 25 million of higher pension expense for 2003. And I was wondering, do I just kind of divide by four and that's what it was during the first quarter, roughly speaking?

Yes. I think that's a good assumption.

In the prepared remarks, I think only Bill mentioned about the impact of higher pension expense on Steel margins. So I'm wondering, is that - is that - is that six million more heavily weighted to Steel than it would be in the auto and industrial area?

No. As a matter of fact, I think we made the general comment that pension and benefit costs really has impacted all three of our segments this year.

OK. Proportionally.

Yes.

OK. And on Torrington, I remember in the prospectus, you know, it was said that, you know, Timken expected that $14 million of lower corporate expenses than what Ingersoll was allocating to the unit. Is that occurring on a - on a, you know, annualized run rate?

Yes. As a matter of fact, most of those costs would have gone out right away. So when we started out, the run rate should be there effectively. If anything, we're probably benefiting a little bit more earlier than we will later on in the year. But for argument's sake, I'd say - it's - it was out at the beginning and will stay there.

OK. And - but when I do the - I think my math is right. The Torrington's margins during the time you owned it, during the first quarter, was four percent and it did, you know, roughly six percent, I think, last year, if I'm not mistaken. So I'm not sure if it, you know, how do you reconcile that where it should actually be a little bit higher with lower corporate expenses?

Well, again, I can't speak to the numbers in the prior period. Just that they did do the four percent, if you will, for the time that we owned them for this quarter. Some of the numbers, when you look at relative to their numbers, you'll have some differences, potentially, in accounting. I'm not saying that was why there was a difference from what you have, but we will providing, I know, in our Q, I think, some pro forma results that could give you a little better sense, year over year performance. But they came in as we would have expected.

Glenn, if I could jump on that. That really gets at this - the issue that I raised in terms of the automotive performance. It's - it is just that we're not very happy with what's - with what has transpired in terms of the results in the plants and a bit of it has to do with the timing and the accounting for the restructuring. Last year they were pro-formaing some of those costs off and were absorbing them into the manufacturing.

So it's fair to say you'd expect Torrington to have substantially better margins than the 4 percent it did during the first quarter?

Yes sir.

OK. Great. Thank you.

Your next question comes from Greg Macosko with Lord Abbott.

Hi, thank you. Could you talk a little bit about the working capital uses. What do you expect this year in terms of contributions to the pension and working capital, I mean cash flow, excuse me. Cash flow uses for the year going forward?

Well, from a working capital standpoint we do expect that our utilization rate will be improved as we go through the year. The absolute level of working capital relative to a source or use of cash is really going to be more of a function on what our top line growth comes in. But from an efficiency standpoint we expect it to be improved from a pension contribution -- again, we do expect to make cash contributions throughout the year, we do expect it to be significantly higher than what we had made in the last year's results. But we do believe that we will use cash from our operating activities to be able to fund it.

Again, we had a significantly underfunded position, and we do expect to contribute a fair amount to it this year as we look to bridge that underfunded position.

And will there be cash charges with regard to the charges for Torrington? We have some -- as well as -- specifically, utilization of cash from Torrington?

Utilization of cash for Torrington relative to pensions or overall?

Overall, for additional charges?

There will -- the only charges that we're envisioning right now would be the integration expenses to drive the synergies between the two companies. So we're still working through where that will be incurred. We also have the issue of what will go through our P&L, versus what will go through our balance sheet.

To the extent that we do rationalization of facilities that would be Torrington related, we will actually adjust that on the balance sheet in the goodwill, versus if we were going to do it from our own, we would be expensing that. So that's still yet to be determined, as well as when we go through purchase price accounting what other changes will go through, either the P&L or the balance sheet as a result of Torrington.

OK. And with regards to this marketplace in steel scrap. You mentioned that scrap went from 90 to 110, 130 a ton, I believe. Could you talk a little bit about what you're seeing, say, in April, with regard to scrap purchases and the cost of scrap now?

Well, the cost of scrap is starting to fall, but not near as fast as when it went up. A lot of the increase this winter was seasonal, of course, another portion of it was because of units no longer being coming in from Venezuela. Well, both of those are past us. Exports are still quite strong, primarily to China. Once that starts to weaken, we would expect to see scrap prices come down. And that's really why I don't think you're going to see any movement until the summer.

OK, and with regard to steel sales, how much was there sales of steel to the Torrington operation? Did that increase at all? Or did that take any of the growth there?

We were always a significant supplier to Torrington so there was no immediate growth there. Longer term there will be some increase but not in the second quarter.

OK, perhaps by the end of the year?

By the end of the year? Yes.

Yes, just to manage your expectations, I think we've been pretty clear all the way through that that is not a material synergy. Clearly, we'll do that and maximize value, but as we've done the valuing of the acquisition, that was not one that we used as part of the synergy. You know we're expecting it might be in the order of five, maybe 10,000 tons and that's not that material in terms of the impact.

OK. And then finally, I believe Torrington has a Czech plant. Could you give us an update of how that's--how things are going there?

They have a plant in place called Olomouc in the Czech Republic and I was there, this is Jim Griffith, I was there two weeks ago. It is a good investment, they have made a good investment, it's a good plant. They moved the process that they had in place in their plant in Germany in order to make room in that German plant for expansion of the product lines there. It is going through a number of what I would call normal startup problems, taking a brand new workforce in a high tech business and learning to make product. I will tell you that the management team there said to me, "We can already feel the difference of being the Timken Company because we're seeing resources from all over the world flying in to help us solve our problems." And so, you know I think the problems that we've had there, the problems that I think Ingersoll Rand was public about, about that plant, are on their way out, but it will take some time to work through that.

OK, thank you.

Your next question comes from with Capital.

Hey, guys. Two quick questions. One is, can you give--for your guidance for Q2, can you give a little more breakdown in the margins you're making, assumptions you're making for each of the divisions. And then can you also help us for the whole year given it's a little hard, given the volatility of the last couple of years, to have a sense where that should be.

I think we want to stay away from forecasting what our margins are being. I think we wanted to provide the guidance and to reaffirm it for the year that, from a profitability standpoint, where we're going to come out. But I think projecting out to the segments you can look at the historical performance and we do look to improve on it.

OK. Can you help us qualitatively then in terms of what areas you expect to be better or worse versus the last year or recently?

The reason you're hearing a deafening silence is that we tend to run on a segment level off a business plan as opposed to comparing on a year-on-year basis. I think, Eric, if you look at what happened in the first quarter versus last year and you look forward into the second quarter, you're not going to see a dramatic change from the pattern that was there.

I think maybe I can give you a little bit more just from the sense that we do expect improved results across the segments year-over-year with, again, the possible exception on the steel--with the steel issues we have, albeit we do expect to see some mitigating impact on the cost of the raw material. But on a stand alone basis, you'll recall we earned 87 cents last year; we provided guidance of $1.10 to $1.25 from our base business. So clearly we're looking at good performance, and that's after absorbing these higher costs. so in the first quarter where we actually were lower than we were for the first quarter of a year ago since that--since the message that we do expect to see improved results in the second half over the second half a year ago.

OK, thank you. Good luck.

At this time, there are no further questions.

OK. Well, I was sitting and quietly waiting for somebody else to formulate another question. Clearly ...

Excuse me, Mr. Beck?

Yes?

You do have a question from Holden Lewis with BB&T.

Go ahead, Holden.

I'm getting in as a charm, I guess. Just wanted to get a sense - you're indicating that the 20 million in savings by year-end - you expect that to be actually recognized, not a run rate. Is that right?

That is correct.

OK. Now, you've also incurred a number of costs, which in addition to recognizing the 20 million, you should also get the benefit, at least, versus Q1 of the exit of some of these unusual costs. Can you quantify what kind of the costs are in Q1 that you've incurred to sort of get there that will reverse themselves?

Our best estimate and, as - when you talk about manufacturing inefficiencies, it's pretty hard to separate them from the normal operating issues. But our best estimate of the first quarter - and remember that's a first quarter that includes three months of Timken and six weeks of Torrington - is something on the order of $6 million.

And that's what you expect would go away as the year progresses. OK. And now, if - it sounds like you were kind of surprised at some of the actions that you found were not taken, due to the negotiations. It sounds like you were kind of surprised that some of those actions, in fact, weren't taken. You know, given that, shouldn't you - you know, shouldn't you be potentially able to get even greater synergies, given that you would have expected to take a Torrington that had some of these, you know, initiatives already completed?

Remember that our discussion and our forecast talked in relation to the accretiveness of the acquisition. And that includes a - our expectation of what the performance of the acquired Torrington division would be. That includes both the improvements that they had going on in their business and were projecting and that we identified during due diligence as well as the synergies that we were able to accomplish.

OK. OK. And just - I may have missed this when you - when you said it earlier, but, you know, given that rates are lower and the moving parts and the interest expense - what is - what are you expecting kind of the full quarter interest expense to be in Q2 at current type rates?

I think we commented before that our blended interest rate on our debt, give or take, would be in around the five percent area. Obviously, it's subject to - we have some of that floating, some of it fixed. Also that we ended the quarter at roughly around a billion dollars in debt, although we had a little bit of cash there as well. We're clearly going to be, from a cash flow perspective, backend weighted there. So I think you can assume that kind of debt level with that kind of interest rate obviously subject to interest rates changing.

OK. Thank you.

Before we conclude the call, I'd like to turn it over to Jim for some closing remarks.

Thanks, Kevin. I talked - I opened my discussion talking about the significant nature of the Torrington acquisition in terms of defining the future of the company and commented on the significance of it from a - the recapitalization of the company. Clearly, the interest that has been evidenced in this teleconference from a number of people who, in fact, were part of our - the benefit of raising that capital signifies to me the increased interest in the Timken Company that's come and perhaps the faith that was evidenced by our investors. When I think about the rest of 2003, the markets are uncertain. There's a lot of uncertainty in the economy, in the market around us, perhaps less though with the Iraqi situation settled and we thought when we did the transaction. But one thing that is very clear. The integration is going well. We will succeed with a quick and effective integration of Torrington, we will achieve the synergies, the supplies to both staffing and the rationalization of operations and our ability to achieve the 20 million dollar number this year.

More importantly, the further under the covers we get with Torrington, the more opportunities we see for growth. We have already quoted new products that incorporate both of our technologies. We've already gotten the first orders from our customers for products that the order comes to us because we are the new Timken Company with a broader product line and we see a very positive future for the people of the Timken Company, for our customers and as a result for our shareholders. Thank you for your interest in the Timken Company.

Thank you Jim, and if you have any further questions, my name's Kevin Beck, Manager of Investor Relations, and my phone number is (330) 471-7181. That concludes our call. Thank you.

This concludes today's conference call, you may now disconnect.