Timken Co (TKR) 2003 Q2 法說會逐字稿

Good morning. My name is Brooke and I will be your Conference Facilitator today. At this time, I would like welcome everyone to Timken Company Second Quarter Earnings Teleconference. All lines have placed on mute to prevent any background noise. After the speakers’ remark’s, there will be a question and answer period. If you would like to ask a question during this time, simple press star, then the number one 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 Brooke and welcome to our second quarter conference call, I’m Kevin Beck, Manager of Investor Relations. With me today is Tim Timken, our Chairman whom I will turn the call over to shortly, Jim Griffith, President and CEO, Bill Bowling, Executive Vice President and Chief Operating Officer and President of our Seal 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 statements 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 11,2003 for the offering of the company’s common stock, as well as the company’s annual report on Form 10-K for the year ended December 31st 2002.

The company’s 2002 annual report page 47, the first quarter Form 10-Q in the press release we issued yesterday. 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 website www.timken.com. Our comments today will focus on our financial results, excluding the impact of special items. Reconciliation between GAAP and non-GAAP financial information is included in this part of the release. Also please note that this telecast contains time sensitive information that is accurate only as of July 24, 2003 the day of this live broadcast. This call is the property of 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 Tim.

Thank you Kevin. Good morning. You’ve seen our disappointing news release that went out yesterday and the financial tailor’s that go along with it. Before I turn things over to Jim Griffith, I’d like to take a few minutes to give you my prospective. On February 18th, we completed the largest the most strategically significant acquisitions in our company’s history. It was strong move by a strong company. The acquisitions represent a magnificent opportunity, to strengthen and position ourselves as a global leader in the anti-friction bearings industry. Now that we have being in possession for five months, we clearly see that potential. In fact, just 5 months after closing the deal, the acquisition is doing precisely what we anticipated. For example, we are now going to market with a product offering that is broader and deeper, in turn, that expanded offering, the offering of the combined Timken and Torrington Companies is giving us new sales opportunities, opportunities that neither company would have had as a stand-alone organization. With an acquisition this size, it is not surprising that we have found issues, which have affected us negatively. Higher than anticipated inventories in the Torrington industrial supply chain, are dissipating more slowly than we expected, due to a slower economic growth. We will absorb these over a next few months.

We also found well-conceived cost saving programs that were not undertaken by Torrington last year leading up to the acquisition. We are implementing those and lastly, there are some issues associated with the start up of a new automotive plan in the Czech Republic and by Torrington. These will be addressed. These issues have depressed 2003 earnings but it will be corrected -- they will be corrected as quickly as possible and Jim Griffith will provide more insight into these issues. If you have being following our company for any length of time, you’ll know that one of our central strategies has always being to maintain a strong balance sheet. We said at the time of the acquisitions that we would work diligently to maintain that strong balance sheet and at the end of the quarter, our debt to capital ratio was still 51% and it was about the time of the acquisitions. Today is lower. We apply the $146m that we received recently from our interest in a joint venture with NSK to paying down this debt. This too is consistent with our financial strategy. We will generate cash from all sources to reduce debt. In spite of lower expected operating earnings, my objective is still to beat our already aggressive target for year-end at debt levels.

When we acquired Torrington, we emphasized that we recognized the importance of a quick and effective integration in fact we thought that would be the major task of the year. And it is absolutely the key to a successful acquisition. We assigned a team of our best people, people representing a cross section of key disciplines and to this mission of integrating the two organizations. Today, I can say that the integration is proceeding swiftly by any measure and exceeding our estimates. The managerial teams has been messed a comprehensive assessment of the global competitiveness of all our facilities is well along as evidenced by the announced closing already of two plans that we acquired that are not measuring up to our competitiveness standard. Simultaneously, we’re moving quickly to identify and capture synergies by leveraging our purchasing strength immediately. We’re moving with dispatch to achieve major cost savings in both manufacturing and administrative operations. In fact, on that score I am still confident that come the end of the year 2003, we will exceed our target of $20m in annualized savings.

Ultimately as all of you will know, at the same time that we have being achieving effective integration we’re having to deal with industrial markets that are simply proving much slower to recover than we or many others predicted. The slow pace of economic recovery, the weakness of key industrial markets is a major problem. A huge run up in raw material and energy prices has caused a large delta in earnings for our steel business way beyond what we expected. However, cash flow in this deal business has been strong; recovery of costs from increased prices steel products has been slow and painful. It will take longer than we originally estimated. Because we now believe that the long awaited economic recovery in industrial markets will not occur over the next six months, we will have to make more adjustments and we have more work to do in our combined Timken and Torrington businesses, we will get it done. Now I’d like to turn the teleconference over to our CEO Jim Griffith who will discuss in greater detail how we are going to tackle these problems, Jim.

Thanks Tim. Good morning. I would like to echo Tim’s comments on the strategic acquisition of Torrington and the disappointment with the performance of the base business. The acquisition is on track having an impact in the marketplace and we are on plan for achieving synergies. While we have accomplished a great deal, we still have a number of challenges ahead of us. I will walk you through each of the challenges we are facing and the corrective actions that we are taking. Let me start by reaffirming that we are committed to deliver the full $120m of benefits committed in our 2001 manufacturing strategy initiative and the full $80m in synergies from the Torrington acquisitions. The shortfall in the second quarter and the reduction of our full year estimates results from three basic problems. First, issues relating to the restructuring of manufacturing plants in our automotive group, which I will describe in detail. Secondly, a weaker than expected industrial distribution market which is delaying our effort to reduce excess inventory of Torrington products at US distributors and third, a significant increase in raw material and energy cost especially scrap and natural gas impacting in all parts of our business but especially our steel business.

The most serious of these issues is the price cost squeeze in the steel business. I will cover the automotive and industrial items; Bill Bowling will cover the third, first the automotive group. The automotive group sales of $377m were up from $196m last year. The Torrington acquisition was the primary driver of the increase, sales for Timken excluding Torrington, were up slightly from last year. EBIT for the quarter was $7m versus break-even results last year. Excluding Torrington earnings, Timken results were a loss of $1.1m. There are several elements, which impact our automotive group. First, as we discussed before, our manufacturing strategy initiative implementation has caused a number of temporary inefficiencies, premium freight, training costs and disruptions in operations. We have focused a great deal of attention on these this quarter and they are largely behind us. Secondly, within our manufacturing strategy initiative is a plan to convert most of our high volume bearing operations from tubing to forgings as a raw material source. This project is expected to generate significant productivity benefits in each of our high volume plants. Delays in expanding a joint venture plant in Kentucky and start up problems at external forging turning suppliers have delayed the implementation of this project and the achievement of the associated benefits. A corrective action plan is in place and this issue should be resolved before the end of the year.

Third, Torrington had also begun a rationalization program similar to our manufacturing strategy initiative. This was placed on hold in the second half of 2002 until we closed the acquisition. We are now completing this program but the delay will result in increased cost and deferred productivity benefits. The moves are now essentially complete and we should see the impact beginning to take effect in the third and fourth quarters.

And finally, one of the Torrington rationalization efforts was the building of a plant in the Czech Republic. This plant continues to experience operating problems, which are more challenging than we expected. We have taken a number of actions to correct the situation and are seeing improvements but do not expect to see the full benefits until the first half of 2004. Now turning to the industrial group. The industrial group sales of $390m were up from $251m last year. The Torrington acquisition is the main driver of this increase. Timken sales excluding Torrington were up slightly reflecting continued flat industrial markets around the world. EBIT for the group was $31m up from $20m in last year’s second quarter. Excluding Torrington, Timken had EBIT of $30m. The primary issue in our industrial group is excess Torrington inventory at our US distributors. We identified that problem during due diligence and put in place plans to deal with that. As we’ve put those plans together for 2003 we made an assumption that we would see an up tic in demand in the second half allowing distributors to manage that inventory and resume normal levels of purchase. It is now our opinion that the second half will not be as strong as we previously anticipated affecting sales to that very attractive segment. We are making every effort to offset this short fall with other sales. It is our expectation that distribution sales will return to normal levels in early 2004.

In closing, let me reiterate that we are confident that the direction we have taken in our transformation is correct. We are dealing with both the Torrington acquisition and managing the challenges in our manufacturing infrastructure. We are proceeding aggressively to complete both efforts and are confident in our ability to deliver the results. Now let me turn the mice to Bill Bowling to discuss our steel business.

Thank you Jim. Steel group second quarter earnings continue to be battered by high raw material cost and energy cost. Steel group net sales including inter segment sales finished the quarter at $257m up slightly from the second quarter of 2002. Second quarter sales to automotive customers were down from last year by over 6%. Sales to the bearing industry continue to be weak. In the second quarter we continued to gain penetration from competition in the industrial sale segment as our industry continue to restructure. [Inaudible] country sales were about double the sales of a year ago and we expect further strengthening for the rest of this year. [Inaudible] country sales however, are a small percentage of our total sales mix. Shipments to steel service centers and from our tool steel distribution business were better than last year but continue to be weak as a result of low overall industrial production. The Aero-spaced business continues to be weak as the majority of our businesses were commercial airline applications. Overall, we do not see signs of the second half 2003 North American manufacturing economic recovery. Our capacity utilization in the second quarter was 70-80% varying by business and product down from the first quarter. In general our capacity utilization was lower than a year ago as we reduced inventories to generate cash

In the second quarter, we had a loss of $2.7m before interest on taxes down from an EBIT of $14.6m in the second quarter of 2002. Price increases during the quarter were more than offset by extremely high raw material and actual gas cost, and cost increases for pensions and benefits. In addition, plant operations were intermittently curtailed during the quarter to control inventory levels, and to avoid extremely high electricity buy through costs. We expect raw material and energy costs in the second half of the year to continue to be high compared to both last year and the first half of this year. Despite the disappointing earnings, during the second quarter, the steel group generated $17m of cash to improve working capital management. Some competitive capacity that has been shuttered during this manufacturing recession. The competition for the products of those companies has resulted in considerable price pressure among the remaining producers. We continue to increase penetration and lower margin products at the expense of weak competitors both here and abroad. We decreased our earnings margin; however, as we increased the amount of lower margin products in our overall product mix. Raw material surcharges are included in the supply agreements we had with many customers. In addition, we have implemented price increases to recover a portion of these higher costs for customers with whom we do not have contracts. Furthermore, we have increased prices for products requiring higher levels of natural gas and their processing. Unfortunately, since these surcharges and price increases lag our raw material and energy costs increases and do not fully cover them. We will continue to have pressure on margins in the second half of this year.

During the second half of this year, we will be negotiating many of our contracts for 2004. At that time, we will again address writing commodity costs. The 201 tariffs announced by President Bush in March of this year, are levied on products that represent approximately 30% for the Steel group sales dollars. It is imperative, that the 201 remedies stay in place through their full term in March of 2005, to foster a [Inaudible]. Now I’ll turn it over to Glenn.

Thanks Bill. My comments consistent with those by Jim and Bill will exclude the impact of special items. In the second quarter of 2002, these special items were $19m for restructuring and reorganization expenses relating to our manufacturing strategy initiative. In the second quarter of 2003, these special items totaled $18m and were principally related to the integration of Torrington. Sales for the quarter were $900m, 50% over last year. Excluding the acquisition of Torrington, sales were up 5%, approximately half of which was organic and the other half the impact to foreign currency translation. Sales were slightly higher in all of our segments. So our sales were up our operating margins have declined. EBIT was $37m or 3.8% of sales approximately a 140 basis points below last year, with declines in gross margin partially offset by lower SG&A. As you heard from Jim and Bill, gross profit was negatively impacted by high scrap and energy costs as well as pricing pressures and continued operating inefficiencies in our Automotive Group. Pension and benefit costs were also higher than last year. Interest for the quarter was $13m or $5m over last year, driven by higher debt associated with the acquisition. With the 38% tax rate, net income for the quarter was $15m, $2m below last year. Our average shares outstanding assuming dilution increased to $85.8m for the quarter, with the issuance of 22m shares in February, to finance the Torrington acquisition. Adjusted EPS for the quarter was 18 cents down from 28 cents last year. Excluding the impact of Torrington, our adjusted EPS was 21 cents. When we announced the Torrington acquisition, we commented that it would be at least 10% accreted for the year, and we continue to believe that this will occur as the majority of the synergies kick in the second half of the year.

Sales for the first half were $1.8 billion, 43% over last year. And excluding Torrington, sales would have been up 9%. Earning per share was 37 cents for the first half versus 51 cents last year. From a cash flow perspective, net cash provided by operating activities was $38m for the half, which was $14m over last year. Relative to last year higher pension contributions offset improved working capital management. Our capital expenditures were $52m up $17m from last year, driven by the addition of Torrington. Capital expenditures will continue to be lower than our depreciation and amortization expense. With regard to our balance sheet, we will be finalizing purchase price accounting for Torrington by the end of the year. We have included a preliminary estimate of ongoing evaluations, which places higher values on our tangible assets that has reduced our goodwill. Total debt to capital at the end of June was 51%, unchanged for March. And in July as Tim mentioned, we sold Torrington’s MTC, joint venture with NSK and used a $146m in proceeds to reduce our debt. Taxes on this will be approximately $30m and will be paid next year. We have lowered our guidance for earnings per share for the year, to be between 80 cents and 95 cents excluding special items. And we estimate that third quarter EPS to be between 10 cents and 15 cents. Our outlook is changed with our belief that we will be seeing softening in North American automotive flight vehicle production. No recovery in the industrial markets in the second half. And that energy and raw material costs will be higher in the second half that what we saw in the first half. These factors as well as certain operating issues that Jim discussed earlier have caused us to lower our guidance. And actions are being taken to mitigate the negative impact of these issues.

That concludes our formal remarks and we’d be now happy to answer any questions that you have.

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 keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from Holden Lewis of BB&T.

Good morning, thank you very much. Can you give some clarification I guess on the Torrington information in the release. On the one hand it sounds like the Torrington having it for the fourth quarter actually was a detraction from your overall earnings. At the same time you are saying that, you know, year-to-date you’ve recognized $5m in pretax savings. How do you lose money on the net line and make money on the pretax line. Could you just clarify that for me?

Holden, Glenn Eisenberg. Clearly the Torrington numbers as we look at it for the full year, we do anticipate it be accreted for the year in our - - what we envision and that hasn’t change now owning the company for the months we have. A lot of issues affect the Torrington numbers especially called on a year-to-year basis. One, you’ve raised. While we have picked up $5m in synergies. Obviously, that’s a small portion of $20m that we envision having for the rest of this year. We also have the impact that Jim had referenced to before, that a very attractive part of their business, which is the after market for industrial needle bearings, that are in distribution were providing less or getting less sales than what we would have initially thought and that’s been---the inventories are starting to come down which would enhance our sales, in the second half, but even more so as we go into next year. Also just a seasonality if you will of Torrington, historically they’ve proved to be a much stronger earnings provider in the second half of the year than the first. And then additionally, as Jim mentioned, just the manufacturing restructuring that was delayed at Torrington, that we are now actively pursuing. So, when you stir all those up, Torrington clearly did not provide the level of earnings contribution that we would have expected for the quarter, but clearly is on track in our minds to deliver the contribution and the accretion that we have expected and communicated as we go through the rest of the year.

Okay. So, year-to-date, base Torrington has wound up being, I guess roughly $7m worse than you would have expected going into this to date. To have gone the $5m pre tax savings you know and I guess, actually on the net income you’ve lost $2m, I think year-to-date but basically the base business has been significantly weaker than you expected when you got into this.

Right and again, I say as we’ve gone through and did all of our due diligence, it was our expectations really, on what they would deliver for the year, more than just the first half if you will. But clearly, having been through the first half, it is providing lower earnings relative to our initial assumption and we believe that we’ll start to make that up as the second half proceeds, but your comment is very valuable.

Right and you said, I mean when you started to say you know, that you still expected to contribute 10% to earnings gross, you know that was a different number at $1.20 than it is at 80 cents. I guess, are you still expecting it to contribute 14 cents to 15 cents even at the lower number, thus actually recognizing $20m in savings as opposed to just getting to the run rate by year-end?

Right. Again, I wanted to get a very perceptive view. Clearly when we originally talked about the accretion that would be provided was based upon the guidance that we had at that time.

We continue to believe that the Torrington acquisition will be accretive to our earnings and obviously the base level of earnings of the Timken Company has come down, making the Torrington contribution, as a percentage of sales, even greater than what we would have expected. At the time we had, even though at nominal dollars it’s coming in, in proximity to what we envisioned, barring the you know, issues that we’ve talked about that we are a little bit behind the curl on.

Okay. So, obviously you know, since the base business is much weaker than you anticipated but you still plan on getting the same net benefit through the savings - - are you expecting - - has there been something in the synergy that’s going faster than you had expected originally or are you significantly back-end loading you know, recovery in the base Torrington business?

Holden this is Jim Griffith, let me just get back through some of the issues that I talked with you about and I think they’ll help you understand the scenario that you’re painting. The issues that have impacted us thus far in terms of earnings, were the - - first of all in the distribution market, we in fact front end loaded the burning off of distributor inventory and as that happens, there will be a disproportionate increase in shipments in the second half of the year. Effectively, the issue is that Torrington had an operating practice where, every year provided discounts for distributors to take large buys and as a result there was an over abundance of Torrington products on distributor shelves. That’s not the way Timken operates and we are trying to burn that off in a dull market and the market is more down than we thought. That obviously will give us a kick in performance in the second half.

Secondly, on the automotive side, these restructuring programs that Ingersoll Rand had started and then put on hold, while we were in negotiations to close the deal, we started again as soon as we closed the deal. We spent a fair amount of money in the second quarter making those happen. As I said, they are effectively done. We won’t have to make that spending anymore. That spending has been charged to normal operations as opposed to being cast as a restructuring charge or as an integration charge, so we wont have that in the second half. Those two issues will give us a stronger performance - - a disproportionately stronger performance in the second half than in the first half within the base Torrington business and then finally to your question. The $20m will be delivered to the bottom line this year.

And I guess [Inaudible] but about the inventory issue, it’s not like that goes from being weak to strong, right? I mean, to a large extent Torrington stuffed the channel. You’d want to burn that off but unless the economy recovers, which we don’t expect, you’re basically trying to burn it off back to sort of a more normal level. It’s not like you’re burning inventories down to a level that they need to be restocked, you’re just trying to get rid of excess stock. So, I guess I don’t see the reversal effect that you’re talking about to recapture some of the surprises that you had, you know, the negative surprise that you had there you know, in the second half.

Again, all I can tell you is that we’re working closely with our distributors. They have significantly reduced their holdings of Torrington stock in the first half of the year and in the second half of they year, we expect to see a gradual ramp up of shipments to them, returning in 2004 to normal levels of shipment.

Okay, thank you.

Your next question comes from Sharmalee Bagel [ph] of Redmann Capital [ph].

Hello this Errol Rickman, I work with Sharmalee. My question is that as we all know, stock prices - - higher stock prices come from predictability and results and it sounds like - - I had trouble understanding why the second quarter was below estimate when most people were really - - most economists and most market forecasters and the auto industry itself was looking for very low production levels in the second an third quarters and we all knew about the financing programs of the auto industry. So, I’m trying to understand better what led you to believe that the markets would improve and allow you to realize the numbers? What was behind your estimates? And to try to better understand what created this, bearing is negative GAAP and investor expectations, you had a large offering historically in the first quarter, you indicated to the street that you had certain expectations and there has been a very serious short fall in the face of a large offering. So, the purpose of the question is not to re-hatch history but to understand how conservative you are. The second half re estimates are, in view of what happened and secondly, some analysts are suggesting that Innersole will be selling the shares they received from you in the third quarter and then a road show will meet necessary. Is that the case?

Errol, this is Jim Griffith. Let me take the first question and then I’ll let Glenn take the second one. The important point to understand is that, in respect to the second quarter numbers specifically, this is not a sales volume problem, particularly in the automotive industry and in fact, not a significant sales volume problem overall. That is not the issue. The short fall in earnings was primarily from operating issues and unforeseen price/cost issues in our steel business. The scrap prices in the steel market are at levels significantly higher than we or anyone else saw in the February period of time when we went out and that is what’s driving it.

The issue in terms of market is in the industrial markets, not the automotive markets and an expectation that we had and many economists had early in the year, that toward the third and particularly the fourth quarter of the year, we would begin to see North American industrial markets rebound. That has not happened. What happens in our business when you see industrial markets start to rebound, is our distributors in the aftermarket begin to stock up and so we - - usually when that happens, we get an early kick in sales in our industrial aftermarket because the distributors are stocking up I anticipation of a rebound. We thought that was going to happen in the fourth quarter. We no longer think that is going to happen and as a result of that, we are [Inaudible] into that market and predicting less into that market. Is that okay?

And with respect to the second half now. Are you being unusually conservative in your estimates to - - are you rebounding from what happened in the first part of the year or do you think - - is there a reasonable chance you could exceed it and in what period most?

This is Glenn Eisenberg. Let me just tackle this, the second one addressing the outlook. Obviously, when we put out guidance on a projection, we make certain based assumptions that Jim alluded to, relative to the strength of the different markets. Clearly, the markets have not been as robust as we would have envisioned and we had other issues that were not market relating but just market related issues. As we look out to the second half of the year as we get together with all of our businesses and see what’s happening in the business and projecting that as our best outlook and the guidance that we’ve provided assumes that kind of level of activity. If you paint the scenario or if the actual occurrence happens where we do see an industrial recovery in the second half, it will be stronger than what we would have envisioned in the guidance that we’ve provided and we should obviously have.

Could you color a little bit what kind of economy you’re expecting for the second half? And also I just want to request if you’d comment whether there was likely to be a road show from Ingersoll Rand’s shares?

I will address the IR share portion when we did the transaction with IR they received shares in our company. They had a lock up on those shares through the middle of August so at that point in time they will have the ability to sell those shares in part or in whole. We have provided them demand rights which effectively would say that if they choose to use us to help market those shares, that we would provide that help and we will absolutely provide that when they’re ready to sell the shares assuming they want us to go out. But again that will ultimately be there call but not until the middle of August will they have that ability to do so.

Is it their indication to you or is it your general understanding I realize they haven’t notified you but is it likely that it would be affective regardless at current price levels or indicated a timing issue here?

Right obviously all I can convey to you on that time frame is that you should really seek their counsel in what they envisioned doing with the shares, what we can comment on is when the lock up will expire and that were prepared to help them put the shares into the market through going on a road show if that’s how they deem to market the shares.

But they haven’t given you any indications in formal conversation as opposed to legal modification?

Again I would just ask you to notify IR and ask them what they anticipate to do with shares, that is a 100% their call, we do not have any involvement if you will in their decision but are there to help them market the share should request us to do so.

I understand thank you.

Your next question comes from Wendy Kaplin (ph) of Wachovia Securities.

Good morning, Jim you outlined the three areas that you felt were troublesome in the quarter of the Auto side, the industrial distribution issue and also the higher than expected scrap and energy cost. Can you give us some sense ---my first question is can you give us some sense of the portion of the short fall that came from each of these factors so that we can understand the importance of each of them?

Yes Wendy that’s a good question it’s probably good that you asked it. If you look at the GAAP in our earnings and the numbers are about the same for the second quarter as they are for the years’ forecast. About half the shortfall comes from Steel business and then the half that comes from the Bearing business about 80% of that is the Automotive issues and about 10% or 20% is the industrial business. So if you took it out of a total of 100%, 50% is steel, 40% is automotive and 10% is in the industrial group.

Okay so when we look at the auto issues in terms of the new startup issues with your new tubing to forging business, the delayed activity restructuring activity with Torrington and the plant issues. Can you talked specifically you referred to corrective action but can you speak specifically as to what corrective actions you’re taking to on those three issues in auto?

I could talk for three hours on the corrective issue actions we’re taking let me just get it to the right level. The --- if we look at the temporary inefficiencies those were basically issues that dealt with we’ve gone to a global supply base, we had customer demand come up faster than we were anticipating and we did a lot of air freighting, as well as had to put some temporary logistics things in place in Europe. Those are affectively behind us it was simply a matter of reinstalled some capacity got ourselves up where capacity meets demand and that’s basically behind us. With regard to material conversion it is simply a question that we had a slower than expected ramp up and new capacity that’s been put in place. We’ve actually restructured our automotive business, recreated a team around that has an individual charged with that. The game plan has put together in fact will be delivered on time, the confidence in that is that we’re already beginning to reduce manning in some of the plants associated with that, that gives me confidence that in fact we will we are back on track and will be delivering results.

Within Torrington on the restructuring issues it was simply a question that IR obviously try to maximize performance, maximize value had put those that spending on hold and soon--. We had identified the projects knew they were there, thought they were being done while we were doing the closing when we discovered they weren’t, we released the money to get them done thought we could offset the cost with other productivity changes and had not been able to do that.

Most of the projects are now done so it’s just a matter of driving through to the bottom line. And finally within the --- with the issue in Europe we’ve actually restructured our automotive business, reappointed a single person in Europe to run our automotive business there. And he has the game plan, he has a team drawn from all over the Timken and Torrington world focusing on the plant in the Check Republic and focusing on the marketing issues associated with that plant and it’s just a long slow process to bring it up.

Thanks Jim I just have one more question that I wouldn’t forgive myself If I didn’t ask and I don’t mean to sound like a congressional enquiry here but to follow on some other earlier questions. This mist on the quarter which was extremely disappointing is this kind of did you know this? When did you know it? Why didn’t you in the spirit of disclosure [Inaudible] know that this was happening? And if you didn’t know it Jill you got all the numbers at the end of the quarter do that say something inherently fundamentally wrong with the business model?

When the --- it’s Glenn let me address that issue I guess obviously has we’ve gone through the quarter and working through it towards the end, we always felt that we still had a chance of getting within the range of guidance that we’d provided for the quarter the 20 cents plus. So towards the end as it looks like that was at risk we were focusing a lot of our time attention with management of really focusing on the second half of the year. Whether are not we were going to hit the number give or take a penny, from our perspective especially from a disclosure standpoint was much more viewed to the importance of our outlook as we went forward in the second half. And have spent significant amount of time with our businesses going through it, painting a different scenario a different outlook than what we shared with you months ago.

Our outlook on the economy the different markets that we serve so we really felt from a disclosure standpoint from just better understanding by everyone of what we’re dealing with and what our outlook for the business is in the second half. That the prudencey of having that additional time to do it gives you the best of our thinking, the best of our businesses thinking at the time, so while we’re different --- disappointed obviously that we didn’t come through on the numbers for the quarter. We felt that having Torrington just for the time frame that we’ve had it, the time spent with the management team there as well, focusing on the second half outlook on our own businesses caused that. No surprises as you’ve heard on really integrating Torrington that’s fine, the operating issues that we have Jim’s going through and again we’d be glad to have spent a lot more time going through a lot more of the details Jim took through the high level given the time of the audience right now of what we’re doing. But we believe in the estimates now or the guidance that we have for the second half based upon the assumptions we have, we’re excited as we can be about the acquisition and what it will do for us for the long term, but again it was management’s decision to have the best information and use this forum to convey what our new outlook is.

Thanks Glenn I’ll let someone else ask a question.

Your next question comes from Gary McManus of JP Morgan.

Good morning everyone and just so I make sure I got this right you say 10% of accretion from Torrington you were saying that before but off a lower expected earnings from now. It seems instead of being like 13 cents you were saying a $1.20-1.40 10% of that is roughly 13 cents, you’re now saying 9 cents depreciation from Torrington do I have that right?

Well I’d say one that the commitment that we have is that it’s going to be accretive when we put out the new guidance which is obviously lower than what we had; we’re saying we’re integrating the companies together; the guidance we’re providing is for the whole company.

As we go through the year the distinction on the contribution that Torrington will have versus Timken becomes more blended, and as you know in the first two quarterly releases we’ve put in the numbers on sales and EBIT for Torrington that we have and will continue to do that as long as we have, I think the message that we want to convey to you is the first year out of the shoots we expect Torrington to still be accretive, to be accretive in roughly the magnitude of what we had envisioned at the time, with again some pressures on it relative to the issues that Jim highlighted on the inventory and then on European restructuring but also there were a lot of other positives that we’ve had to throw into the mix, so we would just that on a relative basis the contribution that it’s going to provide us is going to be comparable even though from a percentage over our new guidance of earnings it could actually have a higher percentage of contribution, but - -

Okay, I just want to get to know - - I - - I - - lets assume 10 cents secretion form Torrington, just for, you know, talking about it. You had, I mean according to your numbers in the press release, 3 cents dilution from Torrington in the first half, right?

That’s correct; we were even in the first quarter and 3 cents diluted in the second.

Do you expect - - do you expect, you know, somewhere around a 13 cent secretion in the second half, how would you weigh that between the third and fourth quarter. In other words the 10–15 cents you expect in the third quarter, how much comes from accretion from Torrington?

Well again, as you - - you’ve seen the guidance that we’ve put out, not just for the year but the third quarter and we expect to have a much fourth quarter than we would third quarter. so the answer is, we expect Torrington to contribute much more on the fourth quarter, that would be seasonally, if you look to the back historically of how the numbers were when I.R. reported them as a segment, they always were a stronger performer in the fourth than any other period of the year, plus we’re going to have the benefit of the synergies. Year-to-date at 5m of synergies we still have 15m to capture and as you would expect we’re going to capture most of that as we go through the rest of the year on our way to getting ultimately to the 80m three years from now. So, we also - - the reason for the lower third quarter is much more of the seasonal pattern as well for the Timken company as being a seasonally low period of time for us, but again the contribution that Torrington is going to provide us is there it will be accretive, the synergies are on track to come in and other than just - - really the two issues that Jim identified relative to Torrington, no surprises and we would again and have said that those truly weren’t surprise the magnitude of how long it will take to absorb the inventory to come out of our distributors hands because of the economic environment we’re in. and that the restructuring especially as dealt with the Czech plant, is going to take longer to remedy than what initially vision, but everything else is moving along well.

Just getting to two points. I mean the excess inventory - - you said in your due diligence you found out there was inventory, was there more inventory than you thought when you were your due diligence? And secondly you said, you said that Ingersoll postponed the restructuring program at Torrington and you weren’t aware of that when the closing - - you know, when the deal was being done.

What we can share with you clearly is that we had a substantial amount of time on our due diligence, many, many months of going their global operations, visiting their plants, we have very similar customer bases, it’s interesting the overlap in product that we have is very small because of our presence in Taper to theirs is a needle but ultimately our customers and are distributors are very, very similar, so we had a very good feel of their business model, what they were doing, we clearly knew to the extent that their inventory levels at distributors were much higher and they have factored that into the contributions and the earnings that we would get from this year. Torrington’s numbers, needless to say, were much lower this past year than had been historically an in part before we both the company and part because of those reasons. So, you know if you ask if the magnitude of it was at a little higher, the answer is probably there’s probably a little bit more inventory than what we had envisioned but relative to the size that we envisioned that was there, you know, not in a material way. I think our bigger issue is what we thought that it would burn out into the marketplace, if the industrial economy was as we envisioned it as it was for our own business, we would have, you know call it this way, met the expectations we had of being able to sell more sales - - more product to those distributors. Because of the slowness or the - - partly this way, not the growth in that industrial market, much more than the fact they had a few more needle bearings in the distributors and - - than what we had thought is the issue.

Just last question. If I do the math, Torrington had, you know for the time you owned it in the first quarter, had a - - like a 4% operating margin, in the second quarter went down under three, 2.9%. So, do you think - - I think it’s, you know, a little nervous, I mean why, you know, - - we’re, you know, assuming, you know, you own the business longer you would get some of the cost savings. Can you talk about the deterioration in Torrington margins from the first to the second quarter?

Well, one obviously, our first quarter was a stub period, so on a full quarter to full - - full quarter basis you really don’t have that comparison, because the time that we didn’t own them in the first quarter, their results would have been lower, so the time we picked it up it would be more comparable on a quarter-to-quarter pro-forma, if you will, adjusted basis. We do expect that the margins in the business will improve over the second and again as the seasonal of the business is stronger in the second half as the restructuring that was delayed continues to go through, and as the synergies kick in again we expect much higher margins going forward.

Okay, thanks.

Your next question comes from Aaron Callan (ph) of Carsh Capital.

Morning guys, thank you for taking the call. Two questions, one is I’m trying to understand the disconnect between what some of your customers such as CAT are saying about the economy recovering and you guys not seeing it, I just - - I’m a little confused there. And then the second question and I think it refers to the second gentleman who asked a question about consistency and predictability to get a higher stock price. I’m concerned you’ve left the fourth quarter too high, if I run the numbers, assuming the mid-point of your third quarter guidance, you guys have to do 28– 43cents to hit the range you’re looking for, that would be a very large step up from the second quarter. So I’m just curious why you’ve left the guidance that high.

Aaron, this is Jim Griffith. Let me take the first one because I was with Caterpillar two days ago and I know they had a good quarter and are forecasting a good quarter. Recognize that we deal across a very broad range of industrial markets, our products both the steel and bearings ship to the broadest number of SIC codes of almost product that you can make. There are selected markets where there is upturn and that those selected markets in our estimation, are being offset, but by other markets, for example and you can talk Caterpillar - - I.R had a good quarter an is bullish about the balance of the year, conversely we sell a lot to the steel industry, and the steel industry - - you know, our steel business is not at all unusual in that industry that they are in very bad shape, so you have that contrast markets. When we look across it and the industrial markets we see effectively demand flat, that’s what our order book said, that what our economic picture said, we don’t see the turn-around coming until sometime in 2004.

We’re - - we - - I was with Dan Murphy from CAT, the head of purchasing and we were pretty pleased to hear the success they’ve had - - the international sales, that would mirror our own business, we got good sales in China, we got good sales in Southeast Asia, but overall it’s - - we see it as flat in the second half.

Aaron this is Glen, as far as the predictability, all I would say is just to echo the comments that we have mentioned earlier on the call. When you look through the second half of the year, we’ve painted now a scenario as we see it, of the different t markets that we’re serving, so to the extent that you believe there will be a stronger industrial recovery than we see currently, we would argue that there is upside but conversely if you’re telling us that you think that the industrial markets will decline, then obviously we have a bad assumption that is too aggressive. You know, you can’t help but be a little bit conservative in your views and your outlook when you’re not seeing something and you’ve been kind of disappointed to date that the markets haven’t been where the consensus of people would tell you. As we look to the second half, again, we truly do have a higher fourth quarter than third, again that’s seasonal, when you look at the fourth quarter relative to even the first and second when you won’t necessarily have the seasonality in the Timken business you have it in the Torrington business, and then on top of it we’re talking about a fair amount of synergies that are going to be driven in the fourth quarter. So, you know, our guidance is our best guess today based upon the scenarios that we’ve painted of what the business will do, and it will always our goal to meet and exceed those goals and with those basic assumptions that’s what we would expect to do.

I guess - - with this [Inaudible] plan is I guess I’m just a little concerned we’re going to be having this conversation, this is now the second time we’ve had a guide down, and I just really hope we don’t have it a third time, you know, beneficial for everybody obviously not to.

Well Aaron, I’ll be glad to have another call pre-announcing results when we find out that scrapid (ph) energy costs are now going down so we can say that the assumption of what’s impacting negatively our steel business hasn’t occurred or to the extent that interests rates drive up higher, where now we have a lower pension obligation or our pension expense is down. What we try to do each quarter is to convey to you what our best understanding of the markets are and the issues to the extent it changes, and again a lot of these things are macro out our control, we’re going to tell you what we believe at that time and not hold back, but I can appreciate the disappointment on not being able to project into the future but, you know, this is an issue that obviously not only we deal with but everybody else does.

Great, thank you.

Your next question comes from Gunner Winston of Oxford Funds.

Hi, my question at first deals with cost savings and if you clarify both timing and the amount you’re expecting for the last two quarters, be it - - you know, if we’re thinking about 5m for Q3 and 10m for Q4. And then also how you’re thinking about these cost savings hitting the bottom line and the risk of them either being competed away, offset by manufacturing plant shutdown and efficiencies or just structural cost increases Because when I looked at the fourth quarter implied guidance, you know anywhere from 20 to 43 cents a share, I have trouble getting the numbers unless we are assuming some type of growth underline business. Because if we do take $10m of cost savings for Q4, we know that we are going to have $6m to make incremental pension, probably lets say $4m or $5m incremental for energy costs. And before any assumption of growth we are at flat operating income the year before. So I’m curious what you are expecting for the auto market, we talked about industrial and then steel also where you do supply a lot to the auto market ‘cause there is a chance that we’ll have another decline in auto production for the fourth quarter. So if we look at what you earn in the fourth quarter of 19 since last year and we take that number in flat and then we add couple a cents for the accretion from Pointen (ph) you get to a number below the low point of your guidance for the year. So if you could just help me understand how you are getting to your large increase in the fourth quarter that would be great.

This is Jim Griffith I guess a couple of comments. One, your concern with the auto industry I think we would reflect, but I think we’ve been consistent in this group saying--- in this meeting saying that we had forecast a auto industry that was down for 2003 over 2002. And because of penetration increases on the steel side because of new product launches that would still generate higher sales for us. That has not changed, we’ve taken our forecast down few hundred thousand vehicles but that’s not the driver in this thing. This is not market driven.

The second point is the reason I went through the various factors that are impacting us from the Torrington (ph) acquisition point of view is to convey to you that our --- we believe our second quarter earnings are artificially depressed by some of those factors associated with the integration of Torrington. The spending to finish their restructuring programs, our effort to produce inventory on our distributor shelves of their product as that artificial depressant comes in we will naturally rising earnings in our third and fourth quarter.

Our third quarter is depressed on a cyclical basis, so that the fourth quarter when we get the benefit. Then add on to that the synergies which if you can imagine going after $20m of synergies to hit the bottom line in a year, it’s a ramp up through the year. So all of that comes together to create what we believe will be a much more robust fourth quarter than we had in the second quarter.

Okay, so for synergies is $10m a good number to assume for the fourth quarter.

I guess this is kind of --- this is Glenn Eisenberg. With the guidance that we’ve provided I think we’ve talked about the synergies coming in for the full year I think we are not trying to be that precise and then having to come the number back. But needless to say you have our guidance for the third quarter, you have our guidance for the synergies that will come in during the year. And I think whether its, you know, 7 or 12 or 10 in the middle our commitment is to deliver this year and we will continue to report back on what we’ve done.

Okay, and just quickly I guess the point being that if you get $15m of gross synergies, you are going to have definitely $12.5m of incremental pension. And then in incremental energy year-over-year negates the cost setting saving the bottom line. That’s --- without question you have given us that your guidance for pension already of $25m for the year.

Correct.

So I’m not understanding how the cost savings actually hit the bottom line here.

How the cost savings will come to the bottom line?

Right, net of any incremental cost, structural cost ---

Right, I guess that’s what I would convey is that we have the good and the bad. The bad is our higher pension expense, the bad is the higher raw material and scrap costs that we do expect to be higher. But the positives are the synergies that we are driving, the continued running of our business the getting through of the costs, the inefficiencies that have hurt us that will hurt us less sell and then ultimately be a way as the year progresses. That based upon our outlook of the markets the revenues that we envision getting and the margins that we’ll drive from them were --- our best guess in providing guidance is that will be the type of fourth quarter that we would expect to have.

Okay, great thank you.

Your next question comes from Bruce Vancarp (ph) of Sage Asset Management.

I was just wondering regarding the restructuring of Torrington I mean you guys presently knew that it bad been slowed down when you are doing your diligence. Certainly by the time of the first quarter you knew because you’ve had access to all of those managers. Two questions on this related. One, do you feel as some of the Torrington operating management was less than effective in communicating to you the status of their restructuring program and we have to deal with those people differently going forward?

And part two to that how do you have --- obviously the restructuring there is, and you’ve crossed issues that are different than you had previously thought they were. How do you have confidence in the synergies going forward and the cost savings going forward getting that plans in public question. Thank you.

Let me step back, this is Jim Griffith. As we went through due diligence remember our due diligence was completed affectively in October when we signed the purchase agreement and then once we did that again remembering these are two companies Torrington and Timken that are competitors, we had limited access to them. The access that we used focused on how to bring the deal to closure and how to plan the integration. They went on and operated their business they made a decision at that point to stop spending on those in the plants and we did not have access. We were not dealing with the plants so we did not know that until after we closed the event.

But you would have known that as of your first quarter when you did your deal anyway because you owned it right?

I’m sorry?

But you would have known I mean I see what you are saying but wouldn’t you have had that information, you would have had full access to those managers after the deal closed.

Understand there are 10,000 people in Torrington as we brought them together and put the actual plan together that fact emerged over the period of the second quarter as will bring in the companies together and putting the plan together as we’ve got that information we began to assimilate it and we believed that we could offset that with savings in other areas. As the second quarter came to an end we concluded that we are not able to do that.

So in what way has the plan changed from what you thought it was now that you have this better information to what it is now and you --- I mean could you characterize how you’ve altered your plan given the new information?

This is Glenn Eisenberg going through the process. Obviously when you are looking to acquire a very large billion-dollar company we look at and talk to management. We review their operating plans, their strategic plans, we visit facilities and everything. So we felt that through the entire amount of due diligence we had very good access so that obviously we are listening to a very rosy story of things as you would expect from a seller.

As we’ve done our due diligence and formulated what our plans were and how strategic plans for the business as it stood along Torrington and then what it could to with Timken. We have our new numbers that clearly diminish the enthusiasm if you will, from Torrington, so as we look at it today now having it for five months is now the management team of Torrington is now the management team of Timken. There is nothing that changes our view of the outlook if you will, over the next few years of what it’s going to contribute and how we are going to integrate the businesses together.

As Jim said, yes, are there pluses and minuses from what we’ve seen? Absolutely, the minuses were, we definitely have a tougher issue or a bigger issue in the Czech Republic. There are also some very positive things that we’ve seen as we’ve gone through it, as you would expect. But there has been nothing structurally, that’s anything less than what we thought. We’re pleased with the management team that we picked up at Torrington. We picked up a lot of outstanding people that are fighting the battles just like we are within our own base business. That’s just a part and parcel of running a big complex global organization, but we truly could not be happier with the people and with the business that we’ve acquired and once we get through the short term issues, it should be an outstanding investment on the company.

Thank you.

Your next question comes from Brian Jacoby (ph) from Morgan Stanley.

Hello. This is actually Jason Devos (ph) for Brian Jacoby (ph). Regarding the pension plan, can you tell us what the status returns on assets were at the end of the quarter?

Yes. Hi. This is Sally Bailey. We only review our funded status like most companies at the end of the year so we wouldn’t have any information that would tell us what our funded status was at different than what was disclosed, just part of our 12.31.02 results.

Okay thank you.

Your next question comes from Anon Moore of Bain Capital.

Hi guys just going back to you know the commentary and predictability and consistency. You know this is – I’m going to take a slightly different approach, this is the 5th year or the 6th that you guys have got special charges flowing through the P&L statement? And while you know I understand that a bunch of them were driven by a kind of exceptional events in the outside world, stuff that was beyond your control. You know that’s just part and parcel of managing kind of a good business. Can you just comment on that philosophically? Either Jim or you know Glenn or who ever.

Anon since I’ve been here through the full 5 years let me respond to it. When we did the restructuring in 2001 we committed to our board that we would do that through that restructuring program. And then that would be it that any further changes we had to do on a manufacturing base would be charge to on going earnings based on what we saw there. And we have lived up to that. And if you – if I go back to the discussion on Torrington on the internal restructuring we’ve been consistent because that’s been charge to our regular operating earnings not pro-forma [Inaudible]. Torrington was certainly not foreseeing them. And a billion dollar transaction I happen to believe we have an obligation to our share holders to convey to them our best assessment of what we thing the on going earnings are when you have a very large event like that. And philosophically we do it on the negative, the charges were implementation. We’ve done it on the positive the last two years when we’ve gotten large positives from CDO, that’s been taken out. In the philosophy of conveying to our shareholders to the financial market what management best assessment of the on going profitability of the company.

So the inherent thing you know just lets go to the second quarter here now. You know the comment that you’re making then Jim is that the GAAP between the 5 and 18 the 13 cents and you know we can calculate the restructuring amount as you’ve release. It’s all Torrington related it is not – none of that is related to the, you know kind of existing – let me rephrase the old Timken baring or steel businesses.

Anon this is Glenn Eisenberg as part of the financial release what we’ve done is we’ve put our reconciliation in front of our reported versus our adjusted numbers by detail to explain all the different variances. By far the bulk of those unusual items all relate Torrington integration. We do have a couple of other ones that are in there such as this small refund that we had to give on the CDO. You know that obviously the CDO as Jim mentioned earlier that when we get it as a positive number we don’t treat it as a usual item, even though some companies do do that. We also had a gain on the sale of assets again we’re not including that in our normal income to distort it.

What we try to do as best as we can is to identify what is the true on going cost and income of the business and take out the issues that are one-time related. And there is no question we’re very sensitive that if you have on going expenses every time and call it unusual when does it become usual? And that’s why we go to the lengths we do to explain exactly what’s in there to tell you how long the program we envision it to be in there. And then stop the program or stop the expenses at that time. Or tell you why we’re going to be doing it again. So I don’t think it’s any thing unusual to do a transaction of this size to go through the restructuring that we’re talking about. But what we do tell you is that this is the cost of the restructuring and here are the benefits of that and then you can formulate it into reported numbers or excluding the unusual and you can make your own judgment. But that’s our best judgment.

Okay so at this point your best judgment would be that ’04 has none of these charges?

We would say that -- take it each you know one quarter to quarter. We’re going to get $80m of synergies from the Torrington integration. That integration will take us a period of time to affect to the extent that part of that $80m could be through a consolidating manufacturing facilities. We would then have a charge that would be associated with that but to – to arrive at a benefit. Most of the synergies obviously we’re just getting a quarter of them. The first year would dictate that we should have on going restructurings or implementation charges at least for a short period of time. But each quarter we’ll identify what they are and how much it was.

Okay well that’s guided slightly differently. I mean we know the $80m that you’ve talked about we know you’re going to get 20 this year or at least you are committed to get 20 this year. So can you outline broadly what you think the restructuring charges are for the remainder of this year and for ’04? ‘Cause I think what you just said in the previous comment was that there will probably be some in ’04. I mean that’s – you’ve almost got to have that laid out if you’ve got the $80m laid out. I mean you’ve got to have some kind of a time line which says we’re closing this plan and you know. Or consolidating these operations or what ever and here is the charges associated with that right. I mean I would imagine.

Right again all I could tell you is that you know the plans that we have which we do, which are very explicit. We’ve shared with you the guidance that we feel is appropriate to do so. And that’s what the numbers will be in the first year and what we’ll grow to in the third year. And frankly that’s the reason why we don’t do it every single quarters because then we’re going to get in the issue of did you make this one move on time and we’re giving you the magnitude or the sub-sensitive nature of what we’re doing.

We will affect one-time charges associated with driving those synergies. But by definition once those one-time charges are done then we’ll get the on going benefit every year of the synergies. So from an investment stand point it’s the most attractive use of capital that we can do as in integrating these two businesses together. And while I can appreciate you don’t want to say, well lets wait and see if we get the $20m or get the $80m. We’ll report on it every quarter. What we can tell you today is that based upon where we are we believe we will achieve $20m this year and we will achieve the $80m by the third year.

Okay.

I don’t know how we can say it clearer than that.

Got you, a couple of just housekeeping things. CapEx is running you know well below depreciation I think Jim kind of mentioned that in his commentary too on the prepared remarks. What can we expect this to be at in terms of ratio you know maybe as a percent of depreciation or percent of sales on a go forward basis? ‘Cause it’s obviously pretty substantially below depreciation both for the first half and the quarter.

That’s right I think what we would say is obviously given the environment we’re in you know you’d manage your CapEx spending as best as you can to drive cash flow. You’ve probably heard that our goal is to reduce our debt levels and we’re going to manage CapEx but stand appropriately and what we spend get a good return on. I think if you look at the historical average of the combined company and what we’ve done just this past year or so you’re looking at around 4% of sales. And I think just to use that as an indicative (ph) number subject to our managing that as appropriate in the conditions is a reasonable assumption.

That’s near term right Glenn?

Yes.

And longer term you would expect it to kind of jump back up to the 5.5 to 6 that you know the Timken Company has historically run? You know I’m just looking at kind of 10 years of data here.

That’s right we currently are spending less than we would other wise in the environment that we’re in. But again what we spend we look to get a good return on that investment. But I’ll let Jim speak more toward the longer term view of our capital spending.

Anon we talked about this as we were out on the road show. Part of the transformation of the Timken Company is to decrease the asset intensity. And so we are as a management targeting operating at a lower level of capital spending on a long term structural basis than we have historically. To actually give you the number it will vary from year to year it vary dramatically particularly if we put capital into our steel business it comes in big chunks. But you know 4% is what we’re doing now, 4% is what Torrington has done over the recent years, sixish percent is what Timken has done. We will be some where below the Timken number on a long term basis.

Got you and one last house keeping one again. Have you had a chance Glenn or Sally to ballpark what the ’04 pension head win might be in a give kind of potential discount rate changes and all that stuff that might be happening with lower interest rates?

Yes we certainly have been taking that under review. I would hesitate to at this point give you too much guidance on that. Because we have seen so much volatility in the discount rates and now discount rates are beginning to creep up. So obviously that will have a positive impact on our ’04 expense numbers.

I would say that we’ve been very actively involve in efforts in Washington to try to get the congress administration to support more market effective rates for calculating the contribution based on the [Inaudible] as you probably know that’s currently calculated on the 30 year treasury which is a non-market rate. And Portman [Inaudible] is looking to utilize corporate bond rate and we’re very supportive of those efforts. We believe those efforts will past that they will -- hopefully permanently. But if the minimum was temporary relief and if that happens it will have a significant impact on the pension contribution in ’04 and going out.

Great thanks Sally.

Yes.

Your next question comes from Steve Hagarty (ph) of Merrill Lynch.

Good afternoon I’m – Glenn can just ask you a quick question about the cash flow out look. The out look had been that Timken could be about break even on cash flow after the dividend for this year. And given the reduction and your outlook for net income do you still think you’ll be at that level of cash flow? And how will you make up the net income short fall?

Steve what – good question obviously from the stand point of just cash to pay down debt we announced our NTC joint venture. You know we’re not counting on the CDO payments or any kind of these one-time items all be it if those occur and obviously NTC did. Those are all favorable just from a debt reduction stand point. As far as the operating cash flow of the business you’re right with the lower guidance, the lower earnings that just by it self would dictate that we would come in below that break even level of cash flow from the business.

Having said that we are focusing on a lot of activities to generate cash. We have a new organization in place on our supply chain that’s really focuses on bringing our working capital levels down more aggressively as we go through the year to counter balance some of that earning short fall. We talked about the CapEx spending just being more stringent on that spending so that cash will be generated. All we can tell you is that there is an intense effort to generate cash for the business especially in the current economic environment. But our balance sheet will be stronger at the end of the year irrespective of every thing that we’ll look to do base upon even just the NTC than where we currently are at the end of the quarter.

So based on the combination of operating and non-operating you’re sort of still in the camp that you’ll be able to use the cash flow goals that you had at the beginning of the year?

That’s right.

And just one other [Inaudible] clarification. You’ve talked about it I don’t know if you mentioned number. What is your North American light vehicle forecast now and what was it for 2003?

The forecast for the year that I think that we’ve got at this point is in the sixteen two sixteen three range and that is slightly down as I said a couple hundred thousand vehicles from what we built our plan on but that is -- it is in that range has being -- we’ve being sixteen two sixteen five consistently for the year recognizing that down from last years results.

Tim is that sales or production you’re talking about?

I’m -- I’m sorry, say -- say that again.

Going too fast, the sixteen two to sixteen three numbers, is that North American sales or North American production?

Total vehicle—I’m sitting looking at a chart trying to tick that off its total vehicle production including heavy truck.

Well thanks a lot guys.

I’m sorry I really need to re-answer that question, its total vehicle, its total vehicle sales. We’ve got a debate on that we’re going have to come back with an answer on that question. I think the note that I got in front of me is not correct.

Your next question is from Bob Sinasky (ph) of CIBC

Thank you. I actually had a couple of questions if I could. One, could I just get some clarification Glenn in terms of the current impact on operating income and was it all dominated by industry?

Yeah the answer at least for the back end part of it was its principally driven off of our industrial business, the currency - - the favorable currency issues. We had, as you saw, around half of our organic growth in sales was impacted, probably benefited by translations.

Right

So, I think that was around $15m each. And we really don’t do it down to the EBIT level for that. But you know you are looking probably at a couple of million dollars benefit from currency, that again principally in our industrial business.

Okay, thanks, over to Bill if I could, if he is still there. Bill I had a couple of questions in terms of the field business was volume up or down for the quarter.

It was flat but somewhat of a significant shift in the mix.

Yeah, can you mention what that shift was.

Our general industrial business trends to be more on a [Inaudible] side than bars and that’s obviously where we’ve seen the most slack and so we basically went out and replace the [Inaudible] with bars. So although the sales dollars were flat, there was a change in mix.

Okay and if I remember correctly after the first quarter, a mean you weren’t anticipating the move in the scrap price. Given that it is higher, what are your scrap inventories look like.

We took a fairly significantly inventory position in May and June, once we have decided that the scrap price was going to go up back again towards the end of the year. So we also have some buy back provisions with some of our customers. So actually we are fairly well protected short term.

So that would be through the third quarter.

Yes

Okay. And then what about natural gas, given the higher prices. Have you changed energy power fuels at all during the quarter?

We are hedging more. We are up to about 60% now.

And that would have compared to what.

25-30%. And you know we’ve got several different contracts out there. And we also have some provision for natural gas storage ourselves. So I’d say they are also pretty well protected through the quarter, relative to most other people.

Okay so the cost structure for you business in the third quarter short of volume changes, should look pretty similar to second quarter?

I think that’s a fair assumption.

Okay and then if I could, probably back to Glenn on this one - -in terms of numbers, you’re talking about the 10 to 15 cents for the first quarter, I’m thinking about this sequentially. You’ve noted that a lot of the costs are going to be addressed that you know, have taken place in the first part of the year. You now have the benefit from Torrington, so when you think third quarter versus second quarter and you know the low end of your range implies as much as a 40% decline. Is this all a function of lower auto bills and the impact on your bearing and shield business or is there other things in there?

And you’re talking specifically to the change from second to third?

Yes.

It - - remember in the auto industry and in a lot of our industrial markets and in Europe, the third quarter is our cyclical low market. Europe effectively shifts down the month of August. July is a time of lots of customer shut downs, and the change from the second quarter to third quarter is a structural increase in performance then depressed by cyclical down turn.

Okay, so in other words, these are seasonal factors?

That’s correct.

Okay and if I could just finally - - I just want to clarify maybe Bruce’s question too. When you talked about you didn’t know that the company had stopped the cost programs that were being implemented at Torrington ,is that from top management? Is it from lower management? Do you have any potential repercussions to go back Ingersol with that? And then finally, if you can, when you talk about that $80m in cost savings, given that you have additional costs put onto you because of the lack of cost savings, would that then imply that there is a number higher than $80m to achieve?

Let me take the first cut of that one. You got the - - you know, the numbers that we had when we looked at the business and began the programs specifically relating to the restructuring. Why did I or did they do anything that they shouldn’t have? Obviously, they need to run their business in the normal course and that’s what you expect when you are looking to buy a company. Obviously, there is a lot of subjectivity to that and obviously as a seller you are trying to maximize the value before you sell it as we are once we buy it, so you know, are we surprised that they weren’t as aggressive in some of the actions that they take and that could have been as a cost to them? The answer is no you know. Are we disappointed that they did it? The answer is yes. We would have thought it would have been for a little longer but that’s why I say, when you look at the pluses and minuses of what we have after the fact of buying such a big business, we don’t feel negative to anything that we have seen even though we are dealing with some of those pluses and minus you know.

Is their upside above the synergy numbers that we’ve given you, you know, we are already dealing with the issues of every quarter, explaining the credibility of what we are telling you, you know. We would always hope to be able to derive more than that but suffice to say we’re still committed and we’ll continue to report up to that 80 end to the extent we’re able to drive more synergies from that which again you can infer if we---if they were slower on their manufacturing restructuring we’ll be glad to talk to that at that time.

Well I guess I could [Inaudible] Glenn is that what we should’ve done $80m that you’re talking about though. Is that, was that a number driven before you realize that they didn’t implement this cost?

All of us we’ve commented that to date, we’re very comfortable in the numbers that we have that could be a plus just like something else that we had envisioned could’ve detracted from our number. But what we’re saying is committed to $80m I can promise you the plan that we have that shows that number will be pluses that we didn’t count on and there’ll be minuses and disappointments from what we thought we would derive but we are behind the number that we’ve committed.

Okay thanks.

Your next question comes from Steve Bolkman (ph) of Morgan Stanley.

I did get in I guess this is a marathon.

By the way we know probably half the group already eating lunch and already had left but we wanted to at least make sure that everyone that was in the queue had an opportunity to make a call so Steve hopefully you ate before the call.

Just make me finish quicker. Just a couple of rogue brief ones this inventory burn off the Torrington inventory burn off, what was the order of magnitude in that system number?

The –the-- I’m questioning on a FD issue the way I answered Wendy’s, the impact of that was about 10% of the shortfall in earnings. Steve you know the profitability of the product I think you can actually work back to the sales, the sales shortfall [Inaudible].

Okay sorry I guess I miss that and then just to talk more about the fundamentals of the business a little bit here. You’ve gotten a fairly dramatics currency benefit versus your largest competitor now, are you seeing any potential market share changes based on that?

We’ve had one quarter since the Euro changed, obviously a lot things are changing in terms of the currencies as well where we all manufacturers changing pretty rapidly. I wouldn’t translate a 10% move from the Euro to thinking suddenly there’s going to be a dramatic change in market share, anymore than I would think that the depression in the Japanese economy is going to dramatically change market share.

Okay fair enough any comment on pricing? And then the after market industrial can you just expand a little bit. I think you’d made some sort of positive comments about your outlook in that area.

Nothing really new on the pricing area obviously we pushed as hard as we can and our customers pushed as hard as they can. Bill talks specifically about difficulty of pushing steel prices in the market and getting our competitors who are some of whom on their deathbeds trying to follow that.

In the industrial after market the optimism that we have is based on the fact that we brought Timken and Torrington together and we see distributors who want that line, particularly outside the United States that was one of our synergies, one of our plans and that is happening that’s being offset by all the factors we talked going on in North America.

Okay great thanks.

Your next question is from Mark Parr of McDonald Investments.

Hi, thank you. Most of my questions have been answered; you guys are really doing a marathon today. Curious, Jim, could you talk about how much - - what was the cost of the - - of re-instating the Torrington manufacturing initiatives in the second quarter?

Again, we’re not going to - -

Okay, we’re not talk through specifics. Okay, this one other question is a specific but I’m just curious, as far as scrap costs - - 2Q versus 1Q, what was the cost of scrap for you guys for the second quarter versus the first quarter?

probably of about $30 a ton, on average.

Right, and as far as the third quarter, you expect it to stabilize?

No, I expect it to start going back up again, rather significantly. The amount of exports have not dropped at all and there seems to be a shortage of scrapple on both coasts and we’re starting to see some scrap pull out of the mid-west.

Okay, just, you know for whatever it’s worth, is [Inaudible], is steel dynamics, you know indicated $8 increase in scrap 2Q versus 1Q, and their outlook for the third quarter is anywhere from -$2 to +$3. For all that’s worth, anyway guys good luck on the third quarter.

Yeah, well I would beg to differ with him. Thanks Mark.

Your next question comes from Werner Freedman of Main First Bank.

Good afternoon. Two or three rather basic questions from me, first just to clarify - - now you’ve stated that energy and raw materials cost will be higher for you in the second half than in the first half, and now I understand that this the case not because you have a special insight into price movements for these products but more because you’ve secured most of your demands for the remainder of the year. Is that correct?

We’ve secured about half, for the remainder of the year.

Okay, second question would be - -

But at higher prices.

Yes, understood, that’s because of the outlook you have. Second question is what is roughly the sales mix in your automotive business between U.S, Europe and the rest of the world?

Our sales in our automotive on the bearings side, I’m assuming you’re

Yes

Referring to, are about 70% in the U.S and the balance of the rest of the world.

Do you have a different outlook for demand for automotive bearings, and for this region for the remainder of this year?

For which region? I’m sorry.

For North America versus Europe.

Actually, not terribly - - it’s a question of degree. Both markets are forecast for the balance of the year is we’ll see the market weakening.

Okay thanks a lot.

By the way that will be our last question. And before we conclude our call I’d like to turn it over to Jim for some closing comments.

Thanks Kevin and thank you all for your interest in and patience with us with the long teleconference. Before we close I would like to emphasize a few points that were made during the discussion.

This morning we talked about some temporary problems and I’ll like to emphasize temporary problems impacting the financial performance of the company. These are being corrected as speak and they do nothing to diminish the power of the Timken Torrington combination. The positives of this combination are as compelling today as they were when we closed the deal. We’ve seen it compelling in the market place. We demonstrated it to Hanover Fair in Germany, at the SAE Show in Detroit. And as I have indicated we’re seeing it in the distribution markets with real orders coming to us as distributors try to stock up with the full Timken Torrington line and the momentum is growing.

And if you need evidence for that we’ve talked a lot about the problems in automotive and steel but note the strong performance of our industrial business in what is at best a flat market thus far. It’s compelling strategically because we’re bringing our mark --- the market access of Torrington together with the technology of the Timken Company to open new market opportunities and it’s compelling economically.

Despite the news this quarter and today I am confident that we will deliver the $120m MSI manufacturing strategy initiative and the $80m of synergies. The tactics are lined up and we’re knocking them off. I look forward to coming back to future quarterly releases when we can review with you those more promising results. Thank you.

Thanks Jim. My name is Kevin Beck my phone number is 330-471-7181. If you have further questions please call me. That concludes our call.

Thank you this concludes today’s Timken Company Second Quarter Earnings Conference Call. You may now disconnect.