Timken Co (TKR) 2004 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Timken Company fourth-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. (OPERATOR INSTRUCTIONS).

Thank you. Mr. Beck, you may begin your conference.

Thank you, and welcome to our fourth-quarter conference call. I'm Kevin Beck, Manager of Investor Relations. With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO; Jacqui Dedo, President of our Automotive Group; Mike Arnold, President of our Industrial Group; and Tim Timken, President of our Steel Group. We have remarks this afternoon from Jim and Glenn, and then all will be available for Q&A. At that time, I would ask that you please limit your questions to one question and one follow-up at a time, to allow an opportunity for everyone to participate.

Before we begin, I'd like to remind you that during our conversation today, you may hear forward-looking statements related to future financial results, plans and business operations. Actual results may differ materially from those projected or implied, due to a variety of factors. These factors are described in greater detail in today's press release and in our reports filed with the SEC, which are available on our website, www.timken.com.

Reconciliations between GAAP and non-GAAP financial information are included as part of the release, as well as on the investor's overview portion of our website. This call is copyrighted by the Timken Company. Any use, recording or transmission of any portion without the express written consent of the Company is prohibited.

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

Thanks, Kevin, and good afternoon. For the Timken Company, the fourth quarter was a strong finish to a good year. Our efforts to reorganize, integrate the Torrington acquisition and to implement new strategies have built a solid foundation for profitable growth. Excluding special items, earnings per share of $1.35 was double our EPS in 2003.

The global industrial recovery arrived sharply in 2004 and challenged supply chains. Our Industrial and Steel Groups benefited from significant demand in many end markets, driving our sales to a record $4.5 billion. Strong end markets were aided by a weaker US dollar, strengthening the ability to export from North American based facilities.

Key raw material costs hit unprecedented levels in 2004. In the short term, the challenge is to recover these costs. Longer term, the increases in raw material prices will fuel investments in mining, oil, oil and gas drilling and related industrial equipment, which in turn drives demand for our products. We see strong industrial demand continuing in 2005.

Now, let's review the performance of our individual segments in the fourth quarter. Industrial Group sales for the quarter were $449 million, up 7 percent from last year. Strong demand increased sales significantly to many OEM segments, led by construction and agriculture, general industrial and rail. Sales to distributors were down for the quarter, and only slightly up for the full year compared to 2003, as the channel continues to reduce their inventory of Torrington-branded products. This inventory reduction is in line with our projections. We expect this trend to continue.

Industrial Group EBIT was $48 million, up $3 million from last year. The increase in EBIT was driven by greater volume through our improved cost structure and improved pricing. We have seen a rapid increase in industrial demand, and anticipate strong demand through 2005. Our focus is on increasing capacity, improving customer service and exploring opportunities for global growth.

Automotive Group sales for the quarter were $392 million, up 5 percent from last year, driven by increased penetration in light vehicles and strong demand in medium- and heavy-duty trucks. Sales to light vehicle applications increased despite lower vehicle production for the quarter in North America. Our products and successful new platforms, including several with Ford and Nissan, boosted sales compared with last year. Medium- and heavy-duty truck demand was Strong, with a 32 percent increase in North American vehicle production versus 2003.

Despite the revenue increase, the Automotive Group reported a loss before interest and taxes of $2 million for the quarter, compared to an EBIT of $8 million last year. Automotive profitability continues to be an issue, but we are making progress.

We saw strong manufacturing performance from our Auto Group in 2004. However, beginning in the second quarter, escalating raw material costs reduced profitability. We are improving pricing to recover these costs as multi-year contracts mature. We expect to improve profitability in 2005.

The Steel Group reported record sales of $389 million, up $131 million or 51 percent from 2003. Slightly more than $40 million of the increase was generated by volume improvement. The remainder came from surcharges and increased prices.

Sales across all market segments were better than last year, led by large increases from oil production, aerospace and general industrial customers. The Steel Group operated at near capacity for the quarter. We expect this to continue into 2005.

Steel Group EBIT in the quarter was $32 million, compared with a loss of $4 million last year. Raw material costs, especially scrap steel prices, continued to increase. We expect raw material costs to remain high through 2005. A new surcharge mechanism in 2004 allowed us to recoup a significant portion of the increased costs. The Steel Group set numerous records for productivity and shipments in 2004, and is expected to improve earnings with real price increases and contracts now in place for 2005.

In conclusion, the fourth quarter represented many of the challenges and successes we have experienced over the course of 2004. Performance in the quarter was a solid finish for the year, and positioned us well moving into 2005. We have seen the benefits of the largest acquisition in our company's history. Our ability to leverage the global industrial upturn reflects not only this acquisition but also many years of strategic work -- actions that allowed us to weather the industrial slowdown earlier in this decade and are now propelling us into the future. We are experiencing solid demand in key markets across the globe. The biggest challenges we face are responding to our customers' requirements and managing the impact of higher raw material costs.

Thank you, and now I would like to turn it over to Glenn.

Thank you, Jim. For the fourth quarter, we reported GAAP EPS of 71 cents compared to adjusted EPS of 44 cents, which excludes special items. These special items included income from CDO payments and closing our bearing operations in England, partially offset by expenses related to integration of Torrington and asset dispositions.

In addition, we recognized a one-time benefit from tax planning strategies, which decreased the annual reported tax rate to 32 percent. The adjusted tax rate and assumed rate going forward remains at 38 percent. In the fourth quarter of 2003, these special items were a net expense of 1 cent per diluted share, with income from CDO payments offset by other expenses. The rest of my comments, consistent with those by Jim, will exclude the impact of these special items.

Sales for the quarter were $1.2 billion, a record quarter for the Company, and 16 percent over 2003 with all three segments contributing to the increase. Strong performance by our Steel and Industrial Groups drove EBIT for the quarter to $79 million, a 57 percent improvement from 2003. This resulted in an EBIT margin of 6.6 percent, and was 170 basis points better than 2003, driven by strong gross profit.

With a 38 percent tax rate for both periods, net income for the quarter was $40 million, 71 percent better than 2003. Average shares outstanding, assuming dilution, increased to 91.3 million for the quarter, compared to 88.5 million in 2003, due to last October's share offering. EPS for the quarter was 44 cents, up from 26 cents in 2003, consistent with our revised estimate for the quarter of 39 cents to 44 cents.

Full-year 2004 sales were also a record at $4.5 billion, up 19 percent due to strong end-market demand, material cost recovery and foreign currency translation.

Pretax synergies from the Torrington acquisition were $80 million for the year, achieving our goal one year ahead of our 2005 target. These were driven by leveraging our combined purchasing spend and reductions in workforce.

Our Faircrest steel facility was shut down for 10.5 days in the second quarter, to clean up contamination from a material commonly used for industrial gauging. We completed the insurance recovery during the fourth quarter, recognizing $5.8 million in proceeds. The total net cost of the incident for the full year was our $4 million in insurance deductibles.

EPS for the year was $1.35, double the 67 cents in 2003, and was consistent with our revised earnings estimate of $1.30 to $1.35.

Net debt ended the year at $728 million, higher than the 706 million at the end of 2003, due to higher levels of working capital to support our sales growth, capital expenditures and pension contributions. While net debt was higher, the Company's leverage was reduced to 36.5 percent net debt to capital at the end of 2004, compared to 39.3 percent at the end of 2003.

Although operating working capital increased approximately $200 million in 2004, the Company improved its asset utilization as the average operating working capital per sales dollar was 21.4 percent, a 120 basis point improvement from 2003. Full-year capital expenditures were $152 million, up 25 million from 2003. Relative to sales, we are spending comparable to 2003 levels at 3.4 percent of sales, and well below depreciation and amortization.

We contributed $185 million to our pension plans in 2004, 15 million higher than in 2003. Pension expense for 2004 was approximately $85 million, which was slightly less than 2003. Our 2005 domestic contributions are expected to be approximately $125 million, while total expense is expected to increase to approximately 100 million.

The fourth quarter is normally our seasonally strong quarter for cash generation, and we reduced net debt by over $130 million during the quarter, with strong cash generation from earnings and no fourth-quarter pension contributions. In addition, we received proceeds from CDO and divesting non-core assets.

Our outlook for 2005 is for continued improvement in our businesses. We expect EPS, excluding special items, to be $1.70 to $1.85 for the year, and 38 cents to 43 cents for the first quarter. Our Industrial and Steel Groups are expected to benefit from continued growth in global end markets, and in the automotive markets, North American light vehicle production should be slightly down for the year, while medium and heavy truck production continues at high levels. We expect all three of our operating groups to improve profitability, due to strong operating performance, higher material cost recovery and price increases.

This concludes our formal remarks, and we will now be happy to answer any questions that you have.

(OPERATOR INSTRUCTIONS). Holden Lewis, BB&T Capital Markets.

On the margin, if you -- I guess I'm sort of curious with your comments about Torrington, and that you got sort of the 80 million annualized savings this year that you wanted to get next year. If I'm doing the math right, that looks like it's a decent incremental contribution to Q4. It looks like $11 million or something to Q4 '04 over what you recognized in '03. And I believe that that's all going into your bearings business, and yet we really didn't see any noticeable impact of that 11 million in either the industrial bearings or the automotive bearings. Can you kind of explain to me where we lost that 11 million, to sort of see the margins be flat, or margins down in auto and flat, I believe, in industrial?

I'll let Glenn respond to the $11 million question. But generically, if you look at the auto business and the industrial business, there are overriding issues in the marketplace that lowered margins and offset that, and would explain what you are seeing. In the auto business, it's pure and simple; it's raw material price increases that have not been recovered. And that's just literally squeezed that out.

On the industrial side, it's a shift in mix. We have very strong OEM markets and distribution shipments that were not as high, and that's a negative mix variance for us, and that affects the margins.

On the synergy capture, we do document, obviously, and track the 80 million of synergies that we received. Approximately half of the benefit is coming from our purchasing, as we have combined the leverage of putting the two companies together. Around 30 percent was from headcount reductions, again, that we tracked as far as implementing our plans, and then, the remaining amount from facility rationalization.

So, as far as achieving the synergies ahead of time, again, we feel very good about the actions that have been taken. And obviously, when we track the people, let's say, from the workforce reduction that were lowered as a result of combining our companies, we are still adding people in other parts of our business, as we grow. So, again, where we are focusing on one aspect of it is just the savings. The other, obviously, is continued investment in our business.

And just sort of follow up, burrowing in a little more specifically, it looks like the character of this quarter was to see really significant improvement in the gross margin. And I was kind of surprised to see that SG&A as a percentage of sales was actually up a bit year over year. And again, that is not consistent with the pattern that we've seen all year. All year, we have seen some SG&A leverage, and that did not appear to sort of be the case in Q4. Can you explain why Q4 was unique in not recognizing much in the way of leverage despite the growth?

Yes. That's a good observation, Holden. Clearly, at the end of the year, we had higher levels of S&A and, frankly, at a rate that probably will continue for a while. We leverage very well on gross profit, and S&A is just a function of continuing to make the investments to take advantage of the current market environment we are in. So obviously, the performance of the Company was very well. We are investing in the growth from a variable comp standpoint. Obviously, that kicks in, as well, given the performance. But we clearly will be at a slightly higher level as a percent of sales than earlier in the year, but less than the growth that we are experiencing within the gross profit of the business.

Can you be a little bit more specific? Because, again, there was clearly a step up in the fourth quarter relative to the prior three quarters. What specifically are the elements of that that are going to be continuing on an ongoing basis?

Well, again, you have the issues with, again, bringing in people to support the growth that we have, investing in the businesses and our systems and our processes. The compensation, obviously, from a quarterly standpoint, given the strong fourth quarter -- it's the highest that we had during the year -- would mean that that would take on the highest amount of that component, as well. So it's just overall investments in our business, but growing at a much slower rate than our profitability is.

But you definitely saw in Q4 that your rate of investment in systems and your rate of personnel additions increased, and you did have accrual true-ups, and that is kind of the reason behind it?

That's right. We are, in a sense, taking advantage of and obviously enjoying a good market now, with the expectation for that to continue. We are beginning to continue to invest to support that growth.

Now, the true-ups, of course, sort of suggest that the prior quarters are understated. This doesn't suggest that we're going to see a lack of absorption in 2005, right? We should still see some SG&A (technical difficulty)?

Well, when you say true-up, maybe I didn't appreciate your comment earlier. There was nothing that, if you will, that was a makeup for the prior periods. Again, it's just reflecting the current level of profitability that we had, the additions that we had. And that's why you should look at SG&A, especially as a percent, to be maintained, if you will, roughly at that level as long as we continue to see improved profitability.

Bob Schenosky, Jefferies.

The first question I had -- can you discuss any synergy and/or remaining charges that may take place for Torrington in '05?

Yes, Bob. I'll take that. For Torrington, we said that all the cost or, if you will, the restructuring costs related to Torrington would be done by the end of '04. So going forward, we won't have any of the one-time integration charges. Over the last couple of years, I think we had around $90 million of those expenses that were restructuring-related that we showed on the reported results, and those were, obviously, the costs that generated the $80 million of synergies.

So you don't anticipate any additional synergies in '05, then?

We would expect continued benefits from synergies. What we are saying is that there won't be additional -- I thought your question related more towards the charges. Most of the synergies that we realized were on the cost side. We still have a lot of benefits to be realized from the topline leveraging of the sales forces and distribution, as well as, still, potentially some consolidation of facilities.

We are sitting here 21 months after making the acquisition, saying we made a great acquisition, a great strategic acquisition. I can recall being asked why we were buying an automotive property at the top of the market. And I responded at that point, saying, we are not; we are buying an industrial property at the bottom of the market. And it clearly is leveraging, from a sales market penetration point of view, as we go up the cycle. So we are seeing synergies in the marketplace, as well as we will continue to drive cost synergies through the business.

I appreciate that, Jim. But just to note, we weren't the ones that asked that question.

If I could, on my follow-up -- and this is either for Jim or Jacqui -- I think most people are very concerned about the big three. But there seems to be greater enthusiasm as it relates to the transplant penetration in the US market. Can you talk about your balance between the big three in the transplants a little bit?

Let me take that, Bob, because that is partially an auto business, but remember -- we've got a steel business that is roughly 30, 40 percent automotive. And we've had some great success with the transplants. And right now, I think it's probably balanced -- maybe I'd give the nod a little bit toward the steel business, in terms of penetration increases with the transplants. We have got some really good work going with Honda, with Toyota on the steel side; on the bearing side, this Pathfinder platform is a very heavily Timken wheel end. It's got our sensorized wheel end products on it. And the new Toyota transmissions, specifically the Eisen (ph) transmissions that go into the Tundra Tacoma, were launched earlier this year -- 100 percent or virtually 100 percent Timken content on the bearing side and with some steel component stuff in it. So it's still small for us, compared with the big three, but it's ramping and ramping very nicely.

Gary McManus, JPMorgan.

I'm not a steel analyst, but I was amazed on your fourth-quarter performance there, both 32 million in profits and 8 percent margins. Now, I'm wondering, should I strip out that -- I think you said, Glenn, $5.8 million of proceeds from insurance. Is that an after-tax or pretax number? Do you think it makes sense to strip that out to get to true underlying performance for steel?

And secondly, what kind of performance are you expecting out of steel? Could they go to like double-digit margins this year? Just give me kind of a broad sense on whether we can see that continue to ramp up in profitability there.

I'll cover just the insurance one, and then let Tim talk about his margin improvement. On the steel side, we had around $6 million, which was a pretax number, related to the insurance recovery. As you will recall, throughout the whole year, we incurred around $14 million of expenses related to cleanup and lost business interruption, of which we had 4 million in deductibles. So for the year, we incurred 4 million of costs that went through their numbers on an annual basis, but for the fourth quarter, they benefited from $6 million. So the 32 million, take out the 6, would be really the more normalized level of performance that they had during the quarter.

Historically, Tim, I believe that the steel business had reached double-digit, around 10 percent margins, through the peak of the last cycle with, obviously, a mix issue in the business between tube and bar and a different environment on -- clearly, we didn't have the material price increases. So the obtainability of margins was clearly there, based on our performance, but you may want to give some light in the current market environment.

I guess I would just add that the fourth quarter was a very good quarter for the steel business. We produced well, we shipped well, we surcharged well, and obviously set ourselves up for a pretty positive start in 2005.

Last year, as we said over the year, was our time to cover our raw material costs with surcharges. As we get into 2005, obviously, the focus shifts towards improving the pricing that we seen in the market.

And just one follow-up. In your first-quarter guidance, I look at year-ago, and automotive had like 18 million of EBIT. And it's been losing money for the last two quarters. Are we assuming -- it looks like your first-quarter projection is pretty close to what you did in the fourth quarter. So we are talking around a breakeven type of number for automotive?

I'll take the first cut of it, Gary. Obviously, we expect, as a general comment, from all of our businesses for the year to be up, given the good market environment that we are in. But from, I guess, a first-quarter outlook, we expect automotive to be back to profitability, but in a nominal way, and then building up throughout the year.

The key to changing automotive profitability is the ability to get prices in Detroit, and that ramps up as contracts expire over the course of the year. That's what's driving it. So if you look at third- and fourth-quarter performance, what you'll see is something that ramps up gradually from that.

If you look at the first-quarter performance from last year, that starts a structural -- that's representative of a structural improvement we have continued on. To Jim's point, we started to be hit in the second quarter; it kept ramping up through the third, with a max in the fourth quarter of steel impact, and now we're addressing this with each customer as the contract comes off. About a quarter of the contracts came up in '04. We see about 50 percent of them coming up this year, and the remainder coming up next year.

So just to clarify, you have 15 million of auto EBIT in '04. I think you said you expect improvement on that for the full year '05. Is that right?

Absolutely.

But it's back-end loaded, of course, if you expect they have got nominal profits in the first quarter?

Yes, absolutely. You should see consistent improvement, as you have since the material impact began to hit us in the second quarter. Third quarter we hit the trough, got aligned with our customers around contract turnarounds. The fourth quarter was better than the third, and you should continue to see improvement as the contracts roll.

Wendy Caplan, Wachovia Securities.

Jacqui, can you talk about how much of the loss in auto was light vehicle versus -- I'm guessing that was all of the loss with the truck business, heavy-duty/medium-duty, being up.

And to follow on the question about your expectations for '05, Jim, I think you talked on the call about making progress. Can you give us some sense of, besides the contracts, what are some of the key elements that are going to improve profitability in '05?

I'll let Jacqui respond, Wendy.

Wendy, let me start with your question on last year in light vehicle. Light vehicle was not the issue with regard to profitability; you are right. Heavy truck was up. We are going through a portfolio management process, and we have good advanced technology in the light vehicle market, and it provides for solid profitability for us.

In terms of '05, we continue to see penetration with our integrated wheel end launches, and that's the strongest part of our portfolio mix.

And you expect that new product, Jacqui, to be the contributor to better profit in '05?

Well, yes, it will continue to be a contributor. But the basic issue -- structurally, we're improving our profitability. The major contribution is agreeing on overcoming steel prices with our customers as contracts roll.

And, Wendy, you can't separate that on a segment-by-segment basis. The difference between the auto business and the steel business -- which are the ones that have been hit us dramatically by the raw material costs -- is the steel business is an annual contracts and therefore has been able to renegotiate them, whereas the automotive customers have multi-year contracts. And as they expire, we are getting price increases, and it's simply a matter of working our way through our portfolio contracts.

I also think, Wendy, it's important to mention that we are taking these contract openings not just to resolve, obviously, the material issues, but to take those profit-based products that our customers value from technology and gain share in those areas, while we talk to our customers about minimizing the share of the products where we don't have value.

Chris Brown, Longbow Research.

Can you give a little bit more detail regarding your scrap price outlook?

Chris, could you repeat that? Your voice is real soft on our --

Can you give a little more details regarding your scrap price outlook?

We'll turn you to our scrap expert, Mr. Timken.

Well, I left my crystal ball in my office, but let me give you our view on things. Obviously, you might have seen what is happening to bundles, the early look on bundles in February. Clearly, over the last couple of months, we have seen prices come down. Our expectation for the year is that we will stay at the high end of what we've seen over the last, say, 12 to 18 months, throughout this year. There don't seem to be any changes in the fundamentals that have driven the pricing up. I think will see some relief as a result of alternate iron units coming into the market, but for the most part I have a feeling we're going to see scrap stay high.

Andrew Obin, Merrill Lynch.

Just in regards to just going back to automotive business, are you guys finding that you need some sort of base capacity in the automotive business going forward? And I was thinking a few years down the road, four years down the road, that you are reluctant to walk away from contracts, to make sure that you have something to cover your fixed costs when the industrial business sort of turns down? Is that something how you think about it?

You're touching an ethical chord at the Timken Company. We're a company that signs agreements, enters into agreements, and we expect our customers to abide by the agreements and we expect to, as long as that is possible. And our relationships with our automotive customers -- our efforts aimed at cooperatively developing technical solutions to problems. And that requires that we maintain a good relationship with them.

But are you finding that, sort of going back six months, are you finding that it's harder to walk away from contracts than you thought?

No, as the contracts come up, Andrew, to underscore what Jim said, we are focusing on restriking the contracts on the products that add value. And the products that don't add value and therefore can't generate margin we're walking away from. We are not maintaining low-margin contracts with the customers to protect for a potential hole in industrial.

And customers who are not willing to pay for that value in this marketplace are not seeing new agreements.

So if a contract doesn't make money, at the end of the day, you'll walk away from it?

If it does not make sense, we are not staying in that part of the business. And that's not just an automotive statement; that applies across the Company.

And it's the right thing to do with the customer in mind. Customers need their suppliers to have the kind of profitability to deliver the technology and the resources that they need. So it's not just an internally focused issue; it's absolutely a customer focused issue. We need to be profitable to deliver to our customers the kind of technologies they need to move forward.

On another note, you guys are a fantastic sort of lead indicator for what is happening in the rest of my universe. Could you guys comment what you are seeing in your various end markets going into 2005? Because your contracts probably -- you know what is going to happen for the next probably three to six months in my world. Can you guys comment on the outlook by end market?

I can kind of gloss over the automotive side, because the numbers are so public, and they in fact are -- we agree effectively with the public forecast. It might be more useful to let Mike Arnold talk about what he is seeing across the range of industrial markets.

As you know, we sell to markets as diverse from the rail industry out to aerospace to heavy industries like steel and other metals, all the way through industrial and automotive distribution. So it's a wide range of industries. We continue to see strength in all industries, actually, across the board. Some of them we will see some slowed growth in 2005, but in fact, we see growth actually across all segments.

So you're not seeing any kinds of slowdown, nothing sort of stands out going into 2005?

Well, some of slowdown you will see is in some of the off-highway equipment, as an example, that just exploded in '04. In particular, the ag side and some of the mining had just such explosive growth that they can't keep up that pace. So they will grow, but in fact, it will slow. Then as you look across the world, you will see different geographical markets that will be reacting very differently. You will see the European markets that have been moving slightly slower than, certainly, the Asian markets. The explosion in China will continue at a greater pace than I think most think, albeit slightly slowed down in the heavy sides of the industry, with regards to investments in power gen and materials making and these sorts of things, where the government has actually put a slowdown on capital available for new investments in those markets. So you really have to stand back and look across the world at all these different segments, but the general consensus still is growth, albeit some of the industries which have exploded in 2004 will see slower growth.

But in construction and ag in particular, these are some of your key customers. I understand that Cat's revenues grew by 30 percent in 2004, and nobody is expecting them to grow by 30 percent in '05. But are we talking about slowing down to single digits, are we talking about slowing down to teens -- I mean, construction, ag -- any color?

Well, as usual, if you want to know about Caterpillar, you probably should ask them.

No, no, no. I'm not looking anything -- but just by industry, what are you guys seeing, just so I can model the industrial business better next year?

Mining is still very strong, but at a slower pace of growth. Ag is still strong, at least through the first half of the year that we see, albeit at a slower pace of growth. And the construction equipment, which really did not explode, I would say, probably at a constant pace from what you saw last year. That would be our best scenario, at least as we look at our customer base across the world.

Tobias Willow (ph), Blackrock (ph).

Can you remind us how much was the raw material hit in the auto segment in 2004?

We would say that, I guess, obviously, raw material for the whole company, we believe, for the most part, that we got a substantial amount of that passed through as a company. Clearly, the one area, as Jim articulated earlier, that wasn't able to pass on as much was within the Automotive Group. As the contracts mature, obviously we will be able to pass on more, but with an environment that would still show higher raw material costs going up, it will still have a negative impact. So on a year-to-year basis, I don't know if you'll see any kind of material improvement based upon recovering, unless material costs kind of stay flat or come down. But we have not broken out the cost to them, other than to say that clearly, they would have had the brunt of that negative impact.

If you want to scale it, to come back to what Jackie said a few minutes go, the first quarter, we made $18 million; that was structural earnings. The balance of the year, effectively, we broke even. That gives you a scale of the impact.

I guess quarters would have to be adjusted, but if the run rate in Q4 was through '05, you would expect that you would be getting the price, certainly, on the 25 percent of the contracts that came up last year, and then some sort of pro rata for the 50 percent that come up this year?

That's a fair approximation of the way we see the market.

How many of the 25 percent of the contracts did you not renew that came up in '04?

There's not a real way to answer that question effectively, because within each contract, the volumes are changing and that sort of thing. There's really not a way to answer that question effectively.

But there were, certainly, some contracts that were not renewed? Is that fair?

Again, in all three segments of our business, as we went into 2004 and 2005, we have ceased doing business with certain customers on certain applications. That's the way you manage an upmarket in our business.

On the steel side, maybe Tim could break out, with the revenues up, obviously, a solid number, how much of that was surcharge versus price? So as we start to look at '05, what was the mix of surcharge versus price in '04?

Well, obviously, the move that you saw on the top line was heavily driven by surcharge, although we did have a positive impact from volume, and some of the pricing that we put into the spot market. But the lion's share of it was tied to surcharge.

And is the pricing that you wanted to get, have you put all of those increases in for now, short of spot moving further?

Yes. We have resolved all of our contracts for 2005.

(OPERATOR INSTRUCTIONS). Stephen Volkmann, Morgan Stanley.

Jim, you said a couple of things at the open about your focus being on increasing capacity and exploring global growth opportunities. And I apologize, as something disconnected me for a couple minutes. But if you said your CapEx numbers for '05, I missed it. And then, if you just want to give us a little color on those two things, it would be great.

I'll start at least with the CapEx. We had around -- I believe it was around 3.4 percent for the year in CapEx pending, and we have said in the past -- not on this call, Steve, but kind of an appropriate metric to model us on is roughly around 4 percent. It clearly will depend on where the opportunities are. Again, in this current environment, where there are growth opportunities, we would expect that to increase more on the high side, as we go forward, than what we have been doing, which has been on the low side.

To put a little color around that, if you model us and target us at around 4 percent, for the last couple of years we have been investing around 3 percent as part of the restructure. It's part of our focus on changing the asset intensity of the business. As we come into 2005, it is clear there are market segments where we need to add capacity, and we are making investments which add capacity. And that would be the big change in the capital budget from 2004 to 2005. They are primarily within the bearings and bearing-related products side of our business.

And then, Jacqui, I think you said you were able to reprice about 25 percent of your contracts in '04. Did you get what you wanted, in terms of price realization on that 25 percent, as a kind of a leading indicator for the rest of this process?

Yes. We would not sign a contract, given where we are and where the market is, unless we were satisfied that it was useful. I assume that the customer signs (ph) were also satisfied.

So, that being the case, if you were able to sort of run that model through the rest of your business base, would we be looking at margins that are kind of more toward the mid, high or single-digit historical ranges?

Yes.

Gary McManus, JPMorgan.

Just a couple of quick questions here. I saw other expenses about 12 million in the quarter, which is unusually high from the usual run rate. Is there anything going on there funny?

It was an unusual, I guess, increase. They are all, obviously, non-operating type of numbers that flow through it, so it goes up and down per quarter. But I'd say, if you say if (ph) something unusual, every five years we do a fixed asset physical, and as a result of that we did write down some of those fixed assets. So that was the biggest increase. But in that, it has some JV equity and some losses that we have had there in donations.

So how much would you consider nonrecurring, of the 12 million?

Well, again, it fluctuates. So if you look at what we did last year, for the year, it was around 15 million. This year it was 30. Somewhere in between, maybe a reasonable proxy, just pluses and minuses as the year comes on.

And that is what you would expect going forward -- not 31 million, maybe not 15, somewhere in the middle?

That's right.

And you talked on -- the working capital in the fourth quarter was a bit disappointing for me. The inventories went up quite a bit, and I'm just wondering what caused that. And you said typically, the fourth quarter is a strong cash-flow generating period, but it wasn't this time around. And what is your expectation on working capital in '05? Is it going to be a source or use of cash?

Gary, I will let Glenn talk about '05. This was an unusual fourth quarter. The strength in the demand -- normally, the last couple of weeks of December are light from us, from a production point of view. And therefore, shipments go down, receivables go down, inventories go down, and we see a real dip at the end of December. We ran hard through the holiday period this year, and in fact, in some cases, took the opportunity to put more raw material on the ground to position us for a strong 2005. That effectively explained the fourth quarter.

Again, I'll go to Glenn to talk about the 2005 forecast.

Again, obviously, it's a lot of factors that all come into that. I'd say that for modeling purposes, the best thing to do is kind of have it around neutral. Right now, we are continuing to focus on working capital management, continuing to try to drive down our inventory levels, in particular. Obviously, it's a function of what the markets are and how growth is. We have taken advantage in some cases of adding to -- very few on the finished goods side, if you will, but on some raw materials, building it up in advance to make sure we have an adequate supply, and take advantage of the pricing. We obviously have the valuation of our inventory reflected because of the high raw material costs that are going in. But clearly, we were disappointed this year, from the standpoint that we used a fair amount of cash and working capital to support the strong growth we had, and the expectation would be for next year is continued growth, but you won't see that as really a significant -- either one way or the other -- use or generation of cash for us.

So I just want to clarify. When you say neutral, you mean not in terms of working capital turns; you just mean in terms of cash, right? If you have -- I think most people are expecting maybe low double-digit revenue growth. You would expect working capital to be neither a source nor use of cash?

Again, that's right. It can go either way, but on average, especially relative to this year, we expect to, depending other growth assumptions that you have used, a neutral amount of cash is a reasonable assumption.

And I think the pension contribution is in that number, right? And you expect, what did you say, 125 million of pension contribution in 2005, whatever it was? You're excluding that from the equation, right?

That's right. For the pension, we'll have lower contributions, but we'll have higher expense. So relative to that line on the payable side, you'll see that to be a small number.

Wendy Caplan, Wachovia Securities.

Two quick things. First, on the CapEx, you mentioned increasing capacity in industrial, Jim. Is that an area that you expect to -- is that part of the CapEx plans? And if you could kind of expand on that.

And also, can you give us an update on the labor situation and the status of the Canton plant?

Wendy, you're doing a great job of putting words in my mouth. What I said was we are investing in capacity on the bearings and bearings-related side of the business. Some of it is for the automotive demand, some of it is for industrial demand. And for a great extent of it, it can be used either way.

On the labor side, we have continuing discussions going on with the United Steel Workers in Canton. We are pleased with the progress that we are making, but we have an agreement with the union that we will not talk about it publicly.

Holden Lewis, BB&T Capital Markets.

You talked a little bit about the impact of pricing and surcharges versus volume on steel. Can you also talk about the impact on growth from pricing and currency in the industrial and the automotive segment, and then for the Company as a whole in the quarter?

That's not a number that we've got with us. Clearly, we are benefiting, from a topline point of view, from both pricing and currency. The currency impact is bigger, at this point. If you look at the bottom line, we're effectively neutral from a currency point of view on bottom line, and I think we have talked about the impact to pricing. Glenn?

I think that's a fair comment. I think overall, if you focus on the quarter, we had 16 percent topline growth. And we would say roughly around half of that was through the material/pricing that accounted for the growth, with probably around 2 percent of that coming from currency.

So for the Company as a whole, 2 percent from currency and then half of the total, like 7 or 8 percent from surcharges and pricing?

Right, around 8 percent. So of the 16, you can say around 8 percent, give or take, from surcharges/pricing and 2 percent from currency.

And just in general terms, the pricing that you're putting through in industrial -- we know that you're not getting enough for automotive, so that has been negative to the margin. Has pricing and industrial been positive to the margin, or simply neutralizing, and what are your expectations in industrial in '05 for that?

From a pricing standpoint, throughout '04, we have been able to cover our cost of added material costs -- raw material costs to us, in terms of both surcharging into the marketplace, where possible and feasible, and then, obviously, price increases throughout the remainder of the market, where in fact that's the best method by which to do it. Just purely the strength of the markets and the capacity versus demand that is available in the marketplace has provided under pricing opportunities. So we continue to see it to be an attractive market through '04 and into '05, with regards to upside pricing.

Okay, but pricing was accretive to your margins in industrial in '04, and you expect it will be so again in '05?

That's correct.

At this time, there are no further questions. Mr. Beck, are there any closing remarks?

Yes, we do. I'd like to turn it over to Jim Griffith, please.

Well, thank you all for your interest and your questions. As you can tell, we are pleased with our performance in 2004, with record sales, markedly improved earnings and, despite the comments on working capital in the fourth quarter, our ability to maintain a strong balance sheet in a very strong market time. We are still well below peak earnings, and will continue to pursue aggressive actions which, accompanied by strong market demand, will deliver improved results for 2005. Thank you.

Thanks, Jim. If anyone has any further questions, please call me, Kevin Beck, and my phone number is 330-471-7181. That concludes our call.

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