Timken Co (TKR) 2005 Q1 法說會逐字稿

Good afternoon. My name is Crystal, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Timken's first quarter 2005 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. [Operator Instructions] Thank you. Mr. Tschiegg, you may begin your conference.

Thank you, and welcome to our first quarter earnings conference call. I'm Steve Tschiegg, Manager, Investor Relations. With me today are Jim Griffith, President and CEO, Glenn Eisenberg Executive Vice President of Finance and Administration and CFO, Jacque 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 we'll then all 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 here forward-looking statements related to a 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 also included as a part of the release as well 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, Steve. Good afternoon. For the Timken Company, the first quarter of 2005 represented a continuation of the progress made in 2004. We reported record quarterly sales of $1.3 billion and earnings per share excluding special items of $0.64 cents, double that of the first quarter last year.

There's been a lot of discussion about the ability of industrial markets to sustain recent growth rates. For the Timken Company, the outlook for continued strength is evident as we look at the orders and in demand across our industrial and steel groups and the drivers of our end markets. High raw material costs are fueling many of our end industrial markets. North American oil rig count increased nearly 20% from last year and is at a 19-year high. The rail industry is starting to ramp up replacement and maintenance spending after a prolonged downturn. North America rail freight car shipments increased more than 60% in the first quarter compared with the same period last year.

Mining companies that have underinvested for many years are now experiencing double digit increases in capital spending. One observer indicated that CapEx by key global mining companies will increase 20% year-over-year in 2005 on top of a 40% increase in 2004. The same time our automotive group is responding to a variety of challenging marketing conditions. Slowdowns in North American light vehicle production, high raw materials costs and, in contrast, extremely strong demand in medium and heavy duty truck sectors.

Now let's review the performance of our industri - - of our individual segments in the first quarters. Our industrial group continues to perform well. Sales for the quarter were $469 million up 14% from last year. End market demand continues to be robust with the strongest growth in rail, mining, construction, and agriculture as well as heavy industrial applications. Industrial group EBIT was $47 million or 10% of sales, up 130 basis points from last year. Performance continues to be favorably impacted by volume and pricing actions. The ongoing strength of industrial demand continues to test supply chains in the industry. Our focus is on increasing capacity, improving customer service, and pursuing opportunities for global growth.

Automotive group sales for the quarter were $420 million, up slightly from last year despite significant declines in North American light vehicle production. We achieved increased penetration as our products were launched in successful new platforms in 2004. Medium and heavy truck demand continues to be strong with an increase of nearly 35% in North American vehicle production versus 2004. The automotive group reported a loss before interest and taxes of $5 million for the quarter compared to EBIT of $18 million last year. The automotive industry is facing tremendous challenges with high raw material costs compared with volume fluctuations.

Since the second quarter of 2004, our automotive group has battled high raw material costs which could not be entirely offset by price increases or surcharges due to long-term contracts. We continue to make progress.

We were also impacted by production volume in two ways. Some plants, most noticeably those serving the North American passenger car applications were challenged by lower volumes. Conversely, the group is experiencing - - experiencing heavy costs due to the need to run some facilities beyond their economic capacity, especially those serving the heavy truck industry.

Our steel group posted record high sales in earnings reflecting strength in both our alloy and our specialty steel businesses. The steel group reported record sales of $467 million up over 50% from 2004. The increase was driven by stronger demand, surcharges, and price increases. Sales into aerospace energy and general industrial markets were much stronger than last year. Steel group EBIT for the quarter was $64 million compared to $3 million last year, as the group leveraged strong volume with productivity improvements, pricing increases and surcharges. The steel group sells predominantly under annual contracts which now include price mechanisms and broader surcharges for 2005. These mechanisms are designed to match raw material costs for scraps, steel and alloys which are significantly higher than last year's first quarter. During this quarter, our steel group benefited from the difference between scrap surcharges in excess of costs. We do not expect this difference to continue.

In conclusion, the performance in the first quarter was a strong start for 2005. And while we have been showing tremendous improvement in our earnings, we are still well below our prior peak earning's performance and we remain committed to achieving increased levels of profitability. Thanks again for your interest. I'll turn it over to Glenn.

Thanks, Jim. For the first quarter , we reported fully diluted earnings per share of $0.63 cents. The quarter included $1.1 million of of pretax expense primarily related to the start of our Canton, Ohio bearing facilities rationalization. in the first quarter of 2004, these special items were pretax income of $700,000. The rest of my comments consistent with those by Jim will exclude the impact of these special items. Sales for the quarter were $1.3 billion, a record quarter for the Company, at 19% over 2004.

Strong performance by our steel and industrial groups drove EBIT for the quarter to $104 million, 85% higher than last year. This resulted in an EBIT margin of 8%, 290 basis points better than 2004 driven by strong gross profit. Net income for the quarter was $59 million or $0.64 cents per diluted share. Earnings per share was more than double last year's results of $0.31 cents and compared favorably to our revised estimate for the quarter of $0.57 to $0.62 cents.

Our effective tax rate for the quarter was 36% compared to 38% for the same period last year due to tax planning initiatives. We expect to maintain the 36% rate going forward. We ended the quarter with net debt of $786 million, 57 million higher than year end 2004 due to higher working capital requirements to support the Company's sales growth and seasonality. The Company's leverage of net debt to capital increased to 37.6% compared to 36.5% at the end of 2004. By the end of 2005, we expect our leverage to be below year end 2004 levels.

During the quarter both S&P and Moody's improved their debt rating outlook on Timken from negative to stable by reaffirming their ratings at B - - triple B minus and BA 1 respectively. Operating working capital increased $127 million during the quarter; the quarterly average operating working capital per sales dollar was 22%, 60 basis points higher than the end of 2004. We continue to focus on reducing the amount of working capital required to support our business. Capital expenditures were $32 million or 2.5% of sales below depreciation and amortization of $54 million. This spending level will increase over the course of the year as we continue to make investments in support of our business.

We contributed $37 million to our domestic pension plans during the first quarter. Our full year 2005 contributions are expected to be approximately $125 million compared to 185 million last year. Our outlook for 2005 is for continued improvement in our businesses. We expect earnings per share, excluding special items, to be $2.05 to $2.20 for the year and $0.55 cents to $0.60 cents for the second quarter. Our industrial and steel groups are expected to benefit from continued growth in global end markets, while our automotive business will continue to be challenged by lower level in North American light vehicle production.

We expect all three of our operating groups to improve profitability over last year due to strong operating performance, higher material cost recovery and price increases. We continue to make the necessary investments to improve our competitiveness and enhance our performance.

This concludes our formal remarks and now we'll be happy to answer any questions that you have. Operator?

[Operator Instructions] Your first question comes from Gary McManus with J.P. Morgan.

Good afternoon, everybody. Just looking at your second quarter guidance versus - - it's down from the first quarter, can you tell me what will be different in the second quarter relevant to the first quarter that we have a sequential - - a slight sequential drop in profits?

Sure, Gary. It's Glenn. We obviously had a very strong first quarter and as we said, enhanced by the benefits within our steel business. We don't believe that the level that steel is operated at the first quarter, the $64 million, if you will, is a sustainable level going forward.

We do expect then to achieve record levels for the year as they did for the first quarter, but the expectation is that we'll see them lower in the rest of the year than they were in the first quarter, but offsetting that as we do expect to see improved operating performance from the first quarter within the automotive businesses. So, those two factors offsetting to some extent the steel numbers but would cause us to provide a range of $0.55 to $0.60 cents for the second quarter which again would be relative to the $0.33 cents that we earned the same period a year ago, so we expect to see our businesses perform well during the quarter.

How much of a margin deterioration would you expect in steel? Would they still say 10% area? Give me some sort of ballpark of how much these first quarter margins unsustainable.

If you look at the, I guess the, historical peak that we've enjoyed within the steel business at least through the last cycle, they have hit margins up to around 11% but at that time probably enjoying a better mix of business between the tubing and the bars. We feel that a double digit margin is a level of performance that the steel business should be at on a more sustainable level going forward.

Okay. And one last question I had. I think you said in your prepared remarks you expect all three operating units to show better performance in '05 versus '04. Right?

Correct.

And you had 16 million of auto profits and your 5 million [a whole] so you expect at least $21 million of operating profits in automotive in the remaining three quarters? Is that realistic?

That's the way the math works, if you will. We clearly do expect to see our automotive business perform at levels higher than last year despite having the shortfall in the first quarter. Despite having, again, the slow light vehicle production markets, we're taking a lot of actions, Jacque's here to talk about them, that give us a lot of confidence that we're seeing improved performance and we'll have a better than last year. Jacque?

Yes, Gary, to underscore that we continue to see cost performance internally over '04, and as we've talked to you before, we 3-year contract cycles, and we continue as the contracts come up to work through material recovery and are progressing satisfactorily at that rate.

Okay. Thanks.

Your next question comes from Bob Schenosky with Jefferies.

Good afternoon. First question for Tim. Tim, can you discuss the component - - the component of the positive impact on steel from Latrobe versus the core operations given you did mention aerospace?

Sure , Bob, the - - Latrobe actually performed very well the first quarter of this year as compared to the first quarter of last year. They've seen very strong demand out of the aerospace sector. Even their tool and die side of the business is performing very well right now and that would go for both the distribution and the manufacturing business.

Okay. On the tool and die side, do you expect that to continue through the balance of the year, because I imagine you haven't been hit with imports [inaudible - microphone inaccessible] Great Lakes.

We haven't seen a strong import surge in those products. I think part of it's currency and part of it's the difficulty in transportation right now. But, I think just in general it's the overall economic activity and the capital spend that we've been seeing that has helped them out.

Okay, so Latrobe should pick up progressively through the year, then?

They should perform very well this year.

Okay, thank Tim, and then for Jim if I could, could you discuss geographic demand with specific interest in Europe where many of the industrial countries have noted they're seeing points of weakness?

Bob, I can - - I can give you qualitative. I can't give you quantitative. We were in Germany last week at the Hanover fair and I sat with the head of VDMA, which is the German engineering society and I kind of asked him the same question. I said, "Why is it that we continue to feel strong demand from your capital goods sector?" And he said one word, that's "China." He also indicated that they were starting to see pricing moving on exports, you know, recognizing that the dollar euro exchange was in fact going to last for a while and instead of absorbing them they were starting to move pricing and that was in fact causing them to - - to see demand come down.

In general, we're seeing some weakness in Europe, but not - - not to the extent that it's impacting us on a corporate basis. We're seeing the North American demand continuing to be very strong across a broad segment and China - - Asia has slowed the rate of growth, but not slowed demand. And you know, obviously it's already an overheated sense of growth, so as we look at the industrial markets in general, we see them continued strong on - - overall on a global basis.

On an automotive side, obviously you know as much about Detroit and the big three as - - as we do. We've seen significant slowdowns, particularly in the pass. car and SUV segments of that market. Europe continues to be flattish and the heavy truck market which is increasingly a global market continues to be very strong.

Okay. And then built into your expectations I take it that you have some sense of potential weakness in Europe and then also down year-over-year in light passenger?

That is - - that's correct.

And, sorry to take up time. Just one last one. Glenn, I don't know if you can offer this out but can you discuss in terms of the total sales increase a breakout in terms of volume versus currency versus price and surcharges; those three categories?

At least on the currency side, we are between 1 and 2% from that. From a volume standpoint versus pricing, say most of that additional amount was in pricing. Pricing and surcharge pass-through. We've been running pretty full through the past quarter , this quarter so again, the bulk coming from pricing, a little bit from volume, call it around, you know, 20% give or take, and the smallest amount from currency.

Okay. Thanks for your time, gentlemen. Excellent quarter.

Your next question come from Wendy Caplan from Wachovia Securities.

Hi. Jacque, can you address the contract issue again, kind of what - - give us some sense of what percentage of the contracts, the multi-year contracts have already rolled over and are now more attractively priced versus what we'll see this year?

Wendy, we exited last year at a little less than 30% rolled over and - - and negotiated. This year we'll get up top about, between 65% and 67% depending on ending volume terms of revenue, and then we'll finish off next year getting - - rounding out a full 100%. The majority of this year's percentage hits before the end of the third quarter, to give you a feel of perspective over the year.

That's helpful. Thank you. And Jim, you mentioned in your - - in your opening remarks that orders were strong in the quarter. Can you give us some sense of how orders - - orders-in compared to shipments-out in the quarter, some sense of book to bill, if you will?

That's a great question. It's just - - that's not a statistic that - - that we maintain. If you look - - if you look at it from a backlog point of view, we - - we continue to have strong backlogs throughout most of our industrial - - industrial markets.

We book backlogs more on the bearing side than the steel side but strong backlogs there and strong demand on the steel side obviously the - - the auto industry doesn't work in terms of bookings like that at all, but as I indicated, the - - the pass. car applications, which traditionally are needle applications, we have open capacity and - - and are suffering a little bit from volume variance in that part of the business.

There are there backlog numbers that you could share with us?

Not - - we don't have those developed in a way that it would be effective for us to release them.

Okay. And - - and - -

But Wendy, lets me respond to that a little bit differently. We've got enough backlog and see enough demand that - - that we're comfortable that demand will last well through 2005. Does that help you?

That is helpful. Thanks. And one last question. Can you give us some indication of the channel health in industrial? I know it's been an issue that we've talked about before.

Let me throw that one to Mike and let him respond to that.

Yes, Wendy this is Mike Arnold. In terms of channel health are you talking with regards to distribution inventory?

Yes.

Yes. As we talked throughout 2004 we laid in plans with regard to reduction in the inventory that was in the channel of, point in fact, our product that had built up over a period of several years. Essentially we hit exactly that plan; it played out very well in 2004, continues to play out very well in 2005 such that we track very closely our distributor sales; their sales of our products and then their purchases of our products and, I will say that the plan has worked out very well for the past six quarters.

So you would identify Mike, that it's a healthy channel at this point in terms of supply and demand?

Absolutely.

Thank you.

Your next question comes from Steve Volkmann with Morgan Stanley.

Hey, guys. Just a quick follow-up on the auto, if you could. It sounds to me like with respect to Gary's question and, you know, trying to get the full year ahead of last year, Jacque, you were kind of saying that - - it sounded like most of it hits in the third and fourth quarter in terms of the improvement year-over-year?

It steps up over the year. The bulk of it does hit into the end of the second quarter. We're concluded, mostly, by the end of the third quarter for year-over-year, Steve, if that helps.

Okay, good. That does help. And then maybe for Glenn on the cash flow, you had mentioned that you were going to step up your capital spending a little bit through the year. Can you remind me the full year CapEx target and maybe if you would want to comment on where working capital may end up and so forth?

We target around 4% of CapEx to sales as - - as kind of a longer term target. And we had around 220 million of depreciation and amortization just to give that in perspective as well. So needless to say, the first quarter at 32 million or 2.5% of sales is low for us but interestingly enough it seems to be more seasonally driven, because of course last year was at the low level and the 2% range and we ended up spending for the year around 3.5% of sales. So we do expect to see a pickup in our CapEx spending but more in line with call it 4% target that could be high or lower depending on opportunities that we have.

With the working capital levels obviously it's first quarter is seasonally, is high for us as well as we continue to enjoy very good industrial markets so the working capital is there helping support sales. We're at a working capital per sales level, again of around 22% looking to hold roughly around that level. I mean, that will fluctuate a little bit, but down from where we were last year.

So the full year is more like the 22%?

I'd say for right now that's a pretty good indication.

Okay. Good. Thank you.

Your next question comes from Mark Parr with KeyBanc Capital Markets.

Thank you very much. Can you hear me all right?

Yes, Mark.

Okay. Terrific. First of all, I just want to congratulate you on a great quarter. I - - I can certainly understand why - - why SUV demand is down given what's going on with gasoline prices. One of the things that I'd kind of like to add to the conversation here , first of all, I mean, your bearings' businesses have been running at pretty much full capacity. Could you talk a little bit about the steel business in terms of what capacity utilization you ran in the first quarter there if there's room for further enhancement?

It just - - just let me correct a couple of comments, Mark, or edit a couple of comments and then I'll let Tim ask your - - answer your question. First, in terms of bearing capacity, we have parts of the business where we're tight on capacity. We have others where there is significant opportunity for growth and - - and that capacity number changes weekly as - - as investment, so don't read that in terms of there are not opportunities to step up.

Secondly, just to correct a - - a misperception, clearly the SUV market is - - is changing in terms of demand for crossover vehicles as opposed to truck platform based SUVs but interestingly the light truck market has stayed very strong which continues to support demand in that area. So don't jump at $2.30 gas prices to think it's the end of light trucks in North America. Tim?

Mark, this is Tim. On the steel business we effectively ran at capacity through the first quarter. We have all of our customer bases still on allocation and ran full out on the bar side of our business. On the tubing side we're a little bit lighter although that - - those are - - the volume there is filling in as we see more activity in the oil and gas exploration, so - - saw a little bit of weakening at the beginning of April, tied to the automotive and we continue to monitor that.

Okay. What - - what's your sense of - - of pricing momentum for steel out over the next several months in your product areas?

Well, you know that the - - the bulk of our - - the business that we do in the steel side is under contract.

Right.

Those - - those contracts seem to be holding very well. You also probably saw in metal market the other day that we continue to bump pricing where we can. We took tube pricing up again and on the specialty side of our business, we're - - we're seeing the - - the pricing that we put in at the beginning of the year hold very well.

Okay. Is there - - is there anything that you can share at this point about the potential to move your union agreement in line with the - - with the pattern that's been established with some of the other consolidation activity over the downturn?

The - - the straight answer to your question is no. We agreed with our union when we sat down with them that we would not talk publicly about the negotiation until it was over and we will abide by that agreement.

So it's fair to say that that's an on-going process?

We continue to negotiate very constructively with the union.

That's helpful. Thanks very much. Congratulations again.

Your next question comes from Andrew Obin with Merrill Lynch.

Good afternoon. You guys sort of talk about the fact that you are capacity constrained on some of your products. As you choose to add capacity, given the structure of your contracts, how much leeway do you have to add capacity in the places that are very profitable for you versus contracts where, you know, you guys are not making a lot of money, or you've been losing money? Do you have a choice to add capacity or more profitable businesses or under your contracts you sort of have to add capacity across the board? How does that work?

We have 100% flexibility on where we choose to have capacity. Now, obviously we are balancing in this market the need to support strategic relationships with customers with the need to - - with the desire to grab spot business at - - at maximum price levels, but as we make our capital decisions, we make them in a portfolio manner in a way that maximizes the Timken Company's profitability.

I guess sort of on the same vein, thinking about the auto business, I'm just wondering, you know, when you guys supply, how can your customers on the auto business pay up to you, you know, basically make the business profitable for you given the structural issues that exist in the automotive business? I mean, do they have the money to start paying you so you can - - you guys can cover the cost of capital on this part of the business? How does this issue get resolved in the long-term, you know, versus your customers?

There's a very clear model in the auto industry that - - that says suppliers make money when they bring value to the industry. The decision - - the products we bring to market, new products that we bring to market are the key, and those products create profits when they bring value to - - to the customer. And that value either comes from value delivered in terms of innovation or cost structure. Beyond that is just a - - a sense of balancing the portfolio so that we - - as - - as you point out quite correctly, we invest and we sell in those markets where we can be profitable and we choose not to in those that we don't.

Now, just one question on steel. I mean, obviously first quarter was a fantastic quarter for that business. You noted that you had some raw materials surcharges baked into the quarter. Could you give us a sense how much it was so I can sort of get a sense what the operating run rate was for the quarter, if that's a number you can share with us?

Andrew, we don't share that. What we have explained, I guess, is that the fourth quarter did benefit from that and we don't expect it to - - as we go forward so that's why the trend of just taking our first quarter by four won't work within the steel group. Having said that we talked about peak performance within the steel business call it 10, 11% that we feel is the more sustainable level running pretty full and given the right mix of the business and again a little bit offset by some mix between tube and bars but that double digit type of margin going forward is a reasonable expectation for this year as long as the markets hold up.

Terrific. Thank you very much.

Your next question comes from [Brent VanFark] with Sage Asset Management.

My questions have been asked and answered. Thank you.

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

Good afternoon. Thank you. I guess as I look at the automotive income and the fact that it was - - that it lost about 5 million in the quarter, and I compare that to Q4, I guess I - - I'm trying to get a little bit more of an explanation why despite the fact that sequentially you had an increase in volumes as you would expect, you know, why you had a widening in that loss. I mean, how does that suggest that there's been a lot of progress in terms of the contracts, you know, what am I missing? What are the moving pieces there that are causing that to worsen sequentially?

Holden, let me try to walk through that for you. In terms of quarter-over-quarter, the 3 million - - the $2 million loss versus the $5 million loss, we had some quarter-over-quarter pricing impact, but it was offset by the unexpected lower volumes in pass. car which we now have our arms around impacting our NRB business as well as running our TRBs beyond their point of economic efficiency. And that - - those are the major reasons you're seeing the quarter-over-quarter slight decay from 2 million to 5 million versus what we saw - - expected as a quarter-over-quarter increase. With that said, we've been talking with our customers, think we have our arms around where they're going in terms of pass. car volumes this year and putting plans in place accordingly with those plans.

Okay. And passenger cars, that's all of the - - that's the light trucks, that's the passenger vehicles, you're talking about the entire light vehicle market?

No. Passenger cars would be two-door and four-door vehicles if I may with trunks and as opposed to light trucks and SUVs; they are down at most of our major customers, and carry the predominance of our power train portfolio volume.

Okay. Now, in terms of the overheating in some of the heavy truck areas, I mean, that was an issue in Q4 and Q3 as well, I think wasn't it? Did that get relatively more severe somehow in the quarter?

It continues to go up and that is shared capacity with the industrial markets going up worldwide.

Got it. Okay. And - -

And just to, Holden, give you a little sense of the business, if we went in in the early phases of this rampup, we had put some industrial inventory on the shelves and therefore we were able to run the plants with higher - - set up - - or higher run the setup ratios and that sort of thing. First quarter we recognized that we needed to shift the focus back to serving industrial customers, and that just - - that means more expedites, more break-ins and that sort of thing, so if you're trying to figure the first quarter out, what you're figuring - - what you're seeing is the slow rampup of the impact of the pricing actions w'ere taking offset by some operating problems, a bit of volume variance on the needle side of the business and a little bit of currency.

Okay. Okay, and now in terms of - - I thought in the first quarter that actually the relative performance of passenger cars versus light trucks in terms of the build rates actually was for the first time in quite some time in favor of the passenger car. How does that dove tail with - - you know, sort of your comments about lower volumes in passenger car and such?

Well, it depends on mix and which of the - - the customers you're talking about. And the mix hit us from a pass. car standpoint. It is still down and continues - - is expected to be down into the second quarter.

The relative strengths in passenger cars was within OEMs that you don't have as great a presence with?

Yes. Holden, I'd be happy to go offline sometime with you. Unfortunately it's not as simple as pass. car when we talk about power train, it is then the take rate of transmissions and engines within pass. car, not to make it sound too complicated but that's where you have to go to see the trend.

Okay, and just, the last thing on automotive. This whole mix effect, right, because if the - - as the mix shifts towards higher - - higher content vehicles like the SUVs, supposedly that would be a favorable mix shift for you. On the other hand, if you get the mix shift towards the passenger car, my understanding is Torrington tends to have more passenger car and a bit more better margins - - what do you perceive as being better for you in general, a stronger light truck versus passenger car or vice versa?

You can't really call it pass. car versus light truck products. The - - the importance is the detail of the portfolio on both. The products we serve to the pass. car and light truck side namely, previous Timken and Torrington, we have very solid products that I would say are valued by the auto industry and have solid margins, and we have some that aren't, so there isn't a - - a clear shift that I could give you in terms of a preference for which way the market goes.

A different way to say it, the challenge for us is more the degree of change and the suddenness of change combined with fairly high fixed cost structure so that small changes in production volumes translate into impacts at the bottom line - - is more significance than the difference in the particular segment.

All right. Thanks.

[Operator Instructions] Your next question comes from Steve Wais - - Stephen Wais with Merrill Lynch.

Hello, Stephen?

Mr. Wais, your line is open. Mr. Wais's line is not responding. We will proceed to the next question. You have a follow-up question with Bob Schenosky with Jefferies.

Thanks, just real quick for Glenn. You mentioned you were putting 125 million into the pension this year?

Yes.

Where would that take you in terms of the funding status?

Well, we're running over 70% now within our - - our funded position and obviously we're going to put in the $125 million. We have performed well relative to the overall performance and the returns on our assets, and then obviously the big driver that's out of our control but seems to be moving in the right direction is rising interest rates that we would discount so relative to a sizable contribution, good performance in the assets, and then with the help of higher interest rates we continue to make significant progress in reducing our unfunded position.

So could you - - based upon those factors could you be at higher than 75% by year end?

Again, it's easy to paint a scenario where we could be at that level.

Okay. Great. Thanks, Glenn.

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

Thanks. Can you comment also just in general, you know, you had - - had some great improvement in the gross margin side, but despite the fact that you had some surcharges or I guess some pricing starting to flow through, there really wasn't much in the way of leverage at the SG&A line. Can you comment as to sort of what's going in there that's limiting the leverageability of that line and what we can expect going forward?

Yes. Obviously, our S&A did improve relative to a year ago on a - - on a revenue basis, but as you point out, our revenues did have the impact of - - of the higher surcharge mechanism. We do, I guess, we're taking advantage of making some longer term investments within our business as we're running the Company. We've done so, started this year talking about process improvements, some systems implementations. Obviously variable comp comes into that as well.

But again, from a margin standpoint we continue to enjoy strong leverage at the gross profit while maintaining or improving our S&A as a percentage of sales and relative to going forward, we believe it's a sustainable rate that we're currently at, which, again we feel is appropriate for our business.

So the investment that relates to your comment in industrial, just related to - - to shortage of capacity here and there and expanding that?

Well, it's more than that. It is a conscious decision to say we want to grow the Company and we want to invest in that growth. And that investment is disproportionately in the industrial side of our business. It's putting the feet on the street to grow our sales in Asia. It is investment and as Glenn said in systems capabilities and we have groups of people stepping back and - - and saying, "How's this Company going to be radically different in order to serve customers on a global basis, particularly those customers who are leading us in growth in Asia?"

Okay. And then in industrial, in terms of the operating margin, you know, you sort of - - you'd been at what, the 10.5 to 11.5 range throughout the last three quarters of '04 and that came down to around 10% in Q1. Is there some seasonality that Q1 tends to be a little bit weaker on the operating margin, or can we expect to see tough comps and lower operating margins on the industrial bearing business for the balance of the year?

There's no real seasonality to that. This is Mike Arnold. What you're seeing is exactly what Jim and Glenn just talked about. We started in the fourth quarter of last year laying in specific investments and in particular with regards to rapid growth that we're seeing in Asia and we clearly have made investments with regards to people and capabilities to grab ahold of the exploding growth and - - particular in China and also in India and essentially you're seeing that investment.

Okay. All right. Great. Thanks.

At this time we have no further questions. Gentlemen, are there any closing remarks?

Yes. Thank you. I'd like to come back and - - and emphasize a couple of points. First of all, we see a lot in the press about slowdowns in industrial markets. You had a lot of questions about backlogs and order rates. Let me be very clear. It's important for you to know that the core markets, the core industrial markets of the Timken Company continue to be strong, and we see them being strong throughout the balance of 2005 at least. We are focused on taking the benefit of those markets and leveraging it through increased productivity to achieve increased levels of profitability going forward.

Thanks for your interest . And look forward to talking to you next quarter.

Thank you for joining us today. If you have any further questions, please call me, Steve Tschiegg, at 330-471-7446. That concludes our call for the day. Thank you.

Thank you for participating in today's Timken first quarter 2005 earnings release conference call. This call will be available for replay beginning at 6:00 p.m. eastern standard time today through 11:59 p.m eastern standard time on Monday April 25th, 2005. The conference ID number for the replay is 3420178. Again, the conference ID number for the replay is 3420178. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Again those numbers are 1-800-642-1687 or 706-645-9291.