Timken Co (TKR) 2007 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Timken second-quarter 2007 earning release conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Steve Tschiegg, you may begin your conference.

Thank you. And welcome to our second-quarter conference call. I'm Steve Tschiegg, Manager Investor Relations. Thank you for joining us today and if after our call should you have further questions, please feel free to contact me at 330-471-7446. With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO; Mike Arnold, President of our Industrial Group; Jackie Dedo, President of our Automotive Group; and Sal Miraglia, President of our Steel Group. We will have remarks this morning from Jim and Glenn, and will 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 would like to remind you that during our conversations 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 report filed with the SEC which are available on our website www.timken.com. Reconciliations between GAAP and non-GAAP financial information are included as a part of the press release, as well as on the investors overview portion of our website. This call is copyrighted by the Timken Company. Any use, recording, or transmission of any portion without the expressed written consent of the Company is prohibited. With that, I'll turn the call over to Jim.

Thanks, Steve, and good morning. I'm pleased to report Timken had another good quarter. The top line was up 4% and we had strong earnings, in line with our second quarter estimate. We are seeing strong demand from key markets. We have solid backlogs for products in aerospace, mining, energy, and in Asia. We posted record steel results and we continue to benefit from sales growth in industrial markets. Auto demand has stabilized. We are capitalizing on the strength in our major markets to continue to shift the Timken portfolio toward higher value sectors.

Let's take a look at our progress this quarter from a business perspective. In steel, the portfolio shift toward differentiated products is driving our profitability and reducing the risk of a cyclical downturn. We broke ground on a $60 million small bar mill that will give us the broadest range of super clean alloy steel bars in North America. Second quarter exports to Asia increased by 15% and we expect to sell roughly $60 million of steel in the region for the full year, double our sales in 2006. We announced a new line of long tubes to support the extremely strong energy markets, and we ceased operation at a tube mill that made non-differentiated products in the UK.

On the industrial side, the story is growth. In Asia, sales grew by 17% compared to the same period a year ago, driven by strong industrial markets. Sales from this region now represent about 11% of our industrial business. The construction of three additional Asian facilities is progressing and will increase our ability to serve industrial market demand as they come on line. These investments are expected to contribute to an improved profitability overall as we ramp up production in 2008. Recent global capacity additions allowed us to increase our sales significantly in targeted market sectors. For example, sales to heavy industries are up 36% in the second quarter versus the same period last year.

The strength of global industrial demand was accompanied by strong pricing during the quarter, as well. In total, sales stemming from our industrial group now represent 42% of our overall company. We continued to improve execution in our automotive group, as well.

Shifting the portfolio to more attractive portions of the market. For example during the quarter we reached an agreement with NSK to dissolve our joint venture that made high volume product in China. This is consistent with our strategy to shift to more differentiated products and market sectors and to reduce fixed costs. Overall, the auto restructuring actions are on track, and we expect the business to return to profitability in 2008.

During the quarter, we completed the first major installation of our project 1 program in the US. This involved bringing on line an SAP application, covering a large part of our North American operations. Over the next year we plan to complete the third phase of the project rollout which includes installations in Europe and some remaining parts of the United States. As reflected in our outlook, we expect to achieve record earnings in 2007 and to generate good cash flow, providing financial flexibility to pursue strategic investments. Our core markets are expected to remain strong, and we believe the initiatives we have underway should drive continued earnings improvement. Now I'll turn it over to Glenn for a more detailed review of Timken's second-quarter performance.

Thanks, Jim. For the second quarter, the Company's fully diluted earnings per share from continuing operations was $0.58, excluding special items earnings per diluted share were $0.73. These special items included $17 million of pretax expense, primarily related to the restructuring and rationalization of the automotive group.

In the second quarter of 2006, special items totaled pretax expense of $21 million. Principally related to manufacturing, restructuring, and rationalization, and a charge for asset dispositions. The rest of my comments will exclude the impact of special items. Sales for the quarter were $1.3 billion, an increase of 3.6% over 2006. Strong demand across the Company's broad industrial markets was partially offset by the divestment of the automotive group steering business and the steel group's European operations. Excluding these divestments sales were up 7% over last year. Gross profit margin for the quarter was 22.2%, 70 basis points lower than last year, due primarily to higher raw material costs across our businesses and higher manufacturing costs associated with the Company's industrial capacity expansions and steel projects. SG&A margin of 13.3% was 20 basis points higher than last year, reflecting increased project 1 costs as we completed the first major US implementation this quarter. As a result, EBIT for the quarter came in at $115 million or 8.5% of sales, 90 basis points lower than 2006.

Net interest expense for the quarter was $9 million. Down $3 million from last year, primarily due to lower debt levels. The tax rate for the quarter was 34.4% compared to 32.5% last year due to the Company having a smaller percentage of its earnings in lower tax rate foreign jurisdictions. As a result, income from continuing operations for the quarter was $70 million or $0.73 per diluted share compared to $0.80 last year and our previous earnings estimate for the quarter of $0.65 to $0.75.

Now I'll review our business group performance. Industrial group sales for the quarter were $566 million, up 7% from a year ago, benefiting from pricing and continued strong demand across its markets with the highest growth coming from heavy industry and aerospace. Industrial EBIT was $62 million or 10.9% of sales, 110 basis points lower than last year. The impact of favorable pricing was more than offset by higher raw material costs and logistics costs as well as higher manufacturing costs related to the ramp-up of capacity. Looking forward, we continue to expect strong industrial markets with improved margins for the year as we better leverage our top line growth through operating improvements.

Automotive group sales for the quarter were $407 million, down 5% from a year ago, primarily due to the sale of its steering business at the end of 2006. Increased sales into light truck markets were offset by lower demand from North American heavy truck customers. For the quarter the group reported a loss before interest and taxes of $7 million, compared to a loss of $2 million last year. The net benefits associated with restructuring initiatives including reductions in SG&A costs were more than offset by higher raw material and project 1 expenses. Looking forward, we expect the automotive group to return to profitability in 2008, benefiting from the completion of its restructuring initiatives and stable automotive markets.

Steel group sales for the quarter were $411 million, up 7% from a year ago. The group benefited from increased pricing, surcharges, and strong demand across its markets. Especially in the energy sector, which more than offset the decline in volume from the closure of its operations in Europe. Steel group EBIT for the quarter was $61 million or 14.9% of sales, 70 basis point lower than last year. The benefit of surcharges and pricing in the quarter was offset by higher raw material costs and manufacturing expenses primarily related to the construction of its small bar mill and productivity improvement projects. We continue to expect strong results for 2007 from our Steel group, exceeding last year's record profitability.

Looking at our balance sheet, we ended the quarter with net debt of $525 million, $43 million lower than the end of the first quarter, principally due to strong cash generation from operations and better working capital management, which was partially offset by capital investments in support of our growth initiatives. The Company's leverage of net debt to capital decreased to 24.1%, compared to 26.7% at the end of the first quarter. The Company expects to generate strong free cash flow for the remainder of the year, driven by expected record earnings and continued working capital improvement, providing additional financial flexibility to pursue strategic investments.

Capital expenditures for the quarter were $64 million or 4.7% of sales, above depreciation and amortization of $48 million. This spending level should increase over the course of the year as we continue to make investments in support of our business and growth initiatives. We contributed approximately $28 million to our global pension plans during the second quarter. Our full-year 2007 contributions are expected to be approximately $100 million compared to roughly $265 million last year. As with last year we will consider making additional contributions based on our pension funding status and financial leverage.

In summary we expect global industrial markets to remain strong and automotive demands to stabilize. We expect to see higher profitability and margins for the full year, compared to last year, driven by continued strength in the broad industrial markets that we serve, capacity additions, and improved operating performance resulting from our restructuring initiatives. The Company anticipates earnings per diluted share for 2007 excluding special items to be in the range of $2.60 to $2.70 per share compared $2.13 from last year. For the third quarter, we anticipate earning per share excluding special items to be $0.55 to $0.65, compared to $0.49 for the same period last year.

The increase in next quarter's outlook versus a year ago reflects expected improvements across all three business groups. From a cash flow standpoint, we expect to see higher free cash flow in 2007 benefiting from earnings growth, better working capital management, and lower pension contributions. Capital expenditures should remain about the same as last year, as we continue to invest in growth initiatives while cash taxes are expected to increase due to higher earnings, an estimated tax rate of 34.3%, and having utilized all of our US tax loss carry forwards in 2006. Execution of our key initiatives remain on track to deliver improved results including our Asian growth initiative, capacity additions in our industrial group, restructuring programs, product differentiation within steel, project 1, and portfolio management. This ends our formal remarks. I now will be happy to answer any questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Andrew Obin with Merrill Lynch.

Hi, yes. Good morning. Just a question on automotive. Do you think there's a chance that we might post positive results in that business in the second half of the year, and at least by the fourth quarter, given sort of better-than-expected news coming out of the automotive sector this earnings season?

Andrew, we're still forecasting consistent with what we said last year -- last quarter to finalize our restructuring. We expect the market to stay stable, and we're not anticipating a strike resulting from the big three negotiations. Also we see the heavy truck market becoming -- starting to come back, but not starting to come back faster than anticipated.

But sequential improvement in the second half is a reasonable expectation, right?

Well, we've been forecasting consistent performance each quarter for the year as we finalize restructuring and deal with some of the normal challenges you have in smoothing out the project 1 implementation.

Got you. And the second question just relates to this reporting season a lot of the machinery companies have cited bearings as a bottleneck. And I was just wondering, A, what does it do to your pricing in the industrial segment looking out in '08? And B, does it mean that we still have to add even more capacity in '08 versus what we're already doing?

Andrew, this is Mike Arnold. Let me take that question. I'll take the second one first. As you know, we are adding significant amounts of capacity across the world to serve those machinery markets. In particular, that capacity is going into the Asian region of the world to serve that emerging market both from the standpoint of what's happening in the end-user market which is requiring this capital equipment machinery from the rest of the world but also expanding our current plants in the Western world, where we have customers who, in fact, are requiring that. So yes, we are on a very rapid pace of expansion of capacity.

The second -- I guess your first question was around does that provide pricing opportunities. Pricing is strong in the marketplace today based upon a couple of factors. One is certainly a constraint of required capacity around the world which provides certainly an opportunity for strong pricing. But also the cost inputs to our products have been significant and in particular with regards to both material costs and our capacity increases where we've gone into the marketplace to recover those costs through pricing with our customers across the world.

I guess my only question is given what's going on, I would expect looking at '08 to see both a step up in revenue growth and improvements in pricing as we negotiate contracts going to next year. Just given how tight capacity is. But are you saying that things should sort of remain fairly similar to '07 in terms of pricing just because we have long-term relationships or what -- I guess I'm just asking what is limiting the pricing power in the segment given how tight capacity is?

I think you might be misconstruing maybe comments that we have made. There isn't anything constraining other than the marketplace itself and the need to remain competitive in certain markets. But if you look at 2008, both our top line revenue and our pricing will continue to increase.

Okay. Thank you very much.

Okay.

Thanks, Andrew.

Your next question comes from Eli Lustgarten with Longbow Securities.

Good morning.

Good morning.

I was wondering if you could talk a little more about the industrial. Margins were off a little bit. We talk about the strong market with very strong pricing. Can you quantify for us what the impact of the ramp up and the startup costs is, you should be able to pass around until your prices grew, so it's just hard to understand why margins are still showing unfavorable comparison. The second half is easy I grant you. And can we finally go up from this level in the second quarter, in the second half of the year?

Yes, Eli. This is Mike again. We do expect our performance to continually improve throughout the year. I think Glenn mentioned it earlier. We expect higher performance this year than we had in '06. Clearly both of those elements that you talk about are happening, and we're seeing that. Secondly, if you put it in terms of the impact on our earnings with regards to both material ramp-up costs, et cetera., we've always put that in terms of 200, 250 basis points. That's the differential in the cost impact that we have on our business today. Mostly from material but also our installation of new capacity, ramping that up across the world, and doing that in multiple facilities versus just one. So that's critical.

So is -- is that 200 basis, that's half material and half ramp-up, or is it mostly material? I mean, can you quantify it? And how far behind are you in pricing to recapture that raw material at this point if it's still impacting you negatively?

Without going into a lot of details, I'd tell you that it's probably almost half and half material and ramp-up costs at this point.

Yes. And how far -- how has pricing moved to sell -- do you expect to recover that entire raw material (inaudible), or give me some idea because with pricing that strong, I'm surprised that you're still negative or you're negative for a short period of time. Is it just timing or can you give us some guidance in the second half. Or should we . recapture all that raw

We are not negative to recapturing our raw material price increases and have not been in the market. Both through a surcharging mechanism where we take the short-term cycle implementations or implications from whether it is scrap or certain alloys, that has been a part of our pricing policy for the last almost four years now. We also have kept pricing in pace with -- at pace with all of the material cost increases in the marketplace. However, the only challenge that we've had is that in some cases, Eli, in certain markets, we are priced at time of shipment. In some cases, we are priced at time of order. And those areas where we are priced at time of order and lead times are extended, we've moved to aggressively move those prices higher to cover what we believe will be the material cost increases going forward. So that should become less and less of an issue across the board in our industrial market as it has been in a few different industries.

Okay. And automotive production in the third quarter is going to be higher than last year by 4 to 8%, depending on what you want to believe. And truck production is no worse in the third quarter than the second quarter. So I mean, is there any reason why we wouldn't narrow the loss in automotive in the third quarter versus the second quarter at this point?

Automotive production in the third quarter will be higher in total. You really need to look, Eli, at the specific platforms. And right now we are not forecasting that light truck production will be higher in the third quarter than the second quarter, nor flat. We think it's going to be slightly down consistent with last year.

Which is why we expect revenue to be flat at this point.

Exactly.

And one final question. Do you think -- can you hold steel margins relatively close to where they are, or will they drift down as two-hour delay did in the second half of last year?

Good morning, Eli, this is Sal Miraglia. I think our margins will stay very good. In fact because of much of what we have is based on surcharging, as our costs go down so will the surcharging, but we'll maintain the margin. You just saw a little slippage here because we have two major projects underway where -- which are advancements for future sales and for cost reductions that we're incurring costs for right now in the second quarter and not getting the benefit yet. So we saw slight deterioration in our margin but not very much. We expect to hold that for the year.

Thank you.

Yes, sir.

Your next question comes from Wendy Caplan with Wachovia.

Hi, good morning. I'm getting a little confused about the capacity additions. Would you mind walking through for us where your increasing capacity, your kind of level of confidence, what do you know that makes you confident that we can use additional capacity in whatever region that is, and is any of this replacing old capacity? And finally, do you expect to see the same -- you mentioned something about the same level of CapEx for next year. Where would we see additional capacity?

Okay. Wendy, this is Mike. That's several questions that you've asked.

Yes.

Let me address those.

Okay, thanks.

The areas in which we are increasing capacity are very focused on, first of all, Asia. And there is -- Jim mentioned that quarter on quarter we've grown 17% across Asia. In the industrial markets, we've grown in excess of 30% in that same period of time. And that requires capacity, and it requires capacity in Asia. So as you know, we have three plants currently under construction in Asia. Two in China, and one in India to serve that market. So very much dedicated.

Now at the same time, we've talked now for the last couple years with regards to the heavy industries, the capital equipment that has been on a significant expansion throughout the world both in terms of the energy industries, but as much to capture the infrastructure build that's going on in Asia. Again, we're very much focused on increasing that capacity, so that's large forebearings. So this includes not only new facilities in Asia, but also includes expansions at our plant in Romania, our plant in Ashburn, North Carolina, and our plant in Tiger River, South Carolina. So those are current plants in the Western world where we've gone through major expansions. And again, as Jim walked through in second quarter, year-on-year, our heavy industries' sales have grown 36%. Again, an area where we're growing very fast.

A third area is our aerospace industry. And that is an area where, again, quarter on quarter, we're up about 11%. I think if you go back to last year, we were up almost 40% year-on-year. That's a combination of both inorganic and organic growth. But it has required capacity increases. Those are primarily the three areas that we're focusing on. sales perspective and they're showing good profitability.

And any places where we are not taking down our production?

Yes. Wendy, we announced a restructuring program several years ago that focused very heavily on the facilities that we have here in Canton, Ohio.

Right.

We have continued to take down those operations to the extent that has been necessary from the restructuring. We also have slowed some of that process because of the need for those products in the marketplace. So we've been very cognizant of the fact that the market has grown much faster than we would have predicted when we announced the original restructuring. So we are balancing very carefully the reduction of facilities and either reinstalling that capacity where we can be competitive or, in fact, leaving it until the market, in fact, softens a little bit or we have the additional capacity installed around the world.

Okay. And your CapEx for next year in terms of plant expansion is more of the same or just -- is it additional capacity or is it finishing the capacity that you started?

It will be both finishing the capacity that we started and adding additional capacity, just in these focused growth areas, Wendy.

Okay.

Wendy, there is Jim. Let me pull that up to a corporate level because you see the same thing going on across the Corporation. Mike answered it because most of the growth is in industrial markets and in targeted industrial markets. There's also some investment in new capacity or new capabilities in the steel business, for the energy market, in small bar, which gives us the ability to use our capacity more flexibly through the cycle, reduces the risk of the downside but actually adds some new capacity. The flip side of that, we've taken out capacity by closing, selling part of and closing two mill in Europe. We've taken out capacity of undifferentiated product in China, dismantling this joint venture with NSK and the automotive restructuring, nets takes out some capacity as we've exited business in the automotive market. So there's -- this -- I understand the fact that it's confusing because there's a portfolio play going on at the same time we are net adding capacity in targeted markets.

So Jim, is there a way to kind of corporatewide give us some sense if current -- if capacity was axed, given the gives and takes here what capacity will be when we're done doing these changes? Is it like 1.2 times X or how should we think about that?

I think the only way I can think about it as you look at it is we look as a corporation, our aspiration is to grow the company kind of 10% a year. And probably half of that ought to be organic growth. So if you sort of step back with the ups and the downs in the various parts of the business, just think in terms of we're trying to push the top line of the Company organically 5% a year.

Okay. That's helpful. Thanks, Jim.

(OPERATOR INSTRUCTIONS) Your next question comes from Peter Jacobs with Wells Fargo.

Hi, good morning, gentlemen. My first question is a housekeeping question. Do you have the straight up continuing operations numbers for the steel group in the third quarter of 2006 that you can share with us, the revenue and the operating income?

No--?

What we can tell you is for the -- I guess the quarter that we just had, we had around $20 million of revenues for, associated with the assets that have been disposed, the European operations. I think that's a pretty good run rate for the year. Effectively those were exited at the end of 2006. So with the closure of some of it was done through the beginning of this year. So from a revenue standpoint, I think the 20 a quarter is pretty indicative. From a profitability standpoint, it's really not a significant or impact on the results.

Okay. And you had about, let's see, in the second quarter of 2006, about $10 million associated with the discontinued operations. I'm assuming most that was in the steel business. Is that correct?

Again, maybe just to make sure there's a distinction between when you use the words discontinued operations and continuing operations. Discontinued which was our Latroe business, we've excluded from all of the financials if you will other than on line specifically identified as income from discontinued operations. So--.

Yes, I guess where I was going on this, I can take this off line with Steve. But to to get a sense of what the third quarter and the fourth quarter looked like last year on a continuing operations basis in the revenue and the operating income line in the steel business. That's just so I can get a better sense of kind of how to look on it as a year-over-year basis as I'm modeling the third quarter and fourth quarter of 2007.

Okay. We have provided I guess the pro forma results for 2006 from what steel would be from a continuing operation basis. The only thing you would have to change out of that is, again, the businesses that we've exited and not treated as discontinued, which again is roughly the $20 million a quarter of revenues with call it a very nominal impact on earnings.

Okay. My second question is associated with the steel business as we look at it on a sequential basis. In 2007 and going into the third and fourth quarter. What kind of seasonality do I need to think about when we're looking at the top line for the steel business?

Yes, good morning, Peter, this is Sal Miraglia. We're going to have this year probably surpassing last year's sales because of strength that we've seen in our marketplace. We definitely will have a lighter sales level in the third quarter just because of the typical shutdowns of plants and maintenance issues that we will see, and in the fourth quarter see the typical end-of-year holiday season. And so what we've seen in the past seems to be pretty much typical of what we would experience this year other than we will not experience, we believe, the same kind of a falloff in the business activity that we saw last year due to automotive cutbacks.

Yes. So if I get this right, the steel business, looking at it on a sequential basis, it would be likely that the third and the fourth quarter at least top line would come in lower than kind of the rate that we saw in this -- in the just-reported second quarter?

In the first and second quarter. Be a little bit lower but still strong from a seasonally adjusted, on a seasonally adjusted--.

So year over year, still good or decent revenue growth but down sequentially?

Actually expect to see a surpassing last year's performance this year, yes. But down from a -- on a seasonal -- seasonally adjusted basis, right.

Okay. That makes sense. Then secondly, what are the thoughts, the general thoughts about share repurchases and -- that you can share with us given where cash flow might get to next year.

Well, I guess first we do have an authorized program to be in the market repurchasing shares, which is a 4 million share program, but the Company has not been into the market repurchasing its shares. Obviously we talk about that as an opportunity to utilize our cash right now. We're focused on shoring up the balance sheet. We've been paying down our debt. Funding our pension plans, obviously funding the capital expenditures that are supporting the growth initiatives. Clearly a strategy that we have is in addition to the organic growth that we're seeing we are pursuing strategic acquisitions to support our business. So it's a combination of all of that that would ultimately determine whether or not we would be in the market repurchasing shares. But it clearly is an option we have.

We would be remiss if we didn't say like I'm sure every other company that we feel our shares are not fully priced. So from an accretion standpoint, repurchasing shares make a lot of sense. The balance sheet, again, is finally back to a very strong position that really provides us the opportunity to grow through strategic acquisitions. And that's our first priority. But we review it continually. And at the appropriate time where we feel that's the best use of our capital, we would consider that as well as the dividend and other options.

And lastly, you gave some breakouts of your international business exposure. And it seemed like those numbers, I'll have to go back and review my notes, but were on a business-by-business basis. Could you give us an overall -- basically an aggregate in terms of the non-US-derived revenue as a percentage of the aggregate revenue?

Yes. Just give you some broad numbers if you will for the quarter. We're currently doing -- call it around between 65% and 70% of our business in North America. We probably do around 15% to 20% over in Europe. And obviously the rest would be -- the rest of the world with Asia probably around 7% as a company. And I think we talked about it being around 11% of our industrial group, were our steel businesses, principally North America and doing some Asia businesses, as well. Those would give you the broad parameters.

Okay. That's great. Those are all my questions. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Bob Schenosky with Jefferies.

Good morning.

Good morning Mr. Schenosky.

Isn't that nice? Glenn, the first one is for you. Recognizing that assumptions could change in regard to the pension at the end of the year going into next year, could you still ballpark where you think the funded status could be by the end of this the year?

Yes. And obviously we look at the stock market pretty often, which is obviously one of the variables that impacts that.

Right.

We ended last year give or take around $400 million of unfunded positions worldwide. And that was in the upper 80% funding of our US business. We're contributing around $100 million this year, and so we would expect that number, give or take, to come down by that amount. So in the US, I guess, as a rounded number, you are looking at around 90% funded with less than that percentage overseas. So we've really made significant headway in our pension, unfunded position, through substantial contributions over the last few years for very good return on assets that we've had, and again with no help from interest rates that had declined over the last several years, which again is a variable, if that increases a little bit would help shorten that unfunded position, as well.

Yes. You have come a long way. The -- are you comfortable then in the 90% range? Because--?

Again, I think as a rounded number, to end this year depending upon what the returns on assets do, interest rates, and so forth. Plus, again, as we said at the end of the year, we'll take a look at our total capital position and make an assessment of whether or not we would contribute more than 100, which is consistent with what we've done in the past. But as far as having that under control and manageable, we're -- we believe we're in good position other than the fact that it is still unfunded.

Right. But do you have a target level of 90% or 95% where you'd like to be and then not throwing in any extra cash at that point?

Again, I think we have a longer term plan. It's not a specific percentage at any one point in time. Over the next five yearsish we would like it to be a fully funded plan. So again, we're in target, and again, o the extent that we have good use of our additional cash in the strategic investment program that would dictate that we're very comfortable with the current contributions we're making but we'll consider additional payments depending on our current situation.

Great. I've got one more if I could for Jim or Jacqui. You mentioned profitability in '08 for the auto business. I've got a two-part question to that. One, what type of build assumptions versus '07 are you using to get to the number? Secondly, from a directional standpoint, is profitability expected early in the year in one of the first two quarters, or are you talking about aggregate profitability for the full year?

Yes, Bob, this is Jacqui. First in terms of build, we're expecting the automotive production worldwide to go up about 2.5% next year, focused our greatest share in North America. We see it growing about 2%. But we see the Detroit three diminishing their share with a large like greater than 5% reduction in light truck volumes in terms of our build assumptions. And in terms of profitability next year, we see being profitable at a -- being in a positive profitabilities run rate in the first half of the year.

Okay. So by -- is it fair to assume something like a break even in the first quarter, or are we strictly talking to the seasonal benefit of 2Q where you're looking at profitability?

We're not going to go that level of detail at this time.

Okay. Thanks.

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

Good morning. Thank you.

Good morning.

Also regarding the automotive side, can you talk a bit more about the impact of heavy duty truck in the quarter? Primarily because we know the revenues were probably down pretty sharply, but I believe that was more profitable work, as well. Can you talk about maybe what the impact on revenues and margins were in Q2 relative to maybe Q1 and year-ago levels from trucks?

Year ago heavy truck versus Q2 -- Q2 this year versus Q2 last year, in revenue we lost about $12 million in heavy truck, and that was offset by stronger than expected light vehicle production. The mix is different there where we're only depending on the mix of light vehicles, it can be in the negative to slightly profitable range with good margins in heavy truck. That answer your question?

It does. Although can you give a sense, when you look at the profitability this quarter, I mean, does -- does the shift in mix assuming it's a push on the revenue, what does the shift in mix away from truck and toward light vehicle, what was the net impact on the margin? And I ask -- it sounds like these things are being to steady out a little bit. So this is probably the worst it gets. I'm trying to get an order of magnitude.

It's not a big impact. It's slightly negative. Because of the portfolio management we've been consistently doing. We're also beginning to get a richer mix in -- in the light vehicle side. So it's not a significant negative, just slightly negative.

Okay. And then on the light vehicle production, where did that offset come from exactly? Was that new platforms? Because it sounds like the mix of the Detroit three and the truck versus car mix might have worked against you to some extent. How did you wind up maybe offsetting that?

Well, first, it's the divestment as part of our portfolio management of steering which was in last year and not in this year. Second, we had a number of key new programs starting this year in terms of truck platforms with new products that we didn't have in the second quarter of last year.

Okay. So that $12 million -- that was mostly just due to new truck platforms that you won.

Right. New truck platforms with the right high value product.

Okay. And then do you have -- what were the revenues of the two divested business in Q2 last year? What's that divested amount together?

You're looking at roughly around $45 million.

For the quarter for the two companies together?

Correct.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) And there appear to be no further questions at this time.

Okay. Well, thank you very much for your interest and investment in the Timken Company. We look forward to talking to you again next quarter.

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