Timken Co (TKR) 2007 Q3 法說會逐字稿

Good morning. My name is Janice and I will be your conference operator today. At this time I would like to welcome everyone to The Timken third quarter 2007 earnings release 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 session. (Operator Instructions) Thank you.

Mr. Tshiegg, you may begin your conference.

Thank you and welcome to our third-quarter conference call. I'm Steve Tshiegg, manager investor relations. Thank you for joining us today and if after our call, should you have any 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, Executive Vice President and President Bearings and Power Transmission Group; Sal Miraglia, President of our Steel Group; and Jackie Dedo, Senior Vice President innovation and growth. We 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 conversation today, you may hear forward-looking statements relating 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 then our report will be followed with the SEC which are available on our web site, www.timken.com.

Reconciliations between GAAP and non-GAAP financial information ares included as a part of this press release, as well as the investors overview portion on our web site. 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 will turn the call over to Jim.

Thanks, Steve, and good morning. As you have seen from today's announcement, results for the third quarter fell short of our expectations. This morning I will address the issues behind that shortfall. I will also explain the realignment of our bearing and power transmission organization and how the changes will reinforce our efforts to improve the execution of both short-term performance and our plans for growth. Finally, I will end with an update on a number of key strategic initiatives targeted to drive continued financial improvement. While we are disappointed with our near-term results, we remain focused on our long-term initiatives to drive improved performance. The primary issue underlying the shortfall in the third quarter was cost overruns in our bearing manufacturing organization.

These cost overruns were the most severe in the plants that produce needle and small tapered products and were driven by several factors. We were experiencing unprecedented levels of demand. That's the good news. Unfortunately, efforts to maintain customer service in the face of that demand that is training costs, logistics costs,line changeovers, et cetera, have caused a spike in cost. Secondly, we are experiencing disruption related to the restructuring under way in automotive manufacturing. We have shifted significant amounts of production as a result of the closure of the Clinton, South Carolina plant. The learning curve in the receding plants has added to the disruption and cost increases.

And finally, we have seen inflation in the cost of purchase items but to date we have been unable to recover with pricing. In addition, we continue to experience increases in the costs of raw materials across the businesses and have been challenged to recover these material costs in the prices of our products on a timely basis in some parts of our business. During the third quarter, those cost increases led to an unexpected increase in -- [inaudible ] -- we anticipate these issues will continue to hamper our performance in the fourth quarter and we have adjusted our outlook for the year to reflect that expectation. This performance is unacceptable. Many of our long-term efforts to improve our operational effectiveness, including our Project O.N.E. program, manufacturing restructuring and lien initiatives are targeted at the same issues that impacted our third-quarter performance. It became clear us to earlier this year these longer term efforts were not moving as quickly enough to facilitate the rapid pace of change necessary to compete in these markets. The recently announced realignment of our bearing and power transmission organization was implemented primarily to bring focus to and to accelerate the impact of these programs to improve operational effectiveness. Specifically, the realignment was targeted to separate and highlight those areas where we were focusing for growth, including aerospace, process, or heavy industries, distribution, and in Asia. Realignment creates focused organizations with the responsibility for both the customer-facing front ends and manufacturing supply chains.

To improve our ability to better respond to changes in demand, we have combined the remaining segments of our bearing and power transmission group within a mobile industries business bringing together common products and customer buying factors under a single management structure. This will facilitate faster decision making, improve our execution and lead to more effective portfolio decisions. The new bearings and power transmission organization is being implemented as we speak and should generate between $10 million and $20 million of selling and administrative savings. However, the real impact of the change will be measured in our ability to more effectively manage our business operations and avoid the type of issues that affected our results this quarter.

On a more positive note, we are seeing good progress on our strategic initiatives across the Company, which had delivered continued improvement and performance for The Timken Company as we move forward. Our $200 million investment in capacity for heavy industrial products is increasing our capacity to serve our process industry customers. We have seen significant improvements in output in our existing plants and have began to ramp up output at our new factory in [inaudible] China and anticipate that our new plants in India and in [inaudible] , India will begin operations early in the new year. We have a significant backlog in these profitable product lines and the additional capacity will have an immediate positive impact on earnings. The closure of our Clinton, South Carolina bearing plant is nearly complete, and the receiving plants are ramping up on the transferred products. We have chosen to delay the Sao Paulo plant closure to enable the Company to capitalize on strong market demand. Project O.N.E. is going well and will provide the framework needed to achieve our longer term process improvement objectives. Bringing this infrastructure online at a time of heavy demand has been challenging, but it is the backbone to improving execution in the bearing and power transmission organization.

During the quarter, we also announced the acquisition of the Purdy Corporation. This $200 million investment is a sizable addition of new power transmission capabilities to Timken's fast growing aerospace growing business. And we advanced our Asian growth strategy achieving a sales increase of 37% in the region compared to last year's third quarter.

In closing, our core markets are expected to remain strong, and our major initiatives are on track. Our focus is on improving our execution to better manage demand, drive improved profitability while continuing to shift the Timken portfolio toward higher value sectors. Now, I will turn over to Glenn for a more detailed review of Timken's third-quarter

Thanks, Jim. For the quarter of the Company's fully diluted earnings per share from continuing operation was $0.43, excluding special items. Earnings per diluted shares was $0.51. This special items included $17 million of pre-tax expense, primarily related to restructuring, rationalization and impairment. In the third quarter of 2006, special items totaled pre-tax expense of $7 million, principally related to restructuring and rationalization. The rest of my comments will exclude the impact of special items. Sales for the third quarter were $1.3 billion, an increase of 6% over 2006. Strong demand across the Company's broad industrial markets was partially offset by the divestment of automotive steering business and steel's European tube manufacturing operation. Excluding the impact of these divestments, sales were up 10% over last year. In addition to demand, sales benefited from favorable pricing and mix, surcharges and currency.

Gross profit margin for the quarter was 20.4%, an improvement of 50 basis points from last year reflecting stronger pricing and demand, partially offset by higher raw material costs across our businesses and higher manufacturing and logistics costs, primarily associated with the Company's restructuring and capacity expansion initiatives. SG&A margin of 13.5% was unchanged from last year. As a result, EBIT for the quarter came in at $82 million or 6.5% of sales. Net interest expense for the quarter was $8 million, down $3 million from last year, primarily due to lower debt levels.

The tax rate for the quarter of 33.9% was in line with the company's estimate, although higher than 27% last year, due in part to the company having a smaller percentage of its earnings and lower tax rate foreign jurisdiction. Note that lastst last year's third-quarter rate also reflected a favorable full-year tax rate adjustment. As a result, income from continuing operation for the quarter was $49 million or $0.51 per diluted share compared to $0.49 last year and our previous earning's estimate for the quarter of $0.55 to $0.65%. The lower than expected results were due primarily to higher material and manufacturing costs as well as an increase in steel's LIFO reserve.

Now I will review our business group performance. Industrial group sales for the quarter were $557 million, up 11% from a year ago, benefiting from pricing, currency, and continued strong demand across all industrial markets, with the highest growth coming from heavy industry and aerospace. Industrial EBIT was $55 million or 9.9% of sales, 30 basis points higher than last year. The impact of favorable pricing was partially offset by higher raw material costs, as well as higher manufacturing logistics cost, primarily related to the ramping up of capacity and managing strong demand through constrained facilities. 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 $361 million, down 1% from a year ago. Increased sales in Europe and in late vehicle markets were more than offset by lower demand from North American heavy truck customers and the sale of its steering business at the end of 2006. For the quarter, the group reported a loss before interest and taxes of $21 million, compared to a loss of $26 million last year. Net benefits associated with restructuring initiatives were partially offset by a higher raw material cost. Relative to our expectations, the quarter was impacted by higher-than-expected raw material as well as manufacturing costs associated with its restructuring actions. While progress continues to be made on our restructuring initiatives, the impact of higher material and manufacturing costs has resulted in the lowering of our Automotive Group outlook for the fourth quarter, albeit to a level of performance better than the third quarter.

Based upon current performance, we are no longer in a position to say that this group will be profitable next year; however, the new management team responsible for this business is in the process of preparing its profit plan for next year, which will include additional tactics to improve profitability. Steel Group sales for the quarter were $381 million, up 7% from a year ago. The group benefited from increased pricing, surcharges and strong demand across all markets, especially in the energy and aerospace sector or automotive sector which more than offset the decline in volume from the closure of the steel tube manufacturing operation located in Europe. Steel Group EBIT for the quarter was $47 million or 12.4% of sales. 180 basis points lower than last year. The benefit of strong demand and surcharges in the quarter was offset by higher-than-expected material costs and a LIFO accrual reflecting the higher cost of purchased scrap.

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 $514 million, $17 million higher than the end of last year. Strong cash generation from operation was offset by capital expenditures in support of our growth initiative, pension contributions and seasonal working capital requirements. The Company's leverage of net debt to capital decreased to 22.6% compared to 25.2% at the end of last year. The Company expects to generate free cash flow for the remainder of the year due to improved earnings and lower working capital requirements.

With the acquisition of Purdy, the Company expects the end of the year to end with leverage that will be higher, as well as higher debt levels than we did at the end of this past year, but below its targeted leverage of 30 to 35% providing flexibility to pursue further strategic investment. Capital expenditures for the quarter were $69 million or 5.5% of sales above depreciation and amortization of $58 million. This higher level of spending reflects our investments in growth initiatives, including capacity to meet strong industrial demand. We contributed approximately $30 million to our global pension plans during the third 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 continued strong demand from our global industrial markets while automotive demands should remain stable. We expect to see higher profitability in margins for the full year compared to last year benefiting from improved pricing and operating performance. We continue to expect improved performance across all businesses for the year compared to last year. We now expect earnings per diluted share for 2007, excluding special items to be in the range of $2.40 to $2.50, compared to $2.13 for 2006. This revised outlook reflects the higher impact of material and manufacturing costs.

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 are expected to be comparable to last year as we continue to invest in growth initiatives while cash taxes are expected to increase slightly due to higher earnings and an estimated tax rate of 34.2%. While the Company is lowering its near-term outlook, we remain committed to improving execution of our key initiatives that will drive and prove performance.

We are currently going through our 2008 profit planning cycle and will provide our outlook for 2008 on our January earnings call. As a result, we will limit our discussion today to our results and outlook for 2007. Also on our January call, we will provide new segment results for the Company that will reflect our new structure, including proforma results for prior periods for comparability. This ends our formal remarks and we will be now happy to answer any questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q & A roster. Your first question comes from the line of Bob Schenowsky from Jefferies.

Good morning.

Good morning.

Two questions. First, Jim, on the auto side, and I am not looking for a forecast for '08, but could you highlight anything else that you have been able to identify in there that has altered your view for next year?

Bob, I think -- Mike has been diving deep into that as he has taken the reins in that area. If you don't mind I will let him respond to that.

Absolutely.

Hi, Bob, this is Mike.

Hi, Mike.

I think there are several things. Clearly we have seen the performance of our -- [inaudible] -- in that market segment not get better with a lot of efforts around restructuring, the redoing of contracts, repricing in the marketplace, et cetera, that as much progress as we make on a forward basis, there is always some things they are holding back. So, there is really three things we will look at, Bob, a part of putting that combined with the rest of our business units into a bearing and power transmission units and those three are exactly what you have been thinking about. Our pricing the marketplace making sure that in fact we are getting paid for the value that we create and a very important aspect of all of our business.

Secondly is just the cost structures. We now have an opportunity basically to put all of our capacities, capabilities together, drive them in one concerted effort to lower cost structures in the marketplace, and then make determinations as to which markets in fact we should participate in, play in, and in fact provide us with an adequate return.

And then the third one, which really comes off of that is this mix change. A possibility for mix change of our sales moving long term, and I think that's a key point. One of them is the fact that we will continue to grow and grow aggressively in those markets that we have continued to do so. Aerospace, distribution, Asia, those places that have been important and this will give us another opportunity to take all of the assets and focus them very uniquely on those markets. And then I think secondly will be to either fix or exit those areas that, in fact, we can't get that profitability, even with our best efforts on pricing, contractual obligations, and restructuring of our manufacturing base.

Okay, great. Thanks, Mike. And then just one more question. In terms of some of the cost challenges that you faced in the quarter, other than raw material prices, is there anything that has really become a surprise, that could actually carry on beyond fourth quarter?

The one that I would talk about is -- and I think Jim and Glenn both mentioned is the disruptions in our manufacturing bases as a result of driving forward with a lot of the restructure. In the restructure, that actually was closing either fully or partially specific facilities. That means the transfer of products to other facilities, their ability to ramp up very quickly on products that they may not have been produced in the past or of similar products, and I would anticipate that we will continue to see that but not as a major emphasis as we begin to bring the restructuring to a close. And I think that is an important point. Jim mentioned that we, at least at this point, have kept open our Brazilian facility. It was announced as a closure. We require that to service the markets that in fact remain hot across the world. And so until further notice anyways, that plant will remain operational to a certain extent.

Okay. And then with the new capacity that has been added, given the market dynamics that you are seeing domestically and globally, how long do you think it's gonna take to get you -- those ramped up where you are comfortable with the returns that you are get.

Yeah, Bob, it is a great question. This is something that we've talked about versus several quarters, and we started our emphasis on this $200 million expansion of our capacity, which I think many of us have talked about specifically as to where those plans are and where they are focused are on. We are beginning to see that. In fact, if we walked a little bit deeper into the industrial numbers, we are beginning to see the mix of the things that may be holding back our margins, move away from the capacity ramp up, because we are starting to get the benefit of the higher sales and more towards the continued escalating of material and then some of this disruption just in the restructuring. So our '08 as we begin to talk about that will see margin improvement and top line revenue improvement specifically on the capacity that is being installed.

Great. Thanks for your time.

Your next question comes from the line of Eli Lustgarten with Longbow securities.

Yes, good afternoon -- still good morning -- feels like afternoon [inaudible] the day. I keep, you know, I keep hearing the same stories, same restructuring in automotive and it keeps coming -- almost like a slow torture for the last couple of years. Is there any indication that you can actually take some definitive steps -- you know, take a charge, close down but get to the business behind you as suppose to every year and every quarter going to the same aggravation, looking at the same mix, getting costs under control, you know, same things that we've been hearing now for three or four years in a row. I mean, there is got to be some more definitive action that you can take or -- and there is not enough capacity in the industry for anybody else to have much alternative. So, I just don't understand why we keep going through this slow torture.

Eli, this is Mike. I will say two things for that. One is we are having exactly the same discussions as to whether or not the incremental changes that we have been driving in that industry and in particular are sufficient enough for us to return to profitability. And we are going to do two things. One, we just got the new team and the new structure on board. We are in those discussions daily with regards to what are the macro types of initiative that we are gonna have to take to either fix or exit. And you will hear me say that multiple times, fix or exit, because it is at the stage that the incremental moves have not been sufficient to return us to profitability. That is not sufficient for us as management to continue forward with. So I would like, though, to come back and talk -- to talk about the fourth quarter with some more definitive actions.

So would there be a chance that we can get some better -- you know, you have an analyst meeting scheduled in December. Is there any, you know, reasonable probability that we can get some more definitive insight and what's going on by that time or do we do have to wait until next year.

Hey, Eli it's Glenn. We actuallu are moving the analyst date from December into February.

Okay.

Almost purposely to address that issue. Because by doing it in February, at that point we will have the new segmentation of our results and again performance for prior periods as the presidents of those business available have our outlook and expectation for 2008, so we can address that a lot clearer than we could earlier in the year.

Unfortunately I signed on a little bit late in the call. Can you talk about pricing recovery for all these raw material impacts that you are talking about? You know for an industry that is constrained and price is time shipment as supposed to some of your heavy -- you know, because of backlogged. I am having difficulty understanding why the impact is so massive [inaudible] and particularly surcharges even in steel are supposed to, you know, offset the problems. I guess I am having trouble understanding why we are having such big raw material impacts.

Good morning, Eli. This is Sal Miraglia. If I speak for the steel business. We have a pretty good system of passing along those raw material costs, increases, on a pretty timely basis. So from that perspective, I think our initial impact is -- is fairly well handled. In fact you heard Glenn say the biggest issue we had this particular quarter was that needed to make a LIFO catch-up because the value of raw materials -- our internal value from our inventory point of view simply crept to levels higher than we had anticipated and weren't reserving enough.

How big was the charge and is this a one-time deal?

Yeah, we will have a bit higher LIFO reserve for the rest of the year too but it was a catch up for three quarters for all practical purposes and of course noncash as you know.

How big was it?

It was South of $10 million.

Okay.

The only thing I would add, Eli, to that is, as you look at the whole company -- this will take the Bearing side as well. We are able to recapture as a company the higher material cost through the surcharges that Sal said as well as through higher prices we have enjoyed within industrial. Where we have been constrained out of any of our groups that is really been in the automotive side of it, where we haven't had the opportunity to get the pricing to overcome that, but at least on a consolidated basis we are still doing that which means we have given up some margins rather than getting the pricing we would have otherwise have wanted to get and therefore, the constraint that we saw in particular was that the manufacturing and logistics cause that we talked about because of the key initiatives we are working on as we go through them really have constrained it. But at least we have had the recovery and we expect that obviously to improve as we go through the -- finish up those program.

I apologize again. Did you quantify the logistics for manufacturing cost impact in the quarter?

We did not. But if you at least assume that the price material cost was neutral, all the degradation if you will really was attributable to those two.

So, higher raw material costs really was offset by pricing and really has not much impact on the bearing side. Is that fair?

Again, if yu want to look at that way. We had stronger pricing than material costs but, again, it is not necessarily a pass through because the industrial business or Mike can speak to it is not necessarily done with surcharges so pricing is a normal occurrence that covers material costs as well as looking for additional profitability.

We have been hit -- let me go back one final question with the automotive sector. We have been hearing that you know you have this contracts through multiple years. They were rolling over and we sort of been negotiating the last contracts that were sort of problematic for the last couple of years. Why are these any contract that is sold that gives you these kind, you know, massive impacts at this point. Why would you continue to take any business that allows you to take this kind of impact, given that you supposed to be getting out of all those poorly priced automotive contracts. Why are we still in the same box?

Eli, I think the straight answer is, each of the Commercial relationships we enter into at this point, we enter into with a belief that it is going to be profitable for us in the long term. The reality is that with the movement of -- of raw material costs and with our own performance in manufacturing, that has not transpired on a holistic basis across the business. It has caused us to step back. It caused us to reorganize the Company. It caused us to shift our strategy and looking forward, the results will have to speak for themselves.

Right. Thank you.

Your next question comes from the line of Lad Slifenberg with Lehman Brothers.

[inaudible] How are you? Hello?

Good morning. Go ahead.

Yeah, a couple of questions. First of all, you know, we -- as we take a look at the outlook for Q4, can you break it down into -- I guess there is a roughly $0.15 decrease versus your prior guidance taken into account Q3 performance. Can you break it down into buckets as far as audit group performance and bearings?

Yes. In our calculation, I don't think it would have been that, that big of a -- of a, a stepdown for the fourth quarter. It would have been around $0.06 relative to our implied numbers because again we wouldn't have had fourth quarter out there, but obviously we had the full year and then the third quarter. But essentially, the $0.20 reduction in our full-year outlook which is now 240 to 250 against implies that fixed end. With that the decline is attributable effectively to the auto group. We have been running as you may recall for the first couple of quarters at around a $7 million loss and we affected -- we felt that that was a reasonable effective rate throughout the rest of the year. What we saw was that the volume have tapered off a bit and the benefits of the restructuring initiatives because of the constraints and the cost and the delay of Sao Paulo didn't enable us to get those [inaudible] to mitigate that. So, we came in lower in the third. It's our expectation that that will continue in the fourth. So, we do expect to have a lower earnings if you will from auto below the $7 million in the 4th but we do believe it will come in better than what we did in the third. So, call it the $0.06 seince the share reduction is equivalent to call it around $9 million of EBIT and so the 7 plus the 9 gets you until call it a ball parkish albeit. We had pluses and minuses elsewhere.

Okay. Then my second question is within the auto group performance this quarter, can you quantify -- also put it into buckets for me between higher raw material prices and manufacturing costs or maybe put a percentage on each -- in terms of on their performance.

Let me take the first shot at it because effectively while we had lower profitability in the third quarter relative to the second, when you look at it year-over-year, auto actually has improved but clearly not to the level that we had expected.

Right, but I am saying even versus your own expectations for Q3.

Fair enough. But at least relative. The biggest squeeze if you will for us, again for the year-over-year would have been the material costs. Relative to our own expectation it would have been probably a little bit more on the manufacturing side relative to what we expected but clearly higher material cost came in, at least higher as well as manufacturing and it is probably two to one, if you will, on manufacturing.

okay were great, thanks

Your next question comes from the line of Amy Noflus with Pilot.

Yes. My question is, in the automotive business, are any of those items one-time in nature that, you know, that have to do with the restructuring or something like that, so that the loss doesn't look as big as it actually is?

Amy, the cost of our restructuring for the most part we do separate. So if it is relating to that. If it's relating to a call at the inefficiencies that we had planned to perform better or do things from a timing standpoint or we have expediting because of customer service issues, you name it, that all goes through what we would call, what we believe to be our normalized result Which doesn't mean that we expect it to recur again but we don't treat that as an unusual item or a special item.

Now, Amy, if I can then add to that -- this is Jim Griffith. I think the message that we are giving by taking the fourth quarter down and recognizing that we won't pop back to profitability in 2008 is the issues are not one time and that we are going to have them in one quarter and then they will be resolved. They've got more stickiness to them and will take longer to resolve. The game plan that we are going through now is to assess what does it take to resolve them and how quickly can we move those numbers back to acceptable ranges.

Okay. But -- I mean, it is kind of like -- the automotive business was supposed to be profitable in '06. It's not gonna be profitable in '07 and even '08, and you know, what happened, I mean, what changed versus your outlook. I mean, because when you were looking at the '06 contracts, those were rolling off and you were looking at what was going on in '07. And I guess in the past quarter there had to be something that was a material change to bring it from the loss of $7 million or so each quarter up to 20?

Let me go back through my, with what I said in my text. The thing that fell short this quarter was a combination of manufacturing, cost issues related to disruption due to excess demand, and that is excess demand across the Company on the factories that are included in the automotive segment. Remember about 40% of their outlook went to industrial customers. And then secondly, the costs associated with the start-up of new factories on the product that is being -- being restructured. Those are the two primary issues.

I think if you look at it over the longer term, when you go back and say it was supposed to be profitable in 2006. Supposed to be profitable in 2007. Supposed to be profitable in 2008. This is the issue we recognized when we stepped back and said the idea of having a separate organization focused on the auto industry that we saw a long-term opportunity to achieve target profitability in that is now behind us. We have rolled it back into a common bearing and power transmission group which allows us to look at the portfolio, take the product out of the factory, move it to the market where it can be sold, most profitably, and ultimately make the portfolio decision of what part of the market that we need to or we desire to compete in

Okay. Okay. And you said that it won't be profitable in '08 also. Is that kind of what you said, the automotive? Or was it just '07.

What we are saying is because, as you said, we were all affirmative in the fact that we did believe that the turn around in auto would occur in '06, again before we saw the big three cutbacks in the latter parts. We reaffirmed again that we thought, that with the restructuring we would get there in '07. Again, a lot of dynamics between material and working through the reconstructuring. We have not gone through the profit planning or we're currently going through looking at '08. We got a new management team in place that leading that effort. So, we don't know what the outlook per se is. But what we wanted to do is no longer be affirmative in that comment given that the losses in the third and what we believe will be in the fourth are greater than what we had expected earlier and therefore as a result now, we just don't want to be out there making that comment again. We will wait until we deliver the performance and then tell you that we've made money.

Okay. Well, good luck.

Thank you.

Once again, ladies and gentlemen, if would you like to ask a question, please press Star 1 on your telephone keypad. Your next question comes from the line of Marty Pollack with NWQ investment management.

Yes, quick one if I may. We are all focusing on automotive and the turn around that isn't taking place, but I'm just wondering, in terms of this new realignment that you described essentially automotive becomes part of global industries and then there's other things that are part of that whole group. Was in this realignment some automatic savings, cost benefits, effectively [inaudible] to essentially create this new structure because in a sense, it looks like we are gonna lose some transparency in terms of the detailed, you know, in that group, since it has become part of the -- bearings - you know, segments. So in effect, isn't there some amount of savings that was visualized in this restructuring to begin with. So, whether you gonna make that target in '08, I'm just wondering what was the original conception in terms of the ability to fold that into that type of structure. I mean, what did you think you could achieve if not in '08, at least in '09 so we have some idea what the applied - you know - opportunity here.

Marty, this is Jim. Let me take the first cut at it and then since Mike has got the helm of that, I will let him expand on it. I think when -- when you see the results that we report at the end of the year, and you see the new segmentation, one of the pieces of transparency you will see is transparency of the industrial markets where we are focusing growth. That a lot of questions about the margins in our industrial business and with those margins, why are you investing to grow.

Well, you will see the places that we are investing to grow broken out, and you will see their profitability. You also see that within the -- what what was the industrial business, there were segments that looked from a profitability point of view not a whole lot better than automotive markets, and it is more efficient, more effective to manage them because they have similar products and similar customer find factors as the automotive segments and now that makes it easy from an internal point of view to move that product back and forth and assure that it goes to the markets where we can earn the best return.

Now, in addition to that, obviously, we've announced, we'll get an S & A reduction, but that wasn't the drive in it. The drive was to create a business that we can run more effectively. I will turn it to Mike and let him expand on that.

Yeah, Marty, I will only add a couple of comments. I think your comment to transparency. The wayl, in fact, we will talk in the future with regards to bearing our transmission business will give you greater transparencies on, I think, more of what we are all interested, obviously the profitable opportunities, those markets in which we will grow. We will be able to see a little bit more significant detail as to how those businesses are performing et cetera. The other one that -- as we look at the mobile industries and our current Automotive Group will become part of that mobile industry. That mobile industry group will also include the off-highway industry, the rail industry, and consumer industry.

And I say that because the asset base that we use to serve the automotive industry also serves those other industries and, therefore, the decisions that we make, you'll have better transparency if the houses decisions can be made on changing the mix of our sales. How we best utilize those assets across those industries and then the eventual profitability of improvement as a result of that. So, I think you will find that this will be of great benefit in providing more transparency on the things that are very important and albeit will still be able to provide color with regards to the automotive industry and our performance in it.

Just wondering. The challenge of execution here in a sense -- it becomes, it seems like you are trying to separate a number of discreet end markets and manufacturing by -- by the manufacturing in a market segment of -- of these -- you know of these business units sort of since you really can maybe price and do strategy more efficiently. But is there -- Does it become more murky essentially into the early part of '08 as you are trying to do this, so that in fact it is going to be even more difficult to read in that initial period?

No, I --

Of what the progress is.

Yeah, Marty, actually I think it will give you more clarity because we will have a better alignment between the markets that we serve and the assets that we use to serve those versus today where there is a lot of that that goes across the two entities of industrial and automotive and there is a lot of things that we do in both businesses to support the other business, and that can be very confusing to someone who isn't in the day to day business.

The new organization will give greater clarity to all of our external constituents with regards to the actual performance and the match of those assets into the marketplace.

And just last point. On the longer term expectations, is it -- is the mobile unit specifically -- or let's say the piece of the mobile which is the traditional automotive, are those expectations for, you might say, their EBIT margins and returns. Are they -- are they expected to actually compete with the same type of returns and same industrial, you know, bearing side today. In other words, is that goal still the same?

Yes, it is, Marty, because we are now looking at the best utilization of the capabilities and assets we have and putting them in the markets where we in fact can garner the most return per shareholder. So, yes they will all come under the scrutiny of very similar hurdles.

Okay, Thank you.

Once again, ladies and gentlemen, if would you like to ask a question, please press Star 1 on your telephone keypad. The next question comes from the line of David Raso with Citigroup.

Yes, I have a question on the industrial division. The revenue growth, can you help me understand with some capacity coming on, I believe there be some catch-up on the large bearing demand that you have been short on supplying in the past. But the same [inaudible] balance that vesus your end market view. So, in a nutshell do you see industrial group revenue growth accelerating like it did in the third quarter from here? I know the format changes, but as we look at the business today, are we on a trajectory of accelerated growth due to capacity? Or is that offset by a slower end market outlook?

No, David, our end market outlook has not deteriorated at all with regards to those industries that we sell large product into. So, as our capacity comes on and again, I think that is something that we can talk about on an ongoing basis as that task that comes on. We actually will leverage that volume uptick with regards to it. So that will be very obvious. In fact the way we talk in future quarters will give you even more insight into our heavy industry side of our business, and if you look at the numbers and quarter on quarter we are up 31% year to date versus year to date last year. We were up 30%. And that actually will continue to accelerate while we not only put more capacity in the markets but also garner better price realization in those same markets.

How should I think about the impact on margins from those products coming on stream? Are those inherently higher margin products than group average or not?

They are inherently higher margin business because it goes both to the original equipment manufacturers but also to the distribution markets for replacement parts.

All right. And then switching gears, if that industrial story then, everybody has their own macro view, but the catch-up mode with better margin products in that catch-up mode. We can get an idea on '08 for industrial. But on the auto space. First question, did the auto builds in the industry exceed your expectations during the quarter?

The -- our sales in the automotive industry exceeded our expectations in the first half of the year. They were about where we expected them to be in the third quarter.

Okay. Then that short circuits my follow-up on the idea of ironically did better build actually dampen your ability to reduce the loss because the products that were ramping up above expectations were money-losing sales. But you are saying pretty much as you thought the demand would come out and it did. It really is truly just an operational problem.

Yeah, [inaudible] if you look at the actual sales revenue quarter on quarter, third quarter versus second quarter, we were down about $40 million in sales in the Automotive Group. And first half versus second half, we would see that same continuation with regards to the sales level. So, no it wasn't either staying even or increasing.

Okay. I appreciate it. Thank you.

Thanks.

Once again if you would like to ask a question, please press star then the number 1 on your touchtone phone. Please be aware there is a two minutes left to ask any final questions. While we are waiting, Sir, do you have any comments or remarks?

Well we -- again, this is Jim Griffith. We would like to thank you for your interest in investment The Timken Company. I think the discussion with the last questioner -- [ Inaudible ] --

Due to technical issues today's conference will resume momentarily

Let me perhaps restate what I attempted to say. The last speaker -- the last questioner I think set us up well for saying thank you for your investment. We are sitting in a situation wherein virtually all of our markets, we see demands stronger than we are able to serve. And that gives us confidence that as we look forward, we will be able to come back and talk to you in upcoming quarters with much better news in terms of the performance of the Company. Thanks again for your investment and your interest.

Sir, you have one final question, this is a follow-up question from the line of Marty Pollack with investment management.

Yes, if I may just pick up on one item that wasn't discussed too much -- on the steel side. The impact of surcharges and also some of the other raw material headwinds -- I don't know what is your exposure directly would be to nickel or -- can you describe or discuss what that impact is and as it goes into '08, do you see that market, you know, remaining fairly firm and where do you see that firmness?

Yeah, Marty. This is Sal Miraglia. Good morning. First of all, yes, we do have exposure to the nickel market, the alloy grades that we use pretty extensively are nickel, [inaudible], chromium, Manganese. We have seen not only price increases or cause increases but some pretty wild volatility in those as well as in the scrap arena.

As you know the nickel market finally came back to something reasonable. We actually speculate that it was due to the lack of availability of credit where some of the speculators finally began getting out of that market. It has come down to about half the value that we had seen it peak at or spike to. We have mechanisms in place today to pass those raw material increases through -- through surcharge mechanisms. All of our contracts cover that. The only issue we have is slight timing issues and exactly how the formula might be impacted by the dates of our shipments and how we collect it. But for the most part, our mechanisms are designed to cover those costs.

Our anticipation is that scrap and alloys as we have seen them will be a bit more stable, a lot more stable than what we have seen, but stabilized at what we call currently relatively higher levels about where they are today and we begun to see that stability to some degree as speculators moved away from that environment. Does that fit what you've seen in your own intercourse with other organizations?

Yeah. I mean certainly, you know, we are gaining some of the Companies [inaudible] have seen the pocket softness in the third quarter related to, you know, the -- the nickel price environment. And, you know, and the fact, stainless was down significantly. As you look into next year though, is next year vis-a-vis end markets, that stability you expect also in pricing and as well to follow through, so that next year's outlook should continue to be fairly bright for that group?

Well we weren't going to talk very much about next year at this stage in time, but what I can say is that we think that our raw material costs look like they are beginning to stabilize, and we don't expect that they will be very volatile as we go into next year. Very superficial level, next year continues to look strong in general.

Okay. Thank you.

Sir, there are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. You may now disconnect .