Timken Co (TKR) 2007 Q4 法說會逐字稿

Ladies and gentlemen, this is the operator. Today's Timken corporation conference call is scheduled to begin momentarily. Thank you for your patience. Your lines will again be placed on music hold until the conference begins.

Good morning. My name is [Lilian], and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Timken fourth quarter 2007 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 session. Thank you.

Mr. Tschiegg, you may begin your conference.

Thank you and welcome to our fourth quarter conference call. I'm Steve Tschiegg, Manager - Investor Relations. Thank you for joining us today. 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; Michael Arnold, Executive Vice President and President of Bearings and Power Transmission Group; and Sal Miraglia, President of our Steel Group.

We have remarks this morning 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 that you 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 the website.

This call is copyrighted to 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. As you've seen from today's announcement, Timken had a solid quarter and a good year. The top line for the quarter was up 9%. Our earnings increased well over last year and within our estimate for the fourth quarter.

As many of you know, Timken products are used across a broad range of industries. In fact, I've been told that the Timken Company serves more SIC codes than virtually any American company. As a result, we have a unique insight into the economy. As we transition from 2007 to 2008, that insight leads us to conclude that there are two very different forces driving the markets that we serve.

One market is driven by global forces. This market is benefiting from the extremely strong demand that is driving up the prices of commodities. This is propelling not only the companies that produce those commodities, it is also driving demand for those companies who produce the equipment necessary for their production.

The other market force is driven by the U.S. consumer. Companies limited to serving the North American markets face much more risk from issues affecting the U.S. economy.

Fortunately, we have positioned two of our businesses to serve the global industrial markets. And as a result of the phenomenal global industrial demand, both are industrial and steel businesses achieved record sales and record earnings for the year, as well as for the fourth quarter. We expect both businesses to continue to benefit from very strong global industrial markets in 2008.

Several indicators in our business lead us to this conclusion. In aerospace, the global aerospace market demand continues to significantly exceed industry and customer forecasts. We cannot bring capacity online fast enough to keep up with demand in these markets. Global mining and energy markets are booming as prices for many commodities are at or near record highs. Backlogs for large bearings and large forging bars extend well into the second half of 2008.

Those parts of the global economy that participate in the building of Asia's infrastructure continue to grow as well. In China alone for example, our sales grew by 30% in 2007. We have three new plants under construction, which will come online in 2008 to serve those segments. And we are continuing to make investments to capitalize on these growing markets.

This quarter, we announced strategic acquisitions and expansions, including the Purdy Corporation. This $200 million deal is our largest acquisition since Torrington and expands the company's range of aerospace gearbox manufacturing and repair. We expect this transaction to be accretive to earnings in 2008. We announced the joint venture in China to manufacture ultra large bore bearings for the growing Chinese wind energy market. Earlier this month, we entered into an agreement to acquire Boring Specialties, which brings together the very unique capabilities with Timken's alloy steel solutions to better serve the oil and gas industry.

Again, two of our businesses are performing very well, fueled by growing global economy and positioned by our investments for additional profitable growth.

But just as there are two sides to the economic story, there are two sides to the Timken story. The flip side to our record results in industrial and steel are the continued challenges we faced in our automotive businesses. Our strategy in automotive segments has been to shift our portfolio to a more attractive product and customer mix while restructuring to reduce costs. In the third quarter, it became clear that this strategy was not moving us fast enough to offset the combination of raw material cost increases and the decline of the North American market.

We implemented two fundamental shifts in the fourth quarter. We reorganized our automotive and industrial businesses into a single bearing and power transmission group. This change improved our ability to focus our capabilities to maximize our overall enterprise performance. We saw immediate benefits in the fourth quarter in the form of record distribution shipments. We also shifted our focus to improving the cash flow in our automotive group. This means moving quickly to bring our announced restructuring efforts to conclusion and moving more aggressively to reprice our products in the life vehicle market. These changes reduced our global salaried employment by over 200 positions. We expect these shifts as well as the cost savings to have a favorable impact on 2008 results.

The bottom line? The direction of the unified bearing and power transmission business is clear. We will not remain in businesses where we cannot make money. We expect continued portfolio shifts as the start-up of three industrial plants in Asia in 2008. It will provide relief for customers as well as results for shareholders. Later this year, our small bar mill will expand our steel capabilities giving us the broadest range of super clean alloy steel bars in North America.

In summary, we are capitalizing on the strength of the global industrial markets to continue the transformation of Timken's portfolio. We are becoming more profitable and less cyclical by shifting toward businesses where we can maximize value creation. We believe this change will translate into much stronger profitability in 2008.

Now, I'll turn it over to Glenn.

Thanks, Jim. For the quarter, the company's fully diluted earnings per share from continuing operations was $0.50 cents. Excluding special items, earnings per diluted share was $0.51. These special items included $1 million of after-tax expense primarily related to restructuring, rationalization, and impairment charges, which was partially offset by the benefit of CDO payments.

In the fourth quarter of 2006, special items totaled after-tax expense of $5 million. It included losses from divestitures and charges related to restructuring, rationalization and goodwill impairment, which was partially offset by the benefit of CDO payments. The rest of my comments will exclude the impact of special items.

Sales for the fourth quarter were $1.3 billion, an increase of 9% over 2006. The increase over last year was due to strong demand across the company's broad industrial markets and favorable pricing. The benefit from currency and acquisitions was offset by divestitures.

Gross profit margin for the quarter was 19.6%, an improvement of 200 basis points from last year reflecting strong demand and pricing, partially offset by higher raw material costs as well as manufacturing and logistics costs associated with the company's restructuring and capacity expansion initiatives.

The company was also able to better leverage SG&A as the margin improved 40 basis points over last year to 13.4%. As a result, EBIT for the quarter came in at $80 million or 6% of sales, 250 basis points better than last year.

Net interest expense for the quarter was $11 million comparable to last year due to similar average debt levels and interest rates, although year-end debt was higher than last year with the acquisition of Purdy.

The tax rate for the quarter was 29.5%, lowering the full-year effective tax rate to 33.3% as the company benefited from having a greater percentage of its earnings in lower tax rate foreign jurisdictions. As a result, income from continuing operations for the quarter was $49 million or $0.51 per diluted share compared to $0.23per diluted share last year.

As Jim commented, the company implemented a change to its management structure, which now operates under two business groups - the Steel Group and the Bearing and Power Transmission Group, which includes three segments - mobile industries, process industries, and aerospace and defense.

Beginning with the first quarter of 2008, the company will report its financial results under this new structure and reclassify 2006 and 2007 for comparability. As financial reporting under the previous segmentation was used through the fourth quarter, our comments today will be based on the industrial, automotive, and steel group segmentation, which is consistent with how they have been reported throughout the year.

Now, I'll review our business group performance. Industrial group sales for the quarter were a record $633 million, up 17% from a year ago as the company benefited from pricing, currency, the Purdy acquisition, and continued strong demand across its broad industrial markets with the highest growth coming from heavy industry, rail, and distribution. Industrial EBIT was a record, $71 million or 11.3% of sales, 320 basis points higher than last year. The impact of favorable pricing and volume was partially offset by higher raw material costs as well as manufacturing and logistics costs primarily related to the ramping up of capacity and managing strong demand through constrained facilities.

Automotive group sales for the quarter were $366 million, up 1% from a year ago. Increased sales in Europe and in light vehicle markets were partially offset by lower demand from North American heavy truck customers. The benefit from currency was offset by the divestment of the steering business at the end of 2006. For the quarter, the group reported a loss before interest and taxes of $35 million, compared to a loss of $42 million last year. The benefits of volume, restructuring, and lower warranty costs were partially offset by higher-than-expected raw material and LIFO costs. We expect to see improved results from this business during 2008, resulting from the company's restructuring, pricing, and portfolio management initiatives within the new mobile industry segment.

Steel group sales for the quarter were a record $379 million, up 6% from a year ago. The group benefited from strong demand across its broad markets, especially the energy sector. The benefit from surcharges offset the decline in volume from the closure of its steel tube manufacturing operation. Steel group EBIT for the quarter was a record $43 million or 11.3% of sales, 30 basis points higher than last year. The benefit of strong demand and surcharges in the quarter was partially offset by higher LIFO and material costs.

Looking at our balance sheet, we ended 2007 with net debt of $693 million, around $195 million higher than the end of last year due to the $200 million Purdy aerospace acquisition in the fourth quarter. Strong cash generation from operations was offset by capital expenditures in support our growth initiatives, working capital requirements in support of sales growth, and pension contributions, which helped bring our global pension funding status to 95%. The company ended the year with net debt to capital of 26.1%, below our targeted range of 30 to 35% providing financial flexibility to pursue strategic investments.

In summary, we expect demand from our global industrial markets to remain strong, especially in key markets where we have invested for growth and for the North American automotive market to be down other than medium and heavy-duty truck. We expect to see higher profitability and margins for the full year across all of our businesses compared to last year, benefiting from improved pricing, operating performance and portfolio management initiatives. The company expects earnings per diluted share for 2008, excluding special items to be $2.75 to $2.95 for the year and $0.70 to $0.80 for the first quarter.

From a cash flow standpoint, we expect to see higher free cash flow in 2008, benefiting from earnings growth, better working capital management, and lower global pension contributions, which are estimated at approximately $20 million compared to $102 million last year.

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 and an estimated tax rate of 34%. This ends our formal remarks and we'll now be glad to answer any questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Raso with Citigroup.

One big [pick] of question. But before that, just a little [cream] of the fourth quarter. I didn't see the release. I apologize if I missed it. The LIFO adjustments, can you give us the size of those in auto and also the one in steel?

David, for the quarter within the auto group that was around $10 million of LIFO costs, in steel just a couple of million for the quarter. Steel issue was more dealing with the full year where they were up year-over-year, where actually automotive would have been relatively flat.

Okay. The question I really have is for Mike. Given the significance of the conversations you've been having the last month and a half or so with the auto customers, can you give us an update of how they've gone and maybe some thought of you can help quantify for us maybe some of the shift in assets that maybe were shared assets before between auto and industrial that you see kind of right off the bat maybe shifting more toward non-auto market?

Yes, David. During the third quarter call, we talked through about five specific initiatives that we would push in fact to drive improvement of the bearings and power transmission business overall. But in particular with regards to automotive, the two that you have raised pricing were actually making good progress. That is something that as you know in that industry contracts come up in general on annual basis that has provided us an opportunity to look at the renewal potentially if we can make them profitable of contracts in 2008. Basically, those are behind us and we've made excellent progress on pricing, which we'll begin to see some improved performance, therefore, in the automotive segment in 2008.

The mix change is one that we have as we talked in the third quarter, we have looked at all of the opportunities to take the assets that we employ across the entire business and best determine which market we should serve with them based upon the profitability. And if you look at the details of obviously some very significant sales in the fourth quarter on the industrial side of our business, you can see the beginning of a mix change where we've been able to redirect some of those assets to more profitable markets. So, both are progressing very well, David.

I know there's some sensitivity on a call discussing this, Mike. But can you give us a little more color on the reaction of your auto customers when you ask for essentially -- look, we need higher price to continue to serve you. Or if you can't offer us a better price, you know, we have to choose to back away from providing this product. Has the reaction been more -- look, we can't give you higher price then you take the [tact] of -- fine, we'll walk away from the business. It's more efficient that way for us as a company. Or have you seen more of, you know, the company's acquiescing -- okay, fine, we need your product. We'll give you a [3, 4, 5%] price increase?

Yes, I won't take either one of your options, David. I'll give you the third one.

Okay.

In general as we go into the marketplace -- in all of our markets, we price based upon the value that we believe the customer gets as a result of doing business with us and with our products, et cetera. And that usually is a mutually agreeable value of which price should fall out. Our approaches in these markets, therefore, have been to get to that point where the value we create and our ability to stay in those markets is dependent upon getting appropriate prices for our product, and that's the approach that we've taken. And I will say that the industry, regardless of the industry, they understand that approach.

Sometimes the magnitude of the increases can be quite difficult at certain times but that's the approach that we take. And I think, as good business people and good industries, they all are reacting in a way that is I think very positive long term and they recognize that a company like Timken needs to be profitable in order to continue to invest in not only capacity but new products and new platforms for the future.

I'll hop off. Just in summary though, I thought I heard you are say that it's more of a situation of being able to get some price and we should see improvement on the existing business more than a walking away from businesses because the customer is not willing to work with you?

That's correct, David.

Okay. Thank you.

Your next question comes from Wendy Caplan with Wachovia.

Good morning. Your -- can you hear me?

Yes, Wendy.

Okay. I just want to be sure. Your outlook, Jim, seems quite optimistic to us. You're suggesting 15 to 23% EPS growth and you spoke to your unique insight given your end market exposure, which I respect and appreciate. But the only times historically that you've posted high year-over-year EPS gains is when we're coming out of a cyclical trough and we're certainly not at that point in that position right now. Can you help us to understand why you think that your EPS growth can be so high in '08?

The problem, I think, Wendy, is if you get caught up looking simply at 2007 versus 2008, you just -- you're looking at one year versus another as opposed to looking at the trends and the changes that have happened in the Timken Company. Go back to our investor relations presentation that we've shown you. We've shown you the comparison between the cyclical terms and the last cycle and the cyclical terms in this cycle. And we have been investing heavily both on an expense basis and on a capital basis this time to change the nature of the company.

As we -- and obviously this year we gave you guidance at the beginning of the year that we did not meet because of some of the impact of some of those investments. 2008, we see strong markets continuing in the parts of the business that we are -- where we are investing and we're seeing some of our investments coming online both the acquisitions that we've made which are accretive to earnings as well as the new capacity coming online that we've been investing in over the last couple of years.

Understood. But, you know, roughly, I just to pick a number about a third or 30% of your business is still auto, and there's not much that's more cyclical than that. And kind of -- as a follow on, how much of your business this year of your revenue in '07 rather not this year, in '07? How much was the North American auto business and what are your assumptions relative to North American auto builds in '08?

Mike, you want to give a sense of the assumptions of auto builds?

Yes. Wendy, this is Mike. As we look at the North American automotive industry for next year, the consensus now is down to about 14.4 or 14.3 million light vehicles. And as a result of that, we have adapted our plans and our activities in the business to that level.

We also have put in a recession scenario that would probably drop maybe another couple percent off of our North American light vehicle systems business and also scenario that says we go to $4 a gallon gas, which would hurt the SUV markets and the light trucks, which again would impact our business. So, we've actually look at that. We've modeled it.

But at the same time we've modeled that, we've modeled all of the aggressive growth that we have, in fact, made from a marketplace perspective and energy industries, the heavy capital equipment, Asia infrastructure build and the aerospace markets that both from the standpoint of strong markets and our capacity installation and then growth associated with that. It actually dwarfs the downside of a North American light vehicle reduction whether it's recessionary or it's $4 a gallon gas or it's just what they are predicting now at the 14.4 million vehicles.

Wendy, this is Sal Miraglia. I can give you a little color from the steel business' point of view for the year 2007 that you are lewding to. About a 30% of our business was devoted to what I'd call either directly or indirectly the automotive market, but also I appreciate the fact that our steel business' automotive business has been a better kind of business than the automotive -- than other automotive businesses.

It has been far less variable than what we would normally expect in certain instances. And because we were on annual contracts, we were able to move very early in this cycle. By that, I mean two years -- two and a half years ago to build into those contracts the right kinds of considerations for costs that were beyond our control. So, that part of the auto business that we participated from the raw materials side has been a fairly good behavior, a fairly good behavior during the course of last year, and we expect it to continue that way.

Okay. Well, you know, maybe I'm just a Jewish mother and I worry too much. Maybe that's the problem. But again, I worry about the assumptions going into '08 but I'll hop back into queue. Thanks.

Wendy, let me follow up, too, because maybe if your premise is that we'll see much stronger top line growth in a good global economy, which again from our standpoint, the markets are still very good as well as we've added capacity. But frankly, we think a lot of the growth that's going to drive the earnings is for a few factors. One, the mixes we've talked about from auto to industrial markets is helping, especially in the energy, which affects both the bearing and steel business. We're seeing improved pricing across. So, we do expect that to continue. We are realizing and expect to realize the benefit of restructuring that we're - we're pretty far down the road on within the automotive group that we've had.

We've constrained our margins fairly significantly within especially the bearing side with the capacity additions that we've put on as well as with our P1 systems that we're putting in place. So, as we look year-over-year, we expect a lot of the constraints that we've had to mitigate.

So, in part, I think you have a point of coming out of recession. You're normally coming out of a low base to get high kind of percent increases. Our view is even though we've had a solid view this year, it's still at a normalized level of profitability that's lower than it should be because of those constraints. So, time will tell but we're not counting on a great economic environment. We're counting on at least the same one but we believe the fundamentals are there that we should be able to drive that kind of earnings per share growth next year.

Thanks. Just one last question. Are we -- given your new restructuring, are we going to ever know whether is profitable or not?

I think. Wendy, this is Mike. On an ongoing basis, although we're reporting in the three new segments, we'll give you some insight into the stand-alone auto business.

Great. Thanks, Mike.

You bet.

Your next question comes from the line of Holden Lewis with BB&T Capital Market.

Actually, this is Adam [Fullen] with [Keller] Capital. I'm calling in with a couple question regarding your operation improvement initiative. What are you, guys, doing in terms of [Lean Six Sigma] to help improve throughout all your plans?

Yes. This is Mike again. As you might imagine, a manufacturing company like ours has been engaged in lean manufacturing for decades now. So, we have ongoing continuous improvement and lean initiatives throughout not only our manufacturing facilities but in our engineering groups and our administrative areas to continually look to the elimination of wastes. So, that's an ongoing process.

And regarding your manufacturing facility, what metrics are you, guys, using to measure yourself in terms of like OEE or RONA? What are, guys -- how are you, guys, measuring how productive you are?

Again, there's a whole host of measures. OEE is a key one that's used throughout our manufacturing facilities because that drives not only the quality but the uptime and the availability of the assets and what is scheduled. So, there's a whole series of them.

Adam, this is Sal Miraglia. Let me give you a little insight about the performance of the steel business where we've applied some of those same metrics over a period of time. Last year, we had what I'd call a record performance from our ongoing. We've combined it actually Lean Six Sigma programs in terms of dollar savings. We look at a couple of different dimensions on improvement.

We have mapped our entire operation in the context that each of the paths that our products take where the constraints exist and what the cycle time through each of those and the actual volume in EBIT dollars are through each of those constraints. Along those areas, we've actually implemented programs that yielded us $7 million worth of savings but more than that increased our capacity throughput in each of those individual pathways significantly in order to be able to respond to this market. In fact, for the last four years, maybe five years, the steel business has essentially done all of its capacity increases through these kinds of incremental improvements associated with the application of Six Sigma disciplines and synchronous manufacturing and lean disciplines.

We probably move a little high right now because of the certain projects we have underway to build new capacity and the need to bridge with inventory over times when we have outages. But we've moved the business to a position where our total working capital to net sales that is including accounts receivable, accounts payable and all inventories are running at about 16%. And we believe we'll get more of that out as these special projects that we have in place are implemented and we don't need the bridging inventories to make it happen.

Just as Mike indicated, we've been at this whole program for quite a number of years and we're really seeing it clicking on all cylinders on a continuing basis.

And final question, when you were talking about programs, are you hiring more people at these plants who are more trained and lean in Six Sigma? Or are you putting in better ERP systems in these plants? How are you, guys, maybe in a day making sure each plant is as effective as possible? I know you, guys, were taking OEE. How are you even making sure every plant is as effective as possible with throughput?

I'll give you a little color from the steel business' point of view, Adam. We have increased productivity and reduce the number of associates regularly over that period of time. But at the same time, as we've added new capacity through these constraint breakings, we've compensated for that by maintaining the use of those people in other operations. So, we've maintained constant employment but have increased our productivity and increased our capacity capability throughout that period. We're kind of in a singular location here in [Kent], however.

Thank you very much. Continued success down the road.

Thank you very much, Adam.

Your next question comes from the line of Mark Parr with KeyBanc Capital.

Thanks a lot. Good morning.

Good morning, Mark.

I want to say that I guess I'm not a Jewish mother and I'm very encouraged by your outlook.

We might want to differ with you on that, Mark.

Thanks, Sal. But one thing I was curious about, if you could provide some more color as far as your pricing versus volume assumptions by sector for '08, if you could give some more color on that, that would be really helpful.

Yes. This is Mike, Mark. Let me see if I can give you some color. In general, again, because of the markets that we serve and the strength in those markets and the fact that many of the markets, the demand was in excess of capacity. The pricing remains strong and therefore the mix of price and volume has been comparable as we go on for the last several years and we see that continuing.

So when you look at our top line results, you will see a pretty healthy mix of pricing movement forward as well as peace volume movement forward and then in the case a lot of our products now with the low value of the U.S. dollar are attractive across the world. We're also seeing some kick in the top line from just pure foreign exchange.

Okay. All right. Hey, Sal, could you give some color on what sort of base pricing increases, if any, you were able to realize for '08?

I'm not going to give you the numbers, Mark. But what I will tell you is that we still see constrained conditions and a lot of the products that are very, very popular with what we can do. We expect the pricing will remain as strong as it was last year. And there is a little bit as you know there's a lot of jumping around just because of the volatility and the almost randomness with which the things like scrap, not so much alloy but scrap for sure iron units jump, and therefore we see changes in our surcharge number which kind of clouds a little bit the nature of the pricing when you look at the transaction level. But we expect the pricing to remain firm and to remain strong throughout the year.

Can you -- do your surcharge mechanisms allow you to fully recover that $100 increase in scrap in January during the first quarter?

They do allow it. The only issues are those associated with timing. And there was a little bit of an issue of that sort in January because of publications of pricings. But over time, that all washes out and the answer is yes.

Okay. Terrific. Is there -- on the project one expenses, is there any significant change in expenses in '08 versus '07?

Yes, Mark. I'd say that significant but we probably have been at the peak level of spending would have occurred this year so we'll see an improvement in it. We're still going through two more ways of implementing it. So, it's not going away, but we'll see an improvement year-over-year. The only offset to that partially will be the depreciation of the new system that's coming in. But [the net ended], it's a benefit.

Okay. I just want to congratulate you, guys, on really being transparent and helping us to understand the earnings magnitude of the challenges and the work you, guys, have been doing. I want to congratulate you on the great progress you've made and looking forward to a good '08.

Thanks a million, Mark. We appreciate it.

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

Hi, everybody.

Yes, Eli. As you said, you remind of Snoopy cartoon. It keep going debt the same. There's no heavier burden than a great potential. We're hearing that. I want to make sure. Wendy is correct. Let me just talk about automotive and make sure. Your 14.4 million unit for '08 is based on 14.9 in '07, is that the basis you're using? Or make sure you're using from that production number.

No, that's correct.

Okay. We talked about -- you talk about improvement and yet we will have $70 million a year across the two years in automotive. And, you know, if you look at '08, you should be -- you know, shouldn't have the $10 million of LIFO and you shouldn't have $25 million. It was supposed to be getting at least a $25 million benefit in the restructuring. Is that how we should think of automotive cut in half even with the lower volume because of those improvements?

Well, I think as you model it, Eli. I'm sorry this is Mike. As you model it, I think there's multiple things that you should look at. One is the restructuring and obviously now getting that to the bottom line and coming through some of the disruptions that we had throughout our manufacturing operations and therefore some of the costs in the last two quarters of this year. So, that clearly is a factor.

The move forward is the reorganization into the bearings and power transmission gave us an opportunity to take S&A costs out of the organization, and I think we talked in terms of between $10 and $20 million. That has been accomplished for next year. Although, if I give you some insight for automotive, it's not all automotive. This was both synergies and some opportunities to take costs out. So again, that won't be just tied to that business. But we took the opportunity and the restructure to take that out across the business.

And then this, the area of pricing as I said before, we are making good progress with regards to repricing or products in the marketplace appropriate both to our contractual obligations and also the value that we create in the marketplace and we're making good progress there. We're also making progress on this mix change, Eli. So, you are very familiar with regards to the opportunities across industrial markets and especially in those area where capacity is constrained. So, we're going to continue to look for those opportunities where we cannot garner the profitability that we would expect in unprofitable markets and move those products to the most profitable markets we can. So again, that may look as a negative to the ongoing automotive business but the bearings and power transmission business will be a positive mix change.

Yes. I guess I understand that, but you know we've seen on the current numbers, we see $70 million drain on the business. I'm trying to get an idea how is the conceptual look at that business in 2008 and it's cutting that loss in half the objective? Is it more than that? I don't know the precision, but trying to get general magnitude because we've been talking about cutting this in half now for a couple of years. Is it unrealistic to expect that to be cut in half for 2008 for all the reasons that you said even without the changes ?

Yes, I won't give you a specific number, but certainly, the direction that you're talking about is consistent with the direction that we're talking about. We'll see a noticeable improvement in the profitability in that business segment or we will force the exit of certain parts of that business to get there. So that's in our plan it's part of our forecast for 2008, a significant improvement in the automotive profitability, and so we're along the same lines that you are, Eli.

Can you give us some idea how much was foreign currency in the quarter by sector? How much was pricing in 2007 for the quarter because you've heard of better pricing but how much did you realize in 2007 to pricing and foreign currency and with Purdy just about $10 million for the quarter? How much contribution did you get from Purdy in the quarter?

Yes. Let me -- I'll give you. This is Mike again, Eli. Let me give you some insight. And I think because it might be most important on the industrial segment as we looked at that. Then, I'll turn it back to Sal or to Glenn to talk about the steel and the corporation as a whole.

But if you look it a sort of fourth quarter this year versus fourth quarter last year from a price perspective, we would have seen 40 to 50% of the topside revenue growth actually coming from price and then about half of that in pure volume, a smaller amount obviously in Purdy. Purdy would have contributed in single digit millions in the quarter and then some foreign exchange which would have been somewhat close to the Purdy. So, it's an interesting mix. Strong price and yet strong piece volume.

Were you up 17% in the industrial group I believe in the quarter. So you're saying half of that in the pricing within the high single digits?

That's correct.

So, it's not unreasonable to expect mid single digit pricing in 2008 based on that kind of scenario?

We continue to see strong pricing opportunities across the market, and under the current pressures from a cost perspective of not only the increase in capacity to serve the needs of the marketplace but also the material costs. We have to move them there.

Okay.

Eli, just on the growth too of the 17%, currency and acquisitions. If you back both of those out, it would be 9%. So from an organic standpoint within the group, both group volume has strong pricing within the group.

The 17.5 was referring to acquisition and the currency. The difference is about 8% which half is pricing and half is volume. Is that the industrial or for the whole company? That's just for industrial, right?

For the automotive group, we had the impact of currency was around call it 4%, but we also had divestment. So if auto was up 1% and you backed out divestment as well as currency to get an organic number, they would have been up 2%.

Okay. Do you have some number to steel, too?

Steel is probably low to middle single digits on price. We have much less currency impact. I don't think there was much at all. We had about $100 million in exports and a little bit of closing sales with our December purchase now closed with our December operations. So it's very, very minor in terms of currency effect. Of course, the big story in steel is just surcharging, which was huge for the year.

Yes.

And Eli, if you look at the steel 6% growth, it was offset equally by the exiting of operation was offset by the increase surcharges. So again, 6% pretty good organic number.

Yes. Very good. And one final question. The amount of incremental capacity was expecting in the industrial bearing business in 2008. Is it still in the 4 or 5% range? Can we get as much as 7 out of it?

I'm just doing the math right now. I think we're about in the 4% range increased capacity.

And we get a similar amount in 2009?

That's the increased capacity based upon the new investments.

Right. Should we expect a similar amount in 2009?

It actually will accelerate slightly because we have currently three plants under construction. So it will accelerate over the next several years.

If we get 4% in 2008, we can expect, you know, mid single digits in '08 and '09?

Yes.

Thank you. I'll get back. All right.

Your next question comes from the line of [Val Slifenberg] of Lehman Brothers.

Thanks. A couple of questions. First of all, what are your expectations for raw materials costs for 2008, which were implied by your guidance?

Val, this is Sal Miraglia from the steel business again. I supposed i should take that first. It's probably the closest to this raw material areas. We've seen scrap prices which are iron unit-related all the way around move back to some of the near highs that we've seen from several years back. And quite frankly when it moved that way in January -- it moved upward from January which was almost $100 a ton. It was about twice of what we expected. So we've got some problems that we think are reflection of the weak U.S. currency that sort of distorting a little bit what the global raw material conditions might be like but nonetheless are indicative of it.

We believe that the raw material prices will stay high. They may go a little higher. They may drift a little lower. We hope not to see the kind of volatility we've seen before. I thought that would be the case for last year. We were proven wrong again. We fully expect them to be high, to stay high without much relief relative to that in the overall picture of where these costs will go.

Secondly, we believe we'll see a mixed bag with respect to some of our alloys. Some of the alloy elements that are important to us are beginning to see some relief as the various different processing capacities come on stream. But others are getting more pressure. So on average, we think we're going to see about the same effect which is upward pressure on alloy costs as well, so raw material is staying high and very probably creeping up a little bit more on average.

And the auto industrial groups?

We're continuing to see much in line of what Sal said increases in material costs and we're planning for that for the new year. From our perspective, however, in these rapidly growing markets and where the demand still is an excess capacity, we're focused very heavily on availability and making sure that our supply chain is strong enough and robust enough to supply our capacity increases. But there's no question with regards to Sal's comments that we're seeing continued pressure on the raw material costs going into our products.

Okay. And related to your response on the focus on availability, is there any way to quantify -- first of all, where on the curve is Timken now as far as ramping up, as far as ramp up of the capacity goes and how much -- by how much did it depressed the margins in Q4 or for all of 2007?

Well, we have talked in general over the last several quarters that that ramp up has impacted our results any place from 50 basis points to as much as 200 basis points as we have initiate these new facilities. That is something we've talked about on an ongoing basis. The ramp up, as I had mentioned to Eli, we have three facilities in the bearing and power transmission group that are under construction now in various phases and beginning to ramp up that capacity. So we're going to see a constant. As long as these markets stay strong and again we have to remember the markets that we are targeting are heavy industries,the energy industries, Asia infrastructure build in particular, and aerospace. All of those are forecasted to continue to remain strong and will continue that capacity upgrade. So we're going to see a constant increase in that capacity and the need for robust supply chain for the coming several years.

And my last question is so you talked about the different scenarios that you looked at for the auto segment as for as the light vehicle build. Which of these scenarios is actually captured in your guidance? What's your base scenario?

Well, we've based our forecast on the 14.4 million vehicle scenario.

Got it. Thanks.

Your next question comes from the line of Blair [Bromley] with River Source Investment.

Good morning, gentlemen.

Good morning.

Very quickly, I think it was Jim a moment ago who outlined in terms of trying to walk us generally through the EPS guidance that you're giving for the year with four pieces, mix from automotive to industrial, improvement to pricing across all of the product lines, restructuring benefits and capacity increases which were an ice bucket. It'd be even nicer if you mentioned them for us a little bit, please.

I don't think we're necessarily in a position to do that, but to say that in each case, they're going to contribute in a meaningful way so said differently, it's not that one is going to be a disproportionate amount but pricing as we see it continues to be strong as you heard from Mike and Sal. I think just the prior question on the manufacturing constraints of the new capacity should be diminishing as well as some of the logistics costs as we've pushing through a lot of demand for some constraints facilities as we balance out the order book. The restructuring benefits that we're getting as we're wrapping up the automotive and just the reorganization. The benefit we obviously have with accretive acquisitions coming on board and the big challenge that we've assumed which actually would be a negative to us. But this material increase that we're at least factoring into that and that pricing, those other initiatives will overcome. So broad based from market standpoint. Broad based from an improvement to the bottom line.

Thank you very much.

Your next question comes from the line of Marty Pollack with NWQ Investment.

I know this question has been asked, Wendy and certainly Eli point to get granularity in the guidance. I would think that the ramification of just reducing your automotive loss with however we'll see that reflected and, you know, first quarter and next year. Why don't you just pencil in the number, you could get in a sense of $0.23 to $0.25 reversal addressed, I mean or at least tail wind just on that estimate. Assuming you know, those losses come down since they were in your base earnings in 2007. I'm just wondering, though, when you look at the outlook for automotive, apply to what you're seeing the exit when you said you could exit the business or get out of it, you are effectively specifically alluding or targeting some of that capacity that is underpriced and not likely to have a chance to hopefully improve. Just wondering if you could or going to stay in automotive bearings with those businesses that can justify themselves or at least those segments within the automotive segment. Can you provide some idea how much of that is really exitable as a percent of auto?

Not really, Marty. The only reason I say that is because the exitable comes after the fact as to whether or not we can make it profitable in the market segments that we're currently servicing. That's the work that we're going through right now.

And we're doing that not only in the automotive segment but obviously all the segments that we serve that are not meeting our profitability targets which long term is earning well in excess of our costs to capital. So to try and put that, that would be a little bit of looking forward and making too much of a prediction of how it might play out. The only thing I can say is every opportunity that we find that we are serving unprofitable markets and can move them, we will in fact do that.

When you talk about the 14.4 million assumption on the builds, what is your forecast behind that for North America? That is your build. I'm assuming you've got a higher SAR number in those assumptions now? I'm just saying essentially the SAR number you bill rates tend to be lower than that. The industry is coming off with expectations by the big three. Is that they're still looking for somewhere between 15 to 16 million units of shipments or sales.

I think we would be using the same numbers that you're using, Marty. I would say that we would be in the 14.4 from a production perspective and in excess of 15 and probably approaching 16 from a sales perspective. Is that your question?

Yes. Effectively, right. I mean, well, it sounds like 14.4 would probably bring it down to the lower side of 15. Maybe that's, you know, that's really what that implies. If I may also, you're describing that a lot of your spending a lot of that is not going to perhaps help in 2008. Is your CapEx budget -- can you tell us what that is for 2008 and 2009. Essentially, are we coming off from the top so that we will begin to see the benefits of that in lower CapEx at higher free cash flow.

Yes. The CapEx spending that we expect for 2008 is comparable to what we had this past year as we're, again, finishing up a lot of the capacity that Mike would have talked about. We think the peak spending on that basis is in 2008 so as we go to 2009 and beyond, we'll start to ratchet down.

There's just one another question. On the pricing, I guess still going back to automotive, it seems like you're implying that one of the challenges will be raw material cost pressures. It's one segment that you would think would be hard to price through, I mean, in effect, you have the flexibility to generally speaking to price even let's say in your best business an environment where raw material costs are rising. Are you able to -- is that the challenge of being able to price? You can do that in other segments where you can put a surcharge or raise prices in those markets which are tight? But is that kind of the reason why your confidence or inability to describe, let's say, more clear outlook is because of that? Just in general?

Marty, I'm not sure that that is what gives us the confidence that we can be successful here. What I can say is that nearly 100% of the business in steel has surcharging in contracts to make certain that uncontrollable costs can flow right through the system, and I think Mike will tell you that a good bit of the same is included in bearings' contracts as well. The confidence that the year will be good comes more from our discussions with our customers in the markets that we're in and the fact that that secondary economy, not the primary home consumer and home-building economy but the industrial economy is seeing no real weakening at this stage in time nor foreseeing that. That gives us more of the confidence than the passthrough capabilities right now.

Okay. Thank you.

Certainly, Marty.

There are no remaining questions at this time. Sir, do you have any final comments or remarks?

Well, let me simply say thank you for your interest and investment in the Timken Company. The change is underway within Timken to serve high value markets. Clearly paid off in 2007 propelled by strong industrial demand. We look forward to continued progress and even better results in 2008. Thank you.

Thank you for participating in today's Timken's fourth quarter 2007 earnings release conference call. You may now disconnect.