Timken Co (TKR) 2010 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Timken earnings release conference call today. (Operator Instructions). Mr. Tschiegg, you may begin your conference.

Thank you, and welcome to our third quarter 2010 conference call. I'm Steve Tschiegg, Director of Capital Markets and Investor Relations. Thank you for joining us today, and if after our call, should you have further questions, please feel free to contact me at 330-471-7446. With me today are Jim Griffith, President and CEO, Glen Eisenberg, Executive Vice President of Finance and Administration, and CFO, Mike Arnold, Executive Vice President and President Bearings Parr Transmission Group and Sal Miraglia, President of our Steel Group. We'll have remarks this morning from Jim and Glenn, and then will all be available for Q and A. At that time I would ask that you would please limit your questions to one question and one follow up at a time to allow an opportunity for everyone to participate.

Before we begin, I'd like to remind you that during our conversation today you may hear forward-looking statements related to future financial results, plans and business operations. Actual results may differ materially from those projected or implied due to a variety of factors. These factors are described in greater detail in today's press release and in our reports filed with the SEC, which are available on our website www.timken.com. Reconciliations between GAAP and non-GAAP financial information are included as a part of the press release. This call is copyrighted by The Timken Company. Any use, recording or transmission of any portion without the express consent of the Company is prohibited. With that, I'll turn the call over to Jim.

Thanks, Steve. Good morning, everyone. During our teleconference in July, I spoke of my confidence in our strategy and talked a bit about how Timken has become a very different company. Of course, performance offers the best proof and I trust that our third quarter report and our positive outlook for the remainder of the year will give you similar confidence.

Timken's results reflect our ability to achieve heightened levels of performance.

In the third quarter our sales were up 39% over last year. This reflects a rebound that is expanding across industrial sectors, as well organic growth in our own business. From that growth we succeeded in driving more to the bottom line. Our earnings continue to exceed expectations and they are generating strong cash flow. It's the kind of performance that gives us confidence in our ability to deliver long-term value to our shareholders.

Let me offer a few comments regarding the global marketplace and the industries that we serve. During the quarter, there's been a steady pickup in demand across a broad spectrum of markets. Early cycle industries continue to gain momentum, while the late cycle sectors are beginning to make their way to recovery.

Our Mobile Industries and Steel Businesses continue to see improved demand from North American automotive manufacturers.

In other mobile markets, heavy truck production has accelerated, off-highway equipment including construction, agriculture and mining machinery also has come back, with particular strength from global markets.

Our Steel Group is seeing heavy demand in machinery markets and its oil and gas business is strong, thanks to a rebound in drilling activities.

Another factor that played positively into this quarter's results is an upturn in shipments to industrial distributors in our process industry segment. This reflects real improvement in demand. For the first time since the recession hit, bearing orders are matching outbound distributors sales to their end-users. These positive indicators coming from distribution, coupled with continued strength in Asia and its infrastructure markets, constitute the early signs of recovery in our Process Industries business. Aerospace markets have yet to recover and, in fact, are languishing longer than we expected. In addition, within our Aerospace Business, we deployed new engineering systems and business processes in the past two quarters that interfered with our ability to ship. This reduced sales in the third quarter, which we expect to recover before the end of the year. Despite those temporary challenges, our Aerospace portfolio is well balanced with original equipment technology and after market capabilities. A fact that makes us confident in the longer term prospects is for our Aerospace Business.

Those of you who have been following Timken know we've been driving improvements through our business to get optimal results more to the bottom line, while shifting our portfolio toward profitable growth. And the strategy is working. We've reinvigorated our Mobile Business and positioned it to perform well through the cycle. We're continuing to invest in our specialty steel capabilities where our focus on differentiated products is yielding results ahead of the industry. We're managing higher volumes with a great deal of discipline, maintaining our reduced cost structure and rigorous working capital controls. We're increasing the sales of new products with a record number of new introductions. And we're growing in attractive industries and expanding in regions where our products and services are in high demand. We have opened new offices in Indonesia and China, closed on the QM Bearing acquisition , and celebrated the opening of our newest plant in China where Timken Ultra Wind Bearings are produced.

As I said earlier, our strong profitability and cash flow are the best measures of our performance. We expect a strong finish to the year and look forward to 2011 with a sense of confidence. We have the resources, capacity and talent to drive the performance of the Company to higher structural levels, leveraging, what we expect to be, moderate growth in the world economy. Before I turn the call over to Glen, I want it say I'm extremely proud of the organization for what we've accomplished. To those of you who have been with us for a long time, I also want to say thank you for placing your trust in us. I'm excited about the opportunities that lie ahead for Timken and am confident that the performance driven culture we have instilled at the Company will serve the interest of our stakeholders exceptionally well in the coming

Thanks, Jim. For the third quarter the Company's fully diluted earnings per share from continuing operations were $0.73. Excluding special items, earnings were $0.80 per share. Special items totalled approximately $7 million of after tax expense, primarily related to the Company's manufacturing rationalization activities. The rest of my comments will exclude the impact of special items.

Sales for the third quarter were $1.1 billion, an increase of 39% over 2009. The increase was due to stronger volume across most of the Company's end markets, the impact of higher surcharges and pricing. These benefits from partially offset by weaker demand in the Aerospace and Defense markets. From a geographic perspective, the increase in sales came from North America and Asia, while demand was down in Europe.

Gross profit of $267 million was up $137 million from a year ago. Gross margin for the quarter was 25.2%, up 810 basis points from last year. The improvement was driven by higher volume, manufacturing utilization, surcharges and pricing, partially offset by higher material costs.

For the quarter, SG&A was $140 million, up $33 million from last year. The increase reflects higher costs related to performance based compensation plans, amounting to roughly $15 million. SG&A as a percent of sales for the quarter improved 830 basis points over last year to 13.2%. As a result, EBIT for the quarter came in at $124 million or 11.7% of sales, 880 basis points better than last year.

Net interest expense for the quarter was $8 million, down roughly $2 million from last year, reflecting lower debt levels. The tax rate for the quarter was 32% compared to 33.6% last year. The lower rate is primarily due to a higher percentage of the Company's earnings coming from lower tax rate foreign jurisdictions. Going forward, we expect to maintain this tax rate of roughly 32%. As a result, income from continuing operations for the quarter was $78.1 million or $0.80 per share compared to $0.08 per share last year.

Now, I will review our Business Segment performance. Mobile Industry sales for the quarter were $404 million, up 23% from a year ago. The increase was primarily driven by higher demand across all market sectors led by off-highway, light vehicle and heavy truck, as well as pricing. From an earnings perspective, the Mobile Segment achieved strong profitability with EBIT of $61 million or 15% of sales compared to $14 million and a margin of 4.2% last year. The improvement was driven by increased demands, better manufacturing utilization and improved pricing. These benefits were partially offset by higher material and SG&A costs.

Looking ahead, we expect Mobile Industry sales to be up between 20% to 25% for the full year, driven by improved demand in the light vehicle, heavy truck and off-highway market sectors, while rail is expected to be relatively flat. Profitability for the fourth quarter is expected to be down from the third quarter, primarily due to the impact of seasonality, the potential for lost sales resulting from our pricing initiatives, as well as higher material costs.

Process Industry sales for the third quarter were $235 million, up 25% from a year ago. Stronger after market demand through our global distribution channels accounted for the increase. Distributors are now purchasing Timken product more in line with their sales rate, following an extended period of inventory reduction. For the quarter, Process Industries EBIT was $37 million, up from $16 million a year ago. Margins were 15.9% of sales, compared to 8.6% last year. The benefit of higher volume and better manufacturing utilization more than offset higher material and SG&A costs. For the year we expect sales for Process Industries to be up between 5% to 10%. We are beginning to see improvement within the distribution channel while most of the industrial original equipment markets remain weak.

Sales from new products and wind energy demand are expected to be largely offset by declines in the heavy industrial and power transmission market sectors.

Aerospace and Defense sales for the third quarter were $81 million, down 19% from a year ago. The decline was driven by lower commercial and general aviation end market demand, combined with some softening in the defense market. In addition, implementation of new engineering systems and business processes temporarily constrained our ability to ship product in the quarter. We expect to make these shipments in the fourth quarter.

EBIT for the quarter was $4 million, down from $19 million a year ago. Margins were 4.7% of sales compared to 19.1% last year. The decline in profitability was driven by lower demand, manufacturing capacity under utilization, and costs associated with our systems implementations, as well as higher SG&A.

Aerospace and Defense sales for 2010 are expected to be down between 15% to 20%, primarily due to a drop in commercial and general aviation demand and some softening in the defense markets. Sales in the fourth quarter are expected to improve from the third quarter, driven by the recovery of the delayed shipments.

Steel Group sales of $371 million for the quarter were up 135% from last year's third quarter sales of $158 million. The increase was driven by stronger demand across the groups end markets. In addition, surcharges were up approximately $80 million for the quarter, due to higher raw material prices and overall demand.

EBIT for the quarter was $41 million or 11.1% of sales, compared to a loss of $20 million last year. The increase resulted from higher volume and mix improved manufacturing capacity utilizations, and higher raw material surcharges, which were partially offset by higher material costs. The Company expects Sale Group sales for 2010 to be up between 80% to 90% percent over the prior year, reflecting last year's depressed levels. The increase reflects an improvement in end market demand and higher surcharges.

Looking at our balance sheet, we ended the quarter with cash in excess of debt of $407 million. Operating cash flow for the quarter was $149 million, while free cash flow, after CapEx and dividends, was $115 million, primarily driven by strong earnings.

For the full year,, the Company expects to generate cash from operating activities of around $400 million and free cash flow of about $250 million. We expect this to be driven by improved earnings, and working capital management and after investing approximately $110 million in capital programs and $135 million in pension contributions. Consistent with prior years, we will consider making additional pension contributions, based on our funded status and financial leverage. Including cash and available credit, the Company had liquidity of $1.8 billion at the end of the third quarter with no significant debt maturities until 2014, providing flexibility to pursue strategic investments. Now turning to our full year outlook for sales and earnings, we expect sales to be up approximately 25% to 30% over 2009 and earnings per diluted share, excluding special items, to be between $2.80 and $2.90, up from our prior estimate of $2.40 to $2.60. This increase reflects the Company's third quarter performance and an improved outlook for the remainder of the year. This ends our formal remarks. So now we'll be happy to take any questions. Operator?.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eli Lustgarten with Longbow.

Good morning.

Morning. Very nice quarter.

Thank you.

You talked in your guidance, again, we have some margin erosion from the third quarter, specifically in the mythical one we're still looking for in the Mobile Industries. Can you take us through what you're expecting to happen -- let's start with Mobile, which has been hanging around 15%. You kept trying to guide us that we're going back to 10% or less. About what we're seeing in the fourth quarter for operating profitability in Mobile and, secondly, are we really that worried about the margin really correcting down to below double digits in the future or can -- are the conditions changed enough at this point that you can hold profitable in the low double digits or something like that?

Yes. Good morning, Eli. This is Mike. Let me take your last question first. No. We actually -- as we look into the fourth quarter, although, we've got some pressure on the top line just because of what we've talked about as -- with regards to seasonality.

Mm-hmm.

Potential closures of the kind of light vehicle car producers, past car light truck and a that sort of thing. So we see some pressure on the revenue, but we expect to still see double-digit margins. And so that's the real good news. So from a structural standpoint that business is to the point now that even with some revenue fluctuations, we still expect to see it there from a structural perspective. So that's really good. And really the impact is really around the lights vehicle side. We still see continued strength in off-highway an heavy truck, in particular. Still some flatness in our rail markets and then the automotive after market still is seeing a little bit of strength, but that light side is still a big enough piece where it's going to affect -- it appears it's going to affect our top line in the fourth quarter. We could be pleasantly surprised if, in fact, the inventory levels stay low in the industry and they decides not to shut facilities down.

So we're are talking about the margin staying -- at this point, probably being notice low teens at this point, as opposed to 15. And is that a new level? You were very cautious looking out in the future, the discussions about profitability of the that business. You're thinking that will hold that level of profitability. Is what you're saying? Is that fair.

Yes. Well, I will say to your first question that yes, a low level of -- of double digits is the right way to look at the fourth quarter, not at 15. Time will tell with regards to the long-term margins, but it is clear that we have changed the structural performance of that business for the long-term. We'll have to continue to see how those markets turn out. The potential for lost business, and changing , and sourcing away from us et cetera, but we are pretty much adamant with regards to that level of performance for

And can you talk about the rest of the segment? You talked about recovery of volume in Aerospace, but you are implying a volume close to $90 million. Are we assuming the profitability goes back to double digits, or does it stay in single digits? Does process hold, and how badly is Steel impacted by lower shipments in the fourth quarter?

Yes. Lets that's talk about process first, Eli. It's a really good story there. Obviously, we are up 25% year-on-year. The story in process is Asia remains very strong for us, in particular with regards to China and India. So our r investments there have just been dynamite. That's been good. The wind component of what's been going on in China has been very positive for us. We just formally opened up a new facility last week that we had been building for the last 18 months. The distribution side finally. We can talk about significant strengthening with regards to purchases from distribution and, therefore, sales through distribution, which gives us a real nice mix moving forward. Even though, the original equipment side of Process Industries is weak now and we still anticipate it to stay relatively weak going into 2011. But the strength of -- of Asia, the wind markets there plus the -- the growth in distribution is going to give us a nice mix.

The dampening on that is, and I think you mentioned it, is the material costs. We're starting to see an increase in our material costs quarter-on-quarter. We have begun to forecast what that might impact in 2011.

The good news is, again, as we look across our businesses we have built in material recovery in most of our contractual obligations across those marketplaces. So that's something that we believe that we can continue to manage as we have in the past.

And then Aerospace the -- is a little bit of a different story. It's been the one that's really been growing through the down turn in the markets in 2009. We said that the second quarter would kind of be the bottoming out of it. Unfortunately, the bottom is lasting and we continue to see that on the civil side, also the defense side, which is interestingly enough, taking some inventory out of play. So the spending isn't necessarily down but the inventory is coming out, which means the supply basis is going to see a little bit less revenue.

We will see a little bits of recovery in top line revenue in the fourth quarter, Eli, but most of that is going to be catch up to what we, actually, didn't get done in the third quarter. So So when you see those results you will see a better top line, but, actually, it's going to be more of a recovery from our own internal inabilities to make some shipments in the third quarter versus any strengthening notice market.

And the margin stay as depressed in Aerospace as they were in the third quarter?

Yes. Not quite as bad as the third quarter. I will anticipate they will be better on the higher volume and the better management of it going through. We had a lot of one time costs also, because we were putting in new systems, new capabilities, finishing up Project One, as we talked about last quarter. And so I anticipate that margins will be not where they were before in the -- in the stronger revenue years, but they'll be improved over the third quarter

And the steel outlook?

Yes. Good morning, Eli. This is Sal. Similarly, we have -- we've got planned in our expectations that the automotive segment of our market will be a little weaker as we get into seasonal shutdowns towards the end of the fourth quarter. We also could be surprised by that and it could strengthen a bit. But having said that, I mean our other market segments have come back nicely. We're still shipping to our distribution customers, oil and gas is good . So, frankly, we actually anticipate our fourth quarter shipments unusually to be stronger than the third quarter as we come back up and not -- and not really decline a lot. But we will see a bit of a -- of a margin pressure, because that rolling shutdown that I talked about at the last conference call, because of the delay in our maintenance will how be rolling into our -- our tube making and finishing operations and so we will have a little bit of -- of capacity under utilization in some of those that will be a little on the weak side. But, overall, our -- our shipment levels we think will be comparable in the fourth quarter to what we did in the

All right. Thank you.

Your next question comes from the line of Holden Lewis with BB and T.

Great. Thank you. Good morning.

Good morning.

With respect to the guidance that you put out there, I guess one of the questions that stems from that is it does seem that in order to -- you back into the fourth quarter number you do seem to be assuming that the incremental margins for the quarter come down into the -- the 13% to 19% range in order to -- to get there. And I would gather given all the improvements that you have made in the business and strength that you're seeing, that you don't see yourself at this point in the cycle of being at 13% to 19% increment amount type of company. Can you comment about that range and where you do see yourself going forward, in terms of the increments amount margin performance?

Yes. Holden, this is Glenn. Let me at least take the first shot at it. For looking at our business from third to fourth is probably not the best indicator, as it would be same period year ago, just given the seasonality. And, again, impacting both our mobile and our steel groups, the leverage that we were enjoying through the first three quarters of the year, we wouldn't expect for the third quarter necessarily get because of the seasonal shutdowns, if you will. Obviously, the impact of some higher material costs that are coming in and just ramping up as well. But, again our expectation is still to have good performance, good margins, but incrementally, again, third to fourth down for the reasons that Mike and Sal spoke about.

Okay. The longer term plans with regards to increment margin? I guess maybe on that, you also fold into your 2012 forecast is $325 million to $375 million, I think it is. You're pretty close to that now, frankly, in 2010. Perhaps you can comment about the expectations around the long-term goals as well.

I think with regards to the long-term targets. As you know, we established those at the beginning of this year and the view was that, obviously , not appreciating the strong of some our markets this year that in a normal environments, which we viewed was three years from now, that would be good performance for the Company. Obviously, it would be record levels of performance for the company. 2010 clearly has come in much stronger than what he had envisioned from the beginning the year and as the year unfolded, so, obviously, very good performance this year. We're right in the process now, as you know, going through our business planning, as well as our strategic planning process. So we will re-evaluate our expectations for our longer term targets as we go through our process. But, again, at that environment we assumed that there would be a normal, call it, economic environment. So the fact that we're closer to it this year than what we would have expected is just the steep ending of the curve this year, that could arguably flatten out over that time. But we will have a better assessment after we have gone over our long-term planning and we will talk more about that when we announce the next quarter results call at the end of

And over that period the kind of incremental that you would expect you could achieve would be?

Well, again, as a general rule of thumb, and we'll provide targets, so we'll give you more accurate. But it's always a desire to leverage at your gross profit and hold to the leverage on your S&A. So clearly, we're leveraging greater than that this year. But that would be a normal expectation. But, again, Mike spoke to the fact that we structurally have changed a lot our business, the pricing of it,. We have leverage better. Our expectation is to see continued improvement, but not at the levels of leverage that we got this year, just for the fact that we were ramping up capacity. So much right now we're probably at around 70% as a Company and it, obviously, varies by the different segments that we have. We have got now the benefit of the pricing initiatives that we have done. We've got benefits of the cost -- the structural cost reductions that are now out. So we've gotten good leverage off of a lot of those initiatives. So now incrementally, again, to leverage out our gross profit level we would feel would be a reasonable target.

Okay. Thank you.

Your next call comes from David Raso with ISI Group.

One near term, one long-term question. The fourth quarter from the third quarter, the material cost that you cited, as well as maybe some lost sales from pricing initiatives. Can you delve a little bit more into a) trying to quantify the material cost increase, and b) where you're seeing it? And the same idea with the prices initiatives. Which of the areas where you are you going to try to get that initiative, as soon as possible, fourth quarter impact and thus what areas you think sales might be lost from it?

Well, let me -- I will handle the first part on just the material recovery. For the Company in the third quarter, as well, between our pricing, and our surcharge mechanism, we're able to fully recover our material costs. So without giving you the magnitude of the costs, we're able to recover it. Obviously, from a margin standpoint the surcharge is reflected, as well as pricing in our sales that are just recouping those. So it does have some margin pressure from that respect. But the mechanisms that we have fully absorb those costs. With regards to the potential lost sales, Mike?

Yes. David, I would tell you that that's all focused on the Mobile side of the business.

The Process side is -- is increasing and increasing well so that's not on issue. We have talked a lot about, over the last 18 months, that our approach into some of the mobile markets has been very much that we would go in and -- and drive some improvement with regards to performance. And that meant focusing on certain industries much more acutely. And in other industries where we didn't think with could get shareholder value we create from them, we would leave, but we would do it on a appropriate fashion. Well, that appropriate fashion means that there is some systematic loss on a quarter-on-quarter basis as we get through the completions of some of these agreements and platforms, et cetera. So we watch it very closely because it's a tough one to measure. We can see lost business specifically, but at the same time we're losing business we're also gaining through business in all of these markets.

So we've got a short-term issue now that we just try and look at that quarter-on-quarter. We can see some of that in the fourth quarter. But a lot of the fourth quarter is also this seasonality and what will happen in these light vehicle production numbers, and what they'll do with their manufacturing plants et cetera . So something that we monitor. I will tell you, as I have told you in the quarters before, that given you are overall strategy in fixing the Mobile business, the "lost business" is not very relevant to our

Are there many legacy contracts left in auto that harken back to, say, two plus years ago, where you were not yet more aggressive with look, this is the price we need to continue to supply you?

Not really.

So we have worked through those? So we've worked through most of them now? Now, we're on the margin, just maybe new pricing?

Not only that, but we are signing new contracts every day, right? So we have worked through the old contracts. We now are in new agreements with all of our customers across the world working very closely with them on the future business, which gives us the level of confidence that I expressed earlier along Eli's question, that it gives us confidence that our structural performance in this business is significantly better, because now we see the new contracts coming along and they are very appropriate for the type of value that we create.

And the longer term question. Looking at the balance sheet power you have now could you, at least, rank how you're thinking of using it, but a little more granularity than the typical just rattling through dividends and repo? A little more sense of look, you're at a unique moment right now where you are seeing $900 million in cash, your net cash over $400 million. Can you help the shareholder base understand what do you plan on doing with that money?

Sure. Let us try to at least give you a little bit more than the mundane answer of how we look to allocate our capital. But how we allocate it is, essentially, what you're seeing us do with it. A combination of it, obviously, internal capital investments that -- such as our Asia growth initiative, the capacity that Mike spoke about in wind energy that's coming in place. From an acquisition standpoint, we look to acquire complimentary businesses like the QM bearing acquisition that we closed this past quarter.

When you talk about $400 million more cash than debt, that's true, but we also have $1.2 billion of -- of under funded pension, and unfunded OPEB obligations that are pretty significant. And we use cash and capital to fund that, like we have this year including discretionary payments so we can effectively bring that more in line with a funded status. From returning capital to our shareholders, we obviously, a dividend program that's been going on since -- since we've been a public company, and that we increased this past year. And we had a share repurchase program that we've initiated this year and have bought back stock.

So as we look at all the mechanisms, if you will, not surprising. We will be at all of them. If you want to prioritize them, clearly, we're sitting on a lot of liquidity and cash. We do want to redeploy some of that in strategic investments and acquisitions along the lines of everything else. So that's clearly still a priority for us, and why us, and probably a lot of other companies, again, the word is there a trillion, call it, a trillion dollars of cash sitting on corporate balance sheets these days. We will look to redeploy that in some acquisitions. And we're starting so see some increased activity on that front as well. So I think we'll continue to report out and tell you how we are using the capital each quarter, but again, those are the areas that we're focused on.

Well, again, not to push you here, but just use my numbers of at least half a billion dollars to a billion dollars to play with. Would you at least categorize -- is acquisitions going to be the largest piece of that 500 to a billion, pension second, dividends third and repo fourth, at least in the sense of ranking the sizes of rough pie of half a bill to a billion?.

Since you didn't like my answer, I'm going to answer Jim answer that.

David, I think it's inappropriate for us to try to quantify it in that sense. The strategy of the Company hasn't changed. And the fact that there is cash on the balance sheet doesn't change our intent. Our intent is consistent over -- as it has been for the last four years. We are building a stronger portfolio with a broader product base. Therefore, we are interested in strategic acquisitions. We are a disciplined acquirer. Therefore, we're not going to rush into make acquisitions simply because we've got cash , and we will proceed down that path. And as -- as it is appropriate, we will make other -- we'll take other actions to strengthen our balance sheet or return cash to our shareholders, as

Okay. I appreciate it. Thank you.

Your next question comes from the line of Samuel Isoner with Sterne, Agee.

Morning everyone.

Morning.

Morning.

I just wanted to talk a little bit about Asia. Obviously, you mentioned that you just recently opened your wind facility there. But just some color on how that's really affecting the Process Business. We see that margins ticked up about 200 basis point sequentially. Is that primarily all Asian related? Is that the distribution margins coming back? So just talk of why the margin I guess are getting better over at Process?

Yes. Samuel, I think you've got it nailed. The distribution mix is good for us, as you might imagine. So it being up about 40% quarter-on-quarter is pretty attractive to the mix. And so we've he been waiting for that uptick. So that's good. The Asian business, let me just take that one, because I love to talk about Asia , because it's been a great story for the Timken Company, and kind of remodeling what our revenue base look like across the world. getting a hold of the fastest growing part of the world, and yet doing it in a -- in a very attractive way for our shareholders. The growth in -- in Asia is working very well for us. Predominantly, that accelerate the growth in macro terms is out of China and India. As you know, in the last five years we've put four new facilities into China, a new facility into India. And we are leveraging very well that new capacity, in particular for the growth of the Asian markets, because, as I've also said before in previous quarters, that our -- the value that we generate in that market and the appropriate pricing that we generate in that market is every bits as attractive, if not more, than any of our geographies across the world. So it's turned out to be a great business model. So the continued adding of capacity into those markets is directly correlating to our success in those marketplaces. And, at the same time, providing us global manufacturing footprint by which to serve some of our customers across the world. So very positive. You will continue to see -- as the distribution side of that business and Asia continues to grow , you

Can you quantify the growth rate in Asia, and maybe the total percentage of either total revenue or of bearing power transmission?

Well, Asia grew about 20%. So quarter-on-quarter, and that's been pretty typical of our growth over the last four or five years in Asia. And we expect to continue to drive that sort of growth level. Obviously, on an overall we don't talk too much in terms of the size of that, but we've always talked in terms of it being slightly that's an a half a billion in revenue in Asia. So I think if you put that in perspective, and most of that plays up through the Process Industries group. There's some of it that's Mobile only but the majority of it is.

Okay. And then on the Mobile Business, or at least on the auto re-pricing, this might have been touched on briefly earlier but the -- you guys were expecting some form of attrition , call it over $100 million dollars. Is that now revise -- could you revise that down to say maybe 50 million or even less than that? I mean how is the attrition looking and what the pricing benefit that you guys got, presumably, in this quarter and maybe even in the

Yes. Well, on the pricing benefit I would guess just tell you to talk a look at the margins over the last couple of years. That would be the best indicator of the contribution with regards to that. In terms of potential lost business, as we talked about this over the last 18 months, we've actually lost significantly less than we had anticipated. That doesn't necessarily predict the future, but so far as we have gone through the turnaround of this business, it's been -- I will say an appropriate turnaround in terms of the true value that we have created in that marketplace. Our ability to price appropriately, and for us to work very closely with our customers to make sure that we are involved in the businesses that they also deem to be valuable for them. And in places where we don't create enough value maybe part ways. But it's been a very positive process. We have actually lost less business than we had anticipated , and that has fed into, obviously, some more attractive pricing at higher revenues, which has brought the margins of that business

Okay and just one last question, Sal, on -- on utilization in the quarter for the steel business. ?

For the third quarter our melt capacity utilization was about 70%, Samuel.

Great. Thank you very much.

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

Yes. Terrific quarter. I keep waiting for -- every quarter seems to be we're getting more positive surprises. But let me ask you about steel. The SBQ business has been very strong. Clearly, contrary to what's gone on in the rest of the steel markets. Can you talk a little bit about the -- the supply demand dynamic there, especially focusing on what's going on with some of the big suppliers. I think SEMXis a player in that. I understand some of their supply is not back. If you would talk about that. And just on the demand side, the other drivers that are significant here. And one other question about pension. Your contribution this year is fairly significant. And as you look into the changing discount rate impact , should we expect a big step up in pension expense next year or effectively are you -- are you essentially mitigating that with these

Hey Marty, let me start this before we get into pension discussion, regarding your question with the special bar quality market arena. As I am sure you are aware the -- the SBQ segment the specialty bar and tube segment really has very little exposure to the construction industry, either residential, commercial or infrastructure, construction products at all, which is really what the weak spot in the majority of the rest of the -- of the steel industry, as it experiences the current market environment. Everything that -- that our segment addresses is in some way associated with some kind of mechanical power transmission , whether we're talking automotive crank shafts and gears or -- or large -- large product for heavy earth moving, or mining, or oil and gas drilling. And in that particular regard, those markets are being driven by global growth, not by North American growth. Although, there is some actual strength and some health to pieces of that in the North American market which has been positive. All that combined has put pretty strong demand in the SBQ segment, especially when you combine it with the extreme de-stocking that went on throughout that entire supply chain throughout 2009. So that we see the combination of that strength coupled with the attempt to restock those supply chains really putting a bits of pressure in that arena. So the -- the -- we think the market is returning to health. It is linked much more strongly with international growth what you see with some of the other industries, which are more regionally linked. A lot of these products that we serve, that some of our competitors serve, go in to export equipment that serves that global growth as well. And it's likely to say that way for another 12, 16 weeks while the restocking part of the demand finally comes to

Hey, Marty. On the pension front, interest rates are lower, clearly, So if we had a lock in on that as a discount rate, it would have a negative impact on our liability. As you know, we have been putting in more than minimums as we look to try to get to fully funded status under a relatively quick time frame, but from an expense standpoint I wouldn't expect much change in the expense. Again, we'll wait to see how we end up at the end of the year. But we'll also be evaluating whether we would make additional pension contributions, as well, But from a P&L, I wouldn't expect much change. From a balance sheet item, If we did a snapshot today, our assets returns our greater than our assumption, but if we had to lock in on a discount rate today, it would be unfavorable to our assumptions. So that net issue would be nets unfavor. But we're putting in more cash than the minimum, which would be a net positive. So view that as kind of a comparable number as you look to next year.

If I may just back on that -- the question on the steel. Just supplying, maybe focusing on the supply side . I mean the dynamic clearly in demand is -- is what you have described. But how does the supply picture look? Market is very attractive. You've got some players in there. New Core, Steel Dynamics and others. But it seems to me that there are some players maybe not as able to bring on capacity that perhaps have some other side line. I'm just wonder approximating you could comment

Well, I can comment on facts. I mean the facts are that most of the industry is operating, with the exception of one facility that belongs to Republic, which is Lorraine. Lorraine has not come back on stream, and that's fact.

Okay. Thanks.

Your next question comes from the line of Edward Marshall with Sidoti and Company.

Good morning and thanks for taking my call. I wondered if you could quantify the push out that was -- that you had in the Aerospace segment and perhaps maybe the impact of the margin that you saw?

Yes. I think if you think in terms of less than $10 million on the push out. So between $5 million and $10 million seems to be the number. So we would expect kind of quarter-on-quarter that you will see that come back into the fourth quarter.

Okay. And then kind of looking at the -- the big -- the picture on acquisition thanks you've mentioned a few times this call. But you also mentioned there is a bit of activity there. Can you kind of give an idea of the potential size of some -- some of the acquisitions that are out there?. How far are you willing to go? We've talked a lot about the cash and the balance sheet, but would you spend upwards of $500 million, $600 million on something if it was good strategic fit?

Lets me at least take the first cut of it. From a financial standpoint, balance sheet standpoint, clearly we could do large acquisition or a lot of them. And, again, from a capital allocation standpoint, we're using that along a broad array of areas. But on acquisitions, you will see most of the transactions that we've done in the more recent years have been in the smaller scale size, if you will. But we have done larger acquisitions in the past that are, assuming they're very good strategic fit, a lot of synergies to be realized, and we can, as Jim commented earlier, that we buy them under the right terms an hold to our financial criteria of accretion first year and earnings cost to capital by year 3. So there are a lot of properties we look at, a lot of the properties that are various sizes. So I wouldn't get fixated necessarily on any one size in particular. But, rest assured, if we re deploy capital into an acquisition, going into it ,it will be very strategic. It won't be a surprise of what we've acquired. And from a financial aspect, it will going in be assumed that it will be a very attractive return on our capital..

Okay. Fair enough. Thank you.

(Operator Instructions). Your next question us a follow-up from Holden Lewis of BB and T.

Earlier in the call I think you had indicated that North America and Asia were strong in the quarter and I guess you quantified Asia around 25% growth. And then you commented that Europe was down. Did I hear that correctly and, if so, why has Europe been sort of weaker than everything, given the data coming out of Europe seems to be okay?

Yes. Holden, this is Mike. Let me take it from a bearing perspective, since that's the majority of our -- our sales over there. There's -- it's a mixed story in Europe. And so you've got to separate north Europe and south Europe, right? So south Europe is actually very ugly. The northern part of Europe, Germany is recovering. The UK is actually recovering, and distribution is now just at that point of recovering. So while you are seeing the indicators turning very positive for the European market, you've got some peculiarities to exactly where you participate, the countries, the industries et cetera. But we are seeing a positive trend in Europe. So we will begin to see that pick up. We are beginning to see that now in the orders. It's just the short term impact of coming out of this recessionary period, and the speeds at which Europe has come along, which has been behind the Americas and Asia.

Do you just happen to be heavier in longer cycle process bearings and lighter in the shorter cycle automotive and mobile bearings over there? Is it your mix?

That's a pretty good analysis, Holden, actually. If you think in terms of what I talk about on the heavy equipment, the Process Industries original equipment manufacturers, a lot of them are European based. So when you look at the -- the steel industry and where that equipment is being produced. So Italy and Germany and then Japan, et cetera, that a lot of our business has been based upon that heavy industry original equipment and that's the one that's still flounders on a global basis. So your assessment is pretty good there.

Okay. Then just in terms of the business as a whole, I guess specifically related bearings more so than steel, the price cost side. Did you say that for the business a whole your price cost has been largely neutral, or is that segment comment?

It depends on the time frame that you're talking about.

Well, in the quarter. I mean was the price cost relationship a positive or a negative for you in the quarter?

I would say it's relatively neutral.

Okay. And with raw materials going up, do you have fresh pricing that you're anticipating putting in in any or all of the segments?

Well, there are two things that go on. Again, on bearing side of the business we have a -- a component of our customers agreements that are contractual. So they are done on an annual basis, or every couple of years, and they have components in there for material recovery. Some of those are -- are exact dollar-to-dollar. Others are trends.

They lag a little bit. The increases or decreases in material. And then you've got another component of our business that, actually , is basically, I will call it price at time of shipment, which is an opportunity to -- to move prices up or down in that context. Or, in some cases, they have no material recovery because you do have the fluidity of being able to make those changes on a relatively short period of time. So the overall way to look at our business is the transformation of the contractual obligations over the past couple years has been the trend to make that a neutral issue, such that costs from a material standpoint, and any time you have these -- these grates cycles in material costs and surcharging, that we have the ability to make that neutral to

Okay. And just the last thing on pricing skipping down to steel. Obviously, that's a heavily contractual business, and so you're probably not seeing a lot of -- a lock on the price increases you put through in the second half of this year. But positioning yourself for negotiating it in next year, what are you kind of expecting from pricing in ASPs as you go into 2011? Do you have any visibility on that at this point?

We expects prices to go up a bit.

Okay. All right. Thank you.

Your next question is a follow-up from Eli Lustgarten of Longbow.

Really quick, can we talk a bit more about the process sector. We've seen very strong orders reported in that sector this morning from Emerson. We've seen numbers come from AB, B. And I was wondering you're talking we haven't seen much OEM business. but we're getting sense that it's beginning to come. And my real question is, is this anything stopping the profitability of that business from getting back to the upper teens as business recovers? We're well below those levels that we're seeing at this point?

No. There's nothing stopping it. We -- the capacity that we've put in, the operating model that we've put in, the improvement in the processes and systems, the pricing and the focus on the specific industries. In addition to Asia, there is nothing stopping it, Eli.

But you haven't seen any of the bigger projects that Emerson reported this morning, at this point.

I didn't see the Emerson report so...

Yes. The Emerson report is a step up in bigger project orders and processes, as well as MRO.

Ah well,.

Okay. Thank you.

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

Just simply to say thank you for your interest and questions. To summarize, the real story at Timken is we're seeing solid demand. We have an improving portfolio and that's translating to improving structural performance. It's an encouraging long-term opportunity. We look forward to discussing it with you again next quarter.

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