Timken Co (TKR) 2010 Q4 法說會逐字稿

Good afternoon, my name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Timkens earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you.

Mr. Tschiegg, you may begin your conference.

Thank you, and welcome to our fourth-quarter 2010 conference call. I am 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; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO; Rich Kyle, President of our Mobile and Aerospace and Defense Businesses; Chris Coughlin, President of our Process Industries; and Sal Miraglia, President of our Steel Group. We have remarks this morning from Jim and Glenn, and then we will all then be available for Q&A. At the time, I would ask that you please limit your question 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 part of the press release. This call is copyrighted by the Timken Company. Any use, recording or transmission of any portion without the expressed written consent of the Company is prohibited.

With that, I'll turn the call over to Jim.

Thanks, Steve. As you have seen from today's announcement, Timken's performance bounced back nicely in 2010. It was a very good year from the top line, to the bottom line, to the ultimate aim of value creation. We returned more to our shareholders than any other year in our history through the appreciation of our stock and the restoration of dividends to pre-recession levels. I want to share some highlights on our performance that reflect our strategy to grow in attractive markets supported by a focused performance-driven organization. I will also note what these improvements mean for our business, and provide some color around Timken's outlook for the year.

Top line growth was strong in the fourth quarter, and we finished the year with earnings higher than our expectations, driven by strong operating margins. Our performance also shows up in cash flow. We had a good year, and are actively redeploying that cash and investments in our business in discretionary contributions to fund our pension and retiree benefits, and in acquisitions that continue to feed our appetite for growth.

While we were forecasting strong sales in the fourth quarter, shipments in our mobile and steel businesses exceeded our best-case projections. We did not experience the year-end pullbacks so typical of the auto industry. The improved fourth-quarter shipments propelled our mobile industry segment to record profitability for the year. It's clear from our performance in 2010 that we have fundamentally repositioned this segment to attractive levels. While we may yet experience some top line impact from business shifts in the light vehicle sector in response to our past pricing actions, we expect this business to keep driving strong results to the bottom line.

The economic rebound has made its way through industrial distribution, benefiting our process industry segment, which achieved excellent profitability in the quarter and in the year. This is important because process industry is the segment where most of our structural growth is focused at this time. In 2010, we saw brisk organic growth in this segment, primarily driven by a broad-based expansion in Asia, and a second-half recovery of the North American industrial distribution. Opportunities for inorganic growth are also promising, such as our acquisition of QM Bearing.

Following a record year in 2009, our aerospace and defense segment saw its markets decline in 2010, reflecting the later economic cycle typical of this industry. Working through it, the aerospace business absorbed additional costs during the (inaudible), including some reserve adjustments that moved into a loss for the period, although the business remained profitable for the year. Just as we did in other businesses when their cycles deepened during the recession, we invested in business systems and processes to position the segment for stronger momentum as the markets recover. These investments signal the confidence that we have and the capabilities we've developed to expand Timken's leadership in aerospace, defense and positioning control.

Our steel business enjoyed the benefits of stronger demand from mobile, as well as energy and other industrial markets. Leveraging that market strength and our innovation, which is reflected by the fact that one-third of our sales came from products developed in the last five years, demand in the steel group came back much faster than expected, leading to significant top and bottom line performance. Profitability swung from a loss in 2009 to double-digit margins in 2010. Our organization has done an exceptional job ramping up capacity for this swing in demand.

The Company's strong performance in 2010 reinforces our confidence in our strategy and our desire to accelerate its implementation. We continue to pursue organic growth, leveraging our technology to deliver solutions for customers who come to us for their most challenging applications. We are investing to expand our capabilities to serve that growth, including investments in our steel business, and capacity expansions in our plants in Romania, the United States, China and India.

Capital spending in 2011 will be approximately [double] that of 2010. We have increased our employment in plants and offices around the world. We've maintained the productivity improvements gained in 2009 while adding approximately 1,800 people to our Company during the year. We anticipate continuing to hire as the market recovers further in 2011. Beyond our organic growth, we will continue to pursue strategic acquisitions in attractive industrial markets with strong after-market opportunities.

Our 2011 outlook is based on moderate economic growth in North America and Europe, and continued strong growth in Asia. We expect to realize top line growth of about 10% to 15%, and achieve record earnings for the year. We are certainly pleased by the significant increases this past year in shareholder value. Yet there is more upside, as we realize the full potential of our stronger, growth-oriented portfolio and optimized operating structure.

At this point, I will turn the call over to Glenn for a more thorough review of our results and financial outlook.

Thanks, Jim. For the quarter, the Company's fully diluted earnings per share from continuing operations were $0.87. Excluding special items, earnings were $0.74 per share. Special items totaled approximately $13 million of after-tax income. This was primarily related to a one-time tax benefit from implementing a voluntary employee benefits arrangement for our VIVA trust, in which we contributed $54 million to fund retiree medical and prescription drug benefits. This benefit more than offsets restructuring charges in the quarter. In addition, this tax benefit mostly reverses the charge we took in the first quarter relating to the new healthcare legislation. The rest of my comments will exclude the impact of special items.

Sales for the fourth quarter were $1.1 billion, an increase of 38% over 2009. The increase was due to stronger volume across most of the Company's end markets, the impact of higher surcharges, as well as pricing. These benefits were 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 sales in Europe were relatively flat. Gross profit of $267 million was up $89 million from a year ago. Gross margin for the quarter was 24.9%, up 190 basis points from last year. The improvement was driven by higher volume, surcharges, pricing, and improved manufacturing utilization, partially offset by higher material costs and a change in LIFO reserves.

For the quarter, SG&A was $150 million, up $37 million from last year; the largest increase coming from higher costs related to performance-based compensation plans. SG&A as a percentage of sales for the quarter improved 60 basis points over last year to 14%. As a result, EBIT for the quarter came in at $120 million, or 11.2% of sales, 310 basis points better than last year. Net interest expense for the quarter was $8 million, down $6 million from last year, reflecting lower average debt levels.

The tax rate for the quarter was 33.6% compared to 39.1% last year. The lower rate is primarily due to a higher percentage of the Company's earnings coming from lower tax rate foreign jurisdictions. However, the fourth-quarter tax rate came in higher than the 32% anticipated, as the Company had a higher percentage of its earnings in the US than expected. As a result, income from continuing operations for the quarter was $73.4 million or $0.74 per share compared to $0.31 per share last year.

Now, I will review our business segment performance. Mobile industry sales for the quarter were $389 million, up 20% from a year ago. The increase was primarily driven by higher demand led by off-highway and heavy truck, as well as pricing. From an earnings perspective, the mobile segment achieved strong profitability, with EBIT of $52 million, or 13.4% of sales, compared to $31 million and a margin of 9.6% last year. The improvement was driven by increased demand and improved pricing, which was partially offset by a change in LIFO reserves and higher SG&A. Mobile industry sales for 2011 are expected to be up slightly. Increased demand across its end markets is expected to be mostly offset by lost light vehicle business resulting from the Company's past pricing initiatives.

Process industry sales for the fourth quarter were $251 million, up 32% from a year ago. Demand from North American industrial distribution, as well as growth in Asia, accounted for the increase. For the quarter, process industries' EBIT was $45 million, or 18% of sales, up from $24 million and 12.6% of sales last year. The benefit of higher volume and better manufacturing utilization more than offset a change in LIFO reserves and higher SG&A. Process industries' sales for 2011 are expected to be up 10% to 15%. The increase is anticipated to come from a further recovery in industrial distribution demand, growth in Asia, and sales from new products.

Aerospace and defense sales for the fourth quarter were $83 million, down 17% from a year ago. The decline was driven primarily by weak demand in the defense sector. EBIT for the quarter was a loss of $3 million, or 3.2% of sales, down from $17 million, or 16.8% of sales last year. The decline in profitability was driven by lower demand, manufacturing capacity underutilization, a change in LIFO reserves and higher SG&A. In addition, the business incurred roughly $7 million of expense related to increased inventory and warranty reserves. Aerospace and defense sales for 2011 are expected to be up 5% to 10%, driven by strengthening commercial aerospace, and health and positioning control markets.

Steel Group sales of $380 million for the quarter were up 119% over last year. The increase was driven by stronger demand across all end markets led by industrial, and oil and gas sectors. In addition, surcharges were up approximately $65 million for the quarter due to higher raw material prices and overall demand. EBIT for the quarter was $42 million, or 11.1% of sales compared to $3 million, or 1.4% of sales last year. The increase resulted from higher volume and mix, improved manufacturing capacity utilization, and higher raw material surcharges, which were partially offset by higher material costs and a change in LIFO reserves. The Company expects Steel Group sales for 2011 to be up 20% to 25%, reflecting an improvement in end market demand and higher surcharges.

Looking at our balance sheet, we ended the year with cash of $877 million, or $363 million in excess of debt. This compares to a net cash position of $243 million last year. Operating cash flow for the year of $313 million reflects the Company's strong earnings and is after discretionary pension and VIVA trust contributions totaling $154 million in the fourth quarter. As a result, free cash flow for the year was $146 million after CapEx and dividends. Excluding the discretionary pension and VIVA contributions in the fourth quarter, free cash flow for the year was $249 million. The Company ended 2010 with unfunded pension obligations of $395 million, or roughly 86% funded, benefiting from contributions and favorable asset returns. The Company ended the year with liquidity of $1.8 billion with no significant debt maturities until 2014.

Our outlook for 2011 reflects continued improvement in the global economy. The Company is projecting sales to be up 10% to 15% over 2010, and expects to leverage this well from improved operating performance. Beginning in 2011, Timken will report its segmented results and earnings estimate inclusive of special items. We expect our 2011 earnings per diluted share to be between $3.30 to $3.60, an increase of roughly 20% to 30% from $2.73 per share in 2010. Included in this estimate is a tax rate of 34%, reflecting our expected geographic mix of earnings and higher foreign tax rates. The Company expects cash from operating activities in 2011 to be approximately $340 million, after $100 million in discretionary pension contributions. Free cash flow is expected to be approximately $50 million after dividends of approximately $70 million and capital expenditures of around $220 million. The higher level of capital spending reflects our investment in attractive organic growth opportunities. As in prior years, the Company will also consider making additional discretionary pension and VIVA contributions based on our financial condition and capital needs.

On February 16, the Company will host an analyst day meeting in New York, where we will review our longer-term outlook. Additional details regarding this event will be announced early next month, including the webcast information.

This ends our formal remarks, and now we will be happy to answer any questions that you have.

Operator?

(Operator Instructions) Your first call comes from Stephen Volkmann with Jefferies & Co.

Hello, good afternoon.

Good afternoon.

Couple of questions if I could about the guidance. I guess on the steel side, revenue wise, that's probably a little stronger than what I was looking for. Do you guys have a sense of how much of that is surcharge price versus volume?

Yes Stephen, this is Sal Miraglia. We actually think our shipments will be up between 15% and 20%. But with the firming prices and the strong raw material costs, it will probably translate into that at sales. Two-thirds to three-quarters of that is volume, the rest of it would be about surcharge.

Okay, so 15% to 20% is still pretty healthy volume wise. What is driving that?

Demand.

End market specifics, or no?

Oh, yes. Understand, we are -- you may have seen some of the other steel companies report outs here recently, but we do not participate in a lot of the market space that continues to be weak. Most of the construction infrastructure building companies still see pretty weak markets there, especially commercial construction and other building territory. We are entirely within the mechanical power transmission arena, so it's everything dealing with machinery, rotating machinery, mining, off-highway, oil exploration, natural gas exploration, those are all very, very active right now globally.

Okay, great. That's helpful. And then Glenn, I don't know if you're willing to do this. Maybe just even --

No.

(laughter) Before even ask?

Go ahead.

The -- you gave us some help on some of the revenue numbers, and I am wondering if we should just think directionally about margins in a different segments? Anything to keep in mind as we try to model 2011?

Well I think -- at least as a general comment, and then obviously Chris, Rich and Sal could provide more color, but we do expect to leverage the improved sales outlook that we have, and obviously, that is reflected in our earnings guidance, if you will, growing at a faster rate than the top line. Really, across-the-board, we are expecting good margin improvement . The one exception, and we will talk, I'm sure, more about it in a little bit is the expectation that mobile will be relatively flat year-over-year, up modestly. Where we do expect the growth is to come from the other three segments, and we expect to leverage that growth well. So, you will see improved operating margins from the other three

Alright, great, thanks.

Your next call David Raso with ISI.

Hi, good afternoon. On the guidance, it looks like if you take the new tax rate, no accretive use of the balance sheet, you're basically implying incremental margins of something like 17% when you look at the midpoint of the guidance. And when you think of the mix within mobile, what's dropping off the low margin auto contracts that you chose not to pursue given the profit profile?

Also, the steel business seems to have -- obviously, when the surcharges are strong and everything's pointing towards maybe even higher surcharge than we are thinking right now. The operating margins in that business are pretty high. Process industries, one of your higher margin businesses, and it's one of the better growth profiles you have for your revenue guidance for 2011. So, can we square that up? Why with the incremental margins be that modest for 2011? Are there some costs we are not thinking about clearly, and I guess your guidance does not include any accretive use of the balance sheet?

I guess maybe just a couple of comments. One, we would say that the operating margins are very attractive, even year-over-year. And again, we are now talking, and we can obviously talk about restructuring, but on a full GAAP basis, we expect to have record operating margins in 2011, so that's a positive from our standpoint. We expect to leverage -- again, we talked about the top line growth growing at 10% to 15%, bottom line growing at 20% to 30%, so I'm not exactly sure what you're modeling from an operating margin standpoint. But we expect to see a fair amount of margin improvement across the board, again, with the exception of mobile that we say is relatively flat, but it is still a large segment within the Company, so that constrains, call it the margin growth if you assume that they will be relatively stable.

So again, overall, we always talk about trying to leverage our earnings or our top line growth at gross margin so we get good leverage from that. And we did better than that obviously last year as we came off of a trough . This year, we expect to be able to plus or minus be in that ballpark of leveraging a gross margin, which we would view as very positive, especially coming off the year we had. Again, mobile and steel had very strong years last year from which to grow this year where we expect to see probably the incremental improvements again as process and defense, which were later cycle businesses that now will have a full year of improvement in 2011. So, we should even see stronger, call it leverage and margin improvement from those

Dave, this is Jim. Let me correct one misperception as it has been a kind of schematic from previous calls that is reflected in your question. In our mobile business, particularly the automotive business, all of the contracts in that business have been repriced. So, that business is attractive business. When we lose business, it is because a customer has sent to us, we will pay that price on an interim basis, but we are going to resource it. So, the resourcing that is going on because of the past pricing that we have done will not affect the margins significantly. It's certainly not the misperception that we are going to be losing a bunch of low margin automotive business. That business has all been repriced, is all attractive, it's just now the negotiations that go on as to whether they want to continue to do business with us.

Okay that is helpful. So again, Glenn, the numbers I'm running is basically -- I can give you the exact numbers here, but the operating profit' like 12.1 for the year, an incremental of 17 or so. So, there's not a ton of leverage. Your incremental is not terribly different than your operating profit. So, just as the street's trying to fully appreciate the earnings power of the company obviously showing some improvement here, is that how you think of the company, or it is, it is what it is. It's January first cut of the guidance, we're not trying to be too aggressive here but -- or is it no, that's how I should think of it. It's a low double digit margin company, and the revenues are moving pretty well. Maybe I can give you a little more incremental than that 15 or 20.

You point to where we are in the cycle and if you're asking what's the peak profitability or peak operating margins within the segments, we don't expect that to happen in 2011. And again, we will provide longer-term outlooks when we are together in February, but for where we are in the cycle, we still have, despite -- again, we are expecting good improvement within process and aerospace coming off of the lows that we had this past year. It's still not necessarily saying that they are going to be at peak performance. And those are both businesses that we said historically at a peak are capable of doing 20% operating margins, not low teens.

The fact is, within our mobile and our steel group, we are already in double-digit operating margins, which are healthy margins for both of those segments. Still opportunities to grow but clearly, they are closer to their peak margin in the cycle than those other two segments are. So, we are looking at nice margin improvement this year. Again, we are leveraging the incremental sales well with continued upside as we go further down the road as our process in our aerospace businesses continue to be more fully deployed and can leverage and have more capacity utilization as well.

Well how about -- I'll ask quickly then. When we look at the revenue guidance with the attrition issue making it probably a little trickier, how do you see the progression of that 12.5% revenue growth, the midpoint? Is a stronger in the first half of the year because your order book is up, I would think more than 12.5% right now and it fades? Or how do we digest the attrition from those contracts? What is the revenue progression for the four quarters in a framework? I know you're not going to give the exact, but at least a framework?

We would say that normally we would see a stronger first half than second half, just from general seasonality. At far as the attrition basis, and again, Rich can provide more color, but that probably would be more of a second half issue than first half issue. So from, again, seasonality, the attrition second half to first, you would be looking at stronger growth in the first half versus second. And then, frankly, we will be able to recalibrate as we get through the first half of the year and see if the assumptions that we used on the top line still hold.

Thank you very much, I appreciate it.

Thanks Dave.

Your next call comes from Wendy Caplan with SunTrust.

Good morning, or good afternoon, sorry. Been that kind of day. Could we -- of the 29% increase that we saw in revenue for 2010, can you split that up for us in terms of volume pricing and surcharges?

We can. If you look at the improvement that we had and first maybe take it -- volume would have been the strongest, we had good top line growth throughout the Company, and that clearly let the bulk of the improvement pricing . Again, was still good, not as much obviously as the volume, but attributed to the top line as well. We also had surcharges, so you don't want to say each or a third, a third, a third, but you could use that as a

Okay. And your assumptions as we go into 2011 are what, in terms of the split? If we start up being a third, a third, a third?

Again, we would say that based upon this year, we will still see very strong top line growth. Sal already spoke to the surcharges issue, which will be up, but not as much as volume. And pricing will be up, but not nearly what it was up the prior year. Again, it's early in the year to tell, but we have already put in several price increases. But our top line growth, again, the strength of it is principally, the biggest piece is on demand.

Okay. And in the release, you mentioned a number of times that operating expenses were up, primarily because of compensation related payouts. Is that the case for all of the segments, or was there something else going on in each -- in one or two of the segments that was beyond that?

Again, I will take the first cut, and again, if the business guys want to add some color as well. But clearly, year-over-year, SG&A was up, virtually all or most of it was incentive-based compensation. We are obviously coming off a year that there was none given. Our incentive is tied obviously to the operating results of the Company.

So, that is really what drove the increase. There was some discretionary dollars that came back in as we start, especially in the second half of the year as we had better visibility on the year. We were very tight on bringing back costs, especially in the first half. So, as we look, call it 2011 versus 2010, you now have the full year over year impact of some of the discretionary expenses coming into the Company. But overall, we are still managing our costs fairly tightly. The increase in S&A is really driven off of the fact that we still are now expecting good top line growth, so discretionary cost will creep in a little bit. But again, as a percentage of sales, we are seeing that come down, and that would be our expectation going forward as well.

Okay. Any segment information that would be helpful? In terms of the G&A or S&A?

Wendy, this is Jim. I was trying to think through that. We continue to invest in Asia. That will show more in the process industry segment, but it's not significant this year. I think the real story here is in 2009 we cut to the bone, we wiped out all variable comp and as we got more and more confident in 2010, we began to go back to normal business operations with obviously good variable comp reflecting the performance of the Company. But still, the structural cost savings we put in place in 2009 are still in place, and we don't intend to put that cost back in the business.

Okay, thank you very much.

(Operator Instructions) Your next call comes from the Eli Lustgarten with Longbow.

Good afternoon, everyone

Good afternoon, Eli.

I'm confused (inaudible) You report using $2.73 as the basis as most liquid adjusted use the $2.95 number for 2010, and you say you are giving us a full GAAP number. What kind of charges do have in 2011 that you're going to bury in there? Are they the same $0.22, or is it zero that makes you go there? How do we look at that? Because what's killing a bunch of numbers is nobody is using -- $2.73 is not the basis that most of us are using.

No, that's -- I'm glad you raised the question, Eli, because it's something that we have talked about over the past that we wanted to evolve, given that a lot of the restructuring and transformation of the Company is behind us. Not that we won't have ongoing restructuring charges periodically going forward. But wanted to at least get to that one number, if you will, and then we would explain what unusual items we may or may not have. And the benefit of doing it this year as we think it's going to be the lowest that we would've had, frankly, over the foreseeable past. So, we do expect that the restructuring that we will have in 2011 will be less that we had last year, but we do expect to have some. So, if we had around $0.20 a share negatively impacted, call it the GAAP EPS number from restructuring in 2010, you are looking at a number that is -- if you wanted to use a rounded number, maybe it's around 10% a share, so call it half of the level. And obviously, given the guidance range we gave of $3.30 to $3.60, the $0.10 is obviously within the range that we are providing.

To the extent as we go through the year and so forth, we will comment and let you know what the restructuring is. But we felt at this stage we will provide one number. And so the comparable number on a fully, call it reported number, is that $2.73 to the guidance range we provided. But again, if you want to take out special items, the $2.95 is the appropriate one from our perspective of what was normalized, backing out the restructuring, you could argue again for apples and apples off of the $2.95 take our guidance range and you could $0.10-ish from that range is what we are burdening that guidance currently with restructuring.

The $3.40 to $3.70 would be an apples to apples versus the $2.95?

If you just isolate it on that, that will get you in the ballpark.

Secondly, can you give some quantification, one, on the aerospace business is volume up 5% to 10%. Profitability going to stay at low single digits or are you going to go back? We've seen -- you reported much better margins starting to come back. Or are we going to see low to mid teens margins in aerospace? And can you quantify the level of lost business in the automotive business?

This is Rich Kyle. On the aerospace side, we're about three quarters now about flat levels of sales in the low $80 million range. We expect a similar level in the first quarter of 2011, and then we expect a gradual improvement coming up from there. However, we are not seeing anything in the aerospace side at this point that is a sharp rebound like we've seen over the last year in steel and mobile industries. So, we are expecting a much more gradual improvement on the top line.

On the bottom line, we expect the fourth quarter was, as Glenn highlighted, back out the one-time occurrences, it gets us back to a mid-single digit range. We expect to start off the year in that range and then improve, both as a result of the volumes as well as a result of the actions that we took into 2010 to improve our performance operating at a lower business level. We don't expect to start the year off at double-digit margins and certainly wouldn't expect to get to the teens through the course of next year unless the markets surprises us. But we would expect to work our way back toward the double digit level as the year progresses.

You'd wind up probably in the upper single digits for the year?

Yes

And how much business are we losing in automotive for the year? That you know of?

In the -- let me start a little bit with 2010 there. We lost a fair on the business in 2010 in the light vehicle segment, but it wasn't readily noticeable, primarily due to that the markets grew so significantly and then also as a result of the pricing that we implemented in 2009. We don't expect significant price movement again in 2011 like we had in 2010, and so we essentially expect that to be noticeable and to net our double-digit tight growth in the mobile markets down into the low single digit growth levels.

Can you use a quantification of how much business you lost in each year? Are we talking $50 million in each year or $100 million? Round numbers of -- what's the magnitude of business that we're losing?

It was between $50 million and $100 million last year, and we would expect it to be similar this year, maybe a little higher.

Okay.

Eli, the piece that is hard to quantify when you say that, and why I think it's better to talk in terms of percentage growth rates is there's a flip side of that. With the strength of the economy and the strength of the Timken Company's brand, we are winning new business. And so we focus on the places where our customers made a negative decision, and we aren't talking to you about the place where customers make positive decisions to take on Timken as a supplier or bring business back to Timken. And what Rich is trying to judge is, what's the balance between those two going forward? Obviously, in 2010, as we went into the year, we were more pessimistic than our results demonstrated over the course of the year and we're, at this point trying to make that judgment again for 2011.

Thank you.

Your next call comes from Jeff Rosenbaum with York Capital.

Hi, I had two quick questions on the mobile segment and then one on the balance sheet. Regardless of what is going on in automotive, if you look at the end markets across the mobile segment, I guess I would have assumed that the heavier industries, heavy truck off-highway, et cetera, would have higher margins than automotive. And as those industries or end markets grow faster than automotive going forward, I would have expected some kind of positive mix shift from a margin perspective within that segment. Is that incorrect?

I would say it our margin across those segments are pretty narrow now. We have improved the margins in the automotive side so that they are within the range of the other ones. And then what you have with a mix change, you get some margin pressure as a result of mix change and the impact that has on our operating footprint.

Okay. And then the automotive business or light vehicle business that is going away, who -- are your competitors acting irrationally and taking on contracts that what you would view as unprofitable or low profit levels? And do you see that continuing or bleeding anywhere? Or is capacity finally an issue in the light vehicle landscape?

Capacity has not been a significant issue in the light vehicle landscape. Down still at the $12 million number in North America. I would not say they acted irrationally and are losing money, but they have been willing to take the business at slimmer margins than what we have been willing to pursue.

Okay, and then from a balance sheet perspective, obviously you guys have voluntary funded some of the pension this past year. But going forward, how do you view the trade-off and how much you want to fund with potential for a rising interest rate environment and potentially, ultimately, I assume you don't want to get into an over funded situation.

No, from our standpoint, again, we want to give fully funded. We've got it to the 86% level this year, so we will continue to monitor that. But to your point, good asset returns or rising interest rates help narrow that gap as well. We have established a trust now, a Viva trust for the post-retiree medical, which we haven't funded before, but obviously is an even bigger liability than we have for the pensions, albeit we are not required to fund the like we are required on the pension. And one other thing that we are looking at doing, albeit we have not made decisions, but we still have a sizable liability. So, what you're seeing on the balance sheet, obviously on the pensions are just the unfunded portion of that. And we are looking at ways to potentially reduce that liability. So, it takes out the volatility going forward, so that could be through annuitization and so forth. So, we're monitoring all of that but obviously, the more cash that we put into the plans over the past few years, we actually have discretion going forward. So, when we say we are making a discretionary payment in 2011 again, mindful that we are not required to fund any of the pensions right now because we put in more than the minimums in the past. So we manage it, it's a big number for us, we are managing it, it's becoming a smaller number and therefore, will be less cash over time. But we will make that assessment as the year goes on.

Okay, thank you.

Your next call comes from Samuel Eisner with Sterne Agee.

Good afternoon, everyone.

Good afternoon.

Just had a quick question for Sal on the utilization in the steel business in the fourth quarter and how you guys are thinking about that into 2011.

Yes, Sam, sure. The fourth quarter we operated our melt shops at about 78% of capacity, and I suppose the easiest way to describe going forward is that right now, our lead times are in July and August.

Okay. So, that would mean -- I would assume it's obviously up from the 78% level, and so you should get some overhead absorption then?

Right.

Okay, and then on the cash use going forward, obviously, your net cash -- you discussed previously that you want to expand into more process industries. Can we put any color on where you are thinking about in those markets?

Sam, this is Jim. As a general statement, our core competency, our core technologies are in the world of mechanical power transmission. And so we are looking to expand our portfolio of businesses and products that leverage that technology and leverage the channels that we have. The work that we have done and aerospace is an interesting proxy for the process industry segment where we have expanded into the after market, we've expanded into services and then we have expanded our product line, moving into complete power transmission systems, meaning the gearbox, of military helicopters. Does that give you some guidance there?

Yes, a little bit. Are there any kind of geographic regions where you feel as though you are underrepresented presently?

There are. I will say it differently. We certainly, if you look at the profile of our business, we are stronger in North America . The focus of our growth is in Asia where the opportunity exists. We have lesser representation in Europe, but that's not really what is driving it. What is driving it is diversifying the business, increasing the proportion of after market in our portfolio and building us to a position we can bring a better value package to customers, particularly end user

Alright, thank you remarks.

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

Hello, good afternoon.

Good afternoon.

Congratulations on solid results and continuation of that profit recovery. It's really exciting to see guys moving forward like this. And we are still in the early part of the cycle, so this could be a good ride for you guys, congratulations. It's really good. I had a couple questions. First Sal, do you have any thoughts about where you think scrap is going to be for February that you could share?

Yes, hi Mark, nice to hear your voice, we haven't heard you for a while. You've been busy, apparently. So, we are looking at the premium scrap floating in at around the $500 a ton mark. It can go up a little bit or down a little bit. We don't see anything really changing much. Little bit of upward pressure perhaps until the weather breaks and the flows start going. As you know, the east coast scrap flows have come to nearly a standstill because of the bad weather that has been there, but --

Those guys have got to figure out what four-wheel-drive is all about, and where do you go to buy a snow blower, right?

Right, exactly.Although I don't know I know what they do about ice in Atlanta.

That's not fun, yes, you are right. Okay, so that's helpful, I had another question. Jim, the -- could you give us an update on the after market component of the various pieces of your bearings businesses, and where you see those percentages potentially moving to over the next several years?And I would also like to get a sense of where the profitability of that after market business is compared to previous cycles and how you might think that profitability could unfold in the cycle. Whether it would be less than or equal to or greater than pure previous cycles.

Mark, let me pass the baton to Chris Coughlin and Rich Kyle, and they can walk through the three bearing businesses as we describe them. Chris, do you want to go first?

Yes, hi Mark, this is Chris. Yes, on the general after market, we see the same basic industries that are driving the after markets that have really driven them in history. The catalyst being different there, though, is Asia and the growth in Asia. In the mining sectors, the steel, anything around the infrastructures be it the steel industries, the cement industries, et cetera. So, as we see that growth in Asia, we continue to see the growth in those after market accordingly. So, as we move forward, we expect it to continue to grow and we expect to also then penetrate those after markets with different products and expanded products per the point Jim was making around the broader power transmission. But in the process industries, we would see our mix being relatively the same as history, but with the broader product lines as we once again implement the strategies Jim referenced.

And that mix is roughly 65% after market today.

Okay.

This is Rich Kyle. The only comment I would add it that is different than Chris' is we've pursued similar strategies in mobile industries. And just as an example of that, in automotive after market, our revenue has continued to grow in the automotive after market while our OE has shrank and we believe we'll continue to progress. So, our mix continues to shift after market as well.

Is the after market in mobile over 50%?

No, no. It's still heavily dominated by the OE side. It would be somewhere in the 20s.

Okay. Is that -- because I was thinking that piece of the business might be an area where after market could become a more important part of the business going forward. And as a result, you would have a better structural improvement in the underlying profitability. Is that an appropriate way to think about that business going forward?

That is absolutely our strategy going forward, yes. I didn't comment on the aerospace side. Most of our inorganic activity in the aerospace side over the last several years has been focused on the after market . You go back four or five years ago, we would have been single digits, low single digits in the after market or approaching a third now in the after market in our aerospace

That would imply a lot more stable profitability going forward as the OE component of your overall business mix declines.

Mark, just a bit of historical perspective, part of the reason we have been trying to grow in process industries is it does have structurally a higher component of after market. Some of the technologies of Timken, including our clean steel, have caused mobile vehicles to last much longer and therefore, decrease structurally the amount of the after market. And a fair number of our acquisitions have been done in order to position us in places that will grow the percentage of after market successfully. Thus far in aerospace, we haven't found a similar acquisitions in the mobile market yet.

Jim, you been growing and broadening your after market exposure, and you've also been doing a tremendous amount of reevaluation of products and restructuring et cetera, over the last three or four years. Do you think the -- if you look at previous cycle peaks, or just previous cycles, given your experience, do you think the after market as a standalone would have similar profitability characteristics or greater than what we have seen in previous cycles?

I think it is very clear to me Mark that we have changed the nature of Timken's participation in the after market. We participate better in it, it's a larger proportion of our business, we're more discriminating where and how and therefore, it would give me confidence that from either a peak or a bottom of the cycle, we will perform better in it as we go forth.

Okay, I appreciate that color. And just one last question, could you give us an update on the Chinese -- the large bearing operations for wind turbines and what kind of growth you expect there in 2011 and 2012 based on what you're seeing in the markets now?

Yes Mark, this is Chris again. Yes, just Asia in general, doing very well. We continue to see very robust growth there. The second point is the new facilities from the last three to five years that we've invested in are -- have ramped very nicely. A couple of them are at full capacity now, and the other ones are coming up the ramp curves quite well. So, we are seeing good cost leverage now from that, and that's also part of the margin story moving forward. And then more importantly, I think in Asia we are finding more market space to grow. We see the wind energy in China is growing very rapidly, so we are also seeing some things in Southeast Asia, Indonesia, have some opportunity for us. So, we're seeing some broader geographic opportunities . And then India appears to be hitting a different plateau in terms of its growth rates relative to the markets we serve. So, generally speaking, Asia looks really good, and we are still very bullish moving forward on it

Terrific, thanks for all that color, and good luck and 2011.

Thanks Mark.

Your next call comes from David Raso with ISI.

Just had a follow-up. Excluding steel, so just your bearings businesses, how are you think about price versus cost in 2011?

I'll start with that . In mobile and aerospace, we are not planning on any significant price movement. Certainly nothing near the magnitude of what we have experienced the last couple of years. However, what's different in 2011 versus what you would have seen a couple years ago is we generally have on all of our large OE contracts material, recovery, surcharge mechanisms that if we experience significant inflation, either those are passed through or it opens the contract for renegotiation. So, we are pretty well protected should surcharges or material costs go up significantly, but we are not planning on moving pricing significantly in those

In the process area, generally speaking, we are obviously covering raw material with our pricing actions. But generally speaking, once again, no major pricing actions except for the annual price increasing that we do in our global distribution business. Obviously, we will be doing that, but generally speaking, it's along those lines.

And I know it's clearly an oversimplification, but Sal saying he is raising surcharges to his customers, why are your suppliers not raising input cost to you? CAT was talked about, we're going to keep material costs flat as well, so we are all trying to square up. Clearly from commodity price pressure one would think, and we are continuing to hear about, we don't have to even raise price much to cover our cost increases. So, if you flesh out a little bit more, it would be great.

Dave, if you summarize what Chris and Rich said, the answer is neutral to slightly positive. So, we will cover our raw material cost increases. And if in fact they are more aggressive than we are forecasting, then our pricing will be more aggressive than what we are forecasting. But at this point, I think what Chris and Richard trying to say to you is if you're looking at the margins of the Timken Company going forward for the next year, pricing isn't going to be a big impact on that. The improved profitability we are going to drive by expanding our shipments and improving our operations.

Beyond price versus cost, not the relationship, just the absolute level of pricing, just making sure I'm not misreading you, it sounds like you don't two, three, one. Nothing of significance which, again, is implicitly saying you're not feeling cost pressure.

This is Chris. Certainly, we are feeling cost pressure, but a couple different aspects. Number one, we have pricing power to capture raw material, we have surcharge mechanisms in place with end users, that kind of thing. So, that covers that pressure that we are seeing. Global distribution, we raise prices every year with the market, and so we can cover those cost increases. The last point is, do remember we have been migrating our footprint, our manufacturing footprint and our supply chains, and we are always aggressively moving our supply chains into lower cost regions and have a continual effort going on in managing those cost increases. So, I don't think it's necessarily right to say we are not seeing cost pressure, it's just we have a whole lot of efforts going on around mitigating the impact of those.

And that's some China relief for Romania factor that might be maxed out, things of that nature, right? Is that the -- you can cost down your product and not offset some of these costs. You don't have to raise price necessarily as much. Is that the general gist here?

Dave, this is Jim again. That is exactly what Chris said, and I think that is fair. But I think you have to understand the perspective of the people in this room versus the average business. We have been through a massive repricing of our bearing product line over the last two years, and it's reflected in our results in 2010. And I think the message that we are giving is we are not doing that again. We are not feeling the need to do that again. We will continue to move prices as driven by the cost that we can't mitigate, but we don't expect those actions to have a significant impact on margins, either in positive or negative.

And last, I apologize I missed it. Clarification, when you said the attrition number for 2011, I think I missed it, was around $70 million or so? I forgot what you said. The lost business from attrition on the auto contracts.

The 2010 level was in the $50 million to $100 million range, and again, that would be a gross number. As Jim said, we win business there as well. And the 2011 would be high end of that and possibly a little higher.

Okay, so even if you call it $90 million, it's implying the rest of the business grows about 9%. And in that, when you think of truck, you think of construction you think of ag, even a little improvement in rail. Two questions, your auto build assumptions in North America and Europe and at the end of 2010, how should we think of auto as a percent of mobile? Again, auto builds baked in and then what percent of mobile at the end of 2010 is still auto?

The auto builds that we had baked in were in the high $12 million in North America, although the light-truck number is actually more important for us in North America and the total number, and we had that baked in at around $7 million.

What kind of growth rate was that, in the light truck specifically? I apologise, I should know the base, but I don't.

$7 million.

No, but what's the base? What's the growth rate $7 million gives you?

Oh, that would be up from about $6.7 million in 2010.

Okay.

And then mobile, the automotive OE mix in mobile would be in the 30% range.

No, I'm thinking of total mobile revs, there were about $1.5 billion, $1.6 billion in 2010. How much do you still characterized as auto?

30%.

Okay, great, I appreciate it. Thank you very much.

That's auto OE, 30%. We have --

Yes, auto OE. Then you have the -- yes. So, how what would you characterize total auto and I can back into it. But what do you think in total auto after market, everything?

45.

Yes, okay. Okay, great, I appreciate it, thank you.

Thanks, David

Your next call comes from Martin Pollock with NWQ Investment Management.

Great quarter. Certainly stocks are reflecting that. I guess expectations were perhaps higher. Quick question. On steel, you described steel margins as near peakish. I'm just wondering if we go back to 2007, 2008, 2006, 50%, 60% type margins you saw there. And I'm just wondering, what would be different this time in terms of getting those margins still a little bit higher? Is there anything different fundamentally about the way the business is?

Martin, this is Sal. Probably there is, because we have better pricing power now. Back in 2006 and 2007, the majority of our attention was being paid to how to get cost pass-throughs and to make sure that we had full coverage under those circumstances. And it was just crazy attention paid to actually just getting enough raw material to deal with issues over that period. Right now, in the current time period, I think we have seen over the course of 2010 coming into 2011, at least in the mechanical power transmission segment of the market, the special bar quality segment for rotating machinery, a tightness that has given us the ability to look to improving the base pricing. And so I think we're a little bit higher than what where we had been before. I think we ended up last quarter at around 11%, 10.9% or 11%. We're probably going to be up another 100 basis points as we go to the -- towards the second quarter here, and I think that's pretty solid, given the amount of the base that is dealing with surcharges.

I guess, still, just a question that goes back to the same, as far as I look back historically, you guys did do this 15% to 17% margins in that business. I'm just wondering, is there any reason why your margins here don't get beyond this 11%, 12% area? That's really the question.

Marty, let me take a shot at this as well, and then Sal will provide some color. But I think the past when we had our peak level of margins within the steel group, there were timing issues relative to a surcharge recovery mechanism and so forth. And at that point, we said normal margins would be around the 12%-ish kind of level. So, we are kind of approaching that, and Sal says we are going to have upside to the margins as we go forward. With that, that's kind of a general comment based upon a normal mix of business and so forth. So obviously, how we mix -- we obviously have a finite amount of steel products that we're going to sell, and we are running at a good optimization right now. But clearly, the mix of the business is going to have an impact, the pricing that goes on in the market is going to have an impact. Again, we've already got very good manufacturing efficiency within the business, so it's a proxy. I think our comment earlier on the call relative to some of the other segments we have is where those businesses frankly are in the cycle. And as steel commented -- or Sal, I'm sorry, commented earlier, we are running pretty full within our steel group right now. So, you're not going to be a big swing off of that number, but it doesn't mean to say that all the things don't align up well and we get additional margin higher than what we are currently talking about.

And I think Glenn hit it perfectly. We have seen in those prior years, we saw some pretty radical swings in raw materials and then all of a sudden, you get this six week missed timing regarding what and when -- what periods dollars get allotted to. And then it swings the other way. So, you see some erratacism in it, but I think we are going to see a little less of that.

As far as an even to -- an environment where surcharges come off, presumably prices, what tends to be the margin situation at a time like that? Is there some compression with that reversal? (inaudible) inventory positioning.

My sense is that that will only occur if you see the development of a huge surplus of supply on a global scale.

Okay, thank you.

Your next call comes from the Eli Lustgarten with Longbow.

Just one quick question. Throughout the presentation you talk about LIFO charges in each group. If you can you quantify what LIFO was in the quarter by segment or by broad business or what have you, what the charges were.

Yes, I'd say when you look at the LIFO for the quarter overall, it's had a negative impact year-over-year of, call it rounding numbers around $50 million. What was interesting is that for the absolute levels, so what penalized just a quarter itself was probably around $50 million of expense. But we had, call it around $35 millionish, if you will, of income in the quarter a year ago. So, the overall a level of LIFO expense wasn't that large. It was, again, just a change year-over-year. So, as we are explaining that change, it had a meaningful impact for each of the four segments.

And you have an assumption of any change in 2011, as far as LIFO goes? Do you have neutral year-over-year, or do have a charge in there, or how have you projected?

Yes, again, we do expect -- it's nominal. Frankly, when you look at the change in the earnings and the fact of how high the level of earnings are, LIFO should be, unless there is a change in our view, should be a number we are not even going to be talking about. We think it's now accurately reflected in the current level, so it's going to be plus or minus a fairly nominal amount.

Thank you.

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

Thank you Lisa. Thank you for everyone who is attending this teleconference. In summary, we obviously believe we had a great 2010. We are moving forward with confidence based on the achievements that we made in 2010 and look forward to delivering additional shareholder value in 2011. Thank you very much.

Thank you for participating in today's Timken fourth quarter 2010 earnings release conference call. You may now disconnect. (End of Transcript)