Timken Co (TKR) 2011 Q3 法說會逐字稿

I would like to welcome you to Timken's earnings release conference call. (Operator Instructions). You may begin.

Thank you and welcome to our third quarter 2011 conference call. I'm Steve Tschiegg, Director of Capital Markets and Investor Relations. Thank you for joining us today. Should you have further questions after our call 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, 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 Glen and then all of us will be available for Q&A. I would ask that you limit to one question and one follow up at a time to allow everyone to participate.

Before we begin, I would like to remind you that during our conversation today, you may hear forward-looking statements related to future financial results, plans and business operation, actual may differ from those projected or implied due to a variety of factors, these are described in greater details with today's press release and FCC which are viable on www.timken.com. Reconciliations between GAAP and nonGAAP financial information are included as part of the press release.

This call is copyrighted by the Timken Company and any use recording or transmission of any portion with out the express written consent of the Company is prohibited. With that, I'll turn the call over to Jim.

Thanks, Steve, and if good morning. By now, you've seen that the Timken Company had another excellent quarter. In fact, today's earnings report, just nine months into the year, we surpassed our prior annual earnings record. Just as importantly, we continue to see strong revenue growth with sales year-to-date up 31% from 2010.

This demonstrates the new reality for Timken. We have shifted the Company to focus on more attractive, industrial markets on an global basis. These include energy, mining, and agriculture as well as the regional markets in Latin America and Asia, all of which are growing faster than the economy as a whole.

We structurally improved our ability to serve customers in those markets with better business processes, a broader product range and more cost effective manufacturing. This combination continues to drive strong revenue growth and even stronger profit growth for the Timken Company. The only exception is our positive third quarter story is our Aerospace and Defense business, which continues to be challenged. While later cycled than our other segments, we have not seen improvement on the Defense side we were expecting.

We have taken actions to address some execution issues within the business and we took a $5 million reserve in the third quarter for a quality concern. We expect to see improvement performance in this segment going forward. Aerospace is not the only area where we look forward to stronger performance in 2012.

Strong demand from the oil and gas sector is leading to an improved mix and better pricing in our steel business, our expanding products line and growing exposure to emerging markets will increase demand for products from both our processed and mobile industries businesses. And as demonstrated by our recent acquisitions, we're demonstrating our ability to expand our product and service offering well beyond historic bounds. Our success in growing the Company led to a number of strategic moves in the past quarter.

We invested almost $300 million in two acquisitions, Philly Gear last quarter, and Drives in this quarter. This compliments our on going organic diversification program, which is responsible for most of our growth in global markets. We opened early negotiations with United Steel Workers to pave the way for a $225 million expansion for our Faircrest steel plant. This would involve building a continuous castor which will give us an additional 25% of high quality alloy steel capacity at that plant.

This highly differentiated production would support growth in energy markets, including export program. We launched two joint investments with local universities to expand our technical competencies with capital effective public-private partnerships. Our strategy is working. Creating more value for customers, and more earnings for our shareholders. As you can see, we continue to advance many opportunities to expand on that success.

To reiterate points that I made in the second quarter call about the global economy, we remain confident about the long-term strength of the industrial markets we serve. Focusing on key areas such as energy, mining and infrastructure. Growth in Asia remains strong, led by China and India with new momentum in the Ozeon region, this is reinforced by growth in Latin America and Africa.

That growth is driving focused demand on specific industries around the world and we're serving that demand as a more effective, more global company. This approach sustains good Timken jobs in the Americas, in Europe and in Asia. Now I'll turn the mic over to Glen to give more details about the third quarter performance.

Thanks, Jim. Sales for the third quarter were $1.3 billion, an increase of 25% over 2010. The increase was due to strong volume across the Companies broad markets with the exception of our Defense business. The top line also benefited from higher surcharges, pricing and acquisitions which included Philadelphia Gear, which closed at the beginning of the quarter.

Excluding acquisitions, sales we up 21%. From a geographic perspective we posted the strongest gains in North America and Asia, followed by Europe. Gross profit of $343 million was up $78 million from a year ago. The improvement was driven by higher volume and mix, while sure charges and price more than offset the impact of material costs.

The gross margin of 26% for the quarter was up 100 basis points from a year ago. For the quarter, SG&A was $155 million up $15 million from last year, primarily reflecting higher variable and compensation and wages, as well as acquisitions. SG&A was 11% of sales, an improvement of 150 basis points over last year, as we continue to affectively leverage our cost structure.

As a result EBIT for the quarter came in at $190 million, or 14.4% of sales, 320 basis points better than last year. Interest expense of $8 million from the quarter was down $1 million from last year, due to higher global returns on invested cash. The tax rate for the quarter was 38.5%, compared to 34.8% a year ago. The higher rate reflects a change in French tax law for the third quarter that was retroactive to the beginning of this year.

The impact was approximately $4 million including the year-to-date catch up. Additionally, the tax rate was adversely impacted by out of period discrete tax items totalling approximately $2 million. Combine these items accounted for around 3.3% of the tax rate.

Going forward, we expect the tax rate to be back at roughly 34%. As a result, income from continuing operations for the quarter was $111 million, or $1.12 per share, compared to $0.73 per share last year. Included in the quarter, $0.06 of unusual items that negatively impacted our results, including the out-of-period tax factors that I mentioned earlier, as well as restructuring costs with our previously announced Brazilian plant closure.

In addition, as Jim noted, we incurred a warranty charge in the Defense business of approximately $0.03 per share. Now I'll review our business segment performance. Mobile Industry sales for the quarter were $442 million, up 9% from a year ago. The increase was driven by higher demand, led by off-highway, rail and heavy truck markets, in addition, the top line benefited from pricing and occurrence. The mobile segment had EBIT of $65 million or 14.8% of sales.

Up from $57 million and 14.1% of sales last year. The increase was driven by stronger volume, while pricing mostly offset material costs. Mobile industry sales for 2011 are expected to be up 10% to 15% for the year. We continue to see improved demand in the off-highway, rail and heavy truck sectors. Process industry sales for the third quarter were $329 million, up 40% from a year ago.

Reflecting stronger demand from industrial distribution. The Philadelphia Gear acquisition, growth in Asia, the Company's expansion into new product lines and pricing also contributed to the increase. Excluding acquisitions, sales would have been up 22%. For the quarter, Process industries EBIT was $78 million or 23.6% of sales, up from $37 million and 15.7% of sales last year.

EBIT benefited from higher volume, pricing and the Philadelphia Gear acquisition. Process industry sales for 2011 are expected to be up 35% to 40% for the year, driven by Industrial distribution demand, Asia, acquisitions and continued growth in new products. Aerospace and Defense sales for the quarter were $82 million, up slightly from a year ago. Increased Commercial and General Aviation demands was largely offset by lower demand in defense business.

EBIT for the quarter was a loss of $2 million or 1.8% of sales, compared to income of $3 million or 3.1% of sales a year ago. The benefit of stronger commercial and general aviation demand and lower operating costs was more than offset by a $5 million warranty charge taken during the quarter. We expect Aerospace and Defense sales to be down slightly for the year as stronger commercial and aviation demand is expected to be more than offset by continued weakness in our Defense business.

Steel sales of $502 million for the quarter were up 35% over last year, the increase was driven by stronger demand across all end markets, led by the oil and gas and industrial sectors. In addition, surcharges were up approximately $45 million in the quarter, due to higher raw material prices and overall demand. EBIT for the quarter was $67 million or 13.4% of sales, compared to $41 million or 11.1% of sales last year.

The increase resulted from higher volume, mix, pricing and surcharges, which were partially offset by higher material costs, as well as higher manufacturing costs, related the to planned maintenance shutdowns in the quarter. Steel segment sales in 2011 are expected to be up 40% to 45%, primarily driven by improved demand in the energy and industrial end markets as well as surcharges and pricing, the segment is also benefiting from increased capacity to satisfy this strong demand. Looking at our balance sheet, we ended the quarter with cash of $407 million and net debt of $106 million. This compares to a net cash position of $363 million at the end of last year.

Net debt to capital at the end of this quarter was roughly 5%. Free cash flow for the quarter was $30 million. Cash generated by earnings was partially offset by discretionary pension and contributions of $63 million net of tax and increased working capital of $39 million to support the Company's higher sales. Free cash flow, excluding the discretionary pension and contributions totaled $93 million for the quarter.

The Company also used cash in the quarter to fund the acquisition of Philadelphia Gear at approximately $200 million, and repurchased an additional 500,000 shares at approximately $19 million. Turning to our outlook, we expect sales for the full year to be up 25% to 30% over 2010. Our earnings per diluted share for 2011 are now expected to be $4.45 to $4.55.

This implies a fourth quarter estimate range of $0.97 to $1.07. While we continue to see good end market demand, we expect sales and earnings in the fourth quarter to be down from the third quarter, due to seasonality. The decline in organic sales will be partially offset by the Drives acquisition, however operating earnings from Drives are expected to be offset by purchasing accounting adjustments is in the quarter.

In addition and included in our estimate range is a $10 million potential charge for exit costs associated with the previously announced Brazil facility closure. For the full year, the Company expects cash from operating activities to be $210 million, free cash flow of use $65 million. After capital expenditures of $200 million and dividends of roughly $75 million.

Excluding discretionary pension and contributions made in the first nine months of 2011, totaling $256 million net of tax, free cash flow is expected to be $190 million. This ends our formal remarks and I'll be happy to answer any questions.

(Operator Instructions). The first question is from Steven Volkmann of Jaffreys. Mr. Volkmann, your line is open.

Yes, Steve.

Sorry about that. So I hate to focus on the one thing you're not doing well because the rest is obviously doing well. But in the Aerospace business, I guess we're talking about taking some actions there to address what's going on. And I'm wondering if you can sort of dig in a little bit on that and give us a sense of what we should be thinking about margin wise going forward.

Steve, this is Rich. I'm not sure if the first question was related to the warranty or not, but putting that aside, coming into the year, our guidance was that we expected to get off to a slow start and have that steadily improve through the course of the year, both on revenue EBIT and EBIT margins and ending the fourth quarter around double digits, and clearly, through three quarters we have not seen the top line improvement that we expected and in the third quarter, what we saw was high single digit improvement in commercial and general aviation, offset by high single-digit decline in defense, which essentially wiped each other out and we have been hovering in this low single-digit EBIT margins in the third quarter.

We don't, at this time, see a significant improvement in the fourth quarter in revenue as we expect to have another year-over-year decline in defense offset by the other segments. As we look to 2012, not looking to provide any specific guidance in 2012 on percentages or targets, we'll do that after the end of the Fourth quarter, but certainly at the end of 2012, we would expect top-line growth and EBIT margins getting back to improved levels in terms of the guidance we provided earlier.

Great, that's helpful and turning to process, those margins continue to be very high, and I thought we discussed how those could potentially start to come down here, but clearly they haven't. So should we think about this as sustainable or is there special going on here.

Stephan, this is Chris, it's going to be the same story as I gave you in the previous quarters. But what happened in the third quarter, the distribution mix remained very strong, and we anticipated that mix to become more OE oriented, once again, as new applications came on. But what happened, the distribution growth was stronger than expected, so that's the third quarter story.

Moving forward, we do expect to maintain very good margins in this segment, and with that said, we do expect downward pressure on these, relative to the 23.6 that you're looking at in this quarter. What's going to drive that, we are still growing in certain applications, which are very good business for us, very important to our long-term after-market, but operate at lower margins than our core distribution business. With that said, we expect to have very good margins in this segment and achieve very good growth rates, but as that comes on line, there will be downward pressure on those margins, still in the 20s, but along those lines.

Glen, can you give us the EBIT impact from Philly gear, and I will pass it on?

I don't think we commented on the earnings, as much as the sales excluding the acquisitions, but suffice it to say, that Philly gear was accretive and we said from a margin stand point fairly comparable to what the process margins are so you can back into it.

Our next question is from David Raso with ISI Group your question, please.

Good morning, you've given the margins and the processes for the rest of the Company, and obviously pretty critical for next year, can process outgrow the other two divisions and leaving Aerospace aside when it comes to the earnings drivers, when you look at process next year, as we sit here today and look at the backlog. It's obviously one of the more diversified geographically businesses that you have.

The 30% or so of process that is Asia, can you help us understand what you're seeing right now, especially the wind business, I assume is a little bit challenged, the contract that you have with Goldwin next year, that steps up pretty sizeably, is that still in place? I'm trying to think through the growth profile for the process next year, because once again, outgrowing the businesses is an area where total Company margins can continue to improve.

David, let me just start for a second, and then I'll have Chris address it, but obviously, as we talk about 2012 outlook, from our standpoint, we're obviously going to speak about our outlook this year and the performance of the Company. As Rich said, we'll get into all of the details when we report out our year of results and our new expectations for each of the segments and in January of 2012.

Having said that, with respect to your question obviously, relating to other issues, and glad to share with you what our views are, and overall, we expect most of the end markets that we're serving to be favorable from year-over-year, and obviously we would expect to leverage that, and clearly we're looking for performance. But let Chris deal with the macro level of the issues regarding the wind industry in China.

Let me split your question in two parts, David. Let me start with Asia. Third quarter, another solid quarter, maintaining our existing growth rate versus history. Generally, once again solid.

Moving forward, obviously China has slowed a little bit. We are still seeing decent growth rates. At this point for 2012, I don't know, I think you need to use your own assumption on what you believe is going to be in that market space. We expect to achieve good solid growth.

Whether it will be our historical growth rate is going to spend on those markets, and whether the market remains relatively robust. But generally speaking a good story. Specifically on wind, let me address this because obviously has come out with other earnings releases. Let me start with first of all, we have had steady growth through 2011 in our wind business.

One thing that's really important to remember, we have only been in this business for five or six years. We're only on the new platforms, which are the multi-megawatt platforms. We're not on the existing base of wind applications it if you go back over what was built in the last 10, 15 years. That's an important point because our business continues to grow as these new platforms come on line. We have clearly seen the slowdown in China that others have referenced and China in particular has issues going on.

I won't get into them here. You have heard them already via other people, but of course we're seeing that. All of that said, we expect to see double-digit growth in our wind business in 2012, as we look at the new applications that are coming on, but they're not all that significant to us in total.

And on Europe in process, how would you characterize the levels of uncertainties high enough? Nobody is going to be exact in their thoughts for 2012 in Europe, but is there something that you're seeing in backlog and order trends.

One comment. Europe is clearly the most challenged area, at least for uncertainty is how I would word that. There clearly have been a lot of things going on there as you're well aware. We do see slowing there, but once again, we're really talking slowing of growth rate. Nothing overly concerning or significant at this point in time, relative to total.

And lastly, something that we picked up on the channel in pricing and process was relatively encouraging. Can you describe a little bit how you're thinking about price right now at the distributor level in particular, or at least process as a whole in how that might dove tail into thoughts on pricing in 2012?

Clearly in distribution, it is our aim to put through yearly price increases in all regions of the world. and those don't happen at certain times of the year, we follow a schedule. The amounts, we don't obviously publish or until we publish them. So I don't want to comment on the actual amounts. In 2012 though, we'll be looking to follow our similar pattern and we'll make the decisions on what those price increases will be, depending on how the year plays out and how the markets are responding to certain issues that we have.

Thank you very much, I appreciate it.

Thank you, our next question is from Andrew Obin of Bank of America Merrill Lynch. Your question?

Yes, talking about the steel, I apologize if I missed it, but how will you add to the capacity in 2012, what's the timing of capacity addition?

This is Sal Miraglia, and I think that Glen was referring to capacity additions that we have made by the operating mode on some of the assets that we have in place. We are essentially operating at our capacity level right now.

We have two approved projects in place, moving forward that will improve that to some extent, but not until 2013, and then Jim made reference to a major project, for which we're currently engaged with a variety of parties to create the receptive environment that would allow us to move forward with a positive decision on an major addition to our Faircrest plant. Should that go forward, that would not occur until 2014.

So Q-3 is effectively your full capacity and you'll have no capacity additions until 2013?

That's correct.

Just historically, you guys concluded your negotiations and by now, you should have concluded your negotiations on steel. Can you share with us what% of capacity you've sold for next year, and just what's the general sense, I assume how tight capacity is, negotiations have been fairly positive, but could you give us more color as to how much capacity you have locked into next year, and directionally what kind of pricing we're getting.

Let me just make sure that I understand your points. I thought I heard thank you say that we had finished our labor negotiation.

No, I'm talking about steel customers.

I wanted to make sure that that was the point in case you made that. But that's not yet finished. We are about 85% through our annual negotiations with customers, and we startled relatively early this year. We are on allocation, and will remain on allocation across all of our product lines.

We're getting no solid indications from any customers about their view of any weakening in demand. We do believe we're at the end of the inventory restocking cycle of what occurred in 2009 and what has been rebuilding since then, and we're taking appropriate pricing options, we took them this year and will take them again. As Chris said, we don't comment on them until those are public and we publish them.

So much how much capacity will be available for the stock market next year.

10% of what we produce is sold on spot market.

Thank you very much.

Thank you, our next question is from Eli Lustgarten. Your question, please.

Good morning, everyone. Can we just go over what all of the charges were, buried in this terrific third quarter, and I think that you talked about taxes only $6 million, but the difference between 34% and 38.5% tax rate is $8 million. I think you have the $5 million warranty and I think there are some Brazilian charges. Can you breakout what limited the quarter specifically because some of the numbers don't add up.

Sure, Eli, the big ones that we highlighted on tax line first are what we would call the unusual or out of period ones in particular, and that was around $0.05 cents a share impact on the quarter. Our tax rate would have been slightly higher even excluding that than kind of our 34% rate. But that fluctuates plus or minus within a percentage point, and we wanted to highlight the one or two unusual items.

One, a change in the French tax law that went into effect for the third quarter, and was retroactive for the full year. Obviously you had three quarters of the higher tax rate in the one quarter, and in addition, in the third quarter each year, when we file our tax returns for the prior year, we trueup reserves, and in this case there was a negative impact of a couple of million dollars. It could be a couple million positive or negative in any year, but it's a third quarter issue that relates to periods other than the third quarter.

The restructuring for Brazil was fairly nominal, it was $0.01 per share. The warranty reserve, the $5 million that was built up for reserve in Aerospace would be around $0.03, so you add all of those together and you're looking at around $0.09, $0.06 of what we would have historically called kind of out of period and therefore not in the adjusted numbers, but $0.09 clearly of impact that we would not have expected to occur in the third quarter.

Just for verification the $10 million charge for the closing of Brazilian charge is a pre tax number.

In the fourth quarter, that's correct, that would be a pre tax. What we have done, we have established a range of costs and I'll use rounded numbers, $10 million to $20 million. We have reserved up to today $10 million of that, and so there's potentially $10 million that is in the range that we provided. But there's no guarantee that we will incur any of that, but that's the range that we're looking at.

Can we talk about, we have talked about process and defense, can we talk about operating margins in both mobile and steel and sustainability in the current levels where we are. Particularly with steel at capacity for a while and the only improvement is price. Can we hold the 13.4% margin or something to that effect, and you've been outperforming in mobile for four quarters, and it has not gone down, and can we look at stable level for the fourth quarter and next year?

Let me make a general comment and ask the others to come in because when you talk about fourth quarter relative to how we did for the prior three quarters, you definitely have seasonality come into play. In the case of mobile, we talked about we expect to have down volumes, and therefore, obviously, it's going to have an impact on their margins.

In the case of steel, while we expect to have down volumes in seasonality, we did take maintenance shutdowns in the third quarter that negatively impacted their margins that we won't have in the fourth or than normal holiday. So net-net will actually leverage better because we don't have that could. But Sal, any additional color, or Rich?

This is Sal, and Glen has it about right, I think the fact that the third quarter maintenance costs may actually spill in to the fourth quarter and put a little more pressure on it, and add to that the holiday periods where people don't receive much, even where we returned and that may put negative pressure. But to the overall point, we believe strongly that we have moved our EBIT margin structurally to a better level.

It will waver around the 12% to 14% range, but given the demand in our particular segment of the steel industry, which is very nichey and very special, given that demand and given the value of it, we think structurally we'll be performing better than low single-digit or low double-digit level that we're talking about earlier. High single or low double-digits.

The only comment that I would add, Eli, just a clarification when Glen said we would expect mobile volume to be down, and that's down sequentially, which is our typical seasonality. If you look year-over-year, our markets, rail, mining, are all continuing to improve, and we would expect them to be up year-over-year. If you look at this last year, third to fourth quarter change, we could expect something similar this year going into seasonality expected.

What was the impact of currency on the quarter, top line and bottom line?

Negligible. I think currency impacted sales 1% out of the 25% and we don't comment on it from an earning standpoint but it would be less than that.

Thank you.

(Operator Instructions). Our next question is from Sam Eisner with William Blair & Co. Your question, please?

Good morning. I just have questions regarding the margins and process, and I know we touched on them. But were there any charges embedded in there for acquisitions such as Philly Gear or for Drives?

Really not an impact for them. The Drives acquisitions which will move into the fourth quarter will obviously have purchase accounting issues, but Philadelphia Gear and other acquisitions and process are operating at their normal performance levels.

And then you mentioned that you had a little bit better mix regarding the industrial distribution business. What was that as a total percentage of the process business? I guess historically, it has been 65% of the total?

We're pushing 70 this quarter, once again, which is a very very strong mix, and as we grow more and more in the areas we're pushing on, we would expect that mix to return more to historical kind of numbers, and maybe even go a little bit lower. Once again, very good business for us, and still very good profit levels, but as we grow in more and more of this business, the margins will be lower than some of that Legacy distribution business.

Understood, and then I guess on the overall incremental margins of the company, you had 25% incrementals and acceleration versus the second quarter, and how are you thinking of incrementals in the coming year. Is this a sustainable level or should we see declines in incrementals going forward?

We will speak more to that as we go through our 2012 outlook, but just a general premise, we try to drive the incremental margins relative to gross margins for the Company and leverage the S&A and effectively that gets in that 25% plus or minus kind of number.

Okay, great. Lastly, you know, in terms of total revenue, Aerospace is about 6% of the total Company through I guess the first three quarters here. You've talked in the past about your strategy as it relates to mobile and is there anything within Aerospace that you may be looking to monetise?

At this point, it's a fix, and we're confident we'll be able to fix the business.

Okay. Great, thank you very much.

Thank you, our next question is from Brian Coffen of Atlantic Investments, your question, please.

Hi, guys, a couple of specific things, and then a high-level question. First, Glen, you talked about the purchase accounting adjustment that's included in the guidance in Q-4, what's the magnitude of that.

A couple of million dollars, it's effectively riding after we are written up the inventory with the acquisition that we did that we're planning to sell that through. So effectively, that will offset the earnings that would have been driven.

There was a warranty charge for a quality related issue, can you talk about that specifically and is that more than enough to cover any quality remediation?

We had a specific issue in the third quarter related to 1 watt of Aerospace gear sets, and we have been and continue to work with the FAA to resolve the issue with issues matter of public record. There are more details through the FAA. It's an isolated incident, and we believe the $5 million charge will cover the warranty costs going forward.

Okay, and then at a high-level, steel is operating extremely well. You're very tight, and it sounds like your competitors are very tight at least halfway through next year, but everybody is also talking about adding capacity. Is it your expectation that kind of as long as the energy markets remain robust that any additional capacity gets soaked up?

It seems to some degree, you're reducing or maybe reducing the number of customers that you have by putting them on allocation and mixing them to the better quality customers. I just worry that at some point, we're mixing the lower quality customers, can you talk about that dynamic?

Yeah, Brian, let me talk about it in general. First of all, appreciate that the capacity in the industry has been altered by one of the participants having taken a fairly large piece of capacity out. What you're hearing in terms of additions are really compensating for that as the demand and the market slowly moves back up to the levels it has seen before.

It moved up very quickly in a short period of time in our interpretation because of global growth for all practical purposes. You made a comment about what parts of the market that we're serving that are strong, and you all know what happens happened in term of the return of relatively modest, but at least healthier levels in the automotive markets base, so that's part of it.

But the real drivers are things that are building infrastructure around the world, mining and construction outside of the U.S, and the relentless thirst for energy, which is driving a very very strong exploration and production activity. The products in the markets that we serve are very valuable in those kinds of marketplaces, and that's what we see. So if you believe that the kind of global infrastructure pursuit that we have seen in China with India right behind it, for all practical purposes will continue, then frankly, the kinds of capacity discussions that we are participating in, and we have heard, are pretty welcome with.

Lastly, you guys recently conducted a survey, I think, of observers of the Company, buy and sell people, and you were trying to see how they perceived Timken and evaluation. As I look at Timken, it seems like your evaluation relative to any steel player, your lower or bearings player, globally, you're lower, and I wonder what you can share with that what you learned from that survey and what there appears to be in a perception gap.

Brian, one, appreciate you participating in that survey. So we periodically do obviously the surveys just to gauge perception on the Company over time and we're still actually finishing compiling the information to get the benefit of it.

But I think it's fair to say similar issues to where we have been before, just the potential cyclicality of the business, based upon historical performance with concerns as what the economy is going to do going forward, and the issues related to the Legacy liabilities and the cash used for pension and Opebs. Those issues, but we're obviously getting it compiled for us so we'll have a lot more specifics to speak to that.

But obviously from our standpoint, what we're looking at is continuing to drive the performance of had the Company and letting that speak for itself. Because as we do, we would expect to see the discount that we trade at relative to other diversified industrials continue to narrow and provide more upside for our shareholders.

Are you any closer to being at a point where you could do something with the pension and annuities the pension and things like that?

It's things that we're looking at to lessen the liability that we have. As you know, we have contributed a lot of cash into our plans to get the plans fully funded, but we still have that big liability and sitting on lots of assets so we're looking at the annuitization and lump sums to potentially bring down the liability.

Thank you, you guys, it was a great quarter.

Thank you, our next question is from Holden Lewis of BBT capital parking lots. Your question, please.

Thank you, good morning.

Good morning.

With regards to the pricing component of your steel business, can you just kind of refresh us? I think you've had six or seven price 4% price increases through the first half of this year, and obviously you're going into your negotiations to try to see what you're going to do with price next year. Can you refresh us, how much price you had, you know, and does that all sort of point to double-digit potential increase in price next year? I'm trying to get a sense of what that order of magnitude might look at.

Let's look at history first, Holden. Yes, we had announced and participated in what would be our spot price market, anywhere from $80.00 to $120.00 a ton, depending on product line of the degree of value added, et cetera, that we had, and that occurred throughout the past year that we made those announcements. All I can say about the future is that we remain tight in capacity, and we are, as I mentioned earlier, fully allocated across all of our product lines, meaning we're only serving existing customers to the extent that they have required our service before, and we will take appropriate price action.

You will be trying to capture some or all of that $80.00 to $120.00 on the 80% to 90% of your business that you can't capture now. Right? Depending on what you get, that pretty much should go separate to the bottom line, it is that right?

Well, we mentioned in the past that our prior announcements of price are a good indicator of who we are trying to achieve. So you can make whatever assumptions you want to make on that, but the market is very strong right now.

Especially, Holden, when you look to the mechanisms of surcharges that the group has to be able to deal with the fluctuations of material cost, it's demand based and it should fall to the bottom line.

You also made an announcement about how you're increasing the minimum lot size. Can you talk about what impact that has had or will have from a margin standpoint?

Basically, it gives us better utilization of our assets, quite frankly, Holden. It will be a contributory from the point of view of eliminating certain numbers of setups and give us more operating and production time. So it's more maximization of capacity and fixed costs.

Both of those things, the pricing flow-through and all of that should point to, in 2012, even though your capacity is constrained, those are elements that should allow margins conceivably to expand, right? Are there any negative offset that would keep the margins in the 2011 range or is it reasonable to assume the margins would expand given some of those elements?

The only real concern we have is the same one that everyone else is looking at, and we don't believe it will materialize, but we don't know how to predict that future. Will we see any softening because of all of the concerns about the nature of the economy? Right now, we don't have any indication that would happen. So as a consequence, we would think very similarly to the way you're thinking. That we should be able to hold these margins and is it perhaps improve it slightly, and look to see exactly what the demand environment is like next year.

The last thing, you don't cite automotive in your mobile segment as one of the strong businesses it has been in the past. Is there anything different there or just comping?

It's really the lost business that we took earlier in the year, so sequentially, the business has been strong, but as you look year-over-year, due to lost business, our light vehicle business is essentially flat.

Okay, thanks.

There are no remaining questions at this time, and I would like to turn the conference back over to Jim Griffith for any final comments or remarks.

Again, thank you for your interest, and we remain committed to bringing Timken to new levels of performance as a leading Industrial Company. Thank you.

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