Timken Co (TKR) 2012 Q4 法說會逐字稿

Good morning, my name is Vickie and I will be your conference operator today. As a reminder this call is being recorded. At this time I would like to welcome everyone the to Timken's fourth-quarter earnings release conference call.

(Operator Instructions)

At this time I would like to turn the call over to Steve Tschiegg. Please go ahead sir.

Thank you and welcome to our fourth-quarter 2012 earnings conference call. I'm Steve Tschiegg, Director of Capital Markets and Investor Relations. Thanks for joining us today and should you have further questions after our call please feel free to contact me at 330-471-7446. Before we begin our call this morning I wanted to point out that we posted to the Company's website this morning presentation materials to supplement our review of the quarterly results as part of this earnings conference call. This material is also available via download feature from earnings call webcast link.

With me today are Jim Griffith, President and CEO; Glen Eisenberg, Executive Vice President of Finance and Administration and CFO; and Group Presidents Chris Coughlin and Rich Kyle. We have remarks this morning from Jim and Glenn and then all of us will be available for Q&A. At that time I would ask that you limit your questions to one question and one follow up at a time to allow an opportunity for everyone to participate.

Before we begin I would like to remind you that during our conversation today you may look 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 at www.Timken.com.

Reconciliations between non GAAP financial information and its GAAP equivalent 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 express written consent of the Company is prohibited. With that I'll turn the call over to Jim.

Thanks Steve and good morning. In our earnings announcement earlier today we reported fourth-quarter earnings of about $0.78 a share on sales of $1.1 billion. Ending the year with strong performance. The quarter unfolded about as expected with the decline in sales as a result of lower demand for the light vehicle, heavy truck, mining, and oil and gas markets, as well as customer inventory adjustments. Asia strengthened a bit in the quarter but did not make up for the lower demand in North America and Western Europe. This level of performance was achieved against a back drop of operating at only a little above 50% capacity utilization in the quarter across all of our operations. Our performance this quarter, especially with that level of capacity utilization, clearly demonstrates the improving resilience of our earnings in all four segments of the Company.

Looking at the full-year we finished with earnings per share of $5.07 on 4% lower sales. After backing out the one-time benefit from the CDSOA receipts, this stands as the second best year in our Company's history. While the year started with a record first quarter the slowing demand across most of our end markets during the second half of the year called for quick and decisive action. We adjusted productions schedules and inventory levels and carefully managed our cash in expenses. Our efforts represent the continued implementation of our strategic plan.

Our focus on key markets that value our technology and our ability to diversify our product portfolio has begun to temper volatility in all parts of our Company. And allowed us to expand into the important industrial and energy markets. This continued focus on driving long-term value for our shareholders help define 2012 for us and underpinned our success. Strong operating performance in free cash flow generation enabled us to redeploy capital to deliver value to shareholders. This included a 15% increase in our quarterly dividend, the repurchase of 2.5 million shares of stock, the introduction of several new bearing lines and a formal increase in our bearing life ratings, the expansion of our global sales presence, especially in emerging markets, and an increase in our pension funding to approximately 90% funded at year end.

Capital investments continued on track as well. In April we broke ground on a $225 million investment at our Faircrest Steel Plant. This investment will significantly enhance efficiency and broaden our product offering in large diameter high-performance steel bar where we have an industry leadership position. In addition, our new intermediate finishing line for mechanical seamless tubing and our new forge press are now coming online. The acquisition of Drives and of Phillie Gear also contributes to our 2012 performance bringing us new capabilities. The contribution of the of acquisitions in 2012 reinforces the importance of the inorganic element of our growth and targeted diversification strategy. Late in the year we further diversified with the Wazee acquisition expanding our services infrastructure and adding critical motor, generator, and up tower wind services to our portfolio.

Overall we believe the demand for our products bottomed in the fourth-quarter based on market indicators, our current order book, and input from our customers. We expect shipments in 2013 to ramp slowly in the first half of the year due to sluggishness in the economy, market place inventory reductions, and the impact of are mobile market strategy. In the second half we anticipate improving levels of demand, especially as customers complete inventory adjustments in key markets, and as momentum builds in the North American economy and the recovery in Asia.

We remain confident of our ability to deliver value to our customers and perform well for our shareholders in 2013. Our confidence is grounded on a number of things; a notable shift in our structural earnings power as evidenced by our recent financial performance, our strong balance sheet provides us with the capacity for focus growth as well is funding pension obligations and returning capital to shareholders in the form of dividends and share repurchases. Our operating model leverages synergies across all of our businesses allowing us to offer differentiated value in the marketplace. We will benefit from capital investments coming online this year, particularly in are steel operations, and our inorganic growth pipeline activity is brisk. We are well positioned to take action as warranted consistent with our disciplined approach.

We are also continuing to exercise prudence in spending particularly with regard to administrative costs. This is an exciting time for the Timken Company. Our strategy is delivering results and we look forward to leveraging the strengthening demand we expect as 2013 unfolds to deliver stronger performance for our customers and shareholders. Glenn will now review our financial performance for the quarter and guidance for 2013.

Thanks Jim. Sales for the fourth quarter were $1.1 billion, a decrease of $184 million or 15% from 2011. The decline reflects lower volume across the Company's light vehicle, heavy truck, mining, and energy markets as well as lower surcharges in our steel segment as a result of lower scrap and alloyed material cost. This was partially offset by favorable pricing across all four of our segments.

From a geographic perspective we posted strong gains in Asia, while North America and Europe were down. Gross profit of $279 million was down $64 million from a year ago. The decrease was driven by lower volume, mix, lower material surcharges and higher manufacturing cost as our operations ran slightly above 50% of capacity utilization in the quarter. This was partially offset by pricing, lower material cost, as well as a favorable change in LIFO of roughly $20 million.

The gross margin of 25.8% for the quarter was down 130 basis points from a year ago. For the quarter SG&A was $164 million, down $4 million from last year, primarily reflecting lower discretionary spending. SG&A was 15.1% of sales, an increase of 190 basis points over last year. As a result, EBIT for the quarter came in at $111 million, or 10.2% of sales, 300 basis points lower than last year. That interest expense of $6.2 million for the quarter was down $1.2 million from last year, primarily driven by a change in capitalized interest reflecting the Company's increased investment program as well as lower average debt balances.

The tax rate for the quarter was 27.9%, compared to 32.1% last year and the Company's prior Outlook of 36.5%. The lower tax rate primarily related to foreign tax credits which the Company was able to utilize in the 2012 tax year. The lower tax rate provided a benefit of $0.09 per share versus the Company's previous Outlook. Going forward we expect the tax rate to be approximately 33%. As a result, income from continuing operations for the quarter was $75.3 million, or $0.78 per share, compared to $1.11 per share last year.

Now I'll review our business segment performance. Mobile industry sales for the quarter were $361 million, down 14% from a year ago. The decrease was driven by lower light vehicle, heavy truck, and off-highway demand which was partially offset by price. The mobil segment had EBIT of $35 million or 9.6% of sales, compared to $49 million or 11.6% of sales last year. The decline in EBIT was due to lower volume partially offset by price. This segment also incurred approximately $5 million in costs related to both our St. Thomas plant closure and a loss on sale of a small joint venture. Mobile industry sales for 2013 are expected to be down 5% to 10% primarily due to lower light vehicle and heavy truck demand resulting from the Company's strategy of focusing on markets which offer long-term attractive returns. For 2013 we expect this market repositioning strategy to reduce sales by approximately $150 million. This reduction is expected to be the final piece of exited business from this initiative.

Process Industry sales for the fourth quarter were $339 million up 5% from a year ago driven by favorable pricing and increased demand in Asia. For the quarter, process industries EBIT was $61 million or 18.1% of sales, down from $65 million or 20% of sales last year. The benefit of increased volume, pricing, and lower S&A costs was partially offset by unfavorable mix, currency, and higher manufacturing costs. In addition EBIT was negatively impacted by $6 million relating to the timing of costs associated with government contracts and a change in inventory reserves. Process industry sales for 2013 are expected to be relatively flat for the year supported by a second-half recovery in Asia and industrial distribution demands.

Aerospace and Defense sales for the fourth quarter were $84 million up 6% from a year ago. Higher market demands led by the defense sector and favorable pricing contributed to the increase in sales. EBIT for the quarter was $10 million or 11.8% of sales compared to $3 million our 3.4% of sales a year ago. The increase in EBIT that was led by higher volume, pricing, and lower manufacturing and S&A costs. For 2013 we anticipate aerospace and defense sales to be up 7% to 12% driven by stronger demand across all of its end markets. Field sales of $316 million for the quarter were down 32% from last year. The decline was driven by lower demand in the oil and gas and industrial sectors, as well as lower surcharges of $70 million due to lower raw material costs and overall demand. This was partially offset by improved pricing.

EBIT for the quarter was $25 million or 8% of sales, compared to $71 million or 15.1% of sales last year. The decrease resulted from lower volume, mix, material surcharges and higher manufacturing costs as operations ran at roughly 47% of capacity utilization. This was partially offset by pricing, lower material costs, as well as a change in LIFO of roughly $20 million due to lower material costs and a mix of ending inventory. Steel segment sales for 2013 are expected to be down 7% to 12% driven by lower end market demand in the oil and gas and industrial sectors, which are expected to improve throughout the year, as well as lower surcharges.

Looking at our balance sheet we ended the quarter with cash of $586 million, a net cash of $107 million. This compares to a net debt position of $47 million at the end of last year. The Company ended the year with liquidity of $1.4 billion. Operating cash flow for the year of $626 million reflects the Company's strong earnings and lower working capital requirements. Free cash flow was $240 million after capital expenditures of $297 million and dividends of $89 million. Excluding CDSOA receipts of $68 million net of tax and discretionary pension and [VIVA] contributions of $245 million net of tax, free cash flow for the year was $417 million. The Company's unfunded pension obligations were $398 million at the end of 2012 with the plans funded status reaching 89%. The benefit of company contributions and favorable asset returns more than offset the negative impact of 100 basis point decline in the discount rate used to value the liability at year end.

Last quarter we indicated that we expected 2013 full-year performance to be comparable to 2012 assuming a similar economic environment. We have adjusted our market Outlook to reflect the slower economic recovery in the second half. As a result, despite our expectations of increasing sales throughout the year, we anticipate an overall decline of sales of around 5% compared to 2012 driven primarily by lower demand and surcharges as well as the impact of our mobile industries market strategy. We expect earnings per diluted share to be in the range of $3.75 to $4.05 reflecting the benefits of the important structural changes we have made. Including in our earnings outlook are restructuring charges of $0.20 per share related to our two previously announced plant closures in Canada and Brazil.

In terms of overall cadence for the year, earnings for the first half of 2013 are expected to be comparable to the second half of 2012. However as we start the year we do not expect the LIFO benefit the and lower tax rates from the fourth quarter to carry over into the first quarter. As Jim noted we will continue to take actions as needed should the economy recover more slowly than we expect.

The Company expects cash from operating activities to be $330 million, which includes working capital requirements to support a second-half recovery, as well as discretionary pension and VIVA trust contributions totaling $180 million net of tax. Free cash flow is expected to be a use of cash of $120 million, after capital expenditures of $360 million and dividends of roughly $90 million. Excluding the discretionary pension and VIVA trust contributions, free-cash flow is expected to be $60 million. We expect to end the year with our pension plans essentially fully funded. This ends our formal remarks and now I would be happy to take any questions that you have.

(Operator Instructions)

We will take our first question today from Eli Lustgarten. Please go ahead.

Just one quick clarification, Glenn, you said 32% tax rate for the year. Is there an R&D tax credit that's coming in the first quarter or catch up for '12 or how will that play through?

Yes it is reflected in our first-quarter numbers and Eli, as you know quarter to quarter our tax rate is going to be volatile, or it moves, but normally within a couple of percentage points plus or minus. So for the full year of 2013 we think 33% is a good targeted rate for us. Obviously, it depends on where we make our money geographically and so forth but a little bit similar to what we saw this year we'll probably see a slightly lower rate per the latter part of the year than the early part. But I think for modeling purposes using 33 just as a general number hopefully keeps us within a point or so of each quarter.

So the R&D tax rate is really not a material number?

Not a significant number, but again, it is within a couple of points of our tax rate.

And you know one of the main points you mentioned in the quarter, the fourth quarter, was the 50% minus operating rate across the Company [47] steel. As we look into 2013 can you give us some feel for how operating rates will be and whether profitability can basically hold at the second half level, or the full-year levels of 2012. I mean what kind of levels of profitability across the Corporation do you expect as we look out to the second half of the year or what are the assumptions for guidance?

Again just on a general level, and again we can have the businesses go through their areas. But overall, as we have said, we expect earnings to be down somewhat from last year and we've obviously provided an earnings guidance number that reflects the first half of 2012 to be--or first half of '13 rather comparable to the second half of '12 kind of as we expected before. And while we still expect the ramp up in the second half compared to the first half of '13 we now believe that second half of '13 will now be lower than the first half that we experienced in 2012, which as you know, were at very high levels.

So from a cadence standpoint we expect the same trend to be there. We have just backed off a little bit giving the macro view of the world that the economy is still going to grow in the second half, but maybe not as strong. From a capacity utilization level our assumption is that on a full-year basis our capacity level which last year was caught around in the low 60% range should be comparable in '13. It's just the timing of it will ramp up from lower levels of capacity in the first half to higher levels in the second half.

And can we get some guidance of what you're looking at profitability across several businesses. Will each of them be able to hold or show some improvement over the reported number for 2012, is really the focus of the question?

Eli, this is Rich. For aerospace we expect significant leverage on the incremental volumes. As we've talked we are targeting to move that business closer to the mid teens in EBIT margins and we expect another year of very good leverage due to mix, cost reduction and then also leveraging the volume so up a couple hundred basis points in aerospace. In steel for the full year we expect, again double-digit EBIT margins. And as Glenn said starting off the year slower and moving up through the year to average into those numbers.

To give you feel on the capacity utilization for steel we finished the fourth quarter at under 50% utilization. We expect with our backlog in order input for the first quarter to be up towards 60%. It can increase from the fourth quarter, but the year-over-year comps are obviously pretty difficult in that first quarter, so that would be down significantly from the first quarter of '12 still.

And mobile process?

Good morning Eli this is Chris. I will just answer your question direct. On process we are expecting for the year to be in the 20% range in 2013. We expect the first quarter to be a little bit challenging but we should be in the 20% or 21% range for the year. On the mobile side we will be in double digits. That is our expectation so the direct answer to your question is yes, we believe we can hold these margins through the balance of 2013.

All right thank you. I'll get in line.

I'll take the next question from Stephen Volkmann with Jefferies. Please go ahead.

Yes good morning.

Morning.

I think maybe Jim had mentioned some customer inventory draw downs and so forth. I am just curious as to what you think you're visibility into that is, and your degree of confidence in terms of where they are in that process.

Since I mentioned it, Steve, let me talk, and then if we have specifics on specific markets then Rich or Chris can comment. When we are doing our forecasting we are touching our customers, we're looking at our order book, and we are looking at the economics, and so we see all of that. We have specific markets and they tend to be in the energy sector and in the mining sector where our customers really over built for the run up in 2011 and in early 2012. And they are very clear with us that they have an inventory reduction to go through.

It is different than we've had in some cycles because it's not so much our inventory in their yards. It's there inventory of finished goods that they are working through. But the forecast that we have given are based on, as a general statement, direct input from our customers as to what they see. The obvious translation of that is it depends on their ability to forecast what their sales will be in the first half and ability to work through that inventory.

To shed a little more color on that; within aerospace no issues, within steel automotive no issues, demand a strong. Within oil and gas much fewer issues than there would have been a quarter ago. We are seeing signs of that in order input and forecast, but there is still an inventory position there that is not completely burned through and expect that as based on Jim's comment and customer feedback and workflow to be on sometime in the second quarter. And then industrial has improved but a lot of mixed markets within the industrial steel space, and we have seen some signs of recovery there in parts and other signs where it is still languishing.

Great a quick follow-up if I could on steel. We get a lot of questions about some of the capacity that is being added both by you guys and by others in SBQ market. And my sense is we are sort of talking about a little bit different product types. But could you just give us your insight of why that shouldn't bother us too much?

Well, I think you largely hit on it on the different product types. First let me say in 2013 the CapEx projects that we have coming online are not really around capacity. There are some small capacity increases but of the two big projects one is really around cost reduction and the other one is around product expansion capabilities and entering new markets and furthering our product line. Our big capacity investment comes online in mid 2014 and that is focused around large products. Most of the capacity that you are reading about is focused more on smaller products and more around automotive markets, where ours is more focused on industrial oil and gas markets.

Is there any additional capacity in the SBQ market in those markets on which you are focused?

Yes, there is some, and we would estimate with our increase in the market that it is around a15% increase in capacity.

Total increase is 15% for the industry?

Yes. Steve's put it in some numerical terms in terms of the product overlap. The Faircrest, which is where we are adding that capability effectively, runs from about 6 inch diameter bar up to 16. Above about 9 inches in diameter there is nobody in North America who can produce. So that is a unique space for us. Conversely where the capacity is being added in the industry it is in the under -- for argument say 6-, 7- or 8- inch diameter. So there is a small overlap, but it is relatively small overlap. As Rich said they are really focused on very different markets. They are focusing on the high-volume automotive mobile equipment markets. Primarily, obviously, that is where the demand is. A chunk of it is to replace the Lorraine capacity of the public that went out during the 2009 recession. Whereas ours is really dealing with a different market opportunity than they are targeting.

That is perfect, thanks Jim.

And will not take a question from Ross Gilardi from Banc of America Merrill Lynch.

Yes good morning. Thanks very much. I wanted to ask more about your cash flow outlook. As you said you generated $600 million of operating cash flow this year in your guiding to $300 million, I think. I think I've got that on an apples to apples basis and you mentioned about some working capital built in the second half. It would seem it is a pretty big working-capital build, and is that just in preparation for the capacity changes on the steel side. Could you flesh that out a bit more?

Yes when you look at the cash, obviously we had an extremely strong year in 2012 driven off of, obviously, very strong earnings. The fact that we generated cash from working capital given that we were in a declining market environment. When you look at what is happening, or at least our expectations, for 2013 we do have earnings coming down again reflecting, obviously, the issues we just talked about.

We have capital budget for the investment opportunities we see are increasing as compared to a year ago. And to your point, from a working-capital standpoint instead of generating cash like we did in 2012, our expectation is that we will use cash for working capital '13 to that delta is compounded on a change basis. And that assumes, again, the second-half recovery that would cause us on a point-to-point period, which, obviously, is cash for working capital that will be a use.

In addition, last year we had the benefit of CDO receipts for the tune of around $100 million that we received that we will not have this year. And then comparably we will probably put a little bit less in the pensions this year than we did last. But net net, it is kind of a culmination of all those issues. Good investment opportunities, working capital to support our growth, not having the unusual CDO receipts, and still high level of profitability, but a little less than what we had last year.

Okay got it. And just in terms of your pension funding, you mentioned that you are fully funded now. If you see the second-half recovery evolve as the year progresses do you think about returning cash more aggressively? And then clearly you have the buyback authorization in place but how are you thinking about cash flow prioritization and returning more?

Yes, it's a great question. We ended close to 90% funded this year, and our expectation is, based upon around $300 million contributed in 2013, most of that would go pension. Some of that would going to our post retiree medical, but it should get us essentially fully funded on pensions. So what has been a significant use of our cash over the past several years will now, obviously, go away from that respect, which then frees up that cash for use for other purposes. Again of which we have a larger share repurchase authorization that the board had granted last year, and we started repurchasing more shares in 2012, and we would expect that to continue, as well.

Okay great to the last one on rail real quickly. You cited that as a source of strength again. Could you just talk a little bit more? I mean how much of that -- is any of that secular, do you think? Or is it just more of a cyclical trend? Any additional color you can provide on that would be helpful.

Sure. I think rail, first of all you need to look geographically, because actually North American rail is a little bit weak because of what is going on in coal. A lot of our rail activity or success is actually international, particularly in Asia, particularly in places like Australia, China and India. So, in summary, our Rail business is doing very well. It is solidly profitable. It's been growing but our growth rate would actually be even better if it was not for the slightly depressed North American market, which, once again, is heavily tied to coal. The other issue to remember about our Rail business is we are primarily a freight rail participant. We do some passenger freight, but it is really freight rail that drives the Timken Company performance.

Thanks very much.

We will now go to James Kawai with SunTrust.

Hey good morning. Thanks for taking my call. Could you go through -- I believe in the past you've characterized this as a period of elevated capital spending. We're looking at around $360 million this year, and my understanding or recollection of the past is maintenance CapEx is around $175 million or so. Could you break down some of the major projects for this year and maybe specifically addressed how much of Faircrest falls this year? And then kind of give some perspective on where CapEx may go over the next couple of years? Thanks.

I'd say just a general comment. We would normally say that a targeted level of capital spending over time would fall in around the 4% level. So clearly last year, then 2013 coming up, then frankly even a little bit beyond that, we do expect to see heightened capital spending. The good news is we see very good investment opportunities. So, it is our maintenance level still remains low at around $80 million, so these are all discretionary dollars for where we feel we have good returns. Obviously, we are seeing a pickup in our capital spending more on the steel side of the business than we have, given several very good investments that will be spent over the next three years. But maybe ask Rich to at least talk a little bit about those three investments, and then Chris a little bit within the mobile and process side, as well.

The bulk of the steel spending in 2012 was on the forge press and intermediate [extension] line which are the two projects I described earlier. One is focused around a significant cost productivity safety gain within the business and the other one is around product capabilities and market expansion.

There is still some carryover spending of those into '13, but the bulk of the spending on '13 is on the caster, which is the significant capacity increase within Faircrest, as well as a significant cost improvement from primarily around yield and energy utilization. And that is intended to come online in 2014, mid-2014, so that is the spin that carries on through the first part of '14, as Glenn alluded to.

Yes on the process mobile side. The majority of our capital expenditures, if you move away from just basic maintenance capital, is really focused on growth primarily in international markets. So, there are a variety of investments particularly in the Asia region which are focused on diversifying our product portfolio and service portfolio and expanding our ability to grow.

And then, just in terms of the seamless tube in the forge press you alluded to some cost savings. Is there any way that you can give us a sense of when those savings may start to accrue relative to the financials? And order of magnitude from a return of investment capital perspective or from our straight out overall segment margin perspective? Either one would be helpful.

On the seamless mechanical tubing automation project kicks in fully in the second half of the year. Obviously some of the savings depends on the volumes, but well into the eight figure annual cost reduction generation from that, and we would expect to see that in the third and fourth quarter. This forge press has a cost savings element which will kick in in the second quarter. The product expansion part of it is a little slower to play out as we look to target those markets and sell additional products through. But we will get the cost benefit of that project, as well, kicking in in the second quarter.

Terrific, and then finally I have a clarification on the earnings bridge that you guys provided from the fourth quarter of '11 through the fourth quarter of '12. You noted $35 million of pricing and then $20 million of LIFO, and I was just kind of curious how much of that was within the Steel business so I can kind of dial it into an underlying margin rate there.

Yes the LIFO one would've essentially been all steel related and your first one was--?

The $35 million price yes

Price for the most part was really spread across all of our businesses. The biggest component of it would've been in steel but all of our segments had pricing power fourth quarter-over-fourth quarter a year ago.

Got it, okay thanks very much.

(Operator Instructions)

We will now take a question from Blaine Marter with Lobe Capital Management. Please go ahead.

Hi guys. Just a quick clarification and then a question. You mentioned that you thought the pension would be fully funded at the end of 2013. I assume this assumes no underlying changes in interest rates or that sort of thing. And would that mean that going forward in '14 there would be no further contributions?

Yes from the standpoint of the assumption that we have next year you are right. It assumes that the contributions we make that are asset returns, around 8% that our discount rate would be around 4%, would get us essentially fully funded on the pension side. So going forward no cash essentially, minimal cash would need to be put into the plans if we wanted to just maintain the pensions at that level.

We are continuing to evaluate, as I think we have spoken about before, ways of just not funding the pensions and being susceptible to the changes in rates and other things outside of our control we have begun to do lump sum distributions in 2012 at the beginning of the year for people that are retiring and are deferred vesteds. And we are also considering or contemplating the potential to annuitize a portion of it, as well, such that we can continue to drive down the gross liability, because from our pensions standpoint we are still looking at liabilities gross of $3 billion which are just sitting on comparable assets that are susceptible to those changes in rates. But to your point, we have assumed that interest rates will hold and the discount rate would maintain at the 4% level.

Okay, and then on the CapEx. I heard your comments, but on an absolute dollar basis would you expect some decline in capital expenditures in 2014 versus 2013?

Yes, again as a general rule we told you about where we are targeting our longer-term capital spend. We will probably still be a little bit above that level at a target of 4% next year but the expectation is it will be down from 2013, and that is just we still have additional capital investments that are going into the caster that will be in 2014, that we will then be done with thereafter.

Okay and then just lastly. At the end of November you guys put out a press release responding to a 13 D from one of your investors, and this investor puts forth a credible analysis on separating the Steel business. And you indeed responded that you evaluated that over the years and that you have hired bankers as recently as this summer and that now is not the right time. And I guess the question is what did that decision hinge on and what would you look for, or what factors would make you consider spending that business out? Thank you very much.

Blaine, the discussion that we had with our board and the discussion we had with relational investors started with the point of agreement that our stock is undervalued from an earnings point view. But if you dived to the next level of the analysis you very quickly come to some of the pension issues that Glenn talked about that we actually are valued at a premium from a cash flow on a view largely because of the pensions. You come to issues of growth and then you come to issues of earnings volatility and sustainability, and we have been implementing over the past half-dozen years of very aggressive strategy that is addressing those and we continue to have steps that we can take. Glenn alluded to some of those as they relate to pension, that will continue to improve those circumstances. And we explained that to relational, our boards very clear on that.

Having said that we are in business to create value for shareholders and so we will constantly circle back and address and assure that the portfolio we have has the best long-term shareholder value potential that we can put together.

Okay, so it is somewhat of an evolution, not a revolution. Thank you very much.

We will now go to Stephen Volkmann with Jefferies.

I just had a quick follow-up for Jim. Given a lot of things seem to be going in the right direction here for you guys and I am focused on the $1.4 billion, I think, was Glenn's number, of liquidity that you guys have now and you will add to that a little bit during 2013, and presumably interest rates will go up a little bit rather than down as we go forward here, if the economy comes back. So it would seem like you have a pretty meaningful nest egg here and if you are right about your business, Jim, why not do $1 billion share repurchase or something? And presumably your stock will be a lot more expensive in a couple of years if your view of the world pans out here. And I am wondering if that is something you guys are considering? Is there some potential large acquisition that would make you want to sit on your powder a little bit, or what is the right way to think about that strategic direction?

Steve, the key to remember is, go back to the last discussion we just had in terms of the evaluation of the Company. We have a multifaceted issue that we are dealing with and we have been dealing with over the last five, six years and the answer to it is a multifaceted answer. If you look in our investment presentation, Glenn talks about our capital redeployment program and we have looked to invest organically where we can put capital to work for the shareholders. We have a very successful and ongoing program to look for acquisitions that will diversify our product range and give us a bigger exposure to the after market which deals with earnings volatility.

We have a large pension liability that we have put $1 billion against in the last three years. I mean that is a fairly big move. And as you saw in 2012 we got from our board an approval to expand our buyback. We raised our dividend because we reflect and are building confidence that we will continue to generate significantly more cash flow than we have done historically. But we will continue in this procedural manner of dealing with all segments of the capital issue.

And the idea of a $1 billion buyback is kind of the same idea that relational flows. It deals with one of those elements. It doesn't deal with all of them. So, we will continue down the path of driving long-term shareholder value by reallocating capital in ways that create returns to shareholders.

All right, fair enough. Thank you.

And one final reminder.

(Operator Instructions)

It appears there are no other questions so I would like to turn the call back over to Jim for any additional or closing remarks.

Thank you and thank you all for your interest and good questions. Obviously, as I said in my opening comments, this is an exciting time for Timken. We're a stronger company today than we were just even a few years ago. Our customers count on our knowledge, collaboration, and our high-performance steel and mechanical components to improve their performance. We appreciate your continued support of the Timken Company. Thank you very much.

And thank you very much. That does conclude our conference for today. You may now disconnect.