Timken Co (TKR) 2013 Q1 法說會逐字稿

Good morning, my name is Camille 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 to Timken's first-quarter 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. Good morning. My name is Camille, and I will your conference operator today.

As a reminder, this call is being recorded. At this time I would like to welcome you to Timken's First Quarter Earnings Release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

(Operator Instructions)

Mr. Tschiegge, you may begin your conference.

Thank you and welcome to our first-quarter 2013 earnings conference call.

I am 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 quarter results as part of the earnings conference call. This material is also accessible via the download feature from our earnings call webcast link.

With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance Administration and CFO; and Group President 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 this time, I would ask that you please limit your questions to one question and one follow-up at a time, to allow an opportunity for everyone to participate.

Before we begin, I would 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 at www. Timken.com. Reconciliations between non-GAAP financial information and GAAP-equivalent are included as part of the press release. This call is copyrighted by the Timken Company and the 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 everyone.

In our earnings announcement earlier today, we reported first-quarter earnings of $0.77 per share, or $0.80 adjusting for the impact of charges relating to our previously-announced plant closures. Sales were $1.1 billion, in-line with our expectations. Results in the quarter reflected lower demand across our end markets, including oil and gas, industrial distribution, and the off-highway market sectors. As indicated last quarter, these reductions in demand reflect inventory adjustments, as our customers adapt to lower commodity prices and the resulted lower-than-expected mining and drilling activity.

In the face of lower demand, we maintain double-digit operating margins across all four segments, reflecting the benefits of our integrated business model. The model consisting of a relentless focus on creating customer value, growing where differentiated, and an ongoing focus on operational effectiveness. Our results demonstrate this strength, as we once again proved our ability to deliver solid margins while operating around 55% of capacity utilization for the quarter.

We have made significant progress in our efforts to strategically deploy our capital, to drive value for customers, and for shareholders. This quarter, we completed three investments, bringing online new equipment that will improve the profitability of our Steel business. The new forge press can unlock new market opportunities and operating efficiencies for us while the thermal treatment line and the new finishing line Incorporate the latest technologies and offer additional capacity and significant cost reductions. Together these investments will enhance our long-term competitiveness by giving us a unique capabilities, greater differentiation and improved cost structure.

Similarly the acquisitions of Smith Services and Interlube Systems further broaden our product and service capabilities. Creating new opportunities for growth in key end markets including construction, mining and heavy industries. Interlube provides an entry for us into the lubrication market, increases opportunities for cross-selling, and the development of new product lines.

Smith Services continues to expand the scope of our growing services and after-market business. In addition, completed a strategic investment within our Rail business through an asset purchase agreement with Greenbrier, that expands our rail-bearing reconditioning services. We leveraged the strength of our cash flow and balance sheet to make additional discretionary pension contributions, continuing our plans to substantially fully-fund those plans by the end of the year.

We remain confident in our ability to deliver strong performance in 2013. As we indicated last quarter, our outlook is based on an expectation that the customer inventory adjustments, which depressed demand in the second half of 2012, would phase out through 2013, and we would see stronger demand as the year progresses.

First quarter was slightly better than expected, and we are seeing improved order volume as we enter the second quarter. Having said that, our lead times are less than 12 weeks in much of our business so complete visibility in the second-half activity continues to evolve. We're demonstrating the benefits of our efforts to drive efficiency across the company, which manifests itself as sustainable margin levels in spite of lower demand and operating levels.

Our confidence is further supported by a number of key items. The first is our ability to leverage the synergies inherent in our operating model. To offer products of differentiated value in the marketplace. Second, we have the benefit of the strategic capital investments we have made including, most recently, in our steel segment. Third, we have a notable shift in our structural earnings power as evidenced by our financial performance. Beyond that, we have the strength of our balance sheet supporting additional investments focused on growth, as well as funding pension obligations and returning capital to our shareholders.

We continue to successfully execute the proven strategy that has enabled us to advance as a global industrial technology leader and deliver strong returns to our shareholders. Our ability to leverage the strengths across our business remains a tremendous source of competitive advantage and we remain committed to continue leveraging that advantage.

Glenn will now review our financial performance for the quarter.

Thanks Jim.

Sales for the first quarter were $1.1 billion, a decrease of $331 million, or 23% from 2012. The decline as a result of lower demand, primarily in the Company's oil and gas, industrial distribution and off-highway market, as well as lower surcharges. This is partially offset by favorable pricing and the benefit from the Wazee and Interlube acquisitions.

Gross profit of $275 million was down $137 million from a year ago. The decrease was driven by lower volume, negative mix and higher manufacturing costs, partially offset by pricing and a favorable change in LIFO reserves. In addition, $3 million of the $4 million of costs associated with previously-announced plant closures negatively impacted gross profits for the quarter.

The gross margin of 25.2% for the quarter was down 380 basis points from a year ago. For the quarter, SG&A was $154 million, down $11 million from last year, due to lower variable compensation and reduced discretionary spending. SG&A was 14.1% of sales, an increase of 250 basis points over last year. As a result, EBIT for the quarter came in at $120 million, or 11% of sales, 630 basis points lower than last year.

Net interest expense of $5.9 million for the quarter was down $2 million from last year, primarily driven by lower average debt balances. The tax rate for the quarter was 34.1%, compared to 34.3% last year. The tax rate for the quarter was higher than our expected annual tax rate of 33% due to timing of certain discrete tax items. As a result, income from continuing operations for the quarter was $75.1 million, or $0.70 per diluted share, compared to $1.58 per share last year. Excluding the charges related to the point closures, earnings-per-share was $0.80.

Now I will review our business segment performance. Mobile industry sales for the quarter were $397 million, down 15% from a year ago. The decrease was driven by lower volume, led by weaker off-highway demand and mining and construction, as well as the impact of $27 million in exited business, related to the Company shift towards higher returning sectors in the mobile equipment market.

The mobile segment had EBIT of $51 million or 12.9% of sales, compared to $87 million or 18.5% of sales last year. The decline in EBIT was due to lower volume and higher manufacturing costs, partially offset by lower SG&A. The segment results also reflect approximately $4 million in plant closure costs. Mobile industry sales for 2013 are expected to be down 5% to 10%, primarily due to lower off-highway demand and lower light vehicle and heavy truck sales, 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, and for this to be the final piece of exited business from this initiative. Partially offsetting the sales decline, is growth in our automotive after-market business, while rail is expected to be flat, benefiting from the addition of the Greenbrier bearing refurbishment business. Process industry sales for the first quarter were $285 million, down 20% from a year ago, due to lower volume from both industrial distribution and OE demand, partially offset by pricing and the favorable impact of the Wazee acquisition.

For the quarter, process industry EBIT was $43 million or 14.9% of sales, down from $82 million or 23.1% of sales last year. The decrease in EBIT is primarily a result of lower volume as unfavorable mix and higher manufacturing costs were offset by favorable pricing and lower SG&A. Process industry sales for 2013 are expected to be relatively flat for the year, supported by a second-half recovery in Asia, industrial distribution demand, and the benefit of our recent acquisition.

Aerospace sales for the first quarter were $83 million, down 10% from a year ago. Lower volume, primarily in the motion control and civil aerospace market sectors, drove the decrease in sales. EBIT for the quarter was $9 million or 10.4% of sales, compared to $11 million or 11.7% of sales a year ago. The decrease in EBIT reflects lower volume in higher manufacturing costs partially offset by pricing and lower SG&A. For 2013, we anticipate aerospace sales to be up 7% to 12%, driven by a strong order book with all end markets expected to be up for the year.

Steel sales of $346 million for the quarter, were down 35% from last year. The decline was due to lower demand in the oil and gas and industrial sectors, which was partially offset by higher mobile on-highway demand. In addition, surcharges were down $72 million, due to lower raw material costs and volume. EBIT for the quarter was $36 million or 10.3% of sales, compared to $88 million of 16.4% of sales last year. The decrease resulted from lower volume and unfavorable mix, partially offset by a favorable change in LIFO reserves of $6 million and lower SG&A. Last year's first-quarter also included a one-time expense of $5 million, related to a new five-year labor agreement.

Fuel sales for 2013 are expected to be down 7% to 12%, as higher mobile on-highway demand is more than offset by demand in the oil and gas and industrial sectors, which, despite anticipated improvement throughout the year, are expected to be down versus last year. In addition, surcharges are expected to be down for the year. Looking at our balance sheet, we ended the quarter with cash of $458 million, and net debt of $15 million. This compares to net cash position of $107 million at the end of last year.

The change in net debt includes the Company's discretionary pension contributions of $66 million net of tax, the Company ended the quarter with liquidity of $1.3 billion. Operating cash flow for the quarter was the use of $36 million, as the Company's earnings were more than offset by discretionary pension contributions and working capital requirements. Free cash flow for the quarter was a use of $121 million, after capital expenditures of $63 million and dividends of $22 million. Free cash flow, excluding the discretionary pension contributions, was a use of $55 million.

In this morning's press release we affirmed our market outlook and confidence that our integrated operating model was sustained strong performance levels. However, we continue to monitor market conditions closely and will take actions as needed to support profitability, should the economy recover more slowly than we expect.

We continue to anticipate an overall decline in sales of around 5% compared to 2012, driven primarily by lower demand and surcharges, as well as the impact of our tactical shift in mobile industries. We expect earnings per diluted share to be in the range of $3.75 to $4.05, reflecting the benefits of the structural changes we have made. Including in our earnings outlook our cost of $0.20 per share, related to our two previously announced plant closures in St. Thomas and São Paulo, Brazil.

For 2013, the Company continues to expect 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 BEVA Trust contributions totaling $180 million net of tax. Free cash flow is expected to be a use of $120 million, after capital expenditures of $360 million and dividends of roughly $90 million, excluding the discretionary pensions and BEVA Trust contributions, free cash flow is expected to be $60 million. We expect to end the year with our pension plans essentially fully-funded, positioning the Company to potentially annuitize a portion of the pension liability.

This ends our formal remarks and now, I will be happy to answer any questions.

Thank you. Eli Lustgarten, Longbow Research

Good morning, everyone. Just one clarification -- the presentation said LIFO was $[15] million, you said $6 million is in steel so the other $15 million is in bearings and public [transmission] and mobile or something?

That's right. The year-over-year change from LIFO was around -- I believe it was a $3 million income, versus a $3 million expense in the same period a year ago. So the Delta was around $6 million.

Okay. So I guess the $15 --

That's correct. That is in the steel and then similarly we had about $4 million of the income and around $9 million of expense in the prior for the entire Company.

Okay. Can we talk a little bit -- the sales numbers and the bearings were and power transmissions were somewhat softer, I think, than most would expect to be offset by British steel. Can you talk about, guidance is unchanged in top line. Can you talk about expected profitability in the three bearing and mobile -- bearing and power transmission sectors? I guess we are sort of expecting that at least mobile and process would be relatively close to what you wind up last year's. Is that still the expectation, or has it come down a little bit because of the week of first quarter?

Yes, so Eli, this is Chris. Let me start with mobile. Revenue was obviously down relative to the huge first-quarter we had last year but was actually up 10% from the preceding fourth quarter. Of that decrease year-on-year, 50% of that was exited business and volume was the other 50%. Rounding numbers a little bit. Moving forward on mobile, we expect it to be relatively stable, relative to the first-quarter performance. And we expect margin performance to stay very consistent with what you saw in the first quarter.

The process area obviously was a disappointment for us in the first quarter. We saw significant volume decreases beyond what we would have expected across all geographies and basically all market segments. And a couple of things about it. First of all, I think you see the impact of our business relative to the energy, mining and infrastructure industries which have a number of challenges as you go around the world. So that is one point on that. And the second thing is in the first quarter, was the first time we saw inventory destocking in the distribution channels that was significant. Let's use that term. So we certainly saw some of that going on as well. Then the last point.

There's no question that we did not get enough cost out relative to the volumes that we were operating at and in hindsight, we were structured for a market recovery that did not occur obviously based on the revenue. And that certainly put a lot of pressure on our cost structures and our margins. So I think moving forward on the process, a couple of things. We expect the situation to improve as we move through the year. But the second quarter we will still not be back maybe to the levels that we would like, but we expect to see an improvement the second quarter over the first quarter, and improvement going on throughout the year. On the original equipment side of process, where we sort of have longer lead times because a lot of that is capital equipment. We clearly have a second half that is stronger than the first half. So we clearly see that in our order book. So, that is somewhat purging forth. And then in margin performance, we expect it to continue to improve through the balance of the year. Where we will shake out on that for the total year is going to be heavily dependent on your second-half assumptions around distribution.

We clearly are expecting to see a recovery continuing through the year. But I think as you know, that is a short lead-time business. You don't have visibility around what the second half is going to look like. So you have to use your own market assumptions on that.

Well, the defense has held up so you expect that to be relatively similar I assume?

On the aerospace side, Eli, a little bit over 50% of the business has visibility to order book six-month and beyond. So first-quarter came in line pretty much with where we would have expected it to be at the end of the year. We expect the second quarter to be up slightly from a sequential standpoint from the first quarter. And then the third quarter and fourth quarter, we have the order booked for a significant uptick in the second half of the year on that side of business to get us up into that range of year-over-year growth of 7% to 10%, I believe was what the guidance says.

Yes. Can we talk about steel profitability also for the rest of the year?

Anything specific?

Well, just to get an idea. We had, probably, a better margin in the first quarter in steel than I think a lot of us expected. The question is, are we going to be able to hold, will the double-digit margin improve in the second half of the year as the negative impact is lessened?

At this point, we look at the fourth quarter was the volume trough and the earnings trough, and we had the help, as you know, from the fourth quarter on the steel side from LIFO on the earnings, we could back that out as clearly lower than the preceding and following quarters. From a buying standpoint, we have limited visibility to the order books but we clearly have most of the second quarter booked and expect the second quarter to be up modestly from the first quarter; third quarter to be up again, modestly. And fourth quarter, some normal seasonality which would be down a little bit from the third. So, probably in line with Chris's comments in terms of generally improving situation from our customer's inventory position and in user demand. And again, we expect the first-quarter to be the margin earnings trough and get some leverage on the improved volume as the year goes forward.

Eli, this is Jim. Just let me give you a little more color on steel in the first quarter. I think you are seeing the impact of the new business model in steel, that is just good solid execution. There's nothing unusual in the numbers, the margin is what we would expect to earn at this level of utilization.

Thank you very much.

David Raso, ISI group.

Good morning. You mentioned the orders improved as the quarter went along. Can you give us a little more detail, where did the orders improve? And how would you characterize the orders for the entire quarter year-over-year? Obviously, we all trying to figure out the rest of the year that sales need to be up 2% year-over-year to hit your full-year number. And I know you mentioned that visibility is not great right now, given the lead time is relatively short, but can you just give us some indication of where you are seeing improvement and how the orders were year-over-year in the first quarter?

Yes, let me have Rich start from a steel perspective, then we can flip over to the bearings side.

The end of last year again, the fourth quarter of last year, would have been a trough of everybody going back on inventory and order books. So, we saw an immediate improvement in January from the end of the year, and saw that build through the year. So, automotive -- strong generally across the board on a steel side and the other markets would be certainly not strong from a year-over-year standpoint, but improving and improving to get into the second quarter. And there is no real outset on automotive. There is no real areas that stand out. But it would be across the board -- oil and gas and industrial markets, etcetera -- all generally improving. And then -- across the board, Chris -- on the aerospace side, as we said, that would not be as much of a short-term trend. So the statement of order book improving necessarily would not hold true for the first quarter but for the full-year the order book filled in very well in the first quarter. And much less uncertainty in that growth projection the second half than what we would have in some of the other areas.

If you can help us a little bit year-over-year, I know it is improving sequentially and it's probably still down year-over-year but we are trying to get some order of magnitude of how much has the year-over-year decline in orders may be mitigated -- to see the line of sight to positive growth? Because I am going to wrap the question up with -- what quarter do expect Timken's revenues to be up year-over-year to begin the climb back out? Rich - I appreciate the color - but if you could just help me year-over-year, how would you describe the orders for the first quarter?

Okay. On the steel side, year-over-year, we still face a very difficult second quarter of comp from both a volume standpoint as well as a scrap surcharge standpoint. So the scrap surcharge started to drop significantly late second quarter, early third quarter. So again on the top line that would normalize year-over-year on the third quarter and quickly [such interact] on revenue. From actual unit volume standpoint, we would expect the third quarter to start seeing year-over-year improvement.

Okay that's helpful.

Okay, so, let's start with distribution. Which I probably have interest. January was a very poor month for us. And we saw a lot of just very weak activity related to inventory situations etcetera. So we have seen in improvement in February and March and April off of those levels. And, we are expecting that to continue to improve as we go through the balance of the year. So that is pretty much the situation there.

On the process OE side, I think I have already explained that. We see a better second half than first half. And we see that very clearly given the longer lead times of the capital equipment build cycles. So that is the story on the process side. By the second half of the year we begin to hit run rates that are more aligned with previous years if I can use that terminology.

Again sort of like the steel comment, third quarter you'd expect to start seeing black numbers again year-over-year?

Basically yes. On a run rate basis, right. Now, by the way, the comps, it depends on -- when you look at last year, remember the first half is very strong and the second half was weak, so depending on what math you are using, you need to account for whatever base period you are referencing with that statement. On the mobile side, we've got the moving parts. Obviously, as you all know, the mining business is very weak, so that business is down a lot and we can all opinionate on when that is going to recover. We are seeing some signs of heavy truck starting to come back. But basically, I think for mobile, the first quarter is sort of what you see, you will see some seasonality in the second half which is generally little bit weaker but I think you can get a pretty good gauge on the mobile just off of that run rate.

Okay, I appreciate the detail. Thank you.

Stephen Volkmann, Jefferies

Good morning. Jim, I think you said 55% capacity utilization in your opening remarks. Would you guys be willing to give us a ballpark kind of by segment?

Yes, Steve. If you look at it by segment, again rounded numbers -- mobile, for the quarter, was around 60%, process at around 55%, aero at around 50%, and steel at around 55%.

Okay so pretty consistent there. And how much of the surcharge is going to be down for the full year do you think?

We have not forecasted it. Obviously it's within the expectation of steel being down 7% to 12%, but it's fair to say that -- look at what it was in the first quarter comparison, that it's going to be more volume than surcharges. But surcharges clearly are playing a role in it.

Second quarter should be similar to the first-quarter in terms of the decline, and then the third and fourth quarter on a year-over-year basis, assuming a relatively flat-scrap market through the second half of the year, would eliminate that reduction. So it would all be taken in the first half of the year. Okay great. The exited business, the $150 million that is kind of the last tranche here, how should we think about the margin on that business?

Well the margin on it is pretty decent, right? Because it is the business that we repriced when we exited to exit the market. So I choose to think of it as the run rate of the mobile business.

Good, that's all I had, thanks so much.

Ross Gilardi, BofA Merrill Lynch

Thanks very much and good morning. I just wanted to delve in to steel a little bit more and the supply demand situation right now. It seems like if you look at it year-on-year sales were down 35% year-on-year. But as you said, $70 million of that or so is surcharges, so it looks like you are down about 15% year-on-year, if we adjust for that. So clearly demand right now is pretty weak. And the market I would think is taking on more excess capacity. So, what makes you confident and a little bit more detail that you can sustain a double-digit margin under these conditions given that you are operating at pretty low capacity utilization right now and you have got additional supply coming into the market over the next 12 months?

Well, let me step back and answer that at the corporate level. And I presume that because you are talking about competition and supply you are really talking about the steel business from that perspective. So Rich can add to it if he wants. The first answer to your question is, demand in the market is improving for our products. And it is being driven by a strong auto market and then the on shoring that is going on with the transmissions particularly in that market. And secondly, this inventory adjustment of our customers is real. We saw it in Caterpillar's announcement that made really clear what they were doing from that point of view. We see it in the oil and gas market were we can actually see the rate of that they're drilling and we compare that to our order book and there is a dramatic difference, because they over inventory from where they thought the market was going and they're going through an adjustment.

So the first answer is that we are expecting overall demand in the market to improve as we go forward. And then secondly, my comment to Eli, is this reflects the first quarter in our steel business reflects the new flexible cost structure that we put in place, and now you add to that the impact of capital programs that we have got coming on which are significant in terms of their ability to reduce cost. And we're pretty comfortable with the ability to continue to operate at those kinds of levels. Rick would you like to add to that?

Yes I would just add that you have seen the result of the effort over a period of several years to shift away from focusing on high utilization model and selling capacity versus focus on attractive market and product and application differentiation. So, we are in a position where we can sustain good margins and a relatively low utilization rate and as Jim said, we expect to advance those products to pick up which would further improve that situation.

And then if you put the surcharge piece aside to recognize that our customers are paying significantly less for a ton of steel today than they were a year ago, based on that surcharge mechanism. But again, we would focus on the application of the differentiation that we have, essentially the base price is held through this year.

Okay thank you. I just have a question on acquisitions. Clearly your three-year targets, for $7.00 a share on your revenue targets incorporate some significant contribution from acquisitions. So, can you talk about your appetite for a larger deal right now? And then you had cited the weakness in mining previously. Would you be willing to increase your exposure to the mining sector right now if the attractive value properties were available?

Ross, let me at least take the first cut of it. The pipeline for M&A continues to be pretty good. Obviously, you have seen us now start to execute on the types of transactions that we have normally done, which has been on the smaller site and very strategic fitting within an existing platform that we have. And so we continue to be encouraged that we are able to read the full capital through acquisitions on attractive returns, especially given the synergistic nature of what we are acquiring.

We continue to have a strong balance sheet. We continue to have ample liquidity. We continue to look at good properties that are out there. So as a general rule we look at all of the properties that, without interest, that would fit well with us, and then obviously very disciplined relative to our criteria of what it would take to do the transaction. So we will continue to pursue it as a key part of our strategy as you know. But having said that, when we get those three-year targets out there, and we say roughly 0.50 of the top line growth is from acquisitions which is again how we would plan and want to see it happen. The other key financial metrics that we get the three-year targets from -- from earnings growth, to free cash flow, to return on invested capital -- are all irrespective of our ability to do those acquisitions, we just redeploy that capital into other areas to continue to drive that kind of performance for the Company. As it relates specifically to mining, Chris?

Yes, on mining, first of all, we like the mining business a lot. So let's be clear. It is a great market for us and it is very profitable market. So we are very strong on the mining thing. The second thing on mining. We are very bullish on the long-term prospects around mining globally. The issue with mining is volatility. This has always been the case for us, and we have always dealt with the volatility. So the issue for us is not that we don't like mining and don't want to grow in mining and all of that kind of stuff. Our issue is, we need long-term to increase our exposure to areas like food and things like that, that have a less cyclical nature. But yes, we are pro-mining and we will continue to grow mining as we move forward.

Thank you.

(Operator instructions)

James Kawai, SunTrust

Great thanks for taking my question. Can you walk me through the steel margins sequentially? Exclusive of the LIFO gains. Because, when you do that, it suggests that we went from low single-digits in the fourth quarter, to 9% or so in the first quarter So, that would suggest almost 100% conversion rate on the sales increase there. So, maybe walk us through the dynamic there, kind of specifically, what happened?

I think your math is close when looking at it. But the utilization of the plants in the fourth quarter was 45%-ish jumping up to 55%-ish in the first quarter. We took inventory down. So we under produced to shipments, as well as the decline in revenues. So we did get good leverage on the incremental production. But there was a certainly an inventory in balance there between the two quarters.

Got you. So that would suggest that the fourth quarter is more depressed, and the first quarter is more reflective, of normalized earnings there?

Yes.

Got you. And then relative to the new steel projects that were in place, how much of the benefits were fully expressed or reflected in the first quarter margins? Or, are the cost synergies or the benefits of those new projects, are they under common? And have you been able to quantify that for people?

First quarter and also in the second quarter, we would say that we are receiving benefits, but the costs are still offsetting those benefits. So we would expect to see positive impact from the two product that are completed in the second half. But even that we would expect to get throttled to some degree by some increasing cost for the caster project which comes online next year. So, we have very minimal benefit this year and some in the fourth quarter, but we would really expect to see the full benefit of those in 2014.

Got you. And in order of magnitude, if you do an IRR on $85 million, I would think it would suggest at least 200 basis points of cost, step down or margin pickup?

Well 0.50 of that $85 million was roughly was for the Forge Press and the primary objective of the Forge Press was new product capabilities and large sound center bars. Second benefit to that would be capacity, and the third would be cost. So if you look across those on the product capability, we are producing the product today, we are selling the product into the market. But we have to penetrate that market so that is a ramp up through the course of the year but we are getting revenue and margin benefit from that today. The capacity benefit it is not being utilized today. The cost benefit is just starting to kick in.

Got you. That's helpful. And then just kind of a final question for Glenn. Just, big picture on the cash flow this year. If I look at your net income as kind of a starting point in using your guidance as a basis, it kind of suggests somewhere close to $400 million, and then you throw on depreciation, probably at least $200 million, and it would suggest a $600 million operating cash flow starting point assuming that working capital is going to be fairly neutral because organic growth is down quite a bit. And, could you step us through how you get down to $330 million as a starting point for guidance this year on the cash flow?

Yes. So let's start out with the midpoint of the guidance that we were given from earnings and work our way back. If you take what we'll call the $390 million of earnings, you can get to work your way through to get to an even number, around we'll call it $600 million, you throw [the ball] in there, you are around $800 million, so you're starting at that level and we have talked about the pension and [o-tab] on a pretax basis as around $280 million-ish if you will, to get to the $180 million net of taxes. Obviously if you back out the taxes, the interest should be holding, call it around $30 million. And then if you back out $90 million of dividends and $360 million of CapEx and all the numbers we have given you and really the only variable left is working capital. We commented that, from a working capital standpoint we expected it to be a use of cash given the second half recovery that is expected. So when you net all of those, you get to follow-up the $120 million of use of cash and then obviously backing out the discretionary spending an op-ed get you to a positive $60 million. So again, strong earnings, some use of cash for working capital, sizable amount going into our pensions, and then a sizable capital investment program this year that will start to come down in the future.

Got it okay great. Thank you.

Steve Barker, KeyBanc capital markets.

Good morning. I want to go back to process. You said there was significant destocking in the quarter. Can you quantify how much of the 20% decline came out of the distribution channel? And, talk about how much the distribution under performed market demand? If you can get to that number?

Well. I cannot give you a precise number on destocking. That is talking with our distributors and working to that. We measured that very clearly in North America but you don't see a lot of that globally. And globally is clearly where the inventory destocking was the biggest issue although in North America there was a little bit of it. So that is that point.

Well, is the destocking still taking place to the same magnitude so far in April? And any expectation for how long it may last?

Well, it is all going to be based on market activity, right? So, as the demand picture improves, obviously with the replenishment models, we'll throttled inventory up and down from a distribution standpoint on the basis of market activity. So that is what it is ultimately tied to and that is sort of how that works.

Right I guess the question is, are you seeing that start to throttle back up at this point?

Well, we clearly have seen a improving incoming order rate since January, which I referenced before. We expect that incoming order rate to continue to improve as we move through the balance of the year. So that's as far as we want to comment on that.

Okay. I did get on the call a little late but I did hear you say that most of 2Q is booked in steel? What end-markets are strong there or maybe, where the customers most optimistic and are coming into place the orders?

The year-over-year standpoint, the only market that will be strong will be automotive. From a sequential standpoint we are seeing a gradual improvement I would say across the board and again no areas beside automotive that stand out in that improvement. But a clear rising of demand for the product in general.

Okay. And for the new product capability? You talked about needing to penetrate new markets. Where is the biggest opportunity in the steel segment there? And where are you focusing your initial efforts to drive new sales?

It is across a broad array of industrial markets in oil and gas is a big consumer of that product. Mining. Anywhere that you would use large-forged product that goes into the demanding applications. Oil and gas is certainly a target market for us with that asset.

Okay and last question. Inventory continued to come down in the quarter. Can you talk about what segments saw the biggest step down? Was that primarily steel? And where -- how much more needs to come out?

Within steel, I would describe our internal inventory levels as appropriate. So, we are making no concentrated efforts there to right size them with the market position. They are in good condition. In the vast majority that actually happened in the fourth quarter.

So where does most of the inventory come out in the quarter?

Yes, it came out with steel.

I thought you said that was in 4Q. Okay.

The majority we took a big internal reduction in the fourth quarter and there was an order reduction in the first quarter.

Okay got it thanks.

Stephen Volkmann, Jefferies

Hello I have a quick follow-up. Can you just update us how you are thinking about share repurchase? I noticed you have not really done any yet. How do we think about that?

Yes Steve, as you know, as we think through the year, we have committed capital if you will to, obviously the capital investment program, the pensions and share repurchases. So we did, around as you know 2.5 million shares last year and we have 7.5 million remaining under our authorized program. And so, I think it is fair to say, as we think through the year that we will be back into the market repurchasing shares as we go throughout the year.

Are you precluded right now for any reason, Glenn?

Again we don't comment on those issues if you will, other than from our standpoint, we did accelerate the amount of call it pension contributions we have made as we're looking to deal with that issue. I think we gave guidance to kind of the $180 million net of tax for the full year and we did $66 million of it upfront, so partly we put more cash into our pensions earlier in the year. So I think it's fair to say that as we wind down on that program you will start to see a pickup on our share repurchases.

Okay good. That make sense. And I guess a more philosophical question, maybe this is a Jim question, I don't know. But given 55% capacity utilization now, it sort of implies that the business would have to kind of double from here to kind of really fill up the plant. And it seems like that would be a lot. And I guess I'm just wondering, whether there is some additional capacity that needs to be right-sized as we go forward?

No, the straight answer to that is no. Again, this is back to the understanding the new Timken company, and this is both on the bearing segments and the steel segment. For us to run at 70% capacity utilization is a really good place to be. Because it allows us to have industry-leading availability, on-time delivery and that sort of thing, which then supports the premium pricing that we have in the marketplace. We learned that in spades in the process industry segment. We translated into the mobile segment and we are implementing that, learning now say in 2012 and 2013. In the steel segment. So, we have been through the big capacity adjustments that we intend to do. On the other hand, I think we have had this discussion in the past, we believe that there will be a continual range of small restructuring, $0.10 to $0.20 a year for the foreseeable future as we continue to improve the footprint that we have around the world and make sure that we are operating the most efficient plants on a global basis.

Okay that make sense. So 70% is kind of what good looks like?

Yes and that is a real shift for us. It is a shift for the industry and it is fundamental to the earnings model that we have implemented across the Company.

That's helpful, thank you.

Ross Gilardi, BofA Merrill Lynch

Thanks I just have a couple of follow ups. On the pension plan, what kind of return do you need for the entire plan to finish the year fully-funded, taking into account your contributions?

Let me answer it this way because that is just one variable and obviously a lot of things come into play so you can not take it in isolation, but our assumption on return on assets, which is normally around 8.25%, would be our longer-term assumptions. But as you know, if we do better than that, we still have the impact on what discount rates will be and so forth. So our view is that with the cash that we are looking to contribute this year and with the general assumptions that we have in the plan and asset returns and call it a level discount rate that we should be plus or minus near fully-funded. So, from a cash standpoint, again if you look at our three-year targets, you really see a pickup in our cash flows, in part we're done with the hopefully - knock wood - the big discretionary contributions we have been making and then also obviously the capital program starting to come by, or come down, both start to generate significant cash for the Company which again fuels into the other uses of our capital going forward.

Do you have to be 100% fully funded to move forward on annuitizing a portion of the plan? And do you have to be 100% fully funded to start to transition into a different cash flow prioritization?

No you would not have to the extent that we do annuitize again, we are looking at the possibility of doing that and you have to pay a premium to do that. So, obviously, being in a good funded position enables you to potentially annuitize a portion of it, because you will see your percent funding go down when you pay that premium. And what we have said before is that, should we go down that route to get plus or minus fully funded now, we're in a great position to now annuitize a piece of that, and that longer-term rather than cash coming from the Company, the expectation is that at some point interest rates will go up over time. Maybe not necessarily in the short term, but hopefully that will cause us to then move into, again, a fully funded or over-funded position in the future which could potentially set us up to annuitize another piece of our liability. The other thing we are able to do obviously if we become more fully-funded is change our mix of assets, to kind of de-risk some of the volatility with our portfolio. But I think the message that we want to convey is, it has been a significant issue for us. We have invested a fair amount of capital to deal with it, to get it plus or minus in that funded position and we believe we are through that as we go through the rest of this year and hopefully we will not be talking much about pensions, and we will be talking more about our business going forward.

Okay thanks. And then can you just talk a little bit more about what you are seeing in the oil and gas markets? Are there pockets of that end market that are stronger than others? If you could give any granularity on that, and just what are you seeing in China right now?

Well on the oil and gas side, I would say the inventory correction that we saw taking place in our supply chain through the second half of last year and slightly into the first quarter of this year, it is largely behind us. And we are keeping up with steady state demand going forward through the second quarter. We definitely have the downturn trough and bounced back up. But if you look at actual rate count, it is not a rogue number at the moment. It has been more of an inventory correction situation for our in-demand.

Yes on China, this has been a difficult situation for about a year now, roughly and finally in the last couple of months, we have begun to see movement up. And that is part of the second half original equipment process that I was talking about. So we see China beginning to move and it is clearly not back to its peak levels. I think for the first time, instead of telling you we are expecting it to move, we can actually say that we see it moving. So that is good news. But we have to see some data came out this week that was not great. But we are cautiously optimistic on China. That it has turned a corner.

Which markets are you seeing some improvement on in China? And what would you attribute that to?

Well a couple. The wind market has started to move some in China. And the whale market is moving pretty decently. And beginning to see some hits in the energy and for us, that's coal and places like that. But I would say, this is a two-month trend now that we are beginning to see. And I think some other people have referenced it as well. So we are cautiously optimistic that China is turning the corner.

This is Jim. Let me come back to the question you asked about the oil and gas part. Because I think Rich talked about the near-term impact on us, just to put it in some perspective. If you compare the first half of 2012, to kind of what we saw in the fourth quarter or the first quarter, the rig counts in the market are down about 15%, there's been some shift from gas to oil focus. But overall the rig count in North America are down about 15%. Our volume has been down, and our steel business has been down almost 50%. Which just gives you a sense of why we believe this is an inventory adjustment. And so, what Rich was trying to convey to you, is that we are now seeing that work its way out, which means we will get a natural uptick as the year goes on in terms of volume from there. Without a change in the drilling right.

Okay that's helpful. Thanks a lot.

David Raso, ISI group.

I'm sorry to go back to this, but process industries, I'm still struggling a little bit with how much it fell sequentially and what you are seeing in the market currently to get us back to where we have the kind of growth that we need to the revenue number? Can you help us a little bit on the OE side? And maybe anything that is taking place in the market, maybe some incentives on your part or whatever may be, that could get the sequential growth that we will need to get back on track to year-over-year growth? Maybe on the OE side, are you seeing much sequential improvement? I'm not trying to pin you to a revenue number for 2Q for process, but I'm just trying to see how much of the hill we are going to climb in 2Q to get back to growth. I'm just not exactly getting an impression yet, that we are seeing any material sequential improvement. It's better. Things must have been really bad in January and late last year. But how much improvement are we are we already seeing, to start that climb back up the hill?

Okay. So to your point, the OE business in the first quarter was quite frankly, very poor. We were off 25%, 30% kind of numbers relative to the year before. And it has been very weak. So the second quarter, we will see it improving -- and I'm talking about the OE business now. But to your point, the second quarter is not going to be fabulous either. But better. Where we see the improvement now is in the second half. And once again with the lead times and the booking of that, business that is what we see coming into the second half of the year. So, that is basically what we see.

And can you help us with modeling this? What percent of the business would you described as MRO? Distribution versus OE? In the first quarter?

Do 70/30. This gets into how you classify services and some other things. There is part of that, that is a classification issue. But use 70/30. Distribution to OE.

All right, that's helpful. All right I appreciate it. Thank you.

It appears there are no further questions in the queue. I would now like to turn the call back to Jim Griffith for closing remarks.

All right thank you for your interest and your questions. Our results this quarter reflected the new Timken Company. We are focused on creating value for our customers and that translates to delivering solid financial results in the face of lower demand. We expect improving results as the year develops, as our demand improves. And we appreciate your support of the Timken Company. Thank you.