Timken Co (TKR) 2013 Q4 法說會逐字稿

Good morning everyone. My name is Calien and I'll 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 fourth 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)

And at this time Mr. Tschiegg you may begin.

Thank you. Welcome to our fourth quarter 2013 earnings conference call. I'm Steve Tschiegg the Company's Director of Capital Markets and Investor Relations. We appreciate you joining us today. If after our call you have further questions please feel frequent to contact me at 330-471-7446.

Before we begin our remarks this morning I wanted to point out that we posted on the company website presentation materials that supplement today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link.

With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO as well as Tim Timken, Chairman Board of Directors; Rich Kyle, Chief Operating Officer, Bearings ad Power Transmission, and Chris Coughlin Group President. This morning Jim and Glenn will offer a few remarks and then all of us will be available for Q&A. During that Q&A I would ask that you please limit your questions to one question and one follow up at a time to allow everyone an opportunity to participate.

Before I turn the call over to Jim I would like to remind you that 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. We describe these factors in greater details in today's press release and in our reports filed with the SEC available on the www.timken.com website.

Reconciliations between non-GAAP financial information and its GAAP equivalent are included in the press release. Today's call is copyrighted by the Timken Company. Any use recording or transmission of any portion without the expressed written consent of the company is prohibited.

With that I will turn the call over to Jim.

Thanks Steve and good morning.

In our earnings announcement earlier today Timken reported fourth quarter sales of $1.1 billion with earnings of $0.55 per diluted share or $0.78 excluding unusual items. We ended the year consistent with our prior estimate posting 2013 sales of $4.3 billion with earnings per diluted share of $2.74.

Despite low levels of demand from many broad in-market segments including industrial distribution, mining, and heavy truck, we performed well while operating our plants at low levels of capacity. Both our bearings and steel businesses continue to demonstrate enterprise wide operational excellence. During the year we advanced the company strategically and moved forward on our efforts to return cash to our shareholders.

In September we launched the project to separate the steel business from our bearings and power transmission business to form two focused enterprises. In the fourth quarter we added a new initiative restructuring the company's cost structure to position it for improved performance in 2014. Let me address each of these efforts.

First we made a number of moves to position the company for long term strategic success. They include completing three strategic acquisitions that further extend the scope of our product and service offering as well as our geographic coverage. Finishing four steel capital investment projects totaling approximately $110 million that will increase our cost competitiveness and further differentiate our products and expand our capacity in critical product ranges.

We are on track with the installation of the $200 million continuous caster for our Faircrest Steel Plant which we expect will come online in the third quarter. We also opened a new Investor Services Center in Raipur India providing gear drive and bearing repair services to meet the customer demand in this target growth area.

Second, we returned capital to our shared holders repurchasing 3.4 million shares and in November the Timken board of directors declared the company's 366 consecutive quarterly dividend. In total we returned $277 million to our shareholders during the year. In addition we ended 2013 with our pension plans fully funded.

Third, we're making very solid progress in separating our steel business from the Timken Company. We launched this effort at the end of the third quarter and the work is going well. We are targeting a mid year separation and remain on track to achieve that goal. We expect to file our initial form 10 in the next couple weeks which will begin to map out the details of the new steel company.

In the meantime let me give you a few pertinent facts. The steel company will be a new independent public company to be named TimkenSteel Corporation and TimkenSteel will trade on the New York Stock Exchange under the symbol TMST. We expect the separation effort will cost approximately $105 million, the vast majority of which will be spent by the time of separation.

As we communicated to you last summer, our initial estimates indicated a need to add approximately $25 million in new costs to the enterprise to set up a second corporate structure. The company now expects to take out approximately $20 million of corporate cost prior to the spin off to help mitigate these additional expenses.

We believe we have identified ways to mitigate the majority of the remainder of the approximately $45 million in dis-synergies that we had outlined during our original analysis. We are developing Investor Relations programs for both companies and will be providing much more information as we approach the launch date.

Finally, as we noted last quarter, recognizing that a rapid resumption of customer demand was unlikely we launched an effort to right size the company for today's market environment. We in fact have moved forward to reduce SG&A expenses within our bearing business expecting to reduce cost by approximately $25 million and anticipating that $20 million of that will impact 2014 earnings.

This is on top of the earlier referenced $20 million reduction, in corporate cost. We expect approximately $15 million of that initiative to also impact 2014.

It's clear that the Timken Company had a good year in 2013 and we enter into 2014 pleased with our financial and operational accomplishments. We believe we have positioned the company well and expect a modest improvement in demand in 2014 as the economy continues to recover and key investor markets complete their inventory right sizing. We are confident in our leadership team and in our ongoing ability to create shareholder value as we forge bright futures for both our bearing and steel organization.

Now here's Glenn.

Thanks Jim.

Sales for the fourth quarter were $1.1 billion a decrease of $17 million or 2% from a year ago. The decline is a result of lower demand in the industrial mining and heavy truck end markets, as well as the impact from light vehicle, planned exits and mobile industry.

This was partially offset by increased demand in the energy, rail, defense, and steel related light vehicle markets, as well as the benefit from acquisition. From a geographic perspective sales decline was primarily in North America.

Gross profit of $264 million was down $15 million from a year ago. The decrease was driven by lower volume and the impact of lower LIFO income compared to last year which were partially offset by lower material costs and the benefit of acquisitions. Gross margin of 24.8% for the quarter was down 100 basis points from a year ago.

Impairment and restructuring costs of $5 million in the quarter compared to roughly $1 million a year ago. The increase was due to $6 million of severance and related cost from the business cost reduction initiative Jim spoke about earlier. Partially offsetting this were lower costs related to the previously announced plant closures in St. Thomas and San Paolo.

Separation costs related to the proposed spinoff of the steel business came in at $13 million for the quarter. We now estimate that our total separation cost will be approximately $105 million down from our original estimate of $125 million. On the $105 million we expect $75 million to be expense and $30 million capitalized.

Other expense for the quarter totaled $5 million of income compared to $4 million of expense in the same period a year ago. Income in the quarter was due primarily to a gain on sale of land in Brazil of roughly $5 million. We expect to record an additional gain of $25 million in the first quarter of 2014.

For the quarter SG&A was $154 million, down $9 million from last year due to lower variable compensation and reduced discretionary spending partially offset by acquisitions. SG&A was 14.5% of sales a decrease of 60 basis points from last year. As a result, EBIT for the quarter came in at $96 million or 9% of sales, 120 basis points lower than last year.

Net interest expense of $6.5 million for the quarter was comparable to last year. The tax rate for the quarter came in at 41.2% compared to 27.8% last year. The increase relative to growth last year and our prior estimate of 25% was principally driven by two discrete items.

First we incurred a one-time non cash tax charge of $26 million related to our global cash repatriation project raising the rate by roughly 31 percentage points. This past quarter the company implemented a strategy to repatriate approximately $365 million of cash to the US at an effective tax rate of 7.3%. The company repatriated $123 million this month with the additional $242 million in cash to be repatriated in future periods.

This initiative improves liquidity in the US to fund future capital allocation plans. Partially offsetting this expense was a non cash tax benefit of roughly $12 million related to the reversal of income tax reserves as we closed out tax audits for certain prior year periods. This lowered the tax rate on the quarter by roughly 14 percentage points.

The tax rate for the year was 36.9% compared to 35.3% a year ago. The increase relative to our prior tax rate estimate of 33% was driven by the two discrete tax items. Going forward we expect the effective tax rate to be approximately 34%, though the rate is expected to vary by quarter throughout 2014, primarily due to the timing and deduct ability of the anticipated steel separation costs and other discrete items. We expect a first half tax rate of roughly 40% and a second half tax rate of about 30%.

Net income for the quarter was $52.6 million or $0.55 per diluted share compared to $0.78 per diluted share last year. In the quarter there were $0.23 of unusual items that included; separation costs associated with the spinoff of the steel business of $0.11, severance due to the business cost reduction initiative of $0.04, CDO expense of $0.02, and discrete tax items totaling $0.15.

These items were partially offset by income from our Brazil plant closure of $0.09 consisting of the gain on sale of land of $0.06 and the reversal of environmental reserves of $0.03. Excluding unusual items earnings per share were $0.78 for the quarter compared to $0.80 a year ago.

Now I will review our business segment performance. Mobile industry sales for the quarter were $337 million down 7% from a year ago. The decrease was driven by the impact of approximately $30 million of lower sales from planned program exits primarily in the light vehicle sector. This was partially offset by improved rail demand and the Interlube Systems acquisition.

The mobile segment had EBIT of $32 million or 9.5% of sales compared to $35 million or 9.6% of sales last year. The decline in EBIT was driven by lower volume and plant utilization partially offset by lower SG&A and the benefit of acquisitions. In addition the business had a year-over-year benefit of approximately $8 million primarily due to the gain on the sale of land in Brazil and lower restructuring costs partially offset by severance costs this quarter related to business cost reduction initiative.

The outlook for mobile industry sales for 2014 is to be down 3% to 8% primarily driven by the year-over-year impact of planned program exits of $110 million that concluded in 2013. Partially offsetting this decline is anticipated stronger demand in off highway and rail end markets.

Process industry sales for the fourth quarter were $325 million, down 4% from a year ago. The decline was driven primarily by lower demand in US industrial distribution as well as lower industrial OE demands across most end markets. This decrease was partially offset benefit of acquisitions.

For the quarter process industry's EBIT was $54 million or 16.6% of sales down from $61 million or 18.1% of sales last year. The decrease in EBIT was primary a result of lower volume, partially offset by lower manufacturing, material, and SG&A costs.

In addition process industries had approximately $3 million of unusual cost in the quarter primarily consisting of severance related to the business cost reduction initiative. Process industry sales for 2014 are expected to be up 7% to 12% driven by improved demand across most of its industrial markets and the full year benefit of acquisition.

Aerospace sales for fourth quarter were $89 million up 5% from a year ago. The increase resulted from improved demand in the defense sector. EBIT for the quarter was $5 million or 5.9% of sales compared to $10 million or 11.8% of sales a year ago.

The decline in earnings resulted from higher manufacturing costs as we reduced inventory levels during the quarter which benefited cash flow. In addition EBIT was negatively impacted by $3 million due to restructuring charges and severance costs related to the business cost reduction initiative.

For 2014, we anticipate aerospace sales to be up 5% to 10% reflecting increased demand across most end markets. Steel sales of $330 million for the quarter were up 4% from last year. The increase was primarily due to higher demand in the oil and gas, and mobile and highway market sectors which was partially offset by decreased industrial demand.

In addition surcharges were up approximately $7 million. EBIT for the quarter was $33 million or 10% of sales compared to $25 million or 8% of sales last year. The improvement reflects higher volume and lower manufacturing costs, material and SG&A costs partially offset by the impact of LIFO.

Steel sales for 2014 are expected to be up 12% to 17% due to stronger demand in the oil and gas and industrial markets while mobile and highway is expected to be flat. In addition surcharges are expected to be up driven by stronger demand and higher material cost.

Looking at our balance sheet we ended the quarter with cash of $385 million and net debt of $91 million. This compares to a net cash position of $107 million at the end of last year. The company ended the year with liquidity of $1.2 billion.

Operating cash flow for the year was $432 million reflecting the company's earnings and lower working capital requirements. Free cash flow was $19 million. After capital expenditures of $326 million and dividends of $88 million.

Excluding discretionary pension contributions of $66 million net of tax and CDO expense of $2 million net of tax, free cash flow for the year was $87 million. In addition, throughout the year the company purchased 3.4 million of its shares for $189 million. The company has approximately 4 million shares remaining under its current board authorized repurchase program and expects to continue to repurchase shares during the year.

The company ended the year with its global pensions funded at roughly 105% compared to 89% a year ago. The improvement was driven by the benefit of a 100 basis point increase in the discount rate, favorable asset return, and pension contribution.

Turning to the outlook, our estimates for 2014 are based on all four operating segments being in place for the full 12 months. We anticipate an improvement in sales for the year of around 6% compared to 2013 due to stronger demand and higher surcharges. Partially offsetting this is the year-over-year impact of approximately $110 million from planned exits in mobile industry segment which concluded in 2013.

We expect earnings per diluted share to be in the range of $3.15 to $3.45. Included in our earnings outlook our costs totaling $0.35 per share for the following unusual items; separation cost related to the spinoff of the steel business of $0.55, end costs associated with the business cost a reduction initiative of $0.10. Partially offsetting these costs is the remaining gain on the sale of land in Brazil of $0.30.

For 2014, the company expects cash from operating activities to be $560 million, free cash flow is expected to be $165 million. After capital expenditures of $310 million of which $30 million is due to separation activities and dividends of roughly $85 million.

We continue to make great progress in our separation activities related to our proposed tax free spend of the steel business targeted to occur midyear. We expect to file our form 10 with the SEC in early February which will provide additional detail outlining the new stand alone steel business.

This ends our formal remarks and now we'll be happy to answer any questions. Operator.

Thank you.

(Operator Instructions)

We'll take our first question from Eli Lustgarten with Longbow Securities.

Good morning everyone.

Good morning.

Nice quarter. Clarification. I know we are exiting businesses in the mobile business by $110 million. Is year-over-year comparison in 2014 verses 2013 another $110 million? Or why isn't that number in the 2013 number. I am not sure you cited that but it's all impacted already in the 2013 reported results.

Eli this is Chris. The last program, major program that we were exiting phased out in the third quarter and a little bit into the fourth quarter of 2013. So there is $110 million impact from exited business that you will see in the mobile revenue in 2014. Around the end of the third quarter, we will be done talking about that exited business. But it's -- basically the business is gone and it's a run rate issue 2013 to 2014 but that will conclude in the third quarter of this year.

It's pretty evenly spread between the first three quarters, the $110 million.

For arguments' sake, yes.

Can you talk about profitability you expect of most of the businesses as we look at 2014? Obviously, you have had a lot of pressure on margins this year and we got lots of costs floating all over the place there so, can we get some sense of what kind of profitability we should be able to expect in Mobile process, Aerospace, and even Steel as we look at 2014 on an operating basis as opposed to all the other noise.

Eli this is Rich. Let me take that for the ongoing three tipping company segments.

Putting aside the separation costs and some of the one offs that Glenn referenced we expect all three segments to be at double digit EBIT margins. We expect Aerospace and Mobile to be in the 10% to 13% range and Process in the high teens, call it 17% to 20% range. The cost savings will be a little bit more rear end -loaded, but we don't have a significant rear end load on the revenue side like we were baking a little bit last year, as you saw in Glenn's guidance. Relatively modest revenue increases, but some of the cost savings will be coming through, through the course of the year and some upon separation, as well.

Eli, this is Tim. I would say the story on the Steel side is similar. We are expecting improved profitability next year based on better volume, better mix, good cost control. Again this would be net of any incremental cost we would have to stand up to separate business.

Looking at margins in 12% to 15% range, is that sort of the normalized earnings to expect?

Are you talking from a Steel perspective?

From a Steel perspective, yes.

We will solidly be in the double digits, yes; so that would be probably a pretty good range.

All right. Thank you.

Thank you. We'll move next to Ross Gilardi with Bank of America Merrill Lynch.

Thanks very much guys. Good morning.

Could you just talk a little bit more about your assumptions behind the Steel sales growth of 12% to 17% in 2014? I realize you cited a number of drivers. What really gives you confidence in that? What specifically are you seeing in the Mobile on highway and oil and gas markets to drive your confidence? Are you seeing anything now, or is this just hope that things pick up in the second half of the year?

Ross this is Tim again.

If you look at the 14% you can probably put it into 2 buckets. Half would be improved volume and mix. The other half would be impact of raw material surcharge, our belief that we are going to see scrap and alloys continue to run throughout the year as volumes in the industry get better.

So, on the volume and mix side we're pretty optimistic about the Mobile numbers. Obviously that sector is doing pretty well. We are calling it for us flat although that would reflect a loss of business tied to the bearing platforms that Chris talked about earlier.

If you back that out actually our Mobile on high will be up. And oil and gas we are seeing solid growth on the oil and gas side right now. We are confident that continues to build throughout the year.

Then the big question is on industrial. And I would say within the industrial sector there are parts that will do better than others. Obviously having listened to some of the calls earlier in the week, there are parts of that, that are a little bit iffy but I think there are other parts that will be very solid.

Can you elaborate on what you are seeing in oil and gas a bit? Because, I think that's new.

Again you have to look on the platforms we are on. Some of the offshore we are seeing is very positive for us. The horizontal stuff is a little bit slow, but our belief is we'll begin to see that pick up through the year. Obviously more of focus on oil and gas right now.

The fundamentals seem to be sound. The inventories might be a little bit heavy down in Houston, but for the most part we think they're relatively in balance. So we feel pretty good about improvement throughout the year.

On capacity for steel, I am sorry if you went over some of this in the beginning of the call. We have been jumping from call to call this morning. But how much of the expected new capacity, your own new capacity and industry capacity that's relevant for your business has come online already verses what's still on the come?

In our case, the caster project will begin to ramp in the second half of the year. We intend to turn it on late in the second early in the third and that will, we'll run that out. So you will begin to see some of that in the fourth quarter, but not in a significant way from a capacity increase point of view.

The industry in general, you have seen the start up on a number of the other facilities that would be in our space. Some have gone better than others.

On the whole the industry seems to be relatively balanced based on strength in the Mobile on highway markets and again beginning to see some growth out of the oil and gas. So in general I would say 2013 was relatively balanced and we are keeping a very close eye on 2014.

Okay. Then just lastly should we expect a more comprehensive announcement on your capital allocation objectives over the next three to five years once the spin is completed? Obviously you finished the year with an over funded pension plan and your net debt is under $100 million, and this is talked about every quarter. Will there be some grander communication on what you plan do with respect to capital allocation at some point in the next, say, six months?

Yes. Ross this is Glenn. Let me address that. The answer is, one, yes especially as we get now closer to the separation where both businesses will come out on an analyst day if you will and talk about not only their business, but also their capital allocation plans.

To your point given that we have now peaked at CapEx level so the expectation is that will start to come down and that the pension plans are now fully funded, more of our capital allocation will now start to go back to shareholders if you will: dividends, share repurchases, and, obviously, also the opportunity do some bolt on acquisitions. But you will see more clarity on that as we go throughout the year.

Should we naturally think of that as something that after you have completed the spinoff that you are free to communicate on, or not necessarily?

We'll obviously communicate on it each quarter as we go through. I think once we have the analysts' day if you will, the separation where you now have the two businesses, that's another opportunity for the leaders of both of those businesses to talk about their capital allocation strategy going forward.

We are planning that analyst day shortly before the separation.

Okay. Thanks very much.

Stephen Volkmann with Jefferies has our next question.

Hello. Good morning guys. Actually I am going to stay with the same theme if it's okay. First on the repatriation of cash Glenn you talked about the 123 that you already got and the rest in future periods. Is that during 2014, or is that the next 10 years or something?

Let's just say you've got the bid and the ask there. But no most of it will be done earlier than later. We will continue to do more this year. It is going to really be a function, as well, of when we need the cash in the US for our capital allocation plans, but it will be spread out over some time.

Okay. Is the 365 it, or is there additional opportunities in future -- future periods?

Well again we'll have more cash overseas. The issue is we're able to bring back that $365 million at an effective tax rate of 7.3%, barring other kind of tax planning strategies or the government changing their view on it, future cash would be in the normal course of call it the 35% rate. We were able to at least bring back the 365 at a very attractive rate.

Okay. Good. Then maybe this isn't as much of a question but I am surprised that you wouldn't have bought more little more stock given the price had been depressed. Maybe not so much today. You sort of had a window of opportunity there and some cash coming in the door. Are you trying to be conservative until you get everything settled on the spin? Or is there a reason that you will have held back on this?

Steve, this is Jim. Let me comment.

The board is very focused on positioning the two new CEOs of the company to have solid balance sheets and to allow them to come out of the dock with their clear CAP allocation strategy. So to use your word, we are conservative now to reserve for the two new CEOs to come out and share with you in somewhat different businesses what their capital allocation strategy is. That is a direction that's coming from our board of directors.

Okay. That's helpful. I guess just a final on this one is should we be expecting the TimkenSteel Company to provide any sort of dividend back to Timken Bearing prior to the spin?

Again Steve, I think we have always said as the guiding philosophy on the separation is that we would have two very attractive strong balance sheets for both companies. So we are viewing it not as the ability to dividend cash back to the company, but to make sure that both companies have strong balance sheets. So we continue to work on it and assess what the capital structure of both of the businesses will look like at the time of separation, and then obviously we will provide you that information when it's ultimately determined.

Okay. I appreciate it. Thanks.

David Raso with ISI Group has our next question.

Hi. Regarding the timing of the savings, the $25 million of annual savings, maybe I missed it. Is that 2014? You can capture the $25 million then, or is that just the first annualized run rate?

David, on the business cost reduction initiative, the one that you are speaking to, in Jim's comments he referenced that it will be $25 million run rate of savings, at which $20 million should will be impacting 2014 results.

Okay. Great. Then, again, maybe I missed this. The separation cost, initiative to generate $20 million of annual savings that's above and beyond what we just spoke about, right? It's above and beyond the $25 million?

That's correct. We kind of viewed that business cost reduction initiative is really reflective of the current business environment and continuing to strive to take costs out. As we look through the corporate cost reduction similarly we know we're in the process of separating into the two businesses and both organizations are looking at the corporate structures that are required in how to lean and take out costs in anticipation of what we know will be new costs added to the company as we stand alone in new public entities.

On the corporate side we are looking at taking out around $20 million of costs on top of the $25 million that the business is taking out and of the $20 of the corporate costs, we are roughly around $15 million of that will be impacted in the 2014 results.

All right that's what I'm trying to think. It's a little tricky.

You break the company into two there is incremental corporate cost for each stand alone. Is this $20 million sort of make it a neutral situation, where you break up two companies, but corporate costs don't need to go up in aggregate? Is that a good way to think about it?

That's a good way to think about it. What we have said before was incremental costs to the enterprise of separating into two public companies; the incremental cost would be roughly $25 million. The corporate cost reduction is really meant to take out and look at the two combined separate companies and how can we mitigate that increase? Again we believe we can take out around $20 million of that before the separation were to occur.

I guess last question not to front run your thoughts on analyst meeting bigger picture view, but maybe just think of it as still a combined company, the company was able to, call it, $1.25 to $1.50 EPS run rate per quarter when the commodity complex was strong, so straight into mining a lot of big infrastructure that spins off when commodity complex is strong. Would some of the restructuring actions, how your thinking about the company broadly, and it sort of goes into I guess what you are going to roll off into a bigger picture view for an analyst meeting.

We've lately been run rating, call it, $0.75, $0.80 a quarter. If the commodity complex doesn't really come back, say it is a weaker dynamic for a couple of years, just hypothetically, how do you think about the earnings power of the Company? I guess it's fair to say that that run you had in late 2011 and early 2012 was very profitable, enjoying the commodity complex. I am giving you the platform here to help us a little bit, how you view the run rate earnings power of the Company if I didn't give you back commodity complex being strong.

Let me maybe take a first cut and see if others want to join in. One way to think about the performance of the Company, and as we look at it this year, we are operating at around 50% to 55% capacity given that a lot of our markets are down. As you point, one, we expect to see improving markets, but modestly so, and we'll start to leverage on that. As you think about kind of the trough to peak for the Company, we are more towards the latter than the former.

We expect to leverage well as the markets pick up. The cost structure is in good shape. The amount of exited business that we have exited that had been less attractive in the past when we have seen stronger markets we expect to perform much better at.

We have given you our targeted if you will returns by the four operating segments as we go through the cycle, and we don't envision that would change. If anything hopefully there is upside to that given you know the focus on our cost structure and the mix of our business.

I wasn't sure if anybody else wanted to chime in there. I mean that's the whole issue right? How much can you take the cost out verses the mix inherently might be a little bit of a struggle the next couple year's versus that run we had, when the commodity complex was strong, giving you a lot of high profit margin in markets.

Dave, this is Jim.

I think there is a little hesitancy to push out here because as we went into the second half of 2012 and the first half of 2013, we shared with you that we saw major segments of our attractive markets going through big inventory right sizing. That has gone on and we forecast it coming to an end, and therefore we gave you upside forecast from that point of view.

At this point, a little bit of the hesitancy is trying to figure out how much of the market conditions that have us running at 50% to 55% capacity utilization is in fact inherent market versus how much of it is still the overhang of inventory in some of the major segments and the lack of demand. So it's a little difficult to answer your question.

I think the more general answer to your question is come back to the margin targets that we've talked about over time. Rich said it. For the Bearings side of the house, that Mobile and Aerospace ought to be in the low- to mid-teens, that Process ought to be in the upper-teens, and that Steel should be in the mid-teens and potentially higher as the new capital things come on.

We've now with a relatively weaker market got the margins right. The question in terms of trying to translate that into EPS is making assumption of what's the fundamental demand for the products that we're serving. Not a question of mix. It's a question of fundamental demand.

I think that's interesting, right there. Even with what I would argue might be a weaker mix you don't see a major change in how you used to view your margins to how you view them today. That sounds like a fair summary.

We can all debate the top line but even with an adverse mix it doesn't seem like you are backing away from what you think inherent margins are for each business. Then of course the kicker is what do we do with the balance sheet?

Right obviously you have fire power to buy back 10% of the company pretty easily here. The analysts' meeting will give us obviously a little more clarity on all these questions.

Yes.

All right. I appreciate it. Thank you.

(Operator Instructions)

We'll move onto James Kawai with SunTrust Robinson Humphrey.

Good morning. Great quarter. I just wanted to dig into organic growth on the process side. Could you break out acquisitions there within the 7% to 12% growth that you are forecasting for the year? Then one of your competitors early in the week on their call kind of flagged improving trends within distribution and I was just wondering if you are starting to see the front end of that, as well?

Okay James, this is Chris, yes, 2% is the acquisition for 2014 is what's in that number. So on the process side moving forward, we very clearly are seeing improved order intake rates within the original equipment space. This is primarily in Power Transmission and wind energy segments are driving that, so that's very clearly happening. The second thing is within distribution, it's very clear that the North America market has bottomed and we are cautiously optimistic that the incoming order rates are going to strengthen from this point.

The only thing we have out there that's concerning us is some of the emerging markets, primarily around distribution with the currency and political stuff that's going on in places in Latin America and, obviously, in the other emerging markets and Ozion, et cetera, there is some concern there. Distributors tend to freeze up when those kind of events are going on, so we have to watch that carefully. But the trend lines in our major groups, for lack of a better term, are clearly more favorable than unfavorable.

Got you. Then on the mobile side, the 3% to 8% decline, it seems like when you strip out the 6% or 7% head wind from program exits you are looking at plus or minus 2% to 3% probably with some down side in mining and upside in autos. Is that a fair look at that?

Pretty much. The organic side of that is about 3% to 4% increase. To your point it's exited automotive program that's driving the total. Yes I think you pretty much had it. On the mobile side mining is obviously still a significant problem for us, but other segments, such as rail and others, are doing pretty well.

Then finally on the steel side I was just wondering how much of the Faircrest continuous cash or upgrade is vacant to the numbers? I am interested in the cost side.

I know that project has been characterized as a $200 million investment with a 15% to 20% IRR with half of it coming from cost, so it implies a pretty good earnings kicker just from the cost side. I am wondering you know is the ramp going to be somewhat mute that gain this year, or can we kind of expect some accretion this year with much more next year?

James this is Tim. As I said earlier, our ramp on that facility is third, late third, early fourth quarter, so the impact on 2014 from a revenue and profitability point of view is going to be relatively minor. When that facility is up and running at full capacity it will have a significant impact. You probably won't see a lot of it in the back end of this year though.

But pretty much the full or a good chunk of the benefit in 2015?

You will begin to see it yes really come on in 2015.

Great. Thank you very much.

Yep.

We'll move onto Stanley Elliott with Stifel.

My question was answered. Thank you.

(Operator Instructions)

Gentlemen, there are no further questions. I will turn the conference back to you all for closing remarks.

Well thank you again for your interest in the Timken Company, and your patience as we attempt to describe to you the many moving pieces going on within our Company. Bottom line, the Company is well positioned going into 2014, and we expect a good year. Thank you.

That will conclude today's conference. Again, we thank you all for joining us.