Timken Co (TKR) 2014 Q4 法說會逐字稿

Good morning. My name is Janet 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 fourth-quarter earnings release conference call.

(Operator Instructions)

Mr. Tschiegg, you may begin your conference.

Thank you and welcome to our fourth-quarter 2014 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 free to contact me at (234) 262-7446.

Before we begin our remarks this morning, I want to point out that we posted on the Company's website presentation material that we will reference as part of 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 the Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We have opening comments this morning from Rich and Phil before we open the call for your questions. During the Q&A, I would please ask that you limit your questions one and one follow-up at a time to allow for everyone for an opportunity to participate.

During today's call you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors which we describe in greater detail on today's press release and in our reports filed with the SEC, which are available on the timken.com website. We included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release.

Today's call is copyrighted by the Timken Company. Without express written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I'll turn the call over to Rich.

Thanks, Steve. Good morning and thank you for joining us today. Over the next few minutes I'll comment on the quarter, talk a bit about our full year and then share how we are thinking about 2015. Phil will follow with a financial recap on the quarter and year as well is our 2015 outlook and then we will open up the line for your questions.

The quarter came in very close to our expectations and guidance. Sales were up 2% despite the negative impact of currency. Process industries was up 12% as we continue to outgrow our markets as a result of our product market and geographic expansion initiatives. We are clearly continuing to build momentum in this segment.

Mobile was down 7% due to exited business, currency, and a softening agricultural market. I am pleased to emphasize that this is the last quarter that we plan to call out the impact of mobile exits as the year-on-year results will no longer be adversely impacted by our multi-year portfolio transformation that ended in 2013. With that initiative now behind us and a building pipeline of commercial activities, we expect to be generating much better top line results in mobile industries in the years to come.

We leveraged our modest revenue growth in the quarter for very strong results at the bottom line, with a 35% gain in adjusted earnings per share. This improvement was the result of our operational excellence initiative that is continuing to deliver significant and sustainable cost improvement, the improved mix from the growth in process industries, tax rate and the benefit of our share repurchase program. We delivered that improvement facing a sizable offset from the impact of currency.

As to margins, very different results within the segments, with process generating excellent margins of 21%, excluding unusual items, and mobile adjusted margins of 7%, which fall below our targeted margin range for the segment. While never happy with a single-digit level margins, we did expect our margins for mobile to be in this range for the quarter due to several headwinds we were facing, including normal seasonality, currency, a significant inventory reduction in the quarter that is now behind us and the softening ag market. We anticipate adjusted mobile margins to rebound back above 10% in the first quarter of 2015 and to be above 10% for the year.

On a GAAP basis, our earnings included planned non-cash pension settlement charges which we had guided to previously. Phil will cover that, as well as last weeks annuity actions, in more detail later.

In the quarter we completed one tuck-in acquisition with the purchase of the bearing company Revolvo, located in the UK. While the business is relatively small, we were very excited to add Revolvo to our bearing portfolio as its filled a specific gap in our product offering and fits squarely within our strategy of offering the best solutions to customers. We expect to leverage our scale and global channel access to both lower Revolvo's cost as well as accelerate their growth.

So if we now turn to our 2015 outlook, a year ago we were optimistic that our 2015 revenue would be significantly higher than the 1% that we were guiding to at the midpoint of our guidance today and that would have been based on a modestly improving market and our outgrowth initiatives. Unfortunately through the course of the past year, and in particular the second half of the year, several macro factors have combined to temper our outlook.

First is currency. The strength of the dollar is expected to trim about 300 basis points off our year-on-year revenue, and that is assuming that the euro does not decline further against the dollar. Second we originally expected sales growth in 2015 in Russia due to increased market participation and while we still see significant opportunity long-term and continue to pursue that market, we are no longer counting on significant sales growth from this region in 2015.

Third, the ag OEM market weakened during the fourth quarter of 2014 and is starting off 2015 soft. And then finally, in regards to oil, oil and gas is a relatively small direct market for us. It was approximately 3% of 2014 sales. We do expect that 3% to come under significant pressure during the course of 2015.

On a positive side, despite all of those unfavorable macros we still anticipate that we can grow 4% at the volume level and modestly even after the currency impact. We serve diverse markets and diverse geographies and several of our end markets show continued signs of strength.

Automotive, wind, rail, commercial aerospace, and China all remain solid growing markets. Additionally, we will see the impact of many of our growth initiatives, including the benefit of new products, our increased participation in the wind energy market, the expansion of our services business and our efforts to increase our penetration in emerging markets, particularly China.

There remains a high level of uncertainty around the impact that the recent volatility in oil, other commodities and currency will have on our end markets through the course of 2015, but as we sit here today our order books remain solid, and based on our backlog and our orders, we expect first-quarter revenue to be up modestly over 2014 and then we are planning for that trend to continue through the full year. While we do have very good visibility to the next several months, as I said, it gets more uncertain beyond that as to how the market volatility will impact markets through the second half of the year. I would add, though, that we are in an excellent position to respond if markets are stronger through the course of 2015 than what we have currently planned for.

As we did in 2014, we plan to leverage that modest growth well at the bottom line and deliver a 6% improvement in earnings per share for 2015 at the midpoint of our guidance. That includes offsetting any unfavorable impact from currency and higher pension expense.

I'd also like to comment on our share buyback activity. We purchased 5.2 million shares in 2014. We pulled off the buyback in the fourth quarter as we evaluated a specific strategic opportunity.

Our pullback and buy-in in the fourth quarter should not be construed as a lack of commitment to deploy our balance sheet or to return capital to shareholders. We remain confident in the cash generation of the business and we are committed to continuing to progress to our targeted capital structure.

Phil will cover capital allocation a more detail in a moment, but before I turn it over to Phil let me wrap up with three comments. First, the fourth quarter played much like we thought it would. Second, again while there is uncertainty as to how the full year will play out, our current order book patterns support our estimates for modest improvement in 2015 and we expect to begin the year along that trajectory. And as a final point, our outgrowth and operational excellence initiatives continue to gain momentum and show results in our revenue and margins.

Phil?

Thanks, Rich, and good morning, everyone. As I go through my remarks this morning, I will reference specific slides from the earnings presentation that we posted to our website earlier today.

Let's start on slide 12. For the fourth quarter, Timken posted sales of $762 million, up 2% from last year. We achieved solid organic growth in multiple sectors led by wind energy, rail, and the industrial after market. This growth, however, was partially offset by lower shipments in aerospace, a weaker agricultural market and the impact of planned exits in the light vehicle sector.

As we have discussed on prior calls, the last major program exit occurred at the end of 2013 and has negatively impacted our comparisons over this past year. As Rich mentioned, this headwind is now behind us and we expect to grow profitably in the light vehicle sector in 2015.

Our sales were also negatively impacted by the appreciation of the US dollar against key currencies like the euro. In the quarter, foreign currency translation reduced our top-line sales growth by $18 million, or around 2.5%.

We expect currency to continue to have a significant impact on our results in 2015. From a geographic standpoint, sales were up in all regions of the world during the quarter with the exception of Europe, which was down about 3% excluding currency.

Turning to slide 13, gross profit in the fourth quarter was $221 million, or 29% of sales, up 130 basis points from last year. We managed SG&A well again this past quarter, with expense coming in at $132 million, down $2 million from last year. The decrease reflects the benefit of our cost reduction initiatives and currency, partially offset by higher incentive compensation and around $2.5 million of M&A-related expenses.

SG&A was 17.3% of sales in the fourth quarter, an improvement of 60 basis points from last year. You'll notice that we had $33 million of non-cash pension settlement charges in the quarter, which was in line with our previous guidance. This relates to lump sum pension payouts we made during the year.

In 2014, these payouts reduced our gross pension liability by around $110 million and they were funded entirely with plan assets, requiring no incremental cash funding from the Company. As a result, you can see on the next line that our fourth-quarter EBIT came in at $50 million.

Turning to slide 14, when you back out the non-cash pension charges and other unusual items, adjusted EBIT in the quarter was $89 million, up 16% from the year-ago period. Our adjusted EBIT margin in the quarter was 11.7% of sales, an improvement of 150 basis points over last year.

On slide 15, you can see that our adjusted EBIT increase was primarily driven by lower manufacturing costs, including benefits from our ongoing operational excellence initiatives. Volume was also favorable, but this was more than offset by $6 million of negative currency.

As outlined on slide 16, we posted quarterly net income from continuing operations of $39 million, or $0.43 per diluted share. On an adjusted basis, our EPS increased 35% in the quarter, coming in at $0.65 compared to $0.48 last year. The increase was driven by higher pretax earnings, a lower tax rate, and the benefit of share repurchases.

Our GAAP tax rate was 8% in the fourth quarter and 28% for 2014. On an adjusted basis, our fourth-quarter tax rate was 29%, which brought our full-year adjusted tax rate to 33%. This was lower than our prior guidance due to the passage of the US tax extenders legislation in December. We expect to maintain a 33% adjusted tax rate for 2015.

Before I review our business results, I want to highlight some changes to our reporting segments that became effective in the fourth quarter. These are outlined in slide 17.

First, as we indicated in the third quarter, we eliminated aerospace as a reporting segment, folding substantially all of this business into mobile industries. Second, we made some changes to our corporate SG&A expense allocations to better reflect the Company's operating model and new cost structure following the steel spin off and the elimination of the aerospace segment. Lastly, we decided to move foreign currency gains and losses related to inter-company financing in the business segments to our corporate segment to better align with the management of these activities.

We filed a form 8-K yesterday to detail the prior period impact of these changes. Today's results reflect these changes in all periods.

Now turning to slide 18, let's take a look at our business segments, starting with mobile industries. In the fourth quarter, mobile industries sales were $390 million, down 7% from last year. This was driven by approximately $15 million in lower sales from planned program exits in the light vehicle sector, which concluded at the end of 2013.

The remainder was driven by lower defense-related aerospace shipments, a weaker agricultural market and unfavorable currency, partially offset by continued growth in the rail sector. Excluding planned exit and currency, sales in mobile industries were down about 1%.

For the fourth quarter, mobile industries EBIT was $22 million. Adjusted EBIT was $29 million, or 7.3% of sales, compared to $34 million, or 8.1% of sales, last year.

The decline in earnings was driven by lower volume, unfavorable mix in currency, partially offset by lower manufacturing costs. Note that margins were impacted by inventory reductions in both periods.

The outlook for mobile industries sales for 2015 is to be roughly flat to down 2%, driven in part by negative currency of approximately 3%. Excluding currency, sales are expected to be up 1% to 3%, reflecting organic growth, primarily in the light vehicle sector, partially offset by lower agriculture demand in the ag sector. EBIT margins are expected to be within our targeted range of 10% to 13%.

Turning to process industries on slide 19, sales for the fourth quarter were $373 million, up 12% from last year. The increase was driven by higher demand and share gains in wind energy, marine and the industrial after market, as well as the benefit of acquisitions. Currency had a negative impact on the top line of just over 2%.

For the quarter, process industries EBIT was $80 million. Adjusted EBIT was $79 million, or 21.3% of sales, compared to $54 million, or 16.4% of sales, last year. The increase in earnings was driven by higher volume and lower manufacturing costs, reflecting our ongoing operational excellence initiatives, partially offset by negative currency.

The outlook for process industries sales for 2015 is to be up 2% to 4% with a negative currency impact of approximately 3%. Excluding currency, sales are expected to be up 5% to 7%, reflecting organic growth in wind energy, marine, and the industrial after market, as well as the benefit of acquisitions completed in 2014. EBIT margins should be at the high end of our targeted range of 17% to 20%.

Turning to slide 20, operating cash flow from continuing operations for the year was $279 million, reflecting improvement in our structural earnings, offset primarily by higher working capital. After CapEx of $127 million, free cash flow for the year came in at $152 million.

Looking at our year-end balance sheet and capital allocation on slide 21, we ended the year with net debt of $236 million, or 13% of capital, compared to net debt to capital of 2% at the end of 2013. During the year, we made progress toward deploying our balance sheet and executing our capital allocation plan. We invested $127 million in CapEx to help drive organic growth in margin expansion.

We paid dividends totaling $1 per share, or approximately 39% of our adjusted EPS. We completed the acquisitions of Schulz and Revolvo and we spent $271 million to repurchase 5.2 million shares during the year. This represents roughly 6% of our outstanding shares. Note that we were out of the market for most of the fourth quarter due to our involvement in a potential strategic acquisition that did not materialize.

Looking ahead to 2015, we will continue to march towards our 30% to 40% leverage target. In particular, we expect to be in the market buying back shares throughout the year and we will report our progress with regard to capital allocation and our targeted leverage on a quarterly basis.

Turning to pensions on slide 22, we ended the year with our pension plans fully funded on a global basis, despite a lower discount rate. During the year, we took several key actions to reduce risk and volatility and manage our obligations down with minimal cash flow impact. Two of the actions included shifting our pension assets more towards fixed income, protecting our fully funded status and creating a natural hedge against the liability and offering lump sum payouts, which I outlined previously.

In addition, last week we purchased a group annuity contract from Prudential for certain US retirees. This action will reduce our gross pension liability by roughly $600 million, or just under 30% of our global obligation. The purchase was funded entirely with plan assets, requiring no incremental cash contribution from the Company.

Our US plans remain over funded post transaction. The annuitization will result in a non-cash charge of roughly $220 million pretax in the first quarter of 2015, and we expect around $30 million of other non-cash pension charges throughout the year.

Shifting to our outlook shown on slide 23, we anticipate improvement in sales for the year of around 1% compared to last year, driven by 4% organic growth, offset by 3% of negative currency. We expect earnings per diluted share to be in the range of $0.85 to $0.95 per share.

Included in our earnings outlook are three unusual items totaling net expense of $1.80 per share, related to the non-cash pension settlement charges I discussed earlier of $1.85, costs associated with ongoing plant rationalization initiatives of $0.20 and $0.25 of income related to an anticipated tax rate reserve adjustment. Excluding these unusual items, we expect adjusted earnings-per-share to range from $2.65 to $2.75 per share, an increase of 6% at the midpoint versus 2014.

We expect our adjusted EBIT margin to be in the in the range of 12.5% to 13%, an improvement over the 12.2% we generated last year. For 2015 we expect free cash flow of roughly $220 million after CapEx spending at around 4% of sales.

Given all of the moving pieces this year, we added slide 24 to provide a bit more color on the components of our earnings-per-share growth. At the midpoint, our 2015 adjusted EPS guidance is up $0.15 from 2014.

We expect organic revenue growth and margin expansion initiatives to add roughly $0.35. This is expected to be partially offset by negative currency of around $0.15, incremental pension expense of around $0.15 and higher interest and other expense -- I'm sorry, incremental pension expense of around $0.05 and higher interest and other expense of around $0.05.

We have also included a $0.05 benefit to reflect the full-year impact of share buybacks we completed in 2014. The sum of these items gets you to the midpoint of our $2.65 to $2.75 per-share estimate for 2015.

Note that 2015 share buybacks are not included in our guidance, so any current year buybacks will further increase our earnings per share. We will adjust our guidance for share buybacks as necessary each quarter.

Overall, we are pleased with our 2014 results. We delivered solid earnings growth and margin expansion on relatively modest net top-line growth and we made good progress toward our long-term targets. While the current environment remains uncertain, we are well positioned to deliver again in 2015.

This concludes our formal remarks and we will now open the line for questions. Operator?

(Operator Instructions)

Stephen Volkmann with Jefferies.

Good morning, guys.

Good morning, Steve.

Rich, can I just push you a little on the share repurchase? I know you said you are committed to -- you remain committed to that program, but I think in the past you talked about finishing it by 12/31/2015 and it seems like you are going to have to be really active and you may even have trouble getting it done now by the end of 2015. Are you still committed to that? Could you do an accelerated kind of a thing? How do you think about that?

I think if it is commitment to moving to our target that you are looking for, you have that. We are -- we remain committed towards making a sizable move to our target and when we established the size and speed of the original buyback, it was to, with a little bit of M&A and cash flow, intended to get us close to that target or around that target by the end of the year and obviously there is a lot of moving pieces in that. So we remain committed to that. You will see progress on that. What we didn't do with guide to specifically to how that would transpire, but as Phil said, we will update you on that quarterly.

We have 8.9 million shares remaining. Do not think that would be a problem from a market standpoint to do all of that in the calendar year. As Phil said, we expect to be active through the course of the year and report out on it on a regular basis.

Good. That is helpful, thanks. And then can you talk about the cadence of the quarter? You talked about the end markets that are still doing fairly well. Unfortunately, I'm going to ask you to do the other side of the ledger and talk about what's -- is it deteriorated and how much and did we end December on the low note for the quarter, those types of things. If you could just layer in any view you may have with respect to customer inventory destocking that might be happening, that would be helpful too.

Okay. I refer everybody to slide 9. We titled this Market Outlook Drivers, so we've mixed currency in with end markets and with geographies. I covered the positives earlier in all of those markets and where we participate in those markets. In some cases, obviously, we have a much greater penetration. Our light vehicle business, as an example, is predominant a North American business. Our oil business is very global. Where we participate in all those are positive for us, end-of-the-year positive. We expect to start the year positive.

The middle is a mix, I would say, of markets that are at healthy levels and are flattish end markets that are at depressed levels, like mining and metals, but we expect this year to be relatively neutral from prior year. Taking mining as an example, the OEM side of that business well off peak levels, probably saw some of our customers in that space would have still indicated they are still reducing inventory. We believe that is largely behind for us, in that, that group of markets and geographies in the middle we would look at flattish year over year.

On the left, we talked about currency and to your point, the currency from a euro perspective has worsened since the first of the year. Some of the other currencies for us have been flat to improved, but clearly there's a risk in that from a downside pressure standpoint for us and obviously there is some upside as well, but the trajectory, as we sit here today, from the first of the year to today, would still be working against us. Agriculture, we saw that decline coming around midyear. Really hit us quite hard in the fourth quarter, is still on a decline and will start off the year very slow. Oil and gas, we really haven't seen yet but are expecting, and as I said in my comments, have some of that baked in.

Defenses could've maybe been in the neutral. It's been fairly stagnant but certainly has some downward pressure on it. We saw some softening in Europe in the fourth quarter. Expect Europe to start off slow in the first quarter. Certainly, the flipside of the currency working against us is, we deal generally with big European multi-nationals and you would think that by the second half of this year the currency, et cetera, could have some positive impact on that coming forward. But that would have been in a down -- the two that would've been in a downward trajectory ending the year for us would've been agriculture and Europe.

Great. And just quickly, any destock our restock at the distributor level? I will pass it on.

No. We -- no. Both largely flattish last year and at this point, not a lot of activity this year either.

Thank you.

Thanks, Steve.

David Raso with Evercore.

Good morning. (Multiple speakers) Can you give us a lay of land on the M&A environment? Then I have a quick question on margins.

Sure. On the -- we were active -- as you mentioned, we bought back 5.2 million shares this year, David, so we were active throughout the year buying back shares. As Rich said, took the second quarter off in advance to the spend and also we're out of the market for most of the fourth quarter because of a strategic opportunity we were looking at that ultimately didn't materialize for us, but we were in the market. Relative to M&A, we continue to work our pipeline. We had looked at several candidates during 2014. We were successful with Revolvo and Schultz, two relatively small acquisitions. As I mentioned, we had a larger acquisition we were looking at but ultimately didn't execute on. We continue to view M&A as important part of our capital allocation program, if you will, and it is the best way for us to diversify our product offering and reach new markets, et cetera. We will continue to focus on M&A and as I indicated, continue to expect to be in the market buying back shares.

Just so I understand, the play book for the rest of the year, and I can understand if it's the assets we all think it was, it was prudent to step away from that sale that took place in the fourth quarter. But are there -- is there a point we should assume maybe you are still holding off looking at other deals where you go, look, we promised we'd get net debt-to-cap near 30% by the end of the year, that we will back away from a deal that might even look interesting, it's in process, but we got to get the balance sheet up and we have to execute on the repo. We're just trying to make sure there aren't too many more quarters where, understandably, you held off from buying back shares, but that we don't have too many of those and we end up not getting either/or. We don't get the acquisition or the repo.

I think a certainly fair question, David. In the past, going back prior to 2014, we had said we were holding on to dry powder for something bigger. We, in 2014, said we were not doing -- going to do that in anticipation and trying to pry something loose. This was something that was presented us as an opportunity so we did think it was prudent to go ahead and pause while we took a look at it. We're glad we took a look at it but obviously it didn't materialize.

Big M&A in our space is not all that prevalent and I would not expect that to be a major issue for us in 2015. Again, going back to Stephen's question, depending on where our cash flow is, where the share price is this year, et cetera, you could buy back the full share, amount of shares, still do a reasonable amount of M&A and still very comfortably be in the target. You are talking about something that is north of $500 million, $600 million that even stretches -- stresses it at all. That being said, if something presented to us in the next couple of quarters, would we not take a look at it? I think we probably would.

Okay, thank you. Regarding the margins, I think there was some thought stranded cost in 2014 would go away in 2015. Obviously some stranded cost around splitting of the Company. But when I look at the margins implied for 2015 versus 2014, and we are working off a restated numbers here, so I apologize if I'm off a little bit, but it seems like we are not expecting really any margin improvement year to year. Did something happen to the stranded cost? Is there more of a mix issue? You rattled off a few things before but just help us understand why we shouldn't --

(Multiple speakers) Let me start, David, and Phil will probably jump in with a little more detail. At the midpoint of our -- one, we improved margins materially from 2013 to 2014 and I think about the midpoint of our guidance would be about another 50 BPs improvement. Two headwinds on that. Currency, obviously, with a higher percentage of our spending in SG&A and you translate the revenue over into a lower amount dollars, with the SG&A predominately in dollars, it compresses that a little. We're offsetting all of that. And then we are also offsetting the change in mortality tables to our pensions. And then obviously it's a pretty modest revenue number as well. The 50 BPs is roughly what we have and hopefully that's where your math comes out as well on the margin expansion.

That's incorporating Phil's comment that expect process margins at the high end. If I use truly the high end, 19.5% then I do get the 50 BPs. Just one last thing to make sure we are all on the same page, with the changing of what is in the business versus corporate, can you give us some help on the corporate expense guidance for the year? Is it the fourth quarter we just saw roughly times four? If you can just help us with that figure.

Sure, David, let me take a crack. The resegmentation did a couple things. We adjusted corporate SG&A to reflect the new operating model going forward. We also moved some foreign currency gains and losses related to inter-company financing to corporate because that's where we manage those types of things. So that is a little bit of a wild card, but from just a core SG&A expense that is now sitting in corporate, if you will, and we would expect to continue to see modest cost improvement as we move through 2015. As you said, most of the stranded costs have been taken out. We probably were a little bit ahead of our plan relative to SG&A expense reduction in 2014, but we would still expect for, call it, some modest improvement on the SG&A line at the corporate level in 2015 versus 2014.

In mathematical terms, basically $75 million, $70 million or so? Or do think there is more savings potential in that?

Again, with the gains being difficult to predict, I would say if you looked at the fourth quarter number in corporate and reduced it a little bit each quarter, and don't forget we had some M&A expenses in the fourth quarter as well, so if you take that out, that was around $2.5 million at the corporate level and then extend that through the year, a little bit of modest improvement off of that, you would probably be in the range.

Alright, that is helpful. Thank you very much. I appreciate it.

Sure, David, thank you.

Eli Lustgarten with Longbow Securities.

Good morning, everyone.

Good morning, Eli.

Again, just to clarify, the corporate allocation was supposed to drop to $15.5 million, $16 million, it was $19.5 million. We're taking out $2.5 million for the M&A. I know we are changing it. Is that where the increased pension is going to show up also? Maybe a $5 million to $10 million (inaudible) in that quarter there?

Sure, Eli. I would say some of the pension will show up there but some of it will rest of the business, because that's where most of these employees lie. The incremental $5 million to $10 million on pension will follow the people, if you will, but there will be a chunk that would hit corporate SG&A. Now, on that -- in the $19 million, though, I want to just kind of emphasize, when we made the move to move foreign currency gains and losses related to inter-company financing to corporate, in the $19 million, that is probably around $3 million of FX loss in the quarter on that line. And again, that is difficult to predict if FX rates hold for the year, that would not repeat. If currencies continue to deteriorate against the dollar, we would see more of that. If it strengthens, you would see the reverse of that. That's really the wild card on that line. We moved it there because, again, that's where we manage those activities.

But nothing has structurally changed from the gains we talked about.

No, in terms of the $5 million a quarter, if you will, we did achieve that by the end of the year.

Okay, so that's fine. Can we talk a little bit for an operating group, the game plan by moving aerospace into mobile was a restructuring, it was going to close the piece, sales go down towards $300 million and you were going to drive towards a double-digit operating margin. As we look at the guidance, are we looking at that kind of environment for the aerospace? Because you sort of indicated it was continuing to be weaker, that we may not get -- the margin number will be weaker and the buy-in number would be suspect.

We are seeing good traction on the aerospace initiative. We closed our engine overall operation, which was unprofitable, sold the assets and have exited all of that so there is no hangover of that into 2015. We have restructured the organization and removed a fairly sizable amount of cost. And in the fourth quarter, while the mobile margins were certainly not all that attractive or at our target, aerospace was not dilutive to them, so we would have seen an uptick in that.

Now that is becoming less and less of a real comparison and it really is becoming a market for us now as we integrated a lot of aspects of the business. So that will be -- we still talk about the aerospace market and general growth trends and profitability as we go into 2015 but as an EBIT number and margin number that would become more and more difficult as the integration gets deeper. Aerospace, as we look at 2015 and 2016 will be a drag on the revenue for mobile in regards to growth rate. We are not expecting significant growth in the former aerospace segment, in the aerospace business over the next year or so. But from a margin standpoint, we expected to be solidly in contributing to the mobile margins of 10% to 13%.

We've got the profitability up of that business, is what --

We did in the fourth quarter. It's still on a -- we still have some more cost improvement to get out, but we do not think it will be overly dilutive to the margins to start the year off.

One final question. Can we talk about the process side of business? I know it is very heavily two-thirds after market business. What are you seeing and what are you hearing from customers in that business? Has there been much project activity, much push out cancellation, redefining timing or anything of that business or is it holding it's own at this point?

No, actually it's pretty much holding it's own, and if anything, improving. To my comments about where we sit today with inventory orders and backlog, suggesting modest growth in the -- as far as our visibility would take us over the next two to four months. Process industries and the after market fit squarely in that. So those of our customers in North America that are public, I think they are talking as they'd be more than bearings in this situation. The low- to mid-single type growth levels similar to what we are talking about before you put the currency on top of it.

Thank you very much.

Thanks Eli.

Michael [Finanger] with Bank of America.

Hey, guys, it is Mike Finanger from Bank of America filling in for Ross. Morning, guys, morning. Just a quick question. We discussed your customer inventories. How are you feeling with your own inventories? Do you feel like your own inventories are currently in line with end-user demand and demand outlook you guys are forecasting?

Thanks, Mike, I will take that. When we talked on the third-quarter call, we talked about inventories being up in the quarter and we were taking steps to reduce inventories before the end of the year. We were able to get the inventory down in the fourth quarter as we planned.

So as we sit here today, we feel pretty good about our inventory levels, both within the business as well as geographically around the world and feel that it will support our growth for 2015, so don't -- feel we are in pretty good balance right now. We will have a seasonal -- we always have a slight seasonal build in the first quarter as business ramps up into the second quarter. But the tactics we employ to take the inventory out, we were able to execute on those in 2014 and then we will continue to look to manage our working capital efficiency in 2015 and have further tactics we will look to execute on.

Alright, thanks, guys. My last question would be, you discussed Europe. Europe was down 3% and you discussed how it was exiting the year on a low note. What specifically in Europe was weak? Was it just general industrial? And how about North America? How did that trending in Q4 into the end of the year?

I would say Europe would have been a fairly -- my comments around Europe would have been a widespread aggregate of the markets in which we participate in, which would be heavily heavy industries, but we also have some light vehicle business there and some lighter industries, but a general heavy industries within Europe would've softened. North America, I would not have -- I would've said continue to move along and we haven't really seen any impact. This probably goes to Eli's question as well. We haven't really seen any impact from the recent volatility of commodities prices and currency on our North American business. There is some confidence in the gas price driving some confidence in the North American auto build. Beyond that, I would say it's largely been business as usual to -- going back Eli's question.

Great, guys. And then I guess -- sorry, just the last one. How are you guys feeling about the pricing environment currently? What should we be expecting maybe in 2015 if this current demand environment stays the same?

I would say in our number we have less than 1% in for price. It is -- and there is obviously some ups and downs in that. With the currency, it is not a great environment in a lot of places for us to move prices because remember we generally compete against global players and those global players are more yen-based our cost structure and euro-based in their structure than what we are. So fairly soft from a pricing standpoint, but we do believe the price cost benefit will contribute to the margin improvement that I talked bout and the other part of that margin improvement, then, would be the SG&A reduction that Phil talked about.

Got it. Thanks, guys.

Thanks, Mike.

Justin Bergner with Gabelli & Co.

Good morning, everyone.

Morning, Justin.

My first question relates to the process industries growth. The 5% to 7%, how much of that is coming from acquisitions? Perhaps if you could just decompose that overall number of 5% to 7% as best as possible in terms of the drivers?

I would say let me start first on the acquisition point. Acquisitions in the 2015 guidance, it would be, call it, 1% to 1.5% relative to the acquisitions. Not a lot. It's mostly organic growth. And then on the organic, we will continue to expect to see growth in wind energy, marine. Rich talked about defense being done generally but we've seen good penetration in military marine and that will continue into 2015. And then the industrial after market generally, we talked about inventories being relatively good equilibrium right now among the distributors, so we would expect to see growth year on year in the industrial after market as well.

The only one I would add to that is China. China is a heavy process industry market for us and China looks really good right now from where we are sitting from a 2015 market outlook. That would be across process industries in that country.

Okay. With respect to the process margin, 19.4% adjusted in 2014, ex-acquisitions the organic rate is still 4% to 6%. What is preventing you from flexing that margin above 20% in 2015?

I would say, one, there is a little bit of seasonality to our process business now with our services business that is a little stronger in the fourth quarter and mixes us up as we finish the year. It is not huge and as we said, we are guiding to the high end of the targeted levels. The other element I would say is the short-term pressure of our growth initiatives. We are putting in capacity. We are putting in some new assets. We are developing new products and in the short term, those items put a little downward pressure on our margins. And then also, while attractive and profitable, the growth in wind mixes us down a little bit as well.

That is really helpful. Just very quickly to wrap up, why not include any 2015 repurchases in your EPS guidance?

We talked about putting that in and putting that in implies a pace, a price, and a capital allocation plan and really what we have been doing is talking about it historically and again then, depending on how fast we do it. What we are doing, we are -- we review it on a quarterly basis with our Board, our Board is very engaged in it and, again, to put my earlier comments, we are very committed to it but felt it was better to separate the base business and our outlook for that from the accretion that we would get from deploying our balance sheet.

Okay. Best of luck in 2015.

Thanks, Justin.

(Operator Instructions)

Steve Barger with KeyBanc Capital Markets.

Good morning.

Good morning, Steve.

Sorry if I missed this when you went through the end markets but I think you said 3% direct exposure to oil and gas. Have you had your team go through to look at the indirect exposure, if any, in terms of products that might go through distribution or supply chain participants to those end markets?

That 3% certainly includes our distribution participation and that actually is a significant part of that 3%. Where it would run through indirectly through a Caterpillar or somebody else that is involved in that, we try to do that and we try to look at where our OEM customers end market is going and until you get into the industrial distribution, or the industrial distribution, miscellaneous industrial machinery equipment, we do a pretty good job of that. We think that 3% is collectively where our products and services and up in that market. What it doesn't include is what that means for the rail industry, what that means for the automotive industry and all those sorts of things and that's where we have just factored that into our other outlooks. We think the 3% captures it all.

Got it. You said it's tougher to call the back half because of the bigger moving parts, which makes sense, but I'm wondering if you can talk about the improvements you guys have made to your internal forecasting or what steps you have taken to improve your own visibility in to the business plan.

Sure, Steve. I think we have made improvement in our forecasting. If you look at our -- the guidance we set back in June of 2014 and I think we had fairly good visibility to what occurred and as Rich said, the quarter played out as we thought. When we set our forecast and set our plans, we look at order book data, we look at pressure curves that we create for our various businesses, we look at leading indicators and we try to triangulate among those and really get the best visibility we can.

Now having said that, we serve the capital goods markets, the capital equipment markets and those are very difficult to predict. As Rich said, the further you get out, it is hard to anticipate what is going to happen but we are -- we have gotten better than we have been in the past. We probably have some more room to move there, room to improve, but we've gotten better and will continue to work at it.

I would just add, depends on what time frame you look at. These are incremental improvements now but we started our global SAP implementation back in the mid-2000s, kind of finished that up in, say, 2010. The comparison far level of sophistication there, our connectivity with our customers today compared to 10 years ago would be light-years ahead. We are now at a much more of a mode where we are working incrementally to make improvements there. Certainly, Phil summed it up well. We are much better than we were. We get better every quarter, but it's not a precise science.

Understood. And just one quick housekeeping. The seasonal build in inventory mean the use of cash in 1Q or do you expect positive free cash flow as you go through the year?

Obviously, we would expect positive free cash flow as we go through the year. I would tell you that typically in the first quarter, we do often build a little inventory. Again, we manage the inventory reduction in the fourth quarter a little bit more mindful of that so occasionally the first quarter could be slightly negative or flat. I would say would be closer to flattish for the first quarter and then it would build as the year goes on.

Got it. Thank you.

There are no further questions in the queue. At this time I'll turn the call back to Rich Kyle for any additional or closing remarks.

All right. Well, we appreciate all the questions today, and the interest. Thanks for joining us.

That does conclude today's conference. Thank you for your participation.