Timken Co (TKR) 2015 Q3 法說會逐字稿

Good morning. My name is Orlando, 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 third-quarter earnings release conference call.

(Operator Instructions)

Ms. Chadwick, you may begin your conference.

Thank you, Orlando, and welcome to the third-quarter 2015 earnings conference call. This is Shelly Chadwick, Vice President of Treasury and Investor Relations for the Timken Company. We appreciate you joining us today. If, after our call, you should have further questions, please feel free to call me directly at 234-262- 3223.

Before we begin our remarks this morning, I want to point out that we have posted on the Company's website, presentation materials 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 will have opening comments this morning from Rich and Phil before we open the call up for your questions. During the 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. 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 in today's press release and in our reports filed with the SEC, which are available on the www.Timken.com website.

We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. 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 would like to thank you for your interest in the Timken Company and I will now turn the call over to Rich.

Thank you, Shelley. Good morning everyone. We appreciate you joining us today. Phil and I will reference several slides from the deck that was included in today's release, and I will start on slide 4.

The third quarter did see the sequential softening in our end markets that we expected. Sales, excluding currency, and inorganic, declined 3% sequentially and 6% year-on-year. Currency also impacted us by about 5% in the year-on-year results, slightly offset by inorganic for 10% revenue decline.

Heavy industries, such as metals, agriculture, mining, and oil and gas, all declined during the quarter. We're confident that the decline is not a reflection of our market position as we continue to focus on improving our organic and penetration levels.

Adjusted earnings per share were $0.55, in line with expectations and helped by our continuing cost reduction efforts. We maintained our adjusted EBIT margins above 10%, in a tough market. Margins in process remain below our target, and we are focused on moving them back into our targeted range.

We generated solid free cash flow of $119 million in the quarter and expect to continue to deliver strong cash flow through the balance of the year. In the quarter, we executed on our share buyback plan, purchasing more than 1.5 million shares. This leaves 3 million shares remaining on our existing plan, and we will remain active this quarter with the buyback.

In September, we closed on our industrial belt acquisition. We have one month included in the third quarter results. The financial performance was in line with our expectations. The integration is off to an excellent start.

I do want to highlight on slide 5, the belt overview that we have called out that the segmentation will be about two-thirds mobile and one-third process, from a revenue perspective with margins within the low end of our targeted ranges for both segments. The big part of our long-term synergy driver for the belts business will be to shift more of the mix to process, and specifically, the after market distribution channel, therefore, mixing the business up over time.

On slide 6 we show the year-on-year sales trend for our last seven quarters excluding the impact of currency. You can see that our markets are declining at an accelerating pace heading into the fourth quarter. This includes the markets that I already mentioned as well as the broader industrial distribution Channel and aerospace.

We have also seen wind and rail, which were drivers of our growth in earlier periods continuing to grow but at a moderating pace. The midpoint of our guidance for the fourth quarter would be an 11% decline, again, excluding currency and the impact of inorganic.

This expected reduction reflects further weakening in end markets compounded by pressure on stocking levels across our customers' supply chains. While we aren't going to provide 2016 guidance today, we do expect to start the year at a lower run rate and with a lighter backlog than 2015. Again, as we look at both our internal forward-looking metrics as well as our backwards looking public industry data, we're confident that we are holding, to slightly improving our market position organically through these difficult markets. And we continue to pursue both organic as well as inorganic outgrowth initiatives.

Shifting the discussion to cost reduction and margins, slide 8. We came into the year with a solid plan for cost reduction.

And as markets have softened, we have worked to expedite those actions and increase their impact to offset the margin compression we are experiencing from currency and volume. Results have been significant at over $60 million estimated for the year. And we are building further momentum heading into 2016.

Right now, our cost-reduction efforts still lag the impact of volume and currency. But as volume stabilizes, we expect to be able to get back into our target market ranges. Material costs have declined through the course of 2015, and we expect further benefit in 2016.

On the SG&A front, summarized on slide 9, we have been steadily reducing our SG&A expenses through an enterprise-wide cost-reduction initiative. This slide does include the benefit of currency that we have experienced this year but also includes -- most of the reduction has been structural. In the quarter, we launched two more structural changes, one in aerospace and the other in our IT organization.

That cumulatively will yield over $10 million in savings when fully implemented in 2016. In manufacturing, in addition to right size and remaining levels, we're still driving footprint and operational productivity improvements across our global operations.

Staying on the theme of margin improvement on slide 10, we provided an update on our aerospace restructuring, which was launched in the third quarter of last year. We consolidated the segment in the top of the organization last year. We closed our engine overhaul operation and sold the assets late last year. Just this month, we closed on the sale of the PMA parts business, Timken Alcor received greater than two times revenue for the business.

Our UK-based bearing plant closure is underway and will be complete next year. And as a result of the further simplification of the portfolio, we just announced another level of integration into the mobile business, which we expect to complete early next year. This integration is designed to both lower costs as well as improve performance in market penetration levels.

The resulting aerospace portfolio is a focused leader in its two product categories, precision bearings and rotorcraft gears and gear drives. We are more focused, more profitable, more competitive, and we are now shifting our focus from restructuring to winning in the marketplace.

Wrapping up, while recognizing that we are faced with what is a deeper and longer decline in global heavy industries markets than what we anticipated, we remain confident in the prospects for our markets and our strategy long-term. One of the strength of our business is the diversity of the end markets where our products and technology are utilized, and we're confident that this market diversity will provide long-term growth and profit opportunities for us.

We remain focused on winning in the global bearings and power transmission markets while delivering on our margin enhancement initiatives, generating strong cash flow and effectively allocating our capital. Phil will now provide more detailed comments on the financials.

Thanks, Rich. And good morning everyone. Let's take a closer look at the numbers starting on slide 14.

For the third quarter, Timken posted sales of $707 million, down 10% from last year with currency negatively impacting our sales by $44 million, or around 5.5%. Excluding currency, sales were down roughly 4.5%, as we experienced lower demand in our industrial end markets.

In addition to lower end user demand, we are also seeing the effects of destocking in our channels, as customers work to reduce their inventory levels in response to the softer environment. These declines were partially offset by growth in the automotive and rail sectors as well as the benefit of acquisitions, which added $12 million to the top line in the quarter. Regionally, excluding currency, sales were off 5% in North America and down 16% in Asia-Pacific.

The decline in North America was largely attributable to softness in the industrial distribution Channel and declines in off-highway and heavy industries. In Asia-Pacific, sales were down in China with most of our major market sectors down year-on-year, including wind energy, where we had a couple of customers take fewer shipments in the quarter. This was more of a timing issue than a market issue.

Sales were up in India, led by rail and heavy truck and down across the rest of the region. On the positive side, sales were up 3% in Europe and up 9% in Latin America, excluding currency. Both regions were positively impacted by growth in wind energy, rail and industrial distribution.

You can see on slide 15 that our gross profit in the third quarter was $195 million, or 27.6% of sales, down about 100 basis points from last year. Note that last year's numbers included an inventory right off of around $20 million. Adjusting for this, our gross margins were down around 350 basis points, as the impact of lower volume, currency and unfavorable price mix more than offset the benefit of lower material and operating costs.

SG&A expense the quarter was $121 million, down around $12 million from last year. The decrease reflects lower incentive compensation, favorable currency and the benefits of our cost-reduction efforts, offset partially by $3 million of higher bad debt expense in the quarter, as well as acquisition related SG&A and ongoing DeltaX expenses.

Our third quarter EBIT was $56 million on a GAAP basis. When you back out restructuring, pension settlements and acquisition related cost, adjusted EBIT was $76 million, or 10.8% of sales, compared to $115 million, or 14.6% of sales last year. On slide 16, you can see that the decline in adjusted EBIT was driven by the impact of lower sales volume, unfavorable price mix and currency, offset partially by lower SG&A expense. In addition, we benefited from lower material and operating costs in the quarter.

However, these were largely offset by the impact of lower production volume as we adjusted for market demand and took steps to reduce inventory in both mobile and process. Considering we build inventory last year, the change in inventory and corresponding lower production levels, negatively impacted our margin by over 100 basis points, with mobile being above that number and process below it.

As outlined in slide 17, we posted net income of $63 million in the quarter, or $0.75 per diluted share on a GAAP basis. On an adjusted basis, our EPS came in at $0.55 per share, compared to $0.77 a year ago. Note that earnings per share benefited from a favorable tax rate and share buybacks, including just over 1.5 million shares repurchased during the quarter.

Our GAAP tax rate in the third quarter was negative 11%, in other words, a tax benefit on pretax income. The large pension settlement charge we took back in the first quarter has caused our quarterly GAAP tax rate to be more volatile than normal. Excluding unusual items, our adjusted earnings reflect a tax rate of 30% in the quarter, compared to 34% a year ago. We expect to maintain our year-to-date adjusted tax rate of 31% for the remainder of 2015.

Now turning to slide 18, let's take a look at our business segments starting with mobile industry. In the third quarter, mobile industry sales were $396 million, down 7% from last year. Excluding currency, sales were down around 1% driven by lower off-highway and aerospace demand offset largely by growth in automotive and rail, and the benefit of acquisitions.

For the third quarter, mobile industries EBIT was $43 million. Adjusted EBIT was $46 million, or 11.6% of sales, compared to $57 million, or 13.2% of sales last year. The decline in earnings was driven by the impact of lower volume, unfavorable price mix and currency, offset partially by favorable material and operating costs and lower SG&A expense.

We now expect mobile industry sales for 2015 to be down roughly 8%, driven in part by negative currency of 5%. Excluding currency, sales are expected to be down 3%, reflecting lower shipments in off-highway and aerospace, partially offset by organic growth in automotive and rail and the benefit of acquisitions.

Slide 19 shows the process industry sales for the third quarter were $311 million, down 14% from last year. Excluding currency, sales were down 9%, driven by weaker industrial distribution and heavy industry demand, partially offset by the benefit of acquisitions.

For the quarter, process industries EBIT was $43 million, adjusted EBIT was $45 million, or 14.6% of sales, compared to $74 million, or 20.5% of sales last year. The decrease in earnings reflects the impact of lower volume, unfavorable price mix and currency and higher bad debt expenses of $3 million in the quarter, partially offset by favorable material and operating costs and other SG&A expenses.

We now expect process industry sales for 2015 to be down approximately 8% with negative 5% coming from currency. Excluding currency, sales are expected to be down 3%, as growth in wind energy and military Marine and the benefit of acquisitions will be more than offset by weaker demand in the industrial after market and heavy industries.

Turning to slide 20, free cash flow in the quarter was strong at $119 million or more than twice our adjusted net income, compared with $52 million during the same period a year ago. The improvement in free cash flow was driven by favorable working capital performance year-on-year, lower CapEx spending, and the positive settlement of certain cash flow hedges in the quarter.

Moving next to our balance sheet and capital allocation on slide 21, we ended the quarter with net debt of $555 million, or 29% of capital, compared to 13%, at the end of 2014. At the end of the third quarter, we were close to the low end of our targeted leverage range of 30% to 40%. We expect to generate strong cash flow again in the fourth quarter, including $45 million from the sale of our aerospace PMA business which closed last week. We will continue to follow our capital allocation framework in looking to deploy it.

In the third quarter, we completed the following capital allocation initiatives. First, we invested $22 million, back into the business, through CapEx.

Second, we continued our commitment towards dividend, paying off $22 million, or $0.26 per share. Next, we completed the purchase of the belts business on September 1. We expect this transaction to be modestly accretive over the balance of 2015 and add between $0.08 to $0.10 per earnings-per-share in 2016.

Lastly, we bought back just over 1.5 million shares at a cost of $51 million. Year to date, we have repurchased 5.9 million shares. And as of the end of the third quarter, we have around 3 million shares remaining under our current authorization. We expect to continue to be in the market buying back shares in the fourth quarter.

Moving to slide 22, we have revised our outlook and now anticipates sales at the corporate level for the year, to be down run 8%, consisting of negative currency of 5% and organic declines of 4.5%, offset partially by acquisition growth of 1.5%.

We expect GAAP earnings per diluted share to be in the range of $0.65 to $0.70 per share. This includes the gain from the sale of our aerospace PMA business. Included in our GAAP earnings outlook are five unusual items totalling net expense of $1.40 per share. These items are laid out in detail on this slide, so I won't go through them individually.

Excluding these items, we now expect adjusted earnings per share to range from $2.05, to $2.10 per share. Our outlook assumes an adjusted EBIT margin for the year of just below 10.5% at the corporate level which includes a negative currency impact of around 100 basis points for the year. We expect to generate free cash flow of roughly $200 million, after CapEx spending at around 3.5% of sales. This represents over 110% of estimated adjusted net income for the year and provides us with flexibility to deliver value to shareholders as we move forward.

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

(Operator Instructions)

Stephen Volkmann, Jefferies.

Good morning, guys.

Good morning, Steve.

Just one quick clarification. Your adjusted EPS target -- the new one $2.05, to $2.10 -- is that assuming any further share repurchase or no?

As normal, Steve, that would reflect share repurchases through the end of the third quarter. Keep in mind, anything we do in the fourth quarter, will have a smaller impact on the year just because of the way it averages in.

Understood. My real question was -- I just wanted to see if you could give us a sense of the cadence of the quarter. We have heard other companies say things got worse as the quarter progressed. And October has also gotten a little bit worse.

Obviously we are trying to start to triangulate what 2016 is going to start out like. I'm curious if you saw any trends through the quarter that are worth calling out?

Steve, at the company level, order book patterns, backlog -- worse in July than June, worse in August than July, and down September, and clearly with the guidance we're forecasting, down the fourth quarter from the third quarter And clearly -- the guidance we are forecasting down the fourth quarter from the third quarter. There is definitely a trending down to the quarter.

There is a definite trending down through the quarter on macro. Now there's a lot of -- there are some bright spots in there. There are some good things happening both from a market and from a penetration standpoint. But definitely downward pressure.

If I could just add, Steve -- when you look at our sales month-to-month, particularly in the third quarter with shutdowns and vacations outside the US, et cetera, it is very difficult to really glean anything. But as Rich said, the bigger point was really the backlog and the order book. As the quarter progressed it clearly, clearly got worse.

Thanks. You mentioned a couple of times -- I think each of you mentioned destocking and some of the distributor channel issues. Do you think this is mostly an issue of inventory? Or are you seeing just as much weakness directly with the OEs that would make you think it is more than just a destock?

Yes, I think there is a destocking at distributors. There is a destocking with OEs, and there is also I would say in some of these heavy industries markets cannibalization -- trying to defer maintenance expenses, et cetera. We are accustomed to these.

We certainly, when we spoke to you last quarter, expected a level of destocking in the fourth quarter, which is fairly common for us. But we are now expecting it to be deeper than what we would have a quarter ago.

Okay. Finally on that -- how much visibility do you have in the sense of -- do you have a sense of how long the destock goes on? Or do you just have to wait it out?

I would say the positive that we have is we certainly did not start off from a high inventory levels standpoint in distribution or our OE channels. We started off from the standpoint of -- these heavy industry markets declined pretty significantly in the second half of 2013. Had a fairly small bounce-back in 2014. And inventory was very reasonable during that time.

It is certainly not a situation where we are starting from a bubble or a massive undertaking. But a clear deceleration that as a look at the fourth quarter it is will clearly going to be lower than what we had today. And we expect to start out obviously going into the first quarter with a lighter backlog, as I said earlier.

Thanks. I appreciate it.

Thanks, Steve.

Eli Lustgarten, Longbow securities.

Good morning. Can we talk a little bit about operating profitability and margins -- how they look going into the fourth quarter? And the real question, through the year, you talked about hoping to get back to target margins next year.

I think you indicated with cost reductions lagging, the volume decline -- that is unlikely to happen. Can we expect to make some progress back towards next year? Or can you give us a sense of what we -- how we should look at the operating profitability as we go through this quarter into next year?

Yes, Eli. I will try to put a little more color on that.

As we look at the rest of the year, I think you can pretty much -- from what we have given you, I think you can pretty much deduct what we're looking at for margins. We again would expect mobile to be on the low end or slightly under the low end and process to not be there yet for the fourth quarter. That is with a further volume decline.

Currency's obviously have for the most part the last couple of quarters. Obviously there are some ups and downs in there, but that that is not -- sequentially, that has not been a major factor for us -- since the drop in the first quarter, where the dollar strengthened.

You would really need volume to stabilize -- and stabilize for a couple quarters and let the cost reductions catch up to that. And clearly, if they go down further -- that gets tougher and tougher to do, within the process segment. Process has been heavier hit by currency and the cross-border impacts.

But where we are still operating at today, we definitely feel we have enough cost-reduction momentum to get the margins back in there. But we aren't here today to talk about what we are forecasting yet for volumes for 2016.

If I can -- I'll just add a little bit there, Eli. Obviously as we look at the third quarter, we talked about in our comments -- clearly working on cost reduction initiatives.

But really hard to catch up with the volumes. So the volume and the mix and currency really combine to really have a negative impact on our margins in the quarter.

As we move to the fourth, I think it will be a little bit more of the same. Although the cost reductions will catch up a bit. The currency will become less of a factor in the fourth quarter. At least at the margin level.

We don't have the same -- we had a little bit of inventory destocking of our own, if you will in the third quarter which will probably moderate a bit in the fourth. I would expect margins, third, to fourth, to be down. Probably not down as much as the volume might imply.

Can you talk a little bit about pricing across the businesses? One of the big dangers we go through in this period is we start seeing price erosion. Are we seeing much of that? Or are prices relatively stable?

And when does the material cost benefit anniversary, or does that continue as we go into next year?

We definitely start seeding -- let me take the material piece first -- we definitely started seeing some material -- more material improvement in the third quarter. Expect to see more in the fourth quarter. And strong material improvement year-over-year in the first half of next year.

Certainly, that has been a contributor to our cost-reduction this year. And we expect it to be a sizable contributor to our cost reduction next year.

On the pricing standpoint for the full year this year, we would expect pricing would be very close to neutral. Within that, there are some ups and downs. The bigger challenge for us this year has been mix, as Phil just mentioned, where it has been less after market more OEM.

As we look at next year, it is a -- we are expecting another tough pricing market where we don't think we can count on pricing to improve our margins. But would not expect pricing to be a significant factor on the macro for us in total next year, and certainly, would be a smaller factor then our cost-reduction.

And the OEMs are not demanding pricing -- price moving back because of low material costs at all?

Absolutely -- our OEMs are always looking at price. We deal with that on a regular basis even in a good market. Obviously in a tougher market, it is a little bit tougher on that. We think we will be able to come out of that at a fairly nominal price situation in the total.

Thank you very much.

Thanks, Eli.

David Raso, Evercore ISI.

Good morning. Just trying to get the framework for 2016 a little bit. If you can just help us with what is known right now.

The cost savings this year. Can you give us some idea of what is the dollar amount you expect to be carry over savings helping 2016 versus 2015?

I would say, David, the cost reductions are ramping, as Rich mentioned. We generated over $60 million this year. That will continue to ramp. We are really not giving a specific number, but I would expect at least an incremental -- call at 100 basis -- call it around $30 million next year versus this year.

Altogether, in terms of incremental material -- we might get the incremental SG&A reductions we put in place this year. Rich talked about the IT. Rich talked about the aerospace.

There are some other things as well. We would expect incremental cost savings as we move into next year.

So $30 million tax effected -- we can use our own share count -- that is at least $0.20, $0.25.

I think as we have been talking with you guys -- I think all year, we have talked about trying to improve our margins as we move into next year and work our margins back up into our targeted ranges. I think it is really under the concept of what we have been talking about all year long, in terms of working our margins back up to the targeted ranges.

And then obviously, we have to see what happens with volume. We have to see what happens with currency and some of the other larger factors.

And then the acquisition -- the incremental accretion from the acquisition expected -- 2016 versus 2015?

We said modestly accretive in 2015. So we would call it may be a $0.01 or $0.02 -- and I think 2016, we are really tracking toward $0.08 to $0.10 -- call it an incremental $0.07 to $0.08 if you will -- $0.06 to $0.08.

The acquisition is on track. We're generating the -- starting to see some of the opportunities we thought we would see and really feel good about the prospects longer-term for the deal.

And then on the repo, we've got 3 million left, would we expect to finish that this year? Do half of it this year?

I understand what the spin, you really can't do another authorization until next summer. So maybe that is a reason to time it a little bit and play it out between now and next summer? Or is it -- no we are going to move ahead and try to finish this repo in 2015?

David, we're going to stick with what we have been doing from a forward standpoint. That's really -- we've been -- forward-looking, we have been committing to the capital allocation framework and the priorities between organic and dividend and buyback and M&A. And forward committed to the 30% to 40%.

And we will give you an update through -- at the end of the quarter, in terms of what we purchased. But reaffirm, we will be in the market in the fourth quarter and active on the buyback.

And as Phil said, we just received proceeds from the sale of Timken Alcor, and we expect to generate strong cash this year. And we are still actually not in the low end of the targeted range yet.

So the inability for another authorization til next summer shouldn't influence how I think about the timing of doing the repo earlier than waiting for the timing of the new authorization?

No, I wouldn't view that as a big influence.

Last question. You said the year is going to start giving back -- a lot of it will be down. I think you said earnings will start the year down, year-over-year. Can you just frame it a little bit?

Can you just give us some quantification of when you say down, how do you expect the backlog to be down at the end of the year? Is it down 10% year-over-year, 15%, 5% -- just trying to get a little feel for the whole that we start 2016 in.

Just to clarify, I said the backlog -- the revenue would end the year at a lower run rate, and the backlog would end lower -- not that earnings would necessarily be lower from that. I think I would just look at where we are implying for revenue guidance for the fourth quarter organically with the belt acquisition on top of that. And use that same sort of percentage implied for where we would end with the backlog.

Okay -- I'm sorry. To be clear -- maybe I misheard.

We're not necessarily saying that the year starts with earnings down year-over-year? I don't mean the full year -- I guess you are implying first quarter, second quarter -- did I not hear that properly that we are starting the year with down earnings?

Down revenue.

Just down revenue.

Down revenue and down backlog.

Helpful. Thank you very much.

Steve Barger, KeyBanc Capital Markets.

Good morning. Rich, in your opening comments, you said you are confident in your market position. I'm curious, when you have slow or negative growth and destocking happening, how do you measure organic penetration to stay confident that you are maintaining or growing share?

Us and the other five biggest global bearing companies all publicly report data. So we have that data that we thoroughly dissect after-the-fact, which is one of the things I was talking about from a publicly reported data standpoint. There is a lot of industry data that is after-the-fact as well. We have forward-looking data -- quotation pipeline, share estimates, et cetera.

We also have publicly reported industrial distributors -- don't necessarily always split out bearings versus their other product lines. But certainly you can see trend lines from that.

I would say -- certainly when you get into China and India and some places like that -- generally with the people we are not competing against, it gets a little bit blurry. But outside of automotive it's -- you can triangulate this pretty well backwards with what the industry comps are doing. And certainly not seeing any signs, nor are we getting any customer feedback of that as well.

Okay. And as growth slows -- it seems like some customers across the space are wanting to lean on the supply base to help with cost. I think you mentioned that on the OEM side.

When you think about your outgrowth initiatives and specifically helping people redesigned products for cost takeout and efficiency, can you capture any cost on the front end? Or do you try to make that up over the product lifecycle?

I'm not sure if I understood that question. Let me give you a chance to maybe clarify the question. And then I will take a shot at it.

You have talked in the past about helping customers redesign product to make their own -- to make the product that the bearings go into more efficient. I'm just wondering about that process. Our customers coming to you more and trying to push that engineering cost on to you? And can you recapture that?

Okay. I would say that our customers definitely have an increased focus today on cost reduction than where they may have been a year or two ago. And again, we go through these cycles we talked about earlier.

Part of that is the design cycle. Part of that is just looking for cost reduction as I think Steve Volkmann inquired about earlier.

Again we would -- as we sit here today -- would expect -- we always try for new designs -- we're always trying to mix ourselves up in that process. That is a key part of mixing ourselves up as we look full forward next year, we would not consider the price element of that to be a significant issue into next year.

Okay. And just staying on price for a minute, where you are seeing price pressure, is that primarily coming from customers asking for price downs? Or are you seeing any competitors proactively cut, to try and take share?

I would say it is -- there hasn't been anything from -- we get asked a lot about the currency situation. And again -- we would see what the impact of that has been on the big competitors -- backwards, with their financial results.

It would be very difficult to point to anything -- really with our customer base which is very global, as is our competitors' customer base. US-based companies that have operations in China, Europe, emerging markets, et cetera. Very difficult to point -- if any of our customers are losing any share or responding negatively to price, nor would we really be able to say anything on a macro level, with price.

It is a tough pricing market out there. We would love to go out and offset all of the currency impact and volume impact we have had. We have to be very selective about it. That's why I don't want to downplay it. You can't really say you are seeing anything specific from competitive reaction as a result of currency or volume being down.

Got it. Thanks. Last question.

This is probably peak delivery in North American rail this year. Can you remind us of the OE after market mix? And then maybe talk about how you see the rail market next quarter and next year if you will take a shot?

I'd say on the North American side, you are right. It is projected at this point to be peak.

Our business is very global. So probably a little less than North America from a rail perspective, then what you might expect. And then globally half-and-half. (multiple speakers)

Keep in mind, our after market is a combination of not only after market -- new bearings, if you will. But we have a recon business as well that actually re-conditions bearings -- as a service in the market as well.

So I guess when I think about the entire revenue mix, are you more skewed to pure OE or after market and reconditioning?

I would say the way we classify it, it would be about half-and-half. Half of the demand is driven by the after market. Half of it is driven by OEM new builds. That would be a global statement.

Got it. Thank you very much.

Thanks, Steve.

Schon Williams, BB&T Capital Markets.

Good morning.

Good morning, Schon.

Can you just clarify -- how much of the $60 million in savings -- how much have you actually realized through Q3?

I would say that $60 million is about -- a little over a third SG&A. And a little less than two thirds cogs. And that is -- the $60 million is not looking at currency. So as you look at the currency slide that we have included in there -- a little under half of that would be -- this year, to last year -- would be currency driven versus cost -- currency neutralized.

So you can take that part -- obviously we've given you the quarterly breakout. And you can see very closely what that part looks like.

And then on the other part again -- that is a full-year number that is building momentum. So that is an impact for this year. Not an annualized impact.

But it would be -- to say it another way -- we are certainly not 75% of the way through to realizing that $60 million -- I mean to some extent, coming back -- I'm just trying to get a sense of how much catch up there is relative to that $60 million.

Certainly we would expect the fourth quarter to be bigger than the third, which was bigger than the second, which was bigger than the first. So it would be a little backend loading on the second half.

Okay. That is helpful.

And then maybe just a little more color on Asia-Pacific. That segment took a pretty significant turndown in Q3. Maybe just a little color there.

I noticed I think you said India was down this quarter. It was up last quarter. Just any additional color would be helpful there.

Sure let me -- I will take that, Schon. Good observation. Asia-Pacific was down more then it was for example in the second quarter.

It's a couple things. If you start with China. We're clearly feeling the effects of the economic slow down in the heavy industrial space there as well as -- which also affects distribution.

And then I mentioned wind energy. Wind has run very strong in China. It is a very strong market for wind.

In the quarter, we kind of had a timing issue, where a couple of domestic customers, if you will, took fewer shipments in the third quarter. That was a big piece of it. That was a big driver of the decline in China, for example. And then I would say -- just broader across the heavy industrial space.

The metals, mining, ag, cement, construction -- for example, distribution. Then moving to the rest of the region -- India -- India was up in the quarter -- just like it was last quarter. So the economy is improving there. The biggest drivers for us in the quarter were rail, heavy truck and probably industrial distribution -- to a slightly lesser degree.

And then as we look across the rest of Asia Pacific -- again not very big -- but that would be Australia, ASEAN, Japan, Korea -- really down across the rest of the region.

Okay. So you feel confident that that wind delay was just a timing issue?

I would say, in the quarter we expect wind to continue to be a strong market for us. It will be seasonally -- it's typically seasonally a little weaker in a fourth. And obviously, we are watching very closely -- obviously in China in particular, it is government influence, in terms of the incentives, et cetera.

Obviously keeping a close eye on that -- it has been running at very strong levels, for a long time. We're beginning to moderate in wind. The comps are getting tougher as each quarter goes on.

But in the quarter, we were down in China because of that timing issue. But actually, we are up a little bit in Latin America and Europe. So as I look -- wind globally -- wind was really kind of flat in the quarter year on year.

Last question from me. You said there was increased bad debt experience I think maybe a in the process side. Any red flags there?

No, I mean we watch it real closely. I called it out because it was a bigger number.

We run typically very low bad debt expense. We had a couple million last year in Venezuela. We had $3 million this quarter.

It was really a combination of Latin America and China. And Venezuela was a big driver within Latin America. It was really receivables crossing a certain aging -- after they cross a certain aging level, we reserve them at 100% per our policy.

We set the reserves up -- and obviously still working to collect those past dues and bring them current. I just felt we would call out the amount just because it was included in our adjusted numbers.

How much was that?

It was $3 million in the quarter. And it was almost all process industries.

All right, thank you.

Really no concerns -- no concerns more broadly from a customer standpoint. We're not seeing anything big that causes us any concern on that end. It was really isolated instances.

I appreciate the color, guys.

Michael Feniger, Bank of America Merrill Lynch.

Hi, guys, this is Mike from Bank of America Merrill Lynch filling in for Ross Gilardi. Good morning, guys.

We talked about destocking. You mentioned your own industries being drawn down in the quarter. How are you feeling right now with your Outlook and what you are seeing on the demand side with your own inventories? And how you guys are trying to figure that out as you progress in the fourth quarter?

Two elements to that. One, we certainly have a very active initiative within our manufacturing and supply chain, distribution network, et cetera, to improve our inventory effectiveness, et cetera, which would be more structural reductions.

And then more pertinent for the [martharim], which is certainly what drives the shorter-term issues -- in terms of what we're looking at from an Outlook standpoint and the demand volume side of that. From -- so, putting the objective of improving inventory turns aside, I would say from where we ended the third quarter, pretty good.

But we actually built inventory last year in the third quarter. So it was a fairly sizable difference, but still Phil highlighted.

And I think -- we typically are down a little bit in the fourth quarter. So the reason we are not looking at a significant inventory reduction in the fourth quarter under the expectation that the first quarter demand would support that.

Okay. Just to be clear, the impact you guys saw from taking down your own inventories on your margin, -- we are not going to see that type of impact in the fourth quarter?

No, I would say we are not going to see that year-on-year, because we actually took inventory out last year and the fourth quarter as well. That will not recur.

But as we look -- sequentially -- we would probably sequentially -- taking a little bit of inventory out in the fourth, versus the third. But it wouldn't be anything that I would call -- material.

Okay. That makes sense.

And then we talked about -- how the cost savings -- the $60 million -- it has to catch up with the lower volume activity. With what you're talking about wind is now facing separate comps. Rail is peaking this year. Is there any room, guys, do you feel like outside the volume environment do your own internal initiatives maybe ramp that up even further, to try to catch up the slower demand environment?

When we come out -- at the end of the year with an Outlook for 2016, cost reduction will certainly be an element of it. And depending on when we are looking at volumes and our Outlook on that -- I think that will dictate how aggressive we are with that.

We have a multi-year plan of things we look at with our footprint and really look to more pull things in, depending on where we are at, with the volume Outlook. We've tried to pull that in this year. We have been successful doing that.

And we will certainly step on it further if our Outlook requires it for next year. But we will provide more guidance on that on the January caught.

The one thing I would add to that -- add to that, Mike -- is that we're as we are planning our cost reduction initiatives, I think we are much more mindful of the trend that we are seeing as opposed to today. It's not like we're cutting costs assuming no further decline. We are very mindful.

Rich showed you the chart of the trends we're seeing relative to top line. We are very mindful of those trends as we think about cost reduction initiatives.

Perfect, guys. Just the update -- you guys gave us what you are expecting -- your guidance to margin. What is the 10.5% -- what should we be expecting for process for the end of this year -- to finish this year?

We really don't split that out by segment. But I think you can probably get there.

When you look at it mobile will be call it high 9%s I think for the year if you look at the midpoint of the guidance. Then process would be in for the year -- kind of in that low to mid-15%s kind of range.

Perfect. Thanks, guys.

Justin Bergner, Gabelli and Company.

Good morning, gentlemen. How are you?

Good.

First question relates to Carlstar. You are maintaining your $0.08 to $0.10 accretion for next year. But clearly we experienced and August, kind of swoon in the market and industrial activities decelerating. What allows you to keep the $0.08 to $0.10 accretion for 2016?

I would start with the market mix of the Belt business -- is significantly different than Timken's core business. Much more on the -- they have an ag component -- which -- when we closed on the deal with the price, we were eyes wide open on what the ag market was looking like, for the short term. But they have a larger power, sports, consumer-oriented product line than what Timken has.

So we do-- the current Outlook for those markets would be stronger than what we're seeing on the heavy industry side. Again, -- being a part of this synergy case for them -- to open up avenues for us into those markets and vice versa.

So, while the sales of the acquisition are certainly under some level of pressure, they are not nearly under the same level of pressure that you're seeing for our Company as a whole. With that, we still think we can hold the Outlook of the -- $0.08 to $0.10 full impact of next year.

Great. But there is no change in your synergy copulation at present? It is more just that looking at the end markets for Carlstar, there hasn't been much change from the announcement of the acquisition?

Correct.

As Rich said, we had a good I on where markets are heading as we were working to the negotiations and feel like we had a pretty good read on it. From a synergy standpoint, really tracking to what we expected.

Great. Second question on -- uses of free cash flow.

It seems like -- as we look toward the rest of the year, the focus is on repurchases. Are you still hoping to do further bolt on acquisitions this year? Or is that more of a 2016 event?

It is possible that we do something yet this year. We have some level of activity that is possible. There is nothing that would happen in the last two month that would be of the size of the Carlstar acquisition.

So certainly gives us comfort that could do both. As you get into next year, you are into even more speculation, in terms of the possibility. We intend to remain active next year in that part of our strategy.

Okay, great. And then, in terms of the free cash flow guidance, I guess it was nudged up from $190 million, to $200 million. Part of it seems to be slightly lower CapEx. Are there other puts and takes in the free cash flow guidance change besides the reduction in CapEx?

I would say CapEx would be a big one. Really three things. Obviously the adjusted earnings are a little bit lower, which would be -- that would kind of flow through the cash line and then offsetting that would be lower CapEx. I would say slightly better working capital than probably we would have guided to in July.

So really -- a combination of those three. So lowering earnings, outlook a negative, and then working capital and CapEx being the positives.

On the working capital side, which line item is there big contributor there, in terms of the better outlook?

It has kind of been all three. I would say inventory has been one we have been focused on for the last -- certainly for the last quarter, in terms of bringing that under control and bringing that down, in line with the sales decline. It has really been multifaceted.

Accounts Payable we're working to -- in the normal course, extend terms where we can. Receivables is a little more the toughest one. You are more subject to industry standards and geographic norms, if you will.

Working to keep the past dues to a minimum and collect on the receivables line as well. So all three. But I would say inventory and payables being the bigger of the three.

Fantastic. Final question would be on wind. Has the wind market peaked for you globally as we look into 2016?

No. I think the -- there are certainly some market pressures with wind, in terms of where things are at in different geographies with government incentives and various things. But, we have a very active wind pipeline. We have technology that -- again, these are generally long sales processes.

But we would definitely expect the pace of growth to moderate significantly. Just because we are now at a level where the scale is such that it would moderate. We still have significant headroom in the wind market to grow.

Okay. Thank you for taking my questions this morning.

Thank you.

Samuel Eisner, Goldman Sachs.

Good morning, everyone.

Good morning, Sam.

Just going back to the -- I guess the operating line here and the decrementals, the decrementals on an organic bases were roughly 12.5% last quarter. This quarter we're roughly 50%.

Is that primarily driven by your company level destocking? Is there anything else that we should be noticing with that 50% -- or that acceleration and the decrementals? Thanks.

No, I think you got it. It is the lower volume. The unfavorable mix with distribution being down more significantly than the NOE.

Then the inventory was as I commented on probably 100 bps in the quarter in terms of building inventory last year, versus taking it out this year. The bad debt expense I mentioned would have been -- obviously would have been another factor.

And I think -- and the currency -- but obviously we had the current the last quarter as well. I think those are the bigger drivers.

Got it. That is helpful there.

Then on the $30 million of incremental savings for next year -- is that weighted more towards SG&A or raw materials? Perhaps you can talk a bit about how the raw material -- I know you gave a little bit before -- but how the raw material is looking for the first half of next year.

Again, I think the way to look at 2016 would be -- trying to work our margins back up to targeted ranges and trying to kind of work them toward the low end of those ranges -- assuming -- obviously we have to see what happens with volume and currency and things of that nature.

But it would be a combination of -- what we would expect to build in next year. Again, we will provide a lot more detail in January. What we would expect to build in would be a combination of SG&A and cost to sales.

As Rich said, as you look at the $60 million this year -- it is probably more one-third SG&A excluding currency and probably two-thirds more on the operating cost line if you will. So I would think -- it would be a similar split. Obviously probably more weighted. We have more cost on the cogs line. But it would be both SG&A and cogs.

That is helpful. And then on the -- on Carlstar, you mentioned -- the margin profile is toward the low end of the targeted range. Can you talk about the path toward improving the profitability of that business on its own?

As I mentioned in the comments, Sam -- I think the real measuring stick several years from now is -- whether the business is going to be a good acquisition for us is really the altering the mix of it and improving our package through the industrial distribution channel that Timken is very prominent in, as well as taking Timken into some of the other distribution channels that they are in and vice versa.

So I think the -- real play-book is over time, is to improve the belt shelf space and presence in that distribution channel. We have -- that is as a play-book that we did with the drives chain acquisition. And it has been successful and are really looking to repeat that play-book. So that would be number one.

And then after that -- obviously there are some costs -- some cost pieces of both leveraging our SG&A structure, as well as some level of consolidation, et cetera. Manufacturing wise, outside the purchasing elements, where there is a piece -- manufacturing wise, very different plants and no short term intentions for anything from a plant standpoint.

The other thing to keep in mind, Sam -- when we bought the business, the EBITDA margins were really do right in line with our corporate EBITDA margins at 16%. That is with two thirds mobile one third process, so to Rich's point, the ability to get that more 50/50 overtime. Obviously it doesn't happen overnight. To get that over time, would be a huge benefit.

Than obviously, we do have the purchase accounting we have to deal with in terms of the non-cash amortization we will have to record over the next several years. But feel really good about the ability to mix that business over time.

That is great. Lastly -- maybe a housekeeping question.

How large is the Chinese wind business as it stands today? And what was it last year? Thanks.

We don't really get into it, but we have said -- I think we have said in the past that it is -- our wind business -- a good chunk of it's China, probably close to half. Then the other half would be the rest of the world. That is what we have said in the past on it.

Thanks.

Larry Pfeffer, Avondale Partners.

Good morning, gentlemen. I know DeltaX has been in place for little while now. Just looking at the pace of product of development, say where it was versus 12 months to 18 months ago. Could you put a little color around where you guys see some of the new market opportunities and product development initiatives?

I made a couple comments on DeltaX. With the SG&A savings that we have outlined there -- net of that we will end the year with more product engineers and more sales resources across the globe net of that.

We came into the year after a few years because of the mobile exits of underperforming -- the market from a top line standpoint with the objectives to be 1% to 2% above. We're probably going to end up more instead of 1% to 2% we'll probably end up zero to 1%. So, under delivered slightly there.

But I would say our application pipeline is as -- is fuller than it has been any time in recent memory. And we are building momentum there. Feel pretty good about what we are doing. I think we are on the right track.

It is a combination, Larry, of both new products that are not existing in our portfolio as well as an increased win rate on application pipeline which is really more using our existing technology to improve customers' applications. So building momentum -- we will come out in 2016 with what our goal is to deliver on it for next year.

Okay. Thanks for taking my question. Best luck in the quarter, guys.

Thanks, Larry.

Stanley Elliott, Stifel Nicholas.

Hello Stanley.

Good morning, everyone. Thanks for fitting me in.

Going back to the Chinese wind business -- there is the new Chinese five-year plan. Admittedly it is still pretty early.

What are some of the areas -- sifting through the initial data coming out -- where you would expect Timken to benefit? And also, maybe any guess on the timing of when we might start to see that stimulus flow through to the results? Thank you.

I think Stanley, as Rich mentioned, obviously -- it is a strong market over there right now. We are performing very well in that market. Would expect to continue to perform very well.

And for us, it is really a combination of -- we will move with the market. But actually the incremental share gains that we expect to achieve over the next -- several years with our product development initiatives and new business wins, et cetera. So really hard to comment on the five-year plan specifically.

But really just to say that it's like any other big heavy industrial market, it will ebb and flow. It will be seasonably weaker in the fourth quarter, as I mentioned. It will ebb and flow and with incentives et cetera. We feel really good about our market positioning.

And feel really good about the long-term prospects for that market, not just in China obviously but in Europe, Latin America and North America as well.

Great, thank you.

That concludes our Q&A session for today. I'll now turn the conference over to Ms. Chadwick for any additional or closing remarks.

Thanks, Orlando. And thanks everyone for joining us today. If you have further questions, please call me at 234-262-3223.

This concludes our call. Thanks again.

That concludes the conference for today. Thank you for your participation.