Timken Co (TKR) 2015 Q4 法說會逐字稿

Good morning. My name is Matt, and I'll be your conference operator today. As a reminder, this call is being recorded. At this time, I'd like to welcome everyone to Timken's fourth-quarter earnings release conference call.

(Operator Instructions)

Thank you. Ms. Chadwick, you may begin your conference.

Thank you, Matt, and welcome to our fourth-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 contact 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 www.Timken.com website.

We've 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.

Thanks, Shelly. Good morning, everyone, and thanks for joining us on the conference today. As Shelly said, Phil and I will reference several slides from the deck that we posted on our investor website earlier today, and I will start with slide 4.

The fourth quarter played out better than our expectations. While we did experience the sequential softening that we expected from weak markets and normal OEM seasonality, we also saw less destocking in our channels than we anticipated.

Demand across our global industrial distribution channel as well as our industrial services business were both stronger than anticipated, which in addition to helping our revenue, also helped our mix. We also saw the benefit in our mobile business of our DeltaX Initiative, with organic revenue holding flat for the segment, despite the difficult off-highway equipment market.

Our adjusted earnings per share of $0.59 was our best quarter of the year, as we saw the benefit of continued cost reduction initiatives, as well as our share buyback.

In the fourth quarter, we announced a new plant in Romania. When combined with other manufacturing investments underway in India and China, these operations will introduce new and proprietary process technology. They'll expand our product range, improve our balance of currency exposure and provide an improved cost structure.

Turning to the full year of 2015, for the year, we posted a revenue decline of 7% and an adjusted earnings per share decline of 13% in what were very challenging markets for us, with a strong dollar compounding already-weak global industrial markets. Despite the tough markets, we delivered double-digit return on invested capital and double-digit adjusted EBIT margins, as well as $269 million of free cash flow.

2015 was a year of strong execution and a year of building a stronger Timken Company for customers and shareholders. In our first full year of our DeltaX Initiative, we improved market penetration via new customers and new applications in wind, rail, marine and light truck markets. We built our application pipeline to put us in position to increase penetration again in 2016 and 2017. We expanded global sales and engineering resources, invested in new sales, pricing and engineering tools to continue to deliver the best technical sales experience in the industry. And we launched products that add new options for the portfolio to solve our customers' friction management and power transmission challenges.

On our operational excellence initiative, we are second-best year for safety in our history. We continue to deliver the quality levels that our customers expect from us. We provide excellent customer service across our diverse channels and markets, and we drove over $60 million of cost reduction initiatives, while committing to an additional $60 million for 2016.

In regards to capital allocation, we invested $106 million of CapEx back into our business for cost reduction, capacity and new capabilities. We increased our quarterly dividend by 4% in May, and paid our 374th consecutive dividend in the fourth quarter.

Acquired the Carlyle Belt product line, increasing our scale and presence in the industrial distribution channel, and increasing the breadth of our power transmission product portfolio. We reduced our gross pension liability in the year by over 50%, while we fulfilled our commitments to our retirees, and we did so with no incremental cash contributions. And we purchased approximately 10% of the outstanding shares of the Company during the year.

We entered 2016 as a stronger player in the global bearings and power transmission space, and with a pipeline of initiatives to further improve our business. We also entered 2016 with a strong balance sheet, strong cash flow and confidence in the long-term value we will create.

As we look at our markets for 2016, we project a year that will look very similar to 2015 in regards to tough market conditions. On the left column on slide 9, we summarize the organic year-on-year outlook for our end markets. You can quickly see that only the automotive market is projected to grow year on year.

Several of our markets, like heavy truck, rail and wind, are projected to remain at what would be historically robust levels; but at the same time, they decline from 2015 levels. Other markets like ag and oil and gas are projected to continue to contract through the course of 2016. We remain focused on managing our mix and profitably increasing our penetration in these markets by increasing our application wins at OEMs and our share of end-users through the aftermarket channels.

I want to emphasize that in many of these markets, our visibility beyond the next several months is limited, and we can certainly see stronger global industrial markets in the second half of 2016. But based on our backlog and orders, as well as general market outlook and input from our customers, we are planning for a slow start to the year, as compared to the first quarter of 2015. And then from this low base, we are planning for stabilization of our markets and channels, with normal seasonality.

On slide 10, the net of our market and penetration outlook is down 5% to 6% organic, an additional 2% down due to currency, partially offset by the positive 3% from acquisitions, for a net 4% to 5% down. At the adjusted earnings per share line, the benefit of 2015 share buyback, as well as our cost reduction initiatives, will partially offset the reduction in volume and currency, resulting in a $1.95 EPS at our midpoint, which would be a 12% reduction from 2015.

At the GAAP EPS line, we are planning to increase our restructuring spend in 2016 to approximately $0.30 a share. Some of that spend is carryover from already-announced plant rationalizations and SG&A reduction initiatives. The remainder will focus on improving our manufacturing footprint and reducing our SG&A costs, and will be communicated when appropriate to do so.

We expect to again generate solid cash flow in 2016, and after investing in CapEx and paying our dividend, we will continue to weigh our opportunities for M&A and share buyback. Our Board yesterday approved a 5 million share buyback authorization that will run through the year.

With that, I will turn it over to Phil before we open the lines for questions.

Okay, thanks, Rich, and good morning, everyone. Let's start on slide 12. For the fourth quarter, Timken posted sales of $714 million, down 6.3% from last year, with currency reducing our sales by $35 million in the quarter, or around 4.5%. Excluding currency, our sales were off just under 2%.

We continue to experience soft demand in most of the industrial end markets we serve, driven by low commodity prices and weakness in emerging markets like China. However, this was offset partially by growth in the automotive, wind energy and military marine sectors. We also benefited from the recent Carlisle Belts acquisition.

Overall, demand declined a bit less than expected in the fourth quarter, with less inventory destocking in our channels than we thought. Regionally, excluding currency, our sales increased 6% in Europe, but were down across the rest of the world. Specifically, sales were down 3% in North America, 4% in Asia and 4% in Latin America.

Europe's increase was driven by wind energy in Western Europe and industrial growth in Eastern Europe. In North America, weak industrial, off-highway and rail markets were partially offset by strength in automotive and the benefit of acquisitions.

In Asia, we continued to see growth in India, but this was more than offset by industrial declines in China and the rest of the region. And Latin America's results reflect the broad economic slowdown there, with the exception of Mexico, which was up slightly in the quarter.

On slide 13, you can see that our gross profit in the fourth quarter was $191 million or 26.7% of sales, down 230 basis points from last year, as lower volume and the negative impact of currency were only partially offset by favorable material and operating costs.

SG&A expense in the quarter was $119 million, down $13 million from last year. The decrease reflects our ongoing cost reduction initiatives, as well as the favorable impact of currency. In the quarter, SG&A was 16.7% of sales, an improvement of 60 basis points from last year.

Below the SG&A line, you can see the $242 million in pension settlement charges we posted in the fourth quarter as we completed our second large annuity transaction, which moved about $475 million of retiree liabilities to Prudential. We also recorded a gain from the sale of our aerospace PMA parts business, and booked around $3 million of restructuring in the quarter.

Our fourth-quarter EBIT was a loss of $150 million on a GAAP basis. When you back out pension settlement charges, the PMA divestiture gain -- a nonrecurring fixed asset write-off -- and other unusual items, adjusted EBIT in the quarter was $79 million or 11.1% of sales compared to $89 million or 11.7% of sales last year.

On slide 14, you can see that the decline in adjusted EBIT was driven by lower volume and unfavorable currency, offset partially by lower SG&A expense and favorable material and operating costs. As outlined on slide 15, we posted a net loss of $36 million or $0.44 per share in the quarter on a GAAP basis.

On an adjusted basis, our EPS came in at $0.59 of income per diluted share compared to $0.65 last year. Note that earnings per share benefited from share buybacks, including 2.7 million shares repurchased during the fourth quarter.

Our GAAP tax rate in the quarter was 78%, which represents a tax benefit on our pretax loss. This was due to the geographic mix of our GAAP earnings, as well as the reversal of approximately $35 million of deferred tax asset valuation allowances and other tax reserves in the quarter. Excluding these items, on an adjusted basis, our tax rate was 31% in the quarter compared to 29% a year ago. We expect our adjusted tax rate to remain 31% in 2016.

Now turning to slide 16, let's take a look at our business segments, starting with Mobile Industries. In the fourth quarter, Mobile Industries sales were $380 million, off 2.4% from last year. Excluding negative currency of around 5%, sales were up about 2.5%, driven entirely by the net benefit of acquisitions.

Organically, sales were flat, as growth in the automotive sector was offset by lower off-highway and rail demand. For the fourth quarter, Mobile Industries' EBIT was $59 million. Adjusted EBIT was $36 million or 9.5% of sales, compared to $29 million or 7.3% of sales last year.

The increase in earnings was driven by the impact of favorable material and operating costs and lower SG&A expense, offset partially by the impact of lower production volume and the net impact of acquisitions. Our outlook for Mobile Industries sales in 2016 is to be down roughly 5%, with currency accounting for negative 2%, and the net impact of acquisitions accounting for positive 2%. So organically, we're planning for sales to be down around 5%, driven by lower off-highway, rail and aerospace demand, offset partially by growth in automotive.

Slide 17 shows that process industry sales for the fourth quarter were $334 million, a decrease of 10.4% from last year. Excluding negative currency of 4.3%, sales were down about 6%, driven by lower demand in the industrial aftermarket and heavy industries, especially oil and gas and another commodity-related sectors. This was offset partially by stronger performance in military marine and wind energy, and the benefit of acquisitions.

For the quarter, Process Industries' EBIT was $45 million. Adjusted EBIT was $56 million or 16.7% of sales compared to $79 million or 21.3% of sales last year. The decrease in earnings resulted from lower volume and currency, which were partially offset by favorable material costs, lower SG&A expense and the benefit of acquisitions. Mix was less of a headwind this quarter, due to distribution and military marine.

Our 2016 outlook for Process Industries is for sales to be down 4%, with currency accounting for negative 2% and acquisitions accounting for positive 4%. So organically, we're planning for sales to be down around 6%, driven by declines across the industrial aftermarket and heavy industries.

Turning to slide 18, you'll see that free cash flow for the quarter was $88 million, up $19 million from the same period last year, despite lower adjusted earnings. The improvement in free cash flow was driven primarily by favorable working capital. You don't see it on the slide, but for the year, we generated free cash flow of almost $270 million, or over 140% of our adjusted net income.

Looking at our balance sheet and capital allocation on slide 19, we managed both cash and debt well in 2015, ending the year with $130 million of cash on hand. We ended the quarter with net debt of $528 million or 28% of capital, compared to $236 million or 13% of capital at the end of 2014.

Following our capital allocation framework, we made good progress in 2015 as we invested for growth and returned significant capital to our shareholders. In particular, we invested $106 million or 3.7% of sales back into our business through CapEx, increased our quarterly dividend by 4%, and paid dividends totaling $1.03 for the year, acquired the Carlisle Belts product line -- adding an exciting new platform to our portfolio. The integration of the business is on track, and despite some end-market challenges, we're pleased with what we see so far.

And lastly, we bought back approximately 8.6 million shares for $310 million, reducing our share count by roughly 10% in 2015. We substantially completed our prior 10 million share buyback authorization. And last week, our Board approved a new authorization of 5 million shares for 2016.

Looking ahead, we'll employ a balanced approach to capital allocation. We expect slightly higher CapEx in 2016 as we advance our global footprint initiatives. We intend to maintain our dividend, and will continue to look at strategic acquisitions and share buybacks. We expect to be in the market buying back shares in the first quarter, and will update our progress as we go.

On slide 20, just a comment on pensions. As we've discussed before, we've taken important steps to de-risk our pensions in order to lessen volatility and the risk of significant cash contributions. In 2015, we reduced our gross liabilities by roughly 50% or more than $1 billion through a number of initiatives, including two large-group annuity transactions. We're pleased to report that the annuity purchases were funded entirely with plan assets, our affected plans remain fully funded, and we have no significant contributions required in 2016.

Turning to the outlook on slide 21, as Rich mentioned earlier, we're expecting another year of challenging markets, with our backlog in industrial order books down significantly from where they were a year ago. As a result, we're planning for sales to be down 4% to 5% in 2016, with currency negatively impacting us on the top line by around 2%.

The net benefit of acquisitions completed in 2015 should add around 3%. So organically, we're planning for sales to be down 5% to 6% in 2016 as a result of continued declines across the industrial landscape, including distribution and services, off-highway, rail and heavy industries, offset partially by growth in automotive.

We estimate GAAP earnings per diluted share will be in the range of $1.35 to $1.45 per share. Included in our earnings outlook are two unusual items totaling net expense of $0.55 related to restructuring and pension settlement charges. Excluding unusual items, we estimate adjusted earnings per share to range from $1.90 to $2 per share, with our adjusted EBIT margin for the year in the range of 9.5% to 10% at the corporate level. Note that our visibility into the second half of the year is limited, and at this time, we see no catalyst for recovery in 2016.

We expect free cash flow of roughly $175 million in 2016 after CapEx spending at around 4.5% of sales. This represents about 110% of adjusted net income at the midpoint.

We included slide 22 to provide a quick walk from our 2015 earnings to our estimate for 2016. At the midpoint, our 2016 adjusted EPS estimate is down $0.26 from 2015. The biggest driver of the year-on-year decline in EPS is organic.

We're forecasting a 5% to 6% decline in revenues organically, and that's after net outgrowth we expect to achieve in sectors like automotive, rail and wind energy. We expect price mix to be negative in 2016, but we continue to expect price cost to be favorable.

On the cost side, we expect to drive roughly $60 million in additional cost reductions over 2015. This includes the full-year effect of actions taken last year and the net impact of current-year actions. Note that for 2016, we're targeting SG&A spending of around $475 million at the enterprise level. This implies net $20 million of cost-downs from 2015, and that's after absorbing the full year of Belts SG&A, as well as normal inflation. So in aggregate, we're estimating the 5% to 6% organic decline net of the cost savings to reduce earnings per share by around $0.26 at the midpoint.

Looking at just a couple of the other items, we expect the lower share count to add roughly $0.10. This includes share buybacks completed in 2015, and we'll update our guidance for 2016 buybacks as we go through the year.

The Belts acquisition should add roughly $0.07 to our earnings. This is consistent with the low end of the range we provided at the time of the acquisition, and reflects softer adding in industrial markets. And currency its estimated at negative $0.13. This is based on year-end 2015 exchange rates.

In summary, Timken and our employees delivered a solid finish to a very challenging year in 2015. While we're planning for 2016 to be another difficult year, we will stay focused on outgrowing our end markets through DeltaX, driving operational excellence and deploying our capital effectively.

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

(Operator Instructions)

Stephen Volkmann with Jefferies.

Hi, good morning.

Good morning, Steve.

Both of you talked a little bit about the destocking less than anticipated in the fourth quarter, so that caught my attention. I'm wondering if you can give us a little more detail on that? And obviously the bigger question is where are we in that big picture of customer destocking? And if you even wanted to do that by segment, that would be quite useful as well. Thanks.

Yes, Steve, let me take a shot at that.

We generally have pretty good visibility to our demand picture three months out, three, four months out -- some parts of the business longer, some shorter. An exception to that is the end of the year, where we sometimes get customers taking extended shutdowns, inventory reduction initiatives, requests to push shipments out. That's the negative side. The positive at the end of the year that makes it hard to predict -- we also see, at times, increased maintenance expenditures, and at times, increased production builds, as well.

So the end of the year is always a little choppier, tougher for us to call. And as we were looking at where our trends were heading into the fourth quarter, we put a pretty cautious outlook that we expected push-outs from OEMs, basically destocking through their channels, and then also some inventory reduction in the distribution channel. And we did see some of that, right? So sales were down year on year, and sales were down slightly sequentially. It was just must less than what we anticipated. As you look across our markets, I would not say we have any areas where we are looking at significant inventory reduction in the first quarter or anticipated through the year. But obviously with our guidance of down organically in the range that we are projecting, we're just generally expecting some light end demand, and inventory to reflect that.

Okay, good. So I think what you're saying is that basically, you're going to be reflecting end market demand rather than any destock or restock?

Yes.

And do you mind -- is there anything to say relative to Mobile versus Process on this issue?

I don't think so. I think our indicators would be that inventory is roughly in line with where we're at. It's certainly -- there are some sectors, as you go through the OEM channel, that are still destocking at their end. And that would be generally where we have read on our slide 9. The ag market is still reducing OEM equipment and distributor channels, and we're seeing that pressure on our side. There's some anticipation of that this year with the North American heavy truck build being down, that we will see some reductions in that, and that's all baked into our guidance.

Okay, thanks very much.

Thanks, Steve.

Eli Lustgarten with Longbow Securities.

Good morning, everyone.

Good morning, Eli.

Nice quarter. A bit of a surprise. Following up Steve's question on the inventory destocking, can you give me an idea of what was happening as we entered 2016. You talk about backlogs being down, and that's what current demand trends look like. And you indicated the top-line impact and the expected declines in organic sales. But can you talk a little bit about profitability in both sectors also? You have goals of, what, 10% to 13% in Mobile and 17% to 20% in Process.

How close do you think you can come to some of those numbers? Profitability in the fourth quarter was quite good. Do we have a chance of getting to the lower end of the guidance range in FY16, despite the lower volume?

Eli, if you extrapolate the midpoint of our guidance and midpoint of the revenue and earnings, and take that down and split it out between the two segments, you'd be a little bit below margins. The target margins -- as you said, we're targeting 10% to 13% in Mobile, 17% to 20% in Process.

We don't generally hold those ranges through cycles; we were above that not too long ago in Process, and operated below it through last year. And we still believe those are good ranges, and over cycles, we will be able to largely be in those ranges. As you look at next year -- and what happened last year, we were chasing the volume down last year with our cost-reduction, looking at volume down again this year. So we're looking at being close to the range in Mobile, but slightly under, and under a little bit more in Process. And that would pretty much add up to what we're guiding. Still believe we can get there, and if volume comes in better than what we are anticipating, we could certainly be right back in the margin ranges above the segments.

Yes. And how weak are the backlogs environment? As we entered this year, you indicated that -- obviously a warning sign. But can you give us some color on where things are versus last year on some of this business? How far down is what?

If you look at slide 9, everything there on the left that's in red is -- we would be starting off the year lower. And you could have backlogs down 5% to 20%-plus in those end markets. Automotive and wind for us is both up. Wind would be more a market penetration thing for us. The ones in the yellow would generally be flattish. Both on ag and rail, we're offsetting some of that, as you see over on the right side, both with the inorganic, as well as some of our continued penetration tactics in rail. But definitely some of these are down double-digit percentages.

I would just add, Eli -- this is Phil. The ones that obviously stand out would be no surprise: industrial distribution, heavy industries. Because again, the oil and gas was still a little bit higher last year. Off-highway, as Rich mentioned. And then probably more recently, rail and heavy truck. And as those markets have started to weaken.

They weakened late in the year. Rail was down in the fourth quarter. We've seen those order books, orders get pushed out there, as well as order book declines there as well. So it's -- as Rich said, it's the markets we've highlighted on that slide, and really some of the same markets we dealt with in 2015.

Is the reason for -- you're more optimistic in heavy truck, despite the market being down. Is that penetration also?

No, I think it's probably more where we play. If you look at our Business, we're probably around 50% aftermarket. It's a very global business. So the North American builds will generally be down. We'll feel the effect of that in the OE sector.

But initiatives that we've been working on to gain share in the aftermarket and heavy truck around the world continue to advance, and that's probably mitigating that market decline. It is going to be down. Heavy truck will be down next year, just not down as much as markets like rail, off-highway and aerospace are expected to be.

Okay. And one other final question. Can you talk about pricing across the products, and maybe price-cost relationships? Are materials still going down, and are prices stable? Or where are we seeing softness at this point?

Eli, let me start, actually, with what we ended up experiencing in 2015. Pricing ended up being a slight positive in 2015. And call it less than 0.5%. So, it's a fairly small number in what was a fairly difficult market.

And two dynamics there. One, we did raise prices through the course of the year in geographies, where we, as well as our competitors, are largely importers of product and there was a significant currency impact. So places like Russia, Brazil, Canada, we raised prices through the course of the year.

And then also, as you know, we have some contractual agreements where steel surcharges get passed on and through to some of our larger OEMs. So that's a negative for us, but price-cost on that is generally positive. Clearly we did not move prices -- the 0.5% was fairly small in terms of the squeeze that we experienced from currency and volume, but we did hold it. In our guidance for this year, we expect some further pass-through of steel costs through to some of the larger OEM customers. Again would expect price-cost to be favorable, and expect price to be flat to maybe down 0.5% across the board.

Okay, thank you very much.

Thanks, Eli.

David Raso with Evercore ISI.

Hi, good morning.

Good morning, David.

You mentioned a slow start to the year. Can you just give me some sense of the cadence of getting to the $1.95 when it comes to the quarters?

I think if you look at how we performed this year, you could probably put that into next year's model relatively closely. The first quarter has been down from the fourth quarter sequentially, really since we changed the mix of our automotive business four or five years ago, and has generally been our lowest earnings quarter of the year.

And then second and third, usually a little higher. And then obviously, last couple years, the fourth quarter has been good. But certainly if you looked at the split on the $2.20-ish from this year and took that to next year, it's $1.95, I think, would be a good benchmark.

Okay, that's helpful.

When it comes to the 20% implied decremental on the volume price and restructuring, the restructuring you alluded to a little bit by giving that cadence. But the restructuring benefits, are they, off the bat, the incremental ones, right here to start the year? Obviously the decrementals have been a little more severe the last couple years. So my first take when I saw the 20% decrementals on that volume decline was some skepticism. Can you help us on the pace of this incremental restructuring, how quickly it can show up?

We have been reducing costs all through the course of 2015, so certainly -- and spent less on it. Much of the benefit, though, of what we would be doing with the $0.30, some of that you'll see in the first quarter, and would be flowing through. So it's very much similar numbers playing out in 2016 to 2015, the revenue.

And really what's happening is, currency was down more in 2015, volume a little less. In 2016, we are looking at those two flipping, but similar numbers. So we'd start the year really with the carryover from last year. Most of what we would spend the $30 million on this year, a lot of it anyway, would be more second-half of the year and into 2017.

Yes, if I could just add a couple things there, David. When you think about the cost reductions though, we delivered a lot in 2015, as we talked about. It sort of ramped throughout the year. As Rich said, last quarter, we started probably a little bit later than we wanted to. And 2016, it's underway as we speak.

So while there will be a ramp like there always is, particularly on the SG&A side, I think we are starting earlier than we did last year. And then really what's driving the better decrementals than you might think is the cost reductions, obviously. And that's material, it's manufacturing costs, as well as the SG&A. And our ability to deliver the $60 million in 2016 will really drive that decremental that we've guided to.

All right, helpful. And then on the balance sheet cash flow usage, you obviously alluded to, when you continue to look at acquisitions. So when I look at the free cash flow guidance, the dividend is $85 million, $90 million. It would seem you have $85 million, $90 million to play with on free cash flow, and then the ability to lever up a little bit more on the balance sheet.

Should I think of the willingness to go up to a 30% net debt to cap is still the parameters? Because that would give you another $100 million to play with, on top of the $85 million to $90 million of access free cash flow, post dividends. Is that the right way to frame it?

Let me make a few comments there, David. The 30% to 40% is a range, it's not concrete. And obviously we're operating nominally below that range. We would, for the right opportunity, be very willing to temporarily go over that level. And the range is intended to signal that if we go over that level, you could expect us to use our free cash flow to pay down debt towards getting to that level.

We are a little below it this year. And as Phil said, we're going to be in the market in the first quarter. As the year progresses, we're going to look at our opportunities, and certainly would not expect us to move too far backwards towards that -- away from that range. And we'll be looking at the combination of M&A and buyback opportunities as we go forward.

And one last small thing. Maybe my memory fails me, but was there some limitation to the size and timing of the share repurchase, the new authorization, related to some lingering issues around the TimkenSteel spend?

David, I'll just say first, from what I know, that your memory never fails you. So I'll let Phil answer that question. (laughter)

Great memory, I can attest to that. But you're right, David, there were some restrictions related to the spinoff in terms of the amount of shares we can have authorized during the first two years. So we put a 5 million authorization in for 2016, safely within the parameters related to the spin. And once we cross the mid-point of the year, those restrictions will no longer apply.

So essentially, the one-year expiration on this authorization, something had to do with, alright, after this anniversary, we have a little more flexibility on the size and scope of future authorizations? That's the way to think about it, right?

I think that's the right way the way to think about it, yes.

Yes, I think normally we would have a larger multi-year authorization outstanding, and we've had these two getting up to the two-year point.

So this will cover 2016, 5 million shares. As Rich said, we'll evaluate it as we go. And then in the second half of the year, or maybe a year from now, the Board and management will consider another authorization at that time. And again, so it's -- on this 5 million, just to provide a little bit of guidance on it, if we were to do the whole authorization, it would be about $0.05 incremental on the EPS, relative to 2016 guidance. And again, we will provide updates as we progress throughout the year, with M&A, share buyback, vice versa.

Yes, it just seemed like you had more flexibility on the balance sheet using that true 30% to 40% range than that authorization suggested. So just wanted to understand that, that limitation was there the way I remembered it. Okay, thank you very much. I appreciate it.

Thanks, David.

Ross Gilardi with Bank of America.

Good morning, guys. Thank you very much.

Hi, Ross.

I just wondering, can you talk a little bit more about rail? I see you're calling for the US market down, which clearly makes sense, but you're saying share gains mitigate. Are you saying share gains will fully mitigate, or just partly mitigate? And can you remind us, are we talking locomotives or railcars?

Yes, thanks, Ross. This is Phil.

No, we are primarily in freight rail, and obviously North America is our biggest market. Our businesses is global though, as we talked about many times, as well as there's a service or aftermarket component.

So we are expecting North American freight to be down, as has been projected by the OE freight car builders. We expect to mitigate that slightly. It will still be down at the Timken level pretty significantly from 2015. But we are continuing to pursue opportunities outside the US. We will continue to do that, and look to eke out some outgrowth relative to the markets we serve around the world in rail. Because again, that's an area where we bring some great capabilities and technology to the table, and we're going to continue to advance those initiatives.

Got it, thank you.

And we've gotten this question from a number of investors, so forgive me in advance for asking. But there's some uncertainty with TimkenSteel, and just wanted to get your sense, is there any potential liability to Timken in the absolute worst-case scenario that TimkenSteel had to file for bankruptcy?

Ross, we are not going to comment or speculate on the prospects of TimkenSteel, or any of our other suppliers or customers. But specifically in relation to the spinoff process, we conducted a robust process when we completed the spinoff of TimkenSteel, cleared a full team of financial legal advisors. And we are confident that our decisions and actions in connection with that spinoff were appropriate and prudent, and do not envision any risk with that.

Okay, thanks, Rich, I appreciate that.

And then just can you discuss room for additional cost savings and facility rationalization in the event that the end markets did turn out to be worse than you expect?

If markets are lower than where we are at, we would continue to pull the levers that -- additional levers of labor reductions and right-sizing. And obviously the other lever we have with that is, it allows us to shift production to lower-cost facilities that are generally running at higher utilization levels.

But with that, as I said earlier, we're operating below our target margin ranges. We are still catching up from last year's volume erosion, with our cost reductions. So clearly, if markets are down lower than that, we will take out more costs. But it will continue to pressure the margin profile.

On the positive side of that, if volumes are better, a lot of the cost reduction that we've done is, particularly on the SG&A side, is structural. And we would expect some really good leverage if we're being too cautious on our market outlook.

Do you have that much room to shift production to -- I know you're adding in Romania. But I would think overseas, you're already operating pretty full-out in your facilities. How much flexibility do you actually have to shift, by region?

We are operating relatively full-out, and so last year, as markets softened, we shifted production. So I was trying to make the point that if markets were below another -- a few percent below that, obviously that would open up some capacity, and we could shift more than what we have in this plan.

Got it. Thanks very much.

Larry Pfeffer with Avondale Partners.

Good morning, gentlemen.

Good morning, Larry.

Just looking at the regional breakdown, Asia-Pac maybe came in not quite as bad as I might've thought. How have you seen China and just the overall region progressing in recent months?

Thanks, Larry. This is Phil.

Asia-Pacific is -- for us, really the two biggest markets are China and India. India actually grew in 2015. It was pretty broad; we saw it in rail, we saw in industrial distribution, we saw it in industrial OE markets, et cetera. So India was a bright spot.

The rest of the region was soft. China -- to speak to China specifically, we continue to see the wind market as being very strong in that region. But where we play in China, which would be heavy industries, wind, off-highway, and to a lesser degree rail, but rail as well, we're seeing those markets continuing to decline.

They declined throughout the year. That's continuing. Wind is actually moderating a bit in China, but still at relatively good levels. But there's a lot of capacity in China in metals and other industrial markets. And it seems like we're going to have to work through that for the next probably few quarters, at least.

Understood. And then on the cost savings side, looking at material, can you walk through how you expect the cost-price dynamic to play out sequentially across the year?

Yes, I'd expect the material, as we talked about last year, material, there's a bit of lag. So the first quarter of last year, it really started to ramp at the end of the first quarter, so we'll get some of the benefit there. The Process are continuing to decline, so we'd expect benefit throughout the year on material. And then on the manufacturing costs in the SG&A, as I said, we will get -- of the $60 million, probably half of that is carryover from 2015.

So we are at the run rate sort of as we speak. The other half will ramp, and then the ramp will occur slowly, probably slightly back-half-weighted, I would say. But we're working on the initiatives as we speak, so would expect a relatively faster ramp than we saw in 2015.

Okay, thanks. Best of luck in this year.

Thanks, Larry.

Steve Barger with KeyBanc Capital Markets.

Hey, good morning, guys.

Hey, good morning, Steve.

Going back to slide 9, you only have auto expected to grow. The question is, with the outlook for everything else being flat to down, why do you have confidence -- or how much confidence do you have that auto can hang in, in 2016?

Well, we are -- two things. One, we are generally going off customer outlook, general industry outlook, et cetera. And then we are weighted towards the favorable part of that market, as well. We are generally on premium passenger cars and light trucks, which is a more -- when you take a cut below what's already a generally pretty positive outlook, we are on the positive side of that. And obviously, there's risk to that, just like there's risk to all the rest of these, but that's what it's based on.

Okay. And the flip side -- when you look at metals, mining, oil and gas, all in decline, do you get the sense that your customers are starting to adopt a bunker mentality, where they see continued deterioration for the foreseeable future? Or are there any areas where they see capacity getting to sustainable levels?

I'll just take the one that's getting the most wide speculation right now, on oil and gas, where you'll find experts predicting $30 a year by the end of the year. You can get $60 a year by the end of the year. And it's obviously an industry that's still contracting and consolidating.

We're relatively small, and that is a direct end market. But, obviously, it's had a contagion effect, if you will, on a lot of our other markets, and capital spending in general. What I would say though, to probably get at the question, you look at mining, heavy truck, still a lot of investment at the OEM level on new equipment, new platforms, focus on fuel efficiency and differentiation of their products. We are not seeing a reduction across these places in long-term investments and product technology, which is where we have the opportunity to win new business and differentiate for longer terms. But clearly a lot of these markets are going through short-term cycles.

Right. And sorry if I missed this, but the $60 million in additional cost savings you're targeting for 2016 -- any more detail on how your sizing that relative to variable costs, physical capacity reductions, outsourcing programs, or anything else?

Yes, Steve, we said about a net $20 million is going to hit the SG&A line. And that is after absorbing the Belts and some other things. So we'll have about $20 million on the SG&A line, and the remainder would be on the cost of sales line, split between material and manufacturing, similar to the breakout we saw in 2015.

And it's a mix of initiatives in that, right? There's the material element, which is pretty straightforward. We have one plant closure that's in process, that we announced some time ago. We announced that we are moving a significant part of our information technology resources to our operation in India. There's an element of right-sizing in our plants. So a combination of initiatives, some which are structural, again, that as volume comes back, we would expect to leverage, others which are more volume-related.

Okay. Last question.

On the manufacturing side itself, is the focus more on shifting capacity or shifting product lines into existing facilities to improve absorption? Or are there areas where you want to de-capitalize and outsource programs to essentially save that cost permanently?

We've had a general trend towards reduction in vertical integration for over a decade. And I would say that that's going to continue to be a general trend, where you see us -- obviously, there's some exceptions. The spinoff of the steel business was a huge step in reduction of vertical integration.

Most of the others have been more that we have not invested in new capital equipment in some of the earlier stages of our processing, and focused more on the differentiated parts of our process. So no major moves there. But again, as we look at the Romanian plant investment, as an example, not only is it a lower labor-cost region, but it's also new assets, new technology that we put in there. And we get benefit of that as we either shift or retire older processes and technology.

Got it. Thanks for the time.

Thank you.

Schon Williams with BB&T Capital Markets.

Hi, good morning. Thanks for squeezing me in.

Good morning, Schon.

I wanted to just reconcile some of your other comments from some public comments that have been made. I mean, one of your key channel partners on the process side talked about some strategic initiatives in Q4 to take on product. Potentially, maybe, to make their rebate hurdle for the year. But there would be significant destocking over the next two quarters. Just help me reconcile. Is that -- that's a different product mix versus bearings. Is that a timing issue? Just maybe help me understand those comments versus your earlier commentary?

I think those comments would be in line with my earlier commentary, which is one of the challenges we have in the last couple months of the fourth quarter in getting whether distributors are going to reduce inventory or increase inventory. And we saw both. So China, as an example, we saw general destocking and a reduction in demand. In the US, we saw a mix, where we saw some of our distributors increase inventory in the fourth quarter, we saw others hold, and we saw some reduce.

So I don't think there's anything inconsistent there, unless it was a universal -- a global statement, if you will, across our network. And we generally have pretty good visibility into what happens with those inventory levels. And if we saw a specific customer's inventory go up in the fourth quarter and not the sale of that product, then we've got that baked into our lower estimate for the first quarter.

I think, Schon, that's consistent with, as Rich said, our order book and backlogs being down at the end of the year from last year. So sales were better in the fourth quarter than we anticipated in the order book. We don't have the order book at the end of the year like we did last year, so clearly we're not expecting -- we didn't see a trend necessarily in the fourth quarter that we expect to repeat.

All right, that's very helpful. I appreciate the clarification. And then maybe Phil, can you talk about what is the delta on the pension contribution in 2016 versus 2015? How much incremental -- I don't know, available cash should that produce?

Yes, just really minimum contributions we've got, probably flat year on year, relative to mostly outside the US. And call it -- it's been running, call it $10 million or so, year in, year out. So the good news is, with the annuitizations we did, we won't have any significant required contributions. And a lot of those contributions are just voluntary steps by us to keep our plans funded where we want them to be outside the US. So nothing real significant, no significant change planned at this point, 2015 to 2016, from a pension contribution standpoint.

All right, that's helpful. Thanks.

Samuel Eisner with Goldman Sachs.

Good morning, everyone.

Good morning, Sam.

Just going back to the Mobile, your margins are up year on year without organic growth. I want to better understand some the cost savings there, and then I want to walk through some of your -- the $0.26 that you are calling out on the organic basis. So maybe starting with the Mobile, can you just walk through why margins are up without organic growth?

Yes, I think, Sam, it really comes down to the cost savings we've been able to achieve during the year. And that's probably, I think, probably the biggest driver. And then obviously, we could just continue to pursue the cost-outs.

The aerospace restructuring that we did in 2014 certainly impacted 2015. So again, it's not a profit-reporting segment, but at a gross margin level, the aerospace part of our business improved in 2015 from 2014. So we got the leverage from the efforts that we did there.

On the mix side, I would say there's a little bit of variations in mix generally with some of the newer products that we put in -- or newer applications, I probably should say. We mix ourselves up a little bit. And rail mixes us up a little bit on the opposite side. A very tough year for off-highway, and that was a little bit of a mix-down. But to Phil's point, it's cost-reduction initiatives, with aerospace being a factor.

That's helpful. And then on this $0.26 that you are calling out from volume mix and price, I just want to better-unpack that. So it sounds as though that $0.26 is roughly $30 million on a pretax basis. So, you're in the hole that much, you're seeing roughly $60 million of cost savings. It sounds like prices are going to be down 15 bps, around $15 million. Am I thinking about it the right way? Maybe you can just help us understand the decrementals on volume and mix into next year, to better-get to that $0.26?

Hey, Sam, this is Phil. I'll take a crack at it.

What we assumed relative to that decremental was that we would de-lever on the volume as we historically have. We said price mix would be negative for the year, although price cost would continue to be positive. And then the cost reductions of the $60 million coming in.

Restructuring is excluded from that obviously; we will adjust for that as we incur it. But I would say, normal deleverage that we've run this year, and then with probably less net price mix than we had in 2015, in terms of less of a negative. And then again offset by the cost reduction.

Yes, and you've got the $20 million that we are targeting for year-on-year net reduction in SG&A spend. And recognizing, as Phil said in his comments, that we pick up a full year of Carlisle. And that's -- so the gross number is larger. Obviously that's helping offset some of the gross margin deleverage that Phil was talking about.

Okay. And then just lastly, on the guidance here, on the EPS guidance, you commented obviously that your visibility is not as great into the back half of the year. If I think about the phasing for the year, that -- let's call it $1.95 at midpoint, how are you thinking about mix between the first half and the second half of the year in that $1.95? Thanks.

Similar to 2015.

Great. Thanks so much.

Thanks, Sam.

Justin Bergner with Gabelli & Company.

Good morning, everyone.

Good morning, Justin.

A couple quick questions here. First, on the Carlisle Belts acquisition, it seems like it's running at a revenue run rate in the fourth quarter, [empiric volumes] at $120 million to $125 million. Is that accurate?

Yes, directionally, that's accurate. And the trailing 12 months of what we acquired would've been closer to $140 million, $145 million. Seasonality of the business is that fourth quarter is usually low, and when we acquired it, we knew they were facing some headwinds on the ag market. Those headwinds have probably gotten a little greater since the acquisition, but we still expect the acquisition to deliver on the low end of the EPS range of when we acquired it.

Great. And is the ability to deliver on the low end of the EPS range related to more success with factors that are offsetting the revenue weakness? Or was this the low end of your revenue range associated with the accretion range when you went to the deal?

I'd say, everything except the revenue is closer to the high-end. And then the revenue is probably a little bit below it, and netting out to be at the low end of the range.

Got it, thanks. Secondly, you haven't talked as much on this call about potential acquisitions in 2016. Clearly you still have balance sheet capacity; valuations have come down. Where does M&A stand in the free cash flow priority spectrum for 2016?

We're going to work the process hard, as we have been for some time. We're going to weigh our opportunities. As I sit here today, I would tell you, nothing of size is likely eminent in this quarter. That being said, we're working a lot of things, and frankly, we'd be disappointed if it doesn't have some contribution through the course of the year.

Great, thanks. And one more, if I may. On wind, I guess, flat to down is perhaps a bit more cautious view on 2016 than where things stood a quarter ago. Is China wind demand rolling over? Or is the flat to down more a function of North America and the cadence there?

No, I would say, I think, Justin, it's probably clearly moderating. And then obviously wind, like any other heavy industrial market, goes through cycles. So there is some expectation that China will be a bit softer in 2016 than it was, although at pretty good levels. I think as we think about wind, it's probably, I think, flat. And then maybe with some of the outgrowth initiatives slightly up, as opposed to flat to slightly down.

But we are viewing the markets as -- globally, as largely flat. And then really any growth we get will really be a function of markets flat to down, and then our outgrowth initiatives getting Timken to flat up.

Okay, great, thanks. I hadn't realized that was more of a market view than a Timken view. That's it for me.

Thanks, Justin.

With no additional questions, I'll turn the call back to Ms. Chadwick for any additional or closing comments.

Thank you. I'd like to take this opportunity to thank you for joining us today. If you have further questions, please call me. This is Shelly Chadwick, and my number is 234-262-3223. This concludes our call.

And again, that does conclude today's conference. Thank you for your participation.