Timken Co (TKR) 2016 Q1 法說會逐字稿

Good morning, my name is Lauren and I will be your conference operator today. As a reminder, this call is being recorded. At this time I would like to welcome everyone to Timken's first-quarter earnings release conference call.

(Operator Instructions)

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

Thank you, Lauren, and welcome, everyone, to our first-quarter 2016 earnings conference call. My name 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 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 up the call for your questions. During the Q&A I would ask 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 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'd like to thank you for your interest in the Timken Company and I will now turn the call over to Rich.

Thanks, Shelley, and good morning, everyone. We appreciate you joining us today. Phil and I plan to reference several slides from the deck that we posted on our website earlier this morning.

Start on slide 4. The quarter was in line with expectations with revenue declining both sequentially and year over year. The 5% revenue decline was driven by multiple weakened markets as well as currency, partially offset by our outgrowth initiatives including the benefit of acquisitions.

From an end-market perspective there were no real surprises, positive or negative, in the quarter from what we built our 2016 plans around. Automotive and wind remain bright spots for us while most of our other markets weakened from 2015 as we expected. Particularly in heavy industries like oil and gas, agriculture, mining and metals, we saw weak demand at OEMs as well as in the after-market.

We performed reasonably well given the environment, with earnings per share down 8% from 2015; positive cash flow of $23 million which is seasonably strong for us; and adjusted EBIT margins of 9%. The EBIT margins were below our target ranges for both business segments, with volume mix and currency continuing to offset our cost reduction and outgrowth actions.

Process Industries margins were particularly weak with challenging mix and low volume. We do expect margins to improve sequentially from the first quarter for both Process Industries as well as the Corporation as volume stabilizes, mix improves and we see the full benefit of cost reductions.

We saw benefits from all three of our major focus areas: outgrowth, operational excellence and capital allocation in the quarter. And we expect to see more benefit through the rest of the year. I'll expand briefly on each.

In regards to outgrowth, the top-line benefited 4% in the quarter from the net benefit of acquisitions and divestitures. I'll talk more about the integration of Carlisle belts in a moment.

On the organic side we continue to make small incremental gains in market share in our targeted markets, highlighted in the quarter with the agreement US Navy to continue supplying gear drives to the Arleigh Burke destroyer for the next decade. We are winning business through our application engineering capabilities, channel management an excellent customer service, all well carefully managing price and mix.

On our operational excellence initiative we continue to see the benefit of cost reduction from both structural cost-reduction initiatives as well as actions related to cyclicality in volume. We saw significant year-on-year improvement in material costs. And while we expect the first quarter to be the peak savings from a year-on-year perspective, we continue to execute additional margin expansion initiatives. We've been aggressively right-sizing our plant operations and we continue to invest in our footprint.

Our UK bearing plant is on track to be closed this quarter. Our new plant in Romania is underway and on pace to be operational in 2017. Our expansion of our India operations is underway. And we initiated the consolidation of a bearing plant in Virginia which will be closed in early 2017.

Our business is typically a consumer of cash in first quarter but our efforts to improve working capital management contributed to our $23 million of cash flow in the quarter. And we expect another strong year of free cash flow for the full-year 2016.

Our continued focus on efficiency across our enterprise resulted in our eighth straight quarter of sequential declines in SG&A spending. We are on track to exceed our $60 million target for cost reduction for the year while we're investing in making our business stronger.

From a capital allocation perspective we paid our 375th consecutive dividend and purchased 1.2 million shares in the quarter for a return capital of $56 million. Additionally we are continuing to plan for a relatively high year of structuring CapEx at approximately $0.30 per share for restructuring and approximately 4.5% of sales for CapEx, as we continue to invest in growth and margin expansion.

We remain on the low end of our targeted debt structure and that is before 2016 free cash flow, so we will continue to evaluate buy-back as well as bolt-on M&A, with the M&A being our three focus areas of bearings, mechanical power transmission products and industrial services.

On the M&A front I did want to touch our acquisition of Carlstar Belts last September. The acquisition was a carve-out and the integration is largely complete and stable. We are pleased with the management team and we are pleased with the product line. We are focused on improving penetration in our targeted channels for both belts as well as our existing product portfolio.

We will be integrating ordering and logistics capabilities for North America in the middle of this year, providing both cost savings as well as ease of doing business with customers. And we're driving our operational excellence initiative across the business to improve safety, expand margins and improve working capital terms.

The acquisition is contributing to our SG&A reduction initiatives, with SG&A being down $10 million year over year while absorbing the SG&A from this business. We're also working to operate the business with lower working capital levels while providing excellent customer service. We remain confident that we can both grow the belts product line and expand margins.

Turning to our outlook, we are holding our full-year adjusted guidance of $1.90 to $2 on a sales decline of approximately 5%. This guidance does not require a second-half recovery but does require many of our end markets to stabilize from the first quarter run rate. While there remains much uncertainty in our end markets, our global backlog, our order patterns, our customer forecast do support the assumption that markets stabilize from the first quarter levels.

We expect the first quarter to be the low point for earnings per share just as it was last year as we benefit from improved mix, seasonality, lower costs and the benefit of share buy-back to the remainder of the year. Phil will now take you through more detail on the quarter and the outlook. Phil?

Thanks, Rich, and good morning, everyone. I'm going to start on slide 10. For the first quarter Timken posted sales of $684 million, down 5.3% from a year ago with currency reducing our sales by $20 million in the quarter. Excluding the currency impact, our sales were down around 2.5%,

As Rich indicated, first quarter played out much as we expected with continued weakness across the industrial end markets, especially in the commodity-related sectors. This was offset partially by growth in automotive and the net benefit of acquisitions. Organically sales were down about 6% in the period.

If you look at the bottom right of this slide, you'll see our geographic performance. Sales in North America were down 1% from last year but this includes the recent belts acquisition. When you take out the net impact of acquisitions, sales in North America were down roughly 7% organically, driven by soft industrial and aerospace end markets, offset partially by growth in automotive.

Excluding currency, sales were roughly flat in Europe, down 12% in Asia and down 1% in Latin America. I will touch on each of these briefly. In Europe growth in wind energy was almost completely offset by lower automotive and heavy industries demand.

In Asia, while we continued to see good growth in India, this was more than offset by sizable year-on-year declines in China. And Latin America's results reflect the continued weak economic conditions in that region.

On slide 11 you can see that our gross profit in the first quarter was $181 million or 26.4% of sales, down 160 basis points from last year, as lower volume, unfavorable price mix and currency were only partially offset by lower raw material and operating costs.

SG&A expense in the quarter was $118 million, down $10 million from last year. The decrease reflects our ongoing cost reduction efforts as well as the favorable impact of currency. In the quarter SG&A was 17.3% of sales, an improvement of 50 basis points from last year, despite lower revenue.

Below the SG&A line you can see we incurred impairment and restructuring charges of $11 million and pension settlement charges of $1 million in the quarter. The restructuring charges were driven by cost reduction initiatives, including the announced closure of a bearing plant in Virginia.

We also accrued $48 million of income in the quarter in connection with a recent distribution Timken received from the US government under the Continued Dumping and Subsidy Offset Act, or CDSOA. This distribution relates to bearing anti-dumping cases from prior years.

Our first-quarter EBIT was $99 million on a GAAP basis. When you back away unusual items, including the CDSOA income, adjusted EBIT in the quarter was $61 million or 9% of sales, compared to $73 million or 10.1% of sales last year.

Slide 12 shows the decline in adjusted EBIT. It was driven by lower volume, unfavorable price mix in currency, offset partially by the impact of lower raw material and operating costs and lower SG&A expenses. Currency negatively impacted first-quarter margins by about 50 basis points year on year.

As outlined on slide 13, we posted net income of $63 million or $0.78 per share for the quarter on a GAAP basis. On an adjusted basis our EPS came in at $0.46 per diluted share compared to $0.50 last year. Note that earnings per share benefited from share buy-backs, including 1.2 million shares repurchased during the quarter.

Our GAAP tax rate in the quarter was 30% compared to 14% a year ago. Our adjusted tax rate was 31% in the quarter and we expect to maintain this rate for the remainder of 2016.

Now turning to slide 14, let's take a look at our business segments starting with Mobile Industries. In the first quarter Mobile Industries sales were $383 million, down 2.5% from last year. Excluding the impact of currency, sales were roughly flat as growth in automotive and the net benefit of acquisitions roughly offset market related declines in off-highway, rail and aerospace. Organically sales were down over 3%.

In the off-highway sector, agriculture, mining and construction were all down year on year. In rail we saw declines in North America while the rest of the world was relatively flat on a net basis. In aerospace sales reflect continued weakness in the defense and rotorcraft markets. On the positive side, in automotive markets remain strong and we are benefiting from new North American light truck business we won in 2015.

For the first quarter Mobile Industries' EBIT was $30 million. Adjusted EBIT was $36 million or 9.4% of sales, compared to just over $36 million or 9.3% of sales last year. The slight decrease in adjusted EBIT reflects lower organic volume and unfavorable price mix, offset by lower raw material and operating costs and lower SG&A expenses.

Our 2016 outlook for mobile industries is for sales to be down around 6% in aggregate. The net impact of acquisitions and currency should roughly offset one another. So organically, we're expecting sales to decline roughly 6%, driven by lower off-highway, rail and aerospace demand, offset partially by growth in automotive. This is slightly lower than the outlook we provided in February, reflecting weaker rail and off-highway markets.

Let's turn now to Process Industries. Slide 15 shows that Process Industry sales for the first quarter were $301 million, a decrease of 8.7% from last year. Excluding the impact of currency, sales were down about 6% as we saw weaker demand in heavy industries and the industrial after-market, offset partially by the benefit of acquisitions.

Organically sales were down over 9% in the quarter. The year-on-year decline was broad across most industrial sectors but was most significant in oil and gas, as last year was a difficult comp and in industrial distribution, driven by North America and China.

For the quarter Process Industries' EBIT was $33 million. Adjusted EBIT was $36 million or 12% of sales, compared to $51 million or 15.4% of sales last year. The decrease in adjusted EBIT was driven by lower volume and negative currency, offset partially by favorable raw material costs and lower SG&A expenses. Currency negatively impacted Process margins by around 100 basis points year on year. Lower production volume was also a margin headwind as we worked to control inventory.

Our 2016 outlook for Process Industries is for sales to be down 4% in aggregate. Acquisitions are expected to add around 3% while currency is expected to reduce revenue by around 2%. So organically, we're planning for sales to be down around 5%, driven by declines in heavy industries and the industrial after-market, offset partially by growth in wind energy. This is essentially unchanged from the outlook we provided in February.

Turning to slide 16, you'll see that free cash flow for the quarter was $23 million, up $26 million from the same period last year as favorable working capital performance year on year more than offset the impact of lower adjusted earnings and higher CapEx. Note that cash related to CDSOA was not received until early April. It will be included in second-quarter cash flow.

Looking at our balance sheet and capital allocation, we ended the quarter with net debt of $551 million or 29% of capital, near the low end of our 30% to 40% targeted range. In the quarter we returned almost $56 million of capital to shareholders through the repurchase of 1.2 million shares and the payment of our quarterly dividend. Looking ahead, we will continue to apply balanced approach to capital allocation, including share buy-backs.

Moving on to our outlook on slide 17, as Rich mentioned, we are maintaining our full-year earnings outlook despite a slightly lower revenue forecast. On the top line we expect consolidated sales to be down about 5% in total in 2016 with currency negatively impacting revenue by around 2%. The net benefit of acquisitions completed last year should add around 3%. Organically, we're planning for sales to be down roughly 6%.

We expect GAAP earnings per diluted share to be in the range of $1.65 to $1.75 per share. Included in that number are certain unusual items netting to $0.25 per share of expense. Excluding those items, adjusted earnings per share is expected to range from $1.90 to $2 per share. As I mentioned, this is unchanged from we provided back in February. While share buy-backs completed in the first quarter will be slightly accretive to EPS for the full year and cost reductions are running a bit stronger than planned, these two items are essentially offset by the slightly softer top-line forecast for Mobile Industries.

We expect to generate over $210 million of free cash flow in 2016 which is roughly 135% of adjusted net income. This includes cash received from CDSOA but also includes cash paid for restructuring. We expect CapEx for the year to come in around 4.5% of sales which includes spending for a new bearing plant in Romania as part of our strategic footprint initiatives.

In summary, we executed reasonably well in the quarter, our cost reduction initiatives are gaining momentum and we continue to succeed in the marketplace and smartly deploy our capital. We are demonstrating the capabilities of the Timken team and our business model and we look forward to continuing to advance the ball on all fronts.

With that, we will conclude our formal remarks and open the line for questions. Operator?

(Operator Instructions)

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

Good morning, everyone

Good morning, Eli.

Can we talk a little bit about -- as you went over the numbers, you did tweak some stuff in process mainly. Actually, your organic is down 5%; it was down 6%. Your acquisition is 3%; it was 4%. And the profitability was a little bit disappointing. So you talk about the changes there, and really, what we should expect for profitability as we go, your 12%. Can you get to your 15% target for the year or something like that?

And you do the same thing for mobile industries. I guess, it's a little bit weaker; I think you said because of some heavy markets. And what can we expect for profitability there, as we go forward through the rest of the year?

Let me start with some of that Eli, and Phil can add some color to it.

Starting with, well, let me make a comment on process and mobile. The two businesses have different seasonality from a revenue and margin standpoint. Where process tends to strengthen in the second half, Mobile tends to weaken in the second half.

Within process, the industrial services business has a significant delta in both revenue and margins from the first quarter to the fourth quarter. And that has been through that business for many years. It's just that if you go back in years, it was such a small part of the Corporation that it wasn't as material as it is today. Today it's 10% of the Corporation, a sizable part of process industries, and certainly swings that. So when we talk about seasonality and mix, in that business does mix us up.

But when we talk about seasonality and mix within process, that is one part of it. The second part of it on process is industrial distribution, which tends to be strongest second and third quarter globally. But not too different between second through fourth quarters, but generally lowest in the first quarter as well. So we have all those phenomena happening certainly within the year, and I'll let Phil talk about tweaks.

Sure, Eli. This is Phil.

So just to clarify on the outlook. So for process, I'd say that is more than anything else. We tend to round those numbers to provide directional indicators. So the rounding of acquisitions to 3, that was probably more a round down than a round up, and not major or a material change in the outlook from that perspective. The real change was really in mobile, where we did take it down organically to reflect softness we're seeing both in rail and in off-highway.

And then, I think Rich hit it -- from a margin standpoint in process in the first quarter. Now keep in mind, the currency was a headwind in the quarter, more in process. Really didn't see it much in mobile. And then also from a production standpoint, we're working to control inventory and obviously cash flow, and we typically build inventory in the first quarter.

Didn't really do that in the first quarter, and that actually affected process margins to the tune of around 100 basis points as well. So that really explains a little bit of margin. Most of the margin decline you can almost attribute to those two items.

And then as we progress throughout the year, keep in mind that process margins should improve with sequential volume improvement, as well as the impact of cost reduction initiatives seasonally, as we sort of did last year. And from a mobile standpoint, I think you've got to keep in mind that the new business we won in 2015 will lap in the middle of the year. And we'll see some year-on-year declines from a volume standpoint in mobile, which will put those margins under a little bit of pressure.

So we'd definitely expect process margins to improve. Mobile margins, I would expect them to hold or maybe be slightly down as we progress through the year.

And, Eli, you did specifically ask about 15%. And I think that'd be a good number for us to be looking at in this guidance to get back to in the second half of this year in process industries. Short of our low end of our target range, but definitely in the mid teens.

And can we just talk a little bit about pricing going on and cost of marketplace? I mean, it's somewhat of a competitive market that we know at this point, so --?

Yes, I think it's definitely a challenging pricing market for us. As you know, Eli, we have a lot of different pricing mechanisms between our various channels, markets, and geographies. Came into the year with -- including lot of our OEM business is fixed pricing for a year, sometimes more than that.

And we came into the year, with the expectation that we could manage price in the tune of 0.5% down for the year, which is certainly not a number that we would like to have. But given the dynamics, felt that was a reasonable number that we could manage and hold and outgrow our markets. And we still believe that's the case for the year.

Great. Thank you.

Thanks, Eli.

Thanks, Eli.

We'll take our next question from Stanley Elliott at Stifel.

Hello. Good morning and thank you for taking my question.

A quick question with all of the new plant and some of the closures. Do we think of this more as a net reduction in square footage or manufacturing capacity, or should we think of this more as cost savings shifting to kind of lower manufacturing?

I would say, yes and yes. And also a shift in our portfolio from what's happened over many years of smaller or higher-volume automotive bearings to generally lower-volume, larger industrial bearings. So the plant we're closing in the US is one of two plants that we have globally that is essentially, exclusively an automotive plant. So the plant has shrunk quite a bit over the last several years. It will be consolidated into what's a hybrid automotive/industrial plant. And obviously, the reduction of overhead that's associated with that.

It's a fairly large plant in terms of square footage and historical capacity and output. But again, we have been downsizing that for plus five years now. So it's really not any longer a huge plant.

Definitely a shift, where most of our capital has been going into lower-cost production areas. Also a trend with new assets we're introducing, particularly in the remaining facility, some new process technology that will give us an advantage over some of our existing assets.

And then also some expansion, I would say, of our product capabilities. And then most of the newer assets are really targeted around late 2017, 2018 for growth. And how much that's growth versus cost reduction will obviously depend on where our markets are at during that time frame.

Thank you for that.

And just a point of clarification. When talking about the process margins, did I hear correctly about 100 basis points was from FX and then 100 basis points was basically from not building inventory? Is that correct?

And then if that's the case, kind of how should we think about the decrementals, as it would be in the coming year?

Yes, thanks, Stanley, This is Phil.

I think you did hear it correct. Currency was around 100 year on year in the quarter. And then the production volume, and we built inventory a little bit last year; didn't build this year; and really kept inventory flat at the corporate level, excluding currency.

And that change -- shift in production -- has an impact on absorption and manufacturing performance. And that was roughly another 100 BPS in process in the quarter. So that obviously hurt the decrementals year on year. And we expect to control inventory and obviously build what we need, but try to keep it under control through the year. So would not expect that kind of a year-on-year impact as we move through the year.

Perfect. Thank you.

Thanks, Stanley.

We'll take our next question from Schon Williams with BB&T Capital Markets.

Hey, good morning.

Good morning, Schon.

Just the increase in the free cash flow guidance, is that purely attributable to the CDSOA? Or was there any internal operating improvements on working capital or anything that we could point to?

Yes, Schon, it's primarily the CDSOA, probably a little bit better on the working capital. But it was predominately layering in the CDSOA.

We also, obviously, the restructuring was in there at the beginning of the year. So the [$210 million] includes both the CDSOA as well as the -- any cash for restructuring, and 135% of adjusted net income. And obviously, we'll work to continue to generate as much cash as we can as we move through the year.

Is our preference on the debt pay down versus share repurchase at this point?

Yes, I'd say as we look at our debt levels at the end of the quarter, we were near the low end of the range. So obviously we're going to continue to look to deploy our capital across the spectrum of items we've talked about in the past. Between organic growth, but really look at the M&A and share buyback and make the appropriate determination.

Would expect us to continue to buy some shares in the second quarter, so kind of keep moving on that. Obviously, since the recently CDSOA cash came in, wouldn't expect us to look to pay down debt significantly. Obviously, quarter to quarter, it's going to depend on the timing of opportunities and how we choose to execute on the share buyback. But structurally or looking longer term, wouldn't expect us to reduce debt significantly.

Okay. I'm going to try to sneak one more in, if I may.

It doesn't seem like despite the ForEx time moving a little bit more favorably, it doesn't seem like a lot of companies are kind of adjusting their guidance just yet. I'm just wondering, if we maintain at current levels on some of the ForEx -- you're talking about a 200-basis-point headwind at the top line. Does that look a little bit better if we hold at current rates as we enter the back half of the year?

I think it's a great question, and I'm sure there are others who are probably thinking the same thing. I think you're thinking about it correctly. So we came into the year, guiding to a 2% headwind.

As we sit here today, we're seeing better than that. We didn't feel comfortable adjusting to that level, just given all the views out there relative to where we might end the year. So we felt the prudent approach was to kind of keep the 2% in the guide.

If currency rates stay at this level, I think it's fair to say there'd be a little bit of upside to the forecast. I wouldn't say a lot. We guided to negative 2%. As we sit here today, it's probably closer to 1.5%, maybe a little bit less -- in that range. It wouldn't be a lot, but there certainly could be some upside if we hold at these levels.

All right. Thanks.

We'll take our next question from David Raso with Evercore ISI.

Hello, good morning.

My question is on the process margins moving forward. I'm just trying to think through the rest of the year. You're implying decrementals of about 25% and, obviously, the first quarter was tougher than that at 50%.

And the currency comment was interesting. I'm not trying to nickel and dime you. I'm just trying to think about the hopefully less of a drag from currency in the rest of the year.

But the numbers you gave us for the first quarter, it implies the currency drag came in at a 33% decremental. I'm just trying to understand why would the currency would come in at such a drag? Because again, you're saying 2.8% process currency drag, a 100-bps hurt to the margin from that. And usually, most companies have a currency hit' and it comes in at 10%, 12% margin.

Is this just a translation comment you're giving us in currency? Or are you baking in some transactional issues with maybe where your footprint is manufacturing-wise? I'm just trying to digest it. Because we can be positive and say, well, if it's that big a drag on the way down, (inaudible) on the way up. So I am just trying to think that through.

No, I think it's a fair question David. I think it's both. And remember, we do have a lot of cross-border activity. The bearing business is capital intensive. We can't have bearing plant everywhere we sell products. So we do see more cross-border activity in process than we do, generally speaking, in mobile.

And I would say in the quarter -- and it fluctuates. And wouldn't expect that for the year, wouldn't expect that kind of decremental for the year. But if you recall last year, the decrementals on currency were in that 25% range at the corporate level.

And I think what we saw in process in the quarter was specific to the mix and what occurred in the quarter. Also, we do have transaction gains and losses come through, as hedges get marked mark to market, et cetera. And I think that was in the quarter a little bit of a drag. Generally, it generally smoothes out through the year. But in the first quarter, it was a little bit of a headwind. And that did hit process a little bit disproportionately to the rest of the Company.

That's good to know. I didn't realize that, Phil. And so that's not just a translation comment, the 100-bip drag. There are some transactional aspects to it?

Correct.

Okay, that's helpful. So then again, we'll see how the currency plays out. But that's less of a drag as the year goes on, okay.

Yes, we expected the first quarter would be a tough comp for currency. And given the way the currency has trended, we would expect that to moderate as the year progresses. And certainly from a margin impact standpoint, we would expect that as well.

That's helpful. Okay, thank you.

Thanks, David.

We'll take our next question from Michael Feniger with Bank of America Merrill Lynch.

Hello. Just first question.

Hello, Michael.

Good morning.

Just first question. Organic growth was down around roughly 6% this quarter. You're guiding for organic growth down 6% for the full year. With easier comps as we go, why shouldn't we see that improve?

Is it because of the mobile and rail? Like why wouldn't that minus 6% slowly get, quote/unquote less bad as we move through the year?

Yes. Hey, Mike, this is Phil. I'll just comment and see if Rich wants to add anything.

But as I think about it, big picture, as we think about mobile, we've been benefiting from the new business we won in 2015. That will lap in the middle of the year. We won't see the year-on-year improvement from that, obviously, any more. It will get baked into the base. So comps get tougher from an automotive standpoint, if you want to look at it that way.

And then in rail and off-highway, we are seeing markets weaken. In the second half of last year, we actually had some pretty important share gains in rail outside the US. We are not expecting that to recur. And frankly, some of those markets are under significant pressure -- when you talk about China and Russia in particular. So we're going to feel the effects of that.

And then I just think with the off-highway markets continuing to decline, we will see year-on-year declines in mobile organically obviously pick up through the year. But in process, I think your point is fair. That as we get to the second half of the year, the comps do get a little bit easier. We don't have those anomalies of big new business wins coming in, and would expect the year-on-year performance of process organically to improve as we go through the year.

I would just add, we obviously try to triangulate a lot of different data points. And we didn't really see enough sequential improvement from the beginning of the year, to as we sit here today, to say that we really expect any sizable strength in the second half. It doesn't mean it couldn't happen. If it does, we will do very well with it.

But we did see -- net it all out, some pluses and minuses -- that there is a pretty good case to be made for stabilizing off where we came off the first quarter. And that is really what the midpoint of our guidance would imply, is flattish revenue through the rest of the year.

On that, I remember in Q4 you were talking about how you finished the year with backlog trending down year over year and quarter over quarter. So how did that actually play out through Q1 and indications of April? Are you starting to see that stabilize?

Yes. Yes, I would say stable is a good word. First quarter to second quarter -- well, from end of year to the end of first quarter, we typically see some improvement in parts of the business. Maybe not quite as strong as we like. But again, it's certainly enough to support, for as far as we see this, flattish flat sales trend.

And that's a net statement, right? We've got, as Phil said, some markets like rail and ag still declining but others, like automotive, improving.

Thanks and then just one last question.

How should we be feeling about your owned inventories? I know you made the comment about process. Do you feel like your inventories right now are in line with your current guidance? And I'd love to hear any commentary you feel about your customer base, the distributors. Do think their inventories now are in line with end-user demand?

Yes, on our owned, we obviously are always trying to improve our working capital turns and have a lot of emphasis there. But as you look at our capabilities today and where we sit in the markets, not looking for any major moves in inventory. With a flattish revenue outlook, we're looking to take a little bit of inventory out through the course of the year, which obviously puts a little pressure on margins.

On the customer base, specifically on distribution, there was some variation around the world. But in North America, we actually thought we might see, with the strong finish we had to the end of the year, some reductions in the first quarter; and didn't see that. So that certainly was a positive sign for us, and some pluses and minuses around the rest of the world.

But a general statement, obviously with where revenue is at, if it levels off, I would say inventory is pretty close to where it's at. I think we've probably got some inventory to come out of our customer supply chain still in ag and rail.

Great. Thanks.

Thanks, Mike.

We will take our next question from Steve Barger with KeyBanc Capital Markets.

Hello, good morning.

Good morning, Steve.

I wanted to go back to your auto comment. I think you said your auto is improving. Is that all share gain, or are the production schedules moving up? And how does the auto plant consolidation affect your capacity?

Our auto business in North America is heavy light truck; and in Europe, it's pass car. And we're a very small player outside of those two markets around the rest of the world. I would say, the automotive light truck outlook for the year today, is probably a little bit stronger than what it was to start the year.

So that's really where my comment was based. And these are relatively small percentages that we're talking about, but good. So that was the automotive market comment.

And your auto plant consolidation, does that affect your capacity to serve markets?

Yes, it is a capacity reduction. But we've been running very low utilization levels across those bearing sizes. And it certainly would not preclude us from being able to grow that business going forward.

Got it.

And more of a big picture question. As you've tried to tighten up your forecasting process over the past few years, is there a specific indicator you go to first to help you guys gauge, or maybe prepare for, changes in customer activity?

No, I would say there isn't one. We have a lot that we're looking at. When you look across the markets, and then you have the OEM versus distribution, and then you look at the geographies, there's are quite a few different -- I think if you had to look at one (inaudible) metric, certainly industrial production globally drives a lot of our markets.

But when you're looking out three to six months, we're in touch with all of our customers. We're looking at our inventory levels, their inventory levels, their orders. And beyond that, generally using a lot of industry data on how many wind turbines are going in, how many cars are going to be built, et cetera, et cetera.

Got it.

And just one more quick one. Thinking about your CapEx expectation for the year, how much is targeted for internal efficiency improvements that can drive higher returns from an existing process? And do you still have a full slate of wish list projects there?

Yes, good question, Steve. I think, as we think about the CapEx forecast for the year, it's a mixed bag. As we talked about, we typically run maintenance CapEx generally, call it 1% a year for maintenance. And then the remainder would be targeted toward either growth initiatives or margin improvement initiatives. And I would say it's a mixed bag.

We've got the new plant in Romania, which is coming in. That has taken a significant portion of CapEx. We've got new wind gearbox capacity that we're adding in India to really serve that market, which has grown a lot for us over the years. So those are a couple of examples where those going to add capabilities, reduce costs, and position us well for the future. And then in our existing plants, we constantly work at improving the productivity by employing the latest technologies, et cetera, to increase margins and reduce volatility or cyclicality where we can.

So I'd say it's a mixed bag. Do we have a wish list beyond what is in the guide? There's always a list of things that are on the priority list. But I think we feel comfortable with the CapEx outlook as it sits today and feel like we can advance the initiatives that are important to us. And really strike a good balance between growth and pushing strategic initiatives, but also managing the balance sheet and cash flow well in this environment.

Well, you're obviously not cash flow constrained. So when you think about that slate of projects, does it really come down to really band width, in terms of being able to do things with the right focus and then move on to the next?

Yes, I think that's a good point. I mean, that's a good way to look at it as well. Obviously, people to run these projects. Big CapEx projects require teams of people across the organization. Obviously, there is a limit on the number of projects we can work on at any given time. And there is a cadence involved, particularly when it comes to big projects. So we do take that into account as well.

You're right. We're not cash-constrained, per se. But obviously, we're going to look at all the capital allocation options that are available to us -- not just CapEx, but M&A and share buybacks as well. So we look at all three. We look at the relative returns and make the appropriate judgments.

Rich?

No, I think you covered it well, Phil.

Thanks.

Thanks, Steve.

We'll take our next question from Larry Pfeffer with Avondale Partners.

Good morning.

Good morning, Larry.

So a quick end-market question. Looking back at the fourth-quarter presentation, you had aftermarket heavy truck in the stable category. I noticed that was absent in this quarter's presentation. Was that just an omission, or did you actually see a little bit of softening in trends there?

I'd say that the North American market has been a little soft. Our business in heavy truck is relatively heavy aftermarket and fairly global. So I think we are holding up better than certainly the North American truck OEM build rates. But that North American side has been a relatively soft market.

Okay. And then just on China more generally, obviously we saw some of the heavier industry stats and equipment orders improve in the first quarter. But it doesn't sound like you really saw a lot of improvement in activity. Just kind of curious how you're seeing trends transition into the second quarter.

We had, on one of the slides that Phil went through, our Asia-Pacific numbers were pretty bad first quarter of 2016 as compared to 2015. And that's with our two biggest markets there are China and then India. And India is doing pretty well.

So obviously that implies some pretty rough numbers in Asia. Our big markets there are metals, construction and heavy industries. There have been some signs from some customers there certainly that we could be bottoming and see some improvement. But we certainly expect for at least the next couple of quarters that to continue to be a challenging market for us sequentially.

Understood.

And then I appreciate the comments on CapEx, and looking potentially for some growth investments in 2017 and 2018. Just curious on an update on the DeltaX pipeline and other initiatives on the market share side.

Yes, I'll talk generally. Most of our wins don't come in the form of gear drives for the Navy and significant platforms, per se. They come more in the size of a few hundred thousand dollars to a couple million dollars.

But I think when you look at our mobile industries revenue numbers the last couple of quarters and reflect into that the heavy mix that we have in construction, agriculture, et cetera, I think our numbers are stacking up very well there when you look at our large OEM basis. And again, with DeltaX, we're looking to outgrow the market 1%, 2% a year, not 5%, 6%. And I think our numbers would support that currently.

On the process side, a little tougher with the fragmentation of the general industries markets. But when you look at our distributors reporting, look at the some of the tough comps here with oil and gas, et cetera, I think our organic numbers are stacking up well. And I think we're on pace to outgrow our end markets this year -- not a sizable number, but slightly.

I appreciate it. And then --?

And doing so while managing price in a very challenging market.

Right.

And, Phil, just a quick housekeeping question. What are your currency cross-assumptions in the guidance range?

I'm not quite sure I understand the question.

If you had an assumption for the euro and/or the yen that were built into the range?

Yes, we went with the year-end 2015 levels, so really didn't change that relative to the guide. So the euro, I think back then, was around $1.09 if I am not mistaken. So I think if you looked at year-end 2015 levels, that would be basically what's embedded in the guidance.

Okay. I appreciate it. Thanks for taking my questions and best of luck in the quarter.

Thanks, Larry.

Our next question comes from Justin Bergner with Gabelli & Company.

Thanks and good morning.

A couple of quick questions here. First off, does your guidance continue to assume no further repurchases or benefit from capital allocation during the year?

Yes, I would say -- Justin, this is Phil -- our guidance would assume nothing beyond what we have done in the first quarter intellectually.

Okay, great. And the comment was made earlier that EPS should increase sequentially as the year goes along, quarter to quarter. Is that correct?

I would say, quarter to quarter to quarter. We said first quarter would be the low. I think we came into the year saying model it fairly closely to last year. Last year's fourth quarter was probably a little bit abnormally high on the EPS side. But to hit the midpoint of our guidance, we have to pick up $0.04 or $0.05 a quarter off the first quarter run rate. And I think with flattish sales, we would be seeing numbers like that through the rest of the year.

Okay, fantastic.

It seems like all the currency transaction headwinds are in your process segment. Is that essentially accurate?

I think I would say it's relatively accurate in the first quarter, but it's not accurate generally. It does vary quarter to quarter based on where currencies are, based on the level of activity. So there are a lot of moving pieces, so I wouldn't view that as a rule.

I would view that as kind of the result in the first quarter but would expect it to hit mobile as well. But again, it all depends on where the currencies go from here and the activity that we see in the quarter.

Okay. Great.

And just to clarify an earlier comment. I guess the incremental weakness in the mobile side was in rail and off-highway. Are you seeing any incremental weakness in aerospace and rotorcraft? Or is that sort of what you expected a couple months back?

I'd say it's generally what we expected -- maybe a tad a little bit better. But I'd say generally in line with what we would have expected back in February.

Okay, great.

And it wouldn't be complete if I didn't ask a question about the wind business. Is your outlook for wind similar to what it was three months ago -- a little better, a little worse?

I would say the same to a little better. Or maybe building confidence in what we were saying before because we had some outgrowth baked in there in a stable-ish market. And I think our confidence on that happening has increased over the last three or four months.

Okay. Thanks for taking all my questions.

Thanks, Justin.

We'll take our next question from Sam Eisner with Goldman Sachs.

Hello, good morning, everyone

Good morning, Sam.

On the top line there, and maybe also on the EBIT walk-through, you call out $44 million of organic headwinds and $34 million of volume, price, and mix on the EBIT line there. Is there a way to parse out the differences between volume and then also price and mix?

Yes, I think it's a split there, Sam, I think is the right way to think about it. I mean, there is -- volume would tend to come through at a typical gross margin level, if you will. And then obviously the price and mix would be additive to that. I would say it'd be -- call it a relatively even split between the two.

Yes, I'd say we did say that price is looking at a 0.5%-ish for the full year, and that's an okay number for the first quarter as well. As you look at our margin compression over the last year, mix has been a big factor in it, right? The automotive and wind OEM businesses are good businesses for us, but mix is down.

Mobile is now higher on the top line; and process, as a general statement, that mix is down. So mix is a big factor in that because we're doing a good job of getting the costs out. Trailing it somewhat with the volume, but we're getting the cost out on term, protecting the pricing. And mix is a big factor in there.

That's helpful.

And when you talk about the 100 basis points of under absorption that's roughly, let's call it $7 million of EBIT hit in the quarter. When you do your EBIT walk from first quarter 2015 to first quarter 2016, the different buckets, which one is that embedded in? Is that in volume? Is that in cost of production that's an offset? I just want to better understand how you are accounting for that.

That would generally be netted in cost of production.

Got it. Very helpful there.

And realizing this is more of a housekeeping question, but what are current utilization levels, and what were they in the first quarter? Can you talk a little bit about how they trended through the course of the first quarter? What are they in April, and how do you anticipate them looking throughout the course of the year in your guidance? Thanks.

Yes, they're certainly lower, I would say, than the top line implies obviously because of the acquisition benefit that we have in our top line. So again, volume down, sizeably organically in the plants, and then no inventory build, and expecting some inventory reduction through the course of the year. We don't generally add up all the apples and oranges and give you one utilization number because of the variation in that.

Generally on smaller bearings that would have a lot of automotive presence, our utilization remains relatively low from where we've been over the years. You get into the largest of bearings we make for wind turbines and specifically for that market, it runs relatively high. Aerospace, relatively low. And I would say, depending on the mixes there, between 50% utilization and 90% utilization.

Got it. That's helpful. Thanks so much.

Thanks, Sam.

Thanks, Sam.

And it appears there are no further questions at this time. I would like to the conference back to our presenters for any additional or closing remarks.

Thank you.

This is Shelly Chadwick again. Thank you for joining us today. If you have further questions, please call me at 234-262-3223. And with that, we'll conclude our call. Thank you.

And once again, that does conclude today's conference. We thank you for your participation.