Timken Co (TKR) 2016 Q4 法說會逐字稿

Good morning my name is Vickie and I'll be your conference operator today. As a reminder, this call is being recorded and at this time I would like to welcome everyone to Timken's fourth quarter earnings release conference call.

(Operator Instructions)

At this time I would like to turn the conference over to Jason Hershiser. Please go ahead.

Thank you Vicki. And welcome everyone to our fourth quarter 2016 earnings conference call. This is Jason Hershiser, Manager of 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 234-262-7101.

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 for 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 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 on today's press release and in our reports filed with the SEC which are available on our Timken.com website.

We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company. Without express written consent we prohibit any use, recording or transmission of any portion of the call. With that I would like to thank you for your interest in The Timken Company and I'll now turn the call over to Rich.

Thanks Jason. Good morning everyone. Thanks for taking the time to join us today. I'm going to focus my remarks on the full-year 2016 as well as our outlook for 2017. I'll just make a few comments on the fourth quarter.

It did come in close to how we expected from a revenue standpoint with sales down 8%. We do not think we had the same magnitude of year end pull ahead as we did in 2015, which did hurt the year-on-year comp a little bit does put us slightly better position to start 2017. We saw normal seasonality with sequential strength in services and the aftermarket and weakness at OEMs and we delivered $0.47 per share, in line with our guidance.

Shifting to the full-year, we came into 2016 preparing for it to be a second consecutive challenging year and it has certainly proved to be. Our business often sequentially each quarter and we ended the year at $2.7 billion in revenue, down 7% from 2015. The decline in volume more than offset a lot of excellent work on out growth, cost reduction and acquisitions, as well as the benefit of share buyback. The net result was an EPS decline of 11% from 2015.

I'm pleased that while markets were slightly more challenging than we anticipated 12 months ago, we maintained the midpoint of our guidance at $1.95 per share all year and we managed to deliver $0.02 above it. We also increased our dividend payout for the year to $1.04 and bought 3.1 million share or about 4% of the outstanding shares. In total we returned $183 million of capital to shareholders while ending the year with roughly the same debt to capital levels as 2015.

We continued to advance our strategy across all fronts. We gained market share in wind, automotive, defense, and rail and we ended the year with a larger pipeline of new customer applications in organic growth initiatives which will yield results in 2017 and 2018. We acquired Lovejoy couplings as well as EDT bearings and we successfully integrated our belts business.

While the belts business fell short of accretion targets due to a weak ag market, it will deliver improved performance in 2017 and has been a solid product extension. Overall we continued to diversify our product and end market revenue to improve our growth, margins and cyclicality. We also invested heavily in our products and manufacturing capabilities, spending over 5% of revenue on CapEx.

We completed two plant closures in the year and have two more in process for closure in 2017. Our new plant in Romania is on track for production in mid-year and plant and capacity expansions in China and India will also be operational in 2017. We drove significant structural as well as volume related cost reductions, which helped to partially offset the adverse impacts of volume and currency. We also had an excellent year for safety. We upheld our industry-leading customer service levels and as always our customers were able to rely on the high quality levels that the Timken brand stands for.

Bottom line we ended the year more efficient and stronger Company and in total given the challenging industrial markets we executed well in 2016 and positioned the Company for greater levels of future performance. Turning to 2017, in the third quarter call we discussed that we were seeing some signs of stabilization in our markets but not a long enough trend to call a bottom or rebound. Since then, sentiment has improved in nearly every market in which we anticipate. We still have some markets like rail, ag and heavy truck that we expect to start the year down materially from 2016, but even in these tough markets the outlook has improved.

We have seen other markets like industrial distribution in China show sustained trends of improvement in orders over the last few months and we now expect them to be growing year-on-year soon. We are forecasting that the net impact is that we will enter 2017 off a relatively low run rate where we ended 2016 and then see improvements in markets as we move through the year. In the specific markets, we expect heavy truck, rail and ag to be doubt, as well as some negative impact from currency. Auto, off-highway, excluding ag, aerospace and heavy industries expected to be neutral and then we are planning for growth in wind, distribution, services, and China.

We expect to outgrow our end markets in 2017 with specific wins in wind, automotive, truck, rail, and aerospace markets, as well as across the general industrial distribution markets. On the margin and earnings side, we continue to have a robust pipeline of cost reduction actions underway, including some carryover from those actions taken through the course of 2016. However we do anticipate material cost to be higher in 2017 than 2016 and we also expect increases in compensation and healthcare.

Additionally, the volume related cost reductions are expected to moderate as we plan for sequential volume improvement. We plan for pricing to be down slightly approximately 0.5% as we remained in a challenging pricing market through the end of 2016. We expect all of our cost reductions to approximately offset these headwinds resulting in the relatively flat guidance. In regards to capital allocation, we plan to return to a more normal CapEx spend of around 4% and we remain committed to our dividend payment. Additionally we tend to be at least as active with acquisitions in 2017 as we were last year.

We have dialed back the share repurchase the last two quarters and we would expect the reduced pace to continue through at least the first-quarter. If the M&A opportunities fail to materialize through the year we would certainly consider deploying more free cash flow to share buyback as the year progresses. Our Board just approved a four-year authorization for up to 10 million shares to provide us the long-term vehicle to do so.

Prior to the incremental earnings from our accounting change, which Phil will describe momentarily, we're guiding to roughly flat revenue and earnings. Should markets continue to improve throughout the year beyond our forecast, we are in a excellent position to capitalize on it and we will be ready to do so. One final comment on the US political landscape. Many of the new administration's priorities are significant issues to Timken and we're pleased that they are in focus.

It is too early to predict the outcome and we would not expect much direct impact in 2017, but we certainly could benefit longer-term from infrastructure spend, tax reform, and efforts to strengthen US manufacturing. Timken is the largest US-based manufacturer of bearings and a strong environment for manufacturing in the United States is very good for our business. In regards to trade, this is a complex issue in our very global industry and the possible impact of trade ideas currently being floated is less clear. We will project the impact for you when any of the ideas move from concept to reality. With that I'll now turn it over to Phil.

Thanks, Rick and good morning everyone. Let's start on slide 10. In the fourth quarter Timken posted sales of $655 million down roughly 8% from last year. The impact of currency reduced our sales by around 1%, while the net benefit of acquisitions added sales of $12 million or around 2%. Organically, our sales were down around 9% in the quarter.

On the bottom right of this slide you'll see our geographic performance. Sales in North America were down 8% from last year reflecting softness across most of the end markets we serve offset partially by the net benefit of acquisitions. Excluding currency, our sales were down 7% in both Europe and Asia and roughly flat in Latin America. Let me touch on each of these briefly.

In Europe aerospace, rail and automotive were lower, while we saw growth in wind energy. In Asia, China drove the decline as we had lower shipments in both wind energy and industrial distribution. And finally in Latin America, higher industrial distribution demand was roughly offset by continued weakness in the mobile end markets. On slide 11 you can see that our gross profit in the fourth quarter was $164 million or 25.1% of sales down 160 basis points from last year, as the impact of lower volume and price mix were only partially offset by favorable material costs and the net of acquisitions.

SG&A expense in the quarter was $112 million down $7 million from last year. The decrease reflects the benefit of cost reduction initiatives and lower spending levels, offset partially by the impact of acquisitions and a slight increase to our bad debt reserves during the quarter. SG&A was 17.1% of sales, 40 basis points higher than last year on the lower revenue. Below the SG&A line you can see that we had $3 million of impairment and restructuring charges in the quarter related to our cost reduction initiatives.

We also had $16 million of pension settlement charges driven by lump sum payouts, as well as $6 million in CDSOA income. Our fourth quarter EBIT was $40 million on a GAAP basis. When you back out the adjustments listed on slide 12, adjusted EBIT was $60 million or 9.2% of sales, compared to $79 million or 11.1% of sales last year. Turning to slide 13, you can see that the decline in adjusted EBIT was driven by lower volumes and price mix offset partially by lower SG&A and material costs.

On slide 14 you'll see that we posted net income of $24 million or $0.31 per diluted share for the quarter on a GAAP basis. On an adjusted basis, our net income was $37 million or $0.47 per share compared to $0.59 per share last year. Our GAAP tax rate was 24.3% in the fourth quarter reflecting some discrete tax benefits we recorded during the period. Our adjusted tax rate was 30.5% for the quarter and for the full year. Reflecting our geographic mix of earnings.

For 2017 we expect an adjusted tax rate of between 30% and 31%. This does not reflect the benefits of any potential US corporate tax reform. Now turning to slide 15, let's take a look at our business segment results starting with mobile industries. In the fourth quarter mobile industries sales were $342 million down 10% from last year. The impact of currency year-on-year reduced our sales by just under 1%.

Organically, sales were down around 9% driven primarily by lower shipments in the rail, automotive, and aerospace sectors as well as lower pricing in the period. Looking a bit more closely at the markets, rail saw the largest decline year-on-year drive by lower freight car build in North America and softness in both Europe and Asia. Automotive demand was down due to a tough comp last year in North America, as well as the impact of some platforms that rolled off earlier in the year.

Aerospace was negatively impacted by the timing of Rotorcraft related shipments in both periods. And while not a big driver, off-highway was up slightly in the quarter versus last year. For the fourth quarter, mobile industry's EBIT was $19 million. Adjusted EBIT was $26 million or 7.7% of sales, compared to $36 million or 9.5% of sales last year. The decrease in earnings was driven by lower volume and price mix offset partially by favorable material and manufacturing costs and lower SG&A expense.

Our outlook for mobile industries is for 2017 sales to be down 4% to 5% in aggregate. Currency is expected to reduce revenue by roughly 1.5%. So organically we're planning for sales declined around 3% driven by market related declines in the rail sector, as well as continued softness in agriculture and heavy truck. Now let's turn to process industries. Slide 16 shows that process industry sales for the fourth quarter were $313 million, a decrease of around 6.5% from last year.

The impact of currency year-on-year reduced sales by about 1.5% and the benefit of acquisitions, including the recent EDT acquisition and the Lovejoy acquisition earlier this year, added sales of $12 million or about 3.5%. So organically, sales were down around 8.5% driven by weaker demand in the industrial aftermarket and heavy industries and as well as lower military marine revenue from POC accounting. Looking a bit more close at the markets, heavy industries and industrial services continued to be impacted by year-on-year declines in oil and glass and other commodity related sectors.

Our performance in industrial distribution was driven by North America and China. Note that last year was a tough comp for us in North American distribution driven by some late December shipments. Market fundamentals and distribution did improve in the fourth quarter as both our incoming order rates and backlog ended the year up from the prior year. For the quarter process industry's EBIT was $43 million. Adjusted EBIT was $46 million or 14.6% of sales compared to $56 million or 16.7% of sales last year.

The decrease in earnings resulted from lower volume offset partially by lower SG&A and material costs. Our outlook for process industries is for 2017 sales to be up 4% to 5% in aggregate. Acquisitions should add around 2.5%, while currency is expected to reduce revenue by 1.5%. So organically we are planning for sales to be up 3% to 4% driven by higher demand in the industrial aftermarket, including both distribution and services, as well as growth in the wind energy sector. Turning to slide 17, you'll see that net cash from operating activities was $125 million during the quarter.

After CapEx spending up $53 million, free cash flow for the quarter was $72 million or nearly 2 times adjusted net income. Our free cash flow in the period was below last year's level mainly attributable to higher CapEx spending in the period. From a capital allocation standpoint during the fourth quarter we continued the EDT acquisition and we returned $38 million to shareholders through the repurchase of 480,000 shares and the payment of our 378th consecutive quarterly dividend. Looking across the full year of 2016. Once again we deployed a balanced approach to capital allocation with CapEx at 5.2% of sales to drive growth in margin expansion, $73 million spent on acquisitions and $183 million returned to shareholders through dividends and share buybacks.

And we ended the year with net debt of $508 million or 28% of capital, virtually unchanged from a year ago. Looking ahead to 2017, we expect CapEx spending at around 4% of sales and as Rich said we are committed to our dividend and we will continue to look for attractive bolt-on acquisitions. We also have the ability to buyback shares as earlier this week our Board approved a new 10 million share buyback authorization covering the next four years. Turn to slide 18, you will see that we are planning to adopt the mark-to-market accounting for our pension and OPEB plans during the first quarter of 2017.

Under the new method we will recognize actuarial gains and losses in the year in which they occur, generally the fourth quarter, rather than amortizing them over many years. We believe this will provide greater clarity around our operating results and retirement plan performance. We estimate the adoption of mark-to-market will add around $0.15 to our 2017 adjusted earnings per share, representing the elimination of prior loss amortization. We have included the $0.15 in our 2017 outlook, which I will cover in a moment.

Note that up on adoption we will retrospectively modified prior periods and we estimate the impact on 2016 adjusted EPS will be roughly the same amount around $0.15. We're currently in the process of computing the impact on all of the prior years and completing the accounting evaluation for preferability. More information will be provided in connection with our first quarter results. I'll now review the outlook on slide 19.

As Rich mentioned while sentiment has improved across our markets we still have markets like rail that are declining and other markets like heavy truck and agriculture that remain weak. Accordingly we are planning for revenue to be relatively flat in 2017 versus 2016. That's flat in total and flat organically as negative currency and the positive impact of acquisitions should roughly offset one another. On the bottom line we estimate that earnings per diluted share will be in the range of $1.90 to $2 per share on a GAAP basis. Excluding estimated restructuring charges we expect adjusted earnings per share be in the range of $2.05 to $2.15, which is relatively flat in 2016 at the midpoint.

Again this includes an estimated $0.15 benefit from adopting mark-to-market in both years. Our 2017 full-year outlook implies a corporate adjusted EBIT margin of just over 10% at the midpoint. While we will continue to benefit from our ongoing cost reduction initiatives, we expect offsetting headwinds in 2017 from higher inflation, price mix and currency. Also as Rich mentioned we expect our performance to gradually improve as we move through the year so our first quarter earnings per share should be the low point for 2017.

And finally we estimate that we will generate free cash flow of over $200 million in 2017 or more than 100% of adjusted net income. In closing, I would like to join Rich in thanking all of our 14,000 associates for delivering solid performance in 2016. Our team will continue to focus on outgrowing our markets, operating with excellence and effectively deploying our capital to drive shareholder value. And we stand ready to respond should markets recover faster than we anticipate.

Before we go to the Q&A I wanted to let everyone know that we have planned and investor day in New York City on May 19th. More information will be forthcoming but please save the date. And with that we will conclude our formal remarks and open the line for questions. Operator?

(Operator Instructions)

Eli Lustgarten, Longbow Securities.

Can we talk a little bit about what is going on it each of these sectors both from a topline and from a profitability for 2017. You've got a pretty good decline forecast for mobile for the year and how much of it is rail? Can you give us an idea of what's taking it down organic and rail should anniversary by the midyear because it's been going down for awhile.

Does that mean auto declines in the first half gets better in the second half and from a profitability standpoint can we talk about the 9% plus margin? What happens to operating profitability in 2017 can it stay above 9% or are we going down for the year? And can you do the same thing for process second. You should have a better mix that as margins go up accordingly or is also a little over 14% so it'll be similar margins in 2017?

Sure Eli. Let me start with that. I will start with mobile and rail is definitely the segment that is dragging mobile down. We are looking at say mid-teens year on year decline -- still in that segment as I said earlier in my comment. I think the sentiment has proved there but we did still see significant double digits year-on-year and sequential declines in the fourth quarter and still see some significant pressure there.

On the automotive side, that segment certainly is starting to feel a little pressure or I guess concern would probably be a more accurate word at this point. There is some concern about inventory building up et cetera. Keep in mind in the US we are heavy on the light truck side and that is the side that is doing well. But we aren't looking for the year-on-year growth that we had over the last couple years there. On the heavy truck side, we are looking for a slow start there.

I would say it is near where sentiment has approved a lot over the last couple quarters, but we are looking for that more to be kicking in the second half versus the first half and then off-highway still an ag issue and we have definitely seen some bottoming and some recovery in off-highway, ag aside, and some of the other construction, heavy equipment mining side. So all that is netting out to the numbers that we gave you.

On the process side, we are looking up a little bit in industrial distribution and again I would say the sentiment there has improved considerably. I would say six months ago our US distributors were talking flattish this year and now they are talking up several percent. Obviously we have our mix within that so that is not necessarily a number that translates directly to us, but that has improved. And we did see the sequential improvement in distribution as I said and that would be normal seasonality but it was good that we saw that and we've seen good order trends there to start the year.

That is encouraging and to your point that has been a big part of our challenge with margins for the mix part of margins that has been a big part of our challenge for the last couple years. Heavy industry is still pretty tough, but again I think we are seeing the end users of those products are certainly running harder than what they were before and again the sentiment has improved from steel mills to paper mills and so on and so fourth. Wind, as you know can be lumpy for us but we are with our market penetration goals expecting good penetration in wind.

Some modest growth in our services business, which is across a lot of heavy industries mostly in North America, some oil and gas in there and I think I covered most of it. So on the margin side, certainly not happy with the margins from last year or where we are guiding to necessarily this year. The margin story is -- we are below our targets for both segments.

Still think we can get back in it. Know we can get back into those ranges, but we've hit two years of currency and a lot of currency with a little bit of volume in 2015 and a lot of volume in a little bit of currency in 2016 and then just to make one more headwind a little bit of bad mix on top of it, both years. I would say it is the volume story for us as we look at this year and with volume improving through the year we would expect to see that improve during the year and again we have not changed our target margins for either of the segments.

We do believe as I said in my comment we've got little bit more inflationary pressures this year at this time than what we had last year. But the plus is last year at this time we really weren't seeing any of the signs of a volume turn and this year as I said we are seeing a lot of clear signs that volume is stabilized and/or growing.

Can we clarify are we looking for mobile margins to go down a bit and process margins to go up a little bit, is that a fair way of doing it? And is most of the decline in volume in mobile in the first half?

Yes, Eli this is Phil, good morning. I think you've got it right. At the corporate level we would expect margins to be relatively flat consistent with our flat earnings guide, but would expect mobile margins to be down year-on-year with the volume and would expect process margins to be up year-on-year again with the sequential improvement.

We do expect to improve as Rich said improve gradually as we move through the year. So I think -- I would say the organic declines in mobile would be more front half loaded, but we would expect, we are expecting soft rail markets as we move through the year. Our guide would be based on freight car builds down pretty significantly, north of 30% this year from 2016 so we will feel that throughout the year but I would agree probably more front half loaded certainly.

Alright, thank you very much.

David Raso, Evercore ISI.

Good morning. I'm wondering if you could help us with total Company, ideally by segment, but total Company where your order book is year-over-year and where the backlog is year over year?

Yes. So if you looked in our 10-K was posted you could see that our backlog is up although I would also say that as we put in their our backlog has a lot of differences in it and so that is one of the reasons we don't report it because we end up with a lot of in the automotive industry -- they don't necessarily correlate in timing or magnitude and so on and so forth. But I'm not going to answer your question correctly David, but I would tell you we have the signs from our last call that we see today has been very encouraging for sequential improvement in our order book.

I'm just trying to equate it with your organic sales guidance. I'm just curious if the order book is already running at the full-year guidance or so. And we expect things are getting better. Why would the organic guide not even be better, is there something I am missing?

The fourth quarter was 8% down. So we've got some work to do to get back up and I already talked about the rail drag. And I would not say we have rebounded from the reductions that we've had in our volume over the last 24 months, but we're seeing sequential strengthening.

Okay so the orders are still down a bit and the improvement in those orders are why the full-year is what it is. Is that a fair characterization?

Well I think it varies a lot by segment so I would say in distribution, orders are up and they are up enough to support that we are forecasting that the business will be up for the year. That is also the shortest lead time part of our business because a lot of it is off the shelf so that can move fairly quickly both to the good and the bad but the trend lines are encouraging. And then on the OEM side I think I ran through all of that already but it is encouraging but I think you have to look where our starting point is as well.

I appreciate that. And a quick question on the pension accounting change. Where are is that going to show up? Is that a help to the business segments or the corporate expense just so I'm clear on when we take your margin comments by segment, should we be incorporating the pension accounting in that or no it's corporate?

No, great question David, this is Phil, good morning. It would affect the segments and corporate as well. So if you want to think about it, the $0.15 would call it roughly translate to $15 million to $20 million of EBIT if you think about it that way. I think if your went one-third, one-third, one-third across mobile, process and corporate, you'd be pretty close. We are still finalizing the numbers obviously, but I think that would certainly get you pretty close. It would improve margin at the corporate level also improve margins at the segment level, but not to the same degree because of that corporate piece.

I just remember -- maybe I missed it, clarification. Price cost you mentioned some of the pricing pressure just if you could articulate where you are seeing it more than others be it geographic, be it business segment, and then how do I think about price cost for the full year?

First part of the question David was about where we are seeing price pressure?

Correct. Be it products segment, be it geography, just how you are thinking about the pricing pressure?

So I think most of our OEM business would be locked in for the year or we would be forecasting where we are picking up new business or losing it through the course of the year. So that is roughly half of the business where pricing should have a pretty good feel for where pricing is going to be, excluding material surcharge. So if material surcharges move up through the year we would pass that on. That would come through as favorable pricing if that were to happen with a little bit of lag.

Last year that was a drag for us on pricing. So that would be where the erosion is as you look at the aftermarket. We did do some pricing last year to where we could to recover both mostly currency I would say. But we are fairly selective in what we did there. We are looking to do some more this year and certainly there we have the ability through the year to move pricing more readily than on the OEM side and don't have anything to say about that just yet, except to say it is factored into our half-ish percent.

So that was a 0.5% for the full-year? Correct?

Correct.

Pricing down 50 bps for the year? Okay. I appreciate it. Thank you very much.

Thank you, David.

Stanley Elliott, Stifel Nicolaus.

Hi guys good morning. Thanks for taking my call. Quick question on the balance sheet. When you look at the free cash flow numbers you are looking at plus continuing to accelerate the dividend, shouldn't you be way below kind of the longer-term range that you all have spoken about.

You talked about maybe some pickup at some of the bolt-on in the M&A but really you guys would have the capacity it would seem like to do some larger deals. Can you talk maybe about the M&A landscape? What are you seeing out there? What are your thoughts? And then potentially moving in businesses beyond some of the heavy industries like the food and beverages that you guys just did here recently.

Sure Stanley. Let me hit that in a few different places. As I talked about we are dialing back the share buyback a little bit under the anticipation that we would be at least as acquisitive but to your point if we are only as acquisitive as we were last year we'd still have significant cash flow beyond on that and that was the point I was making. We would not envision having any platform to pay down debt this year if anything we are a little below that. I wouldn't see - our targets I wouldn't see going above the targets materially for share buybacks at this time.

But certainly we would like to for the right M&A transactions. I believe we've been working the pipeline now harder sequentially for a couple years and building confidence that we will see at least a level of activity we've seen the last couple years or slightly better. I would say the vast majority of what we are working on is in the same size range as you have seen so in the $10 million of revenue to $150 in revenue and not a lot in our space that we are working on that is larger than that.

Every once in a while those do happen. Certainly we would be interested in taking a look at them, but we don't have anything to comment on that. Obviously don't have anything to report on today but we do believe we have enough in our pipeline that we would be very disappointed if we weren't successful with at least a few bolt-ons through the course of the year.

Perfect and then on the cost side you guys have obviously done a fantastic job taking out cost. How do we think about additional cost out opportunities going forward? With the new plant coming along versus the -- well versus the recovery in some of the markets you are talking about and then maybe just refresh us how much carryover on the cost savings you would have in 2017 versus some of the actions you've done in 2016? Thanks

I will just started out on in general and I'll let Phil comment and come in if he wants. We still have a lot of really strong activities on the cost side. As you said we also have some carryover. As we look at our cost reduction over the past two years and there is some overlap with this but there are parts of it that have been more volume related.

You're making 100 bearings last year, you're making 90 this year you get the variable costs associated with the 10 out and that is the part that I think will moderate, but obviously if any of those cost come back in they'll be with the volume. And then we've had a lot of work on structural costs. We've done a lot of work with our footprint, we've done a lot of work on product design, we've done a lot of work on our management efficiency, information technology and so on and we expect to get a lot of leverage off of that. So probably came in as we are sitting here today a little less bullish on the price cost factor maybe from where we would have been maybe six months ago because we've seen a little more pressure on the materials side.

But I would also say -- while we work very hard to work our steel input costs and keep them low, the reality is strong steel pricing generally correlates really well to strong bearing markets and we have never had problems recapturing those steel prices. So while it creates a little bit of short-term, I would look at a strong steel market or an improving steel market as a very bullish sign for our industry globally and one that we would expect to capitalize on. But as we look today with what is happening with some of the prices in a quarter or two, it probably creates a little bit of a squeeze. Anything you want to add to specifics on that, Phil.

Yes, sure. Hey Stanley this is Phil. So I think Rich summed it up well. I think the only thing I would add is we do, based on the year end run rates would expect some carryover from what we did this year and as you know we took quite a bit of cost out in 2016. I think ballpark we would expect roughly full-year impact $20 million carryover from 2016. Probably at least an equal amount of new initiatives we're working on for 2017, which again will come in throughout the year.

And then I think keep in mind as Rich said with the inflation, that's input costs, materials as well as compensation and benefits and on material, keep in mind there is a lag. So while we have the ability to price in the aftermarket to recover at the OE contracts there can typically be a lag for it can be a bit of a headwind until it catches up. When we factor that in than the other elements of inflation couple that with the price mix which we would expect price mix net in 2017 to be unfavorable for the year. It's largely offsetting benefits of those cost reduction initiatives and really getting us back to that flat earnings guidance.

I think you had also asked, Stanley about Romania. The plant is on track. We have some new business coming on as a result of it and some new product categories. But it is not a big swing factor for us in 2017. Obviously we also have a lot of empty stock part of the plant so it could take us a little while to ramp up, but it is a bigger swing factor for us in 2018.

Great guys. I appreciate it and best of luck.

Thanks, Stanley.

Sam Eisner, Goldman Sachs.

Good morning, everyone. Going back to the process guidance here. You are exiting the year with a 9% or nearly 9% organic decline. You guys are guiding to roughly 3% to 4% growth. Can you talk about monthly trends that you are seeing and if you could give some commentary about what you are seen in January that would be I guess helpful to help to qualify in order to get to that 3% to 4% growth.

Let me make two comments. One the seasonality of our services business in that is significant move from the fourth quarter which is the best quarter of the year for the services side and a significant fall off to the first quarter. MRO spent and holiday shutdown and year end et cetera. So we have that dynamic. Now that part of the business did improve for us sequentially from the third quarter to the fourth quarter but it was down materially from prior year.

A lot of that with the oil and gas, space, et cetera. So we do expect that to improve and would expect again by the end of the year for that to be up year on year. And then I think you said earlier on the heavy industries side, still depressed but flattening and then on the industrial distribution side, I would say the trends are very encouraging and the only caution I would put on that is we are five weeks into the year, but the first five weeks are starting off very encouraging.

Got it. That's helpful and then maybe Phil you talked about some of the inflation, obviously the materials and healthcare compensation, can you put any numbers around that similar to what you just did with regarding the cost take out? I think you said that was around $20 million carryover but if you could help us on the EBIT that would be helpful.

That's probably tough for us to do. We typically wouldn't go into that much details on those individual cost increases but clearly we would expect some inflation on material. We have secured some nice price reductions that would mitigate that a bit. But we do expect that inflation to hit and then on the compensation and benefits it is across healthcare, it's certain parts of the world where wages are going up and we've got to meet the market and obviously incentive compensation plays into as well. So they are all in there. That's as much detail as we would be willing to give on it at this point.

Maybe ask a different way. Your SG&A as a percentage of revenue has fallen 17.5% now down slightly under 17% in 2016. In a growing end market let's say that process continues to grow and let's say you are may be a little positive for the year, do you think that you could hold SG&A flat as a percentage of revenue. Do you think that will be up, do you think it would be down? Can you just walk through the moving pieces there?

We are guiding to flattish for 2017 but certainly with volume we would expect to drive that down. And we've had a lot of structural cost reductions there. They've largely, as a percentage, have largely been offset by the volume declines but we would certainly expect leverage on that and we would expect to be able to drive that number below [16%] as a Corporation.

Then just a quick clarification did you say that pricing embedded in your guidance is a 50 bps headwind? I think you guided originally to 100 bps headwind either two or three quarters ago so I wanted to double check on that.

Yes. 50 bps.

Got it. Thanks.

Joe O'Dea, Vertical Research Partners.

Good morning.

Hey, Joe.

Hi. First on Romania, do you think about that as a net plus minus or neutral for the year when some revenue contribution but also you touched upon in another part of that facility that just won't be operating some of the costs associated with getting things going there. Just whether we should think about that as a net positive or minus or not really a big needle mover?

I would say in 2017 not a big needle mover and we are looking to move the needle on it in 2018.

Okay and then on the process aftermarket side of things. I don't know your willingness to talk about what kind of a growth rate to anticipate in the first quarter and then what that means for growth in the latter part of the year. But just when you talk about it as shorter lead time type of business, sentiment clearly improving, but it sounds like the growth rate in the first quarter won't be at the full-year target and just given the shorter lead time nature of the business, the comfort level with an acceleration over the course of the year some of the things you are seeing to help drive that comfort level.

I would say the order trends are very encouraging. There is typical seasonality there so again with the MRO nature of a significant part of that business the fourth quarter and the second quarter tend to be the strongest two quarters of the year. There's usually a little bit of drop-off from the fourth quarter to the first with normal seasonality. But again I think as you compare the order trends we are seeing over the last three months as compared to what we would have been seeing over the same three months 12 months ago, very encouraging that we will see better comps through the year. But I think your point that the first quarter would likely be the low point of the year for that part of the business.

Okay. And then just one more on M&A. It sounds like encouraged by some of the activity in the pipeline. From a valuation perspective and just as the general tone across industrial improves, does that also translate into having to pay up a little bit for these deals in order to move things forward?

Certainly all of the big deals that get headlines in the industrial space have been at double-digit type multiples. We have generally been in the smaller private transactions, but I think it is fair to say that the prices that we have paid for the last three transactions we have done would also be at a turn or two higher than what the historical average would be.

I think part of that is a reflection of we are multiples are today. I think also part of it is that earnings are well off peak earnings. I don't think anything has changed in that. I would not imply that we think we are going to be buying businesses at a couple turns under what the market has been at.

I think it is more a confidence that we have been working the pipeline and the activities that we have been doing will give us several looks this year at that. And then I think we are in an excellent position to bring those in, integrate them and both help them grow as well as improve the cost structure. I think it is more self-help on our part then it is any real change in the M&A landscape in the last year or so.

Very good. Thanks very much.

Larry Pfeffer, Mondale Partners.

Good morning guys. So lot has obviously changed in the last couple months. And I know last quarter you talked about not necessarily expecting to see earnings growth until the second half of 2017. Not necessarily expecting you to give quarterly EPS guidance but kind of the normal sequential walk between Q2 and Q4, those would normally be relatively similar. Should we model kind of on that kind of a cadence or do you think there is a big jump between Q2 in the second half of the year than maybe we have seen in the past?

First quarter we would expect to be the low point. We would expect some normal compression of the fourth quarter for mobile. And then with improving markets through the year, second quarter may still be the high point because sometimes it is but it could -- depends on how robust the markets are going from there. I think that is probably as explicit as would want to be.

Okay. Fair enough. From looking from a different perspective, where do you -- in customer conversations you are having right now, are people -- are you getting to the point where guys are talking about volume levels coming back very quickly? Or is that just still early in the broader improvement and sentiment?

I would say folks are talking about volume levels coming back in bigger numbers then again what they were just three months ago and they're backing some of that up with orders, which they weren't doing three months ago even when they were talking about it. And I would make one more comment -- our markets historically don't typically move gradually.

They are momentum markets and they are almost always moving. Very rare that you would see a couple years of plus or minus 1% or 2%. So I would just say all the signs, Larry, are encouraging that we could be in for some movement here. We have had a couple fake moves on that in the past, but we have been hesitant to jump out too far in front of that but the signs are good.

Got you and is there anywhere you think you would feel capacity constrained? Is there any market or geography where if things did come back after all the structural cost take-out that you've had that you feel like you have to bring them back?

No I think and we've talked about this pick the one place that we had a lot of dedicated, unique capabilities is wind and that really is necessarily tied to the industrial cycle anyway and we will make investments there as we are doing some commercial. So there are some shared assets within that and that market has grown a lot while some of these other markets have compressed. We run a fairly high utilization level there by design and that has happened, but we also have some capacity coming on that we expect to be a part of our growth. So we could handle a pretty good short-term step up and -- we can handle some pretty good growth.

Got you. Thanks for the questions and best of luck of the quarter.

Michael Feniger, Bank of America.

Hi guys. I'm filling in for Ross. I know you guys expect pricing down 50 basis points. It seems that is more and OE channel. Are you seeing any specific pressure coming from maybe European peers, or emerging market peers and emerging market players? I'm just curious if you could give us a more broader description of what is actually going on in the pricing backdrop.

I would say we generally don't compete against emerging market peers so my answer to that on a broad basis would be no. And there is in India and some places that locally there are some exceptions to that, but generally we are competing against the big global bearing companies and typically some strong regional niche players. Obviously over the last couple years we have had a lot of momentum currency and there has been a lot of these.

If anything I would say the Japanese currency has moved a little bit more back in our favor over the last 12 months or so and that has been a positive. The euro has stabilized and I would say we are seeing a normal market where OEMs after a couple years of their own focus on costs versus growth -- it is a tough market out there to be winning new business and new applications where you have to give some things to get some things and I think we are managing that well and netting it out relatively flat the last couple years.

Great, that makes sense. Last question. You guys clearly have communicated you are seeing this pick up in orders in the industrial distribution business and on the aftermarket. But a lot of the other end markets you guys are guiding to are flattish.

So I'm just curious, how much do feel like this pick up in industrial distribution and aftermarket how much of this could be a rebasing of inventories from your channel? I mean maybe inventory was just too low and there is this catch-up going on? Or are you hearing that distributors really want to build inventories in anticipation of a better growth environment?

It's not the latter. I don't think they are actively looking to get out of they year and build inventory. And with where we are as a parts supplier, with a mix with aftermarket and OEM, when the OEMs and the heavy equipment space go to flat, when they move from a couple years of declining to flat, that would typically mean we would be up.

So we would see that a little bit earlier and a little more pronounced because of that inventory correction that you talked about but I think it is the normal flow of inventory versus a manipulation of inventory or anybody trying to get too far out in front of things would be our interpretation of it at this point. So I think the other part of that though that is a positive is we are seeing it in the industrial distribution channel. That means you should see it as well in the OEM service channel that we also provide to around the world and I would say it is a normal inventory correction.

Perfect. Thanks guys.

Thanks Mike.

Justin Bergner, Gabelli & Co.

Good morning. Thanks for fitting me in. First question just relates to price cost. You mentioned the 50 basis point headwind from price. Should I assume that the price cost headwind then would be slightly greater than 50 basis points?

No I think we are sort of thinking when you think of price cost we are going to have some inflation pressures there as we talked about so price cost pre-inflation will be favorable but post inflation, neutral and then obviously flattish at the total earnings line.

Keep in mind we had in addition to the price we've also got a little bit of currency headwind in that as well so in the flat guidance we've got to offset all of those which is essentially what we are committing to on virtually no volume in the guidance.

Okay so the negative 50 basis points is more of a price cost than a pure price?

No, that is the pure price part and then we are offsetting that with cost.

Okay. Thank you. Is mix supposed to be a positive or neutral or negative as you look to 2017 versus 2016?

Well there is some pluses and minuses. Rail is definitely negative for us with that being down. Distribution coming back is a very favorable. Not looking for it to be as we add up all the miscellaneous pieces a big needle mover. And the upside of that certainly is if industrial distribution continues to improve through the year there would certainly be upside to the mix equation there.

Okay. Great and then just lastly could you comment a bit about what you are seeing in China and particularly the wind industry in China? You had an optimistic component in your outlook for 2017 on China and it just has not been discussed so I'd be curious to hear your thoughts.

We did not have a real strong finish in the fourth quarter with China or Asia. The Asia umbers were down. So that was lumpiness and timing and in particular when you get into the wind business, quarter to quarter you can't read too much into the sequential's and you really need to look more we focus more on year-to-year within that.

So definitely seeing China growing this year wind being an element of that and also seeing some same trends that I was talking about with North American distribution inventory stabilizing and that resulting in front of us. So we feel good about China as we head into 2017 both from a wind perspective and from a broader general industrial market perspective.

All right. Thank you so much.

Steve Barger, KeyBanc Capital Markets.

Thanks for getting me in. I want to go back to the capacity question just from a different angle. Obviously there has been a lot of restructuring over the past few years. What is your thought on how much revenue the footprint can support without needing to add manufacturing labor back into the equation? I know mix matters, but if revenue were up 10% over the next year and a half could you support that without a lot of cost addition?

Well we have the capacity for it, but no I would say from a variable labor cost we have been chasing that down so we don't -- we'd do it took hours, work weeks, and in some cases try to do it with contingent labor and flexible labor. But obviously we have gotten to our workforce a little bit with what we've been through the past couple years. So we would definitely be looking to add some labor to make that happen and -- but that is a positive for us. And certainly we think we are catching where we have been chasing the variable side of cost down for the last couple years we feel we are catching that really in the first part of this year and that will be a good thing for us.

So presumably if you had a fairly stable revenue ramp into the back and the first part of 2018 you could support that without a lot of labor addition but a more rapid increase you'd have to add people?

Well we would look to, if we're seeing the signs of it by the middle of the year continuing we would be adding people throughout, but the first switch you flip is over time and filling things in. That would be the variable side of our manufacturing cost. Again we would give really good leverage on that and that would be a significant positive for us. Obviously the downside of that is at some point you would have to adjust back if things neutralize so -- and we have built a lot of cost flexibility into our operating structure of the last decade so we have seen that on the way down. I think we will see the opposite effect of that which will be a positive on the way up.

Yes, the only thing I would add, Steve, this is Phil, we've invested through the cycle so we have invested a lot over the last 10 years in the brick and mortar and as Rich said we have the ability to leverage that so while we will have to be put variable labor in, leverage the fixed cost, and we believe generate strong incrementals with the volume.

Understood. Thank you. Inventory in 4Q basically flat year-over-year despite the decline in sales. Are you especially heavy or light anywhere relative to your end markets view? Do need to build inventory now for the distribution channel?

I think in the fourth quarter I thought we took a little bit of inventory off, but I'll have to double check the number but feel pretty good where we are at from an inventory perspective. Our inventory plan for the year from a build standpoint is kind of lined up with our outlook and as things improve we monitor it daily and obviously have the ability to respond relatively quickly if we see things pick up.

When you look at past cycles or as you think about what you are seeing right now, do you have a view on how long and OEM inflection takes relative to a pickup in distribution volume or your service demand?

I would say it is at least typically a couple quarters, right where the inventory normalizes, the aftermarket consumption hours on our product et cetera normalizes with our sales and we certainly believe we have been producing and selling less of our product then what is being used in and around the world. And that catches first and a lot of these capital -- the capital good side of it is still significantly depressed. I think as you look across some of the big names out there, they are still being pretty cautious on the new equipment builds side at least through the first half of this year. So it would be more on the aftermarket and OEM services side where we would see the improvement.

Alright. Got it. Thank you.

Thanks Steve.

I would like to turn back to Jason Hershiser any additional or closing remarks.

Thanks Vicki and thank everyone for joining us today. If you have further questions after today's call please call me. Again my name is Jason Hershiser and my number is 234-262-7101. Thank you and this concludes our call.

Thank you very much. I would like to thank everyone for your participation today, and you may now disconnect.