Timken Co (TKR) 2017 Q3 法說會逐字稿

Good morning. My name is Alan, and I will be your conference operator today. As a reminder, this call is being recorded.

At this time, I would like to welcome everyone to Timken's third quarter earnings release conference call. (Operator Instructions) Thank you. Mr. Hershiser, you may begin your conference, sir.

Thanks, Alan, and welcome, everyone, to our third quarter 2017 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've 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 both Rich and Phil before we open up the call for your questions. (Operator Instructions)

During today's call, you may hear forward-looking statements related to our future financial results, plans and business operation. 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 would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Thanks, Jason. Good morning, everyone. Thanks for taking the time to join us today.

We posted strong performance in the quarter with revenue up 17% from the third quarter of last year. We saw continued broad-based strength across most end markets and geographies. And when combined with our market penetration initiatives, we delivered 9% organic growth. Acquisitions also contributed over 6% top line growth, and I will speak more about our results from acquisitions in a moment.

Operationally, we continued to respond to the year-on-year demand increase very well, delivering good customer service, improving our productivity from the second quarter.

Our adjusted margins were up 50 basis points from last quarter. And compared with 2016, we expanded our margins 140 basis points and increased earnings per share 34% in the quarter.

As expected, year-on-year price only improved marginally from the second quarter and is on track to be about 50 basis points negative for the full year.

We expect to see the benefit of raw material recovery and other price actions yield positive price in early 2018.

We were pleased with our Process Industries margin at 17.7%, and expect that level to approximately hold for the fourth quarter.

We did manage to improve Mobile margins 10 basis points in what is typically a tough sequential comp for Mobile, but as expected, margins remained below our target range of 10% to 12%. We do not anticipate a sequential improvement in Mobile margins in the fourth quarter, but we do expect to see Mobile margin expansion in 2018.

We expect improvements in price, cost and volume to move us to the low end of our 10% to 12% range in 2018.

On the Mobile cost front, we are on track to close a previously announced Mobile plant by year-end, and our Romanian and Russian plants continue to ramp up their production level and the breadth of product line.

For the full year, we now expect to improve margins about 70 basis points, which will place us near the low end of our company targeted range of 11% to 13%. We remain focused on strengthening margins and moving up in that range.

In addition, we're now forecasting to increase earnings per share by 22% for the full year.

Shifting to recent acquisitions. Lovejoy, EDT, Torsion Control and PT Tech are all contributing to current year results and running ahead of our acquisition synergy models. In each, we're benefiting from growing markets, cost reductions and cross-selling benefits.

We only have one quarter of Groeneveld behind us, but the early results are good. We are benefiting from a growing off-highway and heavy truck market, and we have a good backlog for the rest of the year.

We've integrated Groeneveld and Interlube leadership teams as well as sales organizations, and we're working on the next steps of integration.

We're pleased with the early results and optimistic about the long-term value we will generate from our lubrication systems business.

We also continue to track towards completing the acquisition of ABC Bearings in India in 2018.

With recent acquisitions and our pipeline of opportunities, we have scaled back our share buyback activities and expect to be at a modest buyback level in the fourth quarter.

As we typically do, we'll provide our guidance for 2018 early next year, but we expect to carry our 2017 momentum into 2018. We expect our backlog will end this year higher and that we'll start next year with good organic comps in growing end markets. We also believe price will shift to a positive next year.

As a result of our organic growth initiatives as well as a full year benefit of our 2017 acquisitions, we plan to outgrow our end markets again in 2018, and we will continue to drive our cost reduction and margin expansion initiatives in the next year.

Bottom line, we expect to start 2018 significantly stronger than we started 2017, and we'll provide more color on the full year outlook early next year. I'll now turn it over to Phil to go into more detail on the quarter.

Thanks, Rich, and good morning, everyone.

For the financial review, I'm going to start on Slide 10. Timken delivered strong financial performance in the third quarter, driven by an improving industrial economy. And you can see a summary of those results on this slide.

Revenue came in at $771 million, up over 17% from last year. EBIT was $85 million on a GAAP basis. When you back out the adjustments for the quarter, adjusted EBIT was $90 million or 11.7% of sales. Earnings per diluted share in the third quarter were $0.68 on a GAAP basis. When you back out the adjustments, adjusted earnings were $0.71 per share, up 34% from last year.

Turning to Slide 11. Let's take a closer look at our third quarter sales performance. Organically, sales were up about 9% from the prior year, reflecting increased demand across most end markets and sectors, led by industrial distribution and off-highway. This is the third straight quarter of year-on-year organic sales improvement for Timken.

Acquisitions added $44 million of revenue in the quarter or almost 7%. Most of this was related to the Groeneveld acquisition we completed on July 3, but also includes the EDT, Torsion Control Products and PT Tech acquisitions.

Currency was a slight benefit in the quarter as well, adding just over 1% to the top line.

Sequentially, sales were up around 3% from the second quarter, reflecting the Groeneveld acquisition, offset partially by some seasonality and lower shipments in Mobile Industries.

On the right-hand side of this slide, we outlined sales performance by region, excluding currency. You can see that all of our regions delivered solid growth in the quarter, with the largest increases coming in Europe and Asia.

Let me touch on each region briefly. In North America, about half the increase was acquisition-related, the other half was driven by organic growth in the off-highway and industrial distribution sectors, offset partially by lower shipments in automotive.

Our strong growth in Asia in the quarter was almost all organic and reflects year-on-year increases across most of the industrial end markets we serve.

In Europe, about half the increase there was driven by acquisitions. The other half reflects strong growth in the industrial and off-highway sectors.

And in Latin America, we were up slightly in the quarter, driven mainly by stronger end market demand in Brazil.

Turning to Slide 12. Adjusted EBIT in the quarter was $90 million, up from $68 million last year. The increase in the quarter was driven by higher volume, favorable manufacturing performance and the benefit of acquisitions and currency, offset partially by higher material, logistics and SG&A costs.

Our adjusted EBIT margin in the quarter was 11.7%, up 140 basis points from last year and up 50 basis points sequentially from the second quarter.

On Slide 13, you'll see that we posted net income of $54 million or $0.68 per diluted share for the quarter on a GAAP basis. On an adjusted basis, our net income was $56 million or $0.71 per share, up 34% from the $0.53 per share we earned last year.

Our GAAP tax rate was 28.1% in the quarter. On an adjusted basis, our tax rate in the quarter was 30%, up slightly from last year. Our adjusted tax rate reflects our forecasted geographic mix of earnings, excluding special items, and we expect to maintain the 30% rate for the rest of the year.

Note that our tax rate does not include any impact from potential corporate tax reform or changes in the U.S. corporate tax rate.

Now turning to Slide 14. Let's take a look at our business segment results, starting with Mobile Industries. In the third quarter, Mobile Industries sales were $423 million, up almost 20% from last year. Acquisitions added $42 million of revenue in the quarter or about 12%. This is mainly from Groeneveld, but also includes Torsion Control Products and PT Tech. Organically, sales were up 6.5% in the quarter as we saw increased demand in the off-highway and heavy truck sectors, offset partially by lower shipments in automotive.

Looking a bit more closely at the markets. The strength in off-highway in the quarter was led by the mining and construction sectors, while agriculture was also up slightly. Heavy truck was up in all regions, including North America, where we saw solid growth year-on-year.

In automotive, we had lower shipments in North America during the quarter, reflecting a bit more seasonality than last year, caused by a changeover in one of our major platforms.

Additionally, rail was up slightly in the quarter, with growth in Asia and flat revenue in North America.

Mobile Industries' EBIT was $35 million in the quarter. Adjusted EBIT was $38 million or 8.9% of sales compared to $32 million or 9.2% of sales last year. The increase in earnings reflects the impact of higher volume, favorable manufacturing performance and the benefit of acquisitions and currency, offset partially by unfavorable price/mix and higher material, logistics and SG&A costs.

With respect to margins, Mobile Industries' adjusted EBIT margin was down 30 basis points in the third quarter versus last year as we were negatively impacted by price/mix, material, freight and ramp-related costs and higher incentive compensation expense. However, margins did improve 10 basis points sequentially from the second quarter.

Our outlook for Mobile Industries is for 2017 sales to be up around 13%. Organically, we're planning for sales to increase about 6%, led by improved demand in the off-highway and heavy truck sectors, offset partially by softer demand in rail. Acquisitions should increase revenue by around 6.5%, and we now expect currency to be slightly favorable for the year.

Let's turn to Process Industries on Slide 15. Process Industries' sales for the third quarter was $349 million, up 14.5% from last year. Organically, sales were up 12.5%, reflecting increased demand in the industrial distribution and heavy industry sectors as well as increased shipments in wind energy.

Looking a bit more closely at the markets. Industrial distribution saw growth in all regions, with Asia and Europe seeing double-digit growth year-on-year. We finished the quarter with incoming order rates and backlog up versus last year and up slightly sequentially. The improvement in heavy industries' demand in the quarter was seen across several end markets, including metals and general industrial gear drives, with the largest increases coming in Asia. And wind energy was up in the quarter, with higher shipments in Asia and Europe being offset partially by lower shipments in North America.

For the quarter, Process Industries' EBIT was $62 million. Adjusted EBIT was also $62 million or 17.7% of sales compared to $46 million or 15% of sales last year. The increase in earnings was driven primarily by higher volume and favorable manufacturing performance, offset partially by higher material, logistics and SG&A costs.

Our outlook for Process Industries is for 2017 sales to be up around 11%. Organically, we're planning for sales to increase about 8%, driven by broad-based growth across most end market sectors, led by industrial distribution. Acquisitions should increase revenue by around 2.5%, and we now expect currency to be slightly favorable for the year.

Turning to Slide 16. You'll see that net cash from operating activities was $28 million during the quarter, bringing the year-to-date total to $143 million. After CapEx spending of $63 million year-to-date, free cash flow was around $80 million for the first 9 months of the year.

Note that the year-ago period included $54 million of CDSOA receipts pretax. Excluding those receipts, free cash flow was down about $60 million in the first 9 months of 2017 versus last year. This reflects increased working capital to support higher sales levels and higher cash tax payments, which more than offset improved earnings and lower CapEx.

Despite the increase to working capital dollars, operating working capital as a percentage of sales in the quarter improved versus the same period a year ago and also improved sequentially.

From a capital allocation standpoint, we invested $23 million in CapEx in the third quarter and returned $35 million to our shareholders through the payment of our 381st consecutive quarterly dividend and the repurchase of 312,000 shares.

During the quarter, we also spent roughly $283 million on the acquisition of Groeneveld, net of cash acquired.

Late last quarter, we put in place permanent financing for that acquisition with attractive euro-denominated private placement notes and bank term loan. We finished the quarter with net debt-to-capital at 37%, near the midpoint of our targeted range of 30% to 45%.

Next, let me review our outlook on Slide 17. We are now planning for 2017 revenue to be up about 12% from 2016. Organically, we expect sales to increase about 7%. Acquisitions should increase revenue by around 4.5%, and currency is now expected to be slightly favorable for the year.

On the bottom line, we estimate that earnings will be in the range of $2.78 to $2.83 per diluted share on a GAAP basis. Excluding adjustments totaling $0.20 of income per share for the year, we expect adjusted earnings per diluted share to be in the range of $2.58 to $2.63 per share, which at the midpoint is up just over $0.05 from our July guidance and up about 22% from 2016.

Note that adjustments for 2017 include a $30 million tax benefit we recorded last quarter. This will be offset partially by restructuring, acquisition-related, pension-related and other charges. Note that the $0.20 of income does not include any impact from a fourth quarter mark-to-market pension remeasurement, which will not be known until year-end.

Our 2017 full year outlook implies an adjusted EBIT margin of around 11% at the corporate level, in line with the low end of our targeted range of 11% to 13% and up approximately 70 basis points from last year.

And finally, we estimate that we'll generate free cash flow of around $180 million in 2017 or around 90% of adjusted net income. This is down $30 million from our July guidance, driven by increased working capital needed to support the higher sales levels.

Despite the increase, working capital as a percentage of sales is expected to improve from last year.

In closing, it was a strong quarter for Timken as we responded well to the improving end market environment and continued to advance our strategy on all fronts: organic growth, operational excellence and capital deployment. And we remain well positioned to continue to drive shareholder value going forward.

And with that, we'll conclude our formal remarks and now open the line for questions. Operator?

(Operator Instructions) And we would take our first question from Steve Volkmann with Jefferies.

A couple of questions on the Mobile business, if I can. First of all, if my math is right, and that's certainly a big if, it feels like you're looking for a kind of an acceleration of growth in Mobile in the fourth quarter. And I'm just curious, I know you talked about some of what looked better, but I'm curious what's kind of driving the better fourth quarter organic in Mobile.

Yes, Steve. This is Phil. I think we're certainly implying a real strong fourth quarter year-on-year, even in Mobile. I would say sequentially, third to fourth, we're really factoring in some normal seasonality. So I would expect third to fourth to be down slightly just reflecting, really, 3 fewer shipping days in the fourth versus the third. But I mean, no question, we'll be up nicely, up strong year-on-year. And again, that's very much a continued story around off-highway, heavy truck, and the rest of the markets kind of being relatively flat as we see them.

So Phil, just following up on that, can you tell how much of that business is kind of OE versus parts and service out into the field?

Yes. I'd say through the first half, we would probably have said, particularly in the off-highway, that it was probably a little bit more service/parts than OE. But I'd say in the third quarter, it was a good mix. And I think for fourth quarter, we expect a good mix between OE as well as service/parts demand. We do have -- I would say, we don't have perfect visibility, but we do have some visibility into -- in terms of ship to locations and the like, what's aftermarket service/parts versus newbuilds.

Okay, great. That's helpful. And then just on the margin, I guess you said it would be sort of flattish in the fourth quarter. And I'm assuming your capacity utilization is improving as sales go up here. So what's -- how do we think about margin there? Is there more restructuring that needs to be done here? Is -- or I'll let you answer it.

No, I don't see restructuring as the major driver to get our Mobile margins up in 2018. First, as you look first half to second half, Mobile volume really isn't going up, and that, as Phil said, is more a reflection of seasonality. But we do see the markets continuing to improve as we head into next year. As we look at the Mobile margin expansion next year, first, I'd say rail was a major headwind for us this year. And while we're not planning on it being a tailwind next year, we don't expect it to be the headwind that it was this year in terms of the shrinking and taking out the cost of the business there, et cetera. We've got the carryover from the restructuring and the plant ramp-up being favorable that I talked about, and we also expect pricing to go from a negative to a positive next year. So those would be the big pieces that we would see driving the margin expansion next year.

Hey Steve, I just wanted to jump in and also clarify one thing. When you're looking at the fourth quarter all in, keep in mind substantially all of Groeneveld hits Mobile. So when you're looking at Mobile year-on-year, you're going to see an all-in number probably in the 20s in the fourth quarter, but a lot of that is Groeneveld. And organically, it's -- when you pull out the acquisitions, you're probably looking at high singles in terms of the implied outlook for Mobile in the fourth quarter year-on-year.

And we will take our next question from David Raso with Evercore ISI.

I'm trying to interpret your increasing working capital taking down the cash flow and really trying to quantify a little bit how you're thinking about growth then to start 2018. So can you help us a little bit on -- like, the implied fourth quarter Mobile organic is 9.7%, so definitely an acceleration, as you said, Phil, high-single digits. The decision to pull the working capital higher, hurting the cash flow, is that something pretty focused on the fourth quarter given that acceleration? Or can we think about '18 starting, at least the first quarter or so, in that same kind of high single-digit Mobile growth organically?

Certainly, not ready to give out a revenue number for 2018. But certainly, the -- your read on our reduction in cash flow for working capital for the year is definitely a reflection of our intention not to bring working capital down in the fourth quarter for the expectation of getting off to a strong start in 2018. And not ready to say exactly what strong is, but up year-on-year certainly in both Mobile and Process organically. So we're -- and we're expecting, when you look at those organic numbers for our OEM customers, who often take a lot of holidays and extended shutdowns and maintenance over the fourth quarter, to do a little less so, and for us to run into 2018 from a Mobile OEM standpoint relatively strong.

I mean, what I'm trying to do is back into what you're implying about your Mobile incrementals next year, because when you said you expect your Mobile margins next year to be at the low end of that 10% to 12% in a kind of broader range, I mean, if I use something like 10.5%, I'm trying to back into what you're implying on revenues, add in acquisitions for implied incrementals. I mean, it does appear -- not to put words in your mouth, but just trying to figure out a little bit on what the top line you're sort of implying. Are we implying end of the day incremental margins at Mobile north of 20% next year? It's at least being implied that way. I just want to make sure we understand, are you comfortable incrementals on Mobile next year north of 20%?

Yes. I would not take my 10% Mobile margin target and put it all on volume. Actually, I would start with price. And again, not ready to say how positive we expect price to be. But just going from 50 bps negative in this company-wide to barely positive is a significant -- would be a significant improvement in incrementals and a good step for us to get to where we need to be. Second would be cost, an improved price/cost mix. And then we do expect certainly some volume improvement within Mobile as well, but not -- again, not ready to go to what that is.

Yes. And just to -- again, just so we're clear, though. I mean, if you do 5% organic next year in Mobile plus $80 million carryover from acquisitions, and you go to 10% margin off this year's 9% margin, that is -- that's 20%. I mean, it's just the math. So I just want to make sure, is that what you're implying? Obviously, people are looking for a 2-handle on the Mobile incrementals next year at a minimum. I just want to make sure you're comfortable at that 10% to 12% range. At the very end of that low -- that range, right, 10% for Mobile margins next year, I mean, the only way that the incrementals are below 20, then, is if the top line is even stronger than 5% organic. So I'm just making sure we frame this properly.

Yes. I mean, we've triangulated it and feel comfortable saying that margins or incrementals will be better next year. But again, not ready to split exactly how much of it is volume incremental versus price versus costs, but expect benefit from the 3 to get us there. Anything else you want to add on incrementals, Phil?

No. I think that's it. I think Rich touched on it, David, in terms of when you look at the issues hitting us this year, we would expect to be better next year. The price/cost, logistics and the ramp certainly hitting us in Mobile. And then, obviously, the incentive compensation hits across the company, but Mobile has probably a few more people than Process. So it gets hit a little bit harder. But as that normalizes, as those things normalize or revert, if you will, I would certainly expect better incremental next year in Mobile, getting us to the low end of the range, as Rich mentioned.

And sorry, your comments jarred a question for me on, any early anecdotal or actual signed contracts for next year in Mobile that do already suggest better pricing? Or is this more speculative at this stage, better pricing for Mobile next year on (inaudible) contract?

I would say we have been working on -- we're always working on pricing, but we've been working on it on the different market -- the market dynamic more in our favor for 2-plus quarters. And we already, and even this quarter, had some improvement in Mobile from material pass-through contractually than what we had in the prior quarter. And I would say we have a high degree of confidence in Mobile pricing inflecting from a negative to a positive, and more so than speculation. I would not say we've wrapped up contracts, et cetera, but we have contracts that will pass things through, some of them quarterly, some of them annually, and some of it where we can pass pricing through and feel good that, that will inflect on us in early 2018. So I would definitely say it's more than speculation.

And we will take our next question from Justin Bergner with Gabelli and Company.

I had a couple just quick clarification questions. On the comment you made at the start of the call about price, did I hear that it was actually up slightly in the third quarter over the second quarter?

It was slightly less down. It was down. And year-on-year, it was down in the second quarter. It was down in the third quarter. It was down a little less in the third quarter, but I -- also very little, less. And so that was essentially mostly the material pass-through, some effect of the quarterly material pass-through.

Okay. But was it actually up sequentially from the second quarter? Or was that...

Yes, it would have been from the -- I mean, again, very nominally from some material pass-through that trues up quarterly, yes.

Okay. Got it. And then the organic growth in 2018, you talked about outgrowing the markets and benefiting from the acquisitions. Were you trying to say that the outgrowth was -- the organic outgrowth was being driven by the acquisitions? Or just that you would outgrow and that the acquisitions might allow some cross-sell opportunities to further that outgrowth?

I think the latter. So was saying we're expecting to start the year with market -- year-on-year market growth. On top of that, we believe we have been delivering, will deliver some incremental organic outgrowth. And then on top of that, add on the acquisition carryover. And certainly, obviously, we're working to organically grow the acquisitions not only through cross-selling, but a lot of different initiatives. And to sum the 3 up, I believe both our 9% and 17% will stack up pretty well when we look across our various competitive landscapes in terms of where those revenue numbers sit.

Okay, great. And then on the restructuring side, it looks like the restructuring might come in a little bit lower than maybe it seemed it would come in earlier in the year. So what is sort of a good way to view the restructuring cost this year and maybe looking into 2018, if you're willing to provide sort of a glimpse of that number?

I think we've generally been saying a good number long term is in the $0.15 to $0.25 range. To your point, we're going to be below the $0.15 range this year and not ready to say what next year is, but probably somewhere between this year's number, and the high end of that is where we would typically land. And to the earlier question I took, we don't see any major restructuring within Mobile beyond what has happened and what would be a normal level of some things happening that we would need to make the margin improvement that we need, so probably on the lower end of the historical range would make sense.

And we will take our next question from Stanley Elliott with Stifel.

In the prepared comments, you talked about the auto business being somewhat seasonal and some changeover. Is the outlook for that business to continue to turn positive in the fourth quarter? And then how do we think about that -- are there any other new platform wins or anything like along those lines that we should be aware of?

Yes. Thanks, Stanley. And I'd say the automotive business, where we participate, is holding up real well. As you know, we're mostly exposed in North American light truck, SUVs as well as premium cars globally. So those sectors of the market, if you will, are holding up well. What we saw in the third quarter, as I said, was a bit more seasonality than normal as one of our customers did a model changeover, which took a few more days out than we're normally used to. So we're down in the quarter. Year-on-year, we didn't have quite the same impact -- virtually very little impact last year. And so as we move forward to fourth quarter, we'd expect markets to remain strong, the markets to remain flattish, if you will, and albeit at real strong levels. But -- so not expecting a ton of growth from here, although we continue to quote on new business, et cetera, but expect the market to kind of remain strong at this level. And we'll probably provide a little bit more color on what we're seeing for '18 after we get the benefit of a few more months behind our back.

That sounds fair. In the past, you guys have done almost a heat map, if you will, of which end markets were positive, negative. I mean, is it fair to say kind of if you look at the auto business, maybe the rail business, you're probably tracking 70% positive right now? And what are the expectations to kind of -- to try to square up the comments about backlogs and outlook, how would that heat map maybe change?

The heat map would look positive across everything, with the exception of 3 markets, and those being flattish. And the 3 flattish would be automotive, rail and aero, and rail has really just inflected to flattish. As we talked about through the first half, that was the year-on-year comps in the first half on rail were significantly down. That inflected for us in the third quarter where it's flattish, expecting flattish for the fourth quarter as well. And with them flattish, give me plus or minus a couple of percent. And other markets would all be generally north of that on the plus side.

Perfect. And the last one, kind of talk about incentive comp being a little bit of a headwind. All else being equal for thinking about business trends continuing into next year, kind of at whatever the trajectory ends up ultimately being when you guys announce guidance, does incentive comp become a headwind again? Or is it more neutral given that we've had a big step-up with the markets improving here in 2017?

Our incentive comp plans are approved by the board every year, and they haven't been set or approved for next year. But philosophically, principally, practically, they're set on year-on-year improvement, with EBIT and EPS being the 2 primary -- along with share price, the primary drivers of it. So with a year-on-year improvement in those generally set as the target, it may or may not be a headwind or tailwind in dollars. But in leverage, it would certainly be expected to move from a headwind to a tailwind in leverage.

And we'll take our next question from Joe O'Dea with Vertical Research Partners.

First question on the Process side and just thinking about inventory in the distribution channel and seeing a continuation of some recovery there in the growth. But kind of wondering whether we're seeing end market demand outpace some of what's going into distribution, and just your general gauge of where those inventory levels are and if distributors are perhaps feeling a little bit more confident as recovery extends and you get a little bit of a restock boost moving forward.

We have not seen much restock in North America. We've seen probably a little bit more in other parts of the world. North America has also been -- it's been growing but a little bit softer pace. So I think, really, as we look at the numbers, probably see more upside for us there. Certainly, more upside than downside as we would look out at the inventory levels. We'd be more at historical lows in North America than -- below median, let's put it that way.

Got it. Perfect. And then on the Mobile and just thinking about price/cost within the quarter. It sounds like you did get a little bit better capture on the rising costs that would've helped sequentially from 2Q. Just trying to kind of understand flattish margins with a little bit better cost capture, the degree to which the offset is acquisitions or other items in the quarter that would have been a little bit of an offset.

Yes. Sure, Joe. I'll take it. I think when you look sequentially, you've got to look at a little bit of at -- it's a mix as well hitting us there as well as the other items continuing to impact us like material and that sort of thing, and then the incentive comp adjustments as we did a little bit better in the quarter than prior guidance implied. We actually had some adjustments there as well.

And then thinking about the fourth quarter, and it sounds like flattish on the Mobile side, just trying to understand what we should be thinking about on kind of Process and corporate. It looks like corporate was down a little bit sequentially in the third quarter, but mostly focused on should we think about Process margin coming down a little bit sequentially?

I would say -- I think we would say that the fourth quarter would be similar -- likely be similar to the third in Process.

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

I just wanted to go back to the rail comment. You said that shouldn't be a headwind next year that it was this year. But just trying to square that. We've had solid railcar orders in 2Q and 3Q, railcar traffic has been increasing sequentially over the past year. At what point would you expect that to translate into OE or aftermarket growth?

Yes. Again, probably not ready to call what we're expecting for rail for 2018, except to say when we talk about some of the ramp inefficiencies we had this year, there's both ramp-up inefficiencies in off-highway and heavy truck, but also we were ramping down rail for the last at least 6 quarters now. So really what we're saying is that's leveled off. And to your point, North America, we've seen some strength, we've seen some strength in other parts of the world. You can certainly make a case that we've troughed and there's going to be an uptick. I would tell you we have not seen an uptick yet. We've seen a bottoming and a leveling. So that's what we've seen and that's -- that would take us out through the end of the year and to the first part of next year.

Got it. And then we're early in earnings season, but seeing some improving orders trends at companies, better volumes in North American distribution. Back to your comment with inventory levels being below average, do you expect volumes sooner rather than later from North America? And how are you thinking about price there if volume does start to pick up?

I think we've -- in my comments on the total company that we expect price to be favorable next year as compared to this year, certainly there will be an element of that, of realizing some price in the distribution channel. And then on the inventory side, not expecting anything major as we finish up this year. But again, the backlog will be higher, the run rates are generally higher, the daily order rates are higher. So I would expect to get off to a good year-on-year start and start the year with a better backlog.

And just one last. Any issues on lead times in any of your product lines, or factories are running as expected or can you just talk about that?

Yes. I would say we have -- from a hard-core capacity standpoint of machines and what we could produce, we're not running up to any hard constraints, but certainly, being up 9% organically with some things flat, some things down, that certainly implies some things are up mid- to high teens sort of numbers. And clearly, that has put some pressure on us, but not running into, again, any constraints. But certainly, some of our customers would say they would like some products faster and that sort of thing. So -- but I think we're responding well compared to how we have historically and well from a bearing -- global bearing industry and -- bearing and power transmission industry standpoint and see that as a competitive strength of ours.

And we will take our next question from Ross Gilardi with Bank of America Merrill Lynch.

I'm just trying to get my head around the -- your comments about -- you're sort of seem to be assuming improved price/cost next year for Mobile margins getting back to 10% and just your characterization, Rich, of pricing being slightly up. I mean, I'm going to take that to mean up less than 50 basis points. I'm not -- I don't know if that's what you're trying to say. But if it's 50 basis points, you're talking about $8 million of pricing. In Mobile, and given what we're seeing in steel and SBQ -- I mean, SBQ is a hard market to follow from our standpoint, it's very narrow. But I mean, couldn't you easily see cost inflation multiples higher than what you're -- we're talking about with respect to pricing? So why would improved price/cost be a base case assumption for Mobile next year?

Yes. Well, again, probably not ready to call price/cost. And so I'm expecting price to go from what has been an absolute negative. So this year, we had down price, down cost or negative price, negative price -- or negative price, negative cost. And I'm projecting cost to flip from a negative to a positive next year. If material -- material has been relatively stable now for about 2 quarters. That doesn't mean it couldn't go up while I'm talking on the phone right now or next month or next quarter. If it does, again, would that pinch us a little bit on timing? Yes. Would we recover that longer term? Yes. And we would also be positive versus negative in starting, which again was the biggest pinch point we had in Mobile. So saying price will be up, also saying we have a lot of good cost tactics that are underway, and that will carry over into next year. And as we add all that up and triangulate that and look at our mix and factor in what I just said with rail, we believe we can get the margins back up to 10% next year.

In terms of the materials being stable for 2 quarters, I'm just trying to remember when you used to own a steel business. I thought most of the SPQ you negotiated annually, and I thought that happened in December. So aren't prices always kind of, aside from surcharges, stable entering a year? I mean, do you have any visibility on what your SBQ bill is going to be in 2018 at this point?

Yes. My stable was specifically referencing the North American surcharge mechanism, which as you know, Ross, can be sizable. So yes, in the U.S., we generally have base price locked in for the year and then we get surcharge pass-through, favorable or negative, to us. And then again, we've got a whole bunch of different mechanisms as to how we try to pass that back through to the market. But when it goes down, it's short term in our favor. And when it goes up, there's a timing lag on our end. And then around the world, that is generally not the case, where we generally buy on shorter agreements with an all-in agreement. So my point on stable was referencing generally the global market. But to your point, that doesn't necessarily mean it will be stable 2 or 3 quarters from now.

Okay. And then just generally speaking, I mean, is the pricing model changing in the bearings industry at all? I mean, there was some press about your big global competitor moving more towards a performance-based model for bearings, I think, rather than selling bearings on a per-unit basis. Are you guys experiencing this at all with any of your big distributor customers or any of the big OEMs? And just how does that general shift potentially influence the pricing outlook over the next several years?

I think that, that phenomenon is still a very niche-y part of the market. The question is probably better directed at them than us. We have some very small mechanisms in place that are like that in our services business, where we would do more of a price that we would agree to a service commitment or a replacement rate, et cetera. So -- but it's a -- for us, it's a very small part of our business. Don't see a huge swing on that, certainly in the next year or 2, where it would be a big part of it now. Obviously, the largest player in the world really starts moving in that direction, it could have an impact, but we're not seeing that as a major move in 2018.

(Operator Instructions) And we will take a follow-up question from Justin Bergner with Gabelli & Company.

My follow-up question relates to Process. I mean, given your organic guidance was kept unchanged in Process and yet we've seen exceptional ISM prints and PMI prints around the world, is there anything that was sort of holding back further acceleration in the Process industry, be it restock, fading at some of the distributors or other factors?

No, Justin. I'd say very good growth in industrial distribution that we saw in the quarter. We also had heavy industries improve nicely. And as I said, we saw it in metals. We saw it in general industrial gear drives. We saw it in aggregates. I would tell you the oil and gas OE sector is still pretty weak, not the aftermarket, but the OE sector. There still seems to be a little bit of inventory there. Wind can be -- is project-based, so it can be a little bit lumpy, it was up in the quarter. And then our services business I would say is still a little soft, just really it's tied a lot to commodity-related markets, including a pretty good exposure to oil and gas. So while that was kind of flat in the quarter, still pretty soft. So I do think -- a couple of sectors that are still soft in Process, if you will, but broadly, far more positives than negatives.

Okay. Just a follow-up to that question. Remind me how big services is as a percentage of Process. Does it tend to mix up or down from a margin point of view versus overall Process?

I would say services can tend to, from a Process standpoint, kind of operate a little bit in line, maybe mix is up a little bit relative to the OE and maybe not quite as good as what we see in distribution but kind of in that range. And then from a percentage standpoint, I mean, it is the bulk of our services. I don't have it in front of me, but I would suspect it's probably 15-ish percent of Process, but we can confirm that and get back to you on that.

And that concludes today's question-and-answer session. Mr. Hershiser, at this time, I turn the conference back to you for any additional or closing remarks, sir.

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

Thank you, sir. And ladies and gentlemen, that does conclude today's conference. I'd like to thank everyone for their participation. You may now disconnect.