The Timken Company (TKR) Q4 2007 Earnings Report, Transcript and Summary

Good morning. My name is Luanne and I will be your conference operator today. At this time, I would like to welcome everyone to The Timken's Fourth Quarter 2007 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Tschiegg, you may begin your conference.

Thank you and welcome to our fourth quarter conference call. I am Steve Tschiegg, Manager, Investor Relations. Thank you for joining us today and after our call, should you have further questions, please feel free to contact me at 330-471-7446. With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO; Mike Arnold, Executive Vice President and President, Bearings and Power Transmission Group; and Sal Miraglia, President of our Steel Group. We have remarks this morning from Jim and Glenn and we'll then all be available for Q&A. At that time, I would ask that you please limit your questions to one question and one follow-up at a time to allow an opportunity for everyone to participate. Before we begin, I'd like to remind you that during our conversation today, you may hear forward-looking statements related to future financial results, plans and business operations. Actual results may differ materially from those projected or implied due to a variety of factors. These factors are described in greater detail in today's press release and in our reports filed with the SEC, which are available on our website, www.timken.com. Reconciliations between GAAP and non-GAAP financial information are included as a part of the press release as well as on the Investors Overview portion of our website. This call is copyrighted to The Timken Company. Any use, recording or transmission of any portion without the express written consent of the company is prohibited. With that, I will turn the call over to Jim.

Thanks Steve and good morning. As you have seen from today's announcement, Timken had a solid quarter and a good year. The top line for the quarter was up 9%. Our earnings increased well over last year and within our estimate for the fourth quarter. As many of you know, Timken products are used across a broad range of industries. In fact I have been told that The Timken Company serves more SIC codes than virtually any American company. As a result, we have a unique insight into the economy. As we transition from 2007 to 2008, that insight leads us to conclude that there are two very different forces driving the markets that we serve. One market is driven by global forces. This market is benefiting from the extremely strong demand that is driving up the prices of commodities. This is propelling not only the companies that produce those commodities, it is also driving demand for those companies who produce the equipment necessary for their production. The other market for us is driven by the U.S. consumer. Companies limited to serving the North American markets face much more risks from issues affecting the U.S. economy. Fortunately, we have positioned two of our businesses to serve the global industrial markets and as a result of the phenomenal global industrial demand, both our industrial and steel businesses achieved record sales and record earnings for the year as well as for the fourth quarter. We expect both businesses to continue to benefit from very strong global industrial markets in 2008. Several indicators in our business lead us to this conclusion. In aerospace, the global aerospace market demand continues to significantly exceed industry and customer forecasts. We cannot bring capacity on line fast enough to keep up with demand in these markets. Global mining and energy markets are booming as prices for many commodities are at or near record highs. Backlogs for large bearings and large forging bars extend well into the second half of 2008. Those parts of the global economy that participate in the building of Asia's infrastructure continue to grow as well. In China alone, for example, our sales grew by 30% in 2007. We have three new plants under construction which will come online in 2008 to serve those segments, and we are continuing to make investments to capitalize on these growing markets. This quarter we announced strategic acquisitions and expansions including The Purdy Corporation. This $200 million deal is our largest acquisition since Torrington and expands the company's range of aerospace gearbox, manufacturing and repair. We expect this transaction to be accretive to earnings in 2008. We announced a joint venture in China to manufacture ultra-large-bore bearings for the growing Chinese wind energy market. Earlier this month, we entered into an agreement to acquire Boring Specialties which brings together their unique capabilities with Timken's alloy steel solutions to better serve the oil and gas industry. Again, two of our businesses are performing very well, fuelled by growing global economy and positioned by our investments for additional profitable growth. But just as there are two sides to the economic story, there are two sides to the Timken story. The flip side to our record results in industrial and steel are the continued challenges we faced in our automotive business. Our strategy in automotive segments has been to shift our portfolio to a more attractive product and customer mix while restructuring to reduce costs. In the third quarter, it became clear that this strategy was not moving us fast enough to offset the combination of raw material cost increases and the decline of the North American market. We implemented two fundamental shifts in the fourth quarter. We reorganized our automotive and industrial businesses into a single bearing and power transmission group. This change improved our ability to focus our capabilities to maximize our overall enterprise performance. We saw immediate benefits in the fourth quarter in the form of record distribution shipments. We also shifted our focus to improving the cash flow in our Automotive Group. This means moving quickly to bring our announced restructuring efforts to conclusion and moving more aggressively to reprice our products in the light vehicle market. These changes reduced our global salaried employment by over 200 positions. We expect these shifts as well as the cost savings to have a favorable impact on 2008 results. The bottom line, the direction of the unified bearing and power transmission business is clear: We will not remain in businesses where we cannot make money. We expect continued portfolio shifts as the start up of three industrial plants in Asia in 2008 will provide relief for customers as well as results for shareholders. Later this year, our small bar mill will expand our steel capabilities, giving us the broadest range of super clean alloy steel bars in North America. In summary, we are capitalizing on the strength of the global industrial markets to continue the transformation of Timken's portfolio. We are becoming more profitable and less cyclical by shifting towards businesses where we can maximize value creation. We believe this change will translate into much stronger profitability in 2008. Now I will turn it over to Glenn.

Thanks Jim. For the quarter, the company's fully diluted earnings per share from continuing operations was $0.50. Excluding special items, earnings per diluted share was $0.51. These special items included $1 million of after-tax expense primarily related to restructuring rationalization and impairment charges which was partially offset by the benefit of CDO payments. In the fourth quarter of 2006, special items totaled after-tax expense of $5 million and included losses from divestitures and charges related to restructuring, rationalization and goodwill impairment, which was partially offset by the benefit of CDO payments. The rest of my comments will exclude the impact of special items. Sales for the fourth quarter were $1.3 billion, an increase of 9% over 2006. The increase over last year was due to strong demand across the company's broad industrial markets and favorable pricing. The benefit from currency and acquisitions was offset by divestitures. Gross profit margin for the quarter was 19.6%, an improvement of 200 basis points from last year, reflecting strong demand and pricing, partially offset by higher raw material costs as well as manufacturing and logistics costs associated with the company's restructuring and capacity expansion initiatives. The company was also able to better leverage SG&A as the margin improved 40 basis points over last year to 13.4%. As a result, EBIT for the quarter came in at $80 million or 6% of sales, 250 basis points better than last year. Net interest expense for the quarter was $11 million, comparable to last year due to similar average debt levels and interest rates, although year-end debt was higher than last year with the acquisition of Purdy. The tax rate for the quarter was 29.5%, lowering the full year effective tax rate to 33.3% as the company benefited from having a greater percentage of its earnings in lower tax rate foreign jurisdictions. As a result, income from continuing operations for the quarter was $49 million or $0.51 per diluted share compared to $0.23 per diluted share last year. As Jim commented, the company implemented a change to its management structure which now operates under two business groups: the Steel Group, and the bearing and power transmission group, which includes three segments: Mobile Industries, Process industries, and Aerospace & Defense. Beginning with the first quarter of 2008, the company will report its financial results under this new structure and reclassify 2006 and 2007 for comparability. As financial reporting under the previous segmentation was used through the fourth quarter, our comments today will be based on the Industrial, Automotive and Steel Group segmentation, which is consistent with how they have been reported throughout the year. Now I will review our business group performance. Industrial Group sales for the quarter were a record $633 million, up 17% from a year ago as the company benefited from pricing, currency, the Purdy acquisition and continued strong demand across its broad industrial markets with the highest growth coming from heavy industry, rail and distribution. Industrial EBIT was a record, $71 million or 11.3% of sales, 320 basis points higher than last year. The impact of favorable pricing and volume was partially offset by higher raw material costs as well as manufacturing costs, primarily related to the ramping up of capacity and managing strong demand through constrained facilities. Automotive Group sales for the quarter were $366 million, up 1% from a year ago. Increased sales in Europe and in light vehicle markets were partially offset by lower demand from North American heavy truck customers. The benefit from currency was offset by the divestment of the steering business of the end of 2006. For the quarter, the Group reported a loss before interest and taxes of $35 million compared to a loss of $42 million last year. The benefits of volume, restructuring and lower warranty costs were partially outset by higher than expected raw material and LIFO costs. We expect to see improved results from this business during 2008, resulting from the company's restructuring, pricing and portfolio management initiatives within the new mobile industry segment. Steel Group sales from the quarter were a record $379 million, up 6% from a year ago. The Group benefited from strong demand across its broad markets, especially the energy sector. The benefit from surcharges offset the decline in volume from the closure of its steel tube manufacturing operation. Steel Group EBIT for the quarter was a record $43 million or 11.3% of sales, 30 basis points higher than last year. The benefit of strong demand and surcharges in the quarter was partially offset by higher LIFO and material costs. Looking at our balance sheet, we ended 2007 with net debt of $693 million, around 195 million higher than the end of last year due to the $200 million Purdy aerospace acquisition in the fourth quarter. Strong cash generations from operations was offset by capital expenditures in support of our growth initiatives, working capital requirements in support of sales growth and pension contributions which helped bring our global pension funding status to 95%. The company ended the year with net debt to capital of 26.1%, below our targeted range of 30 to 35%, providing financial flexibility to pursue strategic investments. In summary, we expect demand from our global industrial markets to remain strong, especially in key markets where we have invested for growth, for North American automotive market to be down other than medium and heavy duty truck. We expect to see higher profitability and margins for the full year across all of our businesses compared to last year, benefiting from improved pricing, operating performance and portfolio management initiatives. The company expects earnings per diluted share for 2008 excluding special items to be $2.75 to $2.95 for the year and $0.70 to $0.80 for the first quarter. From a cash flow standpoint, we expect to see higher free cash flow in 2008, benefiting from earnings growth, better working capital management and lower global pension contributions which are estimated at approximately $20 million compared to $102 million last year. Capital expenditure should remain about the same as last year as we continue to invest in growth initiatives while cash taxes are expected to increase due to higher earnings and an estimated tax rate of 34%. This ends our formal remarks and we'll now be glad to answer any questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of David Raso with Citigroup.

One big picture question. But before that, just a little into the fourth quarter. I didn't see in the release, I apologize if have missed it. The LIFO adjustments, can you give us the size of those in Auto and also the one in Steel?

David, for the quarter within the Auto Group it that was around $10 million of LIFO costs. And in Steel, just a couple of million for the quarter. Steel issue was more dealing with the full year where they were up year-over-year where actually Automotive would have been relatively flat.

Okay. And the question I really have is for Mike, given the significance of the conversations you have been having the last month and a half or so with the auto customers. Can you give us an update of how they have gone and maybe some thought of if you can help quantify for us maybe some of the shifts in assets that maybe were shared assets before between Auto and Industrial that you see kind of right off the bat, may be shifting more towards non-auto markets?

Yes, David, during the third quarter call, we talked through about five specific initiatives that we would push in fact to drive improvement of the bearings and power transmission business overall, but in particular with regards to automotive. The two that you have raised, pricing, we are actually making good progress. That is some thing that as you know in that industry, contracts come up in general on an annual basis that has provided us an opportunity to look at the renewal potentially if we can make them profitable of contracts in 2008. Basically, those are behind us and we made excellent progress on pricing, which will begin to see some improved performance therefore in the Automotive segment in 2008. The mix change is one that we have been impact [ph] as we talked in the third quarter. We have looked at all of the opportunities to take the assets that we employ across the entire business and best determine which market we should serve with them based upon the profitability and if you look at the details of obviously some very significant sales in the fourth quarter on the auto... or on the industrial side of our business, the a begin of a mix change where we have been able to redirect some of those assets to more profitable markets, so its, both are progressing very well, David.

I know there is some sensitivity on a call discussing this Mike, but can you just give us a little more color on the reaction of your auto customers, when you ask for essentially, that we need to higher price to continue to serve you, or if you cant offer us a better price, we have to choose to back away from providing this product. Has the reaction been more, look, we can't give you higher price, then you take the tax off... fine, we will walk away from the business and it is more efficient that way for us as a company, or have you seen more of the, the companies acquiescing and say look, okay, fine, we need your product. We will give you 3%, 4%, 5% price increase.

Yes, I won't take either one of your options, David I will give you the third one. In general as we go into the market place, in all of our markets, we price based upon the value that we believe, the customer gets as a results of doing business with us and with our products et cetera, and usually is a mutually agreeable value of which price should fall out. Our approaches in these markets therefore have been to get to that point, where the value that we create, and our ability to stay in those markets is dependent upon getting appropriate prices for our product and that's the approach that we have taken and I will say that the industry, regardless of the industry, they understand that approach. Sometimes the magnitude of the increases can be quite difficult at certain times, but that's the approach that we take and I think as good business people and good industries, they all are reacting in a way that is I think very positive long-term and they recognize that a company like Timken needs to be profitable in order to continue to invest in not only capacity but new products and new platforms for the future.

I'll hop off. Just in summary, though, what I thought I heard you saw then it's more of a situation of being able to get some price, and we should see improvement on the existing business more than a walking away from businesses because the customer is not willing to work with you.

That's correct, Dave.

Okay. Thank you.

Yes.

Your next question comes from Wendy Caplan with Wachovia

Good morning. Your... can you hear me?

Yes, Wendy.

Okay just want to be sure. Your outlook, Jim, seems quite optimistic to us. You are suggesting 15% to 23% EPS growth and you spoke to your unique insight given your end market exposure which I respect and appreciate. But, the only times historically that you've posted high year-over-year EPS gains have been when we are coming out cyclical drop and we are certainly not at that point in that position right now. Can you help us to understand why you think that your EPS growth can be so high in '08?

The problem I think Wendy it is, if you get caught up looking simply at 2007 versus 2008, you are just looking at one year versus another as opposed to looking the trends and the changes that have happened in The Timken Company. You go back to our Investor Relations presentations that we have shown you. We have shown you the comparison between the cyclical terms in the last cycle and the cyclical terms in this cycle and we have been investing heavily both on an expense basis and on a capital basis this time to change the nature of the company. As we... and obviously this year, we gave you guidance at the beginning of the year that we did not meet, because of some of the impact of some of those investments. 2008, we see strong markets continuing in the parts of the business that we are... where we are investing and we are seeing some of our investments coming online both the acquisitions that we have made, which are accretive to earnings, as well as the new capacity coming online that we've been investing in over the last couple of years.

Understood. But roughly, just to pick a number. About a third, or 30% of your business is still auto and there is not much this more cyclical than that. And kind of as a follow on, how much of your business this year of your revenue in '07, rather, not this year. In '07 how much was the North American auto business, and what are your assumptions relative to North American auto build in '08?

Mike, do you want to give a sense of the assumptions of auto build?

Yes. Wendy, this is Mike. As we look at, the North American automotive industry for next year, the consensus now is down to about 14.4 million, to 14.3 million light vehicles and as a result of that we have adapted our plans and our activities in the business to that level. We also have put in a recession scenario that would probably drop may be another couple of percent off of our North American light vehicle systems business and also a scenario that says we have got a $4 a gallon of gas, which would hurt the SUV markets and the light trucks which again would impact our business. So, we've actually looked at that. We have modeled it, but at the same time that we have modeled that, we've modeled all of the aggressive growth that we have in fact made from a marketplace perspective and energy industries, the heavy capital equipment, Asia infrastructure build, and the aerospace markets that both from the standpoint of strong markets and our capacity installation and then growth associated with that. It actually dwarfs the downside of a North American light vehicle reduction, whether it's recessionary, or it's $4 a gallon gas, or it's just what they are predicting now at the 14.4 million vehicles.

Wendy, this is Sal Miraglia. I can give you a little color from the Steel businesses point of view for the year 2007 that you were alluding to. About 30% of our business was devoted to what I would call either directly or indirectly the automotive market. But also appreciate the fact that our steel business's automotive business has been a better kind of business than other automotive businesses. It has been far less variable than what we would normally expect in certain instances and because we were on annual contracts, we were able to move very early in this cycle, by that I mean 2 years, 2.5 years ago to build into those contracts, the right kinds of considerations for costs that were beyond our control. So, that part of the auto business that we participate in from the raw materials side has been a fairly good behavior, fairly good behavior during the course of last year and we expect it to continue that way.

Okay. Well, maybe I am just a Jewish mother and I worry too much, maybe that's the problem. But again, I worry about the assumptions going into '08, but I'll hop back in queue. Thanks.

Wendy, let me follow up too, because maybe if your premise is that we will see much stronger top line growth in a good global economy, which, again from our standpoint, the markets are still very good as well as we have added capacity. But frankly, we think a lot of the growth that's going to drive the earnings is for a few factors, one, the mix as we talked about from auto to industrial markets is helping especially in the energy which affects both the bearing and the steel business. We are seeing improved pricing across, so we do expect that to continue. We are realizing and expect to realize the benefit of the restructuring that we are pretty far down the road on within the Automotive Group that we've had. We've constrained our margins fairly significantly within especially the bearings side with the capacity additions that we have put on as well as with our P1 systems that we are putting in place. So as we look year-over-year, we expect a lot of the constraints that we have had to mitigate. So in part, I think you have a point on coming out of a recession and you are normally coming off of a low base to get high kind of percent increases. Our view is even though we've had a solid year this year, it's still at a normalized level of profitability that's lower than it should be because of those constraints. So time will tell, but we are not counting on a great economic environment, we are counting on at least the same one but we believe the fundamentals are there that we should be able to drive that kinds of earnings per share growth next year.

Thanks, just one last question. Are we given your new restructuring, are we going to ever know whether are those profitable or not?

I think... Wendy, this is Mike. On an ongoing basis that will be reporting in three new segments, we'll give you some insight into the standalone auto business.

Great, thanks Mike.

You bet.

Your next question comes from the line Holden Lewis with BB&T Capital Markets.

Actually, this is Adam Fullen [ph] with Keller Capital. I am calling with a couple of questions regarding your operation improvement initiative. What are you guys doing in terms of Lean, Six Sigma and TPM to help improve throughput throughout all of your plants.

Yes, this is Mike again. As you might imagine, a manufacturing company like ours has been engaged in lean manufacturing for decades now. So we have ongoing continuous improvement and lean initiatives throughout not only our manufacturing facilities, but in our engineering groups and our administrative areas to continually look to the elimination of waste. So that's an ongoing process.

And regarding your manufacturing facilities, what metrics are you guys using to measure yourself in terms of like OEE or RONA? What are you guys... how are you guys measuring how productive you are?

Well again there is a whole host of measures OEE is a key one that used throughout our manufacturing facilities, because that drives not only the quality but the up-time and availability of the assets and order schedules. So there is whole series of...

Okay.

Adam, this is Sal Miraglia. Let me give you little insight about the performance of the steel business where we have applied some of those same metrics over a period of time. Last year we had what I'd call record performance from our ongoing... we have combined it actually, Lean and Six Sigma, Lean Six Sigma programs in terms of dollar savings. We look at a couple of different dimensions of improvement. We have mapped our entire operation in the context of each of the paths that our products take, where the constraints exist and what the cycle time through each of those and the actual volume in EBIT dollars are through each of those constraints. Along those areas, we have actually implemented programs that yielded us $7 million worth of savings, but more than that increased our capacity throughput in each of those individual pathways significantly in order to be able to respond to this market. In fact, for the last four years, maybe five years, the steel business has essentially done all of its capacity increases through these kinds of incremental improvements associated with the application of Six Sigma disciplines and synchronous manufacturing and lean disciplines. We've probably moved... and we are a little high right now because of the... because of certain projects we have underway to build new capacity and the need to bridge with inventory over times when we have outages. But we have moved the business to a position where our total working capital to net sales; that is including accounts receivable, accounts payable and all inventories are running at about 16%. And we believe we will get more of that out as these special projects that we have in place are implemented and we don't need the bridging inventories to make it happen. So we have... just as Mike indicated, we've been at this whole program for quite a number of years and we are really seeing it clicking on all cylinders on a continuing basis.

And final question, when you were talking about programs, are you hiring more people at these plants or more trained in Lean and Six Sigma or are you putting in better ERP systems in each plant? How do you guys at the end of the day, making sure that each plant is as effective as possible? I know you guys were talking OEE. How have you been making sure that every plant is as effective as possible with throughput?

I will give you a little color from the Steel business's point of view Adam. We have increased productivity and reduced the number of associates regularly over that period of time. But at the same time as we have added new capacity through these constraint breakings, we have compensated for that by maintaining the use of those people in other operations. So we have maintained constant employment, but have increased our productivity and increased our capacity capability throughout that period, kind of in a singular location here in Canton however.

Thank you very much. Continued success down the road.

Thank you very much Adam.

Your next question comes from the line of Mark Parr with KeyBanc Capital.

Hey, thanks a lot. Hey, good morning.

Good morning Mark.

I want to say that I guess I am not a Jewish mother, and I am very encouraged by your outlook.

We might want to differ with you on that Mark.

Thanks. One thing I was curious about, if you could provide some more color as far as the... your pricing versus volume assumptions by sector for '08. If you could give some more color on that, that would be really helpful.

Yes, this is Mike, Mark. Let me see if I can give you some color. In general, again, because of the markets that we serve and the strength in those markets and the fact that in many of the markets the demand is in excess of capacity, the pricing remains strong and therefore the mix of price and volume has been comparable as we go on for the last several years, and we see that continuing. So when you look at our top line results, you will see a pretty health mix of pricing movement forward as well as piece volume movement forward. And then in the case that a lot of our products now with the low value of the U.S. dollar are attractive across the world, we are also seeing some kick in the top line from just pure foreign exchange.

Okay, all right. Hey Sal, could you give some color on what sort of base price increases, if any, you were able to realize for '08?

I won't... I am not going to give you the numbers, Mark. But what I will tell you is that we still see constrained conditions in a lot of the products that are very, very popular with what we can do. We expect that pricing will remain as strong as it was last year and there is a little bit... as you know, there is a lot of jumping around just because of the volatility and the almost randomness with which the things like scrap, not so much alloy, but scrap for sure, iron units jumped. And therefore we see changes in our surcharge number which kind of clouds a little bit the nature of the pricing when you look at the transaction level. But we expect the pricing to remain firm and to remain strong for us throughout the year.

Okay. Can you... do your surcharge mechanisms allow you to fully recover that $100 increase in scrap in January during the first quarter?

They do allow it. The only issues are those associated with timing, and there was a little bit of an issue of that sort in January because of publications of pricings. But over time, that all washes out and the answer is yes.

Okay, okay, terrific. Is there... on the Project ONE expenses, is there any significant change in expenses in '08 versus '07?

Yes, Mark, I would say that like significant, but we probably have been... the peak level of spending would have occurred this year. So we'll see an improvement in it. We are still going through two more waves of implementing it. So it's not going away, but we will see an improvement year-over-year. The only offset to that partially will be the depreciation of the new system that's coming in. But net-net, it's a benefit.

Okay, I just want to congratulate you guys on really being transparent and helping us to understand the earnings magnitude of the challenges and the work you guys has been doing. I want to congratulate you on the great progress you have made and looking forward to a good '08.

Thanks a million, Mark. We appreciate it.

Your next question comes from the line of Eli Lustgarten with Longbow Securities.

Hi everybody. You can hear me, I hope.

Yes, Eli.

As you said, I'll just... remind you that there is a Snoopy cartoon I keep on my desk that's saying there is no heavier burden than a great potential. So we are hearing that. We want to make sure. Wendy is correct. Let me just talk a little bit about automotive and make sure. Your 14.3 million and 14.4 million units in '08 is based on 14.9 million in '07. Is that the basis you are using? I want to make sure we are using... that's the production number.

No, that's correct.

Okay. We talked about... you talk about improvement and yet we will have $70 million a year plus the two years in automotive. If you look at '08, you should be... you don't have... you shouldn't have this $10 million of LIFO and you shouldn't have the $25 million... or you are supposed to be getting at least a $25 million benefit from the restructuring. Is that how we should think of automotive being... the loss [ph] should cut in half even at the lower volumes because of those improvements?

Well, I think as you model it, Eli... I am sorry... this is Mike, as you model it, I think there is multiple things that you should look at. One is the restructuring and obviously now getting back to the bottom line and coming through some of the disruptions that we had throughout our manufacturing operations and therefore some of the costs in the last two quarters of this year. So that clearly is a factor. The move forward is the reorganization into the bearings and power transmission gave us an opportunity to take S&A costs out of the organization. And I think we talked in terms of between $10 million and $20 million, and that has been accomplished for next year. Although if I give you some insight for automotive, it's not all automotive. This was both synergies and some opportunities to take costs out. So, again, that won't be just tied to that business, but we took the opportunity in the restructure to take that out across the business. And then this... the area of pricing, as I said before, we are making good progress with regards to repricing our products in the marketplace, appropriate both to our contractual obligations and also the value that we create in the marketplace and we are making good progress there. And we are also making progress on this mix change, Eli. So you are very familiar with regards to the opportunities across industrial markets and especially in those areas where our capacity is constrained. So we are going to continue to look for those opportunities where we cannot garner the profitability that we would expect in unprofitable markets and move those products to the most profitable markets we can. So, again, that may look as a negative to the ongoing automotive business, but the bearings and power transmission business will be a positive mix change.

I guess I understand that, but we have seen on the current numbers, we see a $70 million drain on the business. And I am trying to get an idea, how was... in the modeling or the conceptual look at that business in 2008, and it's cutting that loss in half is the objective. Is it more than that? And I am not looking for precision, but trying to get general magnitude, because we have been talking about cutting this loss in half now for a couple of years. And is it unrealistic to expect that loss to be cut in half in 2008 for all the reason that you say even it [ph] changes?

Yes, I won't give you a specific number, but certainly the direction that you are talking about is consistent with the direction that we are talking about. We'll see a noticeable improvement in the profitability in that business segment or we will force the exit of certain parts of that business to get there. So that's in our plan, it's part of our forecast for 2008 a significant improvement in the automotive profitability. And so we are along the same lines as you are, Eli.

Can you give us some idea how much was foreign currency in the quarter, I mean by sector? How much was pricing in 2007 and for the quarter? You referred to better pricing, but how much did you realize in 2007 for pricing and foreign currency? And with Purdy just about $10 million in the quarter, were there any... how much contribution did you get from Purdy in the quarter?

Yes, let me... I'll give you... this is Mike again Eli, and let me give you some insight. And I think because it might be the most important on the industrial segment as we look at that, and then I will turn it back to Sal or to Glenn to talk about the steel and the corporation as a whole. But if you look at sort of quarter, fourth quarter this year versus first quarter last year, from a price perspective, we would have seen 40 to 50% of the top side revenue growth actually coming from price and then about half of that in pure volume, a smaller amount obviously in Purdy. Purdy would have contributed in single digit millions of dollars in the quarter, and then some foreign exchange, which would have been somewhat close to the Purdy. So it's an interesting mix, strong price and yet strong piece volume.

Well you were up 17% in the Industrial Group, I believe, in the quarter. So you are saying half of that... pricing was in the high single digits?

That's correct.

So it's not unreasonable to expect mid single-digit pricing in 2008 based on that kind of scenario?

We continue to see strong pricing opportunities across the market. And under the current pressures from a cost perspective of not only the increase in capacity to serve the needs of the marketplace, but also the material costs. We have to move them there.

Okay.

Eli, just on the growth too, the 17% currency and acquisitions, if you back both of those out, would have been 9%. So from an organic standpoint both through volume and strong pricing within the Group.

So 17.5 was current... acquisition and currency. So the difference is about 8%, of which half is pricing and half is volume? That's for industrial or for the whole company? That's just for Industrial, right?

That's just for Industrial. For the Automotive Group, we had the impact of currency was around, call it, 4% but we also had divestments. So if Auto was up 1% and you backed out divestments as well as currency to get an organic number, they would have been up around 2%.

Okay. You have similar things for Steel too or --?

Steel is probably low to middle single digits on price. We have much less currency impact. I don't think there was much at all. We had about $100 million in exports and a little bit of closing sales with our Desford, which is now closed, but our Desford operations. So it's very, very minor in terms of currency effect. Of course, the big story in steel is just surcharging, which has been... which was huge for the year.

Yes.

And Eli if you looked at that, the Steel 6% growth was offset equally by the... the exiting of the Desford operation was offset by the increased surcharges. So, again, 6% a pretty good organic number.

Yes. Very. And one final question, the amount of incremental capacity we are expecting in the industrial bearing business in 2008, is it still in the 4%-5% range? Or can we get as much as 7 out of it?

I am just doing the math right now. I think we are about in the 4% range in increased capacity.

And we get a similar math in 2009?

And that's increased capacity based upon the new investments, Eli.

Right. And should we expect a similar amount in 2009?

It actually will accelerate slightly because we have currently three plants under construction. So it will accelerate over the next several years.

So if we get 4% in 2008, we can expect mid single digits in 09?

Yes, yes.

Thank you. I will get back in line

Okay.

Your next question comes from the line of Val Sifenburg [ph] with Lehman Brothers.

Yes, Lorge Steinberg [ph]. A couple of questions. First of all, what are your expectations for raw materials costs for 08 which were... which are implied by your guidance?

Val, this is Salvatore Miraglia from the Steel business again. I suppose I should take that first as we are probably the closest to these raw material areas. We have seen scrap prices, which are iron unit-related all the way around move back to some of the near highs that we have seen from several years back. And quite frankly, when it moved that way in January, it moved upward from January, which was almost $100 a ton was about twice of what we expected. So we have got some problems that we think are reflected... a reflection of the weak U.S. currency that's sort distorting a little bit what the global raw material conditions might be like, but nonetheless that are indicative of it. We believe that the raw material prices will stay high, they may go a little higher, they may drift a little lower. We hope not to see the kind of volatility we have seen before. I thought that would be the case for last year and we were proven wrong again. But we fully expected them to be high, to stay high, without much relief relative to that in the overall picture of where these costs will go. Secondly, we believe we'll see a mixed bag with respect to some of our alloys. Some of the alloy elements that are important to us are beginning to see some relief as the various different processing capacities come on stream. But others are getting more pressure. So on average, we think we are going to see about the same effect, which is upward pressure on alloy costs as well. So raw materials staying high and very probably creeping up a little bit more on average.

And the Auto and the Industrial Groups?

Yes, we are continuing to see much in line with what Sal said, increases in material costs, and we are planning for that for the new year. From our perspective, however, in these rapidly growing markets and where the demand still is in excessive capacity, we are focused very heavily on availability. And I can cheer that our supply chain is strong enough and robust enough, in fact to supply our capacity increases but there's no question with regards to Sal's comments that we are seeing that continued pressure on the raw material costs going in our products.

Okay, and related to your response on the focus on the availability. If so is there any way to quantify... I guess, first of all, where on the curve is Timken now as far as ramping up... as far as ramp up of the capacity goes and how much... by how much did it depress the margin in Q4 or for all of 07?

Well we have talked in general over the last several quarters with that ramp up has impacted our results any you place from 50 basis points to as much as 200 basis points as we have initiated these new facility. So that is something that we have talked about on an on going basis. The ramp up, as I had mentioned to you, we have three facilities in the Bearings Power Transmission Group that are under construction now in various phases and beginning to ramp up that capacity. So we are going to see a cost and as long as these markets stay strong, and again we have to remember the markets that we are targeting are heavy industries, the energy industries, Asia infrastructure build in particular and aerospace, all of those are forecasted to continue to remain strong and we will continue that capacity upgrade. So, we're going to see a constant increase in that capacity and the need for robust supply chain for the coming several years.

Okay. And my last question is... so you talked about the different scenarios that you looked at for the Auto segment as far as the light vehicle build. Which of these scenarios is actually captured in your guidance? Which are base scenarios.

Well we have based our forecast on the 14.4 million vehicle scenarios.

Okay I got it, thanks.

Your next question comes from the line of Blair Brumley [ph] with River Source Investment.

Good morning gentlemen.

Good morning

A very quickly I think it was Jim a moment ago, who outlined in terms of trying to walk us generally through the EPS guidance that you are giving for the year, with 4 pieces mix from automotive to industrial and improvement in pricing across all of the product lines; restructuring [indiscernible] increases which are 4 nice buckets, maybe even nicer if you did mention them for us a little bit, please?

Well, I don't think we are still in the position to do that but to say that, in each case, they are going to contribute in a meaningful way so its going to be differently, its just not that one is going to be a disproportionate amount, but pricing as we see it continues to be strong as you have heard from Mike and Sal, I think just the prior question on the manufacturing constraints of the new capacity should be diminishing as well as some of logistics costs as we pressing through a lot of demand through some constraint facilities as we balance out the order book. The restructuring benefits that we are getting as we are wrapping up the automotive and just the reorganization. The benefit we obviously have with the accretive acquisitions coming on board and the big challenge that we have assumed which actually would be a negative to us would again be this material increase that we are least factoring in... into that net, the pricing and those other initiatives will overcome. So broad-based from a market stand point, broad-based from a... an improvement to the bottom line.

Thanks very much.

Your next question comes from the line of Marty Pollack with NWQ Investments.

Hi. I know this question is being asked. Wendy certainly and Eli appointed the... try to sort of get some granularity in the guidance. I mean I would think that the ramification of just reducing an automotive loss with however you will see that reflected in, and in first quarter and next year. When will you just pencil in the numbers. You could get in a sense $0.23 to $0.25 reversal; just I mean or at least tailwind, I am just on that estimate assuming those losses come down since they were in your base earnings in '07. I am just wondering though when you look at the outlook for automotive, is it implied from what you are saying that... the exit when you said you could exit business to get out of it. You are effectively specifically alluding or targeting some of that capacity that is under-prized and not likely to have a chance of meaningfully improve. I am just wondering if you can or we... because in a sense you are saying going to stay in automotive bearings with those businesses that can justify themselves, or at least those segments within the Auto segment. Can you provide some idea how much of that is really exitable as a percentage of Auto?

Yeah, it's not really Marty. And the only reason I say that is because the exitable comes after the factors to whether or not we can make it profitable in the market segments that we are currently servicing and that's the work that we are going through right now, and we are doing that not only in the automotive segment, but obviously all the segments that we serve that are not meeting our profitability targets, which long-term is earning well in excess of our cost to capital. So to try and put that would be a little bit of looking forward and making too much predictions as to how it might play out. The only thing I can say is every opportunity that we find that we are serving unprofitable markets and we can move them to profitable markets, we will in fact do that.

When you talk about the 14.4 million assumption on the builds, what is your S.A.R.R. forecast behind that for North America?

It's 14.4 million.

That is your build. I mean I am assuming you got a higher S.A.R.R. number in those assumptions, no? I am just saying essentially the S.A.R.R. number you build... bill rate tends to be lower that of... the industry is coming off with expectations by the big three. Is it they are still looking for somewhere between 50.5 million to 60 million units of old shipments or sales?

Yeah I think we would be using the same numbers that you are using Marty that would say that we would be in the 14.4 million from a production perspective and in excess of 15 and probably approaching 16 from a sales perspective. Is that your question?

Yes, effectively right. I mean well it sounds like 14.4 million would probably bring it down to the lower side of 15. Maybe that's really what that implies. If I may also you are describing that a lot of your real spending is... a lot of that is not going to perhaps help in '08. Is your CapEx budget... can you tell us what that is for '08 and '09 essentially? Are we coming off the top so that we will begin to see the benefits of that in lower CapEx and higher free cash flow?

Yes. The CapEx spending that we expect for 2008 is comparable to what we had this past year as we are again finishing up a lot of the capacity editions that Mike would have talked about. We think the peak spending on that basis is in 2008. So as we go to 2009 and beyond we will start to ratchet down.

And just one another question. On the pricing I guess still going back to automotive it seems that you are implying that one of the challenges will be raw material cost pressures. It's one segment that you think would be hard to price through. I mean in effect you have the flexibility to generally speaking to price even let's say in your best business in an environment where raw material costs are rising. Are you able to buoy [ph]... is that the challenge of being able to price, you can do that segments where you can put a surcharge or raise prices in those markets which are tight. But is that the kind of the reason why your confidence or ability to describe let's say more clear outlook is because of that, just in general?

What Marty, I am not sure that that is what gives us the confidence that we can be successful here. What I can say is that nearly 100% of the business in steel has surcharging in contracts to make certain that uncontrollable costs can flow right through this system and I think Mike will tell you that a good bit of the same is included in bearings contracts as well. The confidence that the year will be good comes more from our discussions with our customers in the markets that we are in and the fact that that secondary economy, not the primary home consumer and home building economy but the industrial economy is seeing no real weakening at this stage and time nor for seeing that. That gives more of the confidence than the pass-through capabilities right now.

Okay. Thank you.

Certainly, Marty.

There are no remaining questions at this time. Sir do you have any final comments or remarks?

Well let me simply say thank you for your interest and investment in the Timken Company. The changes underway within Timken to serve high value markets clearly paid off in 2007 propelled by strong industrial demand. We look forward to continued progress and even better results in 2008. Thank you.

Thank you for participating in today's Timken's fourth quarter 2007 earnings release conference call. You may now disconnect.