Good morning, my name is Paula, and I will be your conference operator today. At this time, I would like to welcome everyone to Timken's Second Quarter Earnings Release Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Tschiegg. Mr. Tschiegg, you may begin your conference.

Good morning, this is Steve Tschiegg from the Timken Company. Can everyone hear us okay? Operator?

Yes, sir. I can hear you.

Thank you, and welcome to our Second Quarter 2011 Conference Call. I'm Steve Tschiegg, Director of Capital Markets and Investors Relations. Thank you for joining us today, and should you have further questions after our call, feel 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; Rich Kyle, President of our Mobile and Aerospace and Defense Businesses; Chris Coughlin, President of Process Industries; and Sal Miraglia, President of our Steel Group. We have remarks this morning from Jim and Glenn, and then we'll all be available for Q&A. [Operator Instructions] 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 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. This call is copyrighted by the Timken Company. Any use, recording or transmission of any portion without the expressed written consent of the Company is prohibited. With that, I'll turn the call over to Jim.

Good morning. As you saw in our release today, Timken had another excellent quarter. Top line growth was solid. We're seeing broad-based strength in the industrial areas we've targeted for expansion. We set a new record for second-quarter earnings of 49% from a year ago. Timken's performance stands in stark contrast in the overall economy, at least as you hear it reported in the media. Before Glenn takes you through the details of our performance, I'd like to put the economy in which Timken competes in the proper context to build your confidence in our ability to sustain this higher level of performance. The U.S. and the European economies on the whole continue to recover slowly, stymied by government debt crises and a lack of consumer confidence. This tepid economic growth and the unemployment that accompanies it dominate the headlines. Fortunately, although not reported as broadly, there's another stronger economy creating real market opportunities. This more vibrant economy is driven by developing countries, where an ascending middle class is generating new demands for energy, transportation and infrastructure. While there's much concern about the credit tightening in China, even in a bad year, the economy will grow 6% to 8%. On top of that, India's GDP grew 8.5%, Brazil by over 5% and Indonesia by almost 6.5%. Timken has positioned itself well to serve the demands created by this growth. This growth has also led to unprecedented demand for commodities including copper, iron ore, coal, gold and silver. As well as agriculture commodities such as corn and wheat. The mining and farming industries are expanding globally to meet this demand. Mining equipment shipments are at all-time record levels. Wherever they expand, whether they are operating or repairing older equipment, which is fueling the growth of our distribution business, or creating today's…

Thanks, Jim. Sales for the second quarter were $1.3 billion, an increase of 31% over 2010. The increase was due to strong volume across the company's broad markets, with the exception of our Defense business. The top line also benefited from higher surcharges, pricing and currency. From a geographic perspective, we posted solid gains in all major regions: North America, Europe and Asia. Gross profit of $351 million was up $82 million from a year ago, the improvement was driven by higher volume and mix, while surcharges and pricing offset the impact of higher material costs. The gross margin of 26.4% for the quarter was down 10 basis points from a year ago. The effect of higher surcharges to recover material costs had a dampening effect on the margin. For the quarter, SG&A was $154 million, up $13 million from last year, primarily reflecting higher variable incentive compensation and wages. As a percentage of sales, the margin improved 230 basis points over last year to 11.6%, as we continue to leverage our cost structure well. As a result, EBIT for the quarter came in at $192 million or 14.4% of sales, 160 basis points better than last year and a record for the company. Net interest expense of $8 million for the quarter was down $1 million from last year, the decrease was primarily due to lower financing costs associated with the company's new $500 million senior credit facility and lower interest rates. The tax rate for the quarter was 33.4% compared to 31.8% a year ago. The current rate was in line with our expectations, while the prior year rate benefited from favorable adjustments to our reserves related to pre-2010 tax years. As a result, income from continuing operations for the quarter was $121.5 million or $1.22 per share,…

[Operator Instructions] At this time your first question comes from Steve Volkmann of Jefferies. Stephen Volkmann - Jefferies & Company, Inc.: I was interested in your opening comments, Jim. Certainly what we're seeing across the industrial space and yet as I kind of try to square that up with what I think you're telling me, these are the year outlook, it looks to me like your second half revenue growth probably has to slow a little bit to kind of stay within your targets, and your margins may come in a little bit as well. So I wonder if there's a bit of a disconnect there or are you being a little conservative, is this sort of just the new seasonality we should expect? Or what's the right way to think about that?

Steve, this is Glenn. I think that's more of the latter part of your comment. As you know, the second half for Timken historically, is seasonally lower than the first half. And so the markets that we're seeing aren't changing, if you will, it just -- we do expect to see slightly lower second half than first, with a couple of exceptions. Within Process, you'll see that our expectations are for stronger second half, in part because of the Philadelphia Gear acquisition. Were it not for that, we would have seen the seasonality similar in Mobile we see it. The 2 exceptions to that are in both the Aero and Steel. Aero just because again, later cycle, it's coming off of a low base, but we do expect to see it sequentially progress throughout the year, so it will be higher. And then also in Steel, and the issue in Steel is we're running full. So effectively, the improved outlook we have for the second half is more of a function of that the surcharge is expected to be up, pricing and mix. But as far as the first half, second half, the economy at least as we see it, continues to be strong and it's just more seasonal issues. Stephen Volkmann - Jefferies & Company, Inc.: Okay, good. So can I -- I don't want to put words in your mouth, but can I say that you're not seeing any signs of your end markets kind of slowing as you went through the quarter into sort of June, July time frame?

Yes, from my standpoint, that's correct. I think Chris, Sal and Rich can obviously speak to the outlook for the businesses as we go through it. Questions?

Yes, Steve, let me take the first stab at that. This is Sal. We have not seen any weakening. We might be detecting, finally, the completion of the restoration of stock in some supply chain so that it's not as frenetic as it had been as we were all trying to catch back to where we were. We're certainly getting no signals from our customers about anything back and, of course, it's been in the news, we're probably the only ones officially there. But we're -- in our business, we're on allocation across every one of our product lines and so we have fair visibility through the end of the year as it stands. We may have a little bit of margin weakening. As you know, we're taking our major maintenance outages in the third quarter, and some of those costs may roll into the fourth quarter, and there are likely to be seasonal holiday issues that might put a little bit of damper on the endpoints of the year, but from a market demand point of view, we have yet to detect any softening for those markets that we're serving.

Yes, this is Chris. Our Global Distribution business is still very strong. The growth rate of it has leveled off but at a very good business level. So looking forward, that looks pretty good. It obviously, though, is subject to the seasonality point that Glenn brought up. The only areas where we see a little bit of issues, we are seeing a little bit of a slowdown in growth in China. But I would term that as slowdown in growth. It's not an issue of the market being bad or anything of that nature. But we're clearly seeing the impact a little bit of some of the credit tightening from the government there.

This is Rich. I'll just add that our Mobile is the biggest contributor to the second half being softer than the first, and that is really just seasonality as Glenn talked about it. If you go back to the prerecession years of '05, '06, '07, the second quarter for Mobile is consistently the highest revenue quarter, and we expect that to be the case again this year as we get back to a more normal seasonality.

And your next question comes from the line of Eli Lustgarten of Longbow Securities (sic) [Research].

Going through a little bit of the outlook on the business. I mean you started doing it. But in Steel, you're on allocation, you're sold out for the year. Can you talk a little bit about how much capacity is coming on between now and the end of 2012, because if anything grows, it's got to come from the capacity scenario. I think you indicated that margins will be a little softer in the second half than the first half. Same thing in Mobile, there is seasonality. Do you still expect see $50 million to $100 million worth of auto business this year, how's that allocated or has that gone by the board because of the Japanese problem? And the profitability in Process, that's probably the most spectacular that it's that sustainable on the second half growth, or does it back off a little bit because Philadelphia Gear acquisition cost was dropping?

Let me start, Eli. You asked about Steel to begin with. We have brought all the capacity online that there is to come online between now and the end of 2012, so there won't be much growth in the way of volume in that time period. The capacity additions that we have announced, for example, the Faircrest in-line press, which will become operational the end of 2012 into the first quarter of 2013, will not be available until 2013. So we're kind of at that limit at the current time, but we brought with the fourth crew at Harrison Avenue, we brought 120,000 tons of additional capacity on this year. It was brought on during the latter part of the first quarter and into the second quarter, and we'll be operating at that pace in the latter half of the year and throughout all of 2012, assuming we don't see some kind of other global economic perturbation of some sort.

So year-over-year you'll have some modest addition?

Some modest additions and whatever will come in from the way of pricing.

In profitability, am I right, second half a little lower than the first half?

Just ever so slightly, because of equipment outages, yes, that's right.

Eli, this is Rich, I'll take the question on the loss business in Mobile. The loss business for the rest of the year is not a factor in the second half decline, as I said earlier, it's really just the seasonality. We said that we expected the loss business to be around $100 million. Most of that is -- all of it materially has been in the run rate really for -- since early in the year and it was an issue of contracts expiring at the end of last year and beginning of this year that were not extended. So we expect no material decline through the second half of the year. We do have some contracts at the end of this year that we expect not to be renewed, and that's been in our long-term guidance, and in the 2012 forecast that we provided at the beginning of the year.

So in operating profitability, every quarter we thought it was going to go down a bit. Is it going to stay low that it'd be stable at this rate, is that the expectation?

Well, we'd expect a little bit of a decline in the third and fourth quarter in the guidance due to the seasonality of the volume reduction, but we are within the target range and maybe a little on the high end of it.

Okay, and Process?

Yes, the margin story is the same as the first quarter. We have a very good distribution mix, good service levels, that's helping a lot. We continue to leverage the manufacturing cost ramp in Asia, and just general excellent cost control on S&A and things of that nature. So I mean, those are the primary drivers of the margin. Moving forward, and I'll start with -- we expect to have a very, very good year. But -- and also on that, we believe we have taken our margins to a new structural level versus anything we've had in history. That said though, we do expect to see an increase in our OE mix moving forward. That's a very good business for us, important to the long-term aftermarket. But it is at lower margin than some of our core distribution business. And then, we also then have the seasonality issue where -- with the third quarter is a weaker quarter, and we have outages in plants and things of that nature. So we certainly are going to see some dampening effect from those factors.

And Philadelphia Gear itself would come in at the same margins or a little lower?

Just a tad lower, but not relevant to the total, really. I mean, it's still a pretty good story inside that mix.

And that's $50 million a quarter at this point, I would expect?

No, that's -- $50 million a quarter in sales?

$25 million a quarter, I'm sorry.

Yes, roughly.

And your next question comes from the line of Theodore O'Neil of Wunderlich securities.

How much capacity are you going to add on the Steel side? And are you going to have to take down any of the mills in the third quarter for maintenance?

Yes, let me see if I can handle that, Theodore. During the first part of this year, we brought on, at an annual run rate, about 120,000 tons of capacity which is now on our books. We are operating with it and it's in our projections. That was bringing one of our mill shops up to full 24 hour a day, 7 day a week operating status. Indeed, in the third quarter and in a little bit into the fourth quarter, we have a number of our mills scheduled for maintenance outages, which is why we'll have a little bit of weakening from a margin point of view in the third quarter and a little bit of that cost may run into the fourth quarter. And in the end of the year, we always run into the holiday seasonality and mostly that's from a customer shipment acceptance point of view, more than anything else. But not much different than what we've seen before. So it's actually won't be a very good second half just with those seasonal characteristics associated with it. So we're basically operating at our capacity, and will, for the rest of this year and through 2012, at the levels that we have today.

Okay, and then in the Defense segment, the parts write down of $3 million, is there any chance that you can sell those parts sometime in the future?

Those parts were a nonstrategic part of an acquisition that we made a few years ago. We stayed in the business for a few years, we made the decision to exit that part of the business and we wrote the assets down to what we -- the inventory down to what we would estimate as a liquidation value and we expect to liquidate them over the course of the next few months. So we would get the cash from them, but there is not expected to be another EBIT impact associated with that.

Okay, and the plant closure in Brazil, can you give us a little more color on that?

The plant's actually been closed for going on a year. And that was a combination of 2 items that we made a reserve adjustment for. One is associated with settling labor claims that are common in operating in Brazil after plant closure. And the other is associated with an environmental reserve to prepare the facility for sale in 2012.

And your next question comes from the line of Gary Farber of CL King. Gary Farber - CL King & Associates, Inc.: Can you discuss your updated thoughts on the market for acquisitions or interest in acquisitions? And then, in regards to Philadelphia Gear, can you talk about any opportunities to export that overseas?

Let me cover first just the market for acquisitions and then have Chris talk about the opportunities or the synergies with Phila Gear. We think right now, the market -- or the deal activity is clearly picking up. You could call it a sellers' market. Obviously, the uncertainty of the future, you've got good year this year, you've got a lot of companies and private equity sitting on a lot of cash, banks are borrowing or lending money again, interest rates continue to be very low. So it's clearly a prescription for companies that want to monetize their assets to be in the market. So we are seeing more of that happening, so we continue to evaluate the deals that we feel are strategic to the company. And are encouraged that over time, we'll continue to be able to grow and complement our organic growth through acquisitions. But obviously, we won't speak to any of that. So an acquisition would come around, but the deal activity is there, as far as the opportunities to take Phila Gear internationally, Chris?

Yes, our primary interest in Philadelphia Gear is around bringing more value and mechanical power transmission at end users, which is a very important aspect of our global distribution business. The strength that we bring, they have a very strong brand and a very strong presence in North America. So to your point, we will take our infrastructure globally and extend that model throughout the global infrastructure of Timken.

[Operator Instructions] And there are no questions in queue at this time.

Thank you, this is Steve Tschiegg. Before we conclude today, I'd like to turn the call over to Jim for closing comments. And after our call, if you should have any further questions, please feel free to call me at (330) 471-7446.

I'd simply like to thank you for your interest in the Timken Company. As we discussed, our strong second quarter reflects a new structural level of Timken performance. We look forward to discussing it with you again in the future.

This concludes today's conference. You may now disconnect.