Good morning. My name is Shannon, 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 Fourth Quarter Earnings Release Conference Call. [Operator Instructions] Thank you. Mr. Tschiegg, you may begin your conference.

Thank you, and welcome to our fourth quarter 2014 earnings conference call. I'm Steve Tschiegg, the company's Director of Capital Markets and Investor Relations. We appreciate you joining us today. If after our call you have further questions, please feel free to contact me at (234) 262-7446. Before we begin our remarks this morning, I want to point out that we 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 have opening comments this morning from Rich and Phil before we open the call up for your questions. [Operator Instructions] During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release. Today's call is copyrighted by The Timken Company. Without expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I'll turn the call over to Rich.

Thanks, Steve. Good morning, and thank you for joining us today. Over the next few minutes, I'll comment on the quarter, talk a bit about our full year and then share how we're thinking about 2015. Phil will follow with the financial recap on the quarter and year as well as our 2015 outlook and then we'll open up the line for your questions. The quarter came in very close to our expectations and guidance. Sales were up 2% despite the negative impact of currency. Process Industries was up 12% as we continue to outgrow our markets as a result of our product market and geographic expansion initiatives. We're clearly continuing to build momentum in this segment. Mobile was down 7% due to exited business, currency and a softening agricultural market. I am pleased to emphasize that this is the last quarter that we plan to call out the impact of Mobile exits as the year-on-year results will no longer be adversely impacted by our multiyear portfolio transformation that ended in 2013. With that initiative now behind us and a building pipeline of commercial activities, we expect to be generating much better top line results in Mobile Industries in the years to come. We leveraged our modest revenue growth in the quarter for very strong results at the bottom line with a 35% gain in adjusted earnings per share. This improvement was the result of our operational excellence initiative that is continuing to deliver significant and sustainable cost improvement, the improved mix from the growth in Process Industries, tax rate and the benefit of our share repurchase program. And we delivered that improvement facing a sizable offset from the impact of currency. As to margins, very different results within the segments with Process generating excellent margins of 21% excluding unusual…

Thanks, Rich, and good morning, everyone. As I go through my remarks this morning, I'll reference specific slides from the earnings presentation that we posted to our website earlier today. Let's start on Slide 12. For the fourth quarter, Timken posted sales of $762 million, up 2% from last year. We achieved solid organic growth in multiple sectors, led by wind energy, rail and the industrial aftermarket. This growth, however, was partially offset by lower shipments in Aerospace, a weaker agriculture market and the impact of planned exits in the light vehicle sector. As we've discussed on prior calls, the last major program exit occurred at the end of 2013 and has negatively impacted our comparisons over this past year. As Rich mentioned, this headwind is now behind us and we expect to grow profitably in the light vehicle sector in 2015. Our sales were also negatively impacted by the appreciation of the U.S. dollar against key currencies like the euro. In the quarter, foreign currency translation reduced our top line sales growth by $18 million or around 2.5%. We expect currency to continue to have a significant impact on our results in 2015. From a geographic standpoint, sales were up in all regions of the world during the quarter with the exception of Europe, which was down about 3% excluding currency. Turning to Slide 13. Gross profit in the fourth quarter was $221 million or 29% of sales, up 130 basis points from last year. We managed SG&A well again this past quarter with expense coming in at $132 million, down $2 million from last year. The decrease reflects the benefit of our cost-reduction initiatives and currency, partially offset by higher incentive compensation and around $2.5 million of M&A related expenses. SG&A was 17.3% of sales in the fourth…

[Operator Instructions] We'll take our first question from Stephen Volkmann with Jefferies.

Rich, can I just push you a little on the share repurchase? I know you said you're committed to -- you remain committed to that program, but I think in the past, you sort of talked about finishing it by 12/31/15 and it seems like you're going to have to be really active and you may even have trouble getting it done now by the end of '15. Are you still committed to that? Could you do like an accelerated kind of a thing? I mean how do you think about that?

Yes, I think if it's commitment to moving to our target that you're looking for, you have that and we remain committed towards making a sizable move to our target. When we established the size and speed of the original buyback, it was to -- with a little bit of M&A and cash flow intended to get us close to that target or around that target by the end of the year and obviously, there's a lot of moving pieces in that. So we remain committed to that. You will see progress on that. What we didn't do was guide specifically to how that would transpire. But as Phil said, we will update you on that quarterly. We have 8.9 million shares remaining. Do not think that would be a problem from a market standpoint to do all that in the calendar year. And as Phil said, we expect to be active through the course of the year and report out on a regular basis.

Okay, good. That's helpful. And then, can you just talk a little bit about sort of the cadence of the quarter? And you talked about some of the end markets there that are still doing fairly well, I guess unfortunately, I'm going to ask you to do the other side of the ledger and talk about what's deteriorated, and how much, and did we end December sort of on the low note for the quarter. Those types of things. And I guess if you could just layer in any view you might have with respect to customer inventory destocking that might be happening, that would be helpful too.

Okay. I refer everybody to Slide 9, and we titled this Market Outlook Drivers so we mixed currency with end markets and with geographies, but I covered the positives earlier in all of those markets and where we participate in those markets. In some cases, obviously, we have a much greater penetration. I mean our light vehicle businesses, as an example, is predominantly a North American business, our rail business is very global. So where we participate in all of those are positive for us, ended the year positive. We expect to start the year positive. The middle is a mix, I would say, of markets that are at healthy levels and are flattish end markets that are at depressed levels like mining and metals, but we expect this year to be relatively neutral from prior years. So taking mining as an example, the OEM side of that business well off peak levels, probably soft. Some of our customers in that space would have still indicated they're still reducing inventory. We believe that is largely behind for us. And that, that group of markets and geographies in the middle, we would look at flattish year-over-year. On the left, we talked about currency, and to your point, the currency from a euro perspective has worsened since the first year. Some of the other currencies for us have been flat to improved. But clearly, there is a risk in that from a downside pressure standpoint for us, and obviously there's some upside as well, but the trajectory as we sit here today, from the first of the year to today would still be working against us. Agriculture, we saw that decline coming around midyear really hit us quite hard in the fourth quarter is still on a decline and we'll start off the year very slow. Oil and gas, we really haven't seen yet, but are expecting. And as I said in my comments, I have some of that baked in. Defenses could have maybe been in the neutral. It's fairly stagnant, but certainly has some downward trend pressure on it. We saw some softening in Europe in the fourth quarter, expect Europe to start off slow in the first quarter. Certainly, the flip side of the currency working against us is we deal generally with big European multinationals and you would think that by the second half of this year, the currency, et cetera, could have some positive impact on that coming forward. But that would have been -- the 2 that would've been in a downward trajectory, ending the year for us, would have been agriculture and Europe.

Great. And just quickly, any destock or restock at the distributor level, and I'll pass it on.

No. Both largely flattish last year and at this point, not a lot of activity this year either.

And we'll take our next question from David Raso with Evercore.

With the use of balance sheet for this year, can you give us the lay of the land on the M&A environment? And then I have a quick question on margins.

Sure, we were active -- as you mentioned, we bought back 5.2 million shares this year, David, so we were active throughout the year buying back shares, and as Rich said, took the second quarter off in advance of the spin. And also we're out of the market for most of the fourth quarter because of a strategic opportunity we were looking at that ultimately didn't materialize for us, but we were in the market and relative to M&A, we continue to work our pipeline. We had looked at several candidates during 2014. We were successful with Revolvo and Schulz, 2 relatively small acquisitions. And as I mentioned, we had a larger acquisition we were looking at but ultimately didn't execute on. We continue to view M&A as an important part of our capital allocation program, if you will, and it is the best way for us to diversify our product offering and reach new markets, et cetera, so we will continue to focus on M&A and as I indicated, continue to expect to be in the market buying back shares.

Just so I understand that the playbook for the rest of the year and I can understand if it's the assets we all think it was. It was prudent to step away from that sale that took place in the fourth quarter. But are there -- is there a point we should assume, maybe you're still holding off with other the deals, where you go, look, we promise we'd get net debt to cap near 30% by the end of the year that we'll back away from a deal. That might even look interesting, it's in process, but we got to get the balance sheet up and we have to execute on the repo. We're just trying to make sure there aren't too many more quarters where, understandably, you held off from buying back shares, but that we don't have too many more of those and we end up not getting either or, we don't get the acquisition or the repo.

Yes, I think, certainly a fair question, David. And in the past, going back prior to 2014, we had said we were holding on to dry powder for something bigger. We count -- in '14 said, we weren't going to do that in anticipation and trying to price something loose. This was something that was presented us as an opportunity, so we did think it was prudent to go ahead and pause while we took a look at it and we're glad we took a look at it, but it obviously didn't materialize. Big M&A in our space is not all that prevalent and I would not expect that to be a major issue for us in 2015. And again, going back to Steven's question, it'd depend on where our cash flow is, where the share price is this year, et cetera. You could buy back the full share. The amount of shares still do a reasonable amount of M&A and still very comfortably would be in the target. So I mean you're talking about something that's north of $500 million, $600 million that even stretches -- stresses it at all. So that being said, if something presented to us in the next couple of quarters, would we not take a look at it? I think we probably would.

Regarding the margins, I think there were some thought stranded costs in '14, would go away in '15, just obviously some stranded costs around the splitting of the company. But when I look at the margins implied for '15 versus '14, and we're working off a restated number here, so I apologize if I'm off a little, but it sort of seems like we're not expecting really any margin improvement year-to-year. So did something happen to the stranded cost? Is there more of a mix issue? I mean you rattled off a few things before, but just help us understand why we shouldn't think of margin...

Let me start, David and Phil will probably jump in with a little more detail. At the midpoint of our -- one, we improved margins materially from '13 to '14, and I think about the midpoint of our guidance would be about another 50 bps improvement. And with 2 headwinds on that, currency, obviously, with a higher percentage of our spending in SG&A, and you translate the revenue over -- into a lower amount of dollars with the SG&A predominantly in dollars, it compresses that a little bit. We're offsetting all of that and then we're also offsetting the change in mortality tables to our pensions. And then, obviously, it's a pretty modest revenue number as well. So the 50 bps is roughly what we have and hopefully that's where your math comes out as well on the margin expansion.

Yes, I mean that's incorporating Phil's comment that expect Process margin at the high end. I mean if I use truly the high end, 19.5%, then I do get to 50 bps. So just one last thing to make sure we're on the same page. With the changing of what's in the business versus corporate, can you give us some help on the corporate expense guidance for the year? I mean is it sort at the fourth quarter we just saw roughly times 4? If you can just help us with that figure.

Sure, David. Let me take a crack. The resegmentation did a couple of things. We adjusted corporate SG&A to kind of reflect the new operating model going forward. We also moved some foreign currency gains and losses related to intercompany financing to corporate because that's where we manage those types of things. So that is a little bit of a wildcard. But from just a core SG&A expense that we -- that is now sitting in corporate, if you will, and we would expect to continue to see modest cost improvement as we move through 2015. As you said, most of the stranded costs have been taken out. We probably were a little bit ahead of our plan relative to SG&A expense reduction in 2014, but we would still expect for, call it, some modest improvement on the SG&A line at the corporate level in 2015 versus '14.

So in mathematical terms, basically, $75 million, $70 million or so? Or do you think there's more savings potential than that?

Again, with the gains being difficult to predict, I would say if you look at the fourth quarter number in corporate and reduced it a little bit each quarter, and don't forget we had some M&A expenses in the fourth quarter as well. So if you take that out, there was around $2.5 million at the corporate level and then extend that through the year, a little bit of modest improvement off of that and you'd probably be in the range.

And we'll take our next question from Eli Lustgarten with Longbow Securities.

Again, just to clarify the equivalent allocation was posted throughout the $15 million and $16 million, it was 19.5. We've taken out $2.5 million for the M&A, I know we're changing it. Is that where the increased pension is going to show up also, maybe a $5 million to $10 million pension that go in, in that quarter there?

Yes. Eli, I would say some of the pension will show up there, but some of it will also rest in the business because obviously that's where most of the employees lie. So the incremental $5 million to $10 million on pension will follow the people, if you will, but there will be a chunk that would hit corporate SG&A. Now in the 19 though, I want to just kind of emphasize, when we made the move to move foreign currency gains and losses related to intercompany financing to corporate, and the 19 that is probably around $3 million of FX loss in the quarter or in the quarter on that line. And again, that's difficult to predict, if FX rates hold for the year, that wouldn't repeat. If currencies continue to deteriorate against the dollar, we'd see more of that. If it strengthens, you'd see the reverse of that. So that's really the wildcard on that line. We moved it there because, again, that's where we manage those activities.

But nothing has structurally changed from the gains that we talked about.

No. In terms of the $5 million a quarter, if you will, we did achieve that by the end of the year.

Okay, so that's fine. Now can we talk a little bit about the operating group. The game plan by moving Aerospace into Mobile was restructuring, you were going to close the piece. The sales go down towards $300 million and you were going to drive towards a double-digit operating margin. So as we look at the guidance, are we looking at that kind of environment for the Aerospace? Because you sort of indicated it was continuing to be weaker that we may not get -- the margin number will be weaker and the buy-in number will be suspect.

We're seeing good traction on the Aerospace initiative. We closed our engine overall operation, which was unprofitable, sold the assets and have exited all that, so there's no hangover of that into 2015. We have restructured the organization and removed a fairly sizable amount of cost. And in the fourth quarter while the Mobile margins were certainly not all that attractive or at our target, Aerospace was not dilutive to them. So we've seen an uptick in that and that's becoming less and less of a real comparison and it really is becoming a market for us now as we'd integrated a lot of aspects of the business, so that will be -- we still talk about the Aerospace market and general growth trends of profitability as we go into 2015. But as an EBIT number and margin number, that would become more and more difficult as the integration gets deeper. Aerospace, as we look at 2015 and 2016, will be a drag on the revenue for Mobile in regards to growth rate. We're not expecting significant growth in the former Aerospace segment, in the Aerospace business over the last -- over the next year or so. But from a margin standpoint, we expect it to be solidly in contributing to the Mobile margins of 10% to 13%.

So we've got the profitability up for that business?

We did it -- we did in the fourth quarter. I mean it's -- we still have some more cost improvement to get out, but we do not think it will be overly dilutive to the margins to start the year off.

Okay, and one final question. Can we talk about the Process side of business? I know it's very heavily 2/3 aftermarket business. What are you seeing or what are you hearing from customers in that business? Has there been much project activity, much push out cancellation, redefining timing or anything of that business or is this holding its own at this point?

No, actually, it's pretty much holding its own and if anything, improving, to my comments about where we sit today with inventory, orders and backlog, suggesting modest growth in the -- as far as our visibility would take us over the next, say, 2 to 4 months, Process Industries and the aftermarket fits squarely in that. So those of our customers in North America that are public, I think they're talking and they'd be more than bearings in this situation, but low to mid-single type growth levels, similar to what we're talking about before you put the currency on top of it.

And we'll move to our next question from Michael Feniger from Bank of America.

It's Mike Feniger from Bank of America, filling in for Ross. Just a quick question. We discussed your customer inventories. How are you feeling with your own inventories? Do you feel like your own inventories are currently in line with end user demand and demand outlook you guys are forecasting?

Yes, thanks, Mike. I'll take that. When we talked on the third quarter call, we talked about inventories being up in the quarter and we were taking steps to reduce inventories before the end of the year. We were able to get the inventory down in the fourth quarter, as we planned. So as we sit here today, we feel pretty good about our inventory levels both within the business as well as geographically around the world and feel that it will support our growth for 2015, so we feel we're in pretty good balance right now. We'll have a seasonal -- we always have a slight seasonal build in the first quarter as business ramps up into the second quarter. But the tactics we employed to take the inventory out, we were able to execute on those in '14, and then we have -- we'll continue to look to manage our working capital efficiency in '15 and have further tactics we'll look to execute on.

And then my last question would just be, you discussed Europe. Europe was down 3% [ph] and you discussed how it was kind of exiting the year on a low note. What specifically in Europe was weakness? Was it just general? Industrial? And how about North America? How did that trend in Q4 and to the end of the year?

I would say Europe would've been a fairly -- my comments around Europe would have been a widespread aggregate of the markets in which we participate in, which would be heavily heavy industries, but we also have some light vehicle business there and some wider industries, but the general heavy industries within Europe would soften. North America, I would not have -- I would have said continue to move along. We haven't really seen any impact, this probably goes back to Eli's question as well, we haven't really seen any impact from the recent volatility of the commodities prices and currency on our North American business. There's some confidence in the -- that the gas price drives some confidence in the North American auto build, and beyond that, I would say it's largely been business as usual to -- going back to Eli's question.

All right, guys. And then, I guess -- sorry, it's the last one. How are you guys feeling about the pricing environment currently and what should we be expecting maybe in 2015 if this current demand environment stays the same?

I would say, in our number, we have less than 1% in for price. It is -- and there's obviously some ups and downs in that. With the currency, it is not a great environment, a lot of places for us to move prices because remember we generally compete against global players. And those global players are more yen-based in their cost structure and euro-based in their cost structure than what we are. So fairly soft from a pricing standpoint, but we do believe the price cost benefit will contribute to the margin improvement that I talked about and the other part of that margin improvement then would be the SG&A reduction that Phil talked about.

And we'll move to our next question from Justin Bergner with Gabelli and Co.

My first question relates to the Process Industries growth, the 5% to 7%. How much of that is coming from acquisitions? And perhaps if you could just decompose that overall number of 5% to 7% as best as possible in terms of the drivers.

Yes, I would say -- let me start first on the acquisition point. Acquisitions in the 2015 guidance it would be, call it, 1% to 1.5% relative to the acquisitions. Not a lot, it's mostly organic growth. And then, on the organic, we will continue to expect to see growth in wind energy, marine, Rich talked about defense being down generally, but we've seen good penetration in military marine and that will continue into 2015. And then the industrial aftermarket, generally, and we talked about inventories being relatively good equilibrium right now among the distributors, so we would expect to see growth year-on-year in the industrial aftermarket as well.

What I would add to that is China. China is a heavy Process Industries market for us and China looks really good right now from where we sit, from a 2015 market outlook. That would be across Process Industries in that country.

Okay. With respect to the Process margin, I mean, 19.4% adjusted in 2014, x acquisitions, the organic rate is still 4% to 6%. What's preventing you from flexing that margin above 20% in '15?

I would say, one, there's a little bit of seasonality to our Process business now with our services business that is a little stronger in the fourth quarter and mixes this up as we finish the year, but it's not huge. And as we said, we're guiding to the high end of the targeted level. The other element, I would say, is the short term pressure of our growth initiatives. We're putting in capacity. We're putting in some new assets. We're developing new products and, in the short term, those items put a little downward pressure on our margins. And then also, while attractive and profitable, the growth in wind mixes us down a little bit as well.

Just very quickly to wrap up. Why not include any 2015 repurchases in your EPS guidance?

Yes, we talked about putting that in and putting that in implies a pace, a price and a capital allocation plan, and really what we've been doing is talking about it historically. And again, depending on how fast we do it. So what we're doing, we are -- we review it on a quarterly basis with our board. Our board is very engaged in it, and again put my earlier comments, we're very committed to it. But felt it was better to separate the base business and our outlook for that from the accretion that we would get from deploying our balance sheet.

[Operator Instructions] We'll take our next question from Steve Barger with Keybanc Capital Markets.

Sorry if I missed this when you went through the end markets, but I think you said 3% exposure to oil and gas. Have you had your team build through to look at the indirect exposure, if any, in terms of products that might go through distribution or supply chain participants to those end markets?

That 3% certainly includes -- certainly includes our distribution participation and that actually is a significant part of that 3%. Where it would run through indirectly through Caterpillar or somebody else that's involved in that, we try to do that and we try to look at where our OEM customers' end market is going. And until you get into the industrial distribution or the industrial distribution, miscellaneous industrial machinery equipment, we do a pretty good job of that. So we think that 3% is collectively where our products and services end up in that market. What it doesn't include is what that means for the rail industry, what that means for the automotive industry and all sorts of things, and that's where we've just factored that into our other outlooks. So I think the 3 captures it all.

And you said it's tougher to call the back half because of the bigger moving parts, which makes sense, but I'm wondering if you can talk about the improvements you guys have made to your internal forecasting or what steps you've taken to improve your own visibility into the business plan?

Sure, Steve. I think we have made improvement in our forecasting. If you look at the guidance we set back in June of 2014 and I think we had fairly good visibility to what occurred, and as Rich said, the quarter played out as we thought. When we set our forecast and set our plans, we look at order book data. We look at pressure curves that we create for our various businesses. We look at leading indicators and we try to triangulate among those and really get the best visibility we can. Having said that, we serve the capital goods market, the capital equipment markets, and those are very difficult to predict. And as Rich said, the further you get out, it's hard to anticipate what's going to happen, but we are -- we have gotten better than we have been in the past. We probably have some more ways room to move there, room to improve, but we've gotten better and we'll continue to work at it.

I would just add, depends on what timeframe you look at. I mean these are incremental improvements now, but we started our global SAP implementation in -- back in the mid-2000, kind of finished that up in, say, 2010. The comparison for our level of sophistication there, our connectivity with our customers today compared to 10 years ago, would be light years ahead. We're now in a much more of a mode where we are working incrementally to make improvements there and certainly, Phil summed it up well, I mean we're much better than we were. We get better every quarter, but it's not a precise science.

Understood. And just one quick housekeeping. Does the seasonal build in inventory mean the use of cash in 1Q or do you expect positive free cash flow as you go through the year?

Well, obviously, we would expect positive free cash flow as we go through the year. I would tell you that typically in the first quarter, we do often build a little inventory. Again, we manage the inventory reduction in the fourth quarter a little bit more mindful of that. So occasionally, the first quarter could be slightly negative or flat. I would say it will be closer to flattish for the first quarter and then it would build as the year goes on.

And there are no further questions in the queue. At this time, I'll turn the call back to Rich Kyle for any additional or closing remarks.

All right. We appreciate all the questions today and the interest. Thanks for joining us.