The Timken Company (TKR) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Orlando, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's Third Quarter Earnings Release Conference Call. 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. Miss Chadwick, you may begin your conference.

Thank you, Orlando and welcome to our third quarter 2015 earnings conference call. This is Shelly Chadwick, Vice President of Treasury and Investor Relations for the Timken Company. We appreciate you joining us today. If, after our call, you should have further questions, please feel free to contact me directly at 234-262-3223. Before we begin our opening remarks this morning, I want to point out that we have posted on the company's website presentation materials that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are the Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from Rich and Phil, before we open the call up for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone an opportunity to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors which we describe in greater detail in today's press release and in our reports filed with the SEC which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by the Timken Company. Without express written consent, we prohibit any use, recording, or transmission of any portion of the call. With that, I would like to thank you for your interest in the Timken Company, and I will now turn the call over to Rich.

Thanks, Shelly. Good morning, everyone. We appreciate you joining us today. Phil and I will reference several slides from the deck that was included in the today release and I will start on slide four. The third quarter did see the sequential softening in our end markets that we expected, sales excluding currency and inorganic declined 3% sequentially and 6% year-on-year. Currency also impacted us by about 5% in a year-on-year results slightly offset by inorganic for a 10 years revenue decline. Heavy industries such as metals, agriculture, mining and oil and gas all declined during the quarter. We are confident that the decline is not a reflection of our market position as we continue to focus on improving on organic penetration levels. Adjusted earnings per share were $0.55 in lined with expectations and helped by our continuing cost reduction efforts. We maintained our adjusted EBIT margins above 10% in a tough market. Margins in process remain below our target and we’re focused on moving them back into our targeted range. We generated solid free cash flow of 119 million in the quarter and expect to continue to deliver strong cash flow through the balance of the year. In the quarter, we executed in our share buyback plan purchasing more than 1.5 million share. This means 3 million shares remaining on our existing plan and we will remain active this quarter with the buyback. In September, we closed on our industrial belt acquisition, we have one month included in the third quarter results and the financial performance was in line with our expectations. The integration is off to an excellent start. I do want to highlight on slide five, the belt overview that we have called out that the segmentation will be about two thirds mobile and one third process from a revenue perspective with margins within the low end of our targeted ranges for both segments. The big part of our long term synergy driver for the belt business will be to shift more of the mix to process and specifically the aftermarket distribution channel therefore mixing the business up overtime. On slide six, which show the year-on-year sales trend for our last seven quarters, excluding the impact of currency, you can see that our markets are declining at an accelerating pace heading into the fourth quarter. This includes the markets that I already mentioned as well as the broader industrial distribution channel and aerospace. We’ve also seen wind and rail which were drivers of our growth in earlier periods continuing to grow but a moderating pace. The midpoint of our guidance for the four quarter would be an 11% decline again excluding currency and the impact of inorganic. This expected reduction reflects further weakening in end markets compounded by pressure on stocking levels across our customer supply chains. While, we aren’t going provide 2016 guidance today, we do expect to start the year at lower run rate and with a wider backlog than 2015. Again as we look at both our internal forward-looking metrics as well as our backwards looking public industry data, we are confident that we are holding to slightly improving our market position organically through these difficult markets. And we continue to pursue both organic as well as inorganic outgrowth initiatives. Shifting the discussion to cost reduction and margin slide eight, we came into the year with a solid plan for cost reduction and as markets have soften we work to expedite those actions and increase their impact offset the margin compression we’re experiencing from currency and volume. Results have been significant over $60 million estimated for the year and we’re building further momentum heading into 2016. Right now, our cost reduction efforts still lag the impact of volume and currency but as volume stabilizes, we expect to be able to get back in our targeted margin ranges. Material costs have declined to the course of 2015 and we expect further benefit in 2016. On the SG&A front, summarize on slide nine, we’ve been steadily reducing our SG&A expenses through an enterprise wide cost reduction initiative. This slide does include the benefit of currency that we’ve experienced this year but also included - most of the reduction has been structural. In the quarter, we launched two more structural changes; one is aerospace and the other in our IT organization that will yield over $10 million in savings when fully implemented in 2016. In manufacturing, an additional right size remaining levels were still driving foot print and operational productivity improvements across our global operations. Staying on the theme of margin improvement on slide ten, we provided an update on our aerospace restructuring which was launched in the third quarter of last year. We consolidated the segment in the top of the organization last year. We closed our engine overall operation and sold the assets late last year. Just this month, we closed on the sale of the PMA parts business Timken Alcor received greater than two times revenue for the business. Our UK based barring plant closure is underway and will be completed next year. And as a result of the further simplification of the portfolio we just announced another level of integration into the mobile business which we expect to complete early next year. This integration is designed both lower costs as well as improved performance and market penetration levels. The result in aerospace portfolio is a focused leader in its two product categories precision bearings and rotor craft gears and gear drives. We’re move focused, are profitable, more competitive and we’re now shifting our focus from restructuring to winning in the market place. Wrapping up, we are recognizing that we are faced with what is a deeper and longer decline in global heavy industries markets than what we anticipated, we’ve remained confident in the prospects for our markets and our strategy long term. When the strength of our business is the diversity of the end markets where our products and technology are utilized and we’re confident that this market diversity will provide long term growth and profit opportunities for us. We remained focused on winning in the global and bearings and power transmission markets, while delivering on our market enhancement initiatives, generating strong cash flow and effectively allocating in our capital. Phil will now provide more detailed comments on the financials.

Thanks Rich and good morning everyone. Let’s take a closer look at the numbers starting on slide 14. For the third quarter, Timken posted sales of 707 million, down 10% from the last year with currency negatively impacting our sales by 44 million or around 5.5%. Excluding currency, sales were down roughly 4.5% as we experienced lower demand in our industrial end markets. In addition to lower and user demand, we are also seeing the effects of destocking in our channels as customers work to reduce their inventory levels and response to the softer environment. These declines were partially offset by growth in the automotive and rail sectors as well as the benefit of acquisitions which added 12 million to the top line in the quarter. Regionally, excluding currency, sales were up 5% in North America and down 16% in Asia Pacific. The decline in North America was largely attributable to softness in the industrial distribution channel and declines in off-highway and heavy industries. In Asia Pacific, sales were down in China with most of our major market sectors down year-on-year including wind energy where we had a couple of customers takes fewer shipments in the quarter. This was more of a timing issue than a market issue. Sales were up in India led by rail and heavy truck and down across the rest of the region. On the positive side, sales were up 3% in Europe and up 9% in Latin America excluding currency. Both regions were positively impacted by growth in wind energy, rail and industrial distribution. You can see on slide 15 that our gross profit in the third quarter was 195 million or 27.6% of sales down about a 100 basis points from last year. Note that last year’s numbers included an inventory write-off of around 20 million. Adjusting for this, our gross margins were down around 250 basis points as the impact of lower volume, currency and unfavorable price mix more than offset the benefit of lower material and operating costs. SG&A expense in the quarter was 121 million, down around 12 million from last year. The decrease reflects lower incentive compensation, favorable currency and the benefits of our cost reduction efforts offset partially by 3 million of higher bad debt expense in the quarter, as well as acquisition related SG&A and ongoing dealt DeltaX expenses. Our third quarter EBIT was 56 million on a GAAP basis. When you back out restructuring, pension settlement and acquisition related costs, adjusted EBIT was 76 million or 10.8% of sales compared to a 115 million or 14.6% of sales last year. On slide 16, you can see that the decline in the adjusted EBIT was driven by the impact of lower sales volume, unfavorable price mix in currency offset partially by lower SG&A expense. In addition, we benefited from lower material and operating cost in the quarter. However, these were largely offset by the impact of lower production volume as we adjusted for market demand and took steps to reduce inventory in both mobile and process considering we built inventory last year, the change in inventory in corresponding lower production levels negatively impacted our margins by over 100 basis points was mobile being above that number and process below it. As outlined on slide 17, we posed net income of 63 million in the quarter or $0.75 per diluted share on a GAAP basis. On an adjusted basis, our EPS came in at $0.55 per share compared to $0.77 a year ago. Note that earnings per share benefited from a favorable tax rate and share buybacks including just over 1.5 million shares repurchased during the quarter. Our GAAP tax rate in the third quarter was negative of 11%, in other words, a tax benefit on pretax income. The large pension settlement charge we took back in the first quarter has caused our quarterly GAAP tax rate to be more volatile than normal. Excluding unusual items, our adjusted earnings reflect a tax rate of 30% in the quarter compared to 34% a year ago. We expect to maintain our year-to-date adjusted tax rate of 31% for the remainder of 2015. Now turning to slide 18, let’s take a look at our business segments starting with mobile industries. In the third quarter, mobile industry sales were 396 million, down 7% from last year. Excluding currency, sales were down around 1% driven by lower off-highway and aerospace demand offset largely by growth in automotive and rail and the benefit of acquisitions. For the third quarter, mobile industry’s EBIT was 43 million, adjusted EBIT was 46 million or 11.6% of sales compared to 57 million or 13.2% of sales last year. The decline in earnings was driven by the impact of lower volume, unfavorable price mix and currency offset partially by favorable material and operating costs and lower SG&A expense. We expect mobile industry sales for 2015 to be down roughly 8% driven impart by negative currency of 5%. Excluding currency, sales were expected to be down 3% reflecting lower shipments in off-highway and aerospace partially offset by organic growth in automotive and rail and the benefit of acquisitions. Slide 19 shows that process industry sales for the third quarter was 311 million, down 14% from last year. Excluding currency, sales were down 9% driven by weaker industrial distribution and heavy industry demand, partially offset by the benefit of acquisitions. For the quarter, process industry’s EBIT was 43 million, adjusted EBIT was 45 million or 14.6% of sales compared to 74 million or 20.5% of sales last year. The decrease in earnings reflects the impact of lower volume, unfavorable price mix and currency and higher bad debt expense of 3 million in the quarter, partially offset by favorable material and operating costs and other SG&A expenses. We now expect process industry sales for 2015 to be down approximately 8% with negative 5% coming from currency. Excluding currency, sales were expected to be 3% as growth in wind energy and military marine and the benefit of acquisitions will be more than offset by weaker demand in the industrial aftermarket in heavy industries. Turning to slide 20, free cash flow in the quarter was strong at 119 million or more than twice our adjusted net income compared with 52 million during the same period a year ago. The improvement in free cash flow was driven by favorable working capital performance year-on-year, lower CapEx spending and the positive settlement of certain cash flow hedges in the quarter. Moving next to our balance sheet and capital allocation on slide 21, we ended the quarter with net debt of 555 million or 29% of capital compared to 13% at the end of 2014. At the end of the third quarter, we’re close to low end of our targeted leverage range of 30% to 40%. We expect to generate strong cash flow again in the fourth quarter including 45 million from the sale of our aerospace PMA business which closed last week. We will continue to follow our capital allocation framework and looking to deploy it. In the third quarter, we completed the flowing the capital allocation initiatives. First, we invested 22 million back into the business through CapEx. Second, we continued our commitment to our dividend paying out 22 million or $0.26 per share. Next, we completed the purchase of the belts business on September 1st, we expect this transaction to be modestly accretive over balance of 2015 and add between $0.08 and $0.10 to earnings per share in 2016. And lastly, we bought back just over 1.5 million shares at a cost of $51 million. Year-to-date, we’ve repurchased 5.9 million and as of the end of the third quarter, we have around 3 million shares remaining under our credit authorization. We expect to continue to be in the market buying back shares in the fourth quarter. Moving to slide 22, we’ve revised our outlook and will anticipated sales at the corporate level for the year to be down around 8% consisting of negative currency of 5%, an organic declines of 4.5% offset partially by acquisition growth of 1.5%. We expect GAAP earnings per diluted share to be in the range of $0.65 to $0.70 per share. This includes the gain from the sale of our aerospace PMA business. Included in our GAAP earnings outlook, our five unusual items totaling net expense of a $1.40 per share, these items are laid out in detail on this slide, so I won’t go through them individually. Excluding these items, we now expect adjusted earnings per share to range from $2.5 to $2.10 per share. Our outlook assumes an adjusted EBIT margin for the year of just below 10.5% at the corporate level which includes a negative currency impact of around 100 basis points for the year. We expect to generate free cash flow of roughly 200 million after CapEx spending at around 3.5% of sales. This represents over a 110% of estimated adjusted net income for the year and provides us with flexibility to deliver value to shareholders as we move forward. This concludes our formal remarks and we’ll now open the line for questions. Operator?

Thank you. [Operator Instructions] And we’ll take our first question from Stephen Volkmann with Jefferies.

Hi good morning, guys.

Good morning, Steve.

So just one quick clarification, your adjusted EPS target the new one 2.05 to 2.10, is that assuming any further share repurchase or no?

No, as normal Steve, that would reflect share repurchases through the end of the third quarter. But keep in mind, anything we do in the fourth quarter will have a smaller impact on the year just because the way it averages in.

Understood. So my real question was, I just wanted to see if you could give us a sense of kind of the cadence of the quarter, we’ve heard some other company sort of say things got worse as the quarter progressed and that October has also gotten a little bit worse, obviously we’re trying to start to triangulate what 2016 is going to start out like, so I am curious if you saw any trends through the quarter that are worth calling out?

Yeah, Steve, at the company level, order book patterns backlog worse in July than June, worse in August than July and down September and clear with the guidance we’re forecasting down in the fourth quarter from the third quarter. So is a definite trending down through the core on macro. Now there is a lot of - there is some bright spots in there, there is some good things happening both from a market and from a penetration standpoint, but definitely downward pressure.

Yeah, if I could add Steve, I mean I think when you look at our sales month-to-month, particularly in the third quarter with shutdowns and vacations outside the U.S. et cetera. It’s very difficult to really clean anything but as Rich said, the figure point with the backlog in the order book as the quarter progressed clearly got worse.

Okay, thanks. And you mentioned a couple of times I think each of you mentioned destocking and some of the distributor channel issues, do you think this is mostly an issue of inventory or are you seeing kind of just as much weakness directly with the OEs that would make you think it’s more than just a destock?

Yeah, so I think there is a destocking distributor, there is a destocking at OEs and there is also I would say some of these heavy industries markets, you know cannibalization, trying to differ, maintenance expenses et cetera. And we are customer ease, we certainly when we spoke to you last quarter expected a level of destocking in the fourth quarter which is fairly common for us but what we’re now expecting it to be deeper than what we would have a quarter ago.

Okay and then just finally on that, how much visibility do you have in the sense of - do you have a sense of how long the destock goes on or do you just sort of have to wait it out?

Well, I’d say the positive that we have is we certainly did not start off from a high inventory level standpoint in distribution or ROE channels. We started off from a standpoint of you know - these heavy industry markets declined in the second half of ‘13 at a fairly small bounce back in ‘14 and inventory was very reasonable during that time. So it’s certainly not a situation where we’re starting from a bubble or a mass of undertaking but clear deceleration that as we look into four quarter is clearly going to be lower than what we had. But today and we expect to start out obviously going into the first quarter with a lighter backlog as I said earlier.

Okay, thanks, I appreciate it.

Thanks Steve.

And our next question comes from Eli Lustgarten with Longbow Securities.

Good morning, everyone.

Good morning, Eli.

Good morning, Eli.

Can we talk a little bit about operating profitability and margins, how they look as you are going into the fourth quarter and the real question, through the year, you talked about hoping to get back to target margins next year. I think you indicated with cost reductions lagging the way in the client, that’s likely to happen, can we expect to make some progress back towards next year or give me some sense of what we - how we should look at the operating profitability as we go through this quarter and to next year.

I’ll try to put a little more color on that. And as we look the rest of the year, I think you can pretty from - from what we’ve given you I think you can pretty much left where we can add to margins and we again would expect mobile to be on the low end or slightly under the low end and process to be there yet for the fourth quarter, that’s where the further volume decline. Currency is obviously stabilized to the most part. The last couple of quarters obviously there is some ups and downs and there is not - in sequentially there has not been a major factor for us really since the drop of the first quarter for the dollar strengthen. You really need volume to stabilize and stabilize for a couple of quarters and what the cost reductions catch up to that. And clearly if you down further, that gets tougher and tougher due within the process segment and process has been heavier hit by currency in the cross boarder impacts. But where we are still operating at today, we definitely feel we enough cost reduction momentum to get the margins back in there. But we are here today to talk about what we’re forecasting it for volumes for 2016.

Yeah, if I could I’ll just add a little bit there Eli, obviously as we looked at the third quarter, we talked about in our comments you know clearly working on the cost reduction initiatives but really hard to catch up with the volume. So the volume and the mix in currency really combined to really have a negative impact of our margins in the quarter. As we move to the fourth, I think it will be a little bit of more than same although the cost reductions will catch up a bit, the currency will become a little bit less of a factor in the fourth quarter at least at the margin level. We don’t have the same, we had a little bit of inventory destocking at our own in the third quarter which will probably moderate a bit in the fourth. So we would expect margins third to fourth to be down but probably not down as much as the volume might imply.

Thanks. And can you talk a little bit about pricing across the businesses, I mean one of the big dangers we go through this period is we start seeing price erosion across that, are we much of that or price be stable. And when does that the material cost benefit anniversary or that continue as we go into next year?

We definitely started seeing - let me take the material piece first, we definitely started seeing some material, more material improvement in the third quarter, expect to see more in the four quarter and strong material improvement year-over-year in the first half of next year. So certainly that has been a contributor to our cost reduction this year and it’s expected to be sizable contributor to our cost reduction next year. On the pricing standpoint for the full year this year, we would expect pricing to be very close to neutral. Within that there is some ups and downs. Their challenge force this year has been mix as Phil just mentioned, we’re been less after market, more OEM. As we look at next year, it’s a - we’re expecting another tough pricing market where we don’t think we can count on pricing to improve the margin but we’d not expect pricing to be a significant factor on the macro force in total next year and certainly would be a small factor than our cost reduction.

And the OEMs in that demanding, price - you know price moving back because of raw material cost at all?

Absolutely, our OEMs are always looking at price. We deal with that on a regular basis and even in a good market obviously in a tougher market, it’s a little bit tougher on that. But we think we will be able to come out of that at a fairly nominal price situation in the total.

Great, thank you very much.

Thanks Eli.

Thanks Eli.

And next we’ll hear from David Raso with Evercore ISI.

Hi good morning.

Good morning, Dave.

Just on the framework for ‘15 a little bit, if you could just help us with sort of what’s known right now. The cost savings this year, can you give us some idea of what is the dollar amount you expect to be carryover savings helping ‘16 versus ‘15?

Yeah, I would Dave, you know the cost reductions are ramping as Rich mentioned, we generated over 60 million this year, we now continue to ramp in - we’re really not giving a specific number but I would expect at least an incremental quote you know 100 basis point probably around 30 million next year versus this year. Altogether in terms of the incremental material, we might get the incremental SG&A reductions we put in place this year. Rich talked about the IT and Rich talked about the aerospace, there is some other things as well, but we expect incremental cost savings as we move into next year.

Okay, so I mean 30 million tax effect that we can use around share complements at least $0.20-$0.25, so –?

As we’ve been talking with you guys and I think all year we’ve talked about trying to improve our margin as we move into next year and work our margins backup into our targeted ranges. So I think it’s really under the - really under concept of what we’ve been talking about all your long in terms of working our margins back up to the targeted ranges and then obviously we got to see what happens with volume, we got to see what happens with currency and some of the other larger factors.

And then the acquisition, the incremental accretion from the acquisition expected ‘16 versus ‘15?

Yeah, so we said modestly accretive in ‘15 so we would call that maybe penny or two and then I think ‘16 where we’re really tracking toward the $0.08 to $0.10, you can call it an incremental - call it an incremental seven to eight if you will six to eight. So the acquisitions on track, we’re generating the - starting to see some of the opportunities we thought we’d see and really feel good about the prospects longer term for the deal.

And then on the repo, while we’ve got 3 million left, would we expect to finish that this year, do half of that this year, I mean I understand what the - you know the spend you really can’t do another authorization for next summer, so maybe that’s a reason to sort of just you know time it a little bit and play that between now and next summer and or is it now we’re going to move ahead and try to finish this repo in 2015?

Yeah, David, we’re - we’re going to stick with what we’ve been doing from a forward standpoint, that’s really we’ve been - forward-looking we’ve been committing to the capital allocation framework and the priorities between organic and dividend and buyback in M&A and forward committed to the 30% to 40%. And we’ll give you an update through - at the end of the quarter in terms of what we purchased but we will be in the market in the fourth quarter and active on the buyback. And as Phil said, we just received proceeds from the sale of Timken Alcor and we expect to generate strong cash this year and we are still actually not in the low end of the targeted range yet.

So the inability for another authorization for next summer should have influence, how you think about the timing of doing the repo earlier rather than waiting for the timing of the new authorization?

No, I wouldn’t - I wouldn’t view as a big influence.

Alright and last question, you said that you are going to said given backlog would be down, I think you said earnings will start the year down year-over-year, can you just frame it a little bit, can you just given us some quantification on when you say down, how would you expect the backlog will be down at the end of the year, is it down 10% year-over-year, 15% just want to give a little feel for the whole that we kind of start ‘16 in?

Yeah, just to clarify, it’s - the backlog, the revenue within the year, the lower run rate, the backlog was lower, it’s that earnings would necessarily be lower from that. I think I look at you know where we are implying for revenue guidance for the fourth quarter, organically put the belt acquisition on top of that and use that same sort of percentage implied for where we would end with the backlog.

Okay, so I am sorry, to be clear maybe I misheard, we’re not same necessarily the year starts with earnings down year-over-year, I mean the full year, I mean you are implying first quarter, second quarter, did I’ve not hear that properly that were starting the year with down earnings?

Down revenue.

Just down revenue.

Down revenue and down backlog.

Okay, helpful. Thank you very much.

Moving on, we’ll hear from Steve Barger with KeyBanc Capital Markets.

Hi good morning.

Good morning, Steve.

Rich, in your opening comments, you said you are confident in your market position and I am curious when you have slower negative growth and destocking happening, how do you measure organic penetration to stay confident that you are maintaining your growing share?

So, us and the other five biggest global bearing companies all publically report date, so we have that date that we thoroughly dissect after the fact which is one thing I was talking about from a publically reported date standpoint. There is a lot of industry data that is after the fact is well where forward-looking data, quotation, pipeline, share estimates et cetera. Yes, I have publically reported industrial distributors, don’t necessarily I will split out bearings versus the other product lines but certainly you could trend lines from that. So I would say certain when you get into China and India and some places like that generally with the people we are not competing against, it gets a little bit blurry. But outside of automotive, it’s - you can triangulate this pretty well backwards with what the industry comps are doing and certainly not seeing any signs nor we getting any customer feedback of that as well.

Okay and as growth slows, it seems like some customers across this base are on the supply based output cost, I think you mentioned that on the OEM side. When you think about your out growth initiatives and specifically helping people redesign products for cost take out an efficiency, can you capture any of that cost on the front end or do you try and make that with a product lifecycle?

I am not sure if I understood that question. Let me give you a chance to maybe clarify the question as I and then I’ll take a shot at it.

Yeah, when you talked in the past about helping customers redesign product to make their own - to make the product, the bearings going to more efficient and I am just wondering about that process or customers coming to you more and trying to push that engineering cost on to you and can you recapture that?

Okay, yeah, so I would say that our customers definitely have an increased focus today on cost reduction and where they may have been a year or two ago. And again we go through these cycles we talked about earlier. Part of that is the design cycle part of that is just looking for cost reduction as Stephen Volkmann enquired about earlier. And again we would consider today would expect, we always trying - for new designs, we are always trying to mix our self in that process and that’s a key part of mixing our self-up. As we look full forward next year, we would not consider the price element of that to be a significant issue into next year.

Okay and just staying on price for a minute, where you are seeing price pressures, is that primarily coming from customers asking for price downs or are you seeing any competitors proactively cut to try and take share?

I would say is there hasn’t been anything from if you got to ask a lot about the currency situation and again the - we’d see what the impact of that has been on the big competitors backwards with their financial results. It’ll be very difficult to point to anything really with our customer base which is very global as with our competitors customer base, U.S. based companies, I’ve operations in China, Europe emerging markets et cetera, very difficult to point anything where our customers are losing any share or responding negatively the price and we’d really be able to say anything on a macro level with price. It’s a tough pricing market out there, I mean we would want to offset all the currency impact and volume impact with that, we got to be very selective by this, whether we want to downplay, but you can’t really say you are seeing any specific from competitive reaction as a result of currency of volume being down.

Got it, thanks. And last question. This is probably peak delivery in North American rail this year, can you remind us with the OE aftermarket mix and then maybe talk about how you see the rail market next quarter and next year if you’ll take a shot?

Yeah, I’d say on the North American side, you’re right. It is projected at this point to be peak. Our business is very global so probably a little less in North America from a rail perspective than what you might expect and then globally half.

Yeah, keep in mind, our aftermarket is a combination of not only aftermarket you know new bearings if you will but we do, we have a recon business as well that actually reconditions bearings as a service in the market as well.

Is that - so I guess when I think about the entire revenue mix, are you more to pure OE or aftermarket in reconditioning?

I would say the way we classified it’d be about half and half. Half of the demand is driven is driven by the aftermarket, half of it is driven by OEM new builds and that would be a global statement.

Got it. Thanks very much.

Thank you.

Thanks Steve.

Schon Williams with BB&T Capital Markets has our next question.

Hi good morning.

Good morning, Schon.

Hey, good morning, Schon.

Could you just clarify how much of the 60 million in savings, how much have you actually realized through Q3?

Yeah, I’d say that 60 million is about a little over a third SG&A and the little less than two thirds COGS and that’s because the 60 million is not looking at currency. So as you look at the currency slide that we’ve included in there, a little under half of that would be this year to last year would currency driven versus cost currency neutralized. So you can take that part and obviously we’ve given you the quarterly breakout and you can see very closely what that part is look like. And then on the other part, again that’s a full year number that’s building momentum, so that’s an impact for this year, not an annualized impact.

Alright, but it would be I guess say it another way, I mean we’re certainly not 75% of the way through to realizing that 60 million, I mean just to understand, I mean coming back I am just trying to get a sense of how much catch up there is relative to that 60 million?

Yeah, certainly we would expect the fourth quarter to be bigger than the third which was bigger than the second which was bigger than the first. So it would be a little back in the second half.

Okay, that’s helpful. And then maybe just a little bit more color on Asia Pacific, you know that segment took a pretty significant turndown in Q3, maybe just little color there, I noticed that - I think you said India down this quarter, it was up last quarter, just any additional color would be helpful there?

Sure let me - I’ll take that Schon. Yeah I mean good observation, Asia Pacific was down more than was for example in the second quarter. And it’s a couple things, if we start with China, we are clearly feeling the effects of the economic slowdown in the heavy industrial space there as well as which also effects distribution. And then I mentioned wind energy, I mean wind has run very strong in China, it’s a very strong market for wind. In the quarter, we kind of had a timing issue where a couple of domestic customers if you will took fewer shipments in the quarter, so that - that was a that piece of it, that was a big driver of the decline in China for example. And then I would just say broader across heavy industrial space, so metals, mining, Ag, cement, construction for example, distribution. Then moving to the rest of the region, India was up in the quarter just like it was last quarter, so the economy is improving now. The biggest drivers for us in the quarter were rail, heavy truck and then probably industrial distribution to a slightly lesser degree. And then as well look across the rest of Asia Pacific, again that would be Australia, Japan, Korea really down across the rest of the region.

Okay, you feel confident that wind delay was just a timing issue?

Yeah, I would say in the quarter, we expect wind continue to be a strong market for us, I mean it will be seasonally, it’s typically seasonally a little weaker in the fourth and then obviously we’re watching very closely, obviously in China in particular, it’s government influence in terms of incentives et cetera. Obviously keeping a close eye on that, it’s been running at very strong levels for a long time, we are beginning to moderate in wind, the comps are getting tougher as each quarter goes on. But in the quarter, we were down in China because of that timing issue, but also - but actually we’re up a little bit in Latin America and Europe. So if I look wind globally, you know wind was really kind of flash in the quarter - year-on-year.

Right and then last question for me, just any concerns around you said there was increased bad debt expense, I think may be on the process side, any red flag there?

No, I mean we watch it real closely, I mean I called that out because it was - it was a bigger number. We’ve run typically very low bad debt expense. We had a couple of million last year in Venezuela. We had 3 million this quarter, it was really a combination of Latin America and China, it was as well as a big driver within Latin America and it was really receivables crossing a certain aging. So after they cross the certain aging level, we show 100% for our policy. So we set the reserves up and obviously still working to collect those pass dues and bring them current. But I just felt, we would call out the amount just because it was included in our adjusted numbers.

How much was that?

It was 3 million in the quarter and it was almost all process industries.

Alright, thanks guys.

But really no concerns - no concerns more broadly from a customer standpoint when not seeing anything big that causes any concern on that and that was really isolated instances.

Alright, I appreciate the color, guys.

Thank you.

Thanks Schon.

Michael Feniger with Bank of America Merrill Lynch has our next question.

Hey guys, this is Mike from Bank of America Merrill Lynch doing in for Ross Gilardi.

Hey, good morning.

Good morning, guys. We talked about the stocking and you mentioned your own inventories been drawn down in the quarter, how are you feeling right now with your outlook and what you are seeing on demand side with your own inventories and how you guys are kind of figure that out as you progressing the four quarter?

Yeah, two elements to that, one we certainly have a very active initiative within our manufacturing supply chain, distribution network et cetera to improve our inventory effectiveness et cetera. We could be more structure reductions and then more prudent for the market range which is certainly drives the short term issues in terms of just what we are looking at from an outlook standpoint and the demand volume side of that. So putting the objective of improving inventory turns aside, I would say from where we ended the third quarter pretty good, but we actually built inventory last year in the third quarter, so is a fairly sizable differences still highlighted. And I think we typically are down a little bit in the fourth quarter so the reason, we are not looking at a significant inventory reduction in the fourth quarter under the expectation that the first quarter demand would support that.

Okay, so just to be clear, the impact you guys saw from talking down your own inventories on your margin where not receive that impact in the fourth quarter?

No, I would say we’re not going to see that year-on-year because we actually took inventory out last year in the four quarter as well, that will not recur. But you know as we look - as we look sequentially, we would probably sequentially taking a little bit of inventory out in the fourth versus the third but it wouldn’t anything I would call material.

Okay, that make sense. And then we talked about how the cost savings, the 60 million, you know it has to catch up with the lower volume activity, I mean with - what you are talking about wind this now facing tougher comps, rails peaking this year, is there any room guys you feel like you know volume environment, do you own in terms this is maybe ramp that up even further to try to catch up the slower demand environment?

When we come out at the end of the year with an outlook for 2016, cost reduction will certainly be an element of it and being at where we are looking at volumes and our outlook on that. I think that will dictate how aggressive we are with that. We have a multiyear plan of things that we will get with our footprint and really look to more pull things and depending on where we’re at with the volume outlook. So we’ve tried to pull that this year, we’ve been successful doing that and we’ll certainly step in it further if our outlook requires it for next year, but we’ll provide more guidance on that in the January call.

Yeah, the only thing I would add to that Mike is that we’re - as we’re planning our cost reduction initiatives, we are really, I think we’re much more mindful of the trend we’re seeing as opposed to today. So it’s not like we’re cutting cost assuming no further declines and we’re very mindful which shows at a chart of the trends we are seeing relative to top line, so we are very mindful those trends as we thing about cost reduction initiatives.

That’s perfect guys. And just the update, I mean you guys gave us what you are expecting your guidance, the margin, what is the 10.5%, what we expecting for process for the end of this year, finish this year?

Yeah, it’s - we really don’t split that out by segment but I think you can probably get through. You know when you look at, mobile will be call it you know high nines I think for the year if you kind of look at the midpoint of our guidance and then process would be kind of in the for the year probably in that kind of low to mid 15s kind of range.

Perfect, thanks guys.

And next we’ll hear from Justin Bergner with Gabelli & Company.

Good morning, gentlemen.

Good morning.

How are you?

Good.

First question relates to Carlstar, you’re maintaining your $0.08 to $0.10 accretion for ‘16 but clearly we experienced in August sort of slow in the markets and industrial activities decelerating. You know what allows you to keep the $0.08 to $0.10 accretion for ‘16?

Yeah, I would start with the market mix of the belt business is significantly different than Timken’s core business much more on the - they have an Ag component which you know we - when we closed on the deal the price we’re eyes wide open and the Ag market was looking like for the short term, but they have a larger power sports consumer oriented product line than what Timken also do. Current outlook for those markets would be stronger than what we’re seeing on the heavy industry side and again there’s been a part of those synergy case for them to open up avenues for us into those markets and vice versa. So while the sales of the acquisition are certainly under some level of pressure, they are not nearly under the same level of pressure than you are seeing for our company as a whole. And with that we still think we can call hold the outlook of $0.08 to $0.10 full year impact for next year.

Great, but there is no sort of change in your synergy calculation at present, it’s more just that looking at the end markets for Carlstar, there has been much change from the announcement of the acquisition?

Correct.

Correct.

Okay.

As Rick said, we sort of had a pretty good eye on where market were heading as we’re working those the negotiations and feel like we had a pretty good read on it. And then from a synergy standpoint really tracking to what we expected.

Okay, great. And then second question on kind of uses of free cash flow, it seems like as we look toward the rest of the year, the focus is on repurchases, are you still hoping to do further built on acquisitions this year or is that more of a ‘16 event?

It is possible that we do something at this year. We have some level of activity that it’s possible. There is nothing that would happen in the last two months that would be of the size of the Carlstar acquisition. So certainly gives the comfort that could do both. And obviously as we get into next year and even more speculation in terms of the possible, but we could intend to remain active next year and - in that part of our strategy.

Okay, great. And then in terms of the free cash flow guidance, it guess it was nudged out from a 190 million to 200 million, part of it seems to be slightly lower CapEx, are there other puts and takes sort of in the free cash flow guidance change besides the reduction in CapEx?

Yeah, I would say CapEx would be a big one, but really three things obviously the adjusted earnings were a little bit lower which would be you know that would kind of flow through the cash line then offsetting that would be lower CapEx. And I would say slightly better working capital than probably we would have guided to enjoy. So really the - really the combination of those three, so but we’re earnings outlook are negative and then working capital and CapEx being positive.

And on the working capital side, which sort of line item is the big contributor there in terms of the better outlook?

Well, it’s been you know it’s kind of an all three, but I’d say inventory has been the one we’ve been focused on for the last - certainly for the last quarter in terms of bringing that under control and bringing that down in line with the sales decline. So - but you know it’s really been multi fascinate, I mean accounts payable were working to in the normal course extend terms where we can. Receivables is a little bit more the toughest one because you are more of subject to industry standards and geographic norms if you will but working to keep the past use at a minimum and collect on time, on the receivables on as well. So all three but I would say you know inventory and payables being the bigger of the three.

Okay, fantastic. And then final question would be on wind, I mean has the wind market peaked for you globally as we look into 2016?

No I think the - there is certainly some market pressure with wind and in terms of where things are at in different geographies with government incentives and various things. But we have a very active wind pipeline. We have some technology that - you know again these are long sales processes. But we would definitely expect the pace of growth to moderate significantly just because we’re out of level where the scale is such that it would moderate. But we still have significant headroom in the wind market to grow.

Okay, thank you for taking my questions this morning.

Thank you.

Thanks Justin.

Samuel Eisner with Goldman Sachs has our next question.

Yeah, good morning, everyone.

Good morning, Sam.

Good morning, Sam.

Just going back to the I guess the operating line here in the decrementals, I mean decrementals on organic basis were roughly 12.5% last quarter, this quarter were you know roughly 50%, is that primarily driven by your company level destocking, is there anything else that we should be noticed in that that 50% of the acceleration in the decrementals? Thanks.

No, I mean I think you got it. It’s the lower volume, the unfavorable mix with distribution being down more significantly than we. And then the inventory was you know as I commented on probably 100 bps in the quarter in terms of building inventory last year versus taking it out this year. You know the bad debt expense I mentioned would have been - obviously would have been another factor. But I think you’ve - and the currency but you know obviously we had the currency last quarter as well. But I think those are the bigger drivers.

Got it, that’s helpful there. And then on the 30 million savings for next year, is that weighted more toward SG&A or raw materials and perhaps may be you can talk a bit about how the raw material though. I know you gave a little bit before but how the raw materials looking in the first half of next year?

Yeah, I think the way - I mean again I think the way to really look at ‘16 would be trying to work our margins backup to targeted ranges and trying to kind of work them towards the low end of those ranges assuming, obviously we’re got to see what happens with volume in currency and things of that nature. But you know it would be a combination of what we’d expect a build in next year and again we’ll provide a lot more detail on January but what would expect to build in would be a combination of SG&A and cost of sales as which that when you look at the 16 million this year, it’s probably more one third SG&A excluding currency and probably two thirds more on the operating cost line if you will. So I mean I would think we would - it would be a similar split, obviously probably more way, we have more cost in the COGS line but it’d be both SG&A and COGS.

That’s helpful. And then on Carlstar, you know you mentioned that the margin profiles towards the low end of the targeted range, can you talk a bit about the path towards improving the profitability of that you know that business on its own?

Yeah, as I mentioned in the comment Sam, I think the real measuring stick several years from now is to whether the business is getting better and good acquisition force are not as really altering the mix of it and improving our package through the industrial distribution channel that Timken is very promoting and as well as taking Timken into some of the other distribution channels that they are in and vice versa. So I think the real playbook is over time to improve the belt shelf space and presence in that distribution channel and we have - that’s a playbook that we did with the drives chain acquisition and it’s been successful and really looking to repeat that playbook. That be number one. And then after that, obviously there is some cause - some cause pieces of both leveraging our SG&A structure as well as some level of consolidation et cetera, manufacturing wise, outside the purchasing element, whether it’s a piece manufacturing wise very different plans and no short term intentions for anything from a plant standpoint.

Yeah, the other thing to keep in mind Sam, is that the - you know when we bought the business, the EBITDA margins were really right in line with our corporate EBITDA margins at 16% and that’s with two thirds mobile, one third processor, which has point the ability to get that more 50-50 overtime and obviously didn’t happen overnight, but overtime will be a huge benefit. And then obviously we do have the purchase accounting we got to deal with in terms of non-cash amortization, we’ll have to record over the next several years. But we feel really good about the ability to mix that business up overtime.

That’s great. And then just lastly maybe housekeeping question, how large is the Chinese wind business at is stands today and what was it last year? Thanks.

Yeah, we don’t really get into it, but we have said, I think we have said in the past that it’s - our wind business as we - is around a good chunk of its China probably close to half and then the other half would be the rest of the world. I mean that’s what we’ve said in the past on it.

Great, thanks.

Our next question comes from Larry Pfeffer with Avondale Partners.

Good morning, gentlemen.

Good morning.

So you know - I know DeltaX has been in place for a little while now, just kind of looking at the pace of product development for you know say where it was versus 12 to 18 months ago, could you put a little color around where you guys see some of the new market opportunities in product development initiatives?

Yeah, I’ll make couple of comments on DeltaX. So the SG&A saying that we’ve outlined there, net of that we win the year with more product engineers and more sales resources across the globe net of that. We came into the year after few years because of the mobile exits of underperforming the market from a top line standpoint with the objective to be 1% to 2% above or probably get end up more from instead of 1% to 2% or probably end up 0 to 1, so under delivered slightly there. But I would say our application pipeline is as - is full than it has been any time in recent memory and we’re building momentum there. So I feel pretty good about what we’re doing. I think we’re on the right track and it’s a combination Larry, both new products that are existing in our portfolio as well as an increased win rate on application pipeline which is really more using our existing technology to improve customers’ application. So building momentum and we’ll come out in ‘16 with what our goal is for to deliver on it for next year.

Okay, thanks for taking my question. Best luck in the quarter guys.

Thank you.

Thanks Larry.

And next we’ll hear from Stanley Elliott with Stifel.

Hey Stanley.

Good morning everyone. Thank you guys for taking me in. I kind of go back to the Chinese wind business, you know there is the new Chinese five year plan, in Italy it’s still pretty early but what are some of the areas kind of stick into the initial data coming out, where you would expect Timken to benefit and then also maybe a guess on the timing when we might start to see that stimulus flow through the result? Thank you.

Yeah, you know I think Stanley, as Rich mentioned, obviously you know it’s a strong market over there right now, we’re performing very well in that market, we’d expect to continue to perform very well and for us it’s really a combination of you know really, we’ll move with the market but actually the incremental share gains you know we expect to achieve over the next - you know over the next several years with our product development initiatives and new business win et cetera. So it’s really hard to comment on the five year plans specifically but really just to say that you know it’s like any other big heavy industrial market, it will have inflow and there will be seasonally weaker in the four quarter as I mention, I’ll have inflow and with incentive et cetera. But we feel really good about our market positioning and feel really good you know the real long term prospects for that market not just in China obviously but in Europe, Latin America and North America as well.

Great, thank you.

And that concludes our Q&A session for today. I’ll now turn the conference back over to Ms. Chadwick for any additional or closing remarks.

Thanks Orlando and thanks everyone for joining us today. Again if you have further questions, please call me at 234-262-3223. This concludes our call, thanks again.