The Timken Company (TKR) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Alan, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's Third Quarter Earnings Release Conference Call. [Operator Instructions] Thank you. Mr. Hershiser, you may begin your conference sir.

Thanks, Alan, and welcome, everyone, to our third quarter 2017 earnings conference call. This is Jason Hershiser, Manager of Investor Relations for The Timken Company. We appreciate you joining us today. If after our call, you should have further questions, please feel free to contact me directly at 234-262-7101. Before we begin our remarks this morning, I want to point out that we've posted on the company's website presentation materials that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call 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 report 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 expressed written consent, we prohibit any use, recording or transmission of any portion of the call. With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Thanks, Jason. Good morning, everyone, and thanks for taking the time to join us today. We posted strong performance in the quarter with revenue up 17% from the third quarter of last year. We saw a continued broad-based strength across most end markets and geographies and when combined with our market penetration initiatives, we delivered 9% organic growth. Acquisitions also contributed over 6% top-line growth and I will speak more about our results from acquisitions in a moment. Operationally, we continue to respond to the year-on-year demand increase very well, delivering good customer service, improving our productivity from the second quarter. Our adjusted margins were up 50 basis points from last quarter and compared with 2016, we expanded our margins 140 basis points and increased earnings per share 34% in the quarter. As expected year-on-year price only improved marginally from the second quarter and is on track to be about 50 basis points negative for the full year. We expect to see the benefit of raw material recovery and other price actions yield positive price in early 2018. We are pleased with our process industries margins at 17.7% and expect that level to approximately hold for the fourth quarter. We did manage to improve mobile margins 10 basis points and what is typically a tough sequential comp from mobile but as expected margins remained below our target range of 10% to 12%. We do not anticipate a sequential improvement in mobile margins in the fourth quarter, but we do expect to see mobile margin expansion in 2018. We expect improvements in price, cost, and volume to move us to the low end of our 10% to 12% range in 2018. On the mobile cost front, we are on track to close a previously announced mobile plant by year-end and our Romanian and Russian plants continue to ramp up their production level and the breadth of product line. For the full year, we now expect to improve margins about 70 basis points, which will place us near the low end of our company targeted range of 11% to 13%. We remain focused on strengthening margins and moving up in that range, in addition in our forecasting to increase earnings per share by 22% for the full year. Shifting to recent acquisitions LoveJoy, EDT, Tours and Control and PT Tech are all contributing the current year results and running ahead of our acquisition synergy models. In each we're benefiting from growing markets, cost reductions and cross selling benefits. While we have one quarter of Groeneveld behind us, but the early results are good, we're benefiting from a growing off highway and heavy truck market and we have a good backlog for the rest of the year. With integrated Groeneveld and Interlube leadership teams as well as sales organizations and we're working on the next steps of integration. We're pleased with the early results and optimistic about the long-term value we will generate from our lubrication systems business. We also continued to track towards completing the acquisition of ABC Bearings in India in 2018. With recent acquisitions in our pipeline of opportunities we have scaled back our share buyback activities and expect to be at a modest buyback level in the fourth quarter. As we typically do we'll provide our guidance for 2018 early next year, but we expect to carry our 2017 momentum into 2018. We expect our backlog will end this year higher and that we'll start next year with good organic comps in growing in the markets. We also believe price will shift to a positive next year. as a result of our organic growth initiatives as well as a full year benefit of our 2017 acquisitions we plan to outgrow our end markets again in 2018 and we will continue to drive our cost reduction and margin expansion initiatives in the next year. Bottom line we expect to start 2018 significantly stronger than we started 2017 and we'll provide more color on the full year outlook early next year. I'll now turn it over to Phil to go into more detail in the quarter.

Thanks, Rich and good morning, everyone. For the financial review I'm going to start on slide 10. Timken delivered strong financial performance in the third quarter driven by improving industrial economy and you can see a summary of those results on the slide. Revenue came in at $771 million up over 17% from last year. EBIT was $85 million on a GAAP basis, when you back out the adjustments for the quarter adjusted EBIT was $90 million or 11.7% of sales. Earnings per diluted share in the third quarter were $0.68 on a GAAP basis, when you back out the adjustments adjusted earnings were $0.71 per share up 34% from last year. Turning to slide 11, let's take a closer look at our third quarter sales performance. Organically, sales were up about 9% from the prior year, reflecting increase demand across most end markets and sectors led by industrial distribution and off-highway. This is the third straight quarter of year-on-year organic sales improvement for Timken. Acquisitions added $44 million of revenue in the quarter, were almost 7%. Most of this was related to the Groeneveld acquisition we completed on July 3rd, but also includes the EDT, Torsion Control products and PT Tech acquisition. Currency with a slight benefit in the quarter as well, adding just over 1% in the top line. Sequentially, sales were up around 3% from the second quarter, reflecting the Groeneveld acquisition offset partially by some seasonality and lower shipments in mobile industries. On the right-hand side of this slide, we outlined sales performance by region, excluding currency, you can see that all of our regions delivered solid growth in the quarter, with the largest increase is coming in Europe and Asia. Let me touch on each region briefly. In North America about half of the increase was acquisition related, the other half was driven by organic growth in the off-highway and industrial distribution sectors offset partially by lower shipments in automotive. Our strong growth in Asia in the quarter was almost all organic and reflects the year-on-year increases across most of the industrial end markets we serve. In Europe, about half of the increase there was driven by acquisition, the other half reflect strong growth in the industrial and off-highway sectors. And then Latin America we were up slightly in the quarter driven mainly by stronger end market demand in Brazil. Turning to slide 12, adjusted EBIT in the quarter was $90 million up from $68 million last year. The increase in the quarter was driven by higher volume, favorable manufacturing performance and the benefit of acquisitions in currency offset partially by higher material, logistics and SG&A costs. Our adjusted EBIT margin in the quarter was 11.7%, up a 140 basis points from last year and up 50 basis points sequentially from the second quarter. On slide 13, you will see that we posted net income of $54 million or $0.68 per diluted share for the quarter on a GAAP basis. On an adjusted basis, our net income was $56 million or $0.71 per share, up 34% from the $0.53 per share we earned last year. Our GAAP tax rate was 28.1% in the quarter, on an adjusted basis, our tax rate in the quarter was 30% up slightly from last year. Our adjusted tax rate reflects our forecasted geographic mix of earnings excluding special items and we expect to maintain the 30% rate for the rest of the year. Note that our tax rate does include any impact from potential corporate tax reform, or changes in the U.S. corporate tax rate. Now turning to slide 14, let's take a look at our business segment results starting with mobile industries. In the third quarter mobile industry sales were $423 million up almost 20% from last year acquisition - $42 million of revenue in the quarter were about 12%. This is mainly from growing - but also includes Torsion Control products and PT Tech. organically sales were up 6.5% in the quarter, as we saw increase demand in the off-highway and heavy truck sectors, offset partially by lower shipments and automotive. Looking a bit more closely at the markets, the strength in off-highway in the quarter was led by the mining in construction sectors, while agriculture was also up slightly. Heavy truck was up in all regions including North America, where we saw a solid growth year-on-year. In automotive, we had lower shipments in North America during the quarter, reflecting a bit more seasonality than last year, caused by a changeover in one of our major platforms. Additionally, - was up slightly in the quarter with growth in Asia and flat revenue in North America. Mobile industries EBIT was $35 million in the quarter adjusted EBIT was $38 million or 8.9% of sales compared to $32 million or 9.2% of sales last year. The increase in earnings reflects the impact of higher volume, attributable to manufacturing performance and the benefit of acquisitions in currency offset partially by unfavorable price mix and higher material logistics and SG&A costs. With respect to margins, mobile industries adjusted EBIT margin was down 30 basis points in the third quarter versus last year. As we were negatively impacted by price mix, material, freight and ramp related costs and higher incentive compensation expense. However, margins did improve 10 basis points sequentially from the second quarter. Our outlook for mobile industry is for 2017 sales to be up around 13%, organically, we are planning for sales to increase about 6% led by improved demand in the off-highway and heavy truck sectors offset partially by softer demand in rail. Acquisition should increase revenue by around 6.5% and we now expect currency to be slightly favorable for the year. Let's turn to process industries on slide 15. Process industry sales for the third quarter was $349 million up 14.5% from last year. Organically, sales were up 12.5% reflecting increase demand in the industry sectors, as well as increased shipments in wind energy. Looking a bit more closely at the markets, industrial distribution saw a growth in all regions with Asia and Europe seeing double-digit growth year-on-year. We finished the quarter with incoming order rates and backlog up versus last year, and up slightly sequentially. The improvement in heavy industries demand in the quarter was seen across several end markets including medals and general industrial gear drives. With the largest increase is coming in Asia. And wind energy was up in the quarter with higher shipments in Asia and Europe being offset partially by lower shipments in North America. For the quarter, process industries EBIT was $62 million, adjusted EBIT was also $62 million or 17.7% of sales compared to $46 million of 15% of sales last year. The increases in earnings was driven by primarily by higher volume and favorable manufacturing performance, offset partially by higher material, logistics and SG&A costs. Our outlook for process industries is for 2017 sales to be up around 11%, organically we're planning for sales to increase about 8% driven by broad based growth across most end market sectors led by industrial distribution. Acquisition should increase revenue by around 2.5% and we now expect currency to be slightly favorable for the year. Turning to slide 16, you will see that net cash from operating activities was $28 million during the quarter, bringing the year-to-date total to $143 million. After CapEx spending of $63 million year-to-date free cash flow was around 80 million for the first nine months of the year. Note that the year-ago period included $54 million of CDSLA receipts pre-tax. Excluding those receipts free cash flow was down about $60 million in the first nine months of 2017 versus last year. This reflects increase working capital to support higher sales levels and higher cash tax payments which more than offset improved earnings and lower CapEx. Despite the increased working capital dollars, operating working capital as a percentage of sales in the quarter improved versus the same period a year ago, and also improved sequentially. From the capital allocation standpoint, we invested $23 million in CapEx in the third quarter and returned $35 million to our shareholders through the payment of our 381-consecutive quarterly dividend and the repurchase of 312,000 shares. During the quarter, we also spend roughly $283 million on the acquisition Groeneveld, net of cash acquired. Late last quarter, we put in place permanent financing for that acquisition, with attractive euro denominated private placement notes and bank term loan. We finished the quarter with net-debt-to capital at 37%, near the midpoint of our targeted range of 30% to 45%. Next, let me review our outlook on slide 17. We are now planning for 2107 revenue to be up about 12% from 2016 organically we expect sales to increase about 7%. Acquisitions should increase revenue by around 4.5% and currency is now expected to be slightly favorable for the year. On the bottom line, we estimate that earnings will be in the range of $2.78 to $2.83 per diluted share on a GAAP basis. Excluding adjustments totaling $0.20 of income per share for the year, we expect adjusted earnings per diluted share to be in the range of $2.58 to $2.63 per share, which at the midpoint is up just over $0.05 from our July guidance and up about 22% from 2016. Note that adjustments for 2017 include a $30 million tax benefit we recorded last quarter. This will be offset personally by restructuring, acquisition related, pension related and other charges. Note that the $0.20 of income does not include any impact from a fourth quarter mark-to-market pension remeasurement, which will not be known, until year end. Our 2017 full year outlook implies an adjusted EBIT margin around 11% at the corporate level, in line with the low end of our targeted range of 11% to 13%, and up approximately 70 basis points from last year. And finally, we estimate that we'll generate free cash flow of around $180 million in 2017, or around 90% of adjusted net income. This is down $30 million from our July guidance, driven by increased working capital needed to support by higher sales levels. Despite the increase, working capital as a percentage of sales is expected to improve from last year. In closing, it was a strong quarter for Timken, as we responded well to the improving end market environment, and continue to advance our strategy on out fronts. Organic growth, operational excellence and capital deployment, and we remain well positioned to continue to drive shareholder value going forward. And with that, we'll conclude our formal remarks. And now open the line for questions. Operator?

Thank you, sir. [Operator Instructions] And we would take our first question from Steve Volkmann, with Jefferies.

Hi, good morning guys.

Good morning, Steve.

Couple of questions on the mobile business, if I can. First of all, if my math is right, it's certainly a big if, it feels like you're looking for a kind of being acceleration of growth in mobile in the fourth quarter and I'm just curious, I know, you talked about some of what looked better, but I'm curious, what's kind of driving the better fourth quarter again in mobile?

Yes Steve, this is Phil, I think, we're certainly implying a real strong fourth quarter, year-on-year even in mobile. I would say sequentially third to fourth, we're really factoring into normal seasonality, so would have step down, you know third to fourth, to be down slightly just reflecting really three fewer shipping days in the fourth versus the third. But, I mean, no question will be up nicely up strong year-on-year and again that's very much a continued story around of highway, heavy trucks, and the rest of the markets kind of be in relatively flat as we see them.

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

Yeah, I'd say, the first half, we probably offset, particularly in the off highway, it was probably little bit more service part than OE, but I'd say in the third quarter it was a good mix. And I think for fourth quarter we expect a good mix between OE as well as service parts demand. We do have, I would say we don't have perfect visibility, but we do have some visibility in terms of ship to location in the lake, what's the after-market service parts versus our new builds.

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

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

Great. Thank you so much.

Steve, I just want to jump in also clarify one thing when you are looking into fourth quarter all-in keep in mind substantially all of grown a belt hits mobile so when you are looking at mobile year-over-year they are going to see an all-in number probably in the 20s in the fourth quarter and that's grown about an organically when you pull out the acquisition to probably looking at high singles in terms of the applied outlook for mobile in the fourth quarter of year-on-year.

I understood. Thank you.

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

Yes, hi, I'm trying to interpret your increasing working capital taking down the cash flow, really trying to quantify a little bit how are you thinking about growth and to start 2018. So, can you help us a little bit on are the implied fourth quarter mobile organic is 9.7? So that's an acceleration as you said they were high single-digit. The decision is the total working capital higher in the cash flow, is that something pretty focus on the fourth quarter given that acceleration or when you think about '18 starting with the first two quarters so and that some kind of high single-digit mobile growth organically?

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

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

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

And just a sort of equipment I mean if you do 5% organic next year mobile plus 80 million carryover from acquisition and you get a 10% margin plus this year's 9% margin I mean that is that's 20% I mean just a math so I just want to make sure is that where you are implying because obviously people looking for a two hand on the mobile incrementals next year at a minimum and I just want to make sure that you're comfortable with that 10 to 12 range at a very end of that rate right 10% for mobile margins next year? I mean the only way the incrementals are below 20 then is the top line even stronger than 5% organic so I'm just making sure we've frame this properly?

Yes, we've triangulated it and feel comfortable saying the margin or incremental would be better next year but again not ready to split exactly how much of it is volume incremental versus price versus cost but expect benefits from the three to get us. Anything else you want to add on incremental still.

No I think Rich touched on David in terms of when you look at the issues hitting us this year that we would expect to be better next year the price cost logistics in the ramp certainly hitting us in mobile and then obviously the incentive compensation hits across the company but mobile has few more people than process to settle the hurdle but as that normalizes as those things normalize or revert if you will which really expect better incremental in next year in mobile getting us to the low end of the range as Rich mentioned.

I'm sorry your comments starred a question for me on any early anecdotal or actual sign contracts for next year in mobile that you already suggest better pricing or are this more speculative at this stage better pricing for mobile next year on that contract?

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

All right. Thank you very much, appreciate it.

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

Good morning, and thank you for taking my questions. Had a couple just quick clarification questions, on the comment you made at the start of the call about price did I hear that was actually up slightly in the third quarter over the second quarter?

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

Okay, but was it actually up sequentially from the second quarter? Or was that not?

Yeah, would have been again very nominally from some material pass through that truce up quarterly yes.

Okay, got it. Thank you. And then on the organic growth in 2018 you talked about outgrowing the markets and benefiting from the acquisitions were you trying to say that the outgrowth was organic outgrowth was being driven by the acquisitions or just that you'd outgrow and that the acquisitions might allow some cross-sell opportunities to further that outgrowth?

I think the latter, so was same we're expecting to start the year with market year-on-year market growth, on top of that we believe we have been delivering, will deliver some incremental organic outgrowth and then on top of that add-on the acquisition carry-over. And certainly, obviously we're working organically to grow the acquisitions now two cross selling but a lot of different initiatives and just to sum the three up believe both are 9% and 17%, will stack up pretty well when we look across our various competitive landscapes in terms of where those revenue numbers stood.

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

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

Okay. Thanks for taking my questions. I'll hop back in the queue.

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

Hey guys, good morning and thank you for taking the question. In the prepared comments, you talked about auto business being somewhat seasonal and some change over. Is the outlook for that business to continue to turn positive in the fourth quarter and then how do we think about that - are there any other new platforms or anything along those lines that we should be aware of?

Yeah, thanks Stanley. Actually, the automotive business where we participate is holding up real well. As you know we're mostly exposed in North American like truck SUVs as well as premium cars globally. So those sectors in the market if you will and holding up well. What we saw in the third quarter as I said was a bit more seasonality than normal as you know one of our customers did a model changeover which took a few more days out than we're normally used to. So, we're down in the quarter year-on-year. We didn't have quite to see the impact virtually very little impact last year. And so, as we moved forward in the fourth quarter we would expect markets to remain strong, the markets to remain flattish, if you will and albeit at strong levels, but so not expecting or turn a growth from here although we continue to quote on new business et cetera but expect the markets kind to remain strong at this level and will probably provide little bit more color on what we're seeing for 2018 year after, after we get the benefit of few more months behind our back.

That sounds fair. In the past you guys have done almost a heat map, if you will, which in markets were positive, negative, and is this fair to say kind of if you look at the auto business maybe real business that you're probably tracking 70% positive right now and what are the expectations to kind of to crack the square up the comments about backlogs and outlook. How would that heat map maybe changed?

The heat map would look positive across everything with the exception of three markets and those being flattish and the three flattish would be automotive, rail and aero and rail has really just inflected the flattish as we talked about the first half that was the year on year comps in the first half on rail were significantly down that inflected force in the fourth quarter as well within flattish give me plus or minus a couple of percent and other markets would all be in generally north of that on the plus side.

Perfect. And the last one, kind of talked about incentive comp, being a little bit of headwind. All those been equal for thinking about business trend continuing into next year, kind of whatever the trajectory ends up ultimately being what you guys not guided. Does incentive comp become a headwind again or is it more neutral, given that we've had a big step up with the markets improving here in 2017?

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

Thank you very much and best of luck.

Thanks Stanley.

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

Hi. Good morning. First question on the process side, I'm just thinking about inventory and seeing continuation of some recovery there in the growth, but kind of wondering we're seeing end market demand outpaced some of what's going into distribution to see a general gauge of where those inventory levels are and if distributors perhaps feeling a little bit more confident as recovery extends and you get a little bit of restock boost moving forward?

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

Perfect. And then on the mobile, I'm just thinking about price cost and within the quarter, it sounds like you did get a little bit better capture on the rising cost that would have helped sequentially from 2Q, and just trying to kind of understand flattish margins with a little bit better cost capture, the degree to which the offset is acquisition or other items in the quarter that would have been a little bit of offset?

Yeah, sure Joe, I'll take it, I think you look sequentially, you got to look little bit at mix as well, hitting us there as well as the other items continue to impact just like material and that's sort of thing and then incentive comp adjustments as we deal with it better in the quarter than any of the prior guides - we actually had some adjustments there as well.

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

No, I would say, I think we would say that the fourth quarter would be similar, likely be similar to the third in process.

Okay, thanks a lot.

And we would take our next question from Steve Barger, with Capital Markets.

Hey, good morning guys.

Good morning Steve.

Just wanted to go back to the real comment, you said that it shouldn't be the headwind next year that it was this year. But just trying to square that, we've had solid rail car orders in 2Q and 3Q, rail car traffics been increasing sequentially over the past year. At what point would you expect that to translate into OE or after-market growth?

Again, - to call what we're expecting for rail for 2018 except - when we talk about some of the ramp inefficiencies we had this year, there is both ramp up inefficiencies in off highway and heavy truck but also, we're ramping down rail through the last nearly six quarters now. So, really, we'd saying that's - to off and to your point North America, we've seen some strength, we've seen some strength than other parts in the world, you can certainly make a case that we've - and there's going to be an uptake, I would tell you we've not seen an uptake yet, we've seen a bottom - so, that's what we've seen and that would take us out through the end of the year and to the first part of next year.

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

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

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

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

Understood. Thank you.

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

Good morning, guys.

Good morning Ross.

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

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

But in terms of materials being stable for two quarters I'm just trying to remember when you used to own the steel I thought most of the SPQ you negotiated annually, and I thought that sort of happened in December so our prices always kind of aside from surcharges stable into year I mean do you have any visibility on what your SPQ bill is going to be in 2018 at this point?

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

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

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

Okay, thanks guys.

[Operator Instructions] And we will take a follow-up question from Justin Bergner with Gabelli and Company.

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

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

Okay. And just a follow up to that question, I mean remind me how big services is as a percentage of process it was tending to mix down or up from a margin point of view, versus overall process.

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

Okay. Thanks.

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

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

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