Good morning. My name is Cody, and I will be your conference operator today. As a reminder, this call is being recorded. At this time, I’d like to welcome everyone to Timken’s Fourth 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. Mr. Hershiser, you may now begin your conference.

Thanks, Cody. And welcome, everyone, to our fourth 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 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, we would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Thank you, Jason. Good morning everyone. And thanks for taking the time to join us today. We posted another good quarter in Q4 with revenue and earnings at the high end of our guidance range. Revenue for the quarter was up 19% as a result of strength across our end markets, acquisitions, currency and our multi-year outgrowth initiatives. Adjusted earnings per share was up 33% from the fourth quarter of 2016 as the benefit of the revenue growth and our operational excellence initiatives more than offset negative impacts from cost increases, mix and price. We expanded EBIT margins by 100 basis points from the fourth quarter of 2016. The fourth quarter capped a very good year for the Timken Company to rattle off some of the full year headlines, we grew revenue 12% grew earnings per share 23%, expanded EBIT margin 70 basis points, improved our return on invested capital by 90 basis points and increased our quarterly dividend payout. We also advanced our long-term strategy across multiple fronts, we closed on three acquisitions during the year expanding our mechanical power transmission portfolio and we announced the agreement for a fourth acquisition to increase our global leadership position in tapered bearings. All the acquisitions from the last three years are performing well both financially and strategically. We also continue to drive our operational excellence initiative, which included opening our new plant in Romania, while closing two other plants. We reduce cost improve productivity across the enterprise, we continue to advance our digital platform, we responded well to our customers increases in demand, which in many cases were unplanned and required short reaction times and we continue to focus on outgrowth with investments and product vitality and a focus on winning future customer applications. All this positions as well to deliver…

Great. Thanks, Rich, and good morning everyone. For the financial review, I’m going to start on Slide 13. Timken delivered strong performance in the fourth quarter driven by organic growth in both the Mobile and Process industry segments and the benefit of acquisitions. And you can see a summary of our results on this slide. Revenue came in at $778 million up almost 19% from last year. EBIT was $67 million on a GAAP basis, when you back out the EBIT adjustments in the quarter including pension mark-to-market charges adjusted EBIT was $85 million or 11% of sales. Earnings per diluted share in the fourth quarter were $0.37 on a GAAP basis, when you back out the EPS adjustments including a one-time charge related to the new U.S. tax law adjusted earnings were $0.68 per share up 33% from last year. Turning to Slide 14. Let’s take a closer look at our fourth quarter sales performance. Organically, sales were up 10% from the prior year reflecting higher demand across most end market sectors led by off-highway and industrial distribution. Acquisitions added $44 million of revenue in the quarter or almost 7% most of this relates to the Groeneveld acquisition but also includes Torsion Control Products and PT Tech. And currency translation contributed about 2% to the top line in the quarter. Sequentially our sales were up about 1% from the third quarter as market strength and higher military marine revenue more than offset normal fourth quarter seasonality. Let me comment briefly on pricing. Pricing was slightly lower year-on-year consistent with what we’ve seen throughout 2017 but pricing did improve sequentially. We have been successful in getting pricing in the marketplace but as we expected the inflection from negative to positive pricing year-on-year will not hit until the first quarter of…

Thank you. [Operator Instructions] We’ll take our first question from Steve Volkmann with Jefferies. Please go ahead.

Thank you. Good morning guys.

Good morning, Steve.

Maybe – so it’s okay, we’ll start with Slide 23. I’m just trying to kind of get my head through around that’s kind of price cost issue, which I think you said is going to be positive in 2018. Obviously, you show a pretty big negative for inflation on Slide 23. Where is the positive that offsets that? Is that on the volume price/mix bar there?

Yes, Steve. I would say a couple of things. So inflation there would include material and other operating costs. Obviously, we continue to drive efficiencies in the business. So the bar to the left of it would be ongoing cost efficiencies that would serve to offset that to a degree. And then the pricing, the 100 basis points of positive pricing, you’d see in that volume price/mix bucket, if you will. So when we look at price cost, looking at material inflation, we expect to see in 2018, we’d expect price cost to be positive for the year.

Steve, I would add that outside of material, we’re really not looking at any big inflation. And most of that would be small stuff and kind of business as usual, right? I mean, most years are U.S. health care costs go up some. Most years, we give base wage increases, and we’re to offset that with productivity. So as you said, it’s a fairly big bar, but it’s a chunk of a material and then relatively small stuff after that.

Okay. That’s helpful. And then I guess really the crux of the matter is when I do the math on your guidance at the mid range, it looks like the incrementals are roughly 25% or so. And I guess I just would have thought with Hungary coming online, with price cuts getting better, with the benefits of some of the restructuring you guys have been doing, I would have thought that there was a good chance that could be higher, maybe even materially higher. And I guess I’m just trying to figure out, is that kind of a conservative view or are there some real sort of offset to those benefits that I mentioned?

Yes. I’ll take it first, Steve and let Rich comment on it. Obviously, incrementals are getting significantly better year-on-year. If you look at what we did in 2017 for the full year, all in about 16% or so, jump into as you say on the low 20s – low- to mid-20s at the – at our guidance for 2018. So as you look at it you’d say certainly pricing is the biggest driver of the shift from last year to this year. Obviously, we do have some other benefits, as you talked about. Obviously, incentive comp would be more, obviously, more neutral and obviously, we won’t see the same headwinds probably from logistics as we saw this year. But going the other way would be the inflation that we talked about, material continuing to move up on us, as Rich said, albeit in other cost – albeit modestly. And then from a production standpoint, we did built some inventory in 2017 that would not expect that to recur. So as you sort of – a lot of puts and takes in there. I think what really stands out is the going from negative to positive pricing from 2017 to 2018, which gets us to the, call it, 22%, 23% all in incremental at the midpoint of the guidance. But keep in mind, there’s a lot – there’s acquisitions and currency in there. And when we look at the organic incrementals implied in our guidance at the midpoint, you’re probably looking more at the mid – mid to high 20s as opposed to the low 20s.

All right. That’s helpful. I’ll pass it on. Thank you.

Thanks, Steve.

Thank you. We’ll now take our next question from Sam Eisner with Goldman Sachs.

Yes. Good morning everyone.

Good morning, Sam.

Good morning, Sam.

Just going through the Process segment. It looks as though that growth decelerated a bit when I look at the kind of the comp adjusted dynamics there. So maybe you could talk a bit about fourth quarter that came in a bit below our expectations. And then in addition the incrementals were also a bit softer. So maybe was there anything in particular within the Process Industries segment that caused a decel a little bit on the top line as well as on the incrementals.

Let me take the top line. On the top line, as you know, we always struggle a little bit with predicting the last couple of weeks of the year and the first couple of weeks of the year. And I would say the little bit softer we saw on the fourth quarter probably bodes well for the start of the year and we saw that to the start of the year. So I think that was probably more timing than anything. And sequentially, with the exception of wind, we are seeing strengthening in Process Industries markets.

Yes, and Sam, this is Phil. I would add, obviously, to what Rich said, relative to the Process, didn’t see any big year-end push there. And so as you look at sales up around $4 million sequentially, looking more to the margin performance, just maybe setting the stage, I mean, for the year, Process, really strong performance, sales up 13% in the quarter – sales were up 13% margins up 90 basis points to 16% in the quarter. Sequentially, we did see margins come down from the third, so our sales were up a little bit to up $4 million or so, EBIT was down and really a lot of different things. And Process can be difficult to predict quarter-to-quarter just because it tends to be bigger product, bigger projects, et cetera. But we did see mix manufacturing and material and logistics were all slightly negative in the quarter, which combined to create a bit of a drag sequentially. So while we were obviously up year-on-year, down sequentially, but I would say looking ahead to 2018, would expect margins to improve in Process year-on-year and our guidance would imply margins north of 17% for the year.

Got it. That’s super helpful. And then going back to some of these components of the bridge into next year, you’re calling out about 100 basis points of pricing to the top line. Is there any way to disaggregate kind of what’s in there? You’re – 50% of your business, that’s distribution, that’s list price increases, the other 30% is OE. Any way to kind of parse out, maybe, not the level, but kind of what are you baking into that 100 basis points? Is there anything on the OEM side? Is it all distribution? Any kind of additional details there will be greatly appreciated.

It’s in Mobile. It’s in Process. It’s in OEM. It’s in aftermarket. It’s in contracts. It’s in spot business. It’s – we’re moving prices – in the aggregate, it’s not a big move, right? It’s only 100 basis points. But to get to 100 basis points, you got to move up a little higher than that, because some things will not move during the year and some things won’t move at the beginning of the year. So I’d tell you by our calculations and math, we are net invoicing customers higher today than what we were in the fourth quarter and what we were a year ago today. And we’re doing that in a way that I think we are holding and/or continuing to gain market share at the same time.

Got it. If I can just sneak one more in. The Romania as well as the logistics items that negatively impacted 2017. Is there any way that you guys can call out that impact to EBIT? And where is that being added back, if it is, in 2018? Thanks.

Yes. I would say, as you know, as you think about logistics, Sam, you really got to break it down into two pieces. So it’s – there’s the volume-related logistics, which kind of moves with volume. And obviously, probably, we’ll see some fuel inflation there, which will impact that. And then obviously, the premium freights. So as we sort of ramp, we need to airfreight more premium freight. So as we look ahead to 2018, we’d expect modest inflation on the logistics volume-related line with offsetting benefit from less airfreight or premium freight, if you will. So net-net, thinking of logistics, as kind of flat this year-on-year and it would be netted in that inflation bucket, if you will.

And I’d say on the Romania plant, that as well as the two plant closures that we had in 2017 is definitely part of our margin improvement. One of those plant closures was late second quarter. The other one was the end of the year. So that and then a year ago today, we were building nothing in Romania. We’re still not building a lot, but I guess, now we’ll be building a lot more. So all three of those will certainly be contributing to our Mobile margin improvement for the year.

Got it. Thanks so much guys.

Thanks Sam.

Thank you. We’ll now take our next question from David Raso with Evercore ISI.

Hi, good morning. For 2017, what was the net price material for the year? What was the net drag?

Net price – well, price was approximately 50 basis points down.

We really haven’t gotten that specific, but price was negative. That 50 bps, if you will, for the year and then material also negative. We haven’t really gotten specific. We do kind of want material and logistics together to try to give you a little color, but we haven’t gotten more specific in that.

I would add to that, that we are looking, we believe, and are planning for a similar magnitude of material increase in 2018 as we had 2017. So if you assume whatever went up in 2017, it goes up that much again in 2018. And then take the minus 50 bps to 100 – positive 100 bps year-on-year on the incrementals, it’s again the driver of the margin improvement.

That’s what I’m trying to understand. It sounds like you’re looking for 150 bps swing on pricing, right? Negative 50 to positive 1.

Well we’re looking to 100 year-on-year, but as you look at the incrementals, last year, it was negative – when we get – if you look at volume, all-in, last year, price was a headwind, negative 50. This year, it’s a positive 100. But year-on-year, let’s have a 100 calculated as year-on-year.

Okay. So it’s not a full 100 bps. It’s 100 bps better than last year. That’s right. Negative 50 becomes positive 50 essentially.

100 basis points of price in 2018 on 2017 price levels. So minus 50 to plus 100. Minus 15 last year in our bridge, plus 30 this year in our bridge. So delta is $45 million essentially and – as you would put it on walk.

That’s how I was trying to do it. Because if I look at the segment profitability, roughly what you’re guiding, it seems like you look for segment profits to be up, call it, $60 million to $65 million, something like that, tax effected, you get the EPS walk and adjust for the tax rate, all that. It seems like you get almost, as we just said, almost $45 million benefit from price on the delta, but 50 bps higher on material cost, right? And you’re still looking or – you didn’t give the exact materials, but materials will be up. I guess, I’m trying to get to is the price cost – okay, if you can do that, we’ll see, but that looks constructive. It seems like the rest of the incremental improvement in profitability seems, a conservative or I’m missing something. But it looks like on the volume and everything else, everything outside of price cost, you’re really looking at very light incremental. Is there any other cost creeping in or missing? And I appreciate Slide 23. But it just seems like if you can get that bigger delta on price. Your incremental margins looked relatively conservative outside of that price swing. Are there other costs, I think, Phil, maybe, mentioned other expenses or I just want to make sure we’re not missing this year, because I don’t want to over read, the margins are conservative, because obviously, margins have been a bit of a struggle in 2017, so I don’t want to make it sound like it’s easy, but if you actually do the price, it does seem like the rest of the incremental profitability seems modest. Are there any other costs I’m missing?

I would say the rest of incremental is pretty close what it netted out in 2017. So again, the improvement in incremental from 2017 to 2018 on the volume is largely that difference in price. And the rest, there’s puts and takes, right? So as Phil said, we’re expecting our production levels to be more in line with the revenue this year, whereas last year, they were significantly ahead, still up, but up less when you look at incrementals. You’ve got currency probably a little better this year than last year at least to start the year. We’ve got annual compensation type things we’re doing there, but again, that’s sort of business as usual. So some puts and takes, and we’re basically saying the cost picture is pretty similar in 2018 to 2017.

Those are the pieces I was thinking, maybe less overhead absorption given the production versus retail. Currency, well, you’ll take the absolute EBIT. It’s not a good incremental. But then I thought incentive comp would come down to more than maybe offset that and that’s why – it just seemed like beyond price cost, it seemed like the rest was either easy or I was missing something. Lastly, if you don’t mind, indulging me on the sales cadence. You alluded to it before in the comments about volume, sales growth through early February, it’s encouraging. Can you give us a little flavor? I know you said normal seasonality, but it’s kind of hard to see exactly how normal? I mean, I assume, you mean third quarter below second quarter, fourth quarter gets maybe a little bit better. But what level we coming off of in the first half? I’m just trying to get a sense of, are we looking at given the acquisition start to roll off a little bit, is base case revenue growth less than 5% in the back half?

So, yes, let me run through a little bit of the sequential. So last year, four sequential revenue growth quarters, although I think the third quarter needed the help from the acquisition, which will be normal, a little bit of a drop off from the second and third quarter, but it was organically small, right? And smaller than probably what our normal seasonality would be. So we would expect sequentially to be up from the fourth quarter to the first. Again, from the first of the second. And then, as I said in my opening comments, we would expect normal seasonality to be a slight drop-off in the third and fourth. So a little bit higher revenue in the first half to the second half. That didn’t happen last year. And – I mean, certainly, you can make the case for what we’ve seen with continued sequential strength that we’ll be sitting here in May and we’ll again have those orders. But that will be upside to the revenue of 9% to 10%. We’ve got a slight drop-off from Q2 to Q3 in there.

But just – are you seeing anything about the back half that distributors indicating, hey, the inventory maybe after this quarter were good, we don’t need any more bump up in inventory or anything on the order book that suggest the second half should drop off that much outside of just, comps get a little harder.

No. Definitely, the year-on-year comps get harder. So I mean, that is what it is. But sequentially, no. I would say sentiment is higher today than it was January 1. January 1 was higher than November and it’s higher today than before tax reform. So there’s – you can make the case either way. And I think we shown pretty good ability to predict our markets from quarter one – one quarter to two. We’ve shown pretty ability to show how our business will perform given those revenue numbers, and we’ve got a significant step-up in EPS year-on-year, while first quarter comps obviously still a little low, but still a significant step-up in the second quarter as well. And we feel very good about that. Our ability to predict the markets nine and 12 months out probably hasn’t been much better than anybody else’s. So we’re just putting in some normal seasonality there and a good year.

I appreciate the color.

Yes, I was just going to ask David, so the – yes, just to maybe add on the distributors, where we get the data and it’s mostly in the developed markets not the emerging markets, but the developed markets, we’d say inventory was probably down year-on-year, probably flattish sequentially. So we didn’t really see any restock into 2017. We’re not planning on a significant restock in 2018. We’re planning more for sort of sell-through. And then maybe just a follow-up, Rich, on the cadence of revenue. I mean, I think the – a way to think about it, exactly as you said, but the way – the way we sort of think about it is first half of the year with the – we’ll be up probably double digits all-in organically, probably more mid to high singles, and that’s really the second half – the Groeneveld acquisition coming in, in the first half. And as you move to the second half, it is going to be more mid singles, both overall and organic. So a little bit of moderation. First half to second half, normal seasonality, as Rich talked about. High confidence, good visibility into the first half, but it’s really less visibility into the second half, but nothing that concerns us at this point other than we felt it was prudent to really just expect normal seasonality after June.

Yes. It’s a good point, Phil, and we’re still projecting to be up in the second half organically from the second half of last year.

Okay. I appreciate it. Thank you.

Thank you. We’ll now take our next question Chris Dankert with Longbow Research.

Hey, good morning guys. Thanks for taking my question.

Good morning.

Thinking about the competitive environment here. Department of Commerce recently announced its initial findings regarding some of that South Korean dumping. Again, it’s a pretty small chunk in relation to the addressable market, but I guess, are you able to comment on how you view the determination and what implication at all, if any, have on pricing for the year.

I would say we would not see that having any material impact on pricing for the year, but it was a favorable preliminary ruling that they’re going to do further work on to determine if there’s dumping taking place from products coming from Korea. And I’d say we make bearings all over the world. I have a pretty good idea of cost structures that operate around the world and have seen some – believe that it’s very aggressive pricing there and preliminary finding would support that.

Understood. And then, I guess, just thinking about the guidance and some of the mechanics in there as far as the buyback goes, should we assume a flattish share count for the year? Are we looking at another $15 million pulling towards the buyback? Just any commentary on just share count and expectations for cash deployment in 2018?

Yes, great question. So after CapEx and after dividends, obviously, we’ll look to do more M&As to find some more attractive strategic bolt-on acquisitions. But when you’re thinking about share count, specifically for modeling, I think, if you took the fourth quarter fully diluted shares and use that, it’s probably a good estimate. I mean, we generally kind of endeavored a buyback enough to offset current year dilution. So I think if you took the fourth quarter fully diluted, that probably be a good number. And then obviously depending on how the M&A market or the environment plays out, we have the ability to do more or less if the case may be.

Got it. Thanks so much guys and good luck this year.

We’ll now take our next question from Ross Gilardi with Bank of America.

Thanks, good morning, guys. Sorry for the price cost questions, but can I go back to that? I mean, I’m not really sure what the big confusion is here, I mean, you laid out very clearly on Slide 23, what it looks like, that red bar on inflation looks like, eyeballing at it something like an $0.85 headwind. So I don’t understand why you’re saying price cost, in general, is positive for 2018 and then you’re isolating this other like big bucket of cost inflation of $0.85 headwind. What is in the positive price cost comment? And what’s in that red bar that’s labeled inflation?

I would start with I think your – obviously, we didn’t put the specifics on there, but, I think, you’re taking the highest possible way you could interpret that to get to $0.85. I don’t think that bar is meant to be $0.85.

I think the key, Ross, is obviously, we were hoping you guys weren’t going to pull the rulers out and the micrometers out. But we were – it’s not really the scale, it’s just more – it’s more intended to give relative order of magnitude. And as Rich said, modest – getting modest inflation headwinds in our business is a relatively regular occurrence in a market like this, whether it’s health care costs, whether it’s wage – salaries and wages, whether it’s material, other input costs. And we see what – we would put material aside, which we do have a fair amount of inflation built in, but still less than the pricing as we said. Relatively modest amount of inflation. We try to highlight that there. Offsetting that would be cost efficiencies and the pricing and some of the benefits at higher volume that we expect to get. So again, it was really an attempt to give you somewhat of a view on the puts and takes, not – it wasn’t probably perfectly drawn on the scale.

And on the cost side, I mean, you really have – I mean how much visibility do you have and I think one of the major producers announced the $40 or $50 per ton increase on SBQ just the other day. Steel has continued to go up. I imagine you’re going to have surcharges, you have to absorb, like, as the year unfolds. Can you talk about that, a little bit visibility on cost and what you kind of were able to lock in for – on steel pricing with your year-end negotiations.

So in the U.S., we lock in for the year and we are locked in, and that’s factored in, and that’s excluding scrap surcharges. So to the degree those surcharges stay flat, our price is fixed. We have a little more negative view of that, and we would expect a little – surcharge to be higher – slightly higher this year than last year. Around the world, we would have more exposure. We’d be probably locked in through the middle of the year and have good visibility to that and still have more exposure for the second half of the year.

Okay. And then just getting back to the free cash flow and the inventory. I mean, your inventories year-on-year look like they’re up like 34% on a 12% revenue increase or something like that. And you’re attributing it to, it seems like, better than expected demand. And it’s not like the revenue number for the fourth quarter came in that much better than we were anticipating. So I’m trying to understand is that something else is going on there? And like in terms of the cadence for incrementals in the first half of 2018 versus the second half, if you’ve produced in anticipation of stronger demand, you have to moderate your production a little bit in the first half and is that perhaps why, maybe, your incrementals are little bit softer in the first half than the second half?

Let me comment on the inventory levels first. So you’re right, inventory is up year-on-year and it was up sequentially from the third. So the full year inventory was up if you look at the balance sheet, call it, $185 million or so, about $55 million and that will be the acquisition, so that was sort of inorganic, not really part of the organic part of our business. Organically, up about $130 million. Sequentially, we were up organically, probably around $45 million plus or minus. So clearly, built inventory, and normally in the fourth quarter, we normally don’t have a build. As I said, that would typically drive stronger free cash flow in the fourth quarter. We made the decision to build through the end of the year in anticipation of a good Q1, so did get some benefit from that certainly on the production line, probably help Mobile a little bit more than Process. So looking ahead, I think, the 2018, we’ll be – we’ll have production matching more with end market demand, maybe building a little bit of inventory. So year-on-year, it will be a less of an incremental benefit than we got in 2017. But I feel really good about where our inventory is. And our business is very much all about availability and customer service, and we feel like we’re in a really good position to take advantage. I don’t know that it would have a big impact on incrementals per se, either way because I don’t think we’ll continue to produce roughly equal to end market demand as we move through the year.

But is your view on inventory and how much you needed to build changed that much from late October through the year-end to have missed the free cash flow number by that much? I mean…

So, yes, we did – it – we were expecting – yes, we were expecting a lower inventory build and we ended up executing on. And that was really the, I wouldn’t say, the only cause of the missed free cash flow, but it was certainly the largest cause. And again, it’s something where we just felt like it – the more prudent approach was to put ourselves in the best position for 2018.

Okay, thanks guys.

Thank you. The next question comes from Joe O’Dea with Vertical Research. Joe O’Dea: Good morning. First question just on the tax rate and going to 27% and some of what we’ve seen over the course of earnings season is a little bit bigger moves from others. And so maybe just some of the puts and takes and whether we should think about 27% as being more of the stable rate over time or whether you’re looking at things that will also potentially bring that down?

Yes. Great question, Joe. So obviously, very confident in the 27% for 2018. It’s not as – if you look at just our revenue, probably not as big as you might have modeled, certainly not as big as we would’ve thought one year ago when all the talk started. A lot of puts and takes. Obviously, the elimination of the domestic manufacturing deduction was a bit of a headwind and some of the international provisions will affect us negatively as well. So as we looked at – and then from a U.S. standpoint, while we had about over half of our revenue out of the U.S., we do have a disproportionate amount of certain costs in the U.S., like interest in headquarters cost. So a smaller amount of our income actually is in the U.S. When we looked at – kind of put it all in together with our outlook for next year, we felt like 27% was the best estimate at this point. Again, very confident in it. Looking ahead, I think there’s a lot we need to learn about the new law and we’re in the process of kind of dissecting it. But clearly, it’s changed the game a little bit in terms of the rules. And I think our goal will be longer term to – like, we always do try to work it down over time. But for 2018, we feel like 27% is the best estimate at this point. Joe O’Dea: Okay. And then on the distribution side of things, it sounds like not much in terms of inventory restock anticipated in 2018. Any just perspective on months of inventory with distributors where you have visibility right now, how that compares to longer-term averages? Is there any sort of structural shift there where distributors are leaning a little bit more on you to carry the inventory in a shorter lead time for them and how much ability do you have to push back on that?

So I would say there has been structural shift. I think part of that is distributors managing their inventory better. They’ve invested in information technology and supply chain planning tools. We have better connectivity and visibility to them. So I think there has been inventory taking out – taken out of the supply chain. So some of that is probably a structural reduction. And then – but we believe, in general, that the levels are appropriate for what we see on the coming quarters. So I wouldn’t say they’re high or low and we’d not really say there’s been any structural shift of distributors stocking fewer part numbers or more drop shipments or anything like that. So I don’t think that it is much as better management between us and our distributors. Joe O’Dea: That’s helpful. Thanks a lot.

Thank you. We’ll take our next question from Justin Bergner with Gabelli & Company.

Good morning, everyone. Thanks for the time. A couple of questions here. When you’re talking about the price cost being a net positive in 2018, is that including the benefits from that efficiency cost reduction bar on the waterfall chart? Or is that sort of prior to including the benefit from the efficiencies cost reduction component of the waterfall?

Yes. Justin, I’d say prior. So you start out with the 100 basis points of price, so call it $30 million and then the raw material, the inflation part of the raw material would be deducted from that, if you will. That’s in the inflation bar and the net of that will be positive for the year. And for the efficiencies, we might get in our plants or efficiencies we might get throughout the business would certainly be – would be additive overall. But we wouldn’t contemplate that as we think about it.

Okay, that’s helpful. The 2017 incrementals at 16%, do you have a sense as to what that would have measured without the sort of incentive comp coming back in that headwind?

Yes, I probably don’t have it handy, and again, we don’t really get into a lot of specifics on the incentive comp dollars. But as we looked at – as we’ve talked about, as we looked at 2017, it was certainly a big driver of those incrementals being lower than we would normally expect to see. Obviously, pricing being negative was a headwind. A lot of headwinds in 2017, but incentive comp was one. We would look for that to be a more normalized, so we had a big step-up, 2016 to 2017, on incentive comp and as we look 2017 to 2018, probably some small puts and takes there, but certainly more neutral than what we would’ve seen last year. And so as we look ahead 2017 to 2018, pricing gets better. Some of the other costs get more neutral as we talked about, incentive comp and maybe logistics, but then we still have the material inflation. We still have production volume being lower, relatively speaking, year-on-year, that take the incremental. We were going from 16% all-in to our guidance, we’d say closer to, call it low to mid-20s all-in and a nice step-up driven mostly by pricing. But – and certainly, incentive comp is helping the fact that it’s more neutral this year than what we would have seen last year.

Okay. And then lastly, I think on the third quarter call, you mentioned that the European and Asian organic prints or – I mean, they’re not organic, but the growth in Europe and Asia was being boosted by restocking. Is that still occurring based upon your read, restocking in those regions? Has it come off? Do you expect it to come off?

I would say our distribution – industrial distribution business was up earlier and bigger in those two regions than the U.S. And it continues to be that way today. An element of that is end-user demand. An element of that is stocking to support that end-user demand. So I think that answers the question.

Okay. So the restocking hasn’t come off materially yet?

No.

Okay. Thank you.

Thank you. We’ll now take our next question from Steve Barger with KeyBanc Capital Market.

Good morning. I’m going to ask the inventory question another way. The acquisition strategy has and will presumably continue to add more non-bearing business. Is that making forecasting the right mix of raw and finished product more difficult as end markets improve? Or how did you decide where to pull production forward?

I would not say it’s making that any more difficult. I would say those decisions are generally made by different operating groups for the most part and still the size of our business, the bearing group drives that. So the inventory build was certainly driven – led by bearings. And I don’t think our – I think our visibility of that today is better probably than it’s ever been to our demand signals, the customer connectedness, et cetera. And what we would try to do over time is emulate that model in some of the non-bearing businesses to improve their connectivity and visibility into that as well. But no, I don’t think – obviously, they come in with different working capital levels, they some – come in with a lower inventory, higher inventory, but the planning is not all that co-mingled.

Okay. And just thinking about those distributor comments around better analytics and your own better connectivity. We’ve been hearing more positive commentary around pricing in that channel as volume picks up. Do you expect you can drive more pricing there than other parts of your business?

That is a significant part of our price, but OEM is equally important. And particularly, as we look at Mobile to recover the price there, we’ve got to get some of that through OEMs. So both are active, both are happening, and we’re realizing pricing in both.

Okay. And just one quick one. For the nonbearing business or the acquisitions you got over the last couple of years, what is the mix of OE versus distribution, if you know?

Yes. In total, well, there’s pretty big swings there. If you look at what we did last year, it would be over 50%. It would’ve mixed just a little bit in the direction of distribution, Lovejoy also would’ve mixed this in that direction, Carlstar Belts would’ve mixed this more to OEMs with the strategy to penetrate distribution. So probably within plus or minus 10% of our company average with – of 55-45 sort of mix.

Got it. Thank you.

Thank you. And that does conclude today’s question-and-answer session. I’d like to turn the conference back over to Mr. Hershiser for any additional or closing remarks.

Thanks, Cody, 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. And that does conclude today’s conference. Thank you all for your participation, and you may now disconnect.